Contents

Capital Relief Trades

CRT love

FHFA promotes CRT usage and tempts Fannie back into the mix

The Federal Housing Finance Agency (FHFA) hopes to both lure Fannie Mae back to the CRT market and increase access to affordable housing with its proposed amendments to the Enterprise Regulatory Capital Framework (ECRF) unveiled two days ago, suggest sources.

By replacing the fixed leverage buffer with a dynamic leverage buffer, it becomes more likely that risk-based capital will become the binding constraint upon the GSEs while the RWA floor on CRT exposures has been halved.

These are meaningful adjustments, and are likely to have resonated with Fannie Mae, which has been out of the CRT market since Q1 2020 in protest against last year’s ERCF, which was ratified in November.

Fannie Mae and Freddie Mac declined to comment.

The amendments also represent a complete volte-face in the attitude of the FHFA towards CRT under the new acting director Sandra Thompson. It is only three months since the FHFA, then led by Mark Calabria, poured scorn on the value of the CRT mechanism.

“This is a 180 degree turn from the most recent discussion of CRT,” says a market analyst.

In the fact sheet released this week, the FHFA says “There are many benefits to CRT, including reduced risk to taxpayers from a severe housing crisis, diversification of risk, and potentially lower cost of capital. CRT transactions transfer a meaningful amount of credit risk to private investors in severely stressful economic scenarios, which helps to protect taxpayers from potentially large credit-related losses.”

The two chief levers which the FHFA hopes to increase the attractiveness of the CRT market. Firstly, it replaces the fixed prescribed leverage buffer amount (PBLA) equal to 1.5% of a GSE’s total assets with a dynamic PBLA equal to 50% of a GSE’s stability capital buffer.

The fixed PBLA of 1.5% is in addition to a leverage ratio of tier one capital to total assets of 2.5%, giving an overall leverage ratio of 4. In most circumstances, this has been the binding constraint upon the GSEs, and, according to the FHFA, “could lead to perverse outcomes at the Enterprises, including promoting risk-taking and creating disincentives for CRT and other forms of risk transfer.”

Under the amended rule, FHFA calculates that Fannie Mae’s PBLA would decrease from $62bn to $23bn and Freddie Mac’s PBLA would decrease from $64bn to $11bn. The total leverage capital ratio would be reduced from 4% to 3% at Fannie and from 4% to 2.9% at Freddie.

These are hefty diminishments and in the light of the reductions the FHFA anticipates that a risk-based capital requirement would become the binding constraint rather than the leverage ratio. Indeed, that is its declared aim.

And this is where the second lever begins to operate: the prudential floor of 10% on the risk weighting of any CRT exposure has been halved to 5%. This, according to the Enterprise Capital Tool provided by the FHFA, would increase the RWA relief provided by CAS and STACR by 34%-35% for high LTV loan pools and by 39%-40% for low LTV pools.

Once again, these are eye-catching numbers.

“The FHFA has targeted the parts of the ECRF that raised most questions with these amendments,” says a well-placed source.

According to Morgan Stanley research, Fannie Mae has not transferred risk on a balance of over $700bn of CAS deals since it exited the market. While the steep rise in house prices over the last 18 months has reduced the risk position to the US taxpayer in these deals, the lack of safeguards covering this debt must worry anyone who believes in the utility of the CRT market - as the new FHFA clearly does.

By increasing the capital relief on CRT exposure, the FHFA also, in effect, increases the capital window for the GSEs. They are more able to take on loans of questionable credit quality, and extending the reach of affordable housing to historically disadvantaged borrowers is one of the chief aims of the current administration.

Whether the amendments, if implemented, will work the oracle remains to be seen. But the weather vane seems to be pointing in the right direction.

“I think the probability that we get increased CRT issuance today is higher than it was on Tuesday when these proposals hit,” says James Egan, structured finance strategist at Morgan Stanley.

The proposed changed are now open for comment until November.

Simon Boughey

ABS

Digital lender debuts

German consumer collateral on offer

Digital lending platform auxmoney Investments is in the market with its inaugural public securitisation – Fortuna Consumer Loan ABS 2021. The transaction, which will be certified as STS by SVI, is backed by a €227.75m portfolio of near-prime consumer loans granted to private individuals in Germany.

The portfolio is concentrated in North Rhine-Westphalia (accounting for 21% of the exposure), Bavaria (15%) and Baden-Wurttemberg (12.5%). It comprises 25,645 loans, with an average outstanding balance of €8,881.

The top 10 loans account for 0.24% of the pool, which is characterised by a weighted average fixed interest rate of 10.4%, a WA remaining term of 61.4 months and a WA seasoning of three months. Loans that have defaulted, are delinquent or subject to payment holidays are excluded from the portfolio.

Rated by DBRS and Fitch, classes A through X will be publicly offered and the fixed rate class F notes – which will be sized at 5% of the total pool – retained in compliance with EU risk retention requirements. The class A and B notes benefit from a social label, in accordance with opinions provided by ISS and S&P as to the otherwise underserved borrowers in the pool.

The class A note coupon is one-month Euribor plus 70bp, but the tranche is expected to price above par. The structure benefits from subordination, excess spread and a liquidity reserve that is sized at 0.5% of the aggregate balance of classes A through E and floored at 0.2%. Final maturity is in October 2030.

A virtual roadshow for the deal will commence on Friday (17 September), with pricing expected by the end of next week. BNP Paribas is sole arranger and lead manager on the transaction, which will be serviced by auxmoney affiliate CreditConnect.

Corinne Smith

ABS

Pick-up continues

European ABS/MBS market update

Following on from last week’s pick-up, the European ABS/MBS market is set for another busy week. The pre-summer dynamic has returned, with activity in both primary and secondary.

“It appears as though this week will be particularly busy on the auto ABS front, with four deals currently in the market,” notes one trader. “It is a similar story in the RMBS space, as both asset classes are well standardised. What we are seeing are many repeat issuers and similar transactions in terms of structure, features and pools.”

Indeed, auto and resi deals alike are continuing to see strong demand and tightening during the marketing process, particularly for mezz paper. Two auto deals priced this afternoon - AutoFlorence 2 and Santander Consumer Spain Auto 2021-1 - while UK BTL RMBS Twin Bridges 2021-2 priced yesterday.

AutoFlorence 2 saw its class As come in from initial price talk of high-30s/40 over one-month Euribor to price at 31bp DM. Further down the stack moves were even more significant with, for example, the class Bs moving from mid-90s over to 75bp and the class Cs from mid-100s to 115bp.

Similarly, Santander’s class As began at high-20s/30 over three-month Euribor but priced at 25bp DM; and its class Bs and Cs began at low 90s and mid-100s before printing at 70bp and 115bp over, respectively. Twin Bridges 2021-2 class As, Bs, Cs and Ds priced yesterday at 66bp, 90bp, 115bp and 150bp over SONIA being oversubscribed 1.7x, 3.9x, 4x and 6.6x, respectively.

“The story is a bit different for CMBS,” states the trader. “We have seen a meaningful pick-up in activity this year, mostly driven by demand on post-pandemic ‘recovery assets’, such as retail and hotels, as well as for less risky exposures (logistics, industrial). The office asset class is being caught in the middle, as there has not been a serious credit distress for the bulk of it. However, secondary market prices have been impacted during the pandemic.”

The latest CMBS in the primary market is UK deal Atom Mortgage Securities, which is backed by a combination of life science/office and logistics assets, is due to price this week. It is joined in the visible pipeline by auxmoney’s debut Fortuna Consumer Loan ABS 2021 (see today’s story for more); Citi’s second Glenbeigh Irish BTL RMBS of the year; and two further auto deals, Red & Black Auto Germany 8 and Ulisses Finance No. 2. For more on all of the above deals, see SCI’s Euro ABS/MBS Deal Tracker.

Despite such a busy primary market, European ABS/MBS secondary has seen healthy activity in recent weeks and notably in the past few days. While the market has generally been epitomised by tight spreads so far, no seismic shift should be anticipated before the end of the year.

“At the moment, things are really well balanced. We believe dealers might start to shift into defensive, low-beta assets through the last quarter of the year. However, we do not envisage exogenous factors having an impact in the short term. If we look at current drivers, everyone is monitoring inflation, pandemic trends, growth/labour and of course the central banks, but no one expects big or unfortunate surprises,” the trader concludes.

Vincent Nadeau

ABS

Strong opportunities

European NPL investment trends discussed

Emerging non-performing loan opportunities across a number of jurisdictions in Europe are boosting sentiment in the market, with particularly strong demand seen in Italy. However, challenges are anticipated in this jurisdiction for transactions that are more complex in nature, according to participants at SCI’s 3rd Annual NPL Securitisation Seminar.

“The Italian NPL market is currently very active, with a growing number of transactions. I also expect to see a very lively secondary market,” one panelist noted.

The Italian market at present is described as a market that is suitable for all players – where investors have been focused on retail and corporate deals.

The Greek NPL market has also seen a growing number of transactions in the last few years, including a number of complex and sophisticated deals. However, this was said to present its own challenge: finding the right structure for increasingly complicated asset disposals. Nevertheless, panelists expect opportunities for these jurisdictions to continue as they are for at least 18 months.

Elsewhere, market sentiment in Ireland was described as a relatively positive, with new opportunities emerging – although a number of uncertainties remain post-Covid. “The macroeconomic outlook in Ireland looks relatively positive, but there are still historic NPLs from pre-Covid that still need to be dealt with. With the volume of secondary assets to be worked through and the current banking sector dynamics, there are opportunities there, which attract quite a bit of interest,” said Conor Houlihan, partner at DLA Piper.

Another panelist noted that the UK is another jurisdiction that is demonstrating strong opportunity within this space. The UK was described as a market that has a diverse banking segment, with many different moving parts that all move at different speeds and create NPLs at different rates. 

The panellist concluded that one challenge for the UK market is not overstretching in the current climate.

Angela Sharda

ABS

Legal concerns

Consumer protection uncertainties highlighted

A recent European Court of Justice (ECJ) ruling on consumer rights in German loan agreements amplifies legal uncertainty regarding information that needs to be included in contracts, Fitch suggests. The implications for Fitch-rated German auto ABS have been limited so far, but the rating agency says it remains important to monitor the impact on borrower behaviour and how far this increases exposure to originator creditworthiness, as well as developments in deal documentation.

Several, sometimes conflicting ECJ and German court rulings have led to legal uncertainty on how auto loan contracts should be drawn up to comply with applicable consumer protection legislation. The ECJ last week found compulsory information to be missing from applicable German loan documentation. At the same time, limitations in arguments used by lenders to counter borrowers’ attempts to revoke contracts were found.

In practice, risks to ABS deals arising from this persistent uncertainty have been limited, with no significant impact on transaction performance or cashflows. If a borrower chooses to revoke the loan, the purchase agreement is also unwound and the vehicle must be returned.

Legal uncertainty also has implications for asset eligibility, as ABS documentation typically states that no loans with active revocation rights can be included in transactions. If revocation rights were shown unambiguously to persist over the life of a loan agreement, originators could have to repurchase entire portfolios for a large sum.

Consequently, some originators have been adapting their documentation in both new and existing transactions in anticipation of this possibility. One way is to narrow the scope of their repurchase obligations; for example, by stating that these would only apply in cases of “successful revocation.”

Angela Sharda

ABS

Tight pricing

Santander sets post-Covid record

Santander has completed a €580.8m 14-year full-stack significant risk transfer transaction that references a portfolio of Spanish auto loans. Dubbed SC Spain Auto 2021, the transaction’s first loss tranche achieved the tightest print at that level for a full-stack SRT following the onset of the coronavirus crisis, as pre-pandemic dynamics return to the ABS market (SCI 15 September).

Rated by DBRS Morningstar and Moody’s, the deal consists of €507.3m AA/Aa1 rated class A notes (which priced at three-month Euribor plus 70bp), €33.3m A/A2 rated class B notes (plus 70bp), €23m BBB/Baa3 class C notes (plus 115bp), €5.7m BBB/Ba1 rated class D notes (2.15%), €5.7m BB/Ba2 rated class E notes (2.71%) and €5.8m unrated class F notes (4.58%). Classes A through E amortise pro-rata, with triggers to sequential. The class F notes amortise according to their target amortisation amount, which is equal to the minimum of 10% of the initial balance of the notes and the available funds, following the priority of payments.

The transaction benefits from a 15-month revolving period, during which the class A to E notes will not amortise - unless certain conditions are reached - and the issuer will use the quarterly principal collections to purchase additional receivables that the originator may offer, subject to eligibility criteria.

The transaction benefits from a €5.8m cash reserve that provides credit support to the rated notes. At transaction closing, the cash reserve will be fully funded with proceeds from the subscription of the F notes.

The cash reserve is released with the amortisation of the notes based on some rules, with a floor at €1.4m. The cash reserve will be reduced to zero on the payment date when the rated notes can be fully redeemed.

Geographically, the portfolio is well diversified across Spain, with the highest concentration in Andalusia representing 24.5% of the provisional portfolio by loan balance, followed by Catalonia at 12% and Valencia at 10.6%. The pool has 18 months of seasoning and is very granular, comprising 54,458 loans extended to 54,194 borrowers.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 13 September

A review of SCI's latest content

NPL ABS seminar tomorrow
SCI’s 3^rd Annual NPL Securitisation Seminar is taking place virtually tomorrow 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.
For more information on the event or to register, click here.

Last week's news and analysis
Back in business
European ABS/MBS market update
Chinese reserves
Growth boosts domestic securitisation market
Intrinsically ambiguous
Social RMBS may convey 'elevated' credit risks
JP Morgan into fifth gear
Third CLN in 2021 to cover auto loan losses soon to print
Love me tender
STACR tender shows validity of CRT and salience of capital efficiency
Structural innovation
Evolution of Euro CLOs set to continue
Tender Freddie
GSE has commenced a debut buyback scheme to retire old STACR issuance
WAL enters CRT space
CRT trade covers first losses on warehouse loans

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 7th Capital Relief Trades Seminar
13 October 2021, In Person Event
Last year saw significant regulatory developments in connection with capital relief trades, including the publication of the EBA’s final SRT report and the introduction of an STS synthetics regime. SCI’s Capital Relief Trades Seminar will explore the impact of these developments, as well as the latest trends and activity across the sector.

Structured Finance

On the up

Growth in private real estate deals continues

The UK real estate sector is seeing strong growth in private transactions, with loan-on-loan financings emerging as a popular method of funding for debt funds and challenger lenders. At the same time, forward flow transaction volume is gathering pace (SCI 26 April).

“This longer-term arrangement is proving to be quite popular and there has been a lot of deal activity in this space,” confirms Iona Misheva, partner at Allen & Overy. “Private equity, other non-bank lenders and banks are all involved in [loan-on-loan transactions in] a borrower or lender capacity. We see this level of activity in the loan-on-loan market continuing in the near future, notwithstanding that Covid-19 did dampen everything down temporarily.”

She says that the outlook for the rest of the year is positive, with nothing to suggest that the market will slow down next year - albeit that is heavily dependent on unemployment figures once government support schemes come to an end. “The pipeline of transactions looks great, but it is all dependent on what happens in the market. Looming in the background is the end of the government support schemes and what that will mean.”

Another area that has seen significant demand is CMBS, as pent-up appetite is working its way through the system post the coronavirus crisis. Currently, the main driver behind the demand is investors seeking yield.

“The current CMBS deals, as compared to historic deals, have had a number of features built in to make them more noteholder friendly, which makes them more attractive to investors,” Misheva notes.

From an asset class perspective, she points to the number of deals linked to warehouse and logistics assets (SCI 30 June). This property type has seen a boost, due to the Covid-related uptick in online shopping.

In contrast, Misheva notes that there has been a lot of uncertainty around office assets with people working from home, which has impacted properties from a yield and value perspective.

Angela Sharda

Capital Relief Trades

Spanish SRT finalised

Another STS synthetic executed

Santander has finalised a €177m cash collateralised significant risk transfer transaction that references a €2.528bn portfolio of Spanish corporate, SME and self-employed borrowers. Dubbed Magdalena Five, the deal is Santander’s first Spanish synthetic STS transaction and the first post-Covid SRT from the programme sold to private investors (SCI 12 July).

Magdalena Five pays three-month Euribor plus 8.50% and features a €22.75m retained junior tranche and a six-month revolving period, along with a three-year weighted average life for the sold tranche. Loans subject to payment holidays have been excluded from the portfolio.

Santander carried out a competitive book-building private placement process with more than 15 investors, before finally agreeing final terms with eight investors, including five new ones to the programme.

Several structural features were included in the transaction to optimise RWA reduction and lower the implied cost of capital of the trade. First, the STS designation lowers the risk weights for the retained senior tranche to 10%. Second, senior and protected tranches amortise pro-rata to optimise the cost of the transaction but with triggers to sequential amortisation.

The last deal from the Magdalena programme was carried out with the EIF last year (SCI 29 September 2020).

Stelios Papadopoulos

Capital Relief Trades

Tender pick-up

Buyback value depends on specifics of each bondholder

Freddie Mac broke new ground with its tender offer last week, but there is some doubt about how many investors will be interested in surrendering their by now valuable paper, say market experts.

The average coupon of the eight tranches on offer is 3.85%, and the range is between 2.43% and 4.88%. This, in a low rate environment, is relatively attractive.

Moreover, the average credit enhancement (CE) is 3.76%, with a range of between 2.43% and 5.49%. This is generally three times greater than the CE with which these bonds began their life. For example, the STACR HQA1 2017 M2 tranche, which is at the top of the list of tranches Freddie want to buy back, currently has a 3.20% credit enhancement and this is well in excess of recently issued M1 tranches. Its next coupon will be 3.63%.

 “These are very solid, seasoned pieces of paper. You’d only want to get rid of them if there was something else you really wanted to buy,” says a source.

In total, Freddie Mac has targeted the 2017 HQA1 M2, the2017 HQA3 M3, the 2016 HQA3 M3, the 2016 HSQ4 M3, the 2014 HQ2 M3, the 2015 HQA2 M3, the 2015 HQA1 M3 and the 2017 DNA1 M2.

The original principal amount of the eight tranches up for tender was $2.364bn, of which $1.919bn, or 81%, is current principal outstanding. This constitutes 4.2% of the unpaid principal balance of the CRTx Index - the total return index which tracks the aggregate performance of a basket of CRT bonds issued by Fannie Mae and Freddie Mac. It is the flagship index of Mark Fontanilla and Company, the Charlotte NC-based consultancy.

Nonetheless, it seems that Freddie has offered investors prices which look to be generally above current values.

“The tender price is very compelling,” adds a source.

Whether this will be enough to tempt STACR investors out of the woodwork is unclear. It will depend whether bonds on offer can be replaced easily and perhaps more profitably with other securities. This is a decision which is determined by the current positioning of each CRT investor.

Moreover, most current STACR buyers are typically buy and hold investors and are generally interested in holding notes to maturity. Freddie Mac data reveals that the participation of asset managers in STACR deals has increased lately while that of hedge funds has diminished.

As of June 30, 60.03% of all STACR buyers were money managers, 29.23% were hedge funds, 4.82% were REITS, 2.61% were insurance funds, 2.26% were sovereign funds and 1.06% were bank or credit unions.

In the recently issued STACR 2021 DNA5, money managers constituted 68.78%, hedge funds 24.95%, insurance firms 3.76%, REITs 2.05%, bank or credit unions 0.46%.

 So the extent of the pick-up remains to be seen.

Simon Boughey

Capital Relief Trades

SRT debut

First Nordic green synthetic executed

Nordea and the EIF have finalised a significant risk transfer transaction that references a €1.8bn portfolio of corporate and SME loans (SCI 23 July). The deal will free up capital for green lending to Swedish and Finnish firms, rendering it the first such deal from a Nordic bank.

The transaction features tranches that amortise on a pro-rata basis but with triggers to sequential - as stipulated by EU rules - and a highly granular portfolio of drawn commitments that includes several thousand corporate and SME borrowers. Further features include a retained first loss tranche and synthetic excess spread that is equal to one-year expected losses. Moreover, this is Nordea’s first post-Covid capital relief trade and its first STS synthetic securitisation.  

According to Jonas Backlund, head of structuring at Nordea, the operation was not carried out for capital relief purposes but to expand its green footprint in the region. Indeed, using this technology for growing the balance sheet as opposed to just receiving a capital benefit has been gaining traction in the market, as evidenced in recent transactions by LBBW, Lloyds and BNP Paribas (SCI 25 June).  

The green loans will be offered to eligible SMEs and include reduced margins for eligible projects. The initiative is backed by the EU’s Investment Plan for Europe. Nordea has committed to reach net-zero emissions by 2050 and reduce CO2 emissions from its lending portfolio by 40%-50% by 2030.

Last March, the lender signed an agreement with the EIF to support SMEs in Sweden, Finland and Denmark with attractive lending terms, to help companies facing temporary Covid-19 disruptions and/or to accelerate their growth.

This latest capital relief trade is Nordea’s first for its own book, following the execution of its last deal in 2019 (SCI 20 December 2019). The flexibility that EU regulators introduced on the eve of the coronavirus crisis in the form of reduced capital buffers, along with dividend restrictions, reduced the incentive to carry out such deals. However, the lifting of dividend restrictions raises issuance prospects for Nordea and the market overall (SCI 4 August).

Nordea ceo Frank Vang-Jensen confirmed in the bank’s latest half-year statements that it is ‘’ready to decide on a dividend payment of a maximum of €0.72 per share, to be distributed in October, after the current restrictions are repealed. Regarding share buy-backs, we intend to start the programme in the fourth quarter and have commenced the application process.’’

The transaction will become effective in terms of credit protection, coupon payments and capital relief when Nordea has extended new loans at the magnitude that has been stipulated in the agreement. This is expected in 1Q22 when management buffers are expected to return to normal levels.

Hence, in this sense the guarantee’s commitment to green lending is consistent with normalised management buffers. Management buffers are capital cushions held above the minimum regulatory requirements.

As of July 2021, Nordea’s management buffers remain largely unchanged at €610m, with the lender aiming for 2022 targets of 150bp-200bp above regulatory CET1 requirements. The bank’s CET1 ratio currently stands at 18%, which is 7.8 percentage points above the regulatory requirement.

Stelios Papadopoulos

Structured Finance

Servicing expansion

SitusAMC executive md and head of Europe Lisa Williams and director Alfonso Pagano discuss opportunities in the European direct lending market

Q: Alfonso, tell us a bit about your new role at SitusAMC?
AP: I joined SitusAMC this past July to lead the expansion of the firm’s servicing business beyond commercial real estate to include corporate direct debt, infrastructure and social housing loans (SCI 13 August). I’ve spent the last 15 years of my career servicing debt at some of the top global financial institutions in Europe and look forward to bringing that experience along with SitusAMC’s strong brand reputation in Europe, where we are known for our deep product knowledge and experience in the lending space, to help our clients elevate their loan servicing.

Q: Why did the company decide to expand its servicing business?
LW: Loans are in SitusAMC’s DNA. We already perform the role of facility/security agent and servicer for various lenders and arrangers in the commercial real estate space, so an expansion into a broader range of loan products was a natural evolution for us.

Q: What changes are you hoping to implement in this space?
AP: We’re building upon our wealth of knowledge in commercial real estate loan servicing to help our clients improve their broader lending practice. By bringing together our resources and enterprise-grade technology, we can streamline our payment processes and deliver more efficient, agile and reliable procedures than most providers.

LW: Lenders are looking for certainty in the servicing of their portfolios. We went through a long due diligence process to identify and implement technology that we felt would make a meaningful difference in the servicing of loans. The implementation of our automated payment system – SWIFT – will deliver this assurance when processing large number of payments, without the cost or procedural risk that other providers face who are not as tech-enabled as we are. 

Q: What are your views on the market and are there new trends emerging?
AP: Like in the US, European corporates rely on direct lenders more and more. We’re seeing an oversaturation of the US direct lending arket, while direct lenders only meet financing needs of 35% of European mid-market corporates. Many banks are busy with Covid-19 relief loans and are struggling to allocate the resources to originate new business. Also, with rising M&A activity and the stable and attractive returns offered by direct lending investments, there is a lot of optimism in Europe for this asset class.

LW: On the commercial real estate side, lending has bounced back and is very active across Europe compared to early-Covid timeframes. This surge is being led by increased transactional volume in warehouse, industrial, office and hotel sectors. Retail is still struggling, but the sector was already facing numerous challenges that were exacerbated by the pandemic.

Angela Sharda

Structured Finance

400CM tap NPL ABS market

Sector developments and company hires

400CM tap NPL ABS market
400 Capital Management has closed two securitisations backed by US$780.2m of residential non-performing loans. The firm entered into the securitisations to obtain term financing, remove mark-to-market risk, reduce cost and create scalable fixed-rate financing.

Given the size of the loan pool, 400CM decided to offer two transactions with similar characteristics. 510 Asset Backed (FTAB) 2021-NPL1 - which closed on 29 June - was backed by NPLs with an unpaid principal balance of US$397m and achieved an 80% advance rate for the offered notes. The second transaction - FTAB 2021-NPL2 - closed on 11 August and was backed by US$383.2m of NPLs, with an advance rate of UPB of 81%.

The servicers for the transactions are Rushmore Loan Management Services and Columbus Real Estate Management. The program administrator is Truman Capital Advisors.

In other news…

Corporate service provider acquired
CFE Finance has completed a co-investment - alongside founder Massimo Longoni - of an equal stake of LFS Holding, a holding company that controls corporate service provider and transfer agent Luxembourg Fund Services. The firm specialises in regulated and unregulated investment funds, corporate domain, tax and accounting services, central administration and transfer agency. The acquisition strengthens CFE Finance’s corporate and advisory services hub in Luxembourg. 

EMEA
DBRS Morningstar has appointed Mudasar Chaudhry as head of European structured finance and covered bond research. He will report to Christian Aufsatz, head of European structured finance at the rating agency.

Chaudhry has over 15 years of experience in the European structured finance and loans markets and joined DBRS Morningstar in 2011 as a lead analyst on the European structured credit team. He previously worked at PGIM, Bluecrest Capital Management and Fitch.

Structured Finance

Specialist lender stake acquired

Sector developments and company hires

Specialist lender stake acquired
BNP Paribas Asset Management (BNPP AM) is set to acquire a majority stake in Dynamic Credit Group, the Amsterdam-based asset manager and specialist lender with €9bn of assets under management. The deal will allow BNPP AM’s private debt and real assets (PDRA) investment division - which currently managed €11bn of client commitments - to significantly grow its asset base, while providing Dynamic Credit with access to a large and global distribution network.

The acquisition of Dynamic Credit is in line with BNPP AM’s strategy of accelerating the expansion of its investment platform, particularly within the strategically important area of private markets. The closing of the transaction is subject to regulatory approval.

Dynamic Credit manages assets consisting primarily of Dutch mortgages, which it originates through its own online platform, bijBouwe, and other channels. The firm has built on its expertise within the origination and management of granular loan portfolios to source personal loans and SME loans for its Diversified Loan Fund. Within Dynamic Credit, LoanClear serves as an independent advisory firm focusing on illiquid credit investments.

Dynamic Credit will be incorporated into PDRA, while continuing to operate as an independent entity under the leadership of ceo and founder Tonko Gast, who will report to its board and to David Bouchoucha, cio and head of PDRA.

In other news…

Combo note charges settled
DBRS has agreed to pay US$1m to settle SEC charges relating to the rating of CLO combo notes. The SEC's order finds that DBRS's policies and procedures were not reasonably designed to ensure that it rated CLO combo notes in accordance with the terms of those securities.

While the CLO combo notes included a defined ‘rated balance’ amount, noteholders were entitled to all cashflows from the underlying components of the CLO combo note, which could be greater than the rated balance. Credit ratings that DBRS issued to CLO combo notes considered the risk of default on the rated balance only, and not the risk of default on all amounts that the issuer was obligated to pay based on all of the cashflows from the underlying components. Consequently, DBRS's credit ratings for CLO combo notes did not address the risk of default in payment of the proceeds in excess of the rated balance, even though holders of those notes were entitled to receive such amounts in accordance with the payment terms of those securities.

The SEC's order finds that DBRS violated Rule 17g-8(b)(1) of the Exchange Act. Without admitting or denying the SEC's findings, DBRS agreed to pay a civil penalty of US$1m and to undertake to review, and revise as necessary, its internal policies and procedures relating to the violations.

Data partnership agreed
1010data and Moody’s Analytics have partnered to deliver an expanded data set to the fixed income marketplace through the 1010data platform. Complementing its current base of over 100 MBS and ABS datasets, the relationship with Moody’s Analytics will add data on 9,000 non-agency MBS deals, encompassing over 40 million loans on the 1010data platform. Users of the 1010data platform can now harmonise the Moody’s Analytics data with complementary data sets for prepayment, default, delinquency and loss-severity analysis.

Further ABSF investments announced
The AOFM reports that two transactions have been given in-principle approval by the Australian Business Securitisation Fund delegate for investment, subject to the satisfactory completion of commercial negotiations and documentation processes. An allocation of US$87.5m has been made to a mezzanine investment in a warehouse sponsored by GetCapital and arranged by National Australia Bank, who will also act as the senior financier. Other mezzanine investors are participating in the transaction.

An allocation of US$30m has also been made to a mezzanine investment in a warehouse sponsored by OnDeck Australia and arranged by Credit Suisse, who will act as the senior financier.

In addition to these transactions, the AOFM is in discussions with other proponents whose transactions are at differing stages of development and assessment.

Meanwhile, the AOFM says it has recently indicated to CIP Asset Management that it will exercise its option to extend the investment management agreement for two years, from December 2021 to December 2023.

GSE PSPAs under review
The FHFA and the US Treasury have suspended certain provisions added to the Preferred Stock Purchase Agreements (PSPAs) with Fannie Mae and Freddie Mac on 14 January 2021. This suspension will allow the FHFA to review the extent to which these requirements are redundant or inconsistent with existing FHFA standards, policies and directives that mandate sustainable lending standards. The FHFA will consult with Treasury on the scope of the review and on any recommended revisions to the PSPA requirements.

The suspended provisions include limits on the GSEs’ cash windows, multifamily lending, loans with higher risk characteristics, and second homes and investment properties. The enterprises will continue to build capital under the continuing provisions of the PSPAs.

The FHFA says it is also reviewing the Enterprise Regulatory Capital Framework and expects to announce further action in the near future.

Structured Finance

NPR issued on GSE capital framework

Sector developments and company hires

NPR issued on GSE capital framework
The FHFA is seeking comment on a notice of proposed rulemaking that would amend the Enterprise Regulatory Capital Framework (ERCF) for Fannie Mae and Freddie Mac. The proposed amendments would refine the prescribed leverage buffer amount (PLBA) and the capital treatment of credit risk transfers (CRT) to better reflect the risks inherent in the GSEs’ business models and to encourage the distribution of credit risk from the enterprises to private investors.

Specifically, the proposed rule would: replace the fixed PLBA equal to 1.5% of a GSE’s adjusted total assets with a dynamic PLBA equal to 50% of the enterprise's stability capital buffer; replace the prudential floor of 10% on the risk weight assigned to any retained CRT exposure with a prudential floor of 5% on the risk weight assigned to any retained CRT exposure; and remove the requirement that an enterprise must apply an overall effectiveness adjustment to its retained CRT exposures.

Comments on the proposed rule must be submitted within 60 days of its publication in the Federal Register.

In other news…

APAC
Monroe Capital has expanded its platform to Asia, with the appointment of Alex Kim as md and head of Asia. He will be based in the firm’s newly opened office in Seoul, South Korea.

Prior to Monroe, Kim was the ceo and md of Korea and head of Southeast Asia institutions at Aberdeen Standard Investments. He has over 20 years of experience in asset management and banking, with 15 years spent in the Asia Pacific region. Prior to Aberdeen Standard Investments, he held roles at Russell Investments, RBS and PIMCO.

Structured Finance

Securitisation execs promoted in PGIM reorg

Sector developments and company hires

Securitisation execs promoted in PGIM reorg
PGIM Fixed Income has reorganised its senior management team, with the appointments effective from 1 January 2022. Under the reorganisation, md John Vibert has been promoted to the newly created role of president.

Vibert joined PGIM Fixed Income in 2014 as the head of securitised products and serves in that role currently. Prior to joining the firm, he was a lead portfolio manager for BlackRock’s mortgage credit portfolios and the lead trader for its non-agency RMBS trading team. He has also held senior investment positions at Credit Suisse and Morgan Stanley.

Meanwhile, mds Craig Dewling and Gregory Peters have been named co-cios and will assume cio duties from Michael Lillard, head of PGIM Fixed Income. Dewling joined the firm in 1987 and currently serves as deputy cio, while Peters joined in 2014 and currently serves as head of multi-sector and strategy, as well as a senior portfolio manager for the firm’s multi-sector strategies.

Vibert, Dewling and Peters will report to Lillard, who will remain the head of PGIM Fixed Income.

Upon Vibert assuming the role of president, he will relinquish the role of head of securitised products to Gabriel Rivera and Edwin Wilches, who will become co-heads of securitised products reporting to Peters. Gary Horbacz will, in turn, become head of securitised products research, reporting to Rivera and Wilches.

Upon Dewling and Peters becoming co-cios, the deputy cio role will be eliminated. In addition to his cio duties, Peters will remain a senior portfolio manager on the multi-sector team.

CLO rating criteria updated
Fitch has updated its CLOs and corporate CDOs rating criteria, having not received any market feedback on its exposure draft during the consultation period (SCI 9 August). The rating agency has not made any changes to the proposed methodology, other than to clarify two points.

One clarification made in the updated criteria relates to the ‘margin of safety’ concept for assigning ratings at the single-B minus rating level. The criteria now indicate that a committee may consider actual portfolio modelling results a notch above single-B minus when assigning new ratings to notes at the single-B minus rating level and in such cases would not perform a stressed portfolio analysis at the single-B minus level.

The second clarification is with regard to disclosure of comparison analyses of mid-cap portfolio financial ratios in initial rating reports for notes backed by mid-cap borrowers. Neither of the clarifications has an impact on existing ratings.

Fitch continues to expect that the criteria update will result in a modestly positive impact on ratings, affecting about 4% and 30% of US and EMEA CLO ratings respectively. CLO notes rated in the double-A category may be upgraded by one notch, while single-A and lower rating categories may be upgraded by one to two notches, as a result of the proposed criteria changes. No downgrades are expected from the criteria update.

The agency expects to publish a list of ratings that may be affected by the release of this final criteria within the next week.