Contents

CLOs

Not so new kids

CLO manager readying for launch

Not yet a year old, Sycamore Tree Capital Partners is aiming high. The firm intends to become a significant player in CLO management, with the belief that the experience and character of its team are more important than its age.

“Mark Okada, Jack Yang and I launched Sycamore Tree officially in November 2020, as a boutique private and alternative credit focused asset management firm,” recalls Trey Parker, the firm’s co-founder and cio. “We began with an opportunistic traded credit strategy, primarily bank loans and CLO debt, and we are now launching our CLO issuance and management business, which is obviously very complimentary from a strategy and team perspective.”

Further down the line, perhaps in a year or two, Sycamore Tree plans to add a special situations and/or private capital strategy business to further complement its offering. But for now, the focus is firmly on CLO management, after an initial nine- to 12-month period of putting in place a strong infrastructure and systems and bringing together an experienced team. 

“The firm is now up to 17 people, including an 11-person investment team focused on the bank loan and CLO markets,” Parker says. “All have quite a bit of tenure and experience – the average experience of the investment team is 18 years and the average experience of just the analyst team is a robust 13 years.”

He continues: “We’ve made a deep commitment to the CLO issuance and management business from a personnel, infrastructure and resource perspective, which will enable us to scale. Part and parcel of bringing in highly experienced people, who not only have relevance in CLO management, but also great relationships within the  CLO market –should enable us to be successful in achieving our goal – to consistently and programmatically issue CLOs into the US BSL market and build a successful CLO platform with committed, long-term capital.”

The latest such hire and perhaps the most significant is that of Paul Travers as an md, portfolio manager and member of the firm’s investment committee (SCI 9 September). Travers 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.

Despite, or perhaps because of, his 38 years’ experience in the CLO space, Travers’ enthusiasm for his new role is palpable. “My initial conversations with Sycamore Tree came at a time when I was weighing up whether or not to return to the CLO market; so if I was going to, it needed to be both meaningful and enjoyable,” he says.

As it turned out, this was a very good fit, Travers explains. “Meeting the team here, the quality of people, their commitment to excellence and as importantly their character – this is a business of trust and I wanted to deal with people who would just exude that – was what attracted me most. One of the things we’re committed to, alongside being really good at what we do and providing alpha, is being as transparent and as open as any manager in our business. I think that counts for a lot and is underestimated in terms of how important that can be – we don’t like surprises in our investment portfolio and we don’t intend to surprise our investors, and that can only be done through transparency.”

In addition, Travers says: “I’m going to be a partner in this firm and that’s really, really, important to me. I’m more than an employee; I’m going to have a real say here with my partners – Mark, Trey and Jack – in making sure that everything we do is done in the right manner.”

The feeling is clearly mutual. “The investment lens we look through is very similar to Paul’s history and outlook on the market,” Parker says. “The focus is on high quality deals, limited use of risk buckets and incorporating defensive positions – the nature of CLOs is to be opportunistic during periods of rising market volatility and we want to always be prepared for future volatility.”

That volatility is for now largely absent from a market that Travers believes is ideally positioned to support his firm’s ambitions. “The CLO market is cyclical, like every other business. But what the market is telling us right now is that it is in a really good place – US$18bn of CLOs issued in August, the largest month ever, with US$114bn year to date and virtually every research desk predicting a record year. That tells you the assets and liabilities are lining up and that doesn’t always happen.”

He continues: “Thinking about the asset side, you’ve got a strong economy, which should translate into low defaults. You’ve got a very strong M&A pipeline, which means we should have lots and lots of deals to look at – and we really like that because it allows us to be very selective. When there’s only a few deals in the market, you almost feel compelled to do some percentage of them; when there’s a lot, you can be that much more selective, so that’s really helpful.”

On the other side, Travers adds: “As an industry, we continue to see new entrants at triple-A through equity and we continue to see those who are already invested in the space giving greater and greater allocation. And that provides the liabilities we need to raise the next CLO.”

One potential challenge for Sycamore Tree is the need for a manager to be able to show a credible track record. However, Travers says: “While some will see our name and think we’re new, I believe we can demonstrate we’re anything but new – sure it’s a new name on the door, but we have an abundance of experience. And having some captive equity is also really important – it’s easy to raise capital in a good environment like today, but when it gets tough and you have that capital, you may be able to take advantage of a market when others can’t.”

So, as Parker concludes, the next step for the firm is clear. “We’ve got the investment team in place to be able to manage the deals; we have a very robust investment process that’s been functioning since the beginning of the year, in terms of idea generation and building high quality, risk appropriate portfolios to showcase to the market the type of investment style we will utilise. We have committed capital that we can use to issue deals and so we’re going to get to work.”

Mark Pelham

ABS

New frontiers?

Prospects for further NPL ABS guarantee schemes weighed

Given the success of both GACS and HAPS in facilitating the development of a market for non-performing loans, and consequently bank deleveraging, could similar government-backed measures emerge in other European jurisdictions? This Premium Content article examines the prospects for the introduction of further national guarantee schemes.

Italy and Greece appear to have embraced the most efficient model for de-risking their banks via the GACS and HAPS schemes respectively. With the overhang of troubled assets expected to rise post-Covid and new regulatory rules coming into effect for NPLs, the case for introducing securitisation guarantee schemes in other countries seems to be gaining momentum.

“GACS and HAPS have been game-changers for the NPL securitisation market. In my view, in the next five years, securitisation will be the most relevant tool by which both banks and investors will dispose of their NPL stock. Securitisation allows you to lower the capital structure and it is evident by the current way of the market that such transactions will not be solely confined to Italy or Greece,” suggests Dario Maria Spoto, partner at KPMG.

Structurally and conceptually, the gap between bid and offer prices has historically complicated attempts by banks to dispose of their non-performing loans. However, the Italian Garanzia Cartolarizzazione Sofferenze (GACS) and Greek Hellenic Asset Protection Scheme (HAPS) adopted a direct approach towards the active resolution of NPLs, through specific programmes providing a state guarantee on senior notes in bad loan securitisations. Such government guarantees enable the underlying NPLs to be priced higher and thus bridge the difference between the asking price and the price that potential buyers would be willing to pay.

First introduced in February 2016 and extended several times before its original expiration date of March 2019, the success of GACS in allowing the development of a market for bank NPLs saw the Italian government extending it for another 24 months, until March 2021, and again this year until mid-2022. In October 2019, the Greek government - with the agreement of the European Commission - introduced the HAPS rules, which aim to reduce the NPL stock from Greek systemic banks in a similar manner to those already used in Italy through GACS. HAPS has also been prolonged for a further 18 months, until October 2022.

Both schemes require the senior tranche of a securitisation to be rated by at least one External Credit Assessment Institution (ECAI) approved by the ECB. To be eligible for the government guarantee, the senior tranche should receive a rating equal to or higher than a predetermined target (triple-B for GACS; double-B minus for HAPS).

Spoto notes that the main difference between the two schemes is in fact linked to this minimum rating. “Naturally, we also do have to take into account that we are dealing with two completely different macroeconomic settings and, thus, different sovereign ratings. But the obvious difference is in the target rating.”

There are further differences, particularly as the schemes have also evolved and been modified from time to time. For instance, there are differences in the mezzanine interest deferral trigger.

GACS makes the full deferral of mezzanine interest compulsory if the net cumulative collection ratio is below 90%. HAPS requires the deferral of at least 20% of mezzanine interest if the net cumulative collection ratio is below 80% or if the servicer is replaced.

Under HAPS, upon enforcement of the guarantee, the servicer can be replaced if the net cumulative collection ratio for two consecutive payments is below 70%. Under GACS, upon enforcement of the guarantee, the servicer must be replaced if the ratio has been below 100% for two consecutive payments.

But perhaps what best defines both schemes, and particularly in the case of Italy - being a more mature market and having been operating for longer - is their successful outcome. Industry participants unanimously agree that both programmes are delivering on what they were originally designed to do. Moreover, they highlight the benefits of securitisation as a tool to help reduce the informational asymmetries between banks and investors across the NPL market.

“Prior to the introduction of the GACS and HAPS programmes, there was naturally an NPL market in both jurisdictions, but more related to direct NPL sales. However, the distance or gap between investors and banks was too large and those schemes were introduced within this specific context,” notes Rossella Ghidoni, director, structured finance at Scope.

She adds: “There was a high stock of NPLs which could not have been sold easily, or on a massive scale. National schemes incentivised banks to perform those securitisations. In Italy, for example, over €90bn of securitisations have been closed, which is huge.”

Timur Peters, ceo of Debitos, states: “My impression is that [GACS and HAPS] will be renewed for a while. This securitisation scheme is a success story; clearly a preferred option over having bad banks as a business plan. In the last eight months in Greece, we have seen the same flurry or patterns originally experienced in Italy.”

Meanwhile, the economic pain caused by the coronavirus pandemic has brought a renewed focus on how government guarantee schemes can provide valuable and effective solutions during an unpredictable context - especially one in which non-performing exposures are on the rise. Indeed, a backlog of debt and defaults is anticipated to materialise over the next couple of years, following the withdrawal of governmental coronavirus support measures.

“In Italy, GACS has been extremely relevant and in 2018-2020 accounts for 70%-80% of all transactions. Banks are still active servicers on such transactions,” observes Paolo Pellegrini, director general at Cerved Credit Management.

He adds: “But the typology of a new wave of Covid assets will be significantly different - mainly fresh NPEs still in the unlikely-to-pay classification - and will require new instruments, while it is unclear if GACS will be fully applicable in this new context. At the same time, the Covid crisis also means that no-one can ignore the NPL ratio.”

Prior to the pandemic, Spoto says he was convinced that such schemes would not be replicated in other jurisdictions. “However, if we now combine a more capitalised banking system with the new regulatory rules affecting NPLs, it pushes the case for the need of securitisation guarantee schemes.”

He adds: “My view is that southern countries - such as Spain or even Portugal - could be likely candidates. France has a huge stock of NPLs, but the ratio is more comfortable than in the jurisdictions I have just cited. However, if Spain and Portugal start introducing measures to assist banks through similar schemes - even for sub-performing loans - we could witness a domino effect.”

But Sally Onions, partner at Allen & Overy, says it is unclear whether there is a particular need to replicate such schemes in more established NPL markets, where NPL sales have continued throughout the pandemic. “Following Covid, there has been much said about an ‘NPL cliff’. That remains to be seen. However, what I feel we will see is more jurisdictions being involved in NPL sales, with more diverse types of underlying assets.”

Conceptually, NPL securitisation continues to mean different things to different market participants, according to Reed Smith partner Iain Balkwill. This seems particularly evident in the context of banks disposing of their non-performing loans.

He concludes: “Ultimately, for this technology to really prosper, you need to make sure the ecosystem and structures are all in place - such as rating agencies, legal framework and all the counterparties having the requisite expertise required to structure and effectively execute on these deals - which can explain why Greece took a little longer to get up and running with HAPS.”

Vincent Nadeau

ABS

Excellent shape

European ABS/MBS market update

September is living up to its reputation as a busy month for the European ABS/MBS primary market. Even though four deals are due to price today and tomorrow and three printed yesterday spreads remain tight and demand is still strong.

“It’s pleasing to see that the primary ABS market is in excellent shape,” notes one trader. “Although there is an element of volatility, partially caused by a weak equity market, the fact that the latest Auto ABS – Red & Black Auto Germany 8 – was extremely well-received reflects current market conditions.”

He continues: “It saw very tight levels across the board and the fact that the issuer BDK is not a manufacturer is particularly relevant, I feel. The final spread landed at 10bp, which truly matches pre-GFC levels. There was also considerable investor demand on the mezzanine tranches. If you look at the C tranche for example, it priced at +95bp - when comparably Noria in July priced at +110bp.”

Red & Black also saw fairly broad distribution with 24% of the class As going to asset managers, 43% to banks and 32% to central bank or other institution buyers. By geography the split was 48% Germany, 29% Benelux, 13% France, 5% UK and 6% other countries.

The class Bs were split 86%/14% between asset managers and central bank or other institutions, with 32% going to Germany, 27% UK, 14% France and 28% elsewhere. The class Cs and Ds all went to asset managers, split 51% UK, 37% France, 12% other; and 45% Benelux, 39% France, 16% UK respectively.

The other two deals that priced yesterday saw slightly less demand, though still healthy. Primarily retained Irish BTL RMBS Glenbeigh 2 2021-2’s offered class As saw a 90bp DM print from initial talk of 90-area with 1.2x coverage and Portuguese auto ABS Ulisses Finance No. 2 class As started out at 40-area but finished at 35bp DM with 2.1x coverage.

At the time of writing, one deal is scheduled to price this afternoon – Belgian auto ABS Bumper BE Compartment 1, which has released class A and B final guidance of 33-35bp DM and 85bp over one-month Euribor, respectively. While tomorrow is slated to see green prime RMBS BPCE Home Loans 2021 Green UoP; auxmoney's Fortuna Consumer Loan ABS 2021; and Portuguese consumer deal Viriato Finance No. 1. For more on all of the above deals, including pricing updates, see SCI’s Euro ABS/MBS Deal Tracker.

The current market dynamic makes spread widening unlikely in the short-term.

“Although there’s almost only two months to go, it feels as though December – when we usually see less liquidity – is much further away. The pipeline is looking particularly busy, especially for full-cap deals. These are excellent conditions for issuers, with extremely tight spreads,” the trader concludes.

Vincent Nadeau

Structured Finance

SCI Start the Week - 20 September

A review of SCI's latest content

Last week's news and analysis
CRT love
FHFA promotes CRT usage and tempts Fannie back into the mix
Digital lender debuts
German consumer collateral on offer
Legal concerns
Consumer protection uncertainties highlighted
On the up
Growth in private real estate deals continues
Pick-up continues
European ABS/MBS market update
Servicing expansion
SitusAMC discusses opportunities in the European direct lending market
Spanish SRT finalised
Another STS synthetic executed
SRT debut
First Nordic green synthetic executed
Strong opportunities
European NPL investment trends discussed
Tender pick-up
Buyback value depends on specifics of each bondholder
Tight pricing
Santander sets post-Covid record
Traffic jam
Bumper two days in auto ABS underlines strength of fundamentals

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.

Capital Relief Trades

Fannie is back

New capital rules bring Fannie Mae in from the cold

Fannie Mae is back in the market only five days after the Federal Housing Finance Authority (FHFA) released a proposal to significantly alter the capital treatment of CRT debt

The GSE has announced that it will recommence issuance of CAS bonds next month after an absence of 19 months.

CAS issuance will be accompanied by credit insurance risk transfer (CIRT) deals and multi family credit risk insurance (MCIRT) deals.

The first new CAS bond is likely to come to the market in October, and it might issuance another three at a rate of one per month before the end of the year, according to the GSE.

It does not foresee multi-family CAS issuance in the remainder of 2021.

This return to the market underscores the importance of the adjustments to the capital treatment of CRT introduced last week.

The absence of Fannie Mae has been a big talking point in the CRT sector over the last year and a half. It removed itself from the market in protest, it seems, at the Enterprise Regulatory Capital Framework (ERCF) unveiled by previous director of the FHFA Mark Calabria.

But Sandra Thompson is the new sheriff in town and the innovations introduced have succeeded in bringing Fannie back into the fold – as they were intended to do.

“The new capital rules have worked the oracle,” says a market source.

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 23 September

CRT sector developments and deal news

JPMorgan is believed to be readying a capital relief trade backed by European leveraged loans. The transaction would be the bank’s first such deal and follows deals issue by NatWest and Bank of Montreal (see SCI’s capital relief trades database). The securitisation is expected to close in 2H21.  

Capital Relief Trades

Downward pricing

Deutsche Bank completes CRT

Deutsche Bank has returned to the synthetic securitisation market with this year’s first capital relief trade from the CRAFT programme. Dubbed CRAFT 2021-1, the transaction is the most tightly priced CRAFT deal of the last six years (see SCI’s capital relief trades database).

The US$277.5m CLN printed at three-month Libor plus 8.5%. The pricing compares to plus 10.75% and plus 12.25% for the bank’s two post-Covid CRAFT deals that were executed in June last year. Indeed, at that point, pricing had widened by 3% compared to pre-pandemic levels and the bank had altered the deals after the pandemic in terms of both industry and rating composition (SCI 12 June 2020).

Deutsche Bank was one of the first lenders to execute synthetic securitisations in the aftermath of the coronavirus crisis. However, the focus of market practitioners back then turned to large corporates, which benefit from plenty of disclosure that enables investors to assess the default risk of the underlying assets. Additionally, SRT made sense for many banks, as corporate revolver drawdowns during the peak of the crisis boosted RWA consumption.   

Consequently, large banks with established corporate programmes - such as Deutsche Bank’s CRAFT - were able to tap the market. However, as the recovery continued over the last year, private investors have returned to other asset classes - including Southern European SMEs (SCI 4 August).      

Stelios Papadopoulos

RMBS

BPCE up

Debut French green RMBS prepped

BPCE is in the market with its inaugural green French prime RMBS via BPCE Home Loans FCT 2021 Green UOP (see SCI’s Euro ABS/MBS Deal Tracker). The STS-compliant transaction comprises tranches A and B, tentatively sized at 92.6% (with a 3.3-year WAL) and 7.4% respectively of the overall deal size.

The provisional pool has a total outstanding amount of about €1.9bn, as at end-July 2021. The issuer intends to sell only the triple-A rated class A notes, which are expected to carry a coupon of three-month Euribor plus 70bp, and retain the fixed-rate class B notes.

The collateral pool comprises 19,257 loans extended to 18,755 obligors, with an average loan size and CLTV of €98,700 and 79.4% respectively, after 54 months of seasoning. The majority of the loans (83.9%) are home loan guarantees and the remainder are first-ranking mortgage loans.

The securitised portfolio is well distributed around France, with the Ile de France (Paris) region accounting for 17.9% of the exposure, followed by Auvergne-Rhone-Alpes at 15.1% and Hautes-de-France at 10.3%. Of the borrowers, 70% are employees of private companies, 17.1% are civil servants, 11.8% are self-employed and 1.1% are pensioners.

The purchase price of the home loans paid from the issuer to the sellers is intended to be allocated to finance or refinance - in whole or in part - new eligible loans for the construction or acquisition of energy-efficient dwellings, as defined under BPCE’s Green Bond Framework. The framework has been independently assessed and verified by Vigeo-Eiris as compliant with ICMA’s Green Bond Principles.

Fitch and S&P have assigned preliminary ratings to the transaction. Roadshow calls are being held until Wednesday and the deal is expected to price by the end of this week.

Corinne Smith

CLOs

CLOs and beyond

Don Young, partner and co-founder of CBAM Partners, answers SCI's questions

Q: How and when did you become involved in the CLO market?

My partner Mike Damaso and I have been managing CLOs since 2001. I first became involved in the space when I joined Octagon Credit investors. After this, I went on to manage the Performing Credit business at Och-Ziff, which included US$7.5bn of CLOs. Mike has over 20 years of corporate credit management experience and first became involved in the CLO market when he worked at Guggenheim Investments, where he spent 13 years as a senior md, portfolio manager and chairman of the investment committee overseeing Guggenheim’s US$68bn corporate credit platform.

Mike and I had always talked about working together one day. Then in 2016 we decided to launch CBAM with our co-founder Jay Garrett. A year later, we had issued four CLOs through the CBAM platform totalling US$5.1bn of newly issued paper and we were named the largest CLO issuer of that year. Once we had the US CLO platform in place, we launched CBAM Europe in 2019, by hiring Jean Philippe Levilain from AXA. Jean Philippe has built a great team in Paris, and has issued three Euro CLOs. So, in total we’ve issued 17 CLOs across the United States and Europe and expanded our suite of investment strategies.

Q: How does the firm differentiate itself from its competitors?

There are a few ways we differentiate ourselves but it starts with creating an environment that allows our team to grow and capitalise on their strengths. Since we founded CBAM, Mike and I have continuously worked towards that by creating a collaborative, collegial, and inclusive space for our team of 46 professionals, over 60% of which are directly involved in the investment process. 

When it comes to investment performance, especially during times of volatility, we have the ability to actively trade and have delivered value to investors by doing so. Since 2017 we’ve traded an average of US$11bn of loans each year, and in 2020 we traded nearly US$13bn of loans. While loans were historically a buy and hold asset class, that has changed significantly. We believe that the best way to protect our investors is to constantly optimise the portfolios for risk.  Further evidence of this dynamic is the fact that CBAM was one of 31 CLO managers that did not have a tranche downgraded or put on watch during 2020. In the limited instances of defaults across the portfolio, we have been able to achieve strong recoveries. We expect our two largest defaults to have recoveries well above par. 

Another way we differentiate ourselves is by adapting our business to secular shifts in the markets. For example, the loan market has made a big shift toward private credit. In response we have expanded our credit solutions across broadly syndicated loans, private credit and credit underwriting to create a one-stop-shop for both sponsors and banks. By having a single relationship that can quickly and efficiently assist with any flavour of credit transaction, we’ve been able to expand our offerings. As an increasing percentage of deals flow to the private market with the prevalence of “hybrid” credit underwrites, sponsors and banks will favour those that have credit solutions across both the broadly syndicated and private markets.

Q: What are the firm’s key areas of focus today?

Although our heritage is in the CLO space, we’ve strategically expanded our product suite to include strategies where the firm’s credit research provides insights into other portions of the capital structure, including private credit, capital markets, opportunistic credit, structured credit and equity investing.

A pivotal step in the evolution of CBAM was when we hired Mike Manfred in late 2020 as head of capital markets. CBAM’s capital markets transactions now include direct lending, credit underwrites, bridge loans and other types of bespoke transactions that help our clients achieve their goals, and we’ve committed US$4.5bn in the capital markets space across 64 deals since inception.

As part of our strategic growth, we expanded our lending capabilities from the broadly syndicated market to private credit and direct lending. In private credit, we benefit from a flexible mandate, deploying capital across the capital structure without rigid yield or structural constraints. Our increased focus on managing direct relationships with private equity firms has also significantly bolstered the opportunities to act as a direct lender to their portfolio companies. We also have agency capabilities, which has enabled us to act as an agent and lead arranger in this space. We also now invest in CLO tranches of other managers, primarily in the mezzanine tranches for our opportunistic credit fund.

Five years since inception, we now have over US$15bn in AUM across multiple asset classes and geographies.

Q: What is your strategy going forward?

We’re always focusing on what’s best for our clients and are regularly looking for ways to adapt to the current market environment. We see considerable opportunity to build on our strong initial momentum in capital markets and private credit while also maintaining our position as one of the markets’ leading CLO managers and expanding our existing equity investing business, where we believe our expertise, insights and data can give us, and our clients, an advantage. In addition to our existing Long-Short Equity strategy, we added a SPAC strategy this year to give our investors access to this developing market where we find meaningful opportunities.

Q: Which challenges/opportunities do you anticipate in the future?

Even in bull markets, there are always individual industries and names that are misunderstood, and where there are opportunities to generate excess returns. Inflation and the associated margin compression will certainly be points of focus in the coming months and the best way to prepare for such headwinds is to seek out businesses with solid growth profiles, robust margins and the ability to pass through price increases. We are very focused on assessing our exposure to companies with high labour costs and significant fixed costs.

We’re also carefully monitoring the ongoing changes to the regulatory environment and the impending Libor transition to SOFR which will result in the benchmark for all leveraged loans and CLOs to change. Thanks to our team we’re well prepared to navigate this transition.

The convergence of the private and public markets will also create challenges and opportunities that we’re going to carefully consider. As more higher quality deals of increasing size are migrating to the private markets, our newly expanded suite of lending solutions across both public and private markets positions allows us to play a leading role in any debt transaction.

Mark Pelham

Structured Finance

Pagaya goes public via SPAC

Sector developments and company hires

Pagaya goes public via SPAC
Fintech securitisation issuer Pagaya Technologies and EJF Acquisition Corp (EJFA), a publicly traded SPAC, have entered into a definitive business combination agreement. As a result of the transaction, which values the combined company at an estimated enterprise value of approximately US$8.5bn at closing, Pagaya will become a publicly listed entity.

Founded in 2016 by ceo Gal Krubiner, chief technology officer Avital Pardo and chief revenue officer Yahav Yulzari, Pagaya’s mission is to build the leading artificial intelligence network to help financial services providers enable better outcomes. Pagaya’s partners transact across several markets - including unsecured consumer, auto, credit card, point-of-sale and real estate markets - and the firm aims to further expand, with plans to offer credit solutions for mortgages and insurance-related products.

Upon closing of the transaction, Pagaya’s management team will continue to lead the Company. Manny Friedman, chairman, EJFA and co-ceo and co-cio, EJF Capital will join Pagaya’s board.

Existing Pagaya equity holders are expected to retain an approximately 94% ownership stake in the firm. The business combination is targeted to close in early 2022, subject to customary closing conditions.

In other news…

Italian SRTs upgraded
Scope has upgraded its ratings on a pair of EIB SME Initiative for Italy SME significant risk transfer transactions, following better-than-expected performance that has resulted in significant structural deleveraging. The senior tranche of EIB SME Initiative for Italy (BP Bari) has been upgrade to triple-A from double-A minus, while the senior tranche of EIB SME Initiative for Italy (BCP) has been upgrade to double-A plus from single-A minus.

As of 30 June 2021, 90-days-past-due and defaulted loans collectively represent 2.3% of the initial BP Bari reference portfolio, which is better than Scope’s expectation. The protection buyer has removed €12.2m of portfolio notional from the reference portfolio, which is amortising in line with Scope’s expectation.

Meanwhile, 90-days-past-due and defaulted loans collectively represent 3% of the initial BCP reference portfolio, which is better than Scope’s expectation. The protection buyer has removed €4.6m of portfolio notional from the reference portfolio, which is amortising in line with Scope’s expectation.

Trade finance ABS issuer acquired
White Oak Global Advisors has acquired Finacity Corporation, the global working capital and trade finance funding solutions provider. The deal will see Adrian Katz remain as Finacity ceo and substantive equity holder, working closely with the leadership of White Oak Global Advisors.

With this acquisition White Oak and its affiliates will have over 215 professionals focused on asset-based lending, offering trade receivables securitisation and a variety of ABL products, including invoice discounting, factoring, trade finance, supply chain finance, lender finance and import-export finance. Finacity will operate as a standalone business but will work closely with White Oak in a number of areas where there are synergies – including White Oak deploying institutional capital on Finacity’s platform.

Structured Finance

Pandemic 'feedback loop' highlighted

Sector developments and company hires

Pandemic ‘feedback loop’ highlighted
Secular changes affecting the recovery of in-person office occupancy in New York City is consequential not only for property-level cashflow, but may also have ripple effects on other sectors, Fitch suggests. The city is the largest US office market and the rating agency says it provides a good case study of the potential feedback loop of pandemic pressures on office demand, which has ramifications for mass transit, outmigration and the city’s budget.

In particular, the pandemic is causing unprecedented stress on ridership revenues for broader New York’s metro mass transit systems. Weaker financial profiles could limit capital investment available for system maintenance and improvement, resulting in lower service quality and reliability levels that reinforce remote work trends, according to Fitch.

Meanwhile, the decline in property tax revenues - the largest source of the city’s revenues - due to the drop in property assessed value is expected to be offset by other tax revenue growth, particularly personal income and sales taxes.

Fitch’s base case expectations incorporate secular headwinds of potential entrenched remote working practices and outmigration that negatively affect office fundamentals. “These pressures will result in uninspiring, below-average occupancy gains and net effective rent growth in the next upcycle. Rated NYC office REITs likely will not see positive same-store NOI growth until 2022,” the agency notes.

However, it expects rent collections to remain resilient, as tenants have maintained operations and typically have long-term leases.

For CMBS transactions, Fitch says it is most concerned about office properties with binary risk, concentrated or near-term rollover, or tenancy at risk for greater space reduction. The agency anticipates property performance to become increasingly bifurcated by quality, with Class A space outperforming Class B space.

In other news…

North America
Ocorian has strengthened its Americas capital markets team with the appointment of Ed O’Connell as head of transaction management - Americas, based in New York. O’Connell has over 30 years’ experience in overseeing structured finance transactions, serving as primary deal counsel and general counsel for the issuance of over US$20bn of securities.

Prior to joining Ocorian, he was served as chief legal counsel - capital markets and svp at TMF Group. Before that, he was a partner in Jones Day’s banking and finance department.

Structured Finance

US CLOs, Trups CDOs under observation

Sector developments and company hires

US CLOs, Trups CDOs under observation
Fitch has placed 102 tranches issued by 43 US CLOs and 13 tranches issued by seven Trups CDOs under criteria observation (UCO), following the publication of its CLO and corporate CDO rating criteria last week (SCI 17 September). The agency intends to resolve the UCO status by applying the updated criteria to each transaction within six months.

In other news…

North America
Matthew Hays has joined Latham & Watkins as a partner in the finance department and member of its structured finance practice, based in Chicago. Hays represents asset managers, fintech companies and financial institutions on a variety of complex structured finance transactions across a broad range of asset classes. He joins Latham from Dechert in Chicago. 

Q CELLS North America has named Alex Kaplan head of solar financing, based in San Francisco. Kaplan was previously vp, head of capital markets at Mosaic, responsible for its ABS programme. Before that, he worked at SunFi, SolarCity and the PFM Group.

Structured Finance

Call for 'risk-sensitive' prudential approach

Sector developments and company hires

Call for ‘risk-sensitive’ prudential approach
The ECB has published its comments in connection with the European Commission’s targeted consultation on the functioning of the EU securitisation framework. In particular, the ECB says that the experience it has gained - as an investor in the ABS market through its asset purchase programmes, a collateral taker in its credit operations and as the competent authority for directly supervising significant credit institutions – suggests that improvements are needed to support a more effective securitisation market.

The central bank notes that a well-functioning securitisation market is crucial for European banks, as it enhances their capacity to channel lending to the real economy, provides them with additional funding and allows risk to be transferred to investors. It suggests that achieving the Commission’s strategic objective of scaling up the securitisation market requires the regulatory framework being flexible enough to accommodate the diverse securitisation business models followed by European banks.

For example, the new prudential regulatory framework might include targeted improvements of its risk sensitivity to further enhance the differentiation between the actual risk profile of underlying asset pools, structural features and model and agency risks stemming from information asymmetries. “A more risk-sensitive prudential treatment would better reflect risks and thus enable better calibration of capital requirements,” the ECB states.

Equally, work should continue on prudent safeguards for robust SRT securitisations to avoid so-called flowback risk. Ensuring that originating banks have a robust capital position requires not only a positive SRT assessment at origination, but also that banks carry out ongoing monitoring of SRTs to track any impact on their capital position, business viability and risk management, according to the ECB.

“The changing nature of structural features in SRT securitisations calls for an enhanced regulatory framework that provides sufficient room for supervisors to review these transactions without being constrained by overly rigid fixed timelines,” it observes. “SRT assessments should not follow a ‘one-size-fits-all’ approach. Supervisors should be able to conduct case-by-case assessments within a general regulatory framework, while also considering both the role of securitisations in the comprehensive bank-level supervisory analysis and all relevant risk information about the securitisation transaction.”

Finally, the ECB says it would welcome an assessment of the track record of market liquidity for STS securitisations and ABCP for the liquidity coverage ratio (LCR). This track record could be analysed with a view to revising the existing criteria for including this type of asset in the LCR buffer in the light of the new European securitisation framework.

DLA debuts
Redwood Trust has priced what it says is the first US non-agency RMBS that leverages the power of blockchain technology. The firm engaged Liquid Mortgage to act as distributed ledger agent (DLA) for the US$449m SEMT 2021-6 transaction.

In this role, Liquid Mortgage will leverage its blockchain-based technology to provide end users with more timely reporting of loan level payments of principal and interest on the underlying residential mortgages. Whereas the traditional reporting cycle for remittance data on a RMBS transaction is monthly, Liquid Mortgage is expected to report this payment data to users of its proprietary platform on a daily basis.

By leveraging the speed and accuracy of distributed ledger technology, the firm believes transparency can be drastically increased and the points of friction reduced in the life of a residential mortgage loan. Additionally, with a permanent digital record of loan data, mortgages should be able to be bought and sold in a much more commoditised manner.

Earlier this year, Redwood announced an investment in Liquid Mortgage as its third investment under the company's RWT Horizons venture investment strategy (SCI 20 April).

EMEA
Channel Capital Advisors has appointed Maarten Ooms as senior business development director, reporting to Hilmar Hauer, head of debt products. Ooms has been tasked with deal origination duties and has over 20 years’ experience in the international structured finance market. He previously covered the Spanish, German and UK markets for Rabobank’s financial advisory and solutions team.

Channel has also hired Georgios Gazetas as a structurer within its debt products team, reporting to Hauer. Gazetas was previously a structurer at Demica, where he led trade receivables securitisations.

Structured Finance

Fraud charges for Honor Finance pair

Sector developments and company hires

Fraud charges for Honor Finance pair
The US SEC has announced fraud charges against James Collins and Robert DiMeo, the former principals of Honor Finance, for misleading investors about the subprime automobile loans that backed its US$100m offering. The SEC's complaint, filed in US District Court for the Northern District of Illinois, alleges that the pair were responsible for false and misleading statements about, and engaged in deceptive conduct regarding, Honor's servicing practices in connection with the Honor Automobile Trust Securitization 2016-1 (HATS).

According to the complaint, Collins and DiMeo took various steps designed to artificially inflate the value of the collateral underlying HATS. Specifically, the complaint alleges that: ineligible loans were included in the deal; loan repayment dates were extended without borrower knowledge; and payments due from delinquent borrowers were forgiven. The complaint claims that because of these improper practices, the servicing and performance information Honor provided to investors at the time of the offering and in later monthly reports was false.

The complaint charges the defendants with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC is seeking permanent injunctions, officer and director bars, disgorgement with prejudgment interest and civil penalties.

In other news…

EMEA
Addleshaw Goddard has strengthed its structured finance practice with the hire of partner Carl Posern. With almost 14 years' experience in both London and Frankfurt, Posern is also German-qualified, enabling him to work alongside the firm's Germany team. He was previously a partner at Pinsent Masons and, before that, a managing associate at Linklaters.

Fortrum has launched a suite of ESG services to enhance its existing range of due diligence services for the mortgage and securitisation market. The effort will be led by new hire Gary Killick, who has been named senior ESG consultant. Prior to joining Fortrum, Killick was senior ESG executive at Prudential, focusing on climate risk and responsible investment issues.

Loyalty ABS performance ‘stronger than expected’
Airline loyalty programme securitisations have exhibited stronger than expected performance as the underlying cashflows rebounded significantly during the past year, Fitch reports. The rating agency notes that such performance can be attributed primarily to robust consumer spending and, to a lesser extent, the return of leisure and business travel thus far in 2021.

Over the past 18 months, US airlines raised approximately US$30bn in capital backed by their loyalty programmes, which provided liquidity to weather pandemic-related volatility (SCI 8 February). While issuance was dominated by US airlines during the height of the pandemic, this new asset class may unlock additional financing options for airlines globally, according to Fitch.

Based on the most recent quarterly performance data, loyalty programmes’ cash collections have increased more than 65% since the lowest points observed in 2020. For instance, United’s MileagePlus and Delta’s SkyMiles securitisations’ cash collections nearly doubled since their lowest point in May and June 2020 respectively.

Overall, cash collections are currently trending closer to Fitch’s expectations for performance in 2022, but still remain 25%-45% below 2019 levels. The agency’s base case expectations are for cash collections related to loyalty programmes and air traffic to reach near 2019 levels by year-end 2023.

As of the most recent quarterly payment dates, United, American and Delta’s loyalty programmes saw DSCRs of 2.13x, 1.29x and 1.89x respectively – all well above the 0.75x (American and Delta) and 1x (United) peak DSCR thresholds defined in transaction documents for the period. “Given DSCR headroom, loyalty programmes have enough excess cashflow to cover redemption costs associated with managing the programmes and to provide operating cashflow to the airlines to help manage cash burn and/or low margins,” Fitch concludes.