Contents

ABS

Lack of clarity

Positive signs for Indian ABS, but challenges remain

The Indian ABS market has demonstrated resilience during the Covid-19 pandemic. However, going forward, the lack of a central data depository and secondary market poses challenges to the growth of securitisation in this jurisdiction.

“The Indian securitisation market has crossed 30 years of existence – since then we have come a long way. The Indian market has grown well: there has been a steady rise in issuances and issuers, and this market can become even larger with time,” said one panellist at IMN’s Global ABS conference this week.

The size of the securitisation market in India is estimated to be around US$26bn. Retail loan pools have demonstrated resilience during the pandemic, with collection ratios dipping during the second wave but not as sharply as in the first wave of Covid-19.

Nevertheless, some securitised pools were subject to stresses, where entities had defaulted on their debt. But only five pools from two originators saw a rating downgrade.

Out of the five downgraded pools, the ratings of two pools were restored to their original level subsequently. However, it should be noted that rating upgrades outweighed downgrades across all asset classes.

Looking ahead, challenges for the jurisdiction are attributed partly to the lack of an active secondary market for ABS transactions, which constrains the development of a CDS market for risk protection. Panellists also noted that fundamentally there is a lack of a central data repository on the performance of ABS transactions, which creates information asymmetry.

Another issue for India is limitations on digital infrastructure, which can support price discovery, execution and monitoring of transactions.

Angela Sharda

Structured Finance

Dual-currency debut

Rare European CRE CLO prepped

Starz Realty Capital has mandated leads for a rare European dual-currency static CRE CLO named Starz Mortgage Securities 2021-1 (see SCI’s Euro ABS/MBS Deal Tracker). The transaction has no reinvestment ability but allows the issuer to modify performing loans, as well as sell credit risk and defaulted assets, and it also features note protection tests.

The transaction will issue notes in sterling and euro, and is collateralised by nine commercial mortgage loans secured by 17 properties. Of the loans, six (accounting for an aggregate principal balance of £186.4m, representing 84.8% of the transaction balance) are sterling-denominated, with exposure across 14 properties located in eight regions throughout the UK. The remainder (accounting for an aggregate principal balance of €39.3m) are euro-denominated, with exposure across Spain (5.8%), Ireland (4.8%) and the Netherlands (4.6%).

The assets have regional exposure to London (accounting for 30.1% of the combined pool), the East of England (11.6%), Scotland (11.1%) and the South East of England (10.7%). In terms of property type, the assets are concentrated across multifamily (accounting for 49.4% of the combined pool) and retail (22.2%). The pool has a combined LTV of 65.9% and a combined as-is DSC of 0.71x.

Rated by KBRA and S&P, eleven classes of certificates will be issued, nine of which will be publicly offered. The transaction comprises two separate currency waterfalls, with proceeds from sterling-denominated collateral interests paying the class A1, B1, C1 and D1 notes and proceeds from euro-denominated collateral interests paying the class A2, B2, C2 and D2 notes.

Any remaining proceeds from each waterfall will be used first to make up shortfalls in the class A through D notes of the other currency’s waterfall and then - subject to the note protection tests - to make payments in respect of the sterling-denominated class E and F notes, certain junior expenses and the sterling-denominated subordinated notes. The class F and subordinated notes will be retained by Starz or an entity advised by Starz.

The loan proceeds were used to acquire properties and refinance existing debt. The securitisation is being undertaken as part of Starz’s overall operating strategy, which includes balance sheet financing.

Angela Sharda

Structured Finance

SCI Start the Week - 27 September

A review of SCI's latest content

Last week's news and analysis
BPCE up
Debut French green RMBS prepped
CLOs and beyond
CBAM Partners answers SCI's questions
Downward pricing
Deutsche Bank completes CRT
Excellent shape
European ABS/MBS market update
Fannie is back
New capital rules bring Fannie Mae in from the cold
New frontiers?
Prospects for further NPL ABS guarantee schemes weighed
Not so new kids
CLO manager readying for launch
Replacement issues
SOFR challenges explored

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

Freddie prints again

The seventh STACR of 2021 and third HQA prices

Freddie Mac has priced its latest STACR deal, designated 2021-HQA3 and worth $1.07bn, via Morgan Stanley and Citi. This is its seventh STACR of the year and, is common, will likely be accompanied by an ACIS transaction.

The trade is the last STACR of Q3, and is the third HQA deal – which signify higher LTVs – of the year.The GSE plans to execute another two STACRS in Q4.

The co-managers were BNP Paribas. Credit Suisse, Performance Trust and Societe Generale.

There were four tranches to the trade – M1, rated Baa3/BBB by Moody’s and DBRS, M2, rated Ba3/BB, B1 rated NR/B and B2 which is unrated by both agencies.

The M1 is worth $447m, carries a 2% crredit enhancement (CE), has a 2.34 year weighted average life (WAL) and is priced to yield SOFR plus 85bp. The $268m M2, with a 1.25% CE and 4.91 WAL, yields SOFR plus 210bp.

At the other end of the stack, the $178m B1 has a 0.75% CE, carries a 4.99 WAL and yields SOFR plus 325bp while the $178m B2 has a 0.25% CE, also has a 4.99 WAL and is priced to yield SOFR plus 625bp.

So far in 2021, Freddie Mac has had the field to itself with regard to CRT issuance. But last week Fannie Mae released news that it will re-enter the fray shortly.

Simon Boughey

Capital Relief Trades

Mobilising capital

Call for risk transfer adoption in development finance

Aid agencies, development finance institutions (DFIs) and multilateral development banks (MDBs) must make development finance work harder to achieve impact, according to a new OECD policy briefing. Entitled ‘Making blended finance work for sustainable development: the role of risk transfer mechanisms’, the report calls for the adoption of portfolio approaches that connect large-scale commercial finance supply with small-scale borrower demand, including credit risk transfer mechanisms (RTMs).

The report suggests that three entry points can be used to mobilise commercial capital at scale with credit RTMs. The first is as originator: DFIs and MDBs can offset or share credit risk – stemming from their lending operations – to or with commercial actors, thereby allowing development finance providers to lend more.

The second entry point is as a risk buyer: development finance providers can encourage and enable commercial financial institutions to be more active in relevant geographies, regions and asset classes by taking on credit risks originated by commercial financial institutions. Finally, development finance providers can act as facilitators by providing grants and technical assistance (TA) in connection with developing bankable RTM transactions jointly with the private sector or DFIs, as well as to signal to the market the possibilities of RTM (see SCI’s Impact SRT Research Report).

“DFIs and MDBs are well positioned to release credit risk from their balance sheets in order to finance additional projects. In doing so, they can offset segments of their loan portfolio to commercial investors and focus on new lending,” the OECD briefing notes.

In order to facilitate the scaling of this type of transaction, the report recommends that donors – as owners of the DFIs and MDBs – should invest in having a better understanding of the impact of risk transfer on DFI and MDB balance sheets and the role of rating agencies, as well as ensure that the right incentives are in place for the DFIs and MDBs. Equally, they should invest in understanding the bottlenecks to increase the number of such transactions, including the lack of local regulation, limited availability of sufficiently large high-quality portfolios and misaligned incentives.

The report is the first in a series of three OECD Development Co-operation Perspectives dedicated to risk transfer mechanisms, to be published in 2021 and 2022, with support from the Swedish International Development Agency (Sida). The second paper in the series will explore how data and transparency can enable the use of RTMs on a larger scale, while the third one will investigate the role of regulation.

The report benefitted from input from representatives from Barclays, EIF, FMO, Moody’s, MSPL Consulting, Sida and USAID.

Corinne Smith

Capital Relief Trades

CRTs in the air

Another two warehouse loan banks said circling the market

Two unnamed US regional banks are currently in the throes of putting together new capital relief trades and issuance is tentatively expected in Q1 or maybe Q2 2022, say well-placed market sources.

The issuers are looking to securitize warehouse loans, as did debutant Texas Capital Bank (TCBI) in March and then Western Alliance Bancorporation (WAL) at the end of June.

Both banks are currently trying to size the transactions and also gauging the best moment to issue, add the sources.

Although these issuers are looking to bring portfolios of warehouse loans to the CRT market, the established issuers such as Citi and JP Morgan Chase are also examining the possibilities of issuance in a much wider range of asset classes.

Simon Boughey

CLOs

New heights

European CLO Market remains bullish with a strong pipeline

European CLO issuance volumes are accelerating to new levels and are already some way past last year’s €22.1bn new issue total. However, the market is showing no signs of slowing down and predictions are for new issuance to hit around €30bn. 

“2021 has been a very strong year for CLOs both in terms of new issuance and refinancings. 2020 was a very sad year, but we aren’t a million miles away from levels in 2019 which was a bumper year [where new issuance reached €29.1bn, the post financial crisis record],” said one panellist at IMN’s Global ABS conference this week.

Primary spreads have ticked up throughout the year on the back of increasing supply, but have stabilised at around 100bp for triple-As in the past couple of months. Meanwhile, defaults have pushed up slightly and are currently around 6.5%, almost double the rolling average of 3.3%, though still lower than the 8.5% seen last year.

Members of the panel panellist observed that demand for CLOs remains strong thanks to the widening awareness of the instrument as a resilient product with unique structures that are designed to withhold within periods of stress. Consequently, they said that CLOs are becoming a mainstream asset class that still provides attractive returns for investors.

The outlook for the European market for 2022 remains positive with hope that issuance levels will remain strong and continue to grow. As one panellist concluded: “We are well out of the pandemic and the direction we are moving in is positive. I think we are going to be very busy next year – the market is holding up very well.”

Angela Sharda

Structured Finance

Synthetic Libor settings confirmed

Sector developments and company hires

Synthetic Libor settings confirmed
The UK FCA has confirmed that to avoid disruption to legacy contracts that reference the one-, three- and six-month sterling and Japanese yen Libor settings, it will require ICE Benchmark Administration to publish these settings under a 'synthetic' methodology, based on term risk-free rates, for the duration of 2022. However, these six Libor settings will be available only for use in some legacy contracts and are not for use in new business.

The synthetic rate has been chosen by the FCA to provide a reasonable and fair approximation of what panel bank Libor might have been in the future. The synthetic rates will no longer, however, be 'representative' as defined in the Benchmarks Regulation (BMR).

The methodology the FCA will require Libor’s administrator to use for calculating these synthetic rates is forward-looking term versions of the relevant risk-free rate, plus the respective ISDA fixed spread adjustment. The six Libor settings will become permanently unrepresentative of their underlying markets from 1 January 2022 and the first non-representative publication under their 'synthetic' methodology will be on 4 January 2022.

The FCA will decide and specify before year-end which legacy contracts are permitted to use these synthetic Libor rates.

In other news…

Global
Nigel Batley has been appointed as a global representative of Lord Capital through NIB Advisors, his independent consultancy company. He will focus on introducing the firm’s balance sheet management and professional control party product to clients predominantly in markets other than the Americas. Batley was previously global head of asset-backed finance at HSBC, which he joined in 1987.

North America
Scott Soussa is set to join Angelo Gordon as chief strategy officer in April 2022, reporting to Josh Baumgarten and Adam Schwartz, the firm’s co-ceos. Soussa was previously a senior md at Blackstone and formerly co-head of BAAM’s strategic capital group. Prior to joining Blackstone in 2003, he was controller of Lava Trading, a securities trading technology company.

Structured Finance

CLO ETF moves down cap stack

Sector developments and company hires

CLO ETF moves down cap stack
Janus Henderson Group has filed a preliminary registration statement with the US SEC for the Janus Henderson B-BBB CLO ETF (JBBB) for US investors. The exchange-traded fund - which is expected to be the first ETF focused on providing exposure to single-B to triple-B rated CLO tranches - will be managed by portfolio managers John Kerschner and Nick Childs.

The launch of JBBB follows the pioneering launch of the Janus Henderson AAA CLO ETF (JAAA) and will provide investors with additional options to gain exposure in this traditionally hard-to-access asset class. If all approvals are granted, the fund is expected to launch on or around 15 December 2021.

In other news…

Aircraft lessor formed
Castlelake has formed Castlelake Aviation (CA), a corporate lessor of commercial aircraft that will finance a portfolio of modern, young, fuel-efficient aircraft. The move builds on Castlelake's history of innovation in aviation finance, including its establishment of an aviation lending business in late 2020 and its reopening of the aircraft ABS market with Castlelake Aircraft Structured Trust 2021-1 in January 2021.

CA will directly benefit from this differentiated expertise and senior Castlelake aviation leaders, including Joe McConnell and Otto Verhoeff, who will serve on CA's board and be directly involved in the development, execution and oversight of its growth strategy.

Upon its formation, CA's initial portfolio will be composed primarily of next generation, narrowbody aircraft on long-term leases to leading international airlines and CA will maintain a similarly high-quality, fuel-efficient fleet by utilising Castlelake's robust trading and re-marketing capabilities. Additionally, CA's growth trajectory will be supported by Castlelake's extensive near-term pipeline of investing opportunities, including active negotiations for over 40 aircraft representing over US$2bn in potential investments, primarily in newer technology assets.

CA's portfolio will be financed by a mix of secured and unsecured debt instruments, in addition to equity capital provided by funds managed by Castlelake.

Asian infrastructure partnership inked
Clifford Capital Holdings (CCH) will act as a strategic partner to a sustainable infrastructure debt financing platform to be established by HSBC and Temasek under a proposed partnership. HSBC and Temasek will invest up to a combined US$150m of equity to fund loans, working alongside the platform’s strategic partners, CCH and the Asian Development Bank (ADB) in the initial phase.

The ambition for the platform is to build a pipeline of projects to scale, dispensing over US$1bn of loans within five years, with a meaningful portion targeting marginally bankable sustainable infrastructure projects. Based in Singapore, the platform will target renewable energy and storage, water and waste treatment and sustainable transport to help meet carbon reduction targets and build resilience to offset the impact of climate change.

Aligned with CCH’s commitment to sustainability as well as to address the infrastructure financing gap in Asia, the platform will leverage CCH’s networks, expertise and experience to support set-up of the platform prior to launch. CCH will also provide a combination of middle- and back-office support as a managed services provider when the platform is fully operational.

Call for CRA Regulation update
ESMA has published an opinion on how access to and use of credit ratings can be improved in the EU. In the opinion, ESMA highlights the difficulties experienced by users of credit ratings and recommends that legislators amend the CRA Regulation or take alternative legislative action to address them.

The opinion notes that the usability of credit ratings is severely limited, as they cannot be accessed in a machine-readable format or downloaded in sufficient numbers to be used for regulatory purposes. In practice, users mainly access and use credit ratings and related research reports through licenses for data feeds and platform services offered by other companies in CRAs’ groups. These companies are not currently subject to regulation and their licensing practices and the high fees charged raise both investor protection and competitiveness concerns, according to ESMA.

EMEA
Michael Rurik Halaby has joined MUFG’s London aviation finance office as md and head of aviation advisory, with over 20 years of experience in the sector, including aircraft ABS. He was previously head of aviation debt origination – EMEA at Deutsche Bank, which he joined in 2016. Before that, Halaby worked at Valais Advisory, BNP Paribas and ABN AMRO.

Structured Finance

SFA paper supports agency CRT

Sector developments and company hires

SFA paper supports agency CRT
The SFA has published a white paper on the economics of credit risk transfer at Fannie Mae and Freddie Mac. The paper responds to an earlier FHFA report that had questioned the economic benefits of CRT (SCI passim) and illustrates how CRT has been - and can continue to be - an effective credit risk management tool. It also notes that the recently announced notice of proposed rulemaking (NPR) from the FHFA responds to questions that the securitisation industry has raised, and that the economic analysis of the white paper will form the basis of the SFA’s response to the FHFA’s NPR on enterprise capital.

The paper not only supports the GSE CRT programmes, but also provides statistics on credit risk transfer securities relative to the performance of the underlying risk itself and highlights the risk distribution benefit of programmatic issuance of such transactions under a more reasonable capital framework. Further, to help create an efficient CRT market, the SFA suggests that the FHFA adopt a principles-based approach to the Enterprise Capital Rule that achieves three main goals.

The first goal is to establish a stable and predictable capital regime that prioritises safety and soundness. The second encourages the GSEs to engage in programmatic CRT issuance by providing for meaningful transfer of risk as soon as practicable following loan acquisition. The third is to facilitate access to credit by transferring risk on loans targeted at underserved borrowers.

In other news…

Asia
Richard Ambery has been named senior counsel at the Asian Development Bank, based in Manila. He was formerly partner and head of capital markets at Ganado Advocates in Malta, with a particular focus on international structured finance. Before that he was a partner at Arthur Cox and also worked at Paul Hastings, Mayer Brown, Dechert, Clifford Chance and Freshfields.

Further TCA execs charged
The US SEC has charged Robert Press, the former ceo of TCA Fund Management Group, and Donna Silverman, TCA’s former chief portfolio manager, for their roles in the firm’s scheme to artificially inflate the net asset values and performance results of several TCA-managed funds. The SEC previously charged TCA Global Credit Fund with fraud and obtained the appointment of a receiver over those entities and the TCA funds, as well as two other TCA executives for their roles in the alleged fraud.

The SEC’s order against Press finds that, through Press’s actions, TCA fraudulently inflated net asset values and performance of the TCA funds by recording non-binding transactions and fraudulent investment banking fees on the funds’ books and records. According to the order, the inflated asset values and false performance results were included in promotional materials and account statements distributed to the TCA funds’ current and prospective investors, which showed the funds as always having positive monthly returns. In fact, without the fraudulently booked transactions, the TCA funds would have had at least 34 months of negative returns since inception.

The SEC’s order against Silverman finds that she included the non-binding transactions and fraudulent investment banking fees in data she prepared that was used to calculate the TCA funds’ asset values and performance results.

The SEC’s orders find that Press violated the antifraud provisions of the federal securities laws and that Silverman aided and abetted violations of certain antifraud provisions. Without admitting or denying the SEC’s findings, Press and Silverman each agreed to the entry of a cease-and-desist order.

In addition, Press agreed to be barred from the securities industry and to pay disgorgement of overcharged management and performance fees he received of US$4.41m, plus prejudgment interest of US$755,178 and a penalty of US$292,570. Silverman agreed to a limitation on activities from acting in a director or officer capacity in the securities industry, with a right to apply after three years, and to pay a penalty of US$50,000.

North America
Rohit Chopra has been confirmed as the new director of the CFPB, replacing Trump appointee Kathy Kraninger, who resigned in January. Chopra was confirmed by the US Senate yesterday (30 September) in a close vote of 50-48 along party lines. There has been increasing evidence of a more bellicose CFPB over the last few months, and the securitization market has already found itself in the cross-hairs.