Contents

ABS

Green light

Record second-hand car prices fuel RV opportunities

Rising used car prices are positive for auto ABS transactions with exposure to residual values (RVs). Indeed, opportunities could emerge for deals with RV risk to outperform rating agency assumptions, which could – in turn – lead to rating upgrades.

Car values usually start depreciating as soon as they leave forecourts, but figures from Auto Trader - an automotive advertising business - show that used car prices in the UK have increased by 8.8% on average since the end of 2019. Moreover, the latest retail price index indicates that price growth during September reached an all-time high, posting a 21.4% like-for-like increase, beating August’s 17.2% month-on-month increase - then the largest single month of price growth on record. 

A few factors indicate that this steady increase has been directly accelerated by the Covid-19 pandemic, such as a general reluctance to use public transport, the trend in staycations within the UK or the phenomena of ‘accidental savers’. In the context of securitisation and auto ABS, a recent Bank of America report argues that the asset class could see certain candidates for upgrade as recoveries exceed the rating agencies' assumptions.

“This steady pricing of used cars is positive for ABS transactions with exposure to RVs,” notes Mark Nichol, European CMBS/ABS strategist at Bank of America. “Generally, as a matter of background, auto ABS deals consist of a pool of say 30,000 loans - of which, say, 2% will default over its cycle. How the UK differs, however, is that often one has the option of either turning in the vehicle or paying a final pre-defined balloon instalment. In that sense, the risk gets transferred back to the securitisation, thus adding an extra level or layer of analysis for investors and rating agencies.”

Nichol further argues that this added level of analysis often implies that rating agencies flag RV exposure among the chief risks in transactions and drivers of ratings. He states: “Within this framework, rating agencies tend to be more conservative and adopt conservative resale pricing assumptions, particularly in the case of diesel and electric vehicles. For diesel cars, they have to consider things such as city bans, while for electric vehicles, there is much less data available.”

He continues: “These concerns are valid; however, what we have seen is that prices for used diesel and electric cars have not deteriorated, despite such concerns and the additional stress imposed by the pandemic. We think this creates opportunities for deals with RV risk to outperform rating agencies' assumptions, which could lead to rating upgrades. Also, it is reassuring that diesel is still holding up well - it is a good sign and indicator for the overall performance of auto ABS.”

With the focus shifting increasingly rapidly around ESG considerations, such figures and trends against the backdrop of increasing decarbonisation requirements might seem astonishing. Commenting on the matter, Nichol concludes: “Electric vehicles still account for a very small portion of auto ABS deals - generally only around 1% - which is still tiny. For that reason, constructors will possibly never issue a fully green auto ABS. With such volumes, there is simply not enough to sell a pool.”

Vincent Nadeau

Capital Relief Trades

Landmark guarantee inked

ThinCats and BBB seal agreement

The British Business Bank and alternative lender ThinCats have finalised a guarantee agreement via the former’s ENABLE Guarantee programme. The guarantee will provide up to £300m of additional funding for UK SMEs and midcaps. The transaction features a warehouse facility provided by Citi and it is the first under the ENABLE programme to facilitate lending to smaller businesses from an alternative lender with a bank as a senior funder.

The new funding line will be used by ThinCats to support lending outside the Recovery Loan Scheme, for which it was recently accredited by the British Business Bank. Overall, ThinCats has now more than £500m of lending capital to deploy over the next year or so.

The ENABLE Guarantee programme is designed to encourage banks and other lenders to increase their lending to smaller businesses by reducing the amount of capital or junior funding required for such lending. Under an ENABLE Guarantee, the UK government takes on a portion of the risk on a portfolio of loans to smaller businesses, in return for a fee. When working with non-bank financial institutions, this typically aligns with any senior funder.

According to Michael Strevens, director at the British Business Bank: ‘’The capital treatment for SME lending, particularly for standardised banks, is comparatively intensive compared to other forms of lending, such as mortgages. Given our objective to increase access to SME financing, we introduced second loss capital relief trades through the ENABLE Guarantee programme to allow banks to do more SME lending with less regulatory capital.’’

Nevertheless, this transaction releases economic rather than regulatory capital, since ThinCats isn’t a regulated bank. Additionally, the guarantees are not subsidised guarantees but commercial ones that are priced in line with the underlying risk.

‘’We subsequently thought: if we can do this with regulatory capital for banks, could the same structure apply to economic capital for non-banks?’’ remarks Strevens.

If the lender has a fixed amount of equity - say £50m - and senior funders are offering funding at a 50% advance rate, the lender can create a portfolio of £100m. However, by providing second loss credit protection on the portfolio, the British Business Bank might incentivise senior funders to fund at a 75% advance rate. With this additional leverage, the lender can now create a portfolio of £200m and with a better overall cost of funding.

Ravi Anand, md at ThinCats, notes: ‘’We were looking for non-CBILS senior lines that would allow us to lend to SMEs at a cost of funding that was economical for them. The guarantee allows us to do exactly that. The underlying asset class is unique as it sits somewhere between an SME ABS and a CLO. The combination of this and the pandemic meant that our senior funder could come in on terms that allows us to do more lending at a more competitive pricing.’’

He adds: ‘’The deal will take the bulk of lending that is not CBILS or RLS and ramp up the portfolio over time. If there is a breach of concentration limits during this period, there are automatic triggers for curing the pool and once it’s ramped up, we can refinance the senior in public markets.”

The transaction makes sense within a context in which ThinCats is pivoting towards becoming a balance sheet lender and has already raised £160m from Wafra Capital Partners to fund the equity required for the junior positions.

Anand concludes: “Whether we acted as an agent or funded on balance sheet or we felt we were running the same business risk to losses on our loan book, it made huge sense to keep the majority of  the economic risk and reward for ourselves with a lot of skin in the game.’’

Stelios Papadopoulos

ABS

Untapped markets

French NPLs gaining attention

Southern European jurisdictions continue to witness strong activity in the non-performing loan space, especially in Greece and Cyprus. At the same time, investor interest in French NPLs is on the rise.

“Investors are looking further afield for opportunities in such markets where others aren’t necessarily looking. They are exploring opportunities everywhere that they can,” observes Amo Chahal, md at Alvarez & Marsal.

He continues: “There are some markets where there hasn’t been much investor activity to date – for example, in France. But recently it has gained more attention, given the absolute volume of NPLs still sitting on bank balance sheets.”

Historically, the jurisdiction has had a low NPL ratio. However, on a volume basis, France is the largest NPL market in Europe (SCI 23 September).

Chahal notes: “Every credit fund that you talk to has raised new funds or new capital, so everyone is sitting on dry powder ready to be deployed. As a result, investors are putting in extra effort to get deals done and investment out the door.”

Meanwhile, the overall trend in Southern Europe has been positive, with continued NPL disposals seen in Greece and Cyprus in the last 12 to 18 months. In contrast, Chahal notes that activity within the UK has been quite low in the NPL space.

Angela Sharda

Structured Finance

SCI Start the Week - 4 October

A review of SCI's latest content

Last week's news and analysis
CRTs in the air
Another two US warehouse loan banks said circling the market
Dual-currency debut
Rare European CRE CLO prepped
Freddie prints again
The seventh STACR of 2021 and third HQA prices
Lack of clarity
Positive signs for Indian ABS, but challenges remain
Libor risks
Securitised products with swaps at most risk when Libor dies
Mobilising capital
Call for risk transfer adoption in development finance
New heights
European CLO Market remains bullish with a strong pipeline

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

Recent research to download

GACS, HAPS and more? - September 2021
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 Euro ABS/MBS Premium Content article examines the prospects for the introduction of further national guarantee schemes.

SOFR and equity - September 2021
Term SOFR is expected to be the main replacement for US Libor. This SCI Premium content article explores the challenges the new benchmark presents to US CLO equity investors.

Fannie Mae and CRT – August 2021
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.

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

Chopra on the march

CFPB to expand its role and come down harder on securitisation

The securtisation market will see a more aggressive CFPB under the leadership of recently appointed director Rohit Chopra, with “more frequent enforcements and bigger fines,” according to Rachel Rodman, a partner with Cadwalader, Wickersham and Taft.

Rodman was speaking yesterday (5 October) at the annual SFA conference in Las Vegas on a panel addressing the future of housing finance with new heads in place of both the CFPB and the FHFA. She was previously senior counsel in the CFPB’s legal division and was also enforcement attorney in the agency’s division of supervision, fair lending and enforcement.

This more interventionist stance will be accompanied by a wider use of the CFPB authority than has been seen before, Rodman added. There will be, for example, “new and novel interpretations of what is meant by ‘’covered persons’”.

Who and what constitutes covered person provides the basis for CFPB scrutiny. The CFPB rules state that ‘covered person’ means a creditor with respect to a covered transaction or a person that provides ‘settlement services’, as defined in 12 U.S.C. 2602(3) and implementing regulations, in connection with a ‘covered transaction’. But this leaves plenty of scope for interpretation.

Chopra is also likely to have a broader vision and philosophy than his predecessors, with actions aimed less at individual firms and their indiscretions and more at what he sees as systemic failings.

Indeed, he will be more focused on overall policy, and can be expected to crack down on fintechs and focus on “fair lending,” added Chrissi Johnson, vp of public policy and external affairs with Rocket Mortgage. She is another CFPB alumnus, having served as its chief of staff of external affairs.

The panel agreed that there is now also likely to be a greater consensus and synchronisation of mission between various agencies like the CFPB and FHFA with Biden appointees at the helms.

But cautionary notes were struck by Andrew Olmem, a partner with Mayer Brown. He said there remains a lack of clarity on what constitutes abuse and what does not.

Simon Boughey

Structured Finance

Credit recovery

Rating upgrades outpace downgrades

Rating upgrades are outpacing downgrades this year, although net upgrades so far represent only about 12% of the net Covid-induced downgrades in 2020. Still, credit outlooks in aggregate have stabilised and returned to pre-pandemic levels, while default rates have fallen sharply and are trending towards their long-term average.

According to S&P, credit quality continues to recover slowly from a lower base as the global economy rebounds from the pandemic shock. In large part, this is due to the success of vaccines in reducing the sensitivity of economies to Covid-19, continuing lax funding conditions and supportive fiscal policies in most major economies which have released pent-up demand and boosted revenues and earnings.

Strong exports, large order books, low inventories and high job vacancy rates all attest to the strength of consumer and business demand. This has translated into a moderately positive migration in credit quality, with upgrades exceeding downgrades consistently through the year.

More striking, notes S&P, is the improvement in the net negative outlook bias that - at minus 7.9% - is back to pre-pandemic levels in all regions apart from Europe. This indicates a clear stabilisation in credit prospects. These credit trends broadly mirror the macroeconomy, where global GDP growth forecasts now stand at a solid 5.8% for 2021, declining to 4.4% in 2022, and gradually towards trend growth in later years.

Looking more closely at the ratings performance in different sectors since the start of this year, there has been quite a sharp divergence in the upgrade/downgrade ratio. Two of the more Covid-disrupted sectors have experienced particularly high upgrade-to-downgrade ratios year to date.

The auto sector’s financial performance has held up well, as original equipment manufacturers (OEMs) prioritised higher-value models and their pricing power has been strong given overall lower production, curtailed by the shortage of semiconductor chips. Many rated retailers have protected their balance sheets well through cost reduction and prudent financial management, resulting in positive rating actions, despite a sharp drop in revenues in many cases.

Some sectors, however, are exhibiting ongoing vulnerabilities, with relatively high net negative outlook biases. Covid still casts a dark shadow over the travel and aviation industry, with a slow recovery of international travel likely to prevent credit metrics in the industry returning to pre-pandemic levels until at least 2023.

The utilities sector also has a relatively high net negative outlook bias. This is more challenged by the energy transition, where S&P sees the substantial capital investment required to produce clean energy contributing to negative discretionary cashflow. This further erodes financial headroom that is weak, relative to key rating thresholds for many entities.

Nevertheless, funding conditions remain supportive, with spreads on corporate debt remarkably tight. Issuers at nearly all rating levels - including those industries experiencing structural change that predated the pandemic - continue to have good access to capital markets at attractive rates.

Looking forward, S&P concludes: ‘’Key developing credit issues that we are monitoring closely include persistence of inflationary pressures and central bank policy, China’s policy shift and Evergrande contagion risks, the evolving nature and severity of the Covid-19 pandemic and opportunities and risks related to the climate agenda.’’

Stelios Papadopoulos

Capital Relief Trades

CRT seminar line-up finalised

Fireside chat, awards on the agenda

SCI’s 7th Annual Capital Relief Trades Seminar is taking place in-person on 13 October at the London offices of Allen & Overy. The event will explore the introduction of the STS synthetics regime and publication of the EBA’s final SRT report, as well as examine the latest trends and activity across the market.

The seminar begins with a market overview panel, before moving on to a discussion of recent regulatory developments. Next, there is a panel looking at the latest structuring and documentation developments in the CRT market, while an emerging trends panel focuses on the new jurisdictions and asset classes.

Meanwhile, the investor perspective and issuer perspective panels examine new entrants to the sector and execution risk, among other topics. There is also a fireside chat featuring the European DataWarehouse and Allen & Overy, during which HM Treasury and EU supervisor consultations on the functioning of the securitisation regulation will be discussed.

The seminar concludes with SCI’s CRT Awards ceremony, followed by a cocktail reception sponsored by RenaissanceRe.

SCI’s 7th Annual Capital Relief Trades Seminar is additionally sponsored by ArrowMark Partners, Barclays, Chorus Capital, Clifford Chance, EIF, Linklaters, M&G, Mizuho, Newmarket and Santander. Speakers also include representatives from Alantra, Credit Agricole, Credit Suisse, D.E. Shaw, Lloyds, PAG and PGGM.

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

Capital Relief Trades

Risk transfer round-up - 6 October

CRT sector developments and deal news

BNP Paribas is believed to be readying its sixth capital relief trade from the Resonance programme. The last Resonance trade closed in September 2020 (see SCI’s capital relief trades database).  

Capital Relief Trades

Provisioning relief

Second Stage 2 SRT finalised

Intesa Sanpaolo has executed a synthetic securitisation that references a portfolio of Stage 2 assets. The Italian corporate and SME deal follows its first Stage 2 trade that closed in July (SCI 29 July). Indeed, more such transactions are expected amid a rise in the share of Stage 2 loans on European bank balance sheets after the coronavirus crisis.

The transaction features a €40m mezzanine tranche that references a €500m portfolio of 1,300 Italian corporate and SME borrowers. The tranches amortise sequentially over a 4.2-year weighted average life. The deal achieves both capital and provisioning relief.

The criteria used for classifying the underlying assets as Stage 2 follow the IFRS 9 accounting standard definition, in that the creditworthiness of the assets has deteriorated to a significant extent since initial recognition – although they remain performing. Should any of the assets in the portfolio move to Stage 3, then a credit event is triggered. This is in line with prudential regulation in terms of the credit events being ‘past due’, ‘unlikely to pay’ and ‘bad loan’.

Additionally, once the retained junior tranche is fully exhausted, the originator is entitled to enforce the collateral for an amount equal to losses.

The transaction is a further demonstration that the market has opted for business as usual when it comes to the structuring of provisioning hedges, rather than try and synchronise credit event payouts with IFRS 9 provisioning increases. Instead, originators simply carry out standard synthetic securitisations, but any hedging of expected losses is also accompanied by provisioning relief (SCI 15 June 2018).

Capital relief trades backed by Stage 2 exposures are expected to rise going forward, as the share of these loans on European bank balance sheets has risen following the onset of the coronavirus pandemic. According to the EBA’s risk dashboard, as of June, the EU average for the share of Stage 2 loans stands at 8.8%, while for Italy it amounts to 13.4%.

Stelios Papadopoulos

Regulation

Libor warnings

Senior Fed governor spells things out for the SFA

Federal Reserve vice chair of supervision Randal Quarles fired a shot across the bows – very close to the bows – of the structured finance market this morning (October 5^th) when he addressed the SFA conference in Las Vegas on the topic of Libor transition.

“The year of magical thinking is over,” he said, quoting the title of Joan Didion’s book on mourning, and repeatedly reminded his audience that no new dollar Libor-based contracts can be written from the end of this year. This is only 86 days from today, he stressed, adding “Market participants need to act now.”

The structured finance industry is a particularly heavy user of Libor, yet to date only slow progress has been made. The great bulk of transactions still use dollar Libor as the index rate.

Indeed, according to the Fed’s inhouse research conducted in Q2, less than 8% of derivatives contracts and less than 1% of corporate loans use an index rate other than US dollar Libor, Quarles reported.

If banks do not act now to put in place mechanisms to prepare for the end of Libor the results will be calamitous, says Quarles. “There are unpredictable pathologies if everyone tries to go through the door at once.” There is likely to be “significant dislocation,” he warned.

SOFR is the chosen replacement and had been mandated by New York law for use in legacy contracts where there is no fallback language, but it has remained unpopular among some market players. It is virtually risk-free, unlike Libor, and is an overnight rate.

However, the CME now quotes contracts in term SOFR and there is now “no reason” not to use it beyond December 31 2021, he said.

But more needs to be done to secure the safe harbour status of legacy contracts which used Libor, he conceded, despite the April 2021 New York legislation. Federal legislation is “critical and essential” to provide a safe harbor for legacy deals.

The clock is thus ticking on the Hill as well; whether there will necessary bandwith as Congress is currently consumed by monumental and bitter wrangling over the $1trn infrastructure and $3.5trn Build Back Better bills remains to be seen.

When asked what the Fed will do to bring into line recalcitrant banks which drag their heels on Libor transition, Quarles said the Fed will act “very vigorously” and bring to bear the “whole panoply of supervisory tools”. These range from the “stern letter” (eliciting giggling from his audience) to more draconian intercessions.  

Simon Boughey

RMBS

Forbearances plunge

Fresh data reveals biggest drop in forbearances in a year

The largest drop in the number of US mortgages in forbearance in 12 months was recorded last week in the seven days ending October 4 according to Black Knight data released today.

Active forbearance plans fell by 177,000, or 11%, with healthy declines recorded across all investor classes. There has been a reduction of forbearances of 294,000 in the last 30 days, which is the fastest monthly rate of improvement since October 2020.

These figures reflect the fact that many plans expired in September, 18 months after they were put on, or have been marked for either extension or removal.

“In this past week, we've seen both the fastest monthly rate of forbearance improvement and the largest weekly exit rate in 12 months as the initial wave of early entrants faced final plan expirations. This is both the first and the largest sign of the market beginning to transition away from COVID-19 protections. Although, with newly extended forbearance entry deadlines, that transition likely won't be complete until the second half of 2022 – if not later,” Andy Walden, vp  of market research, told SCI.

There are still 180,000 plans that faced  expirations or review at the end of September that have not been processed yet, and around 420,000 will be reviewed for extension or removal in October, so additional hefty declines are expected for the next month.

The biggest decline in forbearance plans in the last week was in FHA/VA loans, which fell by 84,000. Forbearance in GSE loans fell by 50,000 and private label mortgages by 43,000.

Simon Boughey

ABS

Capitalising Mobility-as-a-Service

SDG Investments partner Stefan Bund and senior structurer Toni Phan explore the opportunity for impact investors in asset-based financing of MaaS providers

The trade-off between urbanisation, individualisation and sustainability has led to the emergence of new business models around individual and micro-mobility. New mobility providers enter the market and shape the urban landscape with their cars, mopeds, bicycles and scooters.

To cover the associated capital requirements, they need financing solutions that are as sustainable as the business models themselves. This offers the opportunity to realise ’sustainable finance‘ in a win-win-win situation for innovative companies, impact investors and society.

Paradigm shift in urban mobility
The need for a paradigm shift in urban mobility is undoubtedly a given. By 2050, 68% of all people are expected to live in urban areas.¹

CMBS

What is the future for US office space?

Steve Jellinek, head of CMBS research at DBRS Morningstar, explores the impact of Covid-19 on the US office property sector

On a national level, the US office market is likely to see a rebound from the coronavirus pandemic-induced recession, even as net absorption has underperformed and construction remains elevated. The amount of sub-leasable space continues to shrink, declines in vacancy were seen in some major metropolitan areas in 2Q21, and office-using employment continues to grow amid the reopening economy.

As the return-to-work landscape evolves, with the average US employee spending less time working in the office, companies will trend away from traditional private office space and increase the amount of their collaborative, support and amenity space.

With robust supply-side pressure and tepid demand, office sector performance has weakened. CBRE Econometric Advisors reports that the overall US office market recorded 6.6m square-feet of negative net absorption in 2Q21, bringing the total for the trailing four quarters to 95.1m sf of negative net absorption, a level not seen since the record 97m sf of negative absorption in 2001.

Net completions are running slightly ahead of pre-pandemic levels, with 15.4m delivered in 2Q21 and another 111.1m sf underway and expected to be delivered in the next two years. Because of this, the overall office vacancy rates increased to 16.5% in 2Q21, up 3.5 percentage points year over year.

However, all is not doom and gloom in the office sector. While the incoming new supply and continuing weakened demand are expected to increase the vacancy rate over the next year, according to CBRE, the construction pipeline is heavily laden with Class A projects and will support an ongoing flight to quality. The trend of developing higher-quality space with careful attention to providing the building amenities that tenants demand is expected to buoy the performance of these newer Class A properties, which could leave a performance gap between them and older, lower-quality assets.

Going into the coronavirus-related downturn, asking rents were only slightly above the long-term average trend and not unsustainably high as they were in previous cycles, according to CBRE. Because of this, there’s less cyclical pressure on rents to return to trend beyond the supply and demand imbalance, with pre-pandemic rent levels expected to be reached by 2Q22.

Accelerated virtual working trends may affect office demand less than commonly anticipated. Although employees may spend less time in the office, the need to accommodate peak office attendance limits the number of potential reductions in space. While these decisions will play out over time as existing leases expire and office attendance levels are assessed, high-tech sectors and markets with costly commutes likely will have more employees working virtually.

The volume of CMBS office-backed loans with balances more than US$100m grew by 53% over 2019 levels, even as the volume of loans with balances less than US$50m fell 68%. These large loans boast an average LTV ratio of 57% and tend to be secured by premium assets with strong sponsorship and superior locations. In contrast, for more standard loans, originators have pulled back, as volume is down and underwriting has become more stringent. Average LTV declined for each of the past three years, to 59% in 2019 from 61% in 2016.

The recent economic downturn and the uncertain future of work have caused occupiers to delay leasing decisions, with many already reducing their space. Downside risks from coronavirus cases and hybrid working trends present a medium-term challenge, but a strong rebound from the coronavirus-induced recession - resulting in continued job growth in office-using sectors - will eventually overcome this.

Structured Finance

CIFC, TRS launch leveraged loan partnership

Sector developments and company hires

CIFC, TRS launch leveraged loan partnership
Teacher Retirement System of Texas (TRS) and CIFC Asset Management have established a new leveraged loan investment fund platform known as Texas Debt Capital (TDC). A CIFC affiliate is the general partner and investment manager of TDC, while TRS is the anchor investor limited partner and has committed significant equity to the fund. The fund will initially provide for up to US$2bn loan purchasing capacity in the US and Europe.

TDC will invest in high quality senior secured loans, including loans issued by TRS’s private equity investment partners and other sponsors. Returns are expected to be enhanced by term and non-mark-to-market leverage, including through the opportunistic issuance of CLOs.

Spanish loan disposals inked
AnaCap Financial Partners has closed two performing loan transactions in Spain via its fourth credit opportunities fund, including what is believed to be the first non-core bank disposal of performing auto loans in the Spanish market. One investment is a portfolio comprised of around 55,000 point-of-sale originated consumer loans, with a significant portion originating from the health and dental sector. The other investment is the non-core disposal of point-of-sale-originated auto and consumer loans from one of Spain’s largest banks.

Both deals represent about €200m face value in seasoned, granular performing portfolios. AnaCap is leveraging a relationship with a best-in-class European consumer debt servicer which dates back to its first credit fund in 2009.

Structured Finance

Regions boosts CRE capability

Sector developments and company hires

Regions boosts CRE capability
Regions Bank has entered into a definitive agreement to acquire Sabal Capital Partners, one of the top originators of Fannie Mae and Freddie Mac small-balance commercial real estate loans with a growing presence in non-agency CMBS loan origination. Regions plans to incorporate Sabal into its growing real estate capital markets division.

Based in Irvine, California, Sabal is a vertically integrated platform that has originated nearly US$6bn in financing across the US since inception and maintains a current servicing portfolio of nearly US$5bn. The company serves clients through its state-of-the-art SNAP platform, a proprietary tool developed by Sabal to optimise the lending and communications processes with clients and Sabal’s investor base.

Regions will maintain Sabal’s flagship offices in Irvine and Pasadena, California, as well as New York City. When combined with Regions real estate capital markets’ existing production offices, the combined platform will have 20 production offices nationwide.

Regions’ agreement to acquire Sabal Capital Partners is specific to the lending and servicing segments of Sabal’s business and does not include Sabal’s investment management business, which will remain with the sellers, including ceo and founder Pat Jackson, and investment funds managed by Stone Point Capital. Jackson and Sabal’s cfo Mike Wilhelms will remain with the investment management business while other members of Sabal’s leadership team will join Regions.

Regions’ acquisition of Sabal Capital Partners is expected to close in 4Q21, subject to satisfaction of customary closing conditions.

In other news…

EMEA
Serdar Özdemir has joined fintech Revolut as senior structured funding manager. He was previously head of structured asset distribution - portfolio management at Rabobank, which he joined in August 2014. Before that, he worked in credit and ABS structuring at RBS.

Private ABS fund closed
LibreMax Capital has closed its fifth drawdown vehicle, LibreMax Structured Opportunities Partners I, with total capital commitments of approximately US$225m. The fund targets investments that have unconventional asset pools or are created in less liquid forms and will focus primarily on private ABS across the consumer, residential and commercial credit sectors.

LibreMax believes that private lending affords an attractive opportunity to generate uncorrelated returns. By leveraging its market relationships, asset expertise and proprietary technological infrastructure, the firm says it is uniquely positioned to provide bespoke capital solutions to help companies fund future growth or meet liquidity needs in a post-Covid world.

Since 2012, LibreMax has managed four drawdown vehicles totaling over US$1.4bn in committed capital as part of its diversified platform of alternative and long-only strategies.

Structured Finance

CSS refocuses on GSE MBS issuance

Sector developments and company hires

CSS refocuses on GSE MBS issuance
Common Securitization Solutions (CSS) is undertaking a series of actions to better align its corporate governance structure with its core mission of supporting the infrastructure for Fannie Mae and Freddie Mac MBS issuance. Matthew Feldman has been named chairman of the board of managers at CSS to assist in this transition on an interim basis.

In early 2020, the FHFA explored expanding the role of CSS to serve a broader market. After a nearly two-year review, the FHFA determined that CSS should instead focus on maintaining the resiliency of the GSEs’ MBS platform.

This decision allows CSS to remain focused on the safety and soundness of the housing finance market and reduce unnecessary expenses as the GSEs rebuild capital. As a result, the independent members of the board of managers brought on as part of the CSS market expansion activity have left the board. However, Anthony Renzi will remain as ceo of CSS and member of the board.

Feldman served as president and ceo of the Federal Home Loan Bank of Chicago from April 2008 until December 2020, after serving in several executive capacities at the bank since starting in 2003, including cro and evp, operations and technology. He was previously president of Continental Trust Company, a wholly-owned subsidiary of Continental Bank, and served in a number of other roles in capital markets, investments and general management during his 15 years there.

EMEA
Asha Narayan has joined Hayfin Capital Management’s European high-yield and syndicated loans investment team as portfolio manager, European CLOs. Based in London, she will report to Gina Germano, portfolio manager and head of the European high-yield and syndicated loans team.

Narayan previously served as CLO portfolio manager at PGIM. Before that, she worked for 14 years at Deutsche Bank, where she was largely focused on sales.

North America
Sweta Chanda has joined Monroe Capital as md, head of business strategy, based in New York. She will be responsible for firmwide strategy, product and corporate development, as well as new initiatives to expand Monroe’s global footprint.

Chanda was previously a director at New York Life Investment Management (NYLIM), responsible for heading alternative investment strategy, where she helped launch a European CLO platform and a social impact fund, among other growth opportunities. She has over 18 years of experience in asset management and has also served at Blackstone, Lehman Brothers and Starpoint Solutions.

Red 2 mezz upgraded
Scope has upgraded tranches C through E and affirmed three other tranches (A, B and F) issued by Santander’s Red 2 Finance CLO 2018-1, a synthetic securitisation of commercial real estate loans. Tranche C has been upgraded to triple-A from double-A plus, tranche D to triple-A from double-A and E to single-A from triple-B plus.

Red 2 references a static £776.9m portfolio (£2.79bn at closing) of 223 commercial real estate loans (837 loans at closing). Sequential amortisation coupled with limited realised portfolio losses have increased credit enhancement since closing as follows: tranche A (60.4% from 18%), tranche B (46.9% from 14.3%), tranche C (31.7% from 10%), tranche D (24.5% from 8%), tranche E (14.8% from 5.3%) and tranche F (6.6% from 3%).

As of July 2021, there were only £33.8m of defaulted assets (representing 4.5% of the total reference pool outstanding balance) and £12m (1.5%) of losses in the reference portfolio. Additionally, as of the July 2021 reporting, there were 37 exposures (£107.3m) on Santander’s internal monitoring list, six of which (£44.6m) the bank considers non-performing.

The portfolio’s average interest coverage ratio is down to 2.65x from 2.96x at inception, while the weighted average LTV ratio has improved to 43.3% from 47.6%.

Structured Finance

US insurer CLO exposure 'relatively small'

Sector developments and company hires

US insurer CLO exposure ‘relatively small’
The NAIC has released stress testing results on US insurers' exposure to CLOs, as of year-end 2020. The stress tests examined the resilience of CLOs under three different scenarios and mirrors findings from the year-end 2019 stress test, wherein normal CLO single-A rated tranches experienced losses under the worst-case scenario. In comparison, the year-end 2018 stress test resulted in no losses on normal CLO tranches rated single-A and higher under the three scenarios.

The year-end 2020 results showed that normal tranches rated double-A and higher did not experience any losses under the three scenarios tested. Nevertheless, NAIC analysis also showed that a few insurers have concentrated investments in combo notes and low-rated tranches.

The report finds that CLO exposures grew as of year-end 2020 to US$192.9bn from about US$156.9bn, as of year-end 2019. Overall, CLO exposure for the US insurance industry remains relatively small, at about 2.6% of total cash and invested assets. The majority (78%) of these investments are rated single-A or above, so the NAIC does not believe the CLO asset class currently presents a risk to the industry as a whole.

In other news…

Increased APRA buffer ‘credit positive’
The Australian Prudential Regulation Authority's increased interest rate buffer is credit positive for new RMBS because it will lower the amount mortgage applicants can borrow, according to Moody’s. This, in turn, will reduce the risk of loan defaults and losses for new mortgages.

Under new rules, APRA expects banks to assess whether new home loan applicants can meet mortgage repayments at interest rates that are at least three percentage points higher than actual loan interest rates, up from the 2.5 percentage points buffer that banks most commonly use. The authority has also asked banks to review their appetites for lending at high debt-to-income ratios.

APRA tightened the minimum interest rate buffer to curb mortgage market risks in an environment of rapidly increasing house prices and very low interest rates. The higher interest rate buffer is expected to reduce average mortgage applicants’ maximum borrowing capacity by around 5%.

“However, the regulatory change may erode Australia’s housing market sentiment and make refinancing more difficult for existing borrowers, particularly those with high debt-to-income ratios - which will increase the risk of borrower defaults for outstanding RMBS. This risk of higher losses is tempered by the rapid house price growth over the past five years, which decreased the loan-to-value ratios for existing borrowers,” says Jacqui Dredge, a Moody’s analyst.

Australian house prices increased an average 20.3% over the year to September 2021. According to APRA, more than one in five new mortgages banks approved in the June quarter were at more than six times borrowers’ income

“The regulatory change will likely reduce borrowing capacity for housing investors more than owner-occupier homebuyers. This is because banks will use the higher interest rate buffer to calculate loan applicants’ capacity to meet repayments for both the amount of the new loan and any other outstanding debt amounts,” adds Dredge.

North America
Josh Soffer has joined Prospect Capital Management, based in New York. Soffer was previously co-founder and portfolio manager at 1L Investments, focusing on CLO mezzanine securities. Before that, he worked at companies including Ad.net, Adrenalads, Rion Capital, Level Global Investors and UBS.