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ABS

Healthy Hertz

Securitization key to Hertz's near-fatal collapse and its resurrection

Hertz this week (October 26) announced an order for 100,000 new Tesla electronic cars for its rental fleet less than four months after it emerged from Chapter 11 bankruptcy protection - a purchase which pushed the market valuation of Tesla to over $1trn.

The news is testament to both the rapidity and comprehensiveness of Hertz’s recovery from the dark days of May 2020, when it first slipped into bankruptcy. At the time, it appeared that a name which has been part of the US corporate landscape for over a century would slip into oblivion.

Indeed, the judge who approved the rescue plan which allowed the car rental firm to leave bankruptcy protection on June 30 said it “surpassed any result I’ve seen in any Chapter 11 case I’ve faced.”

Securitization played a key role in the exit plan. The firm contracted new financing of $16bn and of this $7bn was through various pieces of innovative structured finance costing less than 2% in aggregate per annum.

However, what is less well known is that securitization also played a significant part in the firm’s near death experience as well.

Hertz was one of the earliest and highest profile casualties of the Covid 19 pandemic. Rental car bookings plummeted - which was bad enough - but what was perhaps more damaging was the collapse in the value of used vehicles. Under the terms of its outstanding asset-based debt, the company was obliged to pay compensation to the master trust for the depreciation of the value in its fleet at the very time its revenue was slashed.

Of total debt of $19bn the company held at the end of 2019, almost $13bn was denominated in “vehicle debt” which refers to liabilities issued by a wholly owned subsidiary in the form of securitised transactions. Under the terms of the master lease agreement Hertz made monthly payments to the trust to cover interest but also the depreciation of car values.

“The lease payment is intended to cover note interest as well as the expected depreciation of the fleet. If declines in used car prices cause deal market value triggers to trip, the company would need to either make higher cash payments or add cars to make sure there is sufficient cushion between the collateral and the outstanding value of the notes,” explains Chloe Zhang, an AVP with the structured finance group at Moody’s.

“Early in the pandemic, car values collapsed, the collateral value collapsed, and Hertz had to put in more collateral to meet the trust’s credit enhancement target to avoid early amortization of the notes,” she adds.

Hertz was caught in a perfect storm, and only two months into the pandemic declared bankruptcy with debts of $19bn. Indeed, whole story was used by some commentators as a morality play about the unwisdom of profligate usage of securitization.

“Excessive reliance on the securitization market gave the firm, and its investors, a false sense of security in good times. It continued to raise a lot of debt by tapping the ABS market. A good starting point would have been to build a higher level of equity capital, and lower its debt levels right after the company became public in 2006,” wrote Michael Stark, professor of finance at Ann Arbor School of Finance, University of Michigan, in June 2020. His article appeared in Forbes, the esteemed journal of US business.

“Hertz’s demise serves as a great learning moment for financial analysts and CFOs. While the securitization market provides a cheaper source of funds, it makes debt renegotiation harder than traditional sources of funding, such as bank debt,” he concluded.

What Hertz did next, however, struck some observers as potentially damaging to the structure of the securitization market. Desperate for cash, it attempted to sell off around 30% of its entire fleet of 700,000 vehicles. The company wanted to be allowed to convert the master lease into 494,000 separate agreements so it could reject the terms on 144,000 vehicles.

However, as Karen Ramallo, a svp and manager in the structured finance group at Moody’s, points out, “The master lease agreement is intended to be indivisible for the entire fleet.”

Essentially, Hertz was trying to ditch collateral at the heart of the ABS contract for which it no longer had use; it sought to reject a portion of the contract.

In the event, Hertz reached agreement with its investors regarding liquidation of the fleet and the case never went to court. The agreement resulted in a reduced lease payment schedule and an agreement to sell cars out of the fleet to pay off debt. Cars were duly sold, and the proceeds used to repay outstanding ABS transactions. While investors were doubtless less than thrilled about a contract being repudiated and then re-negotiated mid-life, they saw it as the only chance to get their money back.

But, to some in the market, a dangerous precedent had been set.

“What Hertz was saying was ‘I can deal with these cars one lease at a time. I should be able to reject the contract to the extent I want to sell any of these cars.’ Without a consensual outcome, this could have had a negative effect on the market because the market demands and depends on certainty,” says Joseph Cioffi, a partner with David+Gilbert and chair of its insolvency and finance practice.

Predictability and assurance of execution and outcome are central to the securitization market. If investors cannot depend on events proceeding as they are supposed to proceed, the whole enterprise will become more expensive and less attractive. Access to the market will be restricted.

On this occasion, the courts did not have to decide whether Hertz was entitled to dissolve a portion of the contract and sell cars or not. Referring to the agreement with investors, Scott Hofer, a senior ABS analyst at Loomis, Sayles & Company, said “Some could argue that Hertz exploited a weakness in the documentation that hadn’t been addressed.”

But, according to Cioffi, this is not the last we have seen of this. “It will come back. The courts will have to decide. So much depends on contract language, and both sides will clay claim to a strict interpretation of the documents.  When this happens, a lot depends on which side’s interpretation is aligned with the common understanding,” he predicts.

After such a troubled relationship with structured finance, it might have been expected that Hertz would want nothing to do with the market ever again. Yet a significant securitization was part of the three part bankruptcy exit package, alongside equity funding and a seven bank credit agreement.

According to insiders, a portion of Hertz senior management was indeed very reluctant go back into the securitization market. Yet members of the treasury department and legal counsel White and Case were convinced that this was the way to go. They argued that the securitization market was so hot and funding costs so comparatively low that it would be foolhardy to turn away from it despite the traumatic recent history.

The initial post-bankruptcy $2.2bn ABS offering, comprising a three year note and a five year sold in June, was used to finance the purchase of new vehicles to be leased to Hertz in addition to refinancing both its original pre-bankruptcy legacy fleet-financing facility and a $4 billion interim loan facility established in November.

The AAA-rated tranches were priced at more than 100bp over benchmarks, with the BBB-rated tranches came in at more than 200bp over, and these generous levels attracted wide investor support. Another factor in the success of the deal was that in the 12 months since Hertz’s initial descent into bankruptcy used vehicle values had performed a volte-face and were now surging. Events had turned in Hertz’s favour.

However, the transaction also addressed investor concerns regarding the prior financing facility, namely the perceived indivisibility of the master lease. These bonds at least Hertz cannot dissolve.

There was another important change to the structure of these bonds compared to the old ABS financing which led to so much trouble for Hertz: the book value of the cars in the master lease was considerably more conservative thanks to the removal of the manufacturer rebate so depreciation payments are much lower.

“There is now a structural difference. The starting point of the book value is lower and therefore more conservative than in the previous structure. OEM incentive rebates received on car purchases will also now be remitted to the trust. This provides a cushion in case anything drastic happens to used car prices,” explains Karen Ramallo of Moody’s.

The transaction represented another first: it was the first time securitization has been utilised as the principal avenue of exiting a Chapter 11 bankruptcy of this magnitude. Moreover, the firm emerged from an almost fatal collapse with a lower cost of capital and with a new structure that provides more security than the old one.

Hertz announced Q3 results today (October 28) and it posted total revenues of $2,2bn, up another 19% from Q2. Shares in the company, traded under the new ticket HTZZ, changed hands for $27 at the close on October 27, compared to a pre-bankruptcy price of under $2.

The company has been unavailable for comment.

“They came in with a flat tyre, but they’re coming out on a roll. Vehicle values are higher, there is a better fleet and air travel is returning – less risk in the structure with a good mix of demand and strong collateral,” says Joseph Cioffi.

Simon Boughey

Capital Relief Trades

Risk-sharing remit

CRT definitions discussed

Most practitioners agree that ‘risk-sharing transactions’ is the most appropriate moniker for capital relief trades, but there remains some divergence around the term. This CRT Premium Content article explores what it means for investors and issuers alike.

The term ‘risk-sharing transactions’ is becoming more common and more widely understood to denote capital relief trades, but divergences remain around what different investors require as part of a risk-sharing agreement. However, what is clear is that to create a sustainable CRT market, such transactions must function appropriately for all stakeholders.

“It’s important to have a universal label for the strategy because it is helpful in generating interest in the product and encouraging allocation among investors. Unfortunately, there is no industry association solely representing managers of CRT strategies; such an organisation could standardise the label and advocate for regulators to accept it,” suggests one CRT investor.

The ‘balance sheet synthetic securitisation’ label – which appears to be the term preferred by regulators – is technically correct: it describes the mechanism of transferring risk from banks to investors. Meanwhile, ‘risk transfer’ has connotations of trying to dispose of all the risk.

In contrast, while ‘risk-sharing’ doesn’t technically describe what the product is, the term conveys the spirit of what CRT issuers and investors are seeking to achieve. “It’s a subtle difference in terms of the ability to create a meaningful narrative for prospective clients. Ultimately, we’re seeking access to performing, core assets where banks need help from a return on equity perspective - and synthetic securitisation is the most efficient method of achieving this. We’re not set up to invest in the transmission mechanism, but the underlying portfolio,” the investor observes.

Richard Robb, ceo of Christofferson, Robb & Co, says that a true risk-sharing transaction transfers risk from a bank to an end-investor, satisfying both the letter and the spirit of significant risk transfer. In contrast, ‘regulatory capital arbitrage’ is not sustainable: the risk-sharing transaction should not change the behaviour of the issuer towards the loans the transaction protects. 

“As far as I’m concerned, it shouldn’t matter whether a risk-sharing transaction opens lines for new lending or de-risks the bank. The bank can decide how to run its business,” he observes.

He continues: “True sharing means buying into the bank’s credit policies, the bank’s workout practices with its customers and, indirectly, the bank’s ESG standards. An investor shares the losses that the bank really experiences; in other words, there is no artificial determination of loss by fixed LGD or other mechanisms. It is naïve to imagine that an RST investor re-engineers the bank in any meaningful way.”

Barend van Drooge, director, credit and insurance-linked investments at PGGM, says that his firm cares about genuinely sharing the risk of the core activities of partner banks in the areas where they are market leaders. Partner banks will have been doing business in these areas for decades and the expectation is that they will continue to do so, providing comfort that the bank has in-depth knowledge and those activities are well looked-after.

Genuine sharing of risk entails a genuine sharing of loss: if there is a loss, it is experienced in the same way by both PGGM and the partner bank. But while the standard securitisation risk retention is 5%, PGGM requires partner banks to retain 20% of the risk.

“We are a dedicated investor of pension money, seeking to establish long-term partnerships, so it makes sense to have this alignment. The idea is that we’re in it together and jointly feel the pain,” explains van Drooge.

PGGM also requires partner banks to collateralise the investment notional in order to mitigate counterparty risk. “This stipulation provides certainty that both the bank and investor can get their money when needed. In addition, this ensures that the transaction doesn’t eat into counterparty credit limits that all pension funds have to banks, so that these can be used elsewhere in the business,” he observes.

One CRT structurer agrees that requiring a minimum 20% risk retention makes sense. “Anything below that level and you’re not really risk-sharing,” he suggests. “I personally think the 5% risk retention specified in the securitisation regulation, for example, is too low. The same credit risk exposure should be shared pari passu between issuer and investor to ensure proper alignment - whether it’s a synthetic or true sale securitisation.”

The structurer also indicates that some hedge funds may accept 5% risk retention, especially since it may make them a bit more competitive when sourcing deals. “Some hedge funds are opportunistic in terms of asset class – seeking the best return across the securitisation market, whether it’s CRTs, CLOs or ABS. But several hedge funds have raised money specifically for CRTs and are similarly looking to create partnerships with banks and want to remain invested in deals when they roll over,” he observes.

The investor concurs that risk-sharing should be based on a proper partnership, whereby the bank has skin in the game and there is strong alignment of interest among parties. “The objective is for us to do well when the bank does well and vice versa. Transactions reference portfolios comprising a bank’s best clients, who are well supported by the bank. As such, the bank is not laying off the exposure, but rather freeing up capital to lend more.”

He notes that risk retention forms part of the alignment of interest, but it is not the only aspect to consider. Other factors evidencing alignment of interest include understanding the motivations behind the bank doing the trade and whether the issuance forms part of a programme.

“It’s in the interests of banks for their CRT programmes to perform well, to ensure there is a market for the next deal from the programme and to create a track record,” the investor observes.

An additional consideration is whether the bank’s operations are set up properly. For example, is there a Chinese wall between the team selecting the assets and the risk management team?

The CRT structurer notes that term to maturity is also important in terms of risk-sharing. “Typically, investors aren’t fully aligned in the sense that deal maturity is sometimes shorter than loan maturity. However, banks accept that this is market practise.”

There are several advantages to creating long-term partnerships between CRT issuers and investors. One is being there when a deal matures, so it can be rolled over and the investment maintained.

“We start negotiating prior to maturity about new deals with most banks. As a result, the bank benefits from certainty of having a source of capital available and it means we have stability of investment,” notes van Drooge.

Another advantage of long-term partnerships is that the arrangement can be expanded into other jurisdictions or lending activities of a bank. Furthermore, having real-life experience of how the bank performs and operates provides valuable insights and ensures follow-up deals can be executed more swiftly and be even better finetuned to each party’s requirements.

Van Drooge points out that for some, synthetic securitisation still has a negative connotation - due to how arbitrage synthetic securitisation was applied in products which eventually led to the global financial crisis. Over recent years, however, the benefits of balance sheet synthetic securitisation - as it is applied in bank loan credit risk-sharing - is increasingly being recognised.

But he notes: “The situation remains fragile and if there is a blow-up because a deal isn’t well structured and those risks materialise, the stigma will re-emerge. A risk-sharing transaction must make sense across the board - for investors, issuers and regulators.”

Meanwhile, Robb notes that there are three things a true risk-sharing transaction is not. The first of these is a vehicle for recycling systemic risk back into the financial system.

“Investors should not be other banks. Similarly, in the public sector, sharing the risk of a systemically important bank with a government-sponsored agency seems to me to miss the point,” he remarks.

The second thing a true risk-sharing transaction should not be is tricky. “Investors and issuers should both accept the potential for losing money,” Robb explains. “Tricky and ‘simple, transparent and standardised’ are overlapping concepts but not the same. It is possible, say with a mixed pool of assets, to construct a complex non-standardised transaction that efficiently transfers credit risk.”

The third is that true risk-sharing transactions should not be tied to any risk besides credit. “Unlike, say European SMEs, operational risk is not an asset class to which institutional investors seek exposure. It resides naturally with the bank,” Robb states. 

Van Drooge suggests that scrutiny of the market can be addressed by industry participants explaining what they’re doing and how they’re mitigating risk as transparently as possible. “Otherwise, something else could come along that is less manageable,” he warns.

Overall, van Drooge believes that there is positive momentum for the risk-sharing market. “The adoption of the STS synthetics framework demonstrates that policymakers recognise the utility of capital relief trades and that they can be standardised. Equally, the coronavirus crisis has underlined that credit risk-sharing works, in that banks knew they could call on their partners when necessary.”

There are three main stakeholders in the risk-sharing market: regulators, banks and investors. “These stakeholders need to be aligned in order for the risk-sharing market to grow in a rapid and sustainable way,” the investor states.

He concludes: “Regulators understand the value of the technology and are trying to put the correct rules around it. New banks, in turn, are entering the market because they’re increasingly comfortable, given the robust regulatory recognition of SRT. The current ethos works well with most participants.”

Corinne Smith

Capital Relief Trades

Rocky road ahead

Output floor implementation questioned

The European Commission has approved the long-awaited CRR3 proposal (SCI 28 October). The latest changes to the capital requirements regulation incorporate the final December 2017 Basel 3 rules into EU law. Nevertheless, banks will likely oppose the Commission’s single stack approach to the implementation of the output floor, with the industry already having called for further adjustments to the proposals.  

According to the Commission, the package ‘’implements the final Basel 3 agreement while considering the specific features of the EU's banking sector; for example, when it comes to low-risk mortgages. Specifically, today's proposal aims to ensure that internal models used by banks to calculate their capital requirements do not underestimate risks, thereby ensuring that the capital required to cover those risks is sufficient.’’

The measures are expected to lead to an increase in EU bank capital requirements by less than 9% on average at the end of the envisaged transitional period in 2030, compared to 18.5% if European specificities were not considered.

The key feature of the Basel rules and now CRR3 is the output floor. It’s a measure that sets a lower limit on the capital requirements that banks calculate when using their internal models. The main aim of the output floor is to address model risk and unwarranted variability, thereby enhancing the comparability of capital ratios.

Under current rules, the amount of capital that a bank must hold to cover the risks it is exposed to is calculated as a product between the capital requirement, expressed as a percentage, and the bank's risk-weighted assets (RWAs). Risk-weighted assets can be calculated by using standardised approaches or internal models.

The latest package adds an additional step in the calculation. A bank using internal models will now have to calculate RWAs using whichever model it’s permitted to use.

It must then calculate RWAs using the standardised approach and then multiply the amount obtained by 72.5%. Finally, banks must then compare the results from the last and first step and whichever figure is higher will then be used to calculate the various capital requirements.

The output floor will be gradually introduced from 1 January 2025 over a period of five years. Effectively, this means that the multiplier will gradually increase over this period, from a starting value of 50% to its final value of 72.5%. Additionally, there are targeted transitional provisions to spread the impact of the floor by up to eight years, particularly on exposures pertaining to unrated companies, low-risk mortgages and derivatives. 

However, banks and supervisors hold different views regarding the implementation of the rules. The former argue for a ‘parallel stack’ approach, while the latter support a ‘single stack’ approach.

Each bank is subject to several types of capital requirements. The minimum capital requirements (so-called Pillar One), additional capital requirements imposed by supervisors (so-called Pillar Two) or risks not covered or not sufficiently covered by minimum capital requirements, and capital buffer requirements.

The total capital requirement of a bank is the sum of all these requirements. It is important how each of these capital requirements is positioned compared to the others.

Therefore, the prudential rules set out the order in which the different requirements ‘stack’ on top of each other, hence the name ‘capital stack’. Under the ‘single stack’ approach for risk-based capital requirements, there would be one capital stack with all the requirements in the stack expressed in terms of the risk-weighted assets.

The ‘parallel stack’ approach, on the other hand, would create a new stack standing alongside the existing one and - unlike the single stack approach - it would not contain all necessary requirements. 

For example, it could exclude the Pillar Two requirement (P2R) and the systemic risk buffer (SyRB), which are important aspects of the prudential framework. The Commission chose the single stack approach because, in its view, it best reflects the logic and objective of the output floor as agreed in the Basel framework.

The single stack approach could lead to a duplication of capital requirements, but the Commission states that the proposal introduces safeguards to prevent unjustified increases in the Pillar Two requirement and the systemic risk buffer in case a bank becomes bound by the output floor. For example, the bank's supervisor will be required to review the calibration of the Pillar Two requirements and the systemic risk buffer, respectively, to establish whether double-counting of risk is present and, if so, to recalibrate those requirements to avoid such double-counting.

Nevertheless, banks remain concerned. According to AFME, impact studies suggest that large European banks will face ‘’material increases to their capital requirements, especially once all required capital buffers, such as management buffers, are included. This could have negative consequences for lending and broader economic activity if balance sheet growth is constrained to conserve capital.’’

AFME concludes: ‘’Further adjustments to the proposals are likely to be required, including changes to the calibration of the output floor and to limit the impact of this measure on specific asset classes and business lines.”

Stelios Papadopoulos

ABS

Positive prospects?

Legal changes open up Turkish NPL opportunities

Recent amendments to Turkish law potentially open doors to international investors seeking opportunities in the Turkish non-performing loan market. However, although activity could pick up in the unsecured space, questions remain about secured and lumpy pools.

Under the legislative changes, asset management companies (AMCs) may establish funds to issue ABS. Indeed, by doing so, AMCs have now been given the opportunity to not only securitise their own portfolios, but also loans purchased from local banks - which wasn’t possible previously. AMCs will act as servicers and will conduct all necessary collection proceedings in relation to assets considered as NPLs.  

According to Alex Kay, partner at Hogan Lovells: ‘’Until now, there has not been a mechanism to allow international investors to acquire Turkish NPLs. This change in the law represents an important first step in opening the Turkish NPL market, since it allows local asset managers to acquire NPLs and securitise them to overseas investors for the first time.’’

Nevertheless, it remains to be seen to what extent this opens the secondary market for large corporate debt in Turkey. “It is likely to provide a workable mechanism for the sale of SME or retail portfolios, since for those pools you just need a servicer. But that’s unlikely to be the case for lumpy corporate pools, which may require a workout strategy involving the AMC,’’ says Kay.

He continues: ‘’Another question concerning the effectiveness of the change in law is whether banks are willing to sell NPL exposures at a price that makes sense to international investors. Several international investors have been following the Turkish NPL market for some time and it will be interesting to see if this change results in material deal flow in the coming months.’’

Turkey is starting from a good base, as the enactment of laws governing the foundation and operations of asset management companies in November 2006, NPL servicing has become institutionalised and well regulated by the local supervisor. Accordingly, financial institutions have sold NPLs to AMCs in Turkey over the last 15 years.

According to PwC, between 2008-2020, banks, factoring, leasing and other financial institutions sold a total of TRY62.6bn of NPLs in UPB terms to AMCs. The accounting firm notes that NPL inflow is expected to recover following the sharp decline in 2020 and the limited growth in 2021 due to forbearance measures.

The forbearance measures and restructuring practices going back to 2017 will result in the delayed transformation of accumulated Stage Two loans into NPLs. This is expected to be realised as increased NPL inflow in 2022 and 2023.

Stelios Papadopoulos

ABS

Polish return

Rare lease securitisation completed

Europejski Fundusz Leasingowy (EFL), owned by Crédit Agricole, has completed a rare Polish true sale securitisation. Dubbed EFL Lease ABS 2021-1, the PLN2.15bn transaction has a three-year revolving period and is backed by a portfolio of leases extended to Polish retailers and SMEs (accounting for 99.5% of the pool) and a small portion to large corporate borrowers (0.5%).

The leases finance both new and used light vehicles (accounting for 21.7% and 13.9% of the pool respectively), trucks and trailers (5.8% and 12.7%) and other machinery and equipment (27.5% and 18.6%). The leased objects’ residual value was not securitised in the deal.

Rated by Fitch and Scope, the transaction comprises PLN890m triple-A rated class A1 notes and PLN800m triple-A rated class A2 notes. The notes will pay a floating interest rate in Polish Zloty based on three-month WIBOR. Of the assets, 93.9% will bear a floating interest rate based on one-month WIBOR and the rest will be fixed rate.

The ratings reflect the deal’s financial and legal structure, and several other factors, which include the apparent returning stability of the Polish economy post-Covid. “The stable outlook on the Polish economy reflects positively on expected portfolio performance,” Scope states. The rating agency projects a recovery of GDP to pre-crisis output levels of the 11 EU member countries of CEE economies by 2022.

The deal benefits from 23.1% credit enhancement from overcollateralisation and a funded cash reserve. The portfolio is also expected to generate a considerable spread of up to 4.4% of the performing lease balance, which is available to provide for the collection of shortfalls and the payment of senior expenses and interest.

Since the residual value of the leased objects is not included in the securitisation, all contracts amortise via constant annuities. Nevertheless, the recovery analysis provided by Scope relies upon historical recovery rates that do not account for the sale of the leased objects, due to the generally nonbinding nature of EFL’s commitment to transfer disposal proceeds in the case of originator insolvency.

Claudia Lewis

Structured Finance

Still strong

European ABS/MBS market update

In a quieter week than of late, two full capital stack deals have been competing for investor attention in the European ABS/MBS primary market. Strong demand for both Pixel 2021 and SC Germany Consumer 2021-1 suggests that the market is still strong.

“I think both deals have been executed very well,” notes one ABS/MBS trader. “For SC Germany Consumer 2021-1, we can see that they prioritised the upsize and it has been met with overwhelming demand.”

Indeed, Santander’s German consumer ABS impressed by its size, with the book topping €3bn and coverage on its class A notes coming in at 1.2x, even after the deal was upsized from €1.1bn to €1.5bn. For BNP Paribas’s French lease ABS, meanwhile, the €380m senior notes were 1.9x covered and came in from mid-20s initial talk to print at 22bp DM thanks to similarly strong investor appetite.

“Obviously the market has witnessed a lot of supply in the past two months and although it is not tightening anymore, it doesn’t feel like it is widening either,” observes the trader. “The only area where we are seeing some widening is on B notes, but overall transactions are still very well absorbed by the market.”

Meanwhile, the rare European CRE CLO Starz Mortgage Securities 2021-1 is yet to price. “Naturally you don’t see such deals very often,” states the trader. “It is not a very big transaction, with small tranches, and one that is not going to be that liquid. That is one of the reasons why it will likely be placed with a very small number of investors – potentially just one!”

Looking ahead, macroeconomic concerns - and specifically inflation - do not appear to be a cause for concern, the trader argues. “I think there will be a healthy pipeline until November. Also, inflation is not particularly worrying here, as ABS/MBS are generally perceived as a very good hedge against inflation,” the trader comments.

For now, the visible pipeline is fairly limited, with Starz joined by two UK deals - CMBS Sage AR Funding 2021 and non-conforming RMBS Castell 2021-1. For more on all of the above deals, see SCI’s Euro ABS/MBS Deal Tracker.

Vincent Nadeau

Structured Finance

Covid dip

CRE CLO churn rates drop

Churn rates in US managed CRE CLOs continue to decline, according to new research from KBRA assessing collateral turnover in recent vintage transactions. The study analysed all CRE CLO transactions issued between 2017 and 2020, gathering data on US$23.3bn in issuance across a total of 27 transactions. Most of these transactions had reinvestment periods of 24 months (51.4%) or 36 months (27%), and individual churn rates were assessed during the first 12, 18 and 24 months.

KBRA found the average churn rate for the first 12, 18 and 24 months was 24%, 43.3% and 63.7% respectively. As well, the study noted a wide variability in results – with seven transactions having a churn rate of less than 10% and five having a churn rate of more than 40% in the first year, shifting to greater extremes in the second year, with five transactions having churn rates of around 90% and one with 25.6%.

A decline in churn rates was observed for transactions issued in 2019, for which KBRA states that “much of the slower churn is likely the impact of the Covid-19 pandemic on business plans in 2020.” The churn rates in the first 12 and 18 months of 2019 were reported at 18.9% and 35% respectively, compared to vintages from 2017 and 2018 at 31.2% and 54.5%.

Other variables KBRA believes impacted lower churn rates include weighted average loan terms and seasoning, average total loan commitment balance, percent of future funding remaining, percent of ramp-up proceeds to initial deal balance and multifamily concentration. While the rating agency was unable to isolate these influencers, it is understood they “showed some level of expected correlation.”

This recent dip is part of a broader trend in declining churn rates over time and appears as most significant in the vintages of 2019 and 2020 as a result of Covid-19’s effect on property sales, business plans and refinancing activity occurring in 2020 and early 2021.

Managed CRE CLO transactions now account for a record volume of two-thirds of total year-to-date 2021 issuance. “The very low 12-month churn rate for the two 2020 transactions were likely because the deals spent most of their first year in the period most impacted by pandemic disruptions. Both were issued early in 2020, prior to the onset of the pandemic. All managed CRE CLOs issued after March 2020 have yet to season 12 months or more and were excluded from the study population,” KBRA concludes.

Claudia Lewis

Structured Finance

SCI Start the Week - 25 October

A review of SCI's latest content

New free report to download - US CRT Report 2021: Stepping Up
The US CRT market – as with every other area of society – was tested by the Covid-19 fallout. But the sector arguably finds itself in a stronger position now.
This SCI Special Report tracks the major developments in the US CRT market during the two years since JPMorgan completed its ground-breaking synthetic RMBS in October 2019, culminating in a sea-change in policymaker support for the sector ushered in by the Biden administration.

Last week's news and analysis
CAS calling
Fannie Mae in the market with its first CAS deal since Q1 2020
CAS prices
Expected Fannie Mae CAS, the return to CRT, hits the tape
Innovative SRT finalised
Bank of Ireland executes synthetic RMBS
Pockets of resilience
European ABS/MBS market update
RTS pending
SRT regulatory uncertainty persists
SCI CRT Awards: Arranger of the Year
Winner: Santander
SCI CRT Awards: Credit Insurer of the Year
Winner: Fidelis Insurance Holdings
SCI CRT Awards: Impact Deal of the Year
Winner: Marco Polo Three
SCI CRT Awards: Innovation of the Year
Winner: Colisée 2020
SCI CRT Awards: Investor of the Year
Winner: Christofferson, Robb & Company
SCI CRT Awards: Issuer of the Year
Winner: BNP Paribas
SCI CRT Awards: Law Firm of the Year
Winner: Clifford Chance
SCI CRT Awards: North American Arranger of the Year
Winner: Citi
SCI CRT Awards: North American Issuer of the Year
Winner: BMO Capital Markets
SCI Awards: North American Law Firm of the Year
Winner: Clifford Chance
SRT prints
KIMI X prices tight
Trustmark settles for $5m
Three agencies join forces in breach of Fair Housing Act case

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.

Capital Relief Trades

SCI Awards: Personal Contribution to the Industry

Winner: Christian Moor, team leader at the EBA

Asked about his proudest achievement, Christian Moor, team leader at the EBA, points to - perhaps unsurprisingly - the STS framework for synthetic securitisations.

‘’It was something that I thought about when I was on a holiday in April 2014 and it was clear to me that a more regulated and supervised product would improve funding to the real economy, especially to retail consumers and SMEs, and be overall good for society.’’

Yet Moor’s relationship with synthetic securitisations and securitisations more broadly goes way back. Indeed, his major contribution can only be understood when traced back to the dark days that was the aftermath of the 2008 global financial crisis.

‘’It was decided in 2011 that the market wouldn’t be killed off with new regulation. Yet there was a lack of regulation and the reality was that it was a multifaceted problem. It’s about different types of RMBS; it’s about synthetic securitisations, lack of default data and too much reliance on external ratings,’’ he says.

He continues: ‘’As such, the risk retention rules were introduced with only 5% retention levels and capital requirements were re-calibrated to more reasonable levels than initially proposed.”

Additionally, the EBA had to distinguish between securitisation products and started to develop STS and STC labels. Nevertheless, it was clear to the supervisor from the beginning that securitisation was important as a financing tool for the real economy and the low default rates for European securitisations added further impetus to these efforts.

The statements above encapsulate Moor’s distinctly consensual and balanced approach to financial regulation that earned him respect in both supervisory circles and across the securitisation industry. As he puts it: ‘’At the end of the day, regulatory frameworks shouldn’t be just prudential, but functional as well.’’

Nevertheless, the first steps in rehabilitating the market after the crisis focused on true sale securitisations. ‘’Several EU countries - including France and Germany - believed that synthetic securitisations performed well, so there were discussions on a synthetic STC framework, but it was shelved in one of the Basel meetings back in 2014-2015.’’

However, the failure of the Basel meetings became the starting point for an effort that would eventually lead to STS synthetic securitisations in the EU. In December 2015, the EBA produced a report that introduced the notion of an STS for balance sheet synthetic securitisations within the confines of Article 270 of the CRR.

Under these restrictions, synthetic securitisations could be executed with supranational institutions such as the EIF or cash collateralised with private investors. The report eventually led to a mandate in the CRR for the EBA to develop an STS for balance sheet synthetic securitisations.

Moor notes: ‘’The key points were the distinction between arbitrage and balance sheet synthetic securitisations and data transparency. Still, there was a fear among supervisors that banks could use this to overleverage. Yet banks use this for less than 5% of their loan books and this is something that can be monitored.’’

However, talks with supervisors centred around the inclusion of synthetic excess spread. The main worry was the amount of excess spread relative to the portfolio’s expected losses; concerns that initially excluded synthetic excess spread from the discussion paper on STS synthetic securitisations.

Discussions with market participants reintroduced the feature in the final report but limited it to the expected loss of the portfolio. ‘’Excess spread is crucial for the efficiency of many transactions, especially auto and consumer loan deals. They just cannot work without it. Again, regulation should not be just prudential, but also functional,’’ concludes Moor.

Capital Relief Trades

SCI CRT Awards: Rising Star

Winner: Meindert de Jong, director at PGGM

In a mere seven years Meindert de Jong has gone from graduate recruit to a director and invaluable member of PGGM’s credit & insurance linked investments team, which manages PFZW’s dedicated Credit Risk Sharing (CRS) investments mandate. During that time, his deep involvement and knowledge of CRS transactions has grown his excellent reputation beyond the team and throughout PGGM, across its partner banks and, increasingly, throughout the wider market.

As a son of a farmer and a nurse in the small town of Noordeloos in the Netherlands, working in finance - let alone CRS - wasn’t an immediately obvious career path, but an interest in economics in high school started to lay the way. Next, in what becomes quickly clear in any conversation with de Jong or his colleagues, was a typical decision – he selected a double degree programme combining economics and law, on the basis that the addition of law “would make it a bit more challenging and broaden the potential to learn”.

As his degree course went on, de Jong became increasingly interested in asset management and his three-month internship in the asset management department with pension fund services provider A&O Services put him firmly on the asset management track. Ultimately, he graduated for his double master’s degrees in Law and Financial Economics (with honours) from Erasmus University in Rotterdam, considered one of the top universities in the Netherlands.

Towards the end of his university career, he began applying for specific open positions, one of which was for PGGM. “That was, of course, attractive as one of the largest fund managers in the Netherlands and the role was also a front office one, which is what I hoped for - and once I’d read up on CRS, it really piqued my interest,” de Jong recalls. “A nice coincidence, though not a driver for my application, was that not only my mother but a number of other family members all work in the healthcare sector and are all participants in PFZW’s pension fund.”

The story of de Jong’s job application process remains a regularly shared anecdote by PGGM’s CRS team. He came in for a first-round interview with Mascha Canio, PGGM’s head of credit & insurance linked investments, on a Thursday in October and Canio was so impressed by his interview that she immediately progressed him to do the rest of the process on the same day, something not done before or since. He received an offer and started at the PGGM office in Zeist exactly one week after first being interviewed – still a record.

“I had another interview the next day with another firm, but it didn’t have the same spark and the appeal of working in an esoteric asset class made PGGM a very easy decision,” de Jong says. “With the benefit of hindsight, it was unquestionably the right one, as the job has surpassed my expectations and working with such a close and supportive team has helped me to develop and broaden my experience extensively, which is key to my enjoyment of the role.”

His colleagues report that thanks to his intelligence and broad academic background, he was able to pick up the many facets of SRT transactions quickly and remains a naturally modest and hardworking person. Since joining PGGM, de Jong has been engaged in more than 30 transactions in every continent in virtually all asset classes: from SMEs to large corporates and from trade finance to project finance.

He is able to rigorously asses quantitative data, perform qualitative due diligence and commercially negotiate transactions with risk-sharing counterparties. Apart from developing in-depth knowledge on SRT transactions, this has also enabled de Jong to gain exposure to the industry, and build valuable relationships.

De Jong has also added significant value by providing relevant insights on structural and regulatory matters, both internally and to counterparty banks. He has been a voting member of the team’s investment committee for the past three years and is able to lead new origination from start to closing.

As well as his involvement in deal structuring, de Jong is captain of the team’s centre of expertise in data and databases, spearheading efforts to improve the various tools the team uses - including its proprietary reporting tool SCORE, which he helped design and build. In addition, he is part of the team’s centre of expertise in regulation, playing his part in industry discussions on topics such as significant risk transfer, disclosure templates and STS.

Finally, de Jong featured as a speaker at this year’s Global ABS in a panel on securitisation as a tool for risk transfer. Such wider industry exposure underlines his increasing recognition as a true expert in the field.

Given de Jong’s aforementioned desire to continue to develop, growing towards expert status could be a next challenge. He is confident the evolving CRS market will provide ample opportunity for that.

“We see the idea that when done properly, securitisation can really contribute to both a functioning financial system and the real economy is being embraced by more regulators - notably within the EU – around such things as the ESMA templates, STS for synthetics and so on,” he says. “So we see CRS opening up still further and that will broaden the scope of what we look at – from different types of banks, to different types of portfolios and structures, to how to make it work in different regulatory settings – and that will keep me occupied for a long time to come.”

Capital Relief Trades

Spanish SRT finalised

Sabadell executes capital relief trade

Sabadell has completed a €75m synthetic securitisation that references a portfolio of Spanish corporate and SME loans. The transaction is the lender’s first synthetic securitisation to be sold to private investors.

Sabadell executed its first capital relief trade in full-stack form two years ago (SCI 2 October 2019) and the bank was aiming for a synthetic ABS deal with private investors as well, but the advent of the coronavirus crisis put those plans on hold.

Private investors shunned Southern European jurisdictions during the crisis, particularly SME pools. Indeed, investors sought refuge in primarily Northern European jurisdictions and large corporate exposures. Large corporates have access to capital markets, globally diversified balance sheets and plenty of disclosure that allows investors to formulate a view on the underlying default risk.

Consequently, CRTs referencing Southern European jurisdictions and especially SME portfolios were largely taken on by the EIF. Hence, within this context, Sabadell debuted its first synthetic securitisation last year with the EIF. The €96m mezzanine guarantee referenced a €1.6bn Spanish SME portfolio and was designed to enable the issuer to provide €576m of financing, primarily to self-employed, SME and mid-cap borrowers (SCI 18 June 2020).

However, as the market recovered in 2H20 and the first half of this year, private investors started to return to Southern European jurisdictions, as evidenced by transactions in Greece, Italy and Portugal - thanks to strong performance records, government support for Covid-affected sectors and lack of supply (SCI 4 August).

UniCredit acted as arranger on this latest Sabadell transaction.

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round-up - 28 October

CRT sector developments and deal news

BCP is believed to be readying a capital relief trade in Poland. The trade would be the second alleged CRT from the jurisdiction, following rumours of a transaction being prepped by mBank (SCI 18 October).

Capital Relief Trades

Disclosure deluge

Proposed quarterly capital disclosures brings GSEs into line with banks

The Federal Housing Finance Authority (FHFA) has proposed new more onerous disclosure requirements for the GSEs.

Under the terms of the new rules, Fannie and Freddie would be obliged to disclose details about regulatory capital on a quarterly basis, as well as information concerning corporate governance and risk management.

As the 38-page Enterprises Disclosure proposal released yesterday (28 October) makes clear, these requirements will more closely align the GSEs with common practice among major banks.

The regulatory capital disclosures include risk weighted assets, calculated under the Enterprise Regulatory Capital Framework (ERCF) standardized approach, introduced in May 2020, as well as statutory and supplemental  capital requirements and capital buffers.

“In contrast to US banking organizations that are each either a standardized approach institution or an advanced approaches institution, an Enterprise is required to satisfy all requirements under both the standardized approach and the advanced approach in the ERCF, including any associated disclosure requirements,” the document notes.

These additional disclosures are designed to “facilitate market discipline,” says the proposal.  The FHFA believes the proposed rule will “encourage sound risk management practices and foster financial stability both during and after conservatorship.”

However, most in the market now believe that an end to conservatorship is nowhere in sight so it would seem that current risk management is the focus of the FHFA.

The regulator concedes that the provision of this extra detail on a quarterly basis will “necessarily be somewhat costly for the Enterprises.”

By shining a light on the GSEs’ capital adequacy and sharing the results for all to see, these proposals might make the use of CRT mechanisms even more popular at the GSEs.

Fannie Mae last week returned to the CAS market for the first time since Q1 2020.

Freddie Mac declined to comment on the proposed rules and Fannie Mae has been unavailable for comment.

Simon Boughey

CLOs

Comprehensive metric?

Total alpha touted as CLO performance measure

The CLO market is seeing such growth that there are calls for a more complete performance measure to be introduced. Total alpha is being touted as one way to differentiate between CLO managers.  

Now standing at over US$1trn in issuance, the CLO asset class is becoming more mainstream. “The market has grown so much – even the pension funds are also getting (directly or indirectly) involved in a big way,” observed Poh-Heng Tan, md, CLO Research Group. “Perhaps it is time that we should use a more comprehensive metric to measure both US and EU CLO manager performance. If one is not able to measure properly, it is difficult to improve."

At present, CLO deal metrics are widely used to measure manager performance. While they are useful to a certain extent, they only provide a partial picture, according to Tan during SCI’s Assessing CLO Manager Credit Skills webinar last week. Instead, he suggests that total alpha is perhaps a more comprehensive measure of manager performance.

To arrive at the total alpha number for a given CLO manager, the total investment return for the whole period - from a deal's closing date to the last trustee report date - is first calculated. A manager’s total portfolio return is then annualised, with the excess return over the index's return representing their total alpha.

Tan explained that alpha is not jurisdiction-specific and takes many factors into account, including interest generation, par distribution, par build, default losses, distressed sales, trading gains and losses, unrealised gains or losses and cash drag. Alpha is also unbiased in terms of timing of deal issuance in light of market conditions. 

However, using total alpha as a performance measure is not a straightforward process and presents certain challenges in itself. In particular, total alpha is not easy to calculate.

"It is not straightforward to calculate the alpha numbers – it takes time, effort and a great deal of work," Tan concluded.

Angela Sharda

Structured Finance

Future-proofing credit portfolio management

John Pellew, principal, distribution and securitisation, Arrow Global, discusses the rising importance of technology in managing credit portfolios and how to use it to create competitive advantage

It has become a bit of a cliché to say that technology, data, analytics – and importantly – the appropriate application of such tools has become fundamental to running a successful business. And yet, despite the regularity with which the topic is discussed, how precisely this applies to the distressed loans market has not been fully appreciated. 

For credit fund managers like Arrow Global, technology, data and analytics serve an immediate business purpose – and one, we believe, that is broadly replicable across the industry. It is vital in growing a portfolio of high-yield assets without significantly scaling headcount, and key in creating economies of scale that enable growth without hugely increasing costs.

The primary way we have achieved this ourselves is by deploying effective analytics techniques that accurately predict collections on non-performing loans and other distressed assets. In layman’s terms, we use machine learning and other tech tools to define contact and collections strategies across our markets, and from there, accurately calculate projected future calculations.

This data gives us two precise advantages. First, the access it provides to collections data improves the accuracy of our collections modelling and collections strategy – important for both us and our investors. Second, the insight it gives us into Arrow’s historic dataset is essential for how we build and test our underwriting and pricing models.

At Arrow, it is hard to overstate the importance of data to our business model. We have built our predictive models from 15 years of collections data across a dozen asset classes in five countries and €65bn in assets under management. This institutional knowledge, aligned with our deep in-country local expertise, allows us to look at any prospective portfolio and quickly assess the potential value of collections based on what should be paid for those assets.

Without owning the servicing value chain and, by extension, access to its data, we would not be able to support the business.

Even in this scenario, we know that technology is not a silver bullet. By itself, it adds no value to a business – and instead requires constant innovation and appropriate application to achieve business goals and investment outperformance.

This is where continuously evolving technology to accommodate the needs of our portfolio management team is essential. It also demonstrates the need for continued investment in developing and expanding the quality of data available to in-house data scientists and analysts, whose evolving insights can then feedback through any business.

Ultimately, the formula of bringing servicing data into our fund management business, appropriately applying analytical tools and never resting on our laurels, has enabled us to scale without adding additional costs and to grow our market share.

Looking ahead, we are working to ensure that technology will allow us to increase the velocity of fund assets. This is managed through a process of digitisation and real-time optimisation and automation of the securitisation process. This process touches every aspect - all the way from construction, issuance and on through to the monthly administration of the SPVs, reconciliations and cashflow distributions to bondholders.

As a case in point, through the mass acquisition of data from our vertically integrated serving and fund management business, we see a world where we will run live, real-time multi-variate optimisation of our asset pools and portfolios, using both structured and unstructured data in order to maximise value and balance the needs of all stakeholders and to give our commercial teams the data and curated insights they need to outpace, outprice and continue to outperform our peers.

The industry has a real opportunity to change the way granular NPL and distressed assets are represented, proven, packaged and then ultimately traded. As always, the end game is to leverage technology to drive value in ever more creative ways, while evolving the opportunity for our investors and partners.

Structured Finance

Highland Capital lawsuit filed

Sector developments and company hires

Highland Capital lawsuit filed
The latest lawsuit brought by Highland Capital Management (HCMLP) against former employees has been filed in the bankruptcy court of the northern district of Texas. The action seeks to “recover hundreds of millions of dollars in damages that HCMLP suffered at the hands of its founder, James Dondero, acting in concert with other entities that he owned and/or controlled… and with the aid of other HCMLP officers and attorneys who disregarded their fiduciary duties to HCMLP in favour of Dondero and their own self-interests.”

The suit also includes Mark Okada, now ceo and co-founder of Sycamore Tree Partners. An emailed statement from Okada's spokesman says: “There are no allegations that Mark engaged in any wrongdoing. He acted ethically and appropriately at all times at Highland and looks forward to defending himself in this litigation.”

In other news…

EMEA
Ashurst has appointed Daniel Franks as partner in its global markets practice, based in London. Franks joins from Norton Rose Fulbright, where he has been a partner since 2014. He is a derivatives and structured finance expert, with extensive experience across a broad range of capital markets transactions.

Marcus White has joined Permira Credit as an associate director, based in London. He was previously a senior CLO analyst at Prytania Asset Management, which he joined in January 2006.

Structured Finance

Securitisation stamp duty eyed

Sector developments and company hires

Securitisation stamp duty eyed
The UK government is introducing legislation within Finance Bill 2021-22 that provides a power to make stamp duty and stamp duty reserve tax (SDRT) changes relating to securitisations and ILS by secondary legislation. The power will be a freestanding provision and will allow HM Treasury to make regulations to provide that stamp duty or SDRT is not chargeable on transfers of securities issued or raised by a securitisation company or a qualifying transformer vehicle. It will also allow HM Treasury to make regulations to provide that stamp duty or SDRT is not chargeable on transfers of securities to or by a securitisation company.

There is currently no power to make such changes in secondary legislation, but the government is keen to ensure that the UK’s stamp duty and SDRT rules contribute to maintaining the country’s position as a leading financial services centre. Technical changes to allow UK securitisation and ILS arrangements to operate more effectively - for example, by reducing cost and complexity - may be more appropriately made by secondary legislation than by primary legislation. As such, this measure will increase the flexibility of the government in responding to the evolving nature of the securitisation and ILS markets.

The move follows the government’s consultation on reform of the taxation of securitisation companies (SCI 24 March).

In other news…

Global
Latham & Watkins has elected 44 associates to its partnership and another 39 associates have been promoted to the role of counsel, effective from 1 January 2022. Among the newly-elected partners is Patrick Leftley, who is a member of the firm’s structured finance practice, based in London. He advises banks and asset managers, fintech companies, consumer finance companies and early-stage businesses on a range of public and private securitisation and asset-backed financing structures across asset classes.

The promotions to counsel include Christopher Michail, who is a member of L&W’s structured finance practice, based in Los Angeles. He represents banks, BDCs, large financial institutions, borrowers and asset managers in complex financing transactions, including secured and unsecured credit facilities, leveraged acquisition financings and structured vehicle financings.

OHA acquisition
T. Rowe Price is acquiring Oak Hill Advisors (OHA), with the aim of scaling alternative credit capabilities worldwide. T. Rowe Price will acquire 100% of OHA’s equity, including over 300 employees and a total of US$53bn in capital across its private, distressed, special situations, liquid, structured credit and real asset strategies.

OHA will operate as T. Rowe Price’s private markets platform. The plan is for the firms to co-develop new strategies for T. Rowe Price’s wealth and retail channels and expand into alternative asset categories.

CLOs

New banking rules

Sector developments and company hires

The European Commission has adopted new EU banking rules under CRR 3 and CRD 4, with the aim of ensuring that EU banks become more resilient to potential future economic shocks, while contributing to Europe's recovery from the Covid-19 pandemic and the transition to climate neutrality. The Commission notes that while the overall level of capital held by EU banks is on average satisfactory, some of the problems that were identified in the wake of the financial crisis have not yet been addressed.

The package of rules being adopted comprises three elements. First is the implementation of Basel 3, while taking into account the specific features of the EU's banking sector.

The second element is sustainability: the new rules will require banks to systematically identify, disclose and manage ESG risks as part of their risk management. Finally, the package provides stronger enforcement tools for supervisors overseeing EU banks.

Separately, the Commission has also issued a call for advice to the joint committee of the ESAs (EBA, ESMA and EIOPA) regarding the review of the prudential framework for securitisation; in particular, improving capital calibrations under CRR and Solvency II for banks and insurers and the LCR treatment of securitisations. The timeframe has disappointed the industry, however, given that the ESAs are required to report by September 2022. As such, any resulting reforms will likely be introduced towards the end of next year.

In other news…

Barrow Hanley Global Investors has announced plans to launch its first CLO fund. The launch of the Barrow Hanley CLO Fund I LP is part of its new strategy to build out diversified alternative product lines at the firm and is expected to close by the end of the year.

The new CLO will be backed by the firm’s strategic partner, Perpetual Limited, in line with Perpetual’s aims to expand its product range and global reach.

Plans are for Perpetual, and the employees of both Perpetual and Barrow Hanley, to invest 35% of the equity for this first CLO fund launch.