Contents

Capital Relief Trades

Restricted issuance

STS synthetic volumes to remain constrained

STS synthetic securitisation issuance has been growing since the final framework came into effect earlier in the year (SCI 4 August), as the new regime slashes risk weights on retained tranches, while new structures boost insurer interest by allowing them to execute STS-eligible funded deals. Nevertheless, STS synthetic origination will remain constrained, given the homogeneity and collateral requirements.   

The new framework on STS synthetic securitisations was incorporated into the European Commission’s quick fix proposals in July and consists of two legislative acts pertaining to amendments to the Securitisation Regulation and the CRR, both of which are critical for introducing an STS label for synthetic securitisations. The agreed changes will free up bank capital for further lending and allow a broader range of investors to fund the economic recovery from the Covid-19 crisis. The trilogue agreement on the proposals was finalised in December 2020 (SCI 24 December 2020).  

The benefits of the new regime for banks are notable. According to Jo Goulbourne Ranero, consultant at Allen & Overy: “The risk-weight floor is reduced from 15% to 10% and the ‘p’ parameter governing non-neutrality - the uplift to the unsecuritised capital requirements for the securitisation - is, broadly speaking, halved for STS securitisations.’’

Second, new structures that facilitate the collateralisation of insurers’ unfunded credit protection will help boost investor interest in STS synthetic ABS, given the STS requirement for collateralisation (SCI 27 May). However, banks have raised questions about these structures and more deals need to be executed to acquire a better understanding of the pricing (SCI 11 June).

More saliently, from an originator perspective, the requirement to be rated CQS2 or directly hold cash collateral remains problematic (SCI 15 October 2020), despite the changes that were made in the final draft. Ranero explains: ‘’Originators that don’t meet the requirement are left with a residual credit risk exposure to the account bank or with collateral in the form of 0% risk weighted debt securities, which doesn’t generate a residual risk weight but doesn’t provide funding.’’

The homogeneity criteria are another challenge. She continues: ‘’This is especially relevant for corporate exposures. Synthetic portfolios are typically multi-jurisdictional, so to be workable, the homogeneity criteria will need to allow some mixing of micro and SME corporates, on the one hand, with larger corporates, on the other, and allow some mixing of large corporates with financial institution exposures. We will have to wait for a consultation on this for more answers.’’

Consequently, the homogeneity criteria means that issuance will remain restricted for the most part to more granular pools, like mortgages. ‘’STS synthetics are better for more granular pools like retail mortgages, due to the homogeneity criteria. Furthermore, if the repayment schedule of loans depends very much on the sale of the property - such as in commercial real estate - it will not get the STS label. Homogeneity though remains the main issue,’’ says a credit portfolio manager at a large European bank.

Similarly, Robert Bradbury, head of structured credit execution at Alvarez & Marsal, remarks: ‘’If a bank is transacting on lower-risk pools, such as mortgages, it makes a great deal of sense to pursue STS, since the fractional efficiency is greatly increased.’’

The universe of potential transactions becomes even more restricted considering the type of originators that can benefit the most from these trades. Harry Noutsos, md at PCS, states: ‘’The capital benefit of STS synthetic securitisations for IRB banks is less profound than that for standardised banks. But for frequent issuers, it is still quite beneficial. For standardised banks, the benefits are more profound, but they might have to adjust their IT systems to provide the required data to comply with the ESMA templates and other STS requirements.’’

However, complying is easier said than done. Bradbury concludes: ‘’Standardised banks are now becoming more likely to execute full capital-stack transactions that may not benefit from STS, since they are not retaining the senior tranche. Yet even for transactions that are not full capital stack, particularly for higher risk assets, the overall incremental complexity of execution for such lenders can be high and the benefit smaller.’’

Stelios Papadopoulos

ABS

Electric avenue

Adoption of electric cars spells greater volatility for rental car ABS

If collateral underpinning rental car ABS is increasingly composed of electric cars then the market will be exposed to greater volatility and uncertainty, say credit analysts.

Last week’s purchase of 100,000 new Teslas by Hertz fired the starting gun on the likely increasing adoption of electronic vehicles (EVs) by rental car companies, which will be financed by securitization.

Regulatory pressure and financial incentives by governments in North America and Europe, in addition to changing consumer preference, are likely to promote increasing acquisition of EVs by rental car companies.

The Biden administration has, for example, proposed a tax credit of $12,500on EV purchases, while in the UK Boris Johnson’s Conservative government has declared no new internal combustion engine (ICE) vehicles will be produced after 2030.

In addition to its widely publicised purchase of EVs, Hertz also last week said it will form a partnership with Uber to provide over 150,000 Teslas to the ride-share firm over the next three years.

So the weather vane seems to be pointing in one direction.

Yet EVs at the moment depreciate much more quickly than ICE cars as the technology is rapidly evolving and vehicles produced today will be fast superseded.

Moreover, the supply chain for key parts and equipment, most particularly the batteries, is constrained and vulnerable. Once again, the rapidity of technological change may expose the frailties of the existing supply lines.

Perhaps above all else in importance is the lack of data about historical performance and likely depreciation rates. This means, at the moment, this sector of the rental car ABS market is dealing with great uncertainties.

 “The volatility will be greater. At some date we will have more data and see how they depreciate, but for now given the limited track record we do see the potential for greater volatility which itself creates the potential for greater risks,” says Karen Ramallo, svp at Moody’s.

Some countervailing factors may, however, mitigate the likely impact of greater volatility. Eco-conscious Western governments are currently making great efforts to encourage the purchase of EVs, and with an increase of data pertaining to performance and depreciation some of the uncertainty currently clouding the market should dissipate.

“Government initiatives to meet climate goals and regional changes in emissions regulations or technology, particularly as they relate to fuel consumption, will increase the adoption of EVs over time and likely support the liquidity and resale value of EVs in rental fleets,” says Ramallo..

Rental car companies also generally sell vehicles in their fleet that are over one or two years old, thus limiting the disruptive effect of rapidly developing technologies.

In addition, collateral value tests triggers require rental firms to maintain the targeted credit enhancement by adding collateral if the market value of the fleet declines below net book value.

However, the scantiness of data also limits the potential effectiveness of value test triggers. Topping up the collateral underpinning an ABS deal in the event of a perceived depreciation will also prove costly for the car rental firm. It was precisely this feature that proved so damaging to Hertz in the early days of the pandemic.

If adoption of EVs continues to grow rapidly and they form an increasing proportion of rental car fleets, the window will doubtless grow less opaque. But for the moment there is considerable uncertainty about a number of different factors, and in the ABS market uncertainty generally spells volatility.

“Given what we know today and the information we have for this rapidly evolving technology, it is likely to expose ABS to additional collateral risk, though mitigants exist,” says Ramallo.

Simon Boughey

RMBS

New originations

Reverse mortgage securitisations re-emerging?

The second post-financial crisis publicly-rated UK securitisation of equity release mortgages (ERMs) and the first to comprise recent-vintage originations has priced. The issuance of two deals this year alone suggests the asset class is re-emerging, driven by lender competition and the improving longevity of the population.

The latest transaction – dubbed ERM Funding Series 2021-1 - follows Towd Point Mortgage Funding 2021-Hastings 1 from earlier this year (SCI 15 July). The portfolio, which was acquired by RGA Americas Reinsurance Company, consists of £322.99m in loan assets originated by More2Life.

Maria Divid, vp – senior analyst at Moody’s, suggests that equity release mortgage securitisations are likely to remain a niche sector. “We probably don’t expect a similar number of transactions as we see in the UK for the more traditional types of RMBS, like prime or buy-to-let. Having said that, reverse mortgages are growing more popular these days and we do expect to see more transactions next year. We’ve seen two so far this year and potentially we would expect to see more issuers to start tapping this market going forward.”

Indeed, reverse mortgage origination in the UK is growing and several new players have entered the market. As a result of this competition, interest rates have been trending downwards.

Equally, due to the improving longevity of the population, the stock of real estate owned outright by potentially older individuals that has appreciated in value has resulted in this product being beneficial for those individuals economically.

“From the standpoint of the originators themselves, there is a mix of reasons why they would engage in securitisation: as for other products in the mortgage space, it’s a source of funding, which is part of the reason for the issuance. But, also, there is some capital relief that can be achieved: some of these notes are retained, while others are placed. For the retained ones, given the regulatory environment, the capital relief rationale is a tangible element for this as well,” explains Divid.

She says that growth in origination was already in evidence before the onset of the coronavirus pandemic. “If anything, at the peak of the first wave, during the lockdown, we saw some slowdown in origination - as we have seen for the more traditional mortgage products, purely for operational reasons and uncertainty. Now that these pressures have abated, origination has resumed again - as with other products - so I don’t think the pandemic played a long-term role here.”

Arranged by BofA Securities, ERM Funding Series 2021-1 is backed by a static pool of 4,212 first-lien reverse mortgages extended to obligors across England, Scotland and Wales – with a total of 40.9% of the properties located in the South East region and Greater London. Of the 2,865 borrowers in the pool, 19 are deceased (accounting for £2m of the current balance), with the average age of the pool being 68.

The minimum borrower age of the pool is 55, with the LTV capped at origination at 54%. The weighted average LTV of the portfolio (accounting for the protected equity guarantee) is 33.2% and the average current LTV of the portfolio is 37.2%, with most of the loans originating between 2018 and 2021. The pool has a weighted average seasoning of 27.47 months.

Rated by KBRA and Moody’s, the capital structure comprises classes A1 and A2 through class E notes, as well as unrated classes Z1 and Z2. The class A1 and A2 notes priced above par, with a coupon of 3% and 3.3% respectively (see SCI’s Euro ABS/MBS Deal Tracker).

One reason for the pause in ERM issuance following the financial crisis might be that the product is more complex to analyse, according to Divid. Consequently, following the financial crisis, securitisation issuance volumes were lower and then as the market re-emerged, it was focused primarily on the much simpler type of product. The more niche sectors took longer to come back.

Looking ahead, future reverse mortgage RMBS are expected to securitise both new and legacy originations. “I think we would see a mix of both; the same as we do across the board in the universe of RMBS transactions that we rate,” Divid concludes. “There’s always some legacy collateral coming up; some older deals being refinanced - and that could be another reason driving issuance. However, given the growth in the market and the growth in the number of players, we definitely expect new collateral to play an important part.”

Claudia Lewis

ABS

Freddie and Fannie prosper

Net income/ revenue increased YoY and innovation unveiled in 3Q results

Freddie Mac announced its 3Q results at the end of last week and, alongside healthy YoY growth in net income, several notable firsts were attained in the three month period.

New income was $2.9bn, an increase of 19% YoY, driven by higher revenues and the release of a credit reserve. Net revenues grew by 4% YoY to $5.2bn, as a result of mortgage portfolio growth and higher average portfolio guarantee fees. These factors were also responsible for an increase in net interest income of 28% YoY to $4.4bn.

However, net interest and revenues decreased from 2Q 2021. At the end of June, net interest income was $4.67bn and net revenues were $5.87bn  - indicating that the mortgage boom has abated somewhat.

The GSE also unveiled some innovations to the CRT programme during Q3. It now offers a 20-year final legal maturity to STACR deals, but in addition now incorporates a five-year early redemption call feature. It will also no longer issue B-3 coupon tranches.

It issued three STACR deals and one ACIS in Q3 for a total of $4.3bn, but the ACIS transaction - ACIS 2021-SAP7 - was the largest ACIS deal yet placed. As of the end of last week, it has sold $8.8bn in the STACR sector in 2021 and $6bn in the ACIS sector - but there is more to come before yearend.

Freddie has also continued to support the sector throughout the pandemic, whereas Fannie Mae took a leave of absence from Q1 2020 to Q3 2021.

Participation in Freddie CRT deals has also improved in 2021. There were 132 unique participants by 3Q 2021 compared to 119 at the beginning of the year.

The value of the Freddie mortgage portfolio increased by 23% to $2.68bn as new business swelled.

Delinquency rates also improved to 1.46% from 1.86% at the end of the previous quarter and 3.04% a year ago in keeping with the national trend.

There was $21bn in total MBS issued in October, the second biggest month since the financial crisis, and analysts suggest the overall annual volume will have hit $190bn by yearend.

Private label issuance has surged particularly noticeably as mortgage originators find it more cost effective to issue under their own name rather than pay guarantee fees to the GSEs.  This also makes yields more attractive to borrowers.

The downside, of course, is that investors and mortgage originators are on the hook should things go awry.

Fannie Mae announced results on the same day as Freddie and its net income in 3Q fell to $4.8bn compared to $7.2bn in Q2 - echoing Freddie’s results.

Net worth, however, almost doubled from $20.7bn in Q3 2020 to $42bn. Fannie Mae switched to hedge accounting treatment in 2020, which accounts to some degree for the scarcely credible increase.

This accounting treatment is designed to smooth out rapid and sharp fluctuations in earnings statements caused by mark to mark adjustments in the value of financial instruments, particularly derivatives. Nonetheless, it’s an eye-catching increase.

Simon Boughey

ABS

Holding firm

European ABS/MBS market update

Primary and secondary European ABS/MBS activity is expected to pick up this week after a few slow days. Last week, ABS spreads held firm and were able to maintain a certain pre-summer equilibrium, which could further translate into November.

“We’ve seen strong levels of issuance lately, mainly in the ABS space through auto and leasing deals,” notes one European ABS/MBS trader. “Now, the question is will that continue into November or have issuers already completed their targets for the year?”

Certainly not everyone has yet and the pipeline is still looking healthy for now. Notably, Lloyds Bank is back in the Dutch RMBS market with their Candide programme after a nine and a half years hiatus.

Backed by a €557.1m provisional static pool of prime mortgage loans, Candide Financing 2021-1 is expected next week. “It is definitely a surprise,” states the trader. “I imagine it will land in between the tier 1 and tier 2 names, being a bank issuer, but from an investor’s perspective, it is definitely good to have another name to look at.”

The recently busy lease receivable space is due to see even more deals come to market, with Alba 12 and Treva Equipment Finance 2021-1 expected to price next week. The former is collateralised by a portfolio of performing financial lease contracts to Italian retail and corporate customers. The latter is a static securitisation of vehicle and equipment lease receivables to German small and medium-sized commercial clients and corporates, originated by PEAC.

“Again, we’re seeing new lease ABS deals,” the trader says. “We’ll see how they perform, but clearly there is ample demand for those asset classes at the moment.”

Also in the visible pipeline are two UK RMBS Finsbury Square 2021-2 and Pierpont BTL 2021-1, alongside UK CMBS Sage AR Funding 2021. They are joined by pan-European Frost CMBS 2021-1 and auto deal PBD Germany Lease 2021-1. For more on all of the above deals, see SCI’s Euro ABS/MBS Deal Tracker.

The healthy investor demand seen in primary is also in evidence in the secondary market, according to the trader. “Generally we have seen quite tight levels in the secondary market. If you look at German auto ABS for instance, it is easily trading in the lower single digits - anywhere from 4bp to 7bp - even for the ultra-short bonds.”

He continues: “Essentially what you are buying is a bond with a yield below 50bp, which is not particularly attractive or interesting for banks. Consequently, BWICS have seen some interesting levels, which I feel is due to bank investors selling their exposures.”

Vincent Nadeau

Structured Finance

SCI Start the Week - 1 November

A review of SCI's latest content

Last week's news and analysis
Comprehensive metric?
Total alpha touted as CLO performance measure
Covid dip
CRE CLO churn rates drop
Disclosure deluge
Proposed quarterly capital disclosures brings GSEs into line with banks
Future-proofing credit portfolio management
The rising importance of technology in managing credit portfolios
Healthy Hertz
Securitisation key to Hertz's near-fatal collapse and its resurrection
Polish return
Rare lease securitisation completed
Positive prospects?
Legal changes open up Turkish NPL opportunities
Risk-sharing remit
CRT definitions discussed
Rocky road ahead
Output floor implementation questioned
SCI Awards: Personal Contribution to the Industry
Winner: Christian Moor, team leader at the EBA
SCI CRT Awards: Rising Star
Winner: Meindert de Jong, director at PGGM
Spanish SRT finalised
Sabadell executes capital relief trade
Still strong
European ABS/MBS market update

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

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.

Recent Premium research to download
Defining 'Risk-sharing' - October 2021
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.
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.

Capital Relief Trades

Risk transfer round-up - 1 November

CRT sector developments and deal news

Intesa Sanpaolo is believed to be readying a synthetic CMBS for 4Q21. The transaction would be the fourth pure synthetic CMBS transaction this year, following trades from BNP Paribas, Societe Generale and Bank of Montreal (see SCI's capital relief trades database).  

Capital Relief Trades

Freddie's eight

Two STACRs to go before yearend after eventful Q3

Freddie Mac has priced its eighth CRT trade of the year, designated STACR 2021-DNA6, via joint leads Bank of America and Wells Fargo for a face value of $1.48bn.

This is the borrower’s penultimate DNA STACR transaction of 2021. Another HQA deal, which incorporate mortgages with higher LTVs, is also due to be printed before the end of the year, making 10 STACRs in total in 2021.

This most recent STACR deal is one of the first to incorporate the new 20-year final legal maturity alongside a five year early redemption call option.These new features were introduced at the end of Q3.

The last quarter also saw the first ever tender offer from a GSE. Freddie Mac has offered a buyback for eight old STACR deals.from 2014, 2015, 2016 and 2017 with an initial tender cap of $650m whch has increased to $1.63bn. At the end of Q3 $1.3bn had been used.

Spread levels for this most recent trade were broadly in line with recent issues. The $212m M-1, with a CE of 1.75% and a WAL of 1.25 years, came in at SOFR plus 80bp, while the $424m M-2, with a CE of 1.25% and a WAL of 3.28 years, was priced to yield SOFR plus 150bp.

At the other end of the stack, the $424m B-1 with a CE of 0.75% and a WAL of 4.97 years, yields SOFR plus 340bp while the $424m B-2, with a CE of 0.25% and a WAL of 4.99 years, yields SOFR plus 750bp.

The co-managers were Amherst Pierpoint, Nomura, Performance Trust, SocGen, Castleoak and Drexel Hamilton.

Freddie Mac was unavailable for comment.

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 3 November

CRT sector developments and deal news

JPMorgan is believed to have postponed a synthetic securitisation referencing a portfolio of leveraged loans. Dubbed Valeria, the transaction was expected to close in 3Q21. 

Capital Relief Trades

Back from the brink

Lloyds resurrects UK SME SRTs

Lloyds is marketing a synthetic securitisation referencing a portfolio of UK SME loans under its Salisbury programme. The significant risk transfer transaction marks the first UK SME SRT following the onset of the coronavirus crisis last year.

UK SME SRT issuance took a dive last year along with the broader SME sector, amid wider market uncertainty following the aftermath of the coronavirus crisis (SCI 26 October). Indeed, according to SCI data, the only confirmed SME SRTs from last year were trades issued by Commerzbank and Societe Generale (see SCI’s capital relief trades database).

More saliently, there was the option of the Coronavirus Business Interruption Loan Scheme (CBILS). The latter was designed to provide financial support to smaller businesses across the UK that were losing revenue, and facing disruptions in cashflow, because of the Covid-19 outbreak.

Through the scheme, businesses could access financial support of up to £5m in the form of term loans, overdrafts, invoice finance and asset finance. The scheme expired at the end of March.

The last capital relief trade from the Salisbury programme closed in June 2019. Dubbed Salisbury Three, the £323.5m tranche referenced a £3.3bn portfolio of UK SME loans. Lloyds launched the Salisbury programme in December 2015.

Stelios Papadopoulos

CMBS

Dual-currency deal

Pan-European CMBS prepped

Goldman Sachs is in the market with a dual-currency pan-European CMBS. Dubbed Frost CMBS 2021-1, the transaction securitises a £112.35m loan and a €92m loan advanced to Newcold Holdings, a temperature-controlled logistics company based in the Netherlands.

The sterling-denominated loan is secured by a single cold-storage property in Wakefield, Yorkshire. The euro-denominated loan is secured against one cold-storage asset in Rheine, Westphalia, Germany, and another in Argentan, France.

The portfolio is largely automated with high bay access and offers a total pallet capacity size of 304,928 pallets across 62,844,671 cubic feet. The assets are located strategically close to customer distribution centres and their target markets, placing NewCold as an integral part of the supply chain process for most of its key customers.

The purpose of the loans is to refinance existing indebtedness, pay related financing costs and for the NewCold Group's general corporate purposes. As of 30 June 2021, the portfolio was approximately 85.4% occupied and 65.8% of the capacity was occupied by customers with operating service agreements (OSAs) as at December 2020.

NewCold benefits from longstanding customer relationships and global OSAs, including with Froneri International and McCain Foods, which - on a weighted-average basis - equates to a contract term of 7.9 years. The top 10 customers contributed 80.3% to 2020 portfolio revenue, with the top seven contributing 75.1% of total revenue. Froneri made up 35.4% of total 2020 revenue and is present in Wakefield, Rheine and Argentan, while McCain made up 17.1% of total 2020 revenue.

Rated by DBRS Morningstar, the deal’s capital structure comprises sterling-denominated class A to F notes and euro-denominated class A to E notes. While the facilities agreement provides that the income and principal received in respect of the Wakefield property is allocated to repay the sterling loan and the income and principal received in respect of the Rheine and Argentan properties is allocated to repay the euro loan, both loans are cross-collateralised, include cross-default provisions and are secured by all three properties.

Cashflows arising in respect of the Wakefield property will be used first to make payments under the sterling notes and cashflows in respect of the Rheine and Argentan properties will be used first to make payments under the euro notes. However, due to the cross-collateralisation and cross-default features in the facilities agreement, sterling noteholders will be exposed to the performance of the euro loan, while the euro noteholders will be exposed to the performance of the sterling loan, including in each case any related foreign exchange risk.

The sterling loan and the euro loan represent moderate-leverage financing, with a loan-to-value ratio of 60.5% and 62.4% respectively, based on CBRE’s 1 October 2021 valuation of £185.6m for the Wakefield property, €108.4m for the Rheine property and €39.1m for the Argentan property. DBRS Morningstar derived its calculated LTV of 78.4% and 79.1% for the sterling and euro loans respectively from its valuations of £143.3m and €114.3m.

The loans will bear interest equal to the sterling overnight index average (Sonia) plus the loan margin of 3.25% in respect of the sterling loan and three-month Euribor plus the loan margin of 2.8% in respect of the euro loan for the term of the loan. Each borrower must repay the loans made available to it on the fifth, sixth, seventh and eighth loan interest payment dates in an amount equal to 0.25%. The initial loan maturity date is in November 2024.

Angela Sharda

Structured Finance

SLM EODs eyed

Sector developments and company hires

SLM EODs eyed

Fitch has downgraded from single-B to double-C the outstanding class A4 and B notes of SLM Student Loan Trust 2007-7, 2008-1 and 2008-4, due to the legal final maturity date of the class A4 notes being approximately three months away in January 2022 for SLM 2007-7 and 2008-1 and less than 10 months in July 2022 for SLM 2008-4. The agency notes that repayment by the legal final maturity date is unlikely under its maturity stress scenarios without an extension of the outstanding class A4 legal final maturity date or without support from the sponsor.

If the class A notes miss their legal final maturity dates, it would constitute an EOD on each transaction's indenture, which would result in diversion of interest from the class B notes to pay class A notes until paid in full. This would cause the class B notes to default as well.

Each trust has entered into a revolving credit agreement with Navient, by which it may borrow funds at maturity in order to pay off the notes. Furthermore, Navient has requested investor consent to extend the legal final maturity dates for these transactions.

Additionally, Fitch has downgraded the ratings assigned to the outstanding class A3 and B notes of SLM Student Loan Trust 2008-3 to single-D, reflecting the default on the senior notes in the payment of their outstanding principal on their legal final maturity date of 25 October 2021. Class B interest payments have been diverted to the class A notes until payment in full, given the provisions in the indenture that change the cashflow waterfall while an EOD is continuing.

The agency says it will continue monitoring remedies to the occurrence of the EOD implemented by the noteholders or transaction parties, as provided under the trust indenture, and take any additional rating action based on the impact of those remedies as needed. According to the trust indenture, the EOD may result in acceleration of the notes as declared by the indenture trustee or by a majority of noteholders, or in the liquidation of the trust.

In other news…

EMEA

Alcentra has appointed three new members of their Responsible Investing (RI) team in latest move to build out the division. Ross Curran will now lead the team as head of responsible investing, having been at Alcentra for over 15 years, will lead on the implementation of responsible investment strategy in all areas across the RI team – including securitisation. Additionally, Adriana Carvallo will join the RI team as head of ESG integration, having previously been at Norges Bank Investment Management, and Amanda Provencal has been recruited as ESG analyst to support the integration process by ensuring Alcentra’s delivery on key outcomes.

Paulette Mastin and Paul Regan have joined Reed Smith’s financial industry group in London, as partner and counsel respectively. Previously counsel at Linklaters, Mastin advises bank and independent corporate trustees, agents and companies on a wide variety of capital market transactions, including CDOs, CMBS and RMBS. Regan - who brings to Reed Smith critical in-house experience from his previous role at Bank of New York Mellon - focuses on advising corporate trustees on the full breadth of finance and capital market transactions, including securitisations.

North America

Dechert is welcoming back Jon Burke as partner at the New York office, having previously worked as an associate at the firm, Burke will serve as partner in global finance and play a key role in Dechert’s structured credit and CLO product line. With extensive experience offering advisory in connection with different CLOs to investment banks, asset managers, issuers and investors, Jon Burke’s return will aid Dechert’s global finance practice primarily in the CLO market and aims to enhance client services.

New York-based asset management firm, MidOcean Partners, has announced partnership with Hunter Point Capital (HPC) in latest bid to secure long-term growth. The strategic investment from HPC is its first since being launched in 2020, and has secured them a minority share of the firm. Operating and specialising in middle-market private equity and alternative credit investments for over 20 years, MidOcean intends to leverage the HPC capital to build upon this record and broaden their talent portfolio. While the terms of investment have not been disclosed, MidOcean confirmed operations, including day-to-day and investment processes, will remain unchanged.

SitusAMC has recruited 1,500 employees amid expansion to aid support capacity across both originations and secondary market due diligence. The new recruits are expected to accelerate the turnover of loans into private-label securitisations, as elevated loan production remains high throughout 2021 following a boom in 2020 with MBA reporting a total of US$4.3trn in mortgage loans. This additional capacity will be used to establish dedicated, customised client support teams and services, and offer further support to sellers and internal stakeholders.

Vibrant Capital Partners has bolstered its structured credit investment and business development teams with two new hires. Shawn Lim, former vp of corporate structured products at Oak Hill Advisors, has joined Vibrant as a vp in its structured credit investment team. He will be responsible for sourcing, analysing and executing investments in CLO liabilities and equity.
Zachary Radler, former director at GoldenTree Asset Management, has joined Vibrant as a director in its business development team. Radler will focus on deepening the firm’s relationships with institutional investors across North America.

Wells CTS sale completed

Wells Fargo has completed the sale of its corporate trust services business to Computershare (SCI 29 April), including the vast majority of management, personnel, processes and technology platforms pertaining to the CTS business. Moody's notes that Wells Fargo plays key roles - including trustee, master servicer, calculation agent, paying agent, backup servicer, cash manager and custodian - in many of the US structured finance transactions that it rates.
Wells Fargo has advised Moody's that on the closing date of the sale (1 November), Wells Fargo transferred its roles and responsibilities under the relevant transaction agreements for some of the transactions of the CTS business. For other transactions, including all of the transactions rated by Moody's where CTS plays a role, the parties intend to transfer the roles in stages as requirements from the underlying trust contracts are met. Where one or more of the roles played by Wells Fargo did not transfer at closing, Computershare will perform all or virtually all of the roles as an agent of Wells Fargo pursuant to a servicing agreement.

Structured Finance

Servicers facing 'unprecedented' turnover

Sector developments and company hires

Servicers facing ‘unprecedented’ turnover

US commercial mortgage servicers are facing unprecedented turnover levels and filling open positions in the tight labour market may ultimately increase the cost of servicing loans, Fitch suggests. However, the agency notes that to date, there have not been any noted declines in servicing proficiency among Fitch-rated primary, master and special servicers.

Fitch reports lower-than-average employee turnover in its rated servicers in 2020 as employees transitioned to remote working and rode out the uncertainty of shifts in the workplace. “Those uncertainties resolved themselves in 2021, as commercial loan debt issuance stabilised, servicing portfolios began to grow and servicers began hiring again. Simultaneously, long-tenured employees have been taking a closer look at retirement. Additionally, remote working has become a quality-of-life factor, which some employees are less willing to give up as servicers return to the office,” the agency observes.

Collectively, these factors have led to an increase in employee turnover - particularly in the Kansas City, Dallas, Miami and Washington D.C. markets, which have high concentrations of servicers. At the same time, servicers with geographically diverse offices and remote working options generally experienced less turnover, according to Fitch.

While servicers have generally been able to staff up to cater for growing portfolios, the agency has observed a backlog of open positions due to competition for talent. As such, servicers have had to increase compensation expectations for new hires and create more formalised remote-working policies to attract talent. There has also been an increased willingness among servicers to hire staff remotely almost as a defensive measure, as well as a means to recruit experienced talent.

Overall, Fitch expects special servicers - which added staff to address the influx of borrower requests for debt relief and defaults over the last 18 months - to see a decline in staffing as temporary secondments end and lower default volume mitigates the need to backfill asset manager departures.

In other news…

EMEA 

AXA IM Alts has launched a new global secured assets (GSA) strategy in an expansion of existing secured finance products for pension fund clients. The new strategy follows on from the launch of its first GSA initiative (GSA I), which has achieved €2.2bn in assets since 2018. AXA are well established in alternative investments, with an estimated €163bn in total assets, and this new strategy fits within AXAs wider ambitions as a global investment platform. The newest GSA strategy will work to meet the rising demand from pension schemes across Europe and in the UK that are seeking to diversify their investment portfolios.

Hayfin Capital Management have appointed Caoimhe Bain as new head of ESG, in latest bid to further responsible investment practices at the alternative asset management firm. Caoimhe has over ten years of experience in responsible investing within the asset management sector, and will report to Hayfin’s ESG, investment and management committee member, Andrew McCullagh. She will join the global team of over 160 professionals at Hayfin’s, and work to ensure embedded responsible investment practices are continually reviewed, developed, and implemented.

North America

Muzinich has hired Brian Yorke as portfolio manager and global head to lead in launch of its new US and European CLO platform. Yorke joins from Ostrum Asset Management, where he aided the firm’s production of their US loan and European CLO business, and has a further 13 years of experience as head of global performing credit at Bardin Hill Investment Partners.

At Muzinich, Yorke will be aiding its business development alongside head of syndicated loans, Torben Ronberg, in an effort to improve risk management and capital preservation. It is hoped the move will allow for the expansion of floating rate products during a period of “inflationary uncertainty and rates pressures”, explained founder and chairman George Muzinich.

PWM bankruptcy eyed

PWM Property Management, a special-purpose entity that controls the 245 Park Avenue and 181 West Madison loans, has filed for Chapter 11 bankruptcy. The former property secures a US$1.2bn loan securitised across 14 CMBS, including the 245 Park Avenue Trust 2017-245P transaction. The 181 West Madison property secures a US$240m loan securitised across four CMBS transactions.

KBRA says it is monitoring the rating implications of the PWM bankruptcy, but is not taking any rating actions on the affected CMBS it rates at this time - although it will continue to monitor the filing and performance of the related loans. However, the agency notes that should special servicing fees and trust expenses create interest shortfalls to any rated classes across any of the transactions, watch placements and rating actions may be warranted.

Structured Finance

Fed set to reduce asset purchases

Sector developments and company hires

Fed set to reduce asset purchases

The New York Fed’s FOMC has increased the System Open Market Account (SOMA) holdings of Treasury securities by at least US$70bn per month and of agency MBS by at least US$35bn per month during the monthly purchase period beginning in mid-November. Additionally, SOMA holdings of Treasury securities will increase by at least US$60bn per month and of agency MBS by at least US$30bn per month during the monthly purchase period beginning in mid-December. The committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.

Purchases of agency MBS will continue to generally be concentrated in recently produced coupons in 30-year and 15-year fixed rate agency MBS in the To-Be-Announced market. Principal payments from agency MBS and agency debt will also continue to be reinvested in agency MBS.

Meanwhile, the Fed will no longer purchase agency CMBS as needed to sustain smooth market functioning.

In other news…

APAC

AMAL Trustees has recruited Hagbarth Strom as head of transaction management, based in Sydney. Strom has 20 years’ experience in legal and financial services, with a specific focus on securitisation in the past decade. He was previously senior transaction manager at Perpetual and before that worked at Societe Generale and Clayton Utz in Australia.