Contents

RMBS

Hurdles ahead?

Dutch RMBS market continues to face challenges

The Dutch prime RMBS market received a boost last week with the announcement of Lloyds Bank’s STS-compliant Candide Financing 2021-1, after the issuer’s almost 10-year absence from the market (SCI 3 November). However, while the prime sector remains in the doldrums, the buy-to-let sector is also facing new regulatory challenges.

“Banks have been historically the main users of securitisation, but cheaper alternatives means that securitisation may be less appealing. The Covid-19 impact makes it more of a reality: that banks have more deposits that they were expecting – which means the need to use securitisation more in recent times is lower,” observes Alastair Bigley, senior director, sector lead European RMBS at S&P.

The fact that covered bond funding is typically more attractive than prime RMBS for Dutch banks makes Candide Financing 2021-1 all the more surprising. But Rabobank credit analysts suggest that this may be why Lloyds Bank opted for securitisation, since the covered bond alternative isn’t available to the bank.

Lloyds Bank has expanded its presence in the Dutch market over the last few years, with its market share in new originations standing at 1.5% and its total mortgage book value at €9.8bn as of end-2020, according to DBRS figures.

The transaction is backed by a €557.1m pool of prime mortgage loans with 3.4-years of seasoning, as well as a low exposure to interest-only loans (16.4%), a relatively low DTI ratio of 72.1% and a low current indexed LTV of 56.4%. Additionally, the mix of NHG and non-NHG exposures is well-balanced at 58.1% and 41.9% respectively.

Only the triple-A rated (DBRS and Fitch) notes are being publicly offered. IPTs of three-month Euribor plus high-20s/30bp were released yesterday (8 November), which the Rabobank analysts describe as a “relatively conservative starting point”. The deal is expected to price tomorrow (see SCI’s Euro ABS/MBS Deal Tracker).

Dutch RMBS issuance volumes have been broadly similar for the last three years, with large programmatic bank issuers executing regular transactions and non-banks using securitisation on an opportunistic basis. Bigley notes: “The flow has been consistent over the last few years, but the question is whether we see the same deal volumes coming through and how big those transactions are. I broadly expect deal flow in 2022 to be parallel with what we are currently seeing.”

Peter van der Sterren, portfolio manager fixed income at NIBC Bank, mirrors this view and explains that at present there are around five to eight transactions a year. However, he is hopeful that a few more deals may enter the pipeline before year-end - although he does not expect the deal tally to change excessively over the next few years.

Van der Sterren adds: “There’s a limited number of [prime RMBS] issuers that are coming out with new deals and most only once a year, at best.”  

He suggests that the margin is slim and further spread tightening could push bank investors out of the market. “Other investors who do not have the ECB deposit rate option for their cash may still see value at current levels. But where we are now, I don’t think you are going to attract a whole new level of investors.”

Overall, the buy-to-let segment remains a bright spot for the Dutch RMBS market (SCI 26 January), despite regulatory uncertainty. For instance, the Dutch government is currently exploring possible further rental price regulations in the non-regulated sector of the mortgage market.

Bigley anticipates that demand is likely to continue from both renters and individual investors/landlords. There is, however, an open question as to whether private investors will be able to purchase assets in certain metropolitan areas.

He concludes: “The regulatory challenges will be worth keeping an eye on. This may mean that lenders could move into slightly different assets, in order to keep growing - such as mixed-use or semi-commercial properties.”

Angela Sharda

CLOs

Risk mitigation

Euro CLO wraps gaining traction

Assured Guaranty (Europe) SA this week closed a financial guarantee for a further European CLO, following the wraps it recently provided for the North Westerly V CLO and Tymon Park CLO deals (SCI 6 September). Financial guarantees are proving attractive to investors seeking to reduce regulatory capital consumption, both on existing exposures and new investments.

The latest wrap is in connection with €125m class A notes issued by Bain Capital Euro CLO 2021-2, managed by Bain Capital Credit US CLO Manager Series C. For North Westerly V Leveraged Loan Strategies CLO, managed by NIBC Bank, Assured Guaranty (Europe) SA guaranteed €125m of class A notes. For Tymon Park CLO, managed by Blackstone Ireland, Assured Guaranty UK Limited and Assured Guaranty Corp co-guaranteed €100m, in aggregate, of the class A1, class A2A and class B notes.

The investors in the latter two deals were European, and included one European insurance company. In addition to the credit benefit related to the guarantee, the investors received improved risk-weighted capital outcomes.

Under the Solvency 2 standard formula, a financial guarantee may qualify as a risk mitigation technique, reducing the spread-risk charge for non-standardised securitisations (non-STS securitisations) and resulting in the application of a counterparty risk charge based on the insurer’s rating. “By transferring the risk of default on an underlying CLO to Assured Guaranty, a European insurance company investor may be able to leverage Assured Guaranty’s financial guarantee to mitigate risk and reduce the Solvency 2 capital requirement on CLOs and other non-STS securitisations. Beyond capital relief, the financial guarantee may also provide limit relief to a given asset class or manager, enable credit risk transfer and ensure the benefit of Assured Guaranty’s experienced underwriting and surveillance of exposures,” explains Jeffrey Farron, md, structured finance at Assured Guaranty.

The firm is in active discussions with other investors and arrangers to provide similar solutions. “We have appetite to grow the business across the structured finance space and are open to exploring other opportunities. Clearly there is a market need for more triple-A CLO buyers, and financial guarantees are an efficient way of enabling new investors - who may otherwise be discouraged from investing in CLOs because of punitive capital requirements - to access the market,” Farron notes.

He continues: “However, such wraps can be applied to any non-STS securitisation exposures, not just CLOs. We’d had discussions in connection with CMBS, for example.”

Assured Guaranty was one of the largest and most active CLO 1.0 era financial guarantors working with investors, issuers and arrangers globally. The firm has continued to guarantee transactions during the CLO 2.0 era, primarily in the US middle market CLO sector.

“CLO wraps is a product that’s in the firm’s DNA. We’d like to increase our exposure to CLOs in general and hope to continue partnering with other investors in the space going forward,” concludes Steven Kahn, senior md, structured finance at Assured Guaranty.

Corinne Smith

ABS

Some softening

European ABS/MBS market update

With the end of the year in sight, issuers are competing for investor demand in the European ABS/MBS primary market. This week saw mixed results for the various actors involved.

“Naturally the market is more complex than a few weeks ago,” notes one European ABS/MBS trader. “2021 has generally been an excellent year for the primary market, which saw a lot of paper being absorbed by investors. Now that we are coming to the end of the year, a certain fatigue can be felt. There is less liquidity and more nervousness around rates, equity and credit, which in turn is reflected in spreads.”

This showed in UK deal Pierpont BTL 2021-1, which priced on Wednesday. Although the £212m of class As were eventually 2x covered, the notes priced at SONIA plus 80bp – wide of IPTs of low-to-mid-70s. “It’s never great when a deal widens from talk – it doesn’t reflect well on the deal and it is not the best signal you want to send out to the market,” says the trader.

The RMBS space also witnessed Lloyds Bank’s return to the Dutch market with Candide Financing 2021-1. In the end, the offered class As landed at the wide end of High-20s-30 initial talk to print with a 30bp DM.

“I was surprised with its final results – pricing at 30bp after the book went from 1.5x to 2.1x oversubscribed,” the trader says. “I felt it was extremely good value, backed by excellent collateral. There are questions, however, of whether the ECB participated in the deal.”

The lease receivables space proved to be active once again, with two deals pricing during the week - Treva Equipment Finance 2021-1 and Alba 12. Despite a market with significant competing supply, both deals proved successful - particularly the latter, where the sizeable €474.7m class A tranche was a solid 2x oversubscribed.

As for the secondary market, the trader highlights something of a standstill. “There is clearly less liquidity in the secondary market and it feels as though we are almost done for the year already, with everyone eagerly waiting for 2022,” he says.

Indeed, optimism still prevails, according to the trader. “Although conditions have softened in primary ABS, the outlook for the beginning of 2022 is positive and transactions should be well received. Perhaps the biggest unknown is with regards to the ECB and its stimulus programme."

For more on all of the above deals and more, see SCI’s Euro ABS/MBS Deal Tracker.

Vincent Nadeau

ABS

More of the same?

Euro auto ABS tipped for further diversification

The European auto ABS market is set for further expansion and diversification, according to new research from DBRS Morningstar. The report, which covers auto ABS issuance over the past five years, suggests that present market stability - despite Covid-19 disruptions - indicates at least short-term future growth within the auto finance business.

“We expect to see more transactions backed by portfolios originated by non-financial captives with a focus on used vehicle financing, a comparative increase in market risk compared to credit risk, an increase in receivables related to alternatively fueled vehicles, a stable trend among jurisdictions, and an increase in near prime lenders approaching the auto ABS market,” says Guglielmo Panizza, avp of European ABS at DBRS Morningstar.

The auto ABS asset class is typically understood to be generic. However, DBRS Morningstar ascertained certain portfolio characteristics that were found to be influential in the expected credit performance of transactions, including originator type, risk, jurisdiction, vehicle types and ESG considerations.

Since 2018, the rating agency has rated over 70 auto ABS transactions – which accounts for over half of all European publicly rated issuance. The distribution of these European transactions occurs predominately in five key countries - Germany (28.4%), the UK (23%), France (14.9%), Spain (14.9%) and Italy (12.2%) - with just 6.8% of the deals originating outside of these jurisdictions.

Prior to the pandemic, the European auto ABS market differed from its US equivalent, as originators in the European market did not specialise in subprime lending. However, the European auto ABS market recorded its weakest September since 1995 in 2020, as Covid-19 put a halt to new car registrations across Europe, due to semiconductor chip shortages. With sales down a total 25%, the European market witnessed an increase in used vehicle financing and near-prime originators.

Debtors who purchased these used vehicles tended to have reduced performance in both expected defaults and recoveries. The commentary from DBRS found that in the largest jurisdiction, Germany, default rates remained low - even if a large number of the receivables are related to used vehicles. Ultimately, this indicates that the performance gap - of expected defaults and recoveries - between debtors appears to be closing.

Of the originators of the 70 transactions, the captive (41.9%), non-captive (37.8%) and quasi-captive (20.3%) finance companies had a respective residual value exposure risk of 23.6%, 17.2% and 25.1%. The research details that captive lenders’ stricter credit policies invites better quality borrower profiles - who usually have higher expected recovery rates and lower expected default rates.

Where transactions were exposed to market risk, they demonstrated higher expected default and recovery rates. The associated credit risk of the auto ABS transactions stood at 80% of total securitised receivables (since 2018) and continues to be widespread across the European market.

Claudia Lewis

Structured Finance

Too slow

Disappointing timeline for call for evidence on STS reform

The European Commission’s latest call for evidence on its securitisation prudential framework review highlights a familiar pattern in the EU’s regulatory actions. The combination of an elongated timeline and the absence of a holistic approach point to a lack of momentum for the European securitisation market.

Earlier this year (SCI 17 May), the Joint Committee of the European Supervisory Authorities (ESAs) published an analysis of the implementation and functioning of the EU Securitisation Regulation (SECR). The report, based on stakeholder feedback to two surveys produced by the ESAs, was widely received with disappointment by market participants (SCI 27 May). 

“I feel it was a missed opportunity because there was no substance around what truly matters,” according to Ian Bell, ceo of PCS.

Last month, the European Commission issued a call for evidence to the Joint Committee of the ESAs, specifically aimed at the unfinished parts of the STS reform. “The current consultation must be welcomed as it finally incorporates the items needing to be covered - namely the capital calibrations for both bank and insurance investors and the treatment of securitisations for the liquidity coverage ratio. However, a few months were clearly lost in the process,” notes Bell. 

Indeed, if time is of the essence, the consultation’s timeline might concern many - with the Commission noting that that it would need to receive the JC’s advice no later than by 1 September 2022. “What I have already been hearing from a few regulators is: hopefully we can meet the deadline,” notes Bell.

He adds: “It is clearly disappointing. How long can this market survive on a respirator?”

The elongated timeline does curtail a certain sense of momentum. Furthermore, with the COP 26 negotiations currently dominating both the media and the political apparatus, the regulatory development of the securitisation market arguably should inevitably be integrated within the overall framework of Europe’s green transition plans.

“One of the things we have regretted over the years is the absence of a holistic approach emanating from Brussels. They will look at securitisation regulation and it will follow its own drumbeat,” states Bell.

He concludes: “The same goes for other capital market products or services in relation to ESG factors: each seem to have their own timeframe and sequencing. It leads to a disaggregating approach to regulation, with different rules at different times for otherwise similar instruments. It is particularly distressing in the case of the green bond standard.”

Vincent Nadeau

Structured Finance

Hedges eyed

CPMs target post-pandemic concentration risks

The International Association of Credit Portfolio Managers (IACPM) has completed its 2021 Principles and Practices in CPM Survey. Conducted every other year, the survey focuses on five key areas of concern to its members, including the evolution of risk and credit portfolio management. The latest survey shows that CPM functions are increasingly concerned about concentration risks, following last year’s pandemic, and coincides with the increasing use of synthetics over the last year as a concentration hedge (SCI 25 June).

The IACPM survey’s goal is to allow firms to benchmark their practices relative to those of other financial firms. Globally, 64 member firms - consisting of 54 banks, as well as eight development banks and export credit agencies, and two re-insurance firms - participated in the 2021 survey. Additionally, IACPM staff conducted interviews with a number of participating firms to help inform observations.

The survey was carried out as the outlook was becoming more bullish, after last year’s Covid-19 crisis. CPM functions noted lessons from the extreme stresses of the early days of the crisis when there were unprecedented funding requests from clients amid uncertain conditions, later mitigated by central bank liquidity interventions.

Accordingly, priority considerations for CPMs currently include the stage of the credit cycle, new and emerging credit risks in the wake of Covid-19, and evolving approaches to address an array of non-financial risks.

Last year’s disruption has also exposed vulnerabilities to supply chain risks and cyber risks, as well as sector concerns, including real estate, transportation, retail, tourism and hospitality. CPM functions are acutely focused on forward-looking risks and opportunities as government programmes recede, according to the survey.  

The importance of front-end origination tools increased for all reported measures between 2019-2021, with concentration limits ranking highest. Hedging exposures or risk mitigation is the main driver behind loan sales, credit risk insurance, financial guarantees, single name CDS and funded synthetic securitisations.   

Single name CDS continue to be a core market, while others show varied levels of importance across different regions. Funded synthetic securitisations are of more importance for banks in EMEA, credit risk insurance is used more often in EMEA and APAC, while banks in APAC put higher emphasis on financial guarantees. In the coming months, the survey notes that usage of credit risk insurance and unfunded synthetic securitisation is expected to expand.

More than half of the participating banks have a total balance sheet size above US$500bn. Almost all respondents in 2021 have responsibility for the corporate loan book, and three-quarters cover the leveraged loan book and real estate-CRE as well. The next lower tier includes coverage of project-object finance, SME-middle market, securitisation and credit risk insurance portfolios - all at half to two-thirds coverage by responding firms.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 8 November

A review of SCI's latest content

Last week's news and analysis
Back from the brink
Lloyds resurrects UK SME SRTs
Dual-currency deal
Pan-European CMBS prepped
Electric avenue
Adoption of electric cars spells greater volatility for rental car ABS
Freddie and Fannie prosper
Net income/ revenue increased YoY and innovation unveiled in 3Q results
Freddie's eight
Two STACRs to go before yearend after eventful Q3
Holding firm
European ABS/MBS market update
Matryoshka doll?
Use of proceeds proving contentious for ESG securitisations
New originations
Reverse mortgage securitisations re-emerging?
Restricted issuance
STS synthetic volumes to remain constrained

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

Back to back STACR

Second STACR in just over a week hits the tape

Freddie Mac today priced its second STACR in a little over a week, designated STACR 2021-DNA7. The $1.27bn trade is expected to settle on November 12, says the borrower.

The joint lead managers are Wells Fargo and Citi, while co-managers are Barclays, CS, JP Morgan, and StoneX.

This is the GSE’s final DNA transaction of 2021, while an addition HQA deal will be priced before yearend. This makes 10 CRT capital markets deals this year.

The anticipated capital structure is as follows: the $319m M-1 carries a 1.75% credit enhancement, a 1.77 year WAL, is rated BBB/BBB+ and will yield SOFR plus 85bp.

The $287m 1.30% CE M-2 has a 3.87 WAL, is rated BB/BBB- and will yield SOFR plus 180bp.

The $351m 0.75% CE B-1 is rated B/B+ and will yield SOFR plus 365bp.

Finally, the $319m 0.25% CE B-2 is unrated and will yield SOFR plus 780bp.

The M-1 is priced to yield 5bp wider than the equivalent tranche in last week’s 2021-DNA6, while the other three tranches are between 25bp and 30bp wider.

Freddie Mac declined to make further comment.

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 10 November

CRT sector developments and deal news

BCP is believed to be working on another transaction in Poland (SCI 28 October). Indeed, the bank is rumoured to be readying two transactions. The second trade allegedly references leasing assets.

The Portuguese bank’s last capital relief trade – which was called Caravela SME No. 4 – was finalised in May 2014 (see SCI’s capital relief trades database).    

Capital Relief Trades

A new chapter for GSE CRT - SCI webinar

Inflation, capital rules, lower origination and regulatory change all loom large

As US inflation hits a 30-year high, the GSE CRT market has a headwind to contend with it hasn’t seen for a long time.

October CPI, reported yesterday, increased by 6.2% from 12 months ago, which represented the fastest annual pace of growth seen since 1990 and was the fifth straight month above 5%.

It’s all change in the CAS and STACR markets on a number of other fronts as well.

The new amendments to the Enterprise Regulatory Capital Framework (ERCF) introduced in September have not only made CRT deals more economically viable they also gave notice of a new regime at the FHFA and one that is convinced of the utility of CRT.

The effect of the changing of the guard was made evident almost immediately as Fannie Mae came back to the market for the first time since Q1 2020.

Issuance this year has been driven very largely by record origination. While most forecasts predict volumes to continue to be healthy, the record pace seen in 2020 is unlikely to be maintained. Indeed, a drop of 35% may be on the cards.

This could mean reduced CRT next year, so, all things being equal, spreads should contract further. But Fannie Mae might want to make up for lost time, bolstering supply and softening prices.

Finally, there is more change on the regulatory front than has been the case for a number of years. The FHFA is committed to extend credit to those communities often left out of the housing market, and, on the face of it, this means credit quality - at least as it is traditionally assessed - of collateral pools will weaken. Does this mean a greater role for the CRT market?

SCI will hold a webinar at 10am EDT November 16 2021 to discuss these themes and other pertinent questions connected to the GSE CRT market.

The panel consists of:

Simon Boughey, US Editor, SCI

Seamus Fearon, EVP, Credit Risk Transfer & Services, Arch Capital Group

Jeffrey N. Krohn, Mortgage Credit Segment Leader, Guy Carpenter

Tim Armstrong, Managing Director, Guy Carpenter

Sign up here

Simon Boughey

RMBS

Irish rebound

Second NPL securitisation marketing

Another Irish non-performing loan securitisation has hit the market less than a month after the Rathlin Residential 2021-1 RMBS priced (see SCI’s Euro ABS/MBS Deal Tracker). The move is in line with the expected growth and post-Covid recovery of the market in the second half of 2021 (SCI 23 July).

Dubbed Portman Square 2021-NPL1, the latest securitisation is backed by both non-performing and reperforming loans and is sponsored by Panelview and serviced by Mars Capital. The portfolio includes NPLs in long-term default that AIB Group sold to Mars, as part of a consortium arrangement with Mars and affiliates of Apollo Global Management. Other originators include EBS and Haven Mortgages.

The collateral comprises 3,944 loans that are secured by a pool of mostly residential (owner-occupied and buy-to-let) and mixed properties in Ireland, with the maximum regional concentration being in Dublin (24.85%). The loan has an outstanding balance of approximately €1.08bn and 99% of the pool is in arrears. The Moody’s calculated weighted average original LTV of the pool is 161.6% and the WA current indexed LTV is 166.4%.

The transaction is arranged by Goldman Sachs and has been provisionally rated by both Moody’s and S&P. The transaction comprises €365.4m A1/A rated class A notes and €32.48m Ba1/BBB class B notes. There is also an unrated €684.79m class Z tranche.

Moody’s notes that given the nature of the collateral, payments made to the SPV by borrowers will be irregular. As such, an amortising class A reserve equal to 8.25% of the class A note balance is in place to ensure timely payment of interest to the class A notes and the senior fees. The class A reserve would be sufficient to cover around 40 months of interest on the class A notes and more senior items at closing, assuming a Euribor of 0.50%.

The class B notes also benefit from a dedicated reserve fund of 6% of the class B note balance.

Claudia Lewis

ABS

Indian securitisation market presents challenges

The Indian structured finance market has been around for over two decades but remains quite restrictive for both issuers and investors, explains Arvind Rana, director, structured finance, APAC at Fitch Ratings

The market revolves around Indian banks' targets for lending to priority sectors. Banks have traditionally been the largest investors in securitised debt, as they need to fulfil the Indian central bank’s requirements to lend a target percentage of their loan books to priority sectors, which are defined by the central bank and include minorities, agriculture, SMEs and export industries. The limited investor base has constrained the growth of the SF market, as investors like insurance companies and asset managers are not very active in the market.

With these priority-sector loans (PSL) being prized by banks, PSL securitisation yields have sometimes fallen lower than term deposit rates with large Indian commercial banks. Indian public-sector banks also purchase a significant amount of non-priority sector loan (non-PSL) pools on a bilateral basis at very low risk-adjusted yields. This means that potential originators of securitisation in India have less incentive to securitise non-PSL pools with higher yields.

Indian SF notes are not listed due to their relatively small transaction sizes and are typically privately placed. These transactions are mostly bilateral and typically held to maturity. The bilateral nature of transactions makes the market less transparent and difficult for potential new issuers and investors to enter.

The asset classes available in India are also not the same as those in other jurisdictions. The top three asset classes in India are securitisation of commercial-vehicle (primarily trucks) loans, microfinance loans and loans-against-properties (mainly SME loans). Some globally popular securitisation asset classes are either absent or not popular in India, like personal-vehicle loan or consumer loan ABS, CMBS and RMBS.

The Indian SF market does have some advantages over some of the more developed markets. Typical Indian securitisation structures are very simple, mostly with one senior tranche, and cash or subordination. Some structural features that are often seen in other markets, such as revolving periods or controlled amortisation periods as well as pro-rata repayment, have not been observed in this market. Most transactions have purely sequential repayment structures. Indian transactions deleverage rapidly, reducing the credit risk for SF notes, as a result of their simple and sequential structures. This also reduces the cash flow modelling complexities for prospective investors and issuers.

The Indian economy has come under multiple stresses since the global financial crisis in 2007-2008, such as the 2012-2014 economic slowdown, demonetisation in 2016, goods and services tax implementation in 2017 and pandemic in 2020-2021. These stresses have enriched the historical performance data and increased the predictability of future asset performance. They have also helped Indian originators to enhance their underwriting and servicing capabilities. Fitch-rated ABS transactions demonstrated relatively stable asset performance, even during these stressful periods, which has resulted in stable rating performance.

There have been defaults by some large non-bank financial institutions in recent years, which tested the servicer replaceability and bankruptcy remoteness of securitised assets. Eventually, both features were adhered to by courts and other lenders. The events led to changes in the transaction structures, including a change in the ownership of the cash collateral from originator to trustee. These changes make Indian SF notes more comparable with those in other jurisdictions.

RMBS

Market movers

Leading agency MBS buyer talks taper, inflation and origination

While the encroach of inflationary pressures and the Fed taper will be important factors to consider, the dominant fundamental influence upon MBS in the medium term will be supply, says Brendan Doucette, portfolio manager for GW&K.

Doucette manages an agency MBS portfolio valued at $1.5bn at the end of Q3 2021, up from $1.2bn at yearend 2020. GW&K has over $48bn assets under management.

The US house market has been at white heat this year in many parts of the country, and significant supply has meant significant origination. Over $700bn has printed in the agency MBS market so far this year, and it is on course to print a record $800bn.

This level of supply has been the major influence upon the MBS market this year, in spite of the increasing presence of inflation and the Fed taper - which kicks next month at a rate of $5bn less per month.

While new mortgages are unlikely to maintain quite the same rate in 2021, origination is likely to remain elevated. Home prices have increased 20% this year, and while continuing upward momentum will on the one hand cool new debt applications it will also promote cash-out refinancing, further supporting origination.

Doucette estimates that the agency MBS market will print perhaps $600bn next year - off this year’s pace but still very lively.

In the near term, however, the technicals appear to support narrower spreads. Supply and thus issuance traditionally slows down at the end of the year, while higher mortgage rates have temporarily dampened the refi index.

Indeed, shortly after the Federal Reserve first indicated at the end of September it was ready to start tapering, spreads narrowed, perhaps counter-intuitively. The current coupon spread to the interpolated five-year/10-year Treasury curve was 75bp before the announcement and is now 64bp after hitting a low of 61bp at the end of last month.

The technical impact of the yearend shortage in supply was galvanized by a relief rally as the market finally had some clarity about when the taper would start, how much it would be for and how long it would last.

However, as the taper begins to take a grip of the market next year, spreads could drift wider.  Consequently, Doucette prefers defensive stance on spread duration.

“We are neutral on MBS in terms of weighting versus the index but we prefer to be defensive and underweight in rate and spread duration. The seasonal slowdown will help offset the first leg of the taper but there are unknowns heading into next year,” he says.

One such unknown is whether the Fed will start investing paydowns back into the Treasury market, If it does, MBS spreads to risk-free rates could widen once more.

The uncertainty surrounding the impact of Fed lack of buying leads GW&K to eschew areas of the market in which the central bank is historically most active. For example, the Fed dominates the 2% and 2.5% coupons in 30-year MBS. As they retreat from the regular monthly bid, this is the area of the curve which could see widening.

“We’re owning coupons where the Fed doesn’t own the float. We want to own higher coupons. The moral is: don’t own what the Fed does,” says Doucette.

The third spoke in the wheel is of course inflation. Fed chairman Powell has repeatedly sought to allay concerns by calling inflation “transitory” but it looks increasingly as if that is wishful thinking. According to a Goldman Sachs research report released on Sunday night, prolonged supply chain imbalances and rising wages mean that inflation metrics will remain “quite high for much of next year.”

The latest personal consumption expenditures price index - the Fed’s preferred inflation gauge - showed prices rose 3.6% in August and September. This is the fastest rate for 30 years.

While the dominant influence upon the MBS market over the next year is likely to be origination, inflation is sure to play a large role.

“Recent rate volatility leads us to be underweight rate duration. We would want to be long duration as the Fed hikes rates and the curve flattens. But right now there is too much day to day rate vol,” he says.

Simon Boughey

Structured Finance

US CLO equity outperforms

Sector developments and company hires

US CLO equity outperforms
US CLO Equity cashflows average 15.2% across 1,038 BSL transactions that have had four payment dates in 2021, according to a report from JPMorgan CLO research analysts. This is the highest since 2016, which averaged 19.6%.

CLOs that were reset in 2021 fared best with a 22% average return driven in part by a small minority that included an observed principal payment. “The utilisation of resets may boost returns situationally, but is increasingly blurring the lines between manager performance and equity dynamics,” the JPM analysts note.

The report identifies the top 10 managers by cashflow in 2021 as AIG, Golub, Elmwood, Goldentree, CarVal, Fortress, Canyon, Pretium, Angelo Gordon, and Anchorage. The analysts also highlight that middle market CLO performance also improved this year with the economic recovery – 2021 equity payouts averaged 22.5% compared to 19% in 2020.

In other news…

EMEA

Twelve Capital prepare for future growth with the introduction of a new organisational structure. The day-to-day management of the firm will now be led by Marcel Wildhaber and Nils Ossenbrink as co-managing partners. The pair will also head the group management committee, overseeing all areas of business operations including distribution and client services. Additionally, the firm has established an Investment Oversight Committee, chaired by executive chairman and CIO Urs Ramseier. The reorganisation will allow for the firm to maintain focus on company performance generation as well as client orientation.

North America

Tikehau Capital has appointed John Fraser as partner and new chairman of its Global Structured Credit Strategies. John will join the alternative asset management group’s New York office from Investcorp, where he sat as an independent member of the board of directors. He will oversee global structured credit strategy across Europe and the US as the firm seeks to expand its existing structured credit business with further CLO issuance, having launched its first North American CLO in September this year.

Fahd Basir has joined alternative investment platform Yieldstreet as md, capital markets, based in New York. He was previously senior advisor at Prytania Asset Management, which he joined in April 2018. Before that, Basir worked at 25 Capital Partners, Atlantic Asset Management, UBS and Bank of America.

Structured Finance

First LBR PCC investor signed

Sector developments and company hires

First LBR PCC investor signed

Lloyds has announced that Ontario Teachers’ Pension Plan Board will be the first investor to support underwriting through its multi-insurance SPV, London Bridge Risk (LBR) PCC. LBR was established in January of this year with sponsorship from Lloyds, with ambitions to create a market that invites new forms of capital and allow for easier access for investors to the Lloyd’s market. The independently owned and managed UK PCC has insurance management services provided by Horseshoe and makes up part of the Future at Lloyd’s strategy.

Ontario Teachers’ will be the first to use LBR to underwrite a transaction as Lloyd’s. The Canadian pension fund, which has approximately C$227.7bn in net assets, will initially provide capital in excess of £100m - which is expected to increase over time. Coverage will begin in 2021 (and expanded in 2022) and provide support to three Lloyd’s syndicates: CFC Syndicate 1988, Beazley’s Syndicate 5623, and Beat’s Syndicate 1416.

Lloyds’ CFO, Burkhard Keese, stated on the transaction: “It is a great achievement to see the PCC used, on-shore in the UK, to deliver reinsurance coverage and I am confident that this will be the first of many ILS investments into Lloyd’s as investors, members and syndicates increasingly appreciate the potential of this transformer vehicle.”

LBR is not the first ILS investment at Lloyd’s, but is the first time in the UK that a PCC has been used as a platform that allows investors to both support and provide capital to Members at Lloyd’s.

Operating under the UK Risk Transformation regulations, LBR will provide access to international and UK-based investors - including ILS investors – to offer funds into the Lloyd’s market with tax transparency. The SPV will be available for Lloyd’s members to manage their capital requirements by inviting different classes of investors, benefitting from shorter set-up times and lower transactional costs.

In other news…

North America

Crestbridge has announced the appointment of its new business development director, Marta Ciemiega. She will join the company’s US office in New York as part a strategic move to increase business in the region by increasing executive presence. With over 17-years of experience working in financial services, she will join the global administration, management, and corporate governance solutions firm’s aims for post-Covid US expansion.

Toorak Capital Partners has appointed C. Lamar Myers as new principal and head of multifamily business development. Myers joins the team at Toorak with over 15-years of experience in commercial real estate, including a five-year post running a multifamily development program as production manager at Freddie Mac. It is hoped this new executive hire will assist the residential real estate lending platform establish further partnerships, which will aid the present housing shortage, during this period of increased demand for financing small multifamily loans.

Structured Finance

Sri Lanka eyes remittance securitisation

Sector developments and company hires

Sri Lanka eyes remittance securitisation

The government of Sri Lanka (GOSL) is requesting competitive proposals from banks and investors for consideration to be appointed as counterparts or arrangers for its proposed securitised financing arrangement (SFA). The arrangement would be backed by foreign currency receipts of the Central Bank of Sri Lanka (CBSL) under the mandatory sale of 10% of workers' remittances converted into Sri Lankan rupees by licensed banks.

Sri Lanka receives around US$7bn in workers' remittances annually. Since the introduction of the mandatory sale requirement on 28 May 2021, an average of US$25m per month has been accumulated by the CBSL. With recent focused efforts to strengthen remittance flows by the CBSL in collaboration with stakeholder agencies, such inflows are expected to increase in the coming years.

The proposed SFA would be denominated in US dollars, euros, Chinese Renminbi, Japanese Yen or in any Gulf Cooperation Council (GCC) currency. The SFA is expected to be raised at a fixed or floating rate for a medium-term tenor. Proceeds will be used to finance expenditure as approved in the annual budget of the GOSL.

Proposals should be submitted by 30 November.

In other news…

EMEA

ICG has appointed Marwan Farag as its new managing director of marketing and client relations for the Middle East. Farag has over 17-years of experience of raising capital in the Middle East, and will join the global alternative asset manager’s Dubai office from LGT Capital Partners. ICG has developed client relations across the Middle East for over 13-years, and they hope the new appointment will enable them to meet the rising demand from investors while continuing to serve existing client needs.

Simon Webb has joined LiveMore Capital as md - finance and capital markets, based in London. He was previously investment director at Pollen Street Capital and before that, worked at Bluestone Group, Prudential Assurance, Deloitte, Russell Investments and Towers Perrin.

Irish NPL portfolio sale inked

Permanent TSB is set to sell a loan portfolio to Morgan Stanley Principal Funding, which intends to securitise the assets following completion of the acquisition next year. The pool, which has a gross balance sheet value of around €390m, comprises loan accounts linked to 1,222 borrowing relationships. Loans to the value of €223m (accounting for 57% of the portfolio) were originated as home loan (private dwelling house) products and loans to the value of €167m (43%) were originated as buy-to-let products.

Of the loans, 98% are categorised as non-performing by reference to regulatory definitions and the remainder comprises loan products that were originated pre-2009 and are no longer available to new customers. Typically, these are interest-only or part capital and interest loans, where the borrower and the PTSB have failed to agree a plan to ensure the repayment of the outstanding balance at the end of the agreed loan term.

The loans within the portfolio will continue to be serviced by PTSB for a period of up to six months, after which legal title and loan account servicing will transfer to Pepper Finance Corporation (Ireland).  

The transaction will increase the PTSB's transitional Common Equity Tier 1 (CET1) Ratio by circa 60bp once fully completed. It also alleviates the negative impact of calendar provisioning associated with this portfolio and reduces the bank's non-performing loan ratio.

‘Use of proceeds’ support welcomed

The ECB last week published its opinion on the draft EU Green Bond Standard legislation, which has been welcomed by PCS, for one. In particular, in connection with securitisation, the organisation points to the ECB’s support for a definition of green that encompasses issuance where the proceeds are used by the originator to finance sustainable projects.

PCS highlights this in the context of the current debate as to whether the legal EU definition of sustainable securitisation should be limited to securitisations of green assets or could also cover – as is the case for all other capital market instruments – bonds whose proceeds are used to finance the transition to a sustainable economy. The organisation argues that the latter is both logically compelling and, more importantly, helps achieve Europe’s sustainability goals.

“In the context of the draft EU Green Bond Standard legislation, the intervention of the ECB is welcome not only for its support for the broader definition, but also at a technical drafting level by suggesting a clarification of the text,” PCS notes. “As currently drafted, the law may not allow a real ‘use of proceeds’ approach because of the ambiguity of the definition of proceeds for securitisations. The ECB has rightly suggested the ambiguity be lifted to clarify that proceeds of a securitisation in the hands of the originator may be used for green purposes and not, if one followed a technical narrow reading, only the proceeds in the hands of the SPV.”

Structured Finance

Multi-currency CLO closed

Sector developments and company hires

Multi-currency CLO closed
Barclays has closed a multi-currency managed cashflow balance sheet CLO. Dubbed Duke Global Funding, the £4bn-equivalent transaction is backed by 519 senior secured and senior unsecured loans extended predominantly to large corporate obligors in Western Europe and the US. The underlying loans are denominated in US dollars, sterling and euro.

In terms of geographical diversification, the initial portfolio is concentrated mainly in the UK (50%) and the US (34%), with the remaining portfolio in Singapore, China, Canada, UAE, Qatar, Hong Kong and certain western European countries. The top five industries are construction & building (19.7%), beverage, food and tobacco (8.3%), banking (8.2%), insurance (6.6%) and telecommunications (6.6%). The portfolio will have certain maximum portfolio limits, including to project finance loans (15%), education loans (15%), corporate real estate loans (10%) and loans relating to trade finance transactions (10%).

The CLO is expected to be 100% ramped up, as of the closing date, and will be managed by Barclays. Subject to certain restrictions, it will direct the disposition of collateral on behalf of the issuer during the transaction's two-year reinvestment period, while the selection and acquisition of replacement loans will be subject to pre-defined selection criteria. Thereafter, purchases are permitted using principal proceeds from unscheduled principal payments and proceeds from sales of credit-impaired obligations.

Rated by Moody's, the transaction comprises £1.15bn Aa2 rated class A1 notes, US$1.94bn Aa2 rated class A2 notes and £1.44bn unrated subordinated notes. Each of the two rated classes of notes will receive interest and principal payments from the loans denominated in the same currency, as well as all proceeds from the euro-denominated assets.

In certain cases, if there is a shortfall in one of the currencies, then interest and/or principal proceeds will be converted from proceeds of loans denominated in the other currencies to ensure that any potential payment shortfall will be equally borne by both rated classes of notes. Following redemption of any of the rated classes of notes, proceeds from loans denominated in the same currency will be also used to make payments to the outstanding senior notes until such time that all rated classes of notes are fully redeemed.

In other news…

APAC
CMS has appointed new partner, Kingsley Ong, in its finance practice in Hong Kong. The arrival follows earlier expansion in the region with the appointment of capital markets and derivatives specialist, Christopher Whiteley, in July. Ong previously led Eversheds Sutherland’s structured finance, securitisation, and other practices in Asia. He will join the international law firm as leading financial restructuring partner as a part of CMS’s expansion and commitment to strengthen finance capabilities in Hong Kong.

North America
Capital markets fintech company dv01 has hired Sam Hillier as director of ESG. He will work closely with the team’s principal of strategy, Charlie Oshman to drive product development and innovation of dv01's ESG offering identify securities with outperforming characteristics. Hillier spent over 10 years at SEI Investments, where he evaluated and recommended sustainable investing strategies.

Hayfin has announced two further senior hires in latest bid to strengthen its North American investor base. Both Risa Lipsky and Chris Parisi have been appointed as managing directors within its business development team in New York. Risa Lipsky joins the firm from the private credit platform, Atalaya Capital, where she stood as managing director of business development and investor relations for five-years. Chris Parisi brings over 16 years of experience, having worked with insurance asset management clients at BlackRock as managing director within the Financial Institutions Group, and prior to this as vp within the insurance group at Goldman Sachs Asset Management. The new hires will work to boost client coverage and support the leading alternative asset management firm’s growth into the North American market.

Sabal Capital Holdings has announced the launch of its new CMBS trading business, SCH Trading. The new company will specialise in agency originated multifamily loans and offer an expansion to Sabal’s investment management business, SCPIM. The new trading platform, based in New York, will extend the financial services firm’s existing investment management operations, and will specialise in agency loan securities. SCH Trading will welcome George Geotes as head of the new CMBS business, who will bring over 17 years of experience in CMBS trading to the new platform.