Contents

Capital Relief Trades

Scores on the doors

Significant shift in scorecard augurs increased CAS/STACR

The new 2022 GSE scorecard, released at the end of last week, is likely to mean greater issuance in the CRT sector by Fannie Mae and Freddie Mac, say market sources.

“With the 2022 FHFA scorecard focusing the GSEs on ‘promoting sustainable and equitable access to affordable housing’, while operating with a ‘heightened focus on safety and soundness’, including reducing risk to taxpayers, the need to shed more risk in aggregate dollar terms is likely,” predicts Mark Fontanilla, founder and director of Mark Fontanilla and Company, a leading CRT market data and analytics firm.

This is particularly true of Fannie Mae, which was absent from the CAS market from Q1 2020 until last month, during which period it continued to issue voluminously in the TBA market. They have to make up for lost ground.

The first two issues that Faniie has priced since its return to the market – CAS 2021 R01 and CAS 2021 R02 – have been large transactions. The CAS 2021 R01 was $1.2bn, for example.

“Fannie has a lot of product on its books that is CRT-able,” comments one well-placed source.

Bank research forecasts enormous agency issuance in 2022 due to the expanded mandate of the GSEs but also to the continued bouyancy of mortgage origination. Net growth is predicted to be between $600bn and $800bn, with gross issuance of perhaps $2trn.

The new 2022 scorecard starkly contrasts its immediate predecessors both in substance. "“There is a substantial difference between the current 2022 scorecard versus the. 2020/2021 scorecards based on the prevailing FHFA directorship,” says Fontanilla.

The credit risk transfer market is back at the top of the agenda. On page four of the scorecard, the FHFA says the GSEs should "transfer a significant amount of credit risk to private investors, reducing risk to taxpayers.”

In the 2021 scorecard, however, released under the tenure of director Mark Calabria, the GSEs were told “continue to transfer credit risk to private markets in a commercially reasonable and safe and sound manner, including actively pursuing sales of less liquid assets such as non-performing loans and re-performing loans.”

The new scorecard reintroduces the phrases “significant amount” and “reducing risk to taxpayers.” This is more similar to the wording of the 2020 scorecard, which asked the GSEs to “continue to transfer a significant amount of credit risk to private markets in a commercially reasonable and safe and sound manner.”

So, the new scorecard recapitulates the importance of credit risk transfer and underlines the faith in the mechanism the FHFA has. These changes in wording, though superficially slight, carry considerable weight for the GSEs and those who work in the credit risk transfer market.

There are other still more striking and substantiakl differences. The 2021 scorecard had three main pillars and one of these was a call for the GSEs to “continue to support the development and implementation of a responsible transition plan to exit the conservatorships.”

No mention of an exit from conservatorship can be found anywhere in the new scorecard, and it can be safely assumed that this is a long way down new director Sandra Thompson’s to-do list.

What the 2022 scorecard does stress, however, at the very top of the assessment criteria is “each Enterprise’s products and programs foster sustainable and equitable housing finance markets that support safe, decent, and affordable homeownership and rental opportunities.”

There is a steady drumbeat of the theme of affordable housing throughout the new scorecard. Fully 50% of the mission of each GSE, it says, should be to “promote sustainable and equitable access to affordable housing.” It then details how this might be attained, such as the development of “high quality equitable finance plans”and updating “current pricing framework to increase support for core mission borrowers.”

This means there will be likely increased debt issuance by the GSEs as the credit net expands, but it also means that aggregate credit scores will decline. This is where CRT comes in. “There is a lot of scope for CRT to be helpful,” says another market source.

The remaining 50% of the mission is to ensure that the business “operates in a safe and sound manner” – and objective which was given greater billing in the Calabria years.

This focus on affordable housing and extending the reach of GSE credit to under-served communities is entirely different. There was no mention of it in the 2020 or 2021 scorecards, and it underlines the new priorities of the FHFA.

The 2022 scorecard in fact has more in common with the 2019 scorecard, released in December 2018 in the last days of the directorship of Mel Watt and a month before Joseph Otting became acting director.

Not only did that scorecard prioritise CRT, it specified how much should be done. The GSEs were instructed to “transfer a meaningful portion of credit risk on at least 90 percent of the unpaid principal balance (UPB) of newly acquired single-family mortgages in loan categories targeted for credit risk transfer, subject to FHFA target adjustments as may be necessary to reflect market conditions and economic considerations.”

Simon Boughey

Capital Relief Trades

Spitfire launched

Santander completes capital relief trade

Santander has finalised a synthetic securitisation of UK auto loans. Dubbed Project Spitfire, the transaction references a £750m portfolio. The deal is the first post-Covid European synthetic auto ABS.

Rated by KBRA and Moody’s, the transaction consists of a £26.5m BBB+/Baa2 rated class C tranche (priced at SONIA plus 300bp) and a £30m unrated class D tranche (SONIA plus 900bp).

The significant risk transfer trade was issued under the Motor Securities programme and features a portfolio that is identical to the programme’s first deal. Called Motor Securities 2018-1, the SRT was printed in December 2019 (SCI 18 December 2019).

Project Spitfire was set to close in 4Q20 (SCI 9 November 2020) but the trade was postponed (SCI 10 December 2020) after the lender and investors were allegedly not able to negotiate a pricing for the equity tranche.

Overall, asset classes other than large corporates were placed on the back burner last year as the coronavirus crisis rocked markets. Large corporates benefit from plenty of disclosure that allows investors to formulate a view on the underlying risk as well as access to capital markets and large globally diversified balance sheets.

Auto transactions typically work better with true sale structures given the benefit of excess spread. Banks can greatly benefit from the use of the feature if they sell the whole capital stack and thus demonstrate market pricing. Market pricing means that there is no situation where excess spread can be used to artificially support the junior tranches.

The UK regulatory context further complicates matters simply because PRA rules require banks to fully capitalise synthetic excess spread (SCI 30 November 2018). The EBA and the European Commission have taken the same approach over the last year but this provision remains at the moment just the guidance that it is (SCI 22 October).  

Hence, synthetic securitisations of UK auto loans without excess spread are the only economically viable option but only work in limited situations where standardised risk weights apply.

Stelios Papadopoulos

Slowly widening

European ABS/MBS market update

With investors already looking ahead to 2022, the European ABS/MBS primary market is slowly thinning out. However, transactions were still well received this week, though macro concerns have started to make an impact.

“The market has generally been pretty steady,” notes one European ABS/MBS trader. “Naturally it is a little wider at the moment as we are quickly coming to the end of the year. Also, the recent announcement of a new Covid-19 variant has clearly widened spreads today.”

If the emergence of the new B.1.1.529 variant, identified in southern Africa, might alter the market dynamic in future, the auto ABS market still managed to perform well this week. In this space, Mercedes-Benz concluded its latest transaction Silver Arrow Merfina 2021-1 on Wednesday. The single-offered senior tranche met with decent demand and priced at 39bp DM – landing 4bp wide of the Red & Black Auto Italy transaction back at the start of October.

“Even before the variant news, we were noticing a slow and gradual widening,” says the trader. “It is in line with everything else, as everyone is just finishing off before December.”

Directly competing with the German constructor for investor attention on Wednesday was Portuguese auto and consumer loan STS ABS Pelican Finance 2. The transaction compared well to the Italian deal, particularly through strong demand for the mezzanine tranches. The investment grade B and C tranches saw outstanding demand with final coverage at 5x and 7.25x, respectively.

Also active this week was NewDay, with its latest credit card ABS transaction. The senior sterling A1 notes printed on Monday at SONIA plus 90bp, matching initial talk, albeit 10bp wide of the issuer’s July deal, though still 7bp inside its January offering.

In the visible pipeline is Tudor Rose Mortgages 2021-1 – a straight refinancing of all loans in Tudor Rose 2020-1 – and Highways 2021 a CMBS referencing a single loan on eight UK motorway service area properties. For more on all of the above deals, see SCI’s Euro ABS/MBS Deal Tracker.

As for the secondary market, its recent standstill continued this week. “Volumes have been very slow, particularly since Thursday. However, we will probably see a pick-up next week,” the trader concludes.

Vincent Nadeau

ABS

Advanzia advances

German credit card ABS debuts

European online lender Advanzia has closed its debut ABS transaction of over €475m in senior funding. The deal also represents the first securitisation backed by a German credit card portfolio.

"Advanzia continues to strengthen its position in the capital markets by demonstrating its ability to issue structured debt securities. This is a significant milestone for the bank, as a securitisation programme will provide us with scalable financing in support of our continued growth journey," comments Patrick Thilges, cfo at Advanzia Bank.

On the transaction, Advanzia was supported by ING Bank as arranger, Hogan Lovells as legal advisor and Deloitte as debt advisor. The new ABS programme marks a significant development in the platform’s five-year covered lending history.

Sven Brandt, finance partner at Hogan Lovells and leading advisor on the securitisation, states that there are several “legal and commercial reasons” for why credit card ABS in Germany are so rare.

“The main challenge is that you have these credit card receivables rolled over and rebooked and, therefore, have increasing and decreasing balances. So, over time, you will have a rescheduling of the overall bookings in the credit card balance and, as a consequence, you will have new receivables coming into existence under these credit cards – and they may be considered as future receivables which are especially difficult to handle in the German law environment,” explains Brandt.

ABS backed by credit card portfolios are “unique in how they perform and how they operate,” Brandt explains. “With German receivables, it’s very difficult to assign them if they are future receivables – which is the case for credit card receivables.”

He continues: “Luckily, we found a way to apply the Luxembourg securitisation law in a way that helped to overcome the German law obstacles, and therefore we managed to transfer even those future receivables to the Luxembourg issuer in a way that would also withstand the insolvency of the originator.”

STS Verification International verified that the deal meets EU Securitisation Regulation requirements for STS securitisations. “If you have an STS label, then the investors are treated far easier in terms of regulatory capital - especially if they are regulated institutions - and [Advanzia] tapped regulated entities, therefore it’s beneficial for them to have an STS label,” says Brandt.

Looking forward, Brandt says it remains unclear whether Advanzia will pursue further credit card ABS transactions. “From my perspective, it would make perfect sense for [Advanzia] to market again. They may in some time do a public transaction.”

In terms of other originators marketing ABS transactions backed by German credit card portfolios, he “would think for at least some of the other originators it would make perfect sense to follow that road, also.”

The transaction diversifies Advanzia’s balance sheet, with the lender previously issuing hybrid capital in spring 2021. Brandt concludes: “Pricing as hybrid capital is quite expensive and therefore it is a more commercially sensible road to do a securitised financing like an ABS transaction.”

Claudia Lewis

Structured Finance

SCI Start the Week - 22 November

A review of SCI's latest content

FREE Webinar recording - Post pandemic GSE CRT performance
Click here to see a recording of a distinguished panel of US Credit Risk Transfer industry experts as they discuss the capital regime, issuance trends and the regulatory landscape.

Last week's news and analysis
FFELP follies
Debt servicer in the spotlight as default looms for $3bn SLABS
Lower for longer?
SRTs to benefit from inflation
Nascent asset class
Non-performing lease ABS tipped for growth
New tender, new CAS
Debut Fannie tender and new CAS in the market
Optimisation impact
GSA CMBS exposure gauged
School's out?
Future of PBSA CMBS sector scrutinised
SRT chronicle: part one
The first of a three-part series on bank risk transfer transactions
SRT finalised
Credit Agricole completes capital relief trade
SRT wave
Capital call surge continues
The lessons of history
STACR founder Don Layton talks the early and current days of the market

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
Irish & UK Banking Evolution - October 2021
Consolidation among lenders and the proliferation of fintechs is driving change in the Irish and UK banking sectors. This Premium Content article investigates the impact on the jurisdictions’ RMBS markets.
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.

Capital Relief Trades

Partial placement dropped

Montepio opts for full-stack SRT

Montepio Bank has finalised a full-stack significant risk transfer transaction backed by a €378.3m portfolio of Portuguese consumer and auto loans (see SCI’s Euro ABS/MBS Deal Tracker). Dubbed Pelican Finance Two, the deal is the bank’s first SRT sold to private investors. The lender initially considered a partially placed deal but switched to the typical full-stack form, given the complexity of the regulatory approval process.

Rated by DBRS Morningstar and Fitch, the transaction consists of €285.4m AA/AA- rated class A notes (which priced at one-month Euribor plus 70bp), €20.7m A/A rated class B notes (plus 135bp), €17.5m BBB/BBB+ rated class C notes (plus 225bp), €19.3m B(high)/BB+ rated class D notes (plus 425b) and €17.4m unrated class E notes (fixed 6.4%). Classes A to E amortise pro-rata with triggers to sequential amortisation. Credit Agricole and StormHarbour acted as arrangers on the deal.

According to Daniel Grencho, head of capital markets at Montepio: ‘’Initially we were looking for a partially placed SRT. The idea was to retain maybe 70% of the senior tranche, but this would be less efficient from a regulatory capital standpoint.”

He continues: “Additionally, in our view, pursuing a synthetic securitisation for this type of portfolio didn’t seem right, as the format hasn’t been used so extensively for consumer loans. So, we opted for true sale.’’

Grencho notes that the partially placed option would have allowed Montepio to benefit from a reduction in RWAs and decrease the cost associated with coupon payments, but it wouldn’t have worked as well from a prudential standpoint. “Retaining part of the senior tranche would force us to go through the SRT tests and a more complex regulatory approval process. The full-stack option avoids all of that, although we do retain a small residual piece.’’

One of the challenges for banks seeking to transfer risk via the partially placed format is demonstrating market pricing for the retained senior tranche. Demonstrating market pricing here could involve selling a portion of the senior tranche. However, that portion would typically amount to less than a third of tranche notional size – thereby limiting the pool of investors willing to invest in small and less liquid tickets - but the pricing could also be challenged by regulators.

Consequently, from an execution standpoint, it’s much more straightforward to sell the entire capital stack. The EBA’s final report on SRT allows partially placed true sale deals, but it remains unclear how to practically achieve market pricing (SCI 28 May).

One question is why Montepio opted to securitise consumer loans, given that the bulk of its loan book is concentrated in SME loans and mortgages. Grencho explains: ‘’We simply weren’t using them, and we could follow the same framework we used for the Pelican Finance One transaction from 2014. We also looked at market dynamics and we thought that it was a well understood asset class with a large investor base.’’

Grencho suggests that his firm isn’t necessarily seeking extra liquidity, since it is comfortable in this area. “Instead, we are aiming for a fine-tuning of our capital base and that can be done via cash and synthetic securitisations. Mortgages would be a good candidate in this respect, and we have large enough volumes to make the deals work economically speaking. Depending on the type of structure, this applies to SME portfolios as well,’’ he concludes.    

Stelios Papadopoulos

Structured Finance

SCI forum: What are the benefits of forward flow structures for the securitisation market?

Our panel of market practitioners respond to readers' questions

Conor Houlihan, partner at DLA Piper, Ireland

Current dynamics in the banking sector are such that the opportunity for growth in non-bank lending in Europe is significant.  In certain segments of the market, fintech lending platforms can be more agile and better-placed to deliver what the market wants. 

Platforms with strong origination and underwriting capability can be an attractive partner through which banks and other funders can deploy capital and grow assets.  We see a significant amount of liquidity available to finance platform lenders.  The question of how to structure such funding is an important one – in particular, the merits of a forward flow arrangement versus warehouse financing. 

Structurally, a key difference between forward flow funding and warehouse financing is that forward flow involves a sale of the assets which could be beneficial ownership transferred to the funder at the outset, while warehouse financing is more akin to an asset-backed loan.  The allocation of risk in a forward flow arrangement differs from warehouse financing in that the ultimate credit risk sits with the funder, while the originator remains responsible for origination risk.  A consequence of the forward flow funder assuming all credit risk is that the cost of such funding - and the return earned by the funder - can be higher than in a warehouse financing.

A key benefit of forward flow structures from an originator’s perspective is that the funder’s balance sheet is used to originate loans.  This can allow an originator to establish itself, or a new product offering, in its market.  Forward flow funding can facilitate an originator to prove its ability to originate, underwrite and service product, which can broaden the range of funding options available to the originator as the business grows.  Given that the forward flow funder typically acquires the entire beneficial interest in all assets that meet the applicable eligibility criteria, risk retention requirements typically do not apply to forward flow structures.  This can be a major benefit from the perspective of the originator as it will not be required to provide additional subordinated funding to the structure.

Forward flow can provide a range of different funder types with an opportunity to gain exposure to, and diversify into, new markets or products.  The funder holds the assets on their balance sheet and, through reporting and other mechanisms, will have full visibility on the performance of the particular asset class.

From a documentation and structure perspective, forward flow arrangements – although they can be more bespoke – are typically less complex than warehouse financing, which can be another benefit for funders and originators who are minded to swiftly execute a funding transaction.

For the right originator-funder partnership forward flow structures can have many benefits.  More broadly, forward flow can also have a positive impact in terms of supporting the delivery of new mortgage and other products to the market.

Salim Nathoo, partner and head of the securitisation practice at A&O

We have seen an increasing number of forward flow transactions over the past few years.  They are undertaken by smaller lenders that don’t have access to significant deposits or other funding platforms.  We typically see transactions from mature lending businesses that have built strong origination and servicing platforms or from newer lenders looking to grow their businesses that can no longer rely on pure equity funding models.  The lending covers a range of asset classes from residential mortgages, consumer assets, auto assets, development finance and supply chain receivables.

Forward flow transactions will typically involve the original lender selling the portfolio to an SPV at the point of asset origination or shortly thereafter and the SPV sourcing funding from a bank.  Equity is either provided by the original lender or increasingly, particularly with newer origination platforms, by a private equity provider that is in essence buying the portfolio.  There may occasionally be a mezzanine funding provider also. 

The warehouse will typically anticipate an exit to a public securitisation when enough assets have been built up in the forward flow phase.  This allows for seasoning of the book and for originators to build up track record.  To the extent possible, the same rigour that would apply to a public securitisation is used when structuring forward flows – particularly as regards due diligence of the assets. 

The use of forward flow structures allows original lenders to obtain funding for new and innovative lending products.  As the transactions are private, they accommodate a range of different investors and funding structures.  This makes the forward flow structure a valuable tool in an originator’s funding options.

If you have a securitisation-related question that you’d like answering, please email as@structuredcreditinvestor.com

Capital Relief Trades

SRT chronicle: part two

In the second of a three-part series on bank risk transfer transactions, Olivier Renault* looks at the current state of the market

The SRT market is predominantly European (representing 86% of transactions since 2010), although US banks are accounting for an increasing percentage since 2019 - with JPMorgan now a regular issuer, one transaction by Goldman Sachs in 2020 and a few regional banks entering the market in 2021. Prior to 2019, only Citi and Bank of Montreal were regular issuers in North America. A few transactions have been executed by Japanese megabanks, but they remain sporadic.

Figures 3 and 4 display the number of transactions by country of originating bank and by underlying asset class over the entire period of 2010 to October 2021 and over the more recent period (2019-October 2021).

In terms of asset class split, large corporates account for nearly half of transactions, with SMEs adding another 20% to the corporate group. Figure 4 shows the growing prevalence of mortgage transactions, which were almost non-existent until 2018 but have accounted for 12% of transactions since 2019. This is driven by increasing interest by insurers in the mortgage asset class, high RW on mortgages under standardised US rules, as well as the need for some banks to free up risk capacity in high-LTV mortgages (Lloyds, in particular).

The specialised lending category is quite stable at 12% and refers to an eclectic bucket of transactions backed by real estate, shipping loans, infrastructure, project finance and renewable energy, as well as an increasing number of trades referencing capital call facilities, driven mostly by risk limit considerations. Trade finance transactions have become quite rare in the past few years, but accounted for around 8% of issuance prior to 2019.  

Transaction structures
Box B provides an overview of the main transaction structures used for SRT transactions. The SPV repack structure (illustrated as Structure 1) remains the most common, whereby one or several investors purchase a CLN from an SPV, which sells protection to the bank on a specified tranche of a reference portfolio. The SPV uses the proceeds of the issuance of the notes as collateral for the protection, either as a cash deposit with the hedging bank or by purchasing and pledging high quality securities.

For bilateral transactions between an investor and a bank, the SPV may not be needed, so that the investor could be the direct protection seller to the bank (Structure 2) - again with cash or securities as collateral if required. Well-rated insurance companies and supranational institutions tend not to pledge collateral, as the bank can rely on the credit quality of the counterparty to justify RWA relief.

Bilateral structures, such as those described above, are simpler than SPV structures and cheaper in terms of legal documentation. But they are totally illiquid (i.e. the protection seller would need to novate the contract to another counterparty, which would require bank consent) and do not allow for external leverage. SPV notes, on the contrary, are usually transferable and repo-able, and are more convenient when there are several investors in the transaction.

Over the past few years, CLNs issued directly by a bank rather than an SPV (Structure 3) have become increasingly more frequent and they are the market standard for US banks. The bank issues a bond to one or several investors, whose principal is written down as and when losses erode the reference tranche.

This structure has the same transferability and repo-ability advantages as SPV-issued CLNs, but does not require a vehicle to be set up. This can have favourable tax consequences - in particular, for transactions with a US nexus - and it avoids sometimes difficult Volcker analysis. The main drawback of the bank CLN structure is that investors are exposed to the credit risk of the bank, while SPV structures or bilateral guarantees usually include provisions for the cash collateral to be moved to another bank if the hedging bank’s credit quality deteriorates significantly.

Most risk transfer transactions (between the bank and the SPV or the investor) used to be structured as CDS until 5-6 years ago, but financial guarantees are now the dominant type, due to attractive accounting benefits (no need to mark to market and potential provision release, which is not possible using a CDS). Bank-issued CLNs do not require a CDS or a financial guarantee to be executed, but can be drafted as cross-referencing a hypothetical CDS/guarantee so that the risk transfer language is very similar to that of other structures.

In the third part of this series on bank risk transfer transactions, to be published next week, we will explore the outlook for the market in 2022 and beyond.

*Olivier is a veteran of the SRT market and one of the leading originators and structurers on the asset class

CLOs

US expansion

John Fraser, the new chairman of Tikehau's global structured credit strategies, answers SCI's questions

Q: Tikehau Capital launched its first US CLO in August. Could you explain the motivations for doing so?
A: Establishing a presence in the US CLO market is a key part of Tikehau Capital’s growth plans for its credit platform. The firm is already active in Europe with five CLOs outstanding and, with significant plans for future growth, it’s a natural extension for a very broad-based European credit platform to move into the US via issuing CLOs. This is just one part of what will ultimately be a broad-based credit platform in the US marketplace and will help Tikehau Capital establish a credit brand here in the US that matches the brand that it has in Europe.

Q: In your view, why is now a good time to expand into the US CLO space?
A: Tikehau Capital has had a presence here in the US for several years, but about three years ago really began targeting the US market for significant growth - both in terms of capital raising from US investors, as well as investing in a number of different US markets. As part of that focus, one of the two co-founders of the firm, Mathieu Chabran, moved over here from Paris to lead the charge as the firm expands in the US market.

The US CLO marketplace is open for business. This has been a record year for US CLO issuance, both from established managers as well as several new managers.

Expectations are that the CLO market will continue to be accommodating into 2022. So, the firm made the decision, after careful consideration, to launch its first CLO in 2021 earlier this year. And that is just the first of what is expected to be a number of CLOs issued into the US market over the course of the next several years.

Q: Could you tell us more about your new role and what you're expecting to achieve?
A: My role is chairman of Tikehau Capital’s structured credit strategies. What that really means is that I will work with different people and groups within the firm to help expand its global presence in structured credit markets.

Initially, that focus will be on the US and European CLO markets, but we are already looking at other opportunities to expand into related marketplaces. That could include investing in CLO tranches or equity of other managers or investing in other securitised products.

Q: How are ESG considerations integrated in Tikehau's business?
A: ESG is becoming increasingly important to investors around the world and one of the advantages that Tikehau Capital has is a well-defined ESG process that has been in place for a number of years. Tikehau Capital has been at the forefront of implementing ESG policies and procedures: the firm was an early signer of the UNPRI and it has been very aggressive about developing environmentally-focused products in a number of different asset classes. So, its emphasis on ESG from an early stage will put the firm on a firm footing and allow it to be at the forefront of the marketplace, as investors around the world continue to focus on ESG and what it means for the various firms with which they are considering investing.

 Q: Looking ahead, what do you anticipate for the future of the market and Tikehau’s role in it?
A: The markets are very accommodating right now. But I think the challenges for any firm are balancing the desire to grow with a credit discipline.

One of the aspects that excites me about Tikehau Capital is the fact that it has a very well-defined credit investment process that puts credit quality above everything else. That’s going to be critical for any firm, as the marketplace continues to develop over the next several years and as economies start to absorb the impact of inflation and the fact that growth has not quite been what some had expected it to be coming out of the pandemic.

Tikehau Capital is very focused on those two issues and that factors heavily into its credit decision-making process. Any firm that participates in credit markets in the US, Europe or anywhere else around the globe is going to have to continue to exhibit credit discipline that incorporates some of the issues that our economies are experiencing right now.

Claudia Lewis

Structured Finance

Upgrades anticipated after CMBS updates

Sector developments and company hires

Moody’s has updated three commercial real estate sector methodologies, following requests for comments on the proposals in July. The rating agency has placed a number of US CMBS tranches on review for upgrade as a result.

One of the updates is in connection with Moody's methodology for rating US and Canadian conduit/fusion CMBS, which replaces the version from September 2020. As a result of the update, the agency expects to place approximately 68 tranches from 20 conduit/fusion transactions on review for upgrade. It also expects to place ratings on 20 FREMF structured pass-through (SPC) tranches from 10 Freddie Mac CMBS on review for upgrade based on their direct pass-through exposure to the underlying ratings on the affected conduit transactions.

Another of the updates relates to Moody’s methodology for rating large loan and single asset/single borrower (LL/SASB) CMBS, which also replaces the version from September 2020. As a result of the update, the agency expects to place 278 tranches from 60 LL/SASB transactions and eight non-pooled rake classes issued by four CMBS transactions on review for upgrade. Moody's also expects to place six tranches on review for upgrade from three US CRE CLO/CDO transactions that reference certain tranches within LL/SASB CMBS transactions.

In both of these updates, the agency has added a capitalisation rate adjustment to account for the interest rate environment; updated its legal analysis by specifying loan-level legal-risk adjustments and provided increased transparency on its analysis of transaction-level legal risks; and provided additional information on how it determines and applies other adjustments in its analysis.

The final update concerns Moody's methodology for evaluating CRE collateral by assessing sustainable net cashflow and values of major CRE property types and loans securitised in a CMBS or CRE CLO, which replaces the version from December 2016. In this update, the agency has included extensive editorial changes to enhance clarity and readability, and expanded the coverage of the methodology to include Japan. It notes that these updates do not change its methodological approach and there is no impact on current outstanding ratings as a result.

In other news…

EMEA

Ankura Consulting Group has announced a strategic investment form global investment firm, HPS Investment Partners (HPS). The investment will establish HPS as a minority equity owner in the firm, and value Ankura at US$1.5bn. Since initial investment from MDP in 2016, Ankura has grown to serve more than 3000 clients in more than 55 countries, with a team of over 1,500 employees. The latest investment was structured and arranged by MDP, and it is hoped will allow for further company growth.

Citadel has named Pablo Salame as its new co-cio, effective from 1 January 2022, following the retirement of James Yeh. Salame joined Citadel in 2019 as head of global credit, having previously served as vc and co-head of global markets at Goldman Sachs. In the new role, he will lead Citadel’s investment strategies work alongside ceo and co-cio Kenneth Griffin.

Deutsche Bank has appointed Olivier Vigneron as new cro, succeeding Stuart Lewis, effective from1 June 2022. Vigneron will initially join the bank as senior group director from 1 March next year, having previously served as cro at Natixis since 2020. He will bring over 20 years of experience in structured credit to Deutsche Bank, having begun his career at Goldman Sachs as a credit derivatives trader in 2000. Vigneron has served in several senior markets and risk management positions at UniCredit, BNP Paribas, and J.P Morgan - where he oversaw market risk management as cro for EMEA and Firmwide Risk Executive for Market Risk, and led on the implementation of the Basel III advanced capital models worldwide.

Structured Finance

Rare RMBS with a twist

Sector developments and company hires

A rarely seen public Swedish RMBS is in the market with an unusual structural twist – Hypoteket Mortgages 3 AB. "Credit enhancement is provided through overcollateralisation and can increase as the transaction captures all excess spread available," explains Rodrigo Conde Puentes, vp senior analyst, structured finance, at Moody’s. "A rare feature in European RMBS, but one we may start to see elsewhere.”

The transaction is a 30-month revolving securitisation of loans backed by residential properties in Sweden. The initial portfolio consists of loans extended to 253 prime borrowers, both owner-occupiers and those with tenant owner rights. It is one of only a few Swedish public deals in recent years and the first to be rated by Moody’s since 2007. 

In other news..

North America

Castlelake has announced five new hires in latest expansion of its new lending team. Established in November 2020, the lending team has provided over US$3bn in financing to the aviation sector under the leadership of Armin Rothauser. Joining the team’s work to mitigate the aviation industry’s lack of financing capacity will be Wilhelm Steinmark, who will work as european head of aviation lending in direct structured credit and capital markets. Additionally, Fouad Onbargi will join as md of the direct structured credit team and will work alongside new direct structured credit directors Chris Turner, Brian Banschick, and Ricardo De Armas.

Structured Finance

Syon upgraded on stable performance

Sector developments and company hires

KBRA has completed a surveillance review of Lloyds’ synthetic RMBS Syon Securities 2020-2. The agency subsequently upgraded the class A and B notes by a notch to single-A minus and double-B plus respectively, in light of the fully ramped-up portfolio’s characteristics and the generally stable collateral performance. Syon 2020-2 is the third SRT transaction issued by Bank of Scotland referencing residential mortgages on properties located in the UK.

In other news…

EMEA

Amundi has announced several senior international appointments across its European bank loans division. The European asset manager has promoted senior portfolio manager, Desmond English, to head of European bank loans, where he will report to head of private debt, Thierry Vallière. English, who brings over 24 years of industry experience to the role, will be responsible for managing the firm’s European public leveraged loans exposure for both regional and global loan funds, as well as segregated managed accounts. Additionally, Amundi has promoted Brian Farrell as deputy head of European bank loans based in Dublin, and in Paris, Thierry de Vergnes who will operate as md of European bank loans.

Arrow Global are set to launch a new corporate restructuring business based in Portugal in January 2022. The new firm will be dedicated to the increasing market opportunity in Portugal, and follow the same business model as used by Arrow for its Europa Investimenti business in Milan. Paulo Barradas will join the new business as ceo, who is presently chief transaction officer at Norfin. Additionally, Pedro Ruas has been hired as senior advisor, who will bring over 25-years of experience to the role from companies including David Kempner, KKR, Anacap and Carval. They will be supported by André David Nunes, Arrow’s head of origination in Portugal, and ceo Arrow Portugal and WhiteStar, João Bugalho. The new subsidiary aims to broaden the European asset management and investment firm’s European business by originating, underwriting, and servicing single name restructuring cases – including NPL and UTP.

Kensington Mortgages has announced new long-term, fixed rate mortgages in partnership with Rothesay. The ‘Flexi Fixed for Term’ mortgages will allow borrowers to fix the interest rate paid on their mortgages between 11 and 40 years, without changes to their monthly payments within the term. The ‘Flexi Fixed for Term’ is designed to allow renters and younger buyers onto the housing ladder and is completely transferrable to a new property - with no repayment charges, or changes to rates and fixed monthly payments. Rates will start from 2.38% for a 15-year term and 2.9% for a 30-year term at 60% LTV, and at 95% LTV will start from 3.71% for a 25-year term and 3.77% for a 30-year term. The joint product will be wholly funded by the UK’s largest specialist pensions insurer, Rothesay, and will be available from 23 November.

North America

A total of US$3.134bn, or 83.69% of original principal, was ultimately tendered for the seven Connecticut Avenue Securities (CAS) notes involved in Fannie Mae’s debut tender offer (SCI 15 November). Settlement of the notes tendered and accepted for purchase was due to occur on 23 November, while those using the Notice of Guaranteed Delivery were expected to be purchased yesterday, 24 November.