Contents

CLOs

CLO investors thrive in 2021

An extract from SCI's new CLO Markets service

2021 has been a good year for CLO investors, after very mixed results last year when some funds failed to fully recover from the sharp declines recorded in March and April 2020. CLOs are now present in a range of funds – from diversified macro funds to specialised credit funds, in addition to an increasing number of pure CLO funds – and helped lift 2021 returns. The month of November was disappointing, but not enough to spoil the party.

"This has been a strong year for CLO equity investors. Very few companies defaulted this year, which led to sizeable cash distributions for equity investors like Flat Rock throughout the year,” says Shiloh Bates, a partner at New York-based Flat Rock Global and cio of its Flat Rock Opportunity Fund.

CLO transactions performed well, better than many had anticipated; but at the same time, the CLO bonds looked cheap (or less expensive) than potential alternatives. 

In 2021 the appeal of CLOs was their relative value, according to Mark Hale, ceo and cio of Prytania Asset Management, a securitised credit specialist.

Financial markets in general and spreads in the more conventional ABS sub-sectors specifically rallied quickly in the months that followed the first COVID-induced lockdown, but CLOs lagged and looked comparatively wide for a prolonged period, explains Hale.

CLOs also looked attractive relative to non-ABS products such as corporates. According to BNP Paribas, triple-A CLOs offered good value in 2021 relative to corporate cash credit during most of the year, although the sell-off in corporates at the end of November provisionally made European CLO AAA look slightly less attractive.

(source: BNP Paribas; the ratios are calculated as the ratio of (1) CLO spread in Secondary over (2) the relevant Cash index. The ratio is compared to the average ratio (over the past ~6 years). If the current ratio is above the average, that implies a Cheap bias)

Allocations in 2022 are unlikely to change much, but new entrants may well increase demand for the product further. Volatility, however, may make the ride bumpier.

David Nochimowski, head of Global CLO & ABS Strategy at BNP Paribas, expects CLOs to remain attractive in 2022 and outperform credit; but he cautions that the tapering could cause a widening across the board later in 2022.

Carmignac’s exposure to CLOs at the firm level is expected to remain stable in 2022. “We find that the credit markets are expensive and see a higher risk of a repricing. CLOs would not remain immune to such move and we therefore maintain a cautious stance,” says Florian Viros, a fund manager within Carmignac’s fixed income team.

The CLO investor base may continue to broaden. “We saw this year more interest in CLOs from potential new entrants, enquiring mostly about Triple-As. Japanese banks could be more active next year,” comments Nochimowski.

He also thinks that CLOs could benefit from the new European rules on ESG disclosures and reporting.  In his view, CLOs structured as Article 8 funds could attract more demand from investors keen to increase their exposure to ESG products.

This story is an extract from a longer article on SCI’s new CLO Markets service, which provides deal-focused information for the primary and secondary CLO markets. Offering intra-day updates and searchable new issue/refi/reset databases along with BWIC pricing and commentary. For a free trial to CLO Markets please contact Jamie Harper.

RMBS

Opportunities in interventionism?

New housing bill opens door to Spanish BTL market

Spain’s minority coalition partners recently agreed a draft housing law - the first since the country’s transition to democracy in 1975 - which could redefine the local real estate market. As the cost of housing soars, the leftwing government proposes to protect vulnerable tenants against investment funds and corporate landlord firms. The move could accelerate the emergence of a Spanish buy-to-let RMBS market.

The proposed new law - the result of joint reflection between Pedro Sánchez’s PSOE party and the radical left of Unidas Podemos - will aim to fix rent prices and establish a right to housing. Although owner-occupiers still account for more than three-quarters of homes in Spain, both high youth unemployment and depressed wages have meant that younger households have increasingly turned to renting over the past two decades.

“The law, as it is currently intended, changes the financial dynamics towards smaller landlords at the expense of larger landlords,” notes Alastair Bigley, senior director, sector lead European RMBS at S&P.

Indeed, a combination of rent freezes, with tax hikes for larger landlords and tax breaks for smaller landlords, sit at the core of the new law. Landlords that own more than four dwellings will be charged a surcharge of up to 150% on local property tax for vacant properties. Further, while deductions for corporate landlords are to be cut to 40% of operating costs from 85%, tax deductions could rise to 90% from 60% for small landlords - if they reduce rents and keep subsequent increases within a specified inflation index.

Also included in the draft is a ‘youth bonus’ clause, providing 18- to 35-year-olds whose income is no more than €23,725 with direct housing aid of €250 per month to assist with rent payments.

Such measures put in place favourable conditions towards the establishment of a BTL market in Spain. Furthermore, on a regulatory basis, barriers to its development also appear to be limited.

“Culturally, loans to individuals in Spain tend to be repayment loans. However, this is not a regulatory requirement,” notes Bigley.

He continues: “What this means is that there is no obvious regulatory reason why a buy-to-let loan could not be underwritten on an interest-only basis. It is our view that this would appeal to existing and prospective landlords and changes the economics of underwriting a loan significantly, compared with a repayment loan.”

Bigley further underlines the macroeconomic context: “I think that the wider view is that people are looking for yield and new products. The emergence of a Spanish buy-to-let market - in what is already an established RMBS jurisdiction - would fit that description.”

The new law will, however, have to face the autonomy that regional governments enjoy in Spain. Whether the country’s Autonomous Communities apply these directives - and to what degree - is unknown. Furthermore, the emergence of a BTL market is likely to be confined to the country’s bigger cities.

Bigley concludes: “As things stand, nothing would stop non-bank lenders from financing such deals. The question, rather, is will banks respond? For now, it is unlikely that banks would see a specific BTL product as worth promoting, because it would initially be relatively niche.”

Vincent Nadeau

ABS

Offshore appeal

International ratings for CMB credit card ABS

The first Chinese credit card ABS rated by an international agency (S&P) has closed. Zhaoyin Hezhi 2021 Phase I Personal Consumer Loan Asset-backed Securities is backed by a CNY2.97bn pool of credit card receivables originated by China Merchants Bank (CMB), which will also act as servicer on the transaction.

On why CMB sought international ratings, Andrea Lin, lead analyst and director at S&P in Hong Kong, suggests it was to appeal to a broader investor base and “raise its profile” with offshore investors. The originators, Lin explains, have “quite a good reputation and profile and are well placed to issue notes both to investors in China and in offshore markets.” She confirms that offshore interest in Chinese securitisation is increasing and that the market has grown quite rapidly in recent years.

S&P has assigned ratings of triple-A to the class A1 and A2 notes, double-A to the class Bs and single-A to the class C notes issued by China Resource SZITIC Trust.

The portfolio is well-diversified and the receivables have a weighted average interest rate of at minimum 6.75%. The deal also benefits from legal rights to a cash reserve and a sequential pay waterfall during the amortisation period. The transaction features separate interest and principal waterfalls, and a nine-month revolving period.

Further, the Hezhi-2021-1 deal includes several common arrangements which mitigate set-off risks. Nevertheless, weaknesses of the deal relate to the lack of experience in servicing credit card- ABS in China’s securitisation market, as well as it not being a closed-portfolio transaction.

The transaction is based on the China Banking and Insurance Regulatory Commission (CBIRC) and People’s Bank of China (PBOC) credit assets securitisation (CAS) scheme.

Lin states that for the most part the deal is quite typical. The underlying assets are quite a common product in China, and the deal adopted the usual revolving-pool structure. What makes the deal slightly unusual, comments Lin, is the “absence of the master trust structure and the absence of the seller certificate.”

The master trust structure typically adopted in mature markets for credit card ABS was not adopted due to several legal complications. Jerry Fang, senior director and analytical manager of S&P Global Ratings Structured Finance North Asia excluding Japan, explains that these complications are mostly understood by the wider market.

“I think we learnt this not because of credit cards, but a while ago when some people were contemplating the master trust structure for other deals,” he says.“We are not the legal experts on the deal, of course, but Chinese deals are predominantly structured under trust law. I believe trust law does not have the flexibility to cater for master trust structures.”

Presently, it does not appear that other Chinese credit card issuers are seeking international ratings, although Lin notes that this could change. “There aren’t any that we are aware of, but we are still observing this market, and Chinese originators are closely watching the market over time as well. So, if perhaps other originators see this particular issuance being placed well, and with relatively low funding costs, then they may follow suit. But it really depends on the market condition and offshore demand for the ABS loans, so it is very hard to say.”

While S&P has observed a slow-down in issuance across the Chinese credit card industry since 2017, the agency anticipates that the market will see moderate growth in the coming years. “Going forward, as we continue to observe the market over the coming year, if for instance private consumption safely recovers over time, or originators need more funding to support their business growth, then we can expect to see the issuance momentum activities increase,” concludes Lin.

Claudia Lewis

ABS

Road rage

Soaring used car prices turbo charge auto ABS but risks loom, say Miami panellists

An unprecedented surge in US used car values has led to a remarkable recovery in the auto ABS market from the pandemic lows, agreed panellists today at the ABS East conference in Miami.

Spreads have narrowed from an average of Libor plus 300bp-350bp at the beginning of Q2 2020 to something in the region of plus 150bp at the end of 2021, and delinquency worries have transformed into concern about supply of new vehicles, noted one speaker.

Used car prices have increased no less than 43% in the last year. The average price of a used car in November 2019 was $12,000; it is now $21,000. These kinds of numbers are “unreal”, said another panellist, and have led to a “complete dislocation of the auto ABS market – but in a positive way,” he added.

However, asset appreciation of this kind brings considerable risk to the market as well. It is common to see loans which are 120% or 130% LTV. As interest rates rise and as supply/demand exigencies alter, borrowers could be left with considerable negative equity. A vehicular version of the 2008/2009 mortgage crisis looms.

Loans are much smaller and generally more diversified than in the MBS market. “But this doesn’t de-risk the market. There is real risk,” warned a portfolio manager on the panel.

In a remarkable development, a car is no longer a depreciating asset. In some particularly desirable makes a two way market has developed, with dealers offering to buy back recently sold vehicles as they know they can sell on at a profit.

The strength of the underlying is now such that delinquency rates have tumbled while repayment rates have climbed by 20% from the lows.

Several factors have pushed prices significantly higher. There is a mico chip shortage which shows no sign of abating. There are interruptions in the supply chain. At the same time, inflation is now an established fact and is seemingly quite a long way from being “transitory.”

Supply is also booming. The portfolio manager said he sees between eight and 10 new deals a week at the moment. The market is on course to record a new high of $135bn this year.

At first sight, this is counter-intuitive.if there is a shortage in the supply of cars then where are the new loans coming from? However, there is a four to nine month lag between origination and securitization, so loans being securitized now tend to have been put on in Q1 or Q2. Moreover, lenders have tended to favour borrowers with high FICO scores over the last year, which makes these loans more suitable for securitization.

Nonetheless, the supply is expected to fade a little in 2022. Another speaker suggested a drop to $120bn-$125bn in 2022.

Simon Boughey

Structured Finance

SCI Start the Week - 13 December

A review of SCI's latest content

Last week's news and analysis
Covid-19: Lessons for the CMBS market
Allen & Overy explores the pandemic lessons for European CMBS
CRT bonanza
Record 2021 origination and Fannie's return to drive banner 2022 for CRT
Digital ABS debuts
Fully blockchain-based securitisation completed
Exploiting inefficiencies
CIFC answers SCI's questions
Flowers among weeds
CMBS yields value to canny buyers despite distress
Growth constraints
Disconnect between Euro ABS ambitions and reality?
HSBC hits the US trail
HSBC USA markets corporate loan CRT, Santander brings auto loan CLN
Landmark SRT inked
Wealth management unit completes synthetic ABS
New STACR, last STACR
Freddie prices 10th and final STACR of the year
Perfect harmonisation?
Transparency and standardisation key to EU NPL initiatives
Positive prospects?
CRE tops Stage Two allocations
SME boost
German STS synthetic printed
Record breakers
Strong Euro CLO market set to continue
Starz gazing
Euro CRE CLOs tipped for take-off
UK SME return
Lloyds completes capital relief trade
Year-end?
European ABS/MBS market update

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

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

Recent Premium research to download
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.

SCI Events calendar: 2022
SCI’s 1st Annual ESG Securitisation Seminar
2 February 2022, London

SCI’s 6th Annual Risk Transfer & Synthetics Seminar
April 2022, New York

SCI’s 3rd Annual Middle Market CLO Seminar
June 2022, New York

SCI’s 2nd Annual CLO Special Opportunities Seminar
June 2022, New York

SCI’s 4th Annual NPL Securitisation Seminar
September 2022, Milan

SCI’s 7th Capital Relief Trades Seminar
October 2022, London

Structured Finance

UK review released

HMT 'broadly supportive' of securitisation market

The UK government has published its report on the review of the securitisation regulation (SCI 28 June), which outlines specific areas of the regime that HM Treasury may revisit to ensure it “best delivers” for the UK securitisation market. The report appears to be broadly supportive of the industry - although notably isn’t supportive of extending the public disclosure regime to private securitisations, introducing an ESG securitisation framework in the near future or extending the STS framework to synthetics.

“This report is about tweaking, not transforming,” observes a PCS memo on the HMT report. “A number of technical issues are broached; some small – but not insignificant – changes are mooted, but the report is light on concrete proposals or time frames. On many of the issues where the report does suggest change may be welcome, the report states more work will need to be done before specifics can be considered.”

Rather than extending public disclosure requirements to private securitisations, HMT suggests that the issue requires holistic consideration in terms of the overarching purpose of disclosure requirements, according to an Allen & Overy summary of the report. Nevertheless, Treasury agrees that the disclosure regime can be improved – with, for example, a recalibration of the distinction between public versus private deals.

Another area for improvement may be identifying specific situations in which more flexibility as to the format and content of disclosures would be beneficial. The A&O summary states that HMT will work with UK regulators to identify appropriate changes and will consult on any proposals with the industry, in due course.  

Meanwhile, HMT notes that the ‘substantially the same as’ test also needs to be clarified in order to support UK investors in third country securitisations that meet certain conditions that ensure they receive an appropriate amount of information. As such, UK regulators will seek to clarify which disclosures are required while also taking into account adjustments to public versus private disclosure requirements.

In connection with third country STS securitisations, HMT notes that an equivalence regime is desirable and should be introduced at the appropriate time, indicating that it could provide UK investors with more choice and - if it leads to overseas recognition of UK STS - may provide greater demand for UK-originated STS securitisations. The A&O summary notes that the introduction of any such equivalence regime will be consistent with the principles and processes set out in the Guidance Document for the UK’s Equivalence Framework for Financial Services of November 2020.

While HMT and UK regulators are seemingly not comfortable pursuing the introduction of STS for synthetics, they are apparently open to working further with the industry to better understand the extent to which such an expansion would benefit real economy lending and UK competitiveness.

Regarding an ESG securitisation framework, meanwhile, HMT says it will consider whether it is appropriate to extend the securitisation regulation’s environmental disclosure requirements. However, it stressed that there will be a consultation with the industry before any changes are introduced. It also states that it is not appropriate for green securitisations to be given beneficial capital treatment at present.

In the more immediate future, work on recasting risk retention technical standards is expected to be prioritised in 2022, with the review focusing on enabling the risk retainer to change and introducing a special risk retention regime for non-performing loan securitisations. The latter would allow servicer-retainers and the calculation of the 5% retained interest to take into account the discounted purchase price, thereby removing the current divergence between EU and UK risk retention regimes. HMT also notes that it sees potential benefits in: L-shaped retention; and allowing excess spread to count towards the 5% retention in significant risk transfer transactions.

Finally, in terms of the prudential treatment of securitisation, the report confirms that: the impact of the output floor on STS and non-STS securitisations will be examined through the PRA’s Basel 3.1 consultation, which is expected in 2H22; the treatment of securitisations will be considered in the context of ongoing work on Solvency 2; and the treatment of securitisations under LCR will be considered by the PRA, alongside other liquidity issues.

“HMT recognises the contribution that securitisation can make to the real economy and acknowledges that any potential changes to the UK Sec Reg that HMT may undertake are expected to be beneficial to the UK securitisation market and are in line with the outcome of the wider Future Regulatory Framework (RFR) Review,” the A&O summary concludes.

Corinne Smith

Asset-Backed Finance

Legal fees

Litigation finance market ripe for securitization wizards

Dislocation and delays of normal procedure during the 21 months of Covid-19 have boosted the litigation finance market and with it the possibility of greater securitization, says Jordan Goldstein, partner at Selendy & Gay in New York

Goldstein was speaking today about new trends in structuring and underwriting at the ABS East conference in Miami.

Lenders in the litigation finance market advance capital to consumers and commercial enterprises involved in lengthy legal disputes but ones in which are widely expected to be settled in their favour.

The non-consumer area of the market is now worth $11bn and there are about 45 different funders. Consumer funders include names like Oasis and JG Wentworth.  

Different funders, of which Burford Capital is a prominent name, also lend money to law firms which have invested heavily in a case which has not settled yet. The shortfall between this investment and settlement has increased strikingly in the last eighteen months as, in many cases, courts have all but shut down.

Although the litigation finance market has been around for about a decade, volumes have surged lately, says Goldstein.

At the moment, only consumer lending tends to be securitized as commercial loans are too heterogeneous to form a satisfactory collateral pool. For example, patent litigation finance is a particularly vibrant field of the market, but each case and thus each loan is almost unique.

However, the commercial sector, where loans average $4.5m, offers the richest potential for securitization should these difficulties be overcome. "Were there to be a satisfactory mechanism, there would be appetite for securitization, says Goldstein.

Other areas of esoteric financing are also taking off, said panellists in Miami. Securitzation of data warehouse loans, agricultural loans and medical receivables are becoming more common, while equipment ABS – popular some four or five years ago – is making a comeback, they said.

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 14 December

CRT sector developments and deal news

JPMorgan is believed to be readying a significant risk transfer transaction backed by corporate loans for next year. The bank’s last corporate capital relief trade closed in November 2020 with PGGM (see SCI’s capital relief trades database). The lender was also prepping a leveraged loan SRT called Valeria for this year, but the deal was postponed.   

Capital Relief Trades

Corporate SRT launched

Raiffeisen completes capital relief trade

Raiffeisen Bank International (RBI) has finalised a US$216m significant risk transfer transaction that references a US$4.1bn blind pool of German, Austrian, Slovak and other European large, mid-market, SME and project finance borrowers. Dubbed Roof Corporate 2021, the financial guarantee is one of the largest portfolios to have been securitised this year.

The tranches amortise pro-rata - with triggers to sequential - over a 2.5-year portfolio weighted average life. The pool replenishes over a two-year period and consists of 1,500 borrowers.

A time call can be exercised after 4.5 years, when 50% of the portfolio should have amortised. The rationale is that the impact on the bank’s capital will be less punitive after a call, once that threshold of portfolio amortisation has occurred. At group level, the transaction will strengthen the CET1 ratio by approximately 21bp.    

RBI has built a track record with insurers over the years, but ‘’given the size of the transaction, we were mindful of credit limits to insurance companies, and you can also get more capital relief if the deals are cash collateralised,’’ says Oliver Fuerst, head of active credit management at RBI.

The Austrian lender attempted blind pool deals last year, but market sentiment wasn’t broadly conducive to such portfolios at that time. Raiffeisen addressed investor concerns in the latest SRT by enhancing the granularity of the portfolio.

Looking forward, Fuerst concludes: ‘’We are active in several markets - such as Germany, Austria and Slovakia - so if we need to do transactions with sufficient volume, we will have to look at portfolios from several of our jurisdictions. It’s also consistent with our relationship management approach of securitising core customers. Our deals will therefore continue to be mixed, both in terms of asset classes and jurisdictions.’’    

Stelios Papadopoulos

Capital Relief Trades

Bank bonanza

Massive potential of US bank CRT market stressed in Miami

If 10% of the $2trn US wholesale commercial loan market were to receive the CRT treatment it would create $25bn of new tranches  - only $10bn less than the entire current global CRT market, according to a speaker at the ABS East conference in Miami today.

Moreover, there remains considerable incentive for US banks to take this path: the differential between RWAs determined by internal risk-based (IRB) models and the standardized approach (which banks must use if the IRB models produce a lower number) is in the region of $180bn.

Last year has been a good one for the US bank CRT market, which something in the region of $12bn priced. But more is expected in 2022. “We’re bulllish on the market,” said one investor.

The CRT market was very much the flavour of the afternoon in Miami, with one panel discussing the GSE CRT market while its successor talked about the US bank market in the wake of the ground-breaking US regional deal from Texas Capital Bank in March.

Texas Capital, in fact, is to launch a broker-dealer arm in the very near future, announced evp Madison Miller, which at least raises the possibiity that a new generation of assets will be eligible for capital relief trades by the bank.

Another panellist said that a whole new range of assets are also under consideration for CRT at other lenders, including, for example, prescription finance and equipment finance.

Credit cards and personal loans are, however, much less likely to form the basis of CRT trades. As expected losses in these segmenrs are so high, banks would be forced to retain far too much of the deal, rendering it uneconomic and ineffective from a capital relief perspective.

Meanwhile, the GSE CRT market will see at least $34bn of new issuance next year, suggested a speaker at the earlier panel, some $10bn more than 2021. The spike in supply is attributable to the renewed presence of Fannie Mae in the market and also the increasing size of the MILN sector.

There is considerable uncertainty about home prices next year and the scale of origination. One panellist drew attention to the wide disparity of forecasts, noting the CoreLogic last month suggested prices would increase by 1.9% (this has recently been increased to 2.5%) while Goldman Sachs suggests a 16% increase YOY.

“There is a huge variation’” she observed.

Simon Boughey

Capital Relief Trades

ESG SRT inked

Standard Chartered completes capital relief trade

Standard Chartered has finalised a US$90m significant risk transfer trade that references a US$1bn portfolio of US and European corporate borrowers. Dubbed Chakra Six, the CLN stands out for its ESG features and was priced in the high single digits, rendering it the most tightly priced SRT so far from the Chakra programme.

The transaction features a sequential amortisation structure and a three-year replenishment period along with the standard clean up and regulatory calls. The portfolio consists of mainly undrawn commitments and approximately 100 borrowers. The bulk of the pool is backed by US and European exposures, but the latest deal does have a higher portion of Asian ones compared to previous Chakra trades.

Perhaps more saliently, Chakra Six stands out for its ESG features. Standard Chartered has labelled the latest ticket as ‘’Future Ready Chakra’’ since it’s an evolution of the programme, aligning itself with the objectives of the bank to grow its key client segments of Green CRE, clean tech and hypergrowth.

It incorporates ESG and sustainability requirements into the portfolio selection criteria. The latter is a combination of internal classifications and assessments and external ESG ratings.

Standard Chartered initiated the Chakra programme in 2018 to hedge concentration risks through the credit cycle and grow the corporate and institutional banking business in the US and Europe. The last Chakra closed in April (see SCI’s capital relief trades database).

Stelios Papadopoulos

Capital Relief Trades

CAS Christmas cracker

Fannie's third CRT since its return makes Q4 top of the pile

Fannie Mae has priced its third and final CAS deal of the year, and as this trade will settle before year-end it makes 4Q 2021 the busiest ever seen in the GSE CRT space, say sources.

The US$909m four-tranche offering, dubbed CAS 2021-R03, references a pool of around 117,000 single family mortgages with an outstanding principal balance of $35bn.

It was jointly underwritten by Bank of America and Barclays. The co-managers are Amherst Pierpoint, Morgan Stanley, Performance Trust Capital and Wells Fargo.

"Our final deal of the year was well received by the market. Subject to market conditions, we look forward to returning to market in early January with our first deal of 2022, CAS 2022-R01, a low-LTV transaction," comments Devang Doshi, svp, single-family capital markets.

The trade comprises four tranches. The $264m 1M-1 rated A/BBB+ pays 1m SOFR plus 85bp, the $313m 1M-2 rated BBB/BBB pays 1m SOFR plus 165bp, the $148m 1B1 rated BB/BB+ pays 1m SOFR plus 275bp while the $181m 1B-2 rated B and unrated pays 1m SOFR plus 550bp.

These levels are markedly narrower than were seen in similar trades only a month or two ago.

The reference pool incorporates loans that have LTVs of between 60% and 80%, and were acquired in January 2021. They are fixed rate 30 year mortgages.

With this deal, Fannie Mae has brought 44 CAS deals to the market worth over $50bn since it began the programme in 2013.

Now it is fully back in the market, 2022 is expected to be the host for a bumper crop of GSE CRT business.

Simon Boughey

Capital Relief Trades

Auto CRT priced

Santander engineers US return

Santander has completed its synthetic securitisation that references a US$2.17bn portfolio of US auto loans (SCI 9 December). The transaction is the first post-Covid US synthetic auto ABS issued by a European originator and marks Santander’s return to the US market.

Rated by Fitch, the transaction consists of US$1.656bn unrated class A1 notes, US$10m unrated class A2 notes, US$244m triple-B rated class B notes (that priced at 1.835%), US$20m double-B rated class C notes (3.268%), US$14m single-B rated class D notes (5.004%), US$20m unrated class E notes (6.171%) and US$36m unrated R notes.

The transaction is Santander’s second US auto SRT, following the execution of its first in July 2019 (SCI 5 July 2019). The lender was arguably the first bank to execute a US synthetic securitisation after the 2008 financial crisis and the first to use a direct CLN structure.

Cashflows in the deal amortise pro-rata for classes B and C and the retained class A. Subordinate classes D, E and R remain unpaid until all other classes are paid in full sequential order.

Additionally, more subordinated classes will be locked out of principal entirely if cumulative net losses (CNL) exceed certain thresholds. The sequential lockouts in the event of higher CNL ensure additional protection from default for the senior noteholders and Santander in the event of higher-than-expected loan defaults.

According to Fitch, the sequential structure provides additional support to the more senior notes while allowing for the risk transfer to investors. The deal functions similarly to the Chase Auto Credit-Linked Notes issued by JPMorgan in recent years (SCI passim).

The deal is supported by a weighted average (WA) FICO score of 774, with 92.5% of scores above 675 and the remaining 7.5% in the 630-675 range. Initial hard credit enhancement totals 4.50%, 3.50% and 2.80% for classes B, C and D respectively - which consists entirely of subordinated note balances, including the additional class E and R notes. Initial CE is sufficient to withstand Fitch’s base case CNL proxy of 1.80% at the applicable rating loss multiples.

Stelios Papadopoulos

NPLs

New trends

Italian NPL ABS capture coronavirus exposures

Over the medium term, Italian NPL securitisations will capture loans that have defaulted since the outbreak of the pandemic. They will be different compared to pre-pandemic portfolios featuring loans with low seasoning, at early stages of legal proceedings and with increased concentrations.

According to a new report by Scope Ratings, banks will securitise low-seasoned NPLs, as portfolios will include new defaults because of the pandemic such as a portion of loans exiting payment holidays to borrowers in financial difficulty and loans currently in stage three (unlikely to pay). So far, the average unsecured seasoning has been five years. Less seasoning will be a positive rating driver for unsecured loans, as aged NPLs tend to have a lower likelihood of recovery.

Secured portfolios will be materially guaranteed by commercial assets. Retail and hospitality have been the sectors most affected by the pandemic. “We expect the share of corporate NPLs secured by those assets to increase, potentially exceeding residential mortgages, which had constituted the largest share of secured portfolios-on average 43% of secured gross book values,” states Scope.

Compared to commercial assets, residential properties are more liquid and exhibit less price volatility. This drives tighter bid-ask spreads, which likely explains the high share of exposures backed by residential assets in securitised portfolios.

“We see a higher share of commercial properties as credit negative. That said, given that the Italian NPL market is mature, we also foresee a greater preparedness among market participants to trade commercial NPLs,” says Scope.

New defaults will primarily concern corporate borrowers. “Latest figures show that 80% of outstanding loans under moratorium are corporate loans. On average, 4% of total bank lending is still under moratorium. We expect that new defaults will be mainly related to corporate borrowers, which already account for a high share of defaults-76% on average in GBV terms.”

The share of secured loans at initial stages or with no proceedings has risen by two-thirds since 2017 in GBV terms. Indeed, Scope expects a higher share of secured loans at early stages.

When loans are at early stages, originators or servicers have more room to carry out recovery activities. When loans are at more advanced stages, recoveries are less dependent on servicing capabilities and strategies. This explains why originators generally prefer to service in-house loans that are close to resolution and outsource the servicing of other loans via securitisations, disposals, or outsourcing mandates. A high share of secured loans at early stages is credit negative, as it results in a longer expected time horizon for collections compared to loans at more advanced phases.  

Finally, portfolios in 2021 show above-average concentrations. Scope concludes: “47% of GBV is related to the top 100 borrowers and 19% to the top 10 borrowers. The historical average is 30% and 9%, respectively. Since 2019, portfolio concentration has materially increased, mostly driven by sellers’ disposal strategies vis-à-vis top borrowers. A high concentration exposes noteholders to idiosyncratic risk, as the performance of leading borrowers may materially impact portfolio recovery proceeds.”

Stelios Papadopoulos

Structured Finance

NPL prudential framework revised

Sector developments and company hires

NPL prudential framework revised
The EBA has published its final report on the draft regulatory technical standards (RTS) amending its RTS on credit risk adjustments in the context of the calculation of the risk weight (RW) of defaulted exposures under the standardised approach (SA) of credit risk. The proposed amendments follow up on the European Commissions’ action plan to tackle non-performing loans in the aftermath of the Covid-19 pandemic, which indicated the need for a revision of the treatment of purchased defaulted exposures under the SA (SCI 24 June). This revision is necessary to ensure that the prudential framework does not create disincentives to the sale of non-performing assets by banks.

The Commission’s action plan specifically asks the EBA to reconsider the appropriate regulatory treatment of the RW for purchased defaulted assets, as laid out in the CRR, which have been sold at a discount – in other words, NPL sales. Under the current regulatory framework, the capital charge for a defaulted exposure may – under certain circumstances - increase after its sale from a risk weight of 100% on the seller’s balance sheet to a risk weight of 150% on the balance sheet of the credit institution buying the assets.

The proposed amendment to the existing RTS on credit risk adjustments introduces a change to the recognition of total credit risk adjustments to ensure that the risk weight remains the same in both cases. In particular, the price discount stemming from the sale will be recognised as a credit risk adjustment for the purposes of determining the risk weight.

By implementing this change through an RTS amendment, the EBA aims to clarify the regulatory treatment of sold NPL assets. The EBA also recommends that the treatment set out in this RTS be directly reflected in the level 1 text, in line with the European Commission’s CRR3 proposal.

In other news…

KBRA acquired
Growth-oriented private equity firm Parthenon Capital Partners has acquired a majority stake in KBRA, for a sale price of approximately US$900m. Under this new ownership, KBRA says it will continue to provide unparalleled service combined with exceptional analysis, thorough research and high-quality ratings. The rating agency has more than 400 employees across its five offices in the US and Europe, and has issued over 51,000 ratings across nearly US$3trn in rated issuance since its inception in 2010.

Structured Finance

CyCAC securitisation closed

Sector developments and company hires

CyCAC securitisation closed
Oxalis Holdings has completed a securitisation backed by a portfolio of Cypriot non-performing loans (NPLs) and real estate owned (REO) properties (see SCI’s Euro ABS/MBS Deal Tracker). Dubbed Hestia Financing, the €2.2bn transaction implements a two-tier structure for the management of the portfolio.

The portfolio has a total adjusted pool value of €2.06bn and was originated by Bank of Cyprus. The portfolio was acquired by Themis Portfolio Management Holdings, a Cypriot Credit Acquiring Company (CyCAC), which was in turn acquired by Oxalis Holdings.

The portfolio will be serviced by Themis Portfolio Management Limited. According to the servicer’s business plan, expected lifetime collections - net of asset-level costs - amount to €1.079bn.

The pool mainly comprises senior secured loans (accounting for 79% of the exposures) and the borrowers are mainly individuals (59%). The collateral is a mix of residential real estate assets and land (representing 57% and 25% of appraised property value respectively), with the remainder mainly commercial and industrial real estate. Properties are concentrated in Nicosia and Limassol (35% and 29%).

The transaction’s two-tier structure involves the CyCAC holding the credit rights over the loans and several pre-existing Real Estate Owned Companies (ReoCos), with security rights over the REO assets. The issuer subscribes to senior notes issued by the CyCAC, structured to allow cashflow from the assets - less certain costs and expenses of the CyCAC - to flow into the issuer’s accounts. These are then used as available funds in the issuer level waterfall to repay the issuer’s liabilities.

DBRS Morningstar and Scope rated the €475m class A notes triple-B (low) and triple-B respectively. The €1.725bn class Z notes are unrated.

In other news…

Analytics investment completed
Data and technology firm DealX has completed a Series A capital raise by Morningstar Credit Information & Analytics (MCIA). DealX’s flagship products include DealX Report Stream, a structured products trustee report and data source, and the DealX CMBS and CLO market data feeds.

The investment furthers MCIA’s strategic initiative to increase transparency and offer more data and tools to credit-market decisionmakers. Working with MCIA will enable DealX to execute on its strategy to broaden its distribution of data and scale its information-sharing platform to new customer segments. The capital will be used for key hires in sales and product development.

Direct lender acquired
CIFC has acquired the middle market direct lending platform LBC Credit Partners, as it continues to develop its credit business. LBC has over US$3bn assets under management, and this acquisition will see its investment fund and team become a subsidiary of the CIFC platform – although LBC will continue to trade under the LBC name.

As well, the new subsidiary will retain its offices across the US, and its investment strategy, senior management team, origination, underwriting, research and portfolio management strategies will remain unchanged. CIFC hopes to leverage LBC’s expertise in direct lending to better serve its global institutional investors, having already grown assets by more than US$5bn this year.

North America
Annaly has promoted Ilker Ertas to cio, directing the firm’s investment strategies - including growth initiatives, capital allocation and portfolio operations – as it seeks to expand its mortgage finance business. Ertas, who has worked in the industry for over 20 years and has been with Annaly since 2015, will take on the new role having most recently served as the company’s head of securitised products. He will continue to report to Annaly’s ceo, David Finkelstein, and will remain a serving member of the firm’s operating committee.

Rich Highfield has joined Greystone as the new head of its CMBS lending platform, responsible for the expansion of its proprietary conduit offering into multifamily and commercial assets. Greystone hopes the hire of the industry professional, with over 25 years of experience, will aid the expansion of the firm’s lending platform business and reduce borrower stress.

Highfield joins from Starwood Mortgage Capital, where he led the CMBS/conduit platform as its president. The new position will be based in Charlotte, North Carolina, and he will report directly to Gresytone vp Kevin Williams.

Loomis Sayles has welcomed back Keith Allman to the firm as its new head of research and private credit for the mortgage and structured finance (MSF) team. In the newly created role, Allman will oversee a team of seven analysts and will lead the firm’s work to originate private credit opportunities alongside securitised strategist Michael Meyer.

Allman has previously worked as a senior analyst on the Loomis Sayles MSF team, from 2016 to 2019, where he focused on commercial and esoteric ABS. He will re-join the firm from MUFG, where he served as head of non-flow ABS and led the building of several esoteric structured products.

Loomis Sayles hopes the new hire will strengthen the research capabilities of the MSF team and allow a greater focus on certain asset classes, such as esoteric ABS and asset-backed private credit, that are currently receiving increased interest from investors.

Structured Finance

Spanish private debt fund wins EIF backing

Sector developments and company hires

Spanish private debt fund wins EIF backing
Beka Finance has formed a private debt management unit, dubbed Beka Credit, which it hopes will help consolidate the firm’s growth and leadership position in the alternatives market. The unit is already preparing to launch its first private debt fund, with which it expects to raise around €250m.

The Luxembourg-based vehicle will grant senior loans with a maturity of around six years to Spanish companies. The firm estimates that the leveraged return could reach 15%.

Beka Credit has obtained the support of the EIF, which will provide a guarantee to the new vehicle.

Lars Schmidt-Ott leads the Beka Credit team as managing partner in Madrid, while Jerónimo Sánchez joins as director of origination and business development, Manuel Acevedo as credit director, Víctor Menéndez as structuring director, and José Luis Riera as finance and operations director. Julieta Garretano and Luis Torroba also join the unit, from Finalbion and Be-Spoke Capital respectively.

Schmidt-Ott was previously founder of Be-Spoke Capital and before that co-founded Capital Efficiency Group, having also worked at The Boston Consulting Group and Swiss Re Financial Services. Sánchez was most recently director of distribution of the commercial banking network in Spain and territorial director of Madrid at Santander Group.

Acevedo was also previously at Santander Group, as an md in its corporate and investment banking unit. Another Santander alumnus, Menéndez has extensive experience in leading both structured finance operations and highly specialised finance teams, most recently as an advisor to fintechs. Finally, Riera has been the financial director of the Gedesco group and previously of the Celistics Group.

The team plans to recruit a further 13 professionals before the end of the year and 18 towards the end of 1Q21.

In other news…

Clifden targets further RMBS issuers
The Great Hall Mortgages No. 1 Series 2006-1, 2007-1 and 2007-2 issuers have disclosed their receipt of an email from a Clifden Group account, containing a letter from Cherry Services notifying them of the appointment of four “investor directors”, having purportedly served notices on the issuers on 18 October 2021. On 20 October, having purportedly given notice, these directors apparently held board meetings to call up the unpaid share capital of the issuers and required the existing shareholders to make payment by 10 November 2021.

On 12 November, a purported forfeiture notice was allegedly served on the shareholders for not complying, giving the shareholders until 3 December 2021 to comply. On 7 December, an alleged board meeting was held at which partly paid shares of the issuers held by the shareholders were forfeited and purportedly sold to FVS Investments, allegedly meaning that FVS was now the majority shareholder.

Notices dated 10 December, apparently signed by FVS, then alleged to have: removed Mark Howard Filer and Law Debenture as directors of the issuers; removed Law Debenture as the secretary of the issuers; and replaced Law Debenture as the corporate servicer with Cherry Services.

The issuers have subsequently confirmed that none of the “investor directors” are or have ever been a director and therefore no forfeiture, sale or transfer of any shares has occurred. Thus, FVS is not a holder of any shares in the issuers.

Additionally, the issuers warn that the “investor directors” or those acting on their behalf may attempt to carry out further invalid actions purportedly by or on behalf of the issuers.  

The Clifden email also enclosed a claim form from the Commercial Court in London on 13 December, purportedly issued by Great Hall Mortgages No. 1 and Cherry Services. The defendants were listed as Law Debenture and Mark Filer, but the issuers deny authorising the claim. The issuers have appointed lawyers to take action in relation to these matters.

EMEA
Scope has appointed Matthias Böhm as its new md in a move to strengthen its leadership. Böhm is a certified compliance officer and has served in several senior management roles within the European financial industry, including as md of German operations at Rabobank. He will serve on the management board alongside Scope Group coo, Guillaume Jolivet, and will be based in Frankfurt.

GSE capital plans mooted
The FHFA has issued a proposed rule that would require Fannie Mae and Freddie Mac to develop, maintain and submit annual capital plans. This requirement aims to help protect taxpayers by ensuring that the GSEs properly assess their risks and maintain the appropriate level of capital.

The proposed rule mandates that the enterprises' capital plans include: an assessment of the expected sources and uses of capital over the planning horizon; estimates of projected revenues, expenses, losses, reserves and pro forma capital levels under a range of internal scenarios, as well as under FHFA's scenarios; a description of all planned capital actions over the planning horizon; a discussion of how the enterprise will, under expected and stressful conditions, maintain capital commensurate with the business risks and continue to serve the housing market; and a discussion of any expected changes to the business plan that are likely to have a material impact on their capital adequacy or liquidity. The proposed rule also incorporates the determination of the stress capital buffer into the capital planning process.  

Separately, President Biden has nominated Sandra Thompson to serve as director of the FHFA. The Structured Finance Association welcomed the appointment by noting that during her tenure as acting director, Thompson demonstrated a commitment to FHFA’s housing mission, prioritised the safety and soundness of the GSEs and engaged with industry on a number of important issues - including the capital treatment of the credit risk transfer market.

North America
Caroline Chen has joined Amherst Pierpont as md, strategist, based in New York. She was previously svp, research analyst at Income Research + Management and before that worked at Deutsche Bank and Radian Asset Assurance.

BlueBay has appointed two new senior hires to its structured credit team amid a global structured credit strategy roll-out. Brian O’Hara joins the team as a portfolio manager, having previously spent 13 years as CMBS portfolio manager at KLS Diversified Asset Management. Before that, he held several other senior positions at firms including UBS Investment, Morgan Stanley and Fitch.

Mark Shohet joins BlueBay’s expanding US team as a senior analyst, having previously held the position of head of structured finance transactions at EY. Both O’Hara and Shohet will be based in the US and report to head of structured credit and CLO management, Sid Chhabra.

Remarketing results in SLM bond upgrade
Fitch has upgraded the SLM Student Loan Trust 2003-12 class A6 and B notes, following amendments to extend class maturity dates (to December 2068 from March 2038) and the successful remarketing and conversion of the class A6 from £277m to US$468m. The rating actions reflect the stable portfolio performance and increasing credit enhancement levels, which can sustain Fitch's triple-A and triple-B stresses respectively. The upgrade of the senior class is also supported by the elimination of counterparty risk introduced by the sterling/US dollar cross-currency swap.

RFC issued on credit assessment mappings
The EBA has launched a public consultation to amend the implementing regulation on the mapping of credit assessments of external credit assessment institutions (ECAIs) for securitisation. The changes reflect the relevant amendments introduced by the new securitisation framework, as well as the mappings for two ECAIs that extended their credit assessments to cover securitisations.

The implementing regulation - developed by the EBA and adopted by the European Commission on 11 October 2016 - aims to ensure that credit assessments issued by ECAIs can be used for calculating capital requirements for securitisation positions. As such, the EBA specifies the correspondence or ‘mapping' between credit ratings and the credit quality steps (CQS) defined in Chapter 5 of the CRR.

The CRR amendments brought by the new securitisation framework have made it necessary to update the mapping tables accordingly. Following the amendments to Chapter 5 of the CRR, a hierarchy of approaches was set out to calculate capital requirements for positions in a securitisation, whereby institutions using SEC-ERBA shall calculate risk-weighted exposure amounts based on CQSs set out in the CRR. The amended regulation reflects 18 CQSs for long-term external credit assessments, which ensures enhanced granularity and risk sensitivity with respect to the approaches previously considered in the regulation. 

In addition, since the adoption of the implementing regulation, one additional ECAI has been established in the EU with methodologies and processes in place for producing credit assessments for securitisation instruments, two existing ECAIs have extended their credit assessments to cover securitisations, and ESMA has withdrawn the registration of an ECAI. These changes have been reflected in the mapping tables accordingly.

Responses to the consultation paper should be submitted by 31 January 2022. A public hearing on the draft ITS will be held on 18 January 2022.

UK bridging loan business unveiled
Arrow Global has launched a new bridging loan business, Bergen Finance. The new London-based firm seeks to target the growing UK short-term real estate market - which has expanded since 2013 by over 400% to £5bn per year.

Leading Bergen Finance will be two new senior hires, Andrew Ward and Adrian Hogan, who will respectively serve as md and director. Ward joins having recently founded two independent lenders, and with over 25 years of experience in business and commercial lending at Lloyds, Five Arrows (Rothschild) and Credit Agricole. Hogan has over a decade of experience in secured lending – including establishing the Paddington Street bridge lending business.