Contents

Capital Relief Trades

WAB CRT number 2

WAB becomes 1st US regional to do CRT on direct mortgage exposure

Phoenix-based Western Alliance Bank (WAB), a wholly owned subsidiary of Western Alliance Bancorporation (WAL, marked the last days of 2021 with its second CRT trade in four months, designated WAL 2021 CL2.

The $50bn bank first entered the CRT space in September with a trade covering mortgage warehouse loans but this latest transaction transfers risk on direct mortgage exposure.

This makes it the first US regional bank to sell a CRT backed by direct mortgage exposure. The pioneering issue in this market from Texas Capital Bank 10 months ago also covered mortgage warehouse loans.

“It looks like the deal is backed by mortgages themselves rather than mortgage warehouse loans. They’re high FICO, high quality, mostly non QM loans, mostly acquired by Western Alliance,” says a source.

WAL 2021 CL2 in fact resembles JP Morgan Chase’s 2021 CL1, notes a credit analyst. "Well it is not short-term financing as with a warehouse (for example, for a few weeks before delivery to end investor), and it is not direct in that the loans are not sold into a trust, but the transaction is designed to mimic the credit risk on the underlying loans which remain in the bank’s portfolio. Since they are direct obligations of the bank, the rating is limited to the bank’s issuer rating," he explains.

The trade is also rated, whereas WAB’s original foray into the market was unrated. Like the September trade, however, WAL 2021 CL2 is a credit linked note.

WAB did not respond to phone calls and emails for comment.

The reference obligations consist of a pool of 5,554 mortgages owned by WAB with an unpaid balance of $4.55bn. The loans were originated and serviced by a number of different originators and servicers.

WAB retains risk on $4.3bn and has sold $227m into the market in a six-tranche deal. The $63.7m M-1, rated A-, has a nominal maturity of 2059, a 5% credit enhancement (CE) and pays SOFR plus 315bp. The M-2, also rated A- and also worth $63.4m, has a 2.20% CE and pays SOFR plus 370bp.

The BBB-rated $43.3m M-3 has a 1.25% CE and pays SOFR plus 410bp, while the BB-rated $31.8m M-4 has a 55bp CE and pays SOFR plus 5.35bp. The B-rated $11.4m M-5 has a 30bp CE and pays SOFR plus 650bp while the unrated B tranche has no CE and pays SOFR plus 850bp.

Sole bookrunner was JP Morgan.

Sixty four per cent of the loans were originated in the state of California, with the rest originated in Florida, Washington, Texas, Colorado, Arizona, Georgia, Nevada, Massachusetts and Utah. Nearly 90% were originated in the last 12 months.

The loans vary in credit quality and cover a varying spectrum of risk including primarily prime, agency-eligible and agency “near miss” loans, 18% of which are for non-owner occupied investor properties. The mortgages are predominantly 30-year, fixed-rate fully amortizing loans, and the weighted average (WA) FICO score is 766.

Meanwhile, the non-QM loans in the pool have a WA credit score of 758 and a WA debt-to-income ratio of 40.4%.

Simon Boughey

Capital Relief Trades

Risk transfer return

Santander completes capital relief trade

Santander has finalized a €291.6m synthetic securitisation that references a €5bn portfolio of US, UK, and European undrawn corporate revolvers. Dubbed Bultaco, the transaction is the first confirmed post-covid significant risk transfer trade (SRT) to be backed by such loans.

The tranches amortize on a pro-rata basis over a three-year portfolio weighted average life. The deal was widely syndicated due to good demand, according to sources close to the transaction. Santander executed a very similar trade called Vespa in December 2019 (SCI 10 January 2020).

Undrawn corporate facilities are a typical product that banks must provide to corporate and financial institution clients, even though they are thinly priced and capital inefficient.

The European Banking Authority (EBA) confirmed via a Q&A in 2019 that banks can reference the exposure at default (EAD) of such assets for purposes of achieving SRT. EAD represents the predicted amount of drawn exposure a bank may be exposed to when a debtor defaults on a loan.   

Effectively, the new rules allow Santander to buy protection for a portion of the credit line rather than the whole notional. The latter renders the economics of the deal workable and this is a feature that is present in the Bultaco trade as well.

Stelios Papadopoulos

Capital Relief Trades

Greek wave

Eurobank finalizes SRT

Eurobank has completed a first loss financial guarantee with the EIB group that references a €0.7bn portfolio of Greek SME and large corporate loans. Dubbed Project Wave Two, the transaction is the first capital relief trade of the Greek market to have been structured as a first loss deal under the terms of the European Guarantee Fund (EGF) and is the fourth Greek significant risk transfer trade.

The EGF is a €25bn fund set up by the EIB Group in 2019 and aims to help SMEs reeling from the economic fallout of the Covid-19 pandemic. The fund, managed by the EIB Group, deploys resources from EU member states to support SME lending. The transaction results in an RWA relief of approximately €0.5bn, contributing around 21bps to Eurobank’s total capital ratio.

“The synthetic securitisation is a smart way to reduce RWAs and increase the capital ratios while still having exposure to the loans. The securitisation also carries a first loss guarantee from the European Investment Fund (EIF) and European Investment Bank (EIB). Given that Eurobank is already in the single digits for NPEs and with a good capital position, this move is more tactical,’’ according to Jonas Scorza Floriani, equity research director at Axia.

The lender’s NPE ratio stands at 7.3% as of 3Q21 while the CET1 ratio equals 13.3%. Piraeus Bank launched the first Greek synthetic securitisation in March 2021 (see SCI’s capital relief trades database). The €100m ticket referenced a €1.4bn portfolio of Greek corporate and SME loans.

Executing Greek capital relief trades had been a difficult proposition until the Piraeus deal, due to asset quality issues and the high cost of protection. However, Greek banks are expected to utilise the technology to generate enough capital to offload non-performing loans (SCI 14 January 2021).

Citigroup acted as the transaction’s arranger and Clifford Chance as legal advisors

Stelios Papadopoulos

Capital Relief Trades

First loss SRT debuts

BBVA executes capital relief trade

BBVA and the EIB group have finalized a €120m financial guarantee that will enable the Spanish lender to channel over €960m into SME lending.

The STS transaction will support working capital and liquidity needs, as well as cover the investment constraints of Spanish SMEs affected by COVID-19. The significant risk transfer trade is also the bank’s inaugural first loss guarantee.

The tranches amortize on a pro-rata basis and over a three year portfolio weighted average life (WAL). Further features include a time call that can be exercised once the WAL has run its course and also a static portfolio. Given the costs of the new EBA excess spread guidelines, the bank decided to exclude the mechanism from the deal.

These new guidelines stipulate that synthetic excess spread should be treated as a retained first loss tranche which should be fully capitalized. However, the market is waiting for a consultation and an RTS to provide more clarity later this year. (SCI 22 October 2021).

The guarantee is carried out under the terms of the European guarantee fund. The €25bn fund was set up by the EIB Group in 2019 and now aims to help SMEs reeling from the economic fallout of the Covid-19 pandemic. The fund deploys resources from EU member states to support SME lending.

The European Council endorsed the establishment of the European Guarantee Fund in April 2020 under the management of the EIB Group, as part of the overall EU response to the coronavirus outbreak. The fund was extended to synthetic securitisations in August last year (SCI 18 August 2021).

BBVA issued its first synthetic securitisation in 2017 with the EIF and all transactions since then have been executed with the supranational. However, this is likely to change.

Looking forward, Diego Martin Pena, head of securitisation at BBVA notes, ‘’The European Guarantee fund will last until June 2022, so it won’t be possible to do another transaction under it and also due to the programme’s limited funds. This year or the next we will be contacting private investors.’’

Stelios Papadopoulos

Capital Relief Trades

The year of records

GSE CRT issuance hit peaks in 2021, but 2022 supply set to exceed

The GSE CRT market set records in 2021 and in Q4, according to data produced this week by Mark Fontanilla & Co, the Charlotte, NC-based research and consultancy firm.

Gross benchmark issuance in the CRT market came in at $14.12bn, setting a new high for the sector despite Fannie Mae being absent until September.

“It’s really notable that despite Fannie’s three quarter absence for the year, 2021’s total gross supply still hit a historic record,” says Fontanilla.

Moreover,  $6.2bn was sold in Q4, making it the most prolific quarter the market has seen since the GSE CRT market started in 2013.

Other notable changes to the market in 2021 include the first tender offers for old STACR and CAS deals, initially by Freddie Mac and then followed by Fannie Mae.

B1/B2 deals continued the trend of increased issuance size, and the most recent CRT deals switched to a five year call/20 year maturity format, potentially widening the net of potential buyers.

Fontanilla also notes that the word “significant” has made its way back into the FHFA scorecard, after being left off the 2021 scorecard produced under the regime of Mark Calabria. So, more supply is likely to be seen in 2022, he predicts.

“This year  might be even more prolific, particularly given the FHFA’s 2022 GSE scorecard using the word “significant” in reference to affordable housing and transfer of credit risk, and the growth in both FNMA’s and FHLMC’s guarantee books. All told, CRT may likely have an even bigger role to play,” he says.

Mark Fontanilla & Co’s flagship CRTx Aggregate Index closed 5.86% up in 2021 - which he calls “a year of records, returns and reconfigurations.”

In a further boost to the GSE CRT sector, Sandra Thompson was last month confirmed as director of the FHFA after serving as acting director for six months.

Simon Boughey

ABS

Angel Oak hits up MILNs

In the third and final in our series of EOY interviews with investment managers about where they expect to see value in 2022, SCI caught up with Atlanta-based Angel Oak Capital Advisors.

Colin McBurnette handles RMBS allocation for Angel Oak, and in 2021 he expanded the footprint of his portfolio into the mortgage insurance-linked note market for the first time.

Heading into March 2020, Angel Oak had zero dollars in total MI exposure in its flagship Angel Oak Multi Strategy Income Fund (ANGIX), but this year it climbed to a peak of $400m. The fund will continue to focus on the sector in 2022, he predicts.

“It’s an HPA play for us, and it’s a portion of the market which has an expanding buyer base. We love the floating rate nature, and the built-in finite extension due to the amortization of the underlying mortgages,” he explains.

It is also a portion of the structured finance market which is under-valued, he says, due to the relative complexity and opacity of the product. He doesn’t believe it is in fact a CRT product as it’s a more complicated instrument than CAS or STACR.

But these differences allow MILNs to trade wide of the equivalent coverage points in CAS or STACR notes despite the considerable crossover in the underlying collateral.

“CAS and STACR are huge programmes, they’re unique programmes and Fannie and Freddie offer certain incentives. There are a lot of dynamics that make CAS and STACR trade the way they do that do not exist in the MI market. It’s still under-valued and we have increased our holding lately,” he says.

The three main issuers Angel Oak has concentrated upon are Arch, Essent and Radian. Essent and Radian both issued MILNs in November. The former sold a $435m note, dubbed Radnor Re 2021-2, while Radian sold a $484 note called Eagle Re 2021-2.

To give an idea of yields, the Eagle Re 2021-2 M1-B tranche, rated BBB/Baa3, was priced to return SOFR plus 205bp.

As of 30 September 2021, Angel Oak has $13.3bn assets under management, of which $6.9bn was invested in the ANGIX. Some 62% of the overall total is devoted to RMBS, 10% to ABS, 6% to CLOs, 6% to corporates, 3% to CMBS and the remainder to government bonds and agency notes.

While most onlookers predict a drop off in RMBS issuance in 2022, McBurnette is a dissenter. He thinks 2022 issuance will broadly match 2021 with something like $200bn of new supply hitting the market. Agency origination continues to be profitable he notes, while refinancing will retain its popularity.

He saw considerable value further down the capital structure over the last year as REITs and hedge funds were forced to exit the sector as repo market liquidity dried up, pushing spreads wider.

“For unleveraged players like ourselves spreads got to the point where they were interesting to us, particularly given our low default view. The bottom of the capital structure suddenly looked cheap, when it hadn’t been during the bulk of the new issue wave,” he says.

Volatility is likely to make a return to the market in 2022, however, particularly in light of inflationary pressures. Moreover, the market is still basking in the sunlight of Federal Reserve stimulus measures and will continue to do so.

“Despite the sabre rattling from the Fed, it’s still incredibly accommodative. The tapering discussion does not involve stopping the investment of paydowns of existing holdings. According to JP Morgan data, that will equal 50% of the entire agency gross supply next year. There is a profound amount of accommodation still there,” he says.

In view of these pressures, he wants to stay invested in the short end and believes the curve will steepen. He doesn’t want to take on too much interest rate risk at the moment, and favours short term high quality structured credit like the RMBS sector.

Of course, not all volatility is bad. Triple A yields have recently backed up to over plus 100bp again, allowing investors to go back up the credit curve without sacrificing yield - the opposite position to the one allowed by the absence of REITs and fast money in the lower areas of the capital structure in 2021.

“It’s the reverse of much of 2021. You can shift to the top of the capital structure and still make money. Option values have collapsed and we can see positive returns here in 2022. Volatility within reason is your friend. If it’s like 2020 then you don’t sleep,” he says.

Simon Boughey

Regulation

SCI Forum: does the STS regime work?

Our expert responds to readers' questions

Is STS doing what it is designed to do for the securitisation market?

Daniel Hill, partner at Allen & Overy, gives his view

The STS regime, introduced in the EU for traditional securitisations on 1 January 2019 (and then for synthetic securitisations in April 2021), aimed at increasing issuances, widening the securitisation investor base and cementing securitisation at the centre of the European economy. Traditional securitisation STS issuance momentum began to build up from March 2019, but the increased activity of central banks since early 2020 has muddied the waters in terms of the effectiveness of the regime.

The synthetic securitisation STS regime, which was introduced in the EU in April 2019, remains in its infancy, with some of the legislative framework that is required for full implementation still outstanding. Therefore, while the synthetic STS regime has not yet been fully tested, the clear signs for traditional STS are that it needs tweaking to assist it in achieving the intended aim.

The requirements of the STS regime in both the EU and the UK remain a burden for issuers and investors – over 100 criteria must be met for a transaction to achieve the STS label. This increases costs for both issuers and investors.

The label itself is seen as unnecessary for sophisticated investors that do not get any regulatory benefit and there is a preference among some investors to put the extensive due diligence work to use on higher-yielding non-STS transactions. Indeed, more than twice the number of non-STS transactions as STS transactions have been issued in Europe and the UK since the introduction of the STS regime. 

While an EU or UK STS designation creates work for issuers and investors, the associated capital benefits could be improved. In the case of traditional STS, STS tranches remain at Level 2B for the purposes of EU and UK LCR (as opposed to Level 1 or 2A for covered bonds of equivalent credit quality) and from a capital perspective are not treated as advantageously for investors regulated under EU or UK Solvency 2 or EU or UK CRR as other investments.

The regulatory benefit under a synthetic STS securitisation is only available to the EU CRR bank originator. It is therefore a stringent regime, in relation to which the regulatory benefits could be improved.

In terms of developments, the Securitisation Regulation in both the EU and the UK (including as it relates to STS) is under review by the European Commission and HMT respectively. In the UK, there is already more flexibility on jurisdictional requirements than in the EU, but it remains to be seen whether any further changes (for example, clarifying that DD requirements apply only where an investor is relying on STS designation for regulatory benefit or introducing a permanent equivalence regime for EU STS securitisations) will be implemented. Likewise, the question of equivalence in the EU for third country STS securitisations has been raised in the review, but legislative proposals (if any) would take some years to be finalised and be implemented.

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

CLOs

Rising star

Gordon Neilly, executive chairman at WhiteStar Asset Management, answers SCI's questions

Q: Gordon, what are your expectations for WhiteStar as it expands further into the European CLO space?

A: So, this is our entry point into the European CLO space. If you look at the industry today, not only is the European CLO market far less developed than the US CLO market, it’s also quite fragmented with about 50 players in the European market compared to just over 100 in the US market. But in terms of funds under management, the US market is four times the size of Europe.

A number of European investors are also investors in WhiteStar US CLOs, but we are not a brand name in the European market and it’s going to take us a little bit of time to build up the same profile and presence as WhiteStar has in the US. But, we will do it, because we have a very strong pedigree, and part of our role here will not only be to deliver to the underlying investors but also to try to cultivate new investors in the CLO space. I think there’s a lot of scope for that.

Q: In terms of the transfer process of the Mackay Shields Europe CLO 1 and 2 deals, what’s the next stage?

A: Consent from our investors will need to be received and we are concluding that process now. We are hopeful we will be able to do that before the end of this 2021 calendar year.

Q: And will the two Mackay Shields CLOs stay under their current branding?

A: The two CLOs in Mackay Shields will remain under their current branding for the time being, but any new CLOs that are issued by WhiteStar as a group will be issued under the Trinitas brand, consistent with our US business.

Q: WhiteStar has been noted to have a conservative approach to CLO management. Are there any other ways you feel your approach differentiates to others in the European market?

A: I think there are a lot of very good players in this market, but at WhiteStar we think we are different in a number of respects. First, WhiteStar has a very fundamental approach to credit, and we have a rule that no analyst is allowed to cover more than 30 credits. That means they are able to get to know the credit inside out. It’s a very disciplined process which has resulted in our default ratio standing up very well to the overall market, so I think that is a strength.

Our second strength is that we pay a lot of attention to the liquidity of the underlying investments, because mistakes do take place from time to time, and we need to make sure that if we see anything happen then we can actually exit investments. The metric that is often used in these situations - the weighted average rating factor (WARF) - will typically find WhiteStar and indeed the Mackay Shields CLOs having on average a higher rating in the market. So, I think it comes back to a fundamental approach, attention to liquidity and ensuring we are thinking about returns on a proper risk adjusted basis.

Q: What are your hopes for the new business in 2022?

A: We have opened the first Trinitas warehouse now and are in the process of opening the second. In 2022, we hope to issue two CLOs, and we are aiming to be doing that at the very least every year. There are a number of plans that we have in mind, but we would expect to end the year with - in addition to the CLOs that come with the business - another two CLOs in place.

We also believe there is strong appetite for a credit opportunities fund, so we will be looking to launch that too but I would think that would be more likely to be in the second half of the year. We are going to make sure that any move we make we make at the right pace and one that will be driven by investor appetite.

Q: Are there any other areas of alternative credit that are potentially of interest in developing with the new European business?

A: I think the message we are getting is that we’ll want to be making sure we are relevant to big institutional investors who are looking for multiple capabilities from the managers they are working with. They have to do due diligence on the managers, so it is more compelling if they can access multiple high-quality capabilities from that work. We are looking at a range of capabilities to potentially bring in – including direct lending and infrastructure lending, and there are others under consideration.

I don’t want to be definitive on this though because one thing that I am absolutely certain of is that we are not going to bring in any team where we don’t think there is cultural alignment with us or a shared investment ethos. This is what we have achieved in recruiting the CLO team. This was the process we went through when we were looking to bring in the team; we didn’t just pick up the phone to Mackay Shields. I had well over 100 meetings, and I spoke to a lot of different investors, advisers, individuals, and teams as well as looking at potential corporate acquisitions. I came across some really good businesses that were just not available and others that didn’t quite fit with what we were looking for.

The important thing for me was to identify a team that would be a good fit for WhiteStar, because, ultimately, what we are looking to do is to build a global capability. So, we wanted talented individuals who share the same investment ethos, the same investment approach, and are culturally aligned with the WhiteStar team in Dallas. That took time to achieve, but as soon as we lighted on Brian McNamara and Conor Power, we knew we had found a team which matched our aspirations.

Q: How do you expect ESG considerations and EU regulations will fit in with your future plans for the business?

A: I think ESG is now becoming a pre-requisite in the industry. I’m not sure if it’s a differentiator anymore. But what I think you’ve got to do within that is really identify what you stand for, and our new team is quite advanced on this. They have a lot of detailed polices in place and so ESG will certainly serve as a core part of any offering.

Q: How do you see WhiteStar’s role in the future of the European CLO market?

A: Hopefully what WhiteStar can become is a leading player in the European CLO market, which, as I said, is very fragmented. We would consider ourselves to be a very experienced player, with a very clear investment approach and a strong track record. Fundamental to our modus operandus is to ensure we deliver strong risk adjusted returns for those who entrust their funds to us.

I think, in many ways, the European CLO market has potentially been starved of equity capital and WhiteStar has always been able to deliver that. We have our own risk retention vehicle in place and that has been able to provide a substantial position in the equity of all the CLOs originated, and that will be the same case here in Europe. This brings strong alignment with investors across the tranches.

But at the end of the day, what we want to demonstrate is that we do a really good job for the investors, so our fundamental investment approach is a key strength. I think we are moving into what I would call a ‘stock-pickers market’ in 2022. I think our process will play very strongly into that. It is our hope that WhiteStar Europe can become a significant player in the European market and we will seek to emulate what WhiteStar has achieved in the US.

Q: How did you come to decide on buying over building in the current CLO market?

A: We didn’t go out with the intention to buy. We were seeking to identify a team that we felt to help us achieve our aspirations to build a strong presence in the European CLO market. And when we found the team, we felt it would be worthwhile exploring with their existing employers whether there could be an opportunity to find a way forward that could suit both parties.  After much discussion we clearly arrived at a solution which suited both WhiteStar and MacKay Shields.

But we started with finding a team that we felt fitted our culture and shared our investment ethos. We were prepared to hire them and start a brownfield site. It was always going to be beneficial to launch our European initiative with an existing business that was managed by the team of our choice. We are delighted that Brian and Conor will be joined by colleagues who were an important part of the success they achieved at MacKay Shields - with the entire team joining us at WhiteStar Europe.

Claudia Lewis