Contents

Structured Finance

SCI Start the Week - 17 January

A review of SCI's latest content

CRT Training launch
SCI has launched a new Capital Relief Trades training course, providing complete, deep-dive intelligence on the CRT sector. Aimed at new market entrants, this is a fast track opportunity to get the intelligence you need on the Risk Sharing sector. The course will take place on the 8-9 March 2022, and will be held online.

To find out more about the course, the people who will be leading the training and to download a brochure, please click here or to book click here. If you’d like to discuss any aspect of this course please email David McGuinness at SCI here.

Last week's news and analysis
Corporate SRT priced
HSBC completes US capital relief trade
DTI ratios eyed
Affordability changes could 'increase default risk'
Fannie gets 2022 under way
First CAS deal of the year comes in big at $1.5bn
Fannie off to a flyer
Fannie Mae's inaugural 2022 deal CAS 2022-RO1 prices
Freddie breaks new ground
Debut 2022 STACR increases detachment points
Greek surge continues
Eurobank finalises second SRT
Strong start
European ABS/MBS market update
Texas rising
New Texas Capital broker dealer eyes securitization

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

SCI CLO Markets
CLO Markets is SCI’s new service providing deal-focused information on the global primary and secondary CLO markets. It offers intra-day updates and searchable deal databases alongside BWIC pricing and commentary. Please email Jamie Harper at SCI for more information or to set up a free trial here.

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
16 March 2022, London

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

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

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

SCI’s 8th Annual Capital Relief Trades Seminar
October 2022, London

Capital Relief Trades

Longer-dated profile

Project finance exposure embraced

BBVA has closed its first balance sheet synthetic securitisation referencing a project finance loan portfolio. The risk-sharing transaction – executed with Alecta and PGGM - allows the bank to free up 80% of the capital on the portfolio.

The €500m portfolio represents a cross-section of BBVA’s overall project finance loan book and includes a variety of projects located mainly in Spain and Western Europe. One-third of the portfolio consists of renewable energy-related projects, given that these assets have been a focus for BBVA in terms of its origination activities. The bank retains a risk alignment of at least 20% for each project in the portfolio.

The transaction establishes a framework for future collaborations with PGGM and Alecta that relies on BBVA's origination capabilities to continue investing and provide the bank with capital that will allow it to promote projects that help combat climate change. BBVA has historically actively used credit risk-sharing to capitalise its SME lending activities and is now expanding its use of the tool to its project finance loan book.

Angélique Pieterse, senior director at PGGM, says: “The longer-dated profile of loans to infrastructural, social and energy-related projects fits well with the long-term, buy-and-hold approach of our mandate. Next to that, the transaction reflects both our and our end-investor PFZW’s ambition to contribute to the Sustainable Development Goals. One of the ways to do that is by teaming up with banks that have high-quality origination capabilities and providing them with capacity to grow the lending to projects that help fight climate change.”

PGGM believes that project finance risk offers diversification versus corporate credit risk-based investments, as well as opportunities to contribute to the real economy and climate-focused investment. Recognising that project finance loan books are not as diversified as corporate loans books, PGGM seeks to participate in well-structured transactions with a robust risk-return profile, meaning that the performance should not be fully driven by one or two single defaults.

Tony Persson, Alecta’s head of fixed income and strategy, concludes: “We look forward to further growing our portfolio and see plenty of scope in getting exposure to many different loan books, from SME lending to project finance, and thereby providing additional capacity to lend to the real economy.”

Corinne Smith

Capital Relief Trades

STACR prices

Innovative double M-tranche STACR 2022-DNA1 sets coupons

Freddie Mac has priced STACR 2022-DNA1, reported to be in the market last Friday (January 14), and is expected to settle the trade tomorrow (January 21).

The ground-breaking transaction includes two investment grade tranches - the M-1A and M-1B- rather than one investment grade M tranche. This is due to higher attachment and detachment points than the GSE CRT sector has seen before.

The $478m M1-A has launched at SOFR plus 100bp, the $318m M-1B at SOFR plus 185bp, the $239m M-2 at SOFR plus 250bp, the B-1 at SOFR plus 340bp and the B-2 at SOFR plus 710bp.

Lead managers are Nomura and Morgan Stanley, while co-leads are Amherst, Barclays, Bank of America and StoneX.

There will be bumper volume in the GSE STACR and CAS markets this year. Freddie Mac is expected to sell $25bn compared to $19bn in 2021.

Simon Boughey

Real Estate

Mortgage marvel

Sharp 2021 drop in foreclosure/delinquency - serious delinquency still elevated

At the end of 2021, mortgage foreclosures had hit an all-time record low while the delinquency rate was only 0.10% higher than the historic low of 3.28% hit in February 2020 - just before the pandemic hit - according to data released this morning by Black Knight.

This constitutes a dramatic turnaround from the early days of Covid 19. The delinquency rate, now 3.38%, has been reduced by 45% over the last 12 months and the number of mortgage-holders who are now 30 days overdue but not in foreclosure has dropped below 1.8m for the first time since before March 2020.

Loan in serious delinquency (those 90 or more days overdue) fell another 80,000 in December to below 1m to 946,000.

However, there are still more than twice as many excess serious delinquencies (borrowers who owe more than $500,000) than before the pandemic.

“After the turmoil of the last 22 months, it is certainly good – and somewhat remarkable – that delinquency rates have fallen to a point just 0.1% higher than before the pandemic’s onset. That said, there is still meaningful risk in the market, with nearly two and a half times as many serious delinquencies as there were pre-pandemic and forbearance protections ending. It’s critical to keep a close eye on mortgage performance and foreclosure metrics as we move forward in 2022, particularly in the early part of the year,” Black Knight chief economist Andy Walden told SCI today.

The total number of properties in the US that are 30 or more days past due or in foreclosure is 1.92m, 1.5m lower than December 2020.

Strikingly, foreclosures remain very limited. Only 0.24% of all loans are in active foreclosure, which represents another all-time low, while the 4,100 foreclosure starts recorded in December are 90% below the level seen two years earlier.

But, as a large number of borrowers exited forbearance plans in the last few months, the foreclosure rate may be subject to upward pressure.

The top (that is to say worst) five states for the percentage of properties that are more than 90 days’ delinquent are Louisiana, Mississippi, Oklahoma, Alabama and Arkansas. Louisiana has a serious delinquency rate of 3.84%, but this is almost 40% lower than a year ago.

Prepayment rates fell sharply in December by more than 7%, and this trend is very likely to gather pace given falling stocks and rising rates.

Simon Boughey

RMBS

Primary primary

European ABS/MBS market update

Focus remained on the primary market in European ABS/MBS this week. Another swathe of new issues on offer meant secondary had to again take a back seat.

Five deals priced on the week. All were RMBS and all met with healthy investor demand ensuring support for continued tight levels throughout the stack.

Yesterday saw two deals print – Elstree Funding No.2 and Twin Bridges 2022-1. Both UK RMBS came in with some improvement on initial talk and class As pricing at SONIA plus 72bp and 77bp, respectively.  More surprisingly is the former pricing inside the latter given its pool included second lien paper as opposed to 100% BTL prime, though that could be influenced by Elstree’s considerably smaller size.

The three deals that priced today – Finance Ireland RMBS No. 4, Silverstone 2022-1 and Stratton BTL Mortgage Funding 2022-1 – all benefitted from the heightened current market environment. Finance Ireland’s prime deal gapped in from class A IPTs of high-40s to print with a three-month Euribor plus 40bp DM; and Stratton went from high-70s to a coupon of SONIA plus 73bp.

Silverstone’s dual currency offering exhibited the same pattern at varying levels – again in some part due to their size as the offered triple-As were finally sized at US$250m and £500m. Initially talked at 45-50 and LM30s, they printed at SOFR+38 and SONIA+29 having been 5.7x and 2.1x oversubscribed.  

Meanwhile, secondary did have an uptick in BWIC volume on the previous week, albeit with a significant proportion of line items trading early, but remained generally quiet. Nevertheless, despite some macro volatility, tone there was still strong notably in investment grade mezz.

Looking ahead, secondary could begin to get more of a look in with only two bonds in the immediate primary pipeline. Irish CMBS Pembroke Property Finance 2 and UK non-conforming RMBS Polaris 2022-1 are slated for next week, although another BTL deal, Canada Square Funding 6, is also on the horizon.

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

Mark Pelham

ABS

Same as ever?

Davis+Gilbert partner Joseph Cioffi reflects on the performance of the US subprime auto sector in 2021 and expectations for 2022

The pandemic has been a surprising boon to the subprime auto ABS market, due to supply issues that have raised collateral values and a potent mix of government support and private actions that have bridged consumers through financial distress. The pandemic’s persistence is now calling into question how long favourable conditions may continue and what normalisation will look like. If asked to predict 2022, even Nostradamus would have to shrug.

Nevertheless, the New Year is the time to reflect on 2021 performance and share expectations for the future. In June of 2021, the Davis+Gilbert Credit Chronometer annual subprime auto market study revealed industry participants were at once optimistic and keenly aware of shifting ground. In advance of the next market study to be conducted in summer 2022, below is a look at the 2021 study’s results versus actual performance and initial expectations for 2022.

Loan performance
When asked about loan performance, 73% of participants in the 2021 market survey expected some deterioration. This held true in reality in 2021, but only modestly, as there was a gradual shift back to normality.

Credit extensions worked as the first line of defense through 2020. Borrowers rolled off of them through 2021. The end of extensions and government stimulus later in the year resulted in a gradual creep up in delinquencies.

According to data provided by DBRS Morningstar, subprime 60-plus day delinquencies peaked initially at 2.78% in January 2021, declining to a low of 1.49% in April before reaching a new peak of 3.46% in October. Despite the rise, year-over-year, delinquencies remain below pre-pandemic levels. ABS losses have been mitigated by soaring vehicle values, but this has the contrasting negative affect of increasing consumers’ financial burden and the risk of default.

In 2022, supply chain woes won’t be resolved overnight, so “they may continue to benefit deals through the better part of the year,” advises Clayton Triick, senior portfolio manager at Angel Oak Capital Advisors. Triick also notes areas to watch are “inflation, high purchase costs, larger loans and a winter wave of new Covid cases, which could mean a rocky start to 2022 before things settle down.”

Credit ratings
Our 2021 survey saw participants less concerned about ratings downgrades than the previous year, but still nearly 70% of participants expected downgrades to occur. The major fear at the time was delinquencies, but these concerns have yet to be realised and downgrades have not occurred to the extent anticipated.

According to Ines Beato, svp at DBRS Morningstar, DBRS upgraded or confirmed all but six subordinated classes during the pandemic. Initially, DBRS placed six subordinated classes from six ABS transactions “under review with negative implications” in July 2020, due to potentially insufficient credit enhancement to support the ratings. Since then, the rating agency has upgraded or confirmed the ratings and removed the ‘under review’ as the transactions deleveraged with pool amortisation over time and credit enhancements increased. 

In 2022, key factors for ratings will be continued strength in performance and collateral values. Here’s where the end of supply shortages can have an uncertain effect. If prices begin to slip, higher LTVs on outstanding loans could pinch borrowers’ ability to trade, making loan payments an even higher priority or - if borrowers are upside down on vehicles bought at the height of the market - they may move on to less expensive vehicles (with less equity in the trade, creating risks on new loans).  

Credit enhancements
In 2021, 74% of survey participants expected credit enhancements to increase to support desired ratings. In reality, the vision of higher enhancements generally didn’t materialize, given strong performance and collateral values.

DBRS Morningstar reported that for auto loan ABS rated through the pandemic “[c]redit enhancement increased on most auto ABS deals to cover higher loss assumptions on the securitised pools….[But] as performance has stabilised and expectations of higher risks have tapered, loss assumptions and credit enhancement levels have adjusted back to lower levels.”

For 2022, as Triick notes, “the normalisation of collateral values is inevitable and it’s just a matter of when in 2022, which will impact potential recoveries.”

Credit quality and credit extensions
In our 2021 survey, credit quality was not cited as a significant concern, likely due to the prevalence and success of credit extensions. 86% of servicers surveyed expected to grant the same or more extensions over the next 12-24 months. Extensions have played a significant role in the market’s positive performance.

Data shows that extensions which spiked during the early pandemic in April and May 2020 have returned to below pre-pandemic levels now. DBRS notes that the 2020 vintage has performed better than the 2018 and 2019 vintages, with its tighter underwriting and the benefit of additional cash thanks to government support.

Prudent use of extensions has been an effective tool to address these short-term (or even extended) periods of consumer financial strife. But excessive use of extensions or servicers who are outliers in their use of extensions will be scrutinised. Sean Morgan, svp of finance at Westlake Financial notes: “As the market normalises, extensions simply revert back to an important tool to assist borrowers with micro life events, as opposed to global macro events.”

Regulatory risk
67% of survey participants in our 2021 survey viewed regulatory uncertainty as a major concern.

In 2021, there was some action by the CFPB in auto lending, including civil penalties against Santander for violating the Fair Credit Reporting Act. CFPB studies related to disparities in interest rates suggest it is keeping an eye on the market, but enforcement may have been slowed by director Rohit Chopra’s delayed ascension, as well as the positive performance of auto loans.    

Perhaps most significantly for 2022, the CFPB has made effective new debt collection rules under the Fair Debt Collection Act, under Regulation F. The rules focus on communications and disclosures permitted and not for debt collection.

Collectors will need to tread carefully with this new regulatory landscape. “Regulation F could be a positive catalyst for some servicers to rethink their collection strategies and approach to oversight of third-party collectors to reduce the risk of running afoul of laws and improve the borrower’s experience,” suggests Morgan. “It will also advance the debt collection market to more technology-based collection practices.”

Conclusion
Predicting the trajectory of market factors becomes more difficult as the market moves further through the pandemic, given the accumulative effect of events already transpired and the potential for unexpected shocks in the system. The pandemic has created new market forces and realities, but success will still depend on the fundamentals of performance and collateral values – the same as it ever was.

Nicole Serratore, an attorney at Davis+Gilbert LLP, contributed to this article.

CLOs

How will the CLO market fare in 2022?

Vibrant Capital Partners shares how it expects CLOs to perform in 2022

Once a niche, widely misunderstood asset class, CLOs have proven resilient across credit cycles, transforming into a core allocation for institutional investors. Today, the global CLO market is over US$1trn in size and includes participation from pension plans, insurance companies, and other mostly institutional investors who have reaped the rewards of CLOs’ solid performance. In sum, the tailwinds are strong, and the narrative is positive.

We expect 2022, however, to be differentiating. On a macro level, market fundamentals and technicals are positive, and we anticipate corporate loan defaults to be benign. Importantly, there are risks that call for careful monitoring, including inflation, rate hikes, and Covid-19 variants. Furthermore, we expect asset class specific themes within the CLO asset class to also emerge, and CLO investors that successfully navigate these themes will come out on top.

The most critical question that remains unanswered concerns the timing of the existing US$1.2trn senior secured loan market’s transition to SOFR. We anticipate Q1 to be a period of adjustment, with existing CLOs to begin transitioning to SOFR in Q2 and Q3 of 2022. Although the path forward is still uncertain, we believe many market participants are inadequately prepared in regards to technology, operations, and hedging – all of which can create short term volatility and opportunities to capitalise on mispricings across the CLO capital stack.

Although the market’s current implementation has been rudimentary, we believe it will continue to evolve. In 2021, we saw a significant push, mainly from large CLO debt investors, towards inclusion of ESG guidance in CLO documentation across the US and Europe. CLO managers have also started to adopt comprehensive ESG policies that are being incorporated into their investment processes. That said, CLO transactions marketed with an ESG label were not materially different from a "non-ESG CLO" issued by the same CLO manager. We do not expect to see a material difference in collateral composition or pricing until we see a healthy degree of enforceability and accountability for non-compliance in ESG. However, in 2022, we do anticipate a subset of CLOs to begin incorporating true ESG metrics. Vibrant Capital opened one of the few CLO warehouses with a third-party manager incorporating a proprietary ESG scoring system.

CLOs are actively managed and manager selection is a crucial component of CLO investing. While good credit underwriting is a foundational requirement, different managers and management styles have performed well during different periods. For example, in 2019, a key determinant of manager performance was the ability to avoid the “idiosyncratic single-name" risk. In 2020, manager performance was driven by exposure to COVID-impacted sectors going into the year and trading decisions made during the year.  Despite there being less dispersion in manager performance in 2021 than in the prior years as evidenced by a number of performance metrics including par build and change in average spread, we think that will change in 2022. “Spread compression” is a key risk facing CLO managers in the year ahead, and it will be crucial to align with managers that can navigate it without incrementally adding risk.

While we remain optimistic in the growing opportunity set within the CLO asset class, in 2022, we expect CLO markets to face multiple new themes that could cause near term volatility. As a result, the "long beta" strategy that worked in 2021 may not be as fruitful this year. Accordingly, we have gradually shifted our investment focus to ongoing organic creation of CLOs through opening long-term non-mark-to-market CLO warehouses combined with sourcing secondary opportunities driven by structural inefficiencies and market volatility. We believe that seasoned investors who have invested across market cycles and can evolve their investment strategy as needed will fare well as they invest in CLOs in the year ahead.

Structured Finance

SME mission

Alain Godard, EIF chief executive, discusses Europe's post-Covid recovery and makes the case for STS securitisations

Q: What are the ways in which the EIF utilises securitisation to further its mission?
A: Central to the EIF’s mandate is, of course, our support to SMEs across Europe. There are naturally many ways or various instruments to achieve that, including securitisation.

By facilitating the execution of securitisation transactions, we provide guarantees to banks and financial institutions, allowing them to diversify their funding sources and to achieve economic and regulatory capital relief through credit risk transfer. Our role when we actually do get engaged with our counterparties through securitisation transactions is to ensure that this additional liquidity or capital and/or provisions that are generated are utilised to provide additional lending towards the real economy and more specifically EU SMEs.

Q: How do you see the SME securitisation/synthetic securitisation market developing going forward - especially in view of Europe’s post-Covid recovery?
A: As a general observation, we are currently experiencing economic growth across Europe. Of course, there are different results from one country to another, yet it is a substantial phenomenon.

Uncertainties at the macro level are not negligible and private investors need to provide certain levels of yield to their clients, so the conversations between banks (protection buyers) and investors (protection sellers) are hampered by the difference in demand/supply expectations. Within this macroeconomic context, SME lending progressively encompasses other avenues apart from the banking industry, such as peer-to-peer, direct lending via credit funds, etc. We also observe an increasing focus towards long-term structured loans or products (although of course this can be specific to certain sectors).

Synthetic securitisations were central to our mandate to support the SME sector last year, stimulating lending across Europe. However, regulations remain punitive for this market - and clearly one of the reasons why this market never came back to its pre-financial crisis form. 

Q: Synthetic securitisations are being included in the scope of the European Guarantee Fund. What prompted the move? What has take-up been like?
A: We actively pushed for synthetic securitisation to be included in the European Guarantee Fund. The move has truly been welcomed and well-received, particularly from banks who wish to work with us and - despite some initial reservations, due to a number of rather restrictive parameters enveloping the execution of these transactions - we do remain optimistic that we can generate sufficient demand to deploy the funds allocated for the securitisation activities.

We act as a protection seller and provide a financial intermediary with protection in the form of a guarantee on a specific risk tranche for a portfolio of existing assets. Essentially, we help increase those ratings from a sub-investment grade to an investment grade.

The EIF has a critical mission to play in this space and it is something we will continue to pursue. EIF has used quite extensively, even before the previous financial crisis, securitisation transactions which have proven to be an effective tool to increase access to finance for SMEs, by creating additional lending capacity for financial institutions through alleviating their capital and risk constraints and we intend to continue doing so.

Q: Does the EIF intend to participate in STS securitisations?
A: We sincerely hope new regulations will help revive this market - one we are already active on - and we entirely support the framework. We are also very keen to encourage the growth of STS securitisations as a way of broadening the acceptance and growing the visibility and benefits of this product. The STS framework is a great initiative, well developed by the policymakers, and provides a big incentive for the protection buyers in the form of a lower risk weight on the senior tranche which is typically retained by the originating institution.

Furthermore, the idea in this market segment is to always attach and channel clear public policy objectives. In the case of the Nordea transaction (SCI 16 September 2021), for example, we generate financial support to relevant SMEs in Finland, Sweden and Denmark, in the context of sustainable development. [The initiative is backed by the EU’s Investment Plan for Europe. Nordea has committed to reach net-zero emissions by 2050 and reduce CO2 emissions from its lending portfolio by 40%-50% by 2030]. 

Q: How do you view the European securitisation market moving forward?
A: I will not go as far as to say that the sector has been placed on a ventilator; however, it clearly lacks a certain momentum and growth. I feel that increased transparency, but also a clear perspective of impact will benefit it.

Many factors will come into play, but we will use securitisation more and more for what I view as thematic impacts - may it be ESG, digital transformation or [something] else. Here at the EIF, we operate within this framework and not only as a countercyclical investor with a mandate to enhance access to finance for SMEs.

Vincent Nadeau

CLOs

Continued commitments

Derek Dubois, md and treasurer at Deerpath Capital Management, answers SCI's questions

Q: How does Deerpath differentiate itself from its competitors in the lower middle market?
A: Deerpath Capital has been around for a number of years. It was founded in 2007 and we’ve always been focused on lower middle market US secured debt as our investment strategy. The lower middle market offers a nice dynamic for investors; it’s a little less competitive than the broader middle market - and especially the broadly syndicated loan market - while still being able to generate nice returns for our investors, as there is still a yield premium for lower middle market investments.

How managers define lower middle markets these days has changed. It was once considered a ‘bad word’ to be a lower middle market lender, but now you’re seeing traditional middle market lenders classify themselves as a lower middle market lender.

This is due to the protections we are still getting in our loan investments, including covenant protection on our loans. We are still getting a nice yield premium, and we have a lot more visibility into the underlying borrowers where we have a lot more direct access to the sponsors, as well as to the management teams of the borrowers that we lend to.

The traditional middle market has gotten more commoditised in recent years. While the BSL market today is virtually entirely covenant-lite, the middle market - while not to the same extent as the broadly syndicated loan market - has certainly let this trend creep in alongside the weakening of credit protections in loan documentation. We intentionally focus our attention on the lower middle market (US$50m-$100m enterprise value) as we think above that size, that’s the area were things have gotten more commoditised due to the intense competition in the market. 

Our track record really speaks for itself. Today, we have over US$3bn in AUM. As of our fourth quarter, we have only one realised loss in our history, and I think it’s due to our focus on credit and lending to high quality businesses that makes the difference for us.

Q: The US middle market CLO sector has had a record year in terms of issuance. In your view, what were the drivers behind this?
A: I think the biggest driver to the middle market CLO space is the demand for yield. This sector still provides a yield premium compared to the broadly syndicated loan market - that’s somewhere between 40bp and 50bp across a stack, but on the triple-As it could be 110bp compared to 150bp-160bp. I think that was why there was a shift in demand towards the middle market, because in this environment with very low yields you are getting a bit of a yield premium.

As well, there was a validation from Covid which proved that while, yes, there is an illiquidity of the middle market loans since you can’t just sell the loans as you can in the syndicated loan market, but the yield premium more than makes up for it. It is a stable asset class – when you look at how the CLOs perform through the cycle, it is very strong.

I think they even held up a little stronger than the BSL market if you look at the tests for the CLOs in the middle market space. The BSL market had a whipsaw of downgrades on loans, but there really wasn’t as much pressure for middle market managers because it’s not as actively traded, so you didn’t see the whipsaw that Covid caused in March 2020.

So, I think it was a validation for the CLO space. People search for yield in this asset class, but it has proven to be strong and stable through several credit cycles, and is time tested that the market structures work as they are intended to.

Q: What are your expectations for the middle market CLO sector this year? Is the market likely to continue growing at a similar pace?
A: I think Q1 this year is going to be slow simply because people will be feeling out the market - particularly the middle market - because of the SOFR transition. I don’t think there’s any concern on the underlying loans or the transitioning to SOFR, but there’s going to be a little bit of a lag – which we are already seeing.

Now the question is: will this ease off once a couple of prints are completed? Personally, I think there could be a little bit of slowdown just at the beginning of the year, but I don’t expect any kind of drop-off from the magnitude we saw last year.

This is provided that the credit markets stay where they are at and continue to churn at the same rate. However, it is clear that there is still investor demand for CLO paper, and there are plenty of deals out there in the loan market to put into CLOs.

Q: Which challenges and opportunities do you currently see in the US middle market CLO space?
A: For challenges, as well as the SOFR transition, I think Omicron is causing some heartburn for the markets in general. It appears that everyone is aware that the uncertainty we are facing with the general health environment won’t be going away anytime soon - although I think that it’s a matter of what variants hit next, and how it trickles through the world.

It could cause some challenges, but I think that it has been proven that we are able to keep churning as an economy. Particularly in the US, there’s been a balance of managing the health crisis and figuring out how to keep the economy going, and I think we are all working towards that point now. So, it is a challenge for the market, but a minor one.

In terms of opportunities, I think it’s more of the same. The market has shown that it’s robust over the last year or so, and to me the opportunity that exists is for investors to take advantage of a yield premium for middle market paper compared to BSL paper.

I think the opportunity is that the CLO market in general has a nice yield premium compared to other investment grade products for investors, and it’s proven to work, and it’s proven to be stable. So, I think it’s starting to attract the demand from other investment bases that perhaps in the past weren’t there in part because of the low yield environment. Additionally, there will be some rate increases throughout the year, where it’s floating rate product, and that should be attractive to investors too.

Q: You just announced your fourth CLO since 2018. What are your expectations for Deerpath CLO issuance in 2022?
A: Our intention is to be an annual, programmatic CLO issuer. Last year was the first time we completed two CLOs in a single calendar year, and we would love to be able to complete one or even two again this year.

I think it’s important for us, as a manager and as a direct originator, to continually access this market - whether that’s one, two or even three times this year. As well, as of right now, I think the capital markets are open and the private equity market is definitely moving at a rapid pace, especially towards the end of last year.

Right now, there is a bit of pause, as I think everyone is catching their breath from the end of 2021. But I would expect by mid-late January, things will start moving again across the market.

Q: There is currently a lot of focus on ESG across the BSL CLO market. Do ESG considerations have a role to play in middle market CLOs?
A: I do – I think we are starting to see this question get asked more and more by investors. Fortunately, Deerpath has been on top of ESG.

We became a signatory to the United Nations Principles for Responsible Investment in 2017 and complete the UNPRI Reporting and Assessment review annually. By joining this group and putting policies and procedures in place to make sure we are following our ESG policy, ensures we have protections for our ESG investors. It’s very clear to me that it’s becoming a hot point, whether it’s in the context of middle market CLOs or private equity, and so certainly my investor relations team has been working on that since 2016 to make sure we are staying on top of the latest trends in the market.

Claudia Lewis

New leadership

Sector developments and company hires

Crestbridge has appointed Martin Lambert as its new head of UK operations following the retirement of former boss Paul Windsor. Lambert will join the firm with more than 30 years of experience in the field, having most recently served as partner at Grant Thornton. Based in London, Lambert will work as part of the senior leadership team to continue its efforts to provide quality services at the alternative private equity and real estate administration solutions firm.

In other news…

Global

Ocorian has announced two new senior hires to its capital markets team in bid to extend the company’s offering, worldwide. The first new hire joining the financial services group is Juliette Challenger, who will serve as the firm’s global head of transaction management. Based in London, Challenger will be responsible for client relations and work on capital markets service line strategy and joins the firm from Global Loan Agency Services (GLAS). Challenger will be joined by the firm’s second new hire, Martin Reed, who will also be joining from GLAS to serve as Ocorian’s head of capital markets in the Americas. With over 25-years of industry experience, Reed will be responsible for expanding the business and its offering in the US.

North America

Greater use of CRT is to be encouraged and will mitigate the GSE’s expansion of the credit box, said FHFA nominee director Sandra Thompson at her Senate confirmation hearings on January 13.

She was responding to concern expressed by Senator Pat Toomey, (Rep- Pa), the ranking Republican on the Senate Banking Committee, that the FHFA is urging the GSEs to court increased risk to US taxpayers.

UniCredit unveils ARTS

Sector developments and company hires

UniCredit, in cooperation with the EIB Group, has finalised a new synthetic securitisation under its Asset Risk Transfer Sharing (ARTS) programme. The transaction references a circa €2bn portfolio of Italian SME and mid-cap loans, with the EIF guaranteeing the mezzanine tranche, which is counter-guaranteed by the EIB. The capital freed up by the operation will be used to deploy €720m of new loans to support new projects carried out by Italian SMEs.

The agreement is supported by the European Fund for Strategic Investments (EFSI) and forms part of the broader framework of cooperation established by UniCredit and the EIB to support SMEs in Italy. Over the last six years, UniCredit's EIB resources for businesses in Italy have amounted to more than €4bn, with nearly 6,000 projects financed to date.

UniCredit Bank acted as arranger on the deal.

In other news..

North America 

Invesco Mortgage Capital has appointed Don Liu to its board of directors. Liu, who works as executive vp, chief legal and risk officer, and corporate secretary of Target corporation, will serve on the board from mid-February. Additionally, Liu will join the audit, compensation, nomination, and corporate governance committees of the board. With several years of legal and leadership experience across an array of sectors at firms including Xerox, Toll Brothers, Ikon and Aetna in the US, Liu will join the real estate’s investment trust’s board with extensive experience as the firm demonstrates its commitment to diversity.

Junior tranche guaranteed

Sector developments and company hires

Junior tranche guaranteed

The EIB Group and Banco BPM have joined forces to support the working capital requirements and investments of Italian SMEs hit by the Covid economic crisis. In the first operation of this type in Italy, the EIB and the EIF will provide a guarantee of €91m on a junior tranche of a synthetic securitisation that references a portfolio of SME loans originated by Banco BPM.

The operation covers the first loss of a synthetic securitisation structure via the European Guarantee Fund (EGF), an integral part of the €540bn package of measures approved by the EU in 2020 specifically dedicated to countering economic difficulties caused by the pandemic. The agreement will enable the Italian bank to provide finance and liquidity to SMEs via subsidised loans totaling around €1bn.

The transaction marks the third synthetic securitisation operation between the EIB Group and Banco BPM that references Italian SMEs and mid-caps, the first of which was signed in June 2019 (SCI 28 June 2019) and the second in December 2020 (SCI 22 January 2021).

In other news…….

North America

Dimitry Stambler has joined ING as director, head of insurance sector coverage in New York. Stambler was previously executive director at Natixis, responsible for structuring life ILS transactions and other insurance solutions. Before that, he worked at Citi, Towers Watson, Bank of America, Ambac, Guy Carpenter, Swiss Re, Hartford Insurance Group and Aetna.

King and Spalding has recruited a new structured finance partner, David Ridenour, who will join the firm’s corporate, finance, and investments practice group in Washington, D.C. Ridenour joins from DLA Piper, where he most recently served as partner, and in his new role will support the growth of the firm’s complex securitisation and structured lending business.

MidOcean Partners has announced the hire of former Goldman Sachs executive, Jamil Nathoo, to lead on the expansion of its institutional relationships and CLO platform as md of its credit business. Joining the alternative asset manager from Goldman Sachs, where he served as head of CLO and ABS syndicate, Nathoo will be based at the firm’s New York office and report directly to MidOcean Credit cio, Dana Carey.

Värde Partners has announced the promotion of three members of its senior investment team to the position of partners at the global alternative investment firm.

The promotions include the head of the firm’s commercial estate lending platform based in Minneapolis, Jim Dunbar, who has been at the firm since 2010. The second promotion is of Aneek Mamik, who has been with Värde since 2016 and currently serves as its global co-head of financial services based in New York. The final partner-promotion is of Carlos Sanz Esteve, leader of Värde’s European corporate and traded credit strategy, who has been with the firm since 2011 and is based in London.

Community-focused RMBS prepped

Sector developments and company hires

Community-focused RMBS prepped

Change Lending is in the market with its inaugural RMBS – the US$297.26m CHNGE Mortgage Trust 2022-1. Change is certified by the US Treasury as a Community Development Financial Institution (CDFI). As such, the firm is required to lend at least 60% of its production to certain target markets, including low-income borrowers or other underserved communities.

The transaction is backed by a portfolio of 530 fixed- and adjustable-rate expanded prime first-lien residential mortgage loans. The loans were underwritten through Change's Community Mortgage (accounting for 92.6% of the pool) and E-Z Prime (7.4%) programmes, both of which are considered to be weaker than other origination programmes because income documentation verification is not required. However, DBRS Morningstar notes that the mortgages were extended to generally creditworthy borrowers with near-prime credit scores, low loan-to-value ratios and robust reserves.

Under US risk retention rules, CDFI loans fall within the definition of community-focused residential mortgages. A securitisation containing only community-focused residential mortgages is exempt under the risk retention rules and, accordingly, the sponsor will not be required to retain any credit risk - albeit Change has elected to retain the deal’s class B3, AIOS and XS certificates.

Asia

Structured finance lawyer James Pedley has joined trade finance platform Olea as chief legal officer, based in Hong Kong. He was previously a partner at Simmons & Simmons and before that worked at Clifford Chance.

EMEA

Structured finance lawyer Daniel Peart has joined Matheson as a partner, based in Dublin. Peart was previously general counsel at Queensgate Investments, which he joined in February 2021. Prior to that, he worked at Blackstone, RBS, Cadwalader, Linklaters and A&L Goodbody.

Global

Trimont Real Estate Advisors has promoted Dean Harris to executive md and head of EMEA, replacing Bill Sexton, who has been promoted to ceo and is relocating to Atlanta, Georgia. Harris was previously md - credit and asset management at Trimont, having joined the firm from Situs in 2019. He will also serve on the global management committee and senior leadership group.

Trimont has also appointed Nick Maher as head of credit administration in EMEA and Michael Delaney as head of credit and asset management in EMEA, both reporting to Harris. The pair, who have been with Trimont since 2020 and 2019 respectively, will also join the global senior leadership group.