Contents

RMBS

Mind the gap

Alternative data, RMBS to help address wealth inequality

Securitisation could prove a useful tool in addressing the growing wealth inequality gap. Indeed, the technology is already channelling capital towards underserved communities, aided by CDFI-backed RMBS and alternative data being used to calculate credit scores.

Elen Callahan, head of research at the Structured Finance Association, believes that the use of alternative data to assess consumer credit scores could help those who currently “can’t even get up to bat.” She explains: “By expanding the universe of data that is looked at, then you’re able to include more people in that universe.”

Expanding the use of alternative data to compute consumer credit scores could provide the opportunity for an estimated 53 million underserved people to access credit in the US. The use of alternative data has been trialled by FICO, which piloted the calculation of credit scores across individuals’ cashflow accounts, with other similar schemes being trialled using non-traditional data types at Experian, TransUnion and Equifax.

“You have a credit worthy individual, who knows how to manage money, who knows how to manage credit in a way that is different than how managing credit is traditionally defined, and that person is a credit worthy individual,” Callahan observes.

She suggests that recent progress in terms of widening the types of data assessed when calculating credit scores is in line with recent technological advances. “I think it’s technology finally catching up with these concepts that we have been thinking about for years. It’s the ability to capture that data and analyse it in an intelligent way.”

She continues: “Big data was great – but then what do you do with all of this data? You have to be able to analyse it and create bite-sized, digestible pieces for analysis that you can plug into your models – and I think technology has finally gotten there.”

Alternative data is not new to the market and has a history of more than 20 years, with an approximated 30% of subprime auto ABS pools not having a FICO score at all. In these instances, alternative data - including utility payment and account closures, home rental data, car insurance claims, as well as savings and checking account activity - were used to score lenders.

Callahan notes that, on the homeownership side, there have been failures in selecting quantifiable and predictive types of data to assess before – including personal internet browsing histories. “There have been pitfalls in the past about the type of data to look at, but we’re fine-tuning that,” she explains.

She believes an important consideration is to seek data that has a more predictive quality of information. “Transparency from the credit reporting agencies will be a big factor in how the market gets comfortable with non-traditional data sources.”

Several organisations, including FICO and VantageScore, have released credit scores that are calculated using alternative data scores. On the impact such trials have on the market, Callahan understands that “they’re all actively educating the market on these alternative data sources.”

At the same time, Community Development Financial Institutions (CDFIs) are playing a major role in pushing the market towards bridging the wealth gap in the US. Earlier this year, the Change Company became the first lender to close an RMBS transaction backed entirely by CDFI loans (SCI 21 January).

Founder of The Change Company, Steven Sugarman, notes that “the number one way that people create wealth is through home ownership.” Across the US, Sugarman explains, the racial home ownership gap has also been widening over the last century. “Being able to get credit-worthy borrowers access to a home loan and help them become homeowners is central to addressing the racial equity gap.”

Increasing homeownership is commonly understood to be one of the best tools in combatting wealth inequality, and CDFIs were set up in the US to support that mission. A reported 84% of CDFI customers were identified as being low-income in 2019, with 60% of these customers people of colour, 50% women and 28% living in rural areas.

“Unfortunately, there are highly prescriptive documentation requirements and other regulatory requirements that are unrelated to credit that prevent a lot of people from getting a home loan and CDFIs are uniquely well positioned to provide that group of people the home loan they deserve,” explains Sugarman. “About a trillion dollars’ worth of creditworthy prime borrowers are currently shut out of the financial system, and the more that CDFIs can engage and work with institutional players and the securitisation market, the bigger the impact CDFIs can make in our bringing of equity to home ownership.”

A recent SFA white paper on wealth inequality identifies CDFI securitisations as an important mode of addressing wealth inequality, by channelling private capital towards disadvantaged and underserved communities.

Sugarman agrees: “Securitisation is an important way that institutional investors, asset managers and insurance companies are able to finance high quality lending. With the securitisation market, CDFIs can really scale their businesses and deploy capital to creditworthy borrowers.”

Indeed, Callahan views securitisation as a multiplier tool. “The securitisation market can bring private capital directly into the hands of the lending entities that are working in underserved communities and that are the most knowledgeable about the communities that they are helping.”

The Change Company recently completed a second securitisation backed entirely by CDFI loans. Regarding the transaction, Sugarman states: “I believe we are making progress, but there still remains a pricing gap between bank securitisations and CDFI securitisations of residential mortgages.”

He continues: “Without the securitisation market, CDFIs would have to rely solely on their own balance sheet, and they wouldn’t be able to address the needs of their borrowers like bank borrowers are able to have their needs addressed. It both lowers the cost of capital and also dramatically expands the impact and scalability of lending of CDFIs.”

Callahan anticipates an increased focus on CDFIs going forward, in line with rising investor interest in ESG. “There’s a focus now on supporting underserved communities. Securitisation’s multiplier effect could be a part of the solution, but I don’t think it should be looked at as the only solution,” she states.

She continues: “The players participating in the existing loan aggregator model right now are continuing to look at CDFIs - institutions that directly address communities that haven’t been served by traditional credit.”

Across the US, there are currently 1,298 Treasury-certified CDFIs, the vast majority of which are too small to tap the securitisation market alone. “The loan aggregator model of securitisation is much more suited for CDFIs, which are small institutions, than the stand-alone securitisation model. This model also helps the market better understand the performance of CDFI loans, which is an important step in measuring credit risk,” says Callahan.

She adds: “Once we can quantify this risk, issuers will have a better idea of how to protect investors’ interest through structure, investors can better understand the risk they are taking and the market can price the bonds appropriately.”

Both Callahan and Sugarman agree that at present, it is all about attracting interest in the sector. “Securitisation and CDFIs just makes sense: CDFIs want to diversify their funding source away from public money, while investors are looking for investments that can make an impact. This is one way the securitisation industry can help make a social impact. It’s kind of a call to action for my industry,” comments Callahan.

Sugarman adds: “I believe that institutional investors have the capital and the desire to find creditworthy social bond and ESG investments, and while it takes a little longer to build the market, I think that once comfort is built, you’ll find the depth of the market is incredible.”

While investors and issuers are increasingly interested in the potential of the ‘social’ element of ESG (SCI 15 February), the paucity of quantitative data remains an issue. Callahan argues that to truly measure social impact, quality quantitative metrics need to be defined.

Nevertheless, progress appears to be being made in this direction. “The fact that we’ve identified qualitative metrics today is progress. The fact that we’re asking the right questions makes me think that the quantitative metric is forthcoming,” she states.

“Our view has been that you start with CDFI loans that are as similar as possible to the borrowers who are just prime banked borrowers, and over time we can expand to take on challenges like the inequities and the credit scores. As you get into alternative scoring and AI, it becomes really much more important to make sure there’s equity in your process, but it also creates additional diligence challenges to get through a securitisation,” states Sugarman.

He anticipates that his firm will grow to become a serial issuer as a CDFI and hopes other CDFIs will take its lead, and allow for the market to become increasingly familiar with CDFI securitisations.

Callahan does not believe that lending to creditworthy borrowers who have thus far been unable to access credit warrants greater concern regarding potential risks. “For some borrowers, once they’re onboarded onto the process, in three years’ time they are actually performing at a prime or even super prime level. So, for these borrowers, it was just a matter of bringing them into the process. The more that we are able to include these creditworthy borrowers and provide them with access to credit, we provide them with the same steppingstones to wealth that people who use traditional credit sources have had access to,” she concludes.

Claudia Lewis

Structured Finance

Dual shocks

Securitisation well positioned to withstand headwinds

The Covid-19 shock has been replaced by two others - war and worse-than-expected inflation (SCI 7 April). However, the securitisation market appears to be well positioned to withstand these headwinds.

“We came into the year coming out of one shock – pandemic - only to be hit by two others: worse-than-expected inflation and now war. Those new shocks are having the effect of worsening economic headwinds we already saw in place; namely, slowing growth and challenging supply chains. Moreover, war introduces significant disruption and uncertainty on top of it all,” observes Van Hesser, chief strategist at KBRA.

Nevertheless, the invasion of Ukraine has not frozen the securitisation markets and banks remain open for business. Vivek-Anand Dattani, global head of structured sales at Trepp, observes: “We are seeing CMBS and CLO deals coming into the market, but at a slower pace. Lenders are asking for higher loan spreads than two months ago, which is reflecting higher volatility.”

He notes that although a few deals have been delayed, nothing has been pulled from the CMBS market and the strong origination pipeline continues. At the same time, while buyers are demonstrating some signs of caution, trading has been orderly.

Commercial real estate was one of the most affected sectors during the pandemic, mainly due to the closure of physical spaces, particularly hospitality and retail (SCI passim). However, DBRS Morningstar anticipates the Russian invasion of Ukraine to have no direct negative impact on the CMBS recovery process post-pandemic and expects the shift towards e-commerce to continue to drive the need for warehouse spaces.

Regarding CLOs, some players have argued that new issues should be structured with reinvestment terms similar to those seen during the pandemic, thereby providing CLO managers with greater flexibility to act. The growth in both CLO and CMBS markets over the past decade is seen as a plus in terms of the ability of the asset classes to ride through more challenging environments. 

Meanwhile, DBRS Morningstar suggests that non-performing loan stocks in the main European jurisdictions are likely to grow for years ahead, due to the aftermath of the pandemic and the war. As such, banks will be required to accelerate their deleveraging strategies, thereby providing support to NPL portfolio sales and securitisations. The performance of NPL securitisations will continue to be mixed, driven by market- and transaction-specific factors.

With rising inflation, central banks in developed markets had started tightening monetary policy, but the Russia-Ukraine conflict has exacerbated inflation concerns for consumers amid increasing energy prices and the potential shortage of certain goods. However, so far, the message from central banks is that the invasion of Ukraine will not derail their plans to tighten monetary policy and elevated headline inflation figures should start to revert back towards target inflation figures.

Overall, 2022 is being viewed as a year of transition, from stimulus-fueled extraordinary growth to a more normal glidepath economically. But while solid economic growth is still expected, the direction of travel could weigh on investor sentiment. 

Hesser concludes: “The effects of the new shocks, inflation and war will keep line-of-sight limited, which will keep volatility high. Fasten your seatbelt, as this is likely to be a bumpy ride.”

Angela Sharda

ABS

Stag night

US ABS in good place to absorb impact of raging inflation

Even if the US economy were to plummet into stagflation, the ABS market will suffer only minor negative ratings consequences, according to analysis conducted by Fitch.

There would be virtually no effect on ratings in 67 out of the 78 sub-sectors reviewed, it says.

The bulk of ABS deals were well-positioned at the start of this year in terms of the strength of the collateral. Asset performance was much better than expected throughout the pandemic, and the market has a cushion to absorb any deterioration in collateral as a result of raging inflation.

Indeed, upgrades outnumbered downgrades by a factor of 10 to one in the first two months of the year.

Another factor to bear in mind is that US unemployment is predicted to be in the region of only 1% over the course of this year, which is not big enough to cause asset deterioration and delinquency.

Ratings analysts thus believe the market is strong enough to withstand face headwinds.

The only sector likely to suffer unduly negative consequences is aircraft ABS, and here the major negative factor is the war in the Ukraine rather than inflation.

“Aircraft ABS is the only place we see direct exposure in structured finance globally and here the issue is not really stagflation but that some of the assets are in Ukraine and Russia,” says one of the authors of the report.

The SME CLO sector could also underperform. Small to medium borrowers are more exposed to high inflation as they are unable to pass on higher costs to consumers due to the competitive nature of the markets in which they operate and their relative weakness of position.

However, SME borrowers are generally lower leveraged and can also cut back on capex expenditure to help them ride out the storm.

The US ABS market in general is in a stronger position than EMEA. Inflation was biting hard in many European countries before the Ukraine war, and many countries in the region are heavily dependent on Russian energy supplies. Any interruption of this will have calamitous consequences on Germany, for example.

EMEA CLOs could be especially hard hit as borrowers seek to refinance. Fitch notes that the pressures will become acute from 2H23 onwards when “significant refinancing” will be required.

Fitch factored in a number of variables into its stagflation scenario. It assumed US inflation would jump to 10% and remain elevated throughout 2022. Prices will be pushed higher by a combination of factors. For example, sanctions on Russia could disconnect its energy supplies from the world market, helping to push oil to $150 a barrel. The Fed could initiate a more aggressive tightening policy than currently anticipated, leading to a Fed Funds rate of 3% before yearend.

Higher prices would depreciate equity prices by 10%-15%, and borrowing costs for BB-rated issuers would rise by at least 100bp. Finally, the US and European economies would enter a new period of low growth with rising unemployment.

This scenario is considerably more adverse than currently assumed by most economists. It remains, however, perfectly plausible.

Simon Boughey

Structured Finance

SCI Start the Week - 4 April

A review of SCI's latest content

Last week's news and analysis
Call option pending?
APAC SRT could be called this year
Cautious optimism
European ABS/MBS market update
Guarantee on tap
WBS liquidity facility replaced
How can I manage a thriving CLO platform?
Dana Carey, cio, MidOcean Credit Partners, explains
Keeping score
ESG CLO challenges highlighted
Positive outlook persists
Recession remains unlikely
Quality control
Call for ESG data improvements
Robotic revolution
QSR innovation continues to bolster WBS performance

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

NPL awards
The submissions period has opened for SCI’s inaugural NPL Securitisation Awards, covering the European non-performing loan securitisation market. The qualifying period is the 12 months to 31 March 2022.
Nominations should be received by 3 May. Winners will be announced at SCI’s NPL Securitisation Seminar, in Milan on 27 June.
Click here for more information on the award categories and pitching process.

SCI CLO Markets
CLO Markets provides 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
MDB CRT challenges - March 2022
A number of challenges continue to constrain multilateral development bank capital relief trade issuance. This Premium Content article investigates whether these obstacles can be overcome.
The rise of the ESG advisor - March 2022
ESG advisors are gaining traction in the securitisation market, as sustainability becomes an ever-more import consideration for investors and issuers. This Premium Content article investigates what the role entails.
CLO Control Equity - March 2022
CLO equity is back in vogue and is attracting attention for all the right reasons. As this Premium Content article suggests, for suitably prepared investors, taking a majority position can increase the benefits still further.
Stablecoin and securitisation - February 2022
Appropriate regulation of digital payment could pave the way for the issuance of securitisations in stablecoins. However, this Premium Content article argues that further standardisation across the blockchain ecosystem is needed for the technology to reach a critical mass.
US auto CLNs - February 2022
Santander’s recent auto CRT echoed those previously issued by JPMorgan Chase. This Premium Content article examines the similarities and differences between the transactions.

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

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

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

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

Capital Relief Trades

ESG SRT launched

Santander and IFC finalize landmark SRT

Santander and the International Finance Corporation (IFC) have finalized a US$120m mezzanine guarantee that references a US$730m portfolio of Polish consumer loans. Dubbed Frida, the trade is the first significant risk transfer transaction in emerging markets with a climate risk mitigation objective.

According to Nikolay Potseluev, investment officer at the IFC’s Financial Institutions Group (FIG), ‘’what sets this synthetic securitisation apart is the specification of proceeds earmarked for different types of lending and it’s in line with our development mandate.’’

Indeed, the released capital will enable Santander to provide US$600m of new green lending including renewable energy and energy and water efficiency.

The transaction features a pro-rata amortization structure with triggers to sequential amortization and a replenishment period. Credit enhancement is present only in the form of a retained first loss tranche.

One crucial attribute of such transactions are the data capabilities that track how the released capital is redeployed over time.

Potseluev explains: ‘’We established a system for doing this back in 2017 for a green bond issued between Santander Bank Polska and the IFC. It’s a proprietary tool that we use to track greenhouse gas emissions and it’s widely used by our clients in Europe while being in line with the green bond framework. The gist of it involves an aggregation of data including region, borrower name and GHG savings that can be monitored periodically.’’

However, there are still challenges in building these data capabilities such as an insufficient deal pipeline and lack of trading. Nevertheless, ‘’external consultants can help with chunkier exposures and there’s a wealth of public data you can tap into’’ says Potseluev.

One question is whether future Green SRTs from the IFC can involve private investors as well. A handful of so called risk-sharing deals have been executed between EU banks on the one hand and the European Investment Fund and private investors on the other, but issuance has remained stagnant given the EIF’s disclosure requirements among other factors (SCI 6 August 2021).

Rebecca Xie, senior investment officer at the IFC’s FIG group notes: ‘’As a triple-A investor we don’t have to set up an SPV for cash collateral since the bank usually does this with private investors. However, we can envision a counter guarantee to private investors. Another option is for private investors to directly face the bank as a junior or junior mezz investor. Any participation with private investors would involve adhering to our standard due diligence requirements.’’

Looking forward Xie concludes: ‘’Higher issuance of SRTs in emerging markets can be best secured via the participation of the emerging market subsidiaries of large global banks like Santander.’’

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round up-8 April

CRT sector developments and deal news

Credit Suisse is believed to be readying a significant risk transfer transaction from the Elvetia programme that is backed by Swiss corporate and SME loans. The last Elvetia deal was finalized in May 2021 and referenced Swiss residential mortgages (see SCI’s capital relief trades database).

Stelios Papadopoulos 

Capital Relief Trades

New CAS, spreads wider

Q2 GSE CRT issuance gets going after bumper Q1

Fannie Mae this week printed a $1.1bn CAS REMIC deal, its fourth CAS offering of 2022.

Issuance by the GSEs, briefly halted by the Russo/Ukrainian war, now appears back on track but yields remain elevated.

The trade, designated CAS 2022 R04, consists of four tranches. The $415m M-1 tranche, rated A-/A-, was priced to yield SOFR plus 200bp, the $346m M-2, rated BBB-/BBB came in at SOFR plus 310bp, the $190m B-1, rated BB-/BB, yields SOFR plus 525bp and the $190m unrated B-2 tranche yields SOFR plus 950bp.

Yields seen in the CRT market this year have been the widest for several years, partly as a result of geopolitical turmoil but also due to the heavy volume of supply with more expected.

To give an idea of the significant widening, CAS 2021 R0-1 in October last year- Fannie’s first deal back in the market after its self-imposed 18 month purdah - came in at plus 75bp, plus 155bp, plus 310bp and plus 600bp across the four equivalent tranches.

Meanwhile, STACR 2021 DNA5, sold three months before that, yielded plus 65bp, plus 165bp, plus 310bp and plus 550bp across the four equivalent tranches.

This week’s deal references a pool of 118,000 single family loans with an unpaid balance of $36bn.

The joint leads were Nomura and Citi, with Amherst Pierpoint, Barclays and StoneX serving as co-managers.

Fannie Mae and Freddie Mac issued $3.1bn in new CRT debt in March, which was offset by $868m of principal repayments. The net monthly supply of $2.2bn was the most the market has seen since February 2015.

Total principal outstanding rose by 4.49% in March, which was also the biggest net monthly increase in seven years.

There were some notable highlights in Q1 as well. Total supply of $9.08bn made it the biggest quarter on record, comfortably beating the $6.8bn priced in Q1 2021.

Freddie sold $5.09bn in STACR notes in Q1 and Fannie sold $3.99bn in CAS notes. Neither agency has ever done more in a single quarter. The STACR $1.82bn 2022 HQA-1 was also the biggest high LTV CRT note ever sold.

Meanwhile, STACR 2014 HQ3 last month became the first GSE CRT deal to have all its issued classes pay off.

The CRTx Aggregate, the flagship index of Mark Fontanilla & Co., registered a 1.04% loss in March, making it the second consecutive negative month.

Simon Boughey

CMBS

Maturing prospects

Self-storage loans show highest refi rate

The 10-year Treasury rate closed the month at 2.33%, following the rate hike in mid-March. With the US Fed indicating that six more rate hikes are likely this year, KBRA analysed the refinancing prospects of US CMBS conduit loans that mature through 2023 and found that approximately 60% can successfully refinance with a first mortgage without the need for additional financing. The analysis utilises a loan refinancing test, in which various capitalisation rates were applied to property net cashflow (NCF) in order to assess a loan’s ability to refinance using a number of LTV hurdles.

KBRA identified 2,426 non-defeased loans with a current payment status that are maturing in 2022 (774) and 2023 (1,652), and that have preceding full-year 2021 net operating income (NOI) or annualised 2021 NOI. Loan collateral totaled US$40.7bn, of which US$14.9bn matures in 2022 and US$25.8bn in 2023.

The rating agency points out that many of the maturing loans should have benefited from a period of fairly strong price appreciation, when comparing the 2012 and 2013 vintages (10-year loans account for about 90% of this population) to December 2021 prices. These two vintages across major property types show that multifamily recorded the largest percentage of defeased loans (at 35.8%), followed by industrial (32.4%), office (20.8%), retail (12.8%) and lodging (8.2%).

Further, since 2012 and 2013, the RCA Commercial Property Price Index is up 117% and 97% respectively. The two major property types with the least price increase are retail - which showed about one-half of the price increase (60% and 43%) - and lodging, by about two-thirds overall (83% and 64%).

In KBRA’s base case, the weighted average capitalisation rate and LTV were 6.6% and 64.7% respectively. Based on these metrics, 57.8% of the loans by balance were able to refinance.

The base case capitalisation and LTV rates were then adjusted to study whether the loans could be refinanced under various scenarios. Capitalisation rate scenario adjustments ranged from -100bp to 150bp from the base case, while LTVs ranged from -5% to 20%. NCF was assumed to be constant.

By property type, retail (38.8%) and office (25.3%) account for the majority of the 2022 and 2023 maturing loans. In the base case, retail achieved a refinance rate of 51.7%, compared to office at 66.7%.

Of the 971 retail loans, 50 malls are scheduled for refinancing. Of the 50, nine were able to refinance in the base case (or 10.7% by principal balance).

In terms of office properties, those with leases well beyond the term of the loan as well as newer projects would be more attractive for refinancing, according to KBRA.

Lodging held the third largest percentage of maturing loans, at 13.5%, and had the lowest refinance rate, at 27.7%. However, the low refinance rate is expected, as lodging properties were severely impacted by Covid and many had been operating at historically low occupancy and room rates.

Of the remaining five major property types, multifamily (7.3%) and industrial (2.4%) both showed strong refinancing rates, at 80.1% and 92.1%. The highest base-case refinance rate belongs to self-storage (2.5%), at 100%.

Corinne Smith

RMBS

Going Dutch

Unprecedented RMBS issuance from the Netherlands

A new Dutch prime RMBS issuer has hit the market, following a slow-down in issuance across the segment in recent years (SCI 26 January 2021). The Athora Group is debuting Prinsen Mortgage Finance 1, as the Dutch RMBS market experiences unprecedented levels of activity this week (see SCI’s Euro ABS/MBS Deal Tracker).

The deal’s seller and risk retention holder is Athora Holding via two funds: the German Athora Lux Invest - Duration Fund and the Belgian Athora Lux – Duration Fund AB. The original lender is CMIS Group’s non-bank mortgage lender, Fenerantis, which originates mortgages under the Merius label.

The €662.4m pool comprises 2,647 prime non-NHG residential owner-occupied mortgage loans extended to residents located within the Netherlands, with an average loan balance of €250,228, as of 31 December 2021. The portfolio has a weighted average seasoning of 1.5 years, a WA OLTOMV of 63.5% and a WA CLTIMV of 51.1%.

No loans are subject to a Covid-19 payment holiday and the pool has a strong credit profile, including no arrears or losses, according to DBRS Morningstar. A total 72.3% of the balance is accounted for by refinancings, resulting in a relatively high interest-only share of 67%.

The offered 3.89-year class A, 4.73-year class B and 4.73-year class C notes account for 96.75%, 1.75% and 1.5% of the capital structure respectively. The class A notes are expected to be offered at a cash price above par, with a coupon of three-month Euribor plus 65bp. Unusually, the excess spread and residual notes are being marketed on a ‘call desk’ basis.

DBRS Morningstar and Fitch have assigned preliminary ratings of AAA/AAA, AA/AA+ and A/A+ to the class A to C notes. The transaction is structured to be compliant with STS, LCR and CRR criteria.

BNP Paribas and Natixis are co-arrangers and joint lead managers on the deal. Pricing is expected next week.

The deal is accompanied by two other Dutch RMBS transactions in the pipeline, including Domivest’s buy-to-let RMBS Domi 2022-1 and Obvion’s prime RMBS Green STORM 2022. RNHB’s BTL RMBS Dutch Property Finance 2022-1 printed yesterday, having been upsized to €450m.

Claudia Lewis

Structured Finance

Covid-19: The effects on the securitisation sector

TJ Durkin, head of structured credit at Angelo Gordon explores the immediate and longer-term effects of the pandemic on securitisation markets

Since the Global Financial Crisis (GFC), structured credit markets have often been described as “resilient” given conservative underwriting and collateral fundamentals over that period. Household leverage has considerably declined, and debt-service sits near historic lows – in stark contrast to corporations which sharply re-levered post-GFC. Resiliency paid-off well in the wake of the pandemic as the initial rapid decline in asset values was largely technical. However, unlike the GFC, these markets did not “break,” and, on the contrary, issuance volumes have now reached post-GFC heights. Nevertheless, the pandemic has unquestionably impacted the securitisation sector in several ways, some of which may be long-lasting.

In March 2020, significant outflows from daily liquidity fixed-income funds created a “run on the bank” effect, putting selling pressure on higher-quality securities before the stress eventually worked its way down the capital structure. This forced selling quickly overwhelmed the structured markets and resulted in a liquidity vacuum, coinciding with the near total shutdown of the economy. A coordinated effort between government and the private sector stabilised households with multiple forms of stimulus. Armed with excess cash, and, in many cases, the flexibility to choose which debts to service, households took advantage of payment deferment options in mortgages and other debts. As local economies reopened, collateral fundamentals were further supported.

The resilience of structured credit during this crisis was rooted not only in these accommodations, but also the strong underwriting in the prior decade, which established the foundation for resilient underlying asset values and limited losses. National home prices soared as household demand for single-family homes organically grew while supply was constrained due to limited existing listings, foreclosure moratoriums and a general shortage of labor and material. Autos have had similar supply issues also leading to record high prices. These factors have limited actual losses in bonds backed by those assets and have created positive momentum in structured credit products and securitisation markets more broadly.

Market participants were quick to realise these dynamics, and spreads quickly tightened from wide levels seen at the onset of the pandemic. For example, AAA- and BBB-rated subprime auto ABS were widest in the early weeks of the pandemic nearly 10x and over 7x of their year-end 2019 levels, respectively. However, by the end of July 2020, the AAA tranches had largely recovered, and by the end of January 2021, spreads had fully retraced to their pre-pandemic levels.

Yet, while this fundamental performance has been well-received by market participants, we believe it is unlikely to persist as the impact of stimulus fades. Rather, we expect delinquencies and other credit metrics to gradually return to pre-pandemic levels, ultimately settling near levels seen in early 2020.

These events have also altered the approach required to accurately underwrite securitised credit versus pre-pandemic practices. For example, pandemic-impacted borrowers who utilised available payment accommodations generally did so without impact to their credit because of reporting requirements set in the CARES Act. Where applicable, this “credit score inflation” creates an inaccurate depiction of a borrower’s overall credit risk, necessitating other factors to supplement the weaker predictability of credit scores. Similarly, underwriting must consider the impact of excess household savings on record low delinquency rates and the path of normalisation as savings draw down. Accordingly, we expect performance degradation to vary among issuers, ultimately widening issuer tiers within sectors and creating an interesting environment for active trading and asset selection.

We note that securitisation structures continued to change over the course of the pandemic but generally attribute that more to the natural pace of innovation rather than a direct response to the pandemic, and we expect structures to continue to evolve to meet the balance of issuer and investor needs.

At Angelo Gordon, we believe structured credit provides diversified exposure to a large array of non-corporate asset classes that are well-positioned to benefit from resilient fundamentals. Further, credit risks for many collateral types may be positively impacted by wage and asset price inflation, housing being a good example. We expect the resiliency which was in full force during the height of the pandemic to persist and support investor demand, particularly in the context of the headwinds facing equity and corporate credit markets.  We believe careful asset selection and trading capabilities for structured credit will be critical and that managers who implement these practices be well-rewarded.

Structured Finance

WhiteStar acquires Carlson Capital's CLO business

Sector developments and company hires

WhiteStar Asset Management has announced its acquisition of five reinvesting CLOs of more than US$2bn managed by Carlson CLO Advisers. WhiteStar will take on all collateral management duties of the Cathedral Lake branded CLOs, effective from 31 March 2022. WhiteStar and Carlson were represented in the transaction by Milbank and Mayer Brown, respectively. The acquisition follows WhiteStar’s recent expansion, acquiring more CLOs at the end of 2021, as the firm works to develop its credit business and enter new markets. With the US$2bn Carlson CLOs, WhiteStar will bring its total CLO assets under management to an estimated US$12bn across 27 CLO vehicles, multiple hedge funds, and other account offerings.

In other news…

North America

Angelo Gordon has recruited Neuberger Berman’s former head of product strategy and marketing, Alan Isenberg, to lead the business in its global client and product functions. As head of Angelo Gordon’s Client Partnership Group, he will work on client coverage and services, new business development, as well as product development and management. Isenberg will report to Angelo Gordon co-ceo, Josh Baumgarten, and succeeds Garrett Walls, the firm’s former global head of investor relations, who will continue on as a senior advisor at the firm until his planned retirement at the end of the year. Isenberg follows several other recent additions to the US$51bn alternative investment firm’s team, including chief strategy officer Scott Soussa, and new head of ESG, Allison Binns, as it works to develop its strategic initiatives across the business.

Jeana Curro has joined Bank of America as md, head of agency MBS research, based in New York. Curro was previously a director and portfolio manager within BlackRock’s financial markets advisory team. Prior to that, she worked at Deutsche Bank, RBS and UBS as an agency MBS strategist.

Structured Finance

Nuveen closes CLO issuance fund

Sector developments and company hires

Nuveen has announced the close of its inaugural CLO equity fund with over US$375m in committed capital. The Nuveen CLO Issuance Fund was supported by global public and private pension plans, family offices, as well as insurance companies, and will provide the opportunity to invest alongside Nuveen’s parent company, TIAA. The firm hopes the fund will offer exposure to the controlling equity interests of its several newly issued CLOs, CLO warehouses, and holdings in legacy Nuveen CLO debt and equity tranches – by way of a private placement, commingled fund structure.

In other news…

EMEA

Pemberton has appointed Thomas Doyle to lead its new NAV financing strategy. The announcement follows Pemberton’s recent launch of its new risk sharing and CLO strategies, as the firm works to broaden its offering to both borrowers and investors. Doyle will be responsible for the new strategy, as it works to offer investors more exposure to a new, and rapidly expanding area of the market. He joins from 17Capital where he served as partner and member of its investment team with over 25 years of industry experience in offering innovative investment opportunities to investors.

North America

CoreVest Finance has named Michael Peerson cio, based in Charlotte, North Carolina. He was previously a director and non-agency RMBS trader at Wells Fargo, having joined the firm as a DCM analyst in June 2007.

SitusAMC continues to bring innovative technology to its business as it announces the launch of its new Warehouse Administration Services platform to help support existing operations. The new turnkey approach is designed to support both new and existing mortgage and warehouse lenders by removing the pressures of establishing, managing, and scaling new warehouse facilities, by redirecting responsibilities to the firm’s team of experts. The firm hopes the warehouse administration services will help not only to reduce costs, but also enhance efficiency as the move builds upon SitusAMC’s ambitions to be a technology leader in the warehouse financing market. At present, the firm supports more than US$2trn in warehouse funds, equal to 70% of the warehouse market, with its ProMerit and WLS warehouse lending technologies. SitusAMC’s Warehouse Administration Services hopes to increase profitability by reducing lenders’ costs by up to 30%, and will be supported by its existing team of expert professionals.

Vida Capital has announced the hire of new senior md and head of structured credit, Peter Polanskyj. With experience across both structured credit and insurance, the firm hopes Polanskyj will be able to enhance the portfolio company’s offerings. Polanskyj will report to president and ceo, Blair Wallace, and will work alongside the team to develop new strategies for new and existing investors. With more than US$3.9bn in assets under management, Vida Capital stands as one of the largest vertically integrated platforms within the life settlements space. He joins the Redbird Capital Partners and Reverence Capital Partners subsidiary, Vida Capital, from Sculptor Capital Management, where he served as md and head of US CLO management.

Structured Finance

Lakemore Partners appoints independent board member

Sector developments and company hires

Lakemore has appointed Howard Tiffen as an independent member on its board of directors. With more than four decades of experience in credit, product, and portfolio management, Tiffen brings extraordinary knowledge in high yield capital markets to the firm. Tiffen has held senior credit management positions at numerous firms, including Continental Bank, Bank of America, and Van Kempen (now Invesco). Lakemore hopes Tiffen will offer exclusive insight to its business, and be able to support its business management operations as the firm seeks to continue expanding its business worldwide

In other news..

Intercontinental Exchange (ICE) has announced the launch of a new package of ESG data coverage on over 1.5 million MBS. With the new data, the firm hopes to further enhance ESG considerations across RMBS and CMBS, as it grows the ICE total fixed income coverage to more than 3 million instruments, and accounting for roughly 95% of all outstanding real estate loan volume in the US. The firm’s ESG data covers granular, geospatially linked data for RMBS, CMBS, as well as credit risk transfer and agency pools. ICE’s ESG metrics have already been incorporated into the investment decisions and risk management processes of several investors, as it enables them to compare assets across portfolios and more wisely choose securities in line with their investment strategies.