News Analysis
ABS
Perfect storm
Cat bond market set for exponential growth?
With the climate threat menacing ever more, is the catastrophe bond market set to see exponential growth? This Premium Content article investigates.
This year, the catastrophe bond sector reached a landmark anniversary, marking 25 years since its inception. This follows record levels of issuance in 2021, with the market seeing volumes of US$12.5bn, surpassing the previous record of US$11bn set in 2020. With currently over US$30bn of bonds outstanding and given the current political and scientific contexts around the climate threat, the sector could be set for exponential growth.
The notion of securitising catastrophe risks became prominent in the aftermath of Hurricane Andrew in 1992, initially as a niche form of risk transfer from insurers to investors. Cat bonds are fixed income instruments, typically structured as 144A floating-rate, principal-at-risk notes. On one side of the trade are insurers and on the other sit investors, willing to take on catastrophe-linked risks with their own capital, in return for regular interest payments.
Over the years, the growth of the asset class has consistently pointed to an increasing willingness to assume risk in the ILS market. Peter Nowell, global head of financial solutions at SCOR, notes that there have been three main reasons behind the success of the sector.
He explains: “The first is flexibility, as we’ve had a wide spectrum of very small and very large issues (US$1.5bn being the largest). The second has been to convince investors to support the current trend of indemnity structures (with issuers typically including a risk analysis from an expert third-party modelling firm). And the third being its de-correlation from mainstream assets.”
An integral appeal of cat bonds from an investment perspective is their potential to deliver returns that are fundamentally uncorrelated to traditional financial markets. As such, the sector has not experienced the compression of spreads seen with corporate credits.
Peter DiFiore, md at at Neuberger Berman, says: “I think that cat bonds are a genuinely and fundamentally uncorrelated and diversifying asset class. There is very little outside of natural events that can lead to default.”
He continues: “Cat bonds have a history of attractive returns. Clearly, the main determinant of cat bond performance over time has been and will be insurance events, whereas credit and equity performance is more tightly linked to broader economic and financial cycles.”
The current macroeconomic and political contexts support this thesis. The combination of a war in Europe, a global sell-off in certain areas of the equity market, declining equity valuations, rising inflationary pressure and interest rate fears points to the sector’s characteristic strength.
Additionally, there is an active secondary market in cat bonds. On average, according to a Neuberger Berman report (following data from TRACE and Tullet Prebon), around US$4bn of securities are traded each year - translating to an average of US$15m per day - with lot sizes of US$250,000 to US$10m.
DiFiore views such a feature as yet another strength for the sector: “Cat bonds are liquid and tradable and thus potentially more liquid versus other segments of the ILS market. They are also incredibly specific in what is being covered and provide excellent relative value for investors versus other risk assets - or other diversifying strategies (i.e. hedge funds) whose performance has been less impressive.”
Unsurprisingly, climate change and its association with natural catastrophes is central to the outlook of the asset class. In fact, given the established prominence of the climate threat, it could be argued that the sector - although having just reached the 25-year milestone - is not, in fact, living through its early years.
Such considerations have brought in recent years new participants to the market. Beneficiaries have included Google’s holding company parent, Alphabet, seeking cover for its corporate real estate assets in California, and the state of Jamaica - helped by the World Bank - becoming the first Caribbean nation to step into this sector. The World Bank, which entered the market in 2017, has been able - through cat bonds - to provide financial capacity in developing economies in response to extreme events (SCI 25 April 2019).
However, in merging climate risks with the capital markets, are investors fundamentally wagering, rather gloomily, against the environment? Furthermore, what would be the impact of a devastating year for natural catastrophes on the asset class as whole?
“Climate change is clearly an investor’s concern, one which the industry needs to handle in a learned manner,” states Luca Albertini, ceo of Leadenhall Capital Partners. “However, the fact is that we have already spent so much time and resources modelling climate change in pricing, portfolio construction and risk management. There is a clear understanding of the nature of the risk being underwritten.”
Paul Schultz, ceo at Aon Securities, also highlights the sector’s adaptability: “What suits cat bonds, and which is also true of the ILS market as a whole, is that it tends to be more innovative and faster-moving than other asset classes. However, the continuous challenge is the constant analysis of whether there is adequate return to the risk being assumed. There is persistent reassessment and recalibration of models.”
Also inherent to this market are ‘secondary perils’, which include floods, wildfires and tornadoes. They differ from high-profile catastrophes, such as hurricanes and earthquakes, which have tended to generate the biggest losses for the sector. Again, climate change might act as a catalyst as these secondary perils could become increasingly dangerous and prevalent.
“The sector has a long history pushing outside ‘normal’ exposures,” notes Schultz. “The ILS market can play a prominent role in tackling the impact of climate change, and the sophistication of the funds active in the market act as integral components for those looking to transfer risk. The diversity of issuers is being matched by the diversity in the risks being borne.”
With the feeling that the core thesis of the sector has been tested repeatedly, the overarching sentiment in the market is that cat bonds are expected to grow strongly as an asset class. Schultz identifies non-traditional sponsors as key drivers of growth for the sector: “I think the biggest opportunity will be the expansion of the types of counterparties transferring risk. We are seeing corporations, sovereign states, multinationals all learning about cat funds.”
This is a view shared by DiFiore: “We expect more sponsors to come to market. Following losses in the reinsurance market, rating agencies have revised many of their solvency calculations, which should translate into more issuance.”
He adds: “We have seen more innovation in catastrophe insurance over the last 10 years than in the past 100 years before that. There is a lot of catastrophe risk which is under-insured or not insured. It makes sense to transfer it to the larger capital markets.”
As the market grows, ESG considerations and factors are also expected to become one of the drivers of the ILS market, if not linked at the hip. Albertini notes: “I feel that that doing insurance-linked securities and neglecting ESG guidelines is simply not compatible. It is obvious that supporting cat bonds also means supporting ESG considerations.”
Asked if, all things considered, the sector is set for exponential growth, Nowell adopts a measured vision. “The ILS market’s growth is tightly linked to the underlying growth of the insurance market. The insurance market is still highly dependent and skewed towards North America and, as such, a large part of the world is still not well insured. In that sense, I do not expect exponential growth overnight.”
He concludes: “But it is a hardening market, with higher premiums, which in turn are more attractive for investors. We also need to think about what new risks can be put into a cat bond. Personally, I am very excited about the potential of life risks entering the market.”
Vincent Nadeau
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News Analysis
Capital Relief Trades
SRT hedge eyed
Index tranches mulled as synthetic ABS hedge
Investors have been concerned about negative convexity in credit markets as ultra-low spreads and inflationary pressures renders positive convexity in strategies necessary. Index tranches and particularly the equity pieces of these structures can offer a strong hedge in this respect. Yet investors are also now mulling the potential of index tranches as a hedge for synthetic securitisation transactions.
According to Eric de Sangues, head of macro credit at Fairwater Capital, ‘’index tranches offer good convex hedges against spread widening for synthetic securitisations”.
Index tranches are credit derivatives that give investors or protection sellers the opportunity to take on exposure to specific segments of the CDS index default loss distribution. Each tranche of these structures has a different sensitivity to credit risk correlations among entities in the index. The main benefit of index tranches is liquidity and consistency.
However, from Fairwater’s perspective, SRT investors should aim specifically for the equity and junior mezzanine pieces of index tranche structures when considering a hedge. The equity tranches are long in correlation since they benefit in MTM terms from a rise in the equity tranche correlation assumption. In other words, highly correlated portfolios have higher probabilities of extreme events. The latter means higher portfolio losses, but this doesn’t affect the equity investors of index tranches so much since they are only exposed up to the detachment point.
The MTM position of a delta-hedged trade is theoretically insensitive to small shifts in the index spread but the same is not true for larger aggregate spread movements. Delta describes the sensitivity of the position to changes in spreads. Overall, delta-hedged long equity tranche positions make MTM gains in the case of widespread shifts in the spreads of the underlying CDS names, regardless of whether these shifts signal credit improvement or deterioration.
However, index tranches can conceptually work as an SRT hedge if their usage is restricted to portfolios of large corporate loans rather than highly granular pools of autos, consumer and real estate assets.
Orlando Gemes, founding partner and cio at Fairwater explains: ‘’SRTs are a buy and hold product that most investors own until maturity. From a pricing perspective, different portfolios require various approaches. However, with large corporates, investors can map the portfolios to index tranches in a similar fashion to CSOs. Once you start doing it with granular portfolios there’s going to be a large basis.’’
Moreover, index tranches can also be utilized to hedge potential marked to market losses on leveraged SRT positions. Nevertheless, any pickup in their usage remains to be seen since most SRT investors are buy and hold and generally don’t hedge. The idea is to lock up capital for approximately five years and select an uncorrelated portfolio that complies with certain credit quality metrics. Furthermore, hedging SRTs via index tranches is expensive.
Fairwater’s work focuses on the liquid segments of the structured credit market including index tranches and credit indices, although the firm is an investor in significant risk transfer transactions as well. Fairwater uses data to look for market price information that will in turn enable it to spot relative value trades. The crux of the approach is to use liquid structured credit instruments and macro-level data to spot market dislocations.
Looking forward de Sangues concludes: ‘’When you have market volatility, the frequency of dislocations increases, so you must systematically look out for them. We developed data capabilities and a strategy that utilizes such an approach, and which puts us in a position to harvest volatility.’’
Stelios Papadopoulos
News Analysis
RMBS
Landmark ruling
HEAT decision "watershed" for RMBS litigation
The New York Court of Appeals last month issued a landmark ruling in a case involving US Bank National Association versus DLJ Mortgage Capital, relating to the Home Equity Asset Trust (HEAT) 2007-1 transaction. The precedent-setting decision has ramifications for dozens of other US RMBS repurchase cases pending in the lower courts by significantly limiting the legal exposure of sponsor/originator defendants. Additionally, the judgement impacts repurchase price calculations and therefore damages, by limiting accrued interest on liquidated loans.
In a 6-1 decision, New York’s highest court rebuffed US Bank’s efforts to recover damages for hundreds of purportedly defective loans it had failed to identify to DLJ in timely pre-lawsuit notices. The court held that loan-specific pre-suit notice was required under a contractual sole remedy provision.
“It is a watershed moment in RMBS,” notes one financial litigation lawyer. “The decision found that notices of breaches have to be made pre-suit and they have to be loan-specific. That latter part, in particular, is very important because RMBS litigation has historically allowed for sampling.”
Following that rationale, the court’s decision to require loan-by-loan notice will indubitably favour RMBS defendants. Contracts between RMBS sellers and the trustees that act on behalf of investors typically contain a 'sole remedy provision’, which specifies that any claim that a loan breached a representation or warranty must comply with a contractual notice period, within which defendants are provided a set time to cure the breach. If the trustee can prove a material breach claim for a given loan, the seller is then required to repurchase that loan at a specified price.
“Defendants now have arguments they didn’t necessarily have before,” states the lawyer. “That notice period is exactly what defendants bargained for - to be able to investigate. The court of appeals’ decision is a classic example of a case centred around does a contract means what is says.”
The impact of the decision was immediately apparent when the stock of Ambac Financial Group - which has its own batch of breach-of-contract cases pending, related to its insured RMBS transactions - suffered a 24% fall after the firm disclosed the potential effect on its repurchase claims. In a statement, Ambac notes that the HEAT decision may affect one of the bases upon which it seeks recovery with respect to a “significant portion” of breaching loans in its RMBS cases. Indeed, the firm expects the decision to result in a – potentially “material” - downward adjustment to its estimated subrogation recoveries, recorded as of 31 December 2021.
Nevertheless, Ambac believes potential alternative paths remain open to recovery for the breaching loans. "Surprisingly, there seemed to be some walking back after swift reaction in the industry. 10% of recoveries might be what it is in their case, but every case will be different,” the lawyer reports.
He adds: “Plaintiffs that relied on sampling or didn’t provide specific and timely notice with respect to significant loans are in a bind. Beyond Ambac, this decision is huge and represents hundreds of millions of dollars.”
Looking ahead, the lawyer points to the many reverberations the case may have. “This is the beginning of the end of legacy subprime RMBS litigation, unless certain investors have the fortitude to hang on. What you’ll see going forward is that it crystallises the positions of many parties.”
He concludes: “Cases will either be fully or partially dismissed - or we will see an acceleration to resolve things. The market is moving on and dominoes will start to fall.”
Vincent Nadeau
News Analysis
Asset-Backed Finance
Finding funding
European solar ABS tipped for acceleration
Securitisation could play a vital role in funding the European energy transition, with households likely to bear the brunt of the switch to renewable energy. As the Ukraine conflict continues to raise concerns over Russian energy dependency across Europe, the development of a solar ABS market in the region is expected to accelerate.
Following on from forced sustainable lifestyle shifts adopted during the pandemic, the impact of the ongoing crisis in Ukraine has once again reinvigorated Europe’s climate conversation. Regarding accelerating the energy transition in response to the Russia-Ukraine conflict, Gordon Kerr, head of European research at KBRA, states: “It’s a shake-up of the economics of the situation, and I do think it has the potential to wake people up.”
With the redirection of the conversation from climate financing towards energy security and independence as a result of the conflict, he considers it to be an important reminder along the course of the transition. “We can’t continue to rely upon certain regimes for our energy; we should really be looking at energy independence, and a large part of that should come from renewables – it’s sustainable, it’s feasible, and the economics of it should start to be more valid.”
A recent KBRA report identifies households and small businesses as key participants in reducing energy consumption, with inefficient homes and workplaces accounting for 40% of primary energy consumption and 36% of carbon emissions. In terms of bigger participants, Kerr suggests that “bigger players are almost the easier ones to do, because they can justify the cost via ongoing lower energy bills, or they can get involved with some government support which can specifically target a certain industry to get them over the transition.”
For households and small businesses, solar PV represents the most straightforward solution for generating energy. Solar PV has developed across Europe at varying rates, although remains the easiest mode of implementing renewable energy on-site.
However, the provision of funding for the initial cost for individuals switching over to renewable energy for their homes in the UK remains significantly underfunded. Across Europe, best practices for solar PV according to the European Commission include self-funding, crowdfunding, private equity, leasing, energy co-operative schemes, loans, bonds and project finance.
“There isn’t really a joined-up approach to providing the funding to cover the upfront cost for that energy saving in the future,” states Kerr. “For example, providing feed-in tariffs offers incentives for people to help justify the purchase of solar panels in the long term – but the solar panels still have to be paid for up-front.”
At present, green mortgages are available for customers in the UK with an EPC rating between A and B, who have already made and self-funded sustainable improvements to their homes. Schemes seen elsewhere, such as Ireland’s Micro-generation Support Scheme (MSS) - which allows individuals, businesses and communities to sell back excess renewable energy to the grid - are not available for customers in the UK.
“You need some sort of funding to help get people over that initial hurdle,” says Kerr. “And, as the case has been proven in the US, securitisation is an excellent vehicle for helping support that on an ongoing basis.”
Approximately 70%-80% of all solar PV comes with some form of financing in the US, while the use of securitisation in Europe for the funding of such green projects and initiatives continues to lag behind.
Currently, Germany generates the largest amount of solar PV, accounting for 35% of Europe’s total capacity. Solar PV in Germany has been supported by the state-owned KfW Development Bank.
“KfW offers a loan, but you have to go into your bank to get that loan – it just doesn’t seem to exist in the same way that it does in the US,” Kerr observes.
While the western European market still represents one of the largest areas of investment for renewable energy, representing 15% of total global investment for the sector in 2017-2018, the funding available for individuals and small businesses remains far ahead in the US markets.
The cost of rooftop solar panel installation currently stands at an approximate €10,000 in Europe. “Individuals are the last mile, and they are a big part of it,” comments Kerr. “And they are also the ones that are probably the most willing to do something.”
Alongside facilitating funding availability, securitisation also offers the opportunity to scale residential funding for capital markets. The European solar PV market is dominated by six countries, with 79% of all European installed solar PV being generated in Germany, Italy, the UK, France, Spain and the Netherlands. Going forward, these countries are expected to continue with this lead, accounting for 425,000MW of the expected total 570,000MW European solar PV capacity expansion by 2030.
Growth in European solar ABS has been anticipated for some time. However, recent urgency has redirected understanding of the primary challenge in the sector to be the finding of financing for the willing borrower, rather than understanding their credit quality (SCI 18 May 2021).
Other projects include EuroPACE in Spain (SCI 6 February 2018), which - although successful - are not able to be expanded across the EU or at the EU level, due to the challenges caused by differing tax regimes. However, despite regional disparities seen even within the pilot project in Spain, Kerr believes the PACE concept remains viable - although complex.
Spain presents significant potential for growth in solar ABS, following the success of the PACE scheme, as well as the nation’s projected increase of 735% in solar capacity between 2019 and 2030. The Netherlands and Italy similarly demonstrate potential; however, there is uncertainty regarding the potential of German solar ABS, given the substantial involvement of KfW in solar PV financing.
Beyond acquiring funding, issues facing the development and expansion of the use of solar PV in Europe relate to the regulatory limitations of the panels themselves and the extensive infrastructural changes increased demand would cause the grid, as well as recent supply chain issues facing the industry at present impacting pricing. While the primary challenge for now remains upfront costs, there is hope for swift policy changes in light of the conflict in Ukraine, which could encourage speeding-up of projects and the introduction of more government-backed incentives and funding opportunities.
Claudia Lewis
News
ABS
Hellenic ABS inked
Project Starlight package transaction agreed
Hellenic Bank has agreed a package transaction involving the securitisation of the Starlight Portfolio – which comprises circa €1.32bn of non-performing exposures - and the sale of its servicing platform, APS Debt Servicer, to Oxalis Holding. Upon completion, the agreement will de-risk the bank's balance sheet by reducing NPEs by €720m, resulting in a residual NPE portfolio of circa €653m - of which €433m are covered by the Cypriot Asset Protection Scheme (APS).
Under the terms of the transaction, the Starlight Portfolio will be transferred to a Cypriot Credit Acquiring Company (CyCAC), the shares of which will subsequently be sold to Oxalis. Oxalis will concurrently acquire 95% of the mezzanine and junior notes of the Starlight securitisation for a consideration of €86m, together with 33.3% of the senior notes at par. Hellenic Bank will retain 66.7% of the senior notes and 5% of each of the mezzanine and junior notes.
At the same time, Cypriot debt management and property management company Themis Portfolio Management will acquire 100% of the shares in APS Debt Servicer. Additionally, it has signed a 10-year exclusive servicing agreement for the management of Hellenic Bank’s residual NPE portfolio and any additional future defaults that might arise.
The transaction values the Starlight Portfolio at an implied price of €320m and the enterprise value of APS Debt Servicer at 100%. The servicing contract is valued at €37m, including a €5m earn-out linked to the achievement of certain targets.
The agreement will have an overall positive capital impact on Hellenic Bank’s CET 1 ratio of circa 15bp, taking into account the portfolio deconsolidation and the gain relating to the sale of APS Debt Servicer. The transaction is expected to close by end-2022, subject to regulatory and antitrust approvals and consents.
Hellenic Bank states that the transaction is at arm's length and is the result of a two-stage competitive process, which generated “significant investor interest”. Barclays acted as sole arranger of the securitisation.
Oxalis and Themis are both managed by PIMCO. It was also disclosed that an entity called Poppy, which owns 17.3% of Hellenic Bank's share capital, is owned by investment funds managed by PIMCO.
Corinne Smith
News
ABS
Dutch courage
European ABS/MBS market update
The European and UK ABS/MBS markets are looking to take full advantage of a recent surge in activity. This week, with a number of deals due to price, the market will try to maintain its strong momentum into the Easter break.
After feeling the full effects of macro volatility, the European and UK ABS/MBS markets have over the past couple of weeks taken advantage of what has been widely described as a window of opportunity. However, one European ABS/MBS trader disputes such a narrative: “I wouldn’t necessarily describe it as opportunistic. What we are seeing now is deals that were already in the pipeline back in February/March, therefore it is more a case of now is the first time that issuers can actually come to market.”
The current surge in supply is particularly notable in Dutch transactions (SCI 7 April 2022). Last week saw two deal’s print successfully – RNHB’s BTL RMBS Dutch Property Finance 2022-1, which was upsized to €450m; and Obvion’s energy efficient prime RMBS Green Storm 2022, which saw excellent investor demand driving its class As in from talk of three-month Euribor plus 25-28bp to land at 20bp DM.
Meanwhile, there are two more Dutch RMBS scheduled to price this week – Domi 2022-1 and Prinsen Mortgage Finance 1. For the former, IPTs for classes A to D are identical to those for Dutch Property Finance 2022-1, namely: three-month Euribor plus mid-80s, mid-100s, high-100s and mid-200s. Prinsen has also released IPTs for its widely offered top three tranches – mid-40s, mid-100s and high-100s.
“The Dutch market has been pretty hot on the property side in general,” notes the trader. “As such it is not surprising that on the back of a very strong property market we’re experiencing a lot of lending – particularly from the non-bank sector – which inevitably leads to more securitisation.”
Also expected this week in the RMBS space is the latest Irish legacy non-conforming deal – Mulcair Securities No.3. IPTs for the A-D notes were released at three-month Euribor plus 100-115, 200/low200s, low-300s and low-400s. Finally, Goldman Sachs will look to shortly price its latest CMBS transaction, Vita Scientia 2022-1, having released guidance at or around IPTs last Friday.
As for the secondary market, conditions are looking equally positive, with spreads edging in across the board last week. “The secondary market has felt busier, with clearly more investors active in this space,” reports the trader. “Naturally however, with Easter around the corner, things should slow down by the end of the week.”
Nevertheless, looking ahead the trader remains positive. “The market has felt very good for the past three weeks and hopefully this one will follow suit and send a strong signal,” he concludes. “The overall sentiment is definitely positive and we expect busy days ahead.”
For more on all of the above primary deals, see SCI’s Euro ABS/MBS Deal Tracker.
Vincent Nadeau
News
Structured Finance
SCI Start the Week - 11 April
A review of SCI's latest content
Last week's news and analysis
Covid-19: The effects on the securitisation sector
TJ Durkin, head of structured credit at Angelo Gordon explores the immediate and longer-term
Dual shocks
Securitisation well positioned to withstand headwinds
ESG SRT launched
Santander and IFC finalise landmark SRT
Going Dutch
Unprecedented RMBS issuance from the Netherlands
Maturing prospects
Self-storage loans show highest refi rate
Mind the gap
Alternative data, RMBS to help address wealth inequality
New CAS, spreads wider
Q2 GSE CRT issuance gets going after bumper Q1
Positive performance
INV RMBS gaining traction
Stag night
US ABS in good place to absorb impact of raging inflation
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
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The rise of the ESG advisor - March 2022
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CLO Control Equity - March 2022
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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
News
Capital Relief Trades
Large Algonquin
BMO prices first Algonquin SRT since 2020
Bank of Montreal has priced and settled Algonquin 2022-1, its first deal off this platform since January 2020, say sources close to the deal.
The five tranche SRT trade references a $7.5bn portfolio of mid-sized Canadian and US corporate loans, and as such it is the largest deal of this kind the borrower has ever sold.
The unrated E tranche, with a face value of $487.5m, has a 0%-6.5% thickness.
It was priced to yield SOFR plus 850bp, and the equivalent tranche of its January 2020 trade yielded Libor plus 850bp. Given the differential between Libor and SOFR, this latest deal has a slightly narrower yield to the investor than the one of over two years ago.
This is striking as many SRT borrowers have experienced appreciable yield widening in recent weeks due to geopolitical and economic uncertainties.
Alonquin 2022-1 has been sold to a small club of global buyers, add sources.
Bank of Montreal is also in the market with a new trade off its Boreal programme, according to market sources.
Simon Boughey
News
Capital Relief Trades
Risk transfer round up-11 April
CRT sector developments and deal news
Intesa Sanpaolo is believed to be readying a synthetic securitisation that is backed by residential mortgages. The Italian lender’s last synthetic RMBS was finalized in September 2021 (see SCI’s capital relief trades database).
Stelios Papadopoulos
Market Moves
Structured Finance
PCMA appoints new MD
Sector developments and company hires
PCMA welcomes Thien Nguyen to its senior leadership and investment team as the firm bolsters its expertise in super prime, private client credit. Nguyen will focus on establishing new and managing existing investment strategies and capital market solutions across secondary market trading, structured credit, syndication, and credit risk exposure across the firm’s enterprises. Nguyen joins PCMA as md for capital markets from Cerberus, where he led on the development of its fixed income mortgage investment and valuation platform as vp of RMBS and ABS investment.
In other news…
EMEA
Aegon Asset Management has named Frank Meijer global head of alternative fixed income and structured finance, based in Amsterdam. Meijer was previously European head of alternative and private fixed income at the firm, which he joined in October 2005 as a structured investments analyst. Before that, he worked in credit risk modelling at ABN AMRO.
North America
BTIG has announced a new hire as it works to expand its leveraged loan capabilities for both its corporate and institutional clients. Gil Tollinchi joins the firm’s credit team as md, with hopes his 20 years of experience can assist the firm in strengthening its product offering to clients. Tollinchi joins the BTIG fixed income credit unit, having served as a senior portfolio manager at Pretium Partners, and most recently working as an independent financial services consultant and investor.
Market Moves
Structured Finance
Amended risk retention RTS published
Sector developments and company hires
Amended risk retention RTS published
The EBA has published its final draft regulatory technical standards (RTS) specifying the requirements for originators, sponsors and original lenders related to risk retention, as laid down in the Securitisation Regulation and as amended by the Capital Markets Recovery Package (CMRP). The RTS aim to provide clarity on the risk retention requirements, thereby ensuring a better alignment of interests and the reduction of moral hazard risk - thus contributing further to the development of a sound, safe and robust securitisation market in the EU.
The EBA notes that the minimum retention requirement of 5% of the material net economic interest in a securitisation is essential to ensure that sell-side parties have ‘skin in the game’, thereby addressing the issue of potential misalignment of interest between originators, sponsors and original lenders and investors. Several modifications have been made to the 2018 EBA RTS on risk retention, which were not implemented in a Delegated Regulation by the European Commission, to ensure consistency with the new mandate and to provide further clarity on some specific aspects; namely, the adverse selection of assets by originators.
The modifications due to the CMRP focus on the modalities of risk retention in non-performing exposure (NPE) securitisations and the impact of fees payable to retainers on the risk retention requirement. These changes aim to facilitate the securitisation of NPEs and are part of the EBA’s broader work on supporting the functioning of the secondary markets for NPEs.
In addition, the RTS provide further clarity on the application of the risk retention requirement to resecuritisations, as well as the treatment of synthetic excess spread as a possible form of compliance. Finally, while these RTS will replace the existing 2014 Commission Delegated Regulation, the Securitisation Regulation contains transitional provisions regarding the application of the existing Delegated Regulation to securitisations whose securities were issued before its application date.
In other news…
EMEA
Martin Nijboer has joined STS Verification International as executive director, with a main focus on marketing. Nijboer gained his securitisation experience by structuring ING’s own covered bond and RMBS programmes within the bank’s capital management department since 2007. In 2014, he moved with his team to the commercial side within ING Financial Markets, offering securitisation services and sub-products to external clients - including other European banks and auto captives.
Financial support pilot unveiled
Arrow Global has launched a new partnership with the social enterprise, IncomeMax, as the firm continues working to improve support to customers. The pilot scheme will enable Arrow customers to access IncomeMax financial support services, including helping keep them on track with payments and improve their credit scores. Trained staff on the Arrow team will work to identify and refer customers to IncomeMax, which will then assist these vulnerable customers.
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