News Analysis
Capital Relief Trades
Distribution normalization
Pre-pandemic capital distributions return
European banks have built up a fair amount of capital during the last two years and are in a relatively good position to make distributions. Indeed, several banks have explicitly stated their intentions to reduce capital positions to lower levels to boost target returns as the revenue outlook remains muted. The latter coincides with an expectation of higher Pillar two requirements and increases in countercyclical buffers.
According to Scope rating’s latest European bank capital quarterly, ‘’until 30 September 2021, banks limited their capital distributions in line with supervisory recommendations. The ECB noted that while there has been some catch-up in distributions since, payout ratios have on average remained close to pre-pandemic levels of around 50% in the current environment.’’
Lenders are expected to liaise with supervisors before publicly announcing distributions. Supervisors may restrict distributions if there are concerns about a bank’s capital trajectory and its ability to meet supervisory requirements. The ECB has communicated that it has a neutral view between cash dividends and share buybacks. Share buybacks require prior authorisation by the supervisor within three months of execution.
The more normalized capital distributions coincide with an expectation that more risks will be captured within the Pillar two framework. Scope notes: ‘’ECB supervised banks are currently participating in a supervisory climate risk stress test, with results to be published in aggregate form this summer. Given the importance of sustainability in the political and regulatory agenda, there have been growing expectations that the ECB will begin incorporating the results into the Pillar two framework.’’
In the EBA’s June 2021 consultation on draft guidelines for common procedures and methodologies for SREP and supervisory testing, climate risk was highlighted as one that may not be covered by macroeconomic downturn scenarios so it should be considered when determining Pillar two guidance.
However, this was removed in the final guidelines with the EBA stating that ESG risk consideration under Pillar two requirements and Pillar two guidance should be proportional and progressive. The inclusion of ESG risks within SREP will be part of the next review of the guidelines.
Finally, countercyclical buffers according to Scope ratings are beginning to increase. The rating agency concludes: The impact of higher countercyclical buffer rates should be manageable as major European banks are well capitalised. Furthermore, announced increases will follow an implementation period and banks have been incorporating potential increases in their capital planning.’’
Stelios Papadopoulos
back to top
News Analysis
ABS
A buyer's market
European ABS/MBS market update
Following a flurry of deal announcements (SCI 22 April 2022), the primary European and UK ABS/MBS markets were extensively testing investor demand during the week. With so many deals to absorb, deal performance has been disparate.
In a context of large volumes of paper, UK RMBS transactions were playing a central role with four transactions hitting the market. On Wednesday, Clydesdale Bank concluded their return to the UK Prime RMBS market with the pricing of Lanark 2022-1. The solely offered senior note was ultimately sized at £700m - a strong £200m upsize -, 1.3x oversubscribed.
Also pricing on Wednesday was Genesis Mortgage Funding 2022-1, Bluestone Group’s latest non-conforming RMBS. The senior notes landed at the wide end of IPTs (115-120bp) at SONIA plus 120 bp, with the final book 1.4x oversubscribed.
In the BTL space, LendInvest’s Mortimer BTL 2022-1 saw the AAA notes land at the wide end of guidance at SONIA plus 105 bp, 1.7x oversubscribed. The mezzanine notes attracted stronger coverage ratios (2.4x, 2.3x and 2.0x respectively), yet solely the C tranche managed to price at the tight end of guidance, at plus 195bp. Directly competing with LendInvest was Lendco and its Atlas Funding 2022-1 deal. Whilst the senior notes matched Mortimer at SONIA plus 105 bp, the mezzanine B notes priced wide at plus 180bp from IPTs at plus 150-160 bp.
Meanwhile, in the auto ABS space, RCI Banque brought its latest Cars Alliance transaction (Cars Alliance Auto Loans France V 2022-1) to market. The A tranche landed at the wide end of guidance at plus 39 bp, with IPTs for the AAA senior notes indicated in the one-month Euribor plus 30bp area.
Also expected to price later today are auto ABS deal Hill FL 2022-1 and consumer ABS Pepper Iberia Unsecured 2022. For Hitlermann Lease’ inaugural (SCI 20 April 2022) Dutch auto ABS, senior notes are indicated one-month Euribor plus 70bp, whilst the B-D tranches stand at mid-100s, high-100s and mid-high-200s respectively. Regarding the Pepper transaction, IPTs for the A-D notes have been released, with the 2.7 year senior STS/LCR eligible notes indicated at one-month Euribor plus 70 bp. Further down the capital stack, IPTs the B-D notes stood at one-month Euribor plus mid 100s, high 100s and mid-200s, respectively. Earlier this week, BMW bank further added to the hefty pipeline, mandating a new intra-week Bavarian Sky auto ABS. The A tranche saw IPTs of one-month Euribor plus mid-20 bp.
Reflecting on the week, one European ABS/MBS trader notes: “You still see some of the prime names that get their deals done, however it has been tougher for newcomers and the current context inevitably leads to a widening of spreads. Compared to German benchmark paper, let’s see how Hitlermann perform for example”
He continues: “I think the ABS market is turning more and more into a buyer’s market,” notes on European ABS/MBS trader. Deals have been struggling to build a decent book before the first update.”
As for the secondary market, the trader describes a positive environment: “Generally the number of BWICs has been increasing. Naturally it could have something to do with the primary being so busy. We are trading at decent levels, with ample demand although spreads are wider than before.”
Looking forward, the trader highlights the current advantage of ECB bid and support: “The ECB is still buying in but when they decide to opt out, other investors will have to step in. Some deals are struggling and it will translate into even wider spreads.”
He concludes: “If I were an issuer I would come to market as soon as possible, rather than taking a gamble. However, we cannot debate that supply has been extremely decent.”
For more on all of the above deals, see SCI’s Euro ABS/MBS Deal Tracker
News Analysis
Capital Relief Trades
Risk retention
RTS welcomed with caveats
The EBA’s regulatory technical standards (RTS) on securitisation risk retention requirements stipulates provisions on synthetic excess spread that have been welcomed by originators of significant risk transfer trades (SCI 13 April). Indeed, the RTS allows lenders to count synthetic excess spread as part of their first loss retention. However, banks are unlikely to use it despite the benefits.
The last RTS on risk retention was published in 2018 but it wasn’t until the STS synthetics regime and the capital charges for NPL ABS when changes in certain aspects of the EU’s risk retention framework started to materialize.
According to David Saunders, executive director at Santander, ‘’the latest RTS stipulates that synthetic excess spread can be counted as part of your 5% first loss retention. There isn’t an issue here and the change is quite positive, but unfortunately no originator is likely to use it. if you are retaining 5% first loss then you are not transferring risk through a significant risk transfer transaction.’’
The current practice is to normally retain 5% of each tranche or exposure since in this manner lenders transfer more risk and avoid the full capital deduction for the retention piece.
Jo Goulbourne Ranero, consultant at Allen and Overy notes: “in line with the consultation, the draft RTS allows the originator of a synthetic securitisation to count synthetic excess spread that is subject to a CRR capital charge towards their risk retention requirement, but only under the first loss risk retention option.’’
She continues: ‘’First loss risk retention is unlikely to be economically attractive compared to retaining 5% of each asset outside the securitisation at its unsecuritised risk weight. ‘L-shaped’ risk retention where synthetic excess spread is combined with another form of risk retention as requested by the market is not permitted under the RTS, though HMT has indicated that the UK will be considering this.”
However, there is perhaps another more pertinent point. Even if banks wanted to count synthetic excess spread in their first loss retention, they must still wait for the pending RTS on synthetic excess spread. ‘’The RTS will explain to lenders how to calculate the exposure value of the synthetic excess spread position. If you can’t calculate the exposure value, then you can’t count it in your first loss risk retention’’ says Saunders.
The RTS is currently pending and aims to further specify the provision in the EBA’s final SRT report from 2020 that synthetic excess spread should be treated as a retained first loss tranche (SCI 27 November 2020). The publication date had been moved several times but a new deadline has been set for December 2022 according to an official EBA letter.
Stelios Papadopoulos
News
Capital Relief Trades
Risk transfer round up-27 April
CRT sector developments and deal news
Credit Agricole is believed to be readying a synthetic securitisation that is backed by corporate and commercial real estate loans. The bank’s last corporate deal closed last year (see SCI’s capital relief trades database).
Stelios Papadopoulos
News
Capital Relief Trades
Lift off
Credit Suisse completes SRT
Credit Suisse has finalized a synthetic securitisation that references a granular and blind Sfr3.5bn `portfolio of Swiss corporate and SME exposures. Dubbed Elvetia finance series 2022-1, the transaction is a replacement trade for a significant risk transfer trade that was executed three years ago.
The transaction features a Sfr140m junior tranche (priced at SARON plus 9.25%) and a Sfr70m unfunded mezzanine piece which amortize on a sequential basis. Further features include a call option that can be exercised after three years and a replenishment period equal to 3.5 years.
The size of the portfolio in the latest Elvetia deal is lower compared to the 2019 trade which amounted to Sfr5.6bn (see SCI’s capital relief trades database).
One notable difference with the first transaction is that it’s tilted more towards SMEs than IPRE. The rationale behind this was to render it more in line with the homogeneity criteria of the STS synthetic securitisation framework.
Overall, the Ukraine crisis hasn’t had a material impact on the pricing or the tranching of the latest Elvetia. The latter is evident from the leveraged equity tranche and the maximum 75bps concentration limits derived from the blind pool's customer data
Stelios Papadopoulos
News
Capital Relief Trades
Another Algonquin
BMO brings SRT trade referencing NA corporate loans
Bank of Montreal is back in the market with another SRT trade priced off its Algonquin platform, designated Algonquin Series 2022-2.
It is only two weeks since the borrower priced and settled Algonquin Series 2022-1,which was the first transaction through this platform since January 2020.
It is used to securitize mid-sized US and Canadian secured and unsecured corporate loans.
The notes are issued through the special vehicle Manitoulin USD Ltd.
The Class B notes have been rated AA, the Class C notes have been rated A and the Class D notes BBB.
Bank of Montreal has been unavailable for comment.
Simon Boughey
News
Capital Relief Trades
Risk transfer round up-29 April
CRT sector developments and deal news
JPMorgan and Nordea are believed to be arranging a significant risk transfer transaction backed by consumer loans for Nordic consumer lender Klarna. Meanwhile, details of Bank of Montreal’s latest Algonquin transaction have been revealed(SCI 28 April). The US$162.5m financial guarantee references a US$2.5bn portfolio of US and Canadian secured and unsecured corporate loans.
Stelios Papadopoulos
News
Capital Relief Trades
CAS continuity
Fifth CAS of 2022 in the market
Fannie Mae is in the market with another CAS REMIC deal, designated CAS 2022-R05, according to reports.
Wells Fargo and Bank of America are the lead managers. Barclays, Citi, Morgan Stanley and StoneX are co-managers.
This is the fifth CAS deal of 2022 - a year in which there is expected to be record-breaking CRT issuance. Fannie and Freddie Mac are expected to print in the region of $25-30bn in this market over the course of the year.
This latest transaction references a pool of 127,166 residential mortgages, with an outstanding principal balance of $38.5bn. The loans are high LTV mortgages, with LTVs of between 80% and 97%. All were originated between May 1 and July 31 2021.
The transaction is due to close May 11.
The borrowers in CAS 2022-R05 have a weighted average (WA) credit score of 747 and a WA debt-to-income (DTI) ratio of 36.4%.
As is the case with most CRT deals, there is considerably more geographical diversity than is generally found in prime RMBS deals. California represents the largest concentration of loans, and accounts for 12.8% of the total pool.
Simon Boughey
Talking Point
Structured Finance
The Importance of ESG in credit ratings
Matthew Mitchell, senior director at S&P Global Ratings, explains why ESG is becoming an increasingly important factor when it comes to credit ratings of all types
That is why S&P Global Ratings recently announced it will publish ESG credit indicators for structured finance transactions to increase the transparency of how these factors influence its credit rating analysis. The ESG credit indicators will supplement the current ESG narrative using an alphanumerical scale, ranging from a positive influence in the credit rating analysis (E-1/S-1/G-1) to a very negative influence (E-5/S-5/G-5).
A variety of ESG factors can influence credit analysis, while legal and structural mechanics characterising securitisation can also mitigate the risks. As such, issue credit ratings may not be affected even where there are material exposures to ESG factors. For example, common transaction features such as credit enhancement, deleveraging, eligible collateral requirements, concentration limits, replacement and performance triggers, insurance policies, tenor of the rated debt, and isolation of assets from an originator's bankruptcy may mitigate any negative influence of ESG factors.
Environmental factors tend to be characterised by physical risks, which can disrupt collections, impact the credit quality of obligors, or materially reduce collateral values. Typically, physical risk is more pronounced for concentrated pools of immovable assets, such as in certain CMBS transactions, where a local area or specific asset location could be affected. For transactions with highly diversified collateral pools – including by obligor and geography - physical risks would likely have a neutral influence – this is more common in RMBS and ABS.
In addition to physical risks, there is also climate transition risk which could impact collateral values in asset classes such as auto ABS. Our analysis tends to categorise this as a moderately negative influence. However, this can adjust depending on the pool – for example, where the collateral has relatively high emissions or are located in jurisdictions likely to experience tougher regulation.
A key social factor that we consider in our analysis is conduct risk, which can present a social capital exposure for lenders and servicers, particularly as regulators are increasingly focused on ensuring fair treatment of borrowers. We generally see social factors as having a neutral influence for pools comprising prime borrowers with lower interest rates. In these pools, influence is greater for borrowers where affordability considerations, higher interest rates, and servicing policies and procedures could increase legal and regulatory risks, particularly for nonprime borrowers. Social factors may also have a larger influence in our analysis in asset classes – such as residential mortgages - with strict regulatory requirements and where enforcement of security could experience delays.
Health and safety factors are more likely to influence our analysis when there is a concentrated exposure, including by obligor, industry, or geography, or where the collateral backing the securitized assets could be affected by health and safety risks. For example, sectors reliant on social gathering, such as hotels, may have relatively higher exposure to a pandemic, while vehicle safety and product recalls are a risk for the automotive sector.
Securitisation issuers are typically established as bankruptcy-remote, special-purpose entities where each transaction party's roles and responsibilities and the allocation of cash flows are well defined, and transactions are structured to isolate the assets from the seller. This makes the transaction documentation, outlining the management and operation of the structure, a key component of our analysis of the governance framework. The analysis also takes into account other governance considerations such as key transaction parties including the originator, servicer, and transaction counterparties.
As securitisation is highly regulated, we generally view governance factors as having a neutral influence in our credit rating analysis. However, structural features such as revolving collateral pools or prefunding may have a negative influence because the assets' risk profile could change over time and expose investors to the risk of looser underwriting standards or potential adverse selection. For this reason, the documented requirements for making amendments to a transaction, such as selecting alternative interest rates, or replacing a transaction party following a deterioration in their creditworthiness or non-performance, may also be reflected in our governance credit indicator.
Governance considerations for the originator or servicer could also influence our analysis, such as our view of their risk management and internal control frameworks, and any third-party oversight. Where originators or products are new, the lack of a track record may also have a negative influence in our credit rating analysis.
In considering all of the above, our ESG credit indictors aim to isolate our view of the influence and magnitude of ESG factors before accounting for any benefit of legal or structural mitigants.
For more insights into how we incorporate ESG into our credit ratings, please click here.
Market Moves
Structured Finance
Annaly Capital Management to sell middle market lending portfolio
Annaly Capital Management has announced its entry into an agreement to sell its middle market lending portfolio to the global alternative investment manager, Ares Capital Management. The US$2.4bn transaction represents Annaly’s middle market assets across the balance sheet of primarily first and second lien loans in defensive, counter-cyclical industries, as well as assets managed for third parties. The transaction offers a positive outcome for Annaly shareholders and is expected to complete with the transfer of the portfolio by the end of the Q2 2022. The transaction was supported by Wells Fargo Securities acting as financial advisors, with Hunton Andrews Kurth and Latham & Watkins serving as legal advisors to Annaly and Ares, respectfully.
In other news….
CIFC Asset Management has announced the launch of a new mutual fund in partnership with IBI Investment House for the investment in CLOs. The IBI CLO Strategies Fund will enhance exposure to CLOs for Israeli investors after gaining greater prominence for demonstrating resiliency in recent years. Tzvika Katzman, senior investment manager at IBI, will serve as the Fund’s ceo having worked alongside CIFC md and CLO specialist, Jason Ziegler, to structure the fund. Going forward, CFIC mds and respective heads of structured credit investment and capital markets, Jay Huang and Matthew Andrews, will serve as co-portfolio managers for the fund.
Market Moves
Structured Finance
MSCI and MarketAxess collaborate
Sector developments and company hires
MSCI has announced its entry into a strategic collaboration with MarketAxess to establish new portfolio analytics solutions and fixed income indexes. The two firms hope to improve the fixed income investment process, empower investors, and drive innovation through their collaboration by developing portfolio optimisation, trading, and analytics tools. The collaboration will rely on MarketAxess’ fixed income indexes and AI-informed pricing and liquidity measures integrated into the MSCI house of portfolio construction analytics tools. The news follows the recent launch of MarketAxess’ investment grade 400 corporate bond index, the MKTX 400 Index, and is firmly in line with its commitment to developing practical and innovative data solutions for the fixed income market.
structuredcreditinvestor.com
Copying prohibited without the permission of the publisher
