News Analysis
CLOs
Consolidation considerations
CLO manager acquisition activity set to continue
CLO manager consolidation is expected to continue, following a marked rise in acquisition activity in Q1 this year. However, the trend could be challenging for new entrants going forward and potentially increase exposure to obligor overlap risk.
“I think a lot of it is pent-up demand from the pandemic,” explains Russ Thomas, a director in US structured finance at Fitch. “There was likely a lot of M&A activity delayed due to the pandemic and, as things opened up earlier this year, you’ve seen a lot of these get executed.”
He suggests that such activity is the natural course of business. “It’s not uncommon for managers to be seeking new sources of funding for CLO equity and/or working capital, which may include new strategic partnerships as a possible solution. A lot of smaller firms like to increase or expand their distribution channels in terms of new pockets of money, or new investor relationships, and new alliances can help open up new possibilities for them.”
Notable CLO manager M&A activity seen thus far in 2022 includes the Carlyle Group’s jump to becoming the largest CLO manager through its acquisition of CBAM Partners (SCI 10 March) and AllianceBernstein expanding its private alternatives business by acquiring several CarVal-managed CLOs (SCI 18 March).
“Managers we’ve spoken to recently have indicated that CLO platform M&A activity is always active and many firms are seeking, or being approached for, partnerships or CLO contract sales,” Thomas observes. “We’ve gotten colour earlier this year that most managers that have established any good track record over the past couple of years are being looked at as a potential acquisitions target – whether that’s to buy the platform, or to just buy the contracts.”
Andrew Worthington, a director in US structured finance at Fitch, adds: “In other cases, we’ve also found that a firm is trying to fill a void. Perhaps they already had a middle market manager, so they go out and get an established BSL manager to add to the platform. We’ve observed that firms realise both operational and investment synergies when integrating a middle market and a BSL platform.”
In cases where managers acquire CLO contracts from other platforms, they would typically reposition the deals to fall in line with their existing CLO portfolio within a few months in matters of risk profiling and sector biases. Thomas notes: “Another impact could be a change in the alignment of interests. If one manager is picking up another manager’s deals but they’re not transferring over the equity, then that could lead to a change to alignment in interests in how they’re managing the deals.”
Worthington believes that CLO manager consolidation is generally positive for the overall market and believes that new managers will emerge to fill the void. Typically, pure M&A transactions - where the target company is expected to be run independently - don’t present any risk for the associated CLOs and usually have a positive impact for all involved parties.
In cases where managers are acquiring the CLO transactions and not the management teams, scalability of the platform becomes an important aspect to consider. However, Thomas notes that “most of those cases involve large firms with substantial resources in terms of staffing and systems, so we wouldn’t expect any negative implications.”
Worthington adds: “If it’s a manager that hasn’t been issuing in a while, they might have been losing headcount or not receiving great execution, so bringing the transaction over to a manager with a more established, active platform could be positive for the investors in those transactions. Usually, a manager undertakes a lot of due diligence, including a review of the obligor overlap between the two platforms, prior to purchasing the contracts from a particular manager.”
Nevertheless, rampant acquisition activity could increase obligor overlap risk from a standard CLO obligor overlap under different managers of 40% to as much as 80%-90% under the same manager.
Although the CLO market has seen a steady flow of new entrants, Thomas warns that the narrowing issuer landscape makes it more difficult for brand new managers to enter the space. “For new entrants that are trying to issue maybe one or two deals, or infrequently, it won’t be as much of a change as it was. But for brand new platforms that are looking to issue three deals a year straight out of the gate, I think it’ll be tougher.”
Given the current economic and geopolitical backdrop, the CLO market could present tougher issuance dynamics for new entrants. “There have been quite a few new managers come through over the years. But we have seen some one-and-done type managers too, where they issue one deal and that’s it, as things don’t work out perhaps as they thought they would,” states Thomas.
Additionally, Worthington warns that as acquisitions pick up, the new consolidation-heavy environment could potentially lead to a situation where new managers come in, backed by firms that want to build a platform quickly and then sell it off. He concludes: “It’s important for investors in the deals of new managers to understand the long-term commitment that the owners have to that platform, as opposed to just wanting to get three or four deals done and selling it off quickly.”
Claudia Lewis
back to top
News Analysis
CMBS
More multifamily
Workforce housing in focus amid affordability crisis
Increased focus by Fannie Mae and Freddie Mac on targeted affordable housing appears to be yielding powerful results among both borrowers and lenders. Addressing supply issues requires the development of new properties, as well as renovating the existing stock, however.
A significant issue in the US affordable housing crisis is supply, especially at the lowest income levels. For every 100 extremely low-income households, for example, there are reportedly only 29 adequate, affordable and available rental units. Furthermore, around 10 million low-income renter households routinely spend more than half of their income on rent, when ideally they should spend no more than 30%.
To help address the lack of supply, as well as increasing the GSEs’ volume caps to US$78bn for each enterprise in 2022, the FHFA increased the minimum percentage of units affordable to 60% area median income (AMI) households from 20% of all units financed to 25% of all units. Additionally, at least 50% of the GSEs’ multifamily business is required to be ‘mission-driven’, a category that has been expanded to include certain green efficient properties and those in high-cost areas that otherwise would not fall within the standard requirements for affordable housing transactions.
Sabal Capital Partners is one lender whose small balance multifamily activity has picked up against this backdrop, with the firm closing approximately US$264m in multifamily acquisition and refinance loans secured by primarily affordable and workforce rental properties during 1Q22. The US$264m total is made up of 80 loans secured by 80 properties located across 21 states, the majority of which were financed by small balance Fannie Mae and Freddie Mac programmes serving the affordable and workforce rental segments.
Ed Hussey, head of conventional agency lending at Sabal Capital Partners, stresses the importance of making financing attractive for those that are targeting their rents towards lower income Americans amid the current affordability crisis. “The biggest thing for borrowers right now is liquidity. As we went through the pandemic, there was a lot of insecurity around whether tenants would keep their jobs or whether they would be able to continue to pay their rent.”
He continues: “As we are coming out of that and people are a little more secure in their jobs, it’s really a matter of making sure that their rents are going to still stay in tune with what their jobs are paying – which is key for these affordability programmes. You’ve got to make sure that the financing is available, so they can get attractive interest rate financing for a property that, while is not producing the highest level of rent, is still steady, occupied and providing in-demand housing.”
The GSE programmes focus on providing a pricing incentive to borrowers financing a multifamily property affordable to residents earning 80% of AMI or below. “That’s mainly workforce housing. Even to the point of targeted affordable housing for those receiving 60% of the area median income or below, the agencies are really focusing on trying to provide incentive for those individuals,” Hussey adds.
As well as liquidity, offering incentives to borrowers that would allow them to manage and maintain their properties could prove beneficial to both the tenants and the financing of the properties. “I think the key to addressing this affordability crisis is both developing new properties targeted towards the workforce housing borrower – a borrower that’s at 100% of area median income or below - as well as renovating the existing stock,” Hussey states.
For example, providing green renovations to the existing supply of multifamily housing across the US could be a helpful tool to address the gap between luxury and affordable housing. “Green renovations and providing that access helps revitalise the old stock of multifamily assets. This is needed to address the growing supply gap, which sits between the high luxury communities and targeted affordable units that have subsidies,” Hussey explains.
He adds: “There’s a lot of multifamily stock in this country that can be renovated, made more efficient, made greener and still be available at affordable prices. That older stock - with just a little bit of work - can become affordable housing that is quality, safe, sound, efficient and now smart.”
Of the 80 multifamily loans extended by Sabal during the first quarter, 27 were completed through Fannie Mae’s Multifamily Small Loan programme, which provides loans of up to US$6m for smaller rental properties that tend to be more affordable, are concentrated in urban areas close to transportation and jobs, and that provide housing for working families. A further 47 of the loans were financed through Freddie Mac’s Optigo Small Balance Loans Program, which offers US$1m-US$7.5m loans for small apartment properties of between five and 50 units that serve the workforce. The remaining six loans were closed via Sabal’s conduit CMBS programme.
Claudia Lewis
News
Capital Relief Trades
New CAS, tighter spreads
Fannie prints fifth CAS of 2022
Fannie Mae priced CAS 2022-R05, its fifth CAS of the year, this afternoon, the GSE reported.
The $952m four tranche note references a pool of close to 127,000 single family loans with unpaid principal balance of $38.5bn. This is a high LTV deal, with LTVs between 80% and 97%, which were acquired between May 2021 and July 2021.
The $292.9m M-1 was priced to yield SOFR plus 190bp and is rated Baa1/BBB. The $219.7m M-2 was priced to yield SOFR plus 300bp, and is rated Baa3/BBB-. The $146.5m B-1 yields SOFR plus 450bp and is rated Ba2/BB+ while the $292.9m B-2 yields SOFR plus 700bp and is rated B3/B+.
These yields are appreciably narrower than the equivalent tranches in the low LTV CAS 2022-R04, printed at the beginning of last month. For example, the M-1 in CAS 2022-R04 yielded SOFR plus 200bp even though it was rated more strongly at A-/A-.
Indeed, after two losing months, the CRTx, flagship index of Mark Fontanilla and Co., gained 0.44% in April despite the plentiful bad geopolitical and economic news, it was reported yesterday.
This is also in the face of supply of $2.12bn last month, the second biggest single-month gain since February 2015.
Fannie Mae today also reported its Q1 results. Its net income was $4.4bn, increasing net worth to $51.8bn. Net income decreased by $781m from Q4 2021 as credit-related income became credit-related expense.
Simon Boughey
News
Capital Relief Trades
Risk transfer round up-6 May
CRT sector developments and deal news
Deutsche Bank is believed to be readying a synthetic securitisation backed by leveraged loans. Meanwhile, Credit Agricole and Nordea are each believed to be prepping capital relief trades backed by corporate loans. The Credit Agricole transaction is expected to price in two weeks’ time.
Stelios Papadopoulos
News
RMBS
Warehouse woes?
Turnkey solution offered amid labour shortages
US mortgage warehouse lenders face an increasing competitive landscape, with labour shortages posing an additional challenge. Against this backdrop, turnkey solutions could help lenders scale their businesses.
“The mortgage warehouse financing competitive landscape is increasing. The workplace environment is also evolving; many employees are looking for remote or hybrid working arrangements. Our clients have noted that it is difficult to hire and train resources, given the national labour shortage,” observes Anthony Beshara, md at SitusAMC.
Such challenges are a result of the current macroeconomic environment and the pandemic. SitusAMC is one firm seeking to address these issues, with a variable cost model approach that includes the ability to augment components of an existing or new warehouse financing franchise (SCI 6 April).
Beshara states: “We have brought in institutional expertise with technical and operational skillsets, as it relates to warehouse lending, to address this key issue. The SitusAMC Warehouse Administration Services Team can deliver a cost-effective and efficient solution to help clients navigate both challenges and robust periods of growth alike.”
The solution allows clients to contract with the firm and in two or three months have the technology implemented and integrated with their systems, as well as a team of resources ready to deploy to support their business.
With the agency, non-QM, small balance commercial, reverse mortgages and HECM asset classes all performing well, senior management at many financial institutions have looked at the returns yielded by mortgage warehouse lending and concluded that this can be a strong growth area for their firm. Beshara concludes: “The nice thing about what we're able to do is we can customise the scope of work for our clients. Whether you are a new or existing franchise, experiencing a period of growth or contraction, you can scale your business in accordance with your needs by utilising SitusAMC’s Warehouse Administration Services.”
Angela Sharda
Market Moves
Structured Finance
UHNW securitisation under scrutiny
Sector developments and company hires
UHNW securitisation under scrutiny
Pomerantz has filed a class action lawsuit against Credit Suisse Group and certain of its officers in the US District Court for the Eastern District of New York, on behalf of purchasers of Credit Suisse securities between 19 March 2021 and 25 March 2022 inclusive. The case seeks to recover damages caused by the defendants’ alleged violations of the federal securities laws and to pursue remedies against the bank under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
In a statement, Pomerantz notes that Credit Suisse “has a history of business dealings with Russian oligarchs or ultra-high net worth business leaders possessing significant political influence”. The law firm also cites a recent Credit Suisse synthetic securitisation that references a US$2bn portfolio of loans extended to certain of the bank’s ultra-high net worth clients (SCI 8 December 2021).
The investor presentation for the deal allegedly disclosed that in 2017 and 2018, Credit Suisse experienced 12 defaults on yacht and aircraft loans, a third of which were related to US sanctions against Russian oligarchs. Barely a week after the commencement of Russia’s invasion of Ukraine and the retaliatory sanctions imposed by Western nations, news outlets reported that Credit Suisse had requested non-participating investors who received information about the bank’s loan portfolio destroy any confidential information provided to them regarding the securitisation.
On 28 March, the US House of Representatives Committee on Oversight and Reform sent Credit Suisse a letter asking the bank to turn over information and documents about a portfolio of loans backed by yachts and private jets owned by clients, potentially including sanctioned Russian individuals. The letter questioned Credit Suisse’s request that non-participating investors “destroy documents” related to yachts and private jets owned by the bank’s clients, indicating that such an action raises concerns that the bank may be concealing information about whether participants in the deal may be “evading sanctions” imposed by the West after Russia’s invasion of Ukraine.
The complaint alleges that, throughout the class action period, defendants made materially false and misleading statements regarding the bank’s business, operations and compliance policies.
In other news…
ECAI mapping ITS published
The EBA has published its final draft implementing technical standards (ITS) to amend the Implementing Regulation on the mapping of credit assessments of external credit assessment institutions (ECAIs) for securitisation positions. The authority says the changes reflect the relevant amendments introduced by the new Securitisation Framework, as well as the mappings for three ECAIs that extended their credit assessments to cover securitisations. The Implementing Regulation is part of the EU Single Rulebook for banking aimed at creating a safe and sound regulatory framework consistently applicable across the EU.
Amendments to the CRR under the new Securitisation Framework made it necessary to update the mapping tables of ECAI credit assessments for securitisation positions. Following the amendments to Chapter 5 of the CRR, a hierarchy of approaches was set out to calculate capital requirements for positions in a securitisation, whereby institutions using SEC-ERBA shall calculate risk-weighted exposure amounts based on credit quality steps (CQS) set out in the CRR. The amended Regulation reflects 18 CQS for long-term external credit assessments, with the aim of enhancing granularity and risk sensitivity with respect to the approaches previously considered in the Regulation.
Since the adoption of the Implementing Regulation, one additional ECAI has been established in the EU with methodologies and processes in place for producing credit assessments for securitisation instruments, two existing ECAIs have extended their credit assessments to cover securitisations and ESMA has withdrawn the registration of an ECAI. These changes have been reflected in the mapping tables accordingly.
The EBA also published individual draft mapping reports illustrating how the methodology was applied to produce the mappings.
EMEA
Morgan Lewis continues the expansion of its global structured credit business with the hire of new partner Richard Hanson. Joining the firm’s London office from Orrick, Hanson marks the latest addition to the Morgan Lewis structured transactions team and follows the hire of partner Merryn Craske earlier this year as the firm works to beef up its global transaction capabilities. Hanson has experience advising both alternative investment funds and asset managers on structured finance, securitisation and bespoke finance solutions across alternative and illiquid asset classes.
Stuart Axford has joined Schulte Roth & Zabel’s London finance and derivatives group from Arnold & Porter, bringing over 25 years of experience in securitisation to the new role. His hire follows several other new additions to the firm’s global practice, including new partner Martin Sharkey in London who focuses on CLOs. With experience across residential and commercial mortgages, auto loans, aircraft and supply chain finance, as well as cryptocurrencies and NFTs, the firm hopes Axford will offer greater guidance across an array of financing opportunities.
Global
JPMorgan has named executive directors CJ Martino and Nicolas Robin co-heads of global institutional structuring. Martino joined the firm in June 2012 and most recently led a New York team focused on credit structuring for investor clients, including synthetic securitisations. London-based Robin began his career at Societe Generale in 2002 and has also worked at Barclays.
North America
Churchill has hired Jason Quinn as md in origination to lead its Los Angeles office. Quinn brings more than 14 years of experience to the role and joins from Antares Capital, where he served as svp and maintained responsibility for sourcing deals and managing relationship with private sponsors. In his new role, Quinn will head up the development and maintenance of existing private equity sponsor relationships, and source new senior lending opportunities in the western region of the US. He will report to Churchill’s co-head of senior lending, Randy Schwimmer.
Sabal has welcomed 11 new hires to its team and named its former head of agency lending, Ed Hussey, as new head of conventional agency lending in a bid to support the firm’s second phase of development following its acquisition by Regions Bank. The new hires include Ann Atkinson, who joins Sabal as a small balance loan and market real estate production manager, after spending more than 20 years with Fannie Mae. The remaining new hires will support the origination, underwriting and servicing of the firm’s agency and non-agency programmes, including Sabal’s CMBS conduit loan programme.
Amanda Montgomery and Marc Gonyea are set to join Sycamore Tree in leadership marketing roles as the firm works to build new and strengthen existing relationships with institutional investors and consultants. Montgomery and Gonyea will both serve as mds and join Sycamore Tree from Allianz Global Investors and Alcentra respectively.
Z Capital has hired three new directors to its investment team – Jedidiah Lee, Gregory Poos and Vlad Vladescu. The three new directors join the Z Capital Credit Partners’ investment team with extensive experience in the leveraged credit markets, including CLOs. Lee, Poos and Vladescu previously worked at Bayside Capital, ArrowMark Partners and King Street Capital respectively. They will maintain responsibility for sourcing, researching and analysis across existing and prospective performing, stressed and distressed investments, and middle market loans.
RFC issued on STS sustainability indicators
The European Supervisory Authorities (ESAs) have published a consultation paper seeking input on draft regulatory technical standards (RTS) on the content, methodologies and presentation of information in respect of the sustainability indicators for STS securitisations. The move is in line with the mandate given to the ESAs under an amendment to the Securitisation Regulation in April 2021 that was part of the capital markets recovery package (CMRP).
The proposed draft RTS aim to: facilitate originator disclosure of the principal adverse impacts of assets financed by STS securitisations on ESG-related factors; supplement the single rulebook under the Securitisation Regulation as amended by the CMRP; and draw upon the ESAs’ work in respect of sustainability-related disclosures in financial services under the SFDR. Because securitisation is not a ‘financial product’ under the SFDR, it was decided in the CMRP that originators of STS deals should have the option to disclose principal adverse impacts. Rabobank credit analysts note that the ESAs have sought to ensure harmonisation and consistency between the SFDR RTS and these new draft RTS, while also adapting it where necessary for securitisation specifically.
The closing date for responses to the consultation is 2 July, following which the draft RTS will be finalised and submitted to the European Commission for adoption.
Market Moves
Structured Finance
ICE to acquire Black Knight
Sector developments and company hires
Intercontinental Exchange (ICE) is set to acquire the software, data, and analytics company, Black Knight. Unanimously agreed by the boards of both companies, the definitive agreement to acquire Black Knight would help boost Intercontinental Exchange’s rapidly expanding mortgage technology business. Black Knight is valued by the cash and stock transaction to hold a market value of US$13.1bn, which translates to US$85 per share. The transaction is expected to close in the first half of 2023, with Intercontinental Exchange supported by Goldman Sachs and Wells Fargo Securitise serving as lead financial advisors, and Shearman & Sterling and Morgan Lewis & Bockius serving as legal advisors. Black Knight is supported by JPMorgan as its exclusive financial advisor, and Whitehall, Lipton, Rosen & Katz serving as legal advisor.
In other news….
EMEA
Julia Tsybina has been elected to the Clifford Chance partnership. Based in London, she is a partner in the firm’s derivatives and structured products practice, focusing on CLOs.
Pemberton opens its twelfth office with the establishment of its new Munich branch, which will be led by Adrian Grammerstorf. The firm hopes the opening of its second German branch will help enhance its growth into the DACH region. Grammerstorf joins the firm from Allianz Global, where he served as a director and was responsible for both deal origination and structuring of credit financing for German private equity driven acquisitions. Grammerstorf will work alongside md Nils Weber to lead sponsor coverage and deal origination across the DACH region and expansion of the business in the Nordics.
North America
Alfredo Moreira has joined Blue Owl Capital as a CLO structurer, based in Greenwich, Connecticut. Moreira was previously a vp at Freedom Mortgage and a director at Bank of America, responsible for structuring and placing CLOs. He has also worked at GreensLedge and EY, which he joined in October 2011.
Proskauer welcomes new partner Evan Palenschat to its private credit group. Based in the firm’s Chicago office, Proskauer hopes the addition of Palenschat will further enhance its presence in Chicago and enhance abilities to meet rising demand from clients. Palenschat joins the firm from King & Spalding, and brings extensive experience working across financial institutions, hedge funds, private credit funds, private equity funds, as well as private borrowers, companies, and issuers.
structuredcreditinvestor.com
Copying prohibited without the permission of the publisher
