News Analysis
Capital Relief Trades
Reinsurance resurgence
The CRT reinsurance market takes larger share of risk
Mortgage reinsurance through the ACIS and CIRT programmes is becoming an increasingly important part of the GSE CRT landscape as the capital markets programmes have suffered volatile market conditions in 2022, note onlookers.
When the GSEs unveiled CRT in 2013, the capital markets platforms (CAS for Fannie and STACR for Freddie) absorbed about 75% of the risk sold to the private sector while the reinsurance platforms (CIRT for Fannie and ACIS for Freddie) took the remaining 25%.
Over the last nine years the ratio has steadily become more balanced. In 2018, the GSEs sold $5.1bn in the reinsurance market and $14.25bn in the capital markets. In 2021, just over $14bn of risk was covered in the capital markets but almost $11bn was covered in the reinsurance market.
When comparing the RIF, or risk in force, the differential becomes even narrower. According to the CRT progress report, issued by the FHFA in Q4 2021, “In 2021, the Enterprises transferred risk on $1.1trn of UPB with a total RIF of $25bn. Securities issuances accounted for 57% of RIF, and reinsurance transactions accounted for 43% of RIF.”
Fannie Mae agrees that an increasing percentage of CRT risk will be placed in the reinsurance market. "We have revised our estimate for Connecticut Avenue Securities (CAS) issuance to a range of $13B - $15B for the year, down from the $15B projected at the start of the year. Some of the CAS volume is being shifted to our reinsurance program, Credit Insurance Risk Transfer (CIRT) given the recent volatility in credit markets. Total single-family CRT issuance is expected to be approximately $20B in 2022," the GSE told SCI.
However, a Freddie Mac spokesman sticks to the official line and says, “We are due to do $25bn in CRT markets in 2022, and we expect a 70/30 split between STACR and ACIS.”
Pricing in CAS and STACR has widened sharply in line with most credit markets. Gathering inflation, the Fed moving to an aggressive hiking posture and the war in the Ukraine have pushed spreads wider. Significant supply and the promise of more to come haven't helped either, but to some extent the spread widening has been driven by factors unrelated to fundamental risk.
The reinsurance market has been far less affected by these external factors; investors remain focused upon underlying risk.
“Reinsurance markets have not widened as much as capital markets this year despite increased issuances, the Fed tightening, higher inflation and the Ukraine War. Reinsurers are buy and hold investors and pricing is largely driven by an informed view of risk. Unlike the capital markets that trade in the secondary market, reinsurance pricing is not driven by liquidity or mark-to-market accounting.” says Jeffrey Krohn, md and mortgage credit segment leader at Guy Carpenter.
Reflecting this immunity from non-risk based factors, ACIS pricing has remained stable. In the STACR markets, high LTV M-1 spreads have ballooned to around SOFR plus 370bp in Q1, compared to around plus 125bp in Q4 2021. ACIS spreads for the same tranche of risk have remained around plus 95bp, slightly narrower, in fact, than Q4 2021.
High LTV STACR v ACIS pricing - Guy Carpenter
The same pattern is repeated throughout the capital stack. The STACR M-2 tranches have widened from plus 124bp to 276bp while ACIS M-2 tranches are still around plus 82bp. The STACR B-2 tranches have almost doubled from plus 160bp to plus 298bp while ACIS B-2 tranches are holding at plus 88bp.
Krohn further explains that collateral originated prior to the jump in interest rates are very attractive to the reinsurance market because of higher anticipated persistency and extended WALs. While capital markets will require higher spreads for increased WALs, reinsurers will generally take the view that their cumulative premium is greater, and thus, their upside to downside ratio has improved. This assumes underwriters take the view losses are unlikely to hit the layer.
Average deal size in ACIS and CIRT has also increased. The average CIRT deal was just over $1bn in 2021 compared to $167m in 2015, while to date in 2022 the average ACIS transaction has been $820m compared to $295m in 2015.
Bond market choppiness has affected the mortgage insurance-linked note (MILN) market as well. Last year, there were 14 notes sold from the usual names like Arch, Essent, Radian and MGIC. This year, however, there has been but two. Arch sold a $282m Bellemeade 2022-01 in January and MGIC sold a $474m Home Re 2022-01 in April.
A third is also believed to have been sold, which has not hit the tapes yet, but even so the run rate is well down on previous years. Those borrowers still maintaining a presence are said to be doing so simply so the market doesn’t disappear.
By the end of April, yields for MILN tranches of 3% thickness had hit 9%, compared to 4.60% in January.
Other bond insurance providers are being drawn to the credit risk transfer reinsurance market rather than the MILN market thanks to its relative stability, note onlookers. In its Q1 earnings report, NMI reported that it has entered into a $290 million excess of loss reinsurance agreement with “a high-quality panel of third-party reinsurers, covering an existing portfolio of mortgage insurance policies written primarily from October 1, 2021 through March 31, 2022.”
The credit risk transfer deal provides NMI with protection for aggregate losses on subject loans beginning at a 2.00% claim rate threshold and continuing up through a 6.75% aggregate detachment level.
At the end of March, Enact Mortgage Insurance Corporation, another mortgage insurance provider, announced it had secured approximately $325 million of additional excess of loss reinsurance coverage through a CRT deal with a panel of reinsurers.
Since 2015, Enact has executed approximately $4.4bn of CRT transactions, including approximately $2.6bn through the reinsurance market and $1.8bn through its Triangle Re MILN platform.
Simon Boughey
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News
Structured Finance
SCI Start the Week - 9 May
A review of SCI's latest content
Last week's news and analysis
Consolidation considerations
CLO manager acquisition activity set to continue
More multifamily
Workforce housing in focus amid affordability crisis
New CAS, tighter spreads
Fannie prints fifth CAS of 2022
Warehouse woes?
Turnkey solution offered amid labour shortages
For all of last week’s stories including ‘Market moves’ and ‘Risk transfer round-up’ click here.
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 David McGuinness at SCI for more information or to set up a free trial here.
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SCI Events calendar: 2022
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
Risk transfer round up-9 May
CRT sector developments and deal news
Unicredit is believed to be readying a synthetic securitisation backed by corporate loans. The Italian lender’s last capital relief trade was finalized in January (see SCI’s capital relief trades database).
Stelios Papadopoulos
News
Capital Relief Trades
Stagflation risks disclosed
Airlines at risk from inflation
Fitch Ratings has carried out a sensitivity analysis of 25 global corporate sectors to an adverse macroeconomic scenario marked by stagflation. The rating agency found that only the airline industry would experience a medium to high impact leading to heavy outlook and rating watch (RWs) activity as well as numerous rating changes.
The latest report notes that eleven sectors would experience a medium impact due to stagflation including outlook changes, some RWs and a few possible rating changes. These sectors generally have high exposure to energy and commodity prices.
The rating agency discovered that the remaining sectors would experience virtually no rating impact or a mild to modest one. These are less cyclical, have lower exposure to inflationary pressures or stand to benefit from higher commodity costs. However, the findings are limited to the effects of the adverse scenario on corporate sectors and issuers only in the EMEA.
Automotive, airlines and building materials are highly exposed to falling demand, which could be caused by the assumptions incorporated in Fitch’s adverse scenario. They also present high exposure to cost inflation, particularly labour, raw material, and energy costs. Homebuilders and building products are cyclical and at risk of falling demand but they only have a medium exposure to overall inflation.
However, the potential blow to automotive companies’ and homebuilders’ revenue could be cushioned by pent-up demand created by the supply shortage and the pandemic over the past twelve to twenty-four months. Industrial sectors including aerospace, defence, capital goods, integrated utilities and generation companies, as well as energy intensive industries such as steel and aluminium, chemicals, and energy refining, are highly exposed to inflation. However, these sectors are less vulnerable to eroding demand.
Airlines on the other hand are still recovering from the impact of the pandemic. According to the study, a moderate decline in demand for air passenger travel could have a meaningful impact on industry profitability due to high operating leverage. More expensive tickets, because of higher operating costs, along with a decline in real household earnings is likely to reduce passenger volumes.
Indeed, this will ‘’delay the air passenger demand recovery from the pandemic, which is expected to return to pre-pandemic levels by 2024. Moreover, airlines are likely to see more price-based competition, in case of a slower-than-expected recovery from the pandemic, leading to further margin pressure’’ states Fitch.
The assumptions of Fitch’s adverse scenario include aggressive sanctions on Russia resulting from its invasion of Ukraine that disconnect the Russian economy and its energy by about 10% of global and commodity exports, average global oil prices of US$150 a barrel in 2022 and US$130 per barrel in 2023, US inflation rising above 10% and remaining in the high single digits in 2022, as well as much higher commodity prices and weakening currencies increasing inflation in emerging markets.
Stelios Papadopoulos
News
Capital Relief Trades
PIMCO push
Kruzel hire suggests new SRT focus
Mark Kruzel has joined PIMCO as a senior vice president in the new capital markets group (PCM), according to an internal announcement seen by SCI.
He will report to Sean Meeker, who leads the credit effort in PCM. Meeker reports to Rick LeBrun, head of alternatives business management, and Jamie Weinstein, head of portfolio management.
Kruzel’s appointment means there are now three members of the PCM group. The third is Imran Ahmed, who heads the CRE focus and is also a member of the product strategy group.
The PCM team is said to be responsible for supporting portfolio management in developing and optimizing counterparty relationships, with a view to sourcing high quality investment opportunities in public and private markets.
Kruzel recently left Citi after over seven years at the US banking conglomerate. He was a director in the financial institutions solutions group, responsible for regional bank origination and structuring. In this role he had a leading hand in the placing of SRT transactions both for Citi’s balance sheet management purposes but also as an underwriter and advisor tp US entrants to the market.
For example, Citi both advised on and arranged Texas Capital’s groundbreaking debut in the US regional bank SRT market last year.
In his new role, Kruzel will be responsible for maintaining connections with PIMCO’s regional bank clients, and he will work with the PM and credit research teams to source and structure investment opportunities, says the internal memo.
Given his experience and skill set, it seems likely that his hire suggests a new and more vigorous commitment to SRT investments by PIMCO.
PIMCO is one of the largest investors in the world and manages over $2.2trn in global assets.
PIMCO declined to comment. Mark Kruzel has been unavailable for comment.
Simon Boughey
News
Capital Relief Trades
Risk transfer expansion
MUFG finalizes synthetic securitisation
SCI can reveal details of a transaction that MUFG Bank finalized at the end of March. Dubbed Monolith two, the US$210m five-year first loss guarantee references a revolving US$3bn global corporate portfolio. The risk transfer transaction is the Japanese lender’s first with a global portfolio that incorporates Asian exposures in addition to the usual U.S. and European ones.
The deal features a replenishment period and tranches that amortize on a pro-rata basis but with triggers to sequential amortization. Additionally, Monolith two complies with the 5% risk retention requirement which is present in the form of a vertical retention.
The mezzanine tranche was rated and retained along with the senior piece. ‘’The rating of the mezzanine tranche was the most cost-effective option after having looked at the potential ongoing fees that we had to pay to investors during the life of the deal’’ says Kenji Matsumoto, director, credit portfolio management at MUFG.
The first Monolith transaction was executed in 2019 and referenced a US$1bn portfolio. The main differences between the first and second deals are the incorporation of Asian exposures, the rated mezzanine tranche and the fact that the lender factored in the phase-in of the Basel output floors into capital management and return targets.
Looking forward Matsumoto notes: ‘’Large Japanese banks aren’t capital constrained for now, but they will have to maximize returns to stakeholders, so we expect more issuance out of Japan.’’
He concludes: ‘’We are also hoping for more activity on our side following the establishment of the global securitisation team at MUFG which integrates expertise and coordinates globally. Potential SRTs were discussed by regional business teams but these transactions require plenty of expertise, so we had to make these changes to collaborate globally.’’
Stelios Papadopoulos
News
CMBS
Better bid
REO online auctions gaining traction
The three most active US CMBS special servicers sold 125 commercial real estate assets via online auctions in 2020 and 2021, with sale proceeds on average achieving 103% of the most recent appraised value and 122% of the minimum reserve price, according to a new Fitch study. The findings show that assets sold in 2021 on average achieved 109% of the most recent appraised value, compared to 97% on average in 2020, reflecting improving property performance and strong financing markets.
“The success special servicers are seeing in terms of price and faster disposition times reflects the growing number of buyers and available liquidity pursuing commercial real estate properties,” comments James Bauer, director at Fitch.
Compared to direct broker sales, online auctions offer real-time bidding, access to a wider pool of buyers and more certainty of execution, as property and borrower due diligence and contract negotiations are performed in advance. Bidders are pre-qualified, provided due diligence materials prior to the auction and lose a deposit if they fail to close a transaction.
REO sales accounted for 89% of the total assets sold via the auction platforms involved in Fitch’s study, with the remainder being defaulted mortgage notes. Retail properties (41% of sales by count) and office properties (26%) represented the most common property types sold.
Retail assets had an average unpaid principal balance (UPB) prior to disposition of US$9m and an average sale price of US$5.8m, while office properties had an average balance of US$8.8m and an average sale price of US$4.8m. Lodging properties (23% of sales) typically had larger balances, with an average UPB of US$12m and an average sale price of US$5.2m for properties sold on the platforms.
The average REO asset sold on the auction platforms had been REO for 30 months and the average time from auction date to sale date was approximately two months.
On average, REO sales proceeds were 107% of the most recent appraisals, according to the study. Sales prices for lodging properties saw some of the best results, receiving 120% of the most recent appraisals on average - reflecting daily rate resets and a faster recovery in certain markets, especially in the limited service/extended stay segments. Sales prices for office properties were slightly above appraisals (105% on average) and retail properties were on par with appraisals.
When measured against the reserve price, or the minimum price a seller would accept, sales proceeds were 124% of reserve prices on average. Office properties on average sold for 135% of reserve prices, followed by lodging properties at 128% and retail properties at 116%.
For its study, Fitch analysed online auction sales data from 2020 and 2021 from LNR Partners, CWCapital Asset Management and Rialto Capital Advisors. Of the 125 auction sales observed, 81% of sales were sold through the Ten-X platform and 19% via Marketplace.
Fitch expects the use of online auctions to continue to grow and the average balance of loans to increase.
Corinne Smith
News
RMBS
Servicer strategies
BNPL affordability dynamic eyed
The rapid growth of the buy now, pay later (BNPL) sector (SCI 25 March), coupled with heightened costs of living, is altering the affordability dynamic within existing RMBS portfolios. Against this backdrop, investors are being encouraged to question servicers about their strategies for BNPL schemes.
“From a securitisation point of view, there aren’t huge issuances at the moment - and people are wary, due to the nature of BNPL, as it is a fairly benign market. The concerns are around increased interest rates [and] how they have been tested, as this hasn’t been played out in an economic downturn before,” explains Richard Gater, chief client services officer at Rockstead.
Another concern is how rating agencies will approach BNPL securitisations, given that the underlying are new products and previous ratings have been assigned in a low-interest rate environment. However, rating agencies are expected to consider the structural strengths of other transactions, including the presence of back-up servicers and whether there are any regular cash-sweeps.
Meanwhile, although lenders can adjust affordability assessments for new lending and those investing in future RMBS issues can assess transactions with an updated perspective, holders of existing portfolios do not have this luxury. As such, it is crucial that investors in existing RMBS are aware of the tightening credit position and ask servicers challenging questions around their future strategies for BNPL schemes.
In particular, Gater suggests that investors ensure there is good control from an arrears perspective, ensure that servicers will treat customers fairly and that affordability checks are robust. “Would they be doing a hard search again or will it be a soft search? A soft search doesn’t provide a full picture,” he explains.
A further issue is whether weak underwriting standards could pose problems, in terms of leading customers down the BNPL route and thereby affecting the underlying assets of securitisations. Nevertheless, the BNPL sector will eventually be brought into the regulatory perimeter, which is expected to result in substantial changes to the way schemes are marketed and underwritten.
“This is a fairly new market - there will be challenges ahead and hurdles that need to be overcome. The hardest thing is to model this market and price accordingly - but this potentially will get easier over time,” Gater concludes.
Angela Sharda
Market Moves
Structured Finance
ITRN 'club deal' debuts
Sector developments and company hires
NN Investment Partners (NN IP) has launched the first vintage of a customised solution to invest in trade finance through its Insured Trade Receivables Notes (ITRN) strategy. Structured as a club deal and delivered via a mutual debt vehicle (a fonds commun de titrisation), the offering was specifically designed for a group of high-profile insitutional investors in France, with initial commitments amounting to €258m.
The vehicle is managed by France Titrisation, with NN IP acting as investment advisor. Its multi-currency portfolio with a new tailor-made hedging arrangement requires no collateral to be posted, which broadens the scope of sourcing while remaining efficient in terms of returns.
The vehicle invests in short-dated notes linked to highly granular diversified portfolios of globally generated receivables. Each note is fully insured by a financial institution rated single-A minus (or higher) and targets a one-year effective maturity, with the aim of generating average gross returns of Euribor plus 2%-3% per annum on a medium-term basis.
Other international institutional investors will be able to join for the second vintage of the solution in late 2022.
In other news….
North America
Onex has announced the completion of its inaugural credit opportunities fund, raising more than US$500m in credit from existing investors and new partners. The firm hopes the Onex Structured Credit Opportunities Fund (OSCO) will generate attractive risk-adjusted returns through investment in CLOs, backed primarily by senior securities corporate loans in the secondary and primary markets.
Market Moves
Structured Finance
'Investor-friendly' features introduced
Sector developments and company hires
Rising interest rates and widening spreads have spurred changes in US non-prime RMBS structures that introduce investor-friendly features for senior noteholders, Fitch reports. The move comes amid growing concern over coupon cap shortfalls and lower availability of excess spread.
As such, many issuers have reduced the aggregate servicing fee to 25bp (which historically has been 50bp), while some have introduced straight sequential waterfalls rather than modified pro-rata/sequential waterfalls. Other structural changes reduce or reallocate the interest of the subordinate and risk retention bonds. These include issuing subordinate bonds as principal-only bonds, reducing the subordinate bond coupons to coincide with the senior note step-up coupon and changing transaction waterfalls to reallocate subordinate interest to pay class A1 cap carry-over amounts.
In other news….
EMEA
Arrow Global has appointed a new director of asset management to its Irish servicing business, Mars Capital Finance. Seamus Corbett joins the Dublin-based Mars Capital from BCM Global where he held a similar role, and having previously worked at IBRC, Anglo Irish Bank, Woodchester, and EBS Building Society. Corbett brings more than two decades of experience to his new role as director of asset management, in which he will be concentrating on maintaining the Mars Capital reputation and enabling consistency across existing asset management portfolios.
GLAS has received strategic investment from Levine Leichtman Capital Partners in a move to support the firm’s rapid growth. The London-based independent institutional debt administration services provider, GLAS, increased its revenue by more than 25% and total headcount by over 40% from 2020 to 2021. The firm hopes the investment will help support the development of its technological capabilities and development of bespoke solutions for deal parties in complex transactions. GLAS will continue to be led by its co-founders, Mia Drennan and Brian Carne, as group president and general counsel, respectively. The investment was supported by Lincoln International serving as financial advisor and Addleshaw Goddard acting as legal advisor to GLAS, and the terms of the transaction were not disclosed.
illimity Bank has acquired Aurora Recovery Capital (Arec), a special servicer of securitised mid- and large-ticket unlikely-to-pay (UTP) corporate real estate loans. With offices in Rome and Milan, the firm has €2.1bn third-party assets under management and an average gross book value (GBV) of single positions of circa €30m. Arec is currently owned by Finance Roma, GWM Group Holding (each holding a 40% stake) and Oxalis Holding. The firm ended 2021 with an EBITDA of €3.1m and has a team of around 40 professionals, with specialist skills ranging from managing insolvency procedures and distressed credit restructuring processes to running and turning around complex property estates.
LATAM
Vinci Partners has announced the launch of Vinci Credit Securities, in a move to further develop the company. The fund will centre itself on generating income for quotaholders through a diversified portfolio of MBS and investing in like-minded REITs. As the first perpetual capital listed REIT within MBS and debt-rated securities managed by the firm, the fund has added to initial seed investment to reach R$177m in AUM. The company has now launched seven listed vehicles worth up to R$5.3bn in perpetual capital across real estate, infrastructure, and credit segments.
North America
Advent Capital Management has launched its debut CLO platform through a partnership with and seed capital from Apollo. The new CLO business works to extend Advent’s existing credit underwriting, structuring and leveraged loan services and expertise. Sharing a credit-first philosophy with Apollo, Advent seeks to build upon its disciplined investment and portfolio management approach and offer investors attractive risk-adjusted returns via income and capital appreciation. Advent expects proceeds from the partnership with Apollo to offer both seed equity and debt capital for a series of Advent-managed CLOs.
Mt Logan Re welcomes Youssef Sfaif to its team as coo. Effective from 1 July 2022, Sfaif will join the Everest Re Group’s third-party capital unit amid crucial period of company expansion. Sfaif will report directly to Mt Logan Re president, John Modin, and will help support the firm’s continued expansion of its capital base and bench of offerings. Sfaif joins the firm from PGGM, where he has served as a director in its credit and insurance-linked investment teams since 2017, and brings to the firm expertise in capital markets, reinsurance convergence, and extensive experience in originating, structuring, and executing across different (re)insurance risk-sharing transactions.
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