Contents

Capital Relief Trades

Juicy CRT

Historical wides entice fast money

Spread levels in GSE CRT securities at the bottom end of the capital stack are now so cheap relative to comparable ABS assets that they are attracting attention from hedge fund and private equity money, say analysts.

Five-year B2 notes are currently priced close to 1100bp over SOFR, more than twice the levels at which high yield ABS assets of a comparable WAL are seen.

Even five-year B1s are in the plus 500bp range, while, for example, BBB-rated CLOs with a WAL between six and year years are south of plus 400bp.

Post-crisis RMBS paper with a WAL of 13 years or so is close to the same spreads as the CLO market, while non-QM BBB assets with a WAL of 15-16 years is around plus 300bp.

Single family rental ABS paper with a five-year WAL is some way south of plus 300bp, and three year BBB consumer ABS is under plus 100bp.

There is nothing out there that comes close to the yields attainable for CRT.

“We already think that PE and hedge fund money is already looking at the CRT securities space. If you can hit B2s at 11%, that’s a pretty good target for these guys,” says John Sim, head of securitized products research at JP Morgan in New York.

Levels would have already come off the highs under buying pressure were it not for two factors. Firstly, the fast money accounts were hoping that yields would widen even more, but that hasn’t happened. Secondly, even the hedge and private equity funds have evinced a degree of caution about the exigencies of the market in the current risk off climate.

“People are a little bit worried about liquidity and asset outflows, even at the hedge funds, which is why you haven’t seen them come in as hard and fast as you might. But there are definitely people interested in clipping this,” adds Sim.

Yields may also start to contract once supply drops off. The start of the year has seen unprecedented supply, partly because Fannie Mae is making up for lost ground. It was absent from the CRT market for almost over 18 months in 2020/21 due to the disadvantageous capital rules then in force.

However, while the pace might drop off as Fannie covers vintages acquired in its year of purdah, all analysis suggests that the GSEs will continue to issue at a very brisk rate this year. They are under pressure from the FHFA to extend credit and make home-owning more affordable. In its most recent scorecard, the FHFA also exhorted the GSEs to make significant use of the CRT market.

The GSEs predict that there will be $25-30bn of new issuance in 2022.

New issue spreads in the B2 market are at historical wides due to supply pressures and the generally unfavourable economic climate. High LTV B2s have printed at around 1110bp over SOFR in Q1, while low LTV B2s have come in at a little below plus 1000bp.

High LTV B1s have printed at around plus 700bp, while low LTVs have been seen in the region of plus 600-650bp.

Simon Boughey

Capital Relief Trades

Capital boost

European banks ready for cycle turn

European banks are equipped against a deterioration of the business cycle according to new research, with Nordic banks standing out for both their above-average post-provision profitability and high level of excess capital.

After years of high profit retention, European banks have accumulated very comfortable capital cushions relative to regulatory requirements.  According to the latest research from Scope ratings, the median CET1 ratio now stands well over 15%, and no bank has a CET1 ratio below 10%. This is largely the result of the great re-regulation that followed the 2008 global financial crisis. The latter figures compare to a median CET1 ratio of 7% prior to the 2008 crisis.

Moreover, as the coronavirus crisis rocked markets two years ago, capital accumulation went several steps further as supervisors nudged lenders into retaining profits given expectations of higher loan losses, which nevertheless failed to materialise. Hence, this has left European banks with significant excess capital.

However, capital accumulation went into reverse from 2H21 onwards, when European banks started announcing plans for generous dividend distributions and share buybacks. Yet buffers remain quite large. Scope ratings notes: ‘’If banks headed into the pandemic with buffers typically below 300bp, a more typical figure now is 500bp. This is well above the banks’ own targets, affording significant flexibility with respect to organic growth, M&A opportunities, and distributions.’’

The rating agency continues: ‘’Banks have largely stuck to their pre-war capital distribution plans, with RBI being the most notable exception. Even banks with sizeable exposure to Russia, such as Societe Generale and UniCredit, have indicated that they are comfortable with their distribution plans, at least for now. Supervisors have ruled out imposing blanket bans on distributions, which we take as a sign that they are relatively comfortable with banks’ exposures and overall balance-sheet quality.’’

The agency’s research shows that Nordic banks stand out both for their above-average post-provision profitability and high levels of excess capital. The latter is due to strong efficiency metrics, underpinned by modern franchises and high digital penetration along with low credit losses. Capital buffers have declined in recent years as a percentage of RWAs, although this typically reflects regulatorily-driven RWA inflation and higher buffer requirements.

Scope’s sample includes fifty banks, and they calculate pre-provision profitability and the cost of risk for the 2019-2021 period, giving the agency a rough estimate of the room banks have for absorbing additional costs through their P&Ls before capital is affected. High underlying profitability is also a key anchor determining banks’ ability to raise equity if the need were to arise due to exceptional circumstances.

The initial calculations allow the rating agency to stress cost-of-risk assumptions to model the banks’ ability to withstand increases in the cost of risk. Scope estimates that most of the banks in the sample could withstand a trebling in the cost of risk while remaining profitable.

Stelios Papadopoulos 

ABS

Accelerating change

NPL ABS evolution gathers pace

Regulatory change in the European non-performing loan securitisation market has picked up speed over the last month, with the publication of the EBA’s final draft risk retention regulatory technical standards (RTS) (SCI 13 April) and the launch of an EBA consultation on draft implementing technical standards (ITS) in connection with NPL data templates (SCI 17 May). However, a number of wrinkles have already been identified, which it is hoped will be ironed out over the NPL Directive’s transitional period.

The revised NPL templates are expected to become mandatory for credit institutions during the course of 2023, for the provision of information to investors under the NPL Directive, which passed into law last December with a two-year transitional period (SCI 9 December 2021). The objective is to increase efficiency in the NPL market by providing a common data standard across the EU, thereby enabling cross-country comparison and reducing information asymmetries between buyers and sellers of NPLs.

The templates will be used for loans that are originated after 1 July 2018 and that became non-performing after 28 December 2021. The data fields are classified as mandatory or non-mandatory and vary in their scope of application by nature of the borrower and nature of the loan. When information is unavailable for non-mandatory data fields, defined codes for no-data options shall be used.

However, there is concern that the introduction of mandatory data fields will create a barrier for sellers of NPLs. NPL Markets, for one, is calling for the EBA to clarify the consequence of a seller not being able to provide all mandatory fields.

“Investors may accept loans with incomplete data possibly at a lower price. Sometimes the cost of collecting all mandatory fields is not justified by the potential expected price increase. We deem it essential that mandatory fields do not create an insurmountable hurdle for sellers where some data is not available,” the firm observes.

The consultation also proposes that where credit institutions split an NPL sale between a non-binding offer (NBO) phase and a binding offer phase, the information needed for the financial due diligence and valuation should be disclosed at the beginning of the second binding offer phase. NPL Markets notes that this is not in line with market practice, where investors receive a data tape after signing a non-disclosure agreement in the first NBO phase.

“Certain sensitive fields can be redacted from the initial NBO tape, where required. But organising an NBO without a detailed data tape will fail to provide a reliable criterion to select investors for the binding offer phase,” the firm argues.

Meanwhile, the EBA’s final draft risk retention RTS appear to run counter to the intent of the EU NPL Directive in that rather than encouraging new servicers into the market, it hinders their entrance by requiring that a servicer holding the retention in a securitisation must have a minimum amount of experience or, alternatively, appoint a back-up servicer that has sufficient experience. Specifically, the final draft RTS confirm that servicers may act as retainers, providing they comply with requirements as to ‘expertise’, including that: senior staff have adequate knowledge and skill in servicing non-performing exposures; the business has serviced NPEs for at least five years; at least two senior staff have at least five years' experience in servicing NPEs; and the servicing function is supported by a back-up servicer.

Counter to this, the ability of servicers to passport under the NPL Directive could potentially increase competition among servicers. The Directive is designed to develop the NPL secondary market by introducing a common set of rules for the key parties - credit servicers and credit purchasers.

Such a contradiction is consistent with what is seen in the securitisation market generally, according to Iain Balkwill, partner at Reed Smith. “Regulators appear to have got themselves in a bit of a knot again. Historically, securitisation was stigmatised and then they realised it is a good tool for addressing NPLs,” he observes.

He adds: “The risk retention RTS favour incumbent servicers. Ultimately, the objective should be to promote competition across the servicing sector to encourage more NPL sales activity.”

The European NPL market is characterised by micro-cycles, with some new entrants staying the course and others exiting because they don’t achieve the volumes or returns they anticipated. “The NPL market is specialised and there are significant barriers to entry for new participants. Third-party servicers are incentivised to build AUM and therefore may often generate aggressive business plans, absent true alignment of interests,” observes Adam Croskery, head of debt financing and structuring at Arrow Global.

He continues: “While the Italian and Greek [state guarantee] models provide short-term liquidity, liquidity in the long term is dictated by the number of servicers operating in the market. To best serve the market, servicers need scale or a specific niche.”

Balkwill believes that the NPL Directive is a positive development in many ways, in that it “creates four corners of the playing field” – albeit different European member states will adopt different approaches to implementing the measures. “This creates issues for jurisdictions that already have an NPL servicing law, like Greece. Will the government now amend that law to conform with the Directive or will two different regimes be operational? It adds further complexity in a market where NPLs need to be addressed on a timely basis,” he notes.

Generally, ambiguity remains regarding what constitutes a ‘credit servicer’ and a ‘credit purchaser’. There is ambiguity around what an NPL is too, given the mixed bag of assets they represent.

“NPLs are not just defaulted loans – they include loans that haven’t paid for 90 days, failed financial covenants or haven’t reported for a given period. There are consumer assets at one end of the NPL spectrum and commercial real estate at the other, as well as unlikely-to-pay assets and reperforming loans. Furthermore, sellers will sometimes include performing assets in a pool, depending on which portfolios or areas of business they’re disposing of - although these can sometimes be hived off,” Balkwill explains.

He continues: “Should investors look at assets across an underlying sponsor, by jurisdiction or by asset class? Or does it make more sense to have a blended approach? Ultimately, it’s about achieving the best price for those assets.”

Gianluca Savelli, co-founder and ceo of NPL Markets, notes that a strong bid remains for NPLs. “Investors remain keen to buy NPL assets, but the price differential between bids remains significant, sometimes also up to 20%-30%. IRR targets varies across investors and servicers, depending on access to liquidity and their target AUM.”

He explains that there are always some participants that need to accelerate their ramp-up of assets and therefore can be more aggressive on price. Similarly, each participant has a sweet spot or preferred asset class, so are willing to be more aggressive in those segments.

“If a seller has a large mixed portfolio, they can attract interest from a range of different investors and split the portfolio accordingly,” he notes.

Croskery says that the bid/ask gap between NPL buyers and sellers has narrowed. “To a certain extent, it depends on the jurisdiction and vendor. For example, the gap has almost closed in Greece and Italy, due to the socialisation of losses via the HAPS and GACS schemes.”

Bank sellers are generally well-provisioned and will trade when the opportunity presents itself. But the situation is less clear-cut with asset managers, which often appear to be sitting on pre-Covid marks and are therefore less incentivised to trade.

“All financial assets involve assumptions, but with NPLs especially, the drivers of spread tightening are not always clear – it can relate to a genuine reduction in risk premiums, but can also result from overly optimistic business plans. The relevance of this dichotomy is that in the medium term, maladjusted business plans are quickly found out,” Croskery notes.

The European NPL market has historically been concentrated around a few large investors, mainly because size matters in terms of sourcing opportunities and undertaking due diligence. However, Savelli suggests that platforms like NPL Markets can add value by enabling sellers to reach investors more efficiently.

“There is an interesting opportunity for medium-sized portfolios at the €200m-€700m GBV level, as the platform can facilitate price discovery and reduce pain points, since it automates execution across the entire transaction lifecycle. Investors can access information on the assets, jurisdiction and – in platforms like NPL Markets - run quick portfolio valuation and scenario analysis, which helps them to decide whether to invest time on a portfolio. At the same time, sellers need to overcome certain internal barriers, but relatively soon platforms can serve as an admin tool,” he says.

Balkwill says that as a secondary market develops, the NPL space should open up to smaller investors, who’ll be able to purchase interests in assets without having to buy an entire portfolio. But he suggests that, at present, best practices for conducting portfolio sales remain unclear.

“Typically, a seller wants the sale to happen as quickly and as painlessly as possible, and - other than well-founded sensitivity surrounding reputational risk for itself - is largely indifferent to what the buyer does. Hopefully, all these issues will be identified and fixed during the transitional period,” Balkwill concludes.

These issues and more will be discussed at SCI’s forthcoming NPL Securitisation Seminar on 27 June.

Corinne Smith

Capital Relief Trades

Climate countdown

Green SRT challenges highlighted

A green synthetic securitisation framework remains lacking, despite the current regulatory focus on ESG. This Premium Content article explores why.

Green lending targets in use-of-proceeds synthetic securitisations are expected to become more of an obligation going forward, but such a change should be accompanied by clear parameters and consequences for failing to satisfy that obligation. Nevertheless, a framework for green synthetic securitisations that renders this task more realistic is currently lacking, among other challenges that will keep this segment of the market constrained for the foreseeable future.   

According to Mira Lamriben, policy expert at the EBA: ‘’Regulatory capital should be there to absorb losses. But with synthetics, we have the notion of capital relief, and this is the challenge within the prudential framework when you think about use of proceeds.’’

She continues: ‘’The way issuers of green securitisations have dealt with this issue legally until now was to stipulate contractually that the redeployment of capital or funding from brown to green assets was carried out on a ‘best-effort basis’. So, if banks can’t meet their green lending targets for various reasons, there’s no legal risk. However, the requirements will become more stringent going forward.’’

Leanne Banfield, counsel at Linklaters, responds: ‘’Originators will often agree that any regulatory capital saving is plugged back into sustainability lending, but there is often very little in terms of contractual obligations, with this tending to be on a best-efforts basis. Yet this is akin to the issues faced by the green bond market, which has in part seen more sustainability-linked bonds with measurable KPIs.’’

She adds: ‘’If regulation makes the use-of-proceeds application into an obligation, then the legal documentation will need to have very clear parameters around this and address the consequences of the bank failing to satisfy it. This could include higher paid coupons or an early termination. This will become an important point for investors to negotiate.’’

The EBA acknowledged the lack of a framework for green synthetic securitisations in its landmark report on sustainable securitisation (SCI 2 March), but is leaving it to the market to decide the best practices that will then inform its conceptualisation. According to the EBA report: ‘’More time would be needed to assess whether and how the specificities of synthetic securitisation should be reflected in a green framework, especially given that no green standard has been considered yet for any credit protection instrument. It is therefore proposed that the EBA is mandated to monitor the development of the EU green synthetic securitisation market and, if appropriate, further investigate the relevance and potential content of a framework for green synthetic securitisation.’’

Nevertheless, the supervisor has laid out the building blocks by clarifying the main challenges and questions pertaining to green synthetic securitisations, as well as the rationale for the use of these instruments. The report recognises that ‘’synthetic securitisation may contribute to a more sustainable economy by enabling credit institutions to overcome capital constraints to generate new sustainable investments’’.

The idea here is to enable banks to free up capital held against brown assets that would then be redeployed towards green lending. The latter has been welcomed by market participants, given the limited supply of green assets.

Adelaide Morphett, associate at Newmarket, notes: ‘’There is a limited supply of green assets, as evident by the low green asset ratios of EU banks, which was just 7.9% across a sample taken by the EBA in May 2021. So, if you want to catalyse more sustainable synthetic securitisations, then use of proceeds is an additive path forward, freeing up capital from brown assets to redeploy towards new green lending.’’

However, some investors argue that brown assets are actually a fraction of bank balance sheets. If that’s the case, then the whole discussion over the redeployment from brown to green might perhaps be questionable. 

According to one capital relief trades investor: ‘’The stated rationale behind use of proceeds is that brown assets are clogging up bank balance sheets, but for most large banks they are a small fraction of their books. Banks started to restrict lending to brown projects - such as coal - many years ago and, as these project loans have amortised over time, the extent of their representation has declined. It’s useful to point out that this amortisation will persist.’’

He continues: ‘’Active capital management allows banks to reallocate capital more frequently and with a very relevant view on the use of proceeds. With every (re)allocation decision, banks can incrementally improve the profile of their lending. Focusing predominantly on ‘brown’ to ‘green’ is sub-optimal.’’

Moreover, ESG scores or ratings - which are available for most large public companies - should be a key component of credit risk analysis in any asset class. Governance and environmental issues lead to very fundamental credit risk considerations. Companies that don’t pay attention to ESG issues will have to deal with the repercussions of that in terms of both reputational and credit risk down the line.  

According to an ECB analysis, as of September 2021, the share of bank loans exposed to climate risk and specifically high transition and high physical risk is 10% for ‘significant institutions’ and less than 10% for ‘non-significant institutions’.

The ECB analysis conceptualised climate exposures as those subject to physical and transition risks. Exposures are categorised as high transition risk if a firm’s absolute emissions fall into the 70th percentile of Scope one, two and three emissions for the entire sample. Exposures are categorised as high physical risk if a firm’s probability of suffering from a wildfire, river or coastal flood within a given year is over 1%.

The Scope one, two and three classification is a widely used emissions classification scale among supervisors and academics. Scope one emissions refer to a company’s direct emissions, Scope two encompass indirect emissions - such as purchased electricity - and Scope three emissions refer to all emissions along a company’s value chain.

However, the modelling and data issues around climate exposures are well known, so any figures should perhaps be taken with a grain of salt. In fact, banks and investors are waiting for the results of the ECB’s final climate stress tests for some answers (SCI 3 December 2021). Hence, what counts as ‘green’ and ‘brown’ remains far from clear.

Another key obstacle is the data and monitoring of use of proceeds. Measuring and monitoring the redeployment of capital to green assets is difficult. According to the EBA, in a green use-of-proceeds synthetic securitisation, the amount of assets generated by the transaction would be dependent on the credit risk associated with the green assets.

As a result, to ensure proper monitoring of the green use of proceeds in the context of synthetic securitisation, the exact capital charges of the newly generated green assets would need to be known and disclosed. Moreover, the prudential implications of green synthetic securitisations are uncertain at present, due to the lack of data on the credit risk performance of green assets.

However, the EBA’s position on this has raised eyebrows with originators, since the measurement and monitoring of redeployment isn’t just an issue for synthetics. ‘’Overall, it’s an issue to link assets to the EU Taxonomy. However, since the challenge is similarly present in the case of green bonds, regulators should also consider this as a similar concern. From our perspective, our reporting frameworks are robust enough to address such issues,’’ says David Saunders, executive director at Santander.

The EBA has responded to these concerns by stating that although there are ‘’some challenges in the monitoring of the use of proceeds for green bonds, the situation is different for green synthetic securitisations - which are not green financing instruments by nature, but green protection instruments.’’

Yet the equivalent in the case of synthetics would be the freed-up capital that is redeployed, rather than the lump sum cash resulting from the sale of green bonds. The latter is a mechanism that the EU’s own institution - namely, the EIF - has utilised for its SME financing activities via its synthetic securitisation programmes.  

The future of green synthetic securitisations will be determined by market practice and here the innovation is notable. Santander’s Project Boqueron transaction is a case in point (SCI 21 October 2021). The transaction was carried out with Newmarket last year and references a €1.6bn portfolio.

The significant risk transfer trade champions ESG lending through three unique features, both at inception and during reinvestment. First, the portfolio is focused on ESG assets at issuance, including projects across 21 countries and more than 50% in renewable energy projects. Second, coupon incentives exist to replenish the portfolio with further ESG assets during the revolving period.

Finally, the trade includes coupon incentives for utilising the capital released to further grow Santander’s lending to new ESG assets globally outside the transaction, using a novel approach of linking growth to megawatts funded through green projects, as opposed to simply focusing on RWA metrics. Megawatts is an objective standard that investors desired, since it can be audited and reviewed.

However, the incorporation of environmental risks into the prudential framework will be equally important. Jo Goubourne Ranero, consultant at Allen & Overy, explains that the EBA is keen to keep reflection of environmental risks in the prudential framework risk-based and data-driven and has little appetite for introducing ‘green’ supporting factors or ‘brown’ penalising factors.

Ranero comments: ‘’The EBA is wary of prudential regulation being used as a substitute for public policy, such as effective emissions pricing and of unintended impacts. This includes over-stating or under-stating capital requirements, relative to quantifiable risk, or incentivising a shift in ‘brown’ or transitional financing to shadow banking.’’

She concludes: ‘’Several changes and clarifications to the Pillar One prudential framework - potentially including a large exposures-style concentration limit and/or reporting and monitoring requirement for significant exposures to environmental risk - are, however, contemplated. The EBA also notes that it is working on integrating environmental considerations into the Pillar Two framework, including in the Supervisory Review and Evaluation Process and stress tests.’’

Stelios Papadopoulos

ABS

New path

Mexican securitisation marks firsts for StepStone

Global private markets firm StepStone has structured a US$102.5m public offering of a securitised portfolio of direct loans via Certificados Bursátiles Fiduciarios on Mexico’s BIVA stock exchange earlier this year. Significantly, the transaction represents the first securitisation in Mexico of a portfolio of direct loans granted to North American companies, as well as the first time that StepStone acted as sponsor and manager of a trust issuing a publicly listed rated note in any market.

“This transaction was designed with Mexican insurance companies in mind,” notes Alberto Basave, md at StepStone. “Our initial strategy was to structure and offer private equity strategies; however, we found out that such operations consume a lot of capital from their technical reserves and, as such, were not attractive. Therefore, we eventually decided to structure a debt vehicle.”

Rated triple-A by HR Ratings, the transaction provides an expected yield to maturity of more than 5% and a floating rate structure, which protects investors from any potential interest rate hikes. The securities were priced at US$105 per certificate, have a maturity of 11 years and carry a coupon of Libor plus 2.25% that will be paid semi-annually each July and January.

The equivalent of MX$3.1m was raised by StepStone in the first offering on 18 February. Subsequent offerings will be conducted during the following 12 to 18 months until the total US$102.5m issue is completed, with proceeds invested through StepStone’s private debt platform.

“We were able to raise US$102.5m from insurance companies,” Basave states. “The transaction incorporates very diversified exposures and five to seven different private debt managers. The portfolio will include approximately 80 to 100 loans to medium-sized companies with operations mainly in the US.”

He insists that such am innovative structure will bring more depth and options to the market: “It is something new that insurance companies can invest in. This particular security allows for great diversification and the US dollar-denominated return provides that type of edge.”

Basave concludes: “The Mexican securities commission had never seen anything like this before. No-one was able to put such a puzzle together, in a jurisdiction where government or corporate bonds are the usual norm. Clearly, a new path has been set.”

Vincent Nadeau

ABS

Complex picture

European ABS/MBS market update

With two deals being pulled in the space of a week, the European ABS/MBS markets are facing thorny times. The current complex environment and volatility is set to hinder issuance in the short term.

Last Friday, HSBC announced it had to pull its UK student accommodation CMBS transaction – HXGN CMBS Finance 2022-1 – due to “exceptional market conditions”. The same narrative was communicated yesterday, when PSA Financial Services announced that its Auto ABS Spanish Loans 2022-1 was postponed due to volatile market conditions.

“I think the fact that a couple of transactions have been pulled tells its own story,” says one European ABS/MBS trader. “Naturally, PSA does not quite measure up against its German counterparts VW or BMW. However, you would still expect autos to be the easiest asset class to sell.”

Against such a backdrop, some deals did manage to get over the line. Yesterday, UK non-conforming RMBS Together Asset Backed Securitisation 2022-2nd1 was formally announced and preplaced on the same day.

“I think that getting investor feedback is beneficial in the current context,” the trader argues. “It forces you to look at the deal on its own merit, without being influenced by market momentum. I feel it could be a trend in the coming weeks.”

Prior to that, Fortuna Consumer Loan ABS 2022-1 – Auxmoney’s latest German consumer ABS transaction – priced on Tuesday. Although the deal did ultimately get across the line, the result was rather lacklustre, with joint-lead manager offers needed down the capital stack to complete the deal.

“It was a relatively small transaction that really just limped over the line,” says the trader. “Only 1.0x coverage across the board with support from the JLMs also tells its own story. Such wide levels for short-duration consumer ABS is not encouraging.”

Meanwhile, Volkswagen’s VCL 36 priced this afternoon. The deal’s senior tranche printed with a 30bp DM, twice that of the class As from the previous deal from the platform in February and triple that of those from VCL 34 and 33 last year.

As for the secondary market, the trader cautiously reports some improvements. “Over this week, the tone has improved a little and we are seeing more investors coming through. Liquidity has improved a little bit; however, covers are still very wide.”

Looking ahead, the trader describes a tentative environment: “It is clearly not down to the war anymore. Some investors are still surprised by the withdrawal of central bank support, but the situation should not be as bad as it currently is. Overall, there is a clear lack of liquidity, which in turn brings a lack of confidence.”

For more on all of the above deals, see SCI’s Euro ABS/MBS Deal Tracker.

Vincent Nadeau

Structured Finance

SCI Start the Week - 16 May

A review of SCI's latest content

Last week's news and analysis
Better bid
REO online auctions gaining traction
PIMCO push
Kruzel hire suggests new SRT focus
Reinsurance resurge
The CRT reinsurance market takes larger share of risk
Risk transfer expansion
MUFG finalises synthetic securitisation
Servicer strategies
BNPL affordability dynamic eyed
Stagflation risks disclosed
Airlines at risk from inflation

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.

Recent Premium research to download
Aircraft ABS turbulence - April 2022
The fallout from the Ukraine crisis is likely to affect the entire aircraft ABS market, rather than simply those deals with exposure to Russian assets. This Premium Content article outlines why the sector is bracing for a bumpy ride.
Marking 25 Years of cat bonds - April 2022
With the climate threat menacing ever more, is the catastrophe bond market set to see exponential growth? This Premium Content article investigates.
MDB CRT challenges - March 2022
A number of challenges continue to constrain multilateral development bank capital relief trade issuance. This Premium Content article investigates whether these obstacles can be overcome.
The rise of the ESG advisor - March 2022
ESG advisors are gaining traction in the securitisation market, as sustainability becomes an ever-more import consideration for investors and issuers. This Premium Content article investigates what the role entails.

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

Capital Relief Trades

Fannie prints fifth CIRT of 2022

CIRT and ACIS ride high

Fannie Mae has completed its fifth CIRT transaction of 2022, designated CIRT 2022-5, the GSE announced today (May 20).

The deal transferred $733m of mortgage credit risk to 22 insurers and reinsurers.

There are around 67,700 single family mortgages in the covered loan pool with an unpaid principal balance of close to $21bn. All loans in the pool were high LTV mortgages, with LTVs between 80% and 97%.

Fannie Mae will retain risk for the first 65bp of loss on the covered loan pool. If the $136.2m retention layer is exhausted, the insurers and reinsurers will cover the next 350bp of loss on the pool, up to a maximum coverage of $733.3m.

Fannie Mae has now acquired approximately $19.2bn of insurance coverage on $656.6bn of single-family loans since the inception of the CIRT programme.

In the early days of the CRT market, the capital markets programmes (CAS and STACR) were the principal avenues of credit risk transfer, but in the last year the reinsurance programmes (CIRT and ACIS) have taken an increasing share of the burden.

According to Freddie Mac, some $8.2bn of limit was placed through ACIS in 2021, the busiest year since the market began. The SPL7-2021 was also the biggest single ACIS transaction - $1.8bn – yet seen.

While new issue spread levels bounced up during 2020 – the year of lockdowns – they have been remarkably stable since the beginning of 2021. In contrast, spreads in CAS and STACR deals have widened appreciably this year.

Participation in reinsurance deals has also increased. The inaugural ACIS deal of 2022, the SPL1-2022, was divided between 30 reinsurers. This was the highest number of firms ever represented in an ACIS deal. The subsequent deal to that attracted 27 firms and the most recent SPL2-2022 brought in 29.

In 2019, the last full year before the pandemic, the highest number of reinsurers seen in a single transaction was 20, and the mid-teens was more common.

In general, ACIS risk is sold to repeat customers but in 2021 four new participants were seen.

Freddie Mac is on course to issue $25bn in the CRT market in 2022, and of this half will be investment grade, says the GSE.

It began splitting the M1 tranches into M1-A and M1-B sub-tranches at the beginning of this year, due to higher attachment and detachment points. Fannie Mae followed suit shortly thereafter.

Freddie issued $7.5bn in the STACR and ACIS markets in Q1, which was a quarterly record. It issued $19bn in 2021, or which only 25% was investment grade.

Simon Boughey

Capital Relief Trades

Risk transfer round up-16 May

CRT sector developments and deal news

Credit Agricole and Societe Generale are both believed to be readying synthetic securitisations backed by leveraged loan exposures. The latest deals follow rumours of another such trade from Deutsche bank (SCI 6 May).

Stelios Papadopoulos 

Structured Finance

Time for the European CRE CLO to prepare for take-off

If all indicator lights hold true, then the European CRE CLO market is primed and ready for take-off, explains Iain Balkwill, partner at Reed Smith.

Indeed, if this market manages to follow the same eye-watering trajectory of growth experienced in the United States, then not only are we in for a majestic ride but this could be truly transformational for the European commercial real estate (CRE) finance market.

Just like CMBS, at its core a CRE CLO features the securitisation of a pool of loans secured by CRE. However, unlike CMBS, it is not designed to exploit an arbitrage between capital markets and loan interest rates, but instead it is a balance sheet financing tool which is ideally suited for those debt funds that have stepped into the lending void created by the retraction of the banks from the lending space. To date, such funds have largely financed their loans using either pure equity, loan-on-loan facilities or repo lines, but with the arrival of the CRE CLO they now have another string to their bow.  

For the debt funds, on an economic level a CRE CLO makes a lot of sense given the high level of leverage it enables them to obtain, the compelling weighted average interest rate, as well as the ability to match fund their underlying loans. From a business perspective, these structures are appealing as they allow the sponsor to retain an ongoing relationship with the underlying borrowers. In addition, the funding product has the capacity to cater for a change of the composition of the securitisation pool with loans being replenished as well as actively traded. Comparing these attributes against the other financing options certainly makes embracing this technology a truly exciting funding alternative for the erstwhile debt fund.

From an investor’s perspective, the CRE CLO offers a mouth-watering proposition. The attractiveness of the product stems from the fact that the CRE CLO notes demand a premium compared to CMBS, as well as a number of structural benefits. Chief among these is the fact that the sponsor retains a significant amount of equity in the structure and there is the presence of note protections tests which cut off payments to the equity at times of distress. Further assurance is also derived from the sponsor continuing to have an active role in managing the underlying collateral.

On a macro-economic perspective, the arrival of the CRE CLO can be considered a hugely positive development given that this technology is a neat way of distilling CRE finance risk from the banking sector and transmitting this risk across a wide and diverse investor base. Securitisation also by its very nature shines a light on a traditionally opaque financing market. From a CRE perspective, the tantalising prospect about the product is that it has proven to be ideal at providing back-to-back financing for funding transitional assets. Moreover, it has the capacity to play a key role in enabling property owners to embrace ESG principles, as well as financing the repositioning of properties so that they are better tailored to the practical realities of a post-pandemic world.

Although the benefits of a CRE CLO are great, it also comes with its drawbacks. For example, putting in place a securitisation is more challenging than other forms of finance especially if notes are to be rated, listed and sold to both European and US investors. These structures also come with a high upfront price tag when you factor in all the relevant fees in setting up the structure and preparing the relevant disclosure. Sponsors – and to a certain extent their underlying borrower will also find themselves – under the permanent gaze of the capital markets. However unappealing these stark truths are, when you factor in the overall positive economics and associated benefits, then these drawbacks are put into perspective.

At this point in time, the European CRE CLO product can definitely be considered to be a true game-changer when it comes to financing European CRE. In a world of rising interest rates, coupled with once-in-a-generation demand to adapt and repurpose properties, the arrival of this technology will be hugely welcome. So, when it comes to the European CRE CLO, now is the time to fasten seat belts and prepare for take-off. Whether this will be a plane flight or a rocket ride, time will tell, but if all the indicators prove true then the infamous countdown has already begun. 

Structured Finance

Transportation investment platform founded

Sector developments and company hires

Onex has established a new platform focused on investing in transportation-related assets used for land, air, marine and industrial applications. The strategy will involve investments in hard assets with long lives, contractual cashflows and an element of inflation protection.

The firm has recruited Wes Dick to lead the strategy as md and head of Onex Transportation Partners, based in San Francisco. Dick was previously head of capital markets, corporate finance and business development at BBAM, which he joined in 2006. Before that, he worked in transportation investment banking at Credit Suisse.

Keith Allman also joins the Onex Transportation Partners team as md, based in New York. Allman was previously md, head of esoteric ABS at MUFG and vp, senior securitised asset analyst at Loomis Sayles. Prior to that, he worked at Deutsche Bank, Bamboo Capital Partners, Pearl Street Capital, NSM Capital, Citi and MBIA.

In other news..

EMEA

Fidelity International has appointed several new members to its direct lending team as a part of its move into private credit. The 12 new hires include several senior roles in private credit and follows the firm’s commitment to build a new and separate unit for alternative investment last year. The hires include the former Bank of Ireland’s ceo of France operations, Raphael Charon, who will work on the launch of Fidelity’s direct lending origination initiative. As well, Pierluigi Volini, will join the firm to lead its credit risk management and portfolio oversight from Credit Suisse. Alongside the senior hires, the firm also welcomes Marc Preiser as a portfolio manager from Apollo Global Management, Tim Johnston as md from Beechbrook Capital, Ben Forman as director from Mizhuo Bank, and Mikko Iso-Kulmala as an investment director from Barings.

North America

US Bank has appointed Bill Orr md, ABS syndicate, based in Charlotte, North Carolina. He was previously an md at Wells Fargo, which he joined in January 1998.

Structured Finance

Principles-based cybersecurity approach urged

Sector developments and company hires

The SFA has responded to the US SEC’s proposed new rules to enhance and standardise disclosures made by public companies regarding cybersecurity risk management, strategy, governance and incident reporting. The association believes the proposed rule to be focused almost exclusively on corporate registrants, ignoring the extensive fundamental and technical differences between the potential impact of cybersecurity risks and incidents on investors in corporate securities versus ABS.

The SEC proposal applies to registrants, including corporate issuers and asset-backed issuers, and would require: current reporting about material cybersecurity incidents; periodic reporting to provide updates about previously reported cybersecurity incidents; periodic reporting about a registrant’s cybersecurity risk policies and procedures, including management’s expertise in managing cybersecurity risk; and annual reporting or certain proxy disclosure about the board of directors’ cybersecurity expertise. In its letter, the SFA urges the SEC to propose tailored rules for asset-backed issuers that are appropriately aligned with the SEC disclosure and reporting framework for ABS and the relevant risks to ABS investors, and to give the ABS market an opportunity to provide public comment on those re-proposed rules.

An example of an important area where the proposal does not appropriately address ABS risk is its focus on the asset-backed issuer, whose limited activities do not present cybersecurity risk to ABS investors. Instead, the association believes the primary area of potential cybersecurity risk to an ABS transaction relates to the breach of information systems used by a servicer.

Further, the SFA notes that cybersecurity disclosure should be principles-based, focusing on material risks and risk management - rather than matters of cybersecurity strategy or governance - that would apply to Securities Act registration statements and prospectuses. It also calls for a transition period of at least six months for any proposed and adopted rules that the SEC may release for ABS transactions, and for the exclusion of legacy ABS from additional cybersecurity reporting requirements.

In other news…

North America

BTIG is set to expand its structured products trading team with the hire of James Mozer, who will serve as md within the BTIG fixed income, currency, and commodities division. Mozer joins the firm from Morgan Stanley where he most recently worked as executive director and head of the non-agency RMBS and ABS desk, and brings more than 13 years of experience to the new role.

New Debt Exchange has announced that it has raised US$1m in capital to boost product development. The US-based financial technology company is working to build an integrated connectivity and data utility for the global bond market, with an initial focus on CLOs. The capital was raised from a group of more than 20 strategic individuals, including consultants, former partners from Goldman Sachs, founders of CLO management businesses, portfolio managers, quants, risk managers, and lawyers. The firm hopes the fundraise will enable its expansion into offering greater technological solutions and automation to better support transaction execution for CLO market participants.

RFC issued on NPL standardisation

The EBA has launched a public consultation on draft implementing technical standards (ITS) specifying the requirements for the information that sellers of non-performing loans shall provide to prospective buyers. The objective of the draft ITS is to provide a common standard for NPL transactions across the EU, enabling cross-country comparison and thus reducing information asymmetries between the sellers and buyers of NPLs.

Common templates - including data fields - with their definitions and characteristics set out in the draft ITS would facilitate sales of NPLs on secondary markets, increase efficiency of those markets and reduce entry barriers for small credit institutions and smaller investors wishing to conclude transactions, according to the EBA. The draft ITS are based on the templates to be used for the provision of loan-by-loan information regarding counterparties related to NPLs, contractual characteristics of the loan itself, any collateral and guarantee provided with the associated enforcement procedures and the historical collection and repayment schedule of the loan. The NPL transaction templates are accompanied by a data glossary and instructions for filling in the templates.

The draft ITS also take into account the proportionality principle by setting different information requirements depending on the size of NPL, specifying the mandatory and non-mandatory data fields, and considering a different scope of application of the data fields in relation to the nature of the borrower (private individual or corporate) and that of the loan (secured or not). The EBA developed the draft ITS by leveraging on the experience gained with the voluntary use of NPL data templates.

Comments on the consultation should be submitted by 31 August. A public hearing on the draft ITS will take place on 15 June.

Following the consultation period, the draft ITS will be finalised and submitted to the European Commission by the end of 2022.

Structured Finance

Stonehill announces leadership additions

Sector developments and company hires

Stonehill is set to expand its commercial lending business with four new senior executive hires to its leadership team. Daniel Siegel, Greg Koenig, Nisu Mehta, and Taylor Pike each join Stonehill from Ardent with several decades of real estate business shared between them. The firm hopes the new hires will assist in widening its product offering across all real estate sectors. Firstly, Siegel will serve as the president of the firm’s commercial real estate lending group and will be responsible for its expansion into commercial real estate lending. Koeing, Mehta and, Pike will work alongside Siegel as svps at Stonehill.

In other news…

EMEA

Arrow Global has announced the launch of its new portfolio diagnostic solutions service for its UK client base. The Portfolio Diagnostic Solution aims to support creditors amidst period of uncertainty by assisting them with assessing risk within their portfolio, curate strategies to help reduce risk, while ensuring all customers are treated fairly.

North America

Barrow Hanley Global Investors has appointed TJ Unterbrink md and fixed income portfolio manager. Unterbrink was previously a partner at Carlson Capital, where he developed and co-managed the firm’s CLO business from inception through to the sale of the unit last month (SCI 4 April). Before that, he worked at HIG WhiteHorse, Corriente Advisors, Austin Industries and Deloitte.