News
ABS
Crash landing
Aircraft ABS market papering over the cracks, say critics
There are gaping fault lines in the aircraft ABS market which the industry is doing little to solve, say some investors and structurers.
The Ukraine war has exposed serious imperfections but even more deep-seated problems in the key areas of valuation and transparency bedevil the sector, they add.
Aircraft securitization got under way about four years ago, but volume picked up sharply in 2019.
“The asset class has shown itself to be structurally flawed. The banks are not going to highlight that, the issuers are not going to highlight that, and the senior investors either don’t care or will accept flaws to achieve higher returns or diversity. This is a dangerous path to go down,” says one experienced structured credit investor.
It was while being involved in the syndication process that one structurer began to realise that the market has serious limitations.
Significantly, it seems that banks tend to use conservative assessments to assess the value of the aircraft for their loan books, but when that collateral is valued for securitization then more aggressive valuations are turned to. This creates higher returns for the investor than would be possible if less bullish values were used.
Indeed, some deals have carried an IRR for the equity tranches of around 18% or 19%. “It made little sense that the IRR was higher than what one knew was achievable from those assets,” says a source.
Banks like Bank of China, MUFG and Macquarie have large aircraft lending programmes and all tend to use Ascend for this purpose. Ascend is acknowledged to be a prudent valuer and has over 20 years of experience in the sector.
However, when it came to the securitization of this collateral, other valuers tended to be used. Names like Acumen, IBA, mba, and Avitas were mentioned.
For example, STARR 2019-1, issued by GECAS in April 2019 and which securitized leases covering 20 narrowbody aircraft, came in with a calculated IRR of 17.50%. The total debt size was $474m, the equity tranche was worth $99.56m and had a thickness of 17.36%.
The valuers, which were Avitas, IBA and mba, assessed the aircraft in this transaction to be worth $588.7m, according to documents seen by SCI. There were 13 lessees and the weighted average lease term was 6.6 years.
Sources also add there is often a lack of transparency when it comes to the fees paid to the servicers, the structurers and the syndicate bank. This is particularly damaging in an unwind, as investors are unable to work out what they are proper due.
This opaqueness is possible because, it is alleged, there are frailties in the servicing agreements which allow the SPVs to sometimes fail to act in the best interest of the noteholders.
“The fees that are paid to banks are often not disclosed. It was only when notes began to have structural challenges that we became aware that very high fees were being charged in comparison to ABS deals of similar complexity,” says another market expert.
The leading banks in the syndication of aircraft ABS market are Goldman Sachs and Deutsche, say sources.
Investors have shown little interest to address these imperfections as they are happy with the yield they are getting in the senior, junior and mezzanine tranches and leave the equity tranche to take care of itself, suggest others. While there is a healthy demand for higher yielding esoteric assets, there is a tendency to gloss over the problems.
But clearly a lack of transparency about fees prohibits effective valuation of key aspects of the deal’s collateral. And this applies to senior tranche investors as much as equity tranche investors.
Nor is the wider market showing much keenness to fix the issues, add sources.
“They are some good lessors, and a wide range of fleets of aircraft with various attractive characteristics. I do believe in the importance of the asset class, but my experiences in the aviation securitization market have been problematic. While the flaws in the market have been exacerbated by Covid and the war in the Ukraine, the issues are longstanding and concerning,” says Orlando Gemes, founding partner and chief investment office of Fairwater Capital, a London-based alternative investment firm.
Others question how rating agencies are able to assign ratings when deals appear to lack necessary clarity.
Simon Boughey
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News
Structured Finance
SCI Start the Week - 30 May
A review of SCI's latest content
Last week's news and analysis
Climate impact disclosed
Bank of England releases climate stress tests
Diversification eyed
Investors target derivative backed SRTs
El Clásico?
Groundbreaking AV bond closes
Office sector concerns
The return to work has brought arguably more uncertainty than the initial transition to working from home
Portfolio progress
Business model rethink continues apace
Restructuring event?
Yandex restructuring event rejected
Retail woes
Euro CMBS divergence continues
Slow and steady
Dutch auto ABS to remain stable as car ownership declines
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
Portfolio optimisation and ABS - May 2022
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Green SRT challenges - May 2022
A green synthetic securitisation framework remains lacking, despite the current regulatory focus on ESG. This Premium Content article explores why.
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.
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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
Structured Finance
Fit for purpose?
ESAs urged to revive securitisation market
AFME and Paris Europlace have jointly called for the European Commission and co-legislators to step up efforts to finalise the European securitisation framework and make it “fit for purpose”. The move follows a High-Level Forum, which took place today (31 May), organised by the two associations to discuss the role that securitisation can play in helping to meet Europe’s financing needs.
The event comes ahead of a key report due in the autumn from the European Supervisory Authorities (ESAs), which have been tasked with advising the Commission on how the prudential framework has performed relative to its stated purpose and the objective of revising EU securitisation markets (SCI passim). AFME and Paris Europlace urge the ESAs not to miss this opportunity to introduce more proportionality and risk sensitivity in the regulatory framework, so that European savings can be mobilised to finance the European economy. The two associations believe that this must include targeted measures to revive the market, including a recalibration of capital charges, and better treatment for securitisation issuers and investors.
“We are concerned that time is running out in the current legislative cycle to effect the necessary changes to make European securitisation an attractive asset class and to halt the steady decline of EU ABS,” states AFME ceo Adam Farkas. “Securitisation is being held back by a regulatory framework that was developed in the aftermath of the global financial crisis and is heavily coloured by experiences in the US subprime mortgage market and products which no longer exist or have been prohibited by the European regulatory framework. In order for securitisation to reach its true potential in funding the green transition, supporting growth in the digital economy and providing private capital to businesses, an understanding of the crucial role that EU capital markets must play in functioning EU ABS markets is crucial in driving targeted adjustments to EU prudential regulation.”
During the Forum, speakers agreed that securitisation is important in terms of supporting the European economy in light of the significant financing needs deriving from the war in Ukraine and in the post-Covid recovery, as well as supporting the green and digital transition. Notably, they highlighted private securitisation as a way of enabling corporates to diversify their funding base and for disruptors to scale up their businesses prior to accessing capital markets.
‘Use cases for securitisation’ was one topic discussed during the Forum, whereby representatives from Crédit Agricole, the EIF, Santander and Volkswagen Financial Services showcased how securitisation is used as part of a borrower’s funding model and the impact regulation is having on their businesses. Another topic was ‘proportionality and level playing field’, which saw representatives from BofA, EBRD, ESMA and IACPM identify ways of improving transparency in the securitisation market while eliminating redundant disclosure requirements – with the aim of reducing barriers to entry for investors and issuers.
“European authorities should consider securitisation as a high priority in the context of accelerating the implementation of the European Capital Markets Union and, more especially, due to the overreliance on bank financing in Europe and the need to develop new financing channels through capital markets. The review of investor needs and attracting investors via the necessary simplification of the rules must be a priority,” concludes Arnaud de Bresson, md, Paris Europlace.
Corinne Smith
News
Capital Relief Trades
Ramping up
Santander adds ramp-up feature in new SRT
Santander has finalized a €108m synthetic securitisation that references a €1.25bn portfolio of Portuguese corporate and SME loans. Dubbed Syntotta 2022-1, the transaction differs from the Spanish lender’s previous Portuguese capital relief trades thanks to the inclusion of a ramp period.
According to sources close to the transaction, the ramp-up period will allow Santander Totta-the bank’s Portuguese subsidiary- to add up to €200m of new assets in the first six months of the deal.
The same sources note without further specification that the assets are ‘’very similar’’ to Santander’s last Portuguese synthetic securitisation. The latter was called Castelo and was executed in July 2021. The €183m ticket was backed by a €3bn Portuguese corporate and SME portfolio (see SCI’s capital relief trades database). However, the ramp up feature is new, and the pricing was also tighter in the case of the latest Syntotta trade.
Further features include a pro-rata amortization structure and a time call. The number of borrowers in the portfolio amounts to over 23000. Syntotta 2022-1 is the third significant risk transfer trade in the Syntotta series. The first was executed in June 2019. The €200m tranche referenced a €2bn Portuguese SME portfolio.
Stelios Papadopoulos
News
Capital Relief Trades
Risk transfer comeback
Santander completes US auto SRT
Santander has finalized a synthetic securitisation that references a US$4.76bn portfolio of US auto loans. Dubbed SB Auto CLN series 2022-A, the CLN is a follow up to a similar transaction that the bank closed last year. The latter marked the bank’s return to the US market and it was the first post-Covid US auto synthetic ABS by a European originator (SCI 17 December 2021).
The capital relief trade consists of US$427m class B notes (priced at 5.28%), US$35m class C notes (priced at 7.38%), US$24.50m class D notes (priced at 9.97%), US$35m class E notes (priced at 12.66%).
According to Fitch the deal features a portfolio with strong credit quality. The weighted average (WA) FICO score is 772, with 91.8% of scores above 675 and the remaining 8.2% in the 626–675 range. The pool has a larger concentration of extended term loans, with 84-month loans totalling 20%, up slightly from the 15% in the 2021 trade. Vehicle type and model concentrations have remained consistent compared to the 2021 CLN. The concentration among the top three vehicle models is lower at 97.7% versus 97.3% in the 2021 trade.
The initial hard credit enhancement totals 4.50%, 3.50% and 2.80% for classes B, C and D, respectively, consistent with the prior transaction and consisting entirely of subordinated note balances-including the additional class E and retained R notes. No additional enhancement is provided including no excess spread. Initial credit enhancement is sufficient to withstand Fitch's base case cumulative net loss (CNL) proxy of 1.80% at the applicable rating loss multiples.
Auto loan cash flows are allocated among the class B and C notes based on a pro rata pay structure, with the retained class A certificates receiving a pro rata allocation payment. The subordinate class D, E and R notes remain unpaid until all other classes are paid in full, in sequential order. Additionally, lower-rated subordinated classes will be locked out of principal entirely if the transaction’s CNL exceeds a set CNL schedule.
The lockout feature helps maintain subordination for a longer period should CNL occur earlier in the life of the deal. This feature redirects subordinate principal to classes of higher seniority sequentially, except class A certificates. Moreover, if the pool CNL exceeds 4.00%, the transaction switches from pro rata and pays fully sequentially-including for class A certificates.
Finally, to mitigate tail risk-which arises as the pool seasons and fewer loans are outstanding-class E and R notes are locked out of payments until other classes of notes are paid in full. This leads to a subordination floor equal to 2.80% below the class D notes at issuance.
Stelios Papadopoulos
Market Moves
Structured Finance
Franklin Templeton to acquire Alcentra from BNY Mellon
Sector developments and company hires
Franklin Templeton is set to acquire the European credit and private debt manager, Alcentra, from BNY Mellon. The acquisition of Alcentra and its US$38bn in assets under management will see the expansion of Franklin Templeton’s US alternative credit specialist investment manager, Benefit Street Partners, and ramping up of its presence and capabilities in Europe. The transaction will increase the size of Franklin Templeton’s alternative assets under management to US$257bn, and double Benefit Street Partners’ assets under management to US$77bn. Alcentra and BNY Mellon will maintain existing distribution and asset servicing relationship, with the transaction expected to complete during 1Q23.
In other news…
APAC
Blackstone Credit (BXC) has appointed a new head of Asia Pacific origination, in a bid to expand its presence in the region and support rising demand for private credit financing. Mark Glengarry joins the BXC team from Anchorage Global Capital, where he served as md for the London and Sydney offices, managing private investments across Europe and Asia Pacific. Glengarry will be based in Sydney, and the BXC APAC team will be led by head of Blackstone Credit’s European business, Paulo Eapen.
EMEA
ARA Venn has named Charles-Edouard Pouyet director and head of capital markets, residential mortgages. Based in London, he was previously svp, capital markets at Kensington Mortgages and a vp in credit derivatives structuring at Societe Generale. In his new role, Pouyet is tasked with expanding the firm’s investment management capabilities into new mortgage products and markets.
GSE disclosure requirements introduced
The US FHFA has published a final rule that amends the GSE Enterprise Regulatory Capital Framework (ERCF) by introducing new public disclosure requirements for Fannie Mae and Freddie Mac. The requirements include quarterly quantitative and annual qualitative disclosures related to risk management, corporate governance, capital structure, and capital requirements and buffers under the standardised approach. The aim is to enable market participants to assess key information about the enterprises’ risk profiles and associated levels of capital, and thereby promote transparency and encourage sound risk management practices at the enterprises. The GSEs will publish their first public disclosure reports under the final rule in 1Q23.
Lending partner revealed
Digital-lending platform auxmoney has disclosed that it partnered with Chenavari Investment Managers, for the first time, to issue its latest securitisation. Dubbed Fortuna Consumer Loan ABS 2022-1, the €225m transaction represents the largest public consumer ABS to be issued by a fintech so far this year (see SCI’s Euro ABS/MBS Deal Tracker). The triple-A rated class A notes adhere to the standards defined in the ICMA Social Bond Principles, as confirmed by an ISS Corporate Solutions second party opinion. The transaction is also certified by SVI as a securitisation meeting the requirements for STS.
North America
Churchill Asset Management has hired a new head of sustainability and ESG integration, Mickey Weatherston. He joins the firm as principal and will be based in New York City, reporting to cro, Christopher Cox. Weatherston will be responsible for offering strategic direction for ESG integration across Churchill’s businesses, working alongside parent company Nuveen’s responsible investing team. Weatherston joins with more than 18 years of experience from Muzinich, where he served as director of marketing and client services.
DBRS Morningstar has announced the hire of 10 new senior-level analysts to its global structured finance team in New York and Chicago. Five new members will join the firm’s US structured credit group, including Hylton Heard, Stuart Rothenberg, and Lisa Kwasnowski as senior vps, and David Petu, and John Um as vps. These five will report to md and head of US structured credit, Jerry van Koolbergen. Additionally, Elizabeth Fitzpatrick, Doo-Sik Nam, and Du Trieu will join the DBRS Morningstar US ABS group as senior vps, reporting to md and head of US ABS, Chris D’Onofrio. The new hires join recently recruited Michael Vidmar and Patrick McCormick, who now serve as vps for DBRS Morningstar’s North American CMBS group and operational risk group, respectively.
Post-moratorium arrears volatility eyed
DBRS Morningstar reports that prepayment levels across its European structured finance rated universe have remained stable for RMBS, on a slightly increasing trend for ABS - especially auto loans in Germany and the UK - and on a similarly increasing trend for SME CLOs. Performance has continued to remain solid as pandemic-induced payment holidays in most jurisdictions have not rolled into arrears, although the rating agency observes an increasing trend in 90 plus-day arrears in the UK. There appears to be no clear correlation between payment holidays and prepayments, however.
These findings are from a DBRS Morningstar analysis of coronavirus-related payment holiday data for 275 RMBS, ABS and structured credit transactions it rates across eight jurisdictions. The majority of the data is from Italy (accounting for 81 transactions), Spain (77) and the UK (49). The remaining data is from Ireland (20), Germany (11), the Netherlands (17), Portugal (11), France (6) and Belgium (2). Overall, only 47 out of the 275 transactions still reported payment holidays in 1Q22.
Market Moves
Structured Finance
MidOcean bags PE bigwig
Sector developments and company hires
Erik Oken has joined MidOcean Partners as chairman of its private equity business, based in New York. He will work directly with the firm’s private equity investment team, with the aim of adding valuable senior insights and oversight to its thematic investment approach. Prior to joining MidOcean, Oken spent over 30 years at JPMorgan, most recently serving as global chair of investment banking.
In other news…
EMEA
London-based Centre for Disaster Protection has appointed Cristina Stefan to the role of lead risk finance adviser. Stefan has expertise in designing alternative risk transfer products - including catastrophe bonds and ILS solutions - and was previously a disaster risk finance specialist at the World Bank, which she joined at the beginning of 2018. Before that, she was head of insurance solutions at Metabiota, having also worked at Vienna Insurance Group, Allianz and BNP Paribas.
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