Contents

Capital Relief Trades

Risk transfer return

European CRE SRT finalized

SCI can reveal details of a transaction that Intesa Sanpaolo executed at the end of March this year. Dubbed, GARC CRE one, the synthetic securitisation is the first confirmed post-Covid significant risk transfer trade from a European originator that references commercial real estate loans.

The transaction is backed by an approximately €2bn portfolio of commercial real estate loans and it’s structured in tranched cover format. Protection was bought on a funded junior tranche (0-8.50%) but Intesa retained the senior piece and 10% of the underlying loans.

The portfolio consists of 150 borrowers, including real estate funds, mainly located in the north of Italy and active in the acquisition or construction of non-residential real estate assets-predominantly offices and shopping malls-across Italy. Further features include a two-year replenishment period.

The deal follows SRT trades brought to market in the last 12 months by the Active Credit Portfolio Steering team for a total size of around €10 bn.

The Italian lender concluded in a statement that the ‘’credit portfolio management initiatives are now focused on a forward-looking risks approach that can contribute in actively reshaping the group’s portfolio-as government programs are fading out-and enabling credit to flow at a business level while optimizing risk metrics.’’

Banca IMI acted as the arranger in the trade.

Stelios Papadopoulos

Structured Finance

European CLO structures: Are the foundations changing?

James Smallwood, senior associate at Allen & Overy, examines whether the foundations are changing for European CLO structures

What's in a name? Or, more appropriately for CLOs, what's in a number? And while there are many important numbers and figures in a CLO transaction (obviously), here and in particular, I'm referring to some pretty low digits – one, two and three. Or more accurately, 1.0, 2.0 and 3.0. As whenever there are times of market stress and change, inevitably CLO market participants wonder, are we seeing the emergence of CLO 3.0s? So, when we ask whether the foundations of European CLOs are changing, what we're really asking is – are we seeing the emergence of the next generation of CLO structures?

CLOs have always been complex beasts, evolving from earlier forms of securitisation. CLO 1.0s are used to refer to pre-financial crisis deals; CLO 2.0s in a European context to those deals issued since the market reopened in Europe in 2013. The general differences between these two types of issuances are well-known and well-publicised: shorter reinvestment periods, shorter non-call periods, generally lower leverage percentages, greater refinancing flexibility, risk retention requirements (in Europe at least), for example. And CLO 2.0s have been remarkably successful in moving on from the performance of pre-crisis deals – as shown most recently by their confident display through the pandemic.

I've lost track of the number of conversations over the years on whether market developments mean we're now into the realm of the '3.0' – and I get it, it makes for interesting market chatter, gives market participants something to write about (self-awareness intended!) and creates a bit of a buzz. Changes for Volcker, changes for US risk retention, changes brought about because of the pandemic. Each economic, regulatory and geopolitical hurdle thrown at this market over the past decade has led to such thoughts, and each time the moniker hasn’t caught on. Why? In essence due to both the structural changes being less dramatic than between 1.0s and 2.0s, and because the market's marketing men and women haven’t needed to reboot the sector, as was required after 2008/2009.

After the turbo-charged days of 2021, when lockdown loosening, central bank and governmental largesse contributed to a record year for Euro CLOs, 2022 is providing an entirely different challenge: crisis in Ukraine, inflation levels unseen for a generation and even Brexit back in the news. CLO spreads are up across the capital stack, new deal issuance is flat-lining and refis/resets are off the table for the foreseeable future. Deals are still pricing, albeit at a slower rate and after a lot of hard work tweaking the structure to appeal to investors – so does this mean the fundamentals are having to change as well? No – there is still a portfolio of actively-managed corporate loans combined with a securitisation wrapper, the cashflows are largely similar and the leverage is largely the same. Instead, deals are getting shorter, bond buckets are more important and structural adaptions like mezzanine turbo repayments are being seen again, and I'd argue that this flexibility and nimbleness has now become a central pillar of a mature CLO market. Indeed, the first European print-and-sprints deals for a long time only reinforce this.

So I’d argue that CLO foundations are broadly standard, stable and steady. Yes there is innovation and yes there is flexibility, but this represents a mainstay of modern-day CLOs rather than a fundamental change. Instead, what may really lead to fundamental changes to CLOs in the next few years and beyond will be the global decarbonisation push, represented right now by the burgeoning importance of ESG criteria in CLOs – changes to what types of assets can be held, how these assets are analysed and reported to investors and how CLO cash can impact real life companies fighting the climate crisis… now that sounds like a fundamental change.

Structured Finance

Goodbye and good luck

Steve Gandy, md at Santander, reflects on a 30-year career in securitisation ahead of his retirement

Asked about the day after his forthcoming retirement, Steve Gandy, md at Santander, mildly remarks that a ‘’friend will take us out for curry, including my grandson. I’m then off to Germany to see my daughter and then back to the UK, where we will sell the house and head for the US.’’

Gandy’s unremarkable statements draw a curtain on a long and indeed remarkable career, spanning over three decades as one of the leading practitioners in the securitisation market. He was born in El Paso, Texas, the son of two Texans but with Mexican ancestry, as he enjoys pointing out.

‘’It explains why I get along with Spaniards and Latin Americans, along with all those years at Santander,’’ he says.

El Paso consists of a nearly 700,000 population, according to US Census Bureau data, so it remains a relatively small city for US standards. The latter may explain an early desire for an international career.

‘’I don’t know where I got the desire to travel the world. But I grew up in a town, so I wanted to have an international career, to learn about other cultures and study their languages,’’ reflects Gandy.

Perhaps unsurprisingly, the road led first to a linguistics degree at the University of Texas, where he graduated cum laude. This was then followed by an MBA at the Thunderbird School of Global Management, where he won the school’s highest honour, the Barton Kyle Yount Award.

Gandy’s first post was for PNC in Philadelphia, then Mexico City, Pittsburgh, Hong Kong, New York and Chicago, before settling in London for the last 23 years. However, unlike the international career, securitisation was something that just occurred along the way. 

‘’It was 1989 and I was being transferred from Paris to the US while working for PNC. They just told me that I was going to work for some project. The first question I asked was, ‘what is securitisation?’” he remarks humorously.

He continues: ‘’I went through it with an accountant. The project was for an auto loan securitisation. I asked them a tonne of questions and it clicked with me. I loved the creativity, the complexity and the ability to solve puzzles. It was a toolbox that I could use to help my clients solve problems.’’

As with virtually all securitisation practitioners, the 2008 financial crisis is a period that he remembers with dismay. ‘’I was helping people get cars and recycle capital to lend. It was a product that enhanced my employer’s relationship with our clients. If done in the proper way, it’s a great product. But during the subprime crisis, the incentives were greatly distorted, and it became a race to the bottom.’’

The experience of the financial crisis is what laid the groundwork for Gandy’s career highlight, namely the STS framework for synthetic securitisations. ‘’I’ve been trying to restore the credibility of the market since then. The PCS templates benchmark best in practice, so any deal can be assessed, and the same is even truer of STS synthetic securitisations.’’

He adds: ‘’Santander was one of the founders of the European DataWarehouse and PCS. I worked hard to establish the PCS templates. Furthermore, the discussions that we carried out at the European Parliament were crucial, while the support of AFME, the Commission and the EBA proved decisive.’’

Under Gandy’s reign as head of private debt mobilisation, notes and structuring at Santander Corporate and Investment Banking (CIB), the Spanish lender became one of the most important securitisation issuers. On synthetic securitisations, the bank set the bar high for large and programmatic issuance volumes, innovative structuring on a variety of asset classes and best practices.

Santander’s Project Boquerón transaction – which closed in December 2020 – is a case in point, as regulators look to markets for best practices on ESG and impact trades. It also illustrates Gandy’s point as to what securitisation can offer in a world moving towards net zero.

The significant risk transfer trade was carried out with Newmarket and references a €1.6bn portfolio. The deal 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. Additionally, 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.

In terms of the advice he would like to offer his successor Matt Cooke, who joined Santander CIB in September last year as European head of securitised products group, Gandy says: ‘’Always have the client’s interest in mind, be the best in the business and everything else will follow from there.’’

A simple and straightforward piece of advice, but one that has worked very well for Gandy, for Santander and for the return of a more robust and more legitimised securitisation market.

Stelios Papadopoulos

Structured Finance

Industry CLO e-trading platform unveiled

Sector developments and company hires

Citi and Bank of America, joined by Credit Suisse, Goldman Sachs, JPMorgan, Morgan Stanley, Wells Fargo and Moody’s Analytics, have launched Octaura Holdings. The objective of the company is to create the first open-market electronic trading platform for syndicated loans and CLOs.

Built in collaboration with software development platform Genesis Global, Octaura aims to provide comprehensive trading solutions with natively integrated data and analytics. The Octaura venue for loans will launch first, with the CLO trading venue to follow. The company then plans to expand to other products in the credit market.

Octaura began as a joint incubation and co-development initiative between Bank of America and Citi, within its SPRINT (Spread Products Investment Technologies) team. Citi’s internal Velocity CLO eBidding platform and BofA’s Instinct Loan Match platform improved efficiency, liquidity and transparency for users and were the inspiration for Octaura.

Industry veteran Brian Bejile has been named ceo and a member of the Octaura board. Previously, Bejile spent more than 18 years with Citi, rising to global head of CLO issuer management.

Octaura will provide electronic trading protocols for price negotiations, straight-through processing (STP) for trade booking, and data and analytics functionality supplied by Moody’s Analytics, for the first time in one cohesive solution.

In other news……

EMEA

Akin Gump has welcomed a new structured finance partner to its London office in a move to expand its structured finance offering and enhance its CLO practice. Dasha Sobornova will focus on CLO transactions - advising arrangers, investment managers, and issuers across structured finance products. Sobornova joins the firm from Mayer Brown, where she also led its CLO practice in her role as banking and finance partner, and brings with her extensive expertise in EU and UK securitisation regulation. Her appointment is the latest Akin Gump structured finance hire, and follows the recent appointment of new head of structured finance and securitisation in Los Angeles, Deborah Festa.

Jeremy Hermant has joined SME-focused Allica Bank as head of capital markets, based in London. Hermant was previously a senior manager at British Business Bank, responsible for originating and structuring SME risk transfer transactions. Before that he was vp in Santander’s private debt mobilisation, notes and structuring team. He has also worked at Mariana UFP, AXA Investment Managers and HSBC.

Chorus Capital has appointed Nicholas Jaroszek as director, capital formation, based in London. Jaroszek was previously an adviser in Oliver Wyman’s insurance and asset management practice. Before that, he had business development and investor relations roles at Värde Partners and PIMCO.

Isabel Tinsley has joined Hogan Lovells as counsel, based in London. Tinsley was previously a senior associate within Allen & Overy’s securitisation team, having begun her career at Cadwalader in February 2008.

North America

Davis Wright Tremaine is set to combine with financial services boutique, McGonigle, in a bid to enhance its regulatory and enforcement capabilities. The combination will see Davis Wright’s banking and financial service practice more than double in size with the addition of 44 lawyers from McGonigle, helping boost its presence in the East Coast and Midwest markets. McGonigle will add 22 lawyers to Davis Wright’s Washington, DC office, 15 in New York, three in the firm’s new Chicago office, and four to the soon to be established office in Richmond, Va. The combination was driven by the increasing changes in the financial services industry, with the main hope of joining McGonigle’s experience in securities regulation with Davis Wright's in consumer banking, payments and fintech. The combination will be effective from 1 July 2022.

Sixth CIRT completed

Fannie Mae has completed its sixth CIRT deal of the year, designated CIRT 2022-06. The transaction transfers risk on US$725m of mortgage loans to 24 separate insurers and reinsurers.

Fannie Mae will retain risk for the first 55bp of loss on the US$19.3bn unpaid principal balance in the covered loan pool. If this US$106.3m retention layer is exhausted, the 24 insurers and reinsurers will cover the next 375bp of loss, up to a maximum coverage of US$725m.

The loan pool for the deal consists of approximately 63,000 single-family mortgages. It is a low LTV deal, with LTV ratios of between 60% and 80% on mortgages acquired between August 2021 and September 2021.

This CIRT deal follows the sixth CAS transaction of the year, which Fannie Mae placed in the debt markets last week.

Smaller loans dominate CMBS resolutions

Although 2021 saw a dramatic increase in total US CMBS loan resolutions from prior years, only 25% of those loans were disposed of with losses, as special servicers resolved a high number of pandemic-related transfers, according to Fitch’s latest annual US CMBS loan loss study. Total 2021 resolutions increased to US$15.5bn from under US$8bn in each of the last three years.

Almost 75% of the total loan resolutions were resolved without losses or returned to the master servicer, compared with two-thirds in 2020. Approximately 60% of the resolutions that returned to the master servicer were modified or granted some kind of consent or forbearance; the balance were either denied relief or withdrew the request for relief.

The loss severity for the US$3.1bn in loans disposed of with losses in 2021 was 56%, compared with US$1.9bn disposed of in 2020 at a 55.5% loss severity. When not weighted by loan size, the 2021 average loss severity for these loans is 43.1%. Fitch notes that this is because smaller loans with lower loss severities dominated resolutions last year: 85% of loans disposed of with losses had an original balance of US$25m or less.

Approximately 80% of all resolutions and 80% of all loans with losses were either retail or hotel loans, with both sectors seeing a noticeably higher number of resolutions compared to 2020.

Structured Finance

EIOPA consults on securitisation review

Sector developments and company hires

EIOPA has published a consultation paper in response to the European Commission’s call for advice (CfA) to the joint committee (JC) of the European Supervisory Authorities (ESAs) regarding a review of the securitisation prudential framework (SCI 28 October 2021). Under the CfA, the Commission sought the assistance of the JC to assess the recent performance of the rules on capital requirements (for banks and (re)insurance undertakings) and liquidity requirements (for banks), relative to the framework’s original objective of contributing to the sound revival of the EU securitisation market on a prudent basis.

Regarding the insurance sector, the calibration of capital requirements for investments in securitisation tranches was revised (with the adoption of COM Delegated Regulation (EU) 2018/1221) to reflect the new securitisation framework in the banking sector and creating a specific framework for STS securitisation. The stress factors were modified by replacing the previous categorisation according to type 1, type 2 and resecuritisations with the new classification of senior STS, non-senior STS, non-STS and resecuritisations.

For the purpose of the review of the framework, the Commission would need to receive the JC’s advice no later than 1 September 2022. As such, EIOPA has launched a data collection exercise that includes a questionnaire, in order to gather information that will be included in the final advice.

Among the stakeholder questions included in the consultation paper is: do you have any comment on the comparison of the securitisation capital charges with other asset classes with similar characteristics? Another question is: do you have evidence that the current calculation for capital requirements for securitisation (senior STS, non-senior STS and non-STS) is not proportionate or commensurate with their risk?

EIOPA says it will consider the feedback received from stakeholders before submitting a final proposal for adoption.

In other news….

Commingled resecuritisation fees introduced

Fannie Mae and Freddie Mac have introduced resecuritisation fees for new issuances of commingled securities. The fee is designed to align with the cost of required capital for Fannie Mae guarantees of Freddie Mac UMBS collateral and Freddie Mac guarantees of Fannie Mae UMBS collateral under the Enterprise Regulatory Capital Framework (ERCF). 

Effective from 1 July 2022, each GSE will begin charging a new fixed upfront fee of 50bp to create certain Supers and REMIC securities that have the other GSE’s UMBS collateral underlying those securities. The fee is intended to be charged at the time of settlement of the security, although the GSEs reserve the right to charge this fee post-settlement, if a final review of the collateral demonstrates that commingled securities are present.

The charge to create Fannie Mae and Freddie Mac Supers and REMIC securities that include solely Fannie Mae and Freddie Mac collateral respectively remains unchanged, as no additional capital charge applies to such collateral.

EMEA

PCS has welcomed global ABS expert, Ashley Hofmann, to its market outreach team this week. Hofmann has been active in the securitisation market for 12 years, and has extensive experience in managing securitisation conferences, awards, and client relations. Having helped organise events and marketing campaigns for both GlobalCapital and IMN, PCS hopes her skillset will help bolster its online presence and support its European Symposia Series.

North America

John Duda has been appointed as the new head of ILS development and capital management products at the independent specialist (re)insurance broker, Miller. Joining from Markel, Duda brings extensive expertise to the firm having previously led Markel’s retrocessional portfolio management team and assisted in the launch of its retrocessional ILS fund, Lodgepine Capital Management. The firm hopes Duda will help support its broking and ILS operations in Bermuda, where he will focus on defining and building systems and analytics tools, as well as supporting business development strategies. Duda marks the latest hire in the firm’s expansion into Bermuda and ILS following the launch of its Bermuda platform in early 2021, which included the hires of head of Bermuda, Charlie Simpson, and head of ILS, Erik Manning.

Reed Smith has announced the addition of new finance and tax partner, Todd Anderson, who joins the firm’s New York office. Formerly, Anderson worked as founder and managing member of Anderson Tax & Finance Law, and brings extensive experience across real estate finance, securitisation, and loan origination to the new role.