Contents

ABS

NPL ABS line-up finalised

European NPL Securitisation Awards to debut

SCI’s 4^th Annual NPL Securitisation Seminar is taking place in-person on 27 June at Centro Congressi Stelline in Milan, Italy. Hosted by Orrick, the event focuses on how securitisation is being embraced by policymakers as a way of helping European banks de-risk and optimise their balance sheets.

The seminar begins with an overview of how the Covid-19 pandemic impacted European non-performing loan activity and ABS issuance, followed by a panel focusing on the GACS and HAPS schemes and whether they are replicable in other jurisdictions. Next is a discussion of recent NPE regulatory and legislative developments, including the impact of the EBA NPL templates on portfolio sales. The penultimate panel examines the importance of sourcing relationships and strategic servicing partnerships, while the final panel explores emerging NPL opportunities, including the rise of non-performing real estate leases and unlikely-to-pay exposures.

Rounding off the event is SCI’s inaugural NPL Securitisation Awards ceremony, which will be followed by a cocktail reception.

SCI’s 4^th Annual NPL Securitisation Seminar is sponsored by DBRS Morningstar and Societe Generale. Panelists also include representatives from Alantra, Alvarez & Marsal, Banca Ifis, Christofferson Robb & Co, Debitos, European Central Bank, European DataWarehouse, Intesa Sanpaolo, Intrum, Luigi Luzzatti, NPL Markets, Scope Ratings and S&P.

For more information on the event or to register, click here.

Structured Finance

SCI Start the Week - 20 June

A review of SCI's latest content

FREE SCI special issue
Published for IMN’s Global ABS 2022 – includes recent news, premium content and a profile of Santander’s Steve Gandy. Download here.

Last week's news and analysis
Are the foundations changing?
James Smallwood of Allen & Overy examines European CLO structures
Goodbye and good luck
Steve Gandy, md at Santander, reflects on a 30-year career in securitisation
Risk transfer return
European CRE SRT finalised

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
CLO Migration - June 2022
The switch from the Cayman Islands to alternative domiciles, following the European Commission’s listing of the jurisdiction on the EU AML list, appears to have been painless for most CLOs. This Premium Content article investigates.
Portfolio optimisation and ABS - May 2022
The trend of banks rationalising their business models continues apace across Europe. This Premium Content article explores the role of securitisation in their portfolio optimisation efforts.
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.

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

Stable outlook persists

Moody's maintains stable default outlook

Moody’s has maintained its default outlook below the 4.1% long term average for annual global speculative corporate default rates (SCI 16 February). The rating agency’s outlook remains practically unchanged compared to the period before the Ukrainian crisis since both company liquidity and refinancing needs remain broadly covered.

Moody's credit transition model predicts that the trailing twelve-month global speculative-grade corporate default rate will rise to 2.8% by the end of 2022, and then climb to 3.3% by May 2023. If realized, these forecast rates would remain below the long-term average of 4.1%.

The forecasts assume that the US unemployment rate will remain at a low 3.4% by May 2023 compared to 3.6% in May 2022, while the US high-yield spread will widen to 499 bps-near the long-term average level-from around 400 bps.

The default forecasts incorporate the recent reduction in the rating agency’s global growth projections for 2022 and 2023, and an increase in inflation related risks. Several negative factors are hitting the global economy, including supply shocks that are stoking inflation and eroding consumer purchasing power as well as the shift towards a more hawkish monetary policy globally.  

Indeed, Inflation remains high, with the May US consumer price index at nearly 8.6%, the highest level since 1981. The combination of high inflation, slowing growth and aggressive monetary tightening will squeeze corporate margins and heighten financing risks for speculative-grade borrowers.

Nevertheless, Moody’s qualifies that ‘’in the near-term, liquidity needs are relatively modest as many companies refinanced in the recent past and intrinsic liquidity remains fairly healthy.’’

Hence, the rating agency’s baseline scenario does not anticipate a sharp increase in corporate default rates over the next twelve months, but default risks are clearly growing amid the spill overs of the Ukrainian crisis and ongoing monetary policy tightening.

Defaults rose in May as nine Moody's-rated corporate debt issuers defaulted, up from April’s revised count of five. The May defaults lifted the global speculative-grade default rate to 2.1% for the trailing 12 months ended in May, compared to 1.9% a month earlier. Six of the month's defaults came from advanced markets and three were from emerging markets.

The year-to-date global corporate default tally was 39 through May, up from 26 in the same period last year. Across sectors, Construction and Building, with nine defaults, is the largest contributor to defaults so far this year. North America had 17 defaults-16 in the US and one in Canada. The rest were from Europe (11), Asia-Pacific (nine) and Latin America (two).

Stelios Papadopoulos

Capital Relief Trades

Corporate SRT finalized

Credit Agricole prices capital relief trade

Credit Agricole has finalized a significant risk transfer transaction that references a portfolio of corporate loans. The latest deal has been priced somewhat tighter compared to another corporate SRT that the bank executed last year.

The transaction’s sold tranche features a thickness equal to 6% and has been priced in the 8.5%-9% region. The French lender’s last corporate SRT closed last year (SCI 17 November 2021). Dubbed Premium Green 2021-4, the €168m five-year CLN referenced a €2.8bn pool and paid three-month Euribor plus 9.5%.

Indeed, the pricing for both trades is very standard for corporate capital relief trades although some widening going forward is expected due to rising inflation and quantitative tightening worldwide. However, investors don’t expect this widening to be over two to three percent.

Synthetic securitisation issuance remains strong given the illiquid nature of SRTs and the buy and hold nature of the investor base, as well as the low default rates of the underlying credits and the floating rate nature of the product. The latter acts as an inflation hedge.

Credit Agricole has been broadening the scope of asset classes that it hedges via a synthetic securitisation. Over the last two years, the bank has bought protection on portfolios of capital call facilities and its now readying transactions backed by leveraged loans and commercial real estate assets.

Stelios Papadopoulos 

Capital Relief Trades

Risk transfer round up-23 June

CRT sector developments and deal news

UniCredit is believed to have executed a synthetic securitisation backed by corporate loans. The bank’s last significant risk transfer trade was executed in January and was called ARTS two (see SCI’s capital relief trades database).

Stelios Papadopoulos 

ABS

Changing the paradigm

John Pellew, principal, distribution and securitisation at Arrow Global, argues that it is possible to de-risk NPLs and democratise fixed income through digital securitisation

In isolation and in the absence of mitigating factors, non-performing loan and distressed assets are inherently high-risk investments, but that’s not the whole story.

While it’s true that we are dealing with defaulted loans and distressed assets, these assets are not sold in isolation or single units, and they are not sold because they have no value. They are sold because the banks are forced to sell under the Basel-type regulatory obligations. We argue there is value there; it’s just a question of how much value and how we can extract it.

Where there’s muck, there’s money
The NPL and distressed industry follows the old adage, “Where there’s muck, there’s money” - referring to all of the traditionally ‘dirty’ industries around the world, like domestic waste management and the burgeoning global recycling industry. I chuckle to myself sometimes when I describe Arrow as the waste recycler of the European financial services sector, but it’s true. We do the same job as any scrap metal merchant or plastic recycler: we buy waste, we sort it, we process it, and we transform it into something of value again and sell it back into the markets.

So, how does it work?
NPL and other distressed assets cannot be viewed in the same way as performing assets, where it’s easy to look at the repayment schedules of the loans and project out cashflows which inevitably already account for a level of delinquencies. NPLs, on the other hand, are themselves the delinquencies, so you need to look at value in a different way.

• It is a numbers game; in other words, large granular portfolios are much easier to predict than smaller lumpy portfolios.
• NPLs and distressed assets are traded at a deep discount to the face value, so buyers like Arrow are already de-risking their exposure on day one.
• Time is key. You can remediate NPL and distressed assets if you have enough time. You can collect out what you need to make the portfolio work, but the real risk is how long it takes.
• Collateral is king. Sometimes, but not always, there is some collateral of value that can be converted to cash to recoup some of the investment.

Once you break in a portfolio, you get a small but relatively consistent pool of reperforming loans, which become the foundation of a predictable cashflow. At Arrow, some of our ‘mature’ portfolios collect out at +/- 1% /pa. +/-1% accuracy.

In any other industry, this would be viewed as “very predictable” and therefore low risk. However, in the NPL space, it still seems to carry a negative perception.

Luckily for us, the maths involved does not lie and we find a dislocation between the real risk and the returns in this sector. This is good for Arrow and its investors, but a missed opportunity for the broader investment community.

So, how do we change the paradigm and change the world?
At Arrow, we’ve been securitising NPL portfolios for over 10 years, but historically we’ve suffered from the negative market and rating sentiment towards NPLs. This has forced deep haircuts to be applied to the ratings and heavy retention requirements, to the point where it’s just not economical or capital efficient for us to securitise in the traditional way. We’ve been forced to look at the problem in a different way, in an effort to improve our capital efficiency and optimise returns to investors.

So, where do we start? Apart from educating the market in order to reduce the fear of non-performing and distressed asset classes, I think we need to start answering questions like:

• Does the application of new tech like blockchain and AI change what the products look like?
• Do new world securitisations even need to look like a securitisation and, if not, then what?
• Could we slice and dice cashflows in different ways and achieve better outcomes for both buyers and sellers?
• What is the role of data in this future state?
• Can we have trust and transparency by design, versus having to retrospectively prove what we have or have not done?
• What is the role of analytics in the future product and marketplace?
• Is there an opportunity to truly democratise fixed income by offering pre-baked analytics and tooling?
• There is also the question of data asymmetry; in other words, who should get to see what and when?

So, what does the future of NPL securitisation look like?
First, let’s take a look at what we know so far. The regulatory landscape around blockchain, digital assets and AI is evolving quickly, giving rise to huge opportunities to create new products for new and existing markets.

It is now possible in many jurisdictions to build blockchain digital structures that behave and execute like ABS but are not an ABS and are therefore not regulated as such. This allows much greater flexibility to tailor solutions for specific buyers, whether it be to target the AML requirements of an insurance company or just the delivery of yield to an accredited investor.

We can now build much greater utility into the product itself. Logic would suggest that providing greater utility to investors should translate to better premiums for the issuers.

Where are the gaps?
Data is the number one challenge in the whole story - because, without data, you have nothing. A lot of the work we are doing at Arrow is around building better data services, whether that be at the collection point or in the storage systems or the tools used to analyse the data.

All these efforts are aimed at providing more accurate forecasts of cashflows. We are now focusing heavily on building more flexible and agile platforms using serverless technologies and building data services using graph data architectures instead of rigid SQL formats. The intention is to leverage machine learning and artificial intelligence to optimise our collections strategies and downstream product construction.

The last piece of the puzzle is smart people. You just can’t innovate without smart people. So, we are always on the lookout for talent in these emerging technologies across blockchain and the data sciences.

What happens if the industry doesn’t change?
I hope I’m wrong and the industry adapts and evolves. However, if the industry doesn’t innovate in the collection and use of data, and we can’t develop alternatives to traditional securitisation models that are capital and cost effective, then securitisation in the non-performing and distressed asset classes will become much slower. It will become more expensive and harder to justify, essentially preventing the ‘clean-up’ companies from doing their job.

The implication I would foresee is a significant increase in structural pressure on the whole financial ecosystem, forcing banks to tighten lending criteria to minimise default rates, thereby reducing their capacity to lend and keep the economies of the world moving forward. This would be a serious situation for the whole world economy, and it would require all of us to work to resolve it.

For more on trends and activity in the European NPL securitisation market, join SCI at our NPL Securitisation Seminar on 27 June, either virtually or in-person.

ABS

Quantifi considers

Quantifi founder Q&A on 20th anniversary of firm

Quantifi, the provider of risk, analytics and trading solutions, recently celebrated its 20^th anniversary. Founder and ceo Rohan Douglas started the firm from his attic in New Jersey in 2002, after prior senior credit derivatives research positions at Citigroup and Salomon.

Structured credit has been at the heart of what Quantifi does and SCI caught up with Rohan to talk about the changes he has seen and what he thinks we might see in the future.

SCI: Rohan, nice to meet you and thanks for taking the time to talk to us. Technology is central to what Quantifi does. How did technology help rebuild the structured finance markets after the financial crisis of 2008/2009, and what is still needed?

A: I’m afraid to say that in my view the financial markets are a fair way behind the rest of the general business world in terms of technology, and the securitized market is a long way behind the rest of the financial markets. If I were being cruel, I’d say it’s not going anywhere at the moment. The dominant players in the securitized space are based on technology that is 30 years old, perhaps even older. Their adoption of technology is way behind.

Obviously, the financial world has been transformed by technology with key changes such as the use of the cloud, machine learning, data science and what is generally expected from software. In the bank of the future, everyone, whether they are a trader or a risk manager, will do a bit of programming. But this world already exists outside finance.

A big part of the puzzle is the availability and coherence of key data. Lack of access to this makes entry by new players difficult and expensive.

SCI: You were around for the financial crisis – as was I. What were the key bits of data that were missed or overlooked at the time?

A: I remember going to the SFA conference in Las Vegas when things were beginning to melt down. The general message of that event was that people expected a correction, but then the market would start up again. What people didn’t understand were the connections between different parts of the credit markets. People didn’t grasp how many institutions were on the same side of a trade, and what the connections between them were. The problems were less about fundamental credit and more about transparency and complex interactions. Everyone saw little pieces of the market but not the totality of it. There was no understanding of the concentration of risk.

SCI: What has been learned?

A: I'm afraid to say that some of the challenges that were revealed by the crisis haven’t been addressed. While there have been big improvements, in such areas as bank capital and transparent trading venues, the role of ratings, for example, has not been tackled. While the securitized markets have come back strongly and have an important function, there is still far from optimum transparency in this sector. This is especially true of private label securitized mortgage products.

There has been a lot of discussion about improving the transparency of structures, making the documentation standardized and available in electronic format, but they haven’t gone anywhere. Lots of these types of discussion were started and never finished.

SCI: Are there other failings in securitized markets?

A: It would have been nice to see a real secondary market develop. Products with no secondary market are marked to market, which I think presents contradictions. The market would benefit from greater transparency but there are probably some inherent incentives for some players in this space to not actively support this.

SCI: There has been a great deal of regulation of securitized markets and indeed of markets in general since you started Quantifi. What are the pluses and minuses of this trend?

A: The biggest problem with regulation is that of unintended consequences. There is a lot of regulation, yet still no open and free discussion of the consequences of regulation. Regulation has in some cases increased concentration risk, like, for example, in the greater use of central clearing houses in the derivatives markets. This creates the potential for a smaller number of really bad events. In other cases, regulation has fragmented the market and decreased liquidity.

Regulation tends to become highly politicized and is done without careful thought or the right kind of discussion. If you asked anyone in financial markets what is most important about regulation, they’d say consistency and clarity. It is difficult to provide both of those things if the process is too political.

SCI: What new areas of the securitized market do you find exciting and what are the possible avenues of new growth?

A: I think the securitization of alternative assets is very interesting. There are a lot of traditionally under-capitalized areas which could benefit from securitization, such as music royalties.

I’d also like to see some of the challenges about the transparency of data in securitized markets addressed.

SCI: Thanks very much for your time today Rohan – and here’s to the next 20 years!

Simon Boughey

Structured Finance

USS launches maiden ABS mandate

Sector developments and company hires

Universities Superannuation Scheme (USS), the UK’s largest private pension scheme by way of assets, has launched its first mandate investing in ABS. Likely to exceed £1bn over the next couple of years, USS’s first ABS mandate will focus on investment grade publicly-listed securities.

The move comes a year after USS Investment Management (USSIM), the wholly owned investment management arm of USS, appointed Janet Oram to the new role of head of ABS (SCI 21 June 2021). Her appointment underlined USSIM’s commitment to develop its in-house fixed income and treasury capability and support its increasing focus on liability-driven investing.

Oram was recently joined by Colin Behar, who was recruited from Prytania Asset Management as an ABS portfolio manager. The team is currently seeking to add an ABS analyst.

Next on the agenda for the team will be a more yield-seeking mandate, partnering with USSIM's in-house private markets team.

In other news…

EMEA

Alantra has poached director Marcos Chazan from StormHarbour Securities, where he was a director in the structuring and advisory team. Based in London, Chazan was previously a securitisation structurer at Santander and has also worked at M&G, Resource America and LNR.

Alberta Investment Management Corporation (AIMCo) has appointed Craig Tipping as head of European structured credit, based in London. Tipping was previously md and European head of securitised markets group at Jefferies. Before that, he worked at Nomura, Lehman Brothers and MBIA.

Paul Hastings has added a new partner to its structured credit team in London in its latest move to secure new talent for its fast-growing London business. Jason Brooks joins the firm from CMS where he worked as a partner in the financial services and products group. His hire follows several other recent additions to the firm’s structured credit practice last year, and after the firm’s London-based CLO team handled 116 CLO transactions in 2021 alone.

North America

Alston & Bird has announced the expansion of its finance offerings in the US with the addition of new finance partner, Joseph McKernan, in New York, and counsel, Maria Merritt, in Atlanta. McKernan joins the firm with more than 25 years of experience across a broad range of complex financing transactions, which includes energy-related transactions utilising ISDA as well as other master agreements and purchase and sale agreements. He joins Alston & Bird from Hodgson Russ, where he also worked as partner – representing lenders and borrowers across a range of financings.

Similarly, Merritt brings a breadth of experience in structured financing transactions across multiple asset classes to her new role, as well as with structuring and negotiating on syndicated and single-lender debt facilities. She joins the firm from McGuireWoods where she served as an associate.

MUFG has announced the expansion of its sales and trading team with the hire of new director and head ABS trader, Ray Barretto. Joining the firm from Barclays, where he previously served as a vp in ABS secondary trading, he brings more than 20 years of experience to his new role. Barretto will be based in New York, and will report directly to head of macro trading, Michael McCarthy. He will be focused on expanding MUFG’s ABS trading platform, concentrating on building the esoteric business and enhancing the bank’s market share across the flow ABS space.

NPL investment JV inked

BCMGlobal has formed a partnership in Italy with a group of leading international institutional investors, including Swedish investment firm Albatris, in a joint venture with US-based Three Line Capital. Under the agreement, BCMGlobal has co-invested in the securitisation issued by Wings One SPE.

The partner investors aim to invest up to €100m in secured non-performing exposures in the short to medium term, focusing on real estate-backed NPLs and unlikely-to-pay exposures. As such, they have completed their first investment in the Italian market by purchasing a secured non-performing loan portfolio from a major European financial institution.

BCMGlobal acted as advisor throughout the acquisition process, assisting the partners from the origination of the opportunity through to the underwriting and deal execution. The firm has also been appointed special servicer for the securitisation, with 130 Servicing named as master servicer and corporate servicer. In the context of the securitisation transaction, 130 Servicing will also assume the roles of calculation agent and noteholder representative.

Revlon par erosion eyed

At current prices, there could be significant par erosion for CLOs from Revlon's bankruptcy filing, according to Moody’s. Nearly 140 CLOs the agency rates hold about US$300m of the firm's debt.

Excluding deals nearing end of life, 15 deals have exposures over 1%, with a peak exposure of 5.8%. The majority (95%) of CLO exposure is to Revlon’s term loan B, which was recently quoted at around 24.

Structured Finance

PineBridge sub-advised CLO ETF unveiled

Sector developments and company hires

VanEck has launched an actively managed CLO ETF, dubbed CLOI, which is sub-advised by PineBridge Investments. The fund aims to invest at least 80% of its total assets in investment grade-rated debt tranches CLOs of any maturity.

The fund intends to invest primarily in CLO securities that are US dollar denominated, although it has the ability to invest up to 30% of its net assets in CLO securities that are denominated in foreign currencies. CLO securities may be purchased both in the primary and secondary markets.

The fund may also invest up to 10% of its net assets in affiliated or non-affiliated ETFs, as well as a portion of its assets in cash or other short-term instruments while deploying new capital, for liquidity management purposes, managing redemptions or for defensive purposes, including navigating unusual market conditions.

In other news…

CRA settles conflict of interest charges

The US SEC has charged Egan-Jones Ratings Company with violating conflict of interest provisions. The SEC also charged the company’s founder and ceo, Sean Egan, with causing certain of those violations.

The SEC’s order finds that in 2019, Egan – who, at the time, headed Egan-Jones’s ratings group - became involved in business and marketing activities concerning a client and was influenced by sales and marketing considerations while participating in determining a credit rating for that client, which created a prohibited conflict of interest. The order finds that by issuing and maintaining a rating for the client under those circumstances, Egan-Jones violated the SEC’s NRSRO conflict of interest rules and, further, that Egan caused the company’s violations. 

The SEC’s order also finds that in 2018, Egan-Jones violated another conflict-of-interest provision by continuing to issue and maintain ratings for another client, even though that client had contributed 10% or more of the company’s net revenues during the prior fiscal year. Finally, the order finds that Egan-Jones failed to establish, maintain and enforce policies and procedures reasonably designed to manage such conflicts of interest. 

Without admitting or denying the SEC’s findings, Egan-Jones agreed to settle the matter by paying a US$1.7m penalty and more than US$146,000 in disgorgement and interest. It also committed to conduct training, retain an independent consultant to assess its policies and procedures concerning conflicts of interest, and prohibit Egan from - among other things - participating in determining or monitoring credit ratings issued or maintained by Egan-Jones or developing or approving procedures used for determining credit ratings.

Separately, and also without admitting or denying the SEC’s findings, Egan agreed to pay a US$300,000 penalty to settle the SEC’s charges against him. 

EMEA

Deerpath Capital has announced the launch of its latest international office which is set to open in London, England. The North American private credit manager hopes to expand further into Europe and enhance their offering to existing European clients. The new office will be led by Tania Kutner as head of European investor partnerships and joins the firm from Aerius Associates where she worked as associate director. The firm hopes the new office will not just increase their presence in Europe, but allow them to better meet the rising institutional demand for differentiated private credit solutions.

Reed Smith welcomes new structured finance lawyer, Tariq Zafar, to its global finance practice as a partner. Zafar joins the firm’s financial industry group in London from Bryan Cave Leighton Paisner, where he served as head of its derivatives practice and assisted in the firm’s growth of its derivatives team. He brings extensive experience across derivatives and other structured products to the new role, having also advised several leading investment banks on securitised derivative transactions. The firm hopes Zafar’s arrival will help bolster its existing global structured finance practice and expand its derivatives offerings to specifically prime brokers and fund clients.

North America

KopenTech has announced the launch of new trading protocol, KTX DirectBidding, which aims to offer a streamlined and direct peer-to-peer approach to CLO trading. The new trading protocol will allow buy-side investors to trade CLOs anonymously and directly with one another, offering access to buy-side and sell-side liquidity in a single trading session. The platform offers private bidding and negotiations, and ensures the confidentiality of all investors’ bidding histories, with only matched trades made visitable to the settlement agent. DirectBidding opened for trading last month, with the first buy-side to buy-side trade negotiated on the platform in June. KopenTech Capital Markets will serve as the settlement agent, with MIRAE Asset Securities contracted on a non-exclusive basis offering trade clearing services.

UMBS TBA futures prepped

CME Group is set to offer the first-ever 30-year Uniform Mortgage-Backed Securities (UMBS) TBA futures contracts from 3 October, pending regulatory review. The new futures contracts will be fulfilled by delivery of TBAs cleared by the Fixed Income Clearing Corporation's MBS division, a subsidiary of the DTCC.

The objective is to offer mortgage lenders, issuers, servicers and other participants an exchange-traded and centrally cleared tool for price discovery and risk transfer. For each delivery month, futures will be listed for delivery of specified active mortgage coupon rates 2%, 2.5%, 3%, 3.5%, 4%, 4.5% and 5%.

The three nearest calendar months will be listed at any given time, beginning with the November 2022 contract.