Contents

RMBS

Cost of living concerns

Inflation pressures to push up UK RMBS arrears

The cost of living is increasing at a rate not seen for decades, as consumer price inflation is on the rise and monetary policy tightens in response. Due to elevated levels of inflation, arrears in UK RMBS transactions are expected to increase over the coming 12 months.

“Most people expect some level of deterioration on asset performance towards the end of the year. Sentiment towards prime RMBS is generally positive. However, legacy non-conforming assets - given their interest-only and variable rate nature - do represent a pocket of risk,” notes Alastair Bigley, senior director - sector lead European RMBS at S&P.

The rating agency expects UK consumer price inflation (CPI) to average 7.6% in 2022, before falling to 3.6% in 2023. At the same time, it expects interest rates to continue to rise in 2022 and beyond. However, the effect of inflation for households will depend on an individual and their consumption habits, with some households being more or less affected than the average CPI rate.

For example, lower income borrowers may be more likely to be hit harder by increases in the UK’s energy price cap. Equally, some UK RMBS transactions are characterised by a high proportion of borrowers that are in arrears but have relatively low current monthly payments.

Importantly, many mortgage loans that were originated before 2014 - which back both legacy and newly issued UK RMBS - pay a variable rate of interest, and S&P expects the interest rates on these mortgages to rise in lockstep with market rates. These borrowers are typically among the worst-performers from a credit perspective and when hit by both CPI stress and rate rises will likely show performance deterioration.

For legacy non-conforming collateral, given that approximately 90% is interest-only, some shorter-term servicing strategies - like temporary interest-only payments and term extensions - are not options. Consequently, temporary payment arrangements - that is, accepting a lower payment than contracted - is the only realistic option. But for more recent collateral, temporary movement to interest-only may be viable, as most of the loans are repayment loans.

Meanwhile, similar to what occurred during the pandemic, S&P anticipates that borrowers who communicate with servicers will be given leeway during the period of peak inflation and that repossession will be used only in scenarios where the borrower has no prospect of recovering.

Bigley notes: “It has been a journey: there was uncertainty with the payment holidays, but overall things never got as bad as people were expecting in May 2020. However, there were always question marks around what happens when furlough schemes end. There is a level of uncertainty that is still there, but until performance numbers come in, there will always be that level of concern around it.”

He observes that year-to-date RMBS issuance has been strong relative to that seen in 2021. However, unusually, the market witnessed significant disruption this month with the placement of widely syndicated deals. As a response to this, privately placed deals were executed and, for now, Bigley expects this trend to continue.

Looking ahead, Bigley explains that longer-term issuance prospects are difficult to predict. Although he is not currently seeing performance deterioration in UK RMBS, he does expect some changes in the year to come.

He concludes: “We expect deterioration over 2022 into 2023. Going forward, the thing to look out for is how long inflation remains at elevated levels.”

Angela Sharda

Capital Relief Trades

CRT v CLOs

Vast 2022 spread widening makes CRT look cheap to CLOs

CRT debt has widened so much this year that it now offers better value than most other structured finance products, including CLOs, note analysts.

Though CRT widened sharply during the early days of the Covid 19 pandemic, that was during a period of legitimate concern about mortgage credit. At the moment, however, the fundamentals are strong and the outlook for mortgage credit looks good.

The widening is thus due almost to technical factors, principal among which is the unprecedented issuance by the GSEs in the first half of the year. Some $16bn of STACR and CAS has been priced in H1, which is more than is generally sold in an entire year.

Added to which is the general market uncertainty precipitated by the war in the Ukraine, much higher inflation and rising rates. Finally, the debt which has been issued generally incorporates low coupon collateral, meaning pre-payments will be lower. If these bonds are not called, they will become long duration assets in a rising rate environment.

Consequently, for example, on the run STACR M2 BB rated bonds have widened by 465bp while equivalently-rate high yield assets have widened 213bp.

Meanwhile, M1-B bonds, rated BBB, have widened by 265bp versus investment grade index widening of 74bp. In other words, investment grade CRT assets have widened by almost four times as much as equivalent investment grade bonds.

In view of this significant widening and the fundamental strength of mortgage credit, analysts suggest it now offers considerably better investment opportunities than the CLO market.

“The leveraged loan market already has concerns. It is seeing signs of downgrades outpacing upgrades, the loan market selling off because of loan fund outflows, concerns around inflation and supply chain constraints are now affecting companies. Mortgage credit still has more strength in it than leveraged credit. Taking on mezzanine risk or junior mezzanine risk would probably have better value in CRT than CLOs,” says Pratik Gupta, CLO and MBS strategist at Bank of America in New York.

The technical issues that have beset the CRT market in H1 2022 are also set to improve, further enhancing the value of assets in this space. Most importantly, it is not thought likely that supply in H2 will be anything like as voluminous as is N1.

Analysts think something in the region of $10bn will hit the market in the remaining six months of the year. “It’s fair to say H2 issuance should be slower versus H1,” says Gupta.

Moreover, existing supply will be taken off the Street as Fannie Mae and Freddie Mac persist in tender offers. The debut tender offer was launched by Freddie in September of last year, and their example was followed by Fannie two months later.

Tender offers have now become an established feature of GSE operations as they seek to reduce capital costs of bonds that offer little risk relief as they season.

Fannie is in the market at the moment with another tender offer which will expire tomorrow, and so far this year there has been $3.5bn of paydowns as a result of tender offers. Another $4.5bn has been returned to investors as debt retires.

Another relatively recent development is the preponderance of debt issued in the senior tranches. At the beginning of this year, B1 and B2 tranches accounted for between 30% and 40% of all debt issuance, but in recent deals the mezzanine tranches have accounted for only around 12%.

Analysts predict this trend will continue and suggest that less than $2bn (so about 20%) of the issuance slated for the rest of the year will come in B1 and B2 notes.

There are caveats about the CRT market to be made, however. It has a much thinner investor base than the CLO market, and so will always be more volatile.

In addition, though fundamentals look strong at the moment, the credit box is widening and is set to widen further as originators search for product. The average FICO score in CRT deals is currently around 750-758, lower than 2020-2021 vintages, while the proportion of mortgages offered to borrowers with a FICO score of less than 700 is increasing.

Simon Boughey

Structured Finance

Over the HIL?

Home improvements drive resurgence in HELOC RMBS

Total spending on home improvements and repairs in the US reached US$369bn in 2021, an increase of 9.4% year-over-year, according to Harvard University’s Joint Center for Housing Studies. Home improvement loans (HILs) have emerged as an alternative form of financing for these renovations, particularly for those who lack substantial equity in their homes, while HELOC securitisations are also seeing a resurgence post-financial crisis.

Such growth in demand for home renovations follows the rise in new home-buying activity through the pandemic. Additionally, mortgage borrowers have been able to borrow at historically low rates and now many of them are already in the position of wanting to access the equity in their homes. While rising interest rates could lead homeowners to invest more in their homes through both HELOCs and HILs, the increase in house prices may draw some homeowners towards releasing some equity through HELOCs.

“HELOCs are a way to access that equity without refinancing your entire mortgage balance,” explains Jack Kahan, senior md and head of RMBS at KBRA. “This means your weighted average coupon across all your outstanding debt can remain somewhat low, if you’re only paying the higher rate on the HELOC portion instead of refinancing the entire loan. So, that’s the driver behind recent rise – continuing increases in equity, but higher interest rates locking in the first lien.”

As a US$4.2bn sector, HILs experienced a major rise of 195% in demand in 2021, reaching US$1.9bn in ABS issuance. “A lot of the rise in demand for HILs has been driven by the movement of people out of metropolitan areas during the pandemic, as well as by those who purchased a new home. So, there was a demand for renovating needs,” explains Maxim Berger, director of consumer ABS at KBRA.

He continues: “Perhaps people needed funds much faster or through a more convenient process than provided by a HELOC. Or for people who just bought a new home, they often haven’t built enough equity in their homes yet and may not have been able qualify for a HELOC. Therefore, they go for a HIL instead.”

HILs function primarily as a loan, whereas HELOCs can be drawn from as necessary. There are several other differences between the typically fixed-rate HILs and the adjustable-rate HELOCs, including operational differences.

“One of the main differences between the two is that a HELOC is secured by the borrower’s home. So, if the obligor defaults, the lender can foreclose on the property - whereas that’s not the case for HILs, since they are typically unsecured,” explains Berger.

HILs benefit from a faster closing timeline, typically lower closing costs than HELOCs and are also available for investment properties - which is not always true of HELOCs. “HELOCs are definitely a competing product to HILs, but they target different borrowers: people with potentially less equity, an investment property owner or someone that wants to fund faster and through a more convenient process than a HELOC,” notes Berger. “So, while they are going to certainly compete with one another, I think there’s enough potential target borrowers that will cause increases in the originations for both HELOCs and HILs.”

Since the debut of HIL ABS in 2016, KBRA has rated US$4bn across 12 publicly rated HIL transactions and eight with unpublished ratings. Berger states: “Our approach towards HILs is similar to how we rate an unsecured consumer loan deal - so, we may provide lower recovery credit when a borrower defaults, compared to loans secured by collateral. There’s also no property valuation analysis in the case of a HIL transaction, whereas HELOC transactions are closer to an RMBS analysis, which does include a property valuation analysis.”

On HELOCs, Kahan agrees: “HELOCs are typically second lien but can be first lien as well, and if it’s a first lien HELOC, we would generally look at that similar to any other first lien mortgage loan. This includes FICO, the documentation, the valuation, the CLTV - these are going to be the main drivers of probability of default, and the loss severity is going to be similar to regular first lien.”

He adds: “Generally, the big noticeable difference is that when we are thinking about the risk of loss on a HELOC - or on any mortgage loan - we are thinking about the LTV of the loan. For a HELOC, whether it’s a first lien or a second lien, we are going to be looking at it as if it’s been fully drawn - so whatever its maximum amount is, that is what will drive the CLTV risk in our model.”

Second lien HELOCs make up most of the asset class and would be treated similarly. However, Kahan further states: “There can be cases where, if the CLTV is low enough for a transaction - in the 60s or 70s - then there could be some recovery credit because it’s a secured loan. But otherwise, it remains similar to the analysis on the first lien from a probability of default standpoint. The HELOC is also treated similarly to a closed deal loan; we’re just looking at it as if it’s a fully drawn balance.”

While issuance has remained steady for both HILs and HELOCs, there has been some divergence between the two’s securitisation performance. “For HELOCs, there just hasn’t been many recent securitisations - although there are some unrated securitisations that I’m aware of,” observes Kahan. “At KBRA, we rated a transaction in the last month that has closed end second liens and HELOCs in it. Nevertheless, there’s not a lot of performance history in terms of securitisation.”

Meanwhile, Berger confirms that HILS performance has been within expectations or better, and there hasn’t been any negative performance or negative ratings volatility. KBRA-rated HIL transactions have shown cumulative gross losses below 10% of pre- and post-pandemic levels on quarterly vintages.

Looking ahead, further growth is expected in HIL and HELOC originations. “On the HILs side, more renovation expenditure is simply going to translate to more HIL originations,” explains Berger.

Kahan concludes: “Interest in the HELOC space, as well as just the closed end second lien space, has been pretty significant over the last month or two. And many originators seeking information on securitisation and even banks as underwriters for the products - interest from them have increased pretty significantly too.”

Claudia Lewis

ABS

SCI NPL Securitisation Awards: Transaction of the Year

Winner: Project Galaxy

Project Galaxy has won the Transaction of the Year category in SCI’s NPL Securitisation Awards. The deal marks the second largest rated EMEA NPE securitisation, with €10.8bn in gross book value (GBV). Project Galaxy is also the first public securitisation in the Green Market from the deal’s originator, Alpha Bank, as well as its first transaction enrolled in the Hellenic Asset Protection Scheme (HAPS).

Closing in 2Q21, Project Galaxy enabled Alpha Bank to significantly reduce its non-performing loan ratio down to 13% from 29%. The deal securitises both retail and wholesale exposures, with retail including predominately non-performing exposures collateralised by residential real estate, as well as consumer and small balance loans.

Under the transaction, Alpha Bank retained all of the €3.8bn in senior notes, as well as 5% of the €7bn mezzanine and junior notes. A further 51% of the mezzanine and junior notes are intended to be sold by an entity managed by Davidson Kempner, and 44% of the remaining notes distributed to shareholders.

Galaxy was supported by Alantra, serving as co-arranger and financial lead advisor to the deal. Alantra brought expertise to the structuring of the securitisation, advising on the structure and preparation of data tapes and marketing materials, the structuring and cashflow modelling of the transaction, as well as the coordination of third parties and sales processes.

“This transaction confirms Alantra’s unique position as the leading advisor in supporting European issuers and investors in structured NPL trades, including securitisations. It is also a great testament of the benefit of having APS support schemes in place to deleverage European NPEs, and the continued interest of global investors for these exposures,” states Francesco Dissera, md and head of Alantra’s securitisation practice.

Alpha Bank opted to retain the senior notes by applying a significant risk transfer status for the deal, thereby providing an attractive risk-return investment. Alantra was able to bring extensive knowledge of SRT and ECB guidelines to the deal, allowing also for a speedier execution.

The highly complex transaction also proved transformative for Alpha Bank’s balance sheet, enabling the bank to not only normalise the cost of risk but also establish an internal NPE management team of around 1,000 people to service the new portfolio. In turn, this also aided the speed of execution, as the servicer was already fully operational before the close of the transaction.

Project Galaxy benefited from the Greek government guarantee, HAPS. “HAPS was a very important catalyst for Greek NPL securitisations when introduced,” explains Kostas Skliros, Alantra svp involved on Project Galaxy. “It created incentives for servicers to create business plans that they will be called to execute, linked their fees to the performance of these business plans and established minimum collection thresholds that if breached, penalties would be applied in the form of a reduction of the serving fees or even the termination of the servicer by the guarantor.”

He continues: “HAPS also introduced the necessity of rated senior notes prior to the guarantee becoming available – therefore, an externally recognised agency can express an opinion on the risk of the senior notes. This process materially increased leverage at a reduced cost, due to the presence of government guarantees.”

The transaction also occurred in conjunction with the sale of Cepal Holdings, of which a 20% stake in New CEPAL was retained by Alpha Bank, along with customary governance rights. Alpha Bank was also able to align interests with anchor investor, Davidson Kempner, which acquired 80% of Cepal Holdings.

“Alpha Bank ran a competitive process to find an experienced counterparty to service the loans and maximise proceeds by using the HAPS scheme. The fact that Alpha Bank managed to carve out its internal unit to service the new loans increased execution certainty and speed while minimising migration timing,” states Skliros.

Following Galaxy, further Greek deleveraging activity through primarily HAPS NPL securitisations is anticipated through 2022 until the programme expires in October. As a result of NPL securitisations, the NPE stock in Greece has been reduced by approximately €51bn, as of year-end 2021.

ABS

SCI NPL Securitisation Awards: Innovation of the Year

Winner: Retiro Mortgage Securities

Innovation in securitisation doesn’t always represent an overt major leap forward; much like the market itself, nuance is often the key. The seemingly simple advance of structuring a 144A deal and making it the first European non-performing loan securitisation readily accessible to US investors has won Innovation of the Year as hopefully the precursor to a vastly expanded market through a broader potential investor base.

The €470m Retiro Mortgage Securities deal – sponsored by Oaktree Capital Management and arranged by Morgan Stanley – features a vertical structure for the management of four sub-portfolios, with a mortgage lender, an SPV with credit rights over the loan collateral and a respective propco with security rights over the REO assets.

At closing, the NPL collateral calculated at 30 November 2020 had a total current balance of €678.4m and the REO assets were valued at €396.2m. The four sub-portfolios - Wind, Tag, Normandia and Tambo - were acquired between 2015 and 2017 by OCM Luxembourg OPPS X, which operates as sponsor and retention holder in the transaction.

The assets were originated by Banco Sabadell, Bankia, Caja De Ahorros De Valencia, Castellon Y Alicante (Bancaja), Caja De Ahorros Layetana, Caja De Ahorros La Rioja, Caixa D´Estalvis Laietana and Deutsche Bank. The portfolio is composed of senior secured loans (accounting for 94.5% of current balance), junior secured loans and REO assets. The portfolio is highly seasoned, with the weighted average time since default close to 11 years.

The underlying properties are mainly residential (77.8% of indexed property value) and concentrated in Valencia (27.1%), Catalonia (26.3%) and Andalucía (14.2%). The majority (66.9%) of borrowers are corporates or SMEs.

To ensure the flow of transaction-related funds between the various SPVs, a number of loan agreements were entered into by the issuer and the mortgage lenders, as well as the mortgage lenders and their respective propcos. Under these agreements, at the closing date, the issuer made advances to the mortgage lenders (using note proceeds) and the mortgage lenders used these funds to make advances to the respective propcos. Portfolio collections, as well as principal and interest payments under each mortgage lender/propco loan agreement are used to repay the principal and interest due on the issuer/mortgage lender loans.

Retiro Mortgage Securities was the first public Spanish NPL securitisation since Prosil Acquisition (SCI 10 July 2019). The portfolio is serviced by Redwood MS (as master servicer), VicAsset Holdings (as master servicer and REO servicer), Redwood Real Estate Spain (as REO servicer) and RTA Management Gestion Integral de Activos (as loan servicer).

ABS

SCI NPL Securitisation Awards: Issuer of the Year

Winner: Intesa Sanpaolo

Intesa Sanpaolo has won the Issuer of the Year category in SCI’s NPL Securitisation Awards. Intesa has confirmed its leadership in the non-performing loan space through pioneering execution and innovative solutions over the awards period.

De-risking was the first pillar of the Italian lender’s business plan, through which the Group aimed to reduce the level of gross non-performing loans as a proportion of total loans and develop and implement specific credit strategies, capable of directing the development and composition of the loan portfolio towards a risk-return profile that is recognised as optimal over the medium to long term.

At the end of the financial year 2021, Intesa Sanpaolo recorded the lowest NPL stock levels since 2007 and exceeded the reduction target of the 2018-2021 business plan in 2020. Since 2016, it has totalled over 30 deals, achieving an NPL stock reduction of approximately €43bn and a gross NPL ratio of 3.2%.

Innovative solutions include the servicing bank for short-term and revolving exposures on unlikely-to-pay securitisations, but what stood out in 2021 was Project M2. The latter was a strategic initiative for 2021 and aimed at the disposal of a UTP portfolio consisting of ex-UBI, UBI Leasing and Intesa exposures.

The gross book value, as of 30 April 2020, was approximately €2bn pertaining to Intesa and €0.04bn to UBI Leasing. The portfolio consisted of around 7,500 debtors, mainly secured - 64% secured, 32% unsecured and 4% leasing - with an average vintage of around 3.7 years.

Approximately 35% of the portfolio, or €0.7bn in gross book value terms, was made up of Intesa positions and Intesa-UBI common positions. The latter was managed by Prelios, while the remaining portion was managed internally. The structure of the deal included the transfer of medium- to long-term, short-term withdrawn banking receivables and of leasing receivables to an SPV.

Another milestone for the bank was Project Skywalker. Following the execution of the recent business combination between Intesa Sanpaolo and UBI Banca in February 2021, Intesa sold a business unit to BPER comprising a portfolio of non-performing loans equal to €0.7bn, as of February 2021. In this context, Intesa and BPER developed a strategic initiative called ‘Project Skywalker’.

The project allowed for the deconsolidation of a portfolio of bad loans through a multi-originator and multi-servicer securitisation backed by the GACS guarantee. The gross book value of the loan pool was approximately €3.1bn - €2.2bn pertaining to Intesa and €0.9bn to BPER - as of 31 May 2021. The portfolio consisted of around 9,700 debtors.

In terms of real estate value, assets linked to the loans in the portfolio represented: 44.5% residential properties, 23.9% industrial assets, 11.6% commercial assets and 7.3% hotels. The remaining 12.6% comprised a mix of office, land, ancillary units, agricultural and other assets.

ABS

SCI NPL Securitisation Awards: Investor of the Year

Winner: Cerberus Capital Management

In recognition of its resources, relationships and scale, Cerberus Capital Management has won the Investor of the Year category in SCI’s NPL Securitisation Awards. The firm has garnered significant industry acclaim for helping financial institutions address large non-performing loan portfolios as a long-term strategic partner.

One standout example during the awards period is the sale by Alpha Bank Group of a €2.4bn portfolio of Cypriot NPLs and real estate properties to a Cerberus affiliate in February 2022. Dubbed Project Sky, the transaction represents the largest NPL sale by a Greek bank outside of the HAPS government guarantee scheme. The sale enabled Alpha Bank – which was advised on the transaction by Alantra – to reduce its non-performing exposure ratio by approximately five percentage points to circa 13%.

Cerberus’ global NPL platform has invested approximately US$21.3bn in equity in more than 246 NPL transactions with total transaction values of approximately US$72bn since 1998. The firm has NPL investment experience in 23 countries and its NPL portfolios comprise a diverse spectrum of loans, including SME and other corporate loans, real estate secured loans, loans secured by assets other than real estate, unsecured loans and consumer loans.

The Cerberus NPL platform consists of 50 experienced investment professionals with a track record spanning 25 years. This integrated team works across all stages of an investment’s lifecycle, from sourcing and due diligence during the acquisition process, to monitoring of investments throughout the holding period and monetisation process.

Together with such investment expertise, what gives Cerberus an edge in the NPL market is significant infrastructure and servicing platforms with scale. The former enables the firm to source, screen, underwrite, finance, migrate, service and ultimately monetise thousands of borrowers, loans and assets across multiple geographies.

Meanwhile, Cerberus deems servicing oversight as essential to underwriting and managing NPL portfolios. Cerberus-owned proprietary service providers, along with third-party servicing partners in local jurisdictions, collectively employ over 1,500 full-time employees that service more than two million loans.

In particular, Cerberus European Servicing (CES) is the firm’s in-house servicing platform, which provides what it describes as a “proprietary edge” in terms of investing in European loans and asset portfolios. With offices in London, Amsterdam, Dublin, Frankfurt, Lisbon and Madrid, the platform oversees third-party servicers and operating partners to support Cerberus’ acquisitions and execute its underwritten business plans.

“By utilising both internal and external resources, Cerberus is able to establish robust loan servicing practices with local and regional expertise. We believe our commitment to best-in-class servicing has been a crucial component of our ability to be a trusted partner for Europe’s leading financial institutions,” the firm states.

Overall, the close integration of sourcing, underwriting, valuation and active asset management helps Cerberus execute large and complex purchases of NPLs and REO portfolios. Such an approach has resulted in repeat transactions with a number of large global financial institutions.

ABS

SCI NPL Securitisation Awards: Servicer of the Year

Winner: Intrum

Intrum boasts a presence in 24 European non-performing loan markets and a collection capacity in 160 partner countries, providing it with the broadest geographical reach in the credit management services industry. With revenues amounting to Skr17.8bn in 2021 and around 80,000 clients, the firm is SCI’s Servicer of the Year in recognition of its market-leading business.

“Over the last year, our key priority has been to deliver on our transformation programme to become ONE Intrum and enable further organic growth globally. As a result, standout mergers and acquisitions have recently been less in focus for us on a pan-European level than in previous years. With that said, local portfolio acquisitions are a part of our ongoing business and 2021 was a year with high commercial activity,” observes Alberto Marone, md of Intrum Italy.

In the first quarter of this year, Intrum saw a strong underlying growth trajectory across all segments of its business, with cash revenues up by 10% and cash EBITDA up by 12% versus 1Q21. During the period, the firm signed a transformational partnership with Sainsbury’s Bank in the UK and completed sizeable new deals across multiple geographies, in addition to a large number of important renewals with existing clients.

“In general, we see that an increasing number of clients recognise the benefits of outsourcing the management of late payments and debt collection, so that they can concentrate on their core business. This also proves that our increased focus on customer care, compliance and ethical collection practices is appreciated,” says Marone.

As a full service provider, Intrum offers a complete range of credit management services throughout the value chain, with a strong focus on late payments. At the initial stage of the chain, there are credit information and factoring activities, passing through the invoice and sales ledger phase (with activities including invoicing, white label reminder services and negotiations) to debt collection (including debt restructuring, differentiated collection, payment demands, negotiations, payment plans and follow-up) and finally legal processes and real estate management.

As such, Intrum’s integrated business model interacts with clients to meet their needs at different times. Among the benefits it can offer clients are: acting as a solutions-oriented and flexible partner; the ability to act cross-border; the capacity to take on large strategic projects, including joint ventures; a track record in structuring complex deals and creating value; and financial strength to innovate and provide a better service.

Indeed, Marone believes that Intrum differentiates itself from other servicers in five important ways, the first of which is scale – which creates greater operational efficiencies. The second differentiating factor is diversification, given the firm’s access to multiple asset classes and industry verticals across 24 markets.

The third is its capabilities, with a full service offering across debt servicing and investments. “There is a strong complementarity between Credit Management Services to service and collect debt, thereby receiving commissions, and Principal Investments acquiring debt and real estate-backed portfolios from clients,” notes Marone.

The fourth differentiating factor is the firm’s risk culture, with embedded operating principles and robust processes, including a strong focus on sustainable business practises and ethical treatment of all customers. The fifth is its capital structure, which provides ample liquidity and a low cost of debt.

Looking ahead, Marone anticipates the current macroeconomic uncertainties - combined with rising interest rates and inflation - to lead to rising appetite for consumer credit, which in turn is likely to lead to increased pressures in the credit sector and demand for the firm’s services later this year. “Generally, financial institutions and banks are becoming more and more focused on their core services – which is also driven by regulatory changes - and wish to transfer portions of their activities across the credit value chain to industrial players that can play innovative and complimentary roles, such as Intrum. Overall, the supply of NPL assets has been approaching pre-Covid levels and it is likely that additional supply will be generated by the current challenges,” he concludes.

ABS

SCI NPL Securitisation Awards: Advisor of the Year

Winner: Alantra

Alantra Credit and Portfolio Advisory (CPA) has won the Advisor of the Year category in SCI’s NPL Securitisation Awards, after demonstrating significant innovation across the European non-performing loan landscape over the last year. Indeed, Alantra has successfully established itself as the leading advisory services group in the sector, with a roster of clients that includes many of the largest players in the space.

As an advisory group, Alantra CPA focuses on five key areas in its practice: credit portfolio transactions, securitisation and secured funding, real estate portfolio transactions, bank regulatory and M&A advisory, and credit strategic advisory. The firm has advised on more than 250 transactions since 2015, with €140bn of transactions completed solely over the last three years. It has specialist teams operating across eight countries, with its NPL advisory unit made up of more than 160 professionals.

The type of transactions covered by Alantra varies from publicly rated NPL transactions, which are common within Italy and Greece, to more bespoke deals – for example, in Cyprus, the UK, Ireland and Portugal. “What differentiates Alantra from other players is its capacity to underwrite portfolios and prepare detailed business plans, while understanding investors’ needs. The reason for our success can be attributed to the experience of the KPMG portfolio solutions team, together with experienced ABS professionals, who have collaborated over the years within Alantra’s platform,” notes Francesco Dissera.

He says that growth has been witnessed over the last 12 months across two key streams: the first one being advising investors in structuring NPL ABS transactions with credible business plans. The second one is linked to transactions involving reperforming-type claims – from secured to unsecured - where the firm has been active within Ireland and the UK, in particular.

Alantra adds value to ABS transactions in several key areas. First is data understanding - some larger investment banks do not have the capabilities to support large databases and to properly comprehend the loan tapes.

The second key area is defining business plans. Alantra has a proprietary tool - called ACAP - which is able to simulate business plans across a number of jurisdictions based on different recovery strategies.

“Alantra’s key differentiating factor is our ability to cover all aspects of a securitisation, from onboarding the portfolio, designing a business plan and interaction with rating agencies to connectivity with investors. Not all advisors are able to cover all these tasks,” Dissera remarks.

Among the highlights of Alantra’s extensive advisory involvement across the NPL securitisation market during the awards period is the Greek HAPS NPE transaction, Project Galaxy, on which it acted as co-arranger and lead financial advisor. The firm also worked with Alpha Bank as arranger and sell-side advisor for Project Cosmos, another SRT securitisation of an NPL portfolio comprised of both retail and corporate exposures under the Greek HAPS scheme.

Additionally, the firm was involved with a number of SRT transactions issued by Piraeus Bank. Notably, it served as sell-side advisor and co-arranger on Project Vega, a €4.9bn deal backed by primarily secured NPL portfolios under HAPS.

For Project Frontier, Alantra undertook the role of buy-side advisor, while supporting the National Bank of Greece in the acquisition of the mezzanine notes and the servicing contract for the Frontier securitisation.

Another landmark transaction Alantra was involved with was the first rated NPL cash securitisation in Cyprus. The firm served as sell-side advisor, co-arranger and joint placement agent for the Project Hera transaction, which was backed by a €2.2bn residential NPE portfolio. The deal closed in December 2021, just three months after its initial rating feedback.

Meanwhile, the firm served as sole financial advisor to UniCredit for the Italian Project Olympia, a securitisation of a €2.2bn NPL portfolio, backed by the GACS guarantee. The deal completed in December 2021 after Alantra successfully advised its client on not only the deal’s structure, but also enabled the coordination and remediation of the transaction dataset and support the GACS preparation for the transaction.   

 In terms of the outlook for the NPL securitisation market, sentiment appears to have cooled regarding growth. “A few things have changed over the last few months, from the inflationary environment to geopolitical instability, to changes across quantitative easing. We are now a bit more cautious on public NPL ABS, but have a greater focus on private NPL ABS, distributed bilaterally to selected investors,” concludes Dissera.

ABS

SCI NPL Securitisation Awards: Arranger of the Year

Winner: Morgan Stanley

A leading position in the public and private markets, combined with a strong link to innovation ensured Morgan Stanley is awarded SCI’s European NPL Securitisation Arranger of the Year.

According to SCI data, there were 19 public securitisations involving non-performing or reperforming loans during the awards period of March 2021 to March 2022. Of those deals, Morgan Stanley was arranger on seven – including Innovation of the Year Retiro Mortgage Securities – with its closest rivals only reaching three deals apiece.

Meanwhile, the firm is also consistently highlighted by market participants for its private issuance activity. Of particular note is its success in arranging Project Frontier for National Bank of Greece (NBG), which was acclaimed for its hybrid HAPs (Hellenic Asset Protection Scheme)/private structure and involved the securitisation of a portfolio of non-performing exposures with a total gross book value of circa €6bn

NBG said: “Frontier represents a landmark transaction and a decisive step for NBG to soon deliver a mid-single digit NPE ratio. Specifically, the transaction received two credit ratings; was not associated with a hive-down; and is serviced by a servicer [doValue Greece] not arising from a carve from the bank itself. Frontier also constitutes a unique transaction in Greece from a capital perspective adding circa 150bp to our capital ratios.”

NBG retained 100% of the senior notes and 5% of the mezzanine and junior notes utilising the HAPs. At the same time, it sold 95% of the mezzanine and junior notes to a consortium consisting of affiliates of Bain Capital Credit, Fortress Investment Group and doValue Greece.

ABS

SCI NPL Securitisation Awards: Law Firm of the Year

Winner: Orrick

Orrick, Herrington & Sutcliffe is recognised as Law Firm of the Year in SCI’s NPL Securitisation Awards, having displayed market leadership in the securitisation of non-performing assets and the disposal of unlikely-to-pay portfolios across the main NPL jurisdictions of Greece and Italy.

Orrick’s large finance and capital markets practice - which comprises eight partners and four counsels based across Rome and Milan - acts on behalf of arrangers, originators or subscribers in large NPL mandates. This combined experience, comprehensive approach and expertise to act for all entities within the NPL sector sets the practice apart.

Madeleine Horrocks, partner in Orrick’s Milan office, notes: “A key part of why we are able to complete the matters we do is our ability to assist across the whole spectrum of the market. We equally understand the needs of the banks, servicers and investors, acting on all sides of transactions.”

Over the past 12 months, a particular highlight for the firm has been its role in the GACS securitisation BCC NPLs 2021. Orrick assisted Iccrea Banca and JPMorgan, as co-arrangers and placement agents, in the static cash transaction secured by receivables originated by 77 banks (74 belonging to Gruppo Bancario Cooperativo Iccrea, alongside Banca Ifis, Cassa di Risparmio di Asti and Guber Banca), with assets valued at €1.3bn.

The transaction was arranged with the possibility of benefiting from a Real Estate Operating Company - under article 7.1 of Law 130/99 - subject to obtaining a GACS guarantee on the senior securities.

“This is a market where we have been particularly involved, both within and outside the GACS spectrum,” notes Annalisa Dentoni-Litta, partner in Orrick’s Rome office. “The BCC NPLs 2021 securitisation also included a leasing element, which added another layer of complexity.”

The fully-integrated and international practice also acts on jurisdictions outside of Italy, notably Greece. On the Project Sunrise 1 transaction, for example, it advised the arrangers (UBS and Alantra) on the securitisation of a portfolio of non-performing loans originated by Piraeus Bank, structured to allow the senior notes to benefit from the Greek HAPS guarantee. Regarding the firm’s capacity for cross-border mandates, Dentoni-Litta notes: “We cover both Italian and Greek transactions from our Italian offices. This global vision of all transactions coming to market allows us to suggest innovative solutions to our clients.”

She concludes: “Clients ultimately choose you for your expertise and ability to get the job done. What also differentiates us is our approach to research - embedded in our DNA - allowing us to suggest innovative solutions, in order to close transactions.”

ABS

SCI NPL Securitisation Awards: Service Provider of the Year

Winner: Scope Ratings

Scope Ratings has a strong footprint in the European non-performing loan ABS market, ranking as SCI’s Service Provider of the Year in the space. The organisation has helped paved the way for the development of the sector, rating the first public NPL securitisation with an Italian government guarantee via the GACS scheme, and has successfully broadened its expertise across the asset class since then.

Scope has expanded its footprint to several countries as it delivers on its mission of offering an alternative and distinctively European perspective on credit risk as a leading European rating agency. NPL ABS is a core part of this mission.

In this area, the undoubted crowning achievement for Scope during the awards period has been rating the first public UK reperforming loan deal, in April 2022. Wolf Receivables Financing is a £315.4m gross-book-value (GBV) securitisation of UK reperforming unsecured consumer debt. With this transaction, the organisation now rates around 55 public primary or secondary NPL securitisations across Italy, Cyprus, Spain, Portugal, Ireland and the UK.

“The first transaction in every jurisdiction is always a challenge, as there are no reference points – and this transaction was the first-of-its-kind in the UK,” observes David Bergman, md and head of structured finance at Scope. He explains that the organisation received payment history on an extensive sample of borrowers. Processing the data was not a challenge, however, as the team is well equipped to manage large amounts of data.

Bergman adds: “We analysed historical data, paying particular attention to the borrower characteristics of the underlying sample to make sure observed borrower behaviour was representative for the portfolio being securitised.”

On top of this notable achievement, Scope has delivered non-public credit assessments or ratings for an additional 30 primary or secondary securitisations or senior financings across the same markets, as well as several deals in France.

Non-public bilateral transactions generally feature more complex waterfalls with equity leakage features, which pay out significant amounts to junior noteholders, as long as certain performance ratios are met. This makes the cashflow modelling more complex. However, the main challenge in bilateral transactions relates to the amount of information that the servicer is willing to share, which is less critical in more mature markets but can be an important hurdle in markets with fewer comparable transactions.

Looking back over the last 12 months, Scope has continued to progress in its market coverage and has rated two new public transactions in Ireland, one in the UK as well as transactions in Italy, Portugal and Spain on a regular basis. “This has been achieved because we have demonstrated to the market our growing expertise in NPLs. We have developed a deep understanding of this complex asset class,” observes Paula Lichtensztein, senior representative in structured finance at Scope.

She continues: “We have almost 100% coverage in Italy and have expanded to other markets. Our market penetration is growing, and we fully expect this to continue in the future.”

Scope attributes this to the fact that the team closely follows market trends and keeps up to date with developments in the sector. Analysts recently noted, for example, that there has been an increase in secondary portfolios being securitised, both publicly and privately.

Going forward, Scope will continue to assess different types of transactions in the primary and secondary market in the countries it covers. Bergman and the growing structured finance team are also hopeful that the organisation will assess a securitisation of NPLs in the traditionally low NPL jurisdictions in Northern Europe.

Bergman concludes: “We have worked with different market participants, both on primary and secondary deals. We have rated traditional transactions with the originator involved and we have also been approached by investors providing senior financing, interested in an independent risk assessment on their exposure.”

ABS

SCI NPL Securitisation Awards: Contribution to Market Development

Winner: NPL Markets

Over 750 portfolios have now been onboarded to NPL Markets’ one-stop-shop reporting, trading and analysis platform. For its role in improving efficiency across the non-performing loan market, it is the winner of SCI’s award for the best Contribution to Market Development.

These 753 portfolios represent some 700 different banks, investors and servicers and over 4.5 million individual loans across 25 different jurisdictions. The number of loans on the NPLM platform has increased by 120% and the number of users has leapt from under 200 since 1Q21.

The numbers have been augmented significantly over the last year in part due to the new regulatory requirements imposed by ESMA through the European Securitisation Regulation (​Regulation (EU) 2017/2402), which ​established a general mandatory and reporting disclosure framework for structured finance transactions.

Among other requirements, ESMA mandated that disclosure reports for private securitised deals must be published on a suitable website that includes data quality checks, while public securitisations must submit detailed data to a repository.  This requirement was considerably more onerous than what had gone before and its introduction, in September 2020, brought many new clients to the door of NPLM.

The web-based digital platform takes that considerable burden of time and cost away from those who make uses of its facilities. It also allows ESMA to collate more complete data in a timely manner.

But NPLM offers more than a regulatory reporting facility. Clients can also make use of the valuation and analytics, data preparation and the electronic marketplace for the buying and selling of non-performing assets. The erudition of the research provided by NPLM has also been praised by those in the market.

“Everybody starts in one place and they tend to say, ‘I don’t need anything else.’ Then when they see what else we have, like the marketplace or the analytics, then they’ll say, ‘I need that too,’” says Gianluca Savelli, co-founder and ceo of NPLM. As the portfolio is already on the platform, additional onboarding is straightforward and frictionless, he adds.

The analytics facility provides full valuation of entire loan portfolios, single structured finance transactions and also individual securitisation tranches easily and quickly. All services are available on a 24/7 basis, at the push of a button.

Clients choose whether they use the platform on a self-service or fully supported basis. Some start with self-service and then shift to fully supported membership and vice versa, says Savelli - although all tend to use the regulatory and business reporting function on a supported basis, given the mind-bending complexity of the obligations.

In a further manifestation of NPLM’s flexibility, users can also bring an adviser with whom they have an existing relationship onto the platform. “For example, we usually start with only a seller and buyers and we very often end up with several trusted advisors onboarded by buyer and sellers to facilitate the transaction,” explains Savelli.

The capacity to deal with performing assets has also been recently added to NPLM, although the bulk of loans and portfolios on the platform remain non-performing. For example, about 90% of loans in the marketplace function and 80% of loans using the analytics and data preparation functions are non-performing.

However, the split is more balanced in reporting. About 60% of the assets making use of NPLM’s business regulatory reporting capacity are non-performing.

In addition to the automated compliance with regulatory obligations, NPLM will generate investor reports and interactive portfolio summaries. It also provides business plan reporting – both the targeted business plan and the actual business goals attained - and securitisation transaction cashflow modelling.

NPLM is continuing to expand its reach. More asset classes - such as trade finance, specialised assets and project finance loans - are being added to the roster. More complex structures, like highly leveraged loans, are becoming possible, and the number of regulatory jurisdictions covered is being increased.

Structured Finance

Better methods?

New definitions for green, social securitisations

ICMA has released new definitions for green and social securitisations, together with additional resources for climate transition finance under its update of the Green Bond Principles (GBP), Social Bond Principles (SBP), Sustainability Bond Guidelines (SBG) and Sustainability-Linked Bond Principles (SLBP). In a Q&A document published in conjunction with the updates, the association further clarifies that synthetic securitisations require additional considerations that are not applicable to other secured bond categories.

The new definitions for green securitisation split what ICMA calls ‘Secured Green Bonds’ into ‘Secured Green Collateral Bonds’ and ‘Secured Green Standard Bonds’. The former is defined as a secured bond where the net proceeds will be exclusively applied to finance or refinance the green projects securing the specific bond only, while the latter is defined as a secured bond where the net proceeds will be exclusively applied to finance or refinance the green projects of the issuer, originator or sponsor, where such projects may or may not secure the specific bond in whole or in part.

For social securitisation, the same distinctions are made for ‘Secured Social Bonds’, with ‘Secured Social Collateral Bonds’ and ‘Secured Social Standard Bonds’ defined in the same way for social projects. Secured Green Standard Bonds and Secured Social Standard Bonds may form part of a specific class or tranche of a larger transaction.

For each Secured Green Bond or Secured Social Bond, the issuer, originator or sponsor should clearly specify in its marketing materials, offering documentation or by other means which method is being applied. Further, there should be no double-counting of projects under the bonds with any other type of outstanding green or social financing.

In the Q&A document, ICMA clarifies that while synthetic securitisations are not excluded from these definitions, they do require further considerations that are not applicable to other Secured Bond categories. Where a Synthetic Secured GSS Collateral Bond approach is being taken, it is expected that the reference entities should all be green or social projects on the balance sheet of the issuer, originator or sponsor.

Where a Synthetic Secured GSS Standard Bond approach is being taken, it is recommended that the relevant issuer, originator or sponsor consider capital released, RWA benefit or other appropriate means of measuring the full impact of the transaction via the issuance that is to be redeployed into green or social projects, in relation to the use of proceeds being applied in accordance with the GBP or SBP. “This will require particular consideration, noting that the calculation of that capital amount at the point of issuance and subsequently of the capital amount deployed into green and/or social projects is typically an internal calculation of the issuer, originator or sponsor and is consequently less transparent for investors,” the association states.

The ICMA release also includes an updated registry of approximately 300 key performance indicators (KPIs) for sustainability-linked bonds and a new Climate Transition Finance Methodologies registry, with a list of tools to specifically help issuers, investors or financial intermediaries validate their emission reduction trajectories as ‘science-based’. Additionally, there are new metrics for impact reporting for green projects relating to environmentally sustainable management of living natural resources and land use and for social projects, including an enriched list of social indicators and impact confirmation on target population.

Finally, the association has published a recommendations paper and proposed information template for providers of green, social and sustainability bond index services, as well as a pre-issuance checklist for green bond programmes and an updated sustainable bond programme information template.

Corinne Smith

Structured Finance

SCI Start the Week - 27 June

A review of SCI's latest content

Last week's news and analysis
Changing the paradigm
De-risking NPLs and democratising fixed income through digital securitisation
Corporate SRT finalised
Credit Agricole prices capital relief trade
ESG evolution
European CLO docs continue to evolve
NPL ABS line-up finalised
European NPL Securitisation Awards to debut
Quantifi considers
Quantifi founder Q&A on 20th anniversary of firm
Stable outlook persists
Moody's maintains stable default outlook

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
Container and Railcar ABS - June 2022
Global supply chain issues could continue to support US container and railcar ABS. However, as this Premium Content article shows, both markets are facing challenges on other fronts.
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 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

Full stack return

BBVA launches capital relief trade

BBVA has finalized a full stack significant risk transfer transaction backed by a static €1.2bn Spanish auto loan portfolio. The trade was launched after PSA and Santander retained their respective full stack SRTs at the end of May amid a backdrop of challenging market conditions (SCI Euro ABS tracker). The Spanish lender opted for pre-placement and a retention of a portion of the senior tranche to ensure execution certainty.

Rated by Fitch and Moody’s, the deal consists of a €1bn AA+/Aa2 rated class A tranche (priced at three-month Euribor plus 0.70%), €30m AA-/A3 rated class B tranche (plus 0.90%), €24m A/Baa2 rated class C tranche (plus 1.10%), €48m A-/Ba1 rated class D tranche (plus 1.26%), €30m BBB/Ba3 rated class E tranche (plus 8%), €30m unrated class F tranche (plus 11.0%) and €5.5m unrated class Z tranche (plus 12.0%).

Classes A to F will be repaid pro rata since the first payment date unless a sequential amortisation event occurs. Key performance triggers are cumulative defaults on the portfolio exceeding a certain dynamic threshold or a principal deficiency greater than zero on two consecutive payment dates.

The switch to sequential amortisation is unlikely during the first years after closing, given the portfolio performance expectations compared with defined triggers. Fitch views the tail risk posed by the pro rata paydown as mitigated by the mandatory switch to sequential amortisation when the portfolio balance falls below 10% of its initial balance. 

According to Diego Martin Pena, head of securitisation at BBVA, ‘’we retained almost 30% of the senior tranche or €302m. The cost here is lower since we’re not placing the whole senior tranche and we can use the retained piece for repo purposes. The ECB wants originators to place at least 95% of the capital stack but there are cases such as last year’s pandemic and market conditions where flexibility is provided to do things differently.’’

He continues: ‘’We decided to do a preplacement to ensure execution certainty. We didn’t want a situation where we had to announce the deal and then pull it back due to challenging market conditions. Still, even with preplacement, placing the whole senior tranche remains difficult given its large size; that’s another reason we decided to retain part of it.’’

Moreover, it’s likely that investors don’t want to invest now given higher rates later and the fact that the ECB’s ABS purchasing programme expires on the 30th of June. Originators that don’t participate in the central bank’s ABS programme will have difficulty placing the senior tranche. Indeed, placing the junior tranche is perhaps now easier. However, regulatory pressure to sell the senior to achieve significant risk transfer will remain, but what portion of it will have to be sold to achieve SRT is still a grey area.  

Stelios Papadopoulos 

Capital Relief Trades

SRT debut

BP Sondrio launches capital relief trade

Banca Popolare di Sondrio and the European Investment Bank group have finalized a €48m junior guarantee that references a static €1bn portfolio of Italian SME and Midcap loans. The synthetic securitisation is the Italian lender’s first significant risk transfer transaction.

Pierandrea Fendoni, head of capital and liquidity management at BP Sondrio notes: "Since the beginning of mid-2021 we have approached the transaction with determination, as we deemed that the EGF initiative and the standing of the counterparties would have offered us the best opportunity to develop our first synthetic deal in a constructive and collaborative way.''

He continues: ''We really appreciated the work done by the EIB and EIF teams, which strongly supported us in all phases of the process, maintaining a solid and goal-oriented approach. At the end, we were able to finalize a transaction that is fully aligned with our targets in terms of timing, overall structure, size and economics."

The tranches amortize pro-rata-with triggers to sequential amortization-over an approximately 3.5-year portfolio weighted average life. The operation will further meet the working capital and investment needs of SMEs by providing them with low-interest loans for more than €400m in new financing over the next 18 months. Over 2000 Italian SMEs are set to benefit.

The operation is being supported by the European Guarantee Fund (EGF) which is part of the €540bn package approved by the European Union as a response to the economic impact of the coronavirus crisis.

According to Caroline Sommen-Stokes, structured finance analyst at the EIF, ‘’Sondrio became an IRB bank in 2019 so we had to make ourselves comfortable reconciling the most recent historical data with the older information, but the quality and granularity of the data that was presented to us was excellent. From the bank’s perspective, moving to IRB means a thinner tranche, which improves transaction economics.’’

She concludes: “BPS has always been a big supporter of the EGF programme, being at all stages very comfortable with EGF requirements. Another benefit is that the transaction has a simple senior/junior structure without excess spread or replenishment. This meant swift execution even though they were a first-time issuer. In addition, the impact on the Italian economy via the financing committed by BPS is a remarkable achievement for a first-time issuer’’

Stelios Papadopoulos 

Capital Relief Trades

Corporate SRT launched

Raiffeisen executes corporate SRT

Raiffeisen has executed a €100m unfunded mezzanine guarantee that references a blind €1.8bn portfolio of German, Slovakian and Austrian corporate loans. The bank will be focusing on corporate exposures in the short to medium term with another corporate SRT likely to be executed.

The portfolio has a weighted average life of approximately two years and the tranches amortize pro-rata with triggers to sequential. Further features include a time call that can be triggered after the replenishment period and the portfolio WAL. The portfolio is backed by around 1500 borrowers.

Raiffeisen has retained both the junior and senior tranches in this trade. At group level, the deal will strengthen the common equity tier 1 (CET1) ratio by approximately 8bps. The latest synthetic securitisation from the Austrian lender is called Roof Corporate 2022.

According to Oliver Fuerst, head of active credit management at Raiffeisen, ‘’we were initially aiming for a bigger portfolio later in the year but given the uncertainties in the markets, we decided to opt for something smaller to ensure execution certainty in the second quarter. The macroeconomic considerations were also reflected in the portfolio selection in the form of rating adjustments and by limiting sensitive industry sectors.’’

The underlying assets of the deal come from the same business unit as a corporate capital relief trade that Raiffeisen finalized in December last year (SCI 13 December 2021).  

Stelios Papadopoulos 

Capital Relief Trades

Risk transfer round up-30 June

CRT sector developments and deal news

Santander is believed to be readying a synthetic securitisation backed by SME loans from the Magdalena programme. The last Magdalena deal was executed in September last year (SCI 14 September 2021).

Stelios Papadopoulos 

RMBS

All eyes on FHFA

New GSE fee for joint offerings puts FHFA under pressure

Pressure is mounting on the Federal Housing Finance Authority (FHFA) to amend the capital treatment meted out to Unified Mortgage-Backed Securities (UMBS).

Fannie Mae and Freddie Mac are due to start charging a 50bp fee on each other’s collateral in comingled offerings tomorrow (July 1). This move has been precipitated by the onerous capital treatment of joint deals in the 2020 Enterprise Regulatory Capital Framework (ERCF).

“At this time, FHFA has no comment on future changes to the ERCF,” a FHFA  spokespeson said yesterday (June 29), but a source close to the regulator told SCI: “FHFA has previously stated in the 2022 scorecard and its strategic plan for 2022-2026 that the agency is conducting a comprehensive review of the current pricing framework to increase support for core mission borrowers.”

This would seem to leave the door open for this controversial aspect of ERCF to be changed, which, in turn, would mean that the GSEs can ditch the fee.

Market participants are more hopeful than they were in the past that the FHFA will amend the rules. The regime of Sandra Thompson has so far proved far less hostile to the GSEs than that of her predecessor Mark Calabria.

The regulator last week responded to the new fees by confirming in a public statement that they were introduced to “accommodate the increased capital requirements associated with this activity as proposed and finalized in the 2020 Enterprise Regulatory Capital Framework.”

However, it also said that it “remains committed to the continued strength and resilience of the Single Security Initiative (Initiative) given the significant improvement in liquidity and stability that this Initiative has afforded the TBA market.”

This conciliatory tone and endorsement of the UMBS sector has given onlookers cause to believe that it is open to additional changes to the ERCF.

The GSEs announced the new fee on June 14 to an immediate howl of of dismay from all sections of the mortgage securitization market. It is feared that the charge will destroy UMBS market, which began in 2019 and is generally considered to have improved the MBS sector.

On June 17, the Structured Finance Association (SFA) released a statement saying, “This additional charge appears to undermine the purposes of the UMBS, which risks impairing the fungibility of that security and the liquidity of the broader TBA market, thereby negatively impacting borrowers.”

In a letter sent to the FHFA on June 22, SIFMA was even more direct. It wrote, “In less than two weeks, Super and CMO markets will be bifurcated with negative, yet unknown in scale consequences for UMBS TBA liquidity. We urgently request that FHFA direct the Enterprises to rescind this action as soon as possible so that the fee is not imposed.”

Most independent analysis concurs that the 50bp fee is a game changer. In a note dated June 17, Bank of America MBS analysts wrote about the fee, “A list of potential effects are worse liquidity, more costly CMO execution, and a more adverse impact on smaller holders.”

The UMBS market was set up to create fungibility between Freddie Mac and Fannie Mae securities as until this time deals sold by Fannie enjoyed a significant pricing differential. It was no small undertaking and not only did it not disrupt the successful and liquid TBA market it was able to enlarge it. The MBS market has expanded from $4.7trn in 2019 to $6.4trn.

The comingling numbers are impressive. There is $118bn of Fannie Mae securities in Freddie Mac pools, and $236bn of Freddie Mac securities in Fannie Mae pools. Overall, Fannie Mae has $3.56trn in MBS outstanding and Freddie has $2.84bn.

This new fee threatens to make it uneconomical for one GSE to guarantee securities offered by the other, thus throwing the UMBS sector into disarray.

As a market source told SCI, “GSEs will effectively only do CMO and re-pooling with their own MBS, bifurcating the market again, where UMBS was implemented to combine the Fannie and Freddie market.”

There is no mystery about why the GSEs are taking this controversial step. They are doing so because the 2020 ERCF imposes relatively harsh capital treatment for joint offerings. This aspect to the 2020 rules was left unchanged when the ERCF was amended in February.

Consequently, a 20% risk weighting is imposed for one GSE guaranteeing the debt of the other, which is the same as for banks for holding MBS. With this risk weighting on an 8% capital charge, the GSEs must hold 1.6% of capital against the position.

“Under the ECRF, we are required to hold capital for Fannie Mae guarantees of Freddie Mac UMBS collateral via SUPERs and REMIC structured transactions. The new fee will support capital restoration and corporate returns in a way that we would not expect to impact borrowers’” a Fannie Mae spokesman told SCI yesterday (June 29).

Freddie Mac said in a statement, when it announced the changes, ““This fee is designed to align with the cost of required capital for Fannie Mae guarantees of Freddie Mac UMBS collateral under the enterprise regulatory capital framework." When contacted by SCI, the GSE declined to comment further.

It is perhaps no wonder that the GSEs have taken this step, and the spotlight turns back upon the regulator. Over to you, FHFA. 

Simon Boughey

Structured Finance

Suit filed over alleged CMBS fraud

Sector developments and company hires

Suit filed over alleged CMBS fraud
Kasowitz Benson Torres, as counsel to investment vehicles associated with Carl Icahn, has filed a complaint in Nevada state court against Rialto Capital Advisors for breach of contract and fraud. The case is in connection with Rialto’s servicing of a CMBS trust (COMM 2012-CR4) secured by the Prizm Outlets mall in Primm, Nevada, which resulted in a loss of almost US$73m, plus almost US$13m in fees. The property was reportedly sold in January 2021 for US$1.525m, representing the largest loss on a CMBS conduit loan since the financial crisis.

As alleged in the complaint, Rialto - as special servicer for the trust - breached its obligation to act in the best interest of trust investors by: improperly delaying the sale of Prizm Outlets while syphoning off millions of dollars from the trust; manipulating appraisals for the mall to avoid contractual provisions placing servicing decisions in the control of the class E notes held by the Icahn funds; and unlawfully acting for its own benefit and the benefit of mutual fund giant Putnam Investments and others. The latter are alleged to have interfered in the CMBS market to “protect their billion dollar bets” on CDS linked to the performance of Prizm Outlets and other CMBS assets referenced in the CMBX.6 index.  

In other news…

CAS tender offer underway
Fannie Mae is making another fixed price tender offer for the M2 tranches of 10 CAS issues, all of which were priced in 2016, 2017 and 2018. The principal balance at issue of the notes on offer totaled US$4.7bn, varying from US$713.3m for the M2 tranche of CAS 2016-C05 to US$389.9m for the M2 tranche of CAS 2018-C03.

The tender commenced on 24 June and concludes on 30 June. The GSE has engaged Bank of America as lead dealer manager for the tender.

Impact RE agreement signed
T30 Capital has entered into a strategic partnership with Blueprint Capital Advisors, with the aim of boosting its social impact and expanding its real estate lending business. Under the agreement, the two firms will execute US$5m-US$50m senior bridge and construction loans for properties including hotel, industrial multifamily and mixed-use, throughout the Northeast Corridor, and work to increase minority- and women-owned business enterprise by committing to ‘open door sourcing’. Through the partnership, T30 and Blueprint hope to be able to expand the pipeline of loan opportunities from US$750m to US$2.5bn.

North America
Vesttoo has hired ILS industry veteran Stefano Sola, who will serve as the new head of its global capital markets team. Sola joins the firm with extensive experience from Rewire Securities, having previously served as co-founder and ceo of both Rewire Securities and before that Merion Square Capital. As the new global head of capital markets, Sola will lead a team focused on capital raising and business development of Vesttoo worldwide, including the firm’s flagship ILS programme.

RMBS issuer acquired
Kensington Mortgages has been sold to Barclays Bank, after drawing a broad range of interest through an auction process. Barclays will acquire the business from funds affiliated with Kensington’s joint owners since 2015, Blackstone and Sixth Street. Subject to regulatory approval, the transaction will see Barclays acquire both Kensington Mortgage Company (KMC) and Kensington Mortgage Services (KMS), as well as a portfolio of primarily KMC-originated UK mortgages from October 2021 to the completion of the acquisition.

SME lending partnership inked
Funding Circle and a UK affiliate of Magnetar Capital have announced a lending partnership that is expected to provide more than £300m of funding to small businesses over a three-year period. The partnership will see Magnetar UK support thousands of UK SMEs by leveraging Funding Circle’s technology and distribution platform. In turn, Funding Circle’s machine learning models will provide Magnetar UK with a highly efficient and cost-effective mechanism to deploy capital to the real economy.

Magnetar UK joins a range of investors lending through Funding Circle’s platform, including banks, asset management companies, insurance companies, government-backed entities, individuals and funds. The partnership with Magnetar UK - which was advised by AgFe - follows a commitment by Waterfall Asset Management last month to lend a further £1bn through the Funding Circle platform. Waterfall’s initial investment with Funding Circle was also for £1bn in December 2018 and facilitated the execution of a number of securitisations.

Structured Finance

UTP agreement inked

Sector developments and company hires

UTP agreement inked

UniCredit and Prelios have signed an agreement for the specialised management of unlikely-to-pay (UTP) loans, following the conclusion of a competitive selection process launched by the bank in 4Q21. The long-term agreement involves Prelios acting as the preferred partner in the management of UTP loans in the corporate segment held by UniCredit. An initial stock under management for the year 2022 will be complemented by future flows of new UTP loans over the next six years.

At the same time, Prelios advised UniCredit in the sale and securitisation of a UTP loan portfolio - mainly comprising corporate and SME exposures - amounting to approximately €2bn gross of value adjustments, under which it will be master and special servicer pursuant to Italian Law 130/99. This transaction allows UniCredit to achieve the full accounting deconsolidation of the portfolio in 2Q22, with Christofferson Robb as the main investor in the mezzanine and junior notes.

In other news…

EMEA

Alternative credit manager Arini has made three new hires in its London office. Younes Belcadi joins the firm as coo, Stan Fedorenko joins as senior investment analyst and Mehdi Kashani joins as senior structured credit trader. Belcadi was previously chief of liquid securities at Qatar Investment Authority, Fedorenko was previously an md at Centerbridge Partners and Kashani was previously head of ABS and CLO trading at BNP Paribas.

North America

Onex has named Robbie Jaber and Sandeep Alva as new co-heads of Onex Credit. In their new roles, Jaber and Alva will work collaboratively on both strategic and growth initiatives, and will oversee strategies across their individual areas of expertise. As co-head, Jaber, who joined the firm in 2020 to focus on its structured credit offering including its global CLO business, will concentrate on structured credit and CLOs, as well as liquid and opportunistic strategies. Alva, who similarly joined the firm in 2020 through the acquisition of Falcon Investment Advisors, will maintain responsibility for direct lending, mezzanine, and structured equity. Jaber and Alva each bring a respective 20 and 35 years of industry experience to their new roles, which the firm hopes they will utilise in their new roles to help support its ongoing growth plan.

Risk management firm acquired

SAS has acquired Honolulu-based risk management and analytics firm Kamakura Corporation. SAS’ investment decision comes as rising inflation and a potential recession signal turbulence for the global economy, which the firm believes is a time for financial services organisations “large and small” to closely examine liquidity and other risks in their portfolios.

Seventh CAS deal prints

Fannie Mae has priced the US$866m CAS 2022-R07 transaction, marking its seventh CRT offering of the year. The deal securitises a reference pool of about 101,000 single-family mortgages with an unpaid principal balance of US$30.6bn. The joint bookrunners are Nomura and Wells Fargo.

The deal consists of a US$392.8m BBB+/BBB+ rated M1 tranche that priced at one-month SOFR plus 295bp, a US$275.2m BBB/BBB- M2 tranche that priced at SOFR plus 465bp, a US$91.6m BB+/BB- B1 tranche that priced at plus 680bp and a US$106.9m B-/NR B2 tranche that priced at plus 1200bp. All the loans were contracted in July and August of last year.

SPRINT investment for NLU fintech

Claira, the document intelligence fintech, has received strategic investment from Citi’s strategic investing arm, Citi SPRINT, to give a boost to its next-generation document intelligence technology. The bank hopes the investment capital will enhance Claira’s product offering and help accelerate digital transformation through the adoption of the firm’s AI-powered technology. Claira aims to reinvent the document analysis process with its Natural Language Understanding (NLU) technology, over the prevalent Natural Language (NLP) approaches. Beginning with municipal prospectuses and CLOs, the new data analysis solution aims to aid the document analysis process for both finance and trading professionals.