Contents

Capital Relief Trades

Ready to launch

Allica Bank ramps up securitisation machine

Allica Bank has hired Jeremy Hermant as its head of capital markets. The new role will maintain a focus towards securitisation as the UK challenger bank diversifies its capital and funding options.

Jeremy Hermant, head of capital markets at Allica Bank notes: ‘’Securitisation offers an efficient way to improve returns by separating ownership from income since the bank can still manage their books while increasing their lending capacity. Furthermore, optimizing your cost of funding and capital aids external growth.’’

He continues: ‘’One benefit of working for a smaller, modern challenger bank is the technology. The latter enables us to streamline origination data and the securitisation process without legacy system issues.’’ 

Moreover, smaller banks can make decisions more quickly although the lack of historical data means more reliance on qualitative approaches such as the user experience and origination control whilst scaling.

Managing capital via securitisation offers value for Allica as it grows its lending book, since funding needs are covered through deposits gathered directly and through user platforms. ‘’Thanks to our deposit user experience, we can scale our funding alongside our origination” says Hermant.

Allica bank’s deposits increased from £104m to £846m over the course of 2021 to fund organic growth. Moreover, the lender has diversified its funding in the last year by onboarding additional distribution partners. Total funding raised has now reached £285m. The forecast is for £3bn of SME lending over the next three years.

Going forward, Hermant states: ‘’As the current regulatory pause allows for more perspective, future securitisation transactions will likely incorporate innovative features such as hybrid amortisation and ramp up periods, with the goal of accessing a diverse base of funded and unfunded investors with structures that can be either cash or synthetic.’’

He concludes: ‘’The main benefit of the ramp-up feature is a better alignment of capital relief with origination whilst enabling to do deals earlier and get the capital relief for a larger book when it arrives. However, this introduces subtle differences in modelling and rating that would require additional covenants on parameters such as pool concentration and back-end risk.’’

Stelios Papadopoulos 

ABS

Pre-summer comeback?

European ABS/MBS market update

With one deal pricing, the UK and European ABS/MBS markets reopened this week. As the summer break is fast approaching, issuers will have a short window to come to market.

This week, Premium Credit brought a fifth issue from their PCL master trust. The PCL Funding 2022-1 transaction - which priced yesterday - saw decent demand across the capital stack, with all the notes pricing within IPTs. The senior notes landed at SONIA plus 140 bp, whilst the B and C notes landed at SONIA plus 310 and 410, respectively - all while attracting strong coverage ratios (1.4x, 3.8x and 2.4x respectively).

“I think if there is one recession proof, or a sign of the times, it is that deal,” notes one ABS/MBS trader. He adds: “It highlights how the market views this type of collateral in the current context. Just look at the pool, with remaining average terms of six months and an average yield of 14%. It is a resilient product, which pays off very quickly and offers good yield. It is exactly what investors are looking for at the moment. It was not a surprise to see it price at a good level and even being upsized.”

Notwithstanding good demand, the senior notes landed nearly double the plus 75 bp spread seen for the 2021-1 deal back in April of last year and plus 35 bp wide of their September 2020 deal.

Looking ahead and although looking bare at the moment, the pipeline could pick up rather quickly. “It is a very empty pipeline as far as public transactions go,” explains the trader. “There is essentially 2-3 weeks left before the summer, so issuers will have to announce deals on the 11th at the latest,” he concludes.

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

Capital Relief Trades

WAB trio

Western Alliance Bank surfaces in CRT market for the third time

Western Alliance Bank (WAB) has sold another capital relief trade – its third since its debut last year – in the shape of 18 classes of mortgage reference notes designated Western Mortgage Reference Notes Series 2022-CL1 and Series 2022-CL2.

The Phoenix, Arizona-based borrower first entered the CRT market in September 2021, becoming only the second US regional to do such a trade. Texas Capital was the first, breaking open the market in March 2021. It is not known to have visited the CRT sector since.

WAB’s first deal was a securitization of mortgage warehouse loans, like Texas Capital's deal.

Its second, however, priced in the last few days of 2021, securitized actual mortgage positions and this latest transaction, which hit the market at the end of last week, also transfers risk on direct mortgage exposure.

The guaranteed obligations consist of a pool of 7,486 mortgage loans with an unpaid principal balance of over $3.8bn as of May 31.

The 18 tranches range in size from $10.62m (the unrated M3-C) to $970,000 (the B minus rated M7-C). The latter pays 1m SOFR plus 15%, while the unrated $9.7m M1 pays 1m SOFR plus 225bp.

The total offered amount is $194m with a retained tranche of $3.68bn. The identity of the investor, or investors, is not known.

According to KBRA, unlike the previous WAL 2021-CL2 transaction, payment of interest and principal will be secured by a collateral account in which WAB will grant a first ranking security interest.

Final maturity is 2052 and structuring adviser is JP Morgan.

The average mortgage balance is $518,000 and the WA credit score is 768.

Over half the collateral emanates from the state of California, with smaller shares supplied by Texas, Washington, Colorado, Florida, Arizona, Massachusetts, Utah, Oregon and Virginia.

Almost 70% of the loans are categorized as investment mortgages.

Simon Boughey

Capital Relief Trades

Risk transfer round up-6 July

CRT sector developments and deal news

Commerzbank is believed to be readying a significant risk transfer transaction that is expected to close in 2H22. The German lender’s last capital relief trade was finalized in December 2020 (SCI 22 January 2021).

Stelios Papadopoulos 

Capital Relief Trades

Greek SRT debuts

Piraeus Bank launches first Greek synthetic RMBS

Piraeus Bank has finalized three financial guarantees, two backed by wholesale loans and one by residential mortgages. The synthetic RMBS is the first in the Greek market.

The underlying loan portfolios have an aggregate gross book value of around €2.7bn. As a result of the transactions, the Bank is expected to reduce its risk weighted assets by approximately €1.1bn and thus enhance its capital position by around 50bps.

One of the wholesale SRTs was sold to the European Investment Fund and it’s one of the last transactions under the European guarantee fund. Hence, there is no synthetic excess spread or replenishment period. 

The synthetic RMBS on the other hand went to private investors and consists of a €55m funded first loss tranche that references a €1.5bn loan portfolio. The tranches amortize on a pro-rata basis but there are triggers to sequential amortization. The call period is seven years which is equal to the portfolio weighted average life.

Residential mortgages aren’t typically included in synthetic ABS deals given their low-risk weights, but in this case the risk weights are set according to the standardized approach. Consequently, the deal works from a cost of capital perspective.

According to senior sources close to the securitisation, the rationale for using synthetic ABS initially-and following the announcement of the Bank’s Sunrise plan in March 2021-was to contribute to capital generation among other means, so as to offload non-performing loans (SCI 14 January 2021). The Sunrise plan stipulated capital and debt issuance, carve-outs and synthetic securitisations.

However, following the execution of two SRTs last year (SCI 18 March 2021) and significant reductions in NPE exposures, the focus has now shifted towards balance sheet optimization since synthetic technology can be utilized to enhance returns on capital.

Going forward the same senior source concludes: ‘’ECLs have been dropping so costs as a percentage of capital relief have improved and if you have models that are stable and measurable, then you can broaden the scope of asset classes. So, we are exploring unsecured consumer loans for example, but we also have new loan vintages coming in.’’ 

Stelios Papadopoulos 

RMBS

MBS falter

US MBS issuance set to tumble as refi rates collapse

There is increasing evidence that US mortgage refinancing is dropping fast, which, in turn, will reduce MBS issuance from the record-breaking volume of 2021.

According to data released by Black Knight today (July 6), in the 18-month period starting late 2020, the number of high quality refi candidates has dropped from an all-time high of 20m to the lowest seen since the beginning of this century.

There were 11m refi candidates at the beginning of the year, but this has now fallen to less than 500,000. Most of these have not altered the terms of their mortgages since 2003, indicating they are unlikely to do so now.

As 30-year rates have backed up sharply this year and are now close to 6%, the incentive to refi has disappeared.

Credit scores have also fallen as rates have climbed, so even if borrowers were keen to refi they will find that their room for manoeuvre has diminished. The average credit score for term refinance has dropped from 755 in mid-2021 to 730.

At the same time, while house prices are not going up as fast as they were, they are still going up. Average house prices rose 1.5% in May 2022, twice the monthly historical norm, while annual house price appreciation is still almost 20%.

“The annual home price growth rate fell by more than a full percentage point in May, the largest monthly decline at the national level since 2006. However, even with growth slowing in 97 of the top 100 U.S. markets, overall home prices still rose 1.5% from April – nearly twice the historical average for the month of May,” says Ben Graboske, president of Black Knight data and analytics.

Since the pandemic, house prices in the US have gone up 44%. The average house price in the US is now six times greater than median incomes – the highest ratio since the early 1970s.

While a recessionary climate might level off house prices, the underpinning factor is constrained supply and this is not going to change in the near to medium term.

As rates rise, but house prices remain elevated, it is difficult to foresee anything other than a drop in demand for mortgages and a consequent fall in MBS issuance.

Simon Boughey

Structured Finance

What is the future of the CRE market?

Despite the fluctuations in the capital markets this year, European warehouse funding for granular, small and medium balance commercial real estate mortgage loans remains stable, explains Sabah Nawaz, partner, Cadwalader, Wickersham & Taft LLP.

This is particularly the case in the “loan on loan” warehouse space. “Loan on loan” funding typically involves an institutional lender advancing loans to a SPV established by a sponsor being, in this scenario, an alternative provider of commercial real estate debt. The SPV on-lends the loan proceeds to a range of commercial borrowers, and such borrowers grant security over diverse commercial real estate assets.

The structures of such warehouses can vary. For example, a warehouse may or may not include mark to market or margin call features and various forms and degrees of recourse to the sponsor. These features originated in the U.S. market and, to some extent, these may be included in European structures.

Currently, warehouses are funding assets such as office, multifamily and light industrial, located in the UK and the rest of Europe.

Certain warehouses are matched to the maturity of the underlying assets. Where a warehouse is not match term funded to the underlying assets, there is a need for either a refinancing of the warehouse, either via another private financing route or a publicly offered take-out. Last year, we saw the first CRE CLO in Europe in over 15 years (following the established success of the product in the U.S). This European CRE CLO refinanced warehouse funding of medium balance commercial real estate loans.

At its core, a CRE CLO is similar to a CMBS as it is dependent on the performance of commercial real estate mortgage loans.

One of the advantages of a CRE CLO is that it is a funding tool for sponsors holding medium ticket loans that are secured against “transitional” commercial real estate. “Transitional” in this context means the commercial real estate asset is located in a strong sub-market or is of a stable property type class but could benefit from some asset management or capital expenditure initiatives to realise its full potential.

Another key advantage of a CRE CLO is that the sponsor retains a significant degree of control (subject to conditionality, agreed at the outset of the CRE CLO, to give protection to noteholders) over requests from underlying borrowers for loan modification requests. This is suited to transitional assets, since by their changing nature, the associated financing may need to be modified. In addition, the noteholders in a CRE CLO typically benefit from the sponsor holding a significant percentage of the junior notes.

A CRE CLO can be structured according to the requirements of a sponsor. A CRE CLO may be structured as a static transaction or, to give flexibility, the transaction may incorporate replenishment features. Replenishment allows the CRE CLO (subject to the satisfaction of conditions) to reinvest principal proceeds. Providing further flexibility, CRE CLOs may permit the disposition of defaulted or credit risk assets, again, subject to certain parameters.

In addition to the recent European CRE CLO discussed above, setting aside current pricing considerations, from a medium- to long-term capital markets perspective, there is a gradual trend towards public issuance backed by portfolios of small balance and granular commercial real estate loans.

There are other recent European public issuances which are not marketed or structured as CRE CLOs but have been backed by pools of granular and smaller commercial real estate loans. Subject to the usual pricing considerations, this landscape presents an opportunity for investors in respect of the diversity of underlying assets. It is also an opportunity for sponsors, which are active recipients of private lending, to become debut capital markets issuers.

Structured Finance

Bluerock introduces new credit fund

Sector developments and company hires

Bluerock is set to launch a new CLO interval fund in partnership with WhiteStar, who will serve as sub-advisor, which offers to investors high income and portfolio diversification. Marking the firm’s second interval fund, the ‘Bluerock High Income Institutional Credit Fund’ will aim to provide investors with access to income-producing senior secured loans with a portfolio made up of actively managed pools of diversified CLOs. The fund aims to not only deliver to investors access to an investment class usually only available to institutions, but also a high current income of around 8% annually, attractive risk-adjusted total returns, and the potential for diversification with its low correlation to broader markets.

The registered interval fund has launched with around US$85m in initial seed capital, with its initial portfolio offering exposure to US$4.7bn in underlying loans from more than 670 issuers. The fund also benefits from a 100% floating rate structure, as well as a multi-year track record of historical cash flow generation.

In other news..

North America

The FHFA has announced it will be exploring alternatives to its recently proposed upfront fee for comingled securities following feedback from an array of mortgage market participants (SCI 30 June). Concerns were expressed to the FHFA following the announcement of the fee two weeks ago, specifically regarding its impact on the Uniform Mortgage-Backed Security (UMBS) market. The FHFA has promised to conduct a review of the 2020 Enterprise Regulatory Capital Relief Framework (ERCF) to confirm the risks of comingles securities are accurately reflected, in an effort to help ensure the long-term viability of UMBS.

Structured Finance

A&M move forward with new development

Sector developments and company hires

Alvarez & Marsal’s (A&M) inaugural efforts as sole arranger have secured a breakthrough for Polish bank, Getin Noble Bank (GNB).  A&M financial services served as sole arranger for GNB’s first synthetic securitisation for risk transfer. The transaction compiles a portfolio of housing community loans and marks the first of its kind for the historically well performing but never-before-securitised asset class. The securitisation represented an array of challenges, including long duration and non-EUR currency, as well as being only the second ever non-supranational SRT in Poland. A&M were able to support the bank in the complex transaction by bringing their synthetic structuring expertise and investor interest to the deal. 

In other news…

EMEA

Citi has promoted former credit markets trading chief, Amit Raja, to regional head of market for EMEA. Raja, who joined the firm in 1997, has served since 2017 as the bank’s head of credit markets in EMEA, while also working as senior manager for global spread products trading. The firm hopes Raja’s move will better connect its market franchise with its broader ICG and global wealth platforms, and follows the promotion of Leo Arduini to chief operating officer of global markets earlier this year. In his new role, Raja will concentrate on developing and implementing product delivery strategy and will further the work Arduini has already begun to enhance Citi’s markets business in EMEA. Raja is also expected to join the EMEA operating committee, following regulatory approval, and will take over from Arduini as senior manager for markets for Citi’s UK legal entities.

North America

Megan Messina has joined Oaktree as head of CLO capital markets. The well-experienced CLO banker joins the firm’s New York office from Symphony Asset Management where she worked as director and senior portfolio strategist in structured credit since 2019. Prior to this, Messina served as md and co-head of global structured credit products at Bank of America Merrill Lynch. Messina will bring both her financial services background and extensive knowledge of capital markets, structured credit, fixed income, asset management, and derivatives to her new role.

Structured Finance

Arrow Global hires new leader for Finance Servicing Unit

Sector developments and company hires

Arrow Global has appointed Reza Atighi as new ceo to its Amersfoort-based Vesting Finance Servicing in the Netherlands. Atighi joins Vesting Finance from Intrum where he served most recently as ceo for the Netherlands and Belgium. Bringing more than 20 years of experience to the new role, the firm hopes Atighi will be able to boost the development of its Dutch-arm as a servicing and data specialist in the region.

In other news…

EMEA

Bishopsfield Capital Partners welcomes Arthur Moerman to its London office where he will assume the role of partner. Moerman brings over 20 years of experience across origination, structuring, and management of complex financial products which the firm hopes will assist the firm in the management and growth of its credit monitoring advisory business. He joins Bishopsfield from Kildare Partners where he worked as md in origination for the Netherlands and Belgium.

BNP Paribas has appointed two new members to its consultant relations team in London. Simon Mooney and Catherin Gill join the team as head of consultant relations and senior consultant relations manager, respectively. Mooney joins the firm from State Street Global Investors where he most recently served as head of consultant relations for the UK. In his new role, Mooney will report to head of distribution for the UK, Phil Dawes, and will maintain responsibility for the development of new and existing relationships with key consultants in the UK and other select consultants worldwide. Gill joins the firm from Newton Investment Management where she worked in international consultant relations and business development. In her new role, Gill will report directly to Mooney and will help support efforts to develop and maintain relationships. The firm hopes the two new additions will not only assist in the promotion of BNPP AM products and strategies, but help promote ESG and private markets expertise and enhance the consultancy-led business.