Contents

ABS

Expiration concerns

Questions raised over the end of HAPS

The Greek HAPS programme is set to expire in October, having helped to considerably reduce the non-performing exposures of the country’s systemic banks. However, there is concern that its expiration may be premature, given the possibility of future asset deterioration on bank balance sheets.

 “With the Russian invasion of Ukraine, high energy prices and possible energy bottlenecks, there is more uncertainty in the markets and less visibility going forward. Therefore, scrapping HAPS at its expiry doesn’t make sense,” observes Sinem Erol-Aziz, vp, European ABS at DBRS Morningstar.

At the end of 1Q22, the non-performing loan ratio stood at 7%, with a nominal amount of €15.2bn NPLs for the four systemic banks - Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank. This is in stark contrast to an NPL ratio of 35.2% with a nominal amount of €70.5bn at year-end 2019, when the HAPS programme began.

The decline in the NPL ratio was particularly significant over the last two years, given the requirements stipulated by the economic adjustment programme in Greece, which is – in turn - tied to assistance packages from the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF). These assistance packages are long term and have below market interest rates.

When the Italian GACS scheme was introduced in Italy in 2016, the total NPL ratio of Italian banks covered by the EBA Risk Dashboard stood at 16.8%, and this ratio reduced to circa 3% in around six years. However, when GACS was renewed last year, the NPL ratio for Italy was around 4%. 

With more NPL transactions said to be in the works, the Greek NPL ratio is expected to decline further by the October HAPS expiration deadline. Erol-Aziz anticipates possible reperforming or non-performing portfolio sales from existing transactions, either in the form of direct purchases or securitisations executed outside of HAPS. She also expects that securitisations of newly generated NPLs under HAPS, albeit in smaller sized transactions compared to before, are likely.

She claims: “There isn’t that much visibility from smaller banks in Greece, but in Italy a lot of those come together and issued under GACS. The banking system in Greece is comparatively more concentrated and the smaller banks are much smaller and fewer in number. Therefore, grouped issuance under HAPS from smaller banks is less likely.”

Last year, better-than-expected nominal growth resulted in a primary deficit of 5% in Greece, outperforming the 2022 budget by two percentage points of GDP. Nevertheless, the deficit is projected to decline further in 2023 - although the introduction of measures to cushion the impact of increased energy prices and the anticipated slowdown in growth will lead to a revision of fiscal targets this year from a primary deficit of 1.4% of GDP to 2%.

Against this backdrop, and given the possibility of future asset deterioration on bank balance sheets, there still appears to be room for the Greek NPL ABS sector to grow. Erol-Aziz concludes: “While consensual workouts are preferred, Greek NPLs will continue to put more burden on the legal system. Announced government plans to use part of the NGEU funds for digitalising public administration, digitalising the justice system and accelerating court procedures are positive news for the sector.”

Angela Sharda

Structured Finance

Making hay

New equilibrium for Australian securitisation market

In contrast to Europe and the UK, the Australian securitisation market is continuing to see healthy issuance activity, despite the country dealing with the same inflation and rates pressures as the rest of the world. This Premium Content article investigates why it’s always sunny Down Under. 

After an extraordinarily busy 2021 - with A$48.79bn publicly placed across 64 individual transactions - the Australian securitisation market reached a post-financial crisis issuance high. Such figures reflect the fact that Australian asset performance surprised significantly to the upside from the early months of the pandemic, helped by the success of the Australian government’s support programmes, such as the Structured Finance Support Fund (SFSF) and the Term Funding Facility (TFF). Although market conditions and macro circumstances have changed dramatically this year, Australian securitisation supply held up well at the start of 2022, with issuance levels reaching A$23bn at the end of June – ahead of the year-on-year pace of 2021.

Taking advantage of ideal pricing conditions and ample demand, the Australian securitisation market witnessed a clear issuance skew to the non-bank sector last year. “A key story of the past few years has been the growth, expansion and dominance of non-bank originators. What really worked in favour of the non-bank originators - and the market as a whole - is that banks did not need to fund in capital markets for a good period, thanks to the TFF,” notes Martin Jacques, head of covered bond and securitisation strategy at Westpac.

He continues: “Lack of traditional supply into primary markets meant that non-bank originators saw increased demand for their product. Certain investors, who would only focus on specific bank paper, found as spreads kept on inching tighter that non-bank RMBS - as a relative value proposition - was extremely attractive.”

As non-bank financial institutions increased their share of the RMBS market, such growth further broadened the pool composition observed within prime portfolios, including new asset types, such as non-resident mortgages and self-managed-super-fund (SMSF) loans. Additionally, it facilitated new programmes from established issuers; for example, Brighten Solaris 2021-1 and ThinkTank Prime RMBS 2021-1. 

While there is a market consensus that there would have been a heightened level of non-bank issuer activity, even without the triggers of the pandemic, the sector appears to have jumped on the opportunity presented by such perfect funding conditions. Within this setting of fiscal support, lower rates and government sustenance, Jacques particularly underlines the importance of the Australian Office of Funding Management’s SFSF: “The fund was broad, sizeable and nimble enough to address all the issues the market confronted. Initially providing direct support to primary issuance, the SFSF pivoted to secondary market switching into new issuance, which helped underpin secondary spreads while retaining investors in the broader securitisation market. This support extended across asset classes and down the capital structure (except first loss), ensuring individual sectors were not distorted.”

Furthermore, the broader scope to provide warehouse financing instilled confidence to maintain business-as-usual for non-bank originators and helped mitigate the risk that funding lines would be removed. The ability to fund warehouses also helped reduce the risk that call options would not be met if capital markets were not functioning.

Finally, the establishment of the Forbearance SPV within the SFSF to assist lenders managing payment holidays or hardship arrangements helped allay concerns of many investors. “Long story short, it was a very effective support programme and created an opportunity for new originators to come to market,” observes Jacques.

The market dislocation during the pandemic also generated opportunities for new issuers in the authorised deposit-taking institution (ADI) space. For instance, September 2020 saw HSBC Bank Australia’s first RMBS transaction in 13 years, while last year Defence Bank came to market with its inaugural issuance – the A$300m Salute 2021-1 (SCI 15 March 2021).

In this context, ADIs benefited from the supply dynamic, as margins tightened across the capital stack. “An additional outcome of the TFF was the need for ADIs to provide collateral, and the easiest way to do this was by enlarging or establishing internal securitisations. We expect this will translate into a broader pool of ADI issuers in time,” notes Jacques.

Meanwhile, the emergence of non-resident RMBS as an asset class has been spurred on over the last year or so by the relative value proposition they presented (SCI 8 April 2021). Jacques explains: “These deals are almost entirely backed by foreign investors, with high exposures to individual jurisdictions, which inevitably creates more risks around recovery and enforcement. Given the pool composition, the structures benefit from huge amounts of credit enhancement - though it is a product that truly tests the market’s appetite for more esoteric elements of the Australian mortgage market.”

As the Australian securitisation market - in the same way as other jurisdictions - finds a new equilibrium, following the pandemic and the current macroeconomic and political turmoil, it continues to see a large amount of activity. Although the country is dealing with the same pressure from inflation and higher rates as the rest of the world, as at the time of writing, publicly placed securitisation deals continue to print Down Under - in stark contrast to the European and UK markets.

A recent S&P report, entitled 'Monetary tightening to test Australian RMBS’, reiterates ongoing trends for the local market, including: the expectation that the strong employment outlook will moderate the transition from arrears to defaults and the risk of property price declines; and the RMBS sector’s minimal exposure to fixed rate loans will limit arrears increases after borrowers move to higher rates at the end of their fixed rate period – which, again, is a function of the TFF. 

As investor demand for Australian paper remains strong, Jacques points to the structural robustness of Australian RMBS transactions: “Your typical prime bank RMBS will have 8% credit enhancement on day one and 16%-plus before it starts paying pro rata. For your non-bank transactions, that can vary between 10% and 20%, depending on the name or the underlying asset. Also, an excellent selling point and track record to mention is that Australia has not experienced a loss on any rated notes of Australian prime RMBS.”

Looking ahead, a significant development for 2022 will be the withdrawal of the committed liquidity facility (CLF), which the Reserve Bank of Australia provided to allow banks to meet their LCR requirements due to the low level of government debt on issue pre-Covid-19. As such, the RBA allowed banks to invest in triple-A rated RMBS as collateral, among other high-quality assets. Bank balance sheet appetite has been significantly impacted by the CLF changes and its withdrawal could mean demand for RMBS may be impacted in the long term. 

Also likely to impact the market is the quest for foreign currency. Aside from a handful of deals that included US dollar-denominated notes in 2021, the Resimac 2021-3 RMBS featured a Japanese Yen-denominated senior tranche and in 2020 transactions from three issuers (Liberty, Firstmac and Resimac) all contained Japanese Yen tranches.

While the Japanese investor base has always been an important part of the Australian market, local currency denominated tranches help broaden their investor base. Non-bank financial institutions remain highly reliant on RMBS and might have to seek investors offshore to find additional liquidity, if the local market is tapped out by the banks, despite the additional cost.

Foreign investment may also begin to increase as relative value evolves. Jonathan Rochford, portfolio manager at Narrow Road Capital, notes: “At the triple-A level of the capital stack, some issuers have struggled to get away the volume they want with Australian buyers. One obvious way to remedy this is to issue offshore tranches. However, it is not a clear trend in recent deals.”

Finally, within an environment of low fixed-rate loans, Rochford warns against the outlook for Australian house prices and a sharper-than-expected rise in interest rates. “We are increasingly seeing economists predict a fall in house prices in the next couple of years. As the cost of borrowing money goes up, we could see a substantial shift in fixed rates. Consequently, this would introduce a level of payment shock,” he concludes.

Vincent Nadeau

ABS

Prepayments on the cards

FFELP loan cancellation widely anticipated

President Biden is widely expected to introduce a large-scale student loan forgiveness programme ahead of the US mid-term elections in November. One of two administrative mechanisms is likely to be adopted to implement the programme, each of which would have a significant impact on the over US$90bn FFELP student loan ABS market.

“US consumers are facing a slippery slope: with Covid-related stimulus cheques, unemployment benefits and debt moratoria all expiring, their lifeline is coming to an end. Given that student loans are the second highest burden in terms of consumer debt, at almost US$1.6trn outstanding, it’s unsurprising the Biden Administration is seeking to relieve some of this pressure,” observes Stephanie Mah, svp, structured finance research at DBRS Morningstar.

Specific details of the anticipated forgiveness programme are yet to be released, but it has been indicated that the plan would allow for US$10,000 in federal student loan forgiveness per borrower, with an annual income cap of US$125,000. According to a New York Fed blog post from April, US$321bn of federal student loans would be cancelled under a US$10,000 forgiveness plan. Moreover, 11.8 million borrowers would see their entire student debt balance eliminated and 30.5% of delinquent or defaulted loans would be canceled.

DBRS Morningstar believes that the administrative mechanism to potentially be adopted under the plan would be either consolidation from FFELP into the Federal Direct Loan programme or loan cancellation within FFELP. FFELP student loan ABS would likely experience an unprecedented wave of prepayments under the former mechanism, with the vast majority of eligible FFELP loans in securitisation trusts paid off in a short period of time. Borrowers who do not qualify for loan forgiveness would remain in FFELP ABS pools, although those earning more than an income cap will likely represent a small percentage of the total loan population.

“While this deluge of FFELP ABS prepayments may be problematic for certain bond investors, other investors may benefit from the rising interest rate environment, as funds could be reinvested at more favourable current market levels,” notes Jon Riber, svp, US ABS at DBRS Morningstar.

Forgiveness under the latter mechanism would likely be implemented through a process similar to the one currently used under the provisions of FFELP's income-based repayment (IBR) plan, with loan cancelation occurring within FFELP. Operationally, this process should be seamless because servicers already have capabilities in place due to the discharge provisions under the IBR plan, in addition to rules governing the payment of claims based on other types of discharge, such as death or disability.

“If a borrower’s loan forgiveness is approved within FFELP, it is anticipated that a FFELP guaranty agency would reimburse the FFELP servicer in an amount equal to the balance that is canceled. These funds would be deposited into the FFELP securitisation, acting like a prepayment to bondholders,” explains Riber.

He continues: “A larger percentage of borrowers would benefit if forgiveness were administered within FFELP. The path to loan forgiveness is simpler, with fewer steps for the borrower to navigate. Using this approach would mitigate any complication and ambiguity associated with consolidating into a Direct Loan, thereby increasing the likelihood of a successful outcome.”

DBRS Morningstar views an increase in FFELP prepayments positively and estimates that up to 50% of total FFELP debt could be eliminated, assuming US$10,000 of loan forgiveness per borrower. Faster prepayments would provide a significant amount of relief to FFELP bonds that have been exposed to slower-than-expected repayment speeds, especially those that have upcoming legal final maturity dates.

After forgiveness is applied, the overall credit quality of remaining FFELP ABS pools may also improve. Historical data suggests that FFELP loans with balances of less than US$10,000 tend to have a higher rate of default than loans with larger balances. This effect can partially be attributed to student borrowers that took out a loan but didn’t complete college.

Additionally, because undergraduate degree loan balances are capped, their balances tend to be lower than loans for graduate degrees that are uncapped. As a result of forgiveness, remaining FFELP ABS pools will therefore likely have a higher percentage of graduate degree loans, which tend to perform better than undergraduate degree loans. Furthermore, FFELP pools with borrowers that have an annual income above a forgiveness cap will benefit because a larger percentage of the remaining pool will consist of high earners, who likely have a better ability to pay their outstanding debts.

The US Department of Education last week released proposed regulations designed to improve the major student loan discharge programmes authorised by the Higher Education Act. The regulations seek to alleviate student loan debt burdens for borrowers whose colleges closed or lied to them, or who are totally and permanently disabled, and for public service workers who have met their commitments under the Public Service Loan Forgiveness programme. The regulations also propose stopping many instances of interest capitalisation, as well as giving borrowers their day in court if they have disputes with their colleges.

The Biden Administration has to date approved nearly US$26bn in relief for more than 1.3 million federal student loan borrowers.

Corinne Smith

CLOs

Administrative burden

CLOs caught in disclosure crosshairs

US CLO managers are facing potential disruption from new disclosure requirements proposed by the US SEC in February. The proposed new rules under the Investment Act of 1940 would require registered investment advisors to private funds - including CLO managers - to adhere to new reporting, record-keeping and disclosure requirements.

The proposal’s comment period was extended from the original 30 days, following widespread criticism regarding its inclusion of CLOs by making the rule applicable to all ‘private funds’ that rely on exemption from the ‘investment company’ definition, as per sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940. The primary concern identified by a number of trade associations, including the SFA and the LSTA, regarding the inclusion of CLOs is the lack of grandfathering provisions.

“The problem with the rule is that it applies to all existing CLOs, which would all have to, in some way, shape or form, comply with the new rules. But the CLO documents don’t easily allow for that,” explains Craig Stein, co-head of the finance and derivatives group at Schulte Roth & Zabel.  

The SFA was chief among those requesting the inclusion of grandfathering for all existing CLOs, due to the difficulties and expense of altering already-agreed-upon documents and transactions. “Not only is it difficult to amend the documents, but CLOs are not structured to deal with the additional costs. So, if we had to suddenly hire accountants to run audits, that is an expense that the deal isn’t structured for,” comments Stein.

He continues: “The CLO waterfall has administrative expenses capped at the top and they’ve been capped at a level that would allow for ordinary expenses, as well as some extraordinary expenses. So, if suddenly you have all these additional expenses, it’s going to be difficult.”

With greater expense caps, executing CLO deals would become more expensive. For this reason, the proposal could also precipitate further CLO manager consolidation (SCI 3 May).

“Some people are speculating that it could lead to increased manager consolidation for some smaller managers, who don’t have the capacity or the personnel to deal with the additional work,” explains Stein.

However, while such additional work and costs are a cause for concern for managers, Stein suggests that “ultimately, it’s not an existential threat to the CLO market.”

The proposal would require quarterly statements - including information on expenses, fees and performance - to be shared with private fund investors, which would not improve upon CLOs’ existing monthly reporting. Proposed requirements for monthly financial statements would also not be appropriate for CLOs, which provide monthly reports detailing assets, liabilities, collections and expenses.

Comment letters - including one from the SFA - have responded to the SEC, seeking to inform the regulator about how CLOs really function and state that the consequences of the SEC’s proposal on the CLO market would be unintended and beyond the scope of what the Commission is trying to achieve. Many CLO professionals argue that they already provide in excess of what the SEC is proposing they should be required to produce.

“The driving force from the SEC’s perspective is to protect fund investors. It believes there should be more transparency and more information given to investors and is also keen to put investors on a level playing field,” says Stein.

He continues: “So, for example, there’s a ban on preferential treatment for information access if preferential treatment results in material, negative effects and there is a disclosure requirement of preferential treatment, and there’s also reporting and annual audit requirements.”

While many - including the SFA and LSTA - approve of the strengthening of disclosure regulations, the proposed rules appear to be targeted primarily towards the private equity market rather than CLOs. “There are also rules about special redemption liquidity rights that make sense for private equity and hedge funds that, again, don’t make sense for CLOs,” Stein observes.

The rules do not specifically cite ‘CLOs’ at any point within the proposal, yet it’s unlikely for CLOs to be entirely exempted from the ruling. Nevertheless, adjustments could be made to better include CLOs in the SEC’s proposal following comments.

“The real angle now is to try to explain to the SEC how CLOs work, what CLOs already do in terms of transparency and disclosure, and why the new rules it is proposing don’t quite fit with CLOs,” Stein explains. “Therefore, showing it why it should either tweak the rule to make sense for CLOs, or remove certain requirements because CLOs actually do a better job than what it is proposing for certain areas.”

He remains hopeful regarding the grandfathering and reporting issues, but isn’t optimistic on the liability issue. “I’d be surprised if it pulled back on the redemption rights and liquidity issue. And I’d be surprised if it pulled back on the additional disclosure requirements if there’s any fee rebates, fee sharing, or anything of that nature.”

The proposal was initially intended to be prepared prior to the US mid-term elections in November, but is now expected to be implemented one year from its effective date – which is predicted to be towards the end of 2022 or the beginning of 2023.

Claudia Lewis

Structured Finance

SCI Start the Week - 11 July

A review of SCI's latest content

Call for SCI CRT Awards 2022 submissions
The submissions period has opened for the 2022 SCI CRT Awards – covering the global capital relief trades market and the US credit risk transfer market. Nominations should be received by 25 August. Winners will be announced at the London SCI Capital Relief Trades Seminar on 20 October.
Qualifying period: deals issued in the 12 months to 30 September 2022. For more information on the awards, click here.

Last week's news and analysis
Greek SRT debuts
Piraeus Bank launches first Greek synthetic RMBS
Landmark SRT finalised
Getin Noble bank launches synthetic ABS
MBS falter
US MBS issuance set to tumble as refi rates collapse
Ready to launch
Allica Bank ramps up securitisation machine
WAB trio
Western Alliance Bank surfaces in CRT market for the third time
What is the future of the CRE market?
European warehouse funding for granular, small and medium balance commercial real estate mortgage loans remains stable

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

Structured Finance

Looking for labels

Second-party opinions gaining traction

A total of 17 securitisations with second-party opinion (SPO) labels have been issued in Europe since 2016. With ESG factors playing an increasingly important role in investment decisions, tiering could emerge between transactions based on whether they have an SPO or not.

“There appears to be a trend: if you are an arranger or issuer, you check if you can get a second-party opinion for green or social. There is generally scope for tiering in RMBS – where it could be green or non-green,” notes Christian Aufsatz, md and head of European structured finance at DBRS Morningstar.

When investors look to include ESG considerations in their investment decisions, it is not always clear how they would go about achieving this. Some have internal measures in place and others may use an SPO, which acts as a certification of ESG factors across individual tranches or issuance programmes.

Indeed, SPOs provide an independent view on whether an issuance or issuance framework is ‘green’, ‘social’ or ‘sustainability-linked’. European securitisation issuances with SPOs have so far been dominated by green bonds, with social bonds emerging gradually.

Meanwhile, the most dominant asset class in ESG continues to be RMBS-related SPO transactions in Europe, with at least one green deal coming to the market every year since 2016 – accounting for 80% of the distributed issuance. CMBS is in second place for SPO transactions, with two deals issued in each of 2020 and 2021, while only two ABS SPO transactions were issued in 2021 and 2022 from the same originator.

The Netherlands has been the largest contributor to European ESG-related SPO transactions since 2016, with Obvion accounting for the highest number of deals. From 2020 onwards, other countries began to contribute to SPO securitisation volumes, with the UK accounting for a large proportion.

Last year saw more than €4.5bn in distributed SPO transactions covering a variety of asset classes, representing significant growth compared with just €600m in 2019 and €518m in 2020. In 2022, year-to-date alone, DBRS Morningstar has seen €651m of distributed SPO securitisation transactions.

Aufsatz confirms: “Last year, there was a big boom and everything that was ESG-related on the structured finance side on all asset-classes … appears to have attracted more demand [for SPOs].”

From a credit rating perspective, DBRS Morningstar’s role is to outline if an ESG factor has a credit relevance. Aufsatz notes: “Looking at ESG, we see it from a different angle; we assess whether it is relevant from a credit angle, which is fundamentally different to assessing whether something is green or social in itself. ESG and credit are not correlated and, if correlated, are not always positively related.”

Mudasar Chaudhry, svp, head of European structured finance research at DBRS Morningstar, concludes: “In order to determine credit relevance of green characteristics of the securitised asset, we need more data – and, at the moment, data is far and in-between.”

Angela Sharda

Capital Relief Trades

Consumer SRT prints

Klarna debuts capital relief trade

Nordic consumer lender Klarna has finalized a synthetic securitisation backed by a portfolio of German buy now pay later exposures (BNPL). The transaction is the first capital relief trade to be backed by such exposures.

The significant risk transfer trade features a mezzanine tranche and a retained first loss piece as well as a replenishment period and synthetic excess spread. Pricing could not be disclosed although several well-placed sources note that it priced in the double digits.

BNPL is a form of consumer credit, whereby goods and services are paid for in instalments over a period of typically less than twelve months, instead of being paid for in full at the time of purchase. Such borrowing is utilised in many retail stores for purchases and is generally interest-free, provided the customer pays instalments on time.

The impact of the coronavirus crisis drove a rising use of apps and online shopping - particularly during lockdowns - and this has more recently spurred a rapid growth of BNPL lending (SCI 25 March). The sector is expected to continue to grow going forward as evidenced by this year’s announcements from big brands such as Apple and NatWest regarding the launch of their own BNPL ventures.

Nevertheless, the sector has well known challenges given how nascent the asset class is and which an evolving regulatory environment seeks to address. Indeed, the lack of data is one issue, and the sector hasn’t been tested in a higher interest rate environment. Hence, regulators such as the UK’s FCA are currently developing regulations that are likely to cover several areas including affordability assessments.

Stelios Papadopoulos 

Capital Relief Trades

Landesbank pick up continues

Helaba debuts capital relief trade

Helaba, PGGM and Alecta have executed an STS synthetic securitisation that is backed by a Є2.1bn portfolio of German corporate loans. The capital relief trade is the second confirmed significant risk transfer trade from a German Landesbank as this segment of the market continues to pick up following LBBW’s SRT with the European Investment Fund last year (SCI 22 June 2021).

The transaction features three tranches with Helaba retaining the equity as well as the senior tranche. Helaba bought protection for a funded mezzanine tranche that allowed the lender to free up risk-weighted assets (RWAs) of around Є800m.

According to Meindert de Jong, director, credit risk sharing at PGGM, ‘’for Helaba this is their first credit risk sharing transaction and an addition to their capital management toolbox. For PGGM, it marks the addition of a new counterparty and a diversification of credit exposure given Helaba’s unique client base. Moreover, we welcome the addition of another STS compliant transaction, which is standard and we strongly support.’’

Funded mezzanine tranches are somewhat unusual in this market although they have been picking up this year. De Jong comments: ‘’ banks opt for retaining a first loss tranche to cover a portion of the expected losses and focus protection on the unexpected losses. The choice for the optimal structure by the bank is typically driven by cost of capital relief considerations.’’

Indeed, these transactions are carried out for capital relief purposes but state-owned banks such as Helaba aren’t driven by the same return on equity considerations as private banks.

De Jong responds: ‘’Credit risk sharing transactions offer banks the possibility to attract capital in an efficient and flexible way. Developing and maintaining this capability is therefore a valuable capital management tool for almost all banks.’’

LBBW opened the Landesbank market with a synthetic securitisation that the lender completed with the European Investment Fund last year. Bayern LB on its part is expected to close its own capital relief trade this year (SCI CRT pipeline).

Citi acted as the arranger in the Helaba transaction.

Stelios Papadopoulos 

Capital Relief Trades

Landmark APAC SRT launched

Standard Chartered prints capital relief trade

Standard Chartered, PGGM and Alecta have finalized a synthetic securitisation that references a US$1.5bn portfolio of Asian, Middle Eastern, African, North American, and Western European corporate loans. Dubbed Sumeru four, the capital relief trade renders Standard Chartered the first bank to benefit from capital relief in Hong Kong.

The deal features a sold first loss tranche with a 10% thickness and a portfolio weighted average life equal to approximately 1.5 years, as well as a replenishment period of 3.25 years. Further features include a sequential amortization structure.

Elena Lee, global head of balance sheet securitisation at Standard Chartered notes: ‘’While the structure of Sumeru four has many similarities to previous SRT transactions, one key differentiating feature is that the SPV must enter two separate credit default swaps with the Standard Chartered credit protection buying entities, one referencing the lending portfolio booked in Hong Kong and the other referencing the lending portfolio booked by the group outside Hong Kong.’’

She continues: ‘’The structure enables Standard Chartered to benefit from capital relief not only at the group level but also in Hong Kong. The transaction is a culmination of a two-year effort. We started looking into this several years ago, but a synthetic securitisation could not be put together in the past due to changes in organisation and regulations.’’

Tony Persson, head of fixed income and strategy at Alecta states: ‘’We have strong hopes that this first transaction will stimulate further issuance in both Hong Kong and other Asian markets.’’

Similarly, looking forward, Barend Van Drooge, debuty head, credit and insurance linked investments at PGGM concludes: ‘’We have shown together with Standard Chartered that these transactions also work in an Asian context and can help share local credit risk with international investors, reducing systemic risk. We continue to actively discuss with regulators how credit risk sharing works. Hopefully soon, we can see other markets in the Asia-Pacific region opening up to credit risk sharing.’’

Stelios Papadopoulos 

Structured Finance

Uncertainty prevails

Macroeconomic backdrop in focus

Thus far, 2022 has experienced some turbulent and choppy market conditions. Although poor performance has not yet affected the securitisation sector, the consensus – at least, in evidence during AFME and IMN’s Global ABS conference last month – is that uncertainty prevails and investor sentiment is predominantly focused on the macroeconomic backdrop.

During this period of market dislocation, the theme of regulation appears to have moved to the forefront - taking over from last year’s overarching ESG agenda and considerations. Ifigenia Palimeri, md at Moody’s, noted: “I do not think there is a shift. However, the main difference compared to last year is the macro environment. Given the current uncertainties, people are discussing regulation more closely as one of the elements that may bring new investors to the market.”

Key regulatory aspects discussed at Barcelona included disclosure requirements for public versus private securitisations, jurisdictional scope and the need for improved treatment under both LCR and Solvency 2 rules. When asked what the biggest regulatory issue is for the securitisation market, one panelist at the conference bluntly noted: “Solvency 2, because clearly that is where the money is.”

Market participants further highlighted that the prescriptive nature of regulation in the European securitisation market compared unfavourably to the more clement approach enjoyed by the covered bond market.

Meanwhile, regarding issuance, an important point in the current rising rate environment is the re-pricing of risk. Palimeri observed: “Regarding new issuance, it will depend if non-bank and specialised lenders will originate. As they are re-pricing the risk, this will impact volumes.”

She added: “There is uncertainty on what will come to the market, depending on where spreads will end up. Issuance will inevitably depend on where spreads stabilise.”

Indeed, the traders’ roundtable panel at Barcelona highlighted the not-so-rosy picture impacting spreads. Discussing the pronounced widening down the capital stack and lack of liquidity, one trader revealed the current market trend: “We clearly prefer defensive, long-positioning for now.”

Finally, in terms of ESG, panelists agreed that many changes are still needed; notably, better standardisation, transparency and widespread use of ESG frameworks. Overall though, the dominant feature of the debate remains the fact that there is not enough ‘green’ or ‘social’ collateral available to securitise.

Vincent Nadeau

Structured Finance

Aviva Investors appoints HSBC and Mount Street Group

Sector developments and company hires

HSBC and Mount Street have entered into a ten-year strategic agreement to service Aviva Investors’ £50bn Real Assets business. The firms’ appointment will see them assuming responsibility for all fund administration and debt servicing functions for Aviva Investors’ Real Assets strategies. HSBC and Mount Street were appointed following competitive process due to depth of offering, expertise across real assets credit and equity markets, and end-to-end service solutions.

In other news…

North America

Blue Owl has announced two new hires in latest bid to enhance its CLO team. Joining the firm are Hao Jiang, the former head structurer of CLOs for Mizuho Securities, and Diana Bergman, who joined the team last month from Barclays where she operated as a senior CLO structurer. Jiang and Bergman will each serve on Blue Owl’s structured credit team as md and principal, respectively, and will both report to the firm’s md, Jerry Devito. The two new hires follow Blue Owl’s recent acquisition of the CLO manager, Wellfleet Credit Partners.

Natixis welcomes two new co-heads of Credit Americas, Brad Roberts and David Williams, to oversee the firm’s global structured credit and solutions business. Roberts and Williams have each been with the firm since 2015 and 2006, respectively, and bring extensive experience to their new roles. Roberts has more than 25 years of experience across the financial services industry, having previously worked at RBS and Goldman Sachs, and undertakes the new role after most recently serving as Natixis CIB’s co-head of Global Structured Credit & Solutions & Credit Trading Americas. Williams, prior to this promotion, operated as co-head of Credit Syndicate Americas – which he will maintain alongside his new role. Roberts and Williams will continue to report to head of global markets for the Americas and global head of credit, Emmanuel Issanchou. Chris Gilbert, Head of US CLO Banking, will continue maintain responsibility for managing the CLO banking team.

Structured Finance

Call for proportionality in ABS framework

Sector developments and company hires

AFME ceo Adam Farkas has written to the European Commission, calling for better proportionality in the securitisation framework. The letter points out that despite its importance for the Capital Markets Union project, the European ABS market remains “subdued”, its size having shrunk from 75% that of the US securitisation market in 2008 to just 6% in 2020.

The letter highlights the considerable potential of securitisation to be used as a tool to both transfer credit risk away from the banking sector and to recycle capital into new lending to support SMEs and corporates. Securitisation can also be a powerful tool to allocate capital in supporting the green transition, given that 44% of the funding required to meet the Paris 2C agreement will be in the form of loans to businesses and households.

Indeed, AFME points out that the contribution that green securitisation makes in relation to the total financing of the EU green transition is dwarfed by its contribution in both the US and China - 1% versus 50% and 11% respectively.

While multiple factors have contributed to the decline of the European ABS market, AFME reports that there is a broad consensus within its membership that the lack of proportionality in aspects of the framework has been a significant factor in securitisation becoming unviable for many market participants. As such, the association believes that Europe needs an open debate about the importance of securitisation and how it can function properly to meet the region’s economic needs. This debate should consider the many fundamentally sound elements of the framework, but also aspects which require fine-tuning to better reflect the risk profile of securitisations.

From AFME’s perspective, there are three important areas of focus, the first of which is the current review of the prudential framework for securitisation. The association believes there is a strong case for the EU to consider adjustments to the treatment of securitisation under the CRD/CRR and Solvency 2 frameworks to introduce more proportionality and risk sensitivity, taking into account Europe’s unique risk-mitigating safeguards.

The second area of focus is the transparency and disclosures framework, where there is a need to review template-based reporting to enhance proportionality, practicality and usefulness for all parties. Finally, it is vital that the EU Green Bond Standard framework accommodates the characteristics of securitisation transactions, reflecting European market practice.

In other news…

EMEA

Funding Circle has promoted Dipesh Mehta to co-head of global capital markets, based in London. He was previously head of UK structuring at the firm and head of ABS, UK before that. Before joining Funding Circle in September 2015, Mehta was a European ABS research strategist at Barclays, having also worked at Moody’s, Genworth Financial and PwC.

The Algorand Foundation has named former JPMorgan md, Eric Wragge, as new global head of business development and capital markets. Wragge joins the firm to assist in its mission to boost its global development and expand the Algorand ecosystem. Wragge will lead the Algorand Foundation’s global initiatives and strategic partnerships in traditional capital markets and decentralised finance, and will report to company ceo, Staci Warden. He will serve as chair of the foundation’s investment committee and will work to establish Algorand as the blockchain platform of choice. Wragge brings extensive industry expertise to the new role, having spent 20 years working on JPMorgan’s structured credit team where he most recently served as head of ABS for northern Europe, as well interest and understanding of how crypto and blockchain can be used to improve performance.

North America

Barings has appointed Tom Edwards as md, private asset-backed finance. He was previously a structured products trader at Wells Fargo and an md at Bear Stearns.

Anjana Mohan Ravani has joined Redding Ridge Asset Management as an md in New York. She was previously a director in the CLO primary origination, structuring and syndicate team at Citi.

Reed Smith has recruited structured finance lawyer Joseph Suh as a partner in its New York office. He was previously a partner at Greenberg Traurig, which he joined in January 2017, having worked at Schulte, Roth & Zabel and Clifford Chance before that.

Sculptor Capital Management welcomes Michael Lin to the firm, where he will take on the role of head of CLO structuring and origination. Lin joins the firm from Sound Point Capital Management where he served as the director of CLO structuring. Lin will be based in Sculptor’s New York office, and will report directly to head of US CLO management, Josh Eisenberger.

Structured Finance

GSE NPL sales tallied

Sector developments and company hires

Fannie Mae and Freddie Mac sold 154,972 non-performing loans with a total unpaid principal balance (UPB) of US$28.7bn during the period from programme inception in 2014 through 31 December 2021, according to the FHFA. The loans had an average UPB of US$185,292, an average delinquency of 2.8 years and an average current mark-to-market LTV ratio of 86%.

Specifically, Fannie Mae has sold 104,467 NPLs with an aggregate UPB of US$19bn, an average delinquency of 2.8 years and an average LTV of 84%. Freddie Mac has sold 50,505 loans with an aggregate UPB of US$9.7bn, an average delinquency of 2.7 years and an average LTV of 90%. Loans in New Jersey, New York and Florida represent 41% of the NPLs sold.

In terms of borrower outcomes, NPLs on homes occupied by borrowers had the highest rate of foreclosure avoidance, at 42.3% versus 17.1% for vacant properties. NPLs on vacant homes had a higher rate of foreclosure, at 77.9% foreclosure versus 33.7% for borrower-occupied properties.

In other news…

EMEA

True Sale International has recruited Peter Grijsen as associate director, with a focus on verification of securitisations for SVI. He was previously a manager at Deloitte in Düsseldorf.

Walkers has promoted securitisation lawyer Catherine Overton to partner in its London banking and finance group. She was formerly senior counsel at the firm, having previously worked as a senior associate at Berwin Leighton Paisner and Clifford Chance.

ISPV regime change eyed

The UK PRA has released a consultation paper that sets out some proposed changes in its approach to authorising and supervising Insurance SPVs (ISPVs) that are designed to support the development of the UK ISPV regime. The aim is to enable market participants to make more informed decisions regarding their participation in the UK ILS market and facilitate new ways of raising capital in the insurance market.

The proposed changes include: changes to the legal opinion expectation for non-English law governed contracts; clarification on the number of senior management function (SMF) holders needed for an ISPV; clarification of approach to multiple cedants ceding risk to a single cell via a single contract; clarification on the interpretation of ‘quantifiable risk’; and clarification on the requirement for written policies submitted for ‘standard’ applications. Regarding the SMF clarification, for example, the PRA is proposing that for a ‘standard’ application, a single individual with the relevant skills and experience could hold or perform more than one of the three required SMF roles for an ISPV. For ‘complex’ applications, the authority considers that the three SMF roles may need to be held by separate individuals, although this would be assessed on a case-by-case basis.

The PRA does not anticipate that firms will incur additional costs as a result of the proposals. Feedback on the consultation is invited by 11 October and the implementation date for the changes is expected to be 30 November or one week after the publication of the Policy Statement.

North America

John Hancock Investment Management has announced a partnership with Marathon Asset Management in a bid to expand its alternatives offerings for accredited investors with a new asset-based lending fund. The John Hancock Asset-Based Lending Fund will seek to offer high current income and capital appreciation, aiming to invest more than 80% of its net assets and borrowings in assed-based lending investments. The fund will undertake a flexible, all-weather strategy towards private credit, and aim to take advantage of its subadvisor’s, Marathon, expertise in an array of sectors including transportation assets, healthcare loans and royalty-backed credit, residential mortgage loans, commercial real estate loans, consumer-related assets, liquid securitised credit, and corporate asset-backed credit.

Structured Finance

SME guarantee inked

Sector developments and company hires

The EIB Group has provided RLB Steiermark with a guarantee for a €60m mezzanine tranche of a synthetic securitisation. The transaction is backed by the Investment Plan for Europe and is expected to provide capital relief under the CRR.

The capital relief will enhance RLB Steiermark's risk-taking capacity and create additional lending headroom, enabling it to create a new portfolio of eligible loans to SMEs, mid-caps and private individuals. The portfolio is set to be equal to four times the EIB's guarantee amount and will focus on innovation and climate action mainly in Austria.  

The guarantee will be fronted by the EIF and counter-guaranteed by the EIB for the entire amount. The underlying portfolio is a granular portfolio of loans to SMEs and mid-caps originated by RLB Steiermark.

In other news……

EMEA

Citi has appointed Simon Jones as its new head of credit markets trading for EMEA. Jones will undertake the role alongside his present position as head of global spread products financing and securitisation for the region and will additionally take on the responsibilities as senior manager following the appointment of new EMEA head of markets, Amit Raja. In his new role, Jones will lead the firm’s global spread products franchise across the EMEA region and will assist in the development of strategies to help build the firm’s position. Jones has been with Citi since 2004 and steps up to head of credit markets trading for EMEA from his role as head of global spread products financing and securitisation for EMEA which he has held since 2017.

Global

Clifford Chance has announced five new appointments to its leadership team, with the aim of advancing its strategy of growth. Among the new appointees is Emma Matebalavu, who has been named global head of global financial markets. Matebalavu is currently co-head of global financial markets in the firm’s London office and specialises in real estate finance and securitisation.

Additionally, Jessica Littlewood has been appointed global operations and business transformation partner. In this new role, Littlewood will focus on the firm's operations to ensure they are closely aligned to the client and people strategy, as well as programmes to modernise the firm and the way it operates. She leads Clifford Chance's European CLO practice and is an expert in synthetic securitisation. She was previously a member of the firm's partnership council.

North America

Linklaters has announced three new hires to its capital markets team in New York as the firm works to expand its coverage in the US. Joseph Gambino and Peter Williams join the practice as structured finance and derivatives partners, and Elizabeth Walker joins as a senior associate. They each join Linklaters from Alston & Bird, where Gambino and Williams served as partners and Walker worked as a senior associate. Gambino and Williams bring more than 40 years of combined experience to the firm, and extensive expertise in structured finance but particularly CLOs.

Structured Finance

ABS CDO manager replaced

Sector developments and company hires

Dock Street Capital Management has replaced Dynamic Credit Partners (as successor to Petra Capital Management, the original manager of the deal) as collateral manager for the Brookville CDO I transaction. Moody’s has confirmed that the move will not result in any adverse rating actions with respect to the notes issued by the transaction.

In other news…

EMEA

DLA Piper expands its financial regulation team with the hire of new partner, Karen Butler. She joins the firm from Reed Smith’s financial regulatory practice where she also served as partner and has advised on both UK and EU financial legislation and compliance across a broad range of financial services institutions. Butler is noted for her experience in the regulatory support of capital markets, derivatives, securitisation transactions, and funds regulation, which the firm hopes will make her an excellent addition to the team in the firm’s London office.

Securitisation lawyer Conor Downey has become a partner in ILS (London). He was previously real estate finance partner in the London offices of gunnercooke.

North America

IDX Markets has announced the launch of its new electronic trading platform for securitised products, which will be able to trade CLOs from launch. The IDX Platform is the first of its kind for fully integrated trading and market intelligence for the securitisation market and was developed in consideration of feedback received from dealers and buyside professionals. IDX hopes the new platform will be able to set a new standard for CLO trading by enhancing market liquidity, efficiency, and transparency, that fits in with the existing trading environment.

KBRA has announced a new appointment to its senior management staff on its ABS team. Eric Neglia has been named as head of commercial and consumer ABS following the departure of senior md and former head of commercial ABS, Cecil Smart. Neglia has been with KBRA since 2015, and in his new role will continue to report to senior md and leader of KBRA’s global ABS effort, Rosemary Kelley.

Capital Relief Trades

Greek SRT launched

Alpha bank executes capital relief trade

Alpha Bank has executed a synthetic securitisation that references a €650m portfolio of Greek corporate and SME loans. Dubbed project Tokyo, the first loss financial guarantee was executed with the European Investment Bank group and it’s one of the last ones under the European guarantee fund (SCI 11 February).

The transaction forms part of the lender’s strategic plan called “Project Tomorrow” and is expected to contribute around 13bp to its total capital ratio on a consolidated basis. The deal features a 3.5-year portfolio weighted average life and a time call that is in line with the WAL as well as a pro-rata amortization structure with triggers to sequential amortization.

According to sources close to the transaction, ‘’the main motivation behind the transaction is capital relief following the new strategic plan and a capital raise from last year, as opposed to just generating capital to offload NPL portfolios. Among last year’s capital generating actions included the sale of our Merchant acquiring business unit. Overall, we are just using synthetics for loan growth and balance sheet optimization.’’

Indeed, Piraeus bank confirmed the same past and future motivations following their latest synthetic securitisations (SCI 7 July).  

Looking forward, the same source states, ‘’we will be tapping the market but market sentiment must be conducive enough so the transaction can work from our perspective. Still, we would be aiming for one to two deals per year and target returns on capital for our corporate, SME and retail portfolios.’’

Stelios Papadopoulos