Contents

Capital Relief Trades

Golden opportunity?

Basel 4 raises Japanese SRT prospects

Japanese banks have historically been well-capitalised, but implementation of the Basel output floors could change this. Against this backdrop, this Premium Content article investigates the prospects for capital relief trade issuance in the jurisdiction.

Japanese banks are expected to boost their issuance of significant risk transfer transactions as the implementation of the Basel output floors draws near. Issuance will likely remain restricted to foreign exposures, although the market is expected to broaden beyond corporate loans to project finance exposures.

Historically, Asia Pacific banking systems have been well-capitalised and generally profitable, so there has been no significant push - whether from shareholders or regulators - towards deleveraging. In fact, banks in Australia, Hong Kong, Japan and Singapore have strengthened their capital position since 2016. APAC banking systems are dominated by banks that use IRB models and are thus likely to report higher RWAs because of the implementation of the Basel 4 floor.

The key feature of the new Basel rules is the output floor, which sets a lower limit on the capital requirements that banks calculate when using their internal models. The main aim of the output floor is to address model risk and unwarranted variability, thereby enhancing the comparability of capital ratios.

Banks using internal models will now have to calculate RWAs using whichever model they are permitted to use. Lenders must then calculate RWAs using the standardised approach and then multiply the amount obtained by 72.5%. Banks must then compare the results from the last and first step and whichever figure is higher will be used to calculate the various capital requirements.

Overseas corporate loans have been the predominant asset class in the Japanese SRT market, with MUFG having been the most active SRT originator so far. According to Bank of Japan data, manufacturing makes up over 20% of the composition of overseas loans for the major Japanese banks, followed by electricity and gas. The same data note that North America and EMEA constitute the bulk of the overseas exposure of the major banks.

However, there could be a broadening into other asset classes and particularly project finance, where Japanese banks hold substantial portfolios. Nevertheless, it’s quite idiosyncratic and the amount of exposure is lower compared to corporate loans. It would therefore be more challenging to keep sufficient diversification in the portfolio, according to local originators.

Yet from a regulatory and cost of capital relief standpoint, it’s understandable why project finance would make sense, given the use of the slotting approach. Under the terms of the slotting approach, banks have to assign specialised lending assets into ‘buckets’ from ‘strong’ to ‘default’, with each bucket being associated with a risk weight.

“Yet the risk weight of the best category tends to be higher than the risk weight the bank would have been assigned by their traditional IRB model,” an SRT investor explains. “Japanese banks have been historically well-capitalised, due to their low-risk business and lower capital intensity. However, Basel 4 clearly changes this, so they will need to act - which may involve selling loans or more SRT issuance.’’

Similarly, Martin Neisen, partner at PwC, comments: ‘’The standardised approach is the basis for the calculation of the output floors of Basel 4, which leads to the increase of risk weights for specialised lending in the standardised approach and indirectly also to an increase for IRB positions. Along with the low margins of Japanese banks, the case for synthetic securitisations becomes more convincing.’’

He continues: ‘’An additional reason is that banks can use in the IRB approach either their own PD/LGD estimates or the slotting approach. The latter is more conservative and more qualitative. Over the last years, many supervisors did not allow banks to use their own PD/LGD estimates anymore, especially when they were redeveloping their models for specialised lending.’’

The structuring and design of Japanese capital relief trades is very similar to European transactions, according to investors, other than Europe’s STS framework. The application of the supervisory formula is the same in Europe and Japan. But the difference between STS and non-STS is that STS is more lenient, in the sense that the risk weight floor for the retained senior tranche is 10% rather than 15%.

Hence, banks can achieve a much lower attachment point. Placing a thinner tranche means cheaper pricing and more capital relief, given the lower risk weight for the senior piece.

Yet unlike Europe, Japanese SRT issuance will likely remain restricted to foreign exposures. The same investor states: ‘’The low-rate environment in Japan for over 20 years means that domestic exposures are more tightly priced, so it is hard to execute an SRT trade that doesn’t cost more than the carry on the portfolio. The only other option is a local pension fund or insurer, which could accept much tighter spreads on the SRT deal than international investors, but the universe of structured credit buyers in Japan is limited.’’

Indeed, the long-standing low yields in the domestic loan market have forced Japanese banks into portfolio acquisitions abroad. ‘’Low rates and deflation meant that portfolio loan acquisitions made sense as a diversification play for Japanese banks, along with a strong yen,’’ comments another SRT investor.

Mizuho’s acquisition of an RBS North American loan portfolio in 2015 is a case in point. The low rate environment began in the late 1990s and it involved a decline in both funding and lending rates, resulting in reduced net interest income.

Loan demand stagnated during that time, so banks were not able to compensate for declining interest margins by boosting volumes. Lenders made up for the contraction of their core business by expanding into Japanese government bonds and by finding new sources of revenue other than domestic lending.

The large banks were able to build on their existing foreign branches and representations to expand their cross-border business - expanding primarily in the US and Europe. The major banks increasingly focused on corporate clients from the export-oriented industries. Those clients were expected to have above-average financing needs, as they were growing faster in comparison to those relying on domestic markets only.

Portfolio acquisitions and more broadly the existence of the ‘originate to hold’ model is important for SRT issuance, since synthetic technology is a capital management tool that is utilised for transferring risk on core bank lending books that are originated to hold.

Kenji Matsumoto, director, credit portfolio management at MUFG, comments: ‘’Japanese banks have historically used an originate-to-hold model. However, this depends on each bank’s strategy and market situation. Our understanding is that many banks are promoting an ‘originate to distribute’ model these days for non-Japanese Yen loans.’’

Shunsako Sato, svp at Moody’s, concurs: ‘’The drivers of a shift to originate-to-distribute are global regulatory changes and macro trends in the US financial system. Japanese banks are shifting to it, but also US and other banks as well. Non-blue chip US loans have higher risk weights and therefore require higher capital allocation, which is expensive for all banks.”

Japanese bank non-Yen exposures are mostly wholesale funded. By distributing the loans originated, Japanese banks can reduce reliance on market funding and free up capital.

Sato continues: ‘’Originate to distribute works better in the US, where the practice of originate to distribute has been developed over the years - including the development of an institutional loan market.’’

Looking ahead, if a recession were to occur, then this could perhaps constitute another driver of higher SRT issuance - along with Basel 4 - since raising equity will become expensive. However, Japanese banks have a track record of raising equity when needed.

Sato notes: ‘’Large banks in Japan and other developed economies generally do not need to raise equity to grow their loan book, as they typically generate sufficient capital through profits. Nevertheless, large banks globally have raised equity when they need to replenish it after incurring heavy losses.’’

He concludes: ‘’A recession would make it more expensive for banks to raise equity in any country, not just Japan. Synthetic securitisation could be one way to work around capital constraints, but the Japanese banks have a track record of raising equity when needed; for example, during and after the 2008 global financial crisis.’’

Stelios Papadopoulos

ABS

Relative rebound

European ABS/MBS market update

The penultimate week of July has seen activity rebound in the UK and European ABS/MBS primary markets. Although no widely distributed deals have yet been seen, issuance flows have been encouraging in comparison to recent weeks.

Facing continuing broader macroeconomic concerns exacerbated by political turmoil in Italy, issuers sought to get ahead of today’s long-awaited ECB rate rise by picking up activity in the primary market. “Although market conditions are still tough, we have seen a strong flow of issuance in the last five days or so and at least the market feels more stable,” notes one ABS/MBS trader.

On Tuesday, French Consumer ABS – BPCE Consumer Loans 2022 – hit screens. The transaction featured a €1bn senior tranche, with a 4.66 year weighted-average life, which was priced privately at one-month Euribor plus 55bp. The deal bears the STS designation, is eligible for preferential capital treatment and the senior notes are LCR eligible.

In the market yesterday were two UK mandates. Specialist lender Together, came back with its third transaction of the year – non-conforming RMBS TABS 2022-1ST1. The deal saw its £444.5m senior notes pre-placed at par at SONIA plus 140bp, double the level seen for TABS 2021-1ST1 in September of last year.

Similarly, UK credit card issuer NewDay also issued a pre-placed transaction yesterday. The senior tranche was structured as a loan note, was not offered and still priced at SONIA plus 190bp – 60bp wide of its publicly sold predecessor NewDay Funding 2022-1. Further down the capital stack, the C tranche priced at par for a spread of plus 500 bp whilst the D notes landed at plus 650 bp.

Despite NewDay’s pre-placed status, coverage levels were released by the arrangers. The class Cs and Ds both had 50% protected orders but were covered at 3.9x and 2.4x respectively on the balance.

“Although pricing is still wide, coverage levels were quite good,” says the trader. “Generally speaking, deals are getting done and at levels which one would expect – in that sense, there are no surprises.”

Turning to the secondary market, the trader notes: “BWIC volume has slowed down recently, however client engagement on bonds is not bad. There is definitely a two-way flow going on, buyers are emerging and the market feels more balanced.”

Although September can be seen as the obvious time to expect to see renewed activity in the securitisation market and particularly public issuance, the trader remains cautious. “It will be purely dependent on what happens in the macro environment during the summer months,” he concludes.

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

Vincent Nadeau

Structured Finance

SCI Start the Week - 18 July

A review of SCI's latest content

Last week's news and analysis
Administrative burden
CLOs caught in disclosure crosshairs
Climate impact revealed
ECB releases climate stress tests
Consumer SRT prints
Klarna debuts capital relief trade
Expiration concerns
Questions raised over the end of HAPS
Greek SRT launched
Alpha bank executes capital relief trade
Landesbank pick up continues
Helaba debuts capital relief trade
Landmark APAC SRT launched
Standard Chartered prints capital relief trade
Looking for labels
Second-party opinions gaining traction
Making hay
New equilibrium for Australian securitisation market
Prepayments on the cards
FFELP loan cancellation widely anticipated
Uncertainty prevails
Macroeconomic backdrop in focus

For all of last week’s stories including ‘Market moves’ and ‘Risk transfer round-up’ click here.

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.

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
Australian securitisation dynamics - July 2022
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.
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.

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

Risk transfer round up-19 July

CRT sector developments and deal news

Santander has exercised an early termination for a synthetic securitisation of commercial real estate loans that the bank executed in 2018. Dubbed Red two finance CLO, the £83.5m financial guarantee referenced a nearly a £2.8bn portfolio (see SCI’s capital relief trades database).  

Stelios Papadopoulos 

Capital Relief Trades

Portfolio selection

Credit Benchmark publishes innovative CRT report

Credit Benchmark has published a report that introduces a novel approach to portfolio selection and risk assessment in capital relief transactions. The report advocates the use of credit consensus data to price risk in otherwise unrated names and the use of credit consensus aggregates to proxy risk for undisclosed capital relief trade portfolios. 

Credit Benchmark is an analytics firm that produces a comprehensive view of credit risk by creating Credit Consensus Ratings (“CCRs”) and analytics on the credit quality of companies, financial institutions, sovereigns, and funds. The data is sourced from more than 40 global financial institutions, representing the work of over 20,000 analysts, and is also used by regulators to monitor Basel rules on capital adequacy. Credit Benchmark collects a specific measure of credit risk: a one-year, forward-looking probability of default (PD) and forward-looking senior unsecured loss given default (LGD).

After being anonymized and aggregated, the contributed risk estimates are mapped to the appropriate credit category on the credit benchmark consensus scale, which is calibrated periodically and can be used as a comparison to the scales published by the rating agencies. Credit Benchmark produces regular data updates with a history going back to 2015.

According to David Carruthers, research advisor at Credit Benchmark, ‘’our dataset is uniquely relevant to the CRT market. The anonymized data that we have on individual corporate borrowers and the PDs assigned to them can be used to build hundreds of credit indices for country and industry sectors. We then use this bank credit analyst consensus data to create detailed credit profiles for sectors and jurisdictions and correlations with wider jurisdictional or industry sectors.’’

Indeed, investors can use credit consensus ratings to price risk in otherwise unrated names, but they can also use credit consensus aggregates to proxy risk for undisclosed capital relief trade portfolios.

CRT portfolio credit risk can be proxied in several ways using credit consensus data such as average default probabilities. According to the latest report, ‘’the metrics can be combined with market credit spreads to plot efficient frontiers and identify anomalies or scope for portfolio optimization. US corporate bond spreads are closely correlated with average PDs and tail risk.’’

Diversification benefits can be quantified by adjusting for correlations between aggregates. ‘’These correlations are more stable and potentially more meaningful than market derived equivalents. Correlations between aggregates reduce measured portfolio risk in some cases by more than 20%’’ says the report.

The geographic and sectoral diversity of CRT portfolios is a challenge for portfolio risk managers since a significant portion of the issuers involved are unrated, and in many cases the issuer names are not disclosed to investors. Credit Consensus data coverage includes many of the otherwise unrated corporates that feature in CRT transactions.

Moreover, it shows detailed geographical and sectoral risk trends in the absence of detailed issuer information. However, CRT investors are a diverse group, with variable credit risk appetites and differing tolerance for portfolio disclosure.

Capital relief trades are driven by banks aiming to transfer credit risk and reduce RWAs. If these trades are executed on a blind pool basis, the challenge for investors is to balance return against potential diversification benefits for their existing investments.

Credit Benchmark notes in response that portfolio construction decisions need to use more than one risk metric. Typical approaches ignore correlations between the various risk metrics for each industry or jurisdictional aggregate. The benefit of credit consensus data notes Credit Benchmark is that they can be used to calculate correlations between PDs in terms of PD levels and PD changes.

Credit Benchmark has discovered via this approach that US non-Life, Latin American Corporates and Belgian Corporates offer the best diversification, with regional and large country corporates being the least diversifying, followed by major US sectors.

Alternative sources of correlation estimates are patchy – CDS indices cover a limited range of names and many of them are illiquid. Bond indices are more widely available but restricted to traded bond assets subject to the short-term swings in market sentiment and credit / liquidity risk premiums.

The report concludes: ‘’Credit Consensus data on the other hand provides a set of regular and consistent time series including risk estimates for legal entities that are not publicly traded. They are also stable over short periods, while showing trends and turning points over longer time periods.’’

Stelios Papadopoulos 

Capital Relief Trades

SME SRT launched

BBVA executes synthetic ABS

BBVA and the EIB group have completed a €54m first loss financial guarantee under the European Guarantee Fund. The transaction references a portfolio of Spanish SMEs and midcaps and will mobilize €432m of SME financing.

According to sources close to the transaction, the guarantee was priced in the single digits and features a portfolio weighted average life equal to around 2.4 years as well as tranches that amortize pro-rata with triggers to sequential amortization.

Further features include a time call that can be exercised after the portfolio WAL. As with all transactions issued under the European guarantee fund, the portfolio is static as opposed to revolving. 

The synthetic securitisation is one of the last ones under the European Guarantee fund. The scheme has now come to an end, and it was managed by the EIB Group as part of the EU's global response package to the coronavirus crisis. The intervention stipulated €540bn of support to the European economy and particularly SMEs and mid-caps affected by the pandemic.

Over a thirty-year period, BBVA and the EIB have signed more than 140 deals in 17 countries to provide direct financing to SMEs and mid-caps worth more than €4.5bn overall.

Stelios Papadopoulos 

Capital Relief Trades

Risk transfer round up-21 July

CRT sector developments and deal news

Societe Generale is believed to have closed a synthetic securitisation backed by French SME loans. The bank’s last synthetic ABS was executed in July last year and referenced capital call facilities (see SCI’s capital relief trades database).  

Stelios Papadopoulos 

Capital Relief Trades

Nordic SRT finalized

Nordea executes synthetic ABS

Nordea, PGGM and Alecta have finalized an STS synthetic securitization that references a €2.5bn portfolio of Nordic corporate loans. Dubbed Sisu, the transaction is Nordea’s first post-Covid significant risk transfer trade to be sold to private investors.

The capital relief trade features a 5.5% tranche thickness and a portfolio that revolves over a 3.5-year period. The pool consists of more than 500 borrowers.

Jonas Bäcklund, head of group structuring at Nordea notes: ‘’while offering a further testimony of our strong relationship with PGGM and Alecta, Sisu also shows Nordea’s commitment to capital excellence for the benefit of our customers and shareholders.’’ 

PGGM has been involved in a record number of transactions this year compared to the coronavirus years in Poland, Germany, and the Nordics among other jurisdictions.

Barend van Drooge, deputy head of credit and insurance linked investments at PGGM comments: ‘’Since the start of the COVID pandemic a lot of banks have executed risk sharing trades on a more bilateral basis, which is where we provide added value. By having a thorough understanding of the banks' lending business, we can agree on a better fit for the risk sharing portfolio given our risk appetite and economic uncertainties. This dynamic hasn't changed this year, however general issuance has increased market wide. We believe STS has contributed positively to issuance and we expect it will continue to do so.’’

Looking forward, Van Drooge concludes: ‘’We believe the Nordics provide interesting diversifying exposure for our investment portfolio and remain open to discuss transaction opportunities with other Nordic banks.’’

Stelios Papadopoulos 

 

Capital Relief Trades

Fannie will, Freddie won't

Fannie Mae to place less CAS than predicted, sells another two CIRT deals

While Fannie Mae confided at this week’s SFA conference in Las Vegas that 2022 CAS issuance will be less than was expected at the beginning of the year, Freddie Mac says its forecast is unchanged.

Fannie now anticipates CAS volume this year to be $10bn-$11bn compared to the $13bn-$15bn predicted in January, and will issue another three or four CAS deals before yearend.

Freddie, meanwhile, says it has not updated its forecast made in Q1 and will issue $25bn in the CRT market this year, with a split between STACR and ACIS deals described by a spokesman as “typically 70/30”.

Fannie was unavailable for explanation of the diminution of expected CAS issuance, but both GSEs have placed an increasing volume of CRT debt in the reinsurance markets this year as capital markets costs have risen significantly.

Indeed, the GSE today announced another two CIRT deals, representing the seventh and eighth of the year. Designated CIRT 2022-07 and CIRT 2022-08, these latest transactions have transferred $1bn of risk to the insurance and reinsurance market.

The reference pool for CIRT 2022-07 consists of 64,000 low LTV single-family mortgages with an outstanding unpaid principal balance of $19.8bn. Fannie retains the risk on the first 55bp of risk, and if that retention layer is exhausted the next 335bp of loss will be covered by 24 insurers and reinsurers.

The reference pool for CIRT 2022-08 consists of 43,000 high LTV single-family mortgages with an outstanding unpaid principal balance of $12.9bn. Fannie retains the risk on the first 65bp of risk, and if that retention layer is exhausted the next 275bp of loss will be covered by 19 insurers and reinsurers.

The mortgages in the first deal were acquired in September 2021 and the ones in the second were acquired in August and September 2021.

Simon Boughey

Capital Relief Trades

Capital call CRT

WAB sells subscription CRT to Blackstone, say sources

In addition to its recent CRT deal derived from mortgage assets, Western Alliance Bank (WAB) has been in the market very recently with CRT trades referencing capital call facilities, say well-placed market sources.

The Phoenix-based bank, which is fast becoming the doyen of US regional CRT issuers, has placed least one capital call transaction, add sources.

It is believed to have executed one bilateral trade with Blackstone, the leading US private equity firm which has close to $900m assets under management. Blackstone is also said to have developed an increasingly dominant profile as a buyer of CRT assets in the last 12 months.

There are also rumours of a second capital call facility CRT which was placed with a leading insurance firm, but evidence of this trade is less strong than for the Blackstone trade.

Neither WAB or Blackstone has been available for comment.

Capital call facility, or subscription, CRT trades will appeal to Blackstone in particular as it is a big player in this market and thus has a good understanding of the risk.

Capital call facilities refer to lines of credit between a private equity fund and a bank, secured by the unfunded commitments to a new fund from such investors as sovereign wealth funds, pension plans and insurance companies. By drawing down a line of credit with a bank rather than a commitment from an investor, the particular PE fund is able to enjoy a higher IRR.

In a paper on the mechanism, leading law firm Mayer Brown writes, “The defining characteristic of such Facilities is the collateral package, which is composed not of the underlying investment assets of the Fund, but instead by the unfunded commitments (the “Capital Commitments”) of the limited partners in the Fund (the “Investors”) to make capital contributions (“Capital Contributions”) when called from time to time by the Fund’s general partner.”

WAB has a subsidiary which is described by one source as a “medium sized player” in the subscription finance market.

Under standardised capital treatment, these lines of credit receive a 100% risk weighting. As is the case with the treatment of mortgage warehouse facilities, banks believe the onerous capital requirements are higher than is warranted by the risk.

“It makes sense for them to free up lines and capital. I expect many US banks to want to do the same, as the standardised risk weight on these portfolios is totally out of whack with their economic risk,” says a source in the CRT market.

Simon Boughey

CLOs

Digital revolution?

Claira co-founder, Eric Chang, and co-founder and advisor, Joe Squeri, answer SCI's questions

Q: Claira, the document intelligence fintech, recently announced its collaboration with Citi to help boost digital transformation within securitisation and develop next-generation data analysis solutions for CLOs (SCI 29 June). Tell us more about your vision for the company.
JS: The digitisation of structured credit documents has been something I’ve been trying to solve my entire career, and I’ve suffered through the various pain points. When I joined Exos Financial, a next-gen B2B platform for institutional finance,

we went through that same process in 2018 to find a data science-based product that could digitise our financial documents. We tried a dozen different legal AI products, of which none could draw complex insights from structured credit documents, even after six to nine months training them.

EC: The information in documents is really hard to access, and firms can spend months negotiating 400 pages, and going through all the conditions and revisions they want to account for to make sure that’s incorporated and is really a key part to a security or a deal. As a trading analyst, you’ll probably spend anywhere from 30 minutes to a few hours trying to figure out a deal and typing it into your models.

With Claira, you can get that information within minutes. Clients will get a data feed, and they can incorporate that into their models, and will end up with something that’s much more accurate, and more reflective of the security that you are transacting.

JS: And once we developed this for Exos Financial as a solution for our credit agreements, we saw that what we had was something really innovative which we spun out into Claira. We then started incubating Claira as a fintech, and now it is really starting to solve pain points for other clients, and this partnership with Citi is a great example of that.

Q: Why is the speed of processing documentation so important? Why is it something firms are focusing on more at the moment?
EC: I think the speed of the information is the main point because these are live trades - and the faster we react, the greater the advantage. I think this shift is also reflective of the broad changes that are occurring within the industry as we see more digitisation and streamlining of the markets. Our partners at Citi were also involved in the Octaura Holdings announcement (SCI 14 June), and you can see this across the free markets that where traditionally things had been done over the phone or via email and you had time, that’s no longer available.

JS: Claira’s competitors generally have analysts with advanced degrees, who are manually reading through documents and extracting information into Excel. So, not only is this an opportunity to get things done faster, but human accuracy is only 85% accurate, whereas Claira is close to 100%.

Q: What is Claira able to offer clients that other firms cannot?
EC: First and foremost, I would say it is our approach to the tech-solution and the actual depth of AI analytics that we are able to provide. Most of the firms that are looking to digitise in the document space may take what we would call a ‘Swiss Army knife’ approach to the technology – where there is a lot of labelling and tagging, and the technology can be applied to almost anything because you have to feed it the data.

What this approach doesn’t offer is specific solutions that are particularly skilled or effective in solving any one thing really well. Whereas, at Claira, we’ve taken a computational linguistic approach - it is a bottoms-up proprietary method of understanding legal and financial language, and we’ve built a model that represents a document as a whole. By doing that, we can present results to our clients with the detail that a portfolio manager or trader needs when it comes to the conditions and the provisions that are outlined in the documents.

JS: And Claira can do all of this in minutes, as opposed to hours - which, again, better caters to the recent market structure changes we are seeing in credit that are increasing the speed of trading.

EC: There’s also a scalability that these approaches cannot offer because, unlike those, our models are pre-trained. As a CLO manager or investor, you can load the documents you need, and get the AI analytics that you want in a very streamlined fashion.

The integration of this technology into clients’ investment process is even more streamlined now, given the greater digitisation seen across the market. Most clients now have quantitative models and document databases already established, and we can just plug directly into their existing risk and portfolio management systems and so on.

Another key part of our solution is that there’s also room to adjust and change, as we are able to configure the model for what they want from them. If a client wants something new, that would only be a couple of weeks of work for us to make happen, where these other Swiss Army knife approaches would need another nine months of tagging and labelling again on the bank’s behalf. This is not a separate process a client has to download into excel; it is well engrained into their investment process, which also helps to really speed things up.

Even with all this scalability, Claira can help with transparency too. These are often US$100m deals being analysed, and with Claira everything can be traced back to the context of the document itself. So, as an analyst, you are still in the loop, and can trace back and dive in a little bit further into the document without having to read the whole 400-page agreement again.

Q: What securitised products is Claira able to work with?
EC: Our work with CLOs is really a product of our partnership with Citi, and prior to this we were already covering different areas, including commercial real estate loans and people with debt=backed securities. But wherever there are complex terms and conditions, Claira can come in and help.

JS: And even taking the work that’s being done in a post-signature way to helping benchmarks for pre-signature negotiations as well. Whenever you’re in negotiations, lawyers or business heads need to remember what they’ve agreed on for a private client, and all of that is based on either notes they’ve taken, observations they’ve written down, or just gut feel. Claira allows for the digitisation of all your historical documents, which means clients can create benchmarks for comparison for future negotiations - or on a pre-signature basis - which ultimately allows for people to take a more data-driven approach than this gut-feel analysis.

Q: How does natural language understanding (NLU) differ to existing natural language processing (NLP) services?
EC: From a technology standpoint, what we have built is proprietary, and so my hope is that everyone is going to take up on it. What we hear from clients is that the current batch of NLP solutions are extremely limiting, and don’t necessarily solve the problems of the financial professional.

They can maybe handle some of the simple procurement stuff, but they are not designed for complex conditions. This causes a lot of frustration across the industry, and Claira is extremely well positioned to solve these problems.

JS: If you compare the techniques of NLP to the language understanding of NLU, you can see that turning words into numbers and vectors and then comparing them can only get you so far. When you have heavily negotiated and more bespoke documents, these NLP models break down, simply because the patterns are not as easily recognisable.

However, when you use the NLU models - like the language understanding and computational approach that Claira has taken - the permeations of different words and sentences on even bespoke agreements can be run through Claira and given that insight. Claira offers a really unique approach in what we think is the next generation of document intelligence.

Q: Why do you think we are seeing increased technological innovation in the securitisation space right now?
EC: The transformation that’s happened across the market is not a new trend - nor is it unique to securitisation - but it has definitely been accelerated recently. Technological innovation took off earliest in equities and then bonds, but the securitisation market has maybe taken longer to innovate in this way because of the complexities of the deals involved. A solution like Claira can help accelerate the digital revolution, even in the securitisation market, as it works to reduce some of these complexities.

As with any financial market there might be some resistance, but digital transformations have usually been very positive for market appetite, growth, increasing the number of participants, and opening access for people looking to issue or invest. Digitisation has also been positive for increasing transparency and accountability across the financial industries, and I think it’s going to be a good thing for the securitisation market too.

JS: I’ve witnessed a lot of resistance over the past 25 years or so to the use of technology, and it isn’t normally the technology that proves to be the difficulty but rather human behaviour. People fear giving up control, but what Eric and Claira co-founder, Alex Schumacher, have been able to design takes that into account.

Claira offers clients the ability to double-check on the conclusion given by the technology, which gives people more confidence. Claira is not built to be self-driving; it is built to be driver-assisted. Financial transactions are important, and it is critical to have that transparency and that trust when you are putting capital at risk.

This model also sets a precedent for the next generation of portfolio managers, who are more familiar with digital to not just trust the machine blindly, but to actually engage with it – which is precisely what Claira is built for.

Q: What are your ambitions for Claira going forward?
EC: In the short and medium term, we will be focusing on our partnership with Citi, as well as promoting ourselves, building a brand, and having people really get to know what our solution is about. From there, I think anywhere where there are complex conditions in important agreements is what we want to tackle next.

Even in leasing, if you sign a lease, how are you meant to know it is fair? How are you meant to know what the market standard is? So, if you can analyse 500 leases, you can start to paint a picture of what is and isn’t standard, and you can start to be data-driven in some of these decision-making processes.

Insurance is another area where there are a lot of conditions, and questions about whether someone actually has coverage and so on.

JS: Insurance is definitely on our to-do list. We are working with major insurance companies, but generally in the investment side of insurance, like insurance policies. At the moment, we are seeing a lot of private flood insurance policies being written because of climate change - of which most is non-standard, and so we are working to assist in the analysis of core insurance policies.

EC: I think the opportunities for Claira are very vast, and legal negotiations and conditions are fundamental to how capital markets work. So, for us to be able to digitise those agreements, and provide data and insights about those documents, I think is going to be really helpful for the market as a whole.

Claudia Lewis

Structured Finance

ICE launches ESG Geo-Analyzer

Sector developments and company hires

Intercontinental Exchange (ICE) has launched its ICE ESG Geo-Analyzer tool to better help analyse portfolios of both commercial and residential properties, asset-backed securities, and corporate operations that are tied to certain locations. The Geo-Analyzer tool uses ICE’s geospatial data modelling to create climate risk and social impact data and analytics for properties and communities across the US. It seeks to address the rising physical climate risks that face property owners, investors and corporations, and will be able to offer metrics on an array of hazards including wildfires, hurricanes, droughts, and floods. The new on-demand platform will offer property-level climate risk and demographic data across the contiguous US, which the firm hopes to expand to further geographies globally in 2023.

In other news…

EMEA

IQ-EQ has appointed Stefan Rolf to the newly established position of global head of securitisation and private debt as the firm continues the expansion of its services into the securitisation and private debt industry. Rolf brings more than 25 years of expertise to the firm in financial services and banking from several different jurisdictions, including Germany, the Netherlands, and Singapore. He joins the firm from ING Bank where he served as global head of balance sheet distribution, having also previously served as Volkswagen Financial Services’ global head of securitisation. In his new role, Rolf will work to drive the development of IG-EQ’s securitisation and private debt offering and will lead its global expansion in these areas, broadening the firm’s client base worldwide. Rolf will be based in the IQ-EQ Amsterdam office and will be a key member of its capital markets and corporates segment, led by Edward Stevenson.

North America

Eagle Point Credit has recruited a new senior member to its investment team, Karan Chabba, who will serve as head of ABS, MBS, SRT and speciality finance. Chabba brings more than 25 years of financial services experience to the role, having previously served as partner and head of global RMBS, CLOs, speciality finance/SRT, and European ABS at KLS Diversified Investment Management. In his new role, Chabba will maintain responsibility for managing portfolios of credit investments across ABS, MBS, SRT, and European structured products. Further to this, Chabba will also work to source, diligence, and monitor bespoke lending opportunities.

MidOcean Partners has launched a new programme dedicated to the advancement of gender diversity in the asset management industry. The Women’s Awareness Initiative (WAI) will work to achieve its goal through holding workshops and programmes that help women in the industry hone their skills and build relationships within the field. WAI was set up by MidOcean md and ESG/compliance officer, Candice Richards, with founding members including Riverside Company, Avante Capital Partners, and Churchill Asset Management. The programme has been formally endorsed by the Institutional Limited Partners Association (ILPA) who have already included WAI to its diversity, equity, and inclusion roadmap.

Evan Berman is set to join Ropes & Gray’s New York office as the firm works to expand its securitisation practice. Berman joins the firm as counsel and brings extensive securitisation finance experience to the role. The firm hopes this new addition to the team will help build out its whole business securitisation platform. Berman joins the firm from Paul, Weiss, Rifkind, Wharton & Garrison where he also served as counsel, and counselled several prominent franchisors, their private equity sponsors, and investment banks on an estimated US$10bn in whole business securitisations.

Societe Generale has named Fouad Farah head of fixed income, Americas. Based in New York, he will oversee the trading, sales and engineering teams, as well as continuing his current role as head of credit and structured financing Americas. Farah joined the bank in January 2008 as md, global head of special situations trading.

Warwick Capital Partners has appointed Leland Hart and Andrew Welty as partners, based in New York and Arizona respectively. Hart was formerly co-cio at Alcentra, having previously worked at Wheelhouse Investment Partners, BlackRock, R3 Capital, Lehman Brothers and Bank of America. Welty has been acting as a consultant to Warwick since 2011, alongside a finance and investor relations role at Per Astra. Before that, he worked at Polygon Investment Partners, Nomura and Deutsche Bank.

Structured Finance

'Penalising' RBC proposal criticised

Sector developments and company hires

‘Penalising’ RBC proposal criticised
The LSTA has submitted a comment letter to the NAIC expressing its belief that the NAIC’s risk-based capital (RBC) proposal could penalise insurance company investments in CLOs and consequently impact the CLO and loan markets. The proposal would change the RBC framework such that capital requirements for purchasing all tranches of a CLO match the capital requirements for directly holding the underlying collateral, based on the assumption that the investment strategy presents the same investment risk as holding the entire pool of underlying loan collateral.

In addition, the NAIC is considering adding two new RBC factors to account for the ‘tail risk’ in any structured finance tranche of 75% and 100%. These proposals could lead to significantly higher RBC on CLO note holdings up to – and potentially beyond – the triple-B notes.

The LSTA notes that insurance companies have more than US$200bn invested in CLO notes, including over half of US CLO triple-B notes issued. As such, squeezing their demand for these assets could have a material knock-on effect on the CLO market.

“For companies writing long-tail liabilities, CLOs represent an investment solution that helps meet their asset-liability matching goals. Quickly making such investments less attractive to insurance companies could have material unintended consequences for insurance companies and their policyholders. In particular, insufficient time to reorient their portfolios could have a dislocating impact on insurance company balance sheets and the loan market as CLO investments are sold,” the association argues.

Further, the LSTA highlights the lower loss experience of CLOs historically. In particular, it points to the strong performance of the asset class - thanks to an active management strategy constrained by quality-enhancing tests - and the structural protections embedded in CLOs.

Finally, the association criticises the fact that the industry only received “30 days-and-change” to comment on the proposals. “This simply isn’t sufficient time for the industry to provide constructive feedback on a proposal that requires significant review, analysis and modeling,” it observes.

In other news…

CRE JV formed
Ready Capital and Starz Real Estate have formed a joint venture to originate circa €300m of new commercial real estate loans over the next two years. The new joint venture will focus on deploying commercial real estate bridge and term loans of between €10m and €40m in size across the UK, Benelux, DACH Region, Italy and Portugal with up to 75% LTV across sectors including office, residential, mixed-use, student housing, logistics, self-storage and selective retail and hotel opportunities. The joint venture can also offer construction lending across these continental European locations.

EMEA
Arrow Global is set to establish a new office in Luxembourg City, in a move to support its fund investment strategies in the region. The firm hopes the new office will better deliver infrastructure to its existing Arrow ACO 1 Fund vehicle located in Luxembourg, as well as helping further future investment vehicles within the area. The new office will initially be made up of a fund treasury team, which Arrow hopes to scale to a multi-disciplinary team in Luxembourg City over the next two years.

Pemberton has recruited four new senior hires, bringing the number of professionals it employs to over 145 across 10 offices. Among the new hires is Sally Tankard, who joins Pemberton’s CLO team as a director, responsible for analysis and selection of leveraged finance assets for the firm’s CLOs. She was previously a consultant at Hornblower Business Brokers and a senior analyst at Spire Partners.

Additionally, Pemberton has appointed Christoph Polomsky as md in the business development team for the DACH region, responsible for the coverage of institutional clients. Based in the Frankfurt office, Polomsky was previously an md at Nomura, leading the solutions team. At Nomura, he worked on bespoke investment solutions, as well as the origination, structuring and distribution of financing and securitisation solutions for reverse mortgages, SME portfolios, leases and renewables projects.

North America
Chapman and Cutler has recruited Bart Pisella as a partner within its corporate finance and asset securitisation departments and special situations and restructuring group. Pisella focuses his practice on representing and advising corporate trusts in all aspects of corporate debt offerings, loan administration, collateral agency, escrow and other specialty trustee and agency matters. He was previously a partner at Winston & Strawn and before that, worked at Pillsbury Winthrop Shaw Pittman and Nixon Peabody.

Eagle Point has hired Mary Parrinelli as md of investor relations, responsible for strengthening existing investor relationships and introducing the firm and its strategies to the wider institutional investor community. She will report to principal and head of marketing and investor relations, Kyle McGrady. Parrinelli joins Eagle Point from Angelo Gordon, where she most recently served as an md on its marketing team and worked on new business development in the institutional investor community across multiple strategies, including structured credit.

Societe Generale has named Fouad Farah head of fixed income, Americas. Based in New York, he will oversee the trading, sales and engineering teams, as well as continuing his current role as head of credit and structured financing Americas. Farah joined the bank in January 2008 as md, global head of special situations trading.

Warwick Capital Partners has appointed Leland Hart and Andrew Welty as partners, based in New York and Arizona respectively. Hart was formerly co-cio at Alcentra, having previously worked at Wheelhouse Investment Partners, BlackRock, R3 Capital, Lehman Brothers and Bank of America. Welty has been acting as a consultant to Warwick since 2011, alongside a finance and investor relations role at Per Astra. Before that, he worked at Polygon Investment Partners, Nomura and Deutsche Bank.