News Analysis
ABS
On the cards
Credit card ABS strength likely to attenuate into 2023
The resilience of the credit card ABS market in the face of rampant inflation has surprised analysts, but delinquency rates will increase from the beginning of next year, they say.
Covid-era stimulus payments and delinquency moratoriums by banks, plus lack of spending opportunities, have protected consumers from surging prices so far, but these factors will be of diminishing importance by the end of the year.
“We did not anticipate initially there to be such a lasting effect from the stimulus programme and the payment deferral schemes by the banks, but we expect normalization of performance through the rest of this year. Improvement in charge offs can only trend down so much and right now we are seeing a cap on this,” explains Herman Poon, a senior director at Fitch Ratings in New York.
“Normalization” in this context means increase in delinquencies and subsequently poorer ABS performance.
Fitch’s Prime Credit Card Charge-off Index registered 1.97% in June, a decline of 5bp from May. Sixty-day delinquencies also declined, from 0.61% in May to 0.57% in June.
Meanwhile, the Retail Credit Card Charge-off Index increased slightly from 4.20% in May to 4.32% last month. Charge offs have been trending below 4% for the past two of three quarters.
Prime credit card ABS are based on cards issued by major banks such as Citi and Wells Fargo performance has improved in general over the past decade while retail card ABS refer to cards issued by stores such as JC Penney and Macy’s. Retail card performance tends to be more volatile, as borrowers are usually weaker credits and also generally pay off bank cards first.
“Inflationary pressures and rising interest rates will contribute to this normalization which we expect going into 2023. We will see increased delinquencies which eventually may cause charge offs to rise. We expect this to happen to the retail card sector sooner than in the prime card market,” adds Poon.
The Fitch Prime Credit Card MPR Index increased to 41.58% in June from 40.60% in May, and the 12-month average MPR according to the June distribution date was 40.75%. This is sharply higher than the 33.23% seen for the same period 12 months ago. This index refrers to the MPR, or monthly payment rate, which is a measure of how quickly borrowers are paying off their credit card bills.
However, though delinquency levels are set to rise, analysts are confident that they will not reach the levels seen before the pandemic. Charge offs in the prime market prior to the pandemic at the beginning of 2020 were around 3%, but have averaged over the past 12 months below 2%, notes Poon, and though they are expected to trend higher over time it is not thought likely they will rise towards pre-pandemic levels in the short to medium term.
Personal savings are still high, and consumers are generally more prudent than was the case before the financial crisis he adds. This is particularly true of the prime market.
Moreover, while higher interest rates will make repayments more difficult, they are also like to curb increased borrowing – as of course is the Fed's intention.
Simon Boughey
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News
Structured Finance
SCI Start the Week - 25 July
A review of SCI's latest content
Last week's news and analysis
Capital call CRT
WAB sells subscription CRT to Blackstone
Changing perceptions
Need for liquidity supporting TRS growth
Digital revolution?
Claira answers SCI's questions
Fannie will, Freddie won't
Fannie Mae to place less CAS than predicted, sells another two CIRT deals
Golden opportunity?
Basel 4 raises Japanese SRT prospects
Nordic SRT finalised
Nordea executes synthetic ABS
Portfolio selection
Credit Benchmark publishes innovative CRT report
Relative rebound
European ABS/MBS market update
SME SRT launched
BBVA executes synthetic ABS
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
Japanese SRT prospects - July 2022
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.
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
News
Capital Relief Trades
Risk transfer round up-26 July
CRT sector developments and deal news
Santander is believed to be readying a synthetic securitisation backed by a pan-European portfolio of commercial real estate loans that is expected to close in 2H22. The bank’s last synthetic CRE trade was finalized in 2018. (See SCI’s capital relief trades database). The transaction would mark the fourth such deal this year as synthetic CRE continues its comeback (SCI 10 June).
Stelios Papadopoulos
News
Capital Relief Trades
Risk sharing facility disclosed
Caixabank inks SRT as risk sharing scheme revealed
Caixabank and the European Investment Bank group have finalized a €112.5m first loss financial guarantee that references a €1.5bn portfolio of Spanish SMEs. The significant risk transfer trade is one of the last ones under the European Guarantee Fund as the EIB group reveals a new mezzanine risk sharing facility.
The guarantee features an approximately three-year portfolio weighted average life and a pro-rata amortization structure with triggers to sequential amortization. The EGF has now come to an end, but the EIB group has revealed to SCI a new mezzanine risk sharing facility aimed at sharing risk with financial intermediaries and potentially allowing co-investment with private SRT investors.
According to Pablo Gonzalez Sanchez, head of securitisation investments, Southern Europe at the European Investment Fund, ‘’the mezzanine facility will be backstopped by the EIB but given that the risk appetite for this scheme is more restrictive-with potentially higher attachment points-compared to previous available ones, these new guarantees might be more straightforward for the larger and more sophisticated IRB banks that have a bigger portfolio to choose from as opposed to the smaller banks. In the latter case, it is likely that the new facility needs to be combined with private capital.’’
The scheme could involve splitting the mezzanine tranche into an upper and lower mezzanine. The upper mezzanine will be covered by the EIB group since the group’s mandate doesn’t allow it to attach at lower attachment levels, given the need for more subordination.
Under this scheme, the question is how to split the mezzanine tranche in an efficient way to make it appealing for private investors and economically viable for protection buyers.
Indeed, too thin tranches aren’t something that private investors would like given the high leverage. However, ‘’the EIF could be more accommodating for thinner upper mezzanine tranches that have a bit more subordination. We price these deals more mathematically rather than in absolute yield driven fashion and that makes us sometimes a bit more flexible’’ concludes Sanchez.
Stelios Papadopoulos
News
Capital Relief Trades
Shipping SRT debuts
Piraeus Bank launches landmark shipping SRT
Piraeus Bank has finalized a US$50m mezzanine tranche that references a US$650m Greek shipping portfolio. The transaction is one of only two synthetic securitisations to be backed exclusively by shipping loans.
According to senior sources close to the transaction, ‘’for us, these transactions are aimed at improving our return on capital. After executing synthetic securitisations on corporate, SME and residential mortgage portfolios, we decided to explore other asset classes. Shipping has high RWA density since it’s not eligible collateral under the standardized approach.’’
The transaction features a portfolio weighted average life equal to around 2.6 years and a pro-rata amortization structure with triggers to sequential. The replenishment totals two years and there’s a near five-year time call as well as a 2.5% retained first loss tranche.
The biggest challenge for shipping SRTs is finding high performing portfolios and being able to model expected losses. Indeed, investors need to see that there’s no volatility in the historical data as well as advanced capabilities in portfolio management.
Moreover, LGD estimation is hard and that is where you find disagreement between originators and investors. The process would require banks digging into their historical data and carrying out a scenario analysis to reassure investors on recoveries.
Nord LB executed the last significant risk transfer trade of shipping loans in 2017 but the capital relief trade featured a mixed portfolio (SCI 20 December 2017). The Piraeus deal and a Citigroup transaction from 2013 are the only pure plays.
Stelios Papadopoulos
News
Capital Relief Trades
Portfolio boost
BNP Paribas completes synthetic ABS
BNP Paribas has finalized a seven year €663m mezzanine tranche that references a €13bn global corporate portfolio. Dubbed Resonance seven, the transaction features the largest portfolio size for any capital relief trade in the period after the 2008 global financial crisis.
According to SCI data, the trade features the largest portfolio size following the 2008 global financial crisis, surpassing the €11.4bn record from Nord LB’s Northwest 2014. The large portfolio size can be explained in part by the regulatory differences between US and European banks. Indeed, US tranches are much thicker, so issuance size would be excessively large for portfolios comparable to Resonance seven. However, large French and other European banks can place much thinner pieces.
US banks need to hold the higher capital under the advanced and standardized approaches. Hence, it makes sense to design transactions that work regardless of whether lenders are constrained under the first or second approach.
The last Resonance transaction was finalized last year. The €510m ticket was backed by a €10bn portfolio which was the largest for the programme until the execution of Resonance seven.
Stelios Papadopoulos
News
Capital Relief Trades
TCB test
Chapter 11 filing by TCB debtor puts CRT structure to the test
Texas Capital Bank (TCB) is facing a test of the structure of the CRT it brought in March last year, following the June 30 bankruptcy filing by First Guaranty Mortgage.
The Texas-based mortgage originator was one of the institutions to which TCB lent money through its mortgage warehouse lines, which it then securitized in the debut CRT trade by a US regional bank. According to reports, First Guaranty still has $144.6m outstanding on its warehouse line.
The bankruptcy filing has automatically triggered a possible withholding of interest and principal payments to CRT noteholders.
However, in a warehouse credit line, the exposure is held by the bank for only a short period of usually four or five weeks before being passed on to the mortgage originator. Consequently, it would be something of a surprise if any loss accrued to TCB or to investors in the CRT trade.
“It constitutes a good test case of the structure. The market is hoping it all runs off without loss to the bondholders, but it will be interesting if TCB gets into any trouble,” a structured finance credit analyst told SCI.
TCB declined to comment.
It is entirely likely that the loans will be taken care of quickly, and in fact the bankruptcy could serve to underline what TCB has always maintained: that the risk of loss from warehouse loans is very small and that a risk weighting of 100% under standardized treatment does not adequately reflect the risk.
However, the exact terms of the warehouse loans remain private and there could be a few nasty surprises, suggest market experts. “We don’t know exactly what the prevailing warehouse loans look like. As an example, do any have ,say, 3% rates , when 30-yr mortgage rates are now around 5%? That could present an economic hurdle depending upon haircut requirements, etc. so you’re never entirely sure what the net outcome will be,” warns one.
First Guaranty originated $10.6bn of mortgages in 2021. It owes $473m, owed largely to banks like TCB that provided the financing for mortgage origination.
It said that it had encountered significant cash flow difficulties as the refinancing market and the primary mortgage market dried up as rates have climbed while housing inventory remains constricted.
The lender added that it was on course this year to originate less than half the volume of mortgages it did in 2021. It has already laid off 471 or its 600 employees.
Simon Boughey
News
RMBS
Last week of term?
European ABS/MBS market update
As July comes to an end, the European and UK primary ABS/MBS markets are looking forward to the summer hiatus after a difficut few months. Still, a few RMBS mandates managed to get over the line this week and there is even a deal in the visible pipeline.
Although widely distributed deals were yet to hit screens again this week, issuance flows remain stable. “The fact remains that we haven’t seen any public ABS for a while,” notes a European ABS/MBS trader. “If anything gets done, it is privately placed. If the information we receive is correct, then in terms of pricing what we are generally seeing are elevated spreads.”
Wednesday saw Kinbane 2022-RPL 1 a static performing/re-performing RMBS originated by KBC Bank Ireland and its subsidiary Premier Homeloans quietly print. The deal is understood to be a mix of pre-placed and retained tranches with the former pricing below par.
Yesterday, UK BTL RMBS Canterbury Finance No. 5 priced and was fully retained. Then, this morning UK prime RMBS Holmes Master Issuer 2022-1 saw its £600m senior notes pre-placed at par at SONIA plus 73bp.
Meanwhile, UK RMBS Stratton Hawksmoor 2022-1 is scheduled to price next week via Bank of America. Further details are scarce so far other than that proceeds of the transaction are intended to be used to exercise the call options of Hawksmoor Mortgages 2019-1, Stratton Mortgage Funding 2019-1, Clavis Securities Series 2006-1 and Series 2007-1.
Regarding the secondary market, the trader also points to elevated levels: “The secondary market has been interesting, with some activity in BWICs. What currently characterises this market is a very high bid-ask spread, with many dealers not wanting large positions on their books. People who do want to sell are not willing to lower their prices and for example in Dutch RMBS we see bid-ask spread of plus 25bp - which is quite high for this sector.”
He continues: “With the holidays coming, we tend to see more conservative bids. However, inevitably we will need primary activity to gauge levels.”
Finally, with September clearly being seen as a turning point for this year’s issuance, the trader particularly emphasises the non-bank sector. “September should be really interesting, with many issuers that need to come to market to refinance their deals, especially the non-bank players,” he says. “Unless they find alternatives, like warehouse providers, non-bank issuers will have to go through ABS funding. Essentially it will be do or die for them.”
For more on all of the above deals, see SCI’s Euro ABS/MBS Deal Tracker.
Vincent Nadeau
Market Moves
ABS
Trade finance tokens unveiled
Sector developments and company hires
Trade finance tokens unveiled
Tradeteq has selected XinFin’s XDC Network to launch TRADA tokens, believed to be the first-ever fully regulated trade finance-backed fungible security tokens. The move is expected to deliver liquidity to the trade finance sector by securitising a traditionally illiquid asset class on the XDC Network public blockchain and extending access to the sector to both retail and institutional investors.
The collaboration represents the next evolution in the Tradeteq and XinFin partnership, which introduced trade finance-based non-fungible tokens (NFTs) for institutional investors in September 2021. Like the TRADA launch, the NFT offering used the XDC Network to transform trade finance assets, which Tradeteq repackaged and distributed to investors.
The two firms have established a new entity called XDCTEQ to issue the TRADA tokens.
In other news…
North America
Vesttoo has recruited Minas Kalachian to serve as its new head of structuring as the firm seeks to scale its business and develop new financing solutions. Kalachian joins the Telaviv-based digital insurance risk transfer and investment firm from Allianz Risk Transfer, where he served as md. In his new role, Kalachian will lead a team of product specialists to design and execute financial structure strategies for the firm’s capital markets-based reinsurance solutions to serve its client base.
Gallagher Re has named Keshav Gupta vp, ILS structuring and origination, based in New York. He was previously ILS manager at AXIS Capital, which he joined in June 2018.
Market Moves
Structured Finance
Securitised products business under review
Sector developments and company hires
During its 2Q22 financial results presentation yesterday, Credit Suisse disclosed that it has been conducting a strategic review of the bank's businesses, with the goal of creating “a more focused, agile group with a significant, lower absolute cost base”. As part of this review, the bank is assessing strategic options for its securitised products business, including accelerating growth and strengthening its competitiveness by attracting third-party capital.
“We are…evaluating strategic options for our market-leading securitised products, which may include attracting third-party capital into this high-return platform and potentially freeing up additional resources for the bank's growth areas. This highly profitable global franchise, which employs around Sfr20bn of risk-weighted assets, has significant untapped growth opportunities,” said Thomas Gottstein, ceo of Credit Suisse.
The move comes as Credit Suisse reported net revenues of Sfr3.6bn and a pre-tax loss of Sfr1.2 bn, along with a CET1 ratio of 13.5% in 2Q22. The strategic review will recommend a new model for the bank, including transforming the investment bank into a capital-light, advisory-led banking business and a more sustainable markets business that complements the growth of the wealth management and Swiss bank franchises. The aim is to reduce the group's absolute cost base to below Sfr15.5bn in the medium term, while “remaining focused on improving risk management and risk culture”.
The implementation of the new strategy will be overseen by the board of directors and supported by a board-led ad hoc investment bank strategy committee, with Michael Klein as chair, and also including Mirko Bianchi, Richard Meddings and Blythe Masters.
In other news…
Hyundai penalised over credit reporting
The US CFPB has penalised Hyundai Capital America for repeatedly providing inaccurate information to nationwide credit reporting companies and failing to take proper measures to address inaccurate information once it was identified between 2016 and 2020. The Bureau found that Hyundai used outdated systems and procedures to furnish credit reporting information, which led to widespread inaccuracies and resulted in negative information being placed on consumers’ credit reports.
In total, the CFPB found that Hyundai furnished inaccurate information in more than 8.7 million instances on more than 2.2 million consumer accounts during the period. The order requires Hyundai to take steps to prevent future violations and to pay more than US$19m, including US$13.2m in redress to affected consumers that were inaccurately reported as delinquent and a US$6m civil money penalty, making this the Bureau’s largest Fair Credit Reporting Act case against an auto loan servicer.
Market Moves
Structured Finance
RFC issued on homogeneity RTS
Sector developments and company hires
The EBA has launched a public consultation on draft regulatory technical standards (RTS) specifying the criteria for the underlying exposures in securitisation to be deemed homogeneous, in line with requirements under the Securitisation Regulation and as amended by the Capital Markets Recovery Package (CMRP). The homogeneity requirement aims to facilitate the assessment of underlying risks in a pool of underlying exposures and to enable investors to perform robust due diligence.
The draft RTS are applicable to all securitisations, including ABCP, non-ABCP and on-balance sheet securitisations. They carry over the provisions on homogeneity set out in the existing RTS, with some modifications, including extending the scope to on-balance sheet securitisations.
The EBA notes that considering the relevance of corporate and SME loans in the context of synthetic securitisations, adjustments have been made to one of the homogeneity factors - the type of obligor - to reflect current market practices and the credit risk assessment approaches applied to those asset types. Moreover, to ensure consistency, similar changes are made to the respective homogeneity factor for all relevant asset types. Finally, the draft RTS specify further the asset type for credit facilities provided to enterprises, where similar underwriting standards are applied as for individuals.
Responses to this consultation are invited by 28 October, with a public hearing scheduled for 28 September.
In other news…
EMEA
Perfecta Energia has launched Spain’s first ever Solar ABS transaction. The firm hopes this initial Spanish asset securitisation fund to finance residential energy self-consumption will help facilitate access to solar energy for families and support the transition to renewable energies. The Perfecta Solar Residencial Securitisation Fund has a maximum size of €133.5m, and is supported by a line of credit from Barclays Europe of €50m in its structure that can be extended to €100m.
North America
Fannie Mae is in the market with CAS 2022-R08, its latest CRT capital markets transaction. The lead bookrunner is Bank of America, and StoneX is joint bookrunner. The note offering is for US$624.3m, referencing a pool of 67,644 low LTV 30-year residential mortgages with an unpaid balance of around US$20.4bn. The offering consists of the M1, M2 and B1 notes.
structuredcreditinvestor.com
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