News Analysis
Capital Relief Trades
SRT boost
SRTs thrive as focus shifts to loan-by-loan analysis
Significant risk transfer transactions have been thriving relative to other securitisation asset classes since they can be customized for an environment of higher inflation and interest rates. Moreover, SRTs are backed by high quality core lending books and act as a hedge against inflation among other factors. However, investors note that widening has occurred but the level of that widening remains unclear.
According to SCI data, the number of deals for the first half of the year has now reached 34 overall, which compares to 31 for the first half of last year. Last year proved to be a record one with nearly seventy transactions executed.
Nevertheless, investors note that pricing has widened compared to last year. Arrowmark partners notes that capital relief trades are approximately 1-1.5% wider compared to year end 2021 levels across all transaction types. Nevertheless, these figures understandably differ between investors since transaction and pricing visibility is constrained by niche specialties and mandates.
Indeed, another prominent investor in the market such as AXA IM have noticed wider levels (around 10%) but note that portfolio quality has become better given the current focus on loan-by-loan analysis. Moreover, they qualify that the figures only apply to bespoke trades.
Christophe Fritsch, head of fund management, structured finance at AXA IM Alts comments: ‘’the structure and portfolios of transactions we can negotiate now are much better in terms of quality. Furthermore, SRTs bring diversification and are less volatile than public securitisations.’’
He continues: ‘’Our approach focuses on a loan-by-loan analysis for concentrated large corporate portfolios, with portfolio composition being discussed on a deal-by-deal basis. For granular pools, replenishment will not be automatic, and right now we favour shorter transactions. Overall, we are not supportive of blind pools.’’
Additionally, for granular pools, AXA IM makes sure to take a tranche that corresponds to unexpected losses. Fritsch explains: ‘’If there’s an industry sector that we don’t like, we try to limit the exposure and we want to make sure that the bank retains first loss risk, which corresponds to the expected loss in different macroeconomic scenarios.’’
The approach is reminiscent of how banks and investors approached portfolio construction during the Coronavirus crisis. Moreover, because of that crisis, investors now expect banks to have constructed heat maps or stress tests that would consider the current environment of rising rates and inflation, and its potential impact on the portfolio.
The result of this approach is that wider pricing levels have coincided with much more robust and higher quality portfolios.
Nevertheless, unlike the coronavirus crisis, price volatility has been significantly lower. Kaelyn Abrell, partner, and portfolio manager at Arrowmark partners explains: ‘’price volatility has been significantly lower over the last few months relative to the initial onset of the Covid crisis, thanks to stable market technicals and an ability to negotiate terms. This limits the spread increase required to achieve a higher expected IRR.’’
Another key difference is the type of asset classes that investors allocate funds to. During the coronavirus crisis the market witnessed a flight to safety towards large corporate loans compared to other asset classes. Unlike SMEs for instance, large corporates have access to capital markets and offer SRT buyers a wealth of disclosure that allows them to better assess the underlying risk in these trades.
Yet the current situation couldn’t be more different, with the market currently seeing robust issuance in different types of exposures including leveraged loans, residential mortgages, derivatives exposures and more recently shipping loans (SCI 28 July).
Finally, STS synthetic securitisations have helped expand the investor base and further legitimize the market which has in turn helped with issuance. ESMA data point to a total of 37 STS synthetic securitisations between June 2021 and July 2022.
Looking forward, Abrell concludes: ‘’Assuming no dramatic change in the environment across capital markets, we expect a busy second half of the year based on guidance from our issuer relationships''
Stelios Papadopoulos
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News Analysis
Capital Relief Trades
Downward trend
iTraxx passes peak and heads downwards
The Markit itraxx Europe Index has now passed a mid-July peak following rising levels throughout the year. The latter has coincided with a rally in European corporate credit but uncertainties for the remainder of the year persist.
The Markit itraxx Europe Index closed at nearly 127bps in mid-July before dropping by nearly 20bps in the same month. The decline is the biggest monthly drop since June 2019.
European corporate credit has been rallying since mid-July with Commerzbank research noting that the last time the Vstoxx-which is a volatility measure-was this low was in early February. Consequently, if stress levels remain where they are, spreads should fall further.
According to the analysts, ‘’with 22.3%, the VStoxx ended at its lowest level since early February, and if the overall momentum lasts, iTraxx Main could close below the 100bps mark for the first time since early June.’’
Although last week saw €2.9bn of Investment grade benchmark eligible issuance, the most since the last week of June, Commerzbank doesn’t think this was the overture to a meaningful acceleration.
However, ‘’we believe a more active than usual August is likely if sentiment holds up, primarily driven by the second half of the month’’ states Commerzbank.
Several uncertainties persist going forward. JPMorgan credit analysts state that the voluntary 15% reduction in gas demand at the EU level between August 2022 and March 2023 should reduce some of the pressure on supplies. However, the exact impact will depend on how individual EU member states implement the directive given the carve outs that have been agreed to ensure compliance.
JPMorgan notes: ‘’while we remain cautious of the impact this would have on Industrials and the potential for a drag on growth through manufacturing shutdowns, it is worth noting that a number of companies-including BASF and Mercedes-have come out this week stating their ability to navigate through a period of reduced gas availability.’’
Given the uncertainties, it’s somewhat perplexing that European credit spreads have largely held onto recent gains. Nevertheless, despite the headline gains, quality has outperformed.
JPMorgan explains: ‘’this continues the decompression theme that we’ve been recommending in our top trade portfolio. Euro high grade tightened a further 5bps and is now at 204bps, while high yield spreads widened 9bps to 641bps. We think decompression is justified.’’
JPMorgan concludes: ‘’Concerns about the sudden systemic collapse of a large investment grade utility have eased, with governments showing a willingness to intervene if necessary to protect critical energy infrastructure such as Germany taking a large stake in Uniper and France fully nationalising EDF. To us this means that the main risk to creditors comes from a traditional recession, rather than a Lehman moment.’’
Stelios Papadopoulos
News
Structured Finance
SCI Start the Week - 1 August
A review of SCI's latest content
Call for MM CLO Awards Submissions
The submissions period has opened for the 2022 SCI Middle Market CLO Awards – covering US Middle Market CLOs issued in the 12 months to 30 September 2022. Nominations should be received by 20 September. Winners will be announced at the SCI Middle Market CLO Seminar on 15 November in New York.
For more information on the awards, click here.
Last week's news and analysis
Last week of term?
European ABS/MBS market update
On the cards
Credit card ABS strength likely to attenuate into 2023
Portfolio boost
BNP Paribas completes synthetic ABS
Risk sharing facility disclosed
Caixabank inks SRT as risk sharing scheme revealed
Shipping SRT debuts
Piraeus Bank launches landmark shipping SRT
TCB test
Chapter 11 filing by TCB debtor puts CRT structure to the test
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
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SCI events calendar: 2022
SCI’s 8th Annual Capital Relief Trades Seminar
20 October 2022, London
SCI’s 3rd Annual Middle Market CLO Seminar
15 November 2022, New York
News
Capital Relief Trades
Risk transfer round up-1 August
CRT sector developments and deal news
BCP is believed to be rebooting a synthetic securitisation of polish corporate and SME loans that the lender was expected to close earlier this year. The transaction is now expected to launch in 2H22. The deal would be riding a pick up in Polish significant risk transfer trades following the execution of two capital relief trades this year from mBank and Getin Noble bank respectively (SCI capital relief trades database).
Stelios Papadopoulos
News
Capital Relief Trades
Freddie charts fresh waters
Inaugural June ACIS trade, dubbed AFH1, tackles loan warehouse capital charge
The innovatory AFH ACIS reinsurance transaction, unveiled by Freddie Mac in June and designed to reduce capital charges for loan warehouse exposure, has a bright future, says Jeff Shue, senior director, single-family credit risk transfer.
“The transaction was a success by our metrics. It is a great example of the reinsurance market’s ability to execute on a forward basis, and we are likely to see to see more such execution,” he tells SCI.
In a novel use of reinsurance mechanics, reinsurers cover the period between the point at which Freddie Mac acquires the loan and the point at which these loans enter a CRT transaction. This is generally about one or two months, but is costly to the GSE as during this time the loan is subject to the full ECRF capital charge.
To avoid this, a forward transaction is written on loans yet to be securitized. The inaugural AFH1 deal was executed in June on loans acquired in the same month so the reinsurers wrote cover before the reference pool of loans had been developed.
However, it’s not quite such a blind punt as this would indicate. Freddie Mac prepares data on a proxy pool of loans which have been already acquired and at a date very close to the loans being warehoused.
As the actual loans are securitized, they enter the reference pool and the clock starts on a traditional 12.5 year term. In essence, this is a traditional ACIS deal but one brought forward by two months and written initially on a series of loans that are believed will closely resemble the actual loans in the eventual reference pool.
A Shue points out, credit characteristics in loans of this kind alter relatively slowly and over a long period of time, so the chances of reinsurers being faced with a very different type of risk to the one that they thought they were insuring are very limited.
Indeed, the deal received a strong response from the reinsurers with whom Freddie regularly does business.
“We had participation from a vast majority of existing panel members and because of that we believe AF1 demonstrated that there is a deep market for this product series. Given the response, we see it as a viable product line,” says Shue.
Details on pricing have not been divulged.
The AFH series, of which the June deal was the debut, covers risk on loans with high LTVs. An AFL series, dealing with low LTV loans, is next on the docket.
Even though the capital charge is imposed for only two months of the loan’s warehouse period before it enters a CRT trade, it is still onerous. It includes the counter-cyclical charge as well as the evolution of the refinance pools.
“This new structure saves us the full capital charge, which is very substantial,” says Shue.
At the end of June, the FHFA pledged to review the ECRF. Since its introduction under the directorship of Mark Calabria, it has proved highly controversial. Though it has been tweaked to make it friendlier to CRT the essence remains in place.
Simon Boughey
News
Capital Relief Trades
Asset rich WAB loves CRT
Fast-growing Western Alliance Bank at forefront of US CRT
Prodigious asset growth in the last five years has propelled Western Alliance Bank (WAB) into a prominent position in the US CRT market, and though it is not actively shopping a deal at the moment the mechanism is now an established feature of its capital management, say sources close to the lender.
WAB had assets of around $16bn in 2017 but now has assets of around $66bn, and a substantial part of that growth has been in the mortgage business. It got started in mortgages five years ago, and its footprint was augmented by the purchase of home lender AmeriHome for $1.22bn in early 2021.
“Our balance sheet has grown so much, especially on the resi mortgage side, and with these deals we can reduce the risk weighting (RW) from 50% to 20%,” says a source close to WAB.
It brought a securitization of mortgage warehouse loans (which are assessed at 100% RW) in September 2021, and then brought another CRT trade with a reference pool of direct mortgage exposures at the end of that year.
In 2022, it has sold another CRT of mortgage assets in June, and in the last few weeks also issued CRT referencing capital call facility assets.
This business makes it by far the most active US regional bank in the regulatory capital relief market.
The first trade was sold to three or four major US-based asset managers, but the more recent trades have had only one or two buyers. The capital call facility trade, for example, had only Blackstone on the other side of it, say well-placed sources.
All have been managed by JP Morgan and the yields offered have been between SOFR plus 400bp and 600bp.
But the word about the yields on offer is spreading and more buyers are becoming interested, say sources.
“People that are in the mortgage market themselves are hearing about these deals and finding them pretty attractive. They know the market and understand the yields are pretty fantastic for what so far has been low risk,” says one.
The market has been hit, however, by reduced mortgage origination, rate volatility and rising spreads.
“Volatility in rates has made it more expensive to do these deals. Spreads have widened substantially,” he adds.
Nonetheless, while the market might be paused at the moment, WAB remains convinced that the mechanism has a significant role to play in the future of the lender.
“In the short run, it’s hard to know, but in the long run, over the next two to three years, we’ll continue to do them,” adds the source close to the bank.
WAB has a substantial branch network in the states of California, Nevada and Arizona, but at least a dozen national business lines extends its national reach over all 50 states. It is said to be one of the fastest growing banks in the country.
Simon Boughey
News
Capital Relief Trades
Risk transfer round up-5 August
CRT sector developments and deal news
Goldman Sachs is believed to be planning a synthetic securitisation for 2H22. The transaction would be the bank’s first synthetic ABS following a two-year hiatus (see SCI’s capital relief trades database).
Stelios Papadopoulos
News
Capital Relief Trades
STS homogeneity disclosed
Homogeneity criteria for STS SRTs revealed
The European Banking Authority has published its long-awaited consultation regarding the regulatory technical standards on the homogeneity criteria of STS synthetic securitisations (SCI 29 July). The consultation brings clarity to the market but the proposed grandfathering period for STS synthetic ABS has raised eyebrows, along with the reduced flexibility for portfolios backed by both corporate and SME loans.
The capital markets recovery package amended the Securitisation Regulation to include simple, transparent and standardised (STS) requirements for on-balance-sheet securitisations, thereby extending the STS framework to synthetic securitisations (SCI 26 March 2021). As part of this change, the EBA is mandated to develop draft regulatory technical standards (RTS) that further specify which underlying exposures are deemed to be homogeneous as part of the simplicity requirements.
The latest document adjusts the homogeneity factors for on balance sheet securitisations and more specifically the ‘type of obligor’ related to corporate and SME exposures. The latter exposures comprise the bulk of the synthetic ABS market.
According to the consultation, banks treat large corporate exposures differently from the rest of their corporate book, which in turn are subject to similar credit granting criteria as SMEs. Consequently, to ensure a consistent and harmonised application of the requirements-considering that the term ‘large corporate’ varies greatly across jurisdictions-it was decided to use the ‘large corporate’ definition from the Commission’s CRR three proposals.
The CRR three proposals define the term as ‘’any corporate undertaking having consolidated annual sales of more than €500m or belonging to a group where the total annual sales for the consolidated group is more than €500m.’’
Nevertheless, the proposals have raised eyebrows. David Saunders, structurer at Santander responds: ‘’the homogeneity criteria have been outstanding for a while and the market was hoping that the final rules would be quite flexible, reflecting the nature of synthetic securitisations. However, the latest consultation shows that this won’t be the case when it comes to mixing corporate and SME loans in a single portfolio.’’
He continues: ‘’there are several issues here. First, the EBA stipulates a strict definition of large corporates which isn’t yet part of the CRR. Moreover, regulators are fond of granular portfolios but if banks can’t mix pools, then you get both less granularity and less financing for SMEs. These issues will perhaps be dealt with by larger banks but that’s unlikely to be the case for smaller originators. Furthermore, the paper does not provide any clear risk or rationale driving the separation of SME and corporate asset types.’’
Another concern has been the grandfathering. Jo Goulbourne Ranero, consultant at Allen and Overy notes: “permanent grandfathering is envisaged for traditional STS securitisations. However, on-balance sheet STS securitisations notified before entry into force of the RTS would only benefit from time–limited grandfathering and be required to comply with the RTS requirements a year after its entry into force.’’
She concludes: ‘’this is unworkable because it’s not possible to reverse-engineer the asset base of a securitisation following closing, and even less possible where the securitisation is an SRT deal. The proposal also appears out of line with the EBA’s expressed desire to maintain a level playing field between traditional and on-balance sheet securitisation formats.”
The consultation closes on 28 October 2022. The draft regulatory technical standards will then be submitted to the Commission for endorsement, before being subjected to scrutiny by the European Parliament and the Council.
Stelios Papadopoulos
Market Moves
Structured Finance
NPL Markets reveals new partnership agreement
Sector developments and company hires
NPL Markets has announced a new partnership agreement with World Bank Group member, International Finance Corporation (IFC). The collaboration seeks to develop a greater and more efficient marketplace in South America to manage and trade performing loans, distressed, as well as other illiquid assets. Initially, the partnership will target the large markets of Brazil and Mexico, with hopes to explore more markets going forward. The partnership marks an example of IFC’s ‘Upstream’ approach of early-stage market and project presentation work that seeks to establish new pipelines of opportunity for private sector investment.
In other news…
EMEA
doValue has entered into an agreement with National Bank of Greece for a €1bn HAPS securitisation. Dubbed Project Frontier II, the transaction follows the firm’s earlier Project Frontier I process and marks an important step for the firm’s 2022-2024 business plan. The deal is subject to the completion of the securitisation of the €1m portfolio of predominately secured non-performing loans under the HAPS programme, which is expected to be finalised later this year.
Market Moves
Structured Finance
Germany's auxmoney secures €500m funding
Sector developments and company hires
The German digital-lending platform auxmoney has secured a further €500m in funding for investment into consumer loans on its platform from Citi and Natixis’ ABCP conduit. The digital-lending platform has been supported by investment from Citi since 2021, with this latest funding from the two large financial institutions expected to be used for the origination of new loans. The firm hopes the extension of its lending to a second facility with Natixis as a new senior lender will help boost its standing as a tech-enabled platform for institutional investors.
In other news….
North America
Fannie Mae yesterday (August 2) priced CAS 2022-R08, reported to be in the market last week. It sold a $377.9m M-1, rated BBB+/BBB+, at SOFR plus 255bp, a $124.9m M-2, rated BBB-/BBB at SOFR plus 360bp and a $122m B-1, rated BB-/BB+ at SOFR plus 560bp. The reference pool consists of 68,000 single family mortgages with LTVs of between 60% and 80% and has an unpaid principal balance of $20.4bn. All were written between September and November last year. Bank of America is lead manager is and StoneX is co-lead.
Freddie Mac yesterday (August 2) announced the details of its third tender offer of 2022, via lead dealer managers Bank of America and Wells Fargo. It is tendering 20 high LTV and low LTV M2 and M3 tranches which were priced in 2014, 2015, 2016 and 2017. The value of the tender is around $20.5m.The offer commenced yesterday and concludes next Monday, August 8 at 5pm EDT. Settlement is expected on Wednesday, August 10.
Market Moves
Structured Finance
Voya to acquire Czech Asset Management
Sector developments and company hires
Voya Investment Management has signed a definitive agreement to acquire private credit asset manager dedicated to the US middle market, Czech Asset Management (CAM). The transaction reflects Voya IM’s commitment to the expansion of its private and alternative credit capabilities, and the firm hopes the acquisition will complement its existing fixed income platform and boost the expansion of its private and leveraged credit franchise across multiple channels. CAM’s founder, managing partner, and cio Stephen Czech, along with its current investment and operations teams will join Voya IM following the close of the transaction. The CAM team will continue to manage existing CAM funds at Voya IM and will remain in Connecticut where it will become a part of its fixed income team.
In other news….
APAC
Waterfall Asset Management has named Alistair Ho head of Asia-Pacific, based in Hong Kong. In his new role, Ho is tasked with leveraging the firm’s securitised markets capabilities to provide private debt solutions for APAC non-bank financial institutions, middle market corporates and real estate-related borrowers. He was formerly head of Natixis Investment Managers International Hong Kong, having previously worked at Ostrum Asset Management, Mizuho, Natixis, Credit Suisse and Citi in predominantly structured credit-related roles.
North America
Carlyle Global Credit has closed on its first two debt financings with decarbonisation-linked terms as it launches its new decarbonisation-linked financing programme. The programme seeks to incentivise borrowers to reduce greenhouse gas emissions and other climate-related efforts and offers a pricing benefit tied to borrower achievement in these climate-tied targets. The first two debt financings with decarbonisation-linked terms supported Morgan Stanley’s buyout of Fairway Lawns, and American Industrial Partners’ refinancing in support of its portfolio company, The Carlstar Group. The programme marks the latest step in Carlyle’s mission to drive progress in the energy transition and is one of the first decarbonisation-linked financing programmes in the US private credit market.
Two Harbours Investment Corporation has entered into a definitive agreement to acquire RoundPoint Mortgage Servicing. The agency and MSR mortgage real estate investment trust’s wholly owned subsidiary, Matrix Financial Services, has entered into a stock purchase agreement to acquire the firm from Freedom Mortgage Corporation. In addition, Matrix will pay a primary purchase price on closing equal to the net book value of RoundPoint, along with a premium amount of US$10.5m. The transaction is expected to close in 2023, with Matrix agreeing to engage RoundPoint as a subservicer until the closing date and aiming to start transferring loans to RoundPoint in 4Q22.
Vida Capital welcomes new structured credit md, Matthew Roesler, to the firm’s New York office in its latest bid to grow its global credit platform. Roesler will report to head of structured credit, Peter Polanskyj, who he will work alongside to support the firm’s structured finance portfolios. He joins the firm from Apollo Global where he served as a partner and portfolio manager and maintained responsibility for synthetic structured credit investing, solutions, capital relief transactions, and secured financing.
Market Moves
Structured Finance
London Bridge broadens ILS capabilities
Sector developments and company hires
Lloyd’s has received regulatory approval from the UK PRA and FCA to set up a second Protected Cell Company (PCC), which provides a broadened range of ILS-related capabilities and enhanced accessibility for investors. Following the success of London Bridge Risk PCC (LBR) (SCI 10 February 2021), the new Lloyd’s vehicle is called London Bridge PCC (LB2) and will enable Lloyd’s members and managing agents to manage their capital and risk management requirements by attracting new sources of capital and reinsurance protection in a tax transparent way.
LB2 is authorised to undertake three additional capabilities. For a corporate member, in addition to writing quota share reinsurance, it will be able to write excess of loss coverages.
For a syndicate, it will be able to provide collateralised reinsurance, on both an excess of loss and quota share basis. Finally, for all structures, it will be able to fund the reinsurance obligation through the offer - by the segregated cells of the PCC - of either preference share or debt securities.
Working closely with the PRA and FCA, Lloyd’s says it has developed a set of mandatory terms for the principal transaction documentation with the aim of providing greater commercial flexibility while maintaining regulatory compliance. This is embodied in a Scope of Permissions that enables new cells to be set up and reinsurance written without the need for any additional regulatory approval.
The insurance management services for LB2 will be provided by Artex Capital Solutions.
In other news…
EMEA
ARC Ratings has appointed a new head of methodologies – Lisa Macedo. The ratings group welcomes Macedo to help build upon its expanding capabilities in structured finance, FIs, and corporate ratings. Macedo joins the firm from Moody’s where she was responsible for the analysis and primary ratings across pan-European CMBS, RMBS, and ABS, while also overseeing the surveillance of a range of structured finance rating portfolios. Macedo has maintained several senior roles over the past 20 years at both Moody’s and Merrill Lynch in London.
North America
Swiss Re has launched a new insurance-linked investment advisory business – Swiss Re Insurance-Linked Investment Advisors Corporation (SRILIAC). The advisory company and wholly owned subsidiary will offer a range of investment management services to institutional investors, with an emphasis on catastrophe bonds. As an SEC registered investment adviser, SRILIAC will allow investors the opportunity to access Swiss Re’s proficiencies in catastrophe bond investments, natural catastrophe modelling, and underwriting. SRILIAC will complement Swiss Re’s broader investment strategy targeted towards natural catastrophe reinsurance contracts managed by SRILIM, Swiss Re’s insurance-linked investment management business.
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