Contents

Capital Relief Trades

Exposure value disclosed

EBA releases long awaited excess spread consultation

The European Banking Authority has published its long-awaited consultation regarding regulatory technical standards pertaining to the exposure value of synthetic excess spread in significant risk transfer transactions (SCI 9 August). The main proposal in the consultation falls far short of what the market was expecting and risks rendering the transactions uneconomical.

The capital markets recovery package released in December 2020 to support the European economy during the coronavirus crisis sets out a preferential treatment for the senior tranches that banks retain for STS on-balance-sheet securitisations under certain conditions. The reduction in capital requirements was accompanied by a capital charge for synthetic excess spread (SES). As part of these new rules, the EBA was tasked with the goal of developing regulatory technical standards to specify how banks will determine the exposure value of synthetic excess spread

The gist of the European Banking Authority’s approach is that synthetic excess spread must factor in back loaded, front loaded and evenly loaded losses. Originators then take the arithmetic average of this or how much synthetic excess spread banks use in these scenarios, and fully capitalize it. This means a 1250% percent risk weight for the retained synthetic excess spread position, which amounts to a full capital charge and a deduction from capital. Full capitalization would simply render the transactions uneconomical for lenders.

Robert Bradbury, head of structured credit execution and advisory at Alvarez and Marsal notes: ‘’banks already generally structure synthetic excess spread as a function of portfolio expected losses, but the consultation proposes fully capitalizing the arithmetic average which is the result of scenario analyses. This will mean looking in greater detail at these scenarios not just for SRT demonstration but economic effectiveness as well.’’

Market participants note that there was an expectation that the EBA would propose something akin to the ECB’s approach. The ECB just caps synthetic excess spread at the one-year expected loss of the portfolio. The EBA on the other hand looks at lifetime expected losses.

Jo Goulbourne Ranero, consultant at Allen and Overy comments: ‘’The EBA takes comfort that the decrease in capital relief resulting from the SES capital charge under its proposals is offset by the originator capital benefit associated with the on-balance sheet STS regime. However, this is not true for SME transactions, which benefited from STS-like prudential treatment prior to the introduction of the on-balance sheet STS regime.’’

She concludes: ‘’The prudential benefits associated with the on-balance sheet STS regime were, in any case, intended to level-up the synthetic and true sale securitisation formats from a prudential perspective, and to support the development of the securitisation market, not to be negated by an equal or greater capital charge applicable to synthetics only. Moreover, the SES calculation will require an annual independent audit and regulatory notification with cost implications.’’

The consultation closes on 14 October 2022.

Stelios Papadopoulos

Asset-Backed Finance

Symbiotic relationship

'Recharacterisation' underway for European ABS

The paucity of European publicly placed securitisations in recent months, against a backdrop of challenging conditions, is seen as a symptom of a market that is overregulated and has too few participants. Against this backdrop, a seemingly symbiotic relationship between the public and private securitisation markets is emerging.

“The market for publicly issued securitisation bonds is too illiquid for anything other than a handful of specialist issuers. Demand remains, but for private placements,” confirms Conor Downey, partner at iLS London.

According to AFME figures, €34bn of securitised product was issued in Europe in 2Q22, representing a decrease of 46.8% from 1Q22 (at €63.9bn) and a decrease of 6.6% from 2Q21 (€36.4bn). Of this, €15.8bn was placed - representing 46.6% of the total - compared to €32.7bn placed in 1Q22 (representing 51.2% of that quarter’s total) and €26.1bn placed in 2Q21 (71.7%). So far in Q3, SCI’s Euro ABS/MBS Deal Tracker lists 11 consumer ABS and RMBS issuances, all of which were preplaced.

Given the current extraordinary geopolitical and economic conditions, issuers and arrangers have pivoted towards a more private marketing process in recent months (SCI 29 July), with deals shown privately to potential investors and later announced publicly as ‘preplaced’ when terms are agreed. As such, issuers can avoid pulling transactions that may not have garnered sufficient demand if marketed publicly - while for investors, the reduced transparency in syndication is typically offset by more favourable pricing and allocation.

Banks remain open for business for private repo, conduit, warehouse and term financings in large clips, according to Robert Bradbury, head of structured credit execution and advisory at Alvarez & Marsal. “To a certain extent, banks have taken up financing of assets that would have been securitised in the public market if it weren’t frozen, because they still need to deploy resources. They’re not earning revenues on public transactions, so to an extent they’re earning them in the private market instead.”

He suggests that for less core or more esoteric assets, the impact net/net of the current freeze in public securitisation is relatively limited, since such issuers were unlikely to be counting on a public placement anyway. At the other end of the spectrum, the best prime issuers are still able to tap the public securitisation market, albeit at wider spreads.

The freeze is having the biggest relative impact on less regular issuers across asset classes including RMBS and consumer ABS. “There is substantially less appetite for assets with greater perceived economic sensitivity, such as buy-to-let, second-lien and non-prime auto loans, which are proving more challenging to finance in the current market. Nevertheless, the big names survive because they have access to more diverse funding – whether that’s in the public or the private sphere,” Bradbury confirms.

Given the challenging market conditions, some issuers have strengthened transaction structures by introducing investor-friendly features - such as higher step-ups, turbo amortisation and non-amortising reserve funds – or made deals more attractive to bank treasuries by structuring the senior class in a loan format rather than a bond format. As such, banks can deploy their lending books to participate in new deals as anchor investors.

Bradbury indicates that the absence of a public market is a consequence rather than a driver as it relates to smaller scale issuer behaviour. “If you can’t securitise efficiently, you can’t obtain cheaper financing and hence originate product; if there’s no product originated, you can’t securitise. Until there is a fully functioning market across the credit spectrum and a reference price point for all assets, it will be more expensive to fund those assets that everyone needs – let alone determine how securitisation can best be used as a tool to help address real world challenges, such as those linked to climate, inflation and others.”

Indeed, many argue that a robust mainstream securitisation market needs to be in place before the product can help address challenges like the climate emergency and the energy crisis. “There needs to be more players in the public market. If someone needs to sell in a period of stress that isn’t necessarily due to market conditions and there is no one to take the other side of the trade, the market is broken. A whole host of funding opportunities aren’t getting into institutional investors because they don’t have the prescribed credit expertise,” observes Brian Kane, director of capital markets and originations at CrossLend.

He believes that a recharacterisation of the European securitisation market towards the private sphere is underway. “The securitisation market is like ‘whack-a-mole’ in that if you push it down, it pops back up elsewhere. The private market wouldn’t exist if ABCP conduits were funding the assets they funded pre-financial crisis, but the extent of regulatory complexity in Europe has meant that many market participants have simply walked away from the public market.”

Alongside corporate direct lending and real estate investments, real economy assets are increasingly being funded in the private market. The same tenets that exist in the public securitisation market – such as servicing and back-up servicing, liquidity facilities and reporting – exist in the private securitisation market, as well as the ability to trade positions.

Kane notes that ‘originate to share’ is the new buzz phrase for the securitisation market. “Banks are constrained by the complexity of securitisation regulations – they continue to originate assets, but don’t have infinite amounts of capital or liquidity. At the same time, neo and digital banks are deposit-rich but have no origination, so strategic lending partnerships make sense.”

Forward flow arrangements, for example, allow a bank to keep a portion of the yield on a portfolio it has originated – while becoming the asset manager and servicer of the loans - and the neobank partner benefits from the remainder of the yield. “It’s a balance sheet-light model that creates alignment of interest because both parties are sharing the risk and reward of the origination,” explains Kane.

He suggests that any transformation of the European securitisation market will be around such strategic lending partnerships. “Currently, it’s more straightforward to execute them bilaterally. Securitisation can’t easily be utilised in this trade at the moment because of regulatory constraints, but it should, given all the challenges the economy faces.”

Downey agrees that the private securitisation market is here to stay, not least because execution can often be more efficient than in the public market. “Public issuance can be efficient in terms of creating economies of scale, with issuers historically having more of an ability to dictate terms. However, for investors who aren’t concerned about liquidity, single-tranche deals can be structured in the private market with no risk retention requirement.”

Equally, in a public securitisation, investors rely on the offering circular - which discloses everything. In contrast, there is greater emphasis on investor due diligence in the private market, meaning that the OC becomes less relevant.

Another area of efficiency is that the private securitisation market is dominated by boutique arrangers, which are typically more lightly regulated than investment banks and aren’t encumbered by balance sheet restrictions. “Such boutique arrangers aren’t tying up capital or taking risks in the way that investment bank arrangers are required to,” Downey explains.

Meanwhile, because the public market is largely closed and rates have moved out significantly and so swiftly, non-bank lenders are seeking financing at an unprecedented pace. “Rates have tightened but non-bank lenders haven’t been able to pass the difference on to customers yet. At the same time, some banks have senior lending positions in these platforms and want to exit those positions,” Bradbury explains.

He continues: “Consequently, we’re likely to see subscale platforms failing or being absorbed by other platforms. For those that can attract alternative capital or ongoing bank support, we expect a wave of repricing and amendments to their facilities. As a result of such consolidation, we could see mixed-originator pools being securitised.”

Elsewhere, deals deemed as core private credit are seeing strong bids. While investors that can freely pivot between public and private markets are currently finding better relative value opportunities in public markets because spreads are so wide, specialist private credit funds remain focused on the private market in line with their mandates.

Bradbury cites BNP Paribas’ recent Resonance Seven (SCI 29 July) significant risk transfer transaction as an example. Not only does the deal reference the largest-ever CRT portfolio, at €13bn, it also achieved very tight pricing for this market.

“The execution of Resonance Seven belies the perception of this part of the private credit market representing less ‘accessible’ risk with much higher return requirements. Instead, it demonstrates that SRT is now a core part of the market and is more accepted than ever,” he argues.

The public securitisation market is expected to return once the current dislocation normalises. But Bradbury believes that the perception among prospective issuers of the inability of the public market to absorb paper will remain for much longer.

Looking ahead, he anticipates that the seemingly symbiotic relationship between the public and private securitisation markets in Europe will continue. “The lack of a fully functioning public market is far from ideal, but the securitisation market is ‘making do’, in the same way that it endured the financial crisis and then the Covid crisis.”

Corinne Smith

Structured Finance

SCI Start the Week - 8 August

A review of SCI's latest content

Last week's news and analysis
Asset rich WAB loves CRT
Fast-growing Western Alliance Bank at forefront of US CRT
Downward trend
iTraxx passes peak and heads downwards
Freddie charts fresh waters
Inaugural June ACIS trade, dubbed AFH1, tackles loan warehouse capital charge
SRT boost
SRTs thrive as focus shifts to loan-by-loan analysis
STS homogeneity disclosed
Homogeneity criteria for STS SRTs revealed

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.

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.

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
15 November 2022, New York

Capital Relief Trades

Regulatory block

US CRT sector is becalmed and regulators are to blame, say sources

US regulators have blocked regulatory capital relief trades at a time when the mechanism would be of particular value to US banks, say well-placed market sources.

So far in 2022, only Western Alliance Bank (WAB) has issued in the CRT market. Issuers that have been regular presence in the market over the past couple of years, pre-eminently Citi and JP Morgan, have done nothing and are said to be on hold.

Goldman Sachs, which issued a $3bn CLN in 2020, is also on the sidelines, though there are rumours it has something in the works for 2H 2022.

Texas Capital Bank (TCB), which got everyone excited when it became the first US regional bank to venture into the reg cap market in March 2021, has also failed to make a reappearance despite affirming at the time that the inaugural deal would be part of an ongoing programme.

It has declined to comment on why it hasn’t been seen since.

This sudden and unexpected drought in the market is due to a volte-face by regulators. The Federal Reserve Bank of New York and the Federal Reserve Board are believed to have stopped granting regulatory relief to large institutions for CRT deals in 2021.

“The market is effectively on hold among large banks due to regulatory constraints. The regulators appear to have turned course after a series of transactions in 2020-2021,” says Terry Lanson, a portfolio manager at Seer Capital - a New York-based veteran of the CRT market.

The pitiful harvest of new product in the US CRT market this year has refuted the confident predictions of expansion in the US market that were made at the end of 2021.  

“We’re pretty confident that the regulators stopped granting relief at the end of 2021. These are well-placed sources in the legal community that we’ve talked to,” says another investor.

The New York Fed did not reply to a request for comment by press time.

Sources say that the regulators became disquieted by the CLN structure, as has been widely used by US issuers. Under the CLN structure, the debt is issued directly off the borrower’s balance sheet, and then the notes are written down when and if the reference portfolio experiences losses.

Regulators are believed to have become concerned about the cash collateral posted by investors is not effectively on deposit, and thus cannot protect the institution should losses occur.

An SPV structure would perhaps circumvent these misgivings, but SPVs in deals of this kind come with significant shortcomings. If a large bank set up an SPV as a sponsor it may have to register as a commodity pool operator, which would create further logistic and regulatory headaches. Nor is it really feasible to ask investors in a syndicated deal to set up their own SPVs.

There is a further alternative: that regulators have developed significant concerns about the product as a whole above and beyond the cash collateral angle, so while they are prepared to approve it on a trial basis for smaller banks like WAB, approval for larger, globally systemic institutions is withheld.

“The cash collateral issue could be just an excuse for broader reservations by US regulators.  However we believe these to be unfounded, as CRT has proven an effective risk and capital management tool for European banks for a long time” says Lanson.

Goldman Sachs is, of course, believed to be in the market and is hoping to do a deal later this year. Sources suggest that it could go ahead and do a deal pending regulatory approval.

It is also rumoured that while the New York Fed has set its face against reg cap deals, the Dallas Fed, which governs TCB, and the San Francisco Fed, which governs WAB, are more laissez faire.

This sudden intransigence by the regulators could not come at a worse time for US bank as they are being hit by a one-two punch combination of higher risk weighted assessments (RWAs) and higher capital ratios thanks to recent adjustments.

Firstly, RWAs derived from derivative counterparty exposures increased appreciably at the beginning of 2022 due to the adoption of the Standardized Approach for Counterparty Credit Risk (SA-CCR). This was announced in January 2020 and constitutes an extension of the standardized approach to derivatives exposure.

As the Federal Register of January 20 2020 notes, “Notably, the final rule requires an advanced approaches banking organization to use SA–CCR to determine the exposure amount of derivative contracts included in the banking organization’s total leverage exposure, the denominator of the supplementary leverage ratio.”

Thus, according to Lanson, “Under the SA-CCR, derivatives exposure is treated differently, so if your book of derivatives counterparty exposure would have X RWA on 12/31/2021, by 1/1/22 the RWA would have increased on the same exposure.”

Even more importantly, Common Equity Tier One (CET1) ratios for US banks have leapt this year. For a large bank like JP Morgan, a CET1 ratio of 11.2% applied in 1Q 2022 but by 1Q 2023 this will have been increased by a whopping 1.3% to 12.5%.

While the base CET requirement has not been changed from 4.5%, the G-SIB surcharge increases by 50bp to 4% by 1Q 2023. On top of this, the stress capital buffer has been adjusted from 3.2% to 4% as a result of this year’s Federal Reserve stress tests.

It is calculated that the top four US banks will be required to hold an additional $81bn of capital as a result of these changes. JP Morgan needs another $35.5bn, Citi a further $23.6bn, Bank of America another $18.4bn and Wells Fargo some $3.7bn.

These calculations were made by Seer Capital, based on Bloomberg data and company reports.

So, it seems that regulators have pulled out the rug from under banks just when they are in need of a soft landing.

.

Simon Boughey

Capital Relief Trades

Risk transfer round up-10 August

CRT sector developments and deal news

Eurobank is believed to be readying a capital relief trade of Greek shipping loans for 2H22. The alleged transaction follows the execution of a Piraeus bank shipping CRT  last month (see SCI’s capital relief trades database).

Stelios Papadopoulos 

Capital Relief Trades

Hedging eyed

Goldman Sachs expected to hedge leveraged loans

Last week SCI revealed an alleged synthetic ABS from Goldman Sachs (SCI 5 August), but further information has now been disclosed on the transaction. Indeed, the capital relief trade is believed to be backed by leveraged loan exposures, with the lender allegedly planning the deal for hedging purposes rather than capital relief after US regulators put the US market on hold (SCI 9 August).

SCI understands that the trade is unlikely to be carried out for capital relief purposes after US regulators put the market on hold. Instead, hedging concentrations or exposures to leveraged loan borrowers is said to be the main driver of the deal.

Executing risk transfer trades for hedging purposes rather than just capital relief may offer some relief for US banks wishing to do synthetic securitisations, and there is a precedent in the CRT market as evidenced by Lloyds’ famous Syon programme (SCI 7 February 2020).

Moreover, market participants have mentioned the possibility of regulatory calls that would allow banks to call the deals and avoid paying premiums if they can’t get the desired capital treatment.

Nevertheless, the obvious question here is whether banks and investors are willing to put the time and money to launch a deal only to see it effectively terminated later. Ultimately, these transactions are done for multiple reasons and capital relief remains one of the crucial ones.

Capital relief is perhaps the main motivation for US banks at this point after large US lenders suspended share buybacks in 2Q22 following a large boost in capital requirements.

According to a Seer Capital report, ‘’minimum CET1 ratios set by the Federal Reserve Board include a base requirement plus bank specific buffers determined based on criteria including size and performance in stress tests. Stress capital buffers for US banks will be adjusted based on 2022 Federal Reserve stress test results, and Global Systemically Important Bank surcharges will increase for the largest banks.’’

JP Morgan in particular ascribed RWA increases to higher derivative counterparty exposures at the beginning of 2022, based on the required adoption of the Standardized Approach for Counterparty Credit Risk (SA-CCR). ‘’Like other large US banks, JP Morgan is subject to the Collins Amendment to the Dodd Frank Act, requiring them to calculate RWA based on the higher of the standardized approach and the Internal Ratings Based approach. Owing in part to the adoption of the SA-CCR, the bank’s standardized RWA increased by more than IRB RWA’’ notes the Seer report.

Goldman Sachs would be riding a wave of leveraged loan risk transfer deals this year including one by Deutsche bank that is still currently pending.

Stelios Papadopoulos 

Structured Finance

RFC issued on SES proposals

Sector developments and company hires

The EBA has launched a public consultation on its draft regulatory technical standards (RTS) on the determination by originator institutions of the exposure value of synthetic excess spread (SES) in securitisations. The aim of the proposals is to contribute to a more risk-sensitive prudential framework in the area of synthetic securitisation.

The capital markets recovery package (CMRP) set out a preferential treatment for senior tranches retained by originator institutions in STS on-balance sheet securitisations under certain conditions, based on the qualitative requirements under the Securitisation Regulation. This reduction in capital requirements was accompanied by a capital charge on SES, due to concerns related to regulatory arbitrage opportunities.

Such arbitrage opportunities can occur when an originator provides credit enhancement to the securitisation positions held by protection providers by contractually designating certain amounts to cover losses of the securitised exposures during the life of the transaction. These amounts - which encumber the originator’s income statement in a manner similar to an unfunded guarantee - were not previously risk weighted.

The consultation paper specifies how originator institutions should determine the exposure value of SES, taking into account the relevant losses expected to be covered by it. In particular, the focus is on the exposure value of SES of future periods and on the ‘trapped’ and ‘use-it-or-lose-it’ mechanisms.

Responses to the consultation should be received by 14 October. A public hearing will take place on 6 September. 

In other news…

APAC

Apollo has entered into a joint private credit venture in Korea with Belstar Group to offer a wide array of private credit solutions to the region. The 50/50 venture will see the global alternative asset manager, Apollo, combining its capabilities with Belstar’s extensive expertise in investing and partnering with corporates and institutions in Korea. The joint venture will work to provide large corporations, mid-sized enterprises, and sponsors in the region with asset-backed capital solutions, corporate lending, as well as acquisition financing. Apollo and Belstar hope to also address the liquidity gap facing borrowers in the market at the moment, and follows the recent launch of Apollo’s Asia Pacific Credit Strategy. As an extension of Apollo’s credit investment franchise in the Asia Pacific region, it will be anchored to Apollo’s funds and internal affiliated insurance balance sheets and will focus on offering differentiated and flexible capital in terms of both duration and yield.

North America

Cadwalader welcomes New York-based partner, Jon Brose, to join its tax group and advise on tax issues for CLOs and other structured finance and securitisation products, as well as working on investment funds and cryptocurrencies. Brose brings his experience representing managers, underwriters, issuers, and placement agents to the firm from Seward & Kissel, where he served as partner. Brose marks the latest in a string of many new partners to join Cadwalader, as the firm works to enhance its structured finance and securitisation work to meet demand after a very busy year.

Carlyle has announced several senior leadership changes following the departure of ceo and member of the board of directors, Kewsong Lee. With the close of Lee’s five-year employment agreement coming up at the end of this year, Lee has agreed to step down, with both Lee and the board agreeing to immediately initiate a search committee to identify a permanent successor. In the interim, co-founder and current non-executive co-chairman and former co-ceo, William Conway, will serve as ceo – with Lee on hand to assist the transition. Additionally, to assist Conway in his duties as interim ceo, the firm has established an office of the ceo, which will be comprised of several senior members of staff. This will include: the firm’s cio for corporate private equity and chairman of Americas private equity, Peter Clare; head of global credit, Mark Jenkins; the firm’s coo, Christopher Finn; and cfo, Curtis Buser.

Freddie Mac yesterday (August 8) launched a $540m high LTV CRT bond, designated STACR 2022-HQA3, via lead managers Wells Fargo and Barclays. The trade consists of a $285m M-1A tranche priced at SOFR plus 230bp, a $146m M-1B tranche priced at SOFR plus 146bp and a $109m M-2 tranche priced at SOFR plus 535bp. The co-managers are Amherst Pierpoint, BNP Paribas, JP Morgan and Nomura. Freddie issued $15bn in the CRT market in H1 2022 in the STACR and ACIS market.

Structured Finance

Angel Oak censured for fix-and-flip RMBS

Sector developments and company hires

The US SEC has charged Angel Oak Capital Advisors and its portfolio manager Ashish Negandhi for misleading investors about the firm’s fix-and-flip loan securitisation’s delinquency rates. Angel Oak and Negandhi have agreed to pay a penalty of US$1.75m and US$75,000 respectively.

According to the SEC’s order, in March 2018, Angel Oak raised US$90m through a securitisation backed by loans to borrowers for the purpose of purchasing, renovating and selling residential properties (known as ‘fix-and-flip’ loans). The deal included a provision that would accelerate Angel Oak’s obligation to return funds to certain investors if delinquencies reached a predefined threshold.

Shortly after the deal closed, loan delinquency rates increased unexpectedly. This led to Angel Oak and Negandhi artificially reducing delinquency rates by improperly diverting funds ostensibly held to reimburse borrowers for renovations made to the mortgaged properties to instead pay down outstanding loan balances. Because Angel Oak and Negandhi did not disclose these actions, the performance data regularly disseminated to investors provided an inaccurate view of the actual delinquency rates on the mortgages in the securitisation pool, as well as the securitisation’s compliance with the early repayment trigger.

The SEC’s order finds that Angel Oak and Negandhi violated the antifraud provisions of the Securities Act of 1933 and that Angel Oak violated, and Negandhi caused Angel Oak’s violation of, the antifraud provisions of the Investment Advisers Act of 1940. Without admitting or denying the SEC’s findings, Angel Oak and Negandhi agreed to a cease-and-desist order, a censure and the imposition of civil monetary penalties.

In other news….

ABS CDO transferred

Dock Street Capital Management has replaced Dynamic Credit Partners as collateral manager for the Lenox CDO transaction. The firm has agreed to assume all of the duties and obligations pursuant to the collateral management agreement, the collateral administration agreement and the applicable terms of the indenture. Moody’s has confirmed that there will be no adverse rating impact on the notes as a result of the move.

EMEA

Oxane Partners has received its first primary servicing rating from S&P Global Ratings with a stable outlook. Additionally, the firm was included on S&P’s select servicer list having entered the loan servicing market with Loan Servicing 2.0 at the start of 2020. The rating from S&P reflects the firm’s expertise and technological capabilities demonstrated by its Loan Servicing 2.0 solution, which works to offer lenders data accuracy, digital access to investment data and reports, and a responsive servicing team dedicated to proactive surveillance and risk monitoring.

North America

Lakemore Partners has appointed a new chair of its audit committee. Paul Gyra will assume the role of independent chair of the Lakemore Partners Audit Committee and will offer expertise to help serve the firm and support the maintenance and building of its partnerships with clients and top-tier CLO collateral managers worldwide. Gyra has more than 30 years of experience in investment banking and asset management, and currently holds roles on Lakemore’s advisory board and as a managing partner at the Thompson Family Office. Prior to this, Gyra served as coo, head of strategy, and managing partner at Safanad Limited, where he was responsible for the firm’s business operations and strategy across its Dubai, New York, and London offices.

Upstart CND ratios eyed

Upstart securitisations issued after April 2021 that have large concentrations in collateral with longer original terms and lower Upstart credit grades are experiencing higher-than-anticipated cumulative net default (CND) rates, with some approaching or breaching their respective CND ratio triggers. According to KBRA, UPSPT 2021-ST7 breached a trigger in May, cured a month later as the trigger threshold stepped up and then re-breached a trigger last month. As of the July 2022 distribution date, UPSPT 2021-ST6 is also in breach of its CND ratio triggers.

KBRA estimates that another six Upstart transactions may breach their respective CND ratio triggers in the coming quarters. For the UPSPT and USPTT pass-through securitisations, the rating agency warns that if the CND ratio exceeds the applicable CND ratio trigger level for a specific transaction, an amortisation event will go into effect on such distribution date causing the transaction to enter full amortisation. If the CND ratio trigger is subsequently cured, the overcollateralisation from the distribution date immediately preceding the cure of the breach will be the new required OC percentage.

Upstart has recently updated its underwriting policies, increased its pricing and amended its loan modification policy to allow borrowers that have experienced a temporary reduction in income, unexpected increase in expenses or a job loss to apply for a forbearance or extension - providing they have made at least two full payments. KBRA expects the changes in underwriting and pricing to contribute to future performance improvement.

Structured Finance

DLT powers bank subordinated debt deal

Sector developments and company hires

DLT powers bank subordinated debt deal
Blockchain-powered fixed income platform Brightvine and Angel Oak Capital Advisors have launched what is believed to be the first-ever bank subordinated debt issuance leveraging blockchain technology. A US$147.55m securitisation backed by subordinated debt issued by community banks across the US, BFNS 2022-1 leverages Brightvine Portal, a secure management platform for conducting primary offerings of digital assets via blockchain, to coordinate documentation and loan information among parties and increase efficiencies within the securitisation and diligence processes.

BFNS 2022-1 is Angel Oak's third community bank sub-debt securitisation since 2018 and the senior tranche received a Aa3 rating from Moody's. The securitisation consists of 31 issuers across 20 states, all with under US$10bn in assets.

Angel Oak and Brightvine will continue to collaborate on ways to use the blockchain to introduce immediate benefits to securitisations.

In other news…

Canyon closes third CLO equity fund
Canyon Partners has announced the US$230m close of the Canyon CLO Fund III, its third CLO equity fund to be managed by Canyon CLO Advisors. The fund primarily seeks to acquire majority equity positions in CLOs issued in the US and Europe that are managed by Canyon CLO Advisors. The fund has the flexibility to issue EU risk-retention compliant CLOs, as well as opportunistically invest a portion of the capital directly in dislocated loans and CLO liability tranches.

With the close of CLO Fund III, Canyon has raised an aggregate of approximately US$620m across its CLO funds. The firm's previous CLO funds were closed in 2015 and 2019.

Canyon currently manages 16 active CLOs and loan separate accounts, totalling more than US$8bn of assets under management. The firm's CLO strategy is focused on stable, high-quality portfolios designed to generate excess returns through patient portfolio construction, active management and optimised asset and liability timing and execution.