Contents

Capital Relief Trades

Proportional representation

Scaling factor suggested for capital charges

A new Risk Control paper puts forward a scaling factor as a more risk-sensitive method of calibrating capital formulae under SEC-SA. The objective is to encourage European authorities to rectify the incoherence in securitisation prudential rules that exists between actual risk and capital charges at the mezzanine level, and make the senior tranche floor proportional to pool risk weights rather than a constant.

“A scaling factor would enable the simplistic capital formulae to remain, while making them more reasonable from the perspective of economic imperatives and risk. It would allow policymakers to rescue Basel, as well as address regulatory concerns (in the form of financial stability) and political concerns (reviving the economy),” explains Georges Duponcheele, senior consultant at Risk Control.

He continues: “The regulatory parameter ‘p’ is trying to achieve many things. A scaling factor would split those roles and facilitate decision-making in terms of the importance of securitisation.”

Under the Simplified Supervisory Formula Approach (SSFA), ‘p’ determines the allocation of capital between mezzanine and senior tranches, the capital surcharge post-securitisation and the steepness of the cliff-effect. The Risk Control paper notes that these determinants are relevant to investment risk, economic risk and financial stability risk respectively.

Regarding investment risk, the main financial parameter dealing with allocation between tranches in a risk model is the pool correlation. Meanwhile, in terms of economic risk, as the presence of a surcharge departs from capital-neutrality, requiring additional capital that is not linked to an increase in the riskiness of the assets makes those assets more expensive.

Finally, the steepness of the cliff-effect in the region of subordination above total pool regulatory capital is relevant in terms of financial stability. If the cliff is too steep, in the event of a financial crisis, the increased level of losses in the pool will trigger a 100% capital requirement for some mezzanine risk that has very low capital prior to the losses occurring. Banks retaining this risk only could have insufficient capital in a financial crisis.

“Hitting three targets with one parameter is an overambitious objective and, not surprisingly, the SSFA capital departs significantly from what one could obtain from a more rigorously formulated model,” the paper states.

With ‘p’ set at 1.0, under the allocation role, the parameter overcapitalises tranches from x0.0 to infinity, and materially so from x0.5 to x2.5 KA. “In the zone x1.0 to x2.0 KA, the capital burden for what is considered a fairly safe tranche in investment terms has a higher level of capital requirement than a delinquent asset that is implicitly risk weighted at 625%. There are no zones of undercapitalisation, even in the most senior part of the capital structure. The SEC-SA, as calibrated, fails in the allocation role,” the paper argues.

Under the capital surcharge role, Risk Control finds that there will be 100% more capital, meaning that the economic cost doubles. As such, the paper shows that the SEC-SA - as calibrated in Europe - fails in the capital surcharge role too.

Under the cliff-effect smoothing role, the initial drop is well managed, Risk Control suggests. “It is almost as if there was an imaginary straight line going from 1,250% risk weight at x1.0 pool capital down to 0% RW at x2.0 pool capital. Out of the three roles, ‘p’ is a regulatory ‘success’ only with regards to the cliff-effect smoothing role – a cliff-effect which never was a securitisation risk in the first place, but a regulatory risk.”

William Perraudin, director at Risk Control, observes that if the ‘p’ number is reduced below 0.3, there is a cliff-effect on capital charges. If ‘p’ is set to zero, the smoothing curve disappears and a step function appears.

“The step function generates instability: if there are losses, capital requirements for mezzanines can jump to a high level,” he explains.

Ideally, the three roles of ‘p’ would require three independent parameters – although doing so might be judged to depart too much from the Basel agreements. As an alternative, a scaling factor (SF) could be applied to the KA input in the mathematical description of SEC-SA. With SF set at 0.5, the paper demonstrates that capital neutrality is achieved - thereby removing the capital surcharge and hitting the target under the second role of ‘p’.

This would, in turn, be a significant improvement under the first role of ‘p’, as the capital of the tranches and the investment risk would be more aligned - in particular, in the area x0.5 to x1.5 pool capital. However, the steepness of the curve leaves the area x1.5 to x2.5 slightly undercapitalised, thereby underachieving under the third role of ‘p’. The paper notes that one trade-off would be to increase the SF to 0.65, at the cost of creating a 30% capital surcharge under the second role.

Duponcheele believes that a 30% surcharge is reasonable and would be enough to revive the securitisation market in Europe. “By introducing a scaling factor of 0.65, the risk weighting starts to drop below 1,250% earlier, thereby trimming the fat of the capital surcharge while maintaining ‘p’ at 1.0. An absurd amount of capital is consumed under the current formula, with no concrete justification, since the pool is transparent to investors and Basel 1 arbitrage deals no longer exist,” he says.

He concludes: “The current formulae are too constraining. Basel is an agreement, not a treaty, and is therefore open to modification. Policymakers need to separate the economic impact of not addressing these issues from any financial stability impacts and have a proper debate – or risk damaging the economy further.”

Corinne Smith

Capital Relief Trades

US CRT return?

US impasse raises corporate and leveraged loan CRT prospects

US synthetic securitisation issuance has stalled after supervisors effectively put the market on hold (SCI 9 August). US supervisors are apparently concerned about direct CLN structures, but they are also likely unwilling to consider even structures where cash collateral is deposited in third party bank accounts. The latter suggests scepticism over synthetic technology itself rather than just particular structures. Nevertheless, the current impasse in the market may raise new opportunities, and particularly prospects for higher corporate and leveraged loan issuance.     

According to well-placed legal sources: ‘’in 2013, US capital rules were revised but US regulators have never been enthusiastic about synthetic securitisations and offer less flexibility compared to European supervisors. Another factor is the Basel output floors since in the US supervisors are still thinking about how to implement them, so approving transactions before the revisions isn’t straightforward.’’

JP Morgan and other banks have structured transactions, but they can’t be replicated by everyone.

The same legal sources note: ‘’you don’t know how the transactions would be treated under the new approach to capital and the regulators have also raised questions around the cash collateral. One concern is whether banks can deposit cash with themselves through a direct CLN structure’’

Nevertheless, it’s not hard to envision a CLN structure where the cash is deposited in a third-party bank account which is a structure that European supervisors have been comfortable with.

However, this is apparently still not enough to assuage the scepticism of US regulators. ‘’Depositing cash in a third-party bank account would require a third-party custodian and you would have a situation where the collateral gets tied up. Having said that, third party custodians are good for securing the obligations for the investors, but one or more residual tranches may still be with the bank’’ say the legal sources.

Banks need to hold capital against a residual tranche of the synthetic securitisation which is technically a loan exposure. The latter is then cash collateralized to get a better capital treatment. The issue here from a supervisory perspective is that the cash collateralization is still carried out through a direct CLN structure.

However, this raises the question as to why the collateral for the residual tranches can’t be deposited in third party bank accounts. It’s highly unlikely that US regulators aren’t aware of these options which suggests a broader scepticism that goes beyond specific structural features of synthetic ABS to the product itself.

Nevertheless, this wouldn’t be the end of the US market and in fact the current impasse may perhaps raise prospects for corporate and leveraged loan issuance where banks can just hedge risk and concentrations without getting the capital relief. Goldman Sachs for instance is expected to hedge a portfolio of leveraged loans this year and there is a precedent in the CRT market in this respect as evidenced by Lloyd’s Syon programme (SCI 11 August).

‘’Capital relief trades backed by consumer, auto and mortgage exposures have a lower cost of capital relief than corporate loans but if your goal is just hedging you can still do a CRT without getting the capital relief’’ says an arranger.

Banks factor in the cost of issuing a CLN versus the cost of capital relief. Asset classes with relatively low default rates - like mortgages - that consume capital under the standardised approach, and similarly highly granular asset classes, are more economically efficient.  

Under the standardised approach, banks apply much higher risk weights for their underlying book, irrespective of the risk in those loans. The European approach, on the other hand, is more risk sensitive. As a result of the Collins Amendment to the Dodd-Frank Act, the US has adopted the standardised approach as a binding constraint for most banks subject to advanced approaches.

Indeed, because of this capital calculation approach, the bulk of the US CRT market consists of highly granular asset classes such as mortgages and consumer loans. The only corporate deals came from from JPMorgan, HSBC USA and Goldman Sachs (see SCI’s capital relief trades database).

Nevertheless, investors caution that although some trades might be executed for hedging purposes, the primary motivation remains capital relief and unless the regulatory challenges are resolved it’s unlikely that the US market will pick up in the short to medium term.

An investor concludes: ‘’while we occasionally see issuance based on hedging needs, we don’t believe US issuance will materially increase until banks can achieve multiple objectives including capital relief, as is the case with their European counterparts.’’

Stelios Papadopoulos 

Capital Relief Trades

CDS volumes soar

CDS notional volumes break half year record

CDS notional volumes for 1H22 have surpassed the previous high peak which occurred in 1H20 at the height of the coronavirus crisis. The bulk of the activity was concentrated in CDS indices as they offer a liquid way to manage corporate credit risk instead of selling corporate bonds. However, how volumes will fare for the rest of the year remains unclear given the mix of both positive and negative data in the corporate credit space. 

According to this month’s ISDA data, a record US$8.2trn in CDS traded in the first half of 2022. This represents a US$2trn boost compared to the previous high reached during the first half of 2020 at the height of the coronavirus crisis. The bulk of CDS activity was concentrated in the CDS indices that track corporate credit in the US and Europe.

CDS offers investors a liquid way to manage corporate credit risk instead of say selling corporate bonds and CDS dealers have been recommending them to manage tail risk.

According to BNP Paribas analysts, the negative shock of gas rationing is the number one tail risk, with the analysts noting that if Russian gas supplies do not resume after the Nord Stream one maintenance, euro IG and euro HY spreads could widen to 265bps and 850bps. Consequently, tail risk management is a better strategy than panic selling.

The BNP Paribas analysts explain: ‘’to manage tail risk we recommend buying iTraxx Main Payers and underweighting Industrials, Autos and Chemicals. Investors should not panic sell and we do not believe spreads will hit 2008 or 2011 levels. Spreads are cheap, so a resumption of gas supplies would probably send them tighter.’’

The analysts continue: ‘’furthermore, corporate shock absorbers and a likely less hawkish ECB-utilising its anti-fragmentation tool-would help buffer spreads in a negative scenario. Lastly, the market may be underestimating the spirit of European fiscal cooperation which is now far greater than in 2008 and 2011-12, providing room for further fiscal support in the event of a negative shock.’’

European Industrials are in the eye of the storm given that they are incredibly energy intensive – making up an estimated 37% of European gas consumption. The Chemicals industry is at the upper end of the risk spectrum given a heavier reliance on gas which is likely to lead to production curtailments and a sharp rise in input costs if contracts are re-struck with utility companies. BNP Paribas sees ‘’more secondary impacts for the Autos and Metals and Mining sectors via softer demand, supply chain interruptions and rising input costs for alternative energy sources such as coal.’’

However, euro credit has been rallying recently with investment grade and high yield 5bps and 30bps tighter, respectively. Hence, it remains to be seen how CDS notional volumes will fare for the rest of the year.  JPMorgan credit analysts explain that this was mostly fuelled by a considerably better-than- expected set of US inflation data on a month-on-month basis. Indeed, CPI was flat, and PPI fell by -0.5% driven primarily by lower gasoline and commodity prices.

‘’Although we would always caution against reading too much into a single month of data, this reinforces the view that we are hitting a turning point in inflation with continued deceleration over the final quarter of the year’’ say the JPMorgan analysts.

However, the JPMorgan analysts caution: ‘’while we may see an even slower and more meandering path to wider spreads, we do not think we are already past the worst point of the year for euro credit yet. While our market has been buoyed by the improvement in global investor sentiment this week, we think this will eventually be overridden by concerns over the Euro area macroeconomic backdrop.’’

Indeed, energy security remains the biggest concern for JPMorgan as it is for BNP Paribas and impacts cyclical sectors such as chemicals. Spreads therefore could move higher.

Stelios Papadopoulos 

Structured Finance

SCI Start the Week - 15 August

A review of SCI's latest content

Last week's news and analysis
Exposure value disclosed
EBA releases long awaited excess spread consultation
Hedging eyed
Goldman Sachs expected to hedge leveraged loans
MILN revival?
Narrowing spreads and diminished volatility to give CPR to MILNs
Regulatory block
US CRT sector is becalmed and regulators are to blame, say sources
Symbiotic relationship
'Recharacterisation' underway for European 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.

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

BMO busy

Canadian lender in SRT market with third Algonquin of 2022

Bank of Montreal (BMO) is in the market with Algonquin 2022-03, its third securitization from this platform this year.

The deal is expected to close early next week.

The SPV is called Manitoulin USD Ltd, and the Algonquin platform is used to securitize North American senior secured and senior unsecured corporate loans originated by BMO.

Bank of Montreal was unavailable for comment.

The previous Algonquin SRT was priced in April. This came only two weeks after Algonquin 2022-01, which represented the first transaction from the platform since January 2020.

This latest deal consists of four tranches, rated AAA, AA, A and BBB by DBRS.  

Simon Boughey

Capital Relief Trades

L-Street open?

Prior buyers hopeful L-Street will go live again, others sceptical

Fannie Mae is unlikely to re-open the L-Street Securities lender risk-sharing scheme, believe experienced CRT market players.

West coast lender Pennymac was this week reported to be “optimistic” about resuming the programme, which was discontinued in 2020, but others aren’t so sure.

“I personally don’t believe it. Some lenders have been saying it on their earnings call, but I don’t think it is going to happen. If Fannie Mae is reducing its business, why would they give it to somebody else?” says one.

In its 2Q earnings statement, Pennymac said it was “actively engaged in discussions with Fannie Mae and Freddie Mac regarding resumption of lender-risk share transactions.”

Pennymac bought six L-Street securities offerings between 2015 and 2020, through which it delivered almost $120bn of unpaid principal balance in over 400,000 loans.

In such so-called lender risk-sharing investments, Pennymac originated the loans, sold them to Fannie Mae which would be packaged into agency MBS deals. Fannie would then sell the first 4% loss position back to Pennymac, creating a risk transfer agreement for the GSE and also generating a healthy yield for Pennymac.

The advantage for the investor over conventional CAS securities is that it retains the entire first loss position rather than a portion of it and it also assumes the risk from day one rather than after an aggregation period. Moreover, as the originator and servicer of the loan it knows the risk intimately, and this alignment would, it believed, lead to better performance than through the purchase of off-the-shelf CAS bonds.

Fannie Mae’s latest 10Q shows that at the end of 2020, some 42% of all single-family loans had a credit enhancement of some kind, whether it was through conventional mortgage insurance, CAS and ACIS deals or lender risk-sharing deals. Of this, L-Street Securities contributed 4%, but by the end of 3Q 2021, by which time the programme had been shelved, this had dropped to 2%.

Lender risk-sharing programmes were dropped in 2020 as a result of prevailing GSE capital rules introduced by then Federal Housing Finance Agency (FHFA) director Mark Calabria. The 2020 Enterprise Regulatory Capital Framework (ECRF) dis-incentivised regulatory capital relief trades, and Fannie Mae subsequently froze all such transactions, including CAS bonds.

However, Calabria was removed in June 2021 and the ECRF was subsequently tweaked by his successor Sandra Thompson. This has given prior investors such as Pennymac cause to hope that the L-Street Securities programme will be revived.

But market observers wonder if there is enough incentive for Fannie Mae to bring back the L-Street platform.

“They’re not issuing B1 and B2 bonds any more. Why would they give these wide spreads to someone else?” asked one.

Another noted that there would be administrative costs involved in starting up L-Street once more and that this would likely prove a disincentive as well.

Nonetheless, Pennymac has been in discussions with both Fannie Mae and the FHFA and is believed to think that the mood is encouraging.

It thinks the strong alignment of interest between the GSEs and the originator of the loans that lender risk-sharing bonds offer makes them attractive. As the originator of the loans, the investor is in a good position to work closely with the borrower should the latter get into repayment difficulties.

“We can’t comment on FHFA’s directive or our future plans in the CRT market,” says a Fannie Mae spokesman.

Simon Boughey

ABS

Tangible benefits

Ali Ben Lmadani, founder and ceo of ABL Aviation, argues that aircraft are the inflation-beating asset that investors are missing

Central banks across the globe are tightening monetary policy to curb the highest inflation rate in more than four decades. It’s been a rough ride for consumers – food and living costs have soared, as well as the price of energy. In late July, the US Federal Reserve – which, due to its influence, is a benchmark for the health of the global economy – hiked interest rates by 0.75 percentage points to tame surging prices. America’s economy has waned over the last six months, signalling the start of a recession. Many other countries will fall victim to similar downturns.

For business, inflation can be a double-edged sword: some industries are adversely affected by inflation, while others are more likely to benefit. For example, oil companies are making record profits, as the Ukraine war has driven up energy prices and contributed to rising inflation. Aircraft leasing and investment has felt both the positives and negatives. The sector has been hit by rising fuel costs, driven partly by rising oil. But in an inflationary environment, investment in real assets - such as aircraft - may prove to be an effective hedge against inflation.

The economic turmoil looks set to continue, and many economists believe inflation hasn’t peaked yet. We often talk about consumer inflation, but the elephant in the room is how inflation and rising input costs will impact businesses and industries. There has been enormous pressure on corporate balance sheets and investor returns, as borrowing costs have risen and businesses have lost confidence in their capital. While some investments suffer as prices rise, others excel. Aircraft – both the physical planes and the leases and loans used to purchase them – is an investment class that should do well in a high inflation environment.   

Aircraft leasing first emerged in the mid-1970s at a time of high inflation. Back then, many investors found the space attractive because it was seen as a hedge against inflation, which rose as high as 14.4% and was only contained in the early 1980s.

Due to the establishment of major lessors - including Guinness Peat Aviation (GPA) and ILFC - in the mid-70s, as well as a favourable tax landscape, Ireland’s leasing industry boomed and Dublin became the global hub for the sector. At the time, investors were lining up to enter the market and they continue to do so now, as confidence in the aircraft leasing business grows globally. There are still many opportunities – whether for fixed income funds, pension funds or retail investors – to benefit from investing in aircraft through ABS.

Around half of all commercial aircraft are leased by airlines around the world. Typically, aircraft are leased for up to 12 years from aircraft lessors, in return for monthly or quarterly lease payments. The other costs of operating the aircraft – for example, fuel, crew, maintenance and insurance – are for the account of the airline. Airlines are attracted to leasing as it gives them operational flexibility and they don’t need to commit to large capital sums years before an aircraft will be delivered. 

Lessors finance the purchase of aircraft though a variety of different methods, including ABS. These popular financings enable lessors to raise money against a pool of aircraft leased to different airlines. In recent years, ABS has become more popular, as lessors have been able to raise money at more attractive rates and the capital markets have shown an appetite for the sector.

At ABL Aviation, we see aircraft ABS as an attractive opportunity for those looking to make a smart investment that will mitigate against some of the worst impacts of inflation. Tangible assets - such as aircraft and real estate - tend to increase in value during inflation, whereas intangible assets - like stocks and bonds - tend to be less stable investments.

Physical assets are often less impacted by inflation as they can generate consistent and attractive risk-adjusted returns. Inflation-based price rises positively impact the value of aircraft as they age, slowing depreciation. Furthermore, they provide a steady stream of income through monthly lease rental payments. ABS transactions also see limited sensitivity to changing interest rates, as they are mainly floating rate securities.

But as the American economist Edgar Fiedler once said, there’s no such thing as a riskless hedge against inflation. Rising rates may make businesses less poised to take the risk, borrow or sell their assets.

Prices are expected to continue rising for some time, but the appetite for travel remains strong post-pandemic and many travellers haven’t yet been sensitive to rising costs. There remains a strong demand for both commercial and freight aircraft, which were instrumental in delivering key goods - such as food and PPE - during the pandemic.

Investing in aircraft ABS allows exposure to an asset that will benefit from inflation – by generating monthly rental income from a diversified pool of airlines and aircraft. Although aircraft values depreciate over time, inflation will also offset the decreased resale value of the aircraft, meaning an investor looking to sell it may be able to do so at a higher price.

The market for securities backed by leases and loans for aircraft quickly bounced back after Covid-19. Now is the time for more investors to take advantage of this inflation hedge.

Structured Finance

Latvian auto ABS debuts

Sector developments and company hires

Signet Bank has launched the first securitisation in Latvia, in cooperation with car leasing company Primero. The bank supported its subsidiary in the issuance of a €9.46m ABS.

The seven-year transaction consists of a senior tranche and a junior tranche and is secured by a lease and leaseback portfolio of secured auto loans. The issuance is aimed at attracting additional financing to support Primero’s growth plans.

Primero provides financing of new and used cars for both individuals and legal entities for up to seven years and up to €25,000. The company cooperates with more than 200 car dealers throughout Latvia and currently serves more than 6,000 customers.

In other news…

EMEA

Mayer Brown has appointed structured finance lawyer, Ronan Mellon, as a partner in its banking and finance practice in London. Mellon joins the firm from DLA Piper, where he has served as a partner for eight years, and brings extensive experience in representing issuers, arrangers, investment managers, and investors in an array of complex finance transactions. Mayer Brown hopes the new addition will further its investment commitment in London to its banking and finance capabilities and enhance its offering to institutional investors worldwide.

North America

Greystone has appointed Clive Lipshitz as md in its corporate finance group, reporting to Jeffrey Baevsky, executive md in corporate finance. Based in New York, Lipshitz will oversee institutional investor outreach and develop a new investment management initiative. Prior to Greystone, he was responsible for strategy and product development at Credit Suisse Alternative Investments, having previously worked at Brookfield and Tradewind Interstate Advisors.

The move comes as Greystone is set to purchase the B-piece of the US$1.09bn BANK 2022-BNK43 CMBS, marking its first primary B-piece investment. The firm will also serve as special servicer for the conduit offering.

Swiss Re has named Weilong Su head of portfolio management for SRILIAC, its new ILS investment advisory business (SCI 5 August). Based in New York, Su was previously senior ILS portfolio manager at Swiss Re, which he joined in May 2012.

Two Harbours has recruited Nicholas Letica as its new cio to lead the firm’s investment and hedging strategy. Letica joins the firm from TD Securities where he served as md, co-head of securitised products sales and trading, and led its MBS trading business. In his new role, Letica will report directly to president and ceo, William Greenberg, who also previously served as Two Harbours’ cio. The firm hopes the addition of Letica and his MBS expertise will aid the development to its overall agency and MSR strategy.

Structured Finance

MBS social index proposed

Sector developments and company hires

Fannie Mae has published a proposed methodology for single-family social disclosure, which aims to provide MBS investors with insights into socially-oriented lending while preserving the confidentiality of borrowers. At the core of the methodology are three key outcomes that the GSE is seeking to achieve with its Single-Family Social Index: prioritise borrowers; allow investors to identify pools with high concentrations of loans that meet social criteria; and propose an industry-wide solution.

Underpinning the proposal is the concept that social disclosures should facilitate the identification of MBS pools containing loans made to borrowers meeting certain social criteria, such that investors are empowered to support these lending activities. “While a correlation with loan performance is likely, the proposal contemplates that it is not essential for social disclosures to optimise performance insights. At the same time, we recognise that historical performance analysis is necessary to support investor decision-making,” Fannie Mae states.

The Social Index is contemplated as a scoring system comprising three dimensions, for which socially-minded investors have expressed interest: income, borrower and property characteristics. These dimensions are further defined using eight objective criteria that reflect Fannie Mae mission-focused activities, which would be evaluated for each loan pooled in a majority of the GSE’s single-family MBS. Any loan meeting one or more of the eight criteria would be deemed socially-oriented for the purpose of this disclosure.

The GSE hopes that other agency and non-agency RMBS issuers may desire to adopt the methodology – which, in turn, will help drive greater standardisation for social investment in RMBS and amplify the impact of these activities. Indeed, the Social Index could provide a roadmap for issuers to bring labelled Single-Family Social Bonds to market.

Fannie Mae is seeking to engage with investors and other MBS issuers to solicit feedback on the proposal over the coming months, prior to its implementation, and will work with the FHFA to address investor and issuer feedback ahead of and pending FHFA approval. The GSE envisions beginning implementation with MBS, but says that similar disclosures could be considered for CRT securities in the future.

In other news…

North America

CIFC has added two new senior hires to its legal and compliance team. Asha Richards has been promoted to general counsel, and Lily Wicker has joined the firm to serve as md, chief compliance officer, and associate general counsel. Richards has been with CIFC since 2015, most recently serving as deputy general counsel, and has more than 20 years of experience in asset management. Wicker joins the firm from Sound Point Capital Management, where she worked as chief compliance officer and associate general counsel, and in her new role will report to Richards. The firm hopes the pair in their new positions will contribute to its compliance work.

Deutsche Bank has recruited Philippe Kremer as director - structured credit and FIG (Insurance Solutions), based in New York. He was previously director - structured solutions global markets at Citi, having worked in ILS structuring at Swiss Re before that.

Marathon Asset Management has appointed Karen Lau as a senior portfolio manager within its corporate credit group. Lau joins the firm as md and alongside her new role will also serve as a member of the firm’s performing credit investment committee. She will report to cio, Louis Hanover, and will work primarily on the management of the firm's CLO portfolios. Lau joins the firm with extensive experience in portfolio management from Onex Credit where she served ad md and head of US CLOs. The firm hopes Lau’s expertise will help to build and scale its CLO platform and enhance investor relationships.

Structured Finance

ADB co-financing agreement inked

Sector developments and company hires

ADB co-financing agreement inked
The Asian Development Bank (ADB) has signed an agreement with five global insurers that will mobilise up to US$1bn of co-financing capacity to support lending to financial institutions in Asia and the Pacific. The Master Framework Program for Financial Institutions will allow ADB to increase its lending to both commercial banks and non-bank financial institutions in the region through the use of credit insurance. 

Under the agreement, ADB has signed an initial three-year partnership with Tokio Marine Group, AXA XL, Chubb, Liberty Specialty Markets and Allianz Trade. The insurers will cover the risk of non-payment on a portion of ADB’s loans to financial institutions, allowing it to transfer credit risk from its portfolio to the insurers’ balance sheets - thereby freeing up capital, managing its exposures and increasing its lending capacity. 

The programme streamlines the underwriting and approval process for risk transfers and will allow ADB to more efficiently mobilise co-financing capacity.

In other news…

Mortimer residual interest sold
LendInvest has completed the sale of its residual economic interest in the Mortimer BTL 2022-1 RMBS for a cash consideration of £5.8m. Citi's secondary trading desk managed the sale process and purchase for onward sale.

In line with LendInvest's strategy to optimise its funds under management while moving more assets off its balance sheet, the transaction will result in a reduction in the Group's gross loans and advances of circa £280m. The transaction brings forward profit recognition for the Group from future financial years and will therefore generate a net pre-tax gain of £3.3m for full-year 2023.

The difference between the cash consideration and the Group's net gain is driven by gross profit lost in the second half of the financial year, and the impact of no longer consolidating the Mortimer BTL 2022-1 entity into the Group's results. The brought-forward profits are offset by the weaker performance in the Group's buy-to-let division, as a result of volatility in interest swap rates in the 1H22.