Contents

ABS

FFELP forgiveness miss

Student debt relief impact 'unclear'

The Biden Administration last week unveiled its Student Debt Relief Plan, which will cancel up to US$10,000 of federal student loans for borrowers with individual incomes of less than US$125,000 (or US$250,000 for households) and up to US$20,000 for borrowers that received a Pell Grant. While the move is not expected to have a meaningful direct effect on private student loan ABS, the potential impact on FFELP ABS is less clear-cut.

Under the plan, loans eligible for forgiveness are those held by the federal government, which excludes loans backing FFELP ABS and other loans held by private lenders or investors. “Insofar as federal student loan forgiveness encourages repayment of other, non-eligible student loans, other lenders or ABS may indirectly benefit. Private lenders - such as Sallie Mae and Navient - in addition to the private student loan ABS transactions they have originated, may see a modest positive credit impact if federal student loan forgiveness frees up borrower cashflow to repay other debt,” Fitch suggests.

However, this impact could be offset by the resumption of federal student loan payments at the beginning of next year, following the temporary suspension of monthly payments since the onset of the pandemic in 1Q20. Meanwhile, private refinance activity is likely to be delayed, due to loan forgiveness and the extension of the forbearance period through year-end 2022, along with the sharp rise in interest rates since the beginning of the year.

Student loan forgiveness that includes FFELP loans would have a positive effect on some FFELP ABS trusts exposed to maturity risk, as the resulting prepayment could reduce maturity risk for the most vulnerable trusts (SCI 14 July). With the absence - so far - of a qualification date for eligible loans, consolidation under the federal direct loan programme may increase for certain FFELP loan types if they are excluded from loan forgiveness.

Fitch indicates that consolidation activity tied to the Public Service Loan Forgiveness (PSLF) programme may have a similar yet lesser effect on FFELP ABS trusts. “Income thresholds set by the debt-relief plan also mean that loan consolidations would improve the composition of the trusts by likely reducing the percentage of borrowers who are in income-based repayment, strengthening the long-term payment performance of trusts,” the rating agency observes.

Since 31 October 2021, FFELP trusts have seen an increase in the trailing 12-month constant prepayment rate to 10.5% from around 7.5%, as borrowers utilise the PSLF waiver to consolidate. FFELP borrowers can continue to participate in the PSLF programme if their loan is consolidated into a federal direct consolidation loan by 31 October 2022.

Corinne Smith

ABS

Active autumn?

European ABS/MBS market update

The European and UK ABS/MBS primary market looks set for an active autumn after a lacklustre August. The visible pipeline is beginning to build and a heavy potential refinancing calendar stretches over the next few months.

Finnish auto ABS Tommi 3 was announced last week and is slated to price next week. The deal's top two tranches are being broadly offered, making it the first publicly marketed deal since June.

Also emerging this afternoon are details on non-conforming RMBS Parkmore Point RMBS 2022-1. The deal is backed primarily by re-performing owner-occupied and BTL mortgages originated by Kensington and others.

Issuance volumes through the remainder of the year look likely to be bolstered by refinancings. A total of 30 transactions are coming up on their early redemption/step-up dates in the remainder of this year, with concentrations in September through to November, according to credit research analysts at Rabobank.

They note: "The vast majority (23) are UK transactions and, looking at outstanding volumes, the UK stands out at €6.5bn (equivalent) or 80% of the total €8.2bn. The Netherlands is a distant runner-up at €1.1bn. Finally, RMBS is unsurprisingly good for the bulk of the deals, with a lot of non-prime in the mix."

The amount of such deals combined with continuing adverse conditions has led to concerns that many deals will not be called, as was the case in the similarly volatile environment of 2020. However, Barclays European securitised research analysts suggest in a recent report that for 2022, such extension risk is not material.

"In spite of market volatility, we find that all but one deal with call dates in 2022 have been called so far," the report says. "Hence, we continue to expect strong issuance from backbook deals being refinanced through securitisation."

It continues: "We have had no non-call event from a frontbook deal in 2022 yet. Therefore, we are fairly confident that all frontbook deals will be called. Even so, we highlight frontbook deals with call dates in 2022 issued by non-bank lenders, and a handful deals from banks considered new/challenger banks, such as ELVET 2018-1 from Atom Bank."  

The Rabobank analysts concur: "Generally speaking, we expect the majority of transactions to be called (assuming relatively stable spreads), especially from established repeat issuers. For more opportunistic issuers, the decision will be (more) economical and driven by the market conditions and specific transaction economics/details surrounding the step-up date."

Overall, it is expected that September will be an improvement on what was a typically lacklustre August. In 2022, three deals priced versus six in the same month last year, with both years totalling broadly the same headline volume figure.

Equally, both 2021 and 2022 showed a lack of publicly offered deals, as is usual in August. However, the earlier year saw a far higher percentage of pre-placement, indicating the relative strength of the underlying market.

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

Mark Pelham

Capital Relief Trades

Supply story

Helpful technicals boost GSE CRT performance

CRT assets performed well for the second month in succession during August, boosted by supportive technical factors.

The CRTx Aggregate, the flagship index of Mark Fontanilla & Co, rose 3.21% last month and convincingly outperformed most major fixed income assets as inflationary and rates worries ate into prices.

"Higher rates in 2022, led initially by the back end, followed by the belly of the curve swelling, then the short end caught up with Fed tightening - this is a tsunami twister, which has sent rates rolling down the curve," says Fontanilla.

While not immune to these macro trends, the CRT market has been aided by a number of developments specific to it in the last couple of months. Reduced CAS and STACR deal sizes and much diminished B1/B2 issuance have aided the supply-side technical picture.

Issuance is also expected to be lower in the last four months of the year, so these favourable features will persist for the remainder of 2022.

In fact, GSE issuance in August was the lowest of any month this year. Net supply was minus $0.6bn, thanks to the tender offer from Freddie Mac and regular pay downs. This also constituted the third consecutive month of negative supply in the GSE CRT market.

Freddie Mac’s tender reduced the unpaid principal balance (UPB) in the CRTx August basket by $1.3bn, or 1.1%, to $52.3bn.

However, the YTD issuance of $19.4bn in the CAS and STACR markets is much higher than 2021’s full year total of $14.1bn.

Simon Boughey

Capital Relief Trades

Risk transfer round up-2 September

CRT sector developments and deal news

JP Morgan is believed to have delayed the execution of a synthetic securitisation of leveraged loans until allegedly market conditions become more favourable from the lender’s perspective. Finalizing capital relief trades backed by these exposures is currently expensive with Deutsche Bank having recently closed a first loss deal at SOFR plus 19% (SCI 30 August).

Nevertheless, as the Deutsche Bank deal shows, banks keen to hedge concentration risks are still able to price trades. Goldman Sachs is the latest originator expected to finalize a leveraged loan deal in 2H22.

Stelios Papadopoulos 

Capital Relief Trades

Concentrations hedged

Deutsche Bank closes leveraged loan SRT

Deutsche bank has finalized a 7.5-year synthetic securitisation that references a revolving US$2bn portfolio of US and European leveraged loans. Dubbed LOFT 2022-1, the transaction was upsized from an initial portfolio size of US$1.5bn and it’s riding a wave of capital relief trades backed by such exposures as banks aim to hedge concentration risks amid rising rates and inflation.

The trade features a first loss tranche (0 - 10%) priced at SOFR plus 19%, a junior mezzanine tranche (10% - 14%) priced at SOFR plus 7.5% and a senior mezzanine tranche (14% - 19%) priced at SOFR plus 6%. The blended spread totals 13.2% for the US$380m of issued credit linked notes.

Oliver Moschuering, global portfolio manager, strategic corporate lending at Deutsche Bank notes: “LOFT 2022-1 is part of our broader synthetic securitisation programmes that have been in operation for many years. This deal follows a successful leveraged loan securitisation in 2018. It is a cost-effective way of hedging default and concentration risk and reduces the amount of capital that needs to be held against the loans.”

The last LOFT deal was priced at a 13.25% spread in 2018 and consisted only of a 0%-15% first loss tranche (see SCI’s capital relief trades database).

The latest trade from the LOFT programme is riding a wave of leveraged loan issuance in 2022 as banks attempt to hedge concentration risks amid a rising interest rate and inflationary environment. Goldman Sachs, JPMorgan, Societe Generale and Credit Agricole are all expected to close such trades this year. 

Stelios Papadopoulos  

Structured Finance

S&P Global bolsters private markets offering

Sector developments and company hires

S&P Global has announced the acquisition of the private markets data solutions provider, Private Market Connect (PMC). The acquisition will integrate the platform into the firm’s market intelligence division and will increase the breadth and depth of its data solutions for Limited Partner and General Partner customers. PMC currently tracks over 15,000 unique funds and US$1.2trn in private markets commitments. Prior to the acquisition, S&P was a 50% stakeholder in the business and has now acquired the remaining 50% stake from Hamilton Lane. After closing, S&P will continue to offer data solutions to Hamilton Lane.

In other news…

Asia Pacific

Validus and Citi have established a new US$100m securitisation facility collateralised by SME loans originated by Validus in Singapore. The securitisation facility marks the first example of a collaboration between a large global bank and a fintech in Southeast Asia. The new facility also has participation from the Singapore-based multi-asset investment manager, First Plus, and was launched early in the second quarter of this year. Since the facility was established, Validus has doubled its borrower base in Singapore and expanded its loan book by 60%. The firm hopes that the securitised lending structure, alongside a diversified financing and product strategy will enable even greater group growth.

EMEA

Debitos is expanding its business into Italy with the opening of a new branch in Milan, marking the establishment of its first branch outside of its Frankfurt headquarters. The new office will be led by Francesco Paolo Bellopede, Debitos’ country director for Italy, who will be joined by four new recruits expected to join the firm by the end of the year. Debitos hopes its presence in Milan will aid its service of its growing Italian client base and partners, as well as its existing pipeline of credit transactions that has already been secured through the region.

North America

MetLife Investment Management (MIM) is set to acquire the specialist ESG manager, Affirmative Investment Management (AIM). MIM hopes the acquisition will help expand its sustainable investing solutions for its institutional clients, while also strengthening AIM’s mission to manage high-performing portfolios that consider positive environmental and social impact. MIM intends for the acquisition of AIM, which held a total of US$1.01bn in assets under management as of June 2022, will help boost its ESG investment and reporting capabilities. The transaction is subject to customary closing conditions and regulatory approval.

Structured Finance

SME funding partnership inked

Sector developments and company hires

SME funding partnership inked
SME Capital and JPMorgan have agreed a new funding partnership dedicated to supporting UK SMEs. The collaboration entails JPMorgan extending a significant line of committed capital for SME cashflow lending over the next three years.

The partnership forms the second phase in the development of SME Capital’s warehousing programme - the first phase being the initial commitments from current investors SCIO Capital and Prytania Asset Management in March 2021. SCIO and Prytania will continue to invest in the programme and support more UK SMEs with a range of bespoke funding packages.

In other news…

CLO maturity wall considered
The looming European CLO maturity wall has prompted S&P to consider the potential adverse effects that tighter financing conditions may have on CLO credit performance and ratings going forward. Of the collateral backing EMEA CLOs that the agency rates, €8.5bn - or 7.8% of the total par balance - will mature by end-2024. A further €15.7bn and €25.9bn of underlying loans mature in 2025 and 2026 respectively.

S&P ran four scenario analyses with different levels of CLO asset defaults, trading losses, downgrades and recovery timings. Overall, CLO ratings demonstrated considerable resiliency to these additional stresses, according to the agency.

Read the full story in SCI CLO Markets.

EMEA
Due diligence and business review provider Rockstead has named John Barbour as director of operations. He was previously md of Commercial First.

North America
Greystone has appointed Thomas Wayda as an md, based in New York. He was previously svp, structured real estate finance at Meridian Capital Group, which he joined in July 2017. Before that, he worked at Starwood Capital Group, Wells Fargo and Morningstar in a variety of CMBS-related roles.