Contents

Capital Relief Trades

Consumer SRT launched

Santander prices significant risk transfer trade

Santander has priced a full stack significant risk transfer transaction backed by a portfolio of German unsecured consumer loans. Dubbed SC Germany Consumer 2022-1. The differences with previous tickets from the same programme are limited but the market dynamics this year are more complicated.   

Rated by Fitch and Moody’s, the transaction consists of €756m class A notes (priced at one-month Euribor plus 70bps), €44m class B notes (2.75%), €55m class C notes (3.75%), €40m class D notes (5.5%), €51m class E notes (8.5%) and €26m retained class F notes (12%).

Fitch has set its default base case at 4.5%, which is lower than that determined for the predecessor transaction in November 2021 but remains above recent vintages.

Fitch notes: ‘’there is uncertainty regarding economic dynamics in Germany due to looming shortages of energy supply, the persistence of supply chain disruptions, weakening international trade, as well as higher inflation. These factors combined might impair the ability of borrowers to service debt.’’

Fitch continues: ‘’Yet the base case setting recognises the originator’s prudent risk management over recent years. A buffer above the pre-pandemic default vintages is built into the base case which appropriately reflects our expectation of a more challenged economy over the next 12-18 months.’’

The tranches amortize on a pro-rata basis with the class F notes aimed to be paid from November 2022-the first payment date in the revolving period-via excess spread from the interest priority of payments. Class F is also paid back via the principal priority of payments.

According to Fitch’s cash-flow modelling, the full repayment of senior notes is dependent on the length of the pro rata attribution of principal funds. Fitch finds the three-month rolling average dynamic net loss ratio to be the most effective trigger to stop the pro rata period in the event of performance deterioration. This makes the transaction less sensitive to cumulative loss assumptions during the replenishment period than for most other recently encountered pro rata structures in EMEA ABS.

Finally, as with other full stack SRTs, the rise in Euribor swap rates and higher funding costs have led to materially lower excess spread compared to the predecessor transaction.  Hence, more ‘hard’ credit enhancement, such as overcollateralization and a higher cash reserve, has been introduced in the transaction compared to its predecessor to cover the scenario-specific loss assumptions in the different rating scenarios.

Stelios Papadopoulos 

Capital Relief Trades

Full stack SRT launched

BNP Paribas executes capital relief trade

BNP Paribas has finalized the latest full stack capital relief trade from the Autonoria programme for its Spanish subsidiary Banco Cetelem. The transaction is backed by a revolving Spanish auto loan portfolio and features higher hedging costs, as with other full stack deals following interest rate rises. However, unlike other lenders, BNP Paribas has addressed higher hedging costs by adjusting the eligibility criteria to raise rates on the underlying exposures (SCI 16 September 2022).

Rated by Fitch and Moody’s, the transaction, consists of €493.5m class A notes (priced at one-month Euribor plus 0.84%), €15m class B notes (2%), €24m class C notes (2.8%), €12m class D notes (4.2%), €27m class E notes (7%), €9m class F notes (8.5%), €19.5m unrated class G notes (12%).

The class A-G notes will amortise pro rata if certain principal deficiency ledger (PDL) and default-based performance triggers are not breached. The length of the pro-rata period and therefore outflow of funds to junior positions on the waterfall is driven by the absolute level and timing of defaults.

‘’Lower defaults with back-loaded timing may lead to a later switch to sequential amortisation and could be more detrimental for the notes than higher defaults with a front-loaded timing’’ notes Fitch.

The portfolio includes a small share of recreational vehicle loans (0.7% of the portfolio balance), which carry a higher average outstanding balance, longer initial tenor, and lower interest rates than the other products.

‘’We expect recreational vehicle loan defaults to be more volatile under stress due to the non-essential nature of the vehicles financed, as reflected by the higher default rating multiples calibrated in our analysis’’ concludes Fitch.

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round up-5 October

CRT sector developments and deal news

HSBC is believed to be planning a synthetic securitisation backed by UK corporate loans. The bank’s last capital relief trade was finalized last year and referenced US corporate loans

Stelios Papadopoulos 

Capital Relief Trades

US CRT return continues

Morgan Stanley finalizes capital relief trade

Morgan Stanley has priced a synthetic securitisation that references a portfolio of capital call facilities. The transaction is the second capital relief trade from a large US bank following the recent execution of a leveraged loan deal from Goldman Sachs (SCI 22 September). The New York Federal Reserve has stopped granting capital relief since last year (SCI 9 August), but the Morgan Stanley trade is seemingly aimed for capital relief amid rumours that Goldman Sachs has also been granted relief for its own trade.  

The deal is said to feature a tranche thickness of 0%-12 and priced between 5%-6%. The large thickness reveals that it’s driven more by capital relief which is surprising given that US supervisors haven’t been granting relief since 4Q21 last year. However, Morgan Stanley could simply have designed the transaction for this purpose with a decision on relief still pending.

Capital call facilities are low risk portfolios and come with lower risk weights, so the US bank could have placed a thinner piece. However, US capital relief trades tend to have thicker tranches, but the thickness of the tranche depends on whether the bank is bound by the standardized or advanced approaches.

If they need capital relief and they are bound by the standardized approach then the deal will end up with thicker pieces. The Morgan Stanley transaction coincides with rumours that Goldman Sachs has been granted relief for its leveraged loan CRT.

Issuance of synthetic securitisations backed by capital call facilities has been soaring since last year as banks seek limit relief to expand this business line (SCI 16 November 2021). Standard Chartered is the latest bank believed to be readying such a trade.

Stelios Papadopoulos 

Insurance-linked securities

Wide Arch

Pricing wider and more reinsurance in latest Arch MILN

The pricing was wider than Arch anticipated in its recent Bellemeade Re 2022-02, says the borrower.

Levels across CRT capital markets products have been sharply higher since the spring due to a host of economic and geopolitical factors, and this was certainly reflected in this trade - which was Arch’s first in the mortgage insurance-linked note (MILN) sector since January.

The $52.86m M1-A tranche was priced at SOFR plus 400bp, the $105m M1-Bs were priced at plus 750bp, the $21.57m M2s came in at SOFR plus 925bp and the $21.57m B1s yielded SOFR plus 1200bp. The trade settled at the end of September.

“Pricing in the fixed income market was wider than expected. However, our blended approach of using both the fixed income market and the reinsurance market in our execution delivered results that were in line with our expectations,” says Jim Bennison, executive vice president, alternative markets at Arch.

The 100% fully funded deal was worth $358m and it is believed Arch sought $251m of this through the capital markets, say reports. However, the unfriendly nature of the fixed income sector meant Arch sold only $201m with investors and the remainder was placed in the reinsurance market.

“In this transaction, reinsurance accounted for 43.9%, which is greater than prior deals and is reflective of current market conditions,” says Bennison.

The progress of this trade underlines the trends of this year: less credit risk transfer has been accomplished in the debt market and an increasing share has gone to the reinsurance market.

Essent brought Radnor Re 2022-01 earlier in September, and less was fully funded in this transaction than was initially expected as well.

Market sources have suggested that Arch brought Bellemeade 2022-02 to demonstrate its commitment to the market rather than because it made strict economic sense but Bennison refutes that notion.

“We only do transactions that make economic sense for the business. The overall execution for this transaction was accretive from an economic standpoint while demonstrating our continued commitment to both the fixed income and reinsurance markets,” he says.

Only four MILN deals have been done this year with an overall dollar value of $6.3bn, compared to 14 in 2021. Nonetheless, Bennison also believes that the MILN market will survive and prosper despite the current dislocation.

“Since 2015, tens of billions in capital have been raised from capital markets investors. The MILN market has evolved significantly since 2015 accommodating several periods of volatility while continuing to grow,” he says.

Simon Boughey

RMBS

Testing the waters

European ABS/MBS market update

Following last week’s record €4bn securitisation BWIC volume, European and UK ABS/MBS secondary market activity is fading. At the same time, the primary market is still not completely shut, with a few deals out and testing market conditions.

“The real action has certainly been for the most part in the secondary market with undeniably elevated volumes,” notes one trader. While the secondary market was swamped last week, indicative spreads widened across the board, ending multiple consecutive weeks of spread stability.

However, the trader describes the current context as “relatively orderly”. He says: “If you look back to March-April 2020 at the start of the pandemic, last week definitely held up better than that. We are still seeing certain dealers buying top of the stack bonds and willing to step up. I think that this is the positive for the market.”

Despite last week’s difficulties for UK RMBS (SCI 30 September), Citi managed to close a refinancing of its Canada Square Funding 2019-1 transaction yesterday. Canada Square Funding 7 was mandated and priced in less than 24 hours, with no public release of IPTs. The class A notes were structured as a loan note and listed as ‘not offered’, with only the B-E tranches offered to investors.

“Given the nature of the transaction and the loan note, it does not fully test the market,” says the trader. “However, compared to last week and deals being pulled, the fact that a refinancing is being announced is actually welcome news for the market.”

In this space, another RMBS deal will shortly be competing for investor attention as Finance Ireland announcing a fresh Irish STS Prime RMBS – backed by a circa €413m static portfolio of 1,750 prime mortgage loans. The senior notes are publicly offered, however the mezzanine tranches are only offered on a ‘call desk’ basis.

Pricing is expected during the week commencing 10 October. “I think it will do well,” says the trader. “To pivot on prime STS in euro ABS at the moment is a sound option.”

Also expected to price next week is CA-CIB’s remarketing of the previously retained Ginkgo Auto Loans 2022 class A notes. Commenting on this deal, the trader notes: “I imagine it is purchase programme eligible, which should withstand a lot of the volatility. However, the timing is bit odd and it is a long time to be out on the market at the moment given the current backdrop.”

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

Vincent Nadeau

Structured Finance

CLOs in an age of economic uncertainty

We are currently going through a difficult economic environment – with rising interest rates, a credit squeeze, inflation and currency volatility, explains Rob Reynolds, md and head of CLOs at Pemberton.

After years of cheap money, investors are naturally being more cautious and selective about where they invest their money.

CLOs are one product that has consistently served as a buffer during times of economic distress. But being based on loans and concerns about rising default risk, investors might ask whether they can still fulfil this role.

Research¹ shows that the default rate of loans in CLO portfolios is less than half the reported level for the loan market as a whole. Default rates for CLO tranches themselves are materially lower again.

This is likely due to the way CLOs are structured and managed. For example, there are predetermined parameters which limit individual position sizes (irrespective of the size of the underlying debt tranche), restricting investment in the riskiest loans. They also include a range of portfolio metrics (for example, weighted average spread, weighted average rating, over-collateralisation tests) which protects note holders by providing a cushion. Furthermore, as CLO portfolios are dynamically managed, they can reduce exposure to deteriorating risk.  

Between 1996 and 2020, there were a total 62 note defaults out of 16,806 CLO notes issued.² This is equivalent to a 0.4% total default rate over 24 years. These defaults were in all in respect of CLO 1.0 vehicles (defined as those issued before 2010). Where defaults have happened, S&P research shows they tend to be concentrated among only a small handful of CLO managers. The vast majority of these managers have since been unable to issue further CLOs. Indeed, investors’ memories are long. 

S&P found that problems arose mostly after the reinvestment period during the portfolio’s amortisation phase. The impact of rating downgrades and defaults were magnified as portfolios shrank in size owing to the concentration of fewer assets. Good assets being repaid left a tail of poorer quality assets, while at the same time the cost of the structure increased, reducing the cushion.

So, what’s the outlook for CLO 2.0?

Their historic performance and resilience speak for themselves, indeed most recently through the height of the pandemic, but there have also been structural changes to CLOs since 2010 (known as CLO 2.0) that, in our opinion, suggest they will continue to withstand current market conditions.

S&P’s research points to them having a higher proportion of senior secured loans, no synthetic products, no structured credit holdings and a higher triple-C tolerance. This makes for a more stable, secure product that is built on the basis of withstanding shocks. 

CLO 2.0 vehicles also typically have higher levels of subordination, giving greater protection to note olders, and shorter non-call periods which allow managers to more easily adapt to changing market conditions. 

Possibly the most dramatic change, in our view, was the introduction of the concept of 'risk retention', where the manager is required to invest 5% into the CLO. The objective of this was to ensure that the interests of CLO noteholders and the collateral manager are aligned.

With all this in mind, what can we expect in the months ahead? We believe CLOs will likely continue to remain a popular asset for investors looking for returns in difficult market conditions. Indeed, those CLOs that are still in reinvestment mode may be able to take advantage of current market conditions, with secondary assets trading at a discount to build par and increase par value coverage. However, taking on board the lessons from the first generation of CLOs, managers remain on notice to manage tail risk in amortising vehicles and ensure that their products continue to offer stability in a difficult time.

Sources

¹Meredith Coffey of the LSTA dated 13 July 2022 (CLOs: Superior Performance - LSTA)

²Default, Transition, and Recovery: 2020 Annual Global Leveraged Loan CLO Default And Rating Transition Study | S&P Global Ratings (spglobal.com)

Structured Finance

Staying on track

Stefan Rolf, global head of securitisation and private debt at IQ-EQ, answers SCI's questions

Q: Your role was established when you joined IQ-EQ in July (SCI 19 July). Why has the new position been created and what does it entail?
A: In a nutshell, the new role will see me further developing IQ-EQ’s securitisation and private debt offering worldwide – building out our client base in this space and expanding upon the existing administration service offering. The creation of the role comes in the context of IQ-EQ’s overall strategy, which is based on its three servicing segments: fund and asset managers; private and institutional asset owners; and debt, capital markets and corporates.

Traditionally, IQ-EQ’s backbone has been its funds business. Now, the group is aiming to diversify its offering more widely and focus on adding further strength to its other segments - in this case, the capital markets area. My appointment has come alongside two other recent key hires: the head of insurance and the head of debt restructuring. So, my new role is not to be seen as an isolated single step, but as an integral part of a broader build-out of the segment as a whole.

Q: How is IQ-EQ seeking to extend its service range in securitisation and private debt?
A: The funds business serves as a strong core of IQ-EQ’s business today and, as such, the current product range in the securitisation area focuses predominantly on fund administration and corporate services. The aim is to expand the product and service range along the entire value chain, adding advisory, structuring and distribution service capabilities to enhance the client experience journey into a one-stop shop.

Q: What role do administration capabilities play in advisory, structuring and distribution services? How do you hope to improve on these?
A: It is not only about a single or a few products being improved or added. The aim is to build a fully integrated solution for the client - from onboarding, via advisory on financing or balance sheet management solutions, to data cleansing and reporting, structuring and placement solutions, and of course fund administration and corporate services from the beginning until the close of the fund. Ultimately, the client will decide if they wish to engage IQ-EQ for the complete solution or selected modules.

Q: How is IQ-EQ looking to expand in the future? Are there any particular opportunities you are looking to capitalise on?
A: IQ-EQ has ambitious growth and revenue targets and will continue to grow organically and inorganically in the years to come - particularly in key growth markets such as the US and Asia. Going forward, we will seek opportunities to further leverage our technology-driven, scalable and customer-centric business approach, as well as our highly efficient use of capital to cement our leading position.

Q: How does IQ-EQ differentiate itself from competitors?
A: IQ-EQ is a very entrepreneurial place, where focus isn’t on hierarchy but rather on having open discussions to find the best solution for the client. This not only makes us more agile but also special in the way we go the extra mile. We are always striving to improve, to evolve in line with our clients’ needs and be a true partner to our clients.

Q: How do ESG considerations fit into IQ-EQ’s business?
A: ESG considerations are right at the centre of all we do – both in terms of our clients’ needs and our own ESG credentials. On the client side of things, IQ-EQ’s mission is to help global investors invest and preserve capital in a sustainable and compliant manner. Last year, we launched IQ-EQ Compass, an integrated platform focused on helping clients achieve ESG compliance and build resilience - primarily through benchmarking, analysis and consolidated reporting - and we’re now making moves to further expand our ESG service offering across our segments.

As a group, we have an ESG statement that sets out our global approach to sustainability and forms the basis of our decision-making. We have a growing sustainability team to build upon this agenda, we’re a signatory of the UN PRI and a participant of the UN Global Compact. We’ve also recently partnered with Eden Reforestation Projects and made significant steps towards achieving gender equality in our senior ranks, such that one-third of our group management team is female – the list goes on.

Q: What do you anticipate for the future of the market and IQ-EQ’s role in it?
A: The current market environment is volatile and challenging and will continue to be this way for some time to come. Nevertheless, I strongly believe that this is exactly why we will be much more successful in the future than many of our peers and achieve our group ambition to be the leading investor services provider globally.

We take on the challenge, carefully analyse the situation of each of our clients and make use of the opportunity that dynamic market environments offer. We do so by being a very good listener, and by being agile and focused on our clients and our core values over the long term.

Claudia Lewis

Structured Finance

Leibniz Institute and European DataWarehouse win grant

Sector developments and company hires

The German Federal Ministry for Education and Research has awarded a grant to the Leibniz Institute for Financial Research SAFE and the European Datawarehouse (EDW). The grant has been awarded under the ministry’s Climate Protection and Finance (KlimFi) funding initiative to undertake a three-year project to promote the green auto ABS market. The project, named ‘Green Auto Securitisation’ (GAS), will work to create meaningful incentives for the automotive industry - as well as stakeholders and end users - to establish a framework for a green finance mechanism that supports the financing of low-emission vehicles (LEVs) through bank lending. The GAS project will specifically work to contribute to the KlimFi’s funding initiatives’ objectives by proposing a framework for new and climate-friendly products, as well as making improvements on quality. The database would enable the reporting of ESG-related information at a single exposure level, and the enrichment of loan and lease-level data with manufacturers’ ESG ratings and details on car emissions and characteristics. EDW will develop the ESG database as a tool useful for the study of the nascent market for green auto loans/leases, as well as for the development of corresponding credit risk models – and therefore facilitating the researchers of Loriana Pelizzon’s team at SAFE to compile reliable research results.

In other news….

EMEA

AnaCap Financial Partners has finished the carve-out of its credit business. The leadership of the specialist mid-market private equity investor in financials, technology, and related business services' credit business will establish a new investment advisory business – Veld Capital. Veld will advise the existing credit funds and raise additional funds to be led by the same dedicated team and will continue to utilise the firm’s existing investment approach and broad networks across Europe. Since its initiation in 2009, AnaCap’s credit business has deployed over €2bn into credit-oriented opportunities, beginning by targeting non-core assets from financial institutions across Europe. Financial details of the transaction have not been disclosed, but AnaCap’s European private equity business will remain at the centre of the franchise.

North America

Apollo Funds is set to acquire a minority stake in the alternative asset manager focused on global credit markets, Diameter. The acquisition of a 5% equity interest in Diameter by funds managed by Apollo – including its affiliate Redding Ridge – will help support the development of the New York-based alternative asset manager’s alternative credit platform into direct lending and European credit. The minority investment also builds upon the existing strategic relationship between the firms, following on from capital commitments that helped launch Diameter’s US CLO business last year. Apollo’s investment brings its to-date funds deployed by funds affiliated with Apollo and Redding Ridge to more than US$1bn of debt equity capital across Diameter’s CLO and CBO investment strategies.

Freddie Mac has priced STACR 2022-DNA7 via joint bookrunners Nomura and Credit Suisse. The co-managers were BTIG, Citigroup, JP Morgan and StoneX. The notes settled on 30 September 2022. This trade consisted of a $237m M-1A, yielding SOFR plus 250bp, a $180m M-1B yielding SOFR plus 500bp and a $100m M-1 yielding SOFR plus 700bp.

Moody’s Investors Service (MIS) has published a new assessment framework for offering Second Party Opinions (SPOs) on sustainable debt. The new framework succeeds the transfer of Moody’s SPO business from its ESG Solutions Group to MIS. The new framework establishes how MIS provides SPOs on green-, social-, and sustainability-labelled financial instruments or financing frameworks following a use-of-proceeds or sustainability-linked approach. The MIS SPO assessment framework will score on the alignment with green, social, and sustainability practices, produce a score marking contribution to sustainability across environmental, social, and governance externalities, as well as offering an overall sustainability score. MIS SPOs and their underlying scores are reflective of point-in-time analyses which can be updated upon request by the issuer and are intended to operate as an additional tool for market participants to use in conducting their own analysis.

Structured Finance

Syco Entertainment lands US$125m deal

Sector developments and company hires

A landmark US$125m securitisation of intellectual property has been completed by the Simon Cowell-founded company, Syco Entertainment. The intellectual property is the Got Talent Franchise, including the America’s Got Talent and Britain’s Got Talent formats commissioned in 72 territories across the globe. The complex transaction marks the first instance of leveraging royalty income streams for the securitisation of the intellectual property of media formats, a structure more commonly applied to royalty income streams in the music industry. The transaction will allow for further company growth, with reported intentions of further acquisitions and growth projects. Syco’s securitisation has been dubbed as the first of its kind for its securitisation of different aspects of the Got Talent intellectual property – including product margins and fees, digital income, franchise and original content sales, as well as sponsorship income. Syco was advised in the transaction by London-based international law firm Memery Crystal as legal counsel, with the media and entertainment investment bank, ACF, acting as the lead bank, advising Syco both in the UK and the US.

In other news…..

EMEA

AlbaCore Capital Group has appointed Seán Golden to lead the European credit specialists’ expansion into structured credit. As of December, Golden will lead the development of Albacore's investment capabilities in structured credit as md and deputy portfolio manager. Golden joins the firm from Alcentra, where he spent a decade of his structured credit career, most recently serving as executive director of structured credit. The firm hopes Golden’s expertise in structured products will allow Albacore to unlock the potential being witnessed in European CLO liabilities and elsewhere.

Alvarez & Marsal has appointed Vic Pichon as a director in its structured credit and portfolio advisory team in London. Previously, he was director - capital markets at LendInvest and before that worked at Prodigy Finance, S&P, Dexia, BPCE, Moody’s and Natixis.

North America

Ambac Financial Group has announced the settlement of its RMBS litigations against Bank of America. The firm confirmed today that its subsidiary, Ambac Assurance Corporation (AAC), had entered into an agreement to settle all of its claims against BofA and related entities for US$1.84bn. Ambac estimates it will gain with respect to the settlement approximately US$390m, as the sum exceeds the amount of subrogation recovery recorded on its 2Q22 financial statements. Some of this gain will appear in Ambac’s Q3 financial results, with the remaining portion set to be recognised in Q4 financial results. In addition to this, AAC will repay all outstanding Stika Notes of around US$1.21bn and a further US$213m of Tier 2 notes, with funds expected to be received within 10 days following the satisfaction of certain conditions – including the dismissal of all pending RMBS litigations. Ambac recorded a gross subrogation on its balance sheet of US$1.48bn for the period ending 30 June 2022 relating to RMBS representation and warranty litigation, of which US$1.38bn related to BofA litigation, and the balance relating to AAC’s case against Nomura Credit & Capital and Nomura Holding America. Ambac hopes the settlement will materially advance its strategic priority to progress its subsidiary, AAC, as well as building optionality for its legacy financial guaranty business.

BMO has named Bilal Nasir md and head of CLO trading, based in New York. He was previously director, head of US CLO trading at Deutsche Bank. Before that, Nasir worked at BNP Paribas, Barclays and Lehman Brothers.

CIFC has hired T. Michael Johnson as md and global co-head of business development in a bid to improve the firm’s relationships with existing and prospective clients. In his new role, Johnson will lead CIFC’s multi-strategy credit platform alongside the firm’s existing global co-heads of business development, James Boothby and Joshua Hughes. Johnson brings 20 years of alternative investment sales experience, joining CIFC from Carlyle Global Credit where he most recently served as md and head of investor relations.