Contents

Capital Relief Trades

New opportunities

CRT opportunities assessed as central banks pull back

CRT investors are assessing new opportunities in the market as central banks pull back from years of accommodative monetary policy. CVA hedges continue to emerge as an attractive opportunity as markets face the prospect of higher volatility (SCI 24 May). However, managing concentrations in this environment is key.

According to Giorgio Gallo, portfolio manager at Chorus Capital, ‘’corporate fundamentals are stronger than previous cycles, but central banks are now pulling back and that means more volatility and tail risk. This is a positive for CRTs overall as we expect higher yields to more than compensate for the increase in defaults, although prudent single name underwriting, and concentration risk management remains crucial in this environment.’’

Recent episodes with European utilities and UK pension funds exemplify how elevated market volatility can spill-over onto higher idiosyncratic risk. The easiest way to address these concentration risks is to either structure transactions with lower borrower concentration limits or to lower investment sizes.

Gallo notes: “persistently higher volatility implies persistently higher market risk RWAs and CVA charges going forward. While the impact of the former on capital ratios can only be mitigated indirectly through traditional CRTs, the latter does open an interesting opportunity for investors to access a diversifying pool of corporate exposures – and for issuers to release capacity on a profitable business.”

CVA refers to the credit valuation adjustment which is a change to the market value of derivative instruments to account for counterparty credit risk. It represents the discount to the standard derivative value that a buyer would offer after considering the possibility of a counterparty’s default. Hence, the CVA hedge would involve covering counterparty credit risk.

Alternatives to CVA hedges are single-name credit default swaps or indices but these are imperfect since they cover a subset of events of default or do not perfectly overlap with the book. Consequently, from a diversification perspective, CVA hedges are now a solid opportunity for CRT investors.

Gallo’s assessment is reflected in official data. According to the EBA’s risk dashboard, both market and credit risk RWAs have gone up with market risk RWAs having increased by 31.1%, albeit from a lower base for most banks. Credit risk RWAs continue to explain the bulk of the RWA rise in absolute terms.

Indeed, market risk contributes only 4.1% to total EU RWAs. However, the dispersion among banks as well as countries is wide. For the latter, the share ranges from below 1% to nearly 10%. Heightened market volatility is also reflected in the ratio of net trading income-including fair value results-to equity, which was 2.9% in 2Q22 compared to 3.2% last quarter and 2.4% a year ago. Rising rates and macroeconomic uncertainty have led to further yield increases and spread widening- including sovereign spreads-as well as additional corrections in equity markets, which affect banks’ share and bond holdings.  

Market risk can only be hedged via derivatives but if there’s volatility, the capital for derivatives positions receives a boost, thus adding to the overall RWAs.

Meanwhile, appetite for consumer portfolios has been dwindling given their sensitivity to higher inflation and unemployment levels. Investors such as pension funds have been selling the senior tranches of full stack consumer ABS transactions. Along with higher hedging costs, this has largely depleted the amount of excess spread available for the junior tranches (SCI 16 September), thus increasing the coupon and credit enhancement demanded by CRT investors.

Although structuring consumer transactions as synthetic securitisations remains an alternative, this can present several other challenges, such as fully capitalizing synthetic excess spread. Hence, banks have attempted to address higher hedging costs by boosting the liquidity reserves of the full stack deals. However, arrangers note issues with this approach. Specifically, if the financing that’s used for the liquidity reserve is junior in the waterfall, it can be treated as a securitisation position and hence fully capitalized.

Overall, executing consumer CRTs will remain difficult in the short to medium term. Yet they always will be a fraction of the market, with the bulk of market issuance focussed on corporate loans given the efficiencies that accompany the hedging of this asset class for originators. 

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 24 October

A review of SCI's latest content

CRT awards announced
SCI’s 2022 Capital Relief Trades Awards winners and honourable mentions were announced at a ceremony last week. Many congratulations to them all for their outstanding contributions to the risk transfer industry over the last year! And thanks to our awards advisory board – comprising Holger Beyer of Alantra, Pratik Gupta of BofA Securities and Olivier Renault of Pemberton Capital Advisors – for its invaluable input. For the full list of winners, click here.

Last week's news and analysis
Backward trigger dropped
EBA amends initial STS SRT consultation
Conservative approach
Aeon Investments answers SCI's questions
CRE CLOs: time to zig when others zag
When it comes to structured CRE credit, the European market is at a pivotal juncture
Natural evolution
CLO docs, structures adapting to macroeconomic conditions
Ramping up
Bank of Montreal prices synthetic ABS
SCI CRT Awards: North American Transaction of the Year
Winner: Algonquin 2022-1
SCI CRT Awards: Transaction of the Year
Winner: Project Triton
SRT debut
First Bulgarian synthetic ABS finalized
Swell spreads
Risk pricing means bonds stay costly for GSEs, say speakers at Miami
Through a glass darkly
Regulatory transparency would kickstart US CRT, say Miami speakers

For all of last week’s stories including ‘Market moves’ and ‘Risk transfer round-up’ click here.

Free report
SCI has published a Global Risk Transfer Report, which traces the recent regulatory and structural evolution of the capital relief trades market, examines the development of both the issuer base and the investor base, and looks at the sector’s prospects for the future. Sponsored by Arch MI, ArrowMark Partners, Credit Benchmark and Guy Carpenter, this special report can be downloaded, for free, here.

Podcast
SCI has launched a new podcast series covering all things securitisation and engaging with some of the best minds in the industry! To access the podcast, search for ‘SCI In Conversation’ wherever you usually get your podcasts (including Spotify and iTunes), or 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
US CLO ETFs - October 2022
The popularity of CLO ETFs is set to increase, given the current rising interest rate environment. This Premium Content article investigates how the product has opened up the CLO asset class to a broader set of investors.

STS synthetic securitisation - September 2022
The adoption of STS synthetic securitisation has helped legitimise the capital relief trades market. However, this Premium Content article outlines how the EBA’s most recent consultations could prove challenging.

SCI events calendar: 2022
SCI’s 3rd Annual Middle Market CLO Seminar
15 November 2022, New York

Capital Relief Trades

SCI CRT Awards: Impact Deal of the Year

Winner: FCT Greendom 2021

Societe Generale’s FCT Greendom 2021 has won Impact Deal of the Year in this year’s SCI Capital Relief Trades Awards. Greendom marks the first CRE-backed transaction to be structured in compliance with the new STS synthetic securitisation regulatory framework introduced to assist in post-Covid-19 crisis recovery.

The transaction references a €1bn portfolio of more than 50 high-quality commercial real estate facilities, a decidedly unusual underlying asset class for synthetic securitisations. “Considering that the pool was not very granular, we provided a high level of disclosure with investors – investors which we also had to identify as suitable, who were able to perform some kind of fundamental credit analysis on a line-by-line basis, so they could acquire very good knowledge of the portfolio and price it accordingly,” explains Pascale Olivie, director in asset-backed products at Societe Generale.

The €1bn underlying portfolio was originated by the bank across multiple jurisdictions and with a 4.5-year weighted average life and weighted average loan-to-value of just over 50%. “The first challenge was to select a portfolio and achieve a minimum level of granularity and diversification – which was quite challenging, considering the specific nature of the asset class, even though we have a large book of commercial real estate,” states Olivie.

The transaction was supported by longstanding SG partner AXA IM, as investor, with SG operating as originator, sole arranger and sole lead manager. Greendom’s credit protection is also structured as a funded financial guarantee (repackaged into notes issued by a French FCT) and covers a junior tranche of the portfolio.

The bank retains the senior tranche, as well as an unhedged economic interest of 10% of each reference obligation. Additionally, the trade features a revolving period of one year, and during this period the bank will be able to include other eligible assets in the structure to compensate for the natural amortisation of the portfolio.

“When you consider all of the features of the pool (asset type, asset country), it is quite diversified, and it was a discussion we had and approach we share to demonstrate that by the end of the day this portfolio is rather diversified,” explains Olivie.

She continues: “Typically each asset repayment is backed by the asset itself, as well as the cashflow from the tenants, so I would say because of the assets themselves and this cashflow structure the portfolio was quite diversified.”

The portfolio itself was comprised of 36% warehouse, 35% office, 17% retail, 4% residential, 2% hotel and 6% accounting for other assets. “The portfolio is representative of our books. There is a significant amount in Europe and in France, but also the US and elsewhere,” says Olivie.

She adds: “We also try to be representative of the asset type – which is why we have a significant amount of warehouse, office and retail. Again, the idea being to set up a risk distribution solution on the core book of our commercial real estate business.”

By transferring credit risk, Greendom frees up additional lending capacity for new origination. With the transaction, SG is able to increase its involvement in the financing of Positive Impact Commercial Real Estate (PI CRE) loans, committing to ambitious volumes of PI CRE underwritten by SG by the close of this year.

The transaction also features a pricing adjustment mechanism, which works to incentivise the bank to reach the objective and demonstrates willingness of the investor to foster the development of PI CRE loans.

“We had to identify the right partner and design the right portfolio,” expands Olivie, “which is why this was a bilateral trade, because we needed to find a partner who had both good knowledge of the underlying asset class and of our books, so they could really appreciate the quality of our underwriting in CRE and quality of each deal itself.”

Olivie continues: “The logic of the risk-sharing partnership was very strong in this trade, and very different from the usual SME transaction, which is based on statistics, is very diversified and is on an undisclosed basis.”

The trade also features an innovative tap feature, with a €500m tap once already seen in Q2 earlier this year – increasing the €1bn portfolio to €1.5bn. The feature proportionally increased the size of the deal under the same economic conditions - subject to shared agreement with the investor to the additional loans.

“The innovative tap feature allows SG to reload the portfolio above the initial amount of the portfolio, offering visibility to the business for portfolio ramp-up,” comments Olivie.

SG has operated in the risk transfer space as a consistent and innovative issuer for many years - expertise which Greendom reflects as an innovative transaction fully embedding ESG strategy to meet the sustainability commitments of the bank. Greendom is a landmark transaction achieved by Societe Generale with sustainable use of proceeds: with the additional headroom for new production freed up with this transaction, the bank is committed and incentivised to increase its involvement in the financing of PI CRE loans. Positive Impact CRE loans include those that support access to affordable housing, greater access to education, and loans financing buildings with high levels of energy efficiency.

Honourable mention: Project Frida II (IFC, Santander)
In recognition of the deal being the first emerging markets SRT with a climate risk mitigation objective. The PLN2.4bn Polish consumer loan transaction was the IFC's first SRT investment in Poland and its first where the underlying is not SME loans; it also contained a novel bilateral option to upsize the portfolio.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

Capital Relief Trades

SCI CRT Awards: Innovation of the Year

Winner: Sumeru IV

Alecta, PGGM and Standard Chartered have won the Innovation of the Year award in this year’s SCI Capital Relief Trades Awards for their Sumeru IV transaction. The synthetic securitisation references a global portfolio of corporate loans and is the first transaction to benefit from capital relief in Hong Kong.

Exposures to Asian markets have always been a major part of Standard Chartered’s CRT portfolios, given the bank’s footprint. Although the lender sought capital relief from the group’s regulator – the UK Prudential Regulation Authority (PRA) – throughout these years, the bank is now also focused on capital optimisation for its key subsidiaries. The decision by Hong Kong supervisors to implement the Basel framework when Standard Chartered first started exploring this transaction was a significant step in the right direction, but there were two areas that required further discussions.

First was SRT demonstration via self-assessment. Standard Chartered was able to address this by leveraging its existing platform, track record and extensive experience from the group’s programme.

Second, Hong Kong regulations did not recognise the SPV as the protection provider. But this was subsequently changed via the Banking Rules 2020, which are effective from 30 June 2021.

The Banking Rules rendered Sumeru IV’s innovative structure possible. A typical synthetic securitisation involves one CDS that enables the bank to claim capital relief. The resulting legal entity is also the ultimate owner of the credit risk and due to ringfencing of entities that hold the domestic or regional lending books, this generally means two things.

First, a transaction only references exposures from the lending book of that entity, which may not be large or diversified enough to support a soundly structured transaction by itself. This then leads to exposures from that lending book not being used in synthetic ABS deals.

Second, a transaction referencing multiple lending books can only receive capital relief at a group level, but not at a subsidiary level where some of the loans are held. Hence, Standard Chartered CRTs have historically been executed at the group level to hedge a highly diversified portfolio.

However, Sumeru IV features a dual CDS structure that enables Standard Chartered to extend the same benefits of the hedge to its Hong Kong subsidiary. In particular, the structure consists of two CDS contracts but just one special purpose vehicle.

The presence of only one SPV rather than two is explained by the fact that the reference pool is still just a single global portfolio. The structure has the flexibility to add other locations going forward if needed and it doesn’t pose additional risks for investors, since it’s materially the same as a single CDS structure.

Standard Chartered concludes: ‘’Due to the collaborative efforts and an innovative structure, Sumeru IV has not only achieved the desired outcome, but also became a market-leading model for other jurisdictions. Thus, we can proudly say that it is an innovative transaction with great success for the CRS market in Hong Kong and we are hopeful that there will be more CRS transactions benefitting from capital relief in Asian countries going forward.’’

Honourable mention: Elvetia 14 (Credit Suisse)
In recognition of the deal being the first triple-tranche offering – created to address investor appetite – with each tranche in a different format: CLN, bilateral insurance policy and insurance policy with a club of insurers. In addition, both the junior mezz and senior mezz were offered to insurers; the deal also involved a leveraged first loss piece.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

Capital Relief Trades

SCI CRT Awards: Investor of the Year

Winner: PGGM

Even by its own very high standards, the 2021/2022 awards year was a busy one for the winner PGGM. The firm further enhanced its reputation as one of the most experienced and largest active end-investors in credit risk sharing (CRS) transactions worldwide. PGGM saw record high transaction activity in the year, while continuing to innovate and engage with regulators.

Since September 2021, PGGM has closed 12 transactions, including eight transactions in 2022, for a total amount of €2.2bn capital and €33.6bn of underlying loan notional. Five of those transactions were labelled as STS, in which PGGM invested €1.1bn with a total underlying loan notional of €19.8bn.

This represented record high transaction activity for the firm in any 12-month period and included transactions representing large investments with long-term strategic partners, as well as new partnerships. Further, many were considered landmark transactions in their own right, such as:

• The K2 transaction with the Polish mBank, which resulted in the first STS synthetic securitisation from Poland;
• BBVA’s inaugural project finance transaction – Verano I, referencing around one-third of renewable assets;
• Sumeru IV with Standard Chartered Bank – the first transaction to achieve capital relief in Hong Kong;
• Resonance 7 with BNP Paribas – the largest STS transaction to date;
• Sisu – the first Nordic STS transaction with Nordea;
• The first STS synthetic securitisation by Landesbank Hessen-Thüringen Girozentrale (Helaba).

“We find it important to be there for our risk-sharing partners, both in good and bad times,” says Barend van Drooge, deputy head credit & insurance linked investments at PGGM. “We have demonstrated that during the global financial crisis of 2008, the Covid-19 crisis and we continue doing so during the current situation of inflationary pressures and geopolitical unrest as well.”

He continues: “We manage to do this by staying close to the way the bank manages its loan book and by agreeing realistic constraints on the eligibility and portfolio criteria to that effect. Furthermore, we incorporate macroeconomic expectations into our modelling to adequately price the risk. We have thus managed to find an acceptable balance between our interests and those of our risk-sharing partners and agreed mutually workable transactions.”

The firm believes that its mission is to apply its investment expertise to build and maintain a portfolio that generates attractive risk-adjusted returns under different economic scenarios, while providing diversification to the overall portfolio of its sponsor, healthcare pension fund Stichting Pensioenfonds Zorg en Welzijn (PFZW). To achieve this mission, PGGM follows three core investment tenets:

• Risk sharing in core activities of market leaders to ensure continued dedication and focus on prolonging success.
• Being a reliable risk-sharing partner that values alignment of interest to ensure continuing prudent origination and risk management by the bank through the cycle.
• Bilaterally negotiated investments of significant size, resulting in high-quality transactions at low cost.

“The CRS mandate fits within our broader ambition to contribute to a sustainable financial system. By engaging in CRS transactions, we help the banking sector to manage credit risk efficiently, and the financial sector by reducing systemic risk,” van Drooge explains. “This is particularly relevant at times of the uncertain post-pandemic economic recovery, which is put under pressure by high inflation, disrupted supply chains and the war in Ukraine.”

On average, PGGM’s CRS portfolio has returned over 11% per annum since its inception and is well in excess of its long-term return target. Unsurprisingly, sponsor PFZW is highly supportive of the CRS strategy, given that it has realised an equity-like return with lower volatility than public equity, while generating stable cashflows. The pension fund views CRS as both diversifying and complementary to its other investments.

Indeed, the CRS mandate has demonstrated resilience through past economic challenges, including the GFC and Covid-19 pandemic. The strategy performed well during downturns in public markets, especially at times when the common stock of PGGM’s risk-sharing partners was under pressure.

At the same time, PGGM continues to focus on regulatory engagement. As a pension fund asset manager, it has a long-term investment horizon and consequently needs to try to ensure the long-term viability and sustainability of the CRS market.

The firm believes that this objective is only achievable if a balance is found between the long-term interests of banks, investors and regulators. As a result, it has for many years been a vocal advocate for harmonisation of practices, appropriate standards for healthy transactions and transparency, through active dialogue with regulators, industry bodies, banks and investors.

“We further contribute to roundtables and consultations and publish our opinions where we believe this adds value,” van Drooge says. “Throughout the last 12 months, as in previous years, we have been engaged in responding to public consultations, in workshop presentations for European and international regulators, in discussions on opening new markets for CRS transactions, as well as discussing topics of interest, such as the STS Securitisation framework for CRS in the context of the EU Capital Markets Union Initiative and more recently on the EU Taxonomy, SFDR and Green Bond Standard.”

Looking ahead, PGGM’s commitment to market innovation and growth is unlikely to diminish. “Given our size and presence in the CRS market, we contributed greatly to shaping the market in areas such as transaction structure, robustness and due diligence standards,” says van Drooge. “We will continue to do so and actively engage in such areas as industry forums and regulatory debates.”

Honourable mention: Whitecroft Capital Management
In recognition of the firm’s continuing consistent, disciplined and stable performance, even in difficult market conditions, implementing a unique investor offering with one of the most diverse portfolios in the capital relief trade sector. Whitecroft has built on its track record of building innovative investment products by partnering with Copenhagen Infrastructure Partners to launch a climate-friendly SRT fund dedicated to renewable energy infrastructure, aimed to raise capital for what the firm believes to be a rapidly developing capital relief market.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

Capital Relief Trades

SCI CRT Awards: Credit Insurer of the Year

Winner: RenaissanceRe

RenaissanceRe has won the Credit Insurer of the Year category in SCI’s CRT Awards, following another year of growth and achievements. The Bermuda-based reinsurance firm consistently impressed and continues to stand at the forefront of innovation in the capital relief trades industry. 

Building on close to 30 years of experience and industry leadership in reinsurance solutions, the firm assumes risk on an unfunded basis, complementing cash market participants. RenaissanceRe works primarily with insurance companies (both diversified and monoline), banks and government agencies across the globe to match its capital with risk.

Offering first-class advice and products, the firm targets clients who are considering new and innovative risk transfer programmes. The credit business includes trade and financial credit, surety bonding, political risk, project finance, mortgage and bank capital solutions. Furthermore, the firm’s geographical span and reach continues to grow, having transacted with multiple banks across Europe and Asia. 

“The SRT market has definitely gone back to being healthy, buoyant and busy. What sets us apart in this market is our innovative and distinctive problem-solving approach. We have structured deals on different layers within the capital stack, writing equity and junior mezz tranches, with various features (sequential/pro-rata amortisation; back book with or without ramp-up features/replenishment, etc),” notes Fiona Walden, svp and global head of credit at RenaissanceRe. 

She adds: “We have also completed trades on a bilateral, ‘club deal’ and broadly syndicated basis, and have participated alongside both unfunded and funded investors. We not only write a geographically diverse portfolio, but also an asset-class diverse portfolio, completing transactions across large corporate loans, SME loans, income-producing real estate, residential real estate and capital call facilities.”

Walden also emphasises RenaissanceRe’s institutional and technical investment in the credit team. “We possess an in-depth understanding of the transactions, which stems from a broad base of talent and expertise within the team. We made the decision to invest heavily in the credit team through resources and tools.”

She continues: “We have grown substantially as a broader portfolio over the last few years and also within SRT, demonstrating the support of our executive management and RenaissanceRe’s integrated system. This means we can deliver an educated view to our clients and make sure we have a two-way feedback loop with them as to what we think of a particular risk, inevitably allowing us to have superior risk selection and deliver efficient execution to clients. In the current ever-changing economic conditions, this deep understanding of risk will be imperative.”

The team includes former tax attorneys, investment bankers, software developers, actuaries and reinsurance and claims expertise. Such multifaceted expertise within the team brings different perspectives to the table when collaborating to solve risk challenges.

The firm further boasts a leading position in the US structured credit sector, specifically the private mortgage insurance credit risk transfer space, with a market share twice that of its closest competitor. Such prime market position and eminence is key in a growing jurisdiction for CRT.

“When we look at our overall book, we are market leaders in mortgage CRT in the US, being the largest reinsurer of US private mortgage insurers. Our hope is that we can build on this momentum in the US and SRT gets to a point of being in favour and being invaluable to US banks,” Walden notes.

Additionally, year-to-date, the firm has deployed significant credit risk transfer limit to the GSEs and represents a top three market for the GSEs. 

Moving forward, as the SRT market becomes more mature and stable, the firm believes the market for non-STS transactions will remain sizeable. “It is a very valuable tool for banks to have; however, we are not at a stage where all transactions bear the STS designation. In an ideal world, there would not be this distinction with an STS between unfunded and funded; however, we are not seeing it as an obstacle in our ability to transact with our clients,” Walden concludes. 

Honourable mention: Liberty Specialty Markets (LSM)
LSM started focusing on CRT transactions over five years ago and over the last 12 months has had its largest capacity deployment period. Transactions closed across various asset classes (including SMEs, large corporate and CRE) and attachment points (including junior mezz), all of which represents LSM’s contribution to the development of CRT market. LSM has reached many milestones over this awards period, from aggregate capacity deployed to new structures, and continues to develop further solutions that will aim to help CRT issuers going forward.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

Capital Relief Trades

SCI CRT Awards: Issuer of the Year

Winner: Santander

Santander has won the Issuer of the Year category in this year’s SCI Capital Relief Trades Awards. The bank continues to be one of the largest and most innovative originators in the CRT space globally, with a total of 12 capital relief transactions issued by the group in the 12 months to September 2022 from a record seven countries.

Indeed, this year the bank executed trades referencing €17.6bn of Santander’s global asset portfolio, placing €1.3bn of first loss and junior mezzanine risk with investors. All Santander transactions have been structured, arranged and placed by Santander CIB - and despite the challenging wider market backdrop, Santander CIB adapted placement strategies and continued to place three further transactions since May 2022.

High volumes in 2022 were accompanied by innovative transactions. One such transaction was Project Frida II, an emerging market SRT.

The synthetic securitisation references a PLN2.4bn portfolio of consumer cash loans granted by Santander Bank Polska (SBP) to private individuals in Poland. Protection was provided by the International Finance Corporation (IFC) against a mezzanine tranche via an unfunded financial guarantee, with SBP retaining a small first loss tranche.

The protection enables SBP to optimise its capital and allows for further lending to the real economy. It is a unique transaction in that it was the first-ever SRT in emerging markets with a climate risk mitigation objective.

With the support provided by the IFC, SBP has undertaken to deploy the freed-up capital to issue at least US$600m-equivalent of new green lending. Specifically, the capital freed will support additional climate finance activities, involving renewable energy and water efficiency, as well as green building projects.

Additionally, it offers the bilateral option to upsize the reference portfolio and capital structure by an additional PLN400m within the one-year replenishment period, allowing the issuer to maximise year-end capital benefits.

Another notable transaction issued by Santander was Syntotta Three, due to its ramp-up features. The ramp-up period allows Santander Totta - the bank’s Portuguese subsidiary - to add up to €200m of new assets in the first six months of the deal.

David Saunders, executive director at Santander CIB, notes: “2022 posed challenges to the SRT business. However, our team has proven that with the right people, tools and expertise, we can continue to innovate to help optimise capital and increase lending to the real economy.”

Moreover, the bank has been further expanding the investor base, having attracted over 90 investors in the space - with over two-thirds being first loss or junior mezzanine investors.

Finally, Santander has been actively advocating for regulations that help grow and support the securitisation market across the EU and UK. The bank’s most notable contribution in this regard was the STS framework for synthetic securitisations.

Honourable mention: Barclays
In recognition of the bank executing a record 15 CRTs during the awards period, representing US$2.4bn of equity tranches and US$28bn of portfolio notional, including its first high-LTV mortgage deal and largest Colonnade deal. In 2021, the bank achieved the largest market share of any issuer. All deals utilise its sophisticated CRT platform, featuring automated infrastructure, market-leading quantitative tools, dedicated bank resources and global investor coverage.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

*For more on the outlook for global risk transfer activity, join our complimentary webinar on 2 November at 2pm GMT. Leading CRT practitioners from Arch MI, ArrowMark Partners, Credit Benchmark and Guy Carpenter will discuss current trends in light of today’s macroeconomic headwinds. Click here to register.*

Capital Relief Trades

SCI CRT Awards: Arranger of the Year

Winner: UniCredit Bank

UniCredit Bank has won the Arranger of the Year category in SCI’s Capital Relief Trades Awards, in recognition of the volume and scope of the deals it executed during the awards period. The bank arranged a record 15 deals over the last 12 months across five jurisdictions (Bulgaria, Germany, Italy, Poland and Spain) and four asset classes (auto, large corporate and SME loans and lease receivables), representing an underlying portfolio of over €20bn.

Five of these deals were inaugural transactions – for a top tier Italian bank, Banco Sabadell, Banca Popolare di Sondrio, BulBank and mBank – with UniCredit also acting as sole arranger on five out of the 15 EIF European Guarantee Fund (EGF) trades issued during the awards period. In total, the bank supported 10 clients, seven of which were external to the UniCredit Group.

“SRT is an important product for us. We began building our franchise years ago, with the aim of supporting third-party clients to become more involved in the space. This is possible because we have a large and unique team that is committed to sharing our knowledge of and expertise in the sector,” observes Andrea Modolo, md and head of securitisation, asset-backed solutions, Italy at UniCredit.

He continues: “Over the last 12 months, we’ve concentrated on broadening the franchise outside of our main markets of Italy and Germany and across different asset classes. Importantly, this enabled us to bring SRT technology to a number of new counterparties.”

One highlight was arranging mBank’s inaugural deal in Poland (which has received an Honourable Mention in the Transaction of the Year category, see page X). Sized at PLN8.9bn, Project K2 is the largest-ever securitised CEE portfolio, the first-ever STS synthetic securitisation from Poland, the first Polish SRT trade with a CLN issued directly by a bank and the first Polish SRT trade executed entirely with a private investor (PGGM).

Other highlights include a landmark Italian regional bank EGF deal (for BP Sondrio), the first synthetic securitisation for a Bulgarian bank and the first synthetic securitisation executed without supranational involvement for a top tier Italian bank (€2.2bn of Italian large corporate exposures) and Banco Sabadell (the €1.5bn Galera II). “We wanted to demonstrate that SRT is not limited to national champion banks, but can be adapted for smaller banks too. As with any new project, the challenge for first-time issuers is having the teams and processes in place that are completely focused on the transaction,” says Modolo.  

He adds: “Transparency about what will happen and why you’re asking for certain information is helpful for gaining traction internally. Being smaller can allow greater efficiency, but it also means that typically there are fewer resources to allocate. Consequently, it’s crucial to keep on track in terms of the transaction timeline.”

Modolo notes that the STS synthetics framework is helpful in terms of providing regulatory guidance and reference points for new entrants to the CRT market. However, he points out that not all originators have the desire to meet the STS standard, given that internal policies are necessary with which to maintain and control eligibility.

Looking ahead, Modolo expects the CRT market to continue to grow, driven by the entrance of new participants, jurisdictions and potentially new asset classes. He predicts that over the next 12 months, the bulk of issuance will be made up of large corporate deals and more concentrated pools, for which investors can do their own due diligence. Other asset classes and smaller, more granular pools may begin emerging in 2H23.

“Investors are looking for diversification and are open to seeing new jurisdictions and increasing their capacity. They see value in synthetic securitisations compared to other instruments and invest opportunistically. At the same time, incumbent originators still have other portfolios that they are interested in securitising,” explains Modolo.

He concludes: “Rather than being perceived as an alternative to capital instruments, SRT is now recognised as an additional tool to be used by banks, depending on the market opportunity. During the Covid crisis and the recent volatile market conditions, the CRT market remained open and effective – in some cases, with the EIF and in others, with private investors – unlike the market for some other instruments.”

Honourable mention: Alantra
In recognition of the firm executing five deals in the awards period, including: the first synthetic shipping securitisation in Greece and first shipping-only CRT since 2013; the first-ever synthetic STS mortgage securitisation; and the first synthetic STS mortgage securitisation in Greece. The firm maintains a key strategic goal to support new CRT originators through a hands-on approach across all work streams and developing innovative structural solutions.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

*For more on the outlook for global risk transfer activity, join our complimentary webinar on 2 November at 2pm GMT. Leading CRT practitioners from Arch MI, ArrowMark Partners, Credit Benchmark and Guy Carpenter will discuss current trends in light of today’s macroeconomic headwinds. Click here to register.*

Capital Relief Trades

Risk transfer round up- 26 October

CRT sector developments and deal news

Novo Banco is allegedly prepping a significant risk transfer trade backed by SME loans while Banco BPM is said to be readying a synthetic ABS that references project finance exposures.

The Novo Banco deal would be the lender’s first capital relief trade following the collapse of its predecessor Banco Espirito Santo in 2014. Banco Espirito Santo closed its last synthetic securitisation in 2013 and was called Lusitano Synthetic two (see SCI’s capital relief trades database).   

Stelios Papadopoulos

Capital Relief Trades

SCI CRT Awards: Broker of the Year

Winner: The Texel Group

The Texel Group has won the inaugural Broker of the Year category in this year’s SCI Capital Relief Trades Awards. Texel is a specialist credit and political risk insurance broker with offices in the UK, Europe, Asia and the US and a dedicated focus on arranging non-payment insurance (or credit insurance) for some of the world’s largest European, US and global banking groups, financial institutions, corporates and trading companies. The firm has a history of setting precedents with the insurance market since it was founded 25 years ago, applying credit insurance to new and emerging asset classes and via innovative risk transfer structures, including some of the first-ever applications of unfunded risk transfer to synthetic securitisations.

As a broker, Texel was an early mover in the synthetic securitisation space, hiring Alan Ball as head of its structured and bespoke solutions (SBS) team in 2018 with a specialist focus on SRT transactions. “Texel is extremely client-focused and outcome-driven and this means we often look to innovate or develop the insurance market to meet the evolving needs of our clients,” explains Ball.

He continues: “The first synthetic securitisations were executed on a bilateral basis between a single bank and a single (re)insurer. We knew, however, that for our clients to fully realise the benefits of the insurance market in this area, there would need to be an actual ‘market’ - with multiple participants who could ultimately offer our clients the benefits of scale, pricing competition, counterparty diversification and diversity of risk appetite. Our goal was therefore to develop such a market.”

In developing the market, Texel has achieved a number of milestones, including:

• closing the first-ever synthetic securitisation to be syndicated among multiple insurers;

• significantly growing the market capacity by introducing more than five major global insurers to their first-ever SRT transactions (which have since gone on to support multiple transactions in the SRT space); and

• developing bespoke programme documentation for their clients to help streamline the execution process with (re)insurers.

Some new or less experienced users of credit insurance may not be familiar with how an insurance broker fits into the transaction process for SRT. “The first point to note is that we, as a broker, act in the best interests of our banking clients – our sole goal is to achieve the best possible outcomes for them in the immediate and longer term – we are not tied to particular funders or investors and do not act on behalf of the insurers,” Ball explains.

In relation to how a broker adds value, Ball remarks: “Fundamentally, a good broker should bridge any gaps between insurers and clients to get their clients’ deal over the line, ideally leaving all sides with a positive transaction experience that they want to build on. In order to achieve this, it’s critical to understand the perspectives and needs of both clients and insurers from the outset. Effective execution of synthetic securitisations using unfunded risk transfer therefore requires an understanding of the market practices, dynamics and technical requirements applicable to both banks and insurers alike – understanding just one side of this equation simply doesn’t work.”

Texel attributes its innovations and successes to having such cross-sectoral knowledge, with much of its experienced team having significant transactional and structuring experience from previous careers as underwriters, lawyers and bankers. “It’s important for clients looking to deploy insurance on SRT transactions to appreciate that the credit insurance market has over two decades of established market practice and is a relationship-driven (as opposed to transactional) market. It’s also an incredibly diverse market with diverse institutions, each with their own risk appetites, perspectives and processes,” Ball notes.

He continues: “As a broker, it’s our job to know this market intimately, so that we are able to advise our clients on how best to achieve their desired outcomes – depending on the particular requirements of a client or transaction, we will potentially advise on different courses of action with different insurers. For some transactions, we’ll advise a broadly syndicated placement; for others, we’ll suggest a targeted focus on a few counterparties who we know, for example, have a deep understanding of a specialist asset class or geography from having worked with them over the last two decades.”

This market knowledge has translated into concrete benefits for Texel’s clients, with Texel able to secure highly competitive pricing, which can often represent a material discount to that offered directly to clients by some (re)insurers. Texel has also scaled clients’ SRT programmes by introducing multiple new counterparties and arranging cover for specialist asset classes, such as project finance and lending types specific to local European or international markets – going so far as to bring in new market entrants to support a client’s transaction.

“In addition to knowledge and experience, effective transaction and process management is critical – especially where parties are coming from different markets, such as the SRT market and (re)insurance market. We understand the market practices and expectations of both and are able to pre-empt gaps, obstacles or roadblocks in the transaction process ahead of time and plan to avoid last-minute fire drills or wasted costs and efforts. Where the transaction is particularly complex or niche, we’ll put together detailed submissions, which allow insurers to quickly read into a client’s transaction, navigate the relevant documents and get the key issues on the table - which may be different to those focused on by a funded investor,” Ball comments.

Notably, the firm acted as broker to Credit Suisse in arranging cover for its Elvetia CRT programme earlier this year in a transaction which referenced a CHF3.5bn blind portfolio of SME and corporate loans. The Texel team worked closely with Credit Suisse several years ago to develop the structure and suite of documents used for insurance cover of unfunded tranches of the programme.

Texel’s reputation precedes itself in the market and the SBS team is well regarded by originators and professional advisers in the SRT market, with Texel receiving referrals from these groups and even from insurers themselves, where they may be working directly with a client but feels the transaction could benefit from Texel’s input in terms of process management, input on the deal documents or scaling the client’s programme more generally.

With interest growing in this space over the last five years, the firm hopes to continue to lead the market with its technical expertise without foregoing its roots as an insurance broker. Ball says: “We want to remain relevant by having market-leading expertise, but not forgetting our roots as an insurance broker who knows and has a good understanding of the needs and the requirements of the underwriters, so we can appropriately guide our clients. It is short-sighted to judge the success of a broker by whether they eventually managed to get an individual transaction over the line – this is obviously critical – but we like to act in the longer-term interests of our clients, constantly improving their experience and the value they get from transacting with the (re)insurance market.”

Going forward, Texel remains ambitious for the insurance market generally and has begun working with a number of first-time issuers in the SRT space, in conjunction with more traditional arrangers and advisers. “It’s rewarding to see how unfunded risk transfer in this space has gone from being a marginal, more hypothetical idea five or six years ago to being a regular part of the conversation in SRT. We are hugely excited that both Texel and the insurance market have gained sufficient credibility for experienced advisers in this space to look at involving us in their work with several first-time and potential issuers, looking to create programmes where unfunded protection is an option from the outset rather than an afterthought,” notes Ball.

He concludes: “We want to develop a bigger footprint with the client base and continue to give all of our clients a really positive experience of the insurance market. But in order to do that, we think it’s important that they work with intermediaries who are technically competent, have real world transaction management experience, but also have a solid understanding of both (re)insurance and SRT markets as well.”

Honourable mention: Aon
In recognition of the firm continuing to build on its first-mover advantage as the first insurance broker to identify the CRT opportunity for reinsurers, its ongoing advocacy for the CRT business generally and for having completed 17 transactions with aggregate risk transfer of US$12bn during the awards period.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

*For more on the outlook for global risk transfer activity, join our complimentary webinaron 2 November at 2pm GMT. Leading CRT practitioners from Arch MI, ArrowMark Partners, Credit Benchmark and Guy Carpenter will discuss current trends in light of today’s macroeconomic headwinds. Click here to register.*

Capital Relief Trades

SCI CRT Awards: Law Firm of the Year

Winner: Simmons & Simmons

Simmons & Simmons wins SCI’s Law Firm of the Year award, following a year which saw increased progress, volumes and international coverage for the firm in the capital relief trade sector. The international law firm impressed with its ability to deliver first-class CRT advice to investors in all major European CRT jurisdictions. As the CRT market continues to grow and mature, Simmons & Simmons stands at the forefront of legal advice for investors. 

A leading international law firm, Simmons & Simmons boasts 21 offices across the UK, continental Europe, Ireland, the Middle East and Asia. Its large and well-established structured finance and derivatives practice advises clients on capital relief trades and broader risk transfer mandates, including derivatives products and associated regulatory advice. The firm additionally works extensively on other forms of financial guarantee and risk transfer transactions, including advising governments and supranational institutions on their Covid-19 guarantee schemes.

Sitting within this wider structured finance and derivatives team, Simmons & Simmons CRT practice is led by partner David Toole in London. “It has been a fantastic and breakthrough year for our CRT practice, in terms of growth and particularly in the spread of jurisdictions that we cover and operate in,” notes Toole.

Acting on approximately 30 CRT transactions in the last year, the firm continued to expand its expertise of CRT outside of the UK, reflecting the spread of CRT transactions across Europe and its continued growth in more well-established markets, such as Italy and Germany. The practice has expanded and trained specialist across its offices to cover CRT in all major jurisdictions for the market. The firm’s established international network has allowed it to successfully advise investors on CRT transactions governed by French, German, Italian, Irish, Luxembourg as well as English law (notably through its London, Paris, Frankfurt and Milan offices). 

Simmons & Simmons has acted for significant investors in the market, including Alecta, Anacap, Christofferson, Robb & Co, the European Investment Fund, PAG, PGGM and various leading hedge funds and institutional asset managers. The firm supported these clients as lead counsel on many of their most important CRT transactions in the last 12 months. Having set up one of the strongest rosters of clients in this market, Simmons & Simmons positions itself as a preeminent advisor and actor in the CRT space.

Indeed, the firm advised clients on some of the most outstanding and notable transactions in the past 12 months. Such matters have included transactions structured as financial guarantees, as credit default swaps (both bilateral and embedded into SPV structures), credit-linked notes and credit-linked deposits.

The firm represented PGGM and Alecta in their investment in a CRT transaction originated by Standard Chartered Bank, in which Standard Chartered became the first bank to benefit from capital relief in Hong Kong. The landmark transaction features a sold first loss tranche with 10% thickness and a portfolio weighted average life equal to approximately 1.5 years, as well as a replenishment period of 3.25 years. Further features included a sequential amortisation structure.

The firm’s role in this transaction demonstrated its position and role as adviser of choice to leading investors and its ability to provide seamless cross-border advice in new and developing CRT jurisdictions.

Simmons & Simmons also advised PGGM and Alecta as co-investors in the inaugural CRT issuance by Helaba - an STS synthetic securitisation backed by a €2.1bn portfolio of corporate loan portfolio and credit protection governed by German law. Additionally, the firm acted on the market’s first STS-compliant SRT transaction involving pan-Nordic assets, referencing a €2.5bn portfolio of Nordic corporate loans and originated by Nordea Bank. 

Such ‘firsts’ reflect Simmons & Simmons’ sophisticated and innovative presence in the CRT market. It further highlights the firm’s strategic goal to cement its position as the ‘go to’ firm for investors in this market.

“Although we act for many of the largest investors, our practice also supports arrangers and originators. This gives us a deep understanding of the perspectives of all market participants. By working with clients across multiple jurisdictions, we develop a strong institutional understanding of each investor, allowing us to support them across all their transactions,” Toole explains. 

Moving forward, Toole expects the CRT market to continue to develop. “Obviously, there are potential challenges in terms of the global economy; however, historically this market has shown itself to be extremely resilient and we expect this to continue. We continue to see a lot of investor interest in the market and, despite the current challenges, we do see new investors coming in and I expect people to continue exploring new asset classes,” he observes.

He concludes: “As the market now is pretty mature and better understood by regulators, I think banks do and will explore new asset classes. This is a trend we expect will continue and there is certainly still investor appetite for that.”

Honourable mention: Clifford Chance
In recognition of the firm retaining its position as dominant law firm in both the European and North American CRT markets, acting as originator and drafting counsel on the vast majority of deals, across the full range of asset classes, jurisdictions and legal structures. Notably, the firm advised on Sumeru IV for Standard Chartered – the first local SRT in Hong Kong – and mBank and Getin Noble on the first SRTs placed with private investors in Poland.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

*For more on the outlook for global risk transfer activity, join our complimentary webinaron 2 November at 2pm GMT. Leading CRT practitioners from Arch MI, ArrowMark Partners, Credit Benchmark and Guy Carpenter will discuss current trends in light of today’s macroeconomic headwinds. Click hereto register.*

Capital Relief Trades

Mixed impact

Basel impact assessed

Scope ratings has published its latest bank capital quarterly. The report points to an average increase of 15% of current Tier one minimum from the implementation of Basel three. However, EU adjustments would imply a less punitive impact.

The European Commission (EC) published a legislative proposal for implementing the final Basel three framework in October 2021, but the proposal is still going through the approval process. Meanwhile, the EBA has published an updated assessment of the impact on EU banks in 2028. Full Basel three implementation based on the Basel Committee methodology would lead to an average increase of 15% of current tier one minimum.  

Indeed, for EU banks to comply with the new framework, this would require an aggregate €1.2bn in additional Tier one capital. However, Scope notes that ‘’due to EU-specific adjustments contained in the current CRD four-CRR two framework and in the EC proposal, the impact of implementing the final Basel three standards is expected to be lower. Under the EU scenario, the increase in Tier one minimum required capital would be 10.7% rather than 15%.’’

More saliently for banks, the EC proposes to implement the new rules from one January 2025, two years later than the one January 2023 Basel committee timeline. EU specificities include maintaining the support factor for exposures to SMEs and infrastructure, transitional arrangements for the output floor and reducing the impact of historical losses when determining capital requirements for operational risks.

The output floor remains the key driver for the increase in required capital (+6.8%) with the EC having adopted the “single stack” rather than the “parallel stack” approach (SCI 29 October 2021). For banks employing internal models, the relevant RWA figure for determining capital requirements will be floored by the amount equal to 72.5% of RWAs under the standardised approach. The higher RWA level is then used to calculate various capital requirements such as the Pillar one and two buffers.

The floored RWA amount will be applied at the highest level of consolidation in the EU. Moreover, the EC proposal introduces safeguards to prevent unjustified increases in the Pillar two requirement and the systemic risk buffer requirement in cases where a bank becomes bound by the output floor. These requirements may be recalibrated to avoid the double-counting of risk.

The output floor will be gradually introduced from one January 2025 over a period of five years. Finally, there are specific transitional provisions to spread out the impact of the output floor up to eight years in relation to unrated companies, low-risk mortgages, and derivatives.  

Stelios Papadopoulos

Capital Relief Trades

SCI CRT Awards: Contribution to North American CRT

Winner: Bank of Montreal

For much of the last 12 months, Bank of Montreal (BMO) has been not only a prominent player in the North American CRT market, but it has also been the only player in the North American CRT market. Additionally, at the time of writing, it is the only Canadian shop to have swum in CRT waters. For its continuous commitment to the market and breadth of assets covered, the bank is SCI’s winner of the award for Contribution to North American CRT.

Indeed, in the waning days of September 2022 - just as the qualification period for this award was due to end - BMO demonstrated its innovativeness and expertise by bringing another asset class to the market. Its new programme, dubbed Killarney Series 1, securitises capital call facilities and it closed a deal worth US$100m that is due to mature in 2027.

This programme was added to the four that BMO already operates. The justly lauded Algonquin platform covers US dollar- and Canadian dollar-denominated SME corporate loans extended to US and Canadian borrowers.

The Muskoka platform securitises larger corporate loans and is the sister platform to Algonquin. Boreal deals with Canadian commercial real estate loans and remains the only Canadian dollar-denominated programme in the market.

Finally, the Sauble platform handles leveraged loans and should be seen as more of an origination partnership as the portfolio grows over time, notes Jean-Francois Leclerc, head of risk and capital solutions at BMO Capital Markets in Toronto.

There are also differences in the purpose of risk transfer as it applies to these four platforms. While the mechanism is chiefly viewed as a classic regulatory capital relief tool for Algonquin and Muskoka, it is seen more from the perspective of limit management for Boreal and Sauble.

The lender made its first visit to the CRT market in 2016, and in 2022 has concluded six transactions for a total of US$18.5bn in notional.

In January 2022, BMO issued Sauble III with a notional of US$2bn, and three months later upsized Sauble II - initially offered in 2021 - with an additional US$500m. This platform remains one of the few successful platforms devoted solely to leveraged lending in the CRT market.

 The lender sold a new Boreal, dubbed 2022-01 with C$2.1bn of notional, in April 2022.

The Algonquin programme is the largest and catches most of the headlines. BMO returned to the market three times with this platform in 2022, securitising no less than US$14.4bn of SME corporate loans. It brought US$10bn in two separate deals in April, and followed this up with another US$4.4bn synthetic securitisation in August 2022.

BMO’s appreciation of the product is clear. “We think this is a useful tool to transfer risk and we get significant benefit from these transactions. The programmes have performed well through the cycle, including during Covid. There is recognition that this is genuine risk transfer,” says Leclerc.

The bank has cultivated investors in the US, Canada, Europe and Asia over the last year. The great majority are asset managers with a liking for the rewards that CRT offers and expertise in being able to value the risk.

Some deals are sold on a bilateral basis, others to two or three investors, while some transactions have attracted up to 10 buyers. In all, BMO deals with a regular pool of investors that is numbered in the mid-teens, many of which are repeat buyers.

“Many repeat investors have seen the value of our transactions, the quality of our origination practice and the good credit quality that we have at BMO. Ultimately, this is what they are attracted to,” explains Leclerc.

In addition to the new asset class brought to the market in September 2022, another is due to see the light of day before the end of the year. The commitment to this market and resourcefulness within it are the hallmarks of BMO, and make it a worthy winner of this award.

Honourable mention: Guy Carpenter
In recognition of the firm’s continued leadership role in a year when the reinsurance market has stepped up to take a much greater share of the mortgage credit risk transfer market – over US$18.5bn of mortgage risk will have been placed in the reinsurance market in 2022, almost doubling what was placed in 2020 – as capital market spreads have gapped wider. Not only has the firm played a key role in the redistribution of risk, it has also been a thought-leader and staunch advocate of the industry, consistently stressing the strengths and virtues of the CRT market and the increasingly important role that reinsurance brings to it.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

*For more on the outlook for global risk transfer activity, join our complimentary webinaron 2 November at 2pm GMT. Leading CRT practitioners from Arch MI, ArrowMark Partners, Credit Benchmark and Guy Carpenter will discuss current trends in light of today’s macroeconomic headwinds. Click hereto register.*

Capital Relief Trades

SCI CRT Awards: Personal Contribution to the Industry

Winner: Jessica Littlewood, global operations and business transformation partner at Clifford Chance

The Personal Contribution to the Industry Award this year is dedicated to Jessica Littlewood from Clifford Chance. She has worked in the industry for 24 years and within that time has been commended for her knowledge, expertise and professionalism within the capital relief trades sector. 

She notes: “It's a real honour to win this award. I was completely surprised to receive your email. It's very nice to have been recognised by the industry.”

Littlewood is highly regarded by banks, regulators and investors alike as a leading lawyer in the synthetic securitisation market, or - as they prefer to call it within the legal world - ‘credit risk sharing’ transactions. Credit risk sharing can benefit the real economy by unlocking additional capital for lending and sharing credit risk outside the banking sector.

Littlewood has been praised for being instrumental in developing this market, where she has shown her legal prowess and creativity through her advice on many of the transactions done, often solving specific structuring issues banks were facing and thereby moving the market forward as a whole.

In addition, her peers believe that she has been a key voice of the market in dialogues about regulatory developments throughout the years. Littlewood has extensive knowledge of the market and its increasing regulatory landscape and she is clearly seen by the industry as a thought-leader.

She explains that the key to her success is down to a number of factors, which include a strategic way in which she views deals. “Seeing every deal as a partnership between the protection buyer and seller and to work with all parties in a constructive and collaborative way to get the deal done. To always go the extra mile to get a deal over the line.”

Littlewood explains that every deal comes with its challenges. However, she does note that the wonderful aspect of the CRT market is that no deal is ever the same and each comes with a little variety.

She adds: “Even if you think it is going to be a repeat, there is always a curve ball thrown into the mix. There is always a lot of regulatory change in this market and that creates a challenging backdrop against which to advise clients.”

Littlewood notes that despite having developed a strong reputation in the market, she is very grateful for the support of her colleagues at the firm, who work closely with herself and fellow partner Tim Cleary. She explains that these deals always reflect an incredible amount of expertise, dedication and hard work from the whole team and she couldn't be more thankful for their help and support.

As of July 2022, Littlewood has been appointed as global operations and business transformation partner at Clifford Chance. She says that the opportunities and challenges of navigating a leading global law firm through the post-Covid, digital world is exciting. Littlewood adds that there is certainly a great deal to think about within this sector and never a dull moment.

Her key passion is, and always has been, to see the CRT sector grow – both in terms of the size of the market and its sector, geographical footprint and number of issuers and investors. She notes that it has been wonderful to watch the development of the market over more than 20 years from a small sector with one or two participants to a truly global market with investors and issuers on all continents.

However, going forward Littlewood says that it would be good to see a more even global regulatory level playing field, as there are markets where the regulators can be a barrier to the market developing and it would be great to work with those regulators to address their concerns.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

*For more on the outlook for global risk transfer activity, join our complimentary webinaron 2 November at 2pm GMT. Leading CRT practitioners from Arch MI, ArrowMark Partners, Credit Benchmark and Guy Carpenter will discuss current trends in light of today’s macroeconomic headwinds. Click hereto register.*

Capital Relief Trades

Risk transfer return

African Development Bank stages comeback

The African Development Bank (AfDB), the United Kingdom’s Foreign Commonwealth and Development Office (FCDO) and three insurers have executed a 15-year synthetic securitisation that references a US$2bn sovereign loan portfolio. Dubbed Room to Run Sovereign (R²RS), the transaction marks the Multilateral Development Bank’s (MDB) return to capital relief trades following its landmark Room to Run transaction with Mariner in 2018 (SCI 20 September 2018). More saliently, the lender was able to close the trade despite several challenges that have been holding back MDB CRT issuance until now (SCI 15 March 2022).

The risk transfer trade features a US$400m first loss tranche and a US$1.6bn second loss tranche. Axa XL, Axis Specialty and HDI Global Specialty have bought the first loss tranche while the second loss was acquired by the United Kingdom’s FCDO. Texel acted as the insurance broker in the trade.

The objective of the securitisation is to reduce the capital consumption for the bank’s sovereign loan book to free up capital and redeploy it to finance climate finance projects in Africa for up to US$2bn. In exchange for the credit protection, the AfDB will pay a premium to the private insurers and a guarantee fee to the FCDO.

According to a statement from the African Development Bank, the transaction ‘’demonstrates that with the right structuring, MDBs can increase their lending capacity to serve in their countercyclical role to address emerging issues like climate change. Moreover, it demonstrates the willingness and capacity of institutional investors to engage in development related financing when an appropriate vehicle is presented to them, as well as the support of shareholders like the UK to go beyond their capital subscriptions to create impact.’’

The AfDB remains the lender of record for the covered exposures and the portfolio isn’t linked to any specific loan which is a salient point. One criticism levelled against the use of synthetic securitisations from MDBs is that they could undermine the preferred creditor status (PCT) of these institutions, something that rating agencies are unlikely to ignore.

The logic here is that countries might selectively default on loans where the MDB has transferred the credit risk to a third party. Yet by remaining the lender of record, the MDBs can sanction borrowers in case of selective defaults. Risk retention is another key feature here and it’s present in MDB CRTs.  

The rating agencies have been the most important obstacle to further MDB CRT issuance since the execution of the first R²R deal. Effectively, rating agency methodologies don’t fully consider the strong credit performance of MDB loans according to analysts at Risk Control.

The agencies do recognize the PCT status of MDBs to some extent when they rate them, but there is insufficient reflection of PCT in the securitisation rating methodologies, relevant in evaluating the retained senior tranches of risk transfer transactions.

Hence, the capital consumption of the retained portions of the synthetic securitisations are treated too conservatively. Perhaps unsurprisingly, the AfDB chose to keep its latest synthetic ABS unrated. Insurers believe that they have the answers to rating agency concerns.

Simon Bessant, director, and head of insurance at Texel comments: “The private insurance market has been a strong supporter of MDB led financings for many years and if correctly drafted their credit protection can meet the requirements of the rating agencies for credit substitution. One key point to note is that in all these transactions, there is a requirement for the MDB to retain an unhedged pari-passu exposure to the underlying exposures, which nicely aligns the risk participants with their client.’’

Looking forward, under the AfDB’s balance sheet optimization initiatives, the MDB concludes that it will ‘’continue to explore opportunities to engage with the insurance market, asset managers and pension funds to place their capital in line with the needs of the continent on both non-sovereign and sovereign assets. This will be explored to the extent that our indicative lending pipelines demonstrate the capacity of our borrower clients to absorb more resources and prudential ratios that remain compliant with our triple-A status.’’

Stelios Papadopoulos

RMBS

Reaching milestones

John Beacham, ceo and founder of Toorak Capital Partners, answers SCI's questions

Q: Toorak recently hit a US$10bn milestone in whole loan funding for housing rehab and construction since its inception in 2016. What does this mean to your company? 
A: We’re extremely proud of hitting this milestone and excited for many more to celebrate in the future. When we first started Toorak, we saw an opportunity to provide stable, long-term capital to a fragmented industry, as well as the opportunity to address the national housing shortage by enabling investors to bring units to the market. It’s been a great reward to see the outcomes of our vision unfold, a validation of our business approach, and a testament to our team and their talent and hard work. 

Q: Your company has funded more than 26,000 small-balance business-purpose loans secured by residential, multifamily and mixed-use properties across the UK and the US. What have been the challenges of funding the loans enabling this work? 
A: This is a very data-intensive business and we’ve closely scrutinised the details of every loan. As with any business, there has been stress on our processes and a need for flexibility to handle expected market challenges, as well as unexpected challenges, such as Covid.

With news surrounding the market changing on a daily basis, it can be hard to account for every possible scenario. Thankfully, Toorak has built a recession-resistant model that allows us to remain in ‘business as usual’ mode and continue to flexibly work with our partners. Toorak relies on multiple sources to fund loans and has been able to consistently provide capital through conservative credit standards, close review of construction deals, deep understanding of local markets, materials pricing, and a focus on higher experienced customers.  

Q: Talk us through your focus on new geographies and products.
A: As part of our commitment to finding a solution to the nation’s housing shortage, we work with loan originators around the country and now serve the continental US and the UK. We began by offering a short-term bridge loan product and then expanded into long-term investor loans to best meet the needs of our partners.

We also offer ground-up and intermediate term loans. As we work with our partners, we’ll continue to adjust our product offerings. 

Q: What has been your biggest achievements this year?
A: I was extremely excited to have been named an EY Entrepreneur of The Year 2022 New Jersey Award winner. It was a recognition of the successful business model we’ve built at Toorak and a true reflection of all the hard work our company has done, the grit of our borrowers, the success of our lending partners and the social good that our industry does every day, improving, creating and financing housing to provide quality places for families to live. 

Q: What is in the pipeline for Toorak for 2023?
A: As we move into 2023, we look forward to continuing to see the impact of our work as it relates to improved and affordable housing and plan to keep this as a main pillar to the core of our work. We will also continue to build out our securitisation programme and look to support our originator partners, so they can flexibly provide capital to their borrowers. We’re proud to close out 2022 with a bang and are excited to see what 2023 must bring for Toorak Capital Partners. 

Q: What is your view of the market for the coming year?
A: While recent news in the housing market has focused on rising prices and rental costs, the US continues to suffer a severe housing shortage. While other subsets of the market may be cooling with mortgage and interest rates increasing, a solution needs to be achieved with both ground-up construction, as well as rehabilitation and conversions of existing properties.

Toorak has been consistently funding the loans enabling this work since 2016 – which, in turn, is aiding this niche of the market to continue their work. The market will continue to remain challenging as the Fed hikes interest rates. 

Angela Sharda

Structured Finance

NPL guidelines released

Sector developments and company hires

NPL guidelines released
The European Commission last week published voluntary guidelines on best execution processes for non-performing loan sales in the secondary market. The guidelines define practices across the seven stages of an NPL transaction – from portfolio selection through to post-closing obligations – and cover unsecured and secured portfolios. Debitos notes that the objective is to accelerate the development and standardisation of processes in the NPL secondary market, in line with the EBA’s strategy to reduce NPLs in the euro area.

Specific recommendations are included on the scope of disclosure across the seven phases, which aim to help secure successful outcomes and improve efficiency and transparency. The guidelines also highlight the utility of NPL transaction platforms, for vendors targeting a broad audience and which operate across multiple jurisdictions.

In other news……

APAC
Mizuho Bank Asia Pacific has appointed Peeyush Pallav as head of real estate asset and structured finance, Asia & Oceania corporate banking, based in Singapore. Pallav was most recently head, structured credit syndicate with Natixis in Hong Kong, and prior to that worked at DBS Bank, Fitch, Standard Chartered and HSBC. In this newly created role, he will contribute to providing creative, content-driven solutions to the bank’s clients and delivering on its strategic objectives.

North America
Fixed-income analytics provider Infima has launched a new advanced predictive analytics platform for agency MBS. The platform will offer advanced analytical capabilities to investors, dealers and other market participants, helping to unlock the US$10trn market. The release of the platform marks an advancement in the science of predicting mortgage borrower behaviour for fixed-income market participants, allowing empowering portfolio managers and traders to make solid investment, trading and risk management decisions in all market conditions. Alongside the launch, Infima has also announced its partnership with front-to-risk market analytics and workflow solutions provider Numerix. Infima hopes the new collaboration will offer its customers access to the most accurate agency MBS prepayment analytics with access to the NxCore Cloud offering.

Structured Finance

CMBS hedging agreements eyed

Sector developments and company hires

CMBS hedging agreements eyed
DBRS Morningstar has raised concerns that the current DSCRs of three European CMBS it rates - Sage AR Funding No 1, Sage AR Funding 2021 and Taurus 2021-4UK - will be insufficient to enable the borrowers to use excess cash to purchase new interest rate cap agreements, without cash injections from the sponsors, as the respective facility agreements require new interest rate cap agreements to be purchased in 2022 or 2023. These transactions have a five-year loan term, where the borrower purchased an interest rate cap that expires prior to the loan maturity date. Further, there is an obligation in the facility agreements for the borrower to purchase a new interest rate cap agreement every year for the remaining term of the loan, following the expiry of the initial interest rate cap agreement.

The facility agreements provide that all costs incurred by the borrowers in connection with purchasing a new hedging agreement must be funded from the proceeds of investor debt, subordinated loans, equity contributions and/or amounts standing to credit in the general account. However, premiums for interest rate caps increased five times between January and July 2022 in both the euro and sterling markets, given the increase in interest rates this year. Increased hedging costs may result in some borrowers being unable to purchase new interest rate cap agreements and consequently triggering a loan EOD.

Generally, given lower leverage levels since the financial crisis, DBRS Morningstar suggests that there may be greater capacity for borrowers to absorb increased hedging costs when required. “Ultimately it is [our] view that if there is still equity in the structure, the sponsors are unlikely to allow the loan to default, lest the sponsors lose control of their assets. Hence, they are incentivised to provide equity to the borrowers, allowing them to enter into new hedge agreements,” the rating agency concludes.

In other news…

APAC strategic partnership inked
KKR and UAE sovereign wealth fund Mubadala Investment Company have signed a strategic partnership that will see the two firms co-investing across performing private credit opportunities in the Asia Pacific region. The partnership aims to deploy at least US$1bn of long-term capital, providing bespoke credit solutions to companies and sponsors. Mubadala will deploy its capital alongside KKR’s existing pools of capital, including the recently raised KKR Asia Credit Opportunities Fund, a US$1.1bn vehicle focused on performing, privately originated credit investments in the region.

EMEA
Santander has formed a pan-European structured finance platform, bringing together over 110 professionals under three sectoral clusters across Frankfurt, Lisbon, London, Madrid, Paris and Warsaw. The objective is to refocus the firm’s resources to embed sectoral specialisms across its core geographies in Europe, while maintaining what it describes as a personal pan-European service for its clients.

As such, the firm has named Bart White European head of energy structured finance, based in London. He was previously md and head of structured finance, UK, at the firm.

Santander has also appointed Gonzalo Acha as head of infrastructure and transportation structured finance, based in Madrid. He previously led the firm’s Latin American and continental European structured finance team.

Finally, Marcos García has been named head of real estate, TMT and fund finance, based in Madrid. He was formerly head of LBO, real estate and TMT-Infra, continental Europe and the Andean region.

Structured Finance

Irish reperforming RMBS stress tested

Sector developments and company hires

Irish reperforming RMBS stress tested
S&P has conducted a scenario analysis of seven of the Irish reperforming RMBS it rates, to investigate the impact of the rising cost of living, since legacy mortgage loans are particularly vulnerable to rate increases as the borrowers in these transactions predominantly (94%) pay variable interest rates. The combination of an expected increase in debt servicing costs and previously compromised performance implies that late-stage arrears could materially increase for these transactions.

S&P’s scenario analysis examines the impact of a low, medium and high performance shock - reflecting progressively strenuous scenarios resulting from the increased cost of living - on Irish reperforming RMBS, covering a series of hypothetical stress scenarios of increased arrears. For each transaction, the agency considered loans that are now current but have been in arrears since January 2020 as a starting point for each stress level.

When arrears are applied, the loans lose any seasoning benefit and attract a foreclosure frequency adjustment - which is applied as 2.5x to 30-60 days in arrears, 5x to 60-90 days in arrears and a 100% probability of default to loans in 90-plus days in arrears. The analysis indicates greater rating migration further down the capital structure.

Single- and double-B rated tranches are most vulnerable to rating changes, suffering the most frequent downgrades with the added arrears, because they have less credit support to protect against performance changes and rely more on excess spread. By contrast, triple-A to triple-B tranche ratings are expected to remain largely stable. Low investment-grade ratings showed rating migration of one to two notches, primarily in the most severe scenario.

However, S&P notes that the severity of the impact on ratings is limited, given that many of the loans in the reperforming portfolio already have high foreclosure frequency assumptions. Other borrower and loan characteristics - including high proportions of interest-only and buy-to-let loans - also play a role.

Further, the rating agency reports that all the Irish reperforming RMBS it rates include various structural features that should help mitigate short- to medium-term liquidity stresses caused by increased arrears.

In other news…

CLO ESG questionnaire launched
The European Leveraged Finance Association (ELFA) has launched a new CLO ESG Questionnaire, designed to improve the quality of ESG reporting and data in the CLO market. The current lack of standardisation in ESG disclosure by CLO managers makes relative comparisons very difficult for CLO investors, according to the association.

ELFA’s CLO Investor Committee has collated key questions that CLO investors ask CLO managers about ESG composition and investment framework to compile a comprehensive questionnaire in two parts: one targeted at the manager level and the other aimed at gathering information on the CLO managers’ investment framework. It is intended for arranging banks to distribute the CLO ESG Questionnaire at the time of the CLO offering, to create efficiencies for both CLO managers and those involved in the syndication process.

Structured Finance

Apollo, PIMCO set to acquire Credit Suisse SPG

Sector developments and company hires

Apollo, PIMCO set to acquire Credit Suisse SPG
Credit Suisse has unveiled its new strategy and transformation plan, following a strategic review of the bank’s businesses (SCI 28 July). The bank says it is taking “extensive measures” to deliver a more integrated business model, with the goal of creating value for shareholders.

Over the next three years, Credit Suisse expects to radically restructure the investment bank to reduce RWAs of around 40%, including by reducing its exposure to securitised products and spinning CS First Boston out as an independent capital markets and advisory firm. Additionally, the bank will create a non-core unit (NCU) to accelerate the run-down of non-strategic, low-return businesses and markets to release capital. The objective is to allocate almost 80% of capital to wealth management, its Swiss bank, asset management and markets by 2025.

As part of the restructuring, Credit Suisse has entered into a framework and exclusivity agreement to transfer a significant portion of its securitised products group (SPG) to an investor group led by Apollo Global Management. Under the terms of the proposed transaction, investment vehicles managed by affiliates of Apollo and PIMCO will acquire the majority of SPG’s assets and other related financing businesses from Credit Suisse, enter into an investment management agreement to manage the residual assets on the bank’s behalf, hire the SPG team to the new platform and receive certain ongoing services from Credit Suisse in order to “maintain a seamless, high-touch experience for clients”.

The framework agreement is subject to the signing of final binding documentation, which is anticipated during 4Q22. Closing of the proposed transaction is subject to customary closing conditions and is expected to occur during 1H23.

Meanwhile, the newly-created CS First Boston envisions attracting third-party capital, as well as a preferred long-term partnership with the restructured Credit Suisse. Michael Klein will step down from the board of directors to act as advisor to group ceo Ulrich Körner, helping launch CS First Boston. It is anticipated that he will be appointed ceo designate of CS First Boston in 2023, pending regulatory approvals.

During this transition period, David Miller will continue in his current role as global head of investment banking and capital markets, reporting directly to Körner and supporting the establishment of CS First Boston as an independent firm. In addition, Mike Ebert and Ken Pang are appointed co-heads of the markets business, effective from 1 November. They will also report directly to Körner.

Louise Kitchen has been appointed head of the capital release unit, reporting directly to cfo Dixit Joshi. Kitchen most recently served as head of the capital release group and member of the group management committee at Deutsche Bank.

Finally, Christian Meissner - who has served as ceo of the investment bank and member of the executive board - will leave Credit Suisse with immediate effect.

In other news…

Acquisitions
Aristotle Capital Management is set to acquire Pacific Life Insurance Company’s third-party credit asset management firm, Pacific Asset Management (PAM). As part of the transaction, Pacific Life will receive a minority interest in Aristotle.

The transaction represents the transfer of US$20.7bn in assets under management and over 50 professionals, including 23 investment team members, to Aristotle. Subsequent to the close of the transaction, Pacific Asset Management will be known as Aristotle Pacific Capital.

Aristotle Pacific will be led by PAM ceo Dominic Nolan as ceo. The transaction is expected to close during 1H23, subject to customary approvals.

General Atlantic is set to acquire Iron Park Capital Partners to create General Atlantic Credit (GA Credit). GA Credit will expand and enhance the firm’s ability to provide creative capital solutions to high-quality companies in need of a strategic partner at multiple stages of corporate and economic lifecycles. Tripp Smith, ceo and founder of Iron Park, will be ceo of GA Credit.

Iron Park’s investment offerings include funds that invest in both the public and private credit markets, including Atlantic Park, a joint venture formed with General Atlantic in 2020. The GA Credit team includes nine mds and 18 additional investment professionals based in New York and London.

The transaction is expected to close in 1Q23, subject to regulatory approval.

Nuveen has entered into a definitive agreement to acquire a controlling interest in Arcmont Asset Management, the European private debt investment manager with US$21bn in committed capital. The acquisition will expand Nuveen's private capital expertise and presence into Europe, complementing its North American private debt and private equity investment specialist Churchill Asset Management.

With approximately 100 employees across six offices in Europe, Arcmont's experienced team of investment professionals combines pan-European origination capabilities with long-standing relationships among private equity firms, corporates and advisers. The combined capabilities of Arcmont and Churchill will create one of the world's largest private debt managers, with more than US$60bn in combined committed capital, bringing Nuveen's firmwide alternative credit assets under management to US$178bn.

Arcmont and Churchill will combine to form a new entity dubbed Nuveen Private Capital. Both firms will continue to be managed by their own respective leadership teams, but will benefit from the considerable resources, expertise and distribution capabilities of Nuveen. With more than 240 investment and support professionals, Arcmont and Churchill serve a combined investor base of approximately 600 institutional and family office investors.

Churchill president and ceo Ken Kencel and Arcmont ceo Anthony Fobel will be co-ceos of Nuveen Private Capital, reporting to William Huffman, head of Nuveen equity and fixed income. Huffman will also serve as chairman of Nuveen Private Capital.

The definitive agreement for Nuveen to acquire a controlling interest in Arcmont Asset Management includes the minority stake held by Dyal Capital Partners IV. The transaction is expected to close in 1H23, subject to regulatory approval.

EMEA
Banca Akros has appointed Daniela Di Filippo as md, corporate securitisation, based in Milan. She was previously a director within the global structured finance enhanced analytics team at Fitch. Before that, Di Filippo worked at Intesa San Paolo.

Nile Capital Group Holdings has completed a minority non-controlling investment in Prytania Asset Management. The investment will enable the firm to continue focusing on providing clients with superior investment performance, while Nile assists with strategic value-creating growth initiatives.

Nile is a long-term investor and has primarily purchased interests from outside minority holders, while Prytania staff are all remaining with the business and will maintain a large stake in the firm. The team remain focused on creating strong risk-adjusted returns for clients over time.

GSE guarantee fees reviewed
The FHFA has announced targeted changes to Fannie Mae and Freddie Mac's guarantee fee pricing by eliminating upfront fees for certain borrowers and affordable mortgage products, while implementing targeted increases to the upfront fees for most cash-out refinance loans. The move will result in savings for approximately one in five borrowers of the GSEs’ recent mortgage acquisitions.

Specifically, the FHFA is eliminating upfront fees for: first-time homebuyers at or below 100% of area median income (AMI) in most of the US and below 120% of AMI in high-cost areas; the GSEs’ flagship affordable mortgage programmes HomeReady and Home Possible loans; HFA Advantage and HFA Preferred loans; and single-family loans supporting the Duty to Serve programme. The agency says it will work with the GSEs and announce an implementation date for the changes shortly.

The implementation of new fees for cash-out refinance loans will begin on 1 February 2023, in order to minimise market and pipeline disruption.

North America
GoldenTree Asset Management has appointed Kathy Sutherland as its first ceo, reporting to managing partner and cio Steve Tananbaum, whose role will remain unchanged. He will continue to be responsible for the management of the investment team in his capacity as cio and will continue to oversee the firm’s executive committee. Sutherland will be responsible for GoldenTree’s global strategy, product and business development, as well as long-term planning.

Sutherland will continue serving as a partner and a member of the firm’s executive committee. She joined GoldenTree as a partner and head of European business development in 2008, becoming head of business development in 2014 and head of business development and strategy in 2019. She has been a member of the firm’s executive committee since June 2014.

Prior to joining GoldenTree, Sutherland spent 12 years at JPMorgan, ultimately serving as an md.

Structured credit ETF launched
Angel Oak Capital Advisors has launched the Angel Oak UltraShort Income ETF, its first exchange-traded fund, which will provide investors with an opportunity to invest in short-duration structured credit assets and cash-like instruments that seek to provide higher yield without sacrificing credit quality.

The actively managed ETF is one of the first in the ultrashort space that will have a sizable allocation to non-agency RMBS and ABS. Angel Oak believes its bottom-up approach to uncovering yield in the short-duration space will drive institutional and retail dollar flows alike.

To support its advancement into the ETF industry, the firm added Ward Bortz in June to serve as head of ETFs. Bortz previously served as head of strategy for fixed-income factors at Invesco US.