Contents

SCI MM CLO Awards: Investor of the Year

Winner: CalPERS

The largest public pension plan in the US – the US$495bn California Public Employee’s Retirement System (CalPERS) – has long been a CLO investor and has been involved with middle market CLOs since 2018. However, what caught our attention was market participants’ reports of the fund’s increased buying activity at the top of the MM CLO stack from the beginning of 2022 and its public announcement of a new asset allocation strategy at the end of 2021. That, combined with the reassurance of the US$495bn behemoth’s strong and long-term presence in a market dealing with difficult times, makes CalPERS a clear choice for SCI’s MM CLO Investor of the Year.

“Middle market CLOs is actually part of our broader CLO strategy,” explains Justina Wang, investment manager at CalPERS. “We constantly evaluate opportunities that align with CalPERS Core Values across different asset classes, and middle market is a part of that.”

CalPERS has established itself in the market as a chiefly relationship-centric investor, prioritising collaboration and longevity in deals. “Why so many managers like to work with us is because we view our investment as a partnership,” says Wang. “We work together with the managers through all aspects of the deal – from the assets, right through to the document negotiations.”

CalPERS appreciates the impact that the expected recession may have on the middle market space, but also considers it an opportunity to see greater manager differentiation as they weather the wider macroeconomic difficulties. Indeed, prior to investment, CalPERS dedicates a lot of time to understanding the value of managers.

“One of the key components of our MM CLO strategy is that we really view our work with managers as long-term partnerships,” Wang says. “Given our selected manager’s track record and expertise – as well as the resilience of CLOs seen in the past through different credit cycles, and the structural protections embedded in the CLO structure – I believe our portfolio should fare through this economic downturn okay.”

CalPERS has strengthened its MM CLO business triumphantly in the last 12 months as it has refocused its wider CLO strategy. Nevertheless, CalPERS’ steadfast commitment to establishing relationships with managers has continued through this refocus.

Wang explains: “We keep a dialogue open with the managers – even after the CLO transaction has closed – which means we can continue to talk and, if the right opportunity presents itself, then we are not afraid of moving forward with it. We’ve learned a lot over the past year – both deal-wise, market dynamic-wise and industry-wise. We really have an appreciation for the managers and how they are willing to help us understand the credit selection process.”

On 15 November 2021, the CalPERS Board of Administration announced that it had selected a new asset allocation mix that will guide the fund’s investment portfolio for the next four years, while at the same time retaining the current 6.8% target it assumes those investments will earn over the long term. The board also approved adding 5% leverage to increase diversification.

The decision concluded a nearly year-long comprehensive review of the pension system’s investment portfolio and actuarial liabilities. Known as the Asset Liability Management (ALM) process, the board conducts the evaluation every four years.

As part of the ALM process, led by CalPERS’ investment, actuarial and financial offices, the board examined different investment portfolios and their potential impact to the CalPERS fund. Each portfolio presented a different mix of assets and corresponding rate of expected return and risk volatility.

Ultimately, the board selected the portfolio with expected volatility of 12.1% and a return of 6.8%. The discount rate has been at 6.8% since July, when a strong double-digit fiscal year investment return automatically triggered a reduction under the Funding Risk Mitigation Policy.

The new asset allocation incorporated a shift towards alternative assets, which would include CLOs. It included a projected increase in private debt investment from 0% to 5% – representing approximately US$25bn. The new asset allocation took effect from 1 July 2022.

For the full list of winners in this year’s SCI Middle Market CLO Awards click here.

ABS

Encouraging activity

European ABS/MBS market update

The UK and European ABS/MBS primary market saw some signs of recovery this week, with eight deals pricing. Further, following weeks of volatile market conditions and a lengthy trend of exclusively fully privately/pre-placed deals, the UK market finally welcomed a public transaction.

Yesterday, Nationwide priced the £750m 1A class of its RMBS securitisation Silverstone 2022-2. In an impressive outcome, the final spread was set at SONIA +67bp, down from IPTs of mid 70s, with a 2.8x coverage ratio. By jurisdiction, 95% of the triple-A notes were sold into the UK and 5% into the rest of Europe.

“I was impressed with the coverage levels after what we have experienced in the last couple of months,” notes one European ABS/MBS trader. “The fact that a public primary market deal got a pretty sizeable order says something about the UK ABS market in general. It was definitely a pretty strong deal.”

On Wednesday, Dutch prime RMBS Bastion 2022-1 hit the screens. The STS/LCR eligible deal’s senior tranche was split into two notes, A1 and A2, with the latter paying a fixed rate and retained by the issuer. The €368.5mn A1 tranche was entirely pre-placed and saw the spread on the senior notes land at three-month Euribor plus 60bp.

“It was an interesting deal, in line with what we see in the market,” says the trader. “However, I do not know why they didn’t decide to go public with it – the interest was there and the market appears to be recovering, but they probably chose not to risk it.”

Earlier in the week, Multilease started the ball rolling on Monday by issuing First Swiss Mobility 2022-1 – a securitisation of auto lease receivables granted to Swiss private and commercial customers. The deal was privately placed and was followed over the next three days by five deals that were either executed in the same way or retained – ARTS Consumer; BBVA RMBS 22; Boursorama Master Home Loans France; Coppede; and Elide II FCT Compartiment 2022-01.

Meanwhile, the trader views the secondary market as “still recovering from the significant BWIC activity experienced at the end of September”, but he adds: “It feels a tad stronger than in previous weeks and we are slowly seeing more interest.”

Looking ahead, the trader does not expect encouraging spread levels and publicly syndicated deals to materialise over the next month as we head into year-end. “The European market needs more primary issuance, but we will have to wait for January for things to look up,” he concludes. “In terms of the pipeline for December, I haven’t heard anything yet and I doubt we will see many deals before next year.”

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

Vincent Nadeau

Structured Finance

SCI Start the Week - 21 November

A review of SCI's latest content

New podcast episode available
In the latest episode of the ‘SCI In Conversation’ podcast, we chat to MidOcean Partners about the firm’s Women’s Awareness Initiative and its outlook for the CLO market. To access the podcast, search for ‘SCI In Conversation’ wherever you usually get your podcasts (including Apple Podcasts and Spotify), or click here.

Last week's news and analysis
Action stations?
Reporting template review welcomed
ECB review disclosed
CET1 ratios decline amid weaker ROE outlook
Global Risk Transfer Report: Chapter three
The third of six chapters surveying the synthetic securitisation market
SCI MM CLO Awards: Deal of the Year
Winner: Golub Capital Partners CLO 18(M)-R²
SCI MM CLO Awards: Innovation of the Year
Winner: Lake Shore MM CLO IV
SCI MM CLO Awards: Issuer of the Year
Winner: Owl Rock, a division of Blue Owl
Staying strong
Partnership approach hailed as basis of SRT success
Test case
Bayern LB executes first synthetic ABS

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

Webinar free to view
Leading capital relief trade practitioners from Arch MI, ArrowMark Partners, Credit Benchmark and Guy Carpenter discussed current risk transfer trends yesterday, during a webinar hosted by SCI. Watch a replay here for more on the outlook for the synthetic securitisation sector, in light of today’s macroeconomic headwinds.

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
CFPB judgment implications - November 2022
The US Court of Appeals for the Fifth Circuit last month ruled that the CFPB is unconstitutionally funded. This Premium Content article investigates what this landmark judgment means for the securitisation industry.

Euro 'regulation tsar' - October 2022
The sustainable recovery of the European securitisation market is widely believed to lie in the hands of policymakers. This Premium Content article investigates whether a ‘regulation tsar’ could serve as a unifying authority for the industry to facilitate this process.

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.

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.

Upcoming SCI events
SCI's 7th Annual Risk Transfer & Synthetics Seminar
9 February 2023, New York

SCI’s 2nd Annual ESG Securitisation Seminar
25 April 2023, London

Capital Relief Trades

Cliff edge

New report raises alarm over output floor

The output floor is expected to render synthetic securitisations and specifically those backed by corporate and SME exposures unviable according to a Risk Control report that AFME published today (SCI 22 November). The report confirms the challenges that the floor raises for the transactions, with market participants now calling for the halving of the p factors as an urgent transitional provision to help originators cope with the impact of the floor.

According to the Risk Control report, large corporate pool RWAs will only increase by about 19%, but the securitisation RWAs will increase by about 43% once the output floor is fully implemented. The main source of the increase in RWAs will come from the mezzanine tranches, which would change from 25.8% to 84.2% of pre-securitisation pool RWAs. As a result, ‘’almost all SRT transactions-both non STC and STC currently approved by regulators for SEC-IRBA-will fail risk transfer criteria’’ says the report.

Corporate and SME loans are the bulk of the capital relief trades market and, more importantly, the floor could contribute to a significant reduction in funding to the real economy. Consequently, market participants have called for drastic and urgent transitional provisions, with the most salient one being the halving of the p factors. 

The p factors are an input into the SEC-SA and SEC-IRBA formula, and they were introduced well before the output floor. They govern the non-neutrality for the retained senior tranches of synthetic securitisations and their aim was to address modelling and agency risks.

Under the output floor, a bank using internal models must now calculate RWAs using the standardised approach and then multiply the amount obtained by 72.5%. The output floor will be gradually introduced from one January 2025 over a period of five years. Effectively, this may lead to higher risk weights for the retained senior tranches of synthetic securitisations.

The p factors have gained attention with the introduction of the output floor since ‘’although the market has generally come to accept the output floor, its impact on securitisation and SRT is highly punitive as well as being significantly outsized to all other asset classes and structures. As such, our focus in on trying to fix the SEC-SA by halving the p factors’’ says David Saunders, executive director at Santander Corporate and Investment Banking.

Santander isn’t the only one crying out for the measure. Risk Control and a recent joint letter from AFME, IACPM and others have urgently called for the same drastic change.

The letter notes: ‘’reducing the risk weight floors on retained senior tranches will have no effect unless also accompanied by the reduction of the p factor. This is urgently needed to ensure the viability of securitisation transactions and solve the double counting effect resulting from supplemental capital charges already embedded in the SEC-SA formula. This change would also bring closer alignment between requirements in the EU and the simplified supervisory formula approach applied in the United States.’’

It continues: ‘’We believe a reconsideration of these aspects of the prudential framework is fully justified following the introduction of over 100 criteria to meet the Simple, Transparent and Standardised (STS) securitisation label and safeguards applying also to non-STS securitisations. The safeguards have significantly mitigated perceived agency and modelling risks that have underpinned the design of prudential calibrations. It is worth recalling that such risks exist in many other investments, yet other types of transactions do not carry comparable capital charges.’’

Similarly, an amendment from a group of MEPs mentioned in the letter has also called for the halving of the p factors.

On November eight, the Council published a document as part of amendments to both the CRR and the CRD four. Although the paper clarifies the transitional provisions for the output floor, nothing was mentioned on the p factors. Still, the parliamentary proposal for a halving of the p factors shows differences of opinion between EU bodies. The Council and the Commission will enter trilogue negotiations with the European Parliament to agree on the final version of the text.

Stelios Papadopoulos

Capital Relief Trades

Hedging boost

Unicredit opts for uncapped swap structure

Unicredit has finalized a full stack significant risk transfer trade that is backed by an €845.7m Italian consumer portfolio. Dubbed ARTS Consumer 2022-1, the transaction is the first confirmed case of the use of an uncapped structure for the interest rate swap agreement. The mechanism aims to mitigate higher hedging costs in full stack SRTs following higher interest and swap rates and enhance excess spread levels.

Rated by DBRS and Moody’s, the transaction features €668.2m class A notes (priced at three-month Euribor plus 0.75%), €14.9m class B notes (3%), €49.1m class C notes (4.25%), 27.4m class D notes (7.75%), €86.1m class E notes (13%), €100m class F notes (VR) and €12.3m class Z notes (13%).

Banks have been finding it harder to execute full stack significant risk transfer trades for their consumer and auto loan portfolios given higher interest and swap rates. This means harder to place senior tranches and increased hedging costs respectively.

Increased hedging costs reduce the amount of available excess spread and thus the level of investor protection, while rendering the sold tranches more expensive from the bank’s perspective. In fact, synthetic securitisations have become the relatively more preferable option as a result of these developments (SCI 11 November).

According to sources close to the transaction, the hedging costs have been mitigated given that the interest rate swap doesn’t feature a cap structure. Indeed, the hedging works immediately without first breaching certain target thresholds. Moreover, unlike a cap arrangement, there’s no upfront payment as part of the agreement.

The interest rates on the loans are fixed which may result in lower excess spread available to cover losses if the coupon rates of the floating-rate notes increase. This is where the interest rate swap enters the picture since it can be used to hedge the mismatch between the collateral and the floating-rate notes.

According to the terms of the swap agreement, there’s an interest rate swap with respect to the floating-rate notes where the issuer pays an annualised 2.93% and receives three-month Euribor without a floor, based on the notional amount equal to the outstanding balance of non-defaulted loans.

The trade has a hybrid amortization structure and a one-year revolving period. The initial collateral pool has a weighted average (WA) 19.9-month seasoning and a granularity of over 100,000 loans with a geographical diversification across Italy, but with concentrations in Lazio, Lombardia, and Sicily.

Stelios Papadopoulos   

Capital Relief Trades

Risk transfer round up-24 November

CRT sector developments and deal news

CIBC is rumoured to be the issuer behind the ‘’Waterloo’’ CRT which is being arranged by BNP Paribas (SCI 10 November) amid a surge in the Canadian CRT market (SCI 22 November). Meanwhile, Deutsche Bank is believed to be readying a capital relief trade backed by Italian consumer loans.        

Stelios Papadopoulos

Capital Relief Trades

Sell-side specialisms

SRT bank relationships, technical knowledge transferred

SRT arranger/structurer departures from Citi have been notable over the last year, with Olivier Renault (SCI 1 December 2021), Mark Kruzel (SCI 11 May) and Alexis De Vrieze (SCI 8 September) all moving to the buy-side, for example. Capital relief trade sell-siders bring specialisms – including technical knowledge and bank relationships – that can be particularly valuable on the buy-side.

Investing in a significant risk transfer deal involves getting comfortable with both credit components and structuring components. Uniquely, what an SRT sell-sider can bring to the buy-side is an understanding of the mechanics of a transaction and why an issuer is executing it in a certain way.

“SRT issuers are often driven by regulatory constraints and the need to comply with certain rules,” notes Renault, md and head of risk sharing at Pemberton Asset Management. “For instance, it’s not always obvious why the amortisation could switch back from sequential to pro rata - which is often driven by compliance with EBA tests or STS requirements. If you’re not a regulatory or structuring expert, you wouldn’t necessarily be aware of this.”

He adds that such technical knowledge is helpful in terms of understanding a bank’s motivation for executing an SRT transaction, as well as being able to negotiate meaningfully regarding structural features and terms. “It’s helpful to know where an issuer may be able to compromise and where it can’t; for example, in cases where it might fail a regulatory test. Similarly, banks often use the possibility of failing a regulatory test as an excuse, but I know what is true and what isn’t. Having that experience enables a more thoughtful discussion.”

Structurers can also add value in terms of understanding the subtleties of different regulatory regimes. Meanwhile, arrangers will have pitched to many banks and therefore will have many connections – not only with current issuers, but also with the next generation of issuers.

“This network can be very powerful in terms of origination: it means that, as an investor, your pipeline is not always the same as everyone else’s. Additionally, the advantage of being involved in debut deals is that they tend to be less competitive,” Renault observes.

Another – perhaps more cerebral – advantage of a sell-sider moving to the buy-side is that they are able to put their skills to work in terms of underwriting. As Renault comments: “On the sell-side, once a deal is arranged, you’re out of the picture.”

Pemberton is currently in the process of finalising its first SRT investment, a small club deal. “Given the current market environment, we’ll benefit from wider yields. But, at the same time, we’re having to price in more expected losses,” Renault concludes.

Corinne Smith

Capital Relief Trades

Lift off

Canadian CRT market picks up

Toronto Dominion Bank is believed to be the latest Canadian lender to be readying a capital relief trade amid a surge in the country’s risk transfer market (SCI 14 November). Indeed, five transactions are currently in the pipeline as Canadian issuers get ready for the implementation of the Basel output floor next year.

According to SCI data there’s currently five transactions in the pipeline with the bulk of them expected to be finalized in 1Q23. The deals that are anticipated to close next year include the Toronto Dominion CRT, two trades from Royal Bank of Canada and one that is being arranged by BNP Paribas called ‘’Waterloo’’.

The rise in issuance in the Canadian market marks a significant break with the past given that the only active originator until now has been Bank of Montreal. The bank itself has experienced a record year for its own risk transfer issuance with a total of eight synthetic securitisations this year (SCI 2 November). Issuance is driven by the lender’s ongoing acquisition of Bank of the West. 

The pickup in the Canadian market is perhaps not surprising given that the Canadian supervisor, the office of the superintendent of financial institutions (OFSI), stipulated in an official letter that was published on January 31 that the Basel output floor would have to be effectively frontloaded next year.

According to the letter, the implementation of the 72.5% Basel output floor will be phased in over three years beginning in fiscal 2Q23. The regulatory changes further included the introduction of new deductions from CET1 capital for certain exposures formerly subject to a 1250% risk weight and reverse mortgages with LTV ratios greater than 80%.

Additionally, the new rules call for a reduction of capital requirements for certain qualifying revolving retail exposures and the incorporation of updates to the capital treatment of privately insured mortgages.

However, besides the implementation of the new Basel rules, several market sources note that Canadian banks are responding to headwinds that became apparent from 2021 onwards including credit migrations and the pickup in provisions. Under these conditions, synthetic securitisations become valuable as a credit risk mitigation tool that can address issues around risk, capital, and concentrations.

Stelios Papadopoulos

CLOs

SCI MM CLO Awards: Law Firm of the Year

Winner: Allen & Overy

Allen & Overy wins Law Firm of the Year in this year’s SCI Middle Market CLO Awards, as the practice is recognised for its accomplishments as a leading legal advisor in the MM CLO sector. Allen & Overy boasts a renowned team, well placed to offer advice on a wide range of sophisticated securitisation transactions and which possesses extensive CLO expertise.

Allen & Overy has received abundant praise for its MM CLO practice. The practice focuses on representing underwriters, asset managers, administrative agents and debt and equity investors in CLOs, with clear expertise on the middle market sector. It acts as a central partner to leading investment banks and collateral managers in the public widely distributed and private MM CLO space, representing lenders and borrowers in structured loan facilities, CLO warehouse facilities, risk retention financings and a variety of other asset backed securities transactions. Sitting within the wider structured finance practice, the team is widely recognised by commentators and industry leaders as a dominant force in the industry.

“A fundamental aspect which differentiates Allen & Overy in this market is that we act equally vigorously for both arrangers and managers,” notes partner Lawrence Berkovich. “This gives us a more comprehensive market understanding to arrive at a compromise that is beneficial to all parties.”

Such vision and value is further emphasised by partner Nicholas Robinson: “We take a broad view of the market, both from both the bank and manager’s side and also from the perspective of advising parties to securities issuances in the capital markets and in the private structured loan markets. We aim to strike a balance between strongly advocating for our clients and also being attuned to the commercial drivers in a deal in our understanding of all parties.”

Looking back at the past twelve months and its defining moments, the team highlights its comprehensive approach and market authority on EU risk retention compliance matters.

“There is not a particular or specific deal I would highlight,” views Robinson. “A significant number of our clients are leading European financial institutions, therefore we advise on deals which have to comply with EU securitisation regulations. To be able to truly be on top of those developments and leading the market on such aspects is clearly a highlight for us.”

He adds: “We have also been focusing extensively on warehouse lending and long-term financings. We formulate a certain flexibility for the managers to operate in the current environment and which is acceptable to the bank’s credit.”

Despite the turbulent macroeconomic backdrop and uncertainty hampering capital markets, steady appetite from CLOs has meant that volatility in this segment of market has been less pronounced. With demand for private debt running high, direct lending is becoming increasingly more competitive.

"Given the current environment, traditional banks are tightening up their lending to middle market companies and alternative direct lenders see an opportunity to further expand their market share,” notes Berkovich.  “One of the reasons we are particularly keen to participate and be so involved in this market is to partner with direct lenders in helping them take advantage of such opportunities because most MM CLOs are not arbitrage vehicles, but products designed to help direct lenders finance their business.”

Robinson further expands on this trend: “We are clearly experiencing a move to private credit deals. From a private credit perspective, there are still a lot of healthy sectors where you can look to develop businesses. And with less LBO activity given the current market constraints, direct lenders are looking to use CLOs to leverage their portfolios.”

Unsurprisingly, the outlook for the coming year is uncertain as loans and structures will experience idiosyncratic stresses from the current challenges of rising rates and geopolitical conflict. However, given MM CLOs are a financing product, such a stressful environment is likely to accelerate consolidation of private-credit lenders and MM CLO managers. In what are challenging times, the MM CLO market could experience fewer headwinds than other asset classes.

Berkovich concludes: “Generally the number of new BSL CLOs has been stable, however what is interesting to me is that we are receiving on our desk just as many new MM CLO and structured loan facility mandates. This suggests that private-credit lenders have already begun to take advantage of new opportunities.”

For the full list of winners in this year’s SCI Middle Market CLO Awards click here.

CLOs

SCI MM CLO Awards: Service Provider of the Year

Winner: U.S. Bank

U.S. Bank doesn’t merely have a narrow lead over its chief competitors in the provision of custody and trust services to middle market CLO managers: it has opened up a yawning gulf. For the 12 months ending September 30 2022 U.S. Bank claims a 60.9% market share.

The bank has been prominent in this business since the MM CLO market began really taking off in 2017, and its market share has not dropped below 50% since then. Moreover, it has been dealing with the underlying asset class – middle market loans – around 15 years.

U.S. Bank’s eminence is due to a number of factors. In a business like corporate trust and custody, experience and history count for a lot. The parent institution, US Bancorp, is the fifth largest bank in the country. It operates under the second-oldest continuous national charter, granted in 1863, and has assets of close to $575bn. It is considered a systemically important bank by the Financial Stability Board.

This pedigree is important, and the bank’s management has made it clear that it is considers the provision of CLO services to be central to the model. “U.S. Bank has made a significant commitment to this business over the years, in people and in technology. It is supported at the highest levels of the bank. It is part of wealth management and investment services, one of the core revenue-generating businesses lines, and we’ve made a significant number of acquisitions in this space over the last 30 years,” says Joe Nardi, US CLO business head.

Indeed, U.S. Bank global corporate trust and custody business has bolstered its operations by no less than 26 significant acquisitions in the last 30 years, dating back to 2Q 1992. For example, at the beginning of 2021, US Bancorp bought MUFG Union Bank for $8bn, gaining the debt servicing and securities custody services alongside an additional 190,000 small business customers.

The CLO custody business remains generally labour intensive. However, U.S. Bank’s scale has allowed it to invest heavily in automated processes and this means it can devote more scale and staff resources to the middle market CLO custody business – which is even more labour intensive. “We’ve been able to shift resources to this asset class. There is a lot of picking up the phone, punching in numbers and chasing people about where this or that wire transaction went,” says David Keys, head of CDO relationship management. Some 800 staff is currently employed in the overall CLO business.

The firm operates a third-party vendor platform from Deloitte for trustee services and custodianship, but has it has been customised to suit the specific needs of U.S. Bank in the MM CLO business. “Our continuous investment in technology sets us apart,” says Nardi.

Of course, all manner of whizzy technology counts for naught without experienced staff. This is a complex business, and the firm has acquired and kept people that understand it. This also means that the barriers to entry are high; it is difficult to imagine a competitor dethroning U.S. Bank without equivalent levels of expertise and knowledge.

It got it into MM CLOs at the same time its clients did, and the business has developed as the market has developed. “We want to serve our global clients and as they evolved with the market, we wanted to make sure we could partner with them. As they developed the middle market space, we grew with them,” explains Keys.

There is no typical U.S. Bank MM CLO client, he adds. “The roster spans from the largest established managers to the small niche players that only play in the middle market space.”

The experience and understanding it had of the overall CLO market was an invaluable underpinning of its development of the middle market business. It already knew how to manage loans and it applied this, with requisite tweaks and adjustments, to this new area. The firm has been in the MM CLO space for as long as there has been a MM CLO space.

“We’ve been at the forefront of this market from the beginning. What made us successful in the overall market has made us successful in the middle market area,” says Nardi.

Its scale also allows it to be competitive with fees. Although fees have stabilised in the last year or two, there has been gradual fee compression from the earliest days of the market and U.S. Bank’s size and sophistication means that it can offer competitive rates. If it did not, it would not be able to maintain such a lead over its rivals.

Despite the seismic shifts in the global economy which have become apparent in the past year, the performance of the MM CLO business has been surprisingly robust and issue pipeline appears impressive.

“We’re in a period of disruption right now, but we expect activity to pick up again in 2023,” concludes Nardi.

For the full list of winners in this year’s SCI Middle Market CLO Awards click here.

CLOs

SCI MM CLO Awards: Arranger of the Year

Winner: Natixis

With 18 middle market CLOs arranged during the awards year, 1 October 2021 to 30 September 2022, Natixis is our Arranger of the Year. The firm’s achievement of leading nearly double the number of deals as their nearest rival is borne out of a sector-focused approach.

Christopher Gilbert who is responsible for managing the CLO banking team at Natixis, with a team of 12 bankers and four specialised syndicate professionals says they are really dedicated to the MM CLO sector. “This business is not an add-on to an ABS, leveraged finance or cash management business, this is the front, centre and core of our business and a primary pillar for Natixis,” he says.

Gilbert explains that winning this award is a team effort and he is pleased that his team’s work has received recognition within the market. “We are thrilled to receive this award – there is a great deal of focus, professionalism, dedication, a great deal of work from the team. It is very gratifying to see this recognised – I’m proud of what the team has done and it is nice to see some recognition of our accomplishments and the skill that we bring to the market.”

Natixis has been involved in the sector since the group was formed in 2003. That 19 years of experience allows it to be well-placed to deal with investors, CLO managers and other MM CLO participants.

Gilbert adds: “We have a detailed track record of many managers’ performance. We have extensive experience placing these transactions, and we have a long-term dialogue with investors. We know who is interested in this space and in many cases, we have helped them carry out their initial due diligence as they get up to speed on this market.”

Experts at the organisation explain that deep connectivity with managers and investors is the key to their success. A combination of knowledge, a focus on syndicating positions and distribution as opposed to just lending helps them to be distinguishable players in the MM CLO sector.

“When you have been doing this for many repeat clients for such a long time, there is a level of trust and understanding that translates into long term partnerships. In addition, this leads to private transactions often from the same issuers,” notes Reginald Fernandez, GSCS credit trader and CLO specialist at Natixis.

However, Gilbert explains that despite being successful in winning this award there have been challenges along the way. Like broader markets, things have been difficult since late-February and early-March due to the macroeconomic conditions, such as interest-rates, tightening monetary supply, currency fluctuations and the Ukraine disruption.

“The market has been tough – there has been a reduction in the number of active investors and the obvious widening of pricing since late-Feb to early-March,” he says. “This is not unique to the CLO market but is seen across asset classes.”

During the first part of that period, the market saw a lot of transactions with a great deal of pent-up supply and people with middle market portfolios that wanted to finance in the CLO markets, and there was a lot of money that needed to be deployed in this market.

Gilbert says: “We have been focused on what we do – since the market turned in the first quarter, the environment has been challenging and most deal takes longer. However, we have been successful in placing deals – eight of these deals were completed since the end of Feb. We have remained active during a difficult period. It’s having that deep understanding of our client’s needs.”

Gilbert adds that as we head into a period where people are worried about fundamentals, worried about how credit markets progress and react to the current macro events the increased protection CLOs has given people some comfort. “The experienced manager who issues these – their deep experience is very important; these people can handle complexities.”

Looking ahead, Gilbert says he is keen for his team to continue to display their abilities in the market, and he says that it will be interesting if the market goes into a tricky period, as he is confident that Natixis will emerge as one of the even more dominant players within the market. He observes: “The business is very well-aligned around MM CLOs, and we will be well-positioned to address the market where other players commitment to this space will be tested.”

Fernandez mirrors this view and is confident that the CLO middle market team will be able to address the possible hurdles that could lie ahead. He concludes: “We have been in the market a while; we anticipate more headwinds given the macro backdrop but are confident of working through them and coming out stronger.”

For the full list of winners in this year’s SCI Middle Market CLO Awards click here.

CLOs

SCI MM CLO Awards: Manager of the Year

Winner: Golub Capital

Manager of the Year was perhaps the toughest category at this year’s middle market CLO awards to judge, with a number of likely candidates. However, with a combination of consistent investment performance in a challenging market and strong issuance activity, Golub Capital is our worthy winner.

In terms of investment performance, the manager’s is remarkable in its unremarkability in such a volatile environment. “Things have been quite stable for us over the year. Obviously, that’s changing to an extent now with rising inflation, interest expense and other factors that are impacting the leveraged loan market more broadly. But for us, performance has been quite good,” says Alan George, Managing Director, Head of Structured Products at Golub Capital.

He continues: “Our portfolio companies continue to grow top line revenue and are operating well through this current period of volatility. Defaults have been very, very low. This is consistent with what we've seen from Golub Capital over the last 15 years.”

At the same time, Golub Capital issued and managed six new MM CLOs in the awards period from 1 October 2021 to 30 September 2022, one more than its nearest competitor. They comprised four new issues and two resets.

Among those deals is Golub Capital Partners 18(M)-R², SCI’s Transaction of the Year. But, overall, George views all six deals as part of a greater whole. “Each deal is a little nuanced in terms of the investor base and the documents that those investors require, so we balance our CLO liabilities across investor constructs,” he says. “They were all very good transactions in the typical middle market structures that we've issued over the years.”

That all-encompassing approach is in essence how Golub Capital seeks to differentiate itself. George explains: “One of the ways we differentiate ourselves is by having the type of fund construct where all the equity is owned by our private funds and so all the debt, assets and equity are consolidated onto one balance sheet. It allows us to functionally manage our portfolio across our various leverage facilities and enables us to optimise our portfolio within the constraints of our financings.”

As a result, Golub Capital can take a proactive approach across all its facilities to align the interests of the debt holders with the equity holders. “We're able to better manage risk because we are not selling third-party equity and filling up one CLO with some outsize risk relative to our other products,” says George.

He believes this approach is key for investors. “When you're buying CLO bonds, you have to understand fundamentally how the manager is prepared to manage that securitisation and what kind of controls and levers they can pull to operate through times of volatility.”

What George believes is unique to Golub Capital is the whole package. “What sets us apart from our peers is our ability to manage liabilities the right way, the fact that we've done this successfully for a long time and that we have the right expertise in place in terms of workout specialists, underwriters and valuation team to help effectively manage the pool,” he concludes.

For the full list of winners in this year’s SCI Middle Market CLO Awards click here.

Capital Relief Trades

Global Risk Transfer Report: Chapter four

In the fourth of six chapters surveying the synthetic securitisation market, SCI tracks the evolution of the issuer base

Synthetic securitisation, once tarnished by association with the global financial crisis, has long since come in from the cold. The regulatory framework has developed significantly in Europe since the introduction of the new European Securitisation Regulation in January 2019, culminating in the inclusion of significant risk transfer transactions in the STS regime in April 2021. This label has provided CRT deal flow with additional momentum, broadened the issuer base and helped to legitimise the market.

So, how has the landscape evolved since then? While Europe has historically been the centre of CRT activity, what are the prospects in the US and beyond? SCI’s Global Risk Transfer Report 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 its prospects for the future.

Chapter four: growing the issuer base
Given the utility of SRT technology, combined with clearer rules and guidelines now in place in many jurisdictions, there has been an expansion of first-time issuers entering the CRT space in the last couple of years.

Robert Bradbury, head of structured credit execution and advisory at Alvarez & Marsal, says: “As the technology becomes more mainstream, you will naturally get smaller participants looking at this. There’s much wider awareness that this technology exists now, so I get calls from banks, from private equity funds, from investors, saying please explain this technology. There’s much more public awareness and they are keen to understand how it works.”

However, the initial set-up of an SRT programme can be a daunting proposition for a bank. In particular, smaller banks with smaller IT teams face capacity issues. Consequently, it’s important for a bank to take a long-term view of the benefits of establishing an SRT programme as a strategic pillar in capital management planning.

Bradbury notes: “Many banks I’ve talked to said that the hurdle that stops them issuing is largely resourcing and operational, nothing to do with regulation or pricing.”

The hurdles required to get an STS designation are even higher, adds Seamus Fearon, Arch MI evp, CRT and European markets. “There are challenges for smaller lenders. It typically requires in-house structuring expertise at the lender, which is often a challenge for standardised lenders in terms of systems and data requirements.”

Given that over 100 different criteria need to be satisfied in order to benefit from the label, he suggests that STS is a more suitable tool for the bigger IRB banks. “It’s just more accessible for them.”

The first transaction a bank does is a relatively lengthy process, with execution taking around two to three months and internal preparation taking another three months or so. “First, you need board-level approval. You have to explain to your board why this is the best way of using those assets and the most appropriate way of handling the risk mitigation,” says Gareth Old, partner at Clifford Chance in New York.

He adds: “You then need to make sure that you have the right operational framework in place internally to identify the portfolio, to manage the reporting and make sure that you are monitoring credit events and your credit position.”

Then there’s external scrutiny. Old says: “The regulators are intensely focused on making sure that the banks genuinely get the value of the credit protection that they are buying. They will be looking very carefully at the bank systems to make sure that the portfolio is a good portfolio.”

Given the resourcing and effort to establish an SRT programme, issuer motivations for undertaking an SRT transaction can extend to beyond achieving regulatory capital relief. For example, banks also enter into CRTs for the purposes of managing economic capital and concentration limits.

Andrew Feachem, md at Guy Carpenter, confirms: “In general, banks will try to capture a range of additional benefits beyond regulatory capital relief - including reducing IFRS 9 accounting volatility, managing concentration risks, freeing up credit lines and reducing MREL requirements. Furthermore, we expect to see certain types of non-bank issuers utilising SRT technology to manage credit risks, where the motivation would clearly not be for regulatory capital relief.”

New jurisdictions
As more first-time issuers have entered the CRT market, new jurisdictions have also opened up - including Poland and Greece, where a number of national champion banks have executed SRT transactions, with both supranational and private investor participation. For example, Project K2 - finalised by mBank and PGGM in March - marked the first Polish significant risk transfer trade sold to a private investor and the first STS synthetic securitisation in the country. The transaction references a PLN9bn portfolio of large, small and medium-sized corporate loans.

Another new jurisdiction to arrive on the CRT scene this year was Hong Kong. Standard Chartered became the first bank to achieve capital relief at a local level in the jurisdiction with its US$1.5bn Sumeru IV transaction. PGGM and Alecta invested in the deal, which references a global portfolio of corporate loans.

Issuance from Asian jurisdictions is expected to grow, but at a slower pace than that seen in Europe. Feachem says: “Currently there is only consistent activity, from a regulatory perspective, from Japan. However, transactions are infrequent relative to the size of the Japanese mega banks' balance sheets and part of that is down to a perception of the high issuance costs relative to more traditional forms of balance sheet management, as well as competing regulatory/liquidity priorities in recent years.”

He adds: “We do expect other jurisdictions to come on-line, although perhaps at a slower pace than the regional and local banks would like. In some cases, that is because of a historic negative view of synthetic tranched protection by the regulator - possibly stemming from the lead-up to the global financial crisis - and in other cases, because of limited regulatory experience in supervising banks with a more active approach to credit portfolio management. What is needed here is patient advocacy with the regulatory bodies.”

US potential
The largest potential impact on CRT supply could nevertheless emerge from the US, given the size of US bank balance sheets and the high quality/low yielding nature of the exposures. “The assets align strongly with the CRT market,” suggests Kaelynn Abrell, partner and portfolio manager at ArrowMark Partners.

However, over the last 18 months, there has been a pause in issuance among some of the larger US banks. Old indicates that the reasons for that remain “somewhat obscure”, but are likely to be around discussions with their regulators.

The jurisdiction faces a number of constraints, including the FDIC’s broad ability to repudiate any obligation of a bank if it is appointed as a receiver or conservator. This means that any portfolio transaction has to satisfy the securitisation safe harbour or the participation safe harbour – both of which are largely predicated around a true sale context - in order to offer investors assurance that the FDIC will not exercise its repudiation rights.

Fearon believes that there is unlikely to be broad adoption of private CRT in the US, absent regulatory changes. “The regulators need to keep it simple,” he warns. “We have seen some private deals from a handful of players, such as JPMorgan, but the timeline and the regulatory cost burden to get transactions approved is particularly onerous. The banks would need more confidence that they can get their deals approved before taking them through various different regulatory bodies.”

Tim Armstrong, md at Guy Carpenter, agrees that the regulatory picture for private CRT in the US remains unclear, as there is no clear recipe for regulatory capital credit. “It's a complex regulatory environment with multiple regulators involved and the shadow of GFC failings still hangs heavy. From an unfunded perspective, while technically capital credit is allowed, the current regulations severely limit its applications. However, with recent regulatory developments, there is optimism for additional clarity.”

According to Old, the US credit portfolio management market is very different from other jurisdictions and so private CRT should be viewed within that context. “The cash alternatives to CRT transactions are much deeper and more prevalent than they are in most of Europe. So, the motivation for doing a private CRT transaction - which is quite a complicated thing to do - is rather different,” he explains.

Regional banks
A few regional banks have nonetheless entered the US CRT market, the first being Texas Capital Bank in March 2021 with a mortgage warehouse deal. Western Alliance Bank has since executed three transactions, referencing mortgages and capital call facilities.

More recently, in September, California-based Pacific Western Bank entered the market with a four-tranche CLN referencing residential mortgage assets. Unusually, the deal was a one-off, not the beginning of a larger programme. PWB is not a mortgage originator or warehouse lender, but acquired residential mortgages from other lenders because the assets fit its risk/return requirements.

Old indicates that there are a couple more regional bank deals in the pipeline for late 2022 or early 2023. “I can think of at least five regional banks that are looking quite carefully at the product, but very critically. There's a very significant investment that is required before you start putting together CRT transactions. You’ve got to have confidence that not only is there a case for the current portfolio, but also that you will come back to the market again.”

In terms of reference pools, one area of focus is relatively high-quality assets that have a good credit story behind them and are available in some depth. “So far, there are three different asset classes, but discussions are going on around more or less anything the bank has on its books in large volumes - for instance, auto loan transactions or more consumer loans,” Old notes. “There has been discussion about doing synthetic credit card transactions. We’ve spent a lot of time figuring out how they would work, but it’s a stretch to figure out whether that's better for the bank than the cash transaction.”

Armstrong agrees: “We have seen a sharp increase in inquiries from a variety of risk holders who are looking to CRT to diversify sources of capital and manage a variety of regulatory objectives across an increasing range of asset classes.”

The most recent Western Alliance deal was done on a principal protected basis, marking a first for the market. Old suggests that it will be interesting to see whether that feature is repeated and develops into being essentially a mandatory feature of any regional bank-issued CRT programme, or whether it's something done through a pricing uplift.

Looking ahead, he is optimistic about the prospects for the US private CRT market. “There are a lot of economic headwinds, but capital remains king and we are confident that CRT is going to be able to hold its own against competitors. Because it is very directly focused on maintaining the deep relationships between the banks and their customers and asset bases, while also developing the risk transfer capabilities shown in the European CRT markets for the last decade.”

SCI’s Global Risk Transfer Report is sponsored by Arch MI, ArrowMark Partners, Credit Benchmark and Guy Carpenter. The report can be downloaded, for free, here.

*For more on the outlook for global risk transfer activity, watch a replay of our complimentary webinarheld on 2 November.*

ABS

Less dilutive

Dan Trolio, executive svp and cfo of Horizon Technology Finance Corporation, answers SCI's questions

Q: Horizon recently completed a US$158m ABS - Horizon Funding Trust 2022-1 - backed by non-investment grade performing loans advanced to venture capital-backed companies in the technology, life science, healthcare information and sustainability industries. DBRS Morningstar assigned a single-A rating to the US$100m class A notes, which bear interest at a fixed interest rate of 7.56% per annum and have a stated maturity date of 15 November 2030. What was the motivation to return to the market with a new securitisation?
A: Our overall strategy is to diversify our debt stack by obtaining different sources and types of debt, which add positive aspects to the leverage on our balance sheet. In 2019, we closed a securitisation with a similar structure, which has worked out well for both Horizon and the noteholders. Accordingly, as we significantly grew the asset side of our balance sheet with new loans utilising debt capital from our revolving credit facility with a variable rate of interest, an additional securitisation with a fixed interest rate was an attractive debt source.

In addition to fixing the cost of a portion of our debt capital, the new securitisation increased our capacity to continue to grow the asset side of our balance sheet with additional leverage and freed up capacity on our revolving credit facility to make new loans. Like our 2019 securitisation, the new securitisation allows us a maximum 2:1 leverage, which allows us to increase the overall leverage on our portfolio.

Q: Has the industry changed much since your previous securitisation issuance?
A: From our perspective, the industry did not change much, nor did the structure of the securitisation. But obviously the rates have significantly changed since 2019. Thanks to our strong and long-standing relationships with our debt investors, Horizon was able to access its family of investors, including several from the 2019 securitisation, and not have to market the transaction. 

Q: What are the prospects for the venture debt ABS market?
A: Just like everyone else, we are living in interesting times, especially with all of the macroeconomic issues. The venture debt market looks different than it did a couple of years ago when there was more competition from equity capital. With the recent slowdown in equity investment, the demand for debt has increased, but so has the need for venture lenders to be more selective.

The feature of venture debt that has been most attractive to investors in emerging companies is that debt capital is less dilutive to their ownership interests than equity capital. During the past several years, valuations significantly increased and equity sponsors had plenty of capital to deploy, thus it was more attractive for some private companies to take additional equity over debt.

Today equity sponsors still have access to historically high levels of equity capital, but they are being more cautious and asking their portfolio companies to cut expenses and be more efficient with their cash. Investors still want growth, but are willing to accept lower growth in exchange for reducing their equity capital needs.

With that in mind, we believe sponsors and their companies are more likely to consider and choose venture debt to complement new equity investment. We believe these dynamics continue to increase the demand for venture debt. But, as Horizon has always done, venture lenders need to carefully navigate through the current macroeconomic environment. 

Vincent Nadeau

Asset-Backed Finance

Unlimited mandate

Robert Bradbury, head of structured credit execution and advisory at Alvarez & Marsal (A&M), answers SCI's questions

Q: A&M’s structured credit offering is a core component of the firm’s portfolio advisory group, which acts for both the buy-side and the sell-side in respect of portfolio and credit opportunities across asset classes, including core lending books, non-performing loans, aviation, shipping and specialty lending, as well as all structured finance opportunities relating to these segments. What does your current role and mission at Alvarez & Marsal entail?
A: My mandate at A&M is to focus on all the different layers of structured credit, with a particular expertise and emphasis on securitisation. On one hand, this includes risk transfer - both synthetics and cash, as well as private and big banks - and it extends into a couple of other core pillars, such as warehouse financing for non-bank lenders (but also anything securitisation-related for non-bank lenders) and securitisation as it relates to buy-side or sell-side. And the third pillar in the structured credit world is anything that does not fit into a traditional mold of what a consultant would do or what A&M already does. It might be helping with valuations for SRT paper or it might be helping our debt advisory group with the repo of a retained unrated junior note, for example.

Having this expertise and skillset within the portfolio advisory team is really quite helpful and allows us to be further active on a broad range of matters, including emerging market project finance, export credit agency financing, media, music rights and shipping.  Essentially, anything that has a contractual revenue or future revenue - securitisation or not - is really something that falls into my work. In that sense, it is a fairly unlimited mandate within the securitisation framework.

Q: What can you reveal about your recent advisory involvement with Vehis, on the first-of-its-kind warehouse facility transaction in Poland?
A: Alvarez & Marsal was retained by Vehis - a car leasing business in Poland - to advise on securitisation financing to facilitate the company’s growth over the medium term. Our mandate was effectively, as advisor, to help them structure the entire transaction. Vehis had been successfully expanding - using a combination of private equity sponsorship, factoring and bank financing - and it needed a sizeable institutional debt structure in place to avoid limitations on growth.

Of course, there were a few challenges: it was the first warehouse facility transaction in Poland and the transaction had to be structured with the requirements of STS. In this specific context, the value of the company is dominated by the securitisation.

Therefore, the mezzanine needed a lot of control features that are not necessarily compatible with STS. I think it is a brilliant example of where a completely independent third party can bring a huge amount of value to a transaction.

Q: Generally speaking, what trends are currently impacting the sector?
A: One of the trends that we are seeing at the moment - because of several factors, such as interest rates having gone through the roof, inflation, funding costs going up and macro stress on defaults - is that quite a few banks are looking to exit the space of lending and providing senior loans to platforms. We are acting on a few book sales in the secondary market and we have a number of live platform financing warehouse mandates all across Europe.

There is actually a lot more than we could take on, because people are desperate for the financing. For example, we have a situation where we have been approached by a lender with an existing financing in place which is fully performing, but linked to mid-swaps. All of a sudden, they are facing strong difficulties just because of the way their financing was originally structured.

We can assist them through setting up a new structure, new capital, new tranching, new reference assets and changing the origination. But part of the problem lending platforms are facing is they can’t just pass on the rate increases the same way a bank would.

The other big theme we are seeing, with the securitisation market being largely closed, is that there is a huge boom in the private market (SCI 12 August). For the very best, highest quality, short-duration issuers, they have market access for their consumer products (such as prime autos).

It is really anyone below that level that has been shut out and, as a result, everything is either preplaced or done privately. I feel the market will be somewhat dislocated well into next year.

But there is a large demand from banks to provide private format financing because it is one of their remaining reliable sources of revenue. They need to deploy lending somewhere and they are still keen to lend if the asset class is right and the amount of equity is right. It is less aggressive than it was before, but the pricing hasn’t necessarily moved as much as one would have thought.

Vincent Nadeau

Structured Finance

Call for urgent review of SA output floor

Sector developments and company hires

Call for urgent review of SA output floor
AFME has published a study, commissioned from Risk Control, examining the impact on the European securitisation market of the introduction in 2025 of the Standardised Approach output floor. The study finds that securitisations of large corporate and SME loans are likely to be severely negatively impacted by the rule change, while securitisation of consumer loans may be boosted because the increase in capital for loans held on-balance sheet will exceed that of securitised assets. Given the contradictory effects that this change is expected to have, with no clear rationale based on policy priorities, AFME suggests that the rules are “not soundly rooted in an understanding of the relative riskiness of different asset classes” and is therefore calling on policymakers to urgently review them.

Another key conclusion of the analysis is that existing corporate transactions undertaken for risk management purposes are likely to fail the significant risk transfer test applied by European supervisors and therefore will have to be terminated. However, AFME notes that some of the negative effects of the SA output floors on existing transactions would be substantially mitigated if internal ratings-based (IRB) approach banks were required to evaluate SRT tests only at an IRBA level, even if the SA output floor is binding.

Overall, the study underlines the significant miscalibration of the SEC-IRBA and SEC-SA for mezzanine tranches and a misalignment of senior tranche risk weights in comparison to pool risk weights. As such, the findings contribute to the case for reconsidering the level of capital charges for such tranches.

AFME strongly supports proposals by MEPs for a transitional arrangement, until a wider review of the framework is undertaken. “This transitional measure is critical for the economic viability of synthetic on-balance sheet transactions, the main instrument used to share risk and redeploy capital into lending to SMEs, corporates and project finance, as they are the most severely impacted by this rule change,” the association argues.

In other news…

Cypriot NPL ABS closed
PIMCO affiliate B4 Galium Holding has completed a securitisation backed by a portfolio of Cypriot non-performing loans with a €1.02bn GBV and REO properties with a real estate valuation of €146.5m, as of 31 August 2022. Dubbed Titan Financing, the transaction envisages a double SPV structure: the assets are owned by a bankruptcy-remote Cypriot Credit Acquiring Company (CyCAC); and all collections - net of some structural costs - are passed through to the issuer, a Luxemburg SPV. The assets supporting the notes were originated by Bank of Cyprus Public Company (BOCY). The assets were transferred to the CyCAC via a court-sanctioned scheme of arrangement, which was executed on 13 November. Within the next six months, servicing of the portfolio will migrate from BOCY to Themis Portfolio Management, an affiliate of the sponsor and the CyCAC.

In terms of portfolio composition, loans representing 92.4% of the GBV are secured loans and 86.7% are backed by a first lien mortgage. However, the weighted average LTV ratio is around 140% - higher than in comparable deals – and 74.7% of the loans by GBV are still in an initial workout stage.

DBRS Morningstar and Moody’s have rated the €265m class A notes triple-B and Baa3 respectively. There are also €753m unrated class X notes.

EMEA
HIG Capital has recruited Daniel Rosenthal Ayash, Bernice Berschader and Micael Hagelin to its capital formation group, based in London.

Ayash joins the firm as an md and is responsible for managing HIG’s European client partnerships for the firm’s global private equity platform. He was previously an md in Eaton Partners’ EMEA private funds group.

Berschader joins as a principal and is responsible for managing HIG’s European client partnerships for the firm’s global credit platform. She was previously head of EMEA capital formation at Castlelake, where she was responsible for capital raising activities across the firm’s private credit, private equity and real asset strategies.

Hagelin joins as an md and is responsible for managing HIG’s European client partnerships for the firm’s global credit platform. He was previously a managing partner at New End Associates, where he was responsible for the capital formation of primary funds and direct investments covering institutional clients across the Nordics and the Netherlands.

Life settlement platform founded
Fifth Season Investments has formed a new life settlement investment platform, with backing from the Owl Rock BDCs. The move follows the acquisition of the life settlement business assets of Fifth Season Financial, as well as substantially all of the life settlement investment positions and loans secured by life insurance policies owned by Chapford Capital II and Chapford Diversified Fund.

As a result of the transaction - which is valued at US$220m - all of the employees of Fifth Season Financial, including its founding partners Adam Balinsky and Scott Rose, have moved to Fifth Season Investments' affiliate Fifth Services. The new platform will manage and invest in life insurance-backed assets, including secondary and tertiary life settlements.

Ludlow Re debuts
Hildene Capital has launched a new Class B(iii) insurance company, Ludlow Re, which will offer reinsurance to the global insurance market. The Cayman Islands-based Ludlow Re will reinsure around US$1bn of fixed index annuity reserves through its entry into a quota shared agreement with a US-based life insurance carrier.

Hildene, the US$12bn asset manager, hopes Ludlow Re will help to strengthen its asset management capabilities and provide better returns for its investors, as it believes the duration and liquidity profile of life and annuity insurance liabilities aligns well with the firm’s structured credit assets – particularly TruPS CDOs. The firm ultimately hopes both insurers and asset managers can benefit from a symbiotic relationship by having money managers gain access to insurers’ expansive capital base, while insurers in return receive access to more sophisticated investment opportunities.

Sculptor exploring sale
The board of Sculptor Capital Management has formed a special committee, comprised solely of independent directors, to explore potential interest from third parties in a transaction with the company that maximises value for shareholders.

The special committee has retained PJT Partners as its financial advisor and Latham & Watkins as its legal counsel. JPMorgan has been retained as financial advisor to the company.

The special committee has also reached out to Daniel Och and the four other former executive mds that had filed a books and records action in the Delaware Court of Chancery (SCI 3 November) and the parties agreed that the resolution of that action would be beneficial to the process initiated by the special committee for the benefit of shareholders. The parties therefore have reached a settlement to provide an agreed set of additional company books and records and dismiss the action with prejudice.

UK servicing platforms acquired
Intrum is set to acquire two consumer loan servicing platforms from Arrow Global Group, along with 50% of Arrow UK’s back book consumer portfolios, subject to customary closing conditions. The transaction is expected to be completed in 2Q23 and includes outsourcing contracts with major financial institutions, as well as the continued servicing of Arrow’s UK unsecured consumer portfolios. It marks a significant development in Intrum’s UK growth plans, following the company’s expansion in third-party servicing over the recent years.

The acquisition consists of a £36.5m consideration for the Capquest platform (for servicing unsecured consumer loans) and the Mars UK platform (for servicing residential consumer mortgage loans), along with a £121.25m investment for 50% of Arrow’s UK unsecured consumer portfolios. In total, the acquisition includes approximately 800 roles, as well as two Glasgow servicing centres and premises in Manchester.

Structured Finance

Unrepresentative 'synthetic' Libor mooted

Sector developments and company hires

Unrepresentative ‘synthetic’ Libor mooted

The UK FCA has published a consultation on a proposal to require - using its powers under the UK Benchmarks Regulation - ICE Benchmark Administration (IBA), the administrator of Libor, to publish one-, three- and six-month US dollar Libor settings under an unrepresentative ‘synthetic’ methodology after the end of June 2023 until the end of September 2024. Additionally, the FCA intends to require IBA to continue to publish the three-month ‘synthetic’ sterling Libor setting until the end of March 2024.

The consultation also seeks views on the proposed methodology the FCA would require IBA to use to determine ‘synthetic’ US dollar Libor and on which legacy use of ‘synthetic’ US dollar Libor the FCA should permit. The consultation will remain open until 6 January 2023 and the FCA expects to announce its decision in late Q1 or early Q2 next year.

In other news…

EMEA

Ashurst has named Martin Kaiser head of securitisation (Europe), based in Frankfurt. He has been a partner at the firm since September 2017, having previously been a partner in Baker & McKenzie’s German banking and finance practice.

Global

White & Case has promoted 26 lawyers to local partner and 14 lawyers to counsel, effective from 1 January 2023, including five whose practice involves securitisations.

Caitlin Colesanti has been named counsel in the firm’s global capital markets practice. Based in New York, her practice focuses on advising domestic issuers, investment banks and sponsors on whole business securitisations, rental car securitisations, asset-backed financings, receivables financings and CLO issuances and refinancings.

Meanwhile, in Europe, Markus Fischer has been named a local partner in White & Case’s global debt finance practice. Based in Frankfurt, his practice focuses on advising banks and other financial institutions, private equity investors and corporates on complex, cross-border finance transactions, including the acquisition and sale of non-performing loan portfolios, structured finance, real estate finance and project finance.

Alfonso Garcia Freire has been named counsel in its global debt finance practice. Based in Madrid, his practice focuses on advising major commercial banks, investment banks, financial institutions, private equity sponsors and corporate borrowers on cross-border and domestic leveraged acquisition financings, financial restructurings, syndicated and bilateral loans, securitisations and debt capital markets.

Claire-Marie Mallad has been named a local partner in the firm’s global capital markets practice. Based in Frankfurt, her practice focuses on advising financial institutions, investors and issuers on a wide range of capital markets transactions, including EMTN and CP programmes, regulatory capital and structured finance products.

Finally,Xuan Jin has been named a local partner in White & Case’s global capital markets practice. Based in Hong Kong, his practice focuses on advising issuers, sponsors and arrangers across a number of jurisdictions on debt capital markets, including securitisations and other structured finance and private credit sectors.

North America

Carlyle has announced 32 new partners and 39 new mds across 26 offices globally, effective from 1 January 2023, including two within its US loans and structured credit unit. Matt Stanczuk has been promoted to partner, while Megan Saltzman has been named md. Prior to joining Carlyle, Stanczuk was an associate in the controllers group at Goldman Sachs (within leveraged finance) and Saltzman was a vp in the private credit group of Goldman Sachs’ merchant banking division.

Fannie Mae has completed its 11th and final CIRT transaction of 2023 with 21 insurers and reinsurers.

The covered loan pool for CIRT 2022-11 consists of 34,000 single-family mortgages with an unpaid principal balance of US$10.1bn. All the loans have an LTV of between 60.01% and 80% and were acquired in November and December of last year.

Fannie Mae retains the initial 65bp of loss. If this US$65.5m retention layer is breached, then the 21 participants in the deal cover the next 340bp of loss to a maximum of US$343m.

Both GSEs have made greater use of the reinsurance market to transfer risk this year as their CAS and STACR programmes have encountered much wider spreads and general volatility as a result of macro-economic headwinds.

Figure is expanding its digital fund listing business as Apollo and Hamilton Lane launch new digital-native investment vehicles using Figure’s Digital Fund Services (DFS). The two asset managers will harness the innovative technology used at Figure to resolve business challenges, and the collaboration marks a further step in the wider adoption of blockchain in the financial services industry.

Figure’s DFS platform supports on-chain fund subscriptions and ongoing fund operations and administration and will allow asset managers to capitalise on the opportunity for increased accessibility, digital onboarding, and liquidity through its digital marketplace and real-time digitalisation operations. Investors can also benefit from Universal Passporting, which allows for an anonymised record of verified KYC credentials to be stored on-chain for use across multiple funds.

DFS and the digital-native funds will leverage the purpose-built for financial services public blockchain and ecosystem, Provenance, which is currently leveraged by over 60 financial firms and has supported more than US$12bn in transactions. Clients of DFS can also leverage Figure’s alternative trading system (ATS) for secondary transactions in private company securities and fund interests for Provenance-build smart contracts.

Vista Credit has announced the expansion of its direct lending business with the hire of new senior md, Greg Galligan. Galligan will manage the direct lending business within the firm’s multi-product credit platform and will work to help boost its origination and underwriting efforts for sponsor-backed and founder-led borrowers. In his new role, he will report to the firm’s president and senior md, David Flannery, and will also serve on the Vista Credit Partner’s Investment Committee. Galligan joins the firm with over two decades of experience across leveraged finance, having most recently worked at Ares Management where he served as partner and led the building of its direct lending efforts in the US.