Contents

RMBS

Agency activism

Divided Congress means greater agency intervention

The split US Congress, as a result of the recent mid-term elections, is likely to lead to the agencies responsible for the housing market to steer a course which will be both more independent and more interventionist, say analysts.

Funding that is required to promote affordable housing will be trickier to come by in a divided Congress, leading agencies like the Federal Housing Finance Agency (FHFA) and the Consumer Financial Protection Bureau (CFPB) to take matters into their own hands.

The Democrats retained control of Senate with a 50/49 split (Georgia faces a run-off on December 6) but the GOP now controls the House of Representatives with a slim 222 versus 213 seat majority. This means that Congressional spending needs bipartisan support – a scarce commodity in DC these days.

“The affordable housing agenda needs funding, and now it is more difficult to find common ground. There is a basic philosophical difference between Democrats and Republicans here” says Mike Flood, senior vice president of commercial and multi-family at the Mortgage Bankers Association (MBA).

Republicans tend to feel that government expenditure should be curtailed, or at least circumscribed, rather than endlessly expanded. “Republicans think ‘Boy, we spend a lot of money,’” explains a source.

Democrats also view government intervention into financial markets more favourably than Republicans, making another bone of contention as lawmakers consider what steps to take to make housing more affordable.

While there is more unanimity between both parties on the provision of funding to help potential home-owners and renters at the lower end of the income scale, this unanimity tends to dissipate around the level of 80% of AMI (area median income) and above, say sources.

According to the Department of Housing and Urban Development, (HUD), households with an AMI of 80% are considered low income, while those with an AMI of 50% are considered very low income.

In lieu of greater funding, the agencies most directly responsible for affordable housing – the CFPB and FHFA – will take it upon themselves to have a more prominent role. “Regulators are likely to use the full extent of their regulatory power to do what is necessary,” says Flood.

In August 2021, the FHFA announced new housing goals for the GSEs, the intention of which was to “ensure the Enterprises responsibly promote equitable access to affordable housing that reaches low- and moderate-income families, minority communities, rural areas, and other underserved populations,” said the regulator.

It proposed raising the single-family low income purchase goal from 24% to 28%, and raising the very low income purchase goal from 6% to 7%.

If Congressional funding is harder to come by, then one might expect more such initiatives from the FHFA and a stricter scrutiny of the GSEs to ensure compliance.

Meanwhile, a cloud hangs over the future of the CFPB. The government is contesting the decision of the Fifth Circuit that the agency is unconstitutionally funded, but, it says, even if the courts disagree then the funding structure can be invalidated without jeopardizing the entire future of the CFPB.

The CFPB claims it is business as usual at the moment. Indeed, in the last 24 hours, a San Francisco judge has ruled that a fintech called Block must comply with the agency’s demand for more information as it investigates allegations of fraud.

                                                                                                                        Simon Boughey

Structured Finance

SCI Start the Week - 28 November

A review of SCI's latest content

Last week's news and analysis
Cliff edge
New report raises alarm over output floor
Encouraging activity
European ABS/MBS market update
Global Risk Transfer Report: Chapter four
The fourth of six chapters surveying the synthetic securitisation market
Grounds for optimism
US equipment ABS stays strong
Hedging boost
Unicredit opts for uncapped swap structure
Less dilutive
Horizon Technology Finance Corporation answers SCI's questions
Lift off
Canadian CRT market picks up
SCI MM CLO Awards: Arranger of the Year
Winner: Natixis
SCI MM CLO Awards: Investor of the Year
Winner: CalPERS
SCI MM CLO Awards: Law Firm of the Year
Winner: Allen & Overy
SCI MM CLO Awards: Manager of the Year
Winner: Golub Capital
SCI MM CLO Awards: Service Provider of the Year
Winner: U.S. Bank
Sell-side specialisms
SRT bank relationships, technical knowledge transferred
Unlimited mandate
Alvarez & Marsal answers SCI's questions

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

Podcast
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.

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.

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.

Recent premium research to download
US equipment ABS - November 2022
US equipment ABS has had a good year, notwithstanding macro-driven spread widening. As this premium content article shows, there is also hope for 2023.

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

Swiss CRT launched

Credit Suisse executes synthetic ABS

Credit Suisse has finalized a synthetic securitisation that references a Sfr2bn portfolio of Swiss income producing real estate mortgages with most of the pool backed by residential exposures. Dubbed Elvetia 17, the transaction replaces an older Elvetia deal which the bank called earlier this year.

The transaction features an Sfr80m funded junior tranche and a Sfr40m unfunded mezzanine tranche. The first loss piece was priced less than 20% wider compared to J-Elvetia 2021-1 from last year (SCI 10 May 2021) reflecting investor confidence in the Elvetia programme. The tranches amortize on a sequential basis.

Further features include a portfolio weighted average life equal to approximately three years and a time call that can be exercised around mid-2025. Moreover, the portfolio has a replenishment period that lasts until 2026. The longer revolving period is somewhat unusual for synthetic securitisations, but it offers the bank more flexibility in a relatively uncertain macroeconomic environment.

Stelios Papadopoulos  

Capital Relief Trades

CRT duo launched

Santander finalizes two auto CRTs

Santander has finalized two synthetic securitisations that reference French and UK auto loans respectively. The transactions coincide with the increasing use of synthetic technology for consumer and auto assets (SCI 11 November). However, the recent confirmation of uncapped interest rate swap structures in full stack deals could moderate the growing trend towards synthetics going forward.

The UK transaction was rated by Moody’s and KBRA and is called Motor Securities 2022-1. It features a £24m class C note (priced at 725bps) and a £30m class D note (1475bps). No CLN notes were issued for A, B and E tranches. The portfolio totals £600m.     

The French trade is called ‘’Lorenz’’ and is a placed mezzanine tranche that is said to have priced at 12.5%. Santander allegedly was aiming for more competitive pricing but had to eventually postpone the deal and adjust both the size of the tranche and the pricing to get it off the ground. Santander declined to comment.

The deals coincide with growing synthetic ABS issuance for auto and consumer assets. 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. The 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.

Consequently, synthetic securitisations have become the preferable alternative for consumer and auto loan portfolios because of these developments. However, some banks have started using uncapped interest rate swap structures for their full stack SRTs that could moderate the shift towards synthetics (SCI 25 November).

Uncapped swap structures mitigate hedging costs given that the interest rate swap doesn’t feature a cap structure. In particular, 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.

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round up-2 December

CRT sector developments and deal news

Lloyds is believed to be readying a synthetic securitisation of corporate loans that is expected to close this month. The British lender’s last corporate CRT closed in 2015 and was called ‘’Leicester’’ (see SCI’s capital relief trades database).

Stelios Papadopoulos

Capital Relief Trades

Baltic boost

Second ever Baltic SRT finalized

Citadele banka and the EIB Group have finalized a €60m mezzanine guarantee that references a €350m portfolio of primarily Baltic SME leasing exposures. The transaction is the bank’s first significant risk transfer trade and the second ever synthetic ABS from the jurisdiction following Luminor’s transaction two years ago (SCI 18 December 2020).

The synthetic securitisation will enable Citadele to get the capital relief that will enable it to grant at least €460m in additional loans and leases to businesses in the Baltics over the next three years. In fact, 20% of the lending is geared towards green projects.

Citadele banka will receive advisory support under the Green Gateway facility through the European Investment Advisory Hub in the form of training, development of tools and manuals and on-the-job-support to enhance its capacity to identify, assess and report on green projects.

The operation is the EIB Group’s second securitisation transaction in the Baltic States. The first agreement supported at least €660m in additional loans and leases to SMEs and mid-caps in all three of the Baltic states.

Stelios Papadopoulos

Capital Relief Trades

Santander surging

NA mortgage and auto loan CRT deals looming

Santander is in the market with two regulatory capital relief deals referencing NA assets: a synthetic securitization of US mortgages and of US auto loans.

The securitization of US mortgages, dubbed 2022-MTG1, consists of a six tranche deal with a $2.7bn reference pool, attaching at 20bp and detaching at 5.40%. This gives a face value to the deal of $140m, covering 520bp of loss, say well-placed sources.

In addition, it has an auto credit-linked note, dubbed SBCLN 2022-C, in the works. This is the third credit-linked note transaction issued by SBNA in 2022 to transfer credit risk to noteholders through a hypothetical tranched financial guarantee on a reference pool of auto loans, notes Moody’s.

The reference pool is worth $2bn, say sources. The trade consists of a $10m A2 tranche rated AAA a $77m B tranche rated Aa2, a $34m C tranche rated A2, a $33m D tranche rated Baa2, a $16m E tranche rated Ba2, a $29m F tranche rated B2 and an unrated $15m G tranche.

The borrower retains an 1.8% first loss position of $36m below the G tranche, add sources.

Both deals are expected to price next week, add sources.

These two trades cap a period of hectic business from Santander. This week it also finalized securitizations of UK and French auto loans.

Sources speculate that the keenness to complete regulatory capital relief deals might be driven by the  revision of output floors in the European market. There has been much recent dissension about this of late, and Santander has been outspoken in its criticism of the “punitive impact” upon the SRT market.

Corporate and SME loans are expected to be particularly adversely affected, while deals securitizing consumer loans may, conversely, be boosted. Sources speculate that Santander, which has brought four consumer loan deals in a little more than a week, might be “getting ahead of the game."

Simon Boughey

Structured Finance

Don't panic!

Vadim Verkhoglyad, vp and head of research publication at dv01, argues that US consumer markets remain strong - despite recession fearmongering

Concerns of a recessionary impact on US consumer markets, and comparisons to the global financial crisis, are rampant across the media. This fearmongering is not accurate, is harming the market and is not in our best interest.

Widespread media analysis suggests that we are in a crisis: headlines focus on the increase in subprime auto delinquencies, the downturn of consumer equities and the collapse of companies like Carvana. However, data on the consumer sector indicates that these attention-grabbing articles are an exaggeration of what is occurring – the sector is performing fine and has done so for the past 15 years.

There are three reasons why we believe this. First, we are actually in the midst of a fairly normal credit cycle. This is supported by the fact that we are not seeing broad challenges in all asset classes, or even across the consumer sector.

There are material signs of negative performance of online consumer unsecured loans, with impairments and delinquencies rising from their record lows at a fast pace. However, much of this deterioration is attributable to specific weaker collateral attributes (for example, lower grade, lower FICO and lower income) and is partly reflective of underwriting changes. The underperformance among higher FICOs is also more of a correction from the significant outperformance seen in 2021 than a signal of a sectoral collapse.

It is normal for riskier loans to have higher default and non-payment levels. But if the consumer market was in trouble, we would see significant evidence of a deterioration of consumer credit performance in other asset classes – for example, autos or mortgages – and so far, we are not. Instead, there is no data to suggest there are rising impairments in the mortgage sector and we can see material outperformance in the auto market for this year.

Second, lenders and issuers are quicker to adjust than people realise. At the peak of economic uncertainty from March-June 2020, we saw a substantial tightening in lending standards. This was followed by a rapid return to pre-pandemic trends and a loosening of standards in 2021, as investor confidence and risk-taking capacity increased in the consumer credit sector.

This year, we have already seen the unsecured market tighten at the fastest pace we’ve seen outside of Covid in terms of new issuance standards, with lenders focusing on lower FICO scores. Standards are now trending towards their pre-Covid levels and tightening across grades, in response to uncertainties in the market.  

Third, unlike in 2007 when the mortgage market fell to its knees, there is no single sector that is collapsing now. This points to the strength of the US economy and therefore the consumer sector.

Despite the concerns raised in 2016 and 2020 about the market, no major issuers have collapsed and loans aren’t going to be defunct. As a sign of the market’s strength - despite the wide spreads, particularly in the consumer ABS space - not a single rated tranche from any major consumer unsecured issuer has ever taken a single dollar of loss.

By refusing to see the signs that the consumer market remains robust, we are harming the US economy ourselves and risk doing more damage. This can be seen in the equity valuation of online consumer lenders across asset classes, which have been impacted by market concerns, and the present negative feedback loop for stock prices.

Clearly, the market is directly responding to the negative media sentiment – with the downturn of the mortgage and equity sectors partly caused by panic proliferated by the media.

We must accept that we are not amidst a crisis and that we are not witnessing a repeat of the financial crash. Therefore, we must make different choices to those made at the time – we should not populate headlines with fear-inducing statements and make hasty choices.

For example, the US government tried to heavily regulate the mortgage market post-2008, due to fears post the crash, and this action locked many US consumers with lower credit out of the housing market and further widened inequality. This kind of reaction could be repeated, if we do not take care.

US investors must look at the data objectively to see that the concerns around the consumer market are unfounded and stop panicking.

Capital Relief Trades

Global Risk Transfer Report: Chapter five

In the fifth of six chapters surveying the synthetic securitisation market, SCI highlights the role of reinsurers in US agency CRT

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 five: US mortgage risk transfer
One of the bright spots of the US agency credit risk transfer market this year has been increased allocations to the reinsurance markets via the ACIS and CIRT programmes. Inflation and the resulting widening of credit spreads has dislocated capital market execution via the CAS and STACR programmes and made that option less efficient relative to reinsurance.

Capital market spreads spiked to as high as 200% of 2021 levels amid the volatile market conditions, while reinsurance pricing is up by 60%-80% in the same time period. “Reinsurance pricing would likely not have widened as much as it did, had the capital markets not dislocated, as many view mortgage credit risk to be up in the area of only 10%-20%,” explains Tim Armstrong, md at Guy Carpenter.

Unlike capital market participants, reinsurers don't react to market pricing changes in the secondary market, margin calls - for those investors using leverage - or liquidity premiums. “As a result, reinsurers will absorb three times the limit of liability in 2022 than they did prior to the pandemic,” he adds.

Before the pandemic, agency CRT issuance comprised approximately 75% capital markets and 25% reinsurance markets. Armstrong estimates that this year, reinsurance execution may account for closer to 50% of agency CRT issuance.

The reinsurance platform of Freddie Mac, for one, has run 30%-40% of its total CRT placement this year. Mike Reynolds, vp, single-family CRT programme at the GSE, says: “It has been really well received. We've had a number of new participants in that area. We've seen better price stability out of our reinsurance markets: capital markets executions have been more volatile.”

Freddie Mac’s search for efficiency has proved successful in reducing reinsurance transaction times. Reynolds notes that typically securitisation transactions are executed about four or five months after the MBS execution.

“This year, with the ACIS programme, we’ve actually started to execute transactions at either the same time or even one month forward: we have a hedge for our risk,” he adds.

He suggests that reinsurers have “gotten comfortable with pricing to a proxy pool”.

Indeed, as demand has shifted from the capital markets to reinsurance markets, the flexibility of reinsurance structures has continued to develop. “Several US mortgage insurers have done forward deals on future production, with innovative approaches to matching the detachments to the capital required through time. These approaches have lowered the cost of capital, as they are highly efficient,” confirms Armstrong.

Seamus Fearon, Arch MI evp, CRT and European markets, agrees that forward agency CRT is a natural market for reinsurance because it can provide capacity on a forward basis, which the capital markets struggle with.

Another area of opportunity that he points to is specific pools of cash-out refinance mortgages. These are typically in the 50%-60% LTV bracket, which falls outside the target CRT pool of risk, from 60% LTV upwards. But cash-outs attract quite a high capital charge under the capital rule.

“So, it made sense for the enterprises to try and lay off capital there,” Fearon explains. “We'd seen quite a spike in the number of cash-outs because borrowers have taken advantage of the rapid home price appreciation to take equity out of their homes at historically low interest rates. From a risk perspective, they were lower risk than historically a cash-out borrower would be, so it was a very good trade for the enterprises.”

Record volumes
Overall, Freddie Mac issued unprecedented CRT volumes of nearly US$15bn in the first half of 2022, protecting US$358bn UPB of single-family mortgages. “The volume is primarily driven by our record-breaking acquisitions. We now have nearly a US$3trn book of business. The number one driver is our record-breaking MBS issuance for 2021,” observes Reynolds.

While he describes the ACIS programme as “a tremendous success story” in a rising rate environment, with significant disruption to fixed income markets, he also notes that the floating-rate STACR programme “offers some great protection for investors, given where we are with inflation.”

However, issuance volumes are now declining. “The first half of this year was the largest; the second half is going to be smaller [and] I expect the first half of 2023 to be even smaller still. The Fed will continue to raise interest rates, so I think volumes overall will continue to decrease,” Reynolds predicts.

The best buying opportunities were earlier this year, he adds. “On both the reinsurance and capital markets, the total volumes that we'll be bringing is going to be material and interesting, but it's not going to be anything like what we saw in the first half of this year.”

Nevertheless, Freddie Mac intends to keep increasing the efficiency of its STACR programme. Reynolds says the GSE is seeking to reduce the time it takes to execute STACR transactions.

He also points to Freddie’s tender offers to repurchase outstanding STACR bonds as another area of interest. The first tender offer was launched in September 2021 and the GSE has undertaken one in each quarter of 2022.

“Investors have appreciated the opportunity to be able to sell in bulk. We have a very strong secondary market and August was a very busy month,” Reynolds observes.

ERCF weaknesses
Meanwhile, Fannie Mae is still catching up after its pause from the CRT market following the initial draft of the Enterprise Regulatory Capital Framework (ERCF) capital requirements. The ERCF has been tweaked since director Sandra Thompson ushered in a change of guard at the FHFA, but many market participants believe the GSE capital rules should be reviewed further.

Some see the latest changes made to the ERCF as an improvement over the prior version, but the haircuts for CRT remain onerous and unlike those seen in other capital regimes. Others question the degree of CRT issuance, if it were not for the binding constraints of the FHFA scorecard.  The haircuts remain a significant disincentive, distorting the risk reduction benefits of the transactions as they disconnect the capital requirement from risk, particularly over time. These weaknesses undermine the real economic value provided by loss-absorbing CRT and reduce the efficiencies of and incentives to use CRT.

Looking ahead, an affordability CRT product covering Fannie or Freddie’s affordable mortgage schemes for low- to moderate-income borrowers could be on the cards. “There will be increased ESG focus, as the FHFA encourages CRT approaches that benefit underserved borrowers,” Armstrong predicts. “The GSE programmes that support these borrowers could become CRT targets, or other loan characteristics may be targeted. We could even see an ESG scoring system introduced to CRT deals to help draw certain investors.”

Delinquencies will also be a focus. “As the US macro market changes in 2023, to the extent that a recession does occur, what kind of impact will that have on delinquencies? That's what the markets will be focusing on,” Reynolds suggests.

Nevertheless, he is optimistic about the future, pointing to sound underwriting and effective loss mitigation. “Every situation is different and past does not predict future performance. But you can see what we did coming out of Covid, with millions of properties in forbearance, and we've come out of that with very little losses. Most of those loans are back to performing.”

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.*

Structured Finance

Fitch launches new ESG ratings

Sector developments and company hires

Sustainable Fitch has launched new ESG Ratings for global labelled structured bonds and covered bonds. The news follows its opening of ESG Ratings, Data & Analysis for North American, UK, and European corporates and financial institutions earlier this year. The latest addition will see Sustainable Fitch offering entity ratings, framework ratings, and instrument ratings across covered bonds, as well as framework and instrument ratings for ABS bonds. Sustainable Fitch will give ratings on labelled structured notes across RMBS, CMBS, solar ABS, auto ABS, consumer ABS, as well as utilities ABS. The ESG ratings will be provided on an absolute and entirely cross-comparable rating scale which will include qualitative commentary from ESG analysts. The firm hopes the expansion into ESG ratings will meet rising market demand for the product and offer investors the tools needed to evaluate ESG impact, outcome, and performance.

In other news…

EMEA

Climate Bonds Initiative (CBI) has recruited Doris Honold to serve as its new chair as the organisation works to expand across the globe. Honold brings over 25 years of experience to the non-profit dedicated to mobilising global capital for climate action and joins CBI from Standard Chartered where she formerly served as coo. The German, Swiss, and global banking veteran in her role as chair will oversee the board of trustees as it offers operational and strategic oversight over the UK-based NGO.

Pictet Asset Management has hired four new private debt specialists as it works to expand its fixed income range into private debt. The new private debt team will be led by Andreas Klein in London, who joined the firm earlier this year after previously serving as md at ICG where he helped establish and build its direct lending strategy.  Klein will be joined by Axel Cordonnier and Jan Reichenbach as regional heads in the private debt team, and Christian Eckert as a senior investment manager. Cordonnier will serve as head of private debt, France, and will be based in Paris. He joins Pictet AM from Ares Management where he was a principal in its private debt investment team. Reichenbach will similarly serve as head of private debt for the DACH (Germany, Austria, Switzerland) region, joining the firm from Muzinich where he operated as md and head of DACH and NL private debt. Eckert will join Reichenbach in Frankfurt, supporting him as a senior investment manager with sourcing and executing in the DACH region. Eckert brings his experience to Pictet AM from NIBC Bank where he most recently worked on its leveraged finance team. The new team will build upon the firm’s global infrastructure, with a new direct lending fund focusing on corporate-lending in the lower middle-market bracket launching externally early next year.

Gina Hartnett has joined Schroders Capital’s securitised product and asset-based finance team in the newly-created role of coo. Based in the firm’s London office, she will report to Michelle Russell-Dowe, head of global securitised product and asset-based finance, and be a part of the investment committee. Hartnett was previously the head of distribution - portfolio management within Lloyds’ commercial banking division, responsible for the execution and delivery of a programme of complex structured finance transactions.

South America

NPL Markets has appointed Joaquín Pani as senior advisor to help the firm expand its franchise in Mexico. Pani is the founding partner of Pani Abogados and has over 14 years of experience as a financial lawyer dealing with legal matters related to distressed assets. The move follows NPL Markets’ recent partnership agreement with the IFC that seeks to develop a more efficient marketplace in South America to manage and trade performing, distressed and illiquid loans (SCI 2 August).

Structured Finance

RWA overhaul mooted under Basel 3.1

Sector developments and company hires

RWA overhaul mooted under Basel 3.1

The PRA has released a consultation paper on the UK implementation of Basel 3.1 rules, covering the parts of the Basel 3 standards that remain unimplemented in the country. Indeed, the proposals mainly seek to revise the calculation of RWAs by improving both the measurement of risk in internal models (IMs) and standardised approaches (SAs), as well as the comparability of risk measurement across firms.

In particular, the paper sets out the PRA’s proposed rules and expectations with respect to: a revised SA for credit risk; revisions to the internal ratings-based (IRB) approach for credit risk; revisions to the use of credit risk mitigation (CRM) techniques; removal of the use of IMs for calculating operational risk capital requirements, and a new SA to replace existing approaches; a revised approach to market risk; the removal of the use of IMs for credit valuation adjustment (CVA) risk, replaced by new standardised and basic approaches; and the introduction of an aggregate ‘output floor’ to ensure total RWAs for firms using IMs and subject to the floor cannot fall below 72.5% of RWAs derived under SAs, to be phased in over five years. The revised set of SAs aim to introduce more granular requirements that better reflect the risk of firms’ exposures and make them a more credible alternative to using IMs.

Meanwhile, the proposed new output floor aims to limit the extent to which firms using the IM approaches can lower their RWAs relative to the revised SAs used by SA firms. This floors IM firm RWAs at 72.5% of their SA RWAs on average across all exposures.

The PRA proposes that IM firms apply the same revised SAs in the output floor calculation to those used by SA firms. The objective is to ensure that the output floor is a consistent and transparent backstop to modelled risk weights.

Caroline Liesegang, head of prudential regulation and research at AFME, comments: “AFME is pleased to see the PRA has struck a good balance in its approach to implementing the international Basel standards. It is positive that the UK regulator has sought to ensure a coordinated approach through the proposal of a 1 January 2025 deadline, which is in line with the EU’s proposed timeline. It is also good to see that the proposal addresses certain UK-specific issues in the implementation, a regional approach the EU has also taken to address its own requirements.”

However, the association suggests that the positive adjustments in the proposals have been offset by the removal of preferential treatment elsewhere in the framework, including the SME supporting factor and the increase in capital requirements for trade finance. “AFME believes that risk sensitivity and preferential treatment for certain asset types should be retained, as they enable banks to support the real economy at a time when the financial, corporate and retail mortgage sectors are under enormous economic strain. The combined effect of all these changes will need to be carefully assessed to ensure that the overall calibration of UK regulation is appropriate,” Liesegang says.

The PRA consultation closes on 31 March 2023.

In other news….

APAC

The Ministry of Justice in Korea has approved a joint venture between Ashurst and full-service local law firm HwaHyun. Once established, Ashurst - through the JV - will become the first global firm permitted to practise Korean law since the legal market opened in 2011.

Currently led by John Kim and Huiyeon Kim, Ashurst's outbound Korean practice operates across a number of offices, with clients including Hyundai Motor Group, Samsung Group, SK Group, POSCO and Hanwha Group. HwaHyun is led by co-managing partners Kyung-Shik Shin and Nak Song Sung.

Climate risk partnership inked

Moody’s Analytics and McKinsey Sustainability have partnered to help banks identify, measure and act on risks and opportunities related to climate change. The agreement brings together the two firms’ data, analytics, software and consulting services, with the aim of providing tools to integrate climate risk into banks’ decision-making.

The collaboration combines the climate risk and analytics capabilities of Moody’s Analytics, RMS and McKinsey Sustainability’s Planetrics solution. The suite of solutions augments existing processes with climate information and projections, including climate-risk-aware credit assessment, climate stress testing and scenario analysis, and climate disclosures.

North America

Hildene Capital Management has entered into a strategic relationship with CrossCountry Mortgage (CCM), one of the largest retail residential mortgage originators in the US and CrossCountry Capital (CCC), a company focused on housing-related principal investments. Under the terms of a multi-year agreement, Hildene will gain exclusive access to certain non-qualified mortgage (non-QM) originations from the CCM platform, while CCC representatives will commit to invest in an account managed by Hildene. The relationship between Hildene and CrossCountry provides Hildene with direct access to scalable, high credit quality non-QM loans, and all parties with the opportunity to seek to securitise non-QM loans on a programmatic basis.

Structured Finance

Marble Point acquisition agreed

Sector developments and company hires

Marble Point acquisition agreed

Investcorp is set to acquire Marble Point Credit Management, an affiliate of Eagle Point Credit Management. Upon closing of the transaction, Marble Point will be combined with Investcorp Credit Management, which has US$14.2bn in AUM and an 18-year history of investing across credit markets worldwide. The combined platform will manage US$22bn in assets and rank among the top 15 CLO managers globally by AUM.

Marble Point is led by Thomas Shandell and Corey Geis. The former will lead the combined US CLO and broadly syndicated loans business for Investcorp, while the latter will serve as director of capital markets, head trader and portfolio manager at Investcorp.

The transaction - which is expected to close in 1Q23 - is subject to customary regulatory requirements and closing conditions. 

In other news……

CLO data alliance inked

Allvue Systems has formed a strategic alliance with Coefficient Markets to provide liquid credit and CLO managers with real-time, actionable markets data direct from contributing dealers that utilise Coefficient’s EPIC sell-side software suite. Through this partnership, Allvue’s clients will have market liquidity data fully integrated alongside their portfolios and daily workflow inside Allvue’s suite of loan software offerings. Historically, clients have had to rely on prior day data or view live data outside of the Allvue interface.

CLO equity vehicle closed

Polus Capital Managementhas closed its second captive CLO equity vehicle, Cairn Loan Investments II (CLI II), with €228m of committed capital. CLI II can support up to €4.5bn of European CLO issuance and to date has deployed approximately 50% of its capital, having launched five European CLOs totalling €2bn of target par.

EMEA

Alantra has strengthened its presence in Italy by incorporating private debt operations in Milan, which will be led by md Alberto Pierotti. He joined the firm earlier this year (SCI 21 April) and was previously based in the team's headquarters in Madrid.

Alantra Private Debt will invest in Italy by providing long-term and flexible senior debt instruments, from €10m to €30m, aimed at supporting medium-sized companies in all sectors, including commercial real estate. The firm will favour investments with a strong ESG policy and sustainable characteristics.

Clifford Chance has named Oliver Kronat head of global financial markets, Germany. Based in Frankfurt, he joined the firm in November 2000 and became a partner in May 2007. Kronat advises on German and international structured finance transactions, portfolio trades and alternative investments.

New CLO ETF prepped

Invesco Capital Management is set to launch an actively managed US CLO ETF on 9 December. Dubbed Invesco AAA CLO Floating Rate Note ETF, the fund will invest at least 80% of its net assets in floating rate triple-A CLO bonds of any maturity. The fund may invest up to 15% of its net assets in CLO securities with a minimum rating of double-A and up to 20% of its net assets in CLO securities that are denominated in foreign currencies.

The fund will primarily invest in CLOs whose underlying loan collateral is comprised of broadly syndicated loans, but it may also invest up to 15% of its net assets in middle-market CLOs. ICLO will limit its investment in fixed-rate CLO securities to a maximum of 15% of its net assets.