Contents

CLOs

Selective positioning

Loan refi, liquidity needs to provide private credit opportunities

The European CLO market faces a number of challenges next year, including constrained loan supply, potential loan defaults and downgrades, and a squeeze on equity arbitrage. Against this backdrop, loan refinancing and borrower liquidity needs are set to provide opportunities for private credit investors.

European CLO new issue activity is expected to remain robust heading into 1Q23, which will keep loan market technicals firm, despite CLO cost of capital remaining at elevated levels. Andrew Lawson, md and head of capital markets at Permira Credit, notes that the immediate headwind for European CLOs is the high cost of capital.

“Cost of capital needs to lower, in order for the equity arbitrage to improve to historic levels. In a lot of cases this year, we’ve seen CLO equity being provided by the CLO manager itself. This has been to fill the gap, as traditional CLO equity investors move up the capital stack to the single-B and double-B tranches, while still achieving equity-like returns,” he says.

Another issue is the difficulty in ramping a deal with limited new leveraged loan supply. Against this backdrop, assets that are perceived to be high quality have rallied in the secondary market. In a recent new issue, for example, Foncia printed a €525m loan at the end of November at 95.5 - which rose to 96.5 on the break, demonstrating the strength of demand from CLO managers.

Vedanta Bagchi, portfolio manager at Commerzbank, notes that leveraged loan issuance volume in November totalled around half that seen in November 2021. It is estimated that some €5bn-€10bn of loans from leveraged buyouts sitting on bank balance sheets still need syndicating, a portion of which will likely be syndicated on a bilateral basis at discounts.

At the same time, an estimated 45-50 warehouses remain open, around half of which comprise legacy assets. “Terming these warehouses out is important for new CLO formation, as banks need to take out legacy risk before committing fresh capital,” Bagchi observes.

He anticipates that warehouses could be termed out via static deals, bifurcating the warehouses or issuing traditional CLOs with shorter reinvestment periods, on top of the traditional reinvesting deals. Loan BWICs could also become more common as warehouse partners seek to trim risk and liquidate into the market strength, given the very low new issue pipeline for 1Q23.

A further issue is that a loan maturity wall is looming in 2024. Around €3.5bn of European leveraged loans are due to mature next year (accounting for about 1.27% of the market), but around €20.5bn of loans are due in 2024 (accounting for roughly 7.5% of the market), according to BofA Global Research figures.

Bagchi says that such loan refinancing risk is broadly being addressed proactively and some loan issuers are already opting to amend-and-extend via holder consent, in return for a higher coupon.

Another solution may be that direct lenders step in to bridge the refinancing gap. “We think issuers will probably be able to refinance most of their debt due in 2024 next year, despite the challenging backdrop. This is because with higher interest rates and wider spreads, broadly syndicated loans now offer sufficient returns to direct lenders (which used to focus more on high-yielding middle market transactions), so we expect direct lenders to step in and refinance some of the debt maturing in 2024,” BofA Global Research analysts suggest. 

Meanwhile, Moody’s projects that the European speculative-grade default rate will rise from the current 2.6% to 4% by October 2023 under its baseline scenario, exceeding the long-term average of 3.1% from 2003 to 2022. Under its severely pessimistic scenario - which is characterised by circumstances that include further escalation in the Russia-Ukraine conflict and persistently high inflation that leads to more aggressive interest rate hikes than anticipated - the default rate could reach 11.6% by October 2023. However, this figure still remains below the financial crisis peak of 14.1% reached in August 2009.

The rating agency notes that the European leveraged finance market is dominated by companies with single-B ratings that tend to have high leverage, low interest coverage and low or negative free cashflow. “Higher borrowing costs will create significant pressure for them and some business models will become unsustainable, leading to a rise in defaults,” it observes.

Approximately 60% of single-B rated corporates are susceptible to ratings downgrades, according to Marathon Asset Management figures. A one-notch downgrade would result in a triple-C rating, which is often accompanied by additional selling pressure, given the holding constraints of CLOs.

“If earnings decline and/or recession becomes protracted, we expect to see debt prices for this subset of vulnerable credits that are single-B rated to decline by 20 points, as a result of just a one-notch rating downgrade. As weaker creditworthy issuers face liquidity crunches from debt servicing issues, the natural providers of new liquidity are existing lenders,” Marathon Asset Management states in a recent whitepaper.

The firm continues: “However, many of the CLO managers are unable to provide new capital, given the structural constraints of their vehicles - such as issuer rating limitations and new money restrictions. We believe this will create a highly attractive environment for private capital solutions capabilities to fill the funding gap and deploy capital at attractive pricing and favourable terms with priority ranking.”

As concerns over collateral performance rise, CLO managers are increasing their ability to participate in various workout scenarios. The main development in this area has been the inclusion of uptier priming and asset priming language in European CLOs. The former allows managers to roll some of the senior debt of a borrower they hold into a new super priority tranche issued by the borrower, while the latter allows managers to swap debt held for debt secured by high quality collateral when borrowers relocate assets to unrestricted subsidiaries.

CLOs are also incorporating features aimed at navigating market turbulence, including delayed drawdown notes, turbo redemption, shorter non-call and reinvestment periods, and interim payment dates. A recent BofA Global Research report highlights that six European CLOs have been issued so far this year with a reinvestment period of just one or 1.1 years and a further five deals had reinvestment period of two or 2.1 years, for example. Equally, 23 CLOs were issued with non-call periods of one or 1.1 years, while 13 deals had non-call periods of 1.9-2.1 years.

Lawson remains confident that Permira Credit’s Providus CLO platform is well placed to weather geopolitical, macroeconomic and specific credit headwinds. The Providus CLOs are underweight cyclical credits and longer the more robust sectors, such as telco, healthcare and large, infrastructure-like technology assets. In addition, the platform actively manages positions and proactively re-underwrites its sector and credit decision-making.

“Pricing up to two CLOs a year allows us to be more selective in credit positioning – that’s the DNA of the Providus platform and a differentiating factor. Quality of returns, preservation of capital and market-leading risk-adjusted return on equity is a huge focus for us,” Lawson says.

Overall, KBRA predicts that European BSL CLO issuance volume will reach around €26bn by year-end, which is in line with the five-year average annual issuance (excluding the record-setting 2021). The rating agency anticipates €20bn-€25bn in issuance for full-year 2023, barring further major disruptions from the conflict in Ukraine.

Corinne Smith

CMBS

Eco warriors

New emissions standards backed by fines set to affect CMBS

Increasingly rigorous emission regulations imposed by municipalities on commercial real estate (CRE) properties throughout the USA will likely lead to cash flow difficulties for CMBS deals, say analysts.

Some 30 cities are bringing in much higher standards for CRE emissions, five of which will impose fines if the standards are not met.

San Francisco’s Environment Code 30, for example, requires all large commercial buildings to derive 40% of electricity from “renewable sources” by 2025, rising to 100% by 2050, on pain of fines of $100 per day for a maximum of 25 days in a 12-month period.

New York passed the Climate Mobilization Act in 2019 which imposes CHG emissions standards on buildings greater than 25,000 square feet, and properties which do not meet the standards will, from 2024, incur fines of $268 per metric ton with stricter penalties imposed from 2030.

“Fines might start off light but some of the West Coast cities have challenging schedules for being carbon neutral and you get the sense that at some stage they are going to ramp these up,” says Darrell Wheeler, senior credit officer with Moody’s.

Boston, Washington DC and St Louis will also introduce fines. Even if CRE properties in these five cities are able to evade penalties, the cost of transforming infrastructure, such as much earlier than expected new air conditioning and heating systems, will be considerable.

"What you might have thought was state of the art equipment and that you could amortize over 20 years has to be replaced by expensive new technology ahead of schedule,” adds Wheeler.

According to a new report by Moody’s, properties underlying some 6.5% of New York’s CMBS loans are likely to exceed the 2024 limits, rising to 66% for the more onerous 2030 cap.

For example, the 85 Tenth Avenue SASB, designated DBWF 2016-85T which cover loans to a data centre, is on course to incur fines which will represent 8.8% of NOI in 2024-2029 and 12% in 2030-34. The SASB COCMT 2013-375P, which covers a financial office building at 375 Park Avenue, could incur fines worth 7% of NOI by 2030-34.

CMBS deals underpinned by loans that are already under strain are particularly at risk, as properties do not have the latitude to convert to infrastructure with lower emissions.

Moreover, more municipalities are sure to introduce strict emissions standards as the external pressure to respond to perceived climate change risk becomes ever more noisy.

“These extra costs might not be the item that tips loans into default, but it won’t make things any easier for them. In combination with an under-performing property it may be a factor in a borrower’s final decision to default,” says Wheeler.

Simon Boughey

Structured Finance

SCI Start the Week - 5 December

A review of SCI's latest content

Last week's news and analysis
Agency activism
Divided Congress means greater agency intervention
Baltic boost
Second ever Baltic SRT finalized
CRT duo launched
Santander finalizes two auto CRTs
Don't panic!
dv01 argues that US consumer markets remain strong
Global Risk Transfer Report: Chapter five
The fifth of six chapters surveying the synthetic securitisation market
RMBS becalmed
2023 may be no better while FHFA adds to pressure on GSEs
Santander surging
NA mortgage and auto loan CRT deals looming
Swiss CRT launched
Credit Suisse executes synthetic ABS

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

SCI's 9th Annual Capital Reliefs Trades Seminar
19 October 2023, London

Capital Relief Trades

Issuance boost

BMO finalizes CRE CRTs

Bank of Montreal has finalized two synthetic securitisations from the Boreal and the newly created Taiga programme respectively. The first transaction references Canadian commercial real estate loans while the second is backed by US commercial real estate loans. Overall, BMO has executed ten capital relief trades this year rendering it the most active CRT issuer so far this year amid a strong pick up in the Canadian market (SCI 22 November).

The latest Boreal transaction features a C$70m financial guarantee due in 2028. The Taiga deal is a US$240m note due in 2029. The latest trades bring the bank’s annual deal figure this year to ten which renders it the most active CRT originator so far this year. BMO’s record issuance in 2022 is driven by the bank’s acquisition of Bank of the West (SCI 2 November).

The acquisition was announced in December last year. Under the terms of the agreement, BMO acquires Bank of the West for a cash purchase price of US$16.3bn. BMO funds the transaction primarily with excess capital given its strong capital position and anticipated capital generation.

Moreover, the bank is riding a wave of Canadian transactions this year as Canadian banks get ready for the implementation of the Basel output floor next year and as they respond to post Covid issues that became apparent from 2021 onwards such as credit migrations and a rise in provisions.

Stelios Papadopoulos

Capital Relief Trades

Sizing up

Credit Agricole completes corporate SRT

Credit Agricole has finalized a €330m first loss synthetic securitisation that references a €5.5bn portfolio of global corporate loans. Dubbed CEDAR 2022-2, the transaction is the bank’s largest synthetic ABS to date in both tranche and portfolio terms according to SCI data.

The latest deal from the programme was priced at three-month Euribor plus 10.5%. The last CEDAR trade closed in June. The €258m tranche referenced a €4.3bn global corporate pool and was priced at 8.5%-9% (see SCI’s capital relief trades database).

The transaction is riding a pickup in French issuance this year following the closing of a deal from Natixis in October, an SME deal from Societe Generale in July and a French auto SRT from Santander last month (SCI 2 December).

Meanwhile, BNP Paribas is prepping another synthetic ABS from the Resonance programme. BNP Paribas has been especially active this year as a third-party arranger, being involved in two pending trades from LBBW and CIBC respectively.

French and other banks are feeling the pinch from higher costs of capital and raising equity in this environment is challenging. Consequently, this renders synthetic technology a more attractive alternative.

Stelios Papadopoulos

Capital Relief Trades

Risk transfer return

Chakra seven prices wider

Standard Chartered has executed the seventh synthetic securitisation from the Chakra programme last month. The transaction references a US$1.5bn US and European corporate loan portfolio and has priced wider compared to the last trade from the programme as with most capital relief trades in the market this year.  

According to market sources, the deal features a first loss tranche (0%-6.5%) that was priced at 11% and a mezzanine tranche (6.5%-9%) that was priced at 4.75%. Standard Chartered declined to comment.

The last Chakra deal closed in December last year. The US$90m CLN referenced a US$1bn corporate portfolio and it’s the most tightly priced synthetic ABS from the programme (SCI 15 December 2021).

Chakra seven follows the bank’s landmark Sumeru four CRT which was completed in July. The transaction allowed Standard Chartered to become the first bank to benefit from capital relief in Hong Kong (SCI 14 July).

Standard Chartered initiated the Chakra programme in 2018 to hedge concentration risks through the credit cycle and grow the corporate and institutional banking business in the US and Europe.

Stelios Papadopoulos

Capital Relief Trades

Global Risk Transfer Report: Chapter six

In the final chapter of SCI's survey of the synthetic securitisation market, we examine the sector's prospects for the future

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 six: prospects for the future
Regulatory change has been a key driver of growth in the CRT market to date, but it is now expected to take a back seat. All eyes are on how the current macro themes will play out and the implementation of Basel 4.

“The outlook for the CRT market heading into 2023 and 2024 will most likely be dominated more by changes in credit conditions under the macro themes that are currently evolving. The regulatory aspect will probably be secondary, as the vast majority of regulatory items for the coming years are now well understood by market participants,” suggests Andrew Feachem, md at Guy Carpenter.

Raising capital in the equity market would be very expensive for banks amid the current volatile market conditions. As such, from a relative cost standpoint, SRT appears to be very attractive.

“Banks are once again faced with headwinds in relation to their earnings and capital ratios. They need to more actively manage their capital, as the environment remains very uncertain,” notes Kaikobad Kakalia, chief investment officer at Chorus Capital Management.

He adds: “For banks that have not issued SRT transactions previously, this is a wake-up call. This is exactly what they should be doing to manage RWA volatility at an efficient cost of capital.”

One major regulatory item remaining is the implementation of the new Basel 4 regime, which was originally intended to begin on 1 January 2022, with a phasing-in of the output floor to 1 January 2027. In March 2020, in response to the pandemic, the Basel Committee deferred the implementation timeline by 12 months to 1 January 2023.

The capital treatment of securitisations under the standardised approach are seen as quite punitive. Olivier Renault, md, head of risk sharing strategy at Pemberton Asset Management, describes the Basel 4 output floor as his “bugbear”.

“The Basel 4 floor means that a bank calculating capital under its own internal model cannot have an amount of capital which is less than 72.5% of the capital under standardised. The standardised methodology for securitisation is 72.5% of a very big number because the risk weights on securitisation under the standardised approach are very high. That makes these transactions far less efficient,” he comments.

Feachem agrees, suggesting that this will again lead to thicker tranching requirements. He comments: “As Basel 4 beds in, and with the continued maturation of the SRT market, we again see an important role for (re)insurers to play here combined with participation from real money funds.”

New jurisdictions
While the impact of Basel 4 is yet to be fully understood, ultimately it is expected to increase the capital need across bank portfolios, resulting in greater incentives to issue CRTs. At a high level, Seamus Fearon, Arch MI evp, CRT and European markets, says he is bullish about the growth of SRT in Europe. He expects existing issuers to carry out more transactions in greater volumes, as well as first-time issuances across new jurisdictions and banking groups, as banks seek to reduce their overall cost of capital.

“As an SRT investor, I think that the Basel 4 regime is likely to be a good thing as bank capital needs increase. It will be good for the overall health of the banking sector to diversify and reduce systemic risk through SRT. As an investor, if there are more deals in the market, it increases the choices you have and puts upward pressure on pricing,” Fearon observes.

He continues: “From a country perspective, you could probably see more transactions in the peripheral regions of Europe - the Baltics, Scandinavia and Eastern Europe. We’ll also see more where there has been strong issuance; predominantly Western European countries.”

This year has already seen the first-ever synthetic securitisation referencing buy now, pay later exposures from Nordic lender Klarna. And a housing community loan STS deal issued by Polish lender Getin Noble Bank broke new ground in a number of ways: one of a few standardised bank transactions sold to private investors, it was denominated in Polish zloty and featured an ESG component, given that the assets are linked to heating efficiency upgrades.

Another standout deal of the year was BNP Paribas’ Resonance Seven from July, which referenced a €13bn global corporate portfolio, representing the largest-ever CRT issued. The pricing of the seven-year €663m mezzanine tranche was described as “phenomenally tight”.

Overall, in 2022, SRT issuance continued apace - despite unfavourable conditions in the broader securitisation market – largely due to the ability to customise transactions. Issuers and investors have adapted their approach to executing CRTs to reflect volatile market conditions, Fearon notes, by excluding certain sectors and industries. Investors are also able to negotiate more in terms of pool composition and concentration.

Feachem cites parallels with 2020 in how issuers and investors are responding to the current challenging environment. “Depending on the nature of the underlying portfolio, banks will be flagging loans or sectors that are more impacted by the macroeconomic and geopolitical backdrop, with investors seeking to reduce single name and industry concentrations to those impacted exposures within the SRT.”

He adds: “We have seen risk-takers seeking shorter replenishment periods and more conservative tranching, again in line with 2020. However, while primary and secondary pricing of SRTs has been less volatile than, for example, CLOs, we have seen levels widen in a more sustained way than during Covid.”

Looking ahead, ArrowMark Partners partner and portfolio manager Kaelyn Abrell is optimistic about the market’s prospects. “Overall, the current market is offering a wider variety of transactions, which translates to increased opportunities for us. The ability for banks to issue transactions with differing characteristics also contributes to their ability to achieve various objectives on a greater variety of assets. Investors need to tailor their diligence appropriately, but we believe a wider universe of options is a positive for the broader market.”

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

BWIC template released

Sector developments and company hires

BWIC template released

Real estate standards organisation MISMO has released a BWIC standard template aimed at facilitating the bidding process for MBS between mortgage originators and dealers. The standard has achieved ‘candidate recommendation’ status, meaning that it has been thoroughly reviewed by industry participants and is available for use across the industry.

Mortgage originators are increasingly distributing BWICs to securities dealers. However, the information transmitted to dealers is not currently standardised. As a result, dealers are struggling to keep up with the increased volume of BWICs - which can lead to delays, lower pricing and lower rates of participation in the BWIC process.

The creation of MISMO’s data standard is expected to facilitate increased accuracy, liquidity and rapid pricing by dealers for BWIC lists.

In other news…..

EMEA

Gaetano Anselmi has joined BPER Banca as senior manager, DCM. He was previously a senior risk manager and co-head of NPL disposals at Banca Carige, managing the bank’s NPL securitisation activity.

North America

Fannie Mae has announced (December 5) a tender offer for 14 M1 and M2 tranches issued between 2014 and 2018. The aggregate original principal balance was $4.8bn. Bank of America is the designated lead dealer manager with Wells Fargo as dealer manager. The tender offer expires at 5pm New York City time on Friday 9 December. Offers vary from $1,080 per $1,000 at the generous end of the scale to $1,013 at the other end.

Wilmington Trust has appointed five new team members to its CLO division, marking a total of 22 new hires for the department in 2022. Ann Cung, Jeremy Edmiston, Jack Lindsay, Ana Perkovic, and Wolf Thiele will join the growing team and report directly to CLO product division leader, Richard Britt. Cung will join as CLO transaction manager and maintain responsibility for reviewing, analysing, and negotiating transactions and governing documents, and joins from BNY Mellon where she managed prominent investment bank relationships alongside internal and external counsel. Edmiston, Lindsay, Perkovic, and Thiele will join as relationship managers and will be responsible for the transaction lifecycle including client onboarding, account set-up, documentation review, KYC liaison, as well as monthly and quarterly compliance and day-to-day client support. Edmiston, Lindsay, and Perkovic all join Wilmington Trust’s CLO and loan division from US Bank, while Thiele joins the team from Deutsche Bank where he served as an SCS specialist.

Portfolio optimisation tool launched

Allvue Systems has formed a partnership with Exos Financial to bring the Allvue Exos Portfolio Optimizer solution to market. The Optimizer solution allows front-office users to evaluate their loan portfolios to determine the most beneficial trades and boost performance, with CLO portfolios as an initial focus.

The technology aims to help identify ideal investment opportunities and execute trade management, including full pre-trade and post-trade compliance via a seamless workflow. Exos’ deep understanding of data science supplemented by Allvue’s extensive data sources across the investment lifecycle will provide Allvue’s clients with informed insights to manage their investments efficiently and cost-effectively.

Exos will support Allvue’s clients with its algorithm-based methodology to identify ideal trades, automating an otherwise manual and iterative process to determine loans that will improve the portfolio composition while staying within all compliance and risk profiles determined by indentures, proprietary credit scores and risk tolerance.

Structured Finance

UK mortgage refinanceability eyed

Sector developments and company hires

UK mortgage refinanceability eyed
DBRS Morningstar has analysed the loan-level information of almost 400,000 loans within 36 portfolios of securitised UK mortgages to assess how rising interest rates affects affordability ratios, which borrowers are the most vulnerable and how many mortgages are expected to revise their rates in the short term. The findings suggest that within the owner-occupied segment, about 77% of mortgages will see their interest rates resetting over the next two years. For borrowers in the three lowest income bands, this number is 85%.

DBRS Morningstar notes that even a moderate increase in interest rates (+1%/2%) can materially challenge affordability for the lowest income earners, leading to a relative increase in their mortgage payments by +15%/30%. The ability of borrowers to refinance will depend on how high interest rates rise: a sharp increase in rates could leave many borrowers unable to refinance, given their resulting high debt-to-income ratios.

Meanwhile, the study shows that about 90% of buy-to-let mortgages are interest-only and pay an interest rate of 2.5% on average. While these mortgages might see their payments double or triple if interest rates increase significantly, most of these loans are in a fixed-rate period and have a longer time to reset than owner-occupied loans.

In other news…

Acquisition enhances SPO offering
S&P has acquired the Shades of Green business from the Center for International Climate Research (CICERO), Norway's institute for interdisciplinary climate research. The business will be integrated into S&P Global Ratings and further expand its ESG second-party opinions (SPOs) offering.

Shades of Green provides independent, research-based SPOs of green, sustainability and sustainability-linked financing frameworks and climate risk assessments and impact reporting reviews grounded in climate science. S&P will retain an office in Oslo, where Shades of Green is based. CICERO will continue to lend its climate expertise to Shades of Green and provide insights to S&P's other leading sustainability businesses. 

North America
SFA has announced the incoming class of its board of directors: Michael Canter of AllianceBernstein; David Ellis of Ares Management; Mia Koo of Brighthouse; Marlo Young of Dentons; Alberta Knowles of EY; Bryan Tsu of PIMCO; Song Kim of Upstart; Kyra Fecteau of Wellington; and Jennifer Doyle of Wells Fargo. A significant portion of the SFA’s 40 board members is rotated annually to provide fresh perspectives and expertise.

Structured Finance

Survey suggests improved sentiment

Sector developments and company hires

Survey suggests improved sentiment
KBRA has published the results of its December survey of European structured finance investors, which was conducted to gauge their views and expectations regarding the market. The report reveals a more positive picture than the rating agency’s previous investor survey from June.

“While many challenges remain for the European securitisation sector, sentiment for the market has improved over the past six months. Sentiment is not overwhelmingly upbeat, but it does lean towards a more positive environment in the beginning of 2023 versus 2H22,” KBRA notes.

Most investors surveyed expect a tightening in European securitisation market spreads over the next six months: this appears especially true for investors in RMBS, ABS and CLOs. Bank investors, independent asset managers and pension funds are the strongest believers in future tightening, while hedge funds largely anticipate further spread widening.

Meanwhile, issuance is expected to return in some sectors, with a marginal bias towards an ongoing steady supply of transactions versus a return to retention and a quiet market. From a collateral performance perspective, the UK is overwhelmingly the area of greatest concern for investors surveyed.

For the survey, KBRA gathered responses from 57 investors across a wide spectrum of asset classes, from RMBS to non-performing loan (NPL) ABS. Respondents represented a range of investor types, including those in hedge funds, family offices, pension funds. The survey asked five short questions to gather investors’ views on where the market is heading, as well as the scale of their impression.

In other news…

CAS issuance expectations lowered
Fannie Mae expects “lower issuance volumes” of CAS bonds next year in the region of US$6bn-US$8bn, the GSE has announced. It has issued around US$9bn under the programme this year, much of which was executed in H1. Two deals will be issued every two months, though Fannie Mae says it retains the option to forgo issuance in each window depending on market conditions.

The GSE has also commenced fixed-price cash tender offers for the purchase of 14 CAS bonds issued between 2014 and 2018, with an aggregated principal balance of US$4.83bn. BofA Securities is lead dealer manager on the offer and Wells Fargo is dealer manager, with Great Pacific Securities and Siebert Williams Shank & Co acting as advisors on the transaction.

EMEA
Sustainable Fitch has named senior director Maria Bazhanova co-head of EMEA, ESG ratings, based in London. She was previously head of ESG ratings, financial institutions, EMEA at Fitch Ratings. Before that, Bazhanova worked at BNP Paribas and ABN AMRO in securitisation-related roles.

North America
Neil Aggarwal has joined Reams Asset Management as portfolio manager and head of structured products, based in New York. He was previously a portfolio manager at Verition Fund Management and worked at Semper Capital Management, BlueCrest Capital Management, Jefferies, Barclays, Citi and KPMG before that.

WAB out with fourth CLN
Western Alliance Bank (WAB) is in the market with its fourth CLN transaction, designed to transfer credit risk on a guaranteed portfolio of predominantly prime mortgage assets. Dubbed Western Mortgage Reference Notes Series 2022-CL4, the deal references a pool of 3,205 loans with an unpaid principal balance of US$1.9bn and offers US$95.02m of mezzanine and junior notes with ratings – assigned by KBRA and Moody’s – ranging from double-A to single-B plus.

The reference obligations were originated and are serviced by a number of underlying loan originators and servicers, although the top originator is New American Funding, which accounts for 21.4% of the pool balance. Owner-occupied property makes up 57.9% of the pool and investment property 40.1% of the pool. The properties are concentrated in California (representing 54.9% of the pool) and non-QM loans represent 58.6% of the collateral.

The borrowers in WAL 2022-CL4 have a weighted average original credit score of 770 and a WA debt-to-income (DTI) ratio of 34.7%, which KBRA says are generally consistent with prime-quality underwriting. Additionally, there is notable borrower equity in the properties, which is reflected in the WA original LTV ratio of 66.3%.

The transaction incorporates an actual realised loss framework for the issued notes and a first-priority perfected pledge of a collateral account secures WAB’s principal obligations. A letter of credit has also been obtained to pay up to four months of interest payments due on the notes in the event an FDIC stay is imposed. KBRA notes that this is distinguishable from other, similar CLN transactions, in which unsecured obligations of the issuer constrain the rating on the related notes.

JPMorgan is sole bookrunner on the transaction.