Contents

Capital Relief Trades

Regulatory storm?

CRT market split over new rules

Concern over the future viability of synthetic securitisation is rising, in light of the impending Basel output floor and the EBA’s synthetic excess spread proposals. This Premium Content article investigates whether such regulatory change is likely to be as severe as it seems.

The coming implementation of the Basel output floor and the EBA’s proposal for a full capitalisation of synthetic excess spread (SCI 11 August) are the most salient features of a pending regulatory storm that has sparked concern about the future viability of synthetic securitisations. However, disagreements are beginning to emerge as to whether such regulatory change is likely to be as severe as it seems.  

According to a Risk Control report that AFME published last month, synthetic securitisations - particularly those referencing corporate and SME loans - would become unviable under the output floor as it stands (SCI 22 November). 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.    

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 1 January 2025 over a period of five years. Effectively, this may lead to higher risk weights for the retained senior tranches of synthetic securitisations.

Market participants have therefore called for the p factors to be halved. The p factors are an input into the SEC-SA and SEC-IRBA formulas, 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.

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 significant risk transfer is highly punitive and unfair compared to other asset classes. Hence, the focus has shifted to the rectification of the SEC-SA by halving the p-factors.

If regulators don’t address the output floor, market participants expect waves of regulatory calls. Olivier Renault, portfolio manager and head of risk sharing strategy at Pemberton, notes: ‘’A CRT transaction has a typical five-year life, so it must be efficient within that time. From the end of 2024, the output floor will be a problem that will have to be addressed and if the deals don’t work, you will see a wave of regulatory calls and that’s not something that investors will likely accept.’’

However, disagreements have begun to emerge about the potential impact of the output floor. Robert Bradbury, head of structured credit execution at Alvarez & Marsal, explains: ‘’The market can, to a certain extent, cope without the halving of the p factors, since - relatively speaking - it’s still generally much more cost-effective to do an SRT transaction than raise equity.’’

He continues: ‘’The tranches are likely to be thicker and the transactions less cost-effective due to the output floor, but it won’t prevent banks from issuing. Having said that, a range of legacy deals would likely suffer under the SRT tests following the implementation of the Basel output floor, absent suitable grandfathering provisions.’’

The actual implementation of the output floor will ultimately show whether the transactions remain efficient or not. But quantitative assessments, such as the ones by Risk Control, and the broad consensus in the market still favours the halving of the p factors - despite questions around the potential severity of the output floor.

Equally, not everyone is concerned about the full capitalisation of synthetic excess spread. Some arrangers will still structure a deal with synthetic excess spread if the overall cost of the transaction makes sense (SCI 11 November). One arranger interviewed by SCI works with standardised banks and looks at the overall lifetime cost for a trade - including funding for the senior tranche, set-up costs and ratings – in order to decide between synthetic or true sale execution.

If the issuer is aiming for capital relief and funding and has a covered bond programme, then covered bonds along with a synthetic securitisation make more sense. This is because the cost of funding is more economical relative to the current spreads of full-stack securitisations.

However, if the aim is purely capital relief, synthetic securitisations are a one-way street. The tranching will be better under the supervisory formula, compared to the rating process under true sale, while the set-up costs are much lower.

Furthermore, and especially for IRB banks, the tranches would be effectively thinner and therefore come with lower absolute cost of premia. IRB banks can also benefit from better tranching, given the use of the IRB formula.

However, the full capitalisation of synthetic excess spread remains uneconomical as well as unfair from an originator perspective, since true sale securitisations aren’t subjected to the same punitive treatment. Ultimately, banks must risk weight a retained synthetic excess spread position at 1250%, or a full capital charge plus deduction.

PCS reiterated a similar point in its response to the EBA’s consultation on regulatory technical standards for synthetic excess spread in October. The PCS letter states: ‘’The proposals in the RTS require capital to be set aside against synthetic excess spread calculated over the whole life of the transaction. PCS notes that a basic feature of the CRR - as a whole - is that it operates on a one-year horizon. By departing from this approach, the EBA’s proposal would result in yet another tilting of the uneven playing field, against which European securitisations must struggle.’’

Consequently, the same letter proposes that the ‘’traditional approach of aligning true sale and synthetic securitisation prudential rules be followed and therefore, to the extent that the contracted SES mirrors the flow of actual cash excess spread in a traditional securitisation, the capital requirements be aligned. No prudential justification appears to us to support a more punitive approach to synthetics.’’

Nevertheless, this raises the question as to how synthetic excess spread can ‘mirror’ actual cash excess spread, given that synthetic excess spread has typically been a commitment of the originator that doesn’t necessarily depend on the performance of the underlying portfolio. The letter’s answer to this question is the so-called ‘true sale mirror approach’. Effectively, PCS proposes that a pool of assets - whether securitised via the true sale or synthetic format - should generate ‘actual cash’ that should be made available to cover actual losses, which is the essence of excess spread.

Shifting to structures where synthetic excess spread mirrors actual excess spread is a contractual choice for PCS. If there is a positive difference between synthetic and actual excess spread, then PCS agrees with established regulatory practice that the difference should be capitalised.

The approach has gained a following in the market, as banks wouldn’t have to fully capitalise synthetic excess spread if it mirrored the performance of the underlying portfolio. However, it’s an approach that still begs an obvious question. Can there be a mirroring between true sale and synthetic excess spread or is the so-called mirroring more of a vague reflection?

One criticism levelled against PCS’s true sale mirror approach is that identifying which portion of a portfolio of loans is the source of the synthetic excess spread is much harder, compared to true sale securitisations, given that for cash deals the loans are transferred and segregated into an SPV.

However, for some market participants, this criticism comes across as rather odd. Harry Noutsos, md at PCS, notes: ‘’When you do a synthetic securitisation, you have to identify and monitor every loan in the pool and know the protection you are buying, with loan IDs being present in the pool. Asset selection is crucial in this respect to assess the risk and know the spread in the pool.’’

He continues: ‘’There is nothing that prevents you from using the same monitoring procedures for that portfolio as you would use if that pool was sold via a true sale securitisation. In both cases, the originator is the servicer and whether the loans are sold is irrelevant to the servicing approach to a given pool.’’

Another question that market participants have raised is whether the true sale mirror approach considers hedges, such as interest rate swaps. Renault notes: ‘’Fixed-rate loans are hedged by banks, but it may be done at a macro rather than on a loan-by-loan level. So, should the bank use the fixed rate as income or the swap rate - and if it is the latter, how do you calculate the hedging cost if the bank has a macro hedge, as in the case of true sale deals?’’

Data is another issue. ‘’One of the attractions of synthetics versus cash deals is that they don’t require a lot of loan data. Adopting the true sale mirror approach would eliminate this advantage, since with synthetics, the parties to the transaction don’t need to worry about cash but whether a loan is in default or not,’’ says Renault.

Yet the most pertinent question is determining the cost of funding. The focus on funding cost is important from a significant risk transfer perspective because it is necessary to demonstrate that excess spread is real and not a commitment of the originator that is independent from the performance of the portfolio.

Renault comments: ‘’You must determine the funding cost. In cash deals the funding cost is determined from the sale of the senior tranche, but with synthetics, the senior is not issued as a financial instrument since it is implicitly retained. Banks do not match each individual loan with a funding source. Funding is done at the Treasury level on an aggregate basis, which can comprise deposits, unsecured bonds and ABS.’’

He continues: ‘’So you can’t pin down an individual funding cost on a loan-by-loan basis. One possible solution is to use the aggregate funding cost for the banks and to assume that the hedged portfolio is funded like the remainder of the balance sheet, but you can’t be specific about the funding cost of the underlying loans.’’

Additionally, how is it possible to know the administrative costs for a specific pool? Yet again, banks could consider an aggregate or proxy measure, but servicing retail pools relative to large corporates or specialised lending could result in very different costs. With cash deals, the cost of servicing is straightforward, since banks charge the SPV for services.

Nevertheless, ‘’overall, the PCS approach is intuitively attractive and could work if regulators are willing to let banks estimate the various costs on an aggregate basis. PCS also does have a valid point in the sense that if banks can demonstrate proper risk transfer, there’s no need to discriminate against synthetics. The ECB’s one-year rule works well and is well understood by lenders,’’ remarks Renault.

The question of estimating the cost of funding via proxies or on an aggregate basis is the right question. But this is where the situation becomes complicated, judging from the different responses of market participants.

The arranger comments: ‘’Figuring out the cost of funding isn’t an issue with true sale ABS, since you just sell the senior tranche, but it is a question for synthetics. For synthetics, we would take the price of the senior tranche of the same asset class as a proxy for the synthetic excess spread in the deal.’’

However, how should the ‘true market value’ or ‘true return’ of the senior piece be determined, if it is to eventually be retained? Bradbury concludes: ‘’One possible solution here could be to formalise the approach of demonstrating the ‘market’ value of the senior note as part of the SRT tests by using benchmarks from other markets and other suitable proxy approaches. Clearly, this will always be subjective to a degree. But embedding this into the already detailed SRT process would help set standards for how this could be done, while minimising basis between securitisation types.’’

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 12 December

A review of SCI's latest content

Last week's news and analysis
Ambitious objective
LEV financing investigation underway
Eco warriors
New emissions standards backed by fines set to affect CMBS
Global Risk Transfer Report: Chapter six
The final chapter of SCI's survey of the synthetic securitisation market
Issuance boost
BMO finalises CRE CRTs
Risk transfer return
Chakra seven prices wider
Selective positioning
Loan refi, liquidity needs to provide private credit opportunities
Sizing up
Credit Agricole completes corporate SRT

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 Markets
SCI Markets provides deal-focused information on the global CLO and European/UK ABS/MBS primary and secondary markets. It offers intra-day updates and searchable deal databases alongside CLO BWIC pricing and commentary. Please email David McGuinness at SCI for more information or to set up a free trial here.

Recent premium research to download
US 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.

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.

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

Structured Finance

Mind the gap

'Regulatory impediments' stalling ESG securitisation

Securitisable green lending in respect of residential mortgages on energy-efficient properties, loans for green home renovations and electric vehicle financing could exceed €300bn annually by 2030, according to a new AFME analysis. The findings are part of a study that provides a comprehensive overview of the current European regulatory landscape for green securitisation, challenges preventing the instrument from fully contributing to Europe’s green transition and the scale of its potential growth.

“Outside Europe, securitisation has already become an important tool to channel capital into green lending; however, Europe is lagging far behind other global markets, such as the US and China. This is partly due to regulatory impediments, which prevent the growth of the wider European securitisation market. Another reason is the current lack of green assets to be securitised – although this is expected to increase in the coming years,” says Shaun Baddeley, md of securitisation at AFME.

In particular, the study points out that the lack of risk-sensitivity and proportionality in the European regulatory framework for securitisation substantially prevents the revival of issuance volumes across the sector. “At the heart of the problem is the disconnect between the CMU strategy, which recognises the value of securitisation to the economy and seeks to restore a well-functioning European market, and the direction of work undertaken at the more technical level. It is telling that over the years, the European ABS market has declined in size,” it states.

The report continues: “In 2008, its size (including the UK) was 75% that of the US; however, it diminished to only 6% in 2020, a year after the implementation of the EU securitisation framework. The divergence between ambition and outcome is therefore evident and policymakers should be trying to close the gap, which becomes even more evident by looking at the current contrast between EU and US securitisation issuance levels.”

Although Europe is a leading region for green and sustainable bonds, its green securitisation market remains subdued. For instance, between 2019-2022 green securitisation issuance represented only 1.4% of total European green issuance, whereas it accounted for 8.1% in China and 32.3% in the US. 

The AFME study shows that over the last five years, only 24 securitisations with ESG characteristics have been issued in Europe, including four synthetic securitisations. Most transactions appear to combine sustainable collateral (either green or social) with sustainable (either green or social) use of proceeds.

To gauge the potential scale of future green securitisation issuance by 2030, the association partnered with S&P. The resulting data provides estimates of growth for three securitisable green asset classes: residential mortgage loans on energy-efficient properties; lending for green home renovation; and electric vehicle financing.

Among the study’s findings is that gross green mortgage lending could reach €125bn annually across eight European RMBS markets - Belgium, France, Ireland, Italy, the Netherlands, Portugal, Spain and the UK. Further, if residential buildings reach a 3% renovation rate by 2030, this could generate an annual funding requirement of about €75bn, which may partly be addressed by further mortgage advances that are securitisable. This figure assumes a fully-funded typical renovation cost of about €17,000 per property and considers the same eight European RMBS markets.

Meanwhile, in respect of new battery electric vehicles, securitisable financing could reach €80bn annually, with a further €30bn in annual financing potentially required for used ones. These estimates are in respect of the five major European auto ABS markets - France, Germany, Italy, Spain and the UK.

AFME’s key recommendations for unlocking the potential of the green securitisation market include introducing a framework for green synthetic securitisation within the scope of the EU Green Bond Standard (EuGBS) in short order. “Synthetic securitisation is a particularly useful tool in transferring credit risk from the banking sector and recycling bank capital into new lending, which is particularly the case for ESG lending. Additionally, certain asset classes - such as project/infrastructure finance and SME lending - are better suited for synthetic securitisation than true sale securitisation, given the challenges that arise in the latter around asset transfer to an SPV. The importance of SME lending as part of the CMU project and the prolific use of project finance to fund renewable developments - such as photovoltaic and wind farms - highlight the relevance of synthetic securitisation to the purpose of the EuGBS, which is to help finance sustainable investments,” the study argues.

Overall, a well-designed EuGBS should fully accommodate the characteristics of securitisation and pursue a proportionate approach to sustainability-related disclosures, according to the association.

Corinne Smith

Capital Relief Trades

Landesbank boost

LBBW executes financial guarantee

LBBW and the EIB group have finalized a €160m financial guarantee under the European guarantee fund that references a €2.1bn portfolio of German SMEs and Midcaps. The deal is riding a wave of Landesbank SRTs this year following trades from both Helaba and Bayern LB (see SCI’s capital relief trades database). Meanwhile, LBBW is readying a synthetic ABS backed by corporate loans that is expected to close by the end of the year. 

The transaction will release capital for LBBW and enable Germany’s biggest regional bank to provide €960m of new lending to small businesses (SMEs). The transaction is expected to help these businesses to recover from pandemic-induced liquidity shortages.

The EIB expects the addition of more lenders to expand overall financing to €1.34bn supporting 24 000 jobs. The transaction is supported by the European Guarantee Fund (EGF). The EGF was designed as a high-risk, high-impact intervention of limited time. Its goal is to respond to the economic impact of the coronavirus pandemic by ensuring that eligible entities and primarily SMEs in the participating EU Member States have sufficient liquidity.

Although, the most prominent economic symptoms of the COVID-19 crisis are fading, the economic costs considering rising commodity prices and inflation continue to prevail. Hence, improved access to finance helps companies weather the crisis in the medium and long term.

Under the EGF, the EIB Group has closed fifteen synthetic securitisation transactions with 15 counterparties across seven countries, namely, Bulgaria, Germany, Greece, Italy, Netherlands, Poland, and Spain. Total investment amounted to €1.4bn with all the investments being in the form of junior tranches. The counterparties have committed to allocate €12.4bn of released capital following the EIB group’s intervention into new SME lending.

Stelios Papadopoulos  

Capital Relief Trades

Battle begins

EU and industry lock horns over p factor

The European Banking Authority has published a report that articulates the view of the joint committee of the European supervisory authorities regarding the review of the prudential treatment of securitisation. The joint committee has called for a reduction of the risk weight floor for the retained senior tranches of significant risk transfer transactions, but there has been no change of stance on the p factor. Industry bodies have heavily condemned the move following clear calls for a halving of the p factor (SCI 22 November).

One of the main priorities of the EU capital markets union is the revival of the EU securitisation market to improve financing to the EU economy. Consequently, many actions have been launched, including different regulatory products from the EBA such as the extension of the STS framework to on-balance sheet securitisation.

In this context the European Commission has addressed a call for advice to the joint committee of the European Supervisory Authorities (ESAs) for the review of the prudential treatment of securitisation. The ESAs consist of the EBA, ESMA and EIOPA. According to the EBA report that was published yesterday ‘’at this stage the joint committee considers that re-calibrating the securitisation prudential framework for institutions would not be a solution which alone would ensure the revival of the securitisation market.’’

The reason for this from the committee’s perspective is that the prudential framework is not the key obstacle to the revival of the securitisation market. ‘’A holistic assessment shows that the current subdued status of the securitisation market is the result of an interplay of a series of factors-including the interplay between low supply and low demand-due to a lack of inherent interest from both sides’’ says the report.

However, the committee acknowledges that the capital framework may play a more important role in the significant risk transfer (SRT) market where investor demand seems less of an issue given stellar growth over the last six years. Moreover, the market is now better regulated compared to the period prior to the 2008 financial crisis.

Indeed, banks have been covering their funding needs for some time now through accommodative central bank policies and hence lacked the incentives to originate large volumes of traditional securitisation compared to synthetic ABS.

Against this background the committee advises for an improvement of the risk sensitivity in the prudential framework by acknowledging the reduction in model and agency risk associated with banks retaining senior tranches. The latter is achieved by recommending the reduction of the risk weight floor applicable to those retained senior tranches.

Lars Overby, head of risk-based metrics at the EBA notes: ‘’the purpose of our proposals is to get more investors into the market but in a prudent manner. Therefore, for SRT securitisations falling under certain criteria, the risk weight floor for the senior tranche retained by originators should be lowered.’’

The criteria include eligibility requirements such as pro-rata amortization with triggers to sequential and concentration limits. However, the proposal clearly falls short of market requests for a halving of the p-factor which AFME and IACPM among others have called for. Nevertheless, there is a rationale from the EBA’s perspective besides the notion of boosting SRT deal volumes.

Roberta De Filippis, policy expert at the EBA explains: ‘’The p factor isn’t lowered since this could create cliff effects defined as a situation where comparably small changes in input parameters result in comparably large changes in the risk weight associated with the tranche. This is due to the dual role of the p-factor as a smoothing parameter and as a driver of the capital non-neutrality which the report signals as an issue for future discussion.’’

However, the committee proposal has been met with bitter criticism from industry bodies. According to a PCS release published yesterday ‘’the entire STS regime is designed to eliminate agency risk in securitisations. PCS is not aware of a single securitisation specific agency risk that is not accounted for in the STS criteria.’’

PCS adds: ‘’Unfortunately, the rejection of any amendment to the p factor is not only a missed opportunity to align STS securitisation's capital requirement to the actual risks. It also negates, in the medium term, any value to the proposed lowering of the floor. From January 2025, the introduction of output floors in the final implementation of the Basel III rules will, without changes to the p factor, wipe out any benefit from the lower floor.’’

Similarly, AFME refused to mince words. The industry body’s response published today states that there is a ‘’wide consensus among issuers and investors that existing regulatory imbalances have been a decisive factor in the stagnation of securitisation in Europe. It is fundamental to address aspects of the regulatory framework which remain mis-calibrated and are holding back the tool’s potential to support the economy.’’

The EBA makes eight recommendations to the Commission, which primarily focus on resolving inconsistencies with Basel standards.

However, AFME states that ‘’none of these deal head on with two key prudential challenges for banks that are holding back the securitisation market in Europe, including the miscalibration of bank capital for securitisation and the disproportionate treatment of securitisation within the Liquidity Coverage Ratio. Both challenges disincentivise banks from participating in this asset class. What is needed here is a temporary adjustment to the p factor until a review of the securitisation standardised formula is concluded and any long-term adjustments are made.’’

As with PCS, AFME concurs that the reduction in the risk weight floor will be negated by the phase in of the new Basel rules and particularly the output floor.

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 factor. Still, a parliamentary proposal for a halving of the p factor 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

Corporate CRT launched

HSBC executes capital relief trade.

HSBC has finalized a €400m synthetic securitisation that references a portfolio of European corporate loans. Dubbed project Pixel, the transaction initially involved the sale of both a junior and mezzanine tranche, but the lender ended up placing only the first loss piece.

According to market sources, the transaction features a 0%-11% tranche thickness and was priced at 12.875%. The same sources note that the deal initially featured a 0%-9% first loss and a 9%-12% mezzanine but the bank had to abandon any placement for the mezzanine given reduced appetite for the tranche.

The finalization of Pixel follows news that HSBC also had to reportedly shelve a synthetic securitisation of UK corporate loans that was expected to close in 2H22. HSBC declined to comment.

Overall, the UK market isn’t having its best year given macroeconomic challenges, with only Lloyds readying a corporate CRT.

HSBC’s issuance witnessed a gap between 2015 and 2019 when the bank returned to the market and since then it’s become more systematic. The bank’s last synthetic ABS was executed last year and referenced US corporate loans (SCI 12 January).

Stelios Papadopoulos

CMBS

SCI In Conversation podcast: Iain Balkwill, Reed Smith

We discuss the hottest topics in securitisation today...

In the latest episode of the SCI In Conversation podcast, SCI Deputy Editor Angela Sharda chats to Reed Smith partner Iain Balkwill about prospects for a CRE CLO market in Europe. We also discuss a new SCI Premium Content article, which highlights a conceptual clash between the activist US Consumer Financial Protection Bureau and the ‘originalist’ Supreme Court.

This podcast can be accessed here, as well as wherever you usually get your podcasts, including Apple Podcasts and Spotify (just search for ‘SCI In Conversation’).

Structured Finance

'Big Bang 2.0' to repeal Sec Reg

Sector developments and company hires

‘Big Bang 2.0’ to repeal Sec Reg
The UK government has introduced a Financial Services and Markets (FSM) Bill to Parliament, which will repeal retained EU law (REUL) and replace it with a comprehensive Financial Services and Markets Act (FSMA) model. Commonly known as ‘Big Bang 2.0’, the bill contains detailed proposals – outlined in a draft statutory instrument (SI) – to repeal the Securitisation Regulation and replace most firm-facing requirements with rules made by the FCA and the PRA, as well as restate certain other elements in legislation.

Specifically, the UK Treasury says it is committed to working with the FCA and the PRA to bring forward - where appropriate - reforms in: certain risk retention provisions (for example, in relation to transferring the risk retention manager and risk retention in NPE securitisations); the definitions of public and private securitisation, as well as the disclosure requirements for certain securitisations, to ensure they are appropriate; due diligence requirements for institutional investors when investing in non-UK securitisations, to provide greater clarity on what is required; and the definition of institutional investor as it relates to certain unauthorised non-UK AIFMs that are currently in scope of due diligence requirements, so that they are not disincentivised from seeking investors in the UK.

PCS notes that the draft SI includes a number of highly technical drafting changes, the implications of which are somewhat unclear, although the definition of ‘securitisation’ remains unchanged. The STS regime also remains in place, but the STS criteria have disappeared from the legislative text and are delegated to the FCA. Additionally, the third-party verification and data repositories regimes remain broadly unchanged.

Meanwhile, an equivalence regime for STS is set out, with the Treasury to decide which jurisdictions will be so treated. Similarly, while there is no requirement for an SPV to be domiciled in the UK, a securitisation originator/sponsor needs to be UK-based.

Notably, the text allows for resecuritisations, which are banned in the EU. However, resecuritisation transactions will need to be pre-approved by regulatory authorities on a deal-by-deal basis.

Retention and disclosure requirements are still in place. But PCS suggests that the text seems to allow non-UK issuers to sell to UK investors, provided they comply with substantially the same standards.

Overall, the FSM bill introduces what the government describes as “a range of new tools to enable the transition to the comprehensive FSMA model”, including a new Designated Activities Regime (DAR), which aims to provide a framework for regulating activities related to financial markets in “a proportionate way that reflects the degree of risk these activities pose”. The government has published two other draft SIs: one is in connection with the Prospectus Regulation, where the existing EU-derived framework will be replaced with a “simpler, more agile and more effective regime designed specifically for the UK”; the other contemplates giving the FCA rulemaking powers in relation to payments regulation.

Government says it will deliver its regulatory reform programme by splitting REUL into tranches, with work already underway on the first tranche, in relation to the outcomes arising from the Wholesale Markets Review, Lord Hill’s Listing Review, the Securitisation Review and the Review into the Solvency 2 Directive. The second tranche is focused on areas with the biggest potential benefits to deliver improvements to UK economic growth. The government expects to make “significant progress” on these tranches by the end of 2023.

In other news…

EMEA
Arrow Global Group has recruited Charlotte Gilbert as md for client and product solutions (CPS), the team responsible for setting the firm’s capital formation strategy and broadening its investor base. Gilbert has experience leading capital raising across credit, private equity, lending and real estate strategies and joins Arrow Global from Oaktree Capital Management, where she was md, marketing and client relations. Based in London, she will join Arrow’s executive committee on 2 January and report to the firm’s founder, ceo and cio Zach Lewy.

CBRE has appointed Chris Gow head of debt and structured finance. Based in London, he was previously an executive director at the firm, having worked at JLL, HMT, Candlewick Asset Management, Lloyds and Bank of Scotland before that.

Legal & General has named Roman Hederer head of investments (mortgages, housing) and risk sharing, responsible for the development and execution of risk-sharing solutions in mortgages, housing and middle market loans. Based in London, he was previously head of structuring and mortgage funding at the firm, which he joined in June 2016. Prior to that, Hederer worked at Merrill Lynch, JPMorgan and Allianz.

Structured Finance

CLN rating pressures eyed

Sector developments and company hires

CLN rating pressures eyed
US midsized banks’ utilisation of CLNs to drive share repurchases or to increase leverage could result in negative rating pressures, Fitch suggests. The rating agency notes that for midsized banks, CLNs may have a material impact on regulatory capital ratios, as the reference pools comprise a larger portion of overall lending than for large banks.

Although use of CLNs by midsized banks has been limited to date, undue reliance on the product may result in a negative adjustment to a bank’s capital assessment, which could pressure credit ratings and/or rating outlooks. In its ratings, Fitch considers both the risk profile of reference pool assets and a bank's motivation for utilising CLNs. If a CLN issuance significantly affects the benchmark CET1 ratio, more importance is placed on complementary metrics, such as Tier 1 leverage.

“Through the reduction of risk-weighted assets, banks issuing CLNs will see its CET1 ratio increase, all else equal. However, utilising the expanded regulatory capital headroom to support increased lending or additional capital returns would reduce the Tier 1 leverage ratio. Thus, the risk-weight reduction associated with CLNs is viewed as either credit neutral or negative, leaning towards the latter if the issuing institution then takes on additional balance-sheet risk,” Fitch explains.

The agency concludes that rising interest rates will increase the cost of CLN issuance, as they are floating-rate instruments tied to an index rate, with a premium attached to compensate for the credit risk transfer to the noteholders. This risk is increased when the reference pool contains fixed-rate loans, which can cause banks to overpay for the associated risk transfer.

In other news…

Apollo, Belstar deepen relationship
Belstar Management Company has launched a flagship credit fund - Belstar Credit Opportunities Fund - to invest across liquid and private credit opportunities, including corporate and structured credit assets globally. To support a subset of the investment strategy, Belstar intends to partner with Apollo, in order to access high quality credit assets originated across Apollo’s global platform. The move deepens the strategic relationship between Belstar and Apollo, which formed a non-bank lending joint venture focused on serving Korea-based companies and sponsors (SCI 9 August).

EMEA
Altamira doValue has established a business unit specialising in the management of portfolios bought by investment funds and their growing interest in investing in the Spanish market. Headed by chief investors officer Conrado Caviró, the team currently boasts over 150 professionals and offers specialised technology, an integral vision of assets and bespoke solutions for investors. Caviró joined Altamira doValue in March - having previously worked at Hipogés and Interpares - and is a member of the company’s executive committee.

Cadwalader, Wickersham & Taft has added ESG finance and investment partner Sukhvir Basran in the firm’s London office, strengthening its offering across funds finance, private credit, securitisation, CLOs and real estate finance. Basran joins from Hogan Lovells, where she co-established and co-led the firm’s global sustainable finance and investment group. Combining her experience as a banking and finance lawyer and in sustainable finance and investment, Basran advises a range of clients on ESG strategies, policies, frameworks, disclosure and reporting, ESG-related transactions and products, and the integration and alignment of ESG across investment processes.

Naseem Hossain has joined M&G Investments as head of private markets credit, based in London. With experience in structured finance and non-performing loan workouts, he was previously interim cfo at Acre and before that worked at Aviva, Alvarez & Marsal, Goldman Sachs and RBS.

Private assets unit formed
BNP Paribas has formed a new private assets business unit within its investment and protection services (IPS) division, with the aim of becoming a leading European player in private asset management. Integrated within BNP Paribas Asset Management and operational as of January 2023, Private Assets will combine private asset management expertise across IPS and will operate in close collaboration with BNP Paribas CIB and the group's distribution networks.

The new unit will prioritise development in two key areas: direct management focused on a defined range of verticals - corporate financing, real assets (infrastructure and commercial real estate debt) and individuals’ financing (with Dynamic Credit Group); and indirect management, focused on investment in private asset funds, and advisory in fund selection. The business will be headed by David Bouchoucha, who becomes head of private assets, reporting directly to BNPP AM ceo Sandro Pierri.

Structured Finance

Transitional disclosure measures urged

Sector developments and company hires

Transitional disclosure measures urged
In a letter to the EBA, EIOPA and ESMA, the SFA and 12 other trade associations have requested a pragmatic supervisory approach to the disclosure requirements under the EU Securitisation Regulation (SECR) while the regulators review the current requirements. The associations argue that transitional measures are needed following the European Commission’s interpretation in its recently released report on the functioning of this regulation (SCI 11 October) and “preceding years of ambiguity and industry requests for clarification” around the application of the reporting requirements.

Specifically, the associations have significant concerns about the Commission's interpretation of Article 5(1)(e) set out at section 11.2 of the SECR Report that requires EU institutional investors to obtain full Article 7 information - even in relation to third-country securitisations - by stating that "it is not appropriate to interpret Article 5(1)(e) in a way that would leave it to the discretion of the institutional investors to decide whether or not they have received materially comparable information". The letter notes that third-country reporting entities have been reluctant to provide full Article 7 information, since they would need to make substantial and costly adjustments to their reporting systems to comply with the Article 7 templates. “We expect this reluctance to increase further now that the templates for private securitisations are expected to be significantly changed (and simplified so as to significantly reduce the scale of the changes and costs required) in the relatively short term,” the letter states.

It goes on to say that the effect of the SECR report is to exclude EU institutional investors from investing in most third-country securitisations – significantly reducing the universe of securitised products in which they may invest. “The SECR Report goes on to make clear that it is the Commission's expectation and policy intention that the resulting competitive disadvantage imposed on EU institutional investors should be addressed by the introduction of a new private securitisation template that all private securitisations would use, whether EU or third country. If this happens, the de facto exclusion the Commission refers to would only be temporary. This outcome is perverse – the more so because EU institutional investors are not, in general, taking as relaxed a view of the requirements of Article 5(1)(e) as the Commission might fear.”

For example, as required under Articles 5(3) and 5(4), EU institutional investors are already required to carry out a due-diligence assessment that enables them to assess the risks involved. Such investors also have in place written policies and procedures for the risk management of their investments in securitisations. Additionally, EU institutional investors are protected by other requirements, such as risk retention and disclosure of credit-granting standards.

As such, the letter indicates that the SECR report's interpretation of Article 5(1)(e) denies EU institutional investors the ability to make suitable investment decisions and generate attractive yields balanced by the risk mitigation offered by global diversification, for both themselves and their clients. “This loss of investment opportunity will create costs for European stakeholders of all kinds. To the extent that they are asset managers, it will negatively affect their ultimate stakeholders – who are broadly members of the public in the EU (e.g. via pensions). A further concern is that this will also result in a loss of liquidity for the non-EU borrowers who rely on EU lenders and other institutional investors to raise capital, with attendant harm to the global real economy.”

The associations suggest that the best solution to address the period between now and the finalisation of the new private securitisations template would be the issuance of enforcement guidance by the Joint Committee of the ESAs addressed to national competent authorities (NCAs). That guidance would set the expectation that NCAs would apply their supervisory powers in their day-to-day supervision and enforcement of Article 5(1)(e) in a proportionate and risk-based manner. This approach would entail that NCAs can - when examining EU institutional investors' compliance with Article 5(1)(e) of the SECR - take into account the type and extent of reliable information already available to them, regardless of format or source.

The 12 other associations are AFME, AIMA, Alternative Credit Council, Australian Securitisation Forum, European Fund and Asset Management Association, IACPM, ICMA, Insurance Europe, ISDA, MFA, SIFMA and True Sale International.

In other news…

ABS CDOs transferred
Dock Street Capital Management has been appointed as successor collateral manager for Bernoulli High Grade CDO I and Euler ABS CDO I. Babcock & Brown Securities was the original collateral manager of the transactions, but was succeeded by Threadneedle International in November 2009. Moody’s confirms that the move will incur no adverse rating impact on the notes issued by either deal.

EMEA
Nationwide has promoted Rob Collins to deputy treasurer. Based in London, he was previously head of treasury sustainability and debt capital markets at the building society, which he began working with initially as a consultant in July 2008. Before that, Collins held securitisation-related roles at Morgan Stanley and Abbey.

T-REX has launched a new EMEA division operated from the UK. To lead its business expansion across the region, the firm has hired fintech executive Ben Sher, who was formerly chief commercial officer at London-based Funding Xchange. The move follows a US$40m Series C funding round led by Riverstone Holdings earlier in the year, supporting the rapid growth in customer acquisitions. The cloud-based T-REX platform provides cashflow modelling and projections, portfolio analysis, on-demand reporting and risk management of complex investments across the asset-backed finance spectrum, with advanced support for renewable energy and ESG-driven investment.

North America
Annaly Capital Management has appointed Steven Campbell, the company’s coo, to the additional office of president, effective immediately. As president and coo, Campbell will continue to report to ceo and cio David Finkelstein, who previously held the role of president since March 2020. Campbell joined the company in April 2015 and has served as coo since July 2020. He has over 25 years of experience in financial services, including at Fortress Investment Group, General Electric Capital Corporation and D.B. Zwirn & Co.

Vida Capital, a portfolio company of RedBird Capital Partners and Reverence Capital Partners, has undergone a corporate rebranding - including changing its name to Obra Capital - as part of its business evolution. The name change follows Obra’s numerous additions to its leadership team, adding professionals experienced in crafting alternative asset management solutions. On top of its continued focus on longevity investing, the company has added three new core strategies: insurance special situations (providing customised, solution-based capital and sophisticated structuring to insurance-related opportunities); structured credit (the company’s leadership has a longstanding presence in CLO and other structured markets as investors and managers); and asset-based finance (focusing on assets that perform based on contractual outcomes and/or the operational efficiency of an originator).

Polish SME CRT inked
The EIB Group has signed a synthetic securitisation and new lending commitments with Santander Consumer Bank (SCB) in Poland, marking the third capital relief transaction entered into between EIB Group and SCB, with the earlier transactions being a true sale securitisation from 2016 and a synthetic securitisation from 2019. Under the latest transaction, SCB commits to provide new lending for an amount of up to PLN1.53bn (€327m) over a three-year period.

Most of the new lending will be extended to SMEs, with the remainder extended to mid-caps and private individuals undertaking climate action projects. At least 20% of the financing will go to projects contributing to climate action and environmental sustainability.

The increased lending capacity for SCB stems from the unfunded protection issued by the EIF, referencing a granular portfolio of consumer loans held by SCB (subject to the standardised approach to credit risk) with a total outstanding balance of PLN1.15bn (€245m). The synthetic securitisation is structured such that EIF provides protection on the PLN198m mezzanine tranche and the PLN934m senior tranche.

The majority of the EIF’s exposure is, in turn, counter-guaranteed by the EIB under a back-to-back guarantee covering 100% of the mezzanine tranche exposure and 50% of the senior tranche exposure.

The transaction features synthetic excess spread in the form of use-it-or-lose-it, a two-year replenishment period and pro rata amortisation of the senior tranche and the mezzanine tranche (subject to performance triggers).