News Analysis
Capital Relief Trades
Looking east
CEE SRT issuance prospects gauged
Polish SRT issuance boosted synthetic securitisation volumes last year. This Premium Content article assesses the prospects for increased activity across the CEE region.
Significant risk transfer issuance in Central and Eastern Europe received a boost in 2022, with the opening up of the Polish market. However, activity across the rest of the region will likely continue to be dominated by EIF transactions.
According to Robert Bradbury, head of structured credit execution and advisory at Alvarez & Marsal: ‘’There were already some limitations in the securitisation market in Poland before recent SRT issuances - including having a non-euro currency and Wibor as a benchmark rate. It gives rise to more limited FX liquidity and greater volatility, as well as a narrower pool of investors able to deploy funds in the currency.’’
He continues: ‘’The second obstacle was that the banks previously had limited need for SRT. However, the combination of Basel 4, the credit impact of Covid and legacy issues from Swiss franc mortgage portfolios - as well as the options afforded by the new Securitisation Regulation - have raised prospects.’’
The Polish securitisation market has traditionally been more constrained by supply than demand and Polish banks are well capitalised and funded. Given the concerted effort required to execute the first cash or synthetic transactions, Polish banks needed time to fully incorporate the product into their treasury and capital toolkits. By reducing RWAs, Polish banks reduce MREL requirements and improve CET1 ratios.
Poland is the most active CEE jurisdiction for, among other reasons, the size of the domestic market and the lack of a securitisation framework in other CEE countries. Hence, the EIF has been the most active counterparty in CEE jurisdictions outside Poland, since its presence in those markets doesn’t require the establishment of a securitisation framework.
The dominance of Poland is evident from EIF figures. Over the last 10 years, the fund has invested over €8.5bn in tranche notional terms and more than half has been in Poland.
Nevertheless, issuance has been increasing in other CEE jurisdictions as well, but more because of the snowballing effect from Poland and initiatives from Western European banking groups with subsidiaries in those regions.
Georgi Stoev, head of northern Europe and CEE securitisation at the EIF, explains: ‘’For all the rest of the CEE, what played a role is the snowballing effect from the Polish market, along with Western European parent banking groups - such as UniCredit and Santander - initiating efforts to render their subsidiaries more independent in terms of formulating their own capital management policies.’’
The first transactions with private investors in Poland were funded structures, such as mBank’s debut synthetic securitisation – dubbed Project K2 - in March 2022 (SCI 24 March 2022). The STS deal was structured as a direct CLN.
The aim of the capital relief trade was to deliver the objectives of the bank’s strategy for 2021-2025 and support the development of its corporate and retail banking franchises, both of which are poised for future growth. Commerzbank is the lender’s strategic shareholder, owning the bulk of the shares.
Wasif Kazi, structurer at UniCredit, was directly involved as arranger in the deal. He notes: ‘’Polish banks have been active in securitisation for some time, and they were exploring SRTs for a few years. It was a matter of time before SRTs picked up, given the solid economic advance of the country and, in the case of the mBank transaction, a convincing growth story. K2 is now acting as a model for future trades in the CEE, given its size and efficiency.’’
The K2 trade is not a financial guarantee, since this would involve placing the collateral in a third-party bank account under STS rules. ‘’Until STS rules came into effect, the financial guarantee format suited many banks well. But for bilateral deals, you will see more direct CLN structures such as K2,’’ says Kazi.
Depositing collateral in third-party accounts under STS rules can be an issue from an originator perspective, because it dilutes the capital benefit for some lenders.
The mBank trade was then followed by Getin Noble Bank’s CRT in July (SCI 4 July 2022). The funded first loss guarantee referenced a static portfolio of housing community loans. The transaction was one of a handful of standardised bank SRTs sold to private investors and enabled a significant reduction in risk weighted assets for the reference portfolio of more than 80%.
Yet unfunded structures maybe perhaps even more suitable for CEE jurisdictions. Bradbury explains: ‘’Unfunded deals have much less explicit currency risk, since there’s no currency mismatch to be funded. If a given insurer, for example, acting as a tranche protection counterparty, has no need to switch zlotys to euros or dollars, then there’s no hedging cost for either party. But the transactions must continue to have highly efficient structures to mitigate the impact of counterparty risk.’’
Indeed, several arrangers have pointed to the benefits of the unfunded format - although the first point of contact for them for the foreseeable future will remain the EIF, since for the smaller standardised banks that are typically found in these regions, EIF guarantees remain the most cost-effective option. Nevertheless, insurers can help lay the groundwork for a private market in CEE jurisdictions outside Poland under certain conditions.
Harald Weiser, head of solutions at Erste Group, comments: ‘’In CEE countries, we would look at residential mortgages first, since you would have to start with low-risk portfolios. And this would involve insurers as well, who would be willing to go down the capital structure if there is a retained first loss or synthetic excess spread.’’
He continues: ‘’Synthetic excess spread is less cost-effective, given the EBA’s proposal regarding the full capitalisation of synthetic excess spread. But the excess spread structure can work from an efficiency standpoint, if it’s smaller in size and if the pool is backed by low-risk mortgage pools.’’
Diversified corporate portfolios are another option. But for investors, Western Europe will remain the preferable option in the foreseeable future. Tranching is also expected to be more conservative in the broader CEE, due to the higher risk that investors can expect.
The risk that investors would be focusing on though wouldn’t just concern the underlying portfolio. Getin Noble Bank’s bankruptcy in late September is a case in point (SCI 3 November 2022), in terms of the risks that investors have to consider when dealing with smaller and less experienced banks in a relatively uncharted territory and the implications of this for the credit protection.
Getin Noble Bank had been encountering difficulties since 2016, due to low profitability which depleted its capital. The bank then experienced a bank run in 2018 when around €2.25bn of funds were withdrawn in less than three weeks. The legal and credit risks associated with the Swiss franc mortgage loans further decreased the value of the bank's assets, while the recovery measures taken by the bank since 2016 to address its difficulties proved to be inadequate.
Consequently, on 30 September, Polish supervisors declared the bank ‘’failing or likely to fail’’. The lender was then put into resolution in line with the EU Bank Recovery and Resolution Directive (BRRD).
The resolution plan stipulated that the bank’s main assets and liabilities - except the equity and subordinated debt that will be fully written down to absorb losses - will be transferred to a newly created bridge bank following the resolution. The purpose of this transfer is to ensure the continuation of normal banking operations and provide sufficient time to organise an orderly sales process for the bridge bank.
SCI has confirmed the continuation of the credit protection, which vindicates the resilience of synthetic securitisations. Synthetic securitisations differ in this respect from CDS contracts - where bankruptcies can trigger a close-out - because if the bank keeps paying protection premiums, the hedge remains in place.
However, the resiliency of each transaction depends on the structure of the deal and that structure wasn’t disclosed in the case of Getin Noble Bank’s trade.
Getin Noble Bank proved to be the second SRT issuer to fall under the EU’s BRRD, along with Banco Popular. However, the cases aren’t exactly similar, since Popular was acquired by Santander, which then decided to keep a synthetic ABS called STAR that was executed in January 2016. Getin’s resolution plan, on the other hand, stipulates the transfer of the assets and liabilities to the bridge bank.
Nevertheless, this isn’t deterring investors and arrangers from looking forward. Kazi states: ‘’Good candidates in terms of asset classes for Polish synthetic trades are corporate and SME loans, given the substantial capital efficiency that banks can benefit from and the benchmarking that they allow.’’
He concludes: ‘’Project finance is another one, but a substantial pick-up is unlikely, given the small size of most portfolios. Retail via the full-stack option could also gain a foothold, especially given the track record for cash deals that already exists in Poland.’’
Stelios Papadopoulos
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News
Capital Relief Trades
Risk transfer expansion
Polish SRT deal flow grows
mBank and Bank Millenium have each executed a synthetic securitisation as the Polish market continues to grow and gradually transition away from European Investment Fund guarantees.
The mBank trade is called ‘’Everest’’ and is a €64m mezzanine tranche that references an €800m revolving Polish corporate and CRE pool. The portfolio weighted average life is equal to approximately three years. Further features include a time call that can be exercised once the WAL has run its course. CRC is the investor in the synthetic ABS.
The Bank Millenium transaction is called Jazon and it’s a CLN that features a 1.3% to 11% tranche thickness that references a PLN2.5bn revolving Polish corporate and SME portfolio.
The transactions are driven by several factors including payment holidays and the capital and provisioning implications of the banks’ Swiss franc mortgage exposures.
FX mortgages grew during the 2006-08 real estate market boom. Low credit costs attracted many customers as the zloty was strong against major currencies and interest rates in core markets were much lower than in Poland. However, because of the abrupt depreciation of the zloty in 2H08, the Polish Financial Supervision Authority (KNF) regulated and limited the supply of FX mortgages.
The trades are riding a wave of polish capital relief trade issuance following mBank’s debut synthetic ABS in March 2022 with PGGM. The deal included a direct CLN structure where notes are issued directly from the bank rather than the SPV.
Getin Noble Bank followed in July with a funded first loss guarantee that referenced a static portfolio of housing community loans and it’s one of a handful of standardized bank SRTs sold to private investors (SCI 4 July). CRC is believed to have bought both the Getin Noble Bank trade and Jazon.
Unicredit acted as the arranger in both the Everest and the Jazon transactions.
Stelios Papadopoulos
News
Capital Relief Trades
Synthetic RMBS launched
Montepio debuts private synthetic ABS
Montepio has executed a synthetic securitisation of Portuguese residential mortgages. The transaction is the lender’s first synthetic securitisation to have been placed with private investors.
The funded mezzanine trade features a 0.1%-3.6% tranche thickness and references a static €880m Portuguese residential mortgage portfolio. However, the vertical risk retention brings the size of the pool down to €835m.
Residential mortgages for IRB banks tend to be accompanied by low-risk weights so synthetic RMBS doesn’t typically make sense from a pure capital relief standpoint. However, Montepio is a standardized bank so the exposures would come with higher capital requirements.
The Portuguese market witnessed a resurgence last year with three trades overall including one from Novo Banco whose closing hasn’t been confirmed yet.
The portfolio weighted average life equals around 9.5 years and there’s a time call that can be exercised once the WAL has run its course. The protected tranche amortizes on a pro-rata basis with triggers to sequential amortization.
Credit enhancement is present in the form of a retained first loss and a thin synthetic excess spread position. Synthetic excess spread renders the protected tranche much thinner than it would be and hence reduces the cost of protection. The synthetic excess spread was structured in use it or lose it format and it’s linked to the one year expected loss of the portfolio.
Daniel Grencho, head of capital markets at Montepio explains: ‘’Under the EBA’s new consultation you can utilize use it or lose it synthetic excess spread, but the calculation of the exposure for capital deduction purposes must be higher than it is now.’’
He continues: ‘’Using synthetic excess spread in this way would make sense for low loss portfolios such as mortgages but SME SRTs would be much more uneconomical. Effectively, the synthetic excess spread position for residential mortgages will be much smaller as a percentage of the portfolio compared to other asset classes.’’
Looking forward, Grencho concludes: ‘’Since 2020 we’ve been issuing one SRT per year and we are actively exploring our book. SMEs and mortgages will remain key areas of focus going forward.’’
Alantra acted as the arranger in the transaction.
Stelios Papadopoulos
News
Regulation
Scores on the doors
Affordable housing gets top of the bill in new FHFA scorecard
The new Federal Housing Finance Agency (FHFA) GSE scorecard, released this week, gave top billing to the mission to increase “equitable access to affordable and sustainable housing”.
The GSEs are enjoined to “take significant actions” to make sure all borrowers and renters have access to housing, including “efforts that further energy efficiency, resiliency and cost savings.”
The dangers of climate risk also crop up under the heading of making sure the business is operated in a safe and sound manner. The GSEs must “ensure that the Enterprise is resilient to operational, market, credit, counterparty, economic and climate risks,” says the FHFA.
Credit risk transfer is mentioned only once. Fannie Mae and Freddie Mac will be assessed according to their ability to meet expectations under all FHFA requirements “including those pertaining to capital, liquidity and credit risk transfer.”
At the beginning of December, Fannie Mae announced changes to its underwriting process that make it easier for borrowers without a traditional credit score to qualify for a home loan. This reflects the pressure the GSEs are under to fulfill the FHFA’s affordable housing mandate.
Simon Boughey
Market Moves
Structured Finance
Raiffeisen inks Romanian trade
Sector developments and company hires
Raiffeisen inks Romanian trade
Raiffeisen Bank has partnered with the EIB Group to strengthen its financing capacity in Romania through a synthetic securitisation. The transaction enables Raiffeisen to provide up to RON523m of new financing to eligible SMEs and MidCaps over the next two years, with a reduced interest rate compared to other similar financing.
The securitisation references a RON1.52bn portfolio of non-retail loans and comprises senior, mezzanine and junior tranches. Under the transaction, the credit risk of the mezzanine tranche is assumed by the EIF. The transaction features a three-year replenishment period, during which amortised exposures in the securitised portfolio can be replaced with new eligible exposures.
At the consolidated prudential level of Raiffeisen Bank, the transaction is expected to have an initial positive impact of approximately 40bp on the CET1 ratio and 80bp on the MREL ratio.
Separately, further details have emerged regarding UniCredit’s recent Italian consumer ABS (SCI 25 November 2022). The senior and mezzanine tranches of the notes were purchased by the EIB (for a total of €700m) and by the EIF (for an additional €50m).
In other news…
APAC
Mayer Brown has launched a joint law venture (JLV) with Singapore law firm PK Wong & Nair, marking the first JLV established in the jurisdiction since November 2016. Known as Mayer Brown PK Wong & Nair, the JLV is led by Mark Wong, co-md of PK Wong & Nair and a partner at Mayer Brown, along with Yu Jin Tay, Mayer Brown’s Singapore office managing partner. The JLV currently has over 30 lawyers, including 17 partners, with plans to double headcount over the next two years.
North America
Octagon Credit Investors has promoted Joseph DiCecilia to principal, CLO trading, based in New York. He was previously vp at the firm, which he joined in September 2021. Before that, DiCecilia was a vp, CLO trading at JPMorgan.
Market Moves
Structured Finance
SASB CMBS IRC agreements eyed
Sector developments and company hires
SASB CMBS IRC agreements eyed
Nearly 75% of US floating rate single-asset/single-borrower (SASB) CMBS loans in KBRA-rated transactions have current interest rate cap (IRC) agreements with strike rates below their prevailing index, which is typically one-month term SOFR or one-month Libor. Against the backdrop of sharply rising short-term interest rates, the rating agency has released a report examining IRC agreements for SASB loans, including certain IRC extension requirements that are prevalent across its universe.
Among the findings of KBRA’s review is that 18 transactions (accounting for 39.1% of the sample) specify that the replacement IRC strike rate should be the greater of a specified rate or sufficient to achieve a minimum debt service threshold, while 16 (34.7%) require the replacement IRC strike to be based on a rate that would be sufficient to achieve a minimum debt service threshold. Meanwhile, 14 (30.4%) allow the borrower and lender to negotiate a different replacement IRC strike rate if the current requirement is deemed to not be available at commercially reasonable rates or at a reasonable cost.
In other news…
Ambac settles final legacy RMBS litigation
Ambac Assurance Corporation
(AAC) has entered into a settlement agreement with Nomura to settle its RMBS litigation against the bank. As a result, Nomura has agreed to pay AAC US$140m, which materially exceeds the amount of subrogation recovery recorded on Ambac’s 3Q22 consolidated GAAP financial statements attributable to the Nomura litigation. Accordingly, Ambac estimates that it will record a gain with respect to the settlement of approximately US$43m, which will be recognised in Ambac’s fourth quarter financial results.
Funds are expected to be received within 10 business days from the execution date of the settlement agreement. AAC will use all proceeds, plus cash on hand, to repay the entire outstanding balance of its Tier 2 notes.
Following the previously announced Bank of America settlement (SCI 7 October 2022), Ambac has now successfully brought to a close all of its legacy RMBS representation and warranty litigation.
EMEA
Jefferies
has promoted its EMEA CLO primary co-heads Hugh Upcott Gill and Luis Leon Carsi to the position of md. The London-based pair were previously svps at the firm, which poached them from Citi in September 2020.
Michal Marciszewski
has joined PKO Bank Polski as director, head of securitisation, based in Warsaw. He was previously head of securitisation at Getin Noble Bank, which he joined in December 2010. Before that, Marciszewski worked at Bank Millennium and pension fund EGO, and was a board member of BPI Bank Polskich Inwestycji.
Rockstead
has appointed David Hunter to a senior development role as it continues to work to strengthen its team. The due diligence and business review provider welcomes Hunter from NatWest’s property risk team where he most recently served as property risk policy and proposition manager. Hunter brings extensive experience with him to his new position as senior business development manager across lending, property risk, and managing third-party suppliers.
Universities Superannuation Scheme
has appointed Liam McClure as legal counsel, supporting the investment management arm within the private markets group. He was previously a broker within Texel’s structured and bespoke insurance solutions unit, involved in synthetic securitisations. Before that, McClure was legal counsel at Emirates NBD and 23 Capital, having trained as a solicitor at Baker McKenzie.
Private debt CFO closed
Tikehau Capital
last month completed its inaugural CFO. The US$300m transaction is backed by interests in private debt funds that were mainly held on Tikehau Capital’s balance sheet, including exposure to the firm’s flagship direct lending strategy and its private debt secondaries strategy.
The rated debt and equity tranches were placed with large US institutional investors, while Tikehau Capital retained a portion of the equity. The transaction is expected to have a positive impact of circa US$200m on Tikehau Capital’s cash position over the life of the vehicle.
Market Moves
Structured Finance
CMBS ARAs at 'inflection point'
Sector developments and company hires
CMBS ARAs at ‘inflection point’
US conduit CMBS appraisal reduction amounts (ARAs) have reached an inflection point, according to KBRA. A recent analysis undertaken by the rating agency shows that ARAs outstanding totalled US$3.6bn across 322 loans, as of November 2022, with 80 ARAs totaling US$635.2m being effectuated year-to-date through November 2022.
“In the coming year, we expect to see more ARAs being triggered due to higher loan defaults, as well as increased ARA amounts as property valuations decline,” the agency notes.
The study analyses the reliability of ARAs as an indicator of future potential CMBS loan losses. The findings suggest that when looking at the differences between ARAs and realised losses as a percentage of outstanding loan balances, 46% of the loans were within (+/-) 10%, while 70% were within a 20% margin. Furthermore, deals with high ARA exposures can result in a shift in the controlling class.
In other news…
EMEA
Jason Late
has joined Man Group as portfolio manager and head of leveraged loans and CLOs, Europe. He was previously an md at Ares Management, which he joined in September 2017, having worked in high yield-related roles at Deutsche Bank, Nomura and Brookfield Investment Management before that.
Santander
has appointed Fiona Nelson as an executive director within its London-based securitised products group. She was previously director, capital markets – structuring and execution at Funding Circle, which she joined in April 2021. Before that, Nelson worked at Barclays, Morgan Stanley, Giltspur Capital and Merrill Lynch in securitisation-related roles.
Global
Milbank
has elected 17 attorneys from across nine of its practice areas in the US, Europe and Asia to the firm’s partnership. Three of these lawyers have securitisation-related experience.
Within the firm’s alternative investments practice, London-based Claire Bridcut and New York-based Jared Axelrod have been made partners. The third new partner is Sean O’Neill, from the firm’s project, energy and infrastructure finance group in New York.
North America
Alston & Bird
has elected 23 lawyers to its partnership across eight US offices and 15 practice groups. Within the firm’s finance group, four of the new partners have securitisation-related experience: Jeffrey Bingham (based in the Dallas office), Stacie Cargill (Dallas), Lindsey Deere (Charlotte) and Jon Ruiss (New York).
Octaura
has recruited a new chief product officer from Citi, Vitaliy Kozak, as it moves to expand its C-suite. The trading, data, and analytics solution platform for syndicated loans and CLOs welcomes Kozak, effective immediately, in a bid to assist the company’s growth efforts following the launch of its trading venues last year. Kozak leaves his position as global co-head of CLO, ABS, TruPS and CDO trading at Citi to lead Octaura’s product development, bringing his deep experience to the firm he supported during its incubation and development stages. The firm hopes Kozak will play a critical role as it works to advance its product portfolio and widen its customer reach. Kozak marks the second appointment at Octaura in recent weeks, having also announced the hire of Jason Cohen as cfo, with more key hires expected to follow.
PNC
has recruited Alison Coen as svp - agency finance, within its real estate unit in New York. She was previously a senior md at Greystone, which she joined in May 2021, having worked in CMBS-related roles at Barclays, Natixis, Citi and Fitch before that.
RenaissanceRe
has named Fiona Walden chief underwriting officer - casualty and specialty, based in Bermuda. She was previously global head of credit at the firm, which she joined from Liberty Specialty Markets in April 2018, and specialises in the use of insurance for bank capital solutions.
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