Contents

Structured Finance

Unemployment eyed

Labour market key to Euro ABS outlook

Some deterioration – both in collateral and ratings performance – across the European securitisation market is expected this year, given current global economic pressures. However, S&P suggests in its outlook for the sector that the ultimate impact of economic distress is largely dependent on how the labour market fares.

At present, eurozone unemployment rates stand at 7% and are expected to fall to 4.7% next year, according to the rating agency. In contrast, unemployment rates dropped from over 12% in 2009 to 8.3% the following year. Nevertheless, S&P forecasts a harsher macroeconomic outlook for the UK, which is predicted to see a steeper rise in unemployment than the rest of the eurozone.

Unemployment is key to predicting the impact of the upcoming macroeconomic crisis on RMBS, with some struggling mortgage borrowers likely to prioritise energy bills before mortgage payments. However, for RMBS, the UK is supported by its standing as one of the most developed markets in Europe.

Alastair Bigley, senior director in RMBS at S&P, claims that the servicing environment is “switched on” - with companies already using AI and algorithmic use of data to determine which RMBS borrowers are actually at real risk. He reports that these market participants continue to say they are experiencing no deterioration, nor any that is predicted to kick in just yet.

Nevertheless, with mortgage rates now at much higher percentages, it will take a while for wages to catch up to the cost of living. Bigley notes that although arrears are expected to rise, legislation preventing mass evictions will mean the market is unlikely to see a major wave of forced selling.

Some originators are also opting to extend their RMBS deals beyond the first call date, a trend that is likely to continue in current conditions

Growth is not expected in the European RMBS market until 2024, as while house prices are set to normalise in the majority of European countries this year, only single-digit percentage corrections will be seen to nominal prices for the UK and Ireland. In fact, S&P predicts further decline in RMBS issuance, following the 14% reduction seen in 2022 across Europe - including the primary markets of the UK, Ireland and the Netherlands. Although non-bank originators accounted for a total 77% of the market last year, bank-originated RMBS issuance could offer some hope in 2023, as lenders work to repay central bank liquidity scheme borrowings – meaning they can re-engage with wholesale funding markets.

Away from RMBS, banks are projecting between €18bn and €20bn in European CLO issuance by the end of this year – down from the low €26bn figure seen last year. However, Sandeep Chana, director of CLOs at S&P, points to a more positive tone across the market, with a few new issuances likely to be priced this week and into next (CLO Markets EU Deal Alert - 11 January).

Acquisition activity could limit leveraged loan originations and high-yield bond issuance this year. And given wide liability spreads, refinancing and reset activity will likely remain close to zero – although Chana doesn’t rule out the possibility of some late-2020, as well as potentially some late-2018 and earlier vintage deals looking to refinance or reset at the end of the year.

He also believes that demand is now coming consistently from warehouses and managers looking to issue where they can. Additionally, secondary opportunities continue to exist for managers that are ready to utilise their vehicles.

Overall, CLO ratings remain stable, having seen few rating migrations over the last five years. S&P doesn’t foresee any triple-A rated European CLO tranches being downgraded by more than a single notch.

Regarding the broader securitisation market, consumer credit is expected to take a predictable hit through 2023 as pressure mounts from the cost of living crisis, higher rates and lower consumer confidence. However, originators are looking to new collateral types to securitise, including buy now, pay later finance (SCI 14 December 2022) and solar (SCI 14 April 2022).

S&P depicts drearier prospects for CMBS issuance this year, after volumes dropped to a five-year low in 2022. While few loan defaults are on the immediate horizon, refinancing poses a challenge for the future and rating downgrades across retail CMBS are likely to continue.

Claudia Lewis

Structured Finance

SCI Start the Week - 9 January

A review of SCI's latest content

Last week's news and analysis

Looking east

CEE SRT issuance prospects gauged

Risk transfer expansion

Polish SRT deal flow grows

Scores on the doors

Affordable housing gets top of the bill in new FHFA scorecard

Synthetic RMBS launched

Montepio debuts private 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 Reed Smith partner Iain Balkwill about prospects for a CRE CLO market in Europe. To access the podcast, search for ‘SCI In Conversation’ wherever you usually get your podcasts 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
CEE CRT activity - January 2023
Polish SRT issuance boosted synthetic securitisation volumes last year. This Premium Content article assesses the prospects for increased activity across the CEE region.

CRT regulatory storm - December 2022
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.

BNPL Securitisation - December 2022
The cost-of-living crisis and growing regulatory scrutiny are set to shape the evolution of the BNPL securitisation sector. This Premium Content article explores what the next 12 months may bring for the asset class.

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.

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 Relief Trades Seminar
19 October 2023, London

Capital Relief Trades

Tight pricing persists

BNP Paribas executes synthetic securitisation

BNP Paribas has finalized the ninth synthetic securitisation from the Resonance programme. The latest transaction from the programme priced broadly in line with Resonance seven.

The transaction features a €374.9m mezzanine tranche that references a €7.3bn global corporate portfolio. The transaction priced in the single digits and is broadly in line with the pricing of Resonance seven. The latter was the largest synthetic securitisation to have ever been executed in portfolio terms after the 2008 financial crisis (SCI 29 July).

The pricing of the transaction has come as a surprise to market participants since some widening was expected as with other market transactions last year.

Overall, pricing has widened last year for both first loss and mezzanine deals. Indeed, single digit mezzanine trades have become increasingly rare. Consequently, because of the tight pricing of Resonance nine, market sources believe that PGGM is the most likely investor in the deal, which would be in line with past tickets from the programme. The Dutch pension fund for instance was the investor in Resonance seven.

BNP Paribas has had an active 2022 and there’s more in store for this year. The Bank boosted issuance from its Resonance programme and expanded its foothold as an arranger in Germany and Canada.

Stelios Papadopoulos

Capital Relief Trades

First CAS since September

B1 levels contract

Fannie Mae has priced its CAS 2023-R01, its first appearance in the CAS market for four months.

The bookrunners were BoA Securities and Barclays.

The $429.9m BBB+ M1 tranche was priced at SOFR plus 240bp, the $247.2m BBB- M2 tranche was priced at 375bp over SOFR and the $53.7m BB+ B1 tranche came in at SOFR plus 510bp.

The last CAS, designated CAS 2022-R09,  was priced on September 21. The GSE chose to forgo issuance of CAS deals throughout Q4, though it did conduct CRT operations through the CIRT reinsurance market.

The relative expense of capital markets deals compared to reinsurance was one of the themes of the agency CRT market in 2022 as spreads ballooned from the earliest months of the year due to economic and geopolitical turmoil. Bond issuance became too costly, and as a consequence the GSEs turned to the reinsurance market to absorb a much higher percentage of risk than in the past.

However, this latest deal indicates that at least at the bottom of the capital stack levels are moving in favour of the GSEs. While the M1 and M2 tranches in the September deal were priced very similarly to today’s deal at SOFR plus 250bp and plus 374bp respectively, the B1 was over 150bp wider at SOFR plus 675bp.

The latest transaction, at $731m, was also $140m larger than that of four months ago.

The reference pool for CAS 2023-R01 consists of 68,000 single family mortgages with an outstanding principal balance of $22.6bn. All are low LTV loans, with LTVs between 60% and 80%.

Simon Boughey

Capital Relief Trades

Capital boost

Capital requirements set to rise

EU bank capital requirements are expected to rise this year thanks to Pillar two increases and higher countercyclical buffers. However, bank capital positions have been normalizing since the peak of the coronavirus crisis.

According to new research from Scope ratings, European bank Pillar two requirements for 2023 will witness a rise and reflect well-flagged supervisory concerns about asset quality and leveraged finance exposures. Scope ratings notes that major EU banks should not have issues meeting new requirements even if some are subject to multiple increases.

Major EU banks communicated their SREP requirements for 2023 at the end of last year and for the 17 EU banks in a Scope ratings sample that includes the large banks such as Santander and Deutsche Bank, six saw an increase in their Pillar two requirements while three saw a decline.

UniCredit saw the biggest increase at 25bps while Danske Bank saw the largest decline at 80bps. Deutsche Bank, DNB, BBVA, Santander and BNP Paribas also show Pillar two increases for this year.

Moreover, higher countercyclical capital buffer rates will impact a greater number of lenders. Indeed ‘’despite the uncertain economic outlook, they are still set to increase in several European countries, including France (+50bp), Germany (+75bp), and the Netherlands (+100bp)’’ says Scope.

On top of this, the eight EU G-SIIs-Santander, BNP Paribas, BPCE, Credit Agricole, Deutsche Bank, ING, Societe Generale and UniCredit-have, since the start of the year, been subject to a leverage ratio buffer equal to 50% of their G-SII buffer, which must be met with Tier one capital.

BBVA and Santander’s drivers behind the Pillar two increases were related to the ECB’s prudential provisioning expectations. Addressing non-performing exposures (NPEs) has been a key supervisory priority, with the ECB publishing initial guidance on supervisory expectations for prudential provisioning on new NPEs in March 2018.

However, for Deutsche Bank, the increase in the Pillar two requirements was driven by the ECB’s newly introduced assessment of risks stemming from leveraged finance activities (SCI 9 September 2022). Deutsche Bank and other banks have executed synthetic securitisations of leveraged loans last year in response to such supervisory pressure (SCI 1 November 2022).

The ECB has voiced concerns over risks from the leveraged finance sector for some time and has increased its monitoring, including the use of the Leveraged Finance Dashboard – a supervisory tool sampling bank reports on leveraged finance-related data on a quarterly basis. Leveraged finance is a key supervisory priority for 2022-2024, with the ECB ready to increase Pillar two requirements when banks fail to remedy perceived deficiencies in risk management.

Nevertheless, capital positions have been normalising from the peaks seen during the pandemic but remain sound and above pre-pandemic levels. Still, more and more regulators are asking banks to be prudent and consider the risks from a weaker economic outlook in their capital planning. Given the change in monetary policy, it is unlikely that banks will receive the same regulatory relief as during the pandemic.

According to the EBA’s latest data from its risk dashboard, bank capital ratios slightly decreased in 3Q22. The CET1 fully loaded ratio declined to 14.8% (15% in 2Q22), driven by increasing RWAs and a slight decline in CET1 capital sources. Despite some contraction in CET1 ratios, banks keep a sizeable capital headroom over regulatory requirements.

Stelios Papadopoulos  

Capital Relief Trades

Correlation risk

New report sheds light on post Covid correlations

Credit Benchmark has published a new White paper on credit correlations showing how they’ve become more positive after the coronavirus pandemic, but the researchers qualify that correlations have been dropping since late 2021. Nevertheless, challenges in achieving portfolio diversification are much more acute in the post-Covid period.

As default risks are expected to rise this year, correlations between those risks are increasingly important for credit portfolio management. Exposures to different sectors – that normally diversify the portfolio – may show a simultaneous increase in risk during difficult economic conditions. However, if correlations shift, then sectors that are expected to move together might start to shift.

Credit Benchmark uses consensus credit data-updated twice-monthly-to estimate credit correlations between regions, countries, industries, and sectors. Credit indices (“Aggregates”) track the average probability of default (“PD”) across many constituents.

Investors can use correlation matrices to fine tune synthetic ABS deal terms by plotting the risk and reward of alternatives, where offered. If issuers and investors can agree on a common benchmark correlation matrix-for example monthly and calibrated to the past three years-they have scope to negotiate pricing with more speed and accuracy to minimize opportunity costs.

According to Credit Benchmark’s latest White paper, higher correlations have become more prevalent after the coronavirus pandemic, showing that portfolio diversification is particularly difficult to achieve just when it is most needed.

David Carruthers, research advisor at Credit Benchmark explains: ‘’risk off periods means that there’s no place to hide so correlations go up. However, we’ve rerun the numbers for the last twelve months and correlations have started to drop.’’

He continues: ‘’Some major divergences are beginning to appear. UK industries are less correlated with the other major economies, with UK food products showing a major credit deterioration, bucking the global trend in that industry. Moreover, early in the pandemic, sectors like global pharmaceuticals decoupled from other major industries.’’

The research shows correlations between broad credit categories such as upper and lower investment grade and upper and lower high yield for global industries for the period 4Q18 and 3Q22. Within each credit category, the average industry correlation is IGa = 0.50, IGb = 0.59, HYb = 0.69 and HYc = 0.31.

Carruthers notes: ‘’HYc industries have a lower average correlation which means that investors must be particularly careful with industry selection within that group, since each industry within it can behave differently. Overall, HYc doesn’t move as a group. It’s industry specific.’’

The period 2Q21-3Q22 saw average correlations in each category being IGa = 0.5, IGb = 0.55, HYb = 0.52, HYc = 0.19. Hence, scope for diversification has modestly increased in the most recent 18 months, but so has the hazard of sector concentration and single name event risk.

Stelios Papadopoulos

Structured Finance

CAS trade launched

Sector developments and company hires

Fannie Mae is in the market with its first CAS trade of 2023, designated CAS 2023-R01, consisting of M-1, M-2 and B-1 notes. The A minus-rated $429.9m M1 has a tranche thickness of 2% and credit support of 2.90%, while the BBB-rated $247.2m M2 has a tranche thickness of 1.15% and 1.75% credit support and the $53.7m unrated B1 has tranche thickness of 0.5% and credit support of 1.5%.The structuring lead is Bank of America and co-lead is Barclays. The reference pool consists of loans worth $22.6bn, which were acquired between January 1 and February 28 2022. This is a low 60%-80% LTV transaction, and weighted average DTI ratio of 36.3%. Primary residences account for 88.5% of the reference pool. The deal should be priced this week.

In other news…

ABS CDO transferred

Dock Street Capital Management has assumed the duties and obligations of collateral manager for Orion 2006-1. The ABS CDO was originally managed by NIBC Credit Management. Moody’s has confirmed that the assignment and assumption agreement for the transaction will not affect the current ratings of the notes.

APAC

NAB has promoted Lionel Koe to executive director, securitisation originations, based in Melbourne. Previously a director, he joined the firm in May 2006, having been an associate at S&P before that.

EMEA

Belasko has appointed Edward Green as ceo, succeeding current ceo Paul Lawrence, who is transitioning to the newly created position of group md. Green will be based in London, but divide his time across Belasko’s operations in Guernsey, Jersey, Luxembourg and the UK. With 19 years of experience in private equity, private credit and real estate, he was most recently partner and head of asset management at AnaCap Financial Partners.

Lawrence’s role as group md will largely focus on the delivery of first-class client services, operational performance and regulatory compliance across multiple jurisdictions. He has more than 30 years of experience in private wealth, banking and private capital.

Fieldfisher has announced the addition of Peter Knust to its financial markets and products team. The European law firm hopes Knust’s addition will strengthen its structured finance and securitisation team within its financial markets and products practice. Knust joins the firm as a partner from Berwin Leighton Paisner, where he also served as partner, bringing extensive experience advising on corporate trust and corporate service provider clients on originations of an array of financial transactions, post-closing amendments, restructurings, and issues that may arise through the transaction. The new key hire will work alongside team head, Alex Campbell, and partner, Marsili Hale - who specialises in servicing - to help build further its trustee, issuer, and servicing practice.

UniCredit has named Massimo Catizone head of sustainable finance advisory, based in Milan. He was previously a member of the firm’s securitisation and ESG finance team, covering receivables and strategic asset financing.

North America 
Hildene Capital has entered into a long-term strategic alliance with US annuity provider, SILAC Insurance Company – adding a total of US$4.5bn in assets to Hildene Capital’s portfolio. Hildene has acquired a minority ownership interest in SILAC, and will provide investment management oversight to US$2bn of SILAC’s general account assets. Additionally, SILAC has entered into a US$2.5bn quota share agreement with Ludlow Re SPC, a Hildene affiliate, which will offer reinsurance for SILAC’s annuity products. SILAC hopes the alliance will accomplish the firm’s goal of managing its risk-based capital company action level above 300%.The symbiotic relationship also help Hildene secure good investment opportunities for longer-term capital and support the continued growth of the Ludlow Re platform. The alliance was approved by regulators and closed at the end of December 2022, with Hildene supported by Evercore and Kramer Levin Naftalis & Frankel, and SILAC by Goldman Sachs and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo as their financial and legal advisors, respectively in the transaction.

Private credit JV formed

Alpha Dhabi and Mubadala Investment Company have formed a joint venture to co-invest in private credit opportunities. Under the JV, the two firms aim to collectively deploy up to AED9bn over the next five years, leveraging Mubadala’s long-term and strategic partnership with Apollo. Mubadala will hold 80% ownership in the Abu Dhabi Global Market-based joint venture entity, with the remaining 20% to be held by Alpha Dhabi.

Structured Finance

Cyber cat bond debuts

Sector developments and company hires

Cyber cat bond debuts

Specialist insurer Beazley has launched what is believed to be the first cyber catastrophe bond. The US$45m private Section 4(2) bond is tradeable under Rule 144A resale and provides Beazley with indemnity against all perils in excess of a US$300m catastrophe event, with the potential for additional tranches to be released through 2023 and beyond. The aim is to provide the firm with the flexibility to scale over time and support its continued, sustainable growth in cyber.

The bond is designed to cover remote probability catastrophic and systemic events. Developing effective solutions for catastrophe risk is vital to allow the supply of capacity to the cyber (re)insurance market to increase, to meet growing demand for cover from business and society.

The bond is backed by a panel of ILS investors, including Fermat Capital Management, and was structured and placed by Gallagher Securities.

In other news…

Asset manager merger completed

Nassau Financial Group has merged with Angel Island Capital Management (AIC), with the latter set to become a subsidiary of Nassau Asset Management. Founded in 2008 by Golden Gate Capital, AIC is a specialty credit investment firm that currently manages US$3.6bn in assets, including its balance sheet capital of approximately US$300m. AIC will continue to be led by ceo and md Alex Dias and lead portfolio manager and md Jonathan Insull.

AIC will complement Nassau’s existing asset management businesses, adding new credit capabilities to its suite of specialty finance strategies. Nassau’s asset management business currently oversees more than US$18bn of assets, as of 30 September 2022.

Loan sourcing agreement inked

Alberta Investment Management Corporation (AIMCo) and the Public Sector Pension Investment Board (PSP Investments) have unveiled a new commitment to invest in loan transactions sourced by PSP Investments, with the aim of positioning the organisations for stronger market presence. Under this loan sourcing agreement, PSP Investments will source loan investment opportunities for funds earmarked by both organisations. This collaboration will allow both organisations to grow their respective credit investment portfolios.

AIMCo started investing in private credit in 2010 and currently manages C$6.1bn, having committed C$12.5bn of capital since inception. PSP Investments launched its credit investment practice in November 2015 and manages C$21.9bn in net assets under management. From offices in New York, London and Montréal, PSP Investments' credit investments focus on non-investment grade credit investments in North America and Europe, across private and public markets, as well as rescue financing opportunities.

North America

Alberta Investment Management Corporation (AIMCo) has appointed David Scudellari as senior executive md and head of international investment. In his new role, he will act as vice-chair of AIMCo's investment committee and oversee several key investment functions, including international expansion, credit and private debt, and management of key external relationships.

Scudellari joins AIMCo after seven years at the Public Sector Pension Investment Board (PSP Investments), where he was global head of credit investments and private equity and a member of the executive committee. Prior to joining PSP Investments, he held leadership roles at Barclays and Goldman Sachs.

The move comes amid the signing of a loan sourcing agreement between AIMCo and PSP Investments (see separate story above).

Silver Creek Capital Management has recruited Jessica Hans as an md, focusing on investments across non-corporate debt and real assets, as the firm seeks to strategically grow its private credit and real assets portfolios. She will also serve as a member of the firm’s investment committee and real assets investment committee.
Most recently, Hans served as investment director at UC Investments, focusing on the endowments and retirement plans of the University of California. Earlier in her career, she held roles at Blackstone, Credit Suisse and Bain & Company.
The addition of Hans follows Silver Creek’s promotion of Amy Wells to chief client officer. Wells has worked at Silver Creek since 2006, serving as an md responsible for the firm’s investor intake, client reporting and technology processes.

Structured Finance

Call for additional index granularity

Sector developments and company hires

Call for additional index granularity
SFA has submitted a letter to Fannie Mae and Freddie Mac in response to their Social Index (SCI 19 October 2022) that strongly advocates for additional transparency and granularity in how existing social metrics are reported to investors beyond the index. While the association commends the GSEs for their efforts to improve ESG data collection and reporting, it notes that in its current form, the Social Index obfuscates data and does not provide a sufficient basis upon which investors can satisfy their diligence and compliance obligations. Additionally, the letter argues that the Social Index must not serve as a de facto industry standard framework for how other structured finance issuers disclose and report social data metrics in the future, including the self-selected nature of the index.

SFA says it recognises that there are challenges associated with reporting this data, including protecting borrower privacy. Given those challenges, the association recommends that both GSEs continue to engage with investors on how best to report and disclose social metrics within the context of ESG investing in a way that protects borrowers’ interests while providing investors with the data necessary to make informed investment decisions.

Specifically, SFA investor members believe it’s critical that the GSEs report metrics on an individual, disaggregated basis, noting that disclosure of individual metrics with sufficient transparency is fundamental to investors’ ability to independently assess the characteristics, risks and impact of any bond. As part of future discussions, SFA investor members have offered to provide their consensus prioritisation of fields most relevant and impactful for their investment analysis.

In other news…

EMEA
Urs Banziger has joined Tramontana Asset Management as md, augmenting the firm’s origination and execution capabilities for renewable power transactions and carbon-backed financings across the European region. He was previously md and Switzerland country head at UniCredit, having worked at Barclays before that.

North America
Blackstone has promoted Brad Marshall to global head of private credit strategies, adding to his role as chairman and co-ceo of the firm’s two BDCs, Blackstone Private Credit Fund (BCRED) and Blackstone Secured Lending Fund (BXSL). He has been leading the firm’s direct lending efforts for nearly 17 years. Jonathan Bock, formerly the ceo of Barings BDC, has joined Blackstone to serve alongside Marshall as co-ceo of its BDCs.

Kelli Marti, senior md and head of CLO management at Churchill Asset Management, is set to assume an additional role at the firm. As of 1 March, she will co-head Churchill’s Chicago office alongside Alona Gornick, md and senior investment strategist at the firm.

PGIM has announced that fixed income head Michael Lillard is set to retire in April 2024 and John Vibert will be appointed as president and ceo, effective from 1 January 2024. Lillard joined Prudential in 1987 and has served in a host of investment and leadership roles throughout his tenure, including cio from 2008 to 2021.
Vibert joined the firm in 2014 as head of securitised products, a position he held until assuming the newly created role of president in January 2022. In this role, he works closely with Lillard on the strategic direction and overall management of the firm, including oversight of global operations, technology and business management functions. Vibert also oversees the global CLO business and will retain that responsibility upon his appointment as ceo.
Craig Dewling and Gregory Peters, both mds, will remain co-cios and will report to Vibert when he assumes the role of ceo. Lillard will serve as an advisor to the firm for the period from January through April 2024.