News Analysis
ABS
Nice and niche
Investors eye life ILS strategies as uncertainties loom
The life ILS sector has been caught up in the capital availability dynamics of the wider catastrophe bond market retrenchment caused by several recent big loss events. However, the resultant wider spreads could represent an opportunity this year for those seeking reliable investment strategies amid macroeconomic uncertainties.
“Providing nimble, expert capital to solving problems is the raison d’être for life ILS – and it’s something that is always in fashion and is always there to provide diversified, stable returns,” states Paul Whiting, ceo at Farsight Partners. “It’s not a strategy where you can make 10 times your money, but you can depend on a pretty consistent 10% a year.”
Several developments seen so far this year have highlighted new interest in the life industry, following the comparatively stable performance of life ILS through Covid-19 market uncertainty. “Covid-19 was the life industry’s equivalent of a category five hurricane going through Miami for the natural catastrophe world. While there were some big flu outbreaks in the 1960s-1970s – and, of course, the1918 flu pandemic - until now we haven’t had any recent experience of this kind of extreme event,” states Whiting. “In terms of the life ILS business, Covid-19 has given us a data point that has shown its impact to be pretty benign. In fact, the life ILS business came through the crisis extremely well, with generally flat returns instead of losses – contrasting to equity portfolios and more traditional investment strategies, where investors may not have been as conscious of their exposure to pandemic risk.”
The recently fledged partnership between Twelve Capital and Farsight marks a shift by investment managers as they move towards gaining better insight into life ILS strategies, with investors increasingly eyeing potential in the life insurance industry’s unique protection offerings (SCI 30 January). “There is an ongoing theme which is that life is a global growth area,” explains Whiting. “If you look at Maslow’s hierarchy of needs, right after the most basic physiological needs comes safety and protection. So, as the global middle class grows and more of the population start thinking about savings, health, insurance, pensions, the life insurance industry fits in uniquely to serve there.”
He continues: “The life industry looks after the most vulnerable people when they’re at their most vulnerable, so while there are a number of ways you can invest, you have to go with the life industry if you want protection. It also offers various types of investment products, where it can offer smoothing, guarantees and often tax efficiency. Accounting changes, like IFRS 17 and the UK’s Solvency 2 rethink, will catalyse new pressures and prompt new opportunities for ILS solutions.”
As health-consciousness rose through the pandemic, increases in consumers taking out life insurance policies were noted in the more mature life markets of the US, Europe and Japan. However, a protection gap still persists in these more developed markets, while growing middle class populations in jurisdictions such as India and China show even further potential for the expansion of the life insurance market.
As a result of its largely better-off customer base, life ILS benefits from a wealth buffer, which could support any uncertainty as insurtech firms work to reduce the barrier to entry to expand available assets for securitisation by advertising to lower income borrowers.
At present, life ILS accounts for less than 5% of manager AUM and total public bond issuance of the wider ILS market, despite the underlying life and health industry being far larger that of the non-life industry. As a longer-term product, life ILS has traditionally proven a harder sell for investors, as it can take a longer amount of time to enter the market. However, as a result of issues elsewhere in the ILS market, pricing in life ILS could prove to be a very attractive proposition for investors at the moment.
“Most people who work in life ILS do it as an add-on to their broader ILS strategy - and while it is a complementary strategy, it can stand on its own,” Whiting says.
Life ILS has been caught up in the capital availability dynamics of the wider ILS and catastrophe bond market retrenchment caused by several big loss events, which has driven prices higher in the market. This has seen firms with more passive ILS strategies being forced to drop their peripheral strategies, like life ILS, as a means to concentrate on their core business.
However, in the long term, life ILS strategies present a dependable growth opportunity for those investors that choose to prioritise the strategy, according to Whiting. “ILS is particularly appropriate to novel or complex situations which arise when you have a growth story,” he states.
Farsight is optimistic about the long-term benefits and overall security that life ILS can provide as it partners with Twelve Capital to offer a more life ILS dedicated approach by combining their complementary offerings. Whiting emphasises: “Life ILS has a different risk profile, a different liquidity profile, and shouldn’t be thought of as a bolt-on to an ILS strategy, but a strategy in its own right.”
The strategy can also provide some support for investors through the recession by offering diversification, as life ILS performance doesn’t tend to correlate with the broader financial markets - even during a financial crisis. Indeed, 2023 could present an opportunity for investors to enter the life ILS market as it offers reduced exposure to the wider economy and delivers year-on-year steady cashflows.
“For many investors, that’s a very attractive proposition,” states Whiting.
Life ILS also falls under the wider ILS umbrella, making it particularly attractive in the current harder property-catastrophe environment. “Increasing spreads in structures in the natural catastrophe market has spilled into the life space. For example, the latest B note of the 2023 Vitality series priced at 450bp, up from 275bp (60%) in 2022 and 2021. So, for sophisticated investors, there probably hasn’t been a better time to get into life ILS for many years,” explains Whiting.
Although the broader ILS market is comparatively better understood, it has shown volatility in recent years. However, life strategies can prove to be complimentary to catastrophe risk, as life ILS opportunities continue to open up globally as spreads spike.
Additionally, there could be scope for mispriced assets to be picked up later this year as public life ILS comes into fashion. For instance, life ILS could be considered as falling into alternative credit or social ‘infrastructure’ buckets.
“The main obstacle we face is the challenge of education. Because ILS broadly is relatively new and niche, life ILS is a niche within a niche. While most counterparties and investors - once you explain an ILS solution - understand and accept, there still remains the struggle of which box does it belong in,” Whiting considers.
As familiarity with the life industry increases, life ILS opportunities are emerging globally as traditional forms of capital become increasingly more expensive and difficult to access. “We know this is always going to be a niche strategy, but there’s no reason why we can’t reach mid-single digit billions over the next 10 years in following it,” Whiting concludes.
Claudia Lewis
22 February 2023 12:41:03
News
Structured Finance
SCI Start the Week - 20 February
A review of SCI's latest content
Latest SCI In Conversation podcast available
In this episode, Pretium Partners senior md and structured credit head Jerry Ouderkirk discusses relative value opportunities in the CLO market. The podcast can be accessed wherever you usually get your podcasts, including Apple Podcasts and Spotify (just search for ‘SCI In Conversation’), or by clicking here.
Last week's news and analysis
Backing blockchain
Credit risk considered as DeFi eyed to fund real world assets
Cloudy skies for aircraft ABS
Despite a deal in December, aircraft ABS has problems to solve
German SRT debuts
BNP Paribas launches new Autonoria SRT
Highs, lows and CLOs
CLOZ answers SCI's questions
Incorporating climate risk
Carbon accounting for CLOs examined
Regulatory resentment
Delegates at SCI's New York seminar implore transparency
Shifting gear
Barclays discontinues SPV structures
For all of last week’s stories including ‘Market moves’ and ‘Risk transfer round-up’ click here.
SCI Markets
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Recent premium research to download
Digitisation and securitisation - February 2023
Blockchain and digitisation are increasingly being incorporated into the securitisation process. This Premium Content article explores the benefits and challenges that these new technologies represent.
Alternative credit scores - January 2023
The GSEs are under considerable political pressure to extend credit to the underserved. But what does this mean for CRT investors, issuers and rating agencies? This Premium Content article investigates.
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.
Upcoming SCI events
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25 April 2023, London
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19 October 2023, London
20 February 2023 12:45:53
News
Capital Relief Trades
German SRT priced
BNP Paribas prices capital relief trade
BNP Paribas has priced the first full stack significant risk transfer from the Autonoria programme that references German consumer loans. Dubbed, Autonoria DE 2023, the transaction partially addresses limited excess spread levels via the replenishment criteria (SCI 17 February).
Rated by DBRS Morningstar and Moody’s, the STS SRT consists of €458m class A notes (priced at one-month Euribor plus 47bps), €15.8m class B notes (115bps), €14.3m class C notes (210bps), €5.3m class D notes (305bps), €11.3m class E notes (550bps), €4.5m class F notes (750bps) and €15.8m unrated class G notes.
The tranches amortize on a pro-rata basis with triggers to sequential while the revolving period ends on 25 October 2023.
Full stack SRTs witnessed decreasing levels of excess spread due to higher hedging costs following rising interest rates last year. Limited availability of excess spread has in turn rendered synthetic securitisations a more attractive option. Contrary to other lenders, BNP Paribas has found a simple way to augment excess spread levels without resorting to the use of an uncapped interest rate swap structure.
The transaction structure aims to partially mitigate limited excess spread levels by incorporating a specific feature during the revolving period. Specifically, one of the replenishment criteria aims to increase portfolio yield during the six-month revolving period by mandating that new receivables yield an interest rate higher than the portfolio’s weighted average at closing. However, it would take several years for full repricing to happen and there is only limited benefit to the trade.
Stelios Papadopoulos
23 February 2023 13:45:03
News
Capital Relief Trades
Risk transfer round up-23 February
CRT sector developments and deal news
Credit Agricole is believed to be readying a synthetic securitisation of corporate loans that is expected to close next month. The French lender’s last corporate capital relief trade was executed last year (SCI 7 December 2022).
Stelios Papadopoulos
23 February 2023 15:26:26
News
Capital Relief Trades
Lift off
Toronto Dominion opens Canadian CRT market
Toronto Dominion has priced a synthetic securitisation of corporate loans. The transaction renders the lender the first Canadian bank to execute a capital relief trade after Bank of Montreal. Indeed, other Canadian lenders are expected to follow as Canada frontloads the Basel output floor this year (SCI 22 November 2022).
According to market sources, the trade features a US$600m first loss tranche with a 0%-9% thickness that was priced at 11.5%. The trade is backed by corporate loans but an undisclosed portion of it consists of leveraged loans.
Moreover, CIBC is also said to be readying a synthetic ABS deal. However, unlike the Toronto Dominion trade, the portfolio in this case is a blind pool and consists of predominantly commodity focussed investment grade corporate loans (SCI 6 February).
Further issuance is expected from Royal Bank of Canada which is working on two capital relief trades. The first one is backed by leveraged loans while the second one references corporate exposures.
The pickup in the Canadian market is perhaps not surprising given that the Canadian supervisor, the office of the superintendent of financial institutions (OFSI), stipulated in an official letter that was published on January 31, 2022, that the Basel output floor would have to be effectively frontloaded this year. According to the letter, the implementation of the 72.5% Basel output floor will be phased in over three years beginning in fiscal 2Q23.
Stelios Papadopoulos
23 February 2023 18:54:15
News
Capital Relief Trades
Growing momentum
EU Commission endorses halving of p factor
SCI can confirm that the European Commission has followed the European Parliament and is now endorsing the transitional halving of the p factor as momentum continues to build in the securitisation industry’s favour.
According to a classified Commission non-paper that was leaked to market participants approximately two weeks ago, the EU’s executive is now calling for the transitional halving of the p-factor for the SEC-SA and for adjusting the SEC-IRBA in regards to the p-factor at a 0.1 floor and a cap of 0.3 for STS securitisations.
Similarly, the European Parliament’s Economic and Monetary Affairs Committee (ECON) approved the halving of the p factor on January 24, adding further momentum to calls from the industry to lessen the impact of the Basel output floor.
The p factor is an input into the SEC-SA and SEC-IRBA formula and was introduced well before the output floor. It governs the non-neutrality for the retained senior tranches of synthetic securitisations with the aim of addressing modelling and agency risks.
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 one January 2025 over a period of five years. Effectively, this may lead to higher risk weights for the retained senior tranches of synthetic securitisations.
The p factor has gained attention with the introduction of the output floor since by rectifying the SEC-SA via the halving of the p factor, originators are able to lessen the punitive impact of the floor.
Compared to ECON’s recent decision, the Commission’s non-paper goes further in that the EU’s executive has made drastic changes to the ESA’s December 2022 risk weight floor proposal, which imposes strict eligibility criteria in return for a reduction of the securitisation risk weight floor on certain approaches but with industry amendments (SCI 13 December 2022).
Two of these criteria pertain to the thickness of the sold tranche and the granularity of the portfolio. On tranche thickness, the ESA proposal states that the thickness requirement for the sold tranche should be less than 5% for STS senior risk weights and below 7.5% for non-STS.
The Commission’s non-paper is proposing the elimination or reduction of this thickness requirement.
Second, on granularity, the ESA document calls for a 0.5% concentration limit in accordance with Article 243(2) of the CRR. The Commission’s non-paper on the other hand proposes a 2% granularity in line with STS criteria that will apply to both banks and investors.
Finally, the non-paper suggests the proposals should apply for a transitional period, but the length isn’t wholly clear and may be decided during the Trilogue negotiations where a compromise between the Commission, the Parliament and the Council will be eventually fleshed out.
Meanwhile, the EBA’s RTS on the homogeneity criteria for STS on balance sheet securitisations has been broadly welcomed by market participants (SCI 14 February).
David Saunders, executive director at Santander notes: ‘’The RTS marks a significant improvement from the consultation paper since it effectively offers the same grandfathering to both STS traditional and synthetic securitisations, while also avoiding any arbitrary distinction between large corporate and SME exposures. Instead, issuers can look at their internal underwriting standards.’’
Similarly, Jo Goulbourne Ranero, consultant at Allen and Overy comments: ‘’the RTS abandons the proposed regulatory definition of ‘large corporate’ exposures in favour of corporate obligor classifications based on internal underwriting practices, which the EBA acknowledges will differ depending on the size and jurisdiction of the originating institution.’’
The concerns about the consultation’s approach to the definition of corporate exposures were several (SCI 5 August 2022). First, the EBA stipulated a strict definition of large corporates which isn’t yet part of the CRR and would mean that banks wouldn’t be able to mix corporate and SME loans in the same portfolio. This would in turn imply les granularity and financing for SMEs.
Second, the lack of permanent grandfathering for STS on balance sheet securitisations was another issue despite the existence of such grandfathering for traditional STS securitisations.
However, there is still room for improvement from the market’s perspective. The EBA assumes that the treatment of large corporates that are financial institution exposures should be treated differently relative to those that are non-financial institutions. However, market participants believe that it should be possible to treat them as homogenous if they are originated under aligned underwriting standards.
Stelios Papadopoulos
24 February 2023 15:58:44
News
SRTx
SRTx benchmark debuts
Index to provide pricing guide for corporate, SME CRTs
SCI is set to launch SRTx (Significant Risk Transfer Index), a fixed income benchmark rate index that measures the estimated prevailing new-issue price spread for generic private market risk transfer transactions. The index aims to provide a benchmark for deal and fund performance, provide a guide to pricing deals and to act as an additional validation of the SRT market for would-be issuers and investors.
The index comprises two theoretical deal structures with standardised, pre-defined characteristics across the large corporate and SME sectors in Europe, the UK and North America. Both structures have five-year terms and two-year replenishment periods, with tranche attachment/detachment points of 0.0%-7% and 0.5%-7.5% for the corporate and SME deals respectively.
Calculated and rebalanced on a monthly basis by Mark Fontanilla & Co, the SRTx provides market participants with a benchmark reference point for pricing in the private risk transfer market by aggregating issuer and investor views on pricing. No proprietary information will be revealed, since contributors are pricing identical deal structures to provide a generic benchmark price.
Contributors provide end-of-month pricing on the theoretical deals and, in return, gain access to the high-low pricing spread each month to understand how they price relative to the cohort. Prices are provided on a survey basis, with additional questions covering attitudes to liquidity, credit appetite and risk.
Market participants may license the SRTx underlying data for pricing and benchmarking purposes.
To register your interest as a contributor to the index, click here. For all other enquiries, email SCI.
24 February 2023 18:37:58
Market Moves
Structured Finance
CS duo snapped up
Sector developments and company hires
CS duo snapped up
Financial services firm Baird has expanded its fixed income offering with the addition of two ex-Credit Suisse professionals focusing on CLOs and securitised products. James Gray and Daniel Bates join the firm’s London office respectively as md, European fixed income sales and director, European fixed income trader.
Gray was previously executive director, securitised products sales at Credit Suisse and led the rebuilding of its public side client franchise across Europe and re-established its European securitised products salesforce. Prior to that, he was a member of JPMorgan’s European securitised products, CLO and illiquids syndicate and head of European ABS syndicate at Deutsche Bank.
Bates most recently supported the development of Credit Suisse’s European CLO trading business as CLO trader. Before that, he served as a junior portfolio manager at both Spire Partners and WyeTree Asset Management, where he managed investments in European CLOs and European and US ABS.
In other news…
EMEA
Natixis has recruited Charles Toutain as an ABS/CLO trader, based in Paris. Toutain previously spent almost a decade at AXA Investment Managers, where he served as an ABS/CLO/ILS trader since 2017 and was a derivatives analyst before that.
SMBC Nikko Capital Markets has appointed Ian Willis as head of EMEA ABS/CLO trading, based in London. He was previously a CLO trader at Jefferies, which he joined in September 2009. Before that, Willis worked at Barclays and Lehman Brothers as a CMBS trader and at Dresdner Kleinwort Wasserstein as an ABS trader.
North America
BNP Paribas has promoted its existing head of US CLO structuring and warehousing to md. Alexandra Middleton will step up to the role, having climbed the ranks to become head of US CLO structuring in 2020. Middleton will continue to be based in the firm’s New York office, where she has been since she joined as an analyst in credit structuring in July 2012.
21 February 2023 16:38:05
Market Moves
Structured Finance
FEAC promotes four in direct lending
Sector developments and company hires
FEAC promotes four in direct lending
First Eagle Alternative Credit (FEAC) has promoted four members of its tradable credit and direct lending investment teams. Within the tradable credit team, Robert Hickey has been named deputy cio, reporting to FEAC cio James Fellows.
Hickey joined the firm in 2004 and was formerly senior portfolio manager in the tradable credit team. He is a senior md and will continue to serve on the global investment committee and on the investment committee for tradable credit.
Within the direct lending team, Michelle Handy also becomes deputy cio, reporting to FEAC president Chris Flynn. Handy joined the firm in 2016 and was previously md and head of portfolio and underwriting for First Eagle’s direct lending platform. She will continue to serve as a member of the investment committee for direct lending and of the firm’s operating committee.
Meanwhile, mds Garrett Stephen and Howard Wu have been named co-heads of origination and structuring, having previously been originators in FEAC’s direct lending team. Stephen joined the firm in 2012, while Wu joined in 2007. Reporting to Flynn, the pair serve as rotating members of the direct lending team’s investment committee, covering loans in healthcare, information services and technology.
In other news…
EMEA
Merrill Goulding has joined Permira Credit as md, strategic opportunities, after seven years at The Carlyle Group. Goulding was promoted to md early last year, having served as European co-head of special situations since February 2021. He joins Permira’s growing strategic opportunities business, where he will report to strategic opportunities head, Ian Jackson, who was recruited to lead the strategy last year.
22 February 2023 16:03:05
Market Moves
Structured Finance
Cairo NPL disposal completed
Sector developments and company hires
Cairo NPL disposal completed
doValue has completed Project Souq, the sale to Intrum of two non-performing loan portfolios of approximately €630m in aggregate GBV related to the Cairo 1 and Cairo 2 HAPS securitisation vehicles (SCI 8 June 2020).The
transaction - which was structured, executed and completed by doValue Greece - allows the firm to accelerate its collection activity in Greece, while retaining the long-term servicing mandate on the two portfolios acquired by Intrum.
The disposal was implemented via doLook, the digital NPL trading platform that doValue has developed jointly with Debitos. Hellenic Finance acted as financial advisor for the sale process.
Project Souq is one of the largest secondary sales of NPL portfolios in Europe and the first-ever Greek secondary NPL
transaction undertaken on the doLook platform.
Separately, doValue has disclosed that the class A notes of UniCredit’s landmark Fino 1 Securitisation (SCI 9 February 2017) have been repaid, thanks to the portfolio’s strong collection performance. The firm assumed the roles of master servicer and special servicer on the deal.
In other news…
EMEA
Bank of America has promoted a newly-hired structured finance originations associate to vp. Nathan Levy will take on the new role after joining BofA just eight months ago from NatWest Markets, where he served as an associate in its securitised products team. Prior to this move in 2022, Levy held several other roles in the industry, including as an ABS credit structuring associate at ARA Venn and as a structured finance analyst at DBRS Morningstar.
Barclays has promoted securitised products financing trader Petter Wettestad to vp. Wettestad joined the bank in August 2021, having previously held the position of senior financial analyst in Frankfurt for DBRS Morningstar. He is based in London and will continue to support the securitised products financing team in his role as trader.
Howden CAP has hired banking and insurance lawyer Lee Hitge as an executive director, supporting the development of its capital management and insurance solutions around the distribution of insured loan assets through repacks, as well as portfolio risk transfer. Based in Howden’s London office, she joins from the Willis Towers Watson financial solutions structuring team, where she has been an executive director since 2019.
North America
Annaly co-founder Wellington Denahan is retiring from the company’s board after more than 25 years of service. Effective from the end of Annaly’s 2023 annual stakeholders meeting, Denahan will retire from her positions as vice chair of the board of directors, chair of the risk committee, member of the corporate responsibility committee and as a director of the company.
Denahan has supported and led Annaly since co-founding the firm in 1996, working to grow it from an agency mortgage REIT into a diversified housing finance lender and delivering US$24bn in dividends to shareholders. During her tenure, Denahan held numerous roles within the company, including serving as chairman of the board between 2012 and 2017, an executive chairman since 2015, a co-ceo in 2012 and as ceo between 2012 and 2015.
MUFG has recruited Jimmy Wilson as a director in its securitised product sales team, based in New York. Wilson was previously a director at Barclays, which he joined in July 2017, having worked in securitised product sales at Deutsche Bank and Jefferies before that.
23 February 2023 13:57:49
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