Contents

ABS

Lightning rod?

Dealer incentives eyed in CAC complaint

The CFPB and the New York State Office of the Attorney General (NYOAG) recently brought a lawsuit against subprime auto ABS issuer Credit Acceptance Corp (CAC) for “misrepresenting the cost of credit” and “hiding” costs in loan agreements. Unusually, the allegations centre on the company’s business model, which is unique among auto lenders.

“Credit Acceptance is somewhat of a lightning rod in the subprime auto industry. Part of this is because of its success and because of its different business model, which allegedly creates incentives for dealers to inflate the price of vehicles, even though prices are disclosed to consumers. If responsibility for dealers’ incentives to maximise profit became enough to constitute a violation of law, there would be many other areas and targets of regulatory scrutiny,” observes Joseph Cioffi, partner at Davis+Gilbert.

Specifically, the CFPB lawsuit alleges that CAC engaged in repeated and persistent fraudulent and illegal conduct, including misstating the cost of credit and “entering into unconscionable contractual terms”. CAC is also alleged to have violated the Martin Act by offloading high-cost loans and their associated risks by securitising them, thereby obtaining financing to engage in additional “abusive and deceptive lending practices”. To do so, CAC is alleged to have “falsely represented” to bookrunners, investors and rating agencies that the underlying loans complied with all applicable state and federal disclosure and consumer protection laws.

Cioffi suggests that the alleged hidden finance charge is being used as a way to tie CAC’s conduct to a specific violation of law. “But it’s difficult to prove that the hidden finance charge was actually passed on to an individual consumer, though a dealer may have raised the price of its inventory. The cost of doing business with CAC is baked into its business model, so it’s difficult to prove a violation, especially since vehicle prices change on a daily basis.”

CAC does business with a network of more than 12,000 affiliated used-car dealers. From 2 November 2015 to 30 April 2021, approximately 1.9 million consumers obtained used car loans through CAC and its affiliated dealers.

The CFPB notes that since 2014, CAC loan agreements have stated that consumers would pay interest at an average 22% APR. However, CAC’s business model of incentivising dealers to adjust vehicle prices based on borrowers’ projected performance can increase the principal balance of the loans.

“By hiding the true cost of the credit in inflated principal balances, Credit Acceptance evades state interest rate caps and deprives consumers of the ability to make informed decisions, to compare financing options or to avoid high interest charges,” the complaint states.

In New York, for instance, over 84% of CAC loans exceeded the 25% penal usury cap. The company has issued 35 auto loan ABS, including 11 transactions that remain outstanding.

KBRA notes that if it is determined that any loan is in breach of a representation and warranty, CAC is obliged to repurchase the loans from the ABS trusts. If the loans are not repurchased by CAC, the cashflows may be adversely impacted if a court requires the loans to be rescinded or amended.

The remedies sought by the CFPB and NYOAG include an injunction to prevent CAC from engaging in the alleged fraudulent practices, disgorgement of profits from such practices, rescission or reformation of the affected loan contracts and certain civil penalties. “Compliance with consumer protection laws generally is an area of vulnerability for subprime auto lenders, including under repurchase obligations in securitisations. If the CFPB complaint gets traction, investor scrutiny and private lawsuits will likely follow,” Cioffi indicates.

This is not the first action targeting CAC for violating consumer financial protection laws. In September 2021, the Massachusetts Attorney General secured a US$27m settlement from the company in connection with alleged unfair practices relating to its origination, collection and securitisation of subprime auto loans.

Corinne Smith

Structured Finance

SCI Start the Week - 27 February

A review of SCI's latest content

SRTx benchmark launched

SCI is launching SRTx (Significant Risk Transfer Index), a new benchmark that measures the estimated prevailing new-issue price spread for generic private market risk transfer transactions. Calculated and rebalanced on a monthly basis by Mark Fontanilla & Co, the index provides market participants with a benchmark reference point for pricing in the private risk transfer market by aggregating issuer and investor views on pricing. For more information on SRTx or to register your interest as a contributor, click here.

Last week's news and analysis

German SRT priced
BNP Paribas prices capital relief trade

Growing momentum
EU Commission endorses halving of p factor

Lift off
Toronto Dominion opens Canadian CRT market

Nice and niche
Investors eye life ILS strategies as uncertainties loom

SRTx benchmark debuts
Index to provide pricing guide for corporate, SME CRTs

For all of last week’s stories including ‘Market moves’ and ‘Risk transfer round-up’ click here.

Podcast

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.

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
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
SCI’s 2nd Annual ESG Securitisation Seminar
25 April 2023, London

SCI’s Transport ABS Seminar
May 2023, New York

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

Structured Finance

SCI In Conversation podcast: Keerthi Raghavan, Waterfall Asset Management

We discuss the hottest topics in securitisation today...

In this episode of the SCI In Conversation podcast, Waterfall Asset Management partner Keerthi Raghavan discusses the headwinds and tailwinds currently facing the US ABS market. In a bonus feature marking International Women’s Day on 8 March, we also chat to Linklaters managing associate Ruhi Patil about what this year’s campaign theme - ‘embrace equity’ - means to her.

Additionally, we highlight three SCI Premium Content articles that were published in January. One of the articles explores how blockchain and digitisation are addressing securitisation inefficiencies; another looks at the prospects for significant risk transfer activity in Central and Eastern Europe; and the other investigates the impact that the introduction of alternative credit scores may have on the US RMBS and credit risk transfer markets.

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

Capital Relief Trades

Banks seek CRT clarity

"Reservation of authority" at heart of regulator distaste for CRT, say sources

A top tier US bank has requested a non-objection letter from the Federal Reserve Bank of New York to clarify its attitude to regulatory capital relief trades and the 60-day period allowed for a reply is due to expire in the next few weeks, say well-placed industry sources.

The identity of the bank is not known but it is thought to be JP Morgan Chase, Bank of America or Morgan Stanley.

The inimical attitude of regulators towards the regulatory capital relief mechanism has brought the market in the US to a halt over the last couple of years, with the exception of a couple of trades from smaller regional players such as Western Alliance, PacWest and Customers Bank.

The source of the disapproval is not clear due to the cloud of mystery that typically shrouds the deliberations  and decision-making of US regulators.

However, their scepticism in this case is said to be based upon the reservation of authority clauses, which form part of Title 12, part 217 of Regulation Q. Part 217 deals with capital adequacy of bank holding companies, savings and loans holding companies and state member banks.

Pary 217.1 is concerned with purpose, applicability, reservations of authority, and timing, and within this, subsection D is entitled ‘reservation of authority; and lays down constraints regarding regulatory capital adequacy, risk weighted assets, leverage and additional aggregate capital.

For example, under the section dealing with risk weighted assets, it states  “If the Board determines that the risk-weighted asset amount calculated under this part by the Board-regulated institution for one or more exposures is not commensurate with the risks associated with those exposures, the Board may require the Board-regulated institution to assign a different risk-weighted asset amount to the exposure(s)...”

It is not known whether the CRT device falls foul of this particular stricture, or others within reservation of authority, but the basis of the Fed’s opposition to it is said to lie within this section. However, it is not clear why the Fed deems the regulatory capital relief to contravene one or more of the premises within the reservation of authority clauses.

The regulatory uncertainty has put the US CRT market on hold, but there is no shortage of interest in it, according to anecdotal evidence. One bank with a presence across the country says that it has in the region of 20 smaller client banks ready to pull the trigger when – and if – regulators give the green light.

Banks shouldn’t perhaps get their hopes up. The Securities and Exchange Commission (SEC) recently re-proposed Rule 192, which is designed to implement Section 621 of the Dodd-Frank Act which seeks to prohibit material ‘conflict of interest’ in securitizations.

Among other things, the re-proposal defines the use of credit default swaps in an ABS deal as a ‘direct bet’ against the performance of that ABS trade irrespective of whether the securitization participation actually benefit from that trade.

The SEC has the credit risk transfer market firmly in its sights in this particular reading of conflict of interest, say lawyers.

Simon Boughey

Capital Relief Trades

Balance sheet optimization continues

Piraeus Bank discloses synthetic securitisation

SCI can reveal details of a synthetic securitisation that Piraeus Bank finalized in December last year. Dubbed Hermes, the corporate and SME transaction references a €1.3bn portfolio as the Greek lender continues the shift towards balance sheet optimization.

The transaction features a €10m senior mezzanine tranche with the overall thickness of the sold mezzanine piece totalling 9%. CRC, the EBRD and Veld Capital acted as the investors in the trade. Piraeus Bank is committing 170% of the EBRD’s participation to finance new green investments in renewable energy and energy efficiency.

Piraeus bank executed four synthetic securitisations last year that enabled the lender to reduce its RWAs by approximately €1.6bn and thus enhance its capital ratio by around 80bps.

Piraeus Bank started using synthetic ABS following the announcement of the lender’s Sunrise plan in March 2021 to boost capital generation, so as to offload non-performing loans (SCI 14 January 2021).

The Sunrise plan stipulated capital and debt issuance, carve-outs, and synthetic securitisations. However, following the execution of two significant risk transfer trades in 2021 and significant reductions in NPE exposures, the focus has now shifted towards balance sheet optimization since synthetic technology can be utilized to enhance returns on capital.

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round up-28 February

CRT sector developments and deal news

Alpha bank is believed to be readying a synthetic securitisation of shipping loans. The transaction would be the Greek market’s third capital relief trade to reference shipping exposures. The last shipping CRT was executed by Eurobank last year (see SCI’s capital relief trades database).  

Stelios Papadopoulos

Capital Relief Trades

Back to STACR

Freddie targets 70/30 bonds versus reinsurance split as supply drops

Freddie Mac expects to issue between $4.5bn and $6.5bn in the CRT space in 2023, and it targets a 70/30 split between the capital markets and the reinsurance market, says a spokesman for the GSE at the SFA conference in Las Vegas today (February 28).

This is around a third of the supply seen in 2022, which was a record year.

A 70/30 split re-establishes the traditional ratio of bonds versus reinsurance placement, but in 2021 and 2022 the reinsurance market was almost as important to the GSEs’ CRT programme than the capital markets.

Spreads widened in the bond market over the last two years due to significant supply but also as a result of general geopolitical and macroeconomic concerns. Pricing in the reinsurance market was more focused on fundamental risk and was more benign for the GSEs. As a result, the GSEs placed a  much greater than hitherto proportion of risk in the reinsurance market.

The mortgage insurers discovered the same phenomenon: only two mortgage insurance linked notes (MILNs) were sold in 2022, compared to 14 in 2021. The reinsurance market took up the slack.

While M1A new issue spreads widened close to 200% from June to July 2022, M1 reinsurance spreads widened by about 89%.

However, despite the proven resilience of the reinsurance market, Freddie still targets a 70/30 split this year, though it adds this might be readdressed if market conditions alter.

In the face of record issuance last year, 78 investors bought STACR paper for the first time. Overall, 140 buyers participated in the 10 deals that were brought to market in the first three quarters of the year. There were more insurance company buyers than ever before, and, as spreads widened, private equity buyers came in for STACR paper for the first time.  

Simon Boughey

RMBS

Affordability anxiety

Non-QM originators augment affordability products, raising loss prediction

Mortgage originators are increasing production of affordability non-QM loans partly for purely business reasons but also in response to political pressure to extend home ownership, analysts said today (February 27).

Loss predictions for a range of higher affordability products have also increased, according to a new Fitch Ratings repor . For example, a 40-year fully amortizing fixed rate loan has a 1.84 times greater loss prediction than a standard 30-year fully amortizing loan, a 40-year fixed rate loan with a 10-year interest only period has a loss prediction twice as high as a standard 30-year loan while a 40-year fully amortizing loan with a five-year adjustable-rate mortgage (ARM) is fully 2.28 times more likely to incur losses.

Rising mortgage rates and higher home prices have reduced demand for mortgages, so originators are obliged turn to new products to keep the wheels of their business turning, but the impact of well-publicized initiatives from several Federal agencies to increase access to credit should not be under-estimated either.

“Originators are starting to offer these types of products partly because it makes business sense but also to conform to US government initiatives with regard to affordability,” says Susan Hosterman, senior director, North American RMBS and covered bonds at Fitch.

 “Although the majority of loans in non-QM RMBS transactions are 30-year fixed rate loans, an increasing volume of mortgages have affordability product features, such as over 40-year terms to maturity, interest-only periods, adjustable rates and balloon payments,” notes the report. Lower monthly repayments are offered to borrowers in the short term with the opportunity to refinance when – and if – rates come down.

These new products are currently offered only in the non-QM space and not in the agency market. These lenders are not governed by the Federal Home Loan Agency (FHFA), but the fact that non-QM originators now feel obliged to respond to the overall thrust of the administration’s policy objectives is striking. Observers opined that it was likely that GSE objectives would bleed into the non-QM market when the FHFA first unveiled its affordability changes.

Moreover, the FHFA is not the only agency pushing in this direction. Non-bank mortgage originators are subject to the scrutiny of the Consumer Financial Protection Agency (CFPB), headed by the energetic Rohit Chopra. The Department of Justice (DOJ) is also infused with the same spirit. Sources report that mortgage originators which were in receipt of Covid-stimulus payments have been asked by the DOJ to show how that this money is being spent to advance the affordability mandate.

Despite the resurgence of affordability products for the first time since the late 1990s and early 2000s, Fitch does not expect the private label mortgage market to crater as it did spectacularly in 2008 due to a number of guard rails introduced since those days like, for example, the Ability To Repay (ATP) rule and more exacting risk retention rules.

Governmental initiatives through agencies have been high on the agenda at the Structured Finance Association (SFA) conference currently under way in Las Vegas. The Securities Exchange Commission (SEC) has unveiled an “overwhelming amount of regulation”, noted one speaker, including the conflict of interest ruling and various equity market structure undertakings.

“As a Democrat, I try and be sympathetic to the regulators, but this is creating enormous uncertainty in large and well-functioning markets,” he added.

Simon Boughey

SRTx

SRTx inaugural fixings released

Index values project worsening conditions for CRTs

The inaugural fixings for the SRTx (Significant Risk Transfer Index) have been released. The index values suggest that pricing volatility is rising and credit risk is worsening for US capital relief trades at a higher level than for European CRTs.

Overall, both pricing volatility and SRT execution conditions are shown to be skewing higher for SME transactions in Europe and the US. The highest index values were reported in the SRTx Credit Risk Indexes, with notably elevated levels recorded for US large corporate and SME transactions.

SRTx coverage includes large corporate and SME reference pools across the EU and US economic regions. The index suite comprises a quantitative spread index - which is based on survey estimates for a representative transaction (the SRTx Benchmark Deal) that has specified terms for structure and portfolio composition - and three qualitative indexes, which measure market sentiment on pricing volatility, transaction liquidity and credit risk.

Specifically, the SRTx Volatility Indexes gauge market sentiment for the magnitude of fixed-spread pricing volatility over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating volatility moving higher.

The SRTx Liquidity Indexes gauge market sentiment for SRT execution conditions in terms of successfully completing a deal in the near term. Again, the index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that liquidity is worsening.

Finally, the SRTx Credit Risk Indexes gauge market sentiment on the direction of fundamental SRT reference pool credit risk over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that credit risk is worsening.

The objective of the index suite is to depict changes in market sentiment, the magnitude of such change and the dispersion of market opinion around volatility, liquidity and credit risk.

For the SRTx Spread Indexes, the index values stand at 1,094bp, 863bp, 1,275bp and 1,117bp for the SRTx CORP EU, SRTx CORP US, SRTx SME EU and SRTx SME US indexes respectively, as of the 1 March valuation date. For the SRTx Volatility Indexes, the index values are 50, 63, 56 and 67 for the SRTx CORP VOL EU, SRTx CORP VOL US, SRTx SME VOL EU and SRTx SME VOL US indexes respectively.

Values for the SRTx Liquidity Indexes are 50, 63, 56 and 58 across the SRTx CORP LIQ EU, SRTx CORP LIQ US, SRTx SME LIQ EU and SRTx SME LIQ US indexes respectively. Finally, values for the SRTx Credit Risk Indexes are 69, 69, 81 and 75 across the SRTx CORP RISK EU, SRTx CORP RISK US, SRTx SME RISK EU and SRTx SME RISK US indexes respectively.

The indexes are surveyed on a monthly basis and recalculated on the last trading day of the month. SCI is the index licensor and the calculation agent is Mark Fontanilla & Co.

For further information on SRTx or to register your interest as a contributor to the index, click here.

Corinne Smith

ABS

Independent considerations

Daniel Drummer, cfo of German digital lender auxmoney, answers SCI's questions

Q: auxmoney re-opened the European securitisation market with its third social bond issuance, Fortuna Consumer Loan ABS 2023-1. How does this latest deal compare to auxmoney’s first two ABS transactions?
A: This is our third and largest securitisation at €350m, which directly follows our first securitisation in September 2021 at €250m and our second in May 2022 at €225m. Overall, the structure is similar to these first two deals. However, this deal is really quite unique as it makes us the first company able to price or launch a successful ABS deal in euros since September last year when the whole European consumer ABS market was basically closed (SCI ABS Markets Daily - 6 February).

We saw a lot of investor demand for this transaction, which meant we were able to tighten the pricing compared to the initial guidance that was given out. We were oversubscribed a few times over for all of the tranches - not least because investors now know us as a repeat issuer, but also because they have been able to see the strong track record we have had over the years.

Q: How does securitisation fit into auxmoney’s wider mission?
A: Since auxmoney was founded more than 15 years ago, we have grown to become one of the largest digital lenders in Germany. We can offer a fully digital process - which makes use of our advanced data analytics and machine learning models.

Compared to many traditional high street banks, we are able to offer our customers a more digital, more convenient and much faster means of borrowing money. In fact, for 90% of our customers, we offer a fully digital process.

Another key part of our mission is this element of financial inclusion. We are able to offer credit to some customers who would not be served by many traditional banks – which is why we have been able to obtain the label of a social bond in this recent securitisation.

Customers in this underserved category may include students, people in probation periods, freelancers and the self-employed. So this securitisation is just another element which allows us to keep pursuing our mission and purpose.

Q: How exactly does auxmoney’s more differentiated risk assessment offer more people access to finance?
A: Our differentiated risk assessment includes leveraging several data sources like open banking data with advanced data analytics and machine learning models, which we’ve built based on more than 15 years of data history. What the differentiated credit assessment really means is that we use more data and more advanced models to analyse the data than traditional lenders. Ultimately, this allows us to come up with a more differentiated risk assessment and pricing for many customers, especially in instances where traditional methods would fall short.

Q: What are the prospects for more securitisation transactions for auxmoney? 
A: Our securitisation strategy has now proven to be successful through several different stages of the macroeconomic cycle. We have been able to place securitisations every year since 2021 now, which has also added strong proof to our business model and our credit risk track record. So, we do expect to continue having securitisations as an important pillar of our funding strategy, while we continue to have institutional investors investing directly into the platform.

Q: It is predicted that Germany specifically will head into recession this year. Has auxmoney yet felt the impact of broader macroeconomic pressures?
A: So far, we’ve seen our portfolio perform very resiliently, and we haven’t seen any macroeconomic distress in our internal data. Nevertheless, we are very prudent and proactive when it comes to risk management, and we monitor the external environment very carefully. So, if the macroenvironment was to change at any point, we would be able to act quickly.

Q: Do you expect the recession to impact the prioritisation of ESG by investors?
A: I would argue that ESG is here to stay. After speaking with investors, it is clear that the importance of the different aspects of ESG may well be something that stays independent from the current macroeconomic environment.

For us, ESG is an important subject - independent of macroeconomic developments - and we are proactively furthering this ESG agenda, both internally and externally. When we speak with investors, we observe the same interest in ESG - even more so now than a few years ago.

More investors are focusing on ESG and really appear to be keen to understand what is really behind things like a social bond label. Nowadays, we have had some investors come to us and tell us that they have deliberately invested in our deal because of the social element.

Q: What is in store for auxmoney’s business going forward?
A: We want to continue to focus on growing in our core markets. There is still plenty of opportunity to be found – as there is still a massive market of both underserved customers and those who come to us specifically for the advantages our digital platform can offer them, in terms of efficiency and convenience. We really want to build on what we are good at, expand that further and keep reaping the benefits of the investments made over the past few years - including our funding platform, customer relations and our market-leading risk management capabilities.

Claudia Lewis

CLOs

Confidence and convenience

Brian Bejile, founder and ceo of Octaura Holdings, answers SCI's questions

Q: After launching the platform last year, Octaura reported the completion of its first fully electronic syndicated loan trade last month (SCI 2 February). What has Octaura been working on since then?
A: Since we launched last June, we have covered a lot of ground. We have spent a lot of time recruiting and bringing people into the ranks, with the goal of operationalising the company and the platform itself.

We launched the first part now, which is the beta version on the loan side of the market, to a limited number of customers on the buy-side and sell-side last December. This step was about putting functionality into the marketplace for our clients to use and interact with, to then deliver some meaningful feedback for us to take into consideration before we officially launch the platform.

We expect the formal launch to be done in the early-side of the second quarter this year. We have already completed transactions with 10 buy-side counterparties and four dealers, and we are well on our way to add additional dealers in the next few months.

The buy-side and sell-side names we have on board are some of the most significant participants in the loan and fixed income spaces, which speaks to the seriousness at which the market is taking this platform. It is clear that the market is responding to the solution we have put together, which isn’t a surprise to us because we initially started by asking these key participants precisely which issues they wanted solving in the market.

Currently, people are trialling a beta version of our platform which works to replace the current workflows where dealers are having to manually message clients and sift through the volume of messages to find the right price for the loan. Dealers can instead simply stream this price into our system directly and the buy-side can see if they are looking for a particular loan.

They can see all the bids and offers all at once on their screen, and don’t have to second guess that they have seen all the messages with all the offers. It is all right there.

So, instead of picking up a phone, they can negotiate with a click of a button and consummate the transaction directly on the platform. In today’s existing construct of the trading process, there is a lot of room for human error, and Octaura reduces much of it.

Our new platform is a huge evolution for the loan space, as the use of technology is usually taken for granted in things like trading stocks on an app on your phone. However, this digitisation is not trivial when it comes to the fixed income market, so we are absolutely delighted that this is happening and getting such a positive response.

Q: Is the market ready for this kind of digital innovation?
A: For one, it is needed. One of the questions we were asking ourselves three years ago was: is the market ready for the electronification of the loan and CLO market?

This is a structured space, which has always operated the way that it has. When I worked on the CLO desk at Citi, we launched the precursor to Octaura – Velocity – which automated how bidders communicated. So, instead of having individuals calling their associates, they could be put into the system and receive instant feedback.

In the first week, we had a 50% jump in bidding activity from clients. This was beyond my own wildest expectations because I really thought it was going to take people time to get used to things. This is where we learned that if you make good technology that is simple and easy to use, people will just get it.

Good technology is just intuitive and electronically trading loans should not need to be that complex. So, yes, the market is very much ready and they are hungry for this type of solution.

Q: And how is the market reacting to this change?
A: Change is difficult, even when people can philosophically understand the need for it. So, first and foremost, we have to recognise, understand and empathise, and acknowledge that the main challenge with technology is the fear of the unknown.

This doesn’t eliminate what we are doing, because when it comes down to actually using our platform, traders realise that we are really solving for the manual, menial things, that they don’t enjoy doing. For instance, no one on the buy-side or sell-side likes booking trades, because it is just clerical work that doesn’t really add a lot of value to what they are doing and does leave a lot of room for human error. Traders really value our systems, they love the ease of use and efficiency - but it does take some time for people to be able to see that.

Q: What is the significance of the completion of the first fully electronic syndicated loan trade, both to Octaura’s mission and to the wider market?
A: I think this is a seminal moment in the loan market. This market has more than doubled in size in the last 10-12 years from around US$600bn to US$1.5trn, but the systems and processes used within it were designed more than 20 years ago and are really no longer fit for purpose.

We are making that jump in the infrastructure which resolves the question for buy-side and sell-side participants asking ‘how do I continue to trade in this new and much larger environment?’ The market needs someone who is not just going to make it more efficient, but really make it possible to do more trades in one go – which is a massive change to the existing process.

I think you’re going to see a rapid evolution of the infrastructure in this market over the next few years. Investors have chosen to invest in our project precisely because they want to see this transformation.

In doing this, Octaura may even bring more people into the space as our technology can make it easier for different participants to trade. While before if you wanted to trade CLOs or loans, you would need significant resources within a firm to handle the process, automation would allow some shops to participate in this market without the need for such manpower.

Q: What is in store for Octaura prior to the official launch of the syndicated loan trading platform?
A: Between now and the launch, we are testing the first protocols that we are going to launch with. We are going to be adding further protocols later this year, including the very important innovation of portfolio trading capabilities, as we see a shift away from current constructs geared more towards individual loan issues towards a more basket approach – where you can trade maybe 50 loans at a time.

The buy-side is growing in terms of AUM and they are needing to do a lot more with the same channels they were using before. Portfolio trading can make scaling-up like this possible, especially with a platform like Octaura, as they can issue with 100 loans at a time without making any mistakes they may have made manually. Automating the movement of information from the platform and into peoples’ trading systems like this makes it so much easier and more realistic to operate at scale.

When you start showing people these things that are possible under a new construct, with new workflows, they are able to see how much more they can do. Everybody is being asked to do more with less or more with the same, and we are providing the means for people to do that and boost their productivity.

Q: Which other products are you looking to expand into next?
A: We are working towards deepening our bench of structured products - including in CLOs, ABS and CMBS - and we are also looking to expand into Europe in the coming years. Right now, we are going through some registration processes with the regulators, which we hope can be finished in the next few months, which will offer some clarity about the innovations we want to bring to the CLO market.

While there are a lot of similarities in ABS and CMBS markets just by the nature of them both being structured, and by how investors analyse the bonds, there are significant differences as well. We are going to respect the local nuances unique to CLOs, CMBS and ABS - because if you can get something to work, you still have to adapt it to that local market.

Q: How do you expect the upcoming recession to impact Octaura’s business?
A: It’s always challenging for both us and our customers when we go through rough patches like this. There are a lot of headlines about substantial lay-offs happening in the finance and technology industries. Banks aren’t retrenching and moving away from this market; they are still trading and showing up for clients, but they are reducing their headcounts.

This again speaks to the view that the market is being asked to continue to do more with less, which Octaura can assist with. Octaura can offer another way for these banks to engage with their client base more efficiently. We’re using this moment to bring in additional banks - we are getting a lot of enquiries from additional banks right now, even from the European market, which is on the cards to enter some time in 2024.

There is an underlying theme here about the efficiency of workflows in terms of STP, trade booking, minimising search, reducing search costs, etc. On an infrastructure level, there are two things we are looking to solve.

On a fundamental level, the first thing is to increase the convenience of the customer on the buy-side and sell-side – which we have already directly proven. The other piece you’re going to see us working on later this year is the expansion of our data and analytics products – providing more tools to clients that they need before they’ve completed the trade and help them to make sure they are trading at the right price.

This idea of confidence is going to be very important for a lot of the stuff that we are doing at Octaura, as what we are doing really comes down to two things – convenience and confidence. Convenience, as in understanding the pain points for clients and resolving them; and confidence, as in giving them the information that helps them be very clear and motivated about the prices at which they are actually executing transactions.

Claudia Lewis

Structured Finance

Direct lending platform unveiled

Sector developments and company hires

Direct lending platform unveiled
Oaktree Capital Management has launched private credit-focused Oaktree Lending Partners (OLP) and its related vehicles. OLP is targeting US$10bn in equity commitments from institutional investors and will seek to originate senior secured loans of US$500m or more to private equity-owned US companies, typically with over US$100m in EBITDA.

Oaktree believes this market is especially attractive now, given the limited availability of debt capital to finance large LBOs and the record-high levels of committed private equity capital yet to be deployed that requires financing. In Oaktree’s view, this imbalance has been driven by the retreat of banks from this form of lending and the constrained capacity of non-bank lenders that are fully invested or managing issues with prior investments.

Yields on large LBO loans have increased significantly in the last year, averaging 12.4% at year-end. This is primarily due to the dramatic spike in base rates during 2022 and the shortage of funding for large LBOs.

The companies that are the subject of these transactions often have critical mass and established track records, positioning them well to weather economic cycles. Oaktree therefore believes the risk-adjusted return potential available in this segment of the market is currently very compelling.

In other news…

North America
Octaura has recruited Howard Cohen as head of leveraged loan execution, following the successful completion of its first entirely syndicated loan trade earlier this month (SCI 2 February). As the latest addition to Octaura’s growing executive team, Cohen will be responsible for leading the platform’s ongoing growth and integration strategies. He joins the firm from MarketAxess, where he had operated as head of leveraged loans since 2020, and brings more than 25 years of sales and leadership experience across different fixed income markets.

Portfolio optimisation tool offered
US Bank is expanding its offering to CLO clients with the addition of portfolio optimisation capabilities to its Pivot client platform. Pivot Portfolio Optimisation will offer users a comprehensive view of their accounts, allowing them to evaluate and identify trades that meet their unique portfolio needs.

The new tool will allow CLO portfolio managers to integrate their own research and facilitate faster and more effective trading. The offering is able to sort through tens of thousands of potential portfolio combinations to source the best combination of investments to serve a client’s objectives, which will typically aim to maximise the weighted average spread of a CLO. Designed with investment action in mind, clients will also be able to include custom constraints calculated on their own internal data, such as the use of their own credit scoring system.

Structured Finance

Supreme Court grants CFPB petition

Sector developments and company hires

Supreme Court grants CFPB petition
The US Supreme Court has granted the CFPB’s Petition for a Writ of Certiorari in the case of ‘CFPB v. Community Financial Services Association of America’ and denied the cross-petition filed by Community Financial Services Association of America (CFSAA). The CFPB’s petition asked the court to overturn the 19 October 2022 ruling by the US Court of Appeals for the Fifth Circuit that the CFPB’s funding structure is unconstitutional and, therefore, that the CFPB’s payday lending rule is invalid (SCI 4 November 2022).

Cadwalader notes that by granting the CFPB’s petition, the Supreme Court will have the opportunity to address significant questions about the meaning of the Appropriations Clause, the appropriate remedy for the purported constitutional violation and the viability of the CFPB and other federal financial regulators that are funded outside of annual appropriations. Attorneys General of 21 Democratic states and the District of Columbia have submitted an amicus brief arguing that the potential loss of the “CFPB’s critical enforcement, regulatory and informational functions” threatens “substantial harm to the states.”

However, in another amicus brief, 16 Republican Attorneys General emphasised the federalism concerns underlying this case. They urged the Court to uphold the Fifth Circuit’s decision, in order to “provide the states certainty over their role in regulating our financial system” and “restore the CFPB’s accountability to the states.”

In other news…

CRE REITs merge
Ready Capital Corporation and Broadmark Realty Capital have entered into a definitive merger agreement, pursuant to which Broadmark will merge with Ready Capital. Upon completion of the merger, Ready Capital is expected to have a pro forma equity capital base of US$2.8bn, becoming the fourth largest commercial mortgage REIT.

The combined company will operate under the Ready Capital branding and continue to be managed by Waterfall Asset Management. The combined company is expected to capture economics throughout the full lifecycle of a property and retain sponsor relationships beyond construction and/or bridge stages.

Upon completion of the merger, Ready Capital’s chairman, ceo and cio Thomas Capasse will continue to lead the company and Ready Capital executives Jack Ross, Andrew Ahlborn, Gary Taylor and Adam Zausmer will remain in their current roles. The board of the combined company is expected to increase by three Broadmark-designated directors to 12 directors.

The transaction is expected to close during 2Q23, subject to customary closing conditions.

Global
Stafford Capital Partners has appointed former head of the Australia Post Superannuation Scheme (APSS), Stephen Milburn-Pyle, to its credit investment committee. Milburn-Pyle joined Australia Post in 2005 and held executive responsibility for the strategic and operational management of the APSS until its transfer into Australian Retirement Trust (ART) in 2022.

Since being appointed to the APSS, he has worked with Stafford in the timberland, infrastructure, private equity and private credit sectors. Stafford launched a dedicated private credit strategy for the APSS - the Stafford Credit Opportunity Trust (SCOT) – in 2017.

North America
Proskauer has added Matthew Kerfoot as a partner in its finance group, based in New York. Kerfoot brings more than 20 years of experience in the fund finance industry, including expertise in a broad spectrum of private equity and private credit financing and liquidity solutions. He joins Proskauer from Société Générale, where he was md of credit and structured financing, structuring collateralised financings for portfolios of private equity secondaries, middle market loans, broadly syndicated loans and senior and mezzanine tranches of CLOs, CFOs and other securitised products.

Taxonomy-aligned EUGBS agreed
The European Parliament has agreed a European Green Bond Standard (EUGBS) that aligns with the Taxonomy legislation, which defines which economic activities can be considered as environmentally sustainable. PCS notes that although the text of the EUGBS compromise is not public, indications are that the final agreement may incorporate securitisation and do so on the basis of proceeds rather than assets.

Under the agreement, companies choosing to use the standard when marketing a green bond will be required to disclose information about how the bond’s proceeds will be used, but are also obliged to show how those investments feed into the transition plans of the company as a whole. The disclosure requirements, set out in template formats, will also be open to be used by companies issuing bonds which cannot fulfil all the requirements to qualify for the EUGBS.

Additionally, the regulation establishes a registration system and supervisory framework for external reviewers of European green bonds. It also stipulates that any actual or even potential conflicts of interest are properly identified, eliminated or managed, and disclosed in a transparent manner.

Technical standards may be developed specifying the criteria with which to assess the management of conflicts of interest.