Contents

CLOs

Subjective issue

CLO ESG reporting gaining traction

CLO managers are increasingly investing in their own methodologies and disclosure processes to provide investors with helpful ESG information. However, as this Premium Content article shows, the subjective nature of this data remains an issue.

The SFDR RTS and TCFD reporting for large UK asset managers and asset owners both became mandatory on 1 January 2023. In the case of CLO investments, investors rely on CLO managers to provide the information necessary for them to comply with their obligations under the rules. However, while some CLO managers have invested in their own methodologies and disclosure processes to provide investors with helpful ESG information, the subjective nature of this data remains an issue.

The SFDR applies to ‘financial market participants’ that offer ‘financial products’ and ‘financial advisers’, while the TCFD rules apply to FCA-authorised asset managers. “Investors are caught by these rules and therefore have to adhere to certain reporting requirements, including how they integrate sustainability risks into investment decision-making and how they consider principal adverse impacts of their investments on sustainability factors. In the case of CLO investments, investors rely on CLO managers to provide the information necessary for them to be able to comply with their obligations,” says Jennifer Ellis, counsel at Linklaters.

With investor demand for ESG disclosures rising, more and more CLO managers are implementing investment guidelines and procedures that take ESG considerations into account. Some CLO managers are opting to go further and develop specific ESG policies and their own internal scoring methodologies, whereby an asset must have a minimum ESG score at the time of acquisition to be eligible for inclusion in the portfolio.

Ellis notes that in some recent deals, CLO managers have also agreed to comply with certain initial and ongoing ESG due diligence requirements. These typically include an obligation on the CLO manager to use commercially reasonable efforts when selecting assets for investment to review due diligence materials, attend investor presentations or conduct management meetings and examine publicly available third-party information. For assets already in the portfolio, CLO managers are obliged to attend management meetings, conference calls or other events relating to the relevant obligor and monitor on an ongoing basis the industry and sector trends relating to that obligor.

In terms of investment guidelines, CLOs can incorporate ESG-related provisions focused on negative screening of obligors via the eligibility criteria and some are moving towards positive screening through the inclusion of ESG-related portfolio profile tests (SCI 11 February 2022). Positive screening frameworks can either require a certain percentage of the portfolio to be comprised of ESG assets or employ a more thematic investment approach, whereby the CLO manager invests in assets that provide exposure to specific sustainability themes.

In terms of ESG reporting, an increasing number of managers are providing principal adverse sustainability impact (PASI) statements, in line with the SFDR RTS. This approach involves quantitative disclosures - including data on 14 key indicators (nine relating to the environment and five relating to social factors) for assessing adverse sustainability impacts across a range of ESG factors - and qualitative disclosures, including information about policies on the identification and prioritisation of PASIs, information on engagement policies and policies relating to reducing principal adverse impact (PAIs), and reference to adherence to responsible business conduct codes.

Denis Struc, portfolio manager at Janus Henderson Investors, views certain PAIs and their recommended measures as somewhat “aspirational” for a number of fixed income strategies, given the scarcity of information available to assess them. He points out that the PAIs range from matters of sustainability that can be reasonably quantified to others that are much harder to measure at the present time.

“A number of measures address carbon-related risks and are broadly aligned with other recommendations, such as TCFD, but there is a paucity of data for others that makes them more challenging to assess. This doesn’t mean they don’t need to be addressed - we’re advocates of sustainability and use our leverage as investors to influence change - but finding the right data to accurately measure outcomes can be very difficult for many strategies,” Struc argues.

He cites biodiversity as an example. “I am not sure we have a clear understanding of what counts as ‘biosensitive’ or what counts as having a negative effect on biosensitivity. Without data, where do you start in terms of plausibly developing these definitions? Unlike for carbon, there remains a steep education curve in terms of understanding the metric and what counts as ‘good’ or ‘bad’. As such, it makes sense that there is greater focus on carbon in the first instance, as it is more quantifiable.”

Meanwhile, Ellis suggests that the latest trend to emerge in the CLO ESG space is additional periodic reporting. She cites Fidelity Grand Harbour CLO 2022-1 as an example, the documentation of which includes a requirement to report periodically on the average ESG score (reflecting an obligor’s overall adherence to certain ESG factors) of the portfolio, as well as the obligors that have been added or removed from the portfolio as a result of their compliance with certain ESG factors.

“Currently, this level of reporting is still very much provided at the CLO manager’s discretion and only a handful of managers have elected to do it so far. However, we do expect this activity to grow, due to the availability of ESG scores,” Ellis observes.

Broadly, three streams of ESG CLOs appear to be emerging: those with standard exclusionary lists, or ‘ESG negative’ transactions; those with ESG scoring and reporting provisions, whereby deals report an ESG score but there is no obligation to meet or achieve a certain minimum score; and those with an ‘ESG positive’ approach, where a contractual minimum ESG positive metric for the portfolio is set out, which the manager uses reasonable endeavours to achieve. Anecdotally, Fidelity International is one CLO manager that stands out for its ESG positive approach.

Although some CLO managers have invested heavily in their own methodologies to provide investors with helpful ESG data, the subjective nature of this data remains an issue, according to Ellis. “Data points differ from one manager to another, which makes it difficult for investors to compare different deals. It is likely more managers will look to start utilising third-party ESG score providers, in response to investor demand and to enable investors to more easily compare deals in the market from an ESG perspective.”

CLO document review service Review Port recently introduced a CLO ESG provisions screening system, based on the quality and consistency of CLO manager ESG provisions in offering documentation. “In most cases, definitions of what constitutes ESG for a given CLO are determined solely by the CLO manager, which means it is impossible to monitor without subsequently offering reporting on ESG considerations. The idea behind the Review Port CLO ESG provisions screening is to allow investors to compare and differentiate between managers’ ESG provisions, including noting if there are any internal ESG scoring, reporting requirements or due diligence procedures pre- and after-purchase of collateral obligations,” explains Daniel Kakonge, founder and research director at the firm.

He adds: “The challenge is offering reporting across the market, as some managers still get away without offering any ESG reporting, which makes it harder for investors to track ESG consideration progress. For instance, with reporting requirements or due diligence procedures pre- and after-purchase of collateral obligations, if a credit becomes non-compliant with a manager’s ESG investment policy, the credit can be disclosed in a report. We’re seeing more and more investors requesting for reporting or due diligence procedures, with the documentation being redrafted accordingly.”

Similar to the climate PAIs set out in the SFDR RTS, the FCA encourages in-scope firms to consider making disclosures available to clients via TCFD product reports. Each report should contain portfolio level disclosure on these mandatory metrics: Scope 1 and 2 GHG emissions; Scope 3 GHG emissions (disclosure for Scope 3 is delayed until 30 June 2024); total carbon emissions; carbon footprint; and weighted average carbon intensity (WACI).

Struc points to the variety of recommendations in sustainability reporting under various regimes and the number of different angles that investors have to be aware of, all of which require robust data in order to be adhered to. “The FCA is seeking to clarify the regime for labelling funds - it seems with a focus on core objectives and outcomes - while current EU regulations seem to be more quantitative in their approach, certainly for Article 8 funds,” he observes.

Pursuant to the SFDR, Article 8 funds are defined as “promoting environmental or social characteristics”, while an Article 9 fund has “sustainable investment as its objective” and a higher threshold for compliance. To date, a handful of European CLOs have been marketed as being “aligned” with Article 8.

In contrast, 307 Article 9 funds - representing a combined AUM value of €170.1bn – were downgraded to Article 8 in 4Q22, according to Morningstar data. The firm suggests that this migration to a less stringent category is being driven by uncertainty about how sustainable investments are defined.

At present, Struc suggests that it’s more realistic to look at sustainability related to CLO managers rather than their portfolios. “It’s an immediate win to look at aspects like talent development and inclusive hiring practices. On a relative basis, you can place managers above or below the average and then engage with the managers below that bar to create a constructive dialogue in terms of the path they’re intending to follow.”

CLO investors can also overcome the information barrier to an extent by asking the right questions of CLO managers. ELFA’s CLO Manager ESG Diligence Questionnaire - which aims to improve the quality of reporting and data around the carbon footprint, governance and diversity of managers, as well as underlying obligors (SCI 26 October 2022) – is proving helpful in this regard.

“The questionnaire provides direction in terms of what matters to investors in connection with sustainability. The next step is to encourage widespread adoption of it: the questionnaires were deliberately designed to cater for various CLO managers, from those who are quite advanced and ready to provide comprehensive information to those who are at the early stages on their sustainability path,” Struc observes.

He suggests that the CLO industry has the potential to lead the rest of the fixed income market in terms of ESG disclosure. “Once a dataset is created off the back of responses to the questionnaires, it enables comparisons to be made across a range of sustainability measures that can best be analysed on a relative basis. The end goal is to push for change, but first we need to understand what we mean by change.”

Corinne Smith

Structured Finance

SCI Start the Week - 20 March

A review of SCI's latest content

Last week's news and analysis

Austrian SRT debuts
BAWAG said to have launched first synthetic ABS
CRE CRT prepped
Societe Generale said to be readying CRE CRT
Riding the storm
Banks ready for SVB fallout
Seeking standardisation
Call for consistent EPC ratings as demand for green RMBS grows
SVB failure liquidity-driven
Outsized, unhedged MBS holdings behind bank run
Utility tool
Cat bonds tipped for 'pre-financing' fiscal risks

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

SCI In Conversation podcast
In the latest episode, 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.
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.

SRTx benchmark

SCI has launched 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.

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

Capital Relief Trades

Capital call CRT prepped

Standard Chartered readies synthetic ABS

Standard Chartered is believed to be readying a synthetic securitisation of capital call facilities that is expected to close this year. Dubbed Hector, the transaction is riding a wave of such trades that picked up significantly in the aftermath of the Coronavirus crisis.

Capital call facilities are short term revolving credit lines provided to private equity funds looking for bridge financing. The short-term nature of the exposures and the fact that they are secured by LP undrawn commitments, explains their low risk profile and consequent attractiveness from an investor standpoint. However, this means that they come with low capital requirements so capital relief isn’t the main motivation from a lender’s perspective. Indeed, the main driver is either limit relief or hedging.

Banks that have successfully executed such deals include BNP Paribas, Citi, Societe Generale, Standard Chartered and Western Alliance. The growing trend coincides with a refocusing of CPM function priorities during the Covid-19 crisis. The importance of front-end origination tools increased for all reported measures between 2019-2021, with concentration limits ranking highest. According to an IACPM 2021 survey, hedging exposures or risk mitigation was the main driver behind loan sales, credit risk insurance, financial guarantees, single name CDS and funded synthetic securitisations (SCI 12 November 2021).

Stelios Papadopoulos  

Capital Relief Trades

Risk transfer comeback

Lloyds executes synthetic ABS

Lloyds has finalized a synthetic securitisation of UK corporate loans. Dubbed Musselburgh, the transaction is the bank’s first capital relief trade to reference UK corporate loans following the execution of Leicester eight years ago (see SCI’s capital relief trades database).

According to market sources, the trade features a 0%-7% tranche thickness and was priced at approximately 11%, while the portfolio was sized at £1.1bn.

The bank’s last UK corporate CRT was called Leicester and featured a £178.5m tranche that was backed by a £1.9bn UK corporate pool.

The UK market experienced a pause last year following the release of Liz Truss’ ‘’mini budget’’ but the UK pipeline has now rebounded with two transactions being readied for 2H23. The only exception in 2022 was HSBC with its ‘’Pixel’’ trade but the deal was backed by a European corporate portfolio rather than UK exposures.

Stelios Papadopoulos  

RMBS

Ringfencing the problem

Fed's SVB response calms RMBS nerves

The US Fed's swift response to Silicon Valley Bank's (SVB) collapse has calmed nerves in the US securitisation market. Although some volatility remains in the RMBS sector, conditions may stabilise further once the Fed announces its rate decision later this week.

"It is important to be clear about what the Fed isn’t doing. It is not buying paper. It is allowing banks to put collateral up at par, even where they are trading at below par," says Walt Schmidt, svp and manager of mortgage strategies at FHN Financial.

He adds: “That has taken a lot of nervousness out of the system and increased liquidity. In essence, what it has done is to ringfence the problem around a small number of banks."

The FDIC announced the closure of SVB on 10 March (SCI 13 March). The move came after a US$1.8bn loss on sales of securities by the tech-focused bank led to a share price collapse and a run on deposits, as SVB tried and failed to raise new capital.

The Fed acted quickly to counter the threat of contagion by announcing the creation of the Bank Term Funding Program two days later. The programme offers loans of up to one year to banks and other "eligible depository institutions".

It allows them to pledge certain qualifying assets - including US Treasury bonds, agency debt and MBS – as collateral. Crucially, these assets will be valued at par.

Other factors have also served to calm fears of contagion. In a recent blog post, Schroders Wealth Management points to a poorly diversified customer base at SVB. It highlights that just 12% of the bank's deposit base was insured by the FDIC's guarantee on bank deposits of up to US$250,000.

Schmidt says this unusual scenario made SVB particularly vulnerable to a potential run on deposits. "The main problem at SVB has not been a lack of reserves relative to any other institution or the system as a whole. Its main problem has been that it had a lot of jumbo deposits.”

He continues: “Deposits up to US$250,000 are insured, but it was obvious from various reports that SVB had deposits that were multiple times the insured amount. At that scale, it only takes a few nervous actors drawing those deposits to cause a big problem."

Nevertheless, the scale of SVB - with around US$209bn in assets under management - has inevitably brought about a marked reaction. Spreads, which had been tightening since the start of the year, have once again widened, reflecting weakening investor confidence.

"We are still seeing a lot of volatility in the RMBS market," says Schmidt. "In some cases, we are seeing spreads moving as much in 45 minutes as we would typically expect to see in the space of two days."

However, Schmidt stresses that this is not a sign of panic. "Even though the movements are big, they are back and forth," he says. "And though spreads have widened as a whole, they would be far wider if we were in a panic situation. There has certainly been a knock-on effect from the agency space to the non-agency space."

It may prove that some investors are taking stock and momentarily keeping their powder dry. With the Fed due to announce its rate decision this week, it is possible that conditions will begin stabilising soon.

"RMBS activity has not slowed significantly, other than in the secondary and tertiary markets. What we are seeing from certain types of investors is that they are waiting to see what the Fed does with rates," says Schmidt.

He concludes: “There is still a need to get inflation under control and the expectation is that the Fed will raise the benchmark rate by 25bp. So some are choosing a wait-and-see approach. Others see that spreads have widened and are wanting to take advantage of that."

Kenny Wastell

Structured Finance

Credit Suisse AT1 write-downs 'rip up rules'

Sector developments and company hires

Credit Suisse AT1 write-downs ‘rip up rules’
UBS has agreed to acquire Credit Suisse, creating a business with more than US$5trn in total invested assets and supporting the bank’s growth ambitions in the Americas and Asia, while adding scale to its business in Europe. Under the terms of the all-share transaction, Credit Suisse shareholders will receive one UBS share for every 22.48 Credit Suisse shares held, equivalent to Sfr0.76 per share for a total consideration of Sfr3bn. However, in a move that has shocked many market participants, Credit Suisse AT1 debtholders have been written down to zero.  

In a blog published today, TwentyFour Asset Management says it believes that the Swiss regulators have “ripped up the rules for investing in a company”. The law was reportedly changed over the weekend, which seemingly allowed the Credit Suisse liquidity facility - put in place last week - to be used as a reason to trigger a viability event.

As part of the agreement, UBS will benefit from Sfr25bn of downside protection to “support marks, purchase price adjustments and restructuring costs”, as well as additional 50% downside protection on non-core assets. The Swiss government will provide Sfr8.5bn to backstop losses that UBS might incur during the takeover and the Swiss National Bank (SNB) will provide a further US$100bn of liquidity to UBS to help facilitate the deal.

Following the acquisition, UBS Investment Bank will reinforce its global competitive position with institutional, corporate and wealth management clients through the acceleration of strategic goals in its global banking segment, while managing down the rest of Credit Suisse’s investment bank, with the aim of cutting costs by over US$8bn by 2027. The combined investment banking businesses accounts for approximately 25% of group RWAs.

Colm Kelleher will be chairman and Ralph Hamers will be group ceo of the combined entity.

The transaction is not subject to shareholder approval and is expected to be closed by year-end. UBS says it has obtained pre-agreement from FINMA, SNB, Swiss Federal Department of Finance on the timely approval of the transaction.

In a statement welcoming the Swiss authorities’ actions, the ECB nevertheless noted that the EU resolution framework implemented after the financial crisis has established the order according to which shareholders and creditors of a troubled bank should bear losses. “In particular, common equity instruments are the first ones to absorb losses and only after their full use would Additional Tier 1 be required to be written down. This approach has been consistently applied in past cases and will continue to guide the actions of the Single Resolution Board and ECB banking supervision in crisis interventions,” the statement says.

The Bank of England also released a statement noting that the UK bank resolution framework has a clear statutory order, in which shareholders and creditors would bear losses in a resolution or insolvency scenario. The statement cites the approach used for the recent resolution of SVB UK, in which all of SVB UK’s AT1 and T2 instruments were written down in full and the whole of the firm’s equity was transferred for a nominal sum of £1 (SCI 13 March).

The TwentyFour AM blog references the Banco Espiritu Santo case from 2014, in which the Portuguese regulator was perceived to have failed to treat pari passu bondholders in an equal and fair manner. “Legal action was taken by bondholders and the process is still ongoing. The consequences for Portuguese banks were quite severe, as they were in practice locked out of international capital markets for years,” the blog notes.

In other news…

Energy performance building directive agreed
The European Parliament has voted in favour of a new Energy Performance Building Directive, with the objectives of making Europe’s building stock more energy efficient and addressing energy poverty. The agreement follows the original proposal by the European Commission in 2021 and the amendments made by the European Council in 2022.

According to the European Commission, buildings account for approximately 40% of the EU’s total energy consumption and 36% of its CO2 emissions. The directive will introduce a Minimum Energy Performance Standard (MEPS) for all existing buildings, to be reached by 2050, and a Mortgage Portfolio Standard (MPS). The latter will act as a decarbonisation pathway for mortgage portfolios, whereby mortgage lenders will be encouraged to help building owners renovate their buildings.

Additionally, the directive will seek to harmonise energy labels across Europe and create databases for those labels, so that they are comparable among member states. A Building Renovation Passport (BRP) will also be introduced in the form of an electronic document that provides building owners with the renovation potential and timeline of their house, in accordance with the MEPS. Operational carbon emissions (energy demand), as well as embodied carbon emissions (CO2 in the building materials) are in scope.

North America
PIMCO has promoted five executives with securitisation-related responsibilities to md - David Forgash, Kristofer Kraus, Ashish Tiwari, Bryan Tsu and Jing Yang. Kraus is a portfolio manager in the firm’s New York office, responsible for sourcing, underwriting and managing opportunistic specialty finance investments in the US and Europe.

The other four executives are based in PIMCO’s Newport Beach office. Forgash is a portfolio manager leading the firm’s leveraged finance business, overseeing high yield, CLOs and loan portfolios.

Tsu manages the firm’s StocksPLUS, multi-sector credit and securitised strategies, and is also a senior member of the insurance solutions team and a senior CMBS specialist. Yang oversees the ABS portfolio management team and focuses on StocksPLUS, multi-sector credit and securitised strategies. Finally, Tiwari heads product strategy for PIMCO’s discretionary hedge fund business.

Tamara debuts BNPL securitisation
Goldman Sachs has completed the Middle East’s first-of-its-kind buy now, pay later (BNPL) warehouse securitisation. Backed by US$150m BNPL receivables originated by Nakhla for Information Technology Systems (Tamara) in Saudi Arabia, the transaction is expected to support Tamara’s financing of further receivables and the expansion of its BNPL business in the country. As part of the movement towards using more complex structured solutions for raising financing across the Gulf Cooperation Council, the deal’s structure presents a new way for businesses to monetise receivables in the region.

Goldman Sachs was advised by White & Case, led by London-based partner Debashis Dey and involving several Dubai-based colleagues - partner Greg Pospodinis, counsel Rachet Butt and associates Salvia Matonyte, Eren Ayanlar, Ola Sanni and Gabrielle Low - as well as associates Nezar Al-Abbas in Riydah and Yuning Zhou in Hong Kong. “With the growth of the consumer economy in the Kingdom, we expect these transactions to become more in demand by providers of consumer goods and finance," comments Dey.

Structured Finance

AlbaCore, FSI strategic partnership inked

Sector developments and company hires

AlbaCore, FSI strategic partnership inked
Australian asset manager First Sentier Investors (FSI) has acquired a majority stake in UK-headquartered private debt firm AlbaCore Capital Group. The move is intended to diversify FSI’s portfolio across new asset classes and geographies. Completion of the strategic partnership is targeted for 3Q23, pending regulatory approvals.

The deal is the latest in a trend that has seen large asset managers and private equity houses acquire European private debt managers. Since the start of 2022, Franklin Templeton Investments has acquired Alcentra (SCI 31 May 2022), Nuveen has acquired Arcmont Asset Management (SCI 28 October 2022) and TPG Capital has signalled its intention to buy its way back into private debt. TPG demerged from Sixth Street Partners three years ago.

In other news…

North America
CIFC Asset Management has appointed Anna Kunz as an md in its investor solutions group. In this role, she will cultivate relationships with current and prospective clients and support capital raising efforts across CIFC’s multi-strategy credit platform.
Based in New York and Miami, Kunz reports to James Boothby and T. Michael Johnson, global co-heads of business development. She has 17 years of experience working in the financial markets and most recently served as head of business development at BlockTower Capital.

Eagle Point Credit Management has announced a raft of senior team promotions, including five new senior principals and 16 new principals. Among the new senior principles is Dan Ko, portfolio manager responsible for strategic investment opportunities in the primary and secondary CLO markets.
Also focused on CLO investments are new principals Patricia Antonios, Daniel Wohlberg and Sam Yoon. Recent hire Karan Chabba, portfolio manager and head of specialty finance, SRT, ABS/MBS and European structured products (SCI 19 July 2022), joins them as principal.

Greystone Commercial Capital has added three senior executives to its CMBS and subordinated debt team, based in New York. The moves follow the appointments of senior mds Jeffrey Lavine and Matt Zisler in September 2022, as the firm pursues the “rapid expansion” of its team.
Mike Casavant, formerly director and head of underwriting at Bank of America Securities, has been appointed md and head of credit and underwriting. Casavant left his position at BofA in April 2021 after nearly nine years with the bank and previously had spells at Ladder Capital Finance and Lehman Brothers.
Greystone has also added former Amherst Capital Management vp of origination Ryan Carlin as director of capital markets and syndications, while JP Chisholm – previously investment officer at Philips Academy (Andover) Endowment – has been named director of originations.

Structured Finance

Arrow closes second credit opps fund

Sector developments and company hires

Arrow closes second credit opps fund 
Arrow Global Group has held a final close for its second credit opportunities fund - ACO II – at a hard cap of €2.75bn, surpassing its target of €2.5bn. The strategy focuses on the European non-performing loan market and attracted commitments from institutional investors spanning Europe, the US, the APAC region and the Middle East.

At the time of the predecessor fund’s €1.7bn final close in 2020, Arrow said the number of attractive NPL opportunities had "increased substantially as a result of the economic dislocation caused by the Covid-19 pandemic". The firm has a local presence in multiple geographies, which it says enables it to primarily focus on off-market deals.

Around 90% of the ACO II portfolio is secured against real estate, cash in court or other mixed securities, the firm says.

In other news…

Finance and real estate co-chair named
Dechert has appointed Charlotte-based partner John Timperio as co-chair of its finance and real estate practice group, alongside Laura Swihart. He replaces David Forti in the role, who will take over as co-chair of the wider firm, alongside Mark Thierfelder in June.

Timperio is the first person from the firm’s structured credit and CLO team to co-lead the finance and real estate practice, which comprises roughly 200 attorneys in over 14 offices across five countries. Dechert says the move is driven by its recent expansion in the structured credit space, in addition to future plans to expand into the private debt market.

Structured Finance

Long-term viability of QT questioned

Sector developments and company hires

Long-term viability of QT questioned
US banks borrowed a record amount over the last week, demonstrating the extent to which they are under pressure and also, say analysts, raising questions about the long-term viability of QT. The US Fed released its balance sheet on 22 March and it shows that banks borrowed US$152.9bn during this period, US$11.9bn of which was through the newly established Bank Term Financing Program (BTFP).

The latter was put in place only 10 days ago in the wake of the collapse of SVB and Signature Bank and amid uncertainty surrounding several other US regionals (SCI passim). This sudden surge of borrowing also enlarged the balance sheet from US$8.4trn to US$8.7trn, unwinding much of the work undertaken in the last year to shrink Fed reserves.

In other news…

S&P fined for CRA Regulation breaches
ESMA has fined S&P €1.11m and issued a public notice for breaches of the Credit Rating Agencies (CRA) Regulation. ESMA found that S&P published credit ratings before the relevant securities were issued by the rated entities and announced to the market, due to internal control failures, and led to breaches of the rating agency’s transparency obligations.

The breaches covered by the fine relate to: deficiencies in S&P’s internal control mechanisms, which did not ensure compliance with its obligations regarding the timely disclosure of credit ratings; the failure by S&P to disclose on a non-selective basis and in a timely manner decisions to discontinue credit ratings; and the failure by S&P to submit up-to-date rating information to ESMA. All breaches were found to have resulted from negligence on the part of S&P.

In particular, ESMA found that between 5 June 2019 and 8 September 2021, S&P released solicited credit ratings regarding six issuers prematurely. Consequently, the authority fined S&P €825,000 for not having internal control mechanisms to ensure compliance with its obligations regarding the timely disclosure of credit ratings.

ESMA also found that between 2019 and 2021, in six instances, S&P removed - without providing explanations - credit ratings from its public platforms. Consequently, the authority fined S&P €210,000 for failing to disclose on a non-selective basis and in a timely manner decisions to discontinue credit ratings.

Finally, ESMA found that in relation to one rated entity, S&P did not ensure that the information it submitted to ESMA for publication on the European Rating Platform (ERP) was correct and up to date. Consequently, the authority fined S&P €75,000.

 In calculating the fine, ESMA considered both aggravating and mitigating factors provided for in the CRA Regulation. S&P may appeal the decision to the Board of Appeal of the European Supervisory Authorities.