Contents

Structured Finance

Benchmarking commitments

Importance of private securitisation to real economy underlined

Over 70% of European private cash securitisations fund sellers in the EU and over 68% directly fund the real economy, according to the latest European Benchmarking Exercise (EBE) report. Further, 88% of all transactions by volume were undertaken by sellers with ratings of triple-B and below at inception, with 95.4% of transactions achieving investment grade ratings - demonstrating that private cash securitisations provide a cost-effective means of financing, especially for lower-rated sellers.

The EBE is a market-led initiative organised by AFME, European DataWarehouse and True Sale International, and supported by the Foundation Project Capital Markets Union. Its objective is to enhance the quality and usefulness of disclosure in the EU and UK private cash securitisation markets, across both ABCP and deals financed on-balance sheet.

The latest report provides aggregated transaction-level data gathered during 1H22 from 12 banks across six countries, covering €67.24bn of commitments and an estimated asset amount of €183.33bn. Over that period, 31 new commitments were observed, while 33 existing commitments ended. Overall, committed amounts grew by 7% year-on-year and funding increased by 12.3%, indicating increased demand from the real economy.

In terms of the regional distribution of sellers, there was a slight decline in commitments from UK sellers (-2%) against the general trend, while commitments from German sellers underperformed (rising only by 2%). In contrast, there was pronounced above-average growth seen in Italy, with commitments rising by 24%.

Private securitisations backed by trade receivables (representing €40.68bn of commitments) and auto loans or leasing contracts (€10.16bn) account for around 82% of the market, of which 33% and 88% respectively are funded through syndicated transactions. Consumer loans, equipment leasing, mortgages, credit card receivables, floorplan financings and SME loans make up the remainder of the assets.

By seller industry, the most prominent sectors remain finance and insurance (accounting for 25.3%) and manufacturing (22.1%). The strongest increase (of 39%) was observed in power generation in 2H21, which may be linked to the rise in power prices across Europe.

Finally, the share of STS-compliant assets rose strongly across all asset classes, with the average STS share increasing by 20.6% to 44.4%. The share of STS-compliant trade receivables deals stood at 41.2%, while the share for auto loans and leases and equipment leasing deals reached 78.6% and 72.9% respectively.

BayernLB, BNP Paribas, Commerzbank, Credit Agricole, DZ Bank, Helaba, HSBC, ING, LBBW, Natixis, RBI and UniCredit provided data for the EBE on a voluntary basis across Austria, France, Germany, Italy, the Netherlands and the UK, as of 30 June 2022. The data was submitted to EDW on an anonymised basis.

This marks the third EBE report, following the inaugural publication in November 2021, in respect of a 30 June 2021 cut-off date (SCI 21 December 2021). However, it covers for the first time the period of one full year.

Corinne Smith

Capital Relief Trades

Risk transfer round up-12 April

CRT sector developments and deal news

Societe Generale is believed to be readying two synthetic securitisations. The first one is backed by leveraged loans while the second references corporate exposures. Meanwhile, Banco BPM is said to be prepping a synthetic ABS that references corporate loans.  

Stelios Papadopoulos

Capital Relief Trades

Canadian wave continues

CIBC debuts synthetic securitisation

CIBC has finalized a synthetic securitisation of investment grade corporate loans. Dubbed ‘’Waterloo’’, the transaction is the lender’s first synthetic risk transfer trade and is riding a wave of Canadian capital relief trades as Canada frontloads the Basel output floor this year.

According to market sources, the transaction features a junior mezzanine tranche with an approximately 6% thickness that was priced at less than 10%. The portfolio is backed by US$4.5bn investment grade corporate loans and was upsized from an initial US$3bn. The deal follows another synthetic risk transfer trade from Toronto Dominion that closed in February (SCI 6 February). Yet unlike the Toronto Dominion trade, the portfolio in this case is a blind pool and consists of predominantly commodity focussed corporate loans. Nevertheless, sources qualify that both deals have effectively the same granularity of around 200-250 borrowers.

The rise in issuance in the Canadian market marks a significant break with the past given that the only active originator until now has been Bank of Montreal. The bank itself has experienced a record year for its own risk transfer issuance with a total of ten synthetic securitisations last year (see SCI’s capital relief trades database). Issuance was driven by BMOs acquisition of Bank of the West.

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.

BNP Paribas acted as the arranger in the transaction.

Stelios Papadopoulos

CLOs

CLO pros take volatility in their stride

IMN European CLOs and Leveraged Loans conference recap

The mood was constructive at the IMN 10th Annual Investors’ Conference on European CLOs and Leveraged Loans held in London on 4 April, but many market participants - notably investors - seemed to be in wait-and-see mode.

The panels:

European CLO Market Outlook
Michael Brown, Partner and Head of Structuring and Analytics, Pearl Diver Capital
Luis Leon Carsi, Managing Director - EMEA CLO Primary Co-Head, Jefferies
Kate Lin, Senior Director, Fitch Ratings
Michelle Manuel, Co-Portfolio Manager, Investec
Conor O'Toole, Head of European Securitisation Research & Global Head of CLO research, Deutsche Bank
Chris Porter, Head of Private Equity, Loan & CLO Business Development S&P Global Ratings
Till Schweizer, Senior Portfolio Manager, Partners Group

Middle Market CLOs & Direct Lending
Ravi Anand, Managing Director, ThinCats
Gabriele Gramazio, Senior Director, KBRA
Mark Hale, Chief Executive Officer and CIO, Prytania Asset Management
Daniel Heine, Managing Director, Patrimonium Asset Management
Michael Schewitz, Co-Portfolio Manager, Investec

CLO Manager Roundtable
Nuno Caetano, Director, Invesco
Brendan Condon, Vice President, Deutsche Bank
Gianluca Consoli, Portfolio Manager, PGIM
Madelaine Jones, Managing Director & Portfolio Manager, Oak Tree Capital
Alex Leonard, Senior Managing Director, Blackstone
Gauthier Reymondier, Partner, Bain Capital Credit

Lewis Tan, Principal, Hayfin Capital Management

CLO Innovation and Technological Evolution
Sayed Ali, Sales Director, Broadridge
Aloysius Fekete, Senior Director-Product Management, Moody's Analytics
Lisa Lee, Senior Credit Reporter, Bloomberg
Tim Ruxton, Managing Director, Capital Markets, Alter Domus

Structural Advancements
Sandeep Chana, Director EMEA - Structured Finance, S&P Global Ratings
Alex Collins, Partner, Cadwalader, Wickersham & Taft LLP
Brendan Condon, Vice President, Deutsche Bank
Ben Gaitskell, CLO Analyst, PGIM Fixed Income
Carrine Kumps-Feniou, Senior Credit Officer, Moodys Investors Service

The Big Screen: Implementing ESG in CLOs
Sukhvir Basran, ESG, Sustainable Finance and Investment – Partner, Cadwalader, Wickersham & Taft LLP
Carlos Castro, Director - Financial Engineering, Moody's Analytics
Sabrina Fox, Chief Executive Officer, European Leveraged Finance Association (ELFA)
Elena Rinaldi, Portfolio Manager, TwentyFour Asset Management

CLO Investor Roundtable
Sharif Anbar-Colas, Portfolio Manager for Structured Credit, Kartesia
Colin Behar, Portfolio Manager, USS
Rebecca Mun, Director (European Structured Credit), S&P Global Ratings
Dheeraj Sharma, Vice President, PGIM
Aza Teeuwen, Partner, Portfolio Manager, TwentyFour Asset Management

The overall atmosphere was relaxed, some conference attendees noted, suggesting that this may be down to market participants taking in their stride the current market volatility. This may also be because this was a shorter week, before the Easter break, or because nobody knows what to expect in the current market, an investor commented on the sidelines of the conference.

Investors’ views

The CLO market is going to get worse before it gets better, according to Sharif Anbar-Colas, head of Structured Credit at Kartesia who was speaking on the Investor Roundtable.

“This Macro economic deterioration is going to have a knock-on effect on the asset quality in CLO portfolios, from ratings migration to credit events,” Anbar-Colas said, adding however that it is worth highlighting that because CLOs are actively managed, the portfolio can be rotated. 

“We're already seeing a lot of managers play offence and defence in terms of getting ahead of the problems and finding a solution early, or if they're caught in the situation then turning to solutions like Amend & Extend that allows you to keep the asset going without defaulting,” he said.

Manager’s styles matter and will matter even more in the coming months, and some managers have a good record at navigating tough markets, but current portfolio metrics are closely watched and some CLO investors prefer to be on the safe side. 

“While the portfolios have proven to be resilient, we are cautious about participating in transactions where the starting point in the collateral is an above average proportion of B-/B3s,” said Michele Manuel, co-portfolio manager at Investec, on the European CLO Market Outlook panel.

In the tough market conditions of these past few months, the more established CLO managers are the ones that have tended to be consistently able to bring to market new transactions, but new names appear from time to time. CLO investors usually see new entrants as a positive, but on Tuesday panellists stressed it is important to think of the set-up that lies behind the managers that want to come into the market.  

Having a large number of CLO managers may sound appealing as it would increase liquidity and diversity, but in practice, this is not quite the case, said Aza Teeuwen, a portfolio manager at TwentyFour Asset Management. “Managers need three to five CLOs to really be profitable,” he noted. Otherwise, they simply lack the resources needed to hire enough analyst or retain key employees. “You see it in deal performance and pricing; there is a lot of tiering between the best managers of the weaker ones,” he added.

“We welcome experienced people who are maybe the number two person in a very good institution and they want to make the jump to be number one in a new institution. But if the idea is for an institution to run the deal out of the US with a couple of analysts in Europe but the decisions made in the US, we don't think this is the right approach for the European market,” Anbar-Colas said.

When it comes to new investors, according to one of the panellists, more Asian investors are entering the market, particularly in the AAAs space. But the European CLO market investor base is relatively small at the triple-A level.

CLO formation

European CLO issuance is on a declining trend and there is a little prospect of improvement before the second half of the year. Many CLO managers are waiting in the wings, but activity in the primary leverage loan market needs to pick up first, panellists said.

Some 50-60 warehouses are opened, one panellist estimated. According to Atlantic Star Consulting’s data, 126 warehouses were registered in Dublin as of 2 April. Atlantic Star Consulting classifies all corporate entities that are domiciled in Ireland and match CLO-specific name formats, from the moment of incorporation right up until all debt is listed on an exchange, as warehouses.

The second half of 2023 should be more favourable for CLO formation, supported by greater M&A and LBO activity. Newly-issued loans are attractive as they pay a higher running coupon than loans available in the secondary market. But the notion that CLO primary issuance is fully conditioned by leveraged loan issuance was challenged. One panellist, at the CLO manager roundtable, argued that the secondary market gives CLO managers enough options to construct a diversified CLO portfolio with the type of exposure they are looking for. Another argued that the primary and secondary markets are closely connected, but agreed with the idea that the leveraged loan market secondary market offers man opportunities.

ESG

Another statement may have sounded quite blunt to some conference attendees. “There is not such a thing as a ESG CLO,” said one panellist. “Most CLO managers have their own internal ESG ratings, but they are different from one manager to the other. For us, ESG is all about transparency. “

Panellists explained that quantifiable loan metrics are easier to incorporate in CLO documentation. Other variables can be very subjective and understood differently by investors.

If the triple-A rated bonds of a potential “ESG CLO” priced tighter than a non-ESG CLO, then it would be more justified to restrict the range of credits a CLO manager is allowed to invest in, and easier to make the case to a third-party equity investor to invest in such CLO.

CLO docs

The panel on structural advancements discussed a range of topics, notably WAL extensions and uptier priming debt. Panellists explained that the challenge for the parties involved in a CLO is to ensure that the CLO manager has the right tools when some problems arise while, at the same time, make sure there is no excessive market risk in the transaction. This is one key concern with provisions around “amend and extend”. On this specific point, Alex Collins, a partner at Cadwalader, noted that maturity amendments had been a big focus, and he pays close attention to small changes that can be introduced from time to time in documentation; but all in all, the provisions on amend and extend and WAL tests are increasingly standardised and well understood by market participants, he told the conference attendees.

Collins and his co-panellists agreed that the key change in CLO documentation has been the introduction of provisions on uptier priming debt. “This is a new concept, the latest of many different techniques that are now in place in the documentations so that the CLO manager is not left behind when some debt is rolled up into new super senior debt. This is one of many overlapping features that allow the collateral manager to deal with different scenarios otherwise, in a workout or restructuring, there is a risk that other creditors could use to their advantage the inability of a CLO to roll into the new debt,” Alex Collins explained.

Some features that have been present in CLO documentations for a while but left unused can prove useful when market conditions change. This is the case of interest reserve accounts, which are proceeds set aside on day 1 to address any potential interest shortfalls on the first payment date. If unused for these purposes, the proceeds would be used to flush down to equity, said Sandeep Chana, director and lead analyst in S&P Global Ratings’ EMEA Structured Credit team. “Recent trustee reports show that the amounts set aside in these reserve accounts will likely be used to make interest payments on the CLO’s first IPD, which typically we had not seen before. This shows that CLO structurers had thought about potential issues well before they arise and the product is doing exactly what it is meant to do.”

Opportunities

Financial markets are entering an uncertain phase, with possibly a recession round the corner and higher defaults – which are however expected to remain manageable. This will be a new test for the CLO market in general and a first proper test for European CLO 2.0s.

“While we are not positive about the macro-economic outlook, we see that CLOs, as an asset class, are structured well enough to be able to withstand these times as we've seen from previous history in 2008”, said Kartesia’s Sharif Anbar-Colas, pointing out that “European CLOs have evolved massively and credit enhancement for mezzanine tranches has gone up by an entire rating category since the Great Financial Crisis.”

And in such volatile market, opportunities of different kinds abound, several panellists noted.

“As a triple-A investor, I am enjoying buying AAAs at the current levels and am more active in the secondary market because of the price discounts we are able to get here,” said Michelle Manuel.

Till Schweizer, Senior Portfolio Manager, Liquid Loans at Partners Group, explained that Partners Group has targeted some short-dated loans that were likely to go through an A&E process. These loans, once extended, bring extra spread and upfront fees to the CLO structures.

CLO documentation now includes a range of provisions to give CLO managers more leeway to deal with potentially more stressed credits. On the CLO manager panel, the point was made that these new buckets will soon be used and it will be interesting to see how it all plays out. CLO managers will have to utilise this flexibility and some tiering between managers should emerge over time, a panellist concluded.

Ramla Soni & Jean-Marc Poilpré

Structured Finance

Cross Point tapped for CLO expertise

Sector developments and company hires

Cross Point tapped for CLO expertise
Performance Trust Capital Partners has formed a new CLO trading desk, with the addition of members from the Cross Point Capital team led by Jared Gogek and Alex Navin. The group will expand Performance Trust's presence in credit products by adding in-house expertise in CLOs.

Gogek and Navin were co-presidents and managing partners of Cross Point Capital. The former was previously a director, structured credit sales at Citi, while the latter was a portfolio manager at BlueBay Asset management and a CLO trader at Citi.

In other news…

Digital mortgage lender acquired
SoFi Technologies has acquired fintech mortgage lender Wyndham Capital Mortgage in an all-cash transaction. The acquisition – which includes the integration of both talent and technology from Wyndham Capital – will allow SoFi to broaden its suite of mortgage products available to members, enhance unit economics and take ownership of a scalable platform that has set the industry standard for a fully digital mortgage experience. The objective is to minimise SoFi’s reliance on third-party partners and processes.

Wyndham Capital has helped more than 100,000 borrowers since it launched more than two decades ago. SoFi’s acquisition of Wyndham Capital aims to enable savings for current and prospective homeowners in both time and money through transparent rates and a seamless application process.

North America
Moelis has recruited Chrystalle Anstett as an md based in New York, leading the advisory and management of the private funds advisory (PFA) team’s global fundraises. Anstett brings over 20 years of experience in the investment management industry, where she has worked with managers across all asset classes, including private credit and real estate. She joins from Sound Mark Partners, where she was the head of capital formation and co-coo.

SOMA streamlining underway
The New York Fed’s Open Market Trading Desk will over the coming months continue streamlining the administration of agency MBS held in the System Open Market Account (SOMA). This will initially involve exchanging certain Freddie Mac MBS that have a 45-day payment delay for 55-day payment delay securities.

Once these exchanges are completed, CUSIP aggregation of certain Fannie Mae and Freddie Mac securities that have a 55-day payment delay will begin. Fannie Mae and Freddie Mac aggregation will be conducted separately, rather than by comingling the two issuers.

Exchanges and CUSIP aggregation are commonly used by market participants to reduce the administrative costs and operational complexity associated with managing an agency MBS portfolio. The SOMA currently holds approximately 30,000 individual MBS CUSIPs and the exchange and aggregation processes is expected to reduce that number to less than 10,000.

These processes do not impact the size of the SOMA MBS portfolio, as all payments on the underlying agency MBS flow through to the newly aggregated and exchanged CUSIPs. However, exchanges slightly modify the MBS, as the new cashflows are received 10 days later, for which Freddie Mac provides compensation at the time of the exchange.

Structured Finance

Capital solutions head poached

Sector developments and company hires

Capital solutions head poached
Howden CAP has appointed Colin Reddy as md, head of financial institutions and advisory, based in London. He will leverage his industry expertise to provide clients with balance sheet and regulatory advisory solutions, while deepening Howden CAP’s existing structuring expertise.

Reddy has over 20 years’ experience in financial services and joins Howden CAP from Mizuho Financial Group, where he was responsible for the financial institutions debt capital markets team - including balance sheet and capital solutions and securitised products - across EMEA. During his time at Mizuho, Reddy advised on and executed a number of strategic capital and balance sheet transactions for the firm’s key global clients.

Prior to Mizuho, he spent a decade at Bank of Ireland, working across its global markets, asset management, finance and group treasury functions. Latterly, he served as head of balance sheet management and deputy head of capital management at the bank.

In other news…

EMEA
The EIB has promoted Giovanni Inglisa to senior officer - financial institutions, working on funding capital relief and risk-sharing transactions. Based in Luxembourg, he was previously a loan officer - banks and structured finance at the bank, having been a structured finance manager at the EIF since February 2014. Before that, Inglisa worked at S&P, EY and Protiviti in Milan.

Valcona portfolio securitised
illimity Bank has structured a securitisation backed by a portfolio of performing loans worth €150m. illimity acted as co-arranger for the transaction, together with Banca Finanziaria Internazionale, and underwrote senior ABS notes of €90m.

The securitised loans were originated by Banca Popolare Valconca, which has been in special administration since December. With this deal, the investments made by illimity’s investment banking division have risen to over €250m in just nine months since this specific business segment began operations.

The division has continued to add to and develop its customer services for corporates and financial intermediaries by providing risk hedging instruments to third-party institutions and non-captive customers.

Structured Finance

Risk advisory appointment inked

Sector developments and company hires

Risk advisory appointment inked
African Risk Capacity (ARC) has selected Gallagher Re as its reinsurance broker and risk advisor. The appointment includes the placement of portfolio cover in the reinsurance and capital markets, and the provision of strategic advisory for sustainable growth and portfolio diversification. The design of alternative risk transfer mechanisms, such as ILS, is a core component of targeted development plans.

ARC is a specialist insurance company that provides parametric insurance cover to African countries against climate and disaster events. The company’s ambitious growth plans foresee combined use of traditional and alternative capacity providers as part of a unique risk carrier structure that aims to leverage the private sector for a wide range of resilience applications across Africa.

In particular, ARC seeks to strengthen the capacity of member states to minimise the risk and actual impact from catastrophic events, as well as provide targeted and swift access to finance, tools and products in the aftermath of disasters. To date, the company has provided financial protection in excess of US$1bn to 19 countries. It says it aims to reduce the protection gap even further and its partnership with Gallagher Re will form a key element of this growth.

Following the signing of a Memorandum of Understanding last November between ARC, CCRIF SPC (formerly the Caribbean Catastrophe Risk Insurance Facility) and the Pacific Catastrophe Risk Insurance Company (PCRIC) – and as lead and sole broker to all three developmental insurance risk pools – Gallagher Re is now uniquely placed to support the goals of the MoU, which is to raise their global visibility, reach and influence.

In other news…

Insurtech platform acquired
Arch Insurance has acquired Thimble, a digital platform for small business customers and agents, for an undisclosed sum. Since May 2018, Thimble has delivered more than 170,000 policies to small businesses across the US. The Thimble team will continue growing the business with its existing carrier partners and offer new solutions through Arch.

North America
Swiss Re has named Jean-Louis Monnier global head of ILS, having appointed him as ceo of Swiss Re Capital Markets Corp in November 2022 (SCI 17 November 2022). Based in New York, Monnier joined the firm as director in April 2002 and worked at Gen Re Financial Products, CIBC and Societe Generale before that.

RFC issued on SFDR amendments
The EBA, EIOPA and ESMA have published a consultation paper with amendments to the Delegated Regulation of the SFDR. The ESAs are proposing changes to the disclosure framework to address issues that have emerged since the introduction of the regulation.

Specifically, the authorities are seeking feedback on amendments that envisage: extending the list of universal social indicators for the disclosure of the principal adverse impacts of investment decisions on the environment and society, such as earnings from non-cooperative tax jurisdictions or interference in the formation of trade unions; refining the content of other indicators for adverse impacts and their respective definitions, applicable methodologies and formulae for calculation, as well as the presentation of the share of information derived directly from investee companies, sovereigns, supranationals or real estate assets; and adding product disclosures regarding decarbonisation targets, including intermediate targets, the level of ambition and how the target will be achieved.

Moreover, the ESAs are proposing further technical revisions to the SFDR Delegated Regulation by: improving disclosures on how sustainable investments ‘do not significantly harm’ the environment and society; simplifying pre-contractual and periodic disclosure templates for financial products; and making other technical adjustments concerning the treatment of derivatives, the definition of equivalent information and provisions for financial products with underlying investment options.

Comments on the consultation paper can be submitted until 4 July, after which the ESAs will prepare a final report and submit it to the European Commission.