News Analysis
Asset-Backed Finance
A European ecosystem
Continental solar ABS primed for growth
Continental solar ABS is primed for growth as governments and consumers seek energy independence. This Premium Content article investigates.
Europe could soon see its first public solar securitisation, after renewable energy firm Enpal announced a €356m warehousing facility to finance more than 12,500 photovoltaic (PV) systems in Germany (SCI 30 March). The continent’s solar ABS market has lagged significantly behind the US, but macroeconomic and geopolitical conditions appear to have jump-started activity in the fledgling asset class.
According to recent KBRA figures, the US solar ABS market grew from US$1.4bn total issuance in 2016 to US$8.6bn in 2022. Europe, by comparison, is yet to see its first publicly placed solar ABS deal.
“There has been a lot of talk that this year will be the year where we see the first public solar ABS deal in Europe,” says Andrew South, EMEA head of structured finance research at S&P. “There is still some debate as to what the financing product is, in terms of lease versus loan. But from a rating perspective, because we rate deals in the US market, we could rate deals when they do start appearing in Europe.”
Enpal’s warehousing deal was announced at the end of March and consists of a €300m senior debt commitment from Citi, alongside a €56m mezzanine commitment from M&G. At the time of the announcement, the trio hailed the development as the launch of a “new asset class” on the continent.
“In Europe, there has been a lack of business models like you see in the US, where dedicated solar financing companies work alongside solar installers,” says Béla Schramm, a senior investment manager focused on financing and refinancing at Enpal. “That’s partially because the solar market in Europe as a whole has historically been incredibly fragmented. It is only now that we are beginning to see consolidation happening, with players that are big enough to originate receivables at scale.”
South says much of this can be directly attributed to Europe’s multinational and multi-jurisdiction nature. He highlights that this creates challenges in terms of ensuring there is enough underlying lending to support securitisation in a new asset class.
“Hypothetically, for a lender funding installations across the eurozone, it would be tricky to securitise those loans from multiple countries in a single transaction,” says South. “But if you are restricted to one country, you have a different challenge of reaching critical mass to make a securitisation worthwhile.”
Within Germany itself, the installation of PV systems has been primarily funded by local savings banks to date, explains Dietmar Helms, a structured finance-focused partner at Hogan Lovells. A homeowner would typically add this financing to their existing mortgage. This, he says, means solar credits end up on the books of financial institutions without sufficient volumes to justify securitisation.
“The market was also too fragmented on the installation side,” says Helms. “Solar panels used to be installed by local companies that would just operate in their municipality. They cannot install a sufficient number of devices to also generate a large enough portfolio.”
He adds: “That has only become viable with players such as Enpal. There are a couple of other followers using the same business model, so we will see more deals in the market over the next year or so.”
To combat geographic fragmentation and accelerate Europe’s transition towards renewables, the European Commission introduced its REPowerEU programme in May 2022. The programme provides a framework through which the bloc can collectively tackle climate change while “ending [its] dependence on Russian fossil fuels”.
As part of this, the EU is aiming to more than double the current level of solar PV by 2025 with the addition of 320 gigawatts of capacity. A total of 600 gigawatts are to be added by 2030.
REPowerEU presents a unique opportunity for the European securitisation market, according to a recent S&P report. It notes that solar PV system rollouts are being driven in part by regulations, subsidies and tax incentives introduced by individual European governments.
They are also being partially financed by leasing models, whereby infrastructure investors fund the rollout of PV systems that are then rented by individual homeowners. Yet a scaled-up loan model - and by extension, potential ABS market - will grant access to a far wider range of investors with deep pockets, S&P says.
This theory appears to be supported by Enpal’s growth strategy. Prior to starting its securitisation programme, the firm adopted a leasing model for the rollout of PV systems to its customers. Schramm says Enpal has raised more than €1bn to date in long-dated project financing primarily from infrastructure investors to support this.
“As we began scaling our business rapidly a couple of years ago, we started thinking about securitisation alongside leasing to tap into deeper markets and set up a scalable solution,” he explains. “We obviously saw the US market, where growth has been driven by business models that use securitisation to raise and provide capital for solar customers.”
From a customer’s perspective, Helms believes the loan model is ideal for the installation of solar PV. The large upfront cost, offset by reliable long-term monthly savings on energy bills, makes lending the most straightforward and logical approach, he says. Furthermore, the fact that panels are physically installed on properties makes leasing or rental models less appropriate compared with other sectors such as auto agreements.
“A rental is really more suited to something you want to return after a period of time,” says Helms. “You don’t really want to remove solar panels after a few years. The financing and its structuring is also more complicated for rental models. It is more like a project financing type of structure. A lending model is easier, it is probably more robust and you have a much larger group of banks that can invest in these products.”
The geopolitical motivations behind Europe’s drive for solar have been global headline news since Russia’s invasion of Ukraine began in February 2022. While the move towards renewable energy was already well underway in many countries prior to the invasion, the resulting surge in gas prices has acted as a catalyst.
Schramm says the three key motivations behind consumer adoption of solar PV are its long-term cost efficiencies, ethical and ecological considerations, and a desire for energy independence. The third of these, he says, may be the most important.
“This is a deep and fundamental drive that people have - to decrease their exposure to what is happening out there in the world,” says Schramm. “It spans across all political affiliations and has been reinforced by the war in Ukraine. Renewable energy and independence are no longer just for those who want to do something positive for the environment.”
In December, wholesale European gas prices fell to pre-invasion levels for the first time. This was due to a combination of milder-than-anticipated early winter weather and new agreements struck with alternative, non-Russian suppliers. Nevertheless, across Europe as a whole, the impact of the initial price surge is still being felt.
“It makes sense that high energy prices would push consumers more towards renewables,” says South. “What is striking is that, though inflation and the energy contribution to inflation are both heading downwards, they are not negative. Energy prices that jumped significantly a year ago are still up, for consumers at least. It is just that prices have flattened off at that higher level.”
The EU, and western Europe as a whole, will hope that a sustained acceleration of the transition towards net zero will be one positive development to emerge from the tragedy of Ukraine. With a growth in borrowing for long-term investment at both a consumer and commercial level, the green securitisation space should theoretically - and finally - see rapid growth.
“Even before the war in Ukraine started last year, there was already a lot of discussion about green and social securitisation in the European market,” says South. “There was plenty of debate about what has to be done for a deal to be legitimately labelled as ‘green’, for example. Loans secured on electric vehicles, mortgages backed by energy-efficient properties in RMBS and of course financing of solar PV installations are all possible sources of green securitisation.”
For Helms, electric vehicle charging and heat pumps will be two key areas of growth for green securitisation, in Germany at least. “There is likely to be a law in Germany that will forbid people from installing gas heating in their houses in the near future,” he says. “The energy companies are investing heavily and setting up factories in response to a shortage of supply in heat pumps and increased demand. Securitisation will play a large role in that, most likely all across Europe.”
Indeed, while Enpal’s deal can only be welcomed as a significant step in the right direction, it will require developments in multiple European countries before the continent is able to catch up with the green ABS market in the US. “Our hope is that this develops into a true [solar ABS] ecosystem,” Schramm concludes. “The investor interest is definitely there. Investors have really ambitious goals when it comes to green assets, but the number of assets out there is actually pretty limited.”
Kenny Wastell
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News Analysis
Structured Finance
Meeting of worlds
Opportunities for ABS originators as private and syndicated debt markets converge
Private credit transactions are playing an increasingly prominent role in the structured finance landscape, owing to the continued global growth of the direct lending space. The trend is being reinforced by high-profile entrants into private debt, as banks and asset managers look to diversify into new asset classes.
“Structured credit has not really played a significant role in the private debt world until recently,” says Amy Kennedy, a finance partner at law firm Akin. “That has changed in recent years, as people seek new solutions to offer investors and take a more creative approach to capital. Those two worlds are coming together as the arena of managers and individuals increasingly crosses over.”
Private credit managers have sought a number of ways to introduce liquidity into what is, by its very nature, an illiquid market. A secondaries market is taking shape, enabling institutional investors to trade out from their positions in direct lending funds. Allianz Global Investors, Apollo Global Management, Coller Capital and Pantheon are among a number of managers to have launched secondaries strategies over the past two years, typically focused on acquiring LP commitments at a discount.
On the deal front, middle market CLO activity has risen steadily over the past decade, as private debt managers become more comfortable with the idea of not being the sole lender in transactions. At IMN’s Annual Investors' Conference on CLOs and Leveraged Loans in April, S&P senior director and head of leveraged finance Ramki Muthukrishnan said the volume of middle market CLO issuance had almost doubled in the five years to 2022, compared with the previous five-year period.
Private debt managers have historically focused on holding loans and they still primarily do so with a significant portion of deals, explains Jaisohn Im, a partner in the alternative capital sources team at Akin. However, this is beginning to change.
“As private debt has started encroaching into the structured finance and syndicated world, we have started seeing an increasing number of club deals, largely because the cheques are bigger,” says Im. “It is still not quite the same as the syndicated credit markets, but the processes have started inching that way. Private credit managers have increasingly started selling or partnering with other private credit managers to reduce their exposure as deal sizes have grown over recent years.”
Wall Street banks JPMorgan and Goldman Sachs are among a number of large players to have recently launched private debt platforms, alongside asset managers such as Pictet, Franklin Templeton and Nuveen. Recent reports indicate JPMorgan and Goldman are exploring avenues to start trading private credit loans, in a sign of growing convergence between the syndicated and private markets.
“Historically, two of the key selling points of private credit have been speed of execution and flexibility,” says Kennedy. “The moment you start pulling private credit back into a syndicated model, you have to ask whether you start losing those attractive differentiators.”
Im believes that attempts by large players to increase liquidity in private debt are likely driven by the macroeconomic environment. With an increasing number of loans likely to “be distressed”, the asset class will have to find ways to respond.
“If and when there is a downturn, as the markets get choppy, it will be interesting to see how these funds deal with restructurings,” says Im. “Historically, they have been much more willing to hold onto loans and offer amendments to waive defaults and provide additional runway for sponsors.”
He adds: “That works to a certain extent, but at some stage, you do need to start doing true restructurings. At that stage, it is likely to be a turning point, where private credit managers either have their teams handle restructurings or find ways to sell loans.”
With data provider Preqin forecasting that global private credit AUM is likely to rise from around US$1.4trn in 4Q22 to US$2.3trn in 2027, the asset class could play a growing role in the structured finance ecosystem as the decade progresses. The emerging role of major banking groups in direct lending is only likely to accelerate the trend.
Kenny Wastell
News
Capital Relief Trades
Risk transfer return
Deutsche Bank engineers mid-market comeback
Deutsche Bank has finalized a synthetic securitisation of primarily German mid-market corporate credit facilities. Dubbed DARTS 2023-1, the CLN is the bank’s first such first loss significant risk transfer transaction following the execution of GATE in 2018.
The deal consists of a €300m first loss tranche that references a €3bn blind pool of several hundred borrowers. Deutsche Bank executes SRTs primarily for risk management purposes and hence typically issues first loss tranches. After the 2.5-year replenishment period, the tranche amortizes on a pro-rata basis but with triggers to sequential amortization. The trade also features a time call that can be exercised at the earliest after the end of the replenishment period and once the portfolio WAL at that point in time has run its course.
Looking forward, Oliver Moschuering, global portfolio manager for strategic corporate lending at Deutsche Bank concludes: ‘’The gap in issuance between the two transactions is explained by the fact that we had to wait for regulatory approval of new PD and LGD modelling as required by EBA guidelines and because our mid-market portfolios are blind pools; these are important variables in the investor due diligence. We intend to issue new mid-market transactions more regularly going forward.’’
Stelios Papadopoulos
News
Capital Relief Trades
TD cancels CRT, say sources
Collapse of First Horizon merger cancels planned reg cap trade
The collapse of the merger between First Horizon and Toronto Dominion Bank (TD) has meant a planned CRT trade by the Canadian bank has been shelved, say sources.
TD had intended to execute a synthetic securitization of large corporate loans in June to free up capital as it took the Memphis, Tennessee-based First Horizon under its wing in a $13bn deal, but this is no longer necessary.
If it had gone ahead, the combination would have created the sixth biggest bank in the US. TD is Canada’s largest bank and has assets of around $1.9trn.
It became only the second Canadian bank after Bank of Montreal (BMO) to issue in the CRT market when it closed a synthetic securitization of corporate loans earlier this year.
Since then CIBC has also issued in the market and another deal is said to be in the works as well, which would make the fourth by a Canadian bank this year.
The prominence afforded to the reg cap relief market by Canadian names this year is not entirely unexpected as on January 31 2022 the indigenous banking regulator, The Office of the Superintendent of Financial Institutions (OFSI), stated in a letter that the stipulations of Basel III would become binding in fiscal Q2 2023.
The First Horizon/TD merger was called off to regulatory delays. The Canadian bank told First Horizon that it did not have a timetable for regulatory approvals to be obtained. Sources add that this was related to AML compliance, further adding to the belief in US banking circles that regulators aren’t doing as much to help troubled banks as they might.
In the immediate wake of the news that the merger has been called off, First Horizon’s share price tumbled by 40% to well below the $25 TD had offered when the deal was first announced in February. It is currently $9.81, having fallen 60% this year.
Simon Boughey
News
Capital Relief Trades
Capital calls hedged
Standard Chartered CRT revealed
SCI understands that Standard Chartered finalized a synthetic securitisation of capital call facilities in March called ‘’Hector’’. The transaction is riding a wave of such trades that picked up significantly in the aftermath of the Coronavirus crisis.
According to market sources, the transaction features a 0%-6.5% tranche thickness and was priced at SOFR plus 7.5%. The primary motivation of the trade is understood to be the hedging of concentration risks.
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
News
Capital Relief Trades
Risk transfer reboot
JP Morgan executes synthetic securitisation
SCI understands that JP Morgan has finalized a synthetic securitisation of capital call facilities. The transaction is the first synthetic risk transfer trade for capital relief purposes from a large US bank after US supervisors brought the US market to a halt last year given alleged concerns over direct CLN structures (SCI 19 April 2022).
According to market sources, the trade is a first loss tranche that references a portfolio of capital call facilities and it was initially issued by an undisclosed US regional bank. JP Morgan has now stepped into the role of protection buyer with the aim of restructuring and reformatting the deal. Blackstone is believed to have bought the synthetic ABS. The reformatting of the trade from a CLN into another structure will be finalized in 2Q23 but the transaction has been priced say sources. Nevertheless, regulatory approval and consequent RWA relief is still pending given that the reformatting hasn’t been carried out yet.
Until now, it was understood that JP Morgan would be aiming for an SPV structure due to regulatory uncertainty over the treatment of direct CLNs which remains the case. However, the same sources now qualify that the bank has now shifted position and is now exploring CDS, guarantee and SPV structures with direct CLNs remaining off the table.
Questions remain from a supervisory standpoint as to whether the SPV has ownership of the collateral and pledges to fully repay the notes to the bank and then the investors. Another question more salient for originators is whether banks must comply with swap regulations since the SPV can be considered as a commodity pool (SCI 19 April).
The execution of the trade may pave the way for more US capital relief trades going forward and is riding a wave of synthetic securitisations of capital call facilities (SCI 12 May).
Stelios Papadopoulos
The Structured Credit Interview
CLOs
Best interests
Eric Brown, head of Performance Trust's Institutional Group, answers SCI's questions
Q: Performance Trust announced its entry into the CLO market with the creation of its new CLO trading desk last month (SCI 11 April). What makes now the right time?
A: CLOs are something that we’ve been looking into for quite some time now and figuring out the right time for us to get involved isn’t necessarily market-based, but instead it’s about finding the right people to lead that effort. One of the things that is really important to us is truly partnering and serving the clients that we face, and when we spoke with the Cross Point team, they not only understood that but they embodied that.
I’ve interviewed many people over the last five years and when I met with the Cross Point Capital team, I could tell immediately that it had a very different feel to it. They are a team who started their own broker-dealer and so they know what it is like to really help and serve clients in a way that really solves clients’ issues – and that isn’t always the case.
Q: And what are you hoping to be able to bring to the CLO market?
A: We really want to serve our clients, through what we call a very ‘high touch’ approach. No matter how big or small the space is, there’s always opportunity to help your client solve the problems it’s facing and meet their needs.
We aren’t trying to be something we are not – we know exactly who we are, the types of clients we can serve, and exactly how to do that. We have a history of almost 30 years doing precisely that at Performance Trust and we believe that going in and entering the CLO market and providing that same type of service to clients in this space too will bode well for our firm.
Q: What makes Performance Trust suited to tackling the challenges in the CLO market that maybe its competitors cannot?
A: Any time you enter markets like this, where there’s fear, there’s opportunity. A lot of clients need help, and they want to partner with people they can trust to keep their best interests in mind.
Many people see these markets as being challenging or difficult. But we really see it as a great opportunity to partner with these clients because when they know you have their best interest at heart, it changes the tone and structure of the conversation.
In times and markets where things are really fluid and good, we will still be involved, but we can’t necessarily have the impact that we really want to have in these spaces. Whereas in markets like CLOs, we feel like the opportunity for us there is as high as it has ever been.
There’s a lot of uncertainty, dislocation and confusion, and people are questioning who they can trust to help them – who they can lean on. We do our best work when we enter markets like this, where we have a real level of expertise – and with the Cross Point team, we can bring that to our customers, to our platform, and we can hopefully grow that worldwide.
Q: What attracted Performance Trust to the CLO market?
A: CLOs are probably one of the last structured products we’ve not yet been involved in. We are heavily involved in securitised products, including MBS, both on the residential, agency, non-agency and commercial sides of that market.
We’ve really built on our structured finance expertise internally and, of course, CLOs are something that we’ve looked at before – it’s a sector with plenty of opportunity. But you can’t enter into a new sector by just declaring that you’re entering into it. You need to have true professionals on side that are experts in their space, that have longevity and have built up a great brand in their space – which is exactly what the Cross Point team has done.
Q: How do you hope experience in other structured finance products will better Performance Trust’s efforts in the CLO market?
A: We’ve learnt in our close to 30 years of business that opportunities really grow from building up good relationships and trust with your clients. As a firm, we want to be at the table, sitting with our clients and helping them. After doing this in other sectors, we’ve been able to provide expertise and insight that has allowed our clients to win long term – and when our customers win, we win.
Claudia Lewis
Market Moves
Structured Finance
Rapid rise in defaults for Gedesco TRS
Sector developments and company hires
Rapid rise in defaults for Gedesco TRS
The ratings on €191.8m of notes issued by Gedesco Trade Receivables 2020-1 have been downgraded in light of the significant and rapid increase in defaults observed in March, following the start of the securitisation’s amortisation phase in January. Specifically, Moody's states that most obligors have reportedly stopped paying and recoveries are likely to be delayed, resulting in a higher likelihood that even the senior notes may face losses.
The agency has downgraded and also placed under review for possible downgrade the ratings of Gedesco 2020-1 class A (from Aa3 to Ba3), B (from Baa2 to B3) and C notes (from Ba2 to Caa3), and also downgraded the ratings of the class D (from B2 to Ca), E (from Caa3 to Ca) and F notes (from Ca to C).
The transaction is a revolving cash securitisation of factoring, promissory note and short-term loan receivables originated or acquired by Gedesco Finance and Toro Finance to enterprises and self-employed individuals located in Spain. Gedesco's proposal to extend the revolving period by six months did not receive the required majority noteholder approval.
At closing, Moody's mean default assumption was 10.7% of the portfolio balance for the life of the transaction. Until December 2022, no defaults were recorded. However, the most recent trustee report obtained last month indicates that defaults escalated to €61.6m in March 2023, representing around 27.3% of the outstanding balance.
The rapid increase in defaults has led to a diminished capacity of Gedesco Services Spain to service the underlying receivables in a timely and robust manner, according to Moody’s. It adds that these servicing constraints could add significant volatility to the quantum of both future defaults and recoveries.
In other news…
KBRA’s Kelley switches up
KBRA has named Rosemary Kelley head of structured finance business development. In this newly created role, she will lead the agency’s business development effort for the ABS, CMBS and RMBS sectors, positioning it for future growth.
In addition to structured finance, Kelley will also cover transportation and project finance. She joined KBRA in 2011 as co-head of US ABS and was appointed global head of ABS in July 2019.
Eric Neglia will succeed Kelley as global head of ABS, responsible for all facets of KBRA’s ABS analytical effort, including credit rating methodologies, rating assignment processes and surveillance. He has served as head of consumer and commercial ABS at the agency since July 2022, having previously led its consumer ABS effort.
As part of the management changes, Jason Lilien, senior md, business development, will maintain oversight of KBRA’s growing structured credit and CLO business development efforts. Lilien and Kelley report to Dana Bunting, co-head of global business development, while Neglia reports to Eric Thompson, global head of structured finance ratings.
North America
Scotiabank has appointed mds Brad Roberts and David Williams as co-heads of its new US structured credit unit, based in New York. Roberts was previously co-head of credit, Americas at Natixis, which he joined as head of US credit trading in September 2015 from Nomura. Williams was previously head of GSCS global syndication and co-head of credit syndication Americas at Natixis, having joined the firm as head of US structured credit syndicate in October 2006.
The SFA has recruited Scott Frame as chief economist and head of MBS policy. In this role, Frame will serve as SFA’s principal economist and utilise his years of expertise to provide strategic guidance that drives the association’s economic policy analysis. He joins after serving in various leadership roles for the US Fed, most recently as vp for financial research at Federal Reserve Bank of Dallas.
structuredcreditinvestor.com
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