Contents

Structured Finance

The social struggle

More data needed to tackle 'socialwashing'

Concerns around ‘socialwashing’ remain, despite recent advances in defining social securitisations. This Premium Content article investigates why the ‘social’ side of ESG securitisation is more complex than its ‘green’ cousin.

The European social securitisation sector is lagging behind the green securitisation sector, in terms of both standardisation and the availability of qualitative data. Despite advancements in defining ‘social’, following the introduction of ICMA’s social securitisation framework last year (SCI 29 June 2022), some concerns around ‘socialwashing’ remain.

“There is still a very blurred line between what is social and what might not be beneficial, or may actually be taking advantage of vulnerable customers,” suggests Elena Rinaldi, portfolio manager at TwentyFour Asset Management. “There are some guidelines, but what we have seen so far with the more popular social deals is that they are looking at or targeting financial inclusion, reducing inequality and giving access to finance to underserved borrowers.”

The social side of ESG securitisation remains more complex, as it lacks the same standardisation in both concept and language as green transactions. “Green is easier than doing social as there is a standard definition of what is considered green – like properties with EPC ratings above B and therefore a lender has to issue mortgages backed by a certain amount of energy efficient properties or use the proceeds to lend towards achieving those ratings – you can’t really get around that,” Rinaldi observes.

She continues: “I think that’s why social deals haven’t been that popular, because investors struggle to rely on the label and it is too questionable on certain deals.”

With no clear ‘standard’ for what is social and what is not, social securitisations could be vulnerable to social-greenwashing, or ‘socialwashing’.

Last year, European ESG securitisation issuance fell to €1.2bn from a recorded total of €8bn in 2021, according to AFME’s ESG Finance Report for 2022. More broadly, the report highlights the disparity between the green and social segments - noting that while green bond issuance grew by 6%, social bond issuance declined by 40%.

As well as being harder to define, social issuance may continue to take second place to environmental, as green deals are advantaged by being mandated by governments as they work to meet net zero targets and are incentivised by a green premium, or ‘greenium’ (SCI 9 February). “In the social market, we have the opposite problem – there is no offering discounted rates. You have to charge higher, if you want to target these borrowers with complex credit histories or adverse backgrounds,” states Rinaldi.

Trailblazing social bond issuances from the likes of Kensington Mortgages have not only been compliant with ICMA’s guidelines, but are also widely considered as a strong example of socially-linked securitisation (SCI 27 January 2021). Kensington targets borrowers not served by traditional banks, such as the self-employed, people with incomes from multiple sources, contractors, first-time buyers and borrowers with limited credit histories.

“When we issued our first social bond in 2021, the eligible social project of the bond was the purchase of a portfolio of owner-occupied loans originated by Kensington Mortgages. Given Kensington’s business model, this meant that we were able to use all owner-occupied loans originated by Kensington, as these meet the social objective of the bond,” says Alex Maddox, capital markets and digital director at Kensington Mortgages.

“Generally, when investors think social in the residential housing market, they think of projects aiming to provide housing at affordable rates to low-income individuals or loans targeting social housing. But this is not the market that Kensington operates in – our eligible social project relates to improving access to home loan finance and facilitating home ownership to a target population that could not access mortgage loans from UK mainstream banks,” explains Camille Boileau, svp, capital markets at Kensington Mortgages. “Our eligible social project is aligned to the Social Bond Principles from ICMA and contributes to the achievement of the United Nations Sustainable Development Goals.”

Kensington focuses on viable customers that do not fit the ‘one size fits all’ approach taken by high street banks, whose highly automated and efficiency-driven approaches to underwriting facilitates their ability to offer the most competitive rates. Providing mortgage products to borrowers with complex financial circumstances requires a more tailored and granular approach – which Kensington is able to do by using its manual underwriting capabilities.

“Deploying a human underwriter for each case means we incur a higher origination cost versus an automated underwriting platform. This higher cost means that the interest rate is generally 1%-2% higher than the interest rates charged by high street banks; it is not because the population we lend to is more adverse and therefore riskier,” explains Boileau.

Underserved borrowers - including lower-income borrowers, the self-employed and those with lower credit scores - account for 50% of the portfolio securing German digital-lending platform auxmoney’s second social bond issuance, Fortuna Consumer Loan ABS 2022-1. In the unsecured credit sector, interest rates on auxmoney loans can be as high as 17% - although rates for borrowers with the best credit score start at 5%, with a range of six credit scores resulting in average interest rates of approximately 10% and a portfolio that is well diversified across the various risk segments.

“They are barbelling their portfolio and adding customers with very low rates on one side, at around 5%. And to balance that on the other side and the high default rate, they are offering rates at 17% to the other end of the spectrum,” Rinaldi points out.

auxmoney received a strong ESG second-party opinion from ISS in 2021. As the ISS report explains: “A study conducted by Deutsche Bundesbank (2016) stated that the interest rates (based on risk adjustments) are in line with overall market practice. Given that these borrowers cannot get loans for lower interest rates elsewhere, they do not perceive auxmoney’s interest rates as too high. Importantly, interest rates remain below ranges that apply for credit card or overdraft segments.”

With the rising interest rate environment and a recession predicted for Germany, interest in accessing credit is expected to increase from consumers having a harder time gaining access. Already, this is being seen in the expanding German buy now, pay later industry - which is expected to see growth in payments by 19.4% annually to become a US$98bn industry by 2028.

As such, auxmoney is perceived as fulfilling an important function in the country’s financial sector. According to ISS, the lender’s scoring model meets €30bn-€35bn of the total €90-€100bn demand for consumer lending (as of 2020).

“The German market is different, so lenders may have to take more drastic measures. But I think there is always going to be something you can do on the social side,” notes Rinaldi.

She adds: “You can always make it viable at a decent rate that isn’t massively higher than the average, if that is your objective. We’ve always seen that in the UK.”

Although meeting the demand of 4-4.5 million individuals in Germany classified with ‘manageable’ risks, default rates across auxmoney’s Fortuna deals have turned some heads.

Rinaldi questions whether such default assumptions are, in fact, ‘social’. “To me, having those kinds of default rates on performance means borrowers are struggling to pay their monthly instalment,” she states.

“It is essential to consider the context and the specific borrower demographics served by auxmoney,” explains Boudewijn Dierick, md of auxmoney’s investment entity. “Banks often do not provide loans to clients below certain credit Schufa scores, as in many cases, their dated risk models do not allow for an appropriate assessment of those types of borrowers. Only through auxmoney’s proprietary advanced risk models, we can provide access to credit while reducing the risk and cost of lending for certain borrower segments.”

He continues: “Dedicated to promoting social and financial inclusion in the market, auxmoney also focuses on customers in the traditionally underserved category such as the self-employed, freelancers, entrepreneurs, employees in probationary periods and students. At the same time, auxmoney adheres to responsible lending principles by tailoring loans to borrowers' ability to repay. If there are doubts about the ability to repay, we do not make a credit offer and as a matter of fact, the majority of all loan applicants still get rejected.”

As of March 2023, auxmoney has originated in excess of €4bn in loans. Since 2021, funding via the Fortuna deals has played a vital role in this process.

“As a platform that connects lenders with borrowers over the past 15 years, we are aware of our special responsibility towards both groups and it proves that our business model is sustainable. Part of obtaining the ESG label from ISS was a thorough review of our internal lending practises across all areas, from advertising and sales to customer service,” Dierick notes.

Nevertheless, with sound structures and investor protections in place, interest in the Fortuna transactions are unlikely to be solely due to their ESG labelling. “Investors could be getting 20bp, 25bp or even 30bp of premium versus prime on a consumer deal, as well as having more protection,” notes Rinaldi. “And with massive credit support at the top, the deal almost cannot be broken. So, if you are comfortable from a credit point of view, investors may not consider carefully the ESG side as well like we do.”

Despite question marks around future ESG RMBS issuance from Kensington following its recent acquisition by Barclays, the lender remains positive regarding the future of the social securitisation market. “We issued the first ABS social transaction in the UK, and also the first from a specialist lender. Quickly after, Yorkshire Building Society issued its debut social bond using a similar eligible social project,” notes Yolanda Bushell, senior associate, capital markets at Kensington Mortgages.

She continues: “Specialist lending is about 10%-15% of the total UK mortgage market, which means that we can expect further social issuances from other specialist lenders. ABS should be a good market for ESG issuances, given the pool can be defined and proceeds allocated on day one, as opposed to sovereign or corporate issuers.”

Maddox adds: “Lending to this targeted population is very important, given they are viable customers from a credit and affordability perspective - and we see this segment growing, especially since Covid-19.”

Generally, investors appear to favour undertaking their own due diligence on social criteria as they are required to demonstrate that they have considered ESG factors for all investments. Nevertheless, Boileau suggests that more needs to be done in terms of disclosure of frameworks and standardisation, so investors can compare ESG bonds.

“In the current world, it is key for issuers to supplement the relevant ESG data to investors, in order for them to be able to monitor ESG attributes of deals. Standardisation and transparency are the path forward to develop a social bond market. It is therefore key to see some involvement from the regulator to provide greater consistency in this market,” she explains.

Maddox adds: “While socialwashing is an issue, and people should be very thoughtful about it, it is at least helpful to have some rules and guidelines. Although, ultimately, investors and the rest of the market should form their own opinion.”

auxmoney agrees with this notion. “We provide our investors with a very granular set of information on the underlying loans and borrower characteristics. This allows our investors to also draw their own conclusions. In fact, this is why many investors have chosen to invest in our assets,” Dierick concludes.

Claudia Lewis

Structured Finance

Unfinished business

ESMA review offers opportunity to increase ABS transparency

NPL Markets, the loan trading and analytics platform, has called for increased data transparency in the European private securitisation market, despite resistance from some market participants. The development comes as ESMA conducts its review of mandatory investor disclosure templates in response to a request from the European Commission last year (SCI 15 November 2022).

“Transparency is paramount,” says NPL Markets ceo Gianluca Savelli. “We are talking about the most illiquid market; structured credit and securitisation. It is a large market and loan-level disclosures are important, also for the regulator.”

After carrying out a review into the functioning of the EU Securitisation Regulation (SECR) - which provides rules and criteria relating to due diligence, risk retention and transparency in securitisations - the EC asked ESMA to review disclosure templates in October 2022. The purpose is to better align these disclosures with investors' requirements and create clear, separate templates for public and private securitisations. ESMA is not expected to report back before the end of 2023.

“Overall, the ESMA initiative is a good one that is really bringing transparency into the market,” says Savelli. “We don’t believe that the journey in terms of transparency requirements is complete.”

Some of the issues that have presented themselves so far relate to changes in the way disclosures are made following the introduction of SECR in 2020, NPL Markets says. After the introduction of loan-level disclosures in 2012, submissions were initially made using templates from the ECB and Bank of England. This has changed with the arrival of SECR, with most securitisations transferring to ESMA templates.

“The shift from ECB to ESMA caused a break in historical data formatting,” says Savelli. “Additionally, ESMA dropped two important items that were required by the ECB: internal ratings and loss given default estimates for corporate loans. But overall the transparency requirements have been increased and the initiative is well shaped.”

Among NPL Markets’ key concerns are that securitisation issuers have been tempted to overuse a ‘no data’ option on ESMA disclosures, whereby they state that data is either not applicable or not available. “In principle, this option makes sense because some data are not available, but many originators are applying the option too widely,” says Savelli. “We have seen portfolios where the option has been applied to the interest of the loan. Clearly, if you don’t have that information, you are not able to value the loan. We need to see stricter guidelines about how to apply this option.”

Another key area that NPL Markets has identified is that there is no obligation for private securitisations to report to a central depository. As is the case when there is a lack of data, if information is distributed across various locations, it creates additional complexity for investors and ultimately reduces transparency.

“Public securitisations need to be reported to a repository like European DataWarehouse,” Savelli says. “In private securitisations there is no such obligation. It is enough for the originator to use a suitable password protected website. The information is available, but it is available in different places, some public repositories and some websites. That’s a bit painful for an investor and investors will not be aware of most private securitisations.”

There are further fundamental gaps in disclosure templates that NPL Markets says must be addressed; in particular, the lack of fields dedicated to ESG characteristics, non-EU-issued securitisations and state guarantees on loans. “Clearly, it isn’t good that some of these areas are lacking,” says Savelli.

Yet not all of the firm’s suggestions are focused on quantity of data. Greater harmonisation with existing industry processes would go a long way towards increasing buy-in from originators and investors.

“With ESMA disclosures you need to upload an XML file,” Savelli says. “But most people in the industry operate using Excel sheets and csv text files. XML files require work before being able to extract value from them. Why not allow people to use industry standard formats?”

He adds: “When you get transactions rated, you provide ratings agencies with quite large templates of information. We would like to see the ESMA template being more in line with what rating agencies require to provide a rating to a transaction.”

Ultimately, while most market participants will say that additional transparency can only be a good thing, it typically brings additional demands on - and thus costs for - issuers. In this respect, the role of ESMA is a balancing act of making changes that increase transparency, but that are not overly onerous for issuers.

“If you ask banks, many will tell you it is too complex to provide this data,” Savelli concludes. “Investors will tell you there is not enough data. In some ways they are both right and in some ways they are both wrong. In our view, overall, it is a fair set of rules that has brought transparency. We are on the right track, but the work is not completed.”

Kenny Wastell

Capital Relief Trades

Holding steady

CRT structures unscathed amid bank volatility

Recent banking instability is unlikely to result in contractual changes in synthetic securitisations, but structural divergences are emerging. This Premium Content article investigates further.

The aftermath of UBS’s acquisition of Credit Suisse and the turmoil in the US regional bank market is unlikely to result in any contractual changes around counterparty credit risk in synthetic securitisations. However, opinion is divided over the importance of rating triggers, while the US market appears to be diverging towards the use of SPV structures rather than direct CLNs. Perhaps more saliently, issuance from smaller regional banks on both sides of the Atlantic could decline over the medium term, due to investor preferences for larger and more systemic bank issuers.

Synthetic securitisations can be structured as bilateral guarantees, SPVs or direct CLN structures. Under a bilateral guarantee, the bank enters into a credit default swap directly with the investor, which fully collateralizes the CDS (unless they are an insurer).

SPV structures issue CLNs and sell credit protection on the underlying portfolio, before placing cash on deposit with the issuing bank. Finally, direct CLN structures are CLNs issued off the bank’s balance sheet, meaning that the noteholder has direct exposure to the bank.

Direct CLN structures have come to dominate the CRT market, since they are the simplest and most cost-effective structure for issuing banks. Establishing an SPV involves high set-up and administrative costs, but under an SPV structure, CRT investors rank pari passu with unguaranteed depositors. Direct CLN investors, on the other hand, rank pari passu with unsecured debtholders.

However, it’s important to qualify that direct CLN notes are senior preferred debt. Matthew Moniot, co-head of credit risk sharing at the Man Group, explains: ‘’Structured notes, including synthetic securitisations issued under a CLN structure, rank as senior preferred debt equal to deposits and derivative collateral. Senior preferred bonds are not TLAC/MREL-eligible and, consequently, should be protected from a potential bail-in – unlike AT1 bonds, equity and other subordinated instruments.’’

Figure one: BRRD creditor hierarchy

Source: Scope Ratings

Total loss absorbing capacity (TLAC) is an international standard, finalised by the Financial Stability Board (FSB) in November 2015. The aim of the standard is to ensure that globally systemically important banks (G-SIBs) have enough equity and bail-in debt to pass losses to investors and minimize the risk of a government bailout. Instruments that count as TLAC need to be able to be written down or converted into equity to recapitalize the entity as it goes through resolution.

MREL, on the other hand, is more EU-specific and was conceived as part of the Union’s Bank Recovery and Resolution Directive (BRRD). The BRRD introduces a resolution framework with tools for dealing with failing banks, requiring them to produce recovery plans and granting supervisors sweeping powers to intervene when lenders are experiencing a period of stress.

MREL ensures that banks have sufficient capacity to absorb losses, so that they can fail safely, thereby reducing the need for a public sector recapitalisation. The requirement can be met through both equity and/or loss-absorbing debt.

The legal language around senior preferred versus senior non-preferred debt is more relevant in an EU context, with other jurisdictions - such as the UK - utilizing the OpCo/HoldCo structure. However, CLN notes in these juridictions would sit in the OpCo, which would in principle amount to the same type of seniority as senior preferred debt. Yet where the CLN note sits in a bank’s capital structure would also depend on jurisdictional differences and the idiosyncrasies of individual issuers and deals.

Moreover, regulators can occasionally leverage legal ambiguity, depending on circumstances. ‘’While the US FDIC can only insure deposits up to US$250,000, recent US banking turmoil demonstrated that the definition of a large, systemic bank can be flexed when needed,’’ remarks Moniot.

Yet this is why investors overall prefer to execute transactions with large, globally systemic banks, where loss-absorbing capital definitions are more specific and there’s an explicit understanding that regulators won’t allow such banks to unwind -as evidenced by the case of Credit Suisse - but will instead go through a controlled resolution. The BRRD in Europe, for example, would aim to reduce liabilities via equity and AT1 write-downs, although banks could still see their Tier 2 get wiped out.

Furthermore, smaller lenders don’t tend to trade in CDS, so investors can’t use that tool to hedge counterparty credit risk. Nevertheless, the track record of synthetic securitisations undertaken with smaller banks remains solid.

For instance, Banco Espirito Santo - which collapsed in 2014 - was restructured into its successor entity Novo Banco, but the lender’s capital relief trades continued to pay CDS premiums while in resolution and following its sale. The same is true for Banco Popular in 2016, after it was acquired by Santander, and more recently Getin Noble Bank (SCI 3 November 2022).

If there is no ‘event of default’ or liquidation of the bank and the CDS premiums continue to be paid, the credit protection persists. The difference with smaller, regional banks is that investors might prefer to deposit cash in third-party bank accounts.

For example, PacWest’s mortgage transaction - which was finalized last year - saw cash deposited in a Citi account. Yet this depends on each case, since smaller banks can alternatively simply post collateral in the form of high-quality securities.  

However, third-party accounts have their issues. Robert Bradbury, head of structured credit at Alvarez & Marsal, explains: ''Depositing cash in a third-party bank account increases the operational burden overall for the bank, given the additional lines of communication and parties involved with routine monitoring of defaults and associated cashflows. It also comes with the potential for higher RWAs associated with the account bank counterparty credit risk, which can be mitigated, but adds one more layer of structure.’’

Additionally, ‘’depositing cash in third-party bank accounts rarely happens, since originators don’t get funding. Small banks may be just required to post collateral in the form of high-quality securities, since it’s unlikely that investors would want to take senior unsecured risk for the life of the transaction,’’ says Olivier Renault, head of risk sharing at Pemberton.

Rating triggers are another alternative that has been discussed. According to one SRT investor: ‘’When you enter an SRT contract, there may be clauses to protect from counterparty credit risk, such as a requirement to move the cash deposit to another bank if the issuer’s rating falls below an identified threshold, and this must typically happen within 60 to 90 days. This used to be common prior to the 2008 financial crisis, but since then a lot has changed.”

The investor continues: “The issue here is that banks can jump to default prior to a ratings downgrade. Moreover, moving the collateral to another account isn’t straightforward and takes time.’’

Nevertheless, some investors do see value in rating triggers. ‘’Downgrade triggers are considered pointless by some SRT investors, but it helps you in a takeover scenario, such as UBS’s acquisition of Credit Suisse. During this scenario, the rating of the bank changes with a new rating that might fall below expectations. So, rating triggers preserve the rating quality of the collateral,’’ states James King, portfolio manager at M&G. 

Overall, whatever structural tweaks the sell-side and the buy-side end up agreeing, direct CLNs will likely remain the dominant CRT structure, given the lower costs of setting them up - although this is not certain for the US market. JPMorgan, for instance, is readying a synthetic securitisation that will likely be an SPV structure and US regulators seem to prefer them over direct CLNs (SCI 19 April).

US regulators put the CRT market on hold last year, given alleged concerns over direct CLN structures and the presence of call features. Consequently, JPMorgan’s transaction would be the first deal executed for capital relief purposes in over a year.

Questions though linger from a supervisory standpoint as to whether an 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.

Another important development going forward will be growing significant risk transfer issuance, given the challenges in the AT1 market following the wipe-out of Credit Suisse’s AT1 securities in March. Last year saw record issuance, with 87 transactions in total (SCI 30 March).

AT1s were believed to be senior to equity in bank capital structures, so the write-down of the CS AT1 bonds to zero while the equity holders received a payment came as a shock to many investors and caused substantial disruption in the AT1 market. Supervisors such as the ECB rushed to clarify the ranking of AT1 bonds after the event via public statements, but spreads are high and are likely to remain so for some time, according to a recent Seer Capital report.

Figure two: AT1 spreads March 2018-March 2023

Source: Seer Capital research

Looking ahead, the Seer report concludes: ''Total outstanding AT1 debt is more than US$250m, with many European banks having relied on the instruments for a meaningful portion of the capital they are required to hold. Inability to issue AT1s will leave banks with a meaningful capital shortfall, for which they will need to turn to reg cap, at least in part.’’

Stelios Papadopoulos

ABS

Fire sale

FDIC moving at faster pace than expected to sell off failed bank assets

The Federal Deposit Insurance Corporation (FDIC) yesterday (May 17) sold another $12.5bn of assets from failed Silicon Valley Bank and Signature Bank, which now means it has completed 27% of the $114bn it needs to get off its books.

It was a larger slab than the market had anticipated, but prices have held in with good demand seen from money managers, according to Mohib Karzai, head of agency MBS trading at JP Morgan on a webcast yesterday.

The new bonds were well absorbed, and, in a healthy sign for basis, maturities which had received the bulk of the new paper, did not immediately gap wider, he added.

The securities the FDIC needs to sell are chiefly agency MBS, agency CMBS, municipal bonds and CMOs. Some 37% of the total amount of agency MBS has now been sold back into the market without a significant widening of spreads.

Varied and widespread demand had been provided to the FDIC in response to reverse inquiry, which accounted for the bigger sale than expected. “The FDIC wanted to show as much as possible that it thought the market could absorb at once,” said Karzai. The sale this week thus represented an opportunity to buy some of the rarer assets on display, such as 20-year and 15-year securities.

It is thought, unlikely, however, that the FDIC will go out to the market with as much again. Yesterday’s sale is reckoned to be one of the biggest bid lists seen in the market for 20 years.

Nonetheless, the sale of securities from the failed banks is proceeding at a more rapid rate than most had anticipated. Even if the FDIC reverts to sales of $3bn/$4bn a time, it means that in about three weeks the programme, which began only six weeks ago, will be 50% done.

The market had been expecting the whole process to take between six and eight months.

“The pace at which they’re doing it is a long-term positive for basis because you don’t have to worry about the list dragging out day after day, trying find demand in late summer for $3bn or $4bn every week,” said Karzai.

Picking up SVB and Signature has cost the FDIC around $22bn, some of which it will recoup from the GSIBs and super-regional banks in increased fees. This, and the lack of the likelihood of Congressional agreement plus action, means a blanket FDIC guarantee of all deposits and not just those up to a ceiling of $250,000 is unlikely in the foreseeable future, said analyst Kabir Caprihan on the same webcast.

Simon Boughey

Structured Finance

SCI Start the Week - 15 May

A review of SCI's latest content

Call for submissions: SCI CRT Awards 2023
The submissions period is now open for the 2023 SCI CRT Awards, covering the global capital relief trades market and the US credit risk transfer market. Nominations should be received by 5 July and the winners will be announced at the London SCI Capital Relief Trades Seminar on 19 October. Pitches are invited for deals issued during the period 1 October 2022 to 30 June 2023.
For more information on the awards categories and submissions process, click here.

Last week's news and analysis
A European ecosystem
Continental solar ABS primed for growth
Best interests
Performance Trust's Institutional Group answers SCI's questions
Capital calls hedged
Standard Chartered CRT revealed
Meeting of worlds
Opportunities for ABS originators as private and syndicated debt markets converge
Risk transfer reboot
JP Morgan executes synthetic securitisation
Risk transfer return
Deutsche Bank engineers mid-market comeback
TD cancels CRT, say sources
Collapse of First Horizon merger cancels planned reg cap trade

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

Recent premium research to download
European solar ABS – May 2023
Continental solar ABS is primed for growth as governments and consumers seek energy independence. This Premium Content article investigates.

US CRT thaw – April 2023
The recent Merchants Bank of Indiana deal could herald a thaw in the US capital relief trades market, as this Premium Content article outlines.

CRT 2022 review – March 2023
CRT issuance volumes broke all-time records last year and the pipeline continues to build. The only potential blots on the horizon are the regulatory pause in the US and the fallout from the collapse of Credit Suisse and Silicon Valley Bank, as this Premium Content article suggests.

CLO ESG reporting – March 2023
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.

All of SCI’s premium content articles can be found here.

SCI In Conversation podcast
In the latest episode, Seth Painter, head of structured products at Antares Capital in New York, discusses the development the CLO middle market space and its importance to the funding of the direct lending business at Antares. While the traditional BSL market has been in the doldrums, the middle market space is on fire. 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 Australian/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 Ronald Adjekwei 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 9th Annual Capital Relief Trades Seminar
19 October 2023, London

Capital Relief Trades

Capital squeeze

Greater capital requirements for regionals highlights case for CRT

More stringent regulatory oversight of US banks is likely to make careful capital management even more relevant, consequently highlighting the virtues of the CRT market, suggest sources.

The recent bank crisis, which has seen the collapse of Silicon Valley Bank, Signature Bank and First Republic, has thrown the spotlight on the relatively light touch regulation and easier capital requirements that smaller regionals enjoy.

Although nothing has been decided, capital requirements for the regionals are likely to be made more burdensome in the near future.

According to reports, available-for-sale (AFS) unrealized losses could be included in regulatory capital calculations under new rules to be unveiled in the wake of the collapse of SVB, Signature Bank and First Republic.

Many banks have significant unrealized losses in their holdings of fixed income securities as interest rates have climbed higher. This was central to the failure of Silicon Valley Bank (SVB), which had invested its growing deposits in longer-term Treasuries and suffered vast unrealized losses throughout 2022 and 2023.

Longer term fixed income securities are most vulnerable to interest rate gains. At the end of 2021, the 10-year Treasury note had been yielding 1.52% but a year later it was yielding 3.88% and in the first week of March this year it was 4.08%. Prices had plummeted.

This asset/liability mismatch caused the demise of SVB, but the rise in rates has been painful for many banks – hence the suggestion that regional banks may be obliged to hold capital against AFS unrealized losses in the future.

If this goes forward, it would make use of devices like CRT which relieve capital pressure even more pertinent.

The major US banks are already required to recognize AFS unrealized losses in securities in their regulatory capital ratios – another example of the one rule for one but not for another system that governs US banking.

Another difference which may be subject to review in coming months is the exemption of banks with between $100bn and $250bn in assets from the supplementary leverage ratio. SVB had assets of $210bn, Signature Bank around $114bn and First Republic around $230bn.

Banks with assets of $250bn or less are also allowed to opt out of the impact on capital of accumulated other comprehensive income (AOCI) changes – another area of the balance sheet which has been adversely affected by interest rate rises.

There are five different categories of US regulatorycapital treatment, depending on asset size. These are the GSIBs, banks with assets of $700bn or less, banks with assets of $250bn or less, banks with assets of between $100bn and $250bn and firms with assets of between $50bn and $100bn.

“It’s a complete mess. The result is hardly surprising,” says an asset manager in New York.

Simon Boughey

Structured Finance

AG acquisition creates credit powerhouse

Sector developments and company hires

AG acquisition creates credit powerhouse
TPG is set to acquire Angelo Gordon in a cash and equity transaction valued at approximately US$2.7bn, based on TPG’s share price as of 12 May, including an estimated US$970m in cash and up to 62.5 million common units of the TPG Operating Group and restricted stock units of TPG. The transaction also includes an earnout based on Angelo Gordon’s future financial performance, valued at up to US$400m.

Angelo Gordon’s US$55bn credit platform offers scaled and diversified capabilities across the credit investing spectrum, including direct lending and structured credit, and its US$18bn real estate platform manages dedicated value-add real estate strategies with significant reach in the US, Europe and Asia. Similar to TPG, Angelo Gordon has delivered significant and sustained momentum and growth, doubling its AUM over the past five years.

TPG and Angelo Gordon had a combined AUM of US$208bn as of 31 December 2022. The addition of Angelo Gordon marks a significant expansion into credit investing for TPG, establishing additional levers to drive organic growth and further expanding the breadth, diversification and reach of the TPG platform.

Upon closing of the transaction, Angelo Gordon’s co-ceos Josh Baumgarten and Adam Schwartz will become co-managing partners of the platform, reporting to TPG ceo Jon Winkelried. The transaction is subject to customary closing conditions and is expected to close in 4Q23.

In other news…

BIG bags fifth B-piece
BIG Real Estate BP II, an entity wholly owned by Basis Investment Group, has acquired the B-piece in the BANK5 2023-5YR1 CMBS. Totaling US$1.025bn, the securitised pool comprises 24 newly originated five-year senior mortgage loans originated by Bank of America, Citi, Morgan Stanley and Wells Fargo. The loans are, in turn, collateralised by 134 office, retail, multifamily, hospitality and self-storage properties throughout the US.

BANK5 2023-5YR1 marks the second conduit CMBS consisting fully of five-year loans, reflecting the recent surge in borrower demand for shorter-term, fixed-rate debt in response to rising interest rates. Basis says it believes that the combination of pool metrics, collateral quality and yields make it a good time to invest in these positions.

The investment represents Basis’ fifth B-piece acquisition. The firm also opportunistically acquired the deal’s entire triple-B minus class and the majority of the triple-B class.

Basis has designated CWCapital as special servicer for the portfolio.

EIB, Santander ink energy efficiency deal
The EIB Group and Santander have signed a new synthetic securitisation to support the financing of energy efficiency investments in Portugal, including the construction of new nearly-zero-emissions buildings and the renovation of existing residential properties in line with sustainable standards. The transaction will facilitate new green and sustainable mortgages to individuals, as well as SMEs and midcap companies, to invest in building renovations or new construction with high energy-efficiency standards.

The agreement represents the first synthetic securitisation transaction of Santander with the EIB Group in Portugal. Under the transaction, the EIB Group will provide a €81m unfunded guarantee that will enable Santander to finance new energy efficiency investments for an amount equal to twice the size of the EIB Group guarantee. The individual projects benefitting from the new financing may reach an investment of up to €25m, with a maximum amount of funding of up to €12.5m, and a minimum term of two years.

The projects financed by this operation will contribute to the reduction of CO₂ emissions, deliver health benefits through improved air quality and contribute to climate change mitigation. The project supports the objectives of the European Performance of Buildings Directive (EPBD), the Energy Efficiency Directive (EED) and the Renewable Energy Directive (RED), as well as Portugal's National Energy and Climate Plan (NECP).

EMEA
ARC Ratings has appointed Alex Cataldo as deputy ceo, with key responsibilities including the continued growth of ARC’s rating business, as well as the accelerated delivery of ARC’s broader strategic objectives. Prior to joining ARC Ratings, Cataldo worked at Moody’s in both Milan and London, where he was most recently md, head of EMEA relationship management. During the past 20-plus years with Moody’s, he has undertaken several senior roles, across both analytical and commercial functions, including head of EMEA ABS ratings.

Goldman fined for misreporting RWAs
The ECB has imposed an administrative penalty of €6.63m on Goldman Sachs, after the bank reported incorrectly calculated risk-weighted assets for credit risk. In 2019, 2020 and 2021 - for eight consecutive quarters - Goldman reported lower RWAs for credit risk than it should have because the bank misclassified corporate exposures and applied a lower risk-weight to them than what banking rules prescribe. Furthermore, deficiencies in internal controls prevented it from detecting this mistake in a timely manner.

Structured Finance

CLO heavyweight to lead combined platform

Sector developments and company hires

CLO heavyweight to lead combined platform
Sound Point Capital Management has appointed Gunther Stein as head and cio of its US performing credit and CLO platform. The move follows Sound Point’s recently announced agreement to acquire Assured Investment Management, the institutional asset management business of Assured Guaranty that was formerly known as BlueMountain Capital Management (SCI 6 April).

Stein is a longtime investor and veteran portfolio manager who previously served as chairman, ceo and cio of Symphony Asset Management, which was bought in 2001 by Nuveen Investments, which itself was acquired in 2014 by TIAA. He will join Sound Point in June and his responsibilities will include overseeing the firm’s US CLO vertical, which encompasses 30 US CLOs and a long-only loan investing business. Under the transaction with Assured Guaranty, Sound Point will also assume the management of 32 active AssuredIM CLOs, comprising 25 US CLOs and seven European CLOs.

In his new role, Stein will jointly oversee the US CLO investment committee with Sound Point founder and ceo Stephen Ketchum and chief credit officer Tom Newberry. He is also expected to join the firm’s management committee.

Stein joined Symphony in 1999, having previously worked at Wells Fargo, First Interstate Bank, Standard Chartered Bank and Citi. He rose to ceo and cio at Symphony in 2009, growing the business from approximately US$7bn in AUM to US$19.5bn when he departed the firm at the end of 2018. Under his leadership, Symphony issued more than US$10bn of CLOs and related products.

At Symphony, Stein oversaw a broad slate of traditional and alternative strategies for both institutional and retail investors. In time, under his leadership, Sound Point expects to launch new initiatives in the performing credit space.

In other news…

EMEA
Addleshaw Goddard has hired Taymour Keen as a partner in its structured finance and securitisation practice, based in London. With specific expertise in structured real estate finance, he was previously counsel at Weil, Gotschal & Manges, which he joined in January 2016. Before that, Keen worked at Berwin Leighton Paisner and Trowers & Hamlins.

S&P has promoted md Cian Chandler to chief analytical officer for the global structured finance practice, based in London. He was previously head of EMEA structured finance, having joined the rating agency as associate director in July 2000.

FNMA closes fifth CIRT deal
Fannie Mae has transferred US$424.4m of mortgage risk through its fifth credit insurance deal of 2023, designated CIRT 2023-5. The GSE has visited the capital markets with three CAS CRT deals so far this year, the last at the end of April, so the pattern of making greater use of the reinsurance market than the debt markets - established in the last 18 months or so – continues.

The coverage in the latest CIRT transaction was written by 19 insurers and reinsurers, says Fannie Mae. The pool of mortgages includes around 53,000 loans – which were acquired between March and June 2022 - with an unpaid principal balance of US$18.1bn. It is a high LTV pool, with LTV ratios of between 81% and 97%.

Fannie Mae retains the first 135bp of loss, worth US$243.8m. If this retention layer is exhausted, the 19 reinsurers cover the next 235bp of loss to a maximum of US$424.4m.

North America
Satish Mansukhani has joined Rithm Capital as md in investment strategy. In this role, he will lead in-house research, strategic positioning and cover new emerging opportunities within Rithm’s investment portfolio and operating platforms. Mansukhani previously served as md, head of agency MBS research at Bank of America and worked at Credit Suisse and Bear Stearns before that.