News Analysis
Asset-Backed Finance
Democratising higher education
International student loan expansion targeted
MPower Financing, a provider of loans for international university students, is pursuing its first securitisation following the closing of a US$150m revolving asset-backed warehouse facility with Goldman Sachs. The business may look to expand its offering to include students attending universities and colleges outside North America, as it aims to corner a relatively underdeveloped niche in the student lending market.
MPower positions itself as a “mission-driven fintech firm” that is looking to “democratise access to higher education”. It has a particular focus on post-graduate students from developing economies, including India, Mexico, Brazil, west Africa and southeast Asia, who will typically be in gainful employment and looking to study STEM subjects in the US and Canada.
Ceo Manu Smadja co-founded MPower in 2014 alongside Mike Davis, who left the business two years ago and is now VilCap Investments md. Smadja refers to himself as an “accidental entrepreneur” and explains how his own experience as an international student was a key driver behind the fintech firm’s launch.
“I was firmly on the partner path at McKinsey & Company when I got an email from a student at my alma-mater who was about to drop out of school over US$500,” says Smadja. “That really shook me, because I had experienced a similar thing 15 years prior. I managed to stay in school and graduate by taking a series of odd-jobs and with help from my family, but it resonated with me that banks had done little or nothing to address the international student loan demand.”
Additionally, MPower provides financing for students with DACA (Deferred Action for Childhood Arrivals) status. DACA is a US policy that provides a work permit and protection from deportation to undocumented migrants who entered the country as children. Such students are required to pay out-of-state tuition fees.
Smadja says the system has historically meant that “bright minds” have been left behind and points to the fact that many of the world’s largest tech and tech-enabled brands - including Microsoft, Tesla and Google - are led by former international students. Historically, such students’ primary financing options have involved placing “financial burden” on families, he says. They have either had to rely on US- or Canada-based family members acting as guarantors or taking out loans in their home countries.
“In India, Brazil or Mexico, that typically means your parents need to put up their home as collateral and then they have to co-sign the loan,” says Smadja. “Assuming you have a home that is worthy enough of that collateral, you are placing a big burden on your family. To underwrite a loan of US$100,000, you are likely to need a home that is worth US$500,000. In a lot of countries, that is a very big home, to say the least.”
The company’s belief is that - alongside the stable financial performance of its loans - this makes it an intriguing prospect for investors seeking to flesh out the ESG credentials of their securitisation portfolios.
Though its latest agreement with Goldman Sachs should bring about its first securitisation, it is by no means MPower’s first warehouse. Indeed, Smadja explains that between 2017 and 2021, the firm raised “ever-bigger warehouse lines” as it scaled. After its first US$100m line with impact investor Community Investment Management (CIM) in 2017, it began developing a relationship with Goldman Sachs towards the end of 2018 and early 2019.
“By that point, we had enough data to show that we were institutional calibre,” says Smadja. “We had our first five years’ worth of repayment data. We’ve been very different from some tech companies, where the unit economics are unclear or they’re going at it as a loss leader, hoping to make it up later. In our case, we had very solid unit economics.”
He continues: “We were a little new in that we were going in for a blue ocean strategy. There was nobody in our market, and that was both the opportunity and a hurdle.”
MPower ultimately secured its first US$100m warehouse facility with Goldman Sachs in 2019. While the business maintained its facility with CIM, it pivoted away from warehouse deals in 2021 after securing around US$150m of equity investment. It opted to wind down its Goldman Sachs facility and placed a large portion of its loans on its balance sheet.
However, as it has continued to grow and mature, MPower has begun exploring ways of building out what Smadja refers to as its “capital markets toolkit”, with securitisation featuring heavily. To this end, last year it hired Rob Partlow as cfo from fintech company GreenSky and Christopher Zaki from Above Lending as head of capital markets.
“We take a lot of inspiration from other companies, such as SoFi and Oportun, that have paved the way as marketplace lenders or neo-banks in different segments,” says Smadja. “Both have shown that, as you scale, you get progressively bigger warehouses, but you start doing securitisations, whole-loan sales and so on.”
He adds: “As we originate several hundred millions of dollars a year, as we help 10,000 students this year, building out that toolkit becomes more important. We are starting to get to a scale where economically a securitisation makes sense and where we become attractive to insurance companies and pension funds.”
From an investor’s point of view, Smadja says MPower’s loans have a strong countercyclical profile that should prove particularly attractive in uncertain economic times. He says this was borne out by the performance of its loan book during the Covid-19 pandemic and also points to data showing that enrollment in graduate programmes increases during economic slowdowns.
“There is also a lack of correlation between recession times and unemployment rates for computer scientists or folks in STEM disciplines,” says Smadja. “Despite all the headlines about big tech shedding jobs on the west coast, if you look at computer science, unemployment rates are still at 2% in the US. We're essentially short of people in that space.”
Another key selling point for MPower is that the firm has repeatedly secured the backing of Goldman Sachs, an institution that Smadja says places extreme scrutiny on underwriting processes, compliance and downside risk. This, he says, serves as both a validation of the firm’s underwriting and the maturity of its business model.
“We lend at a higher rate, certainly than domestic student loans from the federal government, but even typical private student loans from the market,” says Smadja. “And then we have lower defaults, even than best-in-class ABS pools of private student loans.”
Underpinning it all, is that - as well as being a provider of loans - MPower views itself as a data company. “We have massively more data on these students than any other company on the planet,” Smadja says. “We get credit data, education data, employment data, financial data, data on how they are paying for their degree and so on.”
MPower has set its sights on exponential growth in the coming years. In addition to building out its institutional investor base, the firm is eyeing expansion beyond the US and Canadian college systems, though it has no formal plans to do so imminently.
“If you look at big international student hubs, the next logical markets are the UK and Australia,” says Smadja. “You put the UK, Australia, US and Canada together, and you have close to 70% or 75% of the global international student market - and a larger percentage in terms of tuition dollars. You are also looking at a really strong set of universities.”
As MPower looks to forge its status as a kingpin in the international student lending space, it hopes to attract the support of prominent institutional investors. The firm is betting on its ESG positioning, portfolio performance and relationship with Goldman Sachs to help it achieve that goal.
Kenny Wastell
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News Analysis
CLOs
Proactive participation
CLO manager differentiation eyed
M&A activity, tiering and the paucity of new collateral are all potential headwinds for CLO managers, especially for smaller players and new entrants. Against this backdrop, proactive CLO management is an increasing differentiator.
Current CLO market conditions could provide early-mover advantages for active managers, as failure to sell out of problematic credits in a timely manner could result in underperformance. “Historically, CLOs have been a passively managed asset class. But investors are looking for better yields and to get better returns out of their investments by proactively managing the CLO structures,” explains Michael Pusateri, ceo of Siepe.
He continues: “40%-50% of CLOs are going past their reinvestment period in 2023-2024. Managing CLOs during the post reinvestment period requires a lot more complexity to manage non-scheduled paydowns and credit impairment sales to meet compliance constraints. For those managers, the path to least resistance is to pay down the bonds, which doesn’t align with their investors’ expectations.”
Nikunj Gupta, former head of European CLO new issue at Deutsche Bank, notes that a lot of larger players do proactively manage their CLOs and that relative value is something that people look at, irrespective of whether they’re smaller or larger managers. “Relative value and proactive trading are going to become really important in this market. The buy-and-hold mindset held by bank asset managers in the GFC didn’t perform well then and I don’t expect it to perform well through another recession either.”
Larger players like Blackstone are likely to be able to exit positions more easily than smaller players, due to strong, long-standing relationships within the market. On the other hand, smaller players may benefit from having fewer CLOs to potentially need to trade out of.
“I think for the larger managers with 30 or 40 CLOs, they are going to have the opposite problem – they will have too many to actively manage, so the question is how do you put the technology in place to help there?” asks Pusateri.
Nevertheless, manager consolidation means that the future of smaller CLO managers and even those looking to enter the market is not certain. “There’s a reason why consolidation happens,” explains Gupta, “and one of the potential reasons could be that the market has become overcrowded – it is a natural process.”
At present, the advantage lies with buyers, as current conditions mean that those being acquired are unlikely to receive high valuations – although they may not have a choice, if they are struggling to issue or to break even. Acquisition is an attractive option for businesses seeking to enter the CLO market over establishing a new CLO business, which can take considerable time (SCI 24 April). The kick-start offered by acquiring is dependent on finding a good fit, as the market continues to undertake a shared-philosophy-centred approach to merging (SCI 9 May).
CLO M&A activity has long been gathering pace in the US and Europe is now following suit, as firms seek out new opportunities for growth. “If you consider that the US market is five times the size of the European market by volume, Europe has almost 50% of the number of active managers as the US – which just doesn’t seem right,” understands Gupta.
Consolidation is also impacting spread premiums, as the gap widens between the top and bottom tiers of CLO managers. “Before the pandemic, in 2019 and early 2020, you would argue whether the top tier premium should be two, three or four basis points and now we are looking at up to 30bp for the triple-As,” explains Gupta. “I think this will continue, because we will see more performance dispersion as we see more defaults happen - and those trading their portfolios more proactively and getting out of problem situations early are likely to outperform.”
Tiering itself may not scare small players away, as proven by the recent debut European CLOs issued by M&G Investment Management and Signal Capital (SCI CLO Markets Daily - 19 May 2023). However, the market has become more complex for newer participants in other ways.
“Five years ago, you could set up a new platform with very little capital invested in your own equity. Today, that is not an option – you need to have your own capital to take equity in at least 2-3 deals, otherwise you just don’t print,” states Gupta. “That is true across the market, for both small and big players, because there is limited to no third-party equity demand.”
The legal aspects of risk retention may also slow M&A processes down, while third-party risk retention providers add a further layer of complexity. “Risk retention provisions make it a lot more difficult for M&A activity to happen, as you don’t only have to figure out if the valuation is right, but you also have to potentially buy the risk retention positions,” confirms Gupta. “Anything that prevents market participants, or the market, from consolidating is not necessarily a good thing – including regulation.”
Going forward, issuance is likely to lag behind that seen before the pandemic when volumes were high across the primary leveraged loan market, providing a solid supply of assets for CLOs. “Sound Point has done an excellent job in terms of issuing a large number of CLOs in a short span of time, as has Palmer Square. But I think that kind of pace of issuance for new entrants isn’t likely,” concludes Gupta.
Claudia Lewis
|
CLO optimisation
Digitisation has taken off in the CLO space more so than in other securitised asset classes, as innovators seek to address market inefficiencies (SCI 1 March). Technology can also aid CLO managers in moving towards a more proactive management style.
“A lot of the space is focused on optimisation, but optimisation doesn’t necessarily address the issue of what is in the market to trade. So, we are combining that to create a different approach to the optimisation of the CLO, which includes more real-time optimisation and feedback on the portfolio as liquidity comes in,” considers Michael Pusateri, ceo of Siepe.
Traditionally, bank debt market systems have been closed systems that do not allow interoperability. However, with the recent launches of Octaura, Versana and Coefficent Markets, strides are being made in introducing integration and new approaches seeking to resolve some of the issues within the bank debt market.
“There is optimism in the space right now that there is going to be change, but just how wide that change is going to be is yet to be seen,” states Pusateri. “We are in new territory, where technology is being implemented to shift CLO management from being passive to proactive.”
Additionally, efforts to improve transparency in CLO reporting in the US may see greater reliance on firms like Siepe from CLO managers, as the need for technological support increases. “Once the ESMA reporting, ESG reporting and SEC reporting starts, it’s going to make it a lot harder – and managers are going to have to rely much more on people like us to do this reporting for them,” Pusateri argues. |
News Analysis
Capital Relief Trades
Ramping up
SRT returns likely to remain high as supply grows
Capital relief trade issuance for the first four months of this year has now surpassed deal count for the same period last year, which proved to be an annual record with 87 transactions overall according to SCI data. Meanwhile, 33 deals are in the pipeline which will continue to grow as 2H23 draws near. However, market participants note that fund capacity might be more limited since capital raising has been more challenging. Moreover, as more investors enter the space-including the more opportunistic private equity players-questions around the relative value of synthetic ABS versus comparable instruments have been raised.
Olivier Renault, head of risk sharing at Pemberton notes: ‘’We believe returns in the SRT market are likely to remain high going forward since supply is growing and it’s still a low default environment. On the demand side, there are more investors, but capital raising has been more challenging for credit funds in the past year, so investor capacity may be more limited in the near future. Despite what we think will be sustained high spreads for SRTs, these transactions still make sense for banks. The cost of their alternative sources of capital such as AT1 and equity has gone up materially on the back of the Credit Suisse and US bank crisis.’’
Equally optimistic, Matthew Moniot, co-head of credit risk sharing at the Man group states: ‘’We think investors can embed relatively high absolute premia to relatively high risk-free rates and take the risk on relatively low risk portfolio exposure. The combination of higher interest and lower risk and the ability to lock up that trade so that ‘beta’ is released over a long period – as opposed to all at once when the market rallies – produces very high relative five-year return expectations. To quantify, using sell-side expectations for credit losses over the forward five-year term, a typical SRT should generate credit loss equivalent to around 5-10% of risk premia. This suggests five-year MOIC returns of approximately 2.0x on very low volatility and no incremental leverage. We think very few investments offer that combination of absolute return, risk-adjusted return, and cash flow certainty.’’
New investors have been asking questions about the relative value of SRTs versus comparable instruments. One comparable instrument that gets mentioned often is CLO equity and some on the buyside use it as a benchmark for pricing. However, other investors take a different approach.
Renault explains: ‘’CLO equity isn’t comparable to SRTs since it doesn’t pay a specified coupon and has much higher upside but also downside compared to synthetic risk transfer. Moreover, there are usually ratings and other triggers in CLO equity which can shut down the coupons even if there are no losses, but this is not the case with SRTs. Double-B CLOs would be a better comparison. It’s junior securitised credit with a defined coupon and resilient historical performance so more in line with SRTs.’’
Unlike CLOs, synthetic securitisations typically have only a single unrated tranche issued to investors, with the rest of the portfolio retained by the sponsor. Hence, without the issuance of a senior tranche, synthetic ABS trades are not structured to protect ratings and so the SRT tranche is never exposed to cash-flow diversion or rapid senior amortisation. Regarding CLO equity more particularly, the difference with SRT tranches can be perhaps glimpsed from the internal rates of return (IRRs). Man group research shows that CLO equity IRRs have oscillated around 10-20% over the past two decades with returns sensitive to cumulative default rates, the timing of default rates and recoveries. SRT returns on the other hand according to the same research have tended to cluster around 8-12% over the past decade.
Renault concludes: ‘’Bank subordinated debt such as AT1 bonds are also a potential comparable but they are very different in nature. Specifically, SRTs do not form part of the bank’s capital structure and are therefore not subject to bank bail-in as is the case with AT1s. SRT performance has been very strong historically and according to our research they have outperformed bank subordinated debt and BB CLOs in terms of both total and risk-adjusted returns. Another advantage of SRTs is that they have less marked to market volatility given that it’s a private instrument mostly held by hold-to-maturity investors.’’
Stelios Papadopoulos
News
ABS
SCI In Conversation podcast: Alon Lifshitz, Vesttoo
We discuss the hottest topics in securitisation today...
In this episode of the SCI In Conversation podcast, Vesttoo co-founder and chief financial engineer Alon Lifshitz outlines how the insurance-linked securities landscape is evolving from catastrophe bonds to a wider range of structures, bringing insurance risk directly to the capital markets. He also discusses ILS modelling approaches, the involvement of rating agencies in the insurance risk transfer space and a new index project that is underway.
Additionally, we highlight a couple of recent Premium Content articles published by SCI. The first piece suggests that the US capital relief trades market is set for a thaw, following the Merchants Bank issuance at the end of March. The other piece looks at prospects for the European solar ABS market, after renewable energy firm Enpal announced a €356m warehousing facility to finance more than 12,500 photovoltaic systems in Germany.
The episode can be accessed here, as well as wherever you usually get your podcasts, including Apple Podcasts and Spotify (just search for ‘SCI In Conversation’).
News
Structured Finance
SCI Start the Week - 22 May
A review of SCI's latest content
Last week's news and analysis
Capital squeeze
Greater capital requirements for regionals highlights case for CRT
Fire sale
FDIC moving at faster pace than expected to sell off failed bank assets
Holding steady
CRT structures unscathed amid bank volatility
International affair
Opportunity for foreign investors in Chinese ABS?
The social struggle
More data needed to tackle 'socialwashing'
Unfinished business
ESMA review offers opportunity to increase ABS transparency
For all of last week’s stories including ‘Market moves’ and ‘Risk transfer round-up’ click here.
Recent premium research to download
CRT counterparty risk – May 2023
Recent banking instability is unlikely to result in contractual changes in synthetic securitisations, but structural divergences are emerging. This Premium Content article investigates further.
‘Socialwashing’ concerns – May 2023
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.
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.
All of SCI’s premium content articles can be found here.
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.
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
News
Structured Finance
Estimating exposures
Italian real estate climate risks gauged
Geographic diversification may be the only saving grace for Italian RMBS and CMBS transactions as the physical impacts of climate change infringe on properties across the country. With temperatures set to breach the 1.5 degree limit within the next five years, considering European real estate exposure to flooding and landslide risk is becoming ever more urgent.
New research from Moody’s shows that the exposure of properties in Italy to flooding and landslide risk is significant in just eight provinces. However, as a result of decent diversification across Italy’s 107 total provinces, RMBS and CMBS exposures are at present considered to be limited.
Overall, Italian RMBS faces greater exposure to both flooding and landslide risks, as the eight provinces with significant risk to each account for 8.6% and 3% of RMBS collateral respectively. The eight provinces with significant flooding risk account for 4.7% of total CMBS collateral, while the seven provinces with significant landslide risk account for just 1.7% of CMBS collateral.
The regions with the greatest exposure to RMBS collateral (10%-12%) include those home to two of its largest cities - Rome and Milan. The risk of flooding in Italy is particularly concentrated within its northern territory, meaning a higher risk in the province of Milano - although just 5%-10% of the province’s land is in fact understood to be at risk of flooding.
Milano is again one of the regions with the highest exposure to Italy’s total CMBS collateral value, alongside Bergamo and Firenze, with exposure recorded between 8% and 18%. However, much like Milano, none of these provinces have more than 10% of their land exposed to the risk of flooding.
The Firenze region is also the region with the highest exposure of CMBS total collateral value to landslide risk. However, with just 2%-4% of the province’s population at risk of landslide, it is far less exposed than the number of provinces understood to have 8%-16% of its population exposed to landslides.
In terms of geographic diversification, RMBS and CMBS exposure to total collateral value does not go above 12% and 18% respectively for any one province.
Claudia Lewis
News
Capital Relief Trades
French SME boost
BNP Paribas executes financial guarantee
BNP Paribas and the EIB group have executed a €120m mezzanine guarantee that references a €1.6bn portfolio of French SMEs. The STS SRT is expected to generate new SME financing with a share of it dedicated to green loans.
The financial guarantee enables BNP Paribas to free up part of the regulatory capital allocated to the portfolio, and to deploy €475m in new loans to SMEs and mid-caps in France over the next two years. The new financing operations may take the form of bank loans or leasing transactions. The significant risk transfer trade is BNP Paribas’s third such trade with the European Investment Fund since 2017.
The contract of the guarantee is governed under Luxembourg law which has become a staple of EIF transactions since the execution of the first such EIF deal in 2020 (SCI 18 December 2020). Besides the fact that Luxembourg law is legally closer to English contract law-which is the defining legal regime for synthetic risk transfer trades-it can guarantee higher levels of recategorizations from financial guarantees to insurance contracts. The latter is especially important for the EIF since the fund can only execute financial guarantees. Recategorizations can occur following independent reviews from auditors and accountants.
Meanwhile, BNP Paribas is expected to close another synthetic securitisation with private investors in 2Q23 and is arranging two other capital relief trades that are expected to be finalized in 2H23.
Stelios Papadopoulos
News
Capital Relief Trades
Risk transfer round up-24 May
CRT sector developments and deal news
Sabadell is believed to be readying a synthetic securitisation of corporate loans that is expected to close in 2H23. The Spanish bank’s last capital relief trade closed last year with Glennmont and Newmarket and referenced project finance assets (see SCI’s capital relief trades database).
Stelios Papadopoulos
Market Moves
Structured Finance
Debutant bank plots 'social CLOs'
Sector developments and company hires
Debutant bank plots ‘social CLOs’
A first-of-its-kind investment bank has launched with the goal of driving institutional capital to small businesses and non-profits in the US, positioning ‘social impact’ as a fully investable asset class for institutional investors. Momentus Securities - a New York-based registered broker-dealer and FINRA member - seeks to address the current scale and liquidity limitations in the mission-driven investing space that inhibit the deployment of institutional capital.
Indeed, the firm intends to facilitate the deployment of US$3bn of social capital by 2026 through issuing what it describes as ‘social CLOs’. Initially, it plans to open warehousing lines to aggregate portfolios of loans across five key segments - affordable housing, healthcare, education, small businesses and food. Once ramped up, the portfolios will be securitised and Momentus will distribute the bonds as a takeout.
The firm is led by president and ceo Alicia Reyes, who has 27 years of experience in investment banking and private equity, most recently as head of EMEA at Wells Fargo. Momentus offers services ranging from structuring and distribution on the public side to debt capital markets and advisory on the private side.
The launch of Momentus Securities is supported with grant funding to Capital Impact Partners from the FB Heron Foundation, Citi Foundation, the Robert Wood Johnson Foundation (RWJF) and MacKenzie Scott, as well as support from The Rockefeller Foundation through a sub-contracting relationship. Momentus Securities and Capital Impact Partners are part of the Momentus Capital-branded family of organisations.
In other news…
APAC
ING has promoted Jordan Batchelor to md, head of global balance sheet distribution for Asia Pacific, responsible for asset-backed lending and capital management solutions. Based in Singapore, he was previously a director within global securitisation at the bank, which he joined in January 2020. Prior to that, Batchelor was a Sydney-based director within structured capital markets at ANZ, where he worked for over 10 years.
EMEA
Europa Investimenti, advisor to the Arrow Credit Opportunities (ACO) I and ACO II investment funds, has appointed Roberto Rondelli as head of going concern strategies, Italy. After the establishment of the Europa Investimenti real estate division in 2022 with the appointment of Donato Piscuoglio as head of real estate Italy, the firm continues to expand operations into the special situations and unlikely-to-pay (UTP) single name markets.
Rondelli will be responsible for growing the going concern division, enabling the group to support companies struggling from a financial and operational point of view, but which have viable and sustainable business models. He has deep expertise in this sector, as well as in special situations investments, private equity and turnaround situations. After starting his career at international banks and advisory firms in London and in Milan, he joined KKR in 2015, where he contributed to the creation and success of Pillarstone.
Global
Allen & Overy and Shearman & Sterling have announced a planned merger to create a global law firm named Allen Overy Shearman Sterling (A&O Shearman), becoming the only global firm with US law, English law and local law capabilities in equal measure. The merger is driven by clients’ needs for a seamless global offering to support them in navigating an increasingly complex legal, regulatory and geopolitical environment.
Through the merger Shearman & Sterling will gain access to a dramatically expanded ‘rest of the world’ offering across practice areas, while Allen & Overy will benefit from increased board-level recognition and expanded access to a corporate client base in the US. The combined firm will be positioned to capitalise on global macro trends, including energy transition, technology and private capital.
Together A&O Shearman will have circa 3,900 lawyers and 800 partners across 49 offices. The two firms have 250 years of combined experience.
The proposed merger is subject to customary closing conditions, including a vote of the partners of each firm.
North America
Marathon Asset Management has promoted Ed Cong, who joined the firm 17 years ago, to partner. He will continue to serve as senior portfolio manager for the firm’s structured credit and asset-based lending businesses and is a member of its executive committee and investment committee.
Proptech firms to combine
Real estate capital markets platform Setpoint has acquired Resolute Diligence Solutions, bringing together two of the fastest growing tech firms in the asset-backed lending ecosystem. Resolute is a due diligence provider focused on single-family rental and residential transition loans.
Founded by Brent Taggart and Richard Lundbeck, Resolute’s transaction services and customer service will continue to be a mainstay of the combined Setpoint and Resolute offering. Setpoint says its fast, accurate infrastructure allows credit to be more widely available and the underlying assets to be more liquid, thereby driving down costs for lenders and borrowers.
The firm’s offerings include third-party verification, calculation and paying agent, portfolio manager, collateral manager and valuations manager services.
Market Moves
Structured Finance
Indian MSE ABS fund debuts
Sector developments and company hires
Indian MSE ABS fund debuts
Vivriti Asset Management has launched Vivriti India Retail Asset Fund (VIRAF), a first-of-a-kind ABS fund in India. The fund aims to strengthen the country’s securitisation market and address gender gaps in formal finance, while expanding additional financing for micro and small enterprises (MSEs).
The IFC has invested US$30m in VIRAF, which is backed by a capital commitment of US$75m from M&G Catalyst, a global private assets strategy within M&G Investment. The fund will focus on scaling investment in securitised debt securities with MSE-backed assets - predominantly microloans to MSEs - which will constitute about 90% of the portfolio.
VIRAF has a fund term of 10 years and a target AUM of US$250m.
India's 63 million micro, small and medium enterprises (MSMEs) contribute up to 30% of GDP, generating over 40% of exports and creating employment for over 100 million people. Yet, an IFC study estimates the MSME finance gap in India is US$342bn, with MSEs accounting for 95% of that gap. IFC's investment will help financial institutions offload existing MSME loans while unlocking capital to support MSME growth.
Further, the financing gap for women-owned MSMEs is estimated at US$158bn, equivalent to about 49% of the total MSME finance gap in India. Addressing this challenge, the project is designed to cater to the needs of WMSEs, with at least 45% of the fund's proceeds earmarked for them.
In other news…
EMEA
Paul Wilden has joined NPL Markets as senior advisor, as the firm shifts to the next level of its development and embraces new opportunities in the performing and non-performing loan markets. Wilden’s global capital markets career spans approximately 30 years across the APAC and EMEA regions. He was most recently global head of capital markets at Apex Group, which he joined in January 2020, having previously worked at TMF Group, Standard Chartered, BNY Mellon, Barclays and Citi.
RenRe to acquire Validus Reinsurance
RenaissanceRe has entered into a definitive agreement with AIG, whereby RenaissanceRe will acquire AIG’s treaty reinsurance business, including Validus Reinsurance and its consolidated subsidiaries, AlphaCat Managers and its managed ILS funds, and all renewal rights to the Assumed Reinsurance Treaty Unit of Talbot (Validus Re). AIG has committed to deliver at closing US$2.1bn in unlevered shareholder’s equity to RenaissanceRe, with any excess to be retained by AIG. RenaissanceRe will pay approximately US$2.985bn in total consideration, including US$2.735bn of cash and US$250m of RenaissanceRe common shares.
As part of the transaction, AIG will retain 95% of the development on net reserves at closing. In addition, following the closing of the transaction, AIG expects to make substantial investments in RenaissanceRe’s Capital Partners business.
The agreement has been approved by RenaissanceRe’s board of directors. The transaction is expected to close in 4Q23 and is subject to customary closing conditions and regulatory approvals.
Market Moves
Structured Finance
USAUT noteholders bag successor servicer
Sector developments and company hires
USAUT noteholders bag successor servicer
KBRA reports that it has received an omnibus amendment, assignment, assumption and consent agreement on each outstanding US Auto Funding Trust (USAUT) securitisation specifying that Westlake Portfolio Management (WPM) has been assigned as successor servicer and the servicing fee has increased to 4.10%, from 3.75%. WPM has assumed the duties and obligations of the servicer, USASF Servicing, a wholly owned subsidiary of USASF Holdco.
This assignment and change to the servicing fee were permitted through amendments to the sale and servicing agreements, following the consent of the majority noteholders and majority certificateholders. In addition, the agreements amended the administration agreements to allow for the majority noteholders to remove the administrator and/or grantor trust trustee without cause.
US Auto Finance currently remains the administrator, Wilmington Trust remains the grantor trust trustee for USAUT 2020-1 and USAUT 2021-1 and BNY Mellon for USAUT 2022-1.
KBRA downgraded the ratings on six classes of notes and maintained the watch downgrade status on all notes across three USAUT transactions, which were already on watch downgrade due to deteriorating performance, a reporting error resulting in cumulative gross and cumulative net losses being understated for six months, and a potential EOD and service replacement event. To date, an EOD has not occurred.
According to the May 2023 distribution reports, there were 27,819 receivables with an outstanding principal balance of approximately US$403.6m across the three USAUT deals.
In other news…
EMEA
Gallagher Re has recruited Jin Shah as international head of ILS sales and distribution, based in London. He was previously client director, ILS and banking at RMS, which he joined in October 2004.
North America
Brightwood Capital Advisors has appointed Eric Pratt as chief credit officer. In this role, Pratt will oversee Brightwood's existing portfolio, as well as play an important role in the firm's analysis of new investments. He brings more than 20 years of experience in credit and risk management to the team.
Pratt has an established record of establishing risk governance frameworks, structuring transactions with middle market and large-cap clients and regulatory engagement. Most recently, he served as md, global head of corporate and investment banking credit portfolio management at Wells Fargo, where he established a new credit portfolio function to enhance loan portfolio management and risk control capabilities. Before that, he held various senior leadership positions at Mizuho, Deutsche Bank (including senior credit officer for leveraged and structured finance credit), JPMorgan and Procter & Gamble.
Market Moves
Structured Finance
ESG impact disclosure RTS inked
Sector developments and company hires
ESG impact disclosure RTS inked
The three European Supervisory Authorities (ESAs) have jointly submitted to the European Commission draft RTS on ESG impact disclosures for STS securitisations under the Securitisation Regulation (SECR). The amended SECR introduced new optional disclosure provisions related to the principal adverse impacts (PAIs) on sustainability factors of the assets financed by the underlying exposures for both non-ABCP traditional STS securitisations and on-balance sheet STS securitisations.
Importantly, the draft RTS are not intended to create a framework for ‘sustainable securitisation’. Rather, the technical standards aim to be consistent with those developed under the SFDR - which distinguish between the publication of available information on mandatory indicators (for example, energy efficiency) and on additional indicators (for example, emissions), whereby originators may select at least one social or governance and at least one environmental indicator.
The key proposals included in the technical standards specify ESG disclosures applying to STS securitisations where the underlying exposures are residential loans and auto loans and leases. The European Commission is expected to endorse the RTS within three months of their publication.
In other news…
Apollo builds venture finance platform
Cadma Capital Partners has named Jon Beizer and Josh Brody as its ceo and president respectively. Recently established by Apollo-affiliated entities, Cadma provides asset-backed financing to venture- and growth-lenders, high-growth companies and financial sponsors.
Beizer and Brody both join Cadma from Western Technology Investment, where they were investment partners. As ceo and president, they will be responsible for the continued build-out of the Cadma franchise. By lending against assets and contracted cashflows, and in consultation with other Apollo-related platforms - including ATLAS SP, Redding Ridge and MidCap - Cadma can help its clients access cost-effective capital while providing investors with downside protected opportunities.
Cadma is headquartered in New York, with professionals in New York and San Francisco. The firm expects to continue building out its team commensurate with its growth plans.
ArrowMark closes fourth reg cap fund
ArrowMark Partners has announced the close of its fourth dedicated regulatory capital relief fund vintage, Global Opportunity Fund IV, raising US$1.1bn of capital commitments in the commingled fund and related fund-of-one vehicles from a diverse range of investors. In line with the prior vintages, Fund IV seeks to generate income-driven returns by investing in a diversified portfolio of regulatory capital relief securities. As one of the largest and longest-tenured investors in the asset class, ArrowMark has invested in 89 distinct regulatory capital relief transactions, representing approximately US$6.5bn of original par amount over the last 13 years.
EMEA
Jason O’Brien has been named md, head of EMEA at ATLAS SP Partners, following Apollo’s acquisition of Credit Suisse’s securitised products group and its subsequent rebranding (SCI 9 February). O’Brien was formerly md, head of European origination and syndication - SP finance at Credit Suisse, which he joined in July 2011 as head of European securitised product sales. Before that, he worked at Jefferies, RBS and Barclays.
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