Contents

Capital Relief Trades

Risk transfer round up-31 May

CRT sector developments and deal news

Santander is believed to be the latest bank readying a synthetic securitisation of capital call facilities following transactions from JPMorgan and Standard Chartered (SCI 12 May). The transaction is expected to close in 2H23.

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round up-1 June

CRT sector developments and deal news

Eurobank is believed to be readying a synthetic securitisation that is expected to close in 2H23. The Greek lender’s last capital relief trade was finalized in December last year and referenced shipping exposures (see SCI’s capital relief trades database). Meanwhile, Alpha bank is allegedly prepping a capital relief trade of shipping loans.    

Stelios Papadopoulos

Capital Relief Trades

Counterparty risk hedged

Further details on JPM CRT revealed

SCI can reveal further details of JPMorgan’s recently executed synthetic securitisation of capital call facilities with Blackstone (SCI 12 May). The transaction was allegedly initially executed between Western Alliance and Blackstone before it was moved over to JPMorgan amid the US regional banking crisis.

According to sources, the trade is believed to have been initially executed between Western Alliance and Blackstone but as the US regional banking crisis gathered steam, Blackstone requested the transfer of the exposures to JPMorgan to address the counterparty credit risk.

The move is another concrete indication of the confidence that investors place in the large globally systemic banks and falls very much in line with a multi-year trend in the synthetic risk transfer market with the bulk of capital relief trades being executed with these large banks. In the US context, the ‘’large’’ institutions would be those with assets over US$250bn.

Western Alliance issued its first synthetic ABS in September 2021, securitizing mortgage warehouse loans, then another on direct mortgage exposures in December 2021, before executing another on mortgage assets and one on capital call facilities in the summer of 2022.

Direct CLN structures were the preference of choice for the bank, and they are tied to the rating of the issuer, so any changes in their rating can potentially affect the rating of the CLNs. However, this doesn’t reflect changes in the credit quality of the underlying exposures. KBRA started taking rating actions on the Western Alliance CRTs back in March (SCI 22 March).

The now JPMorgan transaction is being reformatted into a different structure with the bank said to be locked between an SPV, guarantee or CDS structure with direct CLNs remaining off the table. Meanwhile, the US lender is said to be working on a synthetic ABS of corporate loans, but US regulatory uncertainty still persists after US supervisors brought the market to a halt last year given concerns over the direct CLN structure and call features. Nevertheless, several sources believe that SPV structures are the way forward and a new rumoured consultation on the revision of Regulation Q to be allegedly published this month could yet shed further light for US originators.

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round up-30 May

CRT sector developments and deal news

JPMorgan is believed to be readying a synthetic securitisation of corporate loans that is expected to close in 2H23. This would follow the US lender’s recently executed capital call CRT (SCI 12 May). The latter 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.

Stelios Papadopoulos

Capital Relief Trades

UK SME boost

British Business Bank boosts small business financing

The British Business Bank has agreed an initial £75m guarantee transaction with Cynergy Bank through its ENABLE programme. The guarantee will cover a portfolio of SME term loans secured by commercial real estate (CRE) in sectors such as hotels and care homes. It has the potential to be increased to £150m, resulting in up to £70m of additional lending capacity to UK SMEs

According to Michael Strevens, head of structured guarantees at the British Business Bank: “Unlike traditional SRT transactions where banks sell the junior and retain the senior risk, we offer second loss protection, with banks retaining the junior tranche. Given that we provide an unfunded government guarantee, we can detach up to 100%. This allows the bank purchasing credit protection to hold RWAs against the government risk on the portion guaranteed.’’

He continues: “If it either deducts the retained junior tranche from capital or holds RWAs at 1250% against it, an added benefit of this structure is that there’s no requirement to demonstrate significant risk transfer to gain the RWA benefit, although we expect banks will at least notify the regulator that they intend to do so. This is helpful for the smaller standardized banks, given that their lack of IRB models makes it difficult to do traditional SRT structures.”

The ENABLE Guarantee programme is designed to encourage banks and other lenders to increase their lending to smaller businesses by reducing the amount of capital or junior funding required for such lending. Under an ENABLE Guarantee, the UK Government takes on a portion of the risk on a portfolio of loans to smaller businesses, in return for a fee. The latest ENABLE guarantee was offered to Cynergy Bank which is a specialist bank that was launched in 2018.

The guarantee is a commercial one rather than a subsidized one, so it is priced in line with the underlying risk. The British Business Bank only undertakes UK SME transactions, and it is used to assessing the sort of SME CRE risk exposures such as the ones in the latest deal. More generally, the British Business Bank manages the risk its guarantees cover by adjusting the first loss retention, pricing, and eligibility and portfolio criteria. A higher first loss retention means a lower guarantee fee but also a lower capital benefit.

Stelios Papadopoulos

Capital Relief Trades

Stage two boost

ECB highlights consumer and CRE risks

The European Central Bank (ECB) has released its latest financial stability review. The report notes a slight divergence in the stage two ratio for non-financial corporations and household loans in the second half of 2022 following a simultaneous rise for both in the first half of 2022. Moreover, consumer loan risks are now elevated amid worsening economic conditions and higher inflation.

According to the ECB’s latest financial stability review (FSR), stage two loans for both non-financial corporations (NFCs) and loans to households increased in the first half of 2022 amid a worsening economic outlook. However, in the second half of the year, they diverged, with the stage two ratio dropping slightly for NFC loans and continuing to edge up for household loans

Figure one-EU bank stage two ratios

Source: ECB FSR

However, the recent improvement in the aggregate NFC stage two ratio masks considerable heterogeneity at the country level. The corporate sector more specifically features emerging concerns about the outlook for commercial real estate loans. The report notes: ‘’despite worries about an ongoing downturn in the commercial property market, growth for CRE loans accelerated to 7% in 2022, outpacing growth for total loans by around three percentage points. CRE loans remain a relatively small part of the loan book, however, accounting for little more than 8% of the total loans granted by significant institutions, although this share varies within a wide range across banks.’’

The report continues: ‘’The majority of this exposure is located in the euro area, while US CRE loans-where vacancy rates are substantially higher-are limited to around 6% of significant institutions’ total CRE loans or 0.5% of their total loans. Following an increase in the second quarter, the aggregate stage two ratio for CRE loans dropped slightly in the last two quarters of 2022, albeit still remaining well above its pre-pandemic level.’’

The share of CRE loans with higher loan-to-value (LTV) ratios (above 80%) was relatively low on aggregate, at around 20% at the end of 2022. However, these benign aggregate data hide significant cross-country heterogeneity in terms of both asset quality and collateralization.

Moving on to the household segment, the most material signs of credit quality deterioration in the second half of 2022 were seen in consumer and other (non-mortgage) loans.

Consumer loans account for only 6% of EU banks’ total loans on aggregate, but they are typically more vulnerable to economic downturns, partly because of their low collateralization. Some signs of worsening credit quality could already be observed during 2022. Following a gradual increase in the first three quarters of the year, the share of stage two consumer loans rose more sharply in the fourth quarter amid worsening economic conditions and high inflation. Stage two ratios for other (non-mortgage) household loans also increased significantly during 2022, whereas the rise in stage two ratios for mortgage loans was more contained.

Stelios Papadopoulos

CLOs

Infrastructure CLO debuts

AIIB anchors emerging market pilot

Hong Kong Mortgage Corporation (HKMC) has completed the first CLO issuance under its pilot scheme on infrastructure financing securitisation. Dubbed Bauhinia ILBS 1, the transaction is backed by a US$404.8m portfolio of 35 bank-syndicated senior secured project finance and corporate infrastructure loans secured by 25 individual projects across nine sectors and 12 countries in Asia-Pacific, the Middle East and South America.

In total, five classes of investment grade notes were issued and listed on the Hong Kong Stock Exchange. Moody’s assigned Aaa ratings to the US$100m class A1SU and US$199.6m class A1 notes, an Aa1 rating to the US$36.5m class Bs, A2 to the US$18.25m class Cs and Baa3 to the US$10m class Ds.

The class A1SU notes are backed by sustainable, green and social assets and were issued in accordance with HKMC’s Social, Green and Sustainability Financing Framework, which is aligned with the ICMA Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines. In addition to the rated notes, US$40.43m of subordinated floating rate notes were issued.

The target portfolio is fully acquired on the closing date, with 98.5% of loans fully drawn and the remaining 1.5% pending to be drawn by borrowers. The transaction has a three-year reinvestment period, during which HKMC may direct the issuer to use unscheduled principal collections, undrawn lending commitments that are cancelled or have expired, and proceeds from the sale of credit-risk, defaulted or non-eligible sustainability assets to purchase new assets. The purchase of new assets is subject to certain conditions, including satisfying interest and par coverage tests.

After the reinvestment period, unscheduled principal collections and proceeds from the sale of assets will be used to amortise the notes in sequential order. The transaction incorporates interest and par coverage tests that, if triggered, divert interest and principal proceeds to pay down the notes in the order of seniority.

Project finance loans account for 80.8% of the pool, which historically have had high recovery rates, according to Moody’s. The remaining assets consist of telecommunication and utilities corporate infrastructure loans (15.5%) and corporate- guaranteed project finance loans (3.7%). About 3.8% of the portfolio also benefits from external credit support.

However, the rating agency notes that the portfolio is highly concentrated, with significant exposure to energy-related sectors and common off-takers, operators or sponsors. It points out, for example, that the exposure to the largest obligor group in the power generation renewables sector comprises about 11.8% of the portfolio – which is greater than the subordination of the class D notes.

Furthermore, about 30% of the portfolio is exposed to projects that are in countries with foreign currency country ceilings (FCCs) of single-A or below. Exposure to the top-three countries that have non-Aaa FCCs are China (accounting for about 14%, with an Aa1 FCC), India (about 12%, A3 FCC) and Brazil (about 12%, Baa2 FCC).

Following a two-week roadshow, Bauhinia 1 garnered strong interest from investors including multilateral, local and international financial institutions, insurance companies and asset managers. Asian Infrastructure Investment Bank (AIIB) participated in the deal as an anchor investor, in line with its strategic priority to mobilise private capital into the emerging market infrastructure sector.

Meanwhile, HKMC invested in the subordinated notes and provided a sponsor loan to support the liquidity of the issuer in meeting interest payments on the rated notes on the first payment date. The issuer also invested in about 18% of the portfolio via funded participation agreements with HKMC.

HKMC acts as the sponsor, collateral manager and risk retention holder on the transaction. ING, MUFG and Standard Chartered are joint global coordinators, joint lead managers and joint bookrunners, while Fubon Bank (Hong Kong) is co-manager.

Corinne Smith

SRTx

Latest SRTx fixings released

Improved tone implied in June index values

The latest fixings for the SRTx (Significant Risk Transfer Index) have been released. The index values imply a generally improved tone across all four sub-indexes since May’s fixings (SCI 3 May).

Indeed, this month’s survey responses suggest that spread estimates have tightened considerably for US large corporate and EU SME SRT transactions - by 48bp (representing a -5.1% change) and 77bp (-5.9%) respectively. Minimal spread widening was apparent for European large corporate and US SME transactions, by 1bp (+0.1%) and 10bp (+0.8%) respectively.

The SRTx Spread Indexes now stand at 1,156bp, 887bp, 1,233bp and 1,295bp for the SRTx CORP EU, SRTx CORP US, SRTx SME EU and SRTx SME US indexes respectively, as of the 1 June valuation date.

Meanwhile, the overall improved SRTx Liquidity Index values appear to correlate with the robust capital relief trade issuance volumes being seen at present (see SCI’s capital relief trades database). The indexes now stand at 38 (representing a -25% change), 44 (-27.1%), 42 (-16.7%) and 69 (+10%) across SRTx CORP LIQ EU, SRTx CORP LIQ US, SRTx SME LIQ EU and SRTx SME LIQ US respectively.

Similarly, the SRTx Credit Risk Index values have improved somewhat on the month, with EU large corporate transactions seeing the most improvement. The indexes now stand at 54 (representing a -15.7% change), 69 (-1.8%), 58 (-9.3%) and 75 (no change) across SRTx CORP RISK EU, SRTx CORP RISK US, SRTx SME RISK EU and SRTx SME RISK US respectively.

Values for the SRTx Volatility Indexes appear to be the outlier this month, however, with modestly mixed results. The SRTx Volatility Indexes now stand at 50 (representing a -6.7% change), 63 (+25%), 50 (+33.3%) and 63 (-6.2%) for SRTx CORP VOL EU, SRTx CORP VOL US, SRTx SME VOL EU and SRTx SME VOL US respectively.

SRTx coverage includes large corporate and SME reference pools across the EU and US economic regions. The index suite comprises a quantitative spread index - which is based on survey estimates for a representative transaction (the SRTx Benchmark Deal) that has specified terms for structure and portfolio composition - and three qualitative indexes, which measure market sentiment on pricing volatility, transaction liquidity and credit risk.

Specifically, the SRTx Volatility Indexes gauge market sentiment for the magnitude of fixed-spread pricing volatility over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating volatility moving higher.

The SRTx Liquidity Indexes gauge market sentiment for SRT execution conditions in terms of successfully completing a deal in the near term. Again, the index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that liquidity is worsening.

Finally, the SRTx Credit Risk Indexes gauge market sentiment on the direction of fundamental SRT reference pool credit risk over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that credit risk is worsening.

The objective of the index suite is to depict changes in market sentiment, the magnitude of such change and the dispersion of market opinion around volatility, liquidity and credit risk.

The indexes are surveyed on a monthly basis and recalculated on the last trading day of the month. SCI is the index licensor and the calculation agent is Mark Fontanilla & Co.

For further information on SRTx or to register your interest as a contributor to the index, click here.

Corinne Smith

Structured Finance

Sun King supported via solar ABS

Sector developments and company hires

Sun King supported via solar ABS
British International Investment (BII), the UK’s development finance institution (DFI), and Stanbic Bank Kenya have unveiled commitments to off-grid solar energy company Sun King via a US$130m-equivalent securitisation and a joint US$20m working capital facility. These commitments will enable the purchase of more inventory - such as solar home systems and solar lanterns - and facilitate customer access to new solar products via credit.

The Kenyan Shilling-denominated securitisation provides a capital boost to Kenya’s off-grid solar energy sector and extends access to pay-as-you-go solar home systems and energy-efficient equipment for underserved customers across the country. Approximately half of Sun King’s registered pay-as-you-go customers in Kenya are women, most of whom are accessing formal financing products for the first time.

Sun King is backed by prominent DFIs and commercial lenders, including Absa, BII, FMO, Norfund, the Trade and Development Bank (TDB) and Citi. To date, the company has powered the lives of over 100 million people who cannot access, rely on or afford traditional electric grid connections.

The joint commitment contributes to several of the United Nations’ Sustainable Development Goals - including affordable and clean energy (SDG 7), decent work and economic growth (SDG 8), social inclusion (SDG 10) and climate action (SDG 13) - and qualifies as part of BII’s contribution to the 2X Challenge.

In other news…

EMEA
Deutsche Bank has appointed Oliver Gehbauer to the newly-created position of head of SRT securitisation within GFCT structuring of the investment bank. In this role, he will coordinate origination and structuring efforts relating to synthetic securitisations, both for external clients and Deutsche Bank’s balance sheet.
Gehbauer joined Deutsche Bank through the graduate programme in 2000 and re-joined the firm in 2019, having worked in securitisation-related roles at Lloyds, Credit Suisse and Citi between times. He will report to Laurence Rickard and Mauricio Suárez-Rodríguez.

International law firm Keystone has promoted Marc Wilkinson to partner, just four months after hiring him as senior associate for banking, capital markets, derivatives and structured finance. Wilkinson has also been promoted to director of legal services at affiliated professional services firm Truva Corp, which counts a number of Keystone lawyers on its team. Based in London and Milan, he joined Keystone and Truva in January, leaving his role as senior associate on the structured finance and debt capital markets team at Mayson Hayes & Curran.

Pemberton has recruited Niamh Whooley as md and head of sustainable investing. Whooley will work across all areas of the business to deliver on Pemberton’s ESG commitments, further develop its sustainable investments, lead the dialogue with key stakeholders and work in partnership with clients globally as the firm’s strategy continues to expand.
In this new role, she will report to Harriet Steel, partner and global head of clients at Pemberton. Whooley has over 15 years of experience and leadership in sustainable investing, having held senior roles at Goldman Sachs, PIMCO, Société Générale and Fidelity International. Most recently, she was global head of fixed income ESG research at Goldman Sachs Asset Management.

Santander has appointed Vanessa Lowe, previously of sustainable engineering group Arup, as an energy transition-focused vp on its structured finance team. Lowe will be based in London and leaves her role as senior consultant at Arup after around four years with the firm. She previously spent three years working as an energy and resources process engineer at Aurecon in Wellington.

SCIO Capital has appointed Luxembourg-based Pascal Martis to its advisory board, which advises the firm’s senior management on strategy, market trends, business development and governance. The move follows the launch last month of SCIO’s most recent closed-ended fund offering, SCIO European Secured Credit Fund IV.
Martis is ceo of WGR Invest and cio of DeRaekt. Prior to these two roles, he built a track record advising Benelux HNWIs on investments at Deutsche Bank, ABN AMRO and Van Lanschot Bankiers.
Martis joins SCIO’s founding advisory board members: Carole Sanz-Paris, head of DCM and structured finance at IDB Invest; Ganesh Rajendra, managing partner at Integer Advisors; and Oliver Wriedt, director at HighKey Catalyst.

Structured Finance

Stonepeak eyes structured solutions

Sector developments and company hires

Stonepeak eyes structured solutions
Michael Leitner has joined Stonepeak as a senior md. Based in the firm’s New York office, he will help lead the continued buildout of Stonepeak’s credit investing capabilities. The firm believes there is a clear opportunity to leverage its broader platform and institutional knowledge to support the growth of the infrastructure marketplace through investments in credit and structured solutions.

Leitner joins Stonepeak with more than 21 years of experience in the credit space, most recently as co-head of BlackRock’s direct lending and special situations investment practice. Prior to its acquisition by BlackRock, he was a managing partner at Tennenbaum Capital Partners, serving as a member of its management committee and as a past chair of its investment committee.

In other news…

North America
Scotiabank has recruited Prabu Soundararajan as md, head of CLO banking within its global banking and markets unit in New York. He was previously executive director at Morgan Stanley, which he joined in October 2021. Before that, Soundararajan worked at Natixis, MUFG, Resource America, Stifel and Merrill Lynch.

Brian Bolton has joined Texas-based law firm Winstead PC’s real estate finance, default resolution and servicing practice group as a shareholder. He has deep experience counseling clients in connection with loan originations, modifications, assumptions, workouts and foreclosures of CMBS and balance sheet loans. Bolton was previously a partner at Locke Lord and has also worked at Goldman Sachs and Thompson & Knight.