Contents

Capital Relief Trades

Risk transfer round up-6 June

CRT sector developments and deal news

Santander is believed to be readying a synthetic securitisation of SME loans from the Magdalena programme. The transaction would be the seventh synthetic ABS deal from the programme and it’s expected to be finalized in 2H23 although sources qualify that it hasn’t been launched yet.

Stelios Papadopoulos

Capital Relief Trades

Santander selling

Spanish bank in US market with new auto loan CLN – price indications

Santander Bank NA is currently in the market with its first auto loan CLN of the year, dubbed SBCLN 2023-A. It concluded three such transactions last year, all of which were executed in December.

The trade consists of seven tranches, six of which are unrated and one unrated, according to sources in New York. The overall face value of the trade is $115m, and Santander retains $22m, or 2% below the unrated G class.

The $5.5m A2 tranche, rated AAA, is in the market at the interpolated swaps curve plus mid 100bps. The $42.35m AA2-rated B tranche is being marketed at the curve plus high 100bps, while the $13.2m A2-rated C tranche is in the market at the swaps curve plus low-to-mid 200bps.

Further down the stack, the $16.5m Baa2-rated D tranche is in the market at the swaps curve plus 300bp-to-low 300bps, while the $10.45m Ba2-rated E tranche is seen at swaps plus mid-to-high 600bps. The B2 $19.25m F tranche is in the market at the swaps curve plus 1100-1150bps while the unrated $8.25m G tranche is being shown with an all-in yield of 19.5%-20%.

When priced, the notes will constitute fixed rate obligations secured by a cash collateral account which will be held by a third party rated A2 or P1 by Moody’s. There is also a letter of credit in place also provided by a third party rated no lower than A2 or P1.

Simon Boughey

Capital Relief Trades

Capital panic

Use of SRT by US banks more pertinent as reg cap rises

US regulators are poised to increase capital requirements for bigger banks by as much as 20%, which will make the case for an expansion of the SRT market even stronger, say sources.

The recent spate of bank collapses has persuaded regulators that financial institutions must hold more equity capital.

“Instead of doubling down on a complex system of rules for banks that provide the illusion of stability we should adopt a far simpler and more effective solution: more equity capital,” said Neel Kashkari, president of the Federal Reserve Bank of Minneapolis on May 22.

Increased capital requirements are also likely to kick in earlier than hitherto. Banks with assets of $100bn or more will be caught in the new dragnet, which is much lower than the $250bn threshold at which the most stringent rules currently commence. Dozens of regional banks will now be held to a more exacting standard.

Banks have been on the lookout for more onerous capital requirements for a year or so, but the recent demise of Silicon Valley Bank (SVB), Signature Bank and First Republic has galvanized the resolve of regulators to do something significant sooner rather than later. New rules might be announced this month.

Jeremy Barnum, CFO at JP Morgan said at the end of May that his bank anticipated fresh rules to be announced “any day now”.

Michael Barr, the Federal Reserve vice chairman for Supervision encapsulated the mood of the moment in testimony before the House of Representatives last month, saying ““The banking system might need additional capital to be more resilient precisely because we don’t know the nature of the kinds of ways we might experience shocks to the system, as has happened with these recent bank failures.”

What exactly a 20% increase will look like is not clear. It could mean that the common equity tier one (CET1) is increased by 20%, or there could be additions to the capital buffers or the leverage ratio, or there could be some entirely new feature.

“I think the rules will not be simple (are they ever?) but the aim will be to increase capital requirements overall by 20% depending on various factors,” says a source in New York.

Lobby groups for the industry have responded with predictable scepticism. “Higher capital requirements are unwarranted. Additional requirements would mainly serve to burden businesses and borrowers, hampering the economy at the wrong time,” says Kevin Fromer, the chief executive of the Financial Services Forum, which represents the largest banks.

One upshot of the putative new rules is the boost it should give to the SRT market. There are several reasons why the US market has never taken off as it has in Europe, and one of these has been the relatively greater capitalization US banks enjoy. But an augmented need for capital will hamstring the US banks more than has been the case in the past.

Regulators in the US have also not given the mechanism a clean bill of health, with the result that no tier one institution and only a smattering of regionals have been seen in the market since December 2021.

But, according to rumours circulating in the market at the end of H1, banks are poised to try out SRT deals with an SPV structure rather than the formerly favoured CLN structure.

Banks still prefer CLNs as they are less complicated to manage and easier to set up than SPVs but regulators have been unconvinced that CLNs achieve full risk transfer. Needs must.

Sources also suggest that regulators would be guilty of perversity if they were to deny banks access to a tried and trusted method of achieving regulatory capital relief at a time when they are asking for more equity.

Moreover, that equity must be sold into a falling market as bank stock prices have suffered and will suffer as a result of higher capital requirements.

The KBW Nasdaq Bank Index fell 1.5% yesterday (June 5) when news of impending greater capital obligations was reported, while JP Morgan and Wells Fargo each fell nearly 1%.

Simon Boughey

Capital Relief Trades

CRAFT priced

Deutsche Bank executes new synthetic ABS

Deutsche Bank has finalized the latest synthetic securitisation from the CRAFT programme. Dubbed CRAFT 2023-1, the transaction has priced tighter compared to the last trade from the programme. 

The transaction has priced at SOFR plus 11.75% which compares to SOFR plus 12% for CRAFT 2022-1, but both deals are similar in tranche and portfolio terms. In particular, the new CRAFT is a US$480m CLN that references a US$6bn global corporate portfolio after having been upsized from US$4bn (see SCI’s capital relief trades database). The first loss tranche amortizes on a pro-rata basis subject to certain triggers to sequential amortization. The replenishable transaction has a 7.5-year scheduled maturity while the weighted average life of the initial pool is around three years. Further features include a time call, and the number of borrowers is 100 plus which is standard for the CRAFT deals. Additionally, the new CRAFT ticket is uncollateralized providing a funding benefit and doesn’t feature any rating triggers.  

“CRAFT 2023-1 is part of our flagship CRAFT synthetic securitisation programme that has been in operation for many years and under which we issue regularly for risk management purposes. The transaction was substantially oversubscribed, and we experienced strong interest from accounts that have historically not invested in our SRT programmes. It follows our successful €3bn Midcap synthetic securitisation that we closed earlier this year” says Oliver Moschuering, global portfolio manager for strategic corporate lending at Deutsche Bank.

The Midcap CRT was called DARTS 2023-1 and it was a €300m first loss CLN that referenced a €3bn blind portfolio of primarily German corporate credit facilities (SCI 11 May).

Looking forward, Deutsche Bank is looking at several, additional capital relief trades for various other asset classes.

 Stelios Papadopoulos  

Capital Relief Trades

Unfunded shift

Montepio launches synthetic RMBS

Montepio has finalized a synthetic securitisation of Portuguese residential mortgages. Dubbed Towers two, the unfunded mezzanine tranche marks a shift from the funded format of the first Towers transaction (SCI 5 January).

The deal features an approximately €50m unfunded mezzanine tranche that references an €890m Portuguese residential mortgage portfolio. Further features include a one-year use it or lose it synthetic excess spread position. The motivation of the transaction is pure capital relief which makes sense for these exposures given that Montepio is a standardized bank. IRB models produce lower risk weights for residential mortgages, so IRB banks don’t tend to hedge them via synthetic ABS trades.

Daniel Grencho, head of capital markets at Montepio notes: ‘’Similar to Towers one, the capital impact from the creation of a synthetic excess spread position has been minimal since the low loss profile of residential mortgages translates into a thinner synthetic excess spread position. The new exposure calculation rules for synthetic excess spread will not have a material impact on the efficiency of the trade. We opted for an unfunded transaction this time for several reasons.’’

He continues: ‘’First, we wanted to structure it quickly due to a pipeline of end of year projects and setting up a collateralized CLN structure with an SPV takes time and overall means a more contractually intensive deal. Collateralized structures have benefits since you can release more capital, don’t have to retain RWAs for counterparty credit risk and can get you an STS designation. Nevertheless, the ongoing cost of a collateralized deal is higher, since when resorting to a CLN the investor must post cash at inception while insurers don’t have to under a non-collateralized deal.''

Alantra acted as the arranger in the transaction.    

Stelios Papadopoulos  

CLOs

Manager tiering

Japanese demand driving dispersion?

The US CLO market continues to be characterised by dispersion (SCI 24 May). In this context, secondary double-B paper appears to be competing well against new issue equity.

“The biggest headwind CLO managers face is dispersion right now, particularly in the triple-As, because that makes up such a large part of the capital stack. We are seeing some of this dispersion in the secondary market too, particularly between the older vintage CLO tranches and the clean portfolios of the new deals,” confirms Rob Shrekgast, director of distribution at KopenTech.

US CLO triple-A rated paper accounted for upwards of 50% of total volume seen in May, pushing triple-A spreads 5bp wider over April’s levels. “This 5bp masks the underlying trend of the divergence between the tier one managers and all other issuers,” observes Shrekgast. “Historically, the tier one discount for new issue triple-A paper has been as tight as 15bp or 20bp below tier two or three. However, at the beginning of last month, we saw it get as wide as 50bp-55bp – potentially an all-time wide.”

One driver behind such CLO manager tiering is believed to be the return of Japanese insurance company demand for triple-A rated notes – because they’re conservative and looking for “tried and true”, experienced managers, according to Shrekgast. He points out that new issue activity picked up in May over April, although on the year, new issuance is down by around 20%.

Secondary market activity also had a positive tone last month. “If you track the higher percentage of BWIC trades within the TRACE volume as an indication of market health, 14% in May is similar to what was seen in March. But April had a pretty big spike to 24% - consider this an outlier, as BWICs came out of regional bank pressures and other institutions needing to lighten portfolios,” suggests Shrekgast.

He continues: “It is interesting to see the percentages in March and May are the same. The mood in May is certainly better than in March. However, if both the BWIC percentages and TRACE volume were similar, I think that would indicate a healthier, more orderly market all around.”

In terms of relative value, secondary double-B paper appears to be competing well against new issue equity, which is currently around 14%. “[This] begs the question why you would buy new equity when you could purchase older double-B [notes] with better convexity characteristics, with underlying loans you’re comfortable with,” Shrekgast asks.

Looking ahead, with equity IRRs where they are and triple-A spreads pushing out a little bit, he anticipates that new issue volumes this year will come in below last year’s numbers. “Particularly, we saw a volume spike in February of this year - where a number of deals were completed within a two- or three-week period - and it feels [like] the deals being issued now might need some support of the underwriters to close. There have been four debut issuers so far this year, and I think there will continue to be this natural ebb and flow between new issuances, new issuers and some merger activity,” Shrekgast concludes.

Claudia Lewis

Capital Relief Trades

Entrepreneurial spirit

Colin Reddy, md, head of financial institutions and advisory at Howden CAP, answers SCI's questions

Q: You joined Howden CAP in April from Mizuho, where you executed a number of strategic capital and balance sheet transactions for the firm’s clients (SCI 12 April). What attracted you to move to the insurance side of the risk transfer market?
A: I began my career in insurance, but I have spent the last 20 years in banking working in various roles across asset management, treasury and capital markets, including establishing Bank of Ireland’s significant risk transfer programme and leading Mizuho’s SRT efforts. There are a couple of aspects that attracted me to return to insurance: the dynamic nature of the insurance market, which allows different solutions to be created across many risk categories, and the continued potential for growth.

The level of credit risk on insurers’ balance sheets only makes up a small proportion of their liabilities - especially when compared to credit risk on a bank’s balance sheet - which means there are significant opportunities for them to partner with banks, as banks seek to optimise their balance sheets. Ultimately, banks want to diversify the partners they work with and the ways they distribute risk.

Q: Howden CAP is seeking to leverage the power of insurance to develop balance sheet optimisation solutions for its clients. What makes the business unique in the risk transfer space?
A: The Howden story itself was also an attraction for me. The firm has seen huge growth over the last few years and its entrepreneurial spirit feeds into the CAP strategy.

There is a willingness to invest in opportunities and allow time for those opportunities to have successful outcomes. ‘CAP’ stands for ‘capital advisory and placement’ and is made up of five key pillars: credit & political risk, tax & contingent risk, M&A, surety and climate and transition risks.

The firm has focused on bringing in industry experts from the banking, legal, asset management and consultancy fields across each of the pillars. When combined with the depth of our insurance specialisms, this creates the ability to advise on balance sheet optimisation across a wide range of clients – whether they are corporates, private banks, development banks, asset managers or private equity firms – as well as structure and place solutions for them. These unique synergies allow us to better identify opportunities to serve our clients.

Q: What kind of solutions is Howden CAP seeking to provide in the balance sheet optimisation/risk transfer space?
A: Howden CAP is focused on providing a range of innovative solutions in the balance sheet optimisation and risk transfer space. The team’s goal is to assist clients in managing their financial risks, enhancing their capital efficiency and optimising their balance sheets.

We look at risk transfer through a variety of lenses with a client that may be seeking to address regulatory capital, economic capital or climate-related challenges, for instance, and these challenges tend to be a strategic priority for them. Overall, we aim to be innovative in terms of understanding a client’s capital needs and then proactively engage with the insurance market to develop corresponding solutions.

Q: Do you anticipate increased appetite from insurers for synthetic securitisations?
A: A small cohort of insurers and reinsurers entered the SRT market in 2017, but that cohort has grown over the past six years and new insurers continue to assess the benefits of entering the market. At the same time, unfunded deal volumes continue to grow, with insurers building a solid track record as reliable counterparts for banks. In general, insurers are strong counterparts and with claims experience in credit risk in general being very dependable, we anticipate a growing appetite from banks to work with insurers - which should have a positive impact on insurers’ appetite for synthetic securitisations.

Q: Are you seeing any developments that would enable insurers to participate in STS synthetic securitisations?
A: Insurers are highly regulated and highly rated counterparties with a demonstrable history of claims payment. Consequently, there is a very strong argument for allowing them to participate in STS-eligible SRT transactions and thereby broaden the sources of capital available for banks under the regime. It doesn’t make sense to exclude them from the framework and the hope is that regulators revisit this point in the future.

In the meantime, there is still a large proportion of non-STS transactions being executed, which allows for insurance participation. There are also potential solutions around using insurance to create funded deals that allow access to STS-eligible transactions.

There are different ways of working around this, such as combining insurance unfunded protection with funding from a third party. However, such a scenario entails identifying a source of cost-effective funding, so the combination of insurer and funder would need to be competitive.

Q: What is your outlook for the SRT market more broadly?
A: The SRT market has been through a number of cycles in a short space of time and has continued to deliver strong performance. This demonstrates the benefit of the sector, in that pricing remained relatively stable and deals continued to be executed when other markets were closed or extremely volatile.

Engagement with regulators has become more straightforward in terms of getting transactions approved, which can only be beneficial in terms of market growth. Especially following the recent bout of volatility in the banking sector, having a broad range of tools to optimise a bank’s capital position is extremely positive, and we expect this to entice new jurisdictions and issuers to enter the market alongside the more established players.

The implementation of Basel 3.1/4 is a significant area of focus and how it plays out will impact future issuance dynamics.

Corinne Smith

Structured Finance

Call for 'proper discussion' about risk

Sector developments and company hires

Call for ‘proper discussion' about risk
Securitisation issuance in the EU equaled 0.3% of the bloc’s GDP last year, while UK issuance equaled 0.9% of the country’s GDP, according to AFME data. In contrast, Australian, Chinese and US issuance respectively equaled 2.8%, 1.8% and 1.4% of GDP in 2022.

In newly published research, AFME highlights that Europe languishes far behind its global competitors in terms of the contribution of its securitisation market to the financing of its economy, even when taking into consideration the structural features of different markets. As important EU inter-institutional negotiations are taking place this month on the capital requirements regulation and the UK kicks off its review of the securitisation framework, AFME is urging policymakers to introduce measures that enhance risk-sensitivity in the prudential framework for banks. A review of other frameworks and requirements applying to non-bank investors is also needed to achieve greater proportionality for this asset class, according to the association.

 “Europe’s securitisation market remains depressed while other large global capital markets reap the economic rewards of this financing tool. At a time when inflation continues to rise, monetary policy is tightening and capital becomes increasingly scarce, now is the time to address this gap. The competitiveness of Europe’s financial services sector is at a key disadvantage without a vibrant securitisation market,” comments Adam Farkas, ceo of AFME.

The association also points out that Europe continues to rely disproportionately on bank financing. In June 2022, European (EU+UK) banks reported €16.2trn in total outstanding loans to non-financial corporations and households, representing an increase of 3.5% from 2021. In comparison, outstanding volumes of EU+UK securitisation in 2022 were equal to €1109.4bn, a decrease of 6.7% from 2021.

This reflects a longer-term trend of a decline in outstanding EU+UK securitisation volumes over time, with volumes falling by 12.5% since 2014. Outstanding EU+UK bank loans increased by 22.6% over the same period.

As of June 2022, annual securitisation issuance in the EU+UK represented just 1.2% of total outstanding bank loans, whereas in the US during the same period, annual issuance was equal to 12.6% of outstanding bank loans. AFME notes that this large gap highlights a significant opportunity for the EU and UK to further transform existing outstanding loans on their banks’ balance sheets, via securitisation, enabling additional lending to the real economy. This will not happen without policy action to revive the EU and UK securitisation markets, the association warns.

“Europe needs to have a proper discussion about risk. It is 15 years since the Great Financial Crash, yet it still seems to dominate our thinking. For me, the biggest risk we face today is lack of growth, but we pursue regulatory approaches that make growth more difficult. We need to be honest about the trade-offs involved and ask ourselves whether we have struck the right balance, particularly when our international competitors are striking that balance in a different, more growth-friendly place,” concludes Lord Hill, former EU Commissioner for Financial Services and Capital Markets Union.

In other news…

EMEA
TMF Group has appointed Cliff Pearce as its new global head of capital markets, reporting to Daniel Max, head of global solutions. Pearce joins the firm from Intertrust Group, where he was global head of capital markets services. He brings more than 20 years’ experience in capital markets gained at NatWest, Bear Stearns and Bank of America Merrill Lynch, originating and delivering structured finance transactions to a wide range of clients.

Veld Capital has promoted mds Konstantin Karchinov and Sebastien Wigdo to partner and named Richard Kirkby as cfo. The appointments follow the carve-out of AnaCap Financial Partner’s credit business, including all of its legacy funds, to form Veld Capital at the end of last year (SCI 4 October 2022).
Karchinov joined the firm in 2009 and has senior oversight and responsibility for deal origination and execution of credit investments. Prior to AnaCap Credit, he was a member of JPMorgan’s principal investments team in New York and later London, focusing on whole loans portfolios, asset-backed lending as well as servicing and origination platforms.
Wigdo joined Veld in June 2019 and has senior oversight and responsibility for deal origination and execution of real estate-backed investments. Prior to joining the firm, he was a member of King Street Capital’s investment team in London.
Kirkby joined Veld from CVC Credit Partners, where he had been head of fund accounting, having previously worked in risk management at Davidson Kempner European Partners. He will take responsibility for finance across the firm’s dedicated platform, including all funds and management entities.

Warba Bank, the Kuwait-based group that specialises in banking and investment services in compliance with Sharia principles, has hired Mohammad Alghunaim as a senior analyst. Formerly of public pension fund The Public Institution for Social Security, Alghunaim will focus on structured and syndicated finance. He left his role as a real estate investment analyst after five years at the public pension fund in September to join the Kuwait Foundation for the Advancement of Sciences, where he served as an officer in the finance and investment team for nine months.

North America
Chicago-headquartered law firm Winston & Strawn has appointed Cadwalader, Wickersham & Taft’s Scott Cowie as a structured finance-focused associate in its New York office. Cowie leaves his role as an associate at Cadwalader after two years, during which time he worked on securitisation transactions spanning CLOs, RMBS and middle market lending.

Structured Finance

Strategic partnerships 'positive' for CLO managers

Sector developments and company hires

Strategic partnerships ‘positive’ for CLO managers
The number of US broadly syndicated loan CLOs for which managers retained their majority equity stake continues to exceed the number of CLOs where equity was sold to third parties, according to data published in Fitch’s latest CLO Asset Manager Handbook. The percentage of US managers that retained a majority in their CLOs’ equity increased to 60% in 2022 from 54% in 2021.

Since the repeal of risk retention requirements for US CLOs in 2018, many CLO managers have locked in future equity commitments by forming strategic partnerships or long-term commitments from anchor investors. Of the 24 managers with at least 20 BSL CLOs under management, six pursued a mix of equity retention strategies last year – AGL Credit Management, Ares Management, Bain Capital Credit, Blackstone Alternative Credit Advisors, KKR Credit Advisors and LCM Asset Management.

“Larger platforms with more established track records price CLO debt at tighter spreads than new issuers, leading to better equity returns for the former, all else equal. However, even larger managers were likely affected by wider CLO debt pricing that peaked in 4Q22, which may be one of the reasons behind managers retaining majority CLO equity,” Fitch notes.

The growth in CLOs that hold majority equity coincides with the overall decline in US BSL issuance, which was down 30% in 2022 from the prior year. Fitch says it views strategic partnerships as a positive for managers and believes that longer-term commitments facilitate CLO platform growth and issuance during periods of market instability.

In other news…

North America
Independent insurance company manager Strategic Risk Solutions (SRS) has appointed Charles “Chuck” Scherer as an svp – insurance-linked securities in its Hamilton, Bermuda office. Reporting to Jonathan Reiss, chairman of SRS Bermuda, Scherer will be a key member of the Bermuda leadership team and will be responsible for further expanding SRS’ influence in the ILS sector.

He has 20 years of experience in the financial services and insurance industries, most recently serving as controller for Roche Surety and Casualty Co. Before that, he worked at Aon Bermuda, Marsh USA, Crum & Forster and Ryan Beck & Co.