Contents

RMBS

Changing agenda

UK RMBS evolving alongside borrowers' needs

The return of 100% mortgages and the rise of later-life lenders herald an evolving UK RMBS landscape. This Premium Content article investigates how mortgage borrowers’ changing needs are being addressed.

The UK RMBS landscape is set to evolve in the coming years as new mortgage products emerge. Indeed, the return of 100% LTV mortgages and the rise of specialist later-life lenders in the jurisdiction nod towards a more socially-focused agenda, as they seek to address borrowers’ changing needs.

The revelation in May of Skipton’s 100% LTV mortgage product promises assistance to first-time buyers seeking to get onto the housing ladder in the UK, following the withdrawal of the government’s help-to-buy scheme (SCI 6 April). However, the lender has received some criticism for marketing 100% LTV mortgages again post-GFC, as fears return over the issue of negative equity.

“There’s not much difference between a 100% mortgage and a 95% or even 90% mortgage, to be honest with you,” understands Tom Ward, partner at TLT.

“Everybody gets so frightened of negative equity, which is only really a systemic concern where you have high unemployment coupled with rising interest rates,” adds TLT partner Mark Thomas. “We’ve got over-capacity in employment, no pressures on unemployment rates and so a first-time buyer with a very reasonable and conservative income multiple on a small loan on a small property in a 100% employment scenario isn’t that risky. If it’s not miss-sold and it’s done on an ethical basis, there’s clearly room for a product like that in the market – and I don’t see that it’s really any different to any other regulated owner-occupied mortgage.”

In fact, the offering from Skipton is relatively low risk, as the lender is set to offer its 100% mortgage product only to a distinct group of borrowers earning between £95,000 and £100,000 a year - which excludes a large proportion of struggling first-time buyers. “I think it’s a very sensible product to try and get people out of the rental trap without adding further risk – enabling people to get on the property ladder,” considers Thomas. “Crucially, they’re not lowering the criteria; whereas, if we were to see the criteria being relaxed substantially, then I would be more concerned.”

The UK government has been criticised for not promoting the need for young people to enter the housing market, as neither regulation nor structures have been set up to support this. However, 100% mortgages may be an important first step.

Expanding into the underserved mortgage demographic is not only important for those customers, but also for the future of the UK’s mortgage market – which was ranked in last place in Fitch’s recent assessment of 10 mortgage markets.

“To get better capital markets, you need to have fairly priced mortgages, and the banks need to be forced to price those mortgages competitively,” notes Arjan Verbeek, founder and ceo of Perenna.

Kerr argues: “I do think these are the sort of products that are better served to come from a building society where they have a lower cost of capital, as their model will be able to offer those products at a more reasonable rate than a high street lender necessarily would.”

A 95% LTV mortgage product for UK borrowers has since been announced by Nationwide, while a long-term fixed 100% LTV offering from Perenna continues to near market entry. “Whatever your background is, you look at us slightly differently,” explains Verbeek. “People that don’t work in finance see us as a bank that does mortgages, whereas if you’re an RMBS expert, you would probably see us as a master trust with a banking license.”

He adds: “The advantage of our model – a covered bond bank - is that you can issue long-dated fixed rate bonds, which has the right treatment in the market and is accepted by regulators and investors. And they have massive advantages for people who can’t currently get a mortgage; that’s the key thing.”

Perenna is planning to offer 30-year fixed 100% LTV mortgages – which have already been offered elsewhere in Europe and successfully securitised, including in Obvion’s Green STORM transactions. “The Netherlands has always been a high-LTV market, but they are also different to the UK in terms of the fixed rate term which is offered,” says Gordon Kerr, head of European research at KBRA.

Kali Sirugudi, structured finance analyst at KBRA, adds: “And it’s these high LTVs and longer fixed rates that works for the borrower.”

In fact, the fundamental critique is of the product’s five-year fixed structure, which exposes borrowers to remortgage risk and the risk of negative equity. Sirugudi asks: “Will Skipton be able to offer a remortgage product to such existing borrowers who have fallen into a negative equity position?”

Perenna has recently made available its own mortgage calculator to show customers exactly how much they can borrow. “If you go to another bank’s calculator, you will simply get a multiple - for example, 3.5 times your income. But ours actually calculates how much you can afford,” Verbeek states. “It doesn’t matter whether you earn £25,000 or £100,000, young or old - if you can afford the debt, we will give it to you.”

However, the firm faces a significant regulatory block by government. Verbeek explains: “Unfortunately, the financial policy committee is not allowing this at the moment because we can only give 15% of people more than 4.5 times their income. So, the Bank of England forces us to say to one person ‘yes’ and another person ‘no’, which is complete discrimination.”

According to Perenna’s newly launched mortgage calculator, a 30-year-old first-time buyer earning £100,000 before tax a year could borrow a total of £513,640 for a 95% 35-year fixed mortgage. This compares to the £600,000 figure Skipton quoted as being able to lend first-time buyers.

The path forward, given the future success of Perenna’s long-term fixed 100% mortgage products, may see several more companies following its lead - to which Verbeek takes no issue. “Once we are up and running and we have people, we show people it works and how it works, I have no doubt that people will be looking to clone us.”

He continues: “Denmark has four or five covered bond banks, as does Germany – it’s not a problem, it’s actually very good for the market. We need to get to a fair mortgage market that works for everybody; not the one we currently have, which is dictated by six or seven lenders at a cheap price, just to roll people in and make money from other parts of the business. That’s not a healthy economy.”

“If we get a better priced mortgage market, we will also see an increase in capital markets activity – which isn’t happening at the moment,” Verbeek adds.

Sufficient origination volume is fundamental to the inclusion of these mortgage products from specialist lenders in RMBS pools. “From an individual lender, you’re not going to get to the size and scale that would solicit a purely social securitisation structure,” explains Kerr. “But what you may find in the end is that they may try to contemplate pool products, such as the 100% LTV and later life products.”

It will likely take some time before 100% LTV mortgage products enter RMBS pools, which Thomas expects to see as the minimum earning criteria of £95,000 to £100,000 reduces – enabling the creation of decent sized portfolios. “But I wouldn’t be surprised if you see them going into other portfolios or mixed portfolios and being part of the overall blend around 75%, but I think it will take time. I think in the meantime you will have more private sales, more forward funding, more private securitisations - which will be testing between lenders where the market is, where the value is and therefore where the arbitrage value is on the RMBS.”

Specialist lenders in the UK are also expanding into later life mortgage offerings, as current equity-release products arguably don’t serve the best interests of elderly borrowers. Lenders, including LiveMore Capital, have been established to specifically target this demographic.

“If you are renting in retirement and don’t own your house, you need to have a pension pot that is £360,000 more than if you do,” explains Verbeek. “People are already not saving enough of their income for retirement, so this is something that young people also really need to start thinking about.”

Kerr adds: “The later life product is not just catering to that particular niche, but is also seen to be catering to the issue and phenomenon of mortgage prisoners in the UK.”

There are an estimated 900,000 mortgage prisoners in the UK.

LiveMore has ramped up originations and, with the publication of its social bond framework, is hoping to see loans securitised with ESG labels in the future.

“The FCA is in consultation with many lenders in the UK. They too expect that the retirement interest-only product is absolutely the right one for the purpose of providing relief to the mortgage prisoners who possibly got into house purchase before 2008,” Sirugudi explains.

He concludes: “There are certain regulatory and legal-related hurdles lenders have to jump over to take care of these later life products. But once these boxes are ticked, they certainly can cater to this niche.”

Claudia Lewis

CMBS

Out of office

European, US CMBS headwinds diverging?

The office CMBS market is grappling with headwinds brought about by declining occupancy rates and rising costs of borrowing. However, as this Premium Content article finds, the European CRE market may not be as badly affected as its US counterpart.

Rising delinquency rates and falling office occupancies are a cause for concern among CMBS market participants. However, there are signs that the European CRE market may not be as badly affected as the US market - a factor broadly attributed to differing attitudes towards hybrid working, commuter culture and the supply of modern office stock.

In mid-May, KBRA placed multiple classes across 11 CMBS deals on watch downgrade. The agency attributed the decision to the portfolios’ exposure to office-backed loans deemed to be non-performing, identified as KBRA loans of concern, or with a KBRA performance outlook of ‘underperform’.

Meanwhile, in a recent episode of DBRS Morningstar’s European Securitisation Insights podcast, Andrea Selvarolo, senior analyst in the European CMBS team, notes the agency has a negative outlook for the office CMBS space more broadly. He attributes this partly to shifting work habits following the pandemic and the challenging macroeconomic environment.

“Employees nowadays prefer to have more flexibility when it comes to their workplace,” says Selvarolo. “Old fashioned buildings in poor locations may not be attractive anymore. This is especially true if these buildings do not have certain amenities or do not focus on improving employees’ well-being and productivity.”

This increased flexibility, with hybrid and remote working now commonplace in most office environments, means corporates no longer require the same volume of floorspace. Additionally, he argues, higher energy bills, inflation and a “generally recessionary environment” mean occupiers are cutting costs by reducing inefficient space.

“This will constrain growth in the office leasing market in 2023,” Selvarolo says. “That's why we expect a general decline in demand for office space. And that's why our outlook for offices is negative.”

Earlier this month, data provider Trepp released research stating that, after months of growing “expectations of substantially higher delinquency levels” in office CMBS portfolios, “the tipping point” happened in April 2023. According to the report, the delinquency rate in the US jumped by 125bp month-on-month to 4.02%, its highest rate since 2018 when a number of loans originated prior to the global financial crisis remained outstanding.

It is a point of great frustration for Iain Balkwill, a securitisation and commercial real estate-focused partner at Reed Smith, that unforeseeable wholesale changes to working practices the world over could “tarnish” securitisation. “Historically, a significant amount of large office loans made their way into CMBS and it has been one of the better performing asset classes,” he says. “But everything's completely changed with the pandemic.”

He adds: “Changes in how businesses look to use office space and the level of daily occupancy is having a negative impact on offices generally as an asset class. It is hugely frustrating when these asset-specific features tarnish securitisation, as ultimately any stress is attributable to the nuances of the underlying collateral, rather than the actual CMBS product itself.”

In addition to a rise in vacancies, Marty Migliara, head of Europe at asset manager Rithm Capital, explains that higher base rates have disproportionately affected the property lending market as a whole. However, he highlights that the office space will be impacted more strongly than the residential space owing to supply and demand dynamics.

Residential mortgage borrowers will experience payment shock due to rising rates, Migliara says, likely leading to an increase in delinquencies. This, however, won’t necessarily translate to significant valuation decreases as there is still strong demand for housing. Commercial real estate will likely be the most affected sector, he argues, due to a combination of valuation uncertainty caused by rates, credit tightening and a wave of refinancings over the next 18 to 24 months.

Pan-Atlantic divergence
Despite the gloomy global backdrop, there are signs that the European CRE market may not be as badly affected as the US market - a factor broadly attributed to differing attitudes towards hybrid working, commuter culture and the supply of modern office stock.

A recent analysis by S&P found that triple-A and double-A rated tranches of European CMBS transactions can withstand increased vacancy rates with little risk of downgrade. While lower rated tranches are more vulnerable, only a “limited number of cases” are exposed to principal losses, the report says. It adds that “vacancy assumptions for some transactions would have to double from an already high starting point before ratings are affected”.

The S&P analysis highlights that office attendance in London is amongst the lowest in Europe, citing data from UK real estate agency Knight Frank that puts vacancy rates at 9.6% in the city. By contrast, a recent report from Moody’s finds that the office vacancy rate in the top 50 metropolitan areas of the US currently stands at 18.8%.

“Office vacancies have increased in Europe, but nowhere near the level they have in the US,” says Rithm’s Migliara. “In Europe they are believed to have increased from historically low levels to somewhere in the 7.5% to 8% range, which is really near the long-term average.” The US, by comparison, is seeing vacancy rates in the 20% region, he says.

Part of that, Migliara says, is that public transport in Europe is widely considered to be faster, better and safer than in the US. Additionally, European cities tend to have less suburban sprawl, meaning the typical commute tends to be a shorter distance. Both of those factors render commuting more attractive in Europe compared with the US.

“Europe and the US are very different cultures in many ways and you've always seen that in terms of different working habits and priorities,” says Reed Smith’s Balkwill. “I think that's what we're sort of seeing play out after the pandemic. It's just brought it into sharp focus. It's not something that we've ever had the opportunity to witness, gauge or measure before. We certainly are seeing that now.”

It is a divergence in behaviour on either side of the Atlantic that is also observed by Andrea Daniels, an EMEA- and CMBS-focused associate md at Moody’s. Speaking at IMN’s Annual Global ABS conference in Barcelona last month, she said: “Although [vacancies in the European office space] have definitely increased significantly since 2020, [just over 8% in aggregate as of Q1] in the US market those vacancy rates nationally are probably pretty close to 20% right now. So from a starting position, it's not as bad; let's put it that way.”

Daniels highlighted that there are also differing physical office utilisation trends happening in different markets across Europe. “Markets like Paris and Madrid are pretty much back to pre-Covid utilisation numbers,” she said. “That's not the same for London. London is looking a bit like New York from that perspective.”

Even within European cities themselves, there are significant differences between office occupancy levels in historical central business districts and newer developments outside the city centre, Daniels said. Occupancy in the centre of Paris and London stands at around 5% and 10% respectively, while purpose-built business districts La Défense and Canary Wharf are seeing percentages in the high teens, she said. In Europe, it appears prime locations are relatively shielded.

Green dividend
Furthermore, Rithm’s Migliara argues that availability of modern office stock in Europe and the US differ greatly, further compounding the disparity between the two markets. “There's still a lack of supply of grade A, ESG-friendly space with large flexible floor plates in Europe,” he says. “So I don't see working from home having such a big impact, particularly in high-quality offices.”

He adds: “In Europe, the pressure will mostly be a function of valuations due to increasing yields, rather than actual performance. There will be some financings that have been done in the past where borrowers’ business plans have fallen behind due to constraints caused by Covid. But for the most part, it's really the combination of higher yields and banks tightening lending criteria that will be the pressure point for financing in the near future.”

Many market participants share Migliara’s observation of a growing divergence between the performance of modern, flexible and energy-efficient office space, compared with out-dated stock. Fitch recently released UK-focused research concluding that older offices in outlying locations are facing greater risk of becoming stranded assets. “​​This risk,” it says, “could be reduced by taking early action on climate transition.”

DBRS Morningstar’s Selvarolo expects to see a dual-speed market, with demand for sustainable and flexible premises actually increasing in the medium term, while outdated stock becomes subject to a “brown discount”. The trend is likely to be further reinforced by the outcome of COP27 in November last year, which saw European countries agreeing to tighten environmental targets. The UK is among a number of European countries to have introduced more stringent energy certificate requirements for office rental stock.

“If we look at the UK, starting from April this year, it [became] unlawful to let a building with an EPC [energy performance certificate] rating lower than D, and from 2030 this bar will be further raised to B,” says Selvarolo. “In the Netherlands, from January 2023, it's illegal to let an office property rated below C, with penalties applicable whenever a building is not compliant. Given this new tightened regulation from an environmental perspective, the big question is how much of the existing office market in Europe currently fits into that. And this is a big issue.”

Fitch points to BNP Paribas figures showing that 24% of inner London commercial stock was likely to become “unlettable” from April 2023, due to the introduction of these minimum energy efficiency standards in the UK. The agency says that the removal of properties from the letting market will rebalance supply and demand.

“There is actually no reason why a decent office block - which satisfies the latest and greatest ESG requirements and has very strong tenants, in a decent location, that is properly managed and benefits from ongoing investment - should not perform well,” says Reed Smith’s Balkwill. “Any resultant securitisation should equally benefit from that.”

Bridging the refi rapids
However, with the cost of borrowing rising and occupancy falling, it appears likely that defaults will increase in the medium term and issuers may well struggle to refinance portfolios. According to recent estimates by Fitch, 35% of pooled securitised commercial mortgages due between April and December this year will not be able to refinance. The agency notes that while the retail and hospitality sectors face high default risks, the challenges are even more pronounced for office owners.

Indeed, Blackstone recently defaulted on a €531m bond primarily backed by office properties owned by Finnish real estate company Sponda Oy (SCI 6 March). The firm sought and was declined an extension from bondholders (SCI ABS Markets - 2 March).

Euan Gatfield, md and head of EMEA CMBS at Fitch, says there will inevitably be further refinancing issues in CMBS. “There's no escape really when rates have gone up and there are these fundamental questions about office occupancy,” he says. “Values of pretty good offices in established locations in the UK are reportedly coming off by 35%, 40%, particularly where there's a vacancy issue.”

He adds: “If you have a green office and you've got a nice long lease, that's going to do very well. If it's a brown office with a long lease, that may actually be a handicap, depending on how much work needs to be done. In the latter of those scenarios, there are questions around capex and where the funding will come from.”

Market participants appear to agree that the coming months will see the emergence of alternative approaches to financing office properties. Reed Smith’s Balkwill says a major difference between the US and European markets is that in Europe, a lot of debt is relatively short dated. As loans hit maturity and borrowers are forced to take action, there are likely to be challenges brought about by valuation expectations. These are driven largely by market conditions at the time of original issuance, prior to the pandemic and recent macroeconomic headwinds.

“The chances are sponsors won't voluntarily sell properties in this market as they will not get the best price,” says Balkwill. “Refinancing will inevitably show the value of a fundamentally strong property has deteriorated purely because interest rates have increased. Sponsors are therefore left in the unenviable position of having to either inject more equity into any refinancing or embrace a more sophisticated, leveraged structure and all that entails.”

There is likely to be an increased demand for short-term bridging finance, he explains, allowing property owners to reposition office assets. “In the US, CRE CLO products have been a big deal for securitising those sort of loans,” says Balkwill. “It'd be interesting to see in Europe whether we also embrace the same technology at scale.”

There is also likely to be a growing role played by private credit managers in the coming six to 12 months, says Rithm’s Migliara. “The market will be dominated by trying to find creative ways to introduce new capital into refinancings, as bid/ask spreads between buyers and sellers increase, while bank credit is tightening,” he explains. “There's an opportunity for private credit that's flexible in terms of coupon and structure to bridge that gap between senior lender and borrower. For good properties with good asset managers, they will be able to work their way through this.”

As the office CRE market continues to adapt to a new normal - in terms of working habits, energy efficiency requirements and higher base rates - stability should return once more. In the meantime, market participants are forecasting an interesting two years, where bifurcation, capex injections, delinquencies and new sources of financing will all be prevalent.

Kenny Wastell

Structured Finance

SCI Start the Week - 3 July

A review of SCI's latest content

Last week's news and analysis
CEE expansion continues
Raiffeisen finalizes SRT
O Canada
Perfect storm of factors pushes Canadian banks to SRT
Park Mountain returns
BNP Paribas executes synthetic securitisation
Regulatory boost
Trilogue endorses halving of p factor
Resonance prints
BNP Paribas opts for direct CLN in new SRT
SCI In Conversation: Terry Lanson, Seer Capital
We discuss the hottest topics in securitisation today
Job swaps weekly: US Modular Capital lures Transwestern veteran
People moves and key promotions in securitisation

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, Terry Lanson, an md at Seer Capital and an established luminary in the regulatory capital relief trade market, discusses the prospects for further growth and development of the SRT market in the US. Lanson believes that, in the wake of the failure of several regional names and renewed capital pressures on US banks in general, there are grounds for optimism.
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 Tauseef Asri 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
Esoteric ABS Seminar
12 September 2023

Women In Risk Sharing
18 October 2023

SCI's 9th Annual Capital Relief Trades Seminar
19 October 2023, London

Capital Relief Trades

Risk transfer expansion

Banco BPM continues tapping private market

Banco BPM has finalized a synthetic securitisation of corporate loans. Dubbed Grace, the funded financial guarantee references a static and disclosed €2.5bn Italian corporate portfolio that is backed by around 230 obligors. The transaction is the lender’s second corporate SRT to be sold to private investors, after the ‘’Brigitte’’ trade from December 2021.

According to sources close to the trade, the deal features a €150m-€200m first loss tranche that was priced in the low double digits. The portfolio weighted average life is equal to around three years and the sold tranche amortizes on a pro-rata basis with triggers to sequential amortization. The time call can be triggered after the end of the portfolio WAL which is standard for synthetic securitisations.

The Italian lender is a regular issuer but started printing synthetic securitisations with the European Investment Fund before it turned to private investors in 2021 for hedging. The bank then followed with two more last year. The first was backed by project finance and CRE exposures and included insurer participation while the second referenced SME loans (SCI 17 January).

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round up-4 July

CRT sector developments and deal news

Deutsche Bank is believed to be readying another synthetic securitisation of leveraged loans from the LOFT programme that is expected to close in 2H23. The last transaction from the programme was finalized last year (SCI 30 August 2022). 

Stelios Papadopoulos

Capital Relief Trades

Shipping wave continues

Alpha bank boosts shipping SRT issuance

SCI understands that Alpha bank has executed a synthetic securitisation of shipping loans. The transaction is riding a pickup in significant risk transfer trades backed by such exposures.

The details of the capital relief trade haven’t been disclosed although Christofferson Robb and Co (CRC) is rumoured to have bought the deal. The biggest challenge for capital relief trades backed by shipping loans is finding high performing portfolios and being able to model expected losses. Indeed, investors need to see that there’s no volatility in the historical data as well as advanced capabilities in portfolio management.

Moreover, LGD estimation is hard and that is where you find disagreement between originators and investors. The process would require banks digging into their historical data and carrying out a scenario analysis to reassure investors on recoveries. Consequently, the market hasn’t seen many such deals. Nord LB executed a shipping CRT in 2017 but the trade featured a mixed portfolio. Piraeus’ project Triton that was launched last year along with a Eurobank ticket, a Citigroup transaction from 2013 and Alpha bank’s latest trade are the only pure plays (see SCI’s capital relief trades database).

Alpha bank declined to comment on the story and CRC didn’t respond to a request for comment.

Deutsche Bank and Banca IMI acted as the arrangers in the transaction.

Stelios Papadopoulos

CLOs

Popularity contest

Life insurers clash over CLO capital charges

US life insurer investment in CLOs has grown by about 20% each year over the last decade, with CLOs now accounting for between 3% and 4% of general account investments in the sector and more than 10% for a handful of the top-30 US life insurers. Indeed, the US Fed estimates that life insurers own 20% of the US CLO market and up to 50% in mezzanine tranches. However, an interim proposal under the National Association of Insurance Commissioners’ (NAIC) ongoing review of capital treatment for CLOs could challenge this trend.

Fixed income products present an attractive investment opportunity to life insurers due to the long-term and guaranteed nature of their policyholders. Versus publicly traded bonds, structured credit portfolios have offered higher returns, given the benign credit conditions seen over the last 10 years.

At the same time, private equity firms have been attracted by the large pools of assets backing annuity portfolios, allowing them to lock-in cheap long-term funding for their investment platforms. With this shift in the industry, structured finance products like CLOs are increasingly used to back annuity liabilities, as private equity owners often have deep expertise in this asset class. Apollo Global Management - now the largest US annuity provider through its 2022 merger with Athene - exemplifies this trend, given its focus on structured finance products and private credit.

As part of its review of CLO capital charges, the NAIC received comments from a group of life insurers that favour increasing capital charges on the most junior tranches of CLOs, arguing that a complete loss of principal on such tranches is more plausible than on a similarly rated corporate bond or even on a common equity investment. In addition, these insurers are concerned about the potential for capital arbitrage, where an investor could obtain a lower capital charge by holding the same credit risk exposure through multiple tranches rather than as a whole through one instrument.

Conversely, insurers supportive of the current capital charges on CLOs also commented, pointing to the sector’s diversification benefits and recent history of superior performance. In fact, Athene published data implying lower credit risk on a CLO compared to a similarly rated corporate bond.

The NAIC has not yet acted on an interim proposal to increase the capital charge to 45% from 30% on the riskiest tranche of CLOs. Nevertheless, DBRS Morningstar suggests that the proposal is unlikely to have a large impact on annuity providers, given that they typically focus on the higher quality tranches.

But it may give life insurers a stronger incentive to avoid or dispose of junior CLO tranches. The NAIC is also considering limiting the reliance on credit ratings to determine capital charges on CLOs, which could push annuity providers to invest in corporate credit through other alternative instruments, such as private debt.

“Ultimately, long-term credit performance of each asset class should be the driving factor that will determine the optimal corporate credit allocation for annuity providers. As long as credit losses remain small relative to the extra spread earned on CLOs, it will remain an attractive asset class for the industry, with higher yields potentially becoming priced into annuity rates,” DBRS Morningstar concludes.

Claudia Lewis

SRTx

Latest SRTx fixings released

Improved tone continues in July index values

The latest fixings for the SRTx (Significant Risk Transfer Index) have been released. The improved tone seen across the sub-indexes in June’s fixings (SCI 2 June) generally appears to have continued, as market conditions stabilise following March’s banking volatility.

Indeed, the overall improved values for the SRTx Liquidity Indexes and SRTx Volatility Indexes suggest that issues across the banking market appear to be receding. Based on this month’s survey responses, the SRTx Liquidity Indexes now stand at 36 (representing a -4.8% change), 25 (-42.9%), 43 (+2.9%) and 33 (-51.5%) across SRTx CORP LIQ EU, SRTx CORP LIQ US, SRTx SME LIQ EU and SRTx SME LIQ US respectively, as of the 5 July valuation date. Values for the SRTx Volatility Indexes are 43 (representing a -14.3% change), 38 (-40%), 43 (-14.3%) and 38 (-40%) for SRTx CORP VOL EU, SRTx CORP VOL US, SRTx SME VOL EU and SRTx SME VOL US respectively.

Meanwhile, the SRTx Credit Risk Index values show mixed results, reflecting broader concerns over recessionary pressures. The indexes now stand at 64 (representing a +18.7% change), 69 (no change), 64 (+10.2%) and 69 (-8.3%) across SRTx CORP RISK EU, SRTx CORP RISK US, SRTx SME RISK EU and SRTx SME RISK US respectively.

Finally, spread estimates have widened modestly across all SRTx Spread Indexes, except for SRTx SME US. Values now stand at 1,176bp (representing a +1.7% change), 915bp (+3.2%), 1,257bp (+1.9%) and 1,236bp (-4.5%) for the SRTx CORP EU, SRTx CORP US, SRTx SME EU and SRTx SME US indexes 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

EIB, ICO support Spanish SMEs

Market updates and sector developments

The EIB Group and Instituto de Crédito Oficial (ICO) have invested in senior and mezzanine tranches of ABS issued by BBVA to support Spanish SMEs and mid-caps by addressing their working capital and liquidity requirements. Proceeds worth €60m will also be channelled into energy efficiency projects.

Under the transaction, the EIB makes an investment commitment of €430m, while €30m is committed by the EIF. ICO’s participation accounts for €100m. The total investments of the deal will enable the Spanish bank to direct up to €1.26bn into the economy.

The transaction aims to address the investment challenges of SMEs and mid-caps in cohesion regions, where accessing financing has become difficult following the pandemic, the war in Ukraine, inflationary pressures and rising interest rates. The investment thus aligns with EIB's goal of promoting equitable growth and convergence among EU regions.

The green projects financed by this operation will contribute to the reduction of CO₂ emissions and climate change mitigation. As such, the investment is aligned with the EIB Group's climate change mitigation objectives and REPowerEU.

In other news…

ASR completes Aegon Nederland acquisition
Dutch insurance company ASR Nederland has completed the acquisition of Aegon Nederland after receiving approval from the Consumer & Market Authority, the Dutch Central Bank and the ECB. Aegon will receive €2.2bn in cash and a 29.99% equity stake in ASR - which has a €6.2bn market cap, as of 5 July - as part of the transaction. The deal sees ASR acquire the entirety of Aegon’s Dutch insurance, pensions, mortgages, distribution and services businesses, as well as its banking operations.

ILS distribution agreement inked
Union Bancaire Privée (UBP) has joined forces with Securis to boost their respective strategies in the ILS space. The freshly signed distribution agreement will allow UBP to provide institutional clients and third-party distributors across Europe, the Middle East and Asia with Securis’ global capabilities. The partnership intends to provide mutual benefit to both UBP and Securis in their ILS endeavours by leveraging Securis’ resources and infrastructure with UBP’s global fund distribution capabilities.

Structured Finance

Job swaps weekly: Succession at Oaktree

People moves and key promotions in securitisation

This week’s securitisation job swaps have seen Oaktree Capital Management announce the retirement of ceo Jay Wintrob and a succession plan that sees three senior executives stepping onto its executive committee. Elsewhere, Deutsche Bank has appointed a new CLO implementation head, while Moody’s welcomes back a structured finance professional after a two-and-a-half-year stint with BFF Banking. 

Oaktree ceo Wintrob will retire in the first quarter of next year to be replaced by global opportunities portfolio manager Robert O’Leary and head of performing credit Armen Panossian. As part of the succession plan, the firm’s general counsel and chief administrative officer Todd Molz will also be promoted to coo, and the three will join the US$160bn asset manager’s executive committee.

Wintrob joined Oaktree in 2014 from his previous role as president and ceo of AIG Life and Retirement. He joined AIG following its acquisition of SunAmerica in 1998, where he had progressed to president from the role of assistant to the chairman.

O’Leary and Panossian will serve as co-ceos and will focus on the organisation and performance of Oaktree’s investment teams, while continuing to lead the global opportunities and performing credit teams. They joined the firm in 2002 and 2007 respectively.

Meanwhile, Georges Duponcheele has joined Great Lakes Insurance SE (GLISE), part of the Munich Re group, as senior credit portfolio manager. Duponcheele was previously senior advisor at Risk Control, which he joined in January 2020, having had an almost 20-year career at BNP Paribas that spanned a number of securitisation-related roles.

Deutsche Bank has recruited Phong Lam as global CLO implementation head, within its trust and agency services business. Based in London, he was previously md, capital markets at Vistra.

Francis Teo has joined Mizuho as a director, CLO structuring, based in New York. He was previously head of US CLO structuring at Credit Suisse, which he joined in April 2021 from Moody’s. Before that, Teo worked at PwC and Ambac.

IFM Investors has appointed Adelaide Morphett as associate director, sustainability specialist, based in London. She was previously vp at Newmarket Capital, having joined the team as a financial analyst in July 2017.

Andrew Durante has returned to the Moody’s structured finance team after a two and a half year stint in crossborder sales at BFF Banking. Durante will rejoin the rating agency in Milan as an assistant vp, having previously operated as a sales specialist within its structured finance practice in London.

Santander has made two promotions in its Latin American structured finance team. Nuno da Silva has been promoted to director for structured finance risk and corporate and investment banking risk in Mexico City. He joined the bank from EY in 2018 and is promoted from his role as director for corporate credit risk and investment banking risk at Santander. Luisa Lima has been promoted from senior credit analyst to structured finance specialist, working out of São Paulo. She has been with Santander for five years.

Residential real estate developer Revitalis Real Estate has appointed HypoVereinsbank’s Christina Urlacher as a manager in its real estate structured finance team working out of its Hamburg headquarters. Urlacher leaves her role as wealth client adviser at HypoVereinsbank after seven years with the bank.

Home equity investment fintech Hometap has recruited two new senior members for its executive leadership team amid ongoing efforts to expand in the structured finance sector. Cara Newman and Josh Gaffney have joined the Boston-based firm to serve as head of structured finance and general counsel respectively. Hometap welcomes Newman to the newly established role from Redwood Trust where she served in a similar capacity as head of structured finance since 2018, and Gaffney from BANYAN where he operated as chief privacy officer and general counsel.

In other fintech news, Miami-headquartered CRE debt management and placement platform Finneo has appointed Yellowstone Capital Partners’ Makenzie Warlow as associate vice president. Warlow leaves his role as a private equity-focused vp at Yellowstone after a year with the firm. He previously spent two and a half years on the San Francisco-based CMBS origination team at Deutsche Bank and two years on the commercial real estate debt team at HFF.

CBRE has promoted assistant director Harry Burgess and associate director Stéphanie Müller to the position of director on its operating real estate team within the firm’s debt and structured finance practice. Burgess and Müller are both based in London and both joined CBRE in 2021.

And finally, European DataWarehouse has appointed 321 Crédito’s Fernando Lopes as a senior structured finance data analyst in its Frankfurt office. Lopes leaves his role as financial controller on the auto ABS team at 321 Crédito after two years with the firm and will relocate from Porto. He previously spent two and a half years at EY, based in its Braga office.

CLOs

CVC Credit closes US$800m third CLO equity fund

Market updates and sector developments

CVC Credit closes US$800m third CLO equity fund

CVC Credit has held an US$800m final close for its third CLO equity fund, bringing the total amount of capital raised for the strategy to US$1.66bn. The new vehicle is intended to support more than US$10bn of global issuance for the firm’s performing credit platform throughout the course of its deployment period.

The fund, named CVC CLO Equity III, will make equity investments in more than 20 CVC-managed CLOs across the US and Europe. To date, the vehicle has funded 11 transactions worth an aggregate US$4.8bn, of which six deals have taken place since the start of 2023 worth an aggregate of US$3bn.

In other news…

Man Group buys into private credit

London-listed asset management firm Man Group has expanded into private credit with the acquisition of US middle market manager, Varagon Capital Partners. By acquiring Varagon, Man Group intends to capitalise on increasing interest from private equity investors in the US middle market as it strives to diversify its credit offering for clients in the US.

Man Group, which will pay US$183m in cash to exiting shareholders, said the deal will enable Varagon to benefit from its global distribution, giving it access to new investors. The transaction is due to complete in Q3 and is expected to encourage growth in management fees and EPPS within the first year. Varagon will rebrand as Man Varagon, with all investment committee and team members staying on board under present ceo, Walter Owens.