News Analysis
Capital Relief Trades
Green front
EIF obvious candidate to scale up SRT amid energy transition
A new paper highlights how SRT transactions could be scaled up to support Europe’s shift to the green economy. Central to the proposal is the potential for the EIF to participate as a ‘fronter’ in synthetic securitisations.
In the paper, entitled ‘A proposal for the European Green Transition via Significant Risk Transfer Securitisations’, ECB senior advisor Fernando Gonzalez and Granular Investments md Giuliano Giovannetti argue that both the EIF and the SRT market could and should play a pivotal role in supporting the green transition. However, a longstanding political and regulatory scepticism has too often accompanied it.
“In theory, one would not need this, as all the pieces are there for a self-sufficient and well-functioning SRT market,” says Giovannetti. “However, in practice, we see that the market isn’t working exactly how people in the industry would want it to work.”
He adds: “The amount of regulation which has been piled on the sector has grown immensely, compared to the actual amount of transactions being done. As a result, the market is relatively stiff in that the number of participants is quite limited. The reality is that 80% of the market is concentrated in a handful of issuers and risk takers.”
Within the context of a transition towards a net zero economy and energy independence, where a huge amount of investment is required, Giovannetti argues that the participation of the EIF could scale up the SRT market to meet the European green transition challenge. He says: “The EIF has stood out as the actor that everybody likes, notably by both regulators and politicians. It could leverage its skills, expertise, platform and credibility to integrate more of the private sector. While the EIF, and the EIB Group in general, have significant capital, it is not sufficient to meet all the increased demand for green transitioning - and even if it did, it would be very risky to crowd out the private sector.”
Central to the vision is the potential for the EIF to participate as a ‘fronter’ in synthetic securitisations, which could bring more flexibility in areas that are constraining banks and private sector participation. The proposal puts forward the example of the utilisation in SRT transactions of unfunded protection from re/insurers.
Unfunded protection is permitted under the synthetic securitisation framework, but not yet under the EU STS securitisation regime. At a time when bank demand for SRT transactions is growing and interest rate increases are making traditional funded solution more expensive, banks that use unfunded protection lose the possibility of benefiting from using the STS regime, seriously affecting their cost of released capital. This issue would be addressed if the EIF, with its 0% risk weight, were to ‘front’ on behalf of the insurers, while insurers would not need to pre-fund their guarantees, thereby bringing down overall transaction costs.
Such a role would be similar to that of the US GSEs or German development bank KfW, which used a comparable synthetic securitisation scheme up until 2008. Speaking of the latter, Giovannetti says: “Under Basel 1, it had two platforms: one for residential mortgages and another for SMEs. From a performance perspective, they did very well and achieved their goals. Essentially, they were protecting the whole portfolio via a financial guarantee, while behind the scenes they would be using synthetic securitisation to transfer that risk to different counterparties.”
He adds: “However, then the banks had to transfer everything, including the senior tranche. Today, the current regulatory framework is focused on the mezzanine layer and an intermediary like the EIF could take and share this risk, properly managing counterparty risk. The private sector would also produce a useful pricing benchmark.”
Although the EIF does not currently have a reinsurance product, Giovannetti believes it could be within its remit. Overall, the proposal suggests that by standardising and simplifying risk transfer transaction structures, the “EIF could emerge as an important enabler in the necessary transition to a more sustainable and greener economy.”
Vincent Nadeau
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News
Structured Finance
SCI Start the Week - 7 August
A review of SCI's latest content
Last week's news and analysis
Closing the gap
SRT 'unlevel playing field' called out
Defensive profiles
Tactical secondary CLO opportunities highlighted
Groundbreaking cannabis CMBS closed
Updates on PCG 2023-1 closing and an LOC controversy
Happy birthday STACR
The GSE CRT market hits 10th birthday
Innovative financing inked for Deutsche Bahn
Updates on an EIB and HypoVereinsbank deal and an ALM acquisition
Job swaps weekly: Sixth Street signs Salisbury
People moves and key promotions in securitisation
New tricks
Banks' backing boosts AI utilisation in ABS
Rare ILN spotted
First insurance-linked note in almost a year
Risk transfer round-up - 3 August
The week's CRT developments and deal news
SCI In Conversation podcast: Naomi Prasad, Pemberton Capital Advisors
We discuss the hottest topics in securitisation today...
Triple test
UK RMBS can withstand stresses 'never seen in history'
Plus
Deal-focused updates from our ABS Markets and CLO Markets services. This week, including July monthly round-ups.
Regulars
Recent premium research to download
Emerging UK RMBS – July 2023
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.
Office CMBS – July 2023
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.
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.
All of SCI’s premium content articles can be found here.
SCI In Conversation podcast
In the latest episode, Pemberton Capital Advisors director Naomi Prasad discusses whether we should we be talking about “ESG” or “sustainability” in the context of the securitisation market and which ESG strategies are proving effective in the CLO management space. She also outlines how sustainability can be better integrated at both the corporate and individual level.
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, New York
Women In Risk Sharing
18 October 2023, London
SCI's 9th Annual Capital Relief Trades Seminar
19 October 2023, London
European CRE Finance Seminar
28 November 2023, London
News
Capital Relief Trades
Risk transfer round-up - 10 August
The week's CRT developments and deal news
Market news
Western Alliance Bank has amended its WAL 2021-CL2 transaction, to collateralise the deal and reduce corporate credit risk. Principal payments on the notes are now secured by a cash collateral account equal to the full principal amount. Interest payments remain the obligation of WAB but are newly secured by a line of credit by JPMorgan for up to four months of missed interest payments.
People moves
BPL Global has appointed Riz Sheikh to its portfolio solutions team, reporting to deputy ceo Charlie Radcliffe and working alongside director Gregory King-Underwood. With over 20 years of experience in securitisation, Sheikh is tasked with developing the firm’s significant risk transfer offering, to complement its existing portfolio solutions capabilities for banking and financial institution clients.
Sheikh was previously director, capital management and portfolio risk mitigation at NatWest, overseeing the SRT and credit risk insurance platforms for the bank’s commercial division. Before that, he held origination, structuring and distribution-related roles at RBS, Barclays, KPMG and Deutsche Bank.
Steve Gandy has also joined BPL Global on a consultancy basis. He was formerly head of private debt mobilisation at Santander, having retired from the firm last year (SCI 14 June 2022).
Meanwhile, Jean-Francois Leclerc has joined Polar Asset Management Partners' structured credit team as junior strategy lead, focusing on significant risk transfer transactions and other bespoke structured credit solutions. Based in Toronto, he was previously head of risk and capital solutions at BMO Capital Markets.
Pipeline update
JPMorgan is said to be close to printing an SRT trade referencing a portfolio of leveraged loan credit facilities. The face value of the notes is anticipated to be around €200m and the portfolio sized at around €2bn, with about 95% of the pool understood to be European exposures. The transaction is believed to have been postponed from 2021.
CRT new issue pipeline
| Originator |
Asset class |
Asset location |
Expected |
| Banco Sabadell |
Corporate loans |
Spain |
2H23 |
| Deutsche Bank |
Leveraged loans |
Europe, US |
2H23 |
| Eurobank |
Corporate loans |
Greece |
2H23 |
| Intesa Sanpaolo |
Corporate loans |
Italy |
2H23 |
| JPMorgan |
Corporate loans |
US |
2H23 |
| JPMorgan |
Leveraged loans |
Europe |
2H23 |
| LBBW |
CRE loans |
Germany |
2H23 |
| Lloyds Bank |
SME loans |
UK |
2H23 |
| mBank |
Consumer loans |
Poland |
2H23 |
| Unicredit |
Residential mortgages |
Italy |
2H23 |
Rating actions
Fitch has downgraded the ratings of 435 CAS and STACR CRT bonds to double-A plus, with a stable outlook, from triple-A rating watch negative. The move follows the downgrade of Fannie Mae’s and Freddie Mac’s long-term issuer default rating (LTIDR) to double-A plus, outlook stable, upon the downgrade of the US’s LTIDR to double-A plus from triple-A last week.
As government-sponsored enterprises, Fannie Mae and Freddie Mac benefit from implicit government support and therefore their LTIDRs are directly linked to the US sovereign's LTIDRs. Under all GSE CRT structures, while the transaction repayment profile is linked to the performance of the reference pool, the GSEs are the ultimate liquidity provider for the notes. As such, Fitch's rating is based on the lower of the quality of the mortgage loan reference pool and credit enhancement available through subordination, or the LTIDR of the GSEs.
Fitch confirms that none of the rating downgrades are related to mortgage or borrower performance, but are solely related to the unique structuring of these GSE CRT securities and the counterparty linkage. GSE CRT ratings at or below double-A plus remain unchanged.
SCI SRTx indexes
For more information on the Significant Risk Transfer Index (SRTx), click here.
Market Moves
Structured Finance
FCA seeking a 'more proportionate' SecReg
Market updates and sector developments
The UK FCA has issued its own consultation on proposed changes to the securitisation regime, following the publication of HM Treasury’s near-final statutory instrument (SI) (SCI 13 July) and the UK PRA’s consultation (SCI 28 July) last month. The document appears to focus on fixing some technical issues and clarifying others, rather than recommending any wholesale changes to the current regulatory framework.
The FCA notes that taken together, its consultation paper (CP), the PRA CP and the near-final SI provide an overview of the proposed replacement of the UK Securitisation Regulation. It further notes that the near-final SI requires the FCA and the PRA to “have regard” to the coherence of the overall framework for the regulation of securitisation. This means that, although the FCA and the PRA will write their own rules in relation to the firms and activities they supervise, both regulators need to ensure this creates a coherent set of rules overall.
Under the near-final SI, the FCA is tasked with making general rules requiring a relevant institutional investor to carry out due diligence, both before holding a securitisation position and while holding a securitisation position. Additionally, the authority proposes to make rules for all authorised and unauthorised originators, sponsors, original lenders and SSPEs that are not PRA-authorised firms, in relation to risk retention requirements, transparency obligations, resecuritisation restrictions and credit granting standards. The PRA will make rules for PRA-authorised firms in relation to those obligations.
The FCA also proposes to make rules relating to STS securitisations for all UK originators and sponsors, as well as for securitisation repositories (SR) and third-party verifiers (TPV).
As part of the CP, the authority is seeking to: clarify what kind of information UK institutional investors require to fulfil their due diligence obligations; amend and clarify risk retention provisions, with particular reference to facilitating non-performing exposures (NPE) securitisation; and make a number of clarificatory changes to other areas of the regulation based on market feedback, such as the geographical scope of the UK SR and the criteria for homogeneity in STS securitisations. Additionally, the CP includes a discussion on the definitions of public and private securitisations.
The FCA says it plans to consult on proposed changes to the reporting regime in a second consultation to be published at a later stage, with the aim of making reporting more proportionate. Indeed, the authority emphasises that the outcomes it is seeking from its proposals are: to make the UK SR more proportionate; to remove barriers to the issuance of, and investment in, securitisations; to implement such proposals while maintaining appropriate protections for investors and with as minimal additional regulatory and operational cost upon impacted firms as possible; and to provide a clearer framework within which the market can operate.
The implementation date for the changes resulting from this CP is anticipated to be in 2Q24. The consultation runs until 30 October.
In other news…
ICE, Black Knight timing agreement inked
Intercontinental Exchange and Black Knight have jointly stipulated, along with the Federal Trade Commission (FTC), to dismiss the preliminary injunction proceeding in the US District Court seeking to block the close of ICE’s previously announced acquisition of Black Knight (SCI 10 March). The joint stipulation dismisses the federal court complaint and dissolves the temporary restraining order that was previously in place, allowing ICE, Black Knight and the FTC to continue working towards a final settlement agreement resolving the FTC’s challenge to the acquisition.
In connection with the stipulation, ICE and Black Knight have entered into an agreement with the FTC staff to refrain from closing the acquisition before 11:59pm EDT on the tenth calendar day after the parties sign an Agreement Containing Consent Order (ACCO) for submission to the FTC. The timing agreement provides certain deadlines and milestones for a mutually acceptable ACCO by 25 August. If the parties do not sign an ACCO by that time, any party may unilaterally terminate the timing agreement with three calendar days written notice to all other parties.
The agreement follows divestiture agreements for Black Knight’s Optimal Blue business and Empower loan origination system (LOS) business. The divestiture transactions are subject to the closing of ICE’s acquisition of Black Knight and other customary closing conditions.
Market Moves
Structured Finance
Job swaps weekly: New faces for Newmark
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees Newmark Group making a number of senior appointments to its debt and structured finance team. Elsewhere, Helaba has hired a former Deutsche Bank md to lead its asset finance team, while CRED iQ has appointed a new head of data and analytics.
Commercial real estate manager Newmark has made three senior appointments in its Texas and New York offices, as it continues to build out its debt and structured finance team. The firm has appointed KeyBank Real Estate Capital’s John Ward as vice chair of multifamily capital markets, as well as hiring JLL’s Chris McColpin and Morgan Stanley’s Andrew Porteous as mds.
The appointments come six months after Newmark hired former Lument md Colin Cross in its Dallas office as vice chairman for multifamily capital markets, also focusing on debt and structured finance.
Ward joins Newmark after five and a half years at KeyBank, during which he focused on Fannie Mae, Freddie Mac and HUD lending as well as CMBS origination. He will be based in the New York office.
McColpin and Porteous will be based in Austin and Dallas respectively and will work within the capital markets debt, equity and structured finance practice. McColpin leaves his position as managing director at JLL after six and a half years with the business. Porteous joins Newmark after eight years with Morgan Stanley, leaving his role as head of the Texas office within the commercial real estate group.
Meanwhile, German bank Helaba has hired former Deutsche Bank md Sabine Möller as head of asset finance, starting in October 2023. Möller will take over from outgoing head of asset finance Ulrich Pähler who retired in June. She leaves real estate finance business Deutsche Teilkauf after one year as CEO, prior to which she spent 15 years at Deutsche Bank, latterly heading the structured finance sales department for the DACH region.
Harry Blanchard has joined CRED iQ as md, head of data and analytics, based in New York. He was previously a director - CRE advisory services at Moody’s Analytics, having joined Moody’s as a CMBS senior credit analyst in July 2015. Before that, Blanchard worked at MetLife, Wells Fargo and Bank of New York in various securitisation-related roles.
NORD/LB has recruited Angus Fyfe as an associate director in its energy structured finance team in London. Fyfe joins the firm from Australian bank, NAB, where he focused on renewables origination and deal execution as a project finance senior associate.
HSBC has promoted Veronica Law to associate director for regional lending and portfolio management within its corporate and structured finance team. Law is based in Hong Kong and joined the bank in 2015.
Global solar lender, Lightsource bp, has promoted a former structured finance associate to vp. Sherwyn Vaz will take on his new role as vp having joined the firm’s London office in 2021 from Natwest, where he worked across its structured credit and project finance teams since 2018.
Saudi Arabian bank Riyad Bank has hired the Saudi Industrial Development Fund’s (SIDF) Ibrahim Alrwita as assistant vice president for project and structured finance. Alrwita leaves his position as senior credit relationship manager at SIDF after four years with the fund. In February this year he completed a seven month secondment at Crédit Agricole CIB, where he worked in the EMEA power and utilities structured finance division.
And finally, EY has promoted Louisa Mancuso to the position of senior analyst in its structured finance division in New York after two years serving as a CMBS structured finance analyst at the firm.
Market Moves
Structured Finance
Empirical study reveals blockchain efficiency
Market updates and sector developments
Blockchain technology can reduce the yield spread on securitisations by approximately 25bp, according to a new BIS Working Paper. Based on an analysis of circa 5,000 ABS products issued in China between 2015 and 2020, the study examines whether blockchain-based ABS enjoy better pricing than those not based on blockchain.
Specifically, the study analyses whether the adoption of blockchain technology improves efficiency and transparency of financial transactions; whether the potential weak governance in terms of social interactions among participants generates an illusionary sense of reliability; and whether the market can understand such complexity and price it in. The paper explores how blockchain ABS products compare with traditional ABS products and whether differences in the design and governance of permissioned blockchain, as well as the relationship among participants in the issuance of ABS, affect the valuation and performance of ABS products.
In China, blockchain has been used at various stages in the securitisation process since 2017. Overall, the study implies that adopting blockchain appears to be beneficial in terms of improving the efficiency and transparency of ABS trading in the country. However, the benefit is heterogeneous across different institutional arrangements and asset classes.
For example, blockchain adoption seems more valuable for China Securities Regulatory Commission (CSRC)-regulated ABS products – such as consumer loan or account receivables securitisation – potentially due to information asymmetry. Relatively speaking, CSRC-regulated ABS products are less standardised and more opaque than RMBS, for instance.
In other news…
Medalist integrates Semper team
Medalist Partners and Semper Capital Management have expanded their partnership in the structured credit space (SCI 14 November 2022), with Medalist formally announcing plans to integrate the Semper Capital business onto its platform. As part of this process, various Semper Capital investment and support personnel will join Medalist, where they will manage their existing strategies with the enhanced resources of the Medalist platform, while continuing to leverage the robust investment process developed within Semper Capital over the past 30 years. The integration provides significant investment and operational support to the Semper Capital team and further bolsters the breadth and scale of Medalist’s structured credit and private credit platform.
Under the integration, Semper Capital ceo Greg Parsons, cio and portfolio manager Thomas Mandel and other senior Semper Capital professionals will join Medalist. Mandel will continue leading the investment activities of Semper Capital’s strategies along with Greg Richter, ceo and portfolio manager at Medalist. Together, they will continue to draw upon the broader investment and institutional resources of the Medalist platform to execute on significant opportunities in the structured credit market.
Headquartered in New York, Medalist is led by partners Richter, Michael Ardisson and John Slonieski, who previously led Credit Suisse’s global specialty finance and securitisation business. Following this transition, Medalist and its affiliates are expected to manage approximately US$3bn in assets under management.
Market Moves
RMBS
California judge backs investors in clean-up call dispute
Market updates and sector developments
A court has ruled in favour of investors, in a case centred around RMBS trusts held by Deutsche Bank National Trust and a related clean-up call transaction by mortgage servicer PHH Mortgage Corp. The mortgage servicer had previously announced its intention to exercise its clean-up call rights and purchase the trusts’ assets at a contractually defined price.
The Superior Court of California judge ruled that the price paid by PHH had to take into account the $75m of deferred principal payments owed by mortgage holders who had taken up home loan modification programs in the aftermath of the financial crisis. McKool Smith, which represented investors NAV and Stephen Finkelstein, says the ruling may have “far-reaching consequences” for RMBS trusts containing mortgages that were securitised in the early 2000s.
In other news…
S&P drops numerical ESG scores
S&P Global Ratings is to stop issuing ESG credit indicator scores in credit rating reports. The agency has decided to outline any ESG factors that may impact creditworthiness in “analytical narrative paragraphs”, rather than using the numerical scale from one to five that it previously applied to each area of environmental, social and governance risks.
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