News Analysis
ABS
Skid marks
Sub-prime auto ABS shows sign of pain
After several years of trying economic conditions during which the ABS market has been robust, the sub-prime auto sector could be about to see the first delinquencies since the 1990s.
The Fed hiked rates again in July, its 11th increase since it began in March 2022, taking rates to the highest level seen since 2001. Rather worryingly, the committee gave no indication that it is finished yet, and under Jerome Powell this Federal Reserve has not wanted there to be any ambiguity about its strategy.
Pandemic payments have now also dried up, leaving borrowers with little surplus. A sub-prime borrower (with a credit score below 620) could expect to have an APR of a little shy of 18% on a 72-month new auto loan.
Two used car lenders – US Auto Sales and American Car Center – went bust this summer and bonds issued by these firms are now deep in distressed territory. In the sub-prime auto ABS market, recent performance has been poor while losses have begun to appear - and not only in the equity tranches.
“Losses have bubbled into the junior tranches, and that’s a new day. Generally, investors are protected by all sorts of credit enhancements, so clearly we’re into new territory here,” says Joseph Cioffi, a securitization expert and partner with law firm Davis and Gilbert.
Yet, there are also signs that the losses might be contained both by falling originations and less securitization. Generally, in rising rate environment lenders try to retain market share by moving down the credit curve but this appears not to have been happening on this occasion.
Higher rates are deterring poor credits from taking out loans while automakers prefer to bias their product line to more expensive, greater revenue earning vehicles. In 2018, sub-prime borrowers comprised around 14% of new vehicle sales with deep sub-prime borrowers making up 10% of the market. This year, these proportions have fallen to 6% and 2% respectively.
Originations across the board are well down on two years ago. It seems to be the case that lenders are demonstrating greater discipline in the past. Bank lenders are dealing with greater capital constraints than in the past, while the collapse of SVB and Signature Bank perhaps gave the jitters to lenders as well.
Originators are also less likely to securitize auto loans as the cost of doing so, with increased credit enhancements at most levels of the capital stack, becomes prohibitive. “Even as some deals are reportedly oversubscribed, people are stepping away from the securitization market as it becomes too expensive. In a sense the market has become self-regulating,” says Cioffi.
Elsewhere, the action of the Consumer Finance Protection Bureau (CFPB) against auto loan lender Credit Acceptance (CAC), initiated in January, is on hold until the Supreme Court rules on the constitutionality of the CFPB’s funding structure. Argument is set to commence on October 3.
The CFPB, alongside New York attorney general Letitia James, said the lender had “deceived thousands of low-income New Yorkers into high-interest car loans.” The average CAC car loan had a real APR of around 38% due to non-disclosure of key terms, and some even came in around 100%, they allege. The lender disputes all charges and has said it will "vigorously defend" itself.
All may come to naught if the Supreme Court does agree with the October 2022 ruling of the Fifth Circuit that the CFPB is funded unconstitutionally. A number of amici curiae briefs were filed over the summer to members of Congress, while Michael Mulvaney, former acting director of the CFPB under President Trump, called the CFPB “one of the most opaque, least transparent, and potentially most abusive agencies in the federal government.”
If the CFPB survives and its case against CAC prevails, it will be also a test case of the agency’s effort to extend the “ability to repay” standard to the sub-prime auto loan market. Hitherto, its authority to rule in such cases has been restricted to the mortgage market.
Credit Acceptance protests that the CFPB has no jurisdiction to rule on this area of the sub-prime auto market. “If CAC prevails on its motion, it may put the nail in the coffin of the ‘ability to repay' concept in autos altogether,” says Cioffi.
Simon Boughey
back to top
News
Structured Finance
SCI Start the Week - 21 August
A review of SCI's latest content
Last week's news and analysis
Fine-tuning UK securitisation
FCA and PRA take pragmatic approach to post-Brexit regulations
Job swaps weekly: TCW snaps up American Century securitisation head
People moves and key promotions in securitisation
Prelios acquisition agreed
Updates on X3’s purchase, an ABS CDO transfer and the Vesttoo injunction
Risk transfer round-up - 17 August
The week's CRT developments and deal news
SCI In Conversation podcast: Jeff Krohn, Guy Carpenter
We discuss the hottest topics in securitisation today...
UBS to pay US$1.4bn over pre-crisis RMBS
Updates on UBS settlement and Vesttoo Chapter 11
Plus
Deal-focused updates from our ABS Markets and CLO Markets services.
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, Guy Carpenter's md, mortgage and structured credit segment leader Jeff Krohn talks about the recent shape of events in the GSE CRT sector, from the perspective of the capital markets and reinsurance market. He also touches on the topic of recent issuance - or the lack of it - from mortgage insurers and looks as well forward to the prospect of greater issuance in the CRT sector by US banks.
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
Women In Risk Sharing
18 October 2023, London
SCI's 9th Annual Capital Relief Trades Seminar
19 October 2023, London
Esoteric ABS Seminar
7 November 2023, New York
European CRE Finance Seminar
28 November 2023, London
News
Capital Relief Trades
Risk transfer round-up - 24 August
The week's CRT developments and deal news
Deal news
Standard Chartered has executed the eighth synthetic securitisation from its Chakra programme. The significant risk transfer transaction – Chakra 8 – references a portfolio of global corporate revolving facilities, 30% of which are US exposures.
Two tranches were offered to investors. According to market sources, the first loss tranche (0%-6.5%) priced at SOFR plus 12%, while the mezzanine tranche (6.5%-9%) landed at SOFR plus 5%.
Comparatively, the last Chakra trade – which closed in November last year – priced its first loss tranche (0%-6.5%) at 11% and a mezzanine tranche (6.5%-9%) at 4.75%.
Market news
The ECB has disclosed its own data for the significant risk transfer market in 2022, following last month’s publication of IACPM’s survey results on synthetic securitisation (SCI 11 July). In its latest Banking Supervision Newsletter, the central bank reveals that more than 30 banks issued 118 SRT transactions, worth a total notional amount of over €170bn. The previous peak of slightly above €120bn was reached in 2019, according to the ECB.
The latest figures show that synthetic securitisations continue to dominate the SRT segment, with a share of more than 85% of the overall notional. The majority of transactions (110 out of 118) involved performing loans and accounted for a notional volume of €163bn.
Out of these 110 transactions, 72 are synthetic, representing a total notional volume of €145bn. The remainder are cash securitisations.
In terms of asset classes underlying SRT transactions, the ECB Newsletter confirms a divergence between synthetic and traditional deals. Synthetic securitisations predominantly reference portfolios of loans to corporates and SMEs, as well as residential mortgages and auto loans. On the other hand, traditional securitisations are mostly backed by mortgages portfolios, auto loans, consumer loans and leasing exposures.
Pipeline update
As August and its characteristic summer slowdown soon comes to a close, CRT market participants are getting ready for an expectedly busy second half of the year.
“The pipeline is pretty busy right now,” confirms one SRT investor. “We are currently looking at over 15 transactions, many of which have not launched but have been sort of soft-circled for closing in Q4.”
He continues: “And actually, I expect that a number of deals from other banks that we haven’t seen yet will be shown to us in September. We’ve been signing NDAs with a number of banks, but they haven’t started the marketing process, as they wait for everyone to be back from holidays to kick things off.”
In terms of the upcoming European SRT pipeline and its geographical distribution, the investor describes a diverse distribution: “We’re seeing trades from Portugal, all the way to Holland and everything in between, such as Germany, the UK, the US and Poland.”
Additionally and in anticipation of a flurry of transactions, the investor further reiterates (SCI 3 August) the market sentiment that the buy-side could become resource-blocked from September onwards. “I imagine it’s going to be an extremely heavy year and issuers will need to be careful about not leaving it too late. Banks seem to be well aware that Q4 is always busy and if you want to get investors to focus on your trades, you do need to come early.”
He concludes: “If issuers come too late in the year, people will inevitably ask them what they are going to pay for investors to look at their deal.”
CRT new issue pipeline
| Originator |
Asset class |
Asset location |
Expected |
| Banco Sabadell |
Corporate loans |
Spain |
2H23 |
| Credit Agricole |
Project Finance |
|
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 |
| National Westminster Bank |
Project Finance |
|
2H23 |
| Unicredit |
Residential mortgages |
Italy |
2H23 |
SCI SRTx indexes
For more information on the Significant Risk Transfer Index (SRTx), click here.
Market Moves
ABS
Janus Henderson rounds out securitisation ETF suite
Market updates and sector developments
Janus Henderson is preparing the launch of a new fund that the firm says will complete its suite of securitisation-focused ETFs and enable it to invest in almost all of the US securitised market. The US$253.3bn asset manager filed a preliminary registration statement with SEC for Janus Henderson Securitized Income Exchange Traded Fund on Friday.
The new ETF’s objective is to “seek current income with a focus on preservation of capital”, the firm says. It will sit alongside three other securitisation-specific ETFs managed by Janus Henderson — one of which focuses on triple-A rated CLOs, one that invests in single-B to triple-B rated CLOs and one that focuses on MBS opportunities.
The vehicle is scheduled to launch in November. It will be managed by portfolio managers John P Kerschner and Nick Childs, both of whom are also responsible for Janus Henderson’s other securitisation ETFs.
In other news…
BMA, White Rock action announced
The Bermuda Monetary Authority (BMA) and White Rock Insurance (SAC) have jointly agreed to a course of action in the Supreme Court of Bermuda that will focus on pursuing maximum recovery for the (re)insureds impacted by the alleged fraud involving Vesttoo-related segregated accounts (SCI passim).
Both parties have agreed for the Bermuda Supreme Court to appoint Charles Thresh and Michael Morrison of Teneo (Bermuda) to act as joint provisional liquidators (JPLs) for White Rock Bermuda with respect to the impacted Vesttoo cells. The JPLs and the directors and management of White Rock Bermuda will bring their resources together to address the matter.
This action applies only to the impacted Vesttoo cells. White Rock Bermuda says it continues to operate in the ordinary course of business and this action has no effect on any other cells or White Rock Bermuda clients.Vesttoo, in turn, claims that the joint action is in violation of the automatic stay that began with its Chapter 11 filing last week (SCI 15 August).
Market Moves
Structured Finance
Securitisation exempt from private fund rule
Market updates and sector developments
The US SEC has determined that securitised assets funds, including CLOs, are exempt from its Private Fund Advisers Rule. The new rules aim to protect private fund investors by increasing transparency, competition and efficiency in the private funds market. To enhance transparency, the rules will require private fund advisers registered with the Commission to provide investors with quarterly statements - detailing certain information regarding fund fees, expenses and performance – as well as an annual financial statement audit of each private fund it advises.
The LSTA - which opposes multiple sections of the final rule - notes that the rule would have imposed significant additional disclosure obligations that are of no value to CLO investors and would have prohibited or limited many important practices that are standard in the CLO market. The association remains concerned that this rule may have been adopted without appropriate regard for the substantive and procedural requirements imposed by Congress on SEC rulemakings and may exceed the SEC’s statutory authority.
In other news…
Consumer lender acquisition agreed
Digital lending platform auxmoney has acquired the majority shareholding in Dutch consumer credit marketplace Lender & Spender. With this step, auxmoney builds upon its continued organic growth over recent years, as well as expands its international reach and product range.
The two platforms entered into an integrated partnership in June 2022, whereby auxmoney had begun investing in the Lender & Spender business and helped establish debt-based funding structures with a leading investment bank. Since the launch of the partnership, Lender & Spender was able to grow its loan origination more than fivefold and at strongly improved loan economics.
Founded in 2015, Lender & Spender currently employs 32 staff and originates annualised volumes of close to €200m in new loans. The platform will continue to operate under its own brand in the Dutch consumer market and remain headquartered in Amsterdam.
The transaction remains subject to approval of local authorities.
Market Moves
Structured Finance
Job swaps weekly: Stream of hires at Flowcarbon
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees carbon fintech business Flowcarbon bulk up its structured finance muscles with a promotion and two new hires. Elsewhere, Atom Bank has appointed a former Arrow Global ceo as chair designate, while Bespoke Real Estate Advisers has promoted a founding member to chief investment officer.
Flowcarbon has promoted Martin Kessler to chief business officer, just five months after hiring the former HSBC veteran to head up its business development and global markets team. Kessler left his position as md at HSBC in March 2022 after 11 years with the bank, where he most recently led the regional and global sales teams focused on derivatives and structured credit.
Kessler also previously spent four years at Bank of America Merrill Lynch, seven years at Lehman Brothers and two and a half years at JP Morgan.
Flowcarbon was founded in 2021 and looks to secure financing for carbon negative projects. Carbon credits generated by the projects are then sold to organisations looking to offset their emissions. The business makes use of blockchain transactions in what it says is an effort to expand the voluntary carbon market at speed and help meet climate goals set by the Paris Agreement.
Kessler says Flowcarbon is aiming to leverage the team’s “rigorous structured finance skills” to help institutional investors looking to “place capital into climate channels”. His appointment also coincides with the firm’s hiring of another former HSBC md, Will Higbee, as head of project finance and former Pemberton md Bart Ras as head of carbon markets strategy and propositions.
Meanwhile, Atom Bank has named Lee Rochford as chair designate. Rochford was formerly group ceo at Arrow Global, having previously held securitisation-related positions at Wachovia, Credit Suisse and BNP Paribas, among other roles.
Bespoke Real Estate Advisers has promoted founding member Ed Wlodarczyk to chief investment officer. Wlodarczyk co-founded Bespoke in 2017 and is also president and ceo of Prairie Stone Investors, where he has spent 23 years.
CaixaBank has appointed Ikarus Capital’s Thibaud Ollivier as head of asset and structured trade finance for its UK branch, based in London. Ollivier joins after a four-month stint as senior advisor at Ikarus. He was previously group head of distribution and portfolio management in Sumitomo Mitsui Banking Corporation’s transportation finance team and an EMEA-focused director in MUFG’s structured finance team.
Shearman & Sterling has rehired former counsel Alejandro Gordano from Linklaters as partner in its capital markets practice. Gordano focuses on structured finance transactions, including diversified payment right securitisations, as well as debt and equity offerings, credit facilities, restructurings and liability management. He is based in Shearman & Sterling’s New York office and leaves his position as counsel at Linklaters after three and a half years with the firm.
Renewable energy financing firm NORD/LB has appointed ICBC’s Olivia Jennings as a director in its structured finance portfolio management team, working out of its London office. Jennings spent two years at ICBC in the role of portfolio manager on its project and infrastructure finance team. She previously spent seven years at Société Générale.
Socar Trading, the Geneva-headquartered trading arm of Azerbaijani state-owned oil company Socar, has appointed Credit Suisse’s Antoine Sevray as head of trade and structured finance. Sevray leaves his role as team head at Credit Suisse after a year and a half with the bank, having previously spent 17 years with BNP Paribas.
Mizuho’s Siham El Abbassi has joined Export Finance Australia as associate director in its project and structured finance team, working out of Sydney. She leaves her role as senior associate on the project finance team at Mizuho after five years with the Japanese financial services business. She previously spent three years at BNP Paribas.
US law firm Seward & Kissel has appointed Sean Thorsen as counsel in its real estate group. Thorsen will be based in the firm’s New York office and focus on commercial real estate and securitisation. He leaves his role as associate in the real estate finance team at Cassin & Cassin after two and a half years with the business, and previously worked at McDermott Will & Emery, DLA Piper and Eckert Seamans.
Global real estate consultancy group Cushman & Wakefield has rehired Kristian Brown as senior associate in its equity, debt and structured finance team. Brown will be based in the firm’s Phoenix office and leaves his role as capital markets associate at real estate fintech firm CrowdStreet after one year. Prior to CrowdStreet he spent three years in Cushman & Wakefield’s equity, debt and structured finance team.
Australian financial services firm Perpetual Limited has promoted Jemma Roes to senior securitisation deal analyst. Roes joined the business four years ago and is based in its Sydney office.
Lightsource BP, the solar energy company partially owned by BP, has promoted São Paulo-based Sasha Sampaio to associate vice president in its structured finance team. Sampaio joined Lightsource BP in 2020 after three years with EY and two years with Brookfield Asset Management’s Brazilian division.
Market Moves
RMBS
Nomura pays US$35m to settle RMBS fraud case
Market updates and sector developments
Nomura Securities International (NSI) has agreed to pay a US$35m penalty to the district of Connecticut and US$800,000 in additional restitution payments over alleged historical fraudulent trading of RMBS. The settlement is part of a non-prosecution agreement between NSI and the US Attorney’s Office for the district.
The DOJ investigation found that the Japanese investment bank’s US broker-dealer subsidiary “perpetrated a scheme from 2009 to 2013 to defraud its customers in RMBS trades”. The federal government alleged that NSI and employees primarily based in its New York office conducted the so-called scheme to increase profits at the expense of its customers.
In a statement, the prosecuting office said that traders “lied to the [buyers] about the seller’s asking price — or vice versa” in certain transactions. It added: “In other transactions, NSI traders misrepresented to the buyer that bonds held in NSI’s inventory were being offered for sale by a fictitious third-party seller, which allowed NSI to charge the buyer an extra, unearned commission.”
Nomura says it is pleased to have resolved the matter, grateful that the DOJ recognised its remediation and cooperation, and that the resolution will have no financial impact given that “sanctions were recognised in prior periods”. The agreement comes a week after UBS agreed to pay US$1.435bn to settle a case relating to historical alleged misconduct surrounding the underwriting and issuance of RMBS prior to the financial crisis (SCI 15 August).
In other news…
Arrow fully acquires Maslow
European credit- and real estate-focused asset manager Arrow Global is to wholly acquire real estate direct lending firm Maslow Capital. The agreement follows Arrow’s previous acquisition of a minority stake in the business in December 2021.
Maslow originates, underwrites and services real estate loans ranging from £10m to £300m for UK residential projects. Arrow has recently made similar acquisitions, including the bolt-ons of Eagle Street Partners and Blue Current Capital.
structuredcreditinvestor.com
Copying prohibited without the permission of the publisher
