Contents

Capital Relief Trades

Missed opportunity

UK consultations overlook synthetic securitisations

As part of the broader post-Brexit programme to reform and replace existing EU law in the UK, the FCA and PRA recently published consultation papers setting out proposed rules for the UK securitisation market (SCI 15 August). While the period for both consultations ends on 30 October 2023, the current lack of consideration for synthetic securitisations is evident.

“I think it really is a lost opportunity that the UK regulators have not taken up the securitisation industry’s calls to follow the EU and give STS recognition for synthetics,” notes Katie McCaw, senior practice development consultant at Pinsent Masons. “In particular, because of course, the UK regulators have a new competitiveness objective under the Financial Services and Markets Act.”

At the core of the wider push to show the benefits gained by leaving the EU sits the notion of competitiveness (SCI 12 December 2022). Looking back at the context of the Treasury’s Article 46 report, McCaw describes a lack of impetus.

She says: “What the Treasury said was that HM Treasury and the regulators take interest in the extent to which such a measure, i.e. giving STS recognition for synthetics, would benefit real economy lending and UK competitiveness. The FCA and PRA did not pick up on the fact that the Treasury seemed to leave this door open for the industry to give evidence that it would help competitiveness.”

While there is currently no indication that STS recognition for synthetics will be addressed by the regulators, McCaw further identifies another key omission: “We haven't seen anything new from the regulators on addressing capital requirements for securitisations in the prudential framework. This is something that I think we would like to see addressed from a UK perspective.”

Nevertheless, McCaw highlights the potential for greater flexibility in terms of the way regulators will be rewriting securitisation rules. “We now no longer have an EU derived piece of legislation that we could really only tinker with. We now have rules that will be written under the ‘FSMA model’,” she states.

She continues: “Therefore, the bulk of the rules will no longer sit in legislation; they'll be in the regulatory handbooks. And that gives what I think I'm seeing in other regards as a more proportionate and flexible approach.”

As the regulators consult on their policy proposals, the industry’s response is widely anticipated. Indeed, McCaw views disclosure and transparency as another significant aspect that is lacking in attention.

“I think the industry will have a lot to say about the fact that it has not been addressed at this time and is being left to a later consultation,” she suggests. “Although I think that there may be an element of waiting to see what the EU does, since the EU has tasked ESMA with revisiting the reporting requirements and the templates for all securitisations, particularly for private deals. There is the idea that they may be scrapping reporting for private deals entirely, or at least highly simplifying what has to be done in terms of disclosure.”

McCaw concludes: “I think that despite now being on its post-Brexit path, the UK is hanging on to see what the EU does. Because of course, the other big issue in all of this is that the market would like these deals to be cross-border; sold across borders, with investors operating across borders. And if you have very different reporting requirements in the EU, compared to the UK, it becomes very difficult to do that. And that's not a political point about Brexit; it's a market point.”

Vincent Nadeau

CMBS

Expenses review

Addressing rising operating costs in Euro CMBS

A recent S&P review of European CMBS transactions has revealed a consistent increase in operating costs, both on an absolute (per square-foot) and relative basis (as a percentage of revenue). Consequently, the rating agency argues that the current challenging macro environment demands a stronger focus on property expenses.

Reasons for the rise in European CMBS expenses are threefold, with the most notable one being inflation, which has increased the price per square-foot, as energy, labour and materials have become more expensive. Second, the uptick in vacancy rates has meant that landlords have had to shoulder costs that usually fall within the tenants' remit. Rising market vacancies have also resulted in more competitive rental markets, with landlords having to compete not only on location, amenities and rent, but also on other expenses that add to tenants' total costs, such as utilities, cleaning and security.

Finally, operating expenses account for a larger share of a building's revenue when costs rise and rents decline. In general, rents tend to rise more slowly than inflation - or even decline - when economic growth is slow or about to decrease.

Among the European CMBS transactions S&P reviewed, expense performance varied widely over time. The analysis shows that some transactions have managed to reduce their non-recoverable expenses since closing or the latest pre-pandemic investor report.

Nonetheless, more than 70% have seen expenses increase on a per unit basis and 85% have seen an expense increase as a percentage of their revenue. For instance, in the retail transactions S&P assessed, expenses per square-foot have more than doubled. Barring the minimum and maximum changes, expenses have increased by 37% on average when calculated per unit over a four-year period.

Some of the office transactions the rating agency reviewed have fared better in this analysis than operating properties, such as hotels or student housing.

Similarly, in terms of expenses versus income, non-recoverable expenses as a percentage of revenue were up 55% over a four-year period. Unlike recoverable expenses, such as facility services and utility bills, non-recoverable expenses directly affect a property’s net cashflows. S&P’s rated universe includes non-recoverable expenses that range from 0% for UK buildings under full repairing and insuring leases to 65% for operating assets, such as hotels.

Based on the agency’s conversations with property and asset managers, it believes landlords can benefit from benchmarking initiatives, which will enable them to compare their expenses with their competitors'. “In some instances, landlords may do well to lower service levels in accordance with tenants' requirements or to leverage economies of scale by bundling services and properties. Where possible and economically feasible, landlords could also reduce non-recoverable expenses by changing leases and passing on the costs to tenants. Landlords can, in many cases, even be proactive and help tenants increase office usage; for example, by improving amenities or redefining office layouts,” S&P concludes.

Corinne Smith

RMBS

Refi resolution

Clavel 2 'selective default' an idiosyncratic event

Non-payment of the principal amount outstanding in full at the time of early redemption of Spanish reperforming RMBS Clavel Residential 2 last month (SCI ABS Markets Daily - 4 August) “turned the concept of principal seniority and subordination on its head”, according to DBRS Morningstar. The rating agency highlights in a recent commentary that the deal’s class A notes stand out because their redemption was at a discount to par, whereas the class E and F notes were only partially redeemed with the use of available funds that were applied according to principal priority of payments. Meanwhile, the class B, C and D notes were repaid in full.

The seller - Ellington Residential Holdings Ireland II - had previously issued the €682.6m Clavel Residential 3 (ABS Markets Daily - 26 July) to refinance the Clavel 1 and 2 transactions, by purchasing the respective securitised portfolios. DBRS Morningstar notes that €527.4m was made available for principal redemption of Clavel 1 and Clavel 2, with the proceeds used first to redeem the Clavel 1 bonds (except class Z) in full - hence subjecting Clavel 2 to the entire potential refinancing shortfall, thereby “technically subordinating Clavel 2 to Clavel 1”. The agency suggests that the remaining €386.1m of principal proceeds after the redemption of Clavel 1 could have been allocated to Clavel 2 according to the principal priority of payments, which would have resulted in full repayment of classes A to D, with principal losses occurring on classes E and F.

Instead, following 100% noteholder consent and the execution of a deed of agreement, the class A note outstanding principal balance of €275.7m was redeemed by €270.1m (representing 98.3%). Following the final payment to noteholders, all notes were cancelled.

“In our view, the non-payment of the full class A principal amount outstanding per the transaction documents constitutes a default on repayment of principal and an ultimate loss to class A noteholders, irrespective of whether the noteholders provided consent to it,” observes DBRS Morningstar. “We have reflected this in our rating action by downgrading the bonds to D before discontinuing the rating. However, we think that such default could have potentially been avoided by using other early redemption mechanisms with the same economical effect (i.e. same cash payments to noteholders).”

At the Clavel 2 issuer level, it could be argued that a selective default (SD) occurred, given that the issuer repaid some bonds in full while redeeming higher ranking bonds below par. “In our view, the noteholder agreement strongly implies that the affected bonds were not widely held. In addition, the redemption in full of various mezzanine classes could imply that these were more broadly distributed,” DBRS Morningstar suggests.

The agency concludes: “We think that the Clavel 2 defaults were a result of the specific circumstances and decisions made by a very small number of noteholders involved in the affected classes in this transaction. As such, we do not think [such a scenario] will be repeated often, considering the structural mitigants usually in place - namely that in the case of optional redemption, notes usually need to be repaid in full.”

Corinne Smith

Structured Finance

Bayview branches out into insurance AM

Market updates and sector developments

Bayview Asset Management has launched an Insurance Asset Management business, with the aim of appealing to an insurance industry that is increasingly seeking to diversify and expand beyond its traditional focus on corporate credit. The new division will be led by cio Nancy Mueller Handal, who formerly served as head of private fixed income and alternatives at MetLife, with oversight of approximately US$150bn of investments. She previously partnered with Bayview while building MetLife’s residential whole loan investment platform and invested across the Bayview platform as an LP.

Bayview says it is uniquely positioned to launch this new business as a leading residential loan servicer with US$620bn of owned MSRs, having purchased more than US$163bn of residential loans from over 1,000 counterparties and originated over US$123bn of residential loans since inception. In addition, the firm is a leading provider of credit protection to US banks and GSEs on residential mortgages, having executed transactions representing over US$400bn of credit risk transfer.

Alex Latella has also joined Bayview’s newly formed Insurance Asset Management division as svp responsible for business development. He was formerly a member of the Insurance Solutions team at BlackRock.

In other news…

Former Change chief of staff arrested
The Change Company has released a statement about its former chief of staff, Adam Levine, who it says has made numerous threats and allegations against the firm and its employees since he was placed on leave in March due to allegations of serious and ongoing workplace misconduct. The statement confirms that Levine was arrested last week for impersonating a police officer and that while this charge is unrelated to Change, employees of the firm are cooperating with the investigation, given “common and overlapping fact patterns” and an outstanding workplace violence restraining order (WVRO) against Levine that relates to employees of Change.

Change says it hired a third-party law firm to investigate employee allegations of misconduct leveled against Levine, as well as to investigate allegations of misconduct made by Levine relating to Change, including whistleblower allegations and a lawsuit relating to the firm’s loans, securitisations, reporting and leadership. The investigation found the allegations made against Levine were supported by a preponderance of evidence, while the allegations made by Levine were unsubstantiated.

After being put on leave because of his misconduct, Change reports that Levine began threatening the firm and several of its employees - including by threatening to go to regulators, the press and others unless Change paid him over US$6m, which has since been upped to over US$10m. On 21 April, the Superior Court of Los Angeles issued the WVRO against Levine for threats of violence made against Change’s founder Steven Sugarman, general counsel Alan Lindeke and a female employee who reported to Levine. Levine is alleged to have breached the WVRO numerous times, including by following employees to and from work and by surveilling their office.

Consistent with the arrest of Levine for impersonating a police officer, Change has been advised that Levine has approached employees of the firm wearing items labelled ‘US Marshal’ or with a “police-style” badge. The firm says it remains concerned about Levine’s ongoing erratic and threatening behaviour, and understands that he has also been accused of threatening and illegal conduct by some of his prior employers.

ICE, Black Knight ACCO inked
Intercontinental Exchange (ICE) and Black Knight have entered into an Agreement Containing Consent Orders (ACCO) with the FTC’s Bureau of Competition regarding ICE’s pending acquisition of Black Knight (SCI 7 August). The ACCO contains an agreed form of consent order that will be submitted to the FTC for acceptance and approval.

Pursuant to the previously announced timing agreement entered into by ICE, Black Knight and the FTC, ICE is permitted to complete its acquisition of Black Knight following 11:59pm Eastern Time on the tenth calendar day after the entry into the ACCO. Accordingly, the parties expect to close the acquisition on 5 September and to complete the previously announced divestitures of Black Knight’s Empower and Optimal Blue businesses to subsidiaries of Constellation Software within 20 days thereafter.

The deadline for Black Knight stockholders to elect the form of merger consideration they wish to receive in the acquisition has been set for 5:00pm Eastern Time on 1 September.

Structured Finance

Job swaps weekly: All change at Tikehau

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Tikehau Capital making a number of promotions, including the appointment of a new president of Tikehau IM and a new head of structured credit. Elsewhere, Way Capital has snapped up a new head of agency finance from First Foundations, while CBRE has poached two structured finance executives from Greystone & Co. 

Tikehau Capital has made a number of promotions to its senior team, including elevating deputy ceo Henri Marcoux to president of Tikehau IM and Maxime Laurent-Bellue to head of structured credit. Laurent-Bellue, who joined the firm in 2007 and has a background in private debt, is promoted from head of tactical strategies.

Marcoux has been with Tikehau since 2016 and replaces Bruno de Pampelonne, who has been appointed executive chair of Tikehau Capital Asia and a special advisor to the firm’s founders. 

Other promotions see Tikehau IM deputy ceo Frédéric Giovansili appointed deputy ceo of Tikehau Capital; Tikehau IM cfo Vincent Picot appointed cfo of the wider group, Guillaume Belnat promoted from head of treasury, financing and market operations to deputy cfo; and head of investor relations Louis Igonet appointed head of corporate strategy, development and investor relations.

Meanwhile, Way Capital has hired First Foundations' RJ Opeka as head of agency finance, working out of its office in Scottsdale, Arizona. Opeka leaves his role as director of loan production at First Foundation after one year. He was previously senior managing director in the commercial real estate banking division at Opus Bank, where he spent nine years.

OTP Bank Romania has hired Intesa Sanpaolo’s Titus Nicolae as senior large corporate relationship manager in its specialised lending and structured finance department. Based in Bucharest, Nicolae leaves the same position in Intesa Sanpaolo’s multinational clients department after a year with the bank. He previously spent eight years at Credit Europe Bank, three years at Alpha Bank Romania and four years at Generali.

Francesco Cilloni has joined Pollen Street Capital’s private credit and business development team in London. He was previously head of financial institutions solutions and securitised products at Intesa Sanpaolo, which he joined in September 2018. Before that, Cilloni worked in structured finance-related roles at Phinance Partners, NatWest, the Italian Treasury and Banca IMI.

Greystone & Co duo Jason Stein and Webb DeWitt have joined CBRE as vice presidents in the debt and structured finance division. Stein will be based in New York and joins the group after 11 years in the real estate team at Greystone. He previously worked at TriPoint Global Equities, HC Wainwright & Company, and Spencer Trask Ventures. DeWitt will work in CBRE’s Dallas office and leaves Greystone after three years.

Travers Smith has promoted Sana Dosa to senior associate in its derivatives and structured products team. Dossa is based in London and joined the firm in late 2021 after three years at Ashurst. She previously spent four years in the legal department at Deutsche Bank.

Finally, BNL BNP Paribas has promoted credit analyst Luca Simoncini to structured finance associate. Simoncini joined the bank in 2020 and is based in its Milan office. 

Structured Finance

GLAS strengthens European footprint

Market updates and sector developments

GLAS SAS is set to acquire Paris-based asset management and trust business Pristine, subject to regulatory approval and customary closing conditions. This is GLAS’s first acquisition as it seeks to strengthen its European footprint and fast-track global expansion.

Established in 2016, Pristine provides fund structuring and management services to both international and domestic institutions with the primary purpose of facilitating corporate financing in France. The firm has a diversified track record in restructuring, structured finance and other ad hoc financing projects.

GLAS SAS launched its French operations in 2018 and has since built a sizeable team, headed by Aymeric Mahe. He joined the firm in April 2020 from SG CIB, where he was deputy head of legal - DCM.

GLAS SAS and Pristine will constitute a team of over 40 people in Paris, with the differentiated proposition of operating, in their respective activities, under the regulation of both the ACPR and the AMF. Bringing together industry knowledge and complementary services will immediately benefit both firms’ existing clients and means that GLAS is well-positioned to manage larger and more complex transactions in the future.

In other news…

ABS CDO investment adviser replaced
Dock Street Capital Management has replaced TCW Asset Management Company as investment adviser on Porter Square CDO I. A certificate of acceptance of appointment has been executed, under which Dock Street accepts its appointment as replacement investment adviser and certifies that it satisfies the conditions of an eligible successor, as set forth in the investment advisory agreement. Moody's has confirmed that there is no adverse rating impact on the ABS CDO’s class C notes, given the experience and capacity of Dock Street to perform the duties of investment adviser to the issuer.

CMBS

European CRE debt faces €93bn funding gap

Market updates and sector developments

Updated AEW research shows an estimated European commercial real estate debt funding gap (DFG) of €93bn, representing the shortfall between the original amount of secured CRE debt originated in 2018-2021 and the amount available for refinance at loan maturity for the 2023-2026 period across all four property sectors in France, Germany, Italy, Netherlands, Spain and the UK (SCI 31 January). France has the largest DFG at €19bn, representing 30% of all loan originations - well above the six-country average of 21%.

“For the first time, we analyse the DFG as a percentage of total loan originations, ranking each country on a relative basis. Surprisingly, Italy and the UK come out below average, while France has the largest DFG at an estimated €19bn,” notes Hans Vrensen, md, head of research & strategy Europe at AEW.

Regarding overall leverage levels, debt financing used to fund new acquisitions reduced by 16% from 2021 to €142bn in 2022, due to the increases in all-in interest rates, which started to negatively impact demand for debt. As a result, market-wide acquisition LTVs reduced to 47% from 50% in 2021, with AEW expecting a further reduction based on lower investment volumes in 2023.

All-in borrowing costs reached a new 20-year record high in European real estate, more than doubling in 18 months to 5.9%, as at mid-year 2023. Sterling-based borrowers still face elevated debt costs at 6.8% today.

Nevertheless, AEW’s in-house data on market level loan costs suggests that all-in borrowing costs have started to stabilise, following successive rate hikes by the ECB and Bank of England, which have started to bring down inflation. Although the firm expects LTVs to stabilise at 50% by the end of 2023, declining collateral values and lower LTVs - amplified by the higher interest rate environment - are likely to trigger significant refinancing challenges for existing legacy loans with LTV and ICR/DSCR covenants at loan maturity in 2023-2025. This should be bridged by a combination of new equity top-ups, senior loan extensions and restructurings and junior debt insertions.

Overall, assuming defaults for any vintage segment with an LTV at refi of above 75%, AEW estimates that 5.8% of total CRE loans originated in 2018-2021 will default at maturity - with expected losses at 2.2% of the principal loan amount after adjusting for enforcement costs, in line with historical post-GFC European CMBS losses. Losses are concentrated in loans with retail collateral.

In other news…

FSB to review post-crisis securitisation reforms

The Financial Stability Board (FSB) has launched a study into the effects of securitisation reforms introduced in the wake of the global financial crisis. The international advisory body is gathering stakeholder views on the extent to which the reforms are achieving their intended objectives; on which specific reforms are having the greatest impact on originators, sponsors and investors; and on the overall impact of reforms on the “functioning and structure” of securitisation markets.

The securitisation reforms were introduced to address what the FSB describes as “information asymmetries and incentive problems” associated with securitisation markets. They focus on capital requirements, retention requirements, enhanced ratings and improvements in disclosure and standardisation.

VW launches green finance framework to boost BEV funding

Volkswagen Financial Services has published a green financing framework to support its sustainability strategy, expand its investor base and raise funds for battery-electric vehicles (BEVs). The new framework covers all refinancing products including ABS, traditional bonds, credit lines, commercial paper and promissory note loans. 

The automaker’s financial services division says funds generated under the framework are to be used “exclusively to refinance credit and leasing contracts” for BEVs. “The first Green Finance Framework from VW FS enables us to place sustainable refinancing instruments on the capital market,” says cfo Frank Fiedler. “This means that the theme of sustainability, as a core element of our Mobility2030 strategy, is also being given appropriate weight in our strategic refinancing mix.”

Bain basks in late-summer Sunshine Leases deal

Bain Capital has acquired Piraeus Bank’s financial leasing subsidiary Sunshine Lease, marking its fifth large-scale acquisition of non-performing loan portfolios in Greece. Sunshine’s portfolio has a gross book value of around €500m and is primarily secured against commercial real estate and hotel assets.