Contents

RMBS

Tapping the nest egg

Growth in ERM demand presents securitisation opportunities in Europe

Europe is experiencing growing demand for equity release mortgages (ERM) as its ageing population looks to release funds for retirement or to pass on to younger generations. This demand has started translating to a handful of securitisation deals in the continent over the past two years, and some market participants expect deal volumes to increase steadily.

A number of panellists at June’s Global ABS conference in Barcelona forecast that ERMs — or reverse mortgages, as they are also known — will feature more prominently on the securitisation landscape in the years to come. Two months later, S&P Global released research stating that a number of new lenders across Europe, including some large banks and insurers, are entering the market as part of a diversification play.

Figures from the UK’s Equity Release Council show that annual lending in the ERM space doubled from 2017 to 2022 in aggregate value terms. More recent Equity Release Council figures for Q2 2023 show a 29% year-on-year drop in aggregate volume during the quarter, which the organisation attributes to higher interest rates. However, the Equity Release Council says June was the busiest month of the year so far, offering “cause for cautious optimism”, and that the socio-economic drivers for releasing equity remain prevalent. 

“People are living longer, becoming more active in retirement and looking to fund that more active lifestyle,” says Stephen Kemmy, structured finance analyst at S&P. “On a global basis, pensions aren’t quite hitting the levels that many expected, so they are looking to alternative ways to fund their retirement. Particularly with house price appreciation across Europe over the past 10-15 years, reverse mortgages allow them to tap into funds where traditional lending sources might not be available to them.”

This particular driver is growing in prominence in light of the ongoing cost of living crisis, says Rudy Khaitan, managing partner of later life lending specialist Senior Capital. But it is not the sole catalyst, as the S&P report outlines, with a number of homeowners using the product to gift funds to their children. 

This can be for tax planning purposes, to serve as deposits for property purchases, even to fund postgraduate qualifications or similar, Khaitan explains. “This use case is significantly more relevant in a lower interest rate environment than we are currently operating in, however,” he says.

Innovation paves the way

To date, the largest European market has been the UK, where £6bn in ERMs were originated in 2022, according to the Equity Release Council. This annual figure is forecast to double by 2030. Partly, explains S&P’s Kemmy, this is simply because the product has been around for longer in the UK. Historical mis-selling issues have largely been resolved and consumers are now protected by regulations that are more fit for purpose.

“We are seeing interest from other jurisdictions, which is relatively new,” says Alastair Bigley, senior director for RMBS at S&P. “The UK tends to be a more innovative mortgage market overall, compared with certain other European countries, for both cultural and regulatory reasons. If you rank order in terms of innovation, you start with the UK and then you have the Netherlands and Ireland vying for second. Those are the sorts of places we are starting to see significant interest in this type of product.”

Senior Capital’s Khaitan expects this pan-European growth to take off in the coming years, and the firm is exploring opportunities to capitalise on what he describes as excess UK funder demand. A key reason why there is no current European wholesale market, he explains, is that funding structures need to be available that are able to support long-dated fixed rate products, such as the UK’s annuity liabilities.

“There is approximately £2.5bn of excess funding that needs to be deployed, where there is not enough supply within the UK ecosystem to meet funder demand,” says Khaitan. “Looking to Europe makes sense. The market doesn’t quite exist yet, but the same demographic issues that exist in the UK exist across Europe. There are comparably sized countries — Germany, France, Italy, the Netherlands — with the exact same demographic issues, where an ageing population needs to unlock equity to sustain their retirement.”

Scaling up

As with any asset class, the development of a securitisation ecosystem is dependent on the reverse mortgage market itself reaching significant scale. Despite coming increasingly under the spotlight, S&P’s report highlights that ERM activity has been limited to date, comprising a small number of transactions in the UK, Sweden and Ireland. 

For its part, Senior Capital completed its first external securitisation of ERMs earlier this year and has plans to launch “at least” two per year valued at around £1bn each. Khaitan says the business is aiming to create a “genuine secondary market” for the asset class through its “proprietary hybrid structuring model”. The cashflows, he explains, are constructed specifically to meet insurance clients’ balance sheet and liability matching requirements, spanning a broad range of jurisdictions, including the UK, US, Bermuda and Canada. 

“Ultimately the creation of this secondary market for ERM backed assets should significantly expand the traditional funding universe beyond UK insurance balance sheets,” he says. “This allows us to serve more customers globally and achieve better customer outcomes.”

Equity release largely mirrors the cashflows that insurance companies have to pay out in annuity portfolios, S&P’s Bigley explains, which makes them a potentially alluring proposition. “There are complex calculations as to whether it makes sense to securitise, how much capital you release, what pricing you get on it and the costs associated with things like liquidity facilities to hedge some of the counterparty risk,” he says. “But setting that aside, it does have a natural home with insurance investors.” 

The scale that the European reverse mortgage securitisation market reaches is dependent on lenders’ appetite to securitise, says Kemmy: “A lot of lenders are happy to originate reverse mortgages and keep them on balance sheet. That would continue to stunt any market growth but it could potentially change if, for example, the regulatory environment became less favourable.”

He concludes: “Securitisation structures need to evolve as well. There can be limitations with the typical structures that are proposed, such as significant counterparty risk which can constrain ratings and is also often costly to provide.”

Kenny Wastell

Capital Relief Trades

BMO back

Algonquin transaction in the market, to close next month.

Bank of Montreal is back in the market with a synthetic securitization from its well-established Algonquin platform, say market sources.

The transaction is expected to close in October and references a pool of loans worth US$2.5bn, though it can be upsized to $5bn, add sources.

The bank is selling a 0%-6.25% first loss tranche.

No other details have been forthcoming. The issuer has been unavailable for comment.

Bank of Montreal has been in the SRT market since 2017, and though other Canadian banks have issued in the sector in the last year it remains the most dominant presence.

It now has six platforms, of which Muskoka and Algonquin are the oldest. Each platform references a different asset pool, and Algonquin references pools of US and Canadian dollar-denominated loans to SMEs in the US and Canada.

Though this imminent deal may be upsized to $5bn, it is relatively modest compared to recent forays into the market. For example, the 5.25NC2.75 Algonquin 2022-4, priced in November, referenced a US$10bn pool of loans. It placed the entirety of the class E (0-6.25%) and very small amounts of the other four tranches for total notes sold of US$670m. This was largest SRT transaction in the dollar market in 2022.

Simon Boughey

SRTx

Latest SRTx fixings released

Index values indicate incremental widening in spreads, while credit risk outlook trends towards negative

The latest fixings for the SRTx (Significant Risk Transfer Index) have been released. Following three months of improved tone across the sub-indexes, sentiment has become more varied since August’s fixings (SCI 3 August), with incremental widening in spreads and increased negative outlook in the credit risk index.

This month’s survey responses suggest that spread estimates have widened slightly across all categories, coinciding with pricing in other risk markets. SRTx Spread Index values increased by 11 for European corporate transactions (representing a +0.9% change) and by 27 for US large corporate transactions (+2.9%). For SME transactions, they increased by 36 (+3.0%) and 19 (+1.5%) in Europe and the US respectively.

The SRTx Spread Indexes now stand at 1,186, 940, 1,238 and 1,240 for the SRTx CORP EU, SRTx CORP US, SRTx SME EU and SRTx SME US categories respectively, as of the 5 September valuation date. 

The SRTx Credit Risk Indexes have become biased towards negative sentiment across all categories, coinciding with recent UK inflation and US employment figures. Values are trending above 65 in all categories, following a more neutral picture in August’s fixings.

The SRTx Credit Risk Index values rose for large corporates (+33.3% for Europe and +71.9% for the US) and for SMEs (+24.4% in Europe and +33.3% in the US). The indexes now stand at 67 for SRTx CORP RISK EU, SRTx SME RISK EU and SRTx SME RISK US and at 69 for SRTx CORP RISK US.

Meanwhile, in the SRTx Volatility Indexes, the values are broadly unchanged. Respondents are sensing a slight increase in volatility in the US, though the index values remain below 50. There has been a 1.3% decrease in index value month-on-month for European corporates and SMEs, while the figure rose by 9.4% and 11.1% for US corporates and SMEs respectively.

The SRTx Volatility Index values now stand at 46, 44, 38 and 67 for the SRTx CORP VOL EU, SRTx CORP VOL US, SRTx SME VOL EU and SRTx SME VOL US indexes respectively.

Finally, the SRTx Liquidity Index values reveal mixed sentiment. There is a month-on-month decrease of 6.3% and 4.8% for US corporates and SMEs respectively, reflecting a slight improvement in outlook. In Europe the value rose by 16.7% for both the corporate and SME categories, though index values remain below 50 across the board. The indexes stand at 46, 38, 46 and 42 across SRTx CORP LIQ EU, SRTx CORP LIQ US, SRTx SME LIQ EU and SRTx SME LIQ US 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.

Kenny Wastell

Structured Finance

Job swaps weekly: Pretium snaps up Morgan Stanley coo

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Pretium snap up a long-serving Morgan Stanley coo, as it looks to continue its acquisitive growth strategy. Elsewhere, Société Générale CIB has lured a new head of EMEA CLOs from Credit Suisse, while Annaly Capital Management has appointed two industry veterans as independent board members. 

Residential real estate and structured credit firm Pretium has appointed Morgan Stanley’s Jonathan Pruzan as president and executive committee member. Pruzan leaves his role as coo and executive vice president at Morgan Stanley after 29 years with the firm.

Pruzan previously held other senior management positions at Morgan Stanley including cfo and head of corporate strategy, as well as being head of its global financial institutions group. He will report to Pretium founder and ceo Don Mullen.

Pretium said the appointment comes as it looks to identify compelling acquisitions and partnerships, as well as pursuing organic growth. Since the start of 2019, Pretium has acquired Anchor Loans, Deephaven Mortgage and Selene Finance. In that time, the group has increased its assets under management from around US$10bn to US$52bn.

Meanwhile, Credit Suisse’s Michael Malek has joined Société Générale CIB as md and head of EMEA CLOs (SCI 7 September). This is a new position at SG CIB and Malek will be based in the bank’s Paris office.

Malek spent 16 years at Credit Suisse and was promoted to head of European CLO structuring in 2013. He was initially based in London, but moved to the firm’s Paris office in August 2021. 

New York-headquartered mortgage REIT manager Annaly Capital Management has appointed industry veterans Manon Laroche and Scott Wede as independent board members. Both are based in New York.

Laroche left her role as md and head of global spread products securitised sales at Citi in May after 31 years with the bank. Wede spent 11 years at Barclays, leaving his position as md and global head of securitised products and municipal finance in 2015. He is currently a member of the board at Rapid Applications Group and MPower Financing.

Nomura Holdings has promoted New York-based md Gordon Sweely to global head of securitised products and private credit. Sweely was previously global head of securitised products and the promotion comes six months after the bank’s newly established private capital division launched its first investment fund, Nomura Alternative Income Fund. The launch of the new division forms part of Nomura’s push into private markets, which it says is a “top priority for the firm”.

In other promotion news, Dallas-headquartered real estate focused firm Hall Structured Finance has promoted Renetta Gill to director of compliance. Gill joined Hall in 2016 and has since focused on closing and compliance. She previously worked at Cypress Equities.

In EMEA, DNB Bank Polska has elevated Ewa Banasiuk to head of structured and project finance, working out of its Warsaw office. Banasiuk joined DNB in 2013 and is promoted from associate director. She previously had a four-year stint as a credit analyst at the bank before leaving in 2012 to take up a credit analyst position at PKO Bank Polski.

In APAC, Commonwealth Bank has promoted John Anasis to executive director and head of structured asset finance origination, based in Sydney. The bank has also promoted Angus McFarlane to associate director in the division. Anasis joined Commonwealth Bank in 2021 and previously spent 10 years at Investec, where he focused on structured finance and aviation finance, in addition to emerging companies. McFarlane has been with Commonwealth Bank for two years, joining as a senior associate from National Australia Bank in 2021.

Lightsource BP, the solar energy company partially owned by BP, has appointed Onward Energy’s Yancey May as senior manager in its structured finance team, based in Denver. May leaves his role as manager for M&A and business development at Onward after two years. He previously spent three years at Duke Energy Corporation. The appointment comes shortly after the firm promoted Sherwyn Vaz to vp and Sasha Sampaio to associate vp in its London- and São Paulo-based structured finance teams respectively.

And finally, Bedford Row Capital, the UK-based securitisation-focused fintech company, has appointed Sandra Reivik as head of AI development. Reivik left her role as head of business development at blockchain-focused investment software company Brilliance 3.0 in February.

RMBS

Energy performance regulations yet to impact RMBS

Market updates and sector developments

Climate transition risks linked to changes in energy-efficiency performance regulations are having a limited impact on the European RMBS market, according to research by S&P Global.  The view is the result of a scenario analysis conducted by S&P of properties in England, Wales, Ireland, France and the Netherlands with energy performance certificate ratings of F and G.

The agency acknowledges that, should valuation discounts increase for properties with low EPC classes, it may in future affect how it calculates foreclosure frequency and loss severity of RMBS loan pools. Furthermore, it says valuation discounts could become significant for owners of energy-intensive homes who do not carry out renovations to improve efficiency.

Mortgage loan pools with a high share of buy-to-let properties could also present a higher credit risk, S&P says. This is specifically likely in countries that have introduced — or look likely to introduce — rental market bans on properties with low energy efficiency.

In other news…

ICE secures Black Knight bolt-on

Intercontinental Exchange (ICE), the owner of mortgage loan origination system (LOS) Encompass, has completed the acquisition of its top competitor Black Knight, which owns the second largest LOS in the US, Empower. The deal closure comes five months after it was revealed (SCI 10 March) the US FTC was seeking to block the merger, claiming it would drive up costs, reduce innovation and reduce lenders' choice for tools necessary to generate and service mortgages.

The transaction follows similar bolt-on deals by ICE for Ellie Mae, Simplifile and Mortgage Electronic Registrations Systems in recent years, as it looks to build out its mortgage technology division.

Man Group completes Varagon buyout

Man Group has completed the acquisition of US middle market private credit manager Varagon Capital Partners (SCI 6 July). The acquisition is intended to allow Man Group 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 country.