Contents

Capital Relief Trades

Spanish CRT prices

Magdalena 7 prices tighter.

Santander has executed the seventh synthetic securitisation from its Magdalena programme. The trade, which features a €142.5m tranche and a 7.5% thickness (1%-8.5%), priced at three-month Euribor plus 10%.

The transaction references a €1.9bn portfolio of Spanish corporate, SME and self-employed borrower loans originated by Santander. The deal has a WAL of 3.21 years and a final legal maturity of December 2044. There is a time call in March 2027, as well as a 10% clean-up call and a regulatory call.

Comparatively, the previous capital relief trade in the programme (Magdalena 6) priced at three-month Euribor plus 10.65% in September last year. 

Vincent Nadeau

Capital Relief Trades

Risk transfer round-up - 21 September

The week's CRT developments and deal news

Market news
Approximately US$1.28bn in aggregate original principal amount of notes was validly tendered last week in Freddie Mac’s latest offer to purchase STACR securities. The tender offer comprised 16 class of notes from the 2017-2019 vintages, across the DNA, FTR, HQA and HRP programmes, with noteholder take-up ranging from 4.17% to 100% of the original principal amount. BofA Securities and Wells Fargo were lead dealer managers and CastleOak Securities was co-dealer manager for the offer. 

Pipeline update
As activity levels in the SRT market pick up, conditions appear conducive to large issuers and established programmes. 

Regarding Santander’s recent Magdalena 7 transaction, one SRT investor describes the pricing as a “very tight” print. While Magdalena 7 was a publicly syndicated transaction, the investor indicates that Santander has an additional private unfunded trade in the pipeline that is “about to close.”

The bank is said to have yet another trade in the pipeline, named Chicago, which is described as a “CRE-heavy UK SME programme.” In terms of timeline, the investor states: “Santander had price talk out on the deal last week, so it should be imminent. It appears to have received strong domestic UK interest.” 

In terms of the broader pipeline, the investor highlights Poland as a notable area of activity. He says: “Certainly, one deal is at a fairly advanced stage of the process and there is another that is starting out.”

Looking ahead, the investor views Magdalena 7’s pricing as an encouraging sign for the CRT market and potentially a catalyst for similar trades. He notes: “It should allow issuers with well-known programmes, where you can get financing, to achieve very good deal executions.”

He concludes: “There is a lot of volume out there and some investors have less money than they used to. I think they will have to pick and choose, and for the more esoteric deals, this can be more challenging.”

CRT new issue pipeline

SCI SRTx indexes

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Capital Relief Trades

JPM sounds the klaxon

SRT prices, and new mega-deal looms

Not only is JP Morgan said to have recently priced its heralded SRT deal utilizing the new, regulator-friendly SPV structure, a very large trade referencing a pool of multinational corporate loans is reputed to be in the works.

According to sources, the pool for this transaction could be as large as US$20bn, with as much as US$2bn sold into the market. This would make it perhaps the largest US SRT deal yet priced.

The most recent trade, which has been rumoured in the market for some time, should settle in the next week or so. It was bought by five investors, who took exposure to a 0%-10% first loss position for a return of 15%, say sources.

These details of both trades are unconfirmed.

The fact that JP Morgan has brought and is looking to bring more SRT deals with an SPV structure which apparently clear regulatory hurdles is of maximum importance to the North American capital relief industry. It sounds the klaxon across the continent.

This is a time of maximum pressure for US banks as they face significantly increased capital requirements, and JP Morgan chief executive Jamie Dimon has been at the forefront of criticism aimed at the new rules, announced by regulators on July 27.

Last week he called the enhanced requirements “hugely disappointing” and pushed for greater transparency from regulators, saying that JP Morgan would have to hold about 30% more capital than European banks.

“Is that what they want? Is that good, long term? What was the goddamn point of Basel in the first place?” he inquired.

At an industry conference in the previous week he also railed at the new directive, asking, “Do [regulators] want banks ever to be investable again?”

Nor does he believe the RFC period, which lasts until November 30, will change the regulators’ minds. “It’s my academics arguing with their academics. They’re going to do what they want anyway,” he said.

Dimon is not alone, even though he may be the most forthright. The Bank Policy Unit has unveiled a strategy called “Stop Basel Endgame.”

According to Federal Reserve data, JP Morgan now has capital requirements of 11.4%, which includes a whopping 4% GSIB surcharge. Goldman Sachs has a GSIB surcharge of 3%, but a stress capital buffer of 5.5%, having performed less well in the stress tests, and overall requirement of 13%.

But Deutsche Bank USA has a stress capital buffer of 9.3% and overall capital requirements of 13.8% (CET1 of 4.5% but no GSIB surcharge). Morgan Stanley comes in at 12.9%.

In this climate, every business line is under scrutiny, especially those with a low return on assets (ROA). However, it is far from easy to simply exit those areas which have a low ROA. Capital call financing, for example, might not make much money but it facilitates a relationship with a client which might need, at some stage, underwriting, M&A advice and arrangement, trustee services and so on. All of these businesses do offer a healthier ROA.

So, banks must seek regulatory capital relief, as banks have in Europe for years. Regulators have muddied the waters in the US over the past few years, but with the SPV format apparently being given a clean bill of health, the way is now clear for US banks large and small to follow suit.

“I promise you now that every bank affected by capital proposals are absolutely today looking at every business with a low ROA. And all are trying to justify being in these businesses. Is it worth it to hold capital? All these pressures are pushing banks to do something from a CRT standpoint,” says a market source.

Simon Boughey

Real Estate

Rhapsody in retail

CMBS offers liquidity for non-mall retail borrowers

Since the restrictions imposed by the Covid 19 pandemic and probably before, the US commercial real estate (CRE) sector has by and large been in the doldrums. But experienced CRE investors can find value and remain funded by a combination of traditional bank loans and CMBS financing.

Gary Rappaport is nothing if not experienced: he has been a CRE investor in the Washington DC area for around half a century and started the business that bears his name some 40 years ago. His firm, which has 115 employees, manages 76 properties with 14m square feet worth around $3.5bn.

Experience is not his only asset, however. He manages only non-mall retail properties, which means that he is not exposed to the downturn many US malls have suffered. His field is a complex area of the CRE market, but with appreciation of the complexity come rewards.

“This is a complicated area of the market. There are long-term leases, sophisticated tenants, co-tenancy requirements, exclusivity restrictions. But, because it’s complicated, there are fewer players, and the cap rates and return reflect that. The cap rates on multi-family properties are lower because it’s simpler,” Rappaport told SCI.

Of the 76 properties he manages, Rappaport controls the financing decisions on 50; for the other 26 financing is handled by the owners themselves.

Commercial loans fund 36 of those 50, and 14 are currently funded by CMBS loans. The CRE CMBS market has displayed signs of stress over the past couple of years, but Rappaport is an advocate, despite the restrictions imposed on borrowers.

“CMBS loans are difficult, and the terms are set for the investor. This is tough to change but if you understand it you can deal with it,” he says.

Proceeds in CMBS are lower and the rate of interest offered to CMBS borrowers is higher than in previous years, but investors who have lived through many upturns and downturns accept this as the new cost of doing business.

Moreover, the CMBS market continues to offer liquidity, and at a time when bank lending is retrenching, this is important. “This market is still lending money. It has liquidity and fits into a specific need for specific properties. It is still a good vehicle,” he says.

Bank exposure to commercial real estate has been much in the news lately. Banks doubled their exposure to CRE landlords between 2015 and 2022, to US$2.2trn. Yet if exposure to CMBS backed by CRE and loans to firms that on-lent to landlords is considered then the number is US$3.6trn. This is about 20% of total deposits, say reports. 

Refinancing has become problematic for many CRE investors. Rappaport says his relationship banks are renewing his debt, but if he went to a new bank then he’d run into problems. This is why maintaining a relationship with lenders in good times and bad times is so important, he says.

With current rates at their highest for four decades it would make perfect financial sense to take any cash surpluses out of banks and invest in Treasury bills and receive a higher rate of return than any bank offers. But Rappaport desists from this as right now his banks need his money, and the relationship needs to be cultivated.

An inflationary environment offers some advantages to the CRE investor. For example, rents can be raised in line with CPI. There are inherent structural attractions too: in the retail CRE space, real estate taxes, insurance payments and maintenance costs are generally borne by the tenants.

The nation’s capital also offers a cushion against recession. It is the base for the government and armed forces and all the contractors that supply their needs; these interests cannot simply move out.

This is not to say, of course, that non-mall retail investment is plain sailing; far from it. Investors that took a stake in properties three or four years ago could face acute difficulties. Rappaport tells the story of a local investor who lent to a large shopping entrepreneur three years ago and received attractive returns every quarter until suddenly faced a capital call last quarter even though the property was 100% leased.

The problem is that the sponsor contracted a short-term loan three years ago and the interim rates have risen so much that refinancing has become a tall order. Neither can he sell the property at the price he bought it. The only option is to refinance a smaller portion of the loan, make a capital call and hope for the best. This is happening across the US.

“Investors need to look closely at the sector and even more closely at the financing in place. I did a 10-year fixed rate loan at 3.25% in March 2022. Today, that would be 7.25%. Most people in the business haven’t seen rates rise this far and fast,” says Rappaport.

Simon Boughey

Structured Finance

Job swaps weekly: CBRE names new debt and structured finance president

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees CBRE appointing a successor to its outgoing US debt and structured finance president, Rachel Vinson. Elsewhere, the Structured Finance Association has appointed two industry veterans to its policy team, while Aon has recruited senior members in its structured credit solutions and reinsurance solutions teams. 

CBRE has promoted James Millon to president of US debt and structured finance, working out of its New York office. He will take over from Rachel Vinson on 1 November, overseeing the debt and structured finance division’s US activity, as well as its planned expansion across the country.

Vinson is reportedly leaving the firm due to personal, family-related reasons, having taken on the role as president of US debt and structured finance in May 2022. She rejoined CBRE in 2019 after a six-year stint at Barings.

Millon is promoted from the role of vice chair and co-head of US large loans, having originally joined CBRE as executive vice president in 2016. He previously spent four years at Deutsche Bank and five years at Société Générale.

Meanwhile, the Structured Finance Association has appointed two industry veterans to its policy team in response to what it describes as the continued evolution of the policy landscape in the industry. The organisation has appointed David Dwyer as general counsel and Macquarie Group’s Frank Tallerico as ABS policy director.

Dwyer served as senior counsel on the US Department of the Treasury’s corporate finance and governance team until recently, as well as holding the same role on the US Senate’s committee on banking, housing and urban affairs. He joined the US Department of the Treasury in 2019, having previously had stints at BNY Mellon, State Street, Bank of America Merrill Lynch, Paul Hastings and Linklaters.

Tallerico joined MacQuarie as a senior manager in the specialised and asset finance team in 2021. He was previously a senior consultant at Aurora Structured Finance Solutions, a senior director in the asset-backed finance group at Nord/LB and vice president on the structured finance team at BayernLB.

Aon has appointed Meera Saunders as client director for structured credit solutions and Nicola Fraccalvieri as leader of the EMEA facultative team within reinsurance solutions, both working out of London. Saunders leaves her role as head of strategy and operations for trade finance at AIG after 12 years with the insurer. Fraccalvieri rejoins the group after 15 years with Guy Carpenter, leaving his role as head of continental Europe facultative and head of London facultative for casualty, specialty and financial lines.

Santander has appointed Kai Ang and James Spencer as co-heads of consumer and non-flow asset-based finance and ABS, based in New York. The pair were previously directors at Deutsche Bank, which they joined in 2017 from Bank of America and MUFG respectively.

And finally, First Abu Dhabi Bank has appointed Sarah Pirzada Usmani as global head of loan capital markets and sustainable finance. Usmani joined the bank seven years ago after 13 years with Standard Chartered and moves from her position as global head of sustainable, asset and project finance. Her background spans structured finance, aviation finance, project finance, structured export finance, structured trade finance and Islamic finance.

Structured Finance

ESMA shines light on private securitisations

Market updates and sector developments

ESMA has published an overview of EU securitisation volumes, based on the data it receives under the Securitisation Regulation. The study shows that the size of the European securitisation market has decreased significantly since its peak of €2trn at end-2010. It also highlights that private deals represent 59% of STS securitisation notifications.

As reported to the registered securitisation repositories, 390 individual securitised products were outstanding in the EU at end-2022, amounting to €540bn. Of these outstanding amounts, 54% of products were linked to residential mortgages, followed by auto loans (16%), SME loans (15%) and consumer loans (12%). The majority (86%) of the outstanding was originated in the five largest markets – namely France (25%), Germany (21%), Italy (17%), Spain (13%) and the Netherlands (10%). 

The study also includes data from the ESMA register of STS securitisations, which contained 586 non-ABCP and ABCP STS notifications (238 public and 348 private), as of 31 December 2022. Additionally, the list includes 54 synthetic STS transactions, the majority of which are funded transactions (63%) and in the form of financial guarantees (96%). In terms of the underlying exposures, a mix of SMEs and large corporate loans account for 35% of notifications received by ESMA, followed by large corporate loans (28%) and ‘others’ (15%).

Totalling €215bn, the public STS securitisations were primarily issued in the Netherlands (22%), followed by France (20%), Italy (18%), Luxembourg (15%) and Spain (13%), with the remaining EU countries accounting for around 12% combined. Issuance of private STS deals mostly occurred in three countries: France (37%), Ireland (25%) and Luxembourg (16%), with the remaining EU countries amounting to around 22% of the total. Of the private STS deals, 84% are ABCP issuances, with trade receivables accounting for 64% of the notifications.

Finally, ESMA notes that STS issuance figures for 2022 were lower than in 2021 and 2020, by 15% and 38% respectively.

CMBS

RFC issued on CMBS methodology

Market updates and sector developments

Scope is calling for comments on a proposal to update its CRE loan and CMBS rating methodology. The proposed changes are expected to affect existing ratings assigned by the agency by up to two notches on the upside and four notches on the downside.

Most notably, the proposal introduces a scoring framework for determining assumptions and the rateability of construction and refurbishment CRE transactions. Other adjustments include amendments to Scope’s all-in refinancing rate framework and foreclosure assumptions, as well as its illustrative rental value haircuts, property and vacancy costs and capitalisation rates.

Comments on the methodology should be submitted by 19 October.

In other news…

ICE and DeltaTerra form joint venture

Climate-focused investment consultancy DeltaTerra Capital and Intercontinental Exchange (ICE), the owner of mortgage loan origination system (LOS) Encompass, have launched a joint venture providing climate-adjusted credit risk analytics for RMBS and CMBS. The platform will provide insights at the property, loan, deal and bond levels, producing estimates of potential changes in the value of real estate and MBS “directly attributable to climate risk”, the companies say.

The joint venture comes two weeks after ICE completed the acquisition of its top competitor Black Knight, which owns the second largest LOS in the US, Empower (SCI 7 September). The business has also bolted on Ellie Mae, Simplifile and Mortgage Electronic Registrations Systems in recent years, as it looks to build out its mortgage technology division.