News Analysis
Asset-Backed Finance
Quitting coal
Using utility ABS to fund a 'just' energy transition
An uptick in utility ABS is expected as US utilities seek financial solutions for retiring the country’s aging fossil fuel fleet. This SCI Premium Content article explores how the proceeds from these transactions can be used to facilitate an equitable energy transition.
Utility ABS may be set for revival in the US as a means of funding the ‘just’ energy transition, as consumer concerns over rising energy costs reignite the coal question. With wind and solar energy now the cheapest sources of energy generation in most parts of the world, securitisation is being increasingly considered as a uniquely adept funding solution for decommissioning coal plants – financially benefitting the utilities, surrounding communities and consumers nationwide.
“Securitisation bonds provide immediate, up-front capital, some of which can be allocated toward funding that alleviates the impact of this transition,” explains Christian Fong, senior associate and member of the Utility Transition Finance team within the Rocky Mountain Institute’s Carbon-Free Electricity programme.
Utility ABS allows utilities to refinance the debt issued initially to build the plants by taking out low-interest bonds to pay off the remaining coal investment – despite having several years of operational life left – with additional funds left over to invest in developing replacement renewals capacity. Fong adds: “Some of the bond funding could also be used to fund remediation and clean-up of polluted sites, like toxic coal ash waste ponds, coal mines and stripped lands, as well as other unknown environmental liabilities.”
Since the end of the last century, utility-led securitisation transactions have been focused on transition when electricity generation competition and stranded assets utilities are involved, as securitisation bonds compensate and recover these stranded costs. “Utility ABS can help pull forward that transition. Because these securitisations have strong guarantees of repayment through state legislative requirements and are placed in bankruptcy-remote SPVs, these bonds garner triple-A ratings, providing extremely low-cost capital (with interest rates usually anywhere from 2%-4%),” explains Fong.
He continues: “Compare this to the normal utility-approved rate of return, which ranges anywhere from 7%–10% typically. These lower interest rates, along with long bond tenors (this can range anywhere from 10 years up to 30 years), makes utility ABS an extremely low-cost alternative to business-as-usual cases, with the additional benefit of accelerating the build-out of clean energy.”
Even with interest rates currently sitting between 3%-5% following sharp increases over the last 18 months, the savings from securitisation are likely to remain similar in magnitude, due to the universal impact of increased interest rates on other debt financing methods used by utilities, including corporate debt.
A ‘just’ transition for coal-reliant communities is understood to follow a three-step framework, covering relief, reclamation and reinvestment. This would include reducing pollution risks and supporting the coal workers and local communities in the immediate term with financial relief, and in the medium term with job-creation at old sites, as well as reinvestment to support economic diversification and resilience.
Fong emphasises: “A just transition for the coal industry in the US is one that does not simply abandon the communities, workers and towns that have supported and powered the economic growth of this country over the past century.”
Since 2019, more than 20 US states have legislated the securitisation of utilities. Michigan, New Mexico and Wisconsin have all secured regulatory approval for coal plant securitisation, applications are active for Indiana and Missouri, and plans are being drawn up in both Colorado and North Carolina. Already, some of this emerging state-level utility ABS regulation requires ‘just’ caveats - such as the formation of replacement renewable projects, having to rebuild said project in the same community as the old power plant, continue to benefit the community from investment, employment and so on.
While very few utility ABS transactions have been publicly marketed thus far, completed investor-owned utility securitisations of ratepayer-backed bonds include the 2021 triple-A rated Wisconsin Electric Power Company WEPCO Environmental Trust I, the 2022 DTE Electric Securitisation I in Michigan and the US$341m CenterPoint deal in Indiana. Pending issuances include two deals from Michigan Consumer Energy - one US$688m deal scheduled for this year and the other US$601.6m approved in June - and one US$360m deal from the Public Service of New Mexico, approved in April 2020, which remained in litigation until August of this year.
Colorado, Missouri and New Mexico are chief among those states seeking to use utility ABS to support a ‘just’ transition. Clean energy consultant and attorney, Ronald Lehr, considers the first coupling of the pursuit of a ‘just’ transition and the retiring of coal plants to be in Colorado legislation, and with the public policy design surrounding the closure of the first two units of the Comanche Plant.
Colorado law requires the new funds in part go towards retraining workers from the decommissioned power plant, while the utility ABS statute in New Mexico established the “energy transition displaced worker assistance fund” and other provisions to support displaced workers and communities.
The New Mexico case is widely regarded as a successful paring of utility ABS with ‘just’ caveats – with utility securitisation legislation steering development back into San Juan County’s school districts and jobs. Indeed, following the Public Service Company of New Mexico’s decision to drop its State Supreme Court Appeal last month and agreement to issue delayed rate credits, customers are also expected to see monthly utility bill savings averaging 11%.
“They’ve made quite a conscious effort, and I think that is an example of success,” states Lehr. “But it’s not as widespread as I’d like to see – and, of course, the underlying rate of coal plant retirements is not as fast as it needs to be.”
The inclusion of atypical caveats supporting the energy transition is increasing across the US as state securitisation regulations evolve. The novel application of environmental accountability within financial tools is propelled by campaigning from non-profit organisations like New Energy Economics, where Lehr serves as board chair.
Indeed, not all public policy will necessarily require replacement capacity for renewables, and in some cases ‘replacement’ may only be to slightly cleaner fuel sources – as seen in some cases naming natural gas applied power generation.
William Attwell, Sustainable Fitch climate and sustainable finance research director, confirms: “There is a huge amount of variation. But given the number of pieces of legislation that have been adopted or are in the pipeline across the US, it seems like an approach that is likely to expand.”
The dilemma with public policy is not only in securing ‘just’ requirements, but also in getting the utilities on board in the first place. Fong warns: “Without any smart policies or financial tools, it actually may be cheapest for the utility to wait for another decade for the coal plant’s natural retirement date. Securitisation transactions and legislation must be carefully designed to ensure the highest possible benefit for utility ratepayers. Additionally, in order to build durable constituencies supportive of the clean energy transition, we must incorporate elements of a ‘just’ transition that supports coal communities as coal rapidly declines.”
Monetary motivation is crucial for empowering utilities and ratepayers to embrace and pursue the transition to cleaner energy – ‘just’ or not. Unpaid investment presents a large hurdle in getting utilities to retire their most costly fossil fleet – and indeed replace it with renewables – and utilities would need to see their investment capital returned first.
“Obviously, there is compensation for investors, and the question is how far can this decommissioning be financed in a way that means both ratepayers and investors aren’t unfairly penalised,” explains Attwell.
However, it is not just the ratepayers. The utilities themselves remain divided on the benefits of securitisation, as many feel entitled to the equity lost on the remaining expected years of use from early plant retirement scenarios.
“Some consumer advocates see securitisation as an automatic guarantee for utilities to recover their sunk capital, while some utilities see securitisation as a method that reduces profits,” notes Fong.
In the case of the Arizona Public Service Company, for example, there was much resistance to calls to make the energy transition in the tribal lands. “It’s just not in their mental picture – they don’t see why they would contribute further to community and worker support after they have paid so much money in taxes, wages and benefits to the tribal people for so long,” comments Lehr.
Unlike many other environmental challenges in the US, the use of securitisation for decommissioning coal plants is less politically fraught, given the prevalence of coal plants in rural - and often Republican - states. Instead, the emphasis is on the social and financial aspects of the issue. Indeed, this is exemplified in the historical swing-state of Michigan, where half of the six recent securitisation efforts aimed at recovering stranded costs from coal plant retirements have taken place.
“People really haven’t realised that there has been a fundamental shift in the economics that should cause a lot of change, and quite rapidly,” explains Lehr. “But the utility sector isn’t characterised by fast action in most respects.”
Retirement is inevitable. More coal plant retirements are expected in the US than anywhere else, with more than 110,000 megawatts of coal utility infrastructure scheduled to be decommissioned between now and 2040.
“The data also points to them being retired younger too, with the average age of retirement falling to around 48 years, from 56 years back in 2015,” adds Attwell.
The financial benefits of utility ABS for consumers have already been proven. According to RMI research, through the securitisation of the recently retired Georgia Power coal plant, customers could save more than US$1bn.
The consideration of lowering costs for consumers was considered an important argument backing Consumers Power Michigan’s securitisation activities. Wind energy generation is cheaper too – as the non-profit Catalyst Cooperative’s Public Utility Data Liberation project, ‘PUDL’, found through an analysis of SEC and grid data. The study concluded that the cost of wind per megawatt hour is just US$10 for one competitively acquire wind plant – compared to US$25 for public coal plants in Colorado.
As Fong explains: “Ensuring that securitisations are executed at the lowest possible cost and provide the highest amount of savings to ratepayers, as well as making the utility pay for financial counsel to advise regulators, among other provisions, can help ensure that customers receive the highest possible benefits. And regulators should be aware if securitisation is a viable option in their state and ensure any cost analyses also look at the potential savings from securitisation to accelerate the clean energy transition.”
With more closures on the way, many believe that securitisation offers an all-in-one resolution to the issues of expense for coal plant retirement, and lead to higher profits long-term via new clean energy investments and improved credit metrics. “Rather than relying on a declining ratebase of nearly depreciated coal plants, they can essentially swap out that coal plant as a profit driver to new clean energy as their new profit driver, which can increase their profits via a higher ratebase and improve credit metrics through higher near-term earnings,” Fong explains.
In fact, harnessing utility ABS as a ‘just’ transition funding strategy does appear possible. “It looks like the direction of travel is towards more sates adopting these enabling laws – and part of that is just that it makes economic sense,” adds Attwell.
However, establishing a cleaner energy infrastructure will be a slow process due to reliability concerns, according to continued analysis from New Energy Economics.
Going forward, comparative equity analysis or fairness analysis may provide a basis for quantifying the financial benefits of securitising coal utilities’ unpaid facility debts with ‘just’ transition features, according to Lehr, as seen in a filing from the Navajo Nation at the Arizona Corporation Commission during the debate over the issue of the Navajo generating station. “As a lawyer, in the courts we talk about equity being fairness; an equivalency of claims as among contesting parties,” he explains. “Is there rough equity or fairness between companies who’ve used these communities to get the energy that they’ve sold, what they’ve put in, their profits taken out, and what the communities and workers now face at retirement of those facilities?”
An uptick in utility ABS is expected as US utilities seek financial solutions for retiring its aging fossil fuel fleet. However, whether the proceeds from these securitisation transactions will be used to facilitate a fair and equitable transition remains to be seen – and will depend on local legislation.
“Ensuring a ‘just’ transition is a complicated, multi-faceted issue. Securitisation can help with this, but it is not sufficient alone,” Fong concludes.
Claudia Lewis
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News
Structured Finance
SCI Start the Week - 9 October
A review of SCI's latest content
SCI In Conversation podcast
In this special episode, released today, Matthew Bisanz, a partner in Mayer Brown’s bank regulatory practice, outlines how the Federal Reserve’s update on 28 September of the FAQs on Regulation Q is likely to impact the US capital relief trades market.
Last week's news and analysis
Cat bond rebound
'Significant repricing' spurring renewed interest in ILS
Front and centre
More bank origination expected as TLTROs expire
Fundamental review
FSB response calls for level playing field
Glad confident morning again
Fed's CRT clarity both welcome and begins new era
Job swaps weekly: HSBC snaps up former Deutsche Bank CLO head
People moves and key promotions in securitisation
Latest SRTx fixings released
Index values indicate incremental widening in spreads
Risk transfer round-up - 5 October
The week's CRT developments and deal news
Rithm strengthens MSR capabilities
Updates on Rithm’s mortgage acquisition and Octaura’s AI addition
Roll with the changes
CLO rating upgrades on the cards
RRAM acquires second slate of CLOs
Updates on Redding Ridge’s acquisition, Altriarch’s investor and CRA charges
'Sluggish' September?
Quarterly SCI CRT data review
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, Matthew Bisanz, a partner in Mayer Brown’s bank regulatory practice, outlines how the Federal Reserve’s update on 28 September of the FAQs on Regulation Q is likely to impact the US capital relief trades market. The long-awaited guidance clarifies the definition of a synthetic securitisation and, crucially, states that a reservation of authority can be requested for direct CLNs. Bisanz, for one, anticipates an increased willingness – especially among larger CCAR banks – to enter into CRTs as a result.
The episode can be accessed here, as well as wherever you usually get your podcasts, including Apple Podcasts and Spotify (just search for ‘SCI In Conversation’).
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
Poland first
EBRD and Santander Group close their first synthetic securitisation in Poland
As previously reported in the pipeline, the European Bank for Reconstruction and Development (EBRD) and Santander Bank Polska - the Polish leasing subsidiary of Santander Group - have closed a synthetic securitisation. This is the EBRD’s first CRT trade in Poland.
The EBRD is providing €55m protection on the mezzanine tranche of a synthetic securitisation in the form of an unfunded guarantee. The underlying portfolio references a €514m granular portfolio of performing leasing and loan receivables, originated by Santander.
Santander Bank Polska has committed to redeploying the equivalent of four times the EBRD guarantee to new lending to SMEs and mid-caps in the country. 35% of the new financing will be allocated to green projects that contribute to climate action and environmental sustainability. The project is aligned with the EBRD’s Green Economy Transition (GET) criteria, including renewable energy and energy efficiency financing.
Vincent Nadeau
News
Capital Relief Trades
Snowball effect
EIF expands CEE engagement
The EIF is prepping a third synthetic securitisation with a Bulgarian banking group, following its deals with Bulbank last October (SCI 19 October 2022) and ProCredit Bank in June (SCI 22 June). Meanwhile, a further transaction in Romania is anticipated towards the end of the year, as the fund continues its engagement across Central and Eastern Europe.
The Bulbank transaction had a strong signalling effect, according to Georgi Stoev, head of Northern Europe & CEE securitisation at the EIF. “After ProCredit Bank heard about the main Bulbank transaction, they decided to try it out for themselves. We started discussions in autumn 2022 and in June, we concluded a transaction,” he explains.
The Bulbank transaction was carried out under the European Guarantee Fund mandate, which was launched in late 2021 and had a short deployment period, until June 2022. “It allowed us to invest in junior pieces for the first time, rather than our usual bread-and-butter mezzanine protection. We were able to deploy almost €1.4bn in investments,” says Stoev.
The EIF’s first Romanian synthetic securitisation, meanwhile, was with Deutsche Leasing in early 2021. This was followed by a transaction with Raiffeisen Bank, Romania, in December 2022 (SCI 3 January).
“We start the market and then we see the snowball effect,” observes Stoev. “It’s the same recipe we followed in Poland. Competitors of the first banks that concluded securitisation transactions with us followed suit.”
He continues: “We will keep on playing our role as an anchor investor. It sparks interest from hedge funds and insurance companies on the back of our initial deals.”
The next frontiers could be Croatia and Slovenia - EU countries where the EIF has yet to transact. The EBRD recently executed a transaction with Raiffeisen Bank Croatia (SCI 2 February), featuring a €25.6m unfunded mezzanine guarantee, which is smaller than the EIF’s typical appetite for transactions (in excess of €50m).
But Stoev says the trade “shows that those countries do have interesting prospects”. He adds that the EIF is discussing more potential transactions on a preliminary basis with several banks from the CEE region.
“Countries that have a local currency, but also have long exposures denominated in euros create some difficulties when the transaction is being structured. But for Slovenia, this is not an issue. I would expect either a Slovenian or Croatian transaction with our participation over the next 12 months,” he confirms.
Overall, Stoev notes that opening up smaller countries is challenging and they typically have more difficulty in attracting foreign or private capital. “But I could very well see the setting up of regional funds. During my meetings with hedge funds and pension funds, I see they start to grow their interest outside Poland. It will take some time, but I'm confident that one day we would see a market where private and public capital would transact equally in these markets,” he concludes.
News
Capital Relief Trades
Risk transfer round-up - 12 October
The week's CRT developments and deal news
Market news
Fannie Mae has commenced fixed-price cash tender offers for the purchase of any and all of 11 Connecticut Avenue Securities (CAS) notes, with an unpaid principal balance of US$1.398bn and vintages ranging from 2016 to 2018. The offers will expire on 16 October and settlement is expected on 18 October.
Fannie Mae has engaged BofA Securities as the lead dealer manager and Wells Fargo as the dealer manager for the offers. Additionally, Loop Capital Markets and Mischler Financial Group have been engaged as advisors on the transaction.
Meanwhile, the GSE last week priced the US$536m CAS 2023-R07, representing its seventh CAS REMIC transaction of the year. The reference pool consists of approximately 77,000 single-family mortgage loans with an outstanding UPB of circa US$25.9bn.
The collateral has loan-to-value ratios of 80.01% to 97% and was acquired between June 2022 and December 2022. The loans are fixed-rate, generally 30-year term, fully amortising mortgages.
Three notes were publicly offered and rated by DBRS and Moody’s. The US$245.957m A(l)/A3 rated class 2M1s printed at SOFR plus 195bp, the US$184.467m BBB/Baa2 class 2M2s printed at plus 325bp and the US$105.25m BB/Ba2 class 2B1s at plus 450bp.
Fannie Mae will retain a portion of the offered tranches of the transaction, as well as initially retaining the full 2B2H and 2B3H first-loss tranches.
BofA Securities is the lead structuring manager and joint bookrunner on the deal, while Citi is co-lead manager and joint bookrunner. Co-managers are Cantor Fitzgerald, Morgan Stanley, Nomura and StoneX Financial. Selling group members are Academy Securities and Loop Capital Markets.
With the completion of this transaction, Fannie Mae has brought 60 CAS deals to market, issued over US$63.9bn in notes and transferred a portion of the credit risk to private investors on over US$2.1trn in single-family mortgage loans.
People moves
Arch Capital Group has promoted Seamus Fearon to ceo, international mortgage for the global mortgage group. In this role, he will have responsibility for managing Arch’s Australian and European mortgage operations, as well as its GSE CRT and services business.
Fearon was most recently evp, CRT and European markets for Arch’s global mortgage group, where he oversaw the GSE CRT business and grew the firm’s European SRT business. In his new role, he will be tasked with further diversifying the platform of Arch’s global mortgage group. Nearly 40% of the firm’s underwriting profit comes from non-US operations, compared to just over 10% in 2017.
Beau Franklin, who previously served as the ceo of Arch’s international mortgage group, will begin a new executive role at Arch MI’s parent company, Arch Capital Group.
Pipeline update
The SRT market is experiencing a continued wave of issuance, with deals referencing corporate and leveraged loan portfolios still accounting for the lion’s share.
“We have seen quite a bit of issuance recently; notably, across the corporate and leveraged loan segment of the market,” notes one SRT investor.
He continues: “The market has been reasonably active. However, we haven’t seen a lot of alternative deal profiles – for example, those referencing consumer asset pools.”
Describing the current context and the emerging deal profiles, the investor notes: “Perhaps it is because banks haven't had an urgency to try to hedge that type of risk. I would certainly have expected more hedging on the CRE side, with people wanting to pay a bit more. But this is not happening yet.”
Regarding the pipeline and as reported last week (SCI 5 October), the French banks BNP Paribas and Societe Generale have both successfully closed their deals. BNP Paribas’ trade - entitled Marianne – references a circa €2bn mixed portfolio of French SME and large corporate loans, with a €86M CLN placed with a club of investors.
The investor further reports that UniCredit has recently closed a consumer SRT in Italy, while across the pond, Bank of Montreal’s latest Algonquin deal is also believed to have priced. Meanwhile, Nordea is said to be prepping a corporate SRT and in the UK, both HSBC and Lloyds are currently marketing trades.
Looking ahead, the investor presents a relatively calm picture, in contrast to the anticipated Q4 flurry of deals. “There is not quite a rush, but we shall see. I think there are probably 10 to 12 deals still to come from now to year-end,” he concludes.
CRT new issue pipeline
| Originator |
Asset class |
Asset location |
Expected |
| Banco BPM |
SME loans |
Italy |
2H23 |
| Banco Sabadell |
Corporate loans |
Spain |
2H23 |
| Credit Agricole |
Project Finance |
|
2H23 |
| Deutsche Bank |
Leveraged loans |
Europe, US |
2H23 |
| Eurobank |
Corporate loans |
Greece |
2H23 |
| HSBC |
Corporate loans |
UK |
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 |
| National Westminster Bank |
Project Finance |
|
2H23 |
| Unicredit |
Residential mortgages |
Italy |
2H23 |
| Piraeus Bank |
Consumer loans |
Greece |
1H24 |
| Piraeus Bank |
SME loans |
Greece |
1H24 |
SCI SRTx indexes
For more information on the Significant Risk Transfer Index (SRTx), click here.
News
Capital Relief Trades
SCI's CRT celebration
Women in risk sharing networking event to debut
Next week is shaping up to be a bumper CRT programme from SCI. Not only are we hosting our 9th Annual Capital Relief Trades Seminar and the third edition of our sell-out CRT Training for New Market Entrants, but also an inaugural Women in Risk Sharing networking event.
Hosted by Reed Smith during the evening of 18 October, the theme of the Women in Risk Sharing event is women and leadership in CRT. Representatives from Intesa Sanpaolo, Reed Smith, Santander and S&P will delve into why women are able to thrive in the risk sharing business, which qualities constitute strong leadership in that context and how to retain female talent within the industry. The panel will be followed by a keynote address by Joanne Rowe, the corporate risk officer for Intercontinental Exchange, who will discuss the crucial roles of sponsorship, mentorship and earning the trust of stakeholders.
The CRT Training, meanwhile, comprises 12 different modules, delivered over two days – 17 and 18 October – at the London offices of Allen & Overy. Led by industry practitioners, attendees will learn about regulatory and structuring considerations, as well as modelling, reporting, performance measurement and credit events.
Also hosted by Allen & Overy on 19 October, SCI’s 9th Annual Capital Relief Trades Seminar is chaired by Mark Faulkner, co-founder of Credit Benchmark. The event will cover the latest regulatory developments, key trends and emerging opportunities within the significant risk transfer market. It also features a bank resolution case study demonstrating the resilience of SRT transactions.
The seminar is sponsored by Arch Insurance, ArrowMark Partners, Barclays, Chorus Capital, Clifford Chance, EIF, Guy Carpenter, ING, Intesa Sanpaolo, KPMG, Liberty Specialty Markets, Linklaters, M&G Investments, Mayer Brown, Newmarket, RenaissanceRe, Santander, Societe Generale and Tramontana Asset Management. Panelists also include representatives from Alvarez & Marsal, Bank of America, BNP Paribas, Bayview Asset Management, Erste Group, Magnetar Capital, Munich Re, Nordea, PAG, PCS, PGGM and PIMCO.
Rounding the event off is SCI’s Capital Relief Trades Awards ceremony, followed by a cocktail reception. For more details or to register, click here.
News
Capital Relief Trades
SCI In Conversation podcast: Matthew Bisanz, Mayer Brown
We discuss what the Fed's new CLN guidance means for US CRT
In this special episode of the SCI In Conversation podcast, Matthew Bisanz, a partner in Mayer Brown’s bank regulatory practice, outlines how the Federal Reserve’s update on 28 September of the FAQs on Regulation Q is likely to impact the US capital relief trades market. The long-awaited guidance clarifies the definition of a synthetic securitisation and, crucially, states that a reservation of authority can be requested for direct CLNs. Bisanz, for one, anticipates an increased willingness – especially among larger CCAR banks – to enter into CRTs as a result.
The episode can be accessed here, as well as wherever you usually get your podcasts, including Apple Podcasts and Spotify (just search for ‘SCI In Conversation’).
News
CLOs
Wake-up call
Collaboration needed for consistent CLO ESG practices
Consistency across ESG reporting is the next crucial step for sustainability disclosures in the CLO market, as transitional climate risks exert pressure across the entire value chain. ELFA’s recent CLO Carbon and Sustainability Reporting Paper underscores the necessity for collaboration to determine common practices.
Investor interest in ESG disclosures is surging throughout the structured finance industry (SCI 29 September). Indeed, ELFA’s recent survey reveals that 68% of reporting CLO managers noted an uptick in investor inquiries into ESG-aligned CLOs.
Further, carbon footprint measurements have gained significant traction in the CLO sector, with 76% of CLO managers reporting to ELFA now employing popular metrics – including data transparency breakdowns, absolute metrics (GHG Scope 1+2 finances emissions) and economic emission intensity calculations (carbon footprint Scope 1+2 and weighted average carbon intensity).
Nevertheless, transparency in emissions data continues to be a major challenge, as CLO managers rely heavily on estimated data as reporting within the loan markets remains limited. ELFA understands disclosing the proportional split of estimated and reported emissions data – which would also enhance consistency - to be as easy as providing percentage breakdowns or weighted average indicators, like the PCAF (Partnership for Carbon Accounting Financials) data quality score.
Despite CLOs’ strong diversification and built-in risk protections, investors are urged not to underestimate the potential short- and long-term impact of climate risks. Highly leveraged CLOs are especially sensitive to the increasing financial burdens of ESG compliance, changes in raw material and energy costs, changing demand for goods and services, and the risk of stricter emission standards stranding older assets.
ESG integration is already undertaken by 84% of managers surveyed by ELFA. While it does present challenges, ESG integration could also open up new opportunities going forward – particularly for those with significant exposure to low-carbon assets amid the ongoing low-carbon transition.
Connecting ESG metrics to real carbon-reduction targets, as recommended by the increasingly popular Science-Based Targets Initiative (SBTi) and climate value-at-risk (CVaR) metrics, is expected to effectively combat greenwashing within the industry.
Indeed, the inclusion of these additional carbon metrics is likely to rise, along with the implementation of more regulatory measures. The UK FCA is preparing to introduce Implied Temperature Rise (ITR) as a measure to assess climate impact, and asset managers in the EU and UK will soon have to comply with carbon reporting under SFDR regulation – despite securitised assets like CLOs not being included as a ‘financial product’ in the SFDR rules. As well, European supervisory authorities looking at GHG emissions for CLO investments will need to assess the data for the underlying leveraged loans.
Moving forward, investors are expected to embrace UNGC and OECD norms-based screening, in addition to more value-based screening for non-environmental factors as they rise up the ESG agenda. However, simply understanding credit risk is not enough – as ‘aspirational measures’ recommended by ELFA to target the social ESG element emphasise the need to assess the risks of the connecting ecosystem, business innovations, reputations, and financial and regulatory environments.
Claudia Lewis
The Structured Credit Interview
RMBS
Saying hi to HEI
Cara Newman, head of structured finance at Hometap, answers SCI's questions
Q: Hometap, the home equity investment (HEI) fintech, is expanding into the structured finance market (SCI 7 July). What are Hometap’s motivations behind entering the securitisation market, and why now?
A: For Hometap, it's always about supporting homeowners and fulfilling our mission on their behalf. We view a strong structured finance capability as an important avenue to the capital needed to meet the increasing demand for our home equity investments.
From a timing perspective, this is also a great moment to bring our differentiated exposure to US residential real estate to capital markets investors. We've seen meaningful progress in the second-lien securitisation space in recent years, and the newly-finalised ratings for HEI-backed securities this summer energise a wider universe of ABS investors and asset buyers to consider participation. All of this adds up to a genuine inflection point for home equity investments.
Q: What does Hometap hope to achieve in the securitisation market? Are there any specific opportunities it’s seeking to capitalise on?
A: We believe we can bring HEI-backed securities to market that boast unique collateral and compelling financial structures. Given that HEIs may be new to some investors, we expect a level of discovery and dialogue with this audience to increase awareness and familiarity with how our HEIs are structured and perform, and we love that conversation.
While we believe it is especially timely given the current macroeconomic conditions, we view today’s work as the foundation for a durable issuance platform that will stand the test of time. We see our first rated issuance, currently in development, as the first in a regular cycle - and the more knowledge and operational dexterity we can put in place, the better. We are also actively engaged with industry groups, including as a member of the Structured Finance Association (SFA), to drive collective energy and visibility around HEIs.
Q: What has caused the recent increase in interest for the HEI asset class – both as a product and the securitisation of it?
A: The credit cycle and higher cost of borrowing make it tougher for lenders to meet homeowner demand for traditional products, and homeowners in need of financing are disinclined to add debt or sell their homes in today’s rate environment. For investors, we’ve also seen a need to diversify even further from listed markets’ correlation, driving more appetite for real assets and asset-based. There is a level of normalisation around alternative fintech-driven models for home equity, just as we've seen across other consumer finance applications, so that is driving additional demand.
In terms of securitisation, demand for yield and the universe of asset-backed investors today has widened. Sophisticated members within this group appreciate the risk premium and attributes that HEI exposure can bring.
Q: What are the benefits of HEI products – both for the economy as well as for borrowers?
A: The impact for homeowners, their families and their communities is at the core of HEI's reason for being. The use cases we see for our financing are incredibly diverse, spanning both inevitable challenges and amazing opportunities - from paying off consumer or medical debt to funding higher education to starting a new business, buying an investment property, or even renovating or installing energy-efficient technologies.
Many of our homeowners are strong candidates for home equity financing, but they may not have the traditional credit attributes to qualify them for the traditional home equity products. That is the case even more so now than ever before, as lenders have become even more selective. So, the impact we can make with an HEI alternative is manifest and really central to what we do and how we do it.
Q: What makes Hometap different to others already in, or looking to enter this market?
A: Our peers come in a wide variety of shapes, sizes and models - and even within the broader home equity space, we think there’s a good option for every homeownership need. I believe Hometap distinguishes itself in our sincere, authentic commitment to our mission.
We take tremendous pride in the way we are able to engage with homeowners, and are deeply committed to expanding access to our financing. We see that mission through as we attract asset capital, and with the knowledge, tools and experiences we're building to enable homeowners too. I’m lucky in that all of this enterprise effort and quality shows through in the assets we can take to market.
While Hometap is a relatively young company, our strategy for the platform is for it to be a sustainable, durable and long-term business. This isn't just an attractive model to capitalise on today’s market conditions, but very much our passion - and we build in that way.
Q: The use of technology in the securitisation market is on the up. How will technology factor into Hometap’s securitisation efforts?
A: Technology has been really close to my heart at an industry level, even prior to joining Hometap. There is immense potential - and really a genuine need - to leverage tools like blockchain, tokenisation and automation initiatives to modernise the housing finance ecosystem. Inefficiencies caused by a reliance on manual processes and antiquated technology cause frustration and delays the process of obtaining financing. Technology has the potential to help us make smarter decisions, transact more accurately and quickly, as well as easing the process for homeowners.
We've seen more and more openness from market participants when it comes to integrating technology into their business operations in home finance. That has been exciting to see, although there is much more to do.
Hometap is built on a foundation of technology, engineering and data science, and innovation can be seen in all facets of our business. When it comes to our HEI origination platform, Hometap’s investment in technology positions us to scale our business to serve more homeowners. As we build our securitisation platform, I’m excited to see how we can put this technology to work to increase transparency and integrate functionalities and features that our investors find useful.
Q: What excites you most about your new role at Hometap?
A: Hometap’s authenticity is what stands out. I was incredibly excited to join, most of all because we genuinely live our mission and bring thoughtfulness, innovation and intentionality to bear at every step as we build our platform.
Hometap’s close engagement with homeowners throughout their journey is what distinguishes us; it is proven out in the reviews we are proud to have earned from homeowners who have valued their experience with our team, and I believe that closeness similarly permeates the way we approach asset capital partners. My goal as we ramp up the capital team’s capabilities is for Hometap’s structured finance platform to reflect that same level of authenticity, sophistication and dedication to the mission of making homeownership less stressful and more accessible – and making it relevant to this investor space.
Q: With women still holding a smaller minority of leadership positions with structured finance than any other financial industry, does this factor into your new role at Hometap?
It absolutely does. Mentorship, guidance and support has been invaluable in my career progression, and I am committed to ‘paying it forward’ and driving the development of talented women in the structured finance industry.
There is so much more we can do to expand the pipeline of women moving into leadership positions, including starting that conversation earlier and introducing them to the different corners within the market and their opportunities. Industry groups like Structured Finance Association’s Women in Securitisation initiative, in which I am honoured to serve as vice chair, play an important role in supporting the development and retention of women in the industry.
As individuals, we all have the opportunity to support and encourage the next generation, and organisations play a critical role as well. I've felt tremendous support here at Hometap to continue that advocacy, and we foster it very actively within our own organisation.
Claudia Lewis
Market Moves
Structured Finance
Freddie B-piece investments closed
Market updates and sector developments
Sabal Investment Holdings has closed a series of five B-piece investments, representing approximately US$2bn in collateral balance, across three Freddie Mac multifamily CMBS programmes. The programmes comprise SB-Deals, K-Deals and Q-Deals.
Three SB-Deals closed by Sabal are backed by Freddie Mac multifamily small balance loans (SBLs), totalling US$90m in bond balance across US$933m in collateral balance and 338 loans. Within the K-Deals programme, Sabal closed one B-piece investment within the KF series, which is backed by conventional, stabilised multifamily loans with floating rates and totals US$58m in bond balance across US$769m in collateral balance and 20 loans. The Q-Deals B-piece investment totalled US$55m in bond balance across US$304m in collateral balance and 11 loans.
Sabal has been active in this space since 2016 and is the second-largest purchaser of Freddie Mac small balance B-pieces, with nearly US$11bn notional acquired across 28 FRESB B-piece investments. The firm currently manages over US$1bn in assets.
In other news…
Dock Street bags another CDO
Dock Street Capital Management has been appointed successor investment adviser to the South Coast Funding IV transaction. Under the terms of the agreement, 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 between the issuer and TCW Asset Management Company, as initial investment adviser. Moody’s has confirmed that the execution of the agreement will not impact its current ratings on the ABS CDO’s class B and C notes.
NPL templates adopted
The EBA’s implementing technical standards (ITS) in connection with NPL transaction data templates will become effective on 19 October, following their publication in the EU Official Journal. The final templates – which are to be used by credit institutions for the provision of information to credit purchasers when selling NPLs – include 129 data fields, of which 69 are mandatory.
Different data fields apply, depending on whether the NPL relates to a private individual or corporate borrower and the collateral type of the loan, according to NPL Markets. The templates are to be used for loans that were originated on or after 1 July 2018 and that became an NPL after 28 December 2021.
The ITS do not constitute a supervisory reporting obligation and there is currently no enforcement mechanism, but rather they rely on market discipline.
Market Moves
Structured Finance
Job swaps weekly: Fearon steps up at Arch
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees Arch Capital Group appoint a new ceo in its global mortgage group. Elsewhere, Gallagher Re has hired a new head of global credit and political risk, while Cushman & Wakefield has snapped up a Patterson Real Estate Advisory exec as md.
Arch Capital Group has promoted Seamus Fearon to ceo, international mortgage for the global mortgage group. In this role, he will have responsibility for managing Arch’s Australian and European mortgage operations, as well as its GSE CRT and services business.
Fearon was most recently evp, CRT and European markets for Arch’s global mortgage group, where he oversaw the GSE CRT business and grew the firm’s European SRT business. In his new role, he will be tasked with further diversifying the platform of Arch’s global mortgage group. Nearly 40% of the firm’s underwriting profit comes from non-US operations, compared to just over 10% in 2017.
Beau Franklin, who previously served as the ceo of Arch’s international mortgage group, will begin a new executive role at Arch MI’s parent company, Arch Capital Group.
Meanwhile, Reinsurance group Gallagher Re has reappointed Jonathan Allard as md and head of its global credit and political risk team, based in London. Allard leaves his role as vp of underwriting at RenaissanceRe after four years with the business. He previously spent nine years at Willis Re, leaving shortly before its 2021 acquisition by — and subsequent merger with — Gallagher.
Drew Barnette has joined Cushman & Wakefield as md on its equity, debt and structured finance team, focusing on North Carolina and South Carolina. He will be based in the firm’s Charlotte office. Barnette leaves his position as director at Patterson Real Estate Advisory Group after five years with the business and previously worked at Eastdil Secured and PGIM Real Estate Finance.
MUFG Securities has hired Kommunalkredit Austria’s Martin Conrad as director in its structured financing and solutions sales team, based in its Paris office. Conrad leaves his position as a senior director in the banking division at Kommunalkredit after two years. He previously spent six years with UniCredit, of which three were in its HypoVereinsbank division, and had a number of other stints at SCDM Germany, FS Financial Services, MainFirst Bank, Aurelius Capital Management and Raiffeisen Zentralbank.
Fixed income trading platform Yubi has promoted Vibhor Mittal to coo of its fixed income platform CredAvenue Securities, based in its Mumbai office. Mittal joined Yubi in 2020 and is promoted from the role of group chief risk officer. He previously spent 12 years at Moody’s subsidiary ICRA, where he was group head of structured finance ratings.
International Finance Corporation’s (IFC) Julien Thureau has joined infrastructure and logistics group Vinci Concessions as head of structured finance, based in its office in Nanterre, near Paris. Thureau leaves his position as head of infrastructure and natural resources at IFC after 12 years with the organisation. He previously spent 11 and a half years at Société Générale where he headed up the EMEA transport and infrastructure project finance team.
German renewable energy group UKA has appointed Joshua Christie as structured finance manager, working out of its Oakland office. Christie joins the business after two years as a commercial finance manager at Lendlease, prior to which he had stints at Idemitsu Renewables, Recurrent Energy, Sustainable Capital Finance and KeyBanc Capital Markets.
GLAS has appointed a new senior transaction manager, Ludmila Herzen, to its structured finance practice in Frankfurt, Germany. Herzen holds particular expertise in structured real estate finance and joins from Investec Bank, where she served as a vp on its structured property finance team.
Miami-headquartered energy company Atlas Renewable Energy has appointed Diogo Borges de Andrade as structured finance manager in its São Paulo office. He joins the company from Inter, where he spent two years, most recently in the role of capital markets executive manager.
Siepe is adding to its CLO expertise with the hire of Mark Schultis as an advisor. Working directly with the firm’s founder and ceo, Michael Pusateri, Schultis will support the expansion of Siepe’s products, services and data capabilities. Schultis joins from SE2 where he served as ceo, and brings more than 25 years of fintech and services experience — including almost 20 years spent focused predominantly on CLOs.
And finally, Intesa Sanpaolo subsidiary VÚB Banka has hired Petr Panáček as a senior manager in its investment banking and structured finance team, based in its Prague office. Panáček leaves his position as senior manager at MiddleCap Partners after four and a half years with the firm. He previously worked at EY and ČSOB Pension Company.
structuredcreditinvestor.com
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