Contents

Structured Finance

SCI Start the Week - 16 October

A review of SCI's latest content

Three events this week
SCI is hosting three major CRT events this week: Women in Risk Sharing, the 9th Annual Capital Relief Trades Seminar and CRT Training for New Market Entrants.

Last week's news and analysis
Freddie B-piece investments closed
Updates on a US$2bn investment, a CDO manager swap and NPL template adoption
Job swaps weekly: Fearon steps up at Arch
People moves and key promotions in securitisation
Poland first
EBRD and Santander Group close their first synthetic securitisation in Poland
Quitting coal
Using utility ABS to fund a 'just' energy transition
Risk transfer round-up - 12 October
The week's CRT developments and deal news
SCI's CRT celebration
Women in risk sharing networking event to debut
SCI In Conversation podcast: Matthew Bisanz, Mayer Brown
We discuss what the Fed's new CLN guidance means for US CRT
Snowball effect
EIF expands CEE engagement
Wake-up call
Collaboration needed for consistent CLO ESG practices
Plus
Deal-focused updates from our ABS Markets and CLO Markets services.

Regulars

Recent premium research to download
Utility ABS – October 2023
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.

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.

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

Capital Relief Trades

Junon 4 prices

SG's latest corporate SRT unveiled

Societe Generale has executed the fourth synthetic securitisation from its Junon programme. The significant risk transfer transaction – called Junon 4 – references a €5bn portfolio of global corporate loans. 

Structured as a CLN and issued via a French SPV, the deal further received the STS designation. Regarding the transaction’s syndicated nature, Pascale Olivie, director, asset-backed products at Societe Generale, applauds the growing investor base.

“This is one of our great successes here, to widen the club deal. With this type of programmatic issuance, we always aim to widen our industrial base and in this particular case, we have eight different investors,” she says.

The trade, which features a first-loss tranche and a thickness below 10%, priced in the high single-digits. Alluding to the significant portfolio size (€5bn), Olivie notes: “The deal was initially oversubscribed, so we increased the size of the portfolio to increase the size of the placed tranche.”

She continues: “It is a global and diversified pool, quite representative of our corporate lending book, and includes France, the US and Germany.”

Looking at the market dominance of corporate/leveraged loans mandates this year, Olivie notes: “The corporate asset class is a very usual asset class on this market and regarding leveraged loans, it is a way for banks to manage their exposure to this specific asset class, which has been under strong review by the ECB. It is not only a way to optimise capital, but also to manage risk limit on this asset class. But globally we can see that the scope for different asset classes is always growing and expanding.”

She concludes: “The SRT device is very efficient for banks and Societe Generale in particular. It is completely in our strategy to optimise capital, but also to find some ways of supporting new origination.”

Vincent Nadeau

Capital Relief Trades

JP Morgan inundation

Buyers band together in face of vast deals

CRT investors are forming syndicates to cope with the enormous weight of synthetic securitized paper JP Morgan hopes to sell in the coming weeks, say sources.

The leading US bank is in the market with a CRT trade which has a reference pool as large as US$20bn-US$25bn, as was reported last month. Buyers are being asked to take slugs of US$250m-US$500m, which, in the CRT market, represents a very considerable commitment.

Consequently, some are looking to join forces with others to absorb the paper. A large Dutch pension fund is believed to be among the interested parties.

As if this were not enough, JP Morgan plans to bring another CRT transaction of similar dimensions before the end of the year.

Action among US banks is hotting us, as has been predicted.

Morgan Stanley gained approval from the Federal Reserve to treat a credit linked note (CLN) as a synthetic securitization under Regulation on September 29. This deal has been rumoured for some time and is thought to have been a securitization of capital call facilities, with one single buyer.

JP Morgan research this week predicted that the CLN market for synthetic securitization could reach USS220bn.

Law firm Mayer Brown, a leading voice in bank regulation and capital, also this week published a paper which hailed the recent Fed guidance on CLNs as a “step forward for banking organisations” which now have “greater legal certainty” around effectiveness of SPV CLNs and a “path forward” for obtaining certainty about the effectiveness of direct CLNs.

However, it cautions that the process for gaining approval under Regulation Q, by which the bank must seek approval from the Fed on an individual basis, is unnecessarily “Delphic” and will lead to uncertainty and be burdensome for Fed staff and the bank.

Simon Boughey

Capital Relief Trades

Algonquin prices

Latest BMO deal closes

The latest Algonquin synthetic securitization from CRT veteran Bank of Montreal priced at the end of last week and attracted over ten different investors, according to market sources.

This transaction was reported to be in the market last month, and, as was expected, was upsized from an original US$2.5bn to US$5bn.

A first loss position of 0% to 6.25% was sold for a yield of 10.25%.

The Algonquin platform is one of six run by the Canadian bank in the CRT sector, and it references Canadian and US dollar-denominated loans to US and Canadian SMEs.

Simon Boughey

Capital Relief Trades

SCI CRT Awards: Transaction of the Year

Winner: Project Seed

Project Seed represents the first balance sheet synthetic securitisation referencing corporate exposures executed on an unfunded basis in Portugal. But novobanco’s ability to successfully execute such a transaction – amid challenging market conditions – is also a testament to the progress the bank has made during its restructuring journey.

Created in 2014 from the resolution of Banco Espírito Santo, novobanco had since 2017 been under a restructuring process supervised by the European Commission, which ended in February 2023. The ambitious restructuring plan included key areas, such as asset quality improvement, cost reduction, operational efficiency and strategic realignment. So much so that during 2022, the bank was able to build an impressive 300bp of CET 1 capital – aided by a de-risking strategy, including the disposal of non-core assets and risk weighted assets optimisation.

Executed in 4Q22, Project Seed references a €1bn granular portfolio of SME, corporate and public administration loans originated by novobanco in Portugal. The transaction is structured in a tranched cover format, with a junior and a senior tranche retained unhedged by the originator and a mezzanine tranche guaranteed by RenaissanceRe. The mezzanine tranche amortises on a pro-rata basis, with triggers to sequential, and features a regulatory compliant time call and a static portfolio with no replenishment periods.

Project Seed was executed in complex circumstances in terms of both macroeconomic and political perspectives, given it closed at a time of volatile sentiment for credit risk and towards the end of a significant restructuring process for novobanco. Mehdi Benleulmi, svp and underwriter at RenaissanceRe, credits the success of the transaction to the high levels of transparency and collaboration between the parties to the deal.

“In such a collaborative environment, novobanco provided high-quality data on the assets that comprise the portfolio. This allowed us to better inform our view of the risk, which in turn enabled us to price it more efficiently through stress testing the portfolio,” he explains.

Nuno Duarte, head of Treasury and Financial Department at novobanco, adds: “We were new to the market and therefore needed to understand RenaissanceRe’s feedback/rationale, so we tried to make negotiations as transparent as possible. It was a delicate balance: we understood that providing the data that RenaissanceRe required was a key point to improve pricing and to reach our contemplated cost of release of capital.”

Duarte concedes that SRT can be challenging – in terms of technology, expertise and execution capacity – especially for first-time issuers. However, he says the board understood what was at stake and the benefits such a transaction would bring, and supported the teams involved in this long process. The SRT was an alternative solution to manage credit risk and capital for novobanco, as bond market access (Tier 2) and market conditions at that time were not favourable and were prohibitively expensive.

Benleulmi notes that reinsurance capital is particularly suited to these kinds of opportunities. “Project Seed demonstrates the utility of unfunded sources of capital. Under the straightforward construction of a single contract, we were able to match our capital to the underlying transaction risk profile.”

The transaction also exemplifies RenaissanceRe’s purpose statement. “In Project Seed, we believe we achieved our purpose of protecting communities and enabling prosperity by providing capital to the real economy,” Benleulmi observes.

Marsh & McLennan Companies (MMC) was retained by novobanco as sole advisor and arranger of the transaction. Jaime Lizarraga, partner at Oliver Wyman, notes that the MMC proposition draws upon the combined competences and deep expertise of both Marsh and Oliver Wyman to deliver a market-leading and comprehensive advisory, arranger, structuring and market placement service in the securitisation and risk transfer space. Lizarraga adds that the close and continuous interaction with the regulator was key to deliver a smooth transaction in the required time frame.

Marcus Miller, md from Marsh, comments that the recognition for Project Seed represents another milestone for MMC, following the landmark ING DiBa AG residential mortgage SRT transaction – dubbed Project Simba – back in 2018.

“Marsh and Oliver Wyman transferred the knowledge that was necessary and supported us with the structuring, technology and in the optimisation exercise,” Duarte confirms.

Novobanco expects to be a regular issuer on the credit markets going forward, demonstrating the bank’s strategic decision to leverage synthetic securitisation as an integral part of its capital management strategy for the foreseeable future. “We now have SRT in our capital management toolbox. So, whenever needed, we can tap the market for balance sheet optimisation purposes and can take advantage of a broader investor base in this market segment,” Duarte observes.

This transaction marks another milestone in the recent successes of novobanco, positioning the bank for the next stage of its development and reinforcing its position as a strong and independent domestic bank.

Honourable mention: GARC Corp-5 
GARC Corp-5 represents the largest portfolio ever securitised in Italy, as well as the second largest in Europe in 2022. The transaction allowed Intesa Sanpaolo to transfer the first-loss risk arising from a €7.5bn portfolio of corporate and large corporate loans granted to circa 4,500 borrowers. It involved the placement of a large (€500m) junior tranche in a challenging economic scenario, resulting in a €2.7bn RWA saving for the bank.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

Capital Relief Trades

CRT Market Update

Diversity on display

Capital relief trade issuance volume could creep past €200bn by year-end, according to Man GLG’s Q4 credit outlook paper. The report further states that as SRT spreads sit at their widest levels for over a decade, the opportunity for investors to gain exposure to a diversified pool of high-quality loans is currently compelling (SCI 14 September).

“We’ve seen the most diverse group of asset classes this year, across the board,” confirms one SRT investor. “So, it has been a really interesting year, of which corporate portfolios have represented a smaller part. For us, there were a couple of large deals done over the summer and earlier - particularly from the Canadian banks - that sort of tilts the market in notional terms.”

He adds: “Clearly a couple of leveraged loan transactions have been issued because they can be of large size. They look big; however, the size suggests that the demand is materialising from a particular type of buyer base. Overall, there's been a pretty broad range of deals, asset classes and issuers.”

The investor notes that there is a reasonable number of Q4 deals coming through. “However, what we saw this year is a very large number of deals throughout the year. So, what might have typically ended up in Q4 has been a bit more spread out this year.”

He suggests that experienced issuers are currently in the market. “There are still a couple of deals to come, but the issuers are probably of sufficient maturity to get them done this year - meaning that they're issuers who have done deals previously and therefore can get them away. Inevitably, some deals may be pushed into next year. But that is more likely to be first-time issuers or first-time asset classes, for example.”

The investor concludes: “As long as they have got their regulatory notifications in place, then there is definitely enough time to close their transactions this year.”

Vincent Nadeau

Capital Relief Trades

SCI CRT Awards: North American Transaction of the Year

Winner: St Lawrence

It has been a busy period in the Canadian SRT market. For years, it has been dominated by Bank of Montreal, but in the last 12 months the remaining members of the Big Five have got in on the act. One transaction, however, stood out in our awards year: the debut from Canadian Imperial Bank of Commerce (CIBC), dubbed St Lawrence “Project Waterloo”. This is SCI’s North American Transaction of the Year.

The deal was brought to the market by arranger BNP Paribas in April 2023 and referenced a pool of US$4.5bn corporate loans for a face value of US$261m. It was structured as a credit-linked note incorporating an embedded financial guarantee, with an attachment point of 0.5% and a detachment point of 6.3%.

So far, so good, but the deal also included several features that, at first sight, could be considered somewhat aggressive. For one, the reference pool was blind, constituting investment grade and non-investment grade corporate loans with an average credit rating of low investment grade. Beyond these details, no other specifics were supplied. The reference pool was kept blind to preserve client confidentiality.

Waterloo also featured a three-year replenishment period, so that CIBC maintained some flexibility and was able to extract the full value of the deal.

Considering, however, that Waterloo had to compete with the inaugural SRT trade from Toronto Dominion (TD) - which was in the market at around the same time, but was anchored and had a fully disclosed pool - these features appear startlingly bold. But BNP Paribas was able to secure the full and unflinching support of 10 European and North American investors.

This commitment was put to the test immediately. On the day scheduled for allocations, Silicon Valley Bank (SVB) collapsed amid a firestorm of headlines and predictions of ensuing turmoil for a wide range of US lenders. Yet the deal was upsized by 50% from US$3bn to US$4.5bn and pricing tightened by 25bp from initial guidance.

In the end, the investors scarcely flinched in the face of these events. “For the inaugural deal, we had a relatively modest size in mind. To be able to upsize, and to have such depth of investor base, is testament to the strength of the underlying asset quality and the process we followed,” says Dave Yoon, vp, capital management, treasury.

Waterloo is not expected to be a one-off transaction. It is the starting point of what will be an ongoing programme. In addition to large corporates, the bank believes mid-market commercial loans could be a good fit for future deals, but it is also considering specialty banking assets.

There are two main reasons why CIBC decided to venture into the SRT space. First, the Canadian regulator, the Office of the Superintendent of Financial Institutions (OFSI), has taken a stern line with regard to capital adequacy. In June this year, it upped the Domestic Stability Buffer by another 50bp, taking it to 3.5%, and Canada is one of the first jurisdictions to implement the Basel 4 output floor, which came into effect in 2Q23.

But perhaps more importantly is the flexibility that an SRT programme brings to the bank that wants to grow its business. With the resumption of more normal business conditions after lockdown conditions were eased, capital began to be consumed once again. It was at this point that the treasury began to look at the regulatory capital market.

“We saw the opportunity to bolster capital generation and provide additional flexibility. We have a growth strategy but need to fund that efficiently, so this is about expanding our tool kit,” explains Yoon.

Though the bank began to mull the possibility of issuing in this market a couple of years ago, serious planning began only in the summer of 2022. So it took perhaps nine months from inception to issuance – underlining CIBC’s determination to move in a deliberate and measured manner.

There were multiple difficulties encountered en route in what was a novel transaction for the bank. But perhaps the most taxing was the need to co-ordinate the efforts of many different groups within the institution, all with different priorities, and get them all to face in the same direction.

It did not, however, encounter boardroom opposition. It sought, and attained, approval from senior management at the very earliest stages of the entire operation.

“We did all that work upfront, before any RFP. We had good buy-in from the senior management from the beginning,” says Yoon.

CIBC pitched to a handful of North American and European banks, but BNP Paribas’s experience as both an issuer and an arranger proved winning. The two banks have long-standing relationships in other business areas, of course.

“Waterloo” is the starting point for an SRT programme that will attain meaningful capital reduction for CIBC. As a blind portfolio, with replenishment, sold into some of the most turbulent market conditions seen for a couple of years, the debut deal also represents first-rate execution.

Honourable mention: Merchants Bank healthcare real estate deal (Atlas SP Partners, Merchants Bank of Indiana)
Merchants Bank of Indiana’s US$158m transaction references a US$1.13bn portfolio of healthcare real estate loans. Notably, the deal was executed at the end of March, at a time of maximum stress for US regional banks. In bridge-to-HUD financings, it also securitises a non-traditional asset class.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.

RMBS

New normal?

German house prices see surprise decline

Growth is not yet on the cards for German RMBS, as surprise house price declines hold little room for market expansion. Additionally, German banks continue to prefer covered bonds as a source of secured wholesale funding.

Against the backdrop of a resilient labour market throughout the mild recessionary environment in the primarily-exporting nation, the decline in house prices in Germany is noteworthy in the present context. “Germany has bucked the trend, historically, often seeing prices going up when elsewhere they were all going down,” explains Andrew South, EMEA head of structured finance research at S&P.

Real estate is climbing the risk tables at S&P, which rates 60 predominantly investment grade real estate companies in Europe. As head of corporate research for Europe at S&P, Paul Watters, stated at its European Credit Conditions roundtable: “It’s going to get worse before it gets better.”

Despite ING DiBa’s €6.5bn German Lion 2023-1 issuance from September (SCI ABS Markets Daily - 8 September), German RMBS remains a relatively stagnant market. “German RMBS is not a very active market at all, with one issuance this year and one last year, both of which were just very big retained deals. They’re not examples of banks originating mortgages and then placing the risk with end investors or obtaining funding from them,” confirms South.

He continues: “These German RMBS deals are more like financial engineering, with the bank originators converting loans into securities to have them available as collateral for potential borrowing from a central bank or for some private repo borrowing. RMBS activity is almost non-existent in Germany, which is mainly a covered bond market. That’s how German banks prefer to get their secured wholesale funding.”

S&P has not yet noticed any particular performance deterioration in the outstanding German RMBS that it rates, which for European RMBS is mainly concentrated in the UK legacy buy-to-let RMBS space at present. “House price declines on their own aren’t a big problem for RMBS performance, provided there isn’t a big uptick in unemployment,” observes South. “Pre-financial crisis, there was some securitised German non-conforming mortgage lending, where specialist lenders were expanding into Germany at one point, but most of that collateral has now gone.”

The greatest determining factor for RMBS performance remains unemployment levels, which have not seen a significant rise yet across the jurisdiction.

Claudia Lewis

CLOs

Starting strong

Leland Hart, portfolio manager and cio of performing credit at Warwick Capital Partners, answers SCI's questions

Q: Warwick Capital Partners closed its inaugural BSL CLO transaction – the US$400m Warwick Capital CLO 1 – last month. As a new entrant, how does Warwick’s strategy compare to that of existing managers in the market?
A: It’s a pretty seminal time in the CLO market – when risk retention reared its head in the US and Europe and changed the business model for CLO managers regarding equity capital. While the regulation came and went in the US, the market continued to evolve in terms of how equity was raised and placed importance upon having partners, as managers were less able to rely on selling equity at the time of the deal.

For us, our partners really like the performance profile of CLO equity and realise that also having the commitment of equity beforehand allows you to navigate a market which now has multiple cycles per year rather than cycles that last years. We’ve partnered with our equity from day one; we are focused on CLOs specifically, and we’ve hired a very qualified team of analysts with an average of 20 years of industry experience.

A lot of larger investment platforms have great analysts too – but they will be covering open funds, separate accounts, high-yield, multi-asset funds, in addition to CLOs. That doesn’t mean their analysts aren’t focused on credit, just not specifically for the CLO structure.

What we have is not unique per se, as there are a lot of fantastic platforms out there, but there is a lot of time and thoughtfulness that goes into the structure of a deal, and having this CLO focus and expertise is different to a lot of other firms. Another key piece is that everyone in our CLO business is an owner, so the entire team is naturally encouraged to look not just at their names but the whole portfolio.

Q: What makes now the right time to enter the CLO market?
A: We had warehoused that deal, as we have been acquiring loans at a steady rate since the end of last year. So, it was a combination of what was attainable from a debt perspective, as well as making sure we had the quality of assets that match that, and we felt the total return on the transaction for the risk of the portfolio was decent.

We did benefit from great support from the buy-side community, coupled with a portfolio that we had worked on over a long period of time. It has performed well thus far, along with the loan market, which had a pretty nice run this year. It may have looked like super smart timing, but it was more like a steady march since we started building the loan portfolio at the end of last year.

Q: What is the opportunity for new entrants to the CLO market right now?
A: The top 20 platforms account for something like 45% of the CLO market, but there is certainly room for new entrants. Although only three or four new managers entered the market this year, by seeing who is out there and comparing current volumes with those seen in the past, you can see that things are changing in the market.

A hot-topic issue at the moment is that the market is going through a maturity phase, and issuance has slowed down. There are over 100 platforms in the US, and not all of them are issuing anymore.

Many platforms of material size are seeing reinvestment periods end  – or are at least unable to recommit to deals in their older CLOs. That offers a number of opportunities for those with fresh capital and the ability to help borrowers extend their debt maturities, so it is a massive driver of the market at the moment and into the foreseeable future.

There are some very large firms who used to be able to issue 5-10 deals a year who aren’t necessarily able to do so at the moment, and that has certain implications on the behaviour of those managers who are not only feeling forced to do new deals, but a potential reticence about paying down existing deals. If they’ve gone from asset gatherers to that, their motivation might differ from that of someone who owns their CLO equity. This is a major focus in the market at the moment.

Q: What other opportunities do you see in the CLO market at present?
A: The loan market is very large at approximately US$1.4trn in size, and there are a lot of loan issuers who are looking to amend and extend their maturities. This is usually standard operating procedure, but the number of funds that can extend their loans right now is shrinking because a lot of the deals are post-repayment and have to deal with average life tests.

So, as someone with new capital, that implies that the credit curve will steepen – meaning near-term maturities will have tight spreads and longer-term maturities will have wider spreads for the same underlying credit risk. That is a scalable opportunity for those with fresh capital.

The market has adapted. You’ve seen bond issuance pick up, senior secured bond issuance pick up tremendously, and that’s a natural reaction to the markets that happens rather consistently.

So, the opportunity we see is there are a large number of borrowers that are substantial in size, have been around for years and will continue to be, and they need to access the market and the price at which they are doing that will be attractive to us as investors. So, as investors, it’s great as bigger borrowers tend to do better, so that trend has been a positive one for us.

Q: What is the aim for Warwick’s CLO business going forward?
A: Our goal is to become a consistent and repeat issuer. One of the hallmarks of the CLO market is the importance of vintage diversity, and so we want to be a methodical issuer in the market.

The goal isn’t to try and predict the future, but actually offer our investors real diversification. So, we won’t be doing 10 deals a month anytime soon.

Q: The CLO market has undergone immense evolution in recent years. How has portfolio management changed over time?
A: One of the biggest changes in the loan space over the last 20 years or so is that both the transparency and liquidity of loans has continued to improve. So, as a portfolio manager, you really do have an ability to be active.

The correlating factor to all of that is that price volatility has increased as well. So, when we’re looking at some of the sectors that may have an issue, or we’re looking at a specific opportunity, those become even more actionable because loans are in general more liquid and transparent.

However, they can also be more volatile. The loan markets move closer to the bond market when it comes to the day-to-day execution.

Q: Given the sector-specific impact of ongoing macroeconomic pressures, what pressure does that place on diversification for CLO portfolios?
A: Keeping diversification at an acceptable level is not a problem per se. It is a US$1.4trn market, and the index itself has over 1,000 names. Diversification is one of the reasons that the CLO market has had such a healthy and successful life.

Unquestionably, there are some sectors that are redder on the heatmap than others. Two of these happen to be the biggest – healthcare and technology – but you do also have the telecom-media-cable space and other smaller sectors meriting attention. Navigating through some of those testier sectors isn’t impossible, but there are multiple sub-sectors and names within those that certainly an underlying investor may tire of having to talk about – so we will continue to see some premium being required to get an investor into that space.

For us, without having a giant existing book of exposure, it’s not a bad thing to be getting paid more for the same sectors. But you have to be careful with the amount of lower rated single-Bs, as at some stage people won’t want them anymore and will be unwilling to do the work, particularly in struggling sectors. You may have the great healthcare names or great tech names, but the market during the short and medium term may not care.

Q: Despite macroeconomic difficulty, the CLO market has been getting a lot of good press recently, given the increase in issuance. Do you share in that optimism?
A: Volume has picked up over the last month or two because of recent spread tightening – and so we had a rally in loan prices and CLO costs. There are more than a couple of warehouses outstanding from the last year or two which are looking to find a home.

You have willing issuers, a decent market and a CLO investor base that may seem relatively thin to what was seen historically, while we wait for some of the US banks to return. But there are still a large number of new investors coming to market, so it’s certainly a more diverse investor base. This, however, doesn’t mean everyone can access the market at the same time.

There are a number of reasons to be positive – we’re witnessing CLO liabilities rallying and an increasing number of new investors – but it is always a balance. We are still below the last five years volumes-wise, but it has been steady.

It’s not going to be what everyone wants, and there are reasons for that, but it’s healthy and it’s two-way. Whether you’re buying triple-As or equity, the market continues to prove itself – it ebbs and flows, but the structure works.

Q: And looking forward, do you think the outlook for the market is going to remain positive?
A: Historically, loan prices and the cost of liabilities in the CLO market tend to march together hand-in-hand. There are periods where one is ahead of the other, but it is usually only a matter of months before they come back together again. We saw that between this summer and autumn, where it looked hard in the summer but in the autumn it just worked.

As far as macro or secular changes go, I think it looks positive, as there are still investors that are yet to return to the market fully. Then for loans, when I look at the quality of new issuance, the diversity is decent. It was an incredibly busy September; it wasn’t busy before that and the future calendar of new issues looks a little sparse too. And M&A volumes are low compared to historic numbers – which tends to be the feeding ground for loan issuance.

My gut feeling is that underlying demand for CLO liabilities and equity is absolutely there, but the supply of new loan issues leaves a little bit to be desired post-September. And that means CLO liabilities should continue to strengthen from a price perspective. CLOs are two-thirds of the loan market and have been a relatively consistent theme over the last  20 years, and I don’t see that changing materially.

Claudia Lewis

Structured Finance

US CLN market could reach US$220bn

Market updates and sector developments

JPMorgan securitised products research analysts estimate that the potential size of the US CLN market could amount to US$220bn, as banks become more comfortable with issuing the notes for capital relief purposes, following the Federal Reserve’s clarification of what defines a synthetic securitisation (SCI 29 September). Indeed, they suggest that the move may mark the beginning of a new sector in mortgage credit.

The JPMorgan analysts base their projection on GSE CRT activity: the GSEs issue roughly 5% of their 60%-97% LTV production through CRT. The total outstanding balance of GSE MBS is about US$6.5trn, roughly 80% (US$5.2trn) of which can be delivered into CRT. Approximately 5% of US$5.2trn, or US$260bn, is therefore the theoretical CRT market size.

“Along the same lines, we estimate that banks have US$2.8trn loans on their balance sheet. Assuming that banks sell 10% CLN on similar 60%-97% LTV collateral, the potential size of the CLN market could roughly amount to US$220bn,” the analysts note.

They add: “Clearly, not all banks will issue CLNs and as we understand, the Fed might impose caps on how much CLN banks can sell. However, we believe that bank CLN has the potential to grow in size, proportional to CRT.”

CLNs allow banks to reduce risk weights on ≥40% RWA mortgage loans to 15% RWA for senior securitisation exposures under the Basel 3 Endgame. While the proposal is currently in a comment period and the revised regulation will not be fully implemented until 2028 (starting in 2025), capital relief will nevertheless be a priority for banks.

In other news…

Aquarian strengthens Obra offering
Aquarian Holdings is set to join Obra Capital as a strategic partner. The firm has acquired a minority equity ownership stake, replacing Reverence Capital, which has been an investor in Obra since 2019. RedBird Capital will maintain its current ownership stake.

With the new capabilities and team expansion, Obra is working towards launching a dedicated CLO platform (SCI 21 July). For its part, the transaction provides Aquarian with access to additional alternative investment capabilities, thereby strengthening its expanding financial services platform.

Assets controlled by Aquarian-owned companies exceed US$16bn, as of 30 September 2023.

NPL ABS reaches indemnity settlement
Italian NPL ABS 2Worlds has reached an agreement with the originator to repurchase certain positions and settle for a lump-sum indemnity amount. Scope has confirmed that the move will not impact the current ratings of the class A and B notes.

The transaction is a static cash securitisation of secured and unsecured non-performing loans originated by Banco di Desio e della Brianza and Banca Popolare di Spoleto (which have merged). The issuer intends to sign two agreements with the originator to settle certain indemnity requests. The agreements provide for the repurchase of €22.4m of gross book value, as of 31 March 2023, by the originator and the payment of €33.8m GBV by the originator to indemnify the issuer for some other positions.

Structured Finance

Job swaps weekly: Octagon elevates Lam to ceo

People moves and key promotions in securitisation

This week’s round-up of securitisation-related job swaps sees Octagon Credit Investors appointing senior portfolio manager Gretchen Lam as its new ceo. Elsewhere, structured finance lawyers Martin Bartlam and Elana Hahn have joined Xfinite Global and Fasken respectively.

The appointment of Lam as Octagon’s new ceo comes as the firm’s cofounder Andrew Gordon transitions into a new role as executive chair from January 2024. Lam joined the firm in 1999 and was appointed as a member of the investment committee at Octagon in 2013. In her role as senior portfolio manager, she has managed CLOs, separate accounts and commingled funds, as well as overseeing its structured credit strategies.

Meanwhile, CBA has appointed Rachel Dowel as head of bank and securitisation risk, IB&M, based in Sydney. She was previously a Level 1 credit officer for Westpac Institutional Bank’s securitisation portfolio and has also worked at NAB and ANZ.

CBRE has welcomed a new vp to its debt and structured finance practice in Dallas. DJ Elefant joins the firm’s capital markets division from Greystone and will work primarily on securing financing solutions for multifamily and seniors housing clients across the US. 

S&P subsidiary Crisil has promoted Hiral Bhatt to associate director for structured finance, working out of its Mumbai office. Bhatt joined Crisil in 2012, having previously spent 18 months at KRChoksey Shares & Securities.

Hahn has joined Fasken as a partner in its banking and finance group, based in the firm’s Toronto office. She was previously a partner at Dentons, which she joined in August 2016, having worked at Morrison & Foerster and Mayer Brown in London before that.

Great Lakes Insurance SE has appointed Andrea Itri as md, structured credit solutions, with a focus on SRT transactions. He was previously svp, global portfolio solutions at Marsh, having worked at StormHarbour Securities, Moody’s Analytics and Genworth Financial.

Guido Cafaggi has joined Howden Broking as associate director, balance sheet advisory and structuring, based in London. He was previously associate director, securitised products group at Lloyds, which he joined in February 2022. Before that, Cafaggi was an associate in Mizuho’s securitised products group, where he structured and distributed synthetic securitisations.

Mitsubishi HC Capital America has recruited Tony Montemurro to its structured finance and leasing team, where he will serve as vp of sales. Based in Las Vegas, Montemurro will focus on originating equipment financing solutions across different industries, supporting the firm’s plans for growth in the western US. Montemurro previously held the position of vp at MB Bank and TCF Capital Solutions, and has more than 30 years of equipment financing and banking experience.

Santander has promoted José Luis Castilla Fidalgo to vp, structured finance, based in Mexico City. Before joining the bank as an associate in August 2021, he was associate director, project finance at Fitch.

Finally, Bartlam has joined Xfinite Global as head of business affairs and general legal counsel, based in London. He was previously a partner, specialising in structured finance, and global fintech co-chair at DLA Piper, which he joined in January 2012. Before that, Bartlam worked at Orrick and Jones Day.

CLOs

Sculptor merger hit by litigation

Market updates and sector developments

Rithm Capital has responded to a complaint filed in the Delaware Court of Chancery by the Former EMD Group regarding the proposed merger between Rithm and Sculptor Capital Management (SCI 26 July). The group comprises the founding partners of Sculptor, including Daniel Och, Harold Kelly, Richard Lyon, James O’Connor and Zoltan Varga.

The lawsuit asks the Court to enjoin Rithm and Sculptor from consummating the merger until the Boaz Weinstein Consortium is able to bid for Sculptor without restriction from the standstill obligations imposed on them by the Sculptor Special Committee. It also seeks to stop the Special Committee from enforcing the standstill restrictions against the Consortium, including provisions that have limited the Consortium's ability to communicate with stockholders and/or other potential bidders.

Additionally, the complaint seeks to prevent Rithm from voting new shares of Sculptor stock acquired from Delaware Life Insurance in a side deal facilitated by the Special Committee to influence the vote on the merger. Finally, it also seeks to reinstate the provision of the merger agreement requiring the approval of a majority of independent stockholders to effectuate the merger and to reduce the break-up fee to the substantially lesser amount to which Rithm and Sculptor had previously agreed.

The group argues that the Special Committee’s actions over the past several weeks shows that it favours the preservation of management’s jobs and compensation, at the expense of shareholder value.

However, Rithm states that it has engaged closely with Och and the other members of the group over a period of several months, negotiating extensively with them “in good faith” to have them be supportive of the transaction. The firm says it strongly disagrees with and disputes the allegations against it and remains resolute in its commitment to the pending merger, which it believes delivers “immediate value for shareholders and investors and provides high certainty to close”.

The merger agreement has received all necessary regulatory approvals and has achieved all of the appropriate consents from clients necessary to complete the transaction.

In other news…

ESG scores expanded to the US
Sustainable Fitch has launched ESG scores for the US leveraged finance market. The scores seek to provide the CLO investment community with consistent, independent assessments of the environmental and social impact of business activities, thereby enabling comparability across CLO portfolios.

Sustainable Fitch’s ESG Entity Scores offer an independent view on a leveraged finance issuer’s overall impact on the environment, society and the effectiveness of its governance. The scores are offered on an absolute scale from 0 to 100, enabling a comparable view of sustainability impact at both an entity and framework level across the leveraged finance universe.

To date, Sustainable Fitch has scored more than 1,050 individual borrowers in the US leveraged finance market, which covers 86% of the assets in Fitch-rated US CLOs on a notional basis. This complements the Sustainable Fitch coverage of more than 560 individual borrowers in the European market, which covers 96% of the assets in Fitch-rated EMEA CLOs on a notional basis.