Contents

Capital Relief Trades

SCI CRT Awards: Innovation of the Year

Winner: SLG2

Credit Suisse’s SLG2 transaction is SCI’s Innovation of the Year for pushing the envelope in the SRT market in not one, but three ways. Most notably, the deal features a captive insurance vehicle that enables the participation of reinsurance companies that cannot enter into an insurance policy.

SLG2 is a dual-tranche SRT transaction, whereby Credit Suisse buys credit protection on a multi-currency portfolio of sponsored mid-market loans that will be ramped up over three years. The loans may be denominated in euros, Swiss francs and US dollars.

As the protection notional amount in respect of each loan is stated in the same currency as the loan, the underlying portfolio comprises of three sub-portfolios and the equity tranche of three vertical sub-tranches – each denominated in one of the three currencies, which are cross-collateralised and have cross-default mechanics. Such a structure is designed to avoid a currency mismatch between the hedge and the loans.

At the same time, the mezzanine tranche is denominated in euros only. This is thought to be the first time that an equity tranche has been denominated in three different currencies, with the mezzanine tranche denominated in just one currency.

Featuring several aspects to facilitate reinsurer involvement, the mezz was placed with a syndicate of insurance and reinsurance companies in unfunded format. “We used a transformer SPV to turn the CDS into an insurance contract, while behind the SPV there is a syndicate of insurers – including a captive vehicle – that effectively writes an insurance policy to the SPV and receives back-to-back protection from reinsurers,” explains Hannes Wilhelm, md at Credit Suisse.

He continues: “The aim was to expand the reinsurer investor base. It’s important to facilitate access for new investors, especially for those who had previously been prevented from becoming involved.”

Adding to the complexity of the transaction is that Credit Suisse, as protection buyer under Basel regulation, needs to have a direct claim to a rated company or a company collateralised by cash. The captive vehicle in SLG2 isn’t rated, so there needed to be a cut-through to the reinsurer behind the SPV.

Furthermore, the structure includes CLO features – such as a cash-trapping mechanism – to rebuild the equity tranche, should it be eroded beyond a certain threshold by losses. “Cash trapping acts as further protection for the mezz (and, by extension, the senior) tranche. If the equity tranche falls below a certain threshold, instead of paying coupons directly to the equity investor, the cash is paid to the collateral accounts, increasing therefore the thickness of the equity tranche,” says Dimitris Chalikopoulos, credit structurer - director at Credit Suisse.

While the deal’s ramp-up phase is pro rata, the amortisation phase can switch from pro rata to sequential upon certain forward- and backward-looking triggers. “The ramp-up process allows us to grow the portfolio linearly over time. At close, the facility had a 10% utilisation, but increases pro rata as loans are added to the portfolio. This increases the efficiency of the transaction because we can hedge as we originate,” observes Chalikopoulos.

He adds: “Investors also appreciate it because we’re adding new credit. As the ramp-up phase spans across a longer period of time, underwriting criteria are adapted to changes in the economic environment, reducing cyclicality risk in the portfolio.”

SLG2 closed in November 2022 at approximately €100m and can grow up to €1bn. Equity investors have veto rights until the portfolio reaches a certain size.

Honourable mention: Regulator-investor roundtables (IACPM)
In recognition of the International Association of Credit Portfolio Managers (IACPM) finding new ways to effectively advocate for a healthy capital relief trades market. While the IACPM has organised regulator workshops and roundtables before, over the past year, the association has enhanced its advocacy efforts by bringing regulators directly in contact with a representative group of SRT investors to discuss topics of interest. These roundtables fill a need by regulators for such interactions and the IACPM is well-placed to organise them, given its members include a large cross-section of both banks and investors active in the CRT space.

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

Capital Relief Trades

EU leads the pack

Delegates at SCI CRT event stress jurisdictional divergence

The striking asymmetry between regulators in the EU, UK and the US in their approach to the implementation of the Basel III capital regime was noted by speakers at SCI’s ninth annual capital relief trades seminar in London last week.

There are “big differences” between regulators, with the EU seeking to “mitigate” some of the effects of Basel III upon banks, the UK adopting a “straight down the line” approach while the US is planning some “really quite nasty” policies, said one speaker.

After years during which European bankers complained about the comparative ease of the regime in North America, the wheel has now turned, noted another panellist. “Europe now has it easier, so we shouldn’t complain. I’m now more optimistic about Europe compared to the US,” he said.

Additional stipulations to Basel III proposed by the Federal Reserve at the end of July will raise capital requirements for the top US banks by an estimated 20% and have met fierce opposition. It was announced today (October 23) that the comment period has been extended from November 30 to January 16.

Nowhere is the contrast more obvious than in the treatment of securitization, pointed out speakers. While US regulators intend to move the p-factor from 0.5 to 1.0, their EU counterparts have proposed doing exactly the opposite and move it from 1.0 to 0.5 in a move which was greeted with approval by European securitization bankers.

This halving of the p-factor lessens the impact of the new 72.5% output floor, which is set to be introduced in January 2025 and will increase the risk weights, and thus capital requirements for the senior tranches of synthetic securitizations. It typifies the manner in which the EU appears willing to work with banks and its recognition of the value of the securitization market.

Within the EU there is “political will” to be flexible and “an understanding that the securitization market is incredibly important,” said a speaker at the conference.

“This is what we wanted – though it would have been nice if they had gone further,” said another panellist on stage.

The unusually onerous capital burden due to be placed on US banks will result in significantly greater use of the CRT market, they said. In many cases, current equity values mean that raising extra capital through the issuance of new stock is not feasible, leaving only the CRT market as an avenue to lessen the expanded burden.

This avenue has recently become less circuitous as well, as at the end of last month the Federal Reserve issued guidance on the treatment of CRT deals issued via SPVs and direct CLNs which was less obstructive than many thought likely.

The CRT market is set to grow by “30%-40%”, predicted one delegate, as US involvement becomes much greater than hitherto. JP Morgan Chase, the top US bank, is currently canvassing investors with a megadeal of US$20bn-US$25bn and has another slug of a similar amount waiting in the wings as well. This should absorb most available capacity in the market for the foreseeable future.

Simon Boughey

Capital Relief Trades

SCI CRT Awards: Credit Insurer of the Year

Winner: Arch MI

Following two years of significant growth in the European SRT space, Arch MI has been named Credit Insurer of the Year in SCI’s 2023 CRT Awards. The firm has significantly increased the aggregate value of its insured SRT book, expanded its team and increased its deal volume significantly, most notably in central and southern Europe.

With a significant presence in the Australian and US mortgage insurance sector, Arch’s global mortgage group views SRT as a positive balance sheet diversification play. Since writing its first unfunded mortgage trade in 2018 in Germany, the firm’s European division has expanded into more than 10 geographies.

Ruairi Neville, head of European origination in Arch’s international mortgage division, says the expansion into European SRT provides Arch with access to a growing sector spread across a broad range of geographies. “SRT allows us to grow our book in a prudent manner across both asset class and geography,” he notes. “We like the structural aspects of the trades, which allow us to attach at various risk points, depending on our appetite for a given asset class.”

He adds: “Arch has established direct relationships with Europe’s leading banks since we wrote our first credit insurance transaction in 2012. Many of the transactions we wrote in 2022 are repeat trades with banks we have established an existing partnership with.”

“Strong relationships are key,” says Neville. “We want to do business with people and institutions we trust. The banks we transact with have been excellent counterparties and we have developed positive relationships with them. We understand what they want and need from a transaction, and importantly what they can deliver in terms of data and background to the risk. “

Neville stresses the importance of Arch’s ability to structure cover in accordance with a client’s needs. “We have written transactions in both the insurance and financial guarantee format and have participated in structures where there is a mix of funded and unfunded investors.”

He adds: “At Arch, we also see a growing demand for SRT transactions from both IRB and SA approach banks and we have concluded transactions across both regulatory approaches. Many SA approach banks are often first-time issuers and we work closely with these institutions to find a structure and portfolio which makes economic sense for both parties.”

This openness to diversify when faced with compelling opportunities has also been a catalyst for the expansion of Arch’s global mortgage group into new countries throughout Europe. The firm has been particularly active in Italy, Spain and Portugal - jurisdictions where it likes both the risk and structure of the deals it has come across. It has also recently written trades in the CEE region.

“We're not afraid to break ground,” Neville says. “We have the appetite, capacity and expertise to write SRT trades in countries where they haven't been written before. If the bank is a credible counterparty with strong underwriting standards and the country at a macro level is supportive of a transaction, then Arch has the ability to execute the trade.”

In Italy, for example, Arch has worked towards a material presence through relationship-driven repeat transactions with existing customers. The division’s ventures into central Europe last year saw it write the region’s first private unfunded mortgage SRT trade. Also last year, the business wrote the first private unfunded SRT trade in the Iberia region, which Neville says was a landmark transaction in terms of geographic location, asset class and the size of the underlying tranche.

When asked what differentiates Arch from the traditional SRT funded investor, Neville says: “As an insurer, we provide a diversified and stable source of capital to our clients and unlike certain cash investors, we are willing to write transactions with longer maturities. From a commercial point of view, given the widening of cash spreads, insurers can be competitive versus funded investors.”

Over the past 12-18 months, Arch has focused heavily on building out its SRT team. “We have invested significantly in our team, building our expertise across underwriting, actuarial, legal, banking and finance to ensure we have the in-house capabilities to review and conclude transactions which fall within our risk appetite,” Neville says. “With this additional strength on our bench, we believe we are strongly resourced to provide a best-in-class service to our clients.”

He concludes: “Arch has a deep commitment to the SRT sector and we view it as a core growth area going forward. We have accomplished a lot in the last two years, but I believe we are just taking off and there is a long and very interesting road ahead of us.”

Honourable mention: RenaissanceRe 
With a credit team comprising 13 professionals from multiple disciplines, RenaissanceRe’s broad expertise differentiates the firm from its peers and allows it to develop risk transfer solutions with a unique insight and tailored approach. Since its first SRT transaction in 2018, the firm has grown its credit portfolio to over US$1bn of gross written premium across many asset classes, jurisdictions and originating banks in a variety of formats. Looking forward, RenaissanceRe is continuing to advance its strategy as a leading P&C reinsurer through the acquisition of Validus Re. The transaction is expected to close in 4Q23 and will provide access to a diversified portfolio of over US$3bn gross written premium.

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

Capital Relief Trades

Polish lease SRT prints

Millennium, Veld strengthen relationship

Private credit specialist Veld Capital has acted as investor in Millennium Leasing’s latest significant risk transfer transaction. The trade references a €1bn portfolio, comprising highly granular performing Polish SME leases, underpinned by vehicles and machinery, with Veld Capital investing in the mezzanine tranche of the trade.

Leases originated by Millennium Leasing in Poland have historically exhibited high payment predictability and stable performance, driven by a rigorous approach to credit risk analysis and valuation of underlying assets. Millennium Leasing is ranked seventh in terms of share of the local leasing market in Poland, a market with favourable characteristics where leasing volumes far exceed investment loan volumes.

The transaction was structured and closed bilaterally between Veld Capital and Millennium Leasing under the STS synthetic securitisation framework. Through this transaction, Veld Capital and Millennium Leasing have further strengthened their relationship, with Veld having previously participated in a synthetic securitisation of Portuguese SME loans in December 2022 with Millennium BCP, Millennium Leasing’s parent company. This latest deal represents Veld’s twelfth investment in SRTs since 2017 across a broad range of European countries and underlying asset types.

Veld targets investment opportunities benefiting from data-rich underwriting, where it can leverage internal expertise as well as comparable proprietary data. Approximately 80% of the firm’s total investments since inception in 2009 have been with banks as counterparties, often as repeat transactions, providing credibility and transaction certainty.

Poland continues to be a key market for Veld Capital and the firm says it is exploring further opportunities, both locally and with the Millennium Group more broadly. Veld is currently fundraising for its next flagship credit opportunities fund.

Vincent Nadeau

Capital Relief Trades

SCI CRT Awards: Investor of the Year

Winner: AXA IM Alts

AXA IM Alts has won Investor of the Year in this year’s SCI Capital Relief Trades Awards. A global leader in alternative investments, AXA IM Alts is equally a seasoned and dominant investor in the the credit risk transfer (CRT)/significant risk transfer (SRT) space, with over 20 years of experience across nine generations of funds and more than 90 transactions.

The firm’s SRT team, co-led by Milan Stupar and Edward Robinet, is composed of seven investment professionals with an average investment experience of circa 20 years in the industry and sits within the group’s Alternative Credit business line. “I feel that what sets us apart is our experience, having been present since the inception of the market, as well as our ability to look at all asset classes and long-established relationships with more than 50 originating banks,” notes Milan Stupar, co-head of the SRT team at AXA IM Alts.

AXA IM Alternative Credit, through both its dedicated teams and AXA IM’s shared resources, benefits from strong research capabilities across corporate credit (investment grade, high yield, SME, commercial real estate, mortgages etc). This specific set-up gives the team access to a large range of underlying assets and access to borrowers not available in the public market and under any form of credit exposures (notably revolvers, loans, trade finance, subscription lines, counterparty risk etc).

As 2022 saw another record year in terms of issuance, AXA IM Alts launched its nineth generation of SRT funds (AXA IM Partner Capital Solutions IX), with initial closing at the end of August 2022, targeting €1.5bn. The SRT team has already executed 13 trades with 13 different counterparties in the fund.

Such transactions included a wide array of underlying assets, which were both relatively traditional (large corporates, mid-cap, SME) but also some more esoteric segments of the market, including capital call and consumer loans, across a variety of jurisdictions. Transactions were executed under a variety of structures (SPV, direct issuance, direct financial guarantee, cash securtisation), with around 90% being bilateral trades.

Commenting on the sector’s recent and consistent growth, Stupar describes a “growing appetite for the asset class,” notably from large financial institutions. He says: “Many large financial institutions, whether in Europe, the US or Asia, have or are considering investing in this space. Five years ago this was not the case.”

Stupar further highlights a shift in the broader regulatory approach. He notes: “There will always be technical details to adjust, like the p-factor or the excess spread treatment, yet the overall regulators’ view is positive on SRTs across many jurisdictions. Most regulators now clearly support and understand the benefits of SRT transactions.”

Looking ahead, Stupar identifies the US and its pipeline as a clear opportunity for further and exponential growth. He says: “What is expected as a big event of sorts, later this year or early next year, is the return of large US banks and consequently significant SRT deals. This had been impeded by US regulatory uncertainty so far, but we expect this to change.”

Outside of the US, Stupar expects continued growth and diversification to remain the new norm. He states: “It is a market which has been growing year-on-year. The trend of the market of becoming more global (as experienced with the Canadian banks) is set to stay.”

He concludes: “We are expecting new countries, new banks and new asset classes. And volumes are expected to continue to grow.”

Honourable mention: EIB Group
The EIB Group (EIBG) has historically supported European SMEs and small mid-caps, but it is now also turning its focus on climate action and environmental sustainability lending. In this context, EIBG is a pioneer investor in adopting the use-of-proceeds approach for SRT transactions, being strongly motivated by the desire to support a smooth and fast transition to a green economy. During the awards period, the group deployed €3.4bn in funded and unfunded transactions providing capital relief across seven jurisdictions and new asset classes, collaborating with other investors and insurers to provide ad-hoc solutions and facilitate new lending of up to €6.5bn.

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

Capital Relief Trades

SCI CRT Awards: Issuer of the Year

Winner: Santander

Santander has won the Issuer of the Year category in this year’s SCI Capital Relief Trades Awards. Such recognition further illustrates the bank’s leading and predominant position in the CRT market.

Despite a volatile and challenging wider macro environment, the group successfully issued a total of 15 capital relief securitisations in the 12 months to September 2023. All transactions have been structured, arranged and placed by Santander CIB.

One particular area of growth for Santander during the period has been the arranging of SRT transactions for third-party banks, utilising its significant experience to help and support new issuers in the market. During the last 12 months, Santander has worked on five mandates for third-party issuers, across multiple jurisdictions and asset classes, as well as different transaction structures.

Furthermore, last year’s record activity was further accompanied by various innovative transactions and asset classes, including Santander’s first and second synthetic residential mortgage SRT transactions, including both unfunded public and private investors (Project Aracataca and Fortaleza respectively).

Project Aracataca was the inaugural synthetic unfunded RMBS securitisation issued by Banco Santander S.A. and the first-ever synthetic RMBS securitisation launched in Spain. The transaction references a €1.6bn pool (net of risk retention) of Spanish prime residential mortgages granted to natural persons and originated by Banco Santander in Spain. In terms of execution, the lower mezzanine tranche was initially sold to (re)insurers.

Santander also closed its first pan-European CRE portfolio (Project Gomber) and pro-rata amortisation structure in the UK, and first issuance from the Motor programme, to combine both secured conditional sale and unsecured fixed sum loans (Motor 2022-1). The bank was additionally prominent in the project finance sector, acting as arranger on Project Boreas and Project Bocarte (Banco Santander).

Honourable mention: Barclays
Barclays completed nine first-loss transactions with a notional face-value of US$1.4bn and an aggregate reference portfolio worth US$17bn during the awards period under its Colonnade programme. Notably, the bank also executed its first unfunded SRTs, closing nine mezzanine deals with insurers for US$155m notional. The portfolios comprised a mix of corporate, SME and commercial real estate loans.

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

Capital Relief Trades

SCI CRT Awards: North American Issuer of the Year

Winner: Bank of Montreal

Bank of Montreal (BMO) is both a veteran of the SRT market and a highly frequent issuer. But it is not content to rest on its laurels and has introduced a couple of striking innovations within the last 12 months. For its longevity, its energy and its inventiveness, the Canadian lender is SCI’s North American Issuer of the Year.

BMO unveiled its first SRT platform in 2017 and now has six platforms running, each of which covers a different asset class. It added another platform and asset class during the period of 2022/2023 under consideration.

It is by far the biggest North American bank in the regulatory capital trades market and last year by any measure - whether talking about calendar 2022, fiscal 2022/2023 or by SCI’s awards period - was the most voluminous yet. This exceptional bout of activity was largely the result of BMO’s acquisition of Bank of the West for US$16.3bn in 2021, a move which was finalised in February 2023. At the time of the purchase, California-based Bank of the West had assets of US$105bn. 

BMO is now a top-10 US bank and one of the top-five commercial lenders in North America. The US units contributed around 45% of net income in 2Q23. It is now active across 32 US states and has over 1,000 branches.

Decisions taken by the Canadian regulator, the Office of the Superintendent of Financial Institutions (OSFI), in the last 12 months have made the virtues of the SRT market appear more strikingly abundant. First, the Basel 3 output floor was applied to Canadian lenders from 2Q23; and then, in June, the Domestic Stability Buffer was hiked by an additional 50bp.

“It was a big year for us. The standout was the number of different platforms we issued from. While in the past, we might have issued from Algonquin or Muskoka, this last year was characterised by different platforms and different asset classes,” says Jamie Payne, an md in BMO’s risk and capital solutions group in Toronto.

The debutant was the US$2bn Taiga 1, which closed in November and securitised commercial real estate assets. It appeared on the scene only two months after another debutant – the Killarney 1 trade, which offered exposure to equity subscription line facilities. 

Taiga 1 referenced a US$1.75bn portfolio, with a 12% tranche worth US$210m sold into the market. Like the Killarney transaction, Taiga incorporates an 18-month renewal period, during which BMO can add loans to the reference pool. This structure, which the lender believes is unique to it, was first inaugurated with the debut Sauble deal in 2020.

It sees these types of transactions as more akin to partnerships with a select pool of investors. Buyers have only a limited right of denial, so it is important that the legwork is done when every new deal is initiated to make sure the preferences of both borrower and buyer align.

While attaining regulatory capital relief is important to these types of deals, they also serve another, perhaps more important, purpose: allowing BMO to grow its origination business. “In addition to risk mitigation, the transactions allow us to recycle capital for new opportunities,” says Payne.

In October and November 2022, the lender also priced the biggest deals yet seen on its Muskoka and Algonquin platforms. The 5NC2.5 US$8bn Muskoka 2022-1 - which securitised larger corporate loans - offered four tranches, worth a total of US$617.5m, to the market. The first loss tranche priced at SOFR plus 10.25%, which was considerably within where comparable deals priced, says the bank.

Less than three weeks later, another whopper came to the market. The 5.25NC2.75 Algonquin 2022-4 referenced a US$10bn pool of US and Canadian SME loans. BMO placed the entirety of the class E (0%-6.25%) and very small amounts of the B, C and D classes for total notes sold of US$670m.

Not only did this transaction represent the largest one from the Algonquin platform, but it was also the largest North American dollar deal in 2022 – underlining the primacy in the North American market which BMO holds.

Four of the 10 SRT deals BMO sold in 2022 were bilateral trades and though it has launched a new platform with a new asset in the last year, it tends to work with the same group of tried and trusted investors. “For new asset classes, we tend to work with investors that know BMO well. Our deals are designed as partnerships. They have to be comfortable with our underwriting standards and origination process and we have built trust that leads to support for future opportunities,” explains Payne.

In mid-2023, there is considerable hope that domestic US banks are to issue in the SRT market in increasing numbers. But any new issuer has a long way to go before it can hope to match BMO’s footprint in the North American dollar SRT market. At the moment, it’s BMO, a lot of blue sky, and then everybody else.

Honourable mention: Santander Bank, N.A.
Santander Bank, N.A. issued three US SRT transactions during the awards period, including the US$131.6m SBCLN 2023-MTG1 referencing US$2.5bn of residential mortgage loans – the Group’s first-ever funded US residential mortgage SRT – placing the bank as one of the most active issuers in the jurisdiction. Santander US Capital Markets LLC (SanCap), part of the Santander CIB business in the US, acted as an initial purchaser. Additionally, the bank continues to develop the investor base for SRT trades, with 80 unique investors allocated – including 12 newcomers to Santander CIB SRT programmes.

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

Capital Relief Trades

SCI CRT Awards: Arranger of the Year

Winner: BNP Paribas

BNP Paribas (BNPP) declares it is that rarest of beasts in the jungle of significant risk transfer: a flow monster. “We like taking an illiquid product and making it mainstream,” says Bilal Husain, head of EMEA securitised products and real assets syndicate, in London.

For not only its prominence in this market, but also for its influence in shaping the development of the sector and bringing it to the attention of an increasing number of clients and investors, BNP Paribas is SCI’s choice of Arranger of the Year for the 2023 Capital Relief Trades Awards.

The bank’s role as arranger grew out of its role as an issuer. In March 2022, the securitised products group (SPG) was put in charge of coordinating and executing risk weight asset optimisation solutions for the entire BNPP group. This gave it not just a window into every business at BNP Paribas, but also the knowledge of what internal clients needed to do with regards to hedging.

BNPP’s SPG is a client-facing business, so, possessed with all this new knowledge and data, it seemed criminal not to deploy the expertise it had gained about the regulatory capital market for the benefit of external clients. Without exaggeration, it is fair to say that its business as an arranger has grown from strength to strength and it has marched lock in step with BNPP’s prominence as an issuer. The two functions draw vitality from each other.

“We have a complete took-kit that was very relevant for other issuers and have a global investor placement strategy that we felt would be very powerful. We didn’t want to waste this institutional knowledge,” says Husain.

Over the preceding 12 months, the bank has arranged three cash and nine synthetic deals for third-party clients and various BNPP entities, for a total portfolio size of €27.6bn and a corresponding €9bn placed in the debt markets.

There were some firsts among this number. In 4Q22, it brought LBBW to the private investor market for the first time and also at a time of uncertainty for German banks as energy prices were climbing seemingly inexorably. In the face of these difficulties, BNPP was able to bring to the table a group of investor relationships that it knew well and trusted to deliver a debut trade for its client.

But it was with Canadian issuers that BNPP has really made its presence felt. Hitherto, Bank of Montreal had been the only Canadian lender with a developed reg cap trade programme. But in 2023, Canadian Imperial Bank of Commerce (CIBC), Scotiabank and Toronto Dominion Bank (TD) all unveiled debut deals as capital pressures soared, mainly thanks to initiatives undertaken by the domestic regulator.

Two of these – for CIBC and Scotia – were arranged by BNPP. Not only were they firsts for the borrower, both transactions possessed features which reflected credit upon the arranger. The inaugural transaction for CIBC, dubbed ‘Waterloo’, securitised a mixed portfolio of investment and sub-investment grade large corporate loans. Binding bids on the transaction were due on Friday 10 March, with final execution and signing to take place over the following weeks.

However, in the interim, Silicon Valley Bank collapsed, in the third largest bank failure in US history and the biggest since the financial crisis of 2008/2009. Over that weekend, BNPP had to field numerous calls from investors worried that the deal was not going to go ahead. In fact, not only did it go ahead as planned, but it was also upsized from an initial US$3bn to US$4.5bn and pricing tightened by 25bp.

“Size increased and pricing tightened due to the strength of the transaction and sponsor, but also because of the long-standing institutional investor relationships BNPP had. As an investor, you weren’t just dealing with BNPP on an isolated SRT deal, but BNPP across the entire structured finance platform. This is the strength of our franchise,” says Husain.

The Scotiabank deal possessed some eye-catching features as well. It was a debut deal, yet securitised a pool of investment grade loans of no less than US$9bn, making it one of the largest-ever inaugural transactions and the biggest SRT deal in 2023 to date. This too was upsized from an original US$5bn.

Over a dozen investors participated in the deal, with around half the transaction anchored among a core group of institutional investors, while the remainder was broadly syndicated. The CIBC trade was broadly syndicated, with 10 different buyers as well.

This practice underlines one of the basic tenets of BNPP’s philosophy in the SRT market. While the bilateral market is more straightforward and easier to negotiate, the syndicated space can - under propitious circumstances - offer superior execution.

Syndicated deals do not always offer the easiest path, but BNPP believed it is its job to demonstrate to the client, in a transparent manner, that best execution is being attained. This is especially true as such strategic trades must get signed off at board level.

BNPP also beat competition from both sides of the Atlantic to get the seat at the helm for both the CIBC and the Scotia transactions.

Like many onlookers, Husain expects that the tier one US bank market will produce many more deals in the second half of 2023 and beyond, than has been the case for the last few years. The SRT market is becoming de rigeur. And few banks have played a more important role in that development than BNPP.

Honourable mention: Deutsche Bank 
In recognition of the firm’s thorough and measured approach to investor outreach and supporting debut issuers throughout the execution process.

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

Capital Relief Trades

Risk transfer round-up - 26 October

The week's CRT developments and deal news

People moves
Alan McNamara is set to join Howden CAP as executive director, balance sheet advisory and structuring, based in Dublin. McNamara was previously at the Bank of Ireland, most recently as head of group balance sheet management and execution, responsible for the bank’s extensive SRT programme. In his new role, he will enhance the advisory and structuring expertise across Howden CAP, with a particular focus on portfolio solutions and significant risk transfer transactions.

McNamara’s appointment follows the arrival of Guido Cafaggi, who joined Howden CAP earlier this month from Lloyds Banking Group, where he was associate director in the securitised products group (SCI 20 October). The pair will report to Colin Reddy, head of financial institutions and advisory at Howden CAP.

McNamara will commence his employment at Howden once his contractual obligations to his present employer are discharged at the end of 2023.

Pipeline update
With the final quarter of the year well underway, much of the CRT market’s attention is already turning to the supply expected to materialise from the US heading into 2024.

Regarding recently completed trades, Nordea and UniCredit are understood to have respectively closed a corporate and an Italian consumer SRT. Commenting on the former, one SRT investor describes a “repeat process with a regular investor.”

He adds: “It wasn’t a trade that was broadly discussed or brought to market, as such.”

In terms of the pipeline, Lloyds and HSBC are currently in the market with UK mandates, although at different stages of execution. With respect to Lloyds’ established Salisbury programme, the investor notes: “To the best of my knowledge, I do not think the latest Salisbury transaction has launched yet. Lloyds is usually pretty public about its deals, so market participants tend to be aware of when they’re launching.”

As for HSBC’s corporate trade, named Helium, the investor suggests that the deal is “progressing and expected to close next month.”

Meanwhile and as reported by SCI a couple of weeks ago, the investor points to a resurgent US as a potential watershed in the capital relief trade market’s upcoming supply and development. He says: “JPMorgan is trying to do a couple of gigantic trades. There are other US banks that are prepping their books too. So, it is entirely possible that in the next month - or six weeks - there'll be another couple of US banks out with transactions as well.”

He continues: “So far, pricing in Europe is holding up: I don't think there's been any meaningful movement, but much will depend on what happens in the US. If suddenly we face a lot of supply out of the US, that will impact pricing in Europe because capital is still scarce. Although people are raising more money, they're not raising it at the speed at which, ideally, you would want to be able to invest in all the trades that are out there.”

Nevertheless, the investor expects pricing to tick up a little bit at year-end or very early into Q1 next year, once the US trades are launched. Looking ahead at the upcoming supply, he notes: “I would think that there are probably somewhere around 15 to 18 transactions in the market at the moment. But how many of those will close before the end of the year? It’s tricky to say just yet, as we are still a bit early in Q4.”

CRT new issue pipeline

SCI SRTx indexes

For more information on the Significant Risk Transfer Index (SRTx), click here.

Capital Relief Trades

SCI CRT Awards: Law Firm of the Year

Winner: Clifford Chance

Clifford Chance’s stated objective is to be the leading law firm in the CRT market, advising on nearly every transaction and leading the sector’s evolution. In recognition of its success, the firm is SCI’s CRT Law Firm of the Year.

Given how both the firm’s practice and the market have grown over the last 20 years, Clifford Chance views its CRT activity as a partnership with the industry. “There are the originators, the investors and the regulators, and we see ourselves as the next pillar in delivering both economically and from a regulatory perspective in terms of what each party is trying to achieve. This model that we've been pursuing from the get-go has meant that we're with all of those participants through both the good times and the dark days,” says Jessica Littlewood, a partner in the London office.

Tim Cleary, a partner at the firm, adds: “Our goal has always been to have the biggest team with the most expertise; to be in a position to advise market participants, regardless of their strategy, what type of transaction they're looking to execute and which jurisdiction they're in. We are the only firm that offers this full-service approach.”

Cleary explains that the firm seeks to be at the forefront of market evolution. “A key development this year has been the expansion of the Canadian CRT market, which went from one originator to a position where now all five of the large Canadian banks are active. Another growing market has been Poland, where there had been a very small amount of activity with the EIF in the past, but last year saw a number of private sector transactions come to market. We advised on all of those and are involved with a number of further transactions in the Polish market,” he adds.

Gareth Old, partner at Clifford Chance in New York, expects the US to be the next big CRT market to open up. He says there are three strands to this development.

“First is the regulatory side, with the introduction of the new Basel 3 Endgame. We are working through this lengthy document and we're acting for the trade groups in terms of the responses to that and making sure that it works and aligns with practical and executable transactions that are consistent with the way the market needs to develop,” he explains.

Then there is the wider regulatory framework, he points out. “There's one thing for the bank to say it couldn't get the capital relief that it’s looking for. But there are other aspects, like how does this work with insurance rules and commodity pool regulation. There are a lot of non capital-based regulatory, safety and soundness issues, which banks really need to work through with experts. So that's what we are doing, where we sit alongside the banks and their regulatory accountants, as they're developing their expertise.”

The third aspect is that the US market appears to be developing in two parts. “There are the specialist investors who are the CRT experts and they are particularly active in areas such as corporate credit and subscription loan transactions. They're looking at this as being a specialised market, but the real differentiator for the US is actually in terms of the consumer assets and residential mortgages, where a lot of the growth will come from traditional investors in the cash securitisation market getting comfortable with the synthetic model. This is where an awful lot of the scale is going to come in the US market,” Old observes.

Investors are also interested in being able to use CRT investments in the same way as they can in the cash securitisation market. “For example, repo and loan-on-loan type financing and leverage based on those exposures. So, we're also working with investors to build that up. One of the things that's interesting is that in many transactions, we act for the issuer in terms of issuing the securities, as well as acting for the investors setting up entities to hold their investments,” Old says.

He continues: “It’s clear that capital requirements are increasing for banks, and that includes small, medium and large banks. It's also clear that capital is very expensive for them and that the regulatory requirements for enhanced capital is not going to let up, so what I think we are experiencing already is bank treasurers and bank risk managers recognising that is the current state of play. And they're moving towards issuance of credit risk transfer transactions, which are the alternative capital management tool to raising more capital.”

Looking ahead, Littlewood does not expect revolution in the market this year, but instead a continued expansion. “There are some jurisdictions where it would be nice to see the regulator open the doors. Australia is still one where it doesn't look like the regulator is budging, but we live in hope. I think we'll see a steady evolution of the market – deepening and broadening – as it grows in a healthy way.”

Indeed, largely driven by the STS framework, standardised banks are becoming a larger constituent of the market. “Standardised bank issuance volume is never going to come close to that of the larger banks. But the CRT product bedding down throughout the industry has been a really interesting development and one that I think is going to continue, notwithstanding some of the headwinds that come up,” Cleary concludes.

Honourable mention: Cadwalader, Wickersham & Taft
Cadwalader has seen a meteoric rise within North American CRT endeavors throughout the award's timeline, serving as legal counsel for issuers and investors in the majority of transactions that came to the market. The firm showcases proficiency in both legal and structural aspects, including on-market commercial terms, and a deep bench of first-in-class representation. Its leading CRT services are complemented by top-tier practices in relevant asset classes, pivotal to effective risk transfer.

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

Capital Relief Trades

SCI CRT Awards: Contribution to CRT

Winner: PGGM

PGGM has closed 79 transactions since the inception of its credit risk-sharing (CRS) mandate in 2006, investing €16bn globally across diverse asset types and partnering with 19 global and regional banks through the GFC, Covid-19 pandemic and now during the current environment of inflationary pressures and geopolitical unrest. The firm is SCI’s pick for the Contribution to CRT award not only because it is one of the most experienced and largest end-investors in the risk transfer field, but also in recognition of its promotion of high transaction standards and a robust market, as well as its industry advocacy and engagement.

The CRS mandate fits within PGGM’s broader ambition to contribute to a sustainable financial system. By engaging in CRS transactions, the firm helps both the banking sector to manage credit risk efficiently and the financial sector to reduce systemic risk. At the same time, it generates attractive total returns through unique credit exposures not available in public markets.

PGGM is focused on building long-term risk-sharing relationships and, as such, rolls over transactions when they mature. The firm is often among the first private market investors for its risk-sharing partners. By staying close to a bank’s management of its loan book and by agreeing realistic constraints on eligibility and portfolio criteria, it has also managed to be there for its risk-sharing partners, in both good and bad times.

“We managed through the pandemic by knowing what kind of risks we are willing to take and how to deal with the unknown. We’ve increased stresses in certain areas and reduced our exposure to certain risks. We adjusted, but we ensured that we were able to continue working with our risk-sharing partners,” observes Mascha Canio, head of credit and insurance-linked investments at PGGM.

She continues: “Governments and central banks have been accommodative; we are yet to see any significant defaults, which means that the CRS market has not truly been tested. The instrument will demonstrate its true strengths when defaults begin rising. We anticipate CRS to remain a valuable instrument for banks, in terms of freeing up capital, and for investors to make a decent return in adverse market conditions.”

As a prudent long-term pension fund investor, PGGM has consistently applied its own high ‘pension fund standards’ to its CRS transactions based on understanding the underlying and a genuine sharing of credit risk between the bank and the investor. Indeed, the firm applies three key principles to its investments: adequate risk alignment of 20%; mitigation of counterparty credit risk to the bank by collateralising the funded notional; and having the right data to evaluate the credit risks of the loan portfolio and estimate expected losses throughout the economic cycle.

PGGM also influences the adoption of high-quality transaction standards through its co-investment agreement with Swedish pension fund Alecta, with the goal of helping the CRS market to grow further on a sound and sustainable basis. So far, the pair have closed 21 transactions together under the co-investment partnership.

Furthermore, PGGM strongly believes that financial return and social responsibility go hand-in-hand. Consequently, the firm incorporates ESG standards in its investment decision process as part of a responsible investment philosophy.

By focusing on the real economy as a whole, CRS can positively contribute to the transition to meet the Paris climate goals. Therefore, the firm looks beyond what is already green and supports the shift of all sectors and companies, in order to make the biggest impact.

Meanwhile, PGGM believes that the long-term viability and sustainability of the CRS market is only achievable if the long-term interests of banks are balanced with those of investors and regulators. Because of this conviction, the firm is a vocal advocate for harmonisation of practices, appropriate standards for healthy transactions and transparency.

For example, it began pioneering efforts to establish an STS framework for CRS in 2015 and participated in the High Level Forum on the Capital Markets Union. It continues to be active in supporting a sustainable and healthy CRS market in current active jurisdictions, as well as advocating CRS to regulators in potential new markets.

“We’ve been investing for a long time and take our role seriously in terms of trying to advance the CRS market in several ways, including by espousing high transaction standards and advocating for the STS synthetics regime. We believe CRS transactions are beneficial to the economy, if undertaken in a healthy and sustainable way,” explains Barend van Drooge, deputy head, credit and insurance-linked investments at PGGM.

So far, the firm has invested €1.6bn in nine STS-qualifying transactions, with a total underlying loan notional of €30bn.

Overall, van Drooge believes the market is heading in the right direction, but he says that greater certainty as to what the US regulator expects from issuers would be beneficial. “The US market represents huge potential that is yet to be tapped. We continue to engage with regulators in other jurisdictions – the more that open up, the deeper the CRS market will become. The standards set in Europe are having a positive impact on other jurisdictions and helping regulators to get comfortable with the instrument,” he concludes.

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

Capital Relief Trades

SCI CRT Awards: Personal Contribution to the Industry

Winner: Bruno Bancal, head of active management & transactions at BNP Paribas

In the significant risk transfer space, BNP Paribas has gone from French ground-breaker to international powerhouse and throughout that journey it has been led by Bruno Bancal, its head of active management & transactions. Described as the bank’s “driving force” by one investor, Bancal has also filled a similar role for the market more broadly, as both a leading advocate with regulators and educator through industry conferences and third-party advisory roles.

As with all good leaders, Bancal is more than aware of the role others play in his success. “The quality of people that I am fortunate to work with – from colleagues to investors, to lawyers and so on – is outstanding, making our business both a success and a pleasure,” he says.

Bancal’s involvement in the SRT market began back in late 2009, when – having gained extensive experience as a structurer and a trader across all asset classes – he got the opportunity to move internally to BNP Paribas’ credit portfolio management operation as head of the transaction group. “The idea was to redevelop and rebuild portfolio management activity, in terms of credit hedging, capital and risk management for the corporate and institutional banking division,” he explains. “Very early on we became convinced that synthetic securitisation was a very efficient and powerful tool to manage the bank’s credit risk.”

However, it would take four years for such a transaction to materialise. “When we began, the market was basically still shut for French institutions, thanks to all the bad press surrounding securitisation in the financial crisis – and derivatives had an even worse reputation. So, a combination of both was seen to be very toxic,” recalls Bancal. “In addition to that, some banks had already issued transactions that did not fully transfer risk in the way that they claimed. The regulator saw this and put a stop on any French bank participating in synthetic securitisations.”

As a result, BNP Paribas – led by Bancal – began extensive discussions with the French regulator, while trying to demonstrate that it was working on a true risk transfer transaction. The firm decided that the best way to achieve success was to create the “simplest and most transparent structure possible”. A conversation that was to foreshadow Bancal’s heavy involvement years later in market dialogue with the EBA around the case for an STS framework for synthetic securitisation.

The result of the earlier discussions was BNP Paribas’ first SRT transaction – Resonance I – in 2013. The deal also acted as a proof of concept for both the regulator and, perhaps as importantly, internally within the bank.

Bancal explains: “Internally, we had to convince everybody that going down this route made sense, because this type of transaction has to gather lots of internal stakeholders. Many people need to be involved and, as it was new and was something that had a bad reputation, it required a lot of educational steps to onboard people from both product line and from function – people from risk, from legal, from finance, from ALM. So, it was a long journey, but in the end, we managed to do this first transaction and it went well.”

From there, the bank has gradually and systematically built its franchise in the SRT space. Not least thanks to Bancal and his team building strong relationships with committed investor partners that have accompanied them throughout the development of the business.

At the same time, the bank has widened the scope of the underlying assets that could be used for SRT transactions and grown the range of the BNP Paribas entities and business lines that can utilise the product. “Over 10 years, we have arrived at a very significant activity that now is very important for the bank, in terms of risk weighted asset management and as a true risk management tool,” Bancal says.

BNP Paribas’ evolution reflects that of the broader market. “The market has, driven by changing regulation and increasing cost of capital, totally evolved from being exclusively for top tier one banks to tier two and tier three banks as well and has widened geographically,” observes Bancal. “Capital management is now something that is more and more prevalent for all banks – we've even seen that ourselves, where initially it was only our CIB division that was looking at managing capital, but it is now all areas of our bank.”

The market has not only expanded in terms of issuers, but also investors. Bancal notes that both the number and range of investors is continuously growing, with pension funds, official institutions, private credit funds, credit insurers and reinsurers being joined by the likes of trade insurers and dedicated SRT funds.

Overall, he says: “There is a market infrastructure that is now really robust and developed for these types of transactions. There is no real reason why the market will not continue to grow – though it will, of course, need to continue to adapt as regulations change and bring new constraints.”

Wherever the market goes from here, Bancal aims to remain part of it, not least because he still enjoys the job. He says: “What I like about the job is that there is first an entrepreneurial type of experience and that takes place within a very big institution – it's a very specific type of challenge to onboard people and to keep them potentially out of their comfort zone in an institution that is very much process oriented. It is quite challenging, but it's very exciting and very interesting.”

Bancal continues: “The second point is that I enjoy the ecosystem of the market very much and the people working in it. For instance, our investors are great people; very seasoned, experienced professionals that are eager to build long-term relationships and have knowledge of how complex it is for us to do this type of transaction. So, they are usually very open to adapting to find solutions and are of the same mind as us that those solutions should be as simple as possible.”

As Bancal concludes: “At the end of the day, it’s always exciting to close a transaction and it's very exciting to find simple solutions to complex problems. On one hand, we try to industrialise our process and to standardise everything to create simplicity. On the other hand, we are always facing new challenges that drives us to find new solutions and to be innovative – not innovation for innovation’s sake, but innovation to solve specific problems.”

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

Capital Relief Trades

SCI CRT Awards: Impact Deal of the Year

Winner: Project Bocarte

Project Bocarte has won Impact Deal of the Year in this year’s SCI Capital Relief Trades Awards. Bocarte is a significant risk transfer transaction executed bilaterally between Banco Santander and Newmarket Capital. The deal’s ESG components and ramp-up mechanism provide clear and impressive impact features.

The transaction – which closed in Q4 last year - provides first loss credit protection on a €1.6bn portfolio of project finance loan facilities issued by Santander. In addition to incorporating a number of structural impact and sustainability features, the initial portfolio is comprised of nearly 50% renewable energy assets, spread primarily across Spain, the UK and the US.

Bocarte is Santander’s fourth project finance SRT and the second SRT to align with Santander’s ESG strategy, incorporating additive coupon step-down incentives upon meeting specified ESG targets. The transaction introduces an innovative “ramp-up” feature, enabling portfolio and notes to increase pro-rata utilising committed investor capital at the same initial coupon rate, with the ability to bilaterally agree further increases and extensions. Additionally, Bocarte is Santander’s first project finance securitisation to meet the synthetic STS regime and the second of its kind in Europe.

Looking at the deal’s structure, the funded credit protection is provided to the Santander portfolio via a direct CLN referencing first-loss and mezzanine tranches. The referenced portfolio assets are capitalised through the ‘slotting’ approach, with the retained notes utilising SEC-IRBA as well as STS treatment, resulting in a highly efficient capital saving.

Furthermore, the impact incentive is triggered upon meeting certain ESG targets linked to both Santander’s Sustainable Finance Classification System (SFCS) and the group’s wider renewable energy lending. Specifically, should Santander achieve a pre-set fixed growth rate in this type of lending for certain years of the transaction’s life, a coupon step-down mechanism will be triggered. In order for this mechanism to be quick-started, Bocarte’s growth hurdle targets have been set ambitiously, taking into account the industry growth.

The portfolio ramp-up’s mechanism is designed to increase portfolio and notes pro- rata over 24 months at a constant initial coupon rate. The transaction uses pro-rata amortisation, with a trigger mechanism in place for a switch to sequential amortisation aligned to the EBA’s final RTS on synthetic STS performance-related trigger.

Commenting on the transaction’s alignment to Santander’s SFCS, Elena Eyries, MD and Denis Aranburu, MD at Santander, note: “The transaction is tailored to Santander’s new SFCS. And since we have this coupon incentive, it allows the investor to foster new lending from the bank in the ESG sector. The incentives linked to the ESG objectives for the replenishment of the portfolio, the ramp-up mechanism and the STS feature are all prominent innovations. We feel that all the stars were aligned, both from an investor and issuer perspective.”

Similarly, Molly Whitehouse, MD at Newmarket Capital, praises Bocarte’s forward- looking impact features. She notes: “Santander’s SFCS system goes into so much detail across different ESG-oriented criteria. To be able to align our risk transfer transaction with this new classification system is something that we're very proud of. I think that the challenge in any transaction in which you're trying to have some kind of forward-looking impact criteria is to make sure that you are getting the definitions right, such that you can track targets and have very solid reporting. I feel we have achieved this with Bocarte and it was a pleasure to partner with Santander at the forefront of their thinking around green considerations and around impact.”

She concludes: “I believe Bocarte’s targets speak to Santander and Newmarket’s aligned ambition in accelerating renewable energy growth. Our hope is that Bocarte, like other Santander and Newmarket transactions, will serve as a path for others to follow and encourage financial institutions and investors alike to think creatively about how they can embed positive impact into their own strategies.”

Honourable mention: Room to Run Sovereign (African Development Bank) 
Room to Run Sovereign (R²RS) marks the African Development Bank’s return to the risk transfer market, following its landmark synthetic securitisation in 2018. R²RS references a US$2bn sovereign loan portfolio and features a US$400m first-loss tranche (bought by AXA XL, Axis Specialty and HDI Global Specialty) and a US$1.6bn second-loss tranche (bought by the UK’s Foreign Commonwealth and Development Office). The objective of the transaction is to reduce the capital consumption of the AfDB’s sovereign loan book, in order to free up capital to redeploy in African climate finance projects.

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

RMBS

Legacy adjustments

Call for enhanced transparency for restructured mortgages

A number of recent RMBS have securitised legacy Irish and Spanish restructured residential mortgages (see SCI’s International ABS Deal Tracker). Fitch says it anticipates an increase in both loan restructurings and non-performing loan formation in both of these jurisdictions amid affordability constraints, as borrowers face higher interest rates and greater cost of living pressures.

“Loan restructuring arrangements will remain the primary tool for lenders to manage cases of borrower distress, as policymakers introduced various measures after the global financial crisis and during the Covid-19 pandemic that promote forbearance over foreclosure,” the rating agency notes.

It adds that enhanced data transparency is crucial for the analysis of restructured mortgage portfolios, compared with the standard loan-by-loan dataset used in analysing prime RMBS pools. Such information is key to calibrating assumptions with adjustments for restructuring arrangements, which affect foreclosure frequency and recovery rate expectations.

Additional information that Fitch expects to receive includes restructuring type, post-restructuring loan-by-loan pay rates and date last in arrears. Updated property valuations also reduce uncertainty over achievable recoveries, while servicer capabilities are examined in terms of forbearance and recovery strategies.

Fitch reports that it has typically received this information. However, if such data are not received, rating caps may be applied or the agency may not be able to rate the transaction.

Credit deterioration within rated RMBS portfolios is mainly linked to the non-conforming and reperforming loan sub-segments. For 2023-2024 and in relation to the entire residential mortgage space, Fitch expects late-stage arrears in Spain to increase to 3%-3.5% from 2.4% in June 2023 and to 5%-6% in Ireland from 4.1%, as of September 2023. Late-stage arrears for non-conforming and reperforming loans are expected to increase faster.

The agency estimates that a typical Spanish restructured mortgage carries a probability of default that is two or three times higher than a prime non-restructured mortgage soon after the implementation of restructuring measures. Then, the relative risk gradually converges to par after about four to five years of a clean payment record. However, loans restructured when interest rates were low in 2018-2022 are facing a large payment shock, which could herald a new wave of defaults in this segment of the market.

For Ireland, Fitch expects the proportion of restructured loans to reach roughly 9%-10% of the residential mortgage market stock, which is well below the levels in the aftermath of the financial crisis. “Even though restructurings have been falling since mid-2018, we expect this trajectory to stabilise or rise. Most of the affected mortgages would be legacy floating-rate loans or low fixed-rate loans originated in recent years that roll off to higher floating rates over the next 12 months,” the agency concludes.

Corinne Smith

ABS

Subprime auto is not the next credit crisis

Vadim Verkhoglyad, vp and head of research publication at dv01, argues that challenges in the subprime auto market are not as significant as they seem

Many view the US subprime auto market as a ‘canary in the coal mine’, equating facts like rising delinquencies to an indication of a looming financial crisis. This perspective is false and its adoption could decrease subprime activity and exclude borrowers from a critical market. It is crucial that market participants acknowledge the broader context of subprime auto loans to understand why the issues aren’t as significant as they may appear.

Concerns about the subprime auto sector are predicated on several factors. Delinquency and charge-off rates in subprime auto ABS are increasing: delinquencies 60-plus days overdue hit a seasonally adjusted record high of 5.6% in July. Additionally, interest rates and used car prices are rising, causing affordability challenges for potential borrowers. Moreover, wholesale poor underwriting by a select number of auto lenders has been detrimental to sector performance and perception. 

However, these challenges are not as significant as they seem and are certainly not signals of a looming crash. Increased delinquencies during periods of rising interest rates are not unusual and do not necessarily imply long-term increases in defaults, repossessions or widespread risk to consumer markets.

On top of this, delinquency rates for public issuers remain relatively contained. These delinquencies can also be managed effectively by lenders: they have significantly increased interest rates on new loans, which - while leading to higher delinquency rates - also provide a bigger return and a cushion for existing losses. 

Furthermore, the subprime auto market represents only a small portion of the consumer universe and is a self-contained market. As reported by the Federal Reserve, auto loans make up just 9.3% of total outstanding consumer debt, while SIFMA reports that auto ABS makes up less than 15% of outstanding auto loans.

Moreover, the aggregated performance of auto loans has fared significantly better than subprime auto ABS indices. Fluctuations in the auto market have not historically had a substantial impact on the broader consumer sector or the economy at large. The rates for delinquencies 90-plus days overdue in 2019 were equal to 2008 levels and did not spill over into the broader US economy, as noted by the Federal Reserve.  

Acting on overblown fears is dangerous, as it has implications on subprime auto market activity at large and impacts underlying borrowers. Due to fears of the issues presented above, some lenders have been scaling back their loans to subprime borrowers and are instead targeting higher-quality borrowers.

At the end of June this year, the 12-month rejection rate for auto loans hit a new high at 14.2%, according to the Federal Reserve. This negative sentiment may deter investors from a valuable market, decreasing market activity. It also impacts the many Americans for whom the subprime auto market is the only avenue to access the car they need to get to work and maintain their income. 

Given the vital importance of the subprime auto market for many Americans, we must have a comprehensive understanding of sector performance. Issues in the sector - such as rising delinquency rates - in this self-contained and small market, while noteworthy, are not indicative of a looming credit crisis. By recognising the broader context, we can ensure the market is not negatively impacted and continue to make critical loans available.

Structured Finance

'Endgame' comment period extended

Market updates and sector developments

US federal bank regulatory agencies have extended the comment period for both the Basel Endgame risk-based regulatory capital proposal and the G-SIB surcharge proposal until 16 January 2024 (SCI 28 July). Comments on both proposals were originally due by 30 November, but the comment period has been extended to allow interested parties more time to analyse the issues and prepare their comments.

The Federal Reserve has concurrently launched a data collection exercise to gather more information from the banks affected by these proposals, with a submission deadline also of 16 January. It is hoped that the additional data will further clarify the estimated effects of the proposal on the calculation of RWAs and inform any final rule, with summaries to be made public.

In other news…

Algonquin ratings assigned
DBRS Morningstar has assigned respective ratings of triple-A, double-A, single-A (high) and single-A (low) to the A, B, C and D tranches of Bank of Montreal’s Algonquin 2023-1, which priced last week. The transaction references a portfolio of primarily US and Canadian senior secured and senior unsecured loans.

Alpha, UniCredit sign strategic partnership
UniCredit and Alpha Services and Holdings have signed a binding term sheet for the creation of a strategic partnership in Romania and Greece. The parties have agreed the key economic terms for the merger of UniCredit Romania with Alpha Bank Romania, to create the third largest bank in the local market with a combined 12% market share by total assets.

Transaction closing is expected in 2024, subject to the completion of a due diligence process, corporate approvals for the merger and all necessary regulatory consents. Upon completion, Alpha Bank is expected to retain 9.9% of the combined entity’s share capital and receive a cash consideration of €300m.

Additionally, UniCredit and Alpha have agreed key terms for the purchase by UniCredit of a 51% stake in AlphaLife Insurance Company and the distribution of UniCredit onemarkets mutual funds through the Alpha Bank network, which serves more than 3.5 million clients in Greece. The parties will also explore further collaboration opportunities to support their customers’ needs, leveraging on their combined international footprint and origination capabilities in regional banking, transaction banking, syndicated lending, advisory, other market and corporate services, as well as other banking services and products.

Finally, UniCredit has submitted an offer to the Hellenic Financial Stability Fund (HFSF) to purchase all the shares the HFSF currently holds in Alpha, equal to 9%.

Structured Finance

Job swaps weekly: Antares beefs up team after strategy launch

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Antares Capital hiring multiple senior executives, as it closes its debut broadly syndicated loan CLO. Elsewhere, Prosperise Capital has appointed PC2 Capital’s founder as partner and head of CRE following its acquisition of the firm, while S&P Global has promoted three securitisation execs to md in the Americas.

Antares Capital has made three senior hires in its New York-based liquid credit team, coinciding with the US$450m closing of its inaugural broadly syndicated loan CLO. The firm has hired Rob Davis and Amy Ecker as mds and Jonathan Rogers as vice president.

Davis left his role as md and senior investment analyst at Alcentra at the end of 2022 after 11 years with the manager and previously spent four years at Nomura Asset Management. Ecker joins five months after leaving HPS Investment Partners, where she spent 13 years. She was most recently an md and senior credit analyst focusing on leveraged finance in media and telecommunications. 

Rogers left his role as credit analyst at LoansIntel in April after a year with the business. He previously worked at Investcorp, Apex Credit Partners, CIT Group and UBS Investment Bank.

Meanwhile, CRE investment firm PC2 Capital has been incorporated into Prosperise Capital, with its founder and cio Pasquale Cardone appointed partner and head of CRE at Prosperise, based in Miami. Before founding PC2 in July 2020, Cardone was a CMBS trader at Citi and Wells Fargo in New York, among CMBS-related roles at other firms. The integration of PC2 marks the entry into the US market for Prosperise, which is expected to be an area of additional future growth for the firm.

Additionally, Prosperise has recruited Dirk Rothig and Walter Dolhare as partners, based in London and Charlotte, North Carolina, respectively. Rothig was formerly global head of treasury and capital markets at IKB Deutsche Industriebank, responsible for the bank’s conduit programme and investment book in CLOs and CDOs. Dolhare had a 25-year career at Wells Fargo, including serving as the co-head of the corporate and investment bank and the head of its markets businesses.

S&P Global has promoted two executives to md in its New York structured finance team. Ildiko Szilank has been elevated to md and head of esoteric securitisation and Frank Trick has been promoted to md and co-head of US ABS ratings. 

Szilank has been with S&P for 25 years and is promoted from the role of analytical manager and senior director. Trick joined the agency 22 years ago and is promoted from the role of senior director. He previously had stints at Vanderbilt Financial Services, New York Mortgage Company and Home Federal Savings Bank.

The agency has also elevated Leandro de Albuquerque to md and head of Latin America structured finance, based in its São Paulo office. He joined S&P 19 years ago and is promoted from senior director and analytical manager in the structured finance team.

Intercontinental Exchange (ICE) chief development officer Christopher Edmonds is to take over from Amanda Hindlian as head of the group’s fixed income and data services business segment. He will move to ICE’s head office in Atlanta after being with the business since 2010 and previously worked at International Derivatives Clearing Group and ICAP. 

ICE is also promoting its chief regulatory officer and sustainable finance president Elizabeth King to head of its clearing operations. The development comes a month after ICE announced a joint venture with DeltaTerra Capital to provide climate-adjusted credit risk analytics for CMBS and RMBS (SCI 21 September).

Alan McNamara is to join Howden CAP as executive director, balance sheet advisory and structuring, with a particular focus on portfolio solutions and significant risk transfer transactions (SCI 26 October). He will be based in Dublin and will commence his employment at Howden once his contractual obligations to his present employer are discharged at the end of 2023.

McNamara was previously at the Bank of Ireland, most recently as head of group balance sheet management and execution, responsible for the bank’s extensive SRT programme.

Rémi Kireche has joined AFME as director of advocacy from political risk consulting firm Flint Global. He will be based in Brussels and work on AFME’s advocacy on capital markets union, with a particular focus on securitisation, equity capital markets, post-trade and sustainable finance. Kireche leaves his position as associate director at Flint Global after just nine months and previously spent five and a half years working at the European Commission on financial-institution-related policy. 

Brazilian asset manager Theocta Capital has appointed Eleven Financial Research’s Vivian Satie as partner in its alternatives and structured finance team, working out of São Paulo. Satie leaves her role as head of alternatives and structured finance at Eleven Financial after two and a half years with the firm. She previously worked at Itaú BBA and SAP.

Commercial real estate debt and structured finance manager Scope Capital Group has appointed Angelo Vitale as vice president. Vitale joins the firm from SitusAMC, leaving his position as vice president after two years with the firm. He previously worked at Fitch Ratings, Colliers, Realogy, Rialto Capital and CBRE.

Hayfin Capital Management has expanded its liquid credit team through the appointment of Peter Swanson as senior portfolio manager and head of US high-yield and syndicated loans. Based in New York, Swanson joins Hayfin from Intermediate Capital Group, where he served as a portfolio manager and a senior trader investing in syndicated loans and high-yield bonds in CLO and long-only formats. Prior to this, he was a trader at BMO, working on the leveraged finance distribution and trading team.

TotalEnergies has promoted Michael Doherty to head of structured finance. Doherty is based in Brisbane, Queensland, and is promoted from senior business manager after a year and a half with the business. He previously worked at MUFG and SunEdison, as well as having various periods as a freelance consultant.

Loomis Sayles has recruited Keyur Vyas as senior CLO research and investment analyst, based in Boston. He was previously lead CLO strategy and research analyst at Barclays, which he joined in February 2022. Before that, he worked at Deutsche Bank, Moody’s and Credit Suisse in CLO-related roles.

And finally, former Société Générale executive Gustavo Almeida has joined China Construction Bank as structured finance manager, based in its London office. Almeida left Société Générale in 2021 after seven years with the group. He previously worked at Portuguese bank Montepio.