Contents

ABS

Rules of conflict

Final SEC "conflict of interest" ruling offers crumbs of comfort

The SEC’s final “conflict of interest” ruling, designated Rule 192 and released at the beginning of this week (SCI 29 November), waters down some of the most onerous restrictions but still represents a serious imposition for securitized markets participants, say those in the field.

The new rule prohibits so-called “securitization participants” from engaging in “conflicted transactions” during the life of an ABS deal. Such transactions include short sales of the ABS, credit derivative trades, or – in a change to the original proposed rule released in January – other transactions that are economically equivalent to shorting the ABS or the outcome of the CDS.

 “As directed by Congress, today’s rule prohibits securitization participants - including those who sell or facilitate the sale of an asset-backed security - from engaging in transactions that involve or result in any material conflict of interest with investors in that ABS,” said SEC chair Gary Gensler.

These are material burdens, but the SEC has apparently listened to market criticisms voiced loudly in the last ten months and altered some key provisions. Specifically, the definitions of “securitization participants” and “conflicted transactions” have been narrowed, so that, for example, risk-mitigating hedging is now exempted from “conflicted transactions”.

A “securitization participant” is also now more tightly defined so that it only applies to an affiliate or subsidiary if it acts in coordination with a sponsor, underwriter, initial purchaser or placement agent, or has access to or receives information about the ABS or its asset pool prior to the first closing of the sale.

Nonetheless, this new classification is still “way too broad,” considers Stuart Litwin, co-head of Mayer Brown’s securitization practice in the US. It can still be applied to any affiliate or subsidiary that has access to the prospectus, news reports or rating agency presale reports about the ABS, for example. The industry may continue to press for a further tightening of the definition of “securitization participant.”

On the plus side, the SEC seems to have taken a comparatively lenient line with synthetic securitizations. The latter are not prohibited, and the hedging exception no longer only applies to the securitization business of the “securitization participant.” In its note on this aspect of Rule 192, Mayer Brown writes, “We expect that this will allow synthetic securitizations of previously securitized portfolios and ABS financings of portfolios that previously were reference portfolios in synthetic securitizations.”

In addition, the new rule now offers a safe harbour provision if the ABS trade is not issued by a US entity - another key victory.

But the SEC’s current definition of “securitization participants” and “conflicted transactions” continues to exceed that intended by Congress when the Dodd-Frank Act – the origin of this rule – was passed in the wake of the 2008/2009 financial crisis, say its critics.

The one Republican member of the SEC’s five-person commission voted against the rule.

Market observers claim to be neither disappointed nor pleased with the final rule. "It’s about what we expected.  There is much improvement over the original proposal, but it’s not a perfect rule,” says Litwin.

Simon Boughey

Structured Finance

SCI Start the Week - 27 November

SCI event tomorrow
Join us for our European CRE Finance Seminar in London tomorrow, 28 November

Last week's news and analysis
Basel 4 series: Industry impacts - video
Exploring the effects of Basel 4 on market participants and their clients or members
BlackRock launches Article 8 ABS fund
Updates on the new fund and a call for an ABS-based CMU
Fannie signs off for 2023
Multi-family CAS and last 2023 CIRT for the GSE
Gaining traction
The rise of project finance SRT
Global goals
Challenger Investment Management answers SCI's questions
Global Risk Transfer Report: Chapter four
The fourth of six chapters explores SRT supply and demand trends
Hotel upgrades
Uplift in fortune seen for lodging CMBS
Job swaps weekly: EverBank lures Forbright's Walsh
People moves and key promotions in securitisation
Plus
Deal-focused updates from our ABS Markets and CLO Markets services

Free Special Report available to download

SCI Global Risk Transfer Report 2023: New frontiers in CRT
Capital relief trade issuance witnessed another record-breaking 12 months in 2022, yet a number of regulatory challenges remained outstanding by the end of the year. SCI’s latest Special Report examines how the risk transfer community is addressing these issues – whether through regulatory fixes or structural enhancements – and the fallout from the turmoil in the bank sector in March. It also explores the new frontiers that are emerging across jurisdictions and asset classes, including by highlighting the potential of the Canadian and the CEE CRT markets.

Sponsored by Arch MI, Man GPM, Mayer Brown and The Texel Group, the report is available to download here.

Regulars

Recent premium research to download
Hotel CMBS – November 2023
The lodging sector is one of the few bright spots in the US CMBS landscape. This Premium Content article uncovers the reasons why.

Project finance CRT – November 2023
Synthetic securitisation is expected to play a key role in assisting Europe’s transition towards a more sustainable economy. This Premium Content article explores the significance of project finance SRT transactions within this context.

Data centre securitisation – November 2023
Insatiable demand for connectivity is fuelling a rise in data centre securitisation issuance. This Premium Content article tracks the market’s development.

(Re)insurer participation in CRTs – October 2023
(Re)insurer interest in CRTs is rising, but execution of unfunded transactions remains limited. This Premium Content article outlines the hurdles that still need to be overcome.

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.

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
European CRE Finance Seminar
28 November 2023, London

8th Annual Risk Transfer & Synthetics Seminar
1 February 2024, New York

SCI’s 3rd Annual ESG Securitisations Seminar
16th April 2024, London

Emerging Europe SRT Seminar
16 May 2024, Warsaw

2nd Annual Esoteric ABS Seminar
June, New York

CRT Training for New Market Entrants
14-15 October, London

Women In Risk Sharing
15th October, London

10th Annual Capital Relief Trades Seminar
16 & 17 October 2024, London

2nd Annual European CRE Finance Seminar
November 2024, London

Capital Relief Trades

Arch agony

Cancellation of 8 ILNs leaves investors stewing

The decision last week by Arch Capital to cancel eight Bellemeade insurance-linked notes (ILN) issued between 2018 and 2021 has not gone down well with all investors, say market sources.

Arch was able to redeem the note at par, but some were trading at a premium to par, leaving some investors highly dissatisfied with the decision. They now have a sizeable hole to fill coming into year end.

“Some have said they will never invest in ILN paper again,” says a well-placed source.

The notes, worth US$1.7bn of mortgage relief, were redeemed because S&P has changed its rating methodology and this substantially reduced the capital relief that these notes offer, according to Arch.

This is a hefty amount of limit, representing a little over half the entire limit coverage Arch has in force from all its prior ILN issuance.

The move is similar to the GSE tender offers which have become an integral part of agency strategy, whereby Fannie Mae and Freddie Mac buy back bonds which no longer afford the capital and credit relief for which they were intended.

But there is a crucial difference: the GSEs offer to buy back the bonds. There is no obligation to sell to the GSEs and generally the offer prices afford a premium to the market price.

Arch is reported to have said that changes in rating agency S&P’s Insurer Risk-Based Capital Adequacy Criteria “substantially decreased S&P capital relief” afforded to the Bellemeade cedants, which are Arch MI and United Guaranty.

“They’ve done this because they can. Investors are not happy. They’ve called at par so investors have been hammered,” says another source, adding that he has heard investors saying they will never look at Arch paper again.

The eight notes to be cancelled are the Bellemeade 2018-1, 2019-1, 2019-4, 2020-2, 2020-3, 2020-4, 2021-1 and 2021-2.

Arch declined to comment.

The controversial decision to cancel these notes came on the heels of the issuance of four ILNs in a few weeks from Enact (formerly Genworth), Arch, MGIC and Radian. These were the first trades since August went Essent came to market - and that was the first ILN seen in 11 months.

The ILN sector has been in the doldrums lately as much wider spreads drove the mortgage insurers into the arms of the reinsurance market in an echo of a similar development in the GSE sector.

However, the sudden arrival of a flurry of new issues does not suggest that the market is set to rebound, say sources. Spreads have narrowed somewhat, and the reinsurance market has reduced risk capacity a little, but the issuance is more due to a desire to show commitment to the sector, they add.

“I think it’s just MIs trying to keep the ILN market alive.  Spreads have come in slightly and the reinsurance market pulled back on capacity somewhat,” says one.

Another agrees. “It them saying, ‘We’ll do a deal. We need to let everybody know we’re still here,’” he says.

Enact’s deal was the most recent. It brought a US$278m four tranche bond, with the US$106m M1s paying SOFR plus 340bp and the US$18m B1s paying SOFR plus 740bp.

Before this, Arch brought a US$186m Bellemeade 2023-1, MGIC Investment a US$330m Home Re 2023-1 (its first since April 2022) and Radian a US$353 Eagle 2023-1 (its first since November 2021).

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 1 December

The week's CRT developments and deal news

Market news
A pair of auto loan CLNs hit the market this week, including US Bank’s inaugural capital relief trade. Dubbed US Bank Auto Credit-Linked Notes Series 2023-1 (USCLN 2023-1), the synthetic securitisation has a couple of unusual features.

USCLN 2023-1 transfers credit risk to noteholders via a financial guaranty on a US$2.46bn reference pool comprising 97,444 prime auto loans originated and serviced by US Bank. The notes are fixed rate and are unsecured obligations of US Bank.

Unlike principal payment, interest payment to the notes is not dependent on the performance of the reference pool. Moody’s notes that the deal is unique in that the source of payments for the notes will be US Bank's own funds, rather than collections on the loans or note proceeds held in a segregated trust account.

As a result, the rating agency capped the ratings of the notes at US Bank's senior unsecured rating (A2 negative). Approximately US$258m of securities were rated, comprising A2 rated class B and Ba2 rated class C notes.

Furthermore, the credit risk exposure of the notes depends on the actual realised losses incurred by the reference pool. This transaction has a pro-rata structure, which is more beneficial to the subordinate bondholders than the typical sequential-pay structure for US auto loan transactions.

At closing, the class B and class C notes are expected to benefit from 3% and 2% of hard credit enhancement respectively.

Meanwhile, Santander Consumer Finance priced the other auto loan CLN. Known as Noma, the trade is a Danish STS synthetic securitisation, comprising three tranches.

The Dkr1.263bn mezzanine tranche (1.75%-11%) was placed. The senior tranche is sized at Dkr12.148bn and the junior tranche is sized at Dkr238.87m.

Pipeline update
As the final month of the year begins and banks gear up to meet year-end targets, the SRT market is starting to absorb the remainder of the visible pipeline. 

For example, Deutsche Bank this week executed its latest TRAFIN trade, which references a US$3.8bn global portfolio of trade finance assets. According to market sources, the US$227.5m first loss tranche (0%-6%) priced at SOFR plus 10%.

In comparison, the first loss tranche (0.5%-6.5%) of Standard Chartered’s latest Sealane trade finance transaction – which closed last month – is said to have priced at SOFR plus 11%. One SRT investor notes: “Standard Chartered’s Sealane programme has traditionally referenced higher-risk portfolios because of the emerging market exposures, but also because the rating distribution of the assets is generally lower than TRAFIN’s.”

Regarding the current SRT pipeline, Natwest’s latest project finance transaction is still underway. Commenting on the trade’s overall execution, another SRT investor notes: “As far as I’m aware, the issuer has received some interesting quotes and intends to close the deal this year, but my sense is that they won’t be concerned if it closes early next year.”

He continues: “The challenge, I guess, with those project finance transactions is that they're very long-dated. And actually, in a weird way, because of their ESG credentials, they tend to price tighter than the shorter, more vanilla trades. So, you get paid less for a longer-dated risk.”

Meanwhile, Lloyds’ latest Salisbury transaction is expected to print imminently. “My feeling with Salisbury is that Lloyds has gone to one or two investors on that transaction. I understand that they went through binding bids last week and it will definitely close before the end of the year,” the investor suggests.

It is further understood that Lloyds acted as arranger on Bank of Ireland’s latest Vale transaction, which market sources report priced during the week. The large corporate SRT is believed to have landed at around 10%.

Finally, regarding HSBC’s UK corporates trade (Helium), the investor notes: “The message I got is that it was a bilateral trade with a blind portfolio. Not many people were interested in doing that and the performance on the previous transactions has not been very encouraging.”

Analysing current SRT market conditions and what has been described as a quieter Q4 year-on-year, the investor points to increased seasonality throughout the year. “I feel issuance has been more spread out this year, as banks have realised that they needed to make use of windows while they were open and that they couldn't rely too heavily on doing deals too close to year-end. I also feel as though Q3 saw a lot of deals that then priced in Q4. But there seems to have been a volume drop-off in the corporate credit, middle of the fairway type transactions.”

He cites as examples Credit Agricole - which typically brings two Cedar transactions per year, but has only closed one in 2023 - and Barclays, which executed a significant number of Colonnade trades last year that would perhaps have been unsustainable this year. “However, that has been generally compensated for by a bit more variety from the SME and consumer credit deals. And then on top of that, the US banks started to issue. So overall, we are ending up with the same volume as last year.”

Regarding current pricing conditions, the investor highlights the significance of the US regional banking crisis earlier in the year as a clear influential factor on spreads. “For risk transfer, what we witnessed was a bit of a relative value shift. Spreads widened by 100bp, 200bp, but there wasn’t the same kind of trading rationale that we saw in the cash securitisation sector.”

He continues: “What has happened in the last quarter, but certainly from September onwards, is that we've seen more investors enter the space. In the corporate credit segment, pricing has been grinding tighter and is back towards the levels seen at the end of 2021.”

Overall, the environment continues to remain relatively robust for issuance. The investor concludes: “I think the market is a bit more balanced than it was a year ago, when there was less capital from investors to deploy. Capital raising has been pretty good and there's much more demand from investors to match the supply coming from banks.”

CRT new issue pipeline

SCI SRTx indexes

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

ABS

Treasury overhang

Unprecedented Treasury supply dominates agency MBS story for 2024

The enormous Treasury issuance expected next year forms a long shadow falling over the agency MBS market, say investors.

Estimated 10-year Treasury issuance is now projected to be US$1.34trn in 2024, some US$90bn more than earlier estimates and breaking previous records. Assuming the Federal Reserve extends quantitative tightening, overall 10-year Treasury supply will exceed US$1.5trn.

“The biggest risk to agency MBS is Treasury supply. It’s all competing for the same finite number of dollars. So far, the Fed’s reserve repo has absorbed quantitative tightening but when this is exhausted it will impact bank reserves,” says Brendan Doucette, securitized analyst and government bond portfolio manager at GW&K Investment Management in Boston. Doucette manages a US$1.5bn portfolio of agency MBS assets, part of a wider US$5bn risk-free portfolio.

The US debt to GDP ratio is now over 120%, more than 20% greater than four years ago. Moreover, higher interest rates mean debt service payments are climbing ever higher, making even more issuance necessary.

There are, of course, some significant tailwinds for the agency MBS market as well. Issuance has been much lower as the mortgage and refinancing market has gone into deep freeze. Total agency MBS issuance this year is expected to be around US$1trn, compared to US$1.7trn in 2022 and $3.5trn in 2021.

Higher rates have made agency paper more attractive, and inflation appears to be heading in the right direction. Volatility has also declined. But all this is more than counter-balanced by the overhang of Treasury issuance coming due next year.

Current coupon spreads over seven-year Treasuries hit a post-GFC high of 194bp in May of this year in the wake of the banking failures of the spring, which triggered a round of asset sales. Rate volatility was also at the highs of the year.

Since then spreads have retreated to plus 159bp, and, as refinancing continue to plummet and vol has diminished further, they may settle in the plus 145bp range by end of Q1, suggests Doucette. But he is reluctant to predict any further narrowing thanks to the weight of expected Treasury supply.

Another issue with which the agency MBS market must contend is the absence of bank buyers. As the Fed raised rates, banks have been left with significant mark to market losses on risk free assets. It was this phenomenon, allied to the need to pay higher yields of short-term deposits, that torpedoed Silicon Valley Bank in March. It has been estimated that the big Wall Street houses are sitting on US$650bn of unrealized losses. This does not tempt them back into the risk-free market.

“If banks don’t come back into the market, spreads will have to remain elevated to be more in line with alternative investments,” says Doucette.

It was the unexpected round of bank sales in the spring, leaving the market with another US$1bn to absorb, that sent spreads soaring in the spring and banks haven’t come back in.

There are, according to Doucette, some signs that overseas buyers are starting to show interest, and money managers have increased their holdings as well, but it has not been sufficient to offset the absence of bank buyers.

“We’ve seen some foreign buyers but the big question is when are the banks coming back. Their portfolios are paying down and rate vol has come down as well, so there are some reasons to be optimistic,” he says.

Simon Boughey

Capital Relief Trades

Global Risk Transfer Report: Chapter five

In the fifth of six chapters surveying the synthetic securitisation market, SCI examines trends in the North American CRT market

IACPM’s latest risk-sharing survey notes that 2022 highlighted not only a substantial growth in SRT product utilisation by banks, with €200bn in new issuance, but also some structural changes in the risk-sharing activity of banks. Nevertheless, a number of regulatory challenges remain outstanding.

SCI’s Global Risk Transfer Report examines how the risk transfer community is addressing these issues – through regulation or structural enhancements – and the fallout from the turmoil in the US bank sector in March. It also explores the new frontiers that are emerging across jurisdictions and asset classes.

Chapter 5: North America
North America has, for the last 18 months or so, shown a stark contrast in the treatment of CRTs. The US private CRT market paused last year, due to apparent distaste from the Federal Reserve, thought to be related to CLNs. The Canadian market, meanwhile, is booming.

Three new Canadian banks joined perennial issuer Bank of Montreal (BMO) to tap the CRT market over the last year. “Canadian banks have been active now for over five years, with a lot of different programmes. With the current economic backdrop, it seems reasonable that regulators might consider stress testing various interest rate-sensitive asset classes,” suggests Matthew Moniot, md and co-head of credit risk sharing at Man GPM.

These would include commercial and residential real estate, leveraged finance and commodities. “It’s not particularly surprising that Canadian banks are thinking seriously about their balance sheets. SRTs serve as a useful tool for banks to net down such risk,” Moniot adds. 

BMO has been in the market since 2017 and saw record issuance in 2022. So far this year, Toronto Dominion Bank (TD), Canadian Imperial Bank of Commerce (CIBC) and Bank of Nova Scotia (BNS) have also issued debut transactions.

One source suggests that Canada is probably the best example of CRT becoming very relevant when regulatory pressures reach a certain critical point. Canadian banks rushed to issue after the Office of the Superintendent of Financial Institutions (OFSI) brought forward to 1 January 2023 the implementation of Basel 4 and the output floor in the jurisdiction. This was followed by an increase in the Domestic Stability Buffer (DSB) by another 50bp to 3.50% in June - only six months after it had been increased to 3%.

Vesna Vladusic, a broker in the structured and bespoke solutions group at The Texel Group, says that the increase in Canadian activity demonstrates the attraction of CRTs. “SRT transactions are a highly efficient capital management tool. As more onerous capital requirements are phased in, it is increasingly important for banks to make sure they’ve established the necessary infrastructure and systems to execute these transactions. With the precedents already set in Canada and the front-loading of the output floor, it’s not surprising that Canadian banks want to make sure this tool is available to them,” she observes.

BMO’s most recent foray into the market is expected to close this month (October 2023). Market sources told SCI that the trade is from its well-established Algonquin platform, which references pools of US and Canadian dollar-denominated loans to SMEs in both countries.

BNS, a standardised bank, sold its first CRT in July, with BNP Paribas as arranger – a securitisation of investment grade loans, in a transaction dubbed Granville USD. TD brought a deal in February, while CIBC issued its debut transaction in April.

Basel endgame
Meanwhile, the US may be moving on from the Federal Reserve-induced pause in CRT activity among large banks. The Fed, FDIC and OCC’s proposed final implementation of Basel 4 (dubbed ‘the Basel 3 Endgame’), introduced at the end of July, as well as the Fed's FAQs on CLNs from September are seen by many as encouraging signs.

“There's an implicit recognition in the Basel 4 proposal that CRT can be used to benefit banks. The proposal is not the full-throated endorsement that we wished for. But it also doesn't prohibit CRT, and it doesn't include any other factors that would make it more difficult,” says Sagi Tamir, partner at Mayer Brown in New York.

He adds: “For the banks who are subject to the proposal and FAQs, there is some degree of comfort that the regulators are at least willing to consider their requests.”

Jon Imundo, md and co-head of credit risk sharing at Man GPM, suggests that the turmoil surrounding bank failures earlier this year provides further impetus for regulatory action. “I think it’s possible we will see the Fed provide some incentive to banks to start issuing more programmatically. Having an approved structure is really helpful; it allows banks to issue more securities with different types of collateral, and it can provide different solutions. Those solutions can create different kinds of transactions and therefore different opportunities.”

Indeed, risk transfer is starting to branch out into areas that might address other bank needs, such as internal risk limits. “I think the market will continue to grow beyond just the traditional capital side of the equation. Ultimately, there's a unique opportunity to create attractive risk-adjusted returns for investors that solve various different needs for banks across internal risk limits,” Imundo adds.

Capital rule
However, one striking recent development is that US regulators appear to be heading in the opposite direction to the EU when it comes to the capital treatment of securitisation. The Basel 3 Endgame proposal to increase the p-factor from 0.5 to 1.0 means that risk weightings applied to the more senior segments of the capital structure do not descend as rapidly. Consequently, to achieve optimal risk weightings, credit enhancement must be increased.

“The proposed final implementation of the Basel 3 Endgame contains a lot of new things that the banks are going to need to digest. There are some really positive developments from the SRT market point of view, in the sense that proposed regulatory changes are going to push up capital consumption on balance sheets even more in the US by removing the ability of banks to use their own models to calculate capital. The regulators themselves expect the changes to create significant capital needs,” observes Olivier Renault, md and head of risk sharing strategy at Pemberton Asset Managers.

He continues: “On the other hand, the treatment of securitisation - not specifically SRT, but in general - is going to be less favourable, as the current proposals roll out a risk weight formula which is less efficient than the current one used by US banks. At the moment, it's just a proposal from the regulator and this will be intensely negotiated and lobbied. Stakeholders have 120 days to provide feedback; then the regulators will take that feedback into account.”

But in a joint letter to the US Fed, FDIC and OCC filed in mid-September, the Bank Policy Institute, the American Bankers Association, the Financial Services Forum, the Institute of International Bankers, SIFMA and the US Chamber of Commerce called for a re-proposal of the regulatory capital rule, in order to remedy what the trade associations claim are violations of the Administrative Procedure Act (APA). The letter states that the proposed regulations would significantly increase capital requirements for larger banks, yet the rule repeatedly relies on data and analyses that the joint agencies have not made available to the public. As such, the associations suggest that this reliance on non-public information violates clear requirements under the APA that agencies must publicly disclose the data and analyses on which their rulemaking is based.

Because of such “critical procedural deficiencies”, the associations say they are unable to fully and properly comment on the proposal at this time. Accordingly, they have requested that the agencies make available all evidence and analyses that was relied on in proposing the rule and re-propose the rule with a new comment period.

Nevertheless, the expectation is that the proposal will lead to regulatory changes that will be implemented from July 2025. This could lead to US banks bringing transactions ahead of those changes with regulatory call language, or potentially some waiting to see what the final rules will look like before executing.

Julie Gillespie, co-head of Mayer Brown’s structured finance practice, notes that for the vast majority of smaller US banks, not subject to the proposal, there is still a lot of opportunity for CRT. “Those banks have traditionally had less scrutiny, fewer regulatory requirements and more permissive supervision. They have been more willing to utilise CRT. I see a lot of growth in the US smaller regional banks market because those banks will be well positioned to be CRT partners,” she concludes.

SCI’s Global Risk Transfer Report is sponsored by Arch MI, Man GBM, Mayer Brown and Texel. The report can be downloaded, for free, here.

Structured Finance

Positioned for quality and liquidity

Kate Galustian, lead portfolio manager for BlackRock Senior Securitised Fund and head of European ABS, answers SCI's questions about the asset manager's new flagship securitised pooled fund

Q: When you announced BlackRock Senior Securitised Fund (SCI 20 November), BlackRock stated that this new vehicle will predominantly invest across continental Europe and the UK. To what extent was that driven by current opportunities specific to that geographic market, and could you provide an outline as to what those are?
A: The fund was designed in collaboration with UK consultants to meet the growing international demand across institutional and wealth clients for securitised assets and the diversification benefits that they offer for clients’ fixed income exposures. 

BlackRock has a long history investing in securitised assets and runs more than US$120bn across its global platform. The fund was designed to draw on the expertise of the platform to determine global opportunities with a 25% bucket for the US and other regions whilst highlighting to clients the focus on the UK and Europe. Each security in the fund will be compliant with the EU securitisation regulation.

Q: Could you share with us a target weighting for ABS versus CLO that the fund will pursue, and what the motivations are behind that?
A: Based on client and consultant feedback, BSSF has been designed to have a maximum exposure of 35% to CLOs. The fund will invest in cash – not synthetic bonds – and is able to access issuance across primary and secondary markets. Our activity in both markets will be dependent upon a combination of valuations and supply technicals. 

Q: Which particular sub-asset classes within ABS are looking particularly attractive currently, in the context of the new fund?
A: Fundamental research has been the cornerstone of BlackRock’s securitised teams’ investment process over the many years the team have been investing in the market. 

During 2023, despite a worsening economic picture, securitised assets have performed well so far with only mild signs of deterioration in certain pockets of the market and significant spread tightening across the major asset classes year to date. We have seen an increase in dispersion between sectors, individual securities, and parts of the capital structure and we expect this to continue to be a theme.

Currently, the magnitude of the pricing difference across the capital structure is particularly noteworthy for European securitised assets – providing investors the opportunity to seek differentiated returns depending on their risk appetite compared to both the corporate credit and US securitised market, where pricing overall appears more compressed. 

Each asset class has its own considerations. For example, within RMBS we see signs of delinquencies increasing predominately in old ‘legacy’ transactions backed by non-prime floating-rate loans originated prior to the global financial crisis, which now make up a small part of the UK mortgage market. Within CMBS idiosyncratic risks exist in the market, particularly in sectors such as retail and office, but risk dynamics remain asset specific.

Regulatory requirements following the global financial crisis have also raised the bar for transparency and disclosure across the market, giving securitised investors a level of transparency and disclosure not typically seen in other fixed income markets – an advantage for many clients. Loan level data supports detailed analysis and modelling of metrics such as arrears and defaults allowing investors to combine their own market, sector and asset specific stresses, applied at time of purchase and on an ongoing basis. 

Q: The fund will have a predominant focus on triple-A securities, what are the key motivations behind that?
A: Working with consultants on the design of the fund, we found that there was strong demand from clients, for example pension funds, who are looking for quality and liquidity. 

In our view, it is those assets at or close to the top of the capital structure, which are typically rated AAA or AA, that are most suitable. These are typically the most protected from a capital preservation point of view and, given the large volume of issuance and number of investors participating in this space, tend to offer more liquidity versus those further down the capital stack.

Kenny Wastell

Structured Finance

SIFMA calls for STC framework

Market updates and sector developments

A new SIFMA blog highlights three actions that will mitigate what the association calls the “perverse incentives” created by the lack of appropriate risk-sensitivity of the SEC-SA framework, under the US Basel 3 Endgame (B3E) proposal. The blog describes the proposal as “the most restrictive approach to set capital requirements for banks’ securitisation exposures in the developed world”.

As proposed, the B3E rules will - in many cases - result in significantly more capital for securitised assets than what is required under the current rules. Additionally, because the rules are not risk-sensitive, more capital will be required for securitisations of loans that are expected to experience relatively lower losses than for loans expected to experience higher losses.

The first action recommended by SIFMA is to revert the p-factor to 0.5 from 1 to reduce the degree of securitisation capital surcharge. “Our concerns with the excessive securitisation capital non-neutrality are shared by several major jurisdictions where mitigation actions are being taken. For example, considering that the ‘[risk-weighted amount] resulting from the application of the SEC-SA is not commensurate with the risks posed to the institution or to financial stability’, the UK Prudential Regulatory Authority published a discussion paper on ‘adjustments to the Pillar 1 framework for determining capital requirements for securitisation exposures’”, the association notes.

The second action is to adopt the SEC-IRBA framework, which takes into account the expected performance of the underlying pool of assets in setting capital requirements for securitisation exposures. SEC-SA, however, ignores the expected performance of the underlying pool. As a result, it is the least risk-sensitive and most conservative securitisation framework offered by the Basel standards.

Finally, B3E should implement the simple, transparent and comparable (STC) framework, according to SIFMA. The association says that less uncertainty and more confidence in the performance of STC transactions would justify a reduced degree of conservatism being built into the securitisation capital frameworks through capital non-neutrality. It adds that the STC framework would help lower the hurdles of assessing securitisation exposures and incentivise healthy and responsible growth of the US securitisation markets.

In other news…

Hercules NPL scheme renewed
The European Commission has approved the reintroduction of the Greek Hercules Asset Protection Scheme (HAPS), thereby supporting the reduction of non-performing loans in the jurisdiction, without involving state aid. The Commission initially approved the scheme in October 2019, for a duration of 18 months, which was prolonged in April 2021 and ultimately expired on 9 October 2022. The renewal of HAPS will run until end-December 2024.

Under the scheme, a private SPV acquires NPLs from banks and sells notes to investors. The Greek state will provide a public guarantee for the senior notes of the securitisation vehicle, in exchange for a remuneration at market terms.

All four most significant Greek banks which benefitted from the scheme observed a drastic reduction in the stock of their NPLs. It is estimated that, as a result of the implementation of the scheme, the NPL ratio reduced from 42% in September 2019 to 8.7% at end-2022 (corresponding to NPL securitisations of €49.5bn gross book value).

Irradiant closes CLO equity fund 
Irradiant Partners has closed U$411m in commitments for the third vintage of the Irradiant CLO equity strategy (ICLOP III), eclipsing its fundraising target of US$400m. Over 95% of investors in ICLOP III are returning investors from the last vintage of the strategy.

In addition to investing in the equity tranches of Irradiant-managed CLOs, ICLOP III allows for investment in both the equity and mezzanine tranches of third-party managed CLOs, with the aim of adding alpha to ICLOP III investors regardless of market environment. Irradiant’s CLO equity strategy first launched in 2017 and the firm has issued 21 CLOs for over US$8bn since inception.

Modified conflicts rule adopted
The US SEC has adopted Securities Act Rule 192 to implement Section 27B of the Securities Act of 1933, which is intended to prevent the sale of ABS that are tainted by material conflicts of interest. Although the SEC has incorporated a number of changes to the initial rule that was re-proposed earlier this year (SCI 26 January), following extensive industry feedback, the SFA says it continues to analyse the rule.

The new Rule 192 prohibits a securitisation participant, for a specified period of time, from engaging in any transaction that would involve or result in any material conflict of interest between the securitisation participant and an investor in the related ABS. Under the rule, such transactions would be ‘conflicted transactions’.

Conflicted transactions include a short sale of the relevant ABS, the purchase of a CDS or other credit derivative that entitles the securitisation participant to receive payments upon the occurrence of specified credit events in respect of the ABS, or a transaction that is substantially the economic equivalent of such a transaction - other than those that only hedge general interest rate or currency exchange risk. However, consistent with the statute, Rule 192 provides exceptions for risk-mitigating hedging activities, liquidity commitments and bona fide market-making activities of a securitisation participant.

The SFA, in particular, is working to understand what “substantially the economic equivalent” means and how to comply with that requirement. Nevertheless, it appears that modifications to the rule should allow many market participants to continue to hedge themselves against macro risks without running afoul of conflict-of-interest limitations, according to the association.

“Hedging is an essential tool in protecting securitisation markets that are a vital source of financing for trillions of dollars in consumer and business credit. We appreciate as well that the SEC altered its initial proposal, so that affiliates and subsidiaries of securitisation desks would not automatically be subject to SEC restrictions,” comments Michael Bright, ceo of SFA.

Rule 192 will become effective 60 days after publication in the Federal Register. Compliance with the rule will be required with respect to any ABS, the first closing of the sale of which occurs 18 months after the date of publication in the Federal Register.

Structured Finance

Job swaps weekly: Sirius execs join forces to launch Karis

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees the launch of a new real estate debt advisory firm, Karis Capital UK, led by a number of outgoing Sirius Group executives. Elsewhere, Invesco has lured a Munich-based Patrizia director to its EMEA structured debt finance team, while Sumitomo Mitsui Banking Corporation (SMBC) has appointed a Clifford Chance senior associate as a director in its international and structured finance department.

Nicholas Christofi has left his role as md at Sirius Group to take on the role of ceo at newly launched London-based real estate debt advisory firm Karis. Christofi specialised in high net-worth development and structured finance at Sirius and leaves the business after seven years. He previously spent nine years working on property development finance at Brightstar. 

Christofi takes a number of Sirius team members with him to Karis, including Leoni Alexandrou who is coo and was operations manager at Sirius, Craig Hardiman-Scott who takes on the role of sales director and leaves his position as head of sales at Sirius, Kimberley Gates who is director of client partnerships and was head of corporate partnerships at Karis, and Fodi Christodoulou who is appointed senior associate.

Karis will offer advisory services within the UK spanning a number of products, including development funding, short-term lending, investment finance, commercial mortgages, high net worth mortgages, asset finance and equity and insurance.

Meanwhile, Invesco has hired Alexander Hoffmann as a director in its EMEA structured debt finance team, based in its Munich office. Hoffmann leaves his role as a director at real assets investment manager Patrizia after three years. He previously spent nine years at Deutsche Pfandbriefbank and had stints at DZ HYP and DekaBank Deutsche Girozentrale.

Clifford Chance’s Emily James has joined SMBC as a director in its international and structured finance department. James has been with Clifford Chance since 2011 and leaves her role as senior associate. She is based in London.

DWS has continued the expansion of its alternatives business with the naming of Dan Robinson as its new head of alternative credit for EMEA. Robinson joins DWS from Man Group subsidiary Capital Asset Solutions, where he not only served as managing partner but also led the Man Group structured credit and leveraged loans business as its global head of CLOs and loans. Robinson will be based in London and report to DWS global head of alternatives, Paul Kelly.

HDFC Bank has appointed V Srinivasa Rangan, the former executive director and cfo of HFDC Limited, to serve as its new executive director or “whole-time director”. A securitisation specialist, Rangan is to serve a three-year term in the role, as per recommendation by the nomination and remuneration committee. He brings real estate finance experience to the newly-established merger bank, having previously served on RBI’s committee on asset securitisation and mortgage backed securitisation.

Naina Patel has joined law firm Gowling WLG as a structured finance partner within its banking and finance practice. In her role as a senior legal consultant, Patel has worked with clients including ReLink, TSB Bank, Barclays Capital, Mitsubishi UFJ Securities and Lloyds Banking, across jurisdictions including London, New York, Hong Kong and Singapore.

Davis+Gilbert has named partner Joseph Cioffi as its new chief operating partner. Based in New York, Cioffi will undertake additional responsibilities on top of present duties as a serving member of the executive committee and chair of the insolvency and finance practice. Cioffi will replace partner Lewis Rubin who is due to retire from the firm at the end of this year.

And finally, Natixis Corporate & Investment Banking has promoted Laetitia Koenig to legal counsel for derivatives and structured finance, based out of its Paris office. Koenig joined Natixis from Clifford Chance in early 2022 and moves from her previous position focusing on strategic equity capital markets.