Contents

Capital Relief Trades

Risk transfer round-up - 21 December

The week's CRT developments and deal news

Deal news
The EIB Group has provided a €163m unfunded guarantee to Santander’s latest synthetic securitisation, supporting energy efficiency and climate action projects in the Spanish residential property market. The transaction will facilitate new green and sustainable mortgages, enabling individuals to invest in building renovations or new construction with high energy-efficiency standards, in compliance with the eligibility conditions defined by the EIB.

The individual projects benefiting from this new financing may reach an investment of up to €1.1m, with a maximum amount of funding of up to 100% and a minimum term of two years. The EIB’s commitment under the transaction totals around €118m, alongside €45m committed by the EIF.

The EIB Group’s total investment is executed in a single securitisation transaction with an optimal structure designed for Santander to achieve capital relief on a portfolio of residential mortgages. Under the transaction, the EIB Group will provide a €163m unfunded guarantee in a mezzanine tranche, with the goal of enabling Santander to finance new energy efficiency investments for an amount equal to 1.33 times the size of the EIB Group guarantee.

The deal follows hot on the heels of EIB Group’s synthetic securitisation with BNP Paribas for a total amount of €106m (SCI 15 December). In this transaction, the EIB Group’s support will enable BNP Paribas to partially release its regulatory capital, thereby facilitating an additional commitment of about €425m in new financing for French small businesses and mid-caps over a two-year period. At least €85m of these funds will be allocated to projects promoting the transition to climate neutrality.  

The structure - which features synthetic excess spread, a two-year revolving period and pro-rata amortisation of the senior and mezzanine tranche (subject to performance triggers) - references a portfolio of about €1.4bn.

Market news
Fitch has taken a number of rating actions on 1,117 classes of notes issued by 62 credit risk transfer residential mortgage transactions closed between 2013 and 2022. Specifically, 33 classes have been repaid in full, 589 classes have been affirmed and 495 classes have been upgraded. Of the upgrades, 346 classes are one-notch upgrades, 137 classes are two-notch upgrades and 12 classes are three-notch upgrades.

The rating outlooks for these classes comprise 341 positive outlooks and 743 stable outlooks. No classes have a negative outlook.

Fitch notes that the paydown of subordinate GSE CRT bonds over recent months has resulted in credit enhancement (CE) build-up for subordinate bonds. In particular, classes upgraded to double-A plus have experienced an average increase in CE of 28bp since the prior rating action and 56bp over the last year. Combined with notable declines in pool factors, especially for the 2013-2020 vintages, this has led to significant upgrade pressure across the GSE sector broadly.

As of the November 2023 remittance period, the average three-month CPR is approximately 6.83% - a decrease of 372bp from an average observed rate of 10.55% from last year during the same remittance period. As this trend continues, Fitch expects the positive rating pressure to continue - albeit at a slower pace, especially for the 2021 and 2022 vintages.

SCI SRTx indexes

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ABS

Basel banks

Banks forced away from loans and into low RWA assets in 2024

An unintended consequence of the implementation of Basel III endgame rules in the US is that banks will be forced into more capital efficient agency MBS at the expense of loans, according to Mohib Karzai, head of agency MBS trading at JP Morgan.

Karzai was speaking at last week’s panel to discuss the 2024 outlook for securitized products. He appeared alongside the head of CMBS and CRE loan trading, the head of RMBS trading and the co-head of ABS trading.

Under the punitive new regulations, banks have no alternative but to shift the asset mix. It is striking, noted Karzai, that the GSIBs, which currently labour under the most restrictive capital rules, are already heavily invested in securities not loans. Smaller banks which hitherto have enjoyed more latitude will find themselves in the same boat.

“The US$100bn-US$700bn banks have to adjust new capital regime. They can have a 50% RWA resi loan or a 100% RWA CRE loan or a 0% RWA Ginnie pass thru. When you’re forced to hold more capital banks will be forced to optimize their assets, and they’ll be pressured to move into securities,” he said.

He added that with the advent of portfolio method layer hedging the duration risk can be hedged away, allowing banks to be “duration agnostic.”

Portfolio method layer hedging is a fair value hedging procedure that can be applied to a closed portfolio of assets not expected to be repaid during the hedge period, and was expanded by the Financial Accounting Standards Board (FASB) in March 2022.

The absence of bank investors from many areas of the securitized products arena was a leading topic of discussion by all panel members last week.

Bank buyers are down to 5%-10% of the RMBS market from around 30% a few years ago, noted Marc Simpson, head of RMBS trading. For the most part, this deficit has been made up by insurance companies.

Private credit will make up for the deficiency on the lending side, it is hoped. This, as Lily McGettigan, co-head of ABS trading, is the “biggest buzz word’ in the market.

“Regulation is top of the agenda in 2024. This is going to make it very difficult for banks to lend. We could see a lot more private label securitizations as a result,” said Simpson.

A dark cloud has fallen across much of the CRE and CMBS market over the last year, concurred Jeremy Hellinger, head of secondary CMBS/CRE loan trading, but the wider spreads have created interesting trading opportunities. Levels are still very cheap to corporates, and AAAs could narrow by a further 25bp or more to get back to a more normal differential to other asset classes.

However, further cracks could open up in 2024, particularly in multi-family and low cap products, he suggested. With rates still much higher than they were a couple of years ago, borrowers have a negative cost of carry and refinancing will prove challenging for many.

Simon Boughey

CMBS

Communication skills

CRE loan-on-loan financing a 'relationship-oriented business'

Speakers on the loan-on-loan financing panels at SCI’s inaugural European CRE Finance Seminar last month stressed the importance of a good working relationship between lender and borrower. They also noted that “capital is king” for banks, pointing to securitisation as an effective way to lower RWA treatment for such lending.

Commercial real estate loan-on-loan financing is a relationship-oriented business, the panellists agreed. Their advice was to “tend the relationship carefully”, as ideally it will evolve in tandem with a borrower’s business.

“The key is to get comfortable with what happens if anything goes wrong with a loan,” observed one speaker. “It’s important to be able to request something in short order, so aligned interest between lender and borrower is crucial. Set the framework regarding consents and waivers upfront and work together to resolve issues as they arise.”

Another speaker noted that with development finance in particular, unexpected situations always crop up, so borrowers need to understand when to talk to the lender. “Communication between borrower and lender is crucial. As a borrower, you need clarity about which activities approval is required for and which you can undertake without approval,” he said.

Within the CRE financing space, panelists suggested that loan-on-loan facilities are appropriate for income-producing real estate and transitional assets, while repo arrangements are more appropriate for properties with material construction risk or capex requirements. Protections for lenders include mark-to-market mechanisms, full or partial recourse and guarantees.  

AJ Storton, executive director at JPMorgan, indicated that the level of protection depends on the nature of the underlying loans. “Recourse would typically be required for a higher risk asset or jurisdiction, or until a certain level of diversification is reached, for instance. Another example is requiring future funding guarantees for development loans,” he explained.

He added: “In terms of MTM mechanisms, there can be limited to full discretion, with marks often reflective of the underlying loan covenant triggers. Marks can be benchmark, spread or credit-based, with the latter being the most common.”

Cross-border facilities – whether in Swiss francs, Swedish Krona, sterling or euro – are common in Europe. Under such facilities, each loan is structured as a separate drawdown under the relevant currency. Supplemental security may be required to ensure recoveries are recognised in each jurisdiction.

There are high barriers to entry for newer players and smaller debt funds, according to Rick Hanson, partner at Morgan Lewis. “Bigger players have more bargaining power, but we try to ensure that the documentation is as objective as possible. Often, the most problematic issue is how collateral assets should be valued, given that such assets are fundamentally illiquid and mark-to-market provisions are typically seen in valuing more liquid assets,” he observed.

Hanson noted that over the last 18 months, discussions have increased around ‘bad apple’ risk. In such situations, the discussions revolve around whether the asset can be isolated in a sidecar or other vehicle, or a bridge facility can be utilised while the asset is worked out.

Meanwhile, the office sector – which is seeing vacancy rates of below 10% in Europe, compared to around 20% in the US – was the focus of much discussion on the event’s CMBS panel. “People are demanding a lot more and looking to pay a lot less because of vacancy rates across the board in Europe,” observed one speaker.

Against this backdrop, a seismic shift is occurring in the office sector, with a polarisation between Grade A sustainable office spaces and standard office spaces that haven’t been upgraded over the last 25 years. Redevelopment was promoted as a means to future-proof these office assets.

Grade A offices are also now invariably those in a good location close to transit routes. These properties are expected to perform well, to the detriment of Grade B and C office assets.

Looking ahead, while more CMBS are maturing over the next three years, educating stakeholders on reasons to extend the underlying loans and where the market is in the credit cycle can help. Panellists agreed that lenders would rather not enforce if they do not have to and, thus, extending is often a better option than foreclosing.

Corinne Smith & Claudia Lewis

Structured Finance

Job swaps weekly: Reed Smith poaches Linklaters' Drury

People moves and key promotions in securitisation

This final weekly roundup of securitisation job swaps of 2023 sees Reed Smith snapping up a Linklaters partner and structured finance specialist. Elsewhere, ARIA Commodities has lured a Deutsche Bank veteran as head of structured trade finance, while CBRE has made two senior promotions in its European team.

Linklaters veteran Mark Drury has joined Reed Smith as a partner in its financial industry group, working out of the law firm’s London office. He leaves his position as partner at Linklaters after almost 20 years with the firm, having originally joined as a trainee solicitor in early 2004.

Drury specialises in structured finance, spanning CLOs, risk retention structures and financings, repackagings, fund financings and fund derivatives, and balance sheet issuances. He also works on financial market infrastructure processes including derivatives clearing and payments, and fintech-related matters including crypto asset products.

Meanwhile, Fred Dons has left his role as director and head of large cap sales on the Deutsche Bank structured trade finance team to take up the position of head of structured trade finance at ARIA Commodities, based in Zug, Switzerland. Dons has been with Deutsche Bank for a combined period of 29 years and six months, split between two stints either side of a two-year period at ABN AMRO from 2004 to 2006.

CBRE has made two key promotions in its European structured finance team, including the elevation of Chris Gow to head of debt and structured finance for Europe. Effective from 1 January 2024, Gow’s present responsibilities as lead for the debt and structured finance team in UK and Ireland will expand to include the rest of Europe. In addition, Robert Jan Peters, presently serving as head of debt and structured finance in the Netherlands, will take on greater duties in continental Europe and collaborate closely with Gow in these new roles.

Freddie Mac has appointed Mike Reynolds vp, head of servicing within its single-family portfolio and servicing division. He was previously vp, credit risk transfer, overseeing the STACR programme. Before joining Freddie Mac in July 2012, Reynolds was vp, strategy development director at Fannie Mae.

Italian law firm Pavia e Ansaldo has promoted Massimiliano Elia to partner, working out of its Turin office. Elia focuses on insurance and finance, with particular expertise in mergers and acquisitions, in addition to structured finance. He also advises on matters relating to broader banking and finance, private equity, litigation and arbitration and capital markets. Elia has been with the firm since 2021.

Scope has promoted David Bergman to group md and head of transactional credit and quantitative analysis. Based in Milan, he was previously md and head of structured finance at the rating agency, which he joined in September 2017. Before that, Bergman worked at Moody’s and GE Commercial Finance.

Sidley Austin has promoted Quan Lu to counsel in its energy and infrastructure practice in Houston, with effect from 1 January. He focuses on structured finance, asset securitisation and corporate finance transactions in the energy space. Lu joined Sidley Austin in 2016 from Hunton & Williams and is promoted from associate.

And finally, Marine and rail transportation equipment and services provider The Greenbrier Companies has promoted Nicholas Arnold to director of structured finance and analysis, based in New York. Arnold joined the company in late 2021 and is promoted from manager. He previously spent three years working on the structured product origination team at Guggenheim Partners and a year as an associate analyst on Moody’s Investor Services structured finance group.

The SCI Job Swaps Weekly team would like to wish all our readers a great festive period, and looks forward to bringing you more exciting job swaps in 2024.

Structured Finance

ESMA launches RTS and ITS consultation

Market updates and sector developments

The European Securities and Markets Authority (ESMA) has launched a consultation on revisions to the securitisation disclosure framework. The process is due to run until 15 March and aims to collect stakeholders’ views on proposed changes to the disclosure regulatory technical standards (RTS) and implementing technical standards (ITS).

In particular the consultation will focus on the four proposed options. These include “putting the template review on hold until revision of the L1 text”; the expansion of the current framework “with the introduction of few amendments to the currently used disclosure templates”; a targeted review for “streamlining the information required and developing a new dedicated and simplified template for private securitisations only”; and “a thorough review of the current disclosure framework proposing a significant simplification of the templates”.

The development comes days after the European Commission released a Commission Delegated Regulation supplementing the Securitisation Regulation with regard to RTS specifying performance-related triggers and the criteria for the calibration of those triggers in STS synthetic securitisations.

In other news…

Tikehau to form partnership with Nikko
Tikehau Capital has entered talks to form a partnership with Nikko Asset Management that will lead to a joint venture focusing on Asian private markets. The proposed partnership will see the Japanese asset manager taking an equity stake in Tikehau, while the French alternative assets investment manager says the deal will deepen its presence in the Asian market.

Capital Relief Trades

Performance-related triggers RTS adopted

Market updates and sector developments

The European Commission has released a Commission Delegated Regulation supplementing the Securitisation Regulation with regard to regulatory technical standards (RTS) specifying performance-related triggers and the criteria for the calibration of those triggers in STS synthetic securitisations. The RTS specify the two mandatory triggers under point (a) of Article 26c(5) of the Securitisation Regulation, set out the additional mandatory backward-looking trigger under point (b) and the mandatory forward-looking trigger under point (c).

BofA Global Research analysts note that the RTS is fairly technical in nature and its impact is difficult to assess without applying it to specific transactions. “Broadly speaking, the RTS highlights the use of backward- and forward-looking triggers, the reference points and stresses for their calculation, their calibration and application depending on pool granularity and the deal’s priority of payments.”

They also point to the emphasis on the need to provide for a transition regime for outstanding STS synthetic securitisations to implement the mandatory (as of the adoption of the RTS) performance-related triggers and the criteria for their calibration, so that there is “no interference with existing transactions”.

The Commission Delegated Regulation enters into force on the twentieth day following its publication in the Official Journal of the EU.

In other news…

KopenTech launches CLO trading protocol
Electronic trading platform KopenTech Capital Markets has introduced an all-to-all trading protocol for CLO securities and completed its first two client trades. The nature of the all-to-all protocol allows all market participants, including buy-side firms and dealers to trade with each other anonymously.

The approach is designed to enable a more inclusive and efficient trading environment, KopenTech says, with greater access to liquidity owing to a potentially larger pool of CLO counterparties. The all-to-all protocol is already in use for other fixed income products and KopenTech says it has now proven this approach is both viable and to the benefit of all participants in CLO trades. It intends to roll out the product market-wide.