Contents

Capital Relief Trades

B note bonanza

GSE CRT benefitting from 'bullish technical'

The GSE credit risk transfer market posted one of the highest daily trading volumes on record last Thursday (25 January) at US$910m, exceeding the prior daily trading record of US$895m reached in March 2020. While the latter was driven primarily by the unwinding of levered positions, the former followed Fannie Mae’s strong CAS 24-R01 print (SCI 26 January).

The bond was 22x oversubscribed and priced 50bp-75bp tighter than IPTs, with spreads tightening by 35bp on the follow. In fact, the latest CAS deal priced tighter than 2022 vintage B2 bonds.

JPMorgan securitised products research analysts note the structural change to the CAS programme, whereby the 2022 B2s benefited from 30bp of credit enhancement, while this was increased to 75bp and 100bp for 2023 and 2024 CAS B2s respectively. Based on their mortgage credit model, the analysts suggest that the accumulated equity in CAS 22-R07 holds up better than the higher enhancement in CAS 23-R06 and 24-R01.

“The market has been consistently assigning more value to the additional enhancement in ‘23 over the HPA advantage that ‘22 vintages carry,” they observe. “Our model suggests there should not be a spread difference. Indeed, some of the difference could be attributed to premium price aversion (and not CE versus HPA) or perhaps investors are assigning value to higher WACs in ‘23 and ‘24 paper that would result in faster deleveraging in a lower rate environment.”

The GSE CRT market is the only sector where it’s possible to buy exposure to mortgage credit in size, yet negative net issuance is anticipated this year (SCI 25 January). Moreover, Freddie Mac has not sold STACR B notes since 2Q23 and stated in its 2024 outlook that it is not planning to issue B notes on a programmatic basis this year.

“Consequently, investors are simply grabbing whatever bonds they can, resulting in a very bullish technical in the market,” the JPMorgan analysts explain.

Secondary B2 spreads for seasoned CRT cohorts now stand at 500bp and 400bp for STACR and CAS bonds respectively, according to BofA Global Research figures. With CRT spreads near all-time tights, execution down the capital stack should theoretically be attractive to Freddie.

By way of example, the JPMorgan analysts estimate that in Fannie’s latest CAS transaction, the deal ROE stood at 6.4%, versus 5.3% if the Bs had been retained. “Why then is Freddie not selling B notes?” they ask. “While ROEs are higher with B notes, it could be that the current ROE already meets the target and Freddie is prioritising retaining earnings to build regulatory capital.”

They conclude: “The GSEs were allowed to retain earnings under Calabria’s regime at the FHFA in 2019. Sandra Thompson has continued on that path of preparing the GSEs for an eventual exit out of conservatorship, although GSE reform has not been a priority for the Biden administration. It is still early in an election year, but conversations around GSE reform are already starting to swirl.”

Corinne Smith

RMBS

Mortgage modelling

Agency MBS could 'exacerbate' financial crises

Conventional wisdom holds that by fostering diversification and creating a ‘safe’ asset in the form of MBS, securitisation will reduce risk and enhance liquidity, thereby mitigating financial crises. A new Federal Reserve Finance and Economics Discussion Series paper suggests, however, that government-sponsored securitisation - somewhat counterintuitively - is more likely to exacerbate the severity and frequency of financial crises. The paper analyses a model of the mortgage market, considering scenarios with and without GSE mortgage securitisation.

The model is based on a strategic game framework focusing on the interaction between the securitiser and banks. In this framework, the securitiser initiates the process by setting the MBS contract terms, which includes the guaranteed rate and the criterion that qualifies a mortgage for securitisation. The bank then selects which qualifying mortgages to exchange for the MBS.

The analysis leads to a key result: that the uncomplicated story of safe assets providing stability and liquidity during periods of economic volatility ignores some key elements in the production process that quasi-government entities use to create those ‘safe’ assets. In creating an MBS, the input suppliers (mortgage originators) select which qualifying mortgages to exchange for the MBS. The originators, therefore, have an opportunity and an incentive to retain in their own portfolios the mortgages with lower default risk, adversely selecting mortgages with higher default risks as inputs into the ‘safe’ asset production process.

However, in anticipation of the originator’s decision, the securitiser strategically sets the MBS contract terms, aiming to influence the originators’ choices. This process of creating these government guarantees involves strategic interactions that can result in instability, according to the Fed discussion paper.

Moreover, the adverse selection problem is aggravated when the prevailing demand for mortgages is low enough so that originators choose not to hold any of the higher-risk mortgages. In this case, securitisation serves to decrease the equilibrium mortgage rate, lower the guaranteed MBS rate and expand accessibility to mortgages, while also shifting the burden of default risk from the originator to the securitiser. A key consequence is that both parties experience diminished profit margins, rendering them susceptible to losses stemming from low or negative rates of home price appreciation.

“We concede that in practical reality, the potency of these threats to induce a financial crisis is diminished when robust capital requirements and stringent liquidity standards are in place, ensuring banks have sufficient buffers to absorb losses. Within this context, the outcomes yielded by our model lend support to the idea that macroprudential policies - such as capital and liquidity requirements - would be stabilising,” the paper states.

It concludes that an alternative policy approach involves mitigating the potential adverse impact on bank profits. “One avenue for achieving this is through reforming the process for determining the MBS contract. A potential transformation entails promoting competition in the securitisation market by fostering many independent MBS suppliers, while also reducing banks’ discretion in selecting the mortgages for securitisation.”

Corinne Smith

ABS

Powen pioneers Spanish solar ABS

Market updates and sector developments

Powen Group, a portfolio company of Brookfield Asset Management, has closed a pioneering bank-funded securitisation of Spanish solar assets with a value of up to €120m. The transaction is one of the first private European solar ABS and is the first to finance a combined portfolio, comprising both residential solar loans, as well as solar leases and power purchase agreements in the commercial and industrial (C&I) sector.

Norton Rose Fulbright advised on the structuring and execution of the financing in relation to both English and Luxembourg law, working alongside Garrigues, which provided Spanish law advice. The lender on the transaction, Barclays, was advised by Hogan Lovells.

"Unsurprisingly, the market for solar asset installation and financing is undergoing a period of significant expansion. As a global law firm with offices across Europe, we are very well placed to advise lenders, borrowers and issuers in this growing industry segment. Our renewables practice goes from strength to strength and we expect to see much more solar asset securitisation activity in Europe," comments Norton Rose Fulbright partner Christian Lambie, who led the team advising on the deal.

Structured Finance

Job swaps weekly: M&G lures new cio from Allianz GI

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees M&G Investments snap up a new private markets cio from Allianz Global Investors. Elsewhere, a London-based partner at Allen & Overy leaves the firm after 28 years, while Canopius bids to enhance its SRT business by appointing a new head of structured credit.

M&G Investments has appointed Allianz Global Investors' Emmanuel Deblanc as chief investment officer to lead its private markets business. He will take up his role on 14 March and be based in London, reporting to the subsidiary’s ceo Joseph Pinto.

M&G’s private markets division has £74bn in AuM across its private credit, structured credit, impact and private equity, real estate and infrastructure strategies. Structured credit strategies include consumer and commercial ABS, SRT and specialty finance, and account for €7bn of AuM.

Deblanc will leave Allianz after seven years with the firm, having been elevated to head of private markets at the start of 2021. He previously spent nine years at BNP Paribas.

Meanwhile, Allen & Overy's London-based partner and head of derivatives and structured finance Emma Dwyer has left the firm after 28 years. A spokesperson confirmed the departure to SCI, stating: "Emma Dwyer has left Allen & Overy. We would like to thank her for the contribution that she has made during her time at A&O and wish her all the best for the future."

Angelos Deftereos will take charge as the new head of structured credit at Canopius in a move to enhance the firm’s SRT business. Joining the global credit and political risk team in London, he brings more than 20 years of experience to the role – including special expertise in SRT insurance. 

Deftereos joins Canopius from Volante Global’s structured finance team, where he served as md, and previously held senior positions at Morgan Stanley, Aon, Marsh and Goldman Sachs.

Newmark Capital has recruited Jonathon Firestone to serve as its new co-president of global debt and structured finance. Serving alongside existing co-president, Jordan Roeschlaub, the pair will run Newmark's debt platform.

Firestone joins the firm’s office in LA from Eastdil Secured where he spent the last 23 years, supporting the development of its debt, structured finance and loan sale business as an md and member of its management committee.

Greystone has appointed a new senior md, Leena Amin, to its structured finance team to support the expansion of its structured product advisory and capital markets offerings. Amin will be based in Virginia and report recently recruited executive md Debby Jenkins, and joins from Freddie Mac where she led the multifamily structured transactions team.

Strategic Value Partners (SVP) has appointed two new mds to lead its structured capital team in Europe. Based in London, Timo Koch and Ahmed Khan will report to the firm’s head of structured capital, Brian Himot, and work to scale SVP’s private capital solutions business in Europe. Koch and Khan join SVP from Avenue Capital and KKR Special Solutions, respectively.

Haynes and Boone has hired Reed Smith’s Joe Sarcinella as a transactional partner based in its New York office. Sarcinella – who primarily focuses on cross-border real estate finance, structured finance and consortium lending – leaves his position as chair of the real estate practice group at Reed Smith after eight years with the firm. He previously held partnership roles at Thompson & Knight and Arent Fox, and formerly worked at Schulte Roth & Zabel, SRC and King & Spalding.

Wedbush Financial Services has appointed investment banking veteran Kevin D White to evp and senior advisor to develop its new investment management business. He joins the firm from the CRE and structured finance-specialist merchant bank, Spring Hill Capital Partners, where he was the founder and managing partner. 

Based in Wedbush’s New York office, White will focus on the new investment management business – initially providing family offices with CRE and private structured credit opportunities.

And finally, Greenberg Traurig has poached Mizuho Yamada from White & Case in a bid to bolster its real estate team in Japan. The former head of White & Case’s real estate practice in Japan brings more than 20-years of experience to the new role as a real estate shareholder in Greenberg Traurig’s office in Tokyo. Yamada’s practice focuses on corporate law, real estate, NPLs, and structured finance transactions.

Capital Relief Trades

PRA urged to fix non-neutrality issue

Market updates and sector developments

PCS has submitted its response to the UK PRA in connection with the consultation on the introduction of the output floor pursuant to Basel 3.1, as it relates to securitisation (SCI 1 November 2023). While welcoming the PRA’s suggestions, the organisation points out that “all the obvious difficulties that flow from a rigid application of the proposed Basel rules to securitisations – and especially SRT securitisations – flow from the original miscalibration of the capital requirements.”

More specifically, PCS states that they flow from an incorrectly calibrated non-neutrality factor (the p-factor), which is then made worse by structural flaws in the current CRR architecture that result in doubling-up the prudential buffers. “Therefore, PCS urges the PRA to go beyond ad hoc, stop-gap measures designed to ameliorate the most egregious outcomes of the currently miscalibrated framework and fix, once and for all, the Pillar 1 non-neutrality issue. For reasons set out in our response, we do not believe that leaving this issue to the Basel Committee is the best way to proceed,” it argues.

The response also seeks to answer the question of whether STS should be extended to synthetics, as it has been in the EU. PCS says it has tried to show why, for reasons of prudential coherence, competitiveness within the UK banking system and the international competitiveness of the UK as a whole, such an extension should be put into effect.

In other news…

Italian court rulings could slow NPL securitisation recovery times
Recent decisions by Italian courts to suspend foreclosure proceedings started by securitisation SPVs through special servicers could lead to considerable delays in recovery times for Italian NPL securitisations. Morningstar DBRS says debtors could start defending enforcement proceedings by third parties on the basis of the rulings, which could mean master servicers having to start fresh enforcement proceedings.

Some Italian enforcement courts suspended foreclosures in Q4 2024 on the basis that third-party entities who had been subdelegated the task of recovering receivables were neither banks nor authorised financial intermediaries, as required by the Italian Securitisation Law. The rulings followed the 2021 decision by the Bank of Italy to intensify supervisory activity in relation to servicers, off the back of an increase in securitisation transactions.

The ratings agency says the “lack of uniform interpretation could also affect the performance of transactions that benefit from the garanzia sulla cartolarizzazione delle sofferenze (GACS) scheme”.

The Italian Supreme Court is yet to rule on limits to subdelegating special servicing activities to entities that are not either a bank or authorised financial intermediary.

CMBS

Office loans face global DFG challenges

Market updates and sector developments

AEW has published its first global commercial real estate debt funding gap (DFG) analysis, which provides insights on the relative refinancing challenges faced by three key regions. The findings indicate that Europe has the largest DFG on a relative basis, standing at 16% of loan originations, closely followed by the US at 14%, with Asia Pacific remaining relatively immune. Meanwhile, office loans consistently emerge as the primary concern across all three regions, followed by the multifamily and retail property sectors, which experienced significant capital value declines during the recent economic cycle.

In Europe, Germany and the Nordics exhibit the highest DFGs at over 22% and 18% respectively, while the UK and Southern Europe are best placed at 9% and 11% respectively. Notably, the DFG for Europe is projected to return to 2024 levels in 2026 after a substantial decline in 2025, attributed to the rebound in 2021 acquisitions and AEW’s assumption of uniform five-year loan maturities.

In the US, despite similar value declines as in Europe, detailed loan maturity data for 2024-2026 points to a declining DFG in 2025 and 2026, compared to 2024. Sector-wise, offices and retail in the US show relative DFGs of 37% and 29%, presenting significant variations from the 14% US average. Conversely, loans backed by industrial collateral exhibit a lower relative DFG.

There is a more diverse landscape in the APAC region, with major markets - such as Australia, Singapore, South Korea and Japan, as well as Tier 1 cities in China - all facing a DFG of 7.6%, lower than that of both the US and Europe. Notably, around 60% of APAC's DFG is concentrated in the office markets of Australia and Tier 1 cities in China, with an additional 30% in the retail sector. The shorter three-year loan tenures in APAC and the slow adjustment of property valuations/pricing contribute to the region's comparatively low relative DFG, according to AEW.

“With many commentators believing interest rates have peaked and some early confidence returning to the market, 2024 will be a critical year for real estate globally. In the end, the scale of the DFG challenge and its impact on local markets ultimately depends on investors and lenders’ ability to cure associated defaults and absorb potential losses,” comments Hans Vrensen, head of research and strategy at AEW.

The study utilised a standardised methodology, incorporating the best available local data on CRE loan maturities, originations and refinancing assumptions.