Contents

Capital Relief Trades

US SRT: First waves - video

Seer Capital's Terry Lanson speaks to SCI about the outlook for SRT in 2024

Terry Lanson, md and portfolio manager at Seer Capital, speaks to SCI's Simon Boughey about the outlook for SRT in 2024. Lanson discusses how SRT can help banks compete amid the ongoing expansion of private credit, whether the US market is finally ready for lift-off, and what Seer looks for in an SRT partnership.

ABS

Unlocking new frontiers

TRS market to grow as investor demands and market needs collide

The trade receivables securitisation (TRS) market is set for growth, as strong investor appetite and the ongoing squeeze in SME financing boost the asset class’s potential. TRS programmes – particularly those in emerging markets – could evolve into a new frontier in SME funding, as banks retrench in response to concerns over weak economic growth and potential recessions. 

The increasing reluctance of traditional lending institutions to extend credit has in recent years created challenges for businesses reliant on bank financing. This has been partly mitigated by the ongoing, seemingly never-ending rise of direct lending. 

However, as private credit managers raise increasingly larger funds and creep higher up the value chain, it is becoming apparent that they alone are not filling the SME funding gap left by traditional lenders. They have also typically concentrated most of their efforts in developed markets.

Indeed, according to the International Finance Corporation, 70% of micro, small and medium-sized enterprises (MSMEs) in emerging economies “lack adequate financing to thrive and grow”. The result is a financing gap of some US$5.2trn for formally recognised MSMEs, the corporation says.

Although banks could choose to lend with tightened credit terms, thus hindering competitiveness and causing further issues down the line, addressing working capital and cash flow cycles is likely to be the preferred alternative.

“One way to achieve this is by selling receivables – through trade receivables securitisation –  enabling quicker access to cash,” explains Cliff Pearce, global head of capital markets at TMF Group. “But you do need a platform and investor market for it.”

Historically, trade receivables have been favoured for their scalable and solid returns, which remain tethered to real live trades, rather than certain market fluctuations. More broadly, investment in trade finance is often encouraged as a means of stimulating the economic environment.

Although European investors are well versed in the TRS space, jumping over to setting up new programmes in emerging markets may not be entirely straightforward.

“It will require a degree of specialisation and understanding of specific jurisdictions, legal systems and currency risks,” says Pearce. “Investors will need to invest a lot of time and effort in order to understand it.”

He continues: “That’s not to say they won’t do it.  In fact, many investors in private credit are already involved in this market in one way or another – so there is an opportunity to leverage that existing experience – but it’s not an immediate translation.” 

The legal intricacies of each different jurisdiction also present challenges in establishing TRS programmes in emerging markets. These relate to the assignment of the receivables, trust-law, and accommodating multiple emerging markets at one time with multi-jurisdictional deals.

The latter is a primary concern for navigating the set-up of a TRS platform, given the current prevalence of multi-jurisdictional deals in more mature TRS markets and the proven cost benefit.

“There’s a large set-up cost in establishing the programme,” explains Pearce. “But once the structure is there it is scalable – so there are relative benefits and merits out of that.”

The TRS market has undergone major standardisation-related change in areas such as trust law and enforcement in instance of default, and multi-jurisdictional trades, which were not a feature of the market 25 years ago.

“Like anything, once you’ve got the core capability, you get the ripple effect going into the market and other markets try to replicate that,” Pearce says.

Given the large investment necessary for setting up new TRS programmes, trade credit insurance could offer investors some comfort regarding credit performance, although this has historically been most commonly used in Europe.

“Having that trade credit insurance sat there is another layer of protection,” Pearce explains. “It’s not the first thing on your mind when setting up the programme, but maybe it’s the next thing you look at. It’s a consideration I can see coming to the fore in emerging markets as well.”

Offsetting costs
Indeed, as market participants continue to navigate TRS opportunities, meticulous structuring and strategic risk management could be crucial to unlocking the full potential of the asset class. 

“There is obviously a slight cost to having the insurance – but that is potentially offset against higher interest rates, an advanced rate on the receivable purchase prices, and maybe even enhanced pricing as well,” says Pearce. “There is a benefit to having it.”

He adds: “It’s not unusual to see some businesses have a base policy and an SPV policy, and the two are linked. So the same credit limit can be applied across two policies, but it gives the business flexibility to choose which receivables it sells and which it doesn’t. It ultimately gives them peace of mind that they’re going to be paid for the receivables. So if you are seeing a more distressed environment, they know that their write-offs and dilutions are going to be much lower.”

No other asset class is as self-liquidating as trade receivables, given the average life of 40 days. This is even the case when measured against insurance premium receivables, which have an average 10-month lifespan and offer strong performance yields, the use of complex models and other barriers to entry. All of these factors mean it does not pose a competitive risk to TRS.

“The relative high rates of interest embedded in trade receivables securitisations appeal to investors,” says Pearce. “But they belie the short-term nature of the credit risk and the benefit of the inherent credit enhancement built into it.”

Discussions regarding implementing a maximum tenor for trade receivables of 30 days are continuing, although the shortening from the average by 10 days is not expected to have a significant impact. Such public deliberation over new potential regulation could, however, draw more attention to the benefits of TRS programmes hidden in the finer details – highlighting its potential as an alternative financing solution.

Even in the face of geopolitical concerns and supply chain issues, Pearce expects the TRS market to continue to grow in the short- to medium-term. Even after hiccups seen during the pandemic, interest in the murky TRS asset class remains high – and is only expected to rise (SCI 21 July 2022).

“I think private transactions are more attractive as being more discreet,” says Pearce. “People may not necessarily want disclosures around their arrangements. If you look at the commercial paper market, the multi-seller conduit market – having this level of discretion about how you fund yourself  is quite key to internal players.”

Claudia Lewis

ABS

Historic opportunity?

MPL ABS set to benefit from credit card refinancing needs

Marketplace loan ABS issuance in the US posted volumes of US$7.6bn last year, lower than the US$9.5bn of supply seen in 2022, as post-pandemic headwinds combined with macroeconomic pressures to drive underperformance across the sector. However, the market is poised to benefit from an influx of private credit money and the need to address historic levels of credit card debt.

 Upstart’s UPST 2022-1 last month reported negative overcollateralisation on the class C notes of circa US$1.3m, marking the first securitisation to see an unrealised write-down within the MPL segment. KBRA had downgraded the class Cs to triple-C from double-B minus in November and currently has the deal’s class Bs at double-B plus, having originally been rated at triple-B minus.

JPMorgan securitised products research analysts point to weakness in 2022 MPL pools, reflecting issuers moving down in credit to feed their growth metrics. “The rapid pace of originations has significantly impacted credit metrics across early 2022 transactions for select MPL ABS programmes. Specifically, pools with higher non-prime concentrations have been most affected,” they observe.

But they note that sponsors have adjusted their credit boxes since then, focusing on tighter underwriting and servicing standards, as well as upward pricing adjustments. This has been accompanied by a significant drop in personal loan origination volume in recent quarters.

By way of comparison, the JPMorgan analysts cite on the one hand Upstart origination volume through 3Q23, which dropped by 65% and 57% versus the same period in 2022 and 2021 respectively. On the other hand, SoFi - which is primarily focused on the prime lending segment - grew its originations in 2023.

Clarke Roberts, general manager, Marketplace at LendingClub, noted during a recent dv01 webinar that borrower demand for marketplace loans remains strong, but the issue had been finding investor capital to fund this demand. “The rise of other higher yielding instruments made personal loans look relatively less attractive, while the rising cost of capital meant that some investors pulled back from the sector. Uncertainty over the health of consumers also pushed lenders into higher prime segments,” he explained.

However, David Staley, vp, capital markets at Prosper, added that the extraordinary amount of money raised by private credit funds is already flowing through to the MPL sector. “Private credit represents smart and innovative money – the ability to be creative that this provides is helpful to the MPL asset class,” he said.

In particular, webinar participants highlighted the fact that the MPL industry is well-placed to capture the “historic opportunity” presented by credit card refinancing needs. Indeed, with circa US$1trn on credit card balances at average interest rates exceeding 21%, this is expected to create significant MPL demand from both borrowers and investors.

Looking ahead, the JPMorgan analysts anticipate that MPL losses and defaults (if any) will be limited to select tranches and not spillover into newer vintages. “The top of the stack in MPL ABS remains solid in various scenarios and investment grade ratings have held up, despite rare exceptions. However, as long as the market has recession concerns, we expect to see slower upgrades - particularly after the weak 2022 performance, as well as subsequent increase in loss expectations by rating agencies for recent transactions. Negative actions should remain concentrated at the very bottom (non-IG rated tranches) of the capital stack and the 2022 vintage.”

Improvements in ABS execution, driven by the rally in the broader credit market, is beginning to flow through to pricing in the MPL space. Nevertheless, at spreads of plus 100bp, MPL ABS triple-A rated one-year paper still offers a 50bp-55bp pick-up compared to credit card and auto loan ABS bonds.

“It is tough to make a case for material spread tightening from this point on, given the macro rate/recession uncertainty still ahead in 2024. Additionally, the heightened level of idiosyncratic/sponsor risk and an asset class that has not been recession-tested will continue to prevent tightening, albeit more on the subordinates than seniors. Nonetheless, 5%-6% all-in yields for short one-year amortising paper, combined with higher rating agency base-case loss expectations - resulting in higher enhancement/support for recent vintages - create an excellent value proposition for senior short-duration MPL ABS,” the analysts conclude.

Corinne Smith

CLOs

SCI In Conversation Podcast: Ian Wolkoff, Pretium Partners

We discuss the hottest topics in securitisation today...

In this episode of the SCI In Conversation podcast, SCI US editor Simon Boughey speaks to Ian Wolkoff, structured credit and CLO liabilities md at Pretium Partners, about the CLO market’s outlook for 2024. Wolkoff discusses the types of loans that are likely to see default rates tick upwards; refinancing challenges; the high levels of issuance seen so far in 2024 and what it suggests for the year ahead; and more.

Wolkoff says the early expectations are that 2024 could see record – or close to record – levels of CLO issuance. Forecasts are for around US$80bn to US$120bn of new issue, with around US$300bn of existing deals already out of their reinvestment periods; a further US$70bn due to exit reinvestment periods before the end of 2024; and around US$45bn that were issued in 2022-2023, have high financing costs, and are “likely reset candidates” as they exit non-call periods.

This 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')

Capital Relief Trades

Getting ahead

SRT Market Update

Investors continue to highlight the notable pipeline of European corporate mandates in the SRT market as a clear trend. Meanwhile, across the pond, what to expect from the US market in terms of volume and growth for this year remains unclear.

Asked if, as reported last week, the significant number of European corporate SRT trades currently in the pipeline could be partly explained by the US push experienced in Q4 last year, one SRT investor notes: “What is impressive is the amount of volume that's already coming out for this time of the year. However, I do not know if it’s specifically related to the US push experienced last year.”

He continues: “I just think a lot of banks are generally trying to get ahead and avoid the Q4 rush. Given that the supply is increasing, it’s probably better to already start thinking about trades early rather than wait until later.”

Regarding spreads, another investor notes an asset-class specificity. He says: “I think regarding spreads, it really depends on the asset class. If you look at the infrastructure/project finance segment, for instance - where you have some construction rates in the portfolios (and looking at the news, projects are being delayed by supply chains and so on) - we are seeing prices widen a little bit. However, in other asset classes - the very short-duration ones particularly - you are probably seeing a slight tightening.”

For example, regarding Deutsche Bank’s latest CRAFT trade, market participants are predicting a “material tightening” in pricing. One investor says: “Obviously, spreads have come in and the market is well supplied. Yet the portfolio is similar to previous CRAFT deals and, in order to get such tight pricing, Deutsche Bank has had to sign over 75 NDAs. That represents many, many people on a deal which is not that big (about USD$300m). If everybody throws in US$10m, that's how you get a deal pricing quite tight.”

He continues: “It’s a different strategy than the rest of the banks, with a sort of take-it-or-leave-it approach. The SRT market is currently seeing a lot of new players and maybe some of those guys are trying to build a track record and experience. So, we expect the deal to price in the nine handle (as opposed to SOFR pus 11.75% for last year’s deal).”

Meanwhile, regarding the European pipeline, the investors points to some movement in the infrastructure/project finance space. He says: “We are seeing some discussions with a handful of Italian and Spanish banks. But generally, across the market, I feel the real action will happen around Q2-Q3, for closing in Q4.”

Looking at the US, investors are generally expecting good supply to emerge. One potential new entrant is Barclays, which reportedly intends to explore selective SRT transactions referencing its US credit card exposures to mitigate an increase in RWAs from the upcoming migration of this portfolio to the IRB approach.

The investor states: “I think the US is definitely going to be a big one this year again, with more coming. In my view, it is just a question of timing. Essentially, US banks will have to add more capital to the balance sheet, which naturally drives SRT issuance. The question is who's going to move first and set the standard.”

Commenting on the investor base and structure for US ‘megadeals’, the investor points to big players. He says: “You might see multiple big players in order to price it as cheaply as possible, especially because those banks would probably try and bring in diverse investors. This includes the large hedge funds, credit funds, pension funds, and giving them a different slice in the various capital stacks. And I think, given the size of the tickets, they will most likely have to partner up.”

Again, mentioning the US market, another investor suggests that its anticipated growth is still to be determined. He notes: “I don't know if we're going to beat last year’s volumes. If JPMorgan does do a follow-on trade, it is unclear whether they will be doing the same volume as they did last year because a lot of it was pent-up.”

He concludes: “I generally think we will see a lot of supply, but will it be to the same extent as last year, who knows?”

Vincent Nadeau

Capital Relief Trades

Into the blue

Alpha Bank's latest SRT unveiled

Further details have emerged regarding Alpha Bank’s synthetic securitisation that it executed in Q4 last year. The significant risk transfer trade – called Project Blue – references a €1.6bn portfolio of Greek corporate and SME loans.

The financial guarantee on the mezzanine tranche was executed with a diversified pool of investors, going against the norm of bilateral transactions usually experienced in the Greek market. Christofferson, Robb & Company and Davidson Kempner are rumoured to have been among the investors in the transaction.

Alpha Bank was unable to comment on the exact pricing of the transaction. However, the bank confirms that it was “quite competitive” - taking into account the year-end over-supply - and “naturally well below our cost of equity, reflecting the credit quality of the portfolio.”

The transaction supports Alpha Bank in enhancing its capital resilience by achieving an expected risk-weighted asset relief of €800m. Additionally, the trade falls under the STS securitisation framework.

Commenting on the motivations behind the transaction and the bank’s overall SRT strategy, Alpha Bank notes: “For us, it is something that is at the core of our balance sheet optimisation strategy. This last transaction fits within this strategy and we will continue to be active in this space, as it is an effective credit portfolio management tool, a way for optimising the capital structure and also improving returns on adjusted capital.”

The bank adds that it has started doing SRT transactions relatively recently, so it is fair to assume that it still has portfolios “where it would make financial sense for us to do synthetic securitisations”. “At the same time, we have committed towards our shareholders that we will continuously improve the balance sheet as much as we can. Therefore, it is reasonable to assume that [SRT] will form an integral part of our credit risk and capital planning and, as the market matures and other asset classes are tested, it will become a recurrent tool,” it concludes.

Vincent Nadeau

Structured Finance

SCI Start the Week - 19 February 2024

A review of SCI's latest content

Last week's news and analysis
Corporate flow
SRT Market Update
Job swaps weekly: Hogan Lovells adds dozens from Orrick
People moves and key promotions in securitisation
Judgement day
Appeals court to rule on SEC's private funds proposals
On the cards?
BBUK acquisition could spell end of DELAM issuance
Survival of the biggest
CLO platforms retain allure as M&As in alternative credit continue apace
Tectonic shift
Evolution of European NPL market could change geography of ABS opportunities
Plus
Deal-focused updates from our ABS Markets and CLO Markets services

SCI In Conversation podcast
In the latest episode of the SCI In Conversation podcast, SCI's deputy editor Kenny Wastell speaks to S&P Global Ratings’ md and head of EMEA structured finance research Andrew South and Alastair Bigley, md and sector lead for European RMBS, about the year ahead.
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
SCI’s 3rd Annual ESG Securitisation Seminar
16 April 2024, London

Emerging Europe SRT Seminar
18 June 2024, Warsaw

2nd Annual Esoteric ABS Seminar
25 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

Rates and regionals

Greater AOCI pressures will bring US regional banks to SRT market

The pipeline in the burgeoning US SRT market is in the hands of the Federal Reserve, according to a leading asset manager.

If rates remain relatively elevated, the value of fixed income asset portfolios diminishes and banks suffer AOCI losses. At the same time, they are paying out more on cash balances. This squeeze makes preservation of capital particularly important.

The 10-year Treasury currently stands at 4.27%, but has backed up from 3.79% before Christmas. At the beginning of the year, there was much breezy talk of six rate cuts by the Fed in 2024, but, since then, the situation has become a bit more uncertain.

January CPI showed that while inflation has decreased it has not come down as much as was hoped. Year on year inflation was reported to be 3.1%, still much above the target rate of 2%. Fed chairman Jerome Powell has been notably guarded in recent comments.

“There were some pretty significant bank losses in 2023, and the market was recovering in the fourth quarter of last year and the beginning of the first quarter of this year. However, as the 10 year gets closer to 4.5%, AOCI (Accumulated Other Comprehensive Income) issues come into focus and the preciousness of capital increases, we would expect to see more SRT transactions getting done,” says Kevin Alexander, a partner in the Alternative Credit strategy at Ares Management. “

Higher rates also heighten the pressure felt by commercial real estate assets, to which many regional banks are exposed. New York Community Bank’s stock prices has tumbled by over 50% this year after it posted a surprising loss and a US$552m provision for credit losses.

If, however, rates tumble, the value of fixed income positions increases and there is less pressure to optimize risk weighted assets. So it’s all in the hands of the Fed.

“Assuming a higher-for-longer rate environment, we expect the market opportunity for SRTs will remain robust,” says Alexander.

The Credit Group is one of four business lines that constitute Ares and is devoted to liquid and non-liquid assets in the non-investment grade sector. It has around US$60bn AUM, while the entire group manages close to US$300bn.

It is a notable investor in the SRT market, and is rumoured to have taken a healthy slug of the US$20-US$25bn JP Morgan megadeal that was in the market before Christmas. Alexander declined to comment on the alleged involvement.

The regulatory capital regime for US banks has become increasingly burdensome with the proposed implementation of Basel III, and now any bank with over US$100bn in assets faces the most rigorous demands. There are 28 institutions in the US that fall above this threshold and these are the most likely suspects for energetic CRT supply.

Banks further down the league table with less than US$100bn assets may look at the SRT market as well, but are perhaps more likely to have more pressing items in their in tray, such as divesting unprofitable business lines and maintaining a stable portfolio.

But for banks above the US$100bn dividing line, which, apart from the Wall Street giants, includes names like US Bancorp, Truist and Fifth Third Bank. US Bancorp has already visited the SRT market and others must be regarded as likely suspects.

“Given the current regulatory capital regime, we believe that banks can optimize capital by selling assets, reducing forms of origination and/or doing some form of SRT,” says Alexander.

Simon Boughey

Capital Relief Trades

Challenger firm

Having recently joined law firm Dentons, partner Toby Gray and counsel Ruhi Patil are looking to put the SRT market at the forefront of their practice

Q: Tell us about your recent move to Dentons and your targets within this new practice?
TG: I joined Dentons in October 2023 (SCI 6 October 2023). After nearly 28 years at Linklaters, I was ready for a new challenge. Dentons was an attractive option for me, as it is what I like to refer to as a ‘challenger’ law firm – that is, one of the small band of law firms that might previously have been referred to as ‘silver Circle’ back in the day, but which have in the past few years been expanding aggressively into areas that were previously considered the exclusive bailiwick of the traditional ‘magic circle’ firms.

One of the areas in which Dentons is increasingly challenging the magic circle firms is its capital markets, structured finance and derivatives practice. The fact that the firm was massively investing in its SRT focus within this practice represented an exciting challenge and prospect for me, particularly at this advanced stage of my career, to go somewhere new and build out a practice from scratch.

RP: I joined Dentons in January 2024, having worked at Linklaters for just under seven years (SCI 12 January). I have expertise across securitised and OTC products, but my specialist focus is on SRT transactions.

One of the biggest draws for me to join Dentons was the fact that, as Toby said, I liked the idea of building a new practice offering from the ground up. It was an exciting prospect to embark on a new challenge with someone that I have previously worked with and enjoy working with.

What further bolstered my confidence was that Dentons is the largest global law firm in the world and its international network is unparalleled. The SRT market has grown over the years and continues to expand into new jurisdictions. There are an increasing number of new asset classes and new market entrants every year. Our client offering also needs to be at a global level and we can achieve this at Dentons.

TG: As Ruhi said, that sort of ‘one-stop shop’ approach that we're able to offer to clients was certainly a draw to me. We've certainly hit the ground running, having closed two large SRT transactions during December, and we are in active discussions now with a number of clients for the 2024 pipeline.

Q: What do you feel sets you apart from your competitors in this market?
TG: I think there are clear pricing advantages. Although I find the whole ‘magic circle/silver circle’ distinction an increasingly archaic concept from a quality perspective, it is certainly the case that the traditional magic circle firms continue to have the highest charge-out rates. These high charge-out rates create parameters within which the partners in those firms have to operate, in order to maintain recovery levels and margins.

Simply put, we do not face the same pricing pressures here at Dentons as the magic circle firms. Accordingly, we are able to price extremely competitively, which is obviously highly attractive to clients.

But fundamentally, it comes down to product expertise. One of the issues that Ruhi and I faced at our previous firm was that we did find ourselves occasionally pulled in different directions, which limits and constrains your ability to focus wholly on a particular area.

But having come to Dentons, SRT is very much the forefront of our focus. And we arrived with an existing client following and market profile.

We're recognised as having a high level of expertise and the clients who instruct us are market leaders. So, we're coming to the party with deep product knowledge and with the ability to focus 100% on this sector.

RP: One aspect that works in our favour is that the SRT market is still a relatively small market. Even with new entrants each year, it continues to be a small, friendly, collaborative market.

It also helps that we regularly speak at industry conferences. We have very strong brand recognition and a strong public profile when it comes to these transactions. Furthermore, our strategy is clear – we want to focus on the investor role and we believe that there is enough work for everyone!

TG: Also, I think that the banks that we tend to face on these transactions when we're advising investors appreciate the sophistication of the advice that we're giving and the commercial position that we're able to take, based on that deep product knowledge. As a result, we often find those same banks subsequently referring new investor entrants in the market to us.

Q: Regarding the regulatory environment and agenda for this year, what are the most pressing issues?
RP: On the regulatory side, implementation of the output floor/p-factor, sustainability and approach to disclosure and transparency requirements continue to be hot topics. In particular, following the HM Treasury’s review last year, it will be interesting to see how the securitisation regime gets implemented within the UK’s prudential regulatory framework and the level of discretion that the UK regulators will enjoy. Holistically speaking, we cannot ignore the fact that divergence between the EU and UK synthetic securitisation regimes is growing and it remains to be seen if this will impact the competitiveness of these markets.

It would also be interesting to see what happens on the insurance side. As you know, the (EU) STS regime does not apply to unfunded deals involving insurers and reinsurers. It’s highly possible that insurers get more creative with products that they can offer to banks as an alternative (more appealing) method of transferring credit risk.

TG: Outside of regulatory developments, in terms of market trends, with the US opening up, I think that 2024 is going to be pretty hot from a US origination perspective. We are already seeing an influx of deals from US banks.

Q: Do you expect the SRT market to grow into new jurisdictions this year? 
TG: I think that in terms of expansion, we've already seen Canadian banks, but I think there’s the possibility of seeing more Asian banks. However, I do feel that 2024 is going to be largely dominated by the US banks making up for lost time.

RP: I think another one to monitor is South Africa. Banks are actively looking into this space, but I understand that the requirements around regulatory capital and credit risk are yet to be clarified. Once the banks get more clarity around the regulatory regime, we would hopefully see more SRT activity in that jurisdiction.

Q: In the context of the climate transition and ESG goals, how significant a role can SRTs play for banks?
RP: SRT is certainly one of the ways in which banks can get closer to achieving their ESG goals (although we cannot really comment on how significant this is for banks internally). We have seen certain banks structuring transactions to proactively include an ESG element.

For example, in such transactions, either the underlying portfolio is green or the intention is for any regulatory capital savings to be invested by the bank into green loans. The coupon payable to the investor may also be linked to sustainable goals of the bank. So, for example, if the bank originates ‘x’ amount of green assets in its portfolio, the investor will agree to be paid ‘y’ coupon less.

Sustainability remains a priority in this changing world and we believe it will continue to be an important tool in the SRT market.

Vincent Nadeau

Structured Finance

Job swaps weekly: Allen & Overy lures five from Milbank

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Allen & Overy hiring five structured finance professionals from Milbank, including a new partner, ahead of its merger with Shearman & Sterling. Elsewhere, Howden CAP has appointed a new head of execution to its tax and contingent risks team, while Winston & Strawn has added a transactions partner to its New York structured finance practice.

John Goldfinch (pictured) has joined Allen & Overy as structured finance partner based in London, two months after leaving his role as partner at Milbank. The development follows news earlier this month that Emma Dwyer, formerly partner and head of derivatives and structured finance at A&O, had left the firm after 28 years (SCI 2 February).

The firm has also appointed four other structured-finance-focused Milbank professionals including Adrian Kwok and Peter West, who take on the roles of senior associate. Eleanor Cripps and Alexandra Wells have also followed Goldfinch to A&O.

Goldfinch left Milbank in December after 12 years with the firm. He has a particular focus on CLOs and related markets, and previously worked at Bedell Group before joining Weil Gotshal and Manges.

The multiple changes come ahead of A&O’s merger with Shearman & Sterling and the consolidated group’s subsequent rebranding as A&O Shearman. The merger received the approval of both firms’ boards in October 2023, when more than 99% of votes cast by each board were in favour of the move. The transaction is due to formally close in May.

Meanwhile, Gregor McMillan has joined Howden CAP’s tax and contingent risks team as head of execution, based in London. He brings significant securitisation, risk transfer and tax structuring experience to the team, having spent 25 years in investment banking at Barclays and Merrill Lynch, most recently as md, head of principal secured issuance and risk transfer, treasury at the former.

McMillan will advise the firm’s banking, asset management and large corporate clients on innovative, new-to-market tax and contingent risk insurance solutions designed to support investment, growth and capital optimisation opportunities, as well as leveraging his extensive capital markets experience and network to build out its funding solutions platform for insured contingent assets.

Winston & Strawn has added Michelle Abad to its structured finance practice as a New-York-based partner in its transactions department. Abad joins the firm from fintech platform Rocket Central, where she spent a little more than two years as senior counsel, including a one-and-a-half-year secondment. She previously spent seven years at Cadwalader, Wickersham & Taft.

Canyon Partners has appointed James Anderson as head of EMEA capital formation, based in the firm’s London office. Most recently, Anderson served as head of UK and EMEA sales and distribution at Barings, where he helped establish and was integral to the growth of the company’s European business for nearly 13 years. Canyon’s London-based investment team has deployed approximately US$20bn of capital over the last decade across corporate and structured credit-oriented strategies and the firm says it plans to hire additional team members in the region over the coming months.

Federated Hermes has strengthened its real estate debt team with the appointment of Paul Robinson as director, origination and structuring, based in London. In this newly created role, Robinson will report to Vincent Nobel, head of asset-based lending, and will be responsible for driving the origination of lending opportunities and the creation of customised loan structuring. He previously led the underwriting teams at Trimont Real Estate Advisors and Hudson Advisors.

Holland & Knight has strengthened its real estate capital markets group with the addition of partner Chris Ezell in Miami. Ezell focuses on business litigation involving creditors' rights, lender liability, commercial contracts and injunctive relief, including advising clients on compliance with CMBS pooling and servicing agreements. He was previously a partner with Jones Walker.

Alcentra has promoted Cameron McKenzie to executive director, based in London. He was previously a vp at the firm, which he joined as a structured credit analyst in August 2016.

And finally, Natixis CIB has promoted Damian Hammond to vice president, structured finance hedging, in its New York office. Hammond rejoined Natixis in 2022 after a brief stint at Credit Suisse and is promoted from associate.

Kenny Wastell, Corinne Smith

Structured Finance

Landmark DFC facility inked

Market updates and sector developments

Fintech provider StoneCo has obtained a landmark commitment of US$467.5m from the US International Development Finance Corporation (DFC) in the form of a revolving securitisation facility. The facility - which has a final maturity of seven years and a six-month availability period - finances the acquisition of up to US$14bn accounts receivables due by over 20 Brazilian financial institutions that are credit card issuers, on a non-recourse basis.

Involving SPVs in both Brazil and Luxembourg, the facility was established as a multi-compartment securitisation fund in the form of a fiduciary estate, governed by the Luxembourg Securitisation Law and sponsored by StoneCo. The transaction is the first of its kind for DFC in Latin America and represents a significant milestone in its mission to support private sector development and advance US foreign policy objectives in emerging markets.

The transaction strengthens Stone's ability to offer prepayment of receivables to micro, small and medium-sized businesses (MSMBs), which use the solution to optimise cashflow, financial flexibility and improve management. The focus of the facility is to support businesses that are women-led or have the majority of the workforce composed of women. The intention is that the resource will mainly impact entrepreneurs in the North and Northeast regions of Brazil.

With this deal, Stone is also pledging to become part of the 2X Global Challenge - not only because of the focus on supporting women-led businesses, but also because of the firm’s commitment to certain KPI reports in its workforce and leadership.    

In other news…

Analytics platform launched
ARC Risk Group has unveiled ARC Analytics, sister company to ARC Ratings and provider of complimentary access to analytical tools, data and insights across various asset classes. Interactive data dashboards - such as the Transaction Hub – are also available to market participants, with key details on numerous structured finance transactions.

Among the tools available on the ARC Analytics platform is a cashflow simulator, which performs comprehensive analysis - most commonly on structured finance transactions - to evaluate whether the cash generated by a portfolio of assets can satisfy the required interest and principal payments of the liabilities. Another tool is a portfolio risk calculator (PRC), which analyses the default risk of a portfolio of loans using a flexible mathematical framework. The PRC is commonly used for the asset side analysis of structured finance transactions.

Additionally, there are the banking risk and insurance risk tools, which respectively deliver detailed insight into a financial institution or an insurer’s credit profile by analysing financial statement data and qualitative factors.

Corinne Smith

CLOs

CLO 'stress indicator' launched

Market updates and sector developments

KopenTech has launched a multifactor measure designed to enhance the monitoring of secondary CLO market conditions. Called the K-Indicator, the tool combines five key factors: the did-not-trade (DNT) rate; colour rate; same-day BWIC rate; triple-A average traded price level; and triple-A average price talk deviation from colour (PTDC). Derived from analysing CLO BWIC volumes and granular CUSIP-level pricing data, these factors are standardised and combined to provide a weekly market stress indicator, offering a single measure that summarises market conditions.

The DNT rate measures market demand by comparing traded securities against those tagged as did-not-trade: a rise in DNT percentage typically signals increased market stress. The colour rate indicates market transparency, determined by comparing trades with and without provided price information. Reluctance to post prices during stress periods can lead to lower trading levels.

The same day BWIC rate reflects market stability: same day BWICs, which are often linked to forced selling, limit bidders’ analysis time. The triple-A average traded price level serves as a proxy for market strength: trading below par in the secondary market can indicate a cash-raising trend among market participants.

Finally, the triple-A average PTDC measures market liquidity: a larger difference between price talk and colour suggests heightened market stress and rapid market movement.

The K-Indicator employs a dynamic scale, categorising values into ‘poor’, ‘fair’, ‘good’ and ‘excellent’, based on their relation to the previous 20 weeks.

In other news…

Homogeneity rules amended
Delegated Regulation (EU) 2024/584 has been published in the Official Journal of the EU, amending Delegated Regulation (EU) 2019/1851 on the homogeneity of exposures underlying STS securitisations. The new delegated regulation includes two new features: it allows for the harmonised inclusion of the rules applicable to STS synthetic securitisations; and extends the rules relating to the category of loans to individuals to loans to companies, whose conditions for assessing credit risk are based on the same approach as those applicable to individuals  These provisions enter into force on 6 March, securitisations issued and notified before that date will continue to be able to use the STS label.

Angel Oak converts two funds to ETF
Angel Oak Capital Advisors, a structured credit focused investment manager, has converted two of its mutual funds to ETFs, it announced on February 20.

The Angel Oak Mortgage-Backed Securities ETF is an actively managed pure play resi mortgage fund and it is joined on Angel Oak's fledgling ETF platform by the Angel Oak High Yield Opportunities ETF, which tracks high yield corporate bonds and securitised credit assets. The ETF platform was unveiled in November 2022, and now comprises four funds with about US$350m in AUM.

Corinne Smith, Simon Boughey