Contents

Capital Relief Trades

Tale of two markets

SRT Market Update

The outlook for the US SRT market currently appears to be mixed, with some banks reportedly waiting for the outcome of November’s presidential election before completing trades. Across the pond, meanwhile, Santander’s Portuguese subsidiary Totta is understood to be prepping a transaction for Q2.

Sources tell SCI that the Totta deal is likely to reference a granular portfolio of Portuguese SME loans and lending facilities. The trade is expected to be a “2024 version” of the one Totta carried out last year.

“This may be the only deal out of Portugal this year,” suggests one SRT investor. “I’m not getting the sense that there’s much need for Portuguese banks to release capital this year.”

He adds: “Portugal has quite generous capital ratios and the banks have been raising capital for years. They are in good shape, have shed a lot of their non-core assets and have been reasonably active users of SRT.”

Another investor says Portuguese deals this year will be dependent on “what banks have left over”, indicating that Portuguese banks may not have portfolios of sufficient size to securitise. He explains: “Part of the story with high rates is that loan origination has been slow, so banks don’t hold as much collateral as they would in a normal environment. For example, Montepio has issued SRT trades historically, but right now it doesn’t have a lot of unencumbered assets and will probably issue an AT1 instead.”  

Meanwhile, the flurry of SRT activity in the US appears to have slowed, with sources providing conflicting opinions on when issuance is likely to pick up again. One investor anticipates that mega deals, such as those recently carried out by JPMorgan, may return in Q2 and Q3. Some regional banks could also tap the market in the consumer and auto loan space in Q2. 

Another investor points to rumours that some banks are waiting for November’s election before pulling the trigger on transactions. There is concern over what a potential new Trump presidency could mean for the US SRT market, with the Basel 3 Endgame a striking example. One investor suggests that a Republican victory will be “the end of the endgame”, while another indicates that it will likely just be diluted.

Given such uncertainty, one source estimates that US SRT issuance volume is likely to reach around US$25bn-US$30bn this year, compared to around US$20bn-US$25bn last year.

Joe Quiruga

Structured Finance

Vintage matters

Adam Castle, partner and portfolio manager at Lord Abbett, answers SCI's questions

Q: When did Lord Abbett begin investing in securitised products? Was there a specific driver behind its decision to enter the market?
A: Lord Abbett has been a multi-sector fixed income investor since the 1970s and we started investing in securitised products in the early 1990s, so the firm has a long history of evaluating opportunities in a wide range of market sectors. Securitisation provides exposure to the household balance sheet - auto loans, student loans, credit cards and so on - and real estate, where there is a lot of value to be found. Securitised bonds provide greater returns for the equivalent rating than corporate bonds, so it pays to invest the time and resources to invest in the asset class. 

However, an actively managed approach is necessary to achieve yield. The difference between corporate bonds and securitised bonds is loss given default: going down in quality in a securitisation means surrendering a range of security rights. Ensuring that you’re being properly compensated for the risk therefore requires active surveillance and monitoring of performance, together with a strong trading team to allow you to exit a position and find liquidity should you need it.

Q: How does Lord Abbett differentiate itself from its peers?
A: One differentiator is our scale and resources: deep resources are needed to benefit from the opportunities in the securitisation market. We have a large team of 17 specialists in securitisation and invest across asset classes and the capital stack. We also leverage technology and proprietary tools, which provides us with a persistent edge when screening for opportunities.  

Q: Where are you seeing value in the securitisation market at present and why?
A: A key nuance at Lord Abbett is our view that vintage matters a great deal. For example, last year was a good vintage for consumer ABS because of the tight underwriting that emanated from the fear around households navigating inflationary pressures. The market expected a painful transition, but it didn’t materialise.

We expect 2024 to be a good vintage for commercial real estate because peak fear equals an opportune time to create risk in conservative structures and at low entry points in assets being discarded by sellers. The bid/ask is wide for CRE – people need to sell and others need to buy, in an illiquid environment, so the market has been whittled down to those that must transact – resulting in high quality loan origination at decent prices and with certain structural protections.

Q: Why are CLOs such an attractive proposition right now?
A: At Lord Abbett, we’re not fans of exogenous forces that we’re not in control of. CLOs have strong predictable cycles, which means we’re better able to deal with supply events and we don’t have to take undue risk in terms of entry and exit.

The predictability of CLOs stems from the fact that all participants in a transaction are economically-driven; in other words, CLOs hold assets and seek to finance assets, and all parties derive returns from the vehicle. It is a closed system: when one part of the system is squeezed, it pulls back until equilibrium is restored.

We’re involved at all levels of the capital stack, so we can see the entire relative value picture, which helps us pick our spots in the CLO market. Our CLO specialists also work closely with our leveraged loan teams to understand pricing and fundamentals in the underlying bank loans.

Student loan ABS is at the opposite end of the predictability spectrum because it is difficult to forecast cashflow on the bonds, as a change in administration can have a dramatic effect on prepayment profiles. Performance is largely driven by policy decisions; therefore, while there may be extra value to be had in the sector, the tail risk is also wider.

Q: Which attributes do you look for in a CLO manager?
A: We typically take into account a CLO manager’s alignment of interest, track record and resources. Triple-A rated CLO tranches are very liquid and while there is a degree of commoditisation at this level of the capital stack, we find that there are tiers of liquidity within the sector, as not all bonds are equal.

We bucket CLO liquidity into tiers, having identified numerous factors to predict how a CLO triple-A tranche will price. Top tier bonds are excellent - among the most liquid - but it is vital to have an actively managed approach to create value in this segment. Of course, CLOs themselves are actively managed vehicles, so they can change over time and migrate in tier.

There are a number of potential flags that we keep an eye on to try to minimise such a risk. At the triple-A level, these tend to be more manager-related, such as the loss of a portfolio manager or a challenging organisational change. At the BBB/BB level, loan management matters more.

Q: What is your outlook for the securitisation market this year?
A: Our outlook as a firm is that there are many reasons to suggest we’re currently in the late stage of the economic cycle. Expansion is slowing down and tight financial conditions persist, which can be causes for concern.

However, the resilience of the economy is very apparent and conducive to being overweight high-grade risk, while outyielding benchmarks and peers with assets we have high confidence in. Right now, we follow more of a middle-of-the-fairway approach than a barbell approach.

While 2022 was the year of panic, due to widespread fears of recession, 2023 was the year of relief and saw spreads compress and inflation subside. In 2024, it is becoming apparent that the panic may have been premature. There is a clear resiliency in the economy, so we see justification for maintaining exposures to numerous high-quality credit sectors.

Corinne Smith

Capital Relief Trades

Growth expectations

Alastair Pickett, co-portfolio manager of Chenavari's risk sharing strategy, answers SCI's questions

Q: As the team prepares to launch a new fund around its risk sharing strategy within the next few months, can you give us some background to SRT at Chenavari?
A: Our risk sharing business sits alongside and is complementary to our private credit investment strategy, through which we cover both portfolio acquisitions and warehouse financing extended to our non-bank lending partners. We are very active in consumer, mortgage and SME asset classes with our non-bank lenders, and this broad experience lends itself to how we view risk sharing across granular portfolios.

Focusing on the risk sharing market itself, we have been actively involved since 2011, and I believe that we are one of only a handful that can claim to have been a foundation investor in this market in its current form.

Q: And how does that influence your approach?
A: To illustrate this question with an example, we assisted one of the largest currently active bank issuers to establish their credit risk sharing programme in its current format, executing a bilateral transaction with them after working closely with them on multiple parts of the approval and structuring process. Our perspective and experience lends itself to working very closely with issuers like this, given the complexities a bank faces in setting up a programme, obtaining regulatory and internal approvals, and the systems that they need to establish for portfolio selection and replenishment.

Q: What does ‘risk-sharing’ mean to you?
A: What we’re primarily focused on is alignment of interest with the bank. We call these transactions risk sharing for the precise reason that we're aligned and sitting side-by-side with the bank.

We have seen various terminology being used for these types of transactions, including capital relief transactions, significant risk transfer, regulatory capital transactions. But for us, it's about building long-term relationships with, and being a reliable partner for, the bank.

Taking a broader view, risk sharing has become a very important tool since the GFC, to effectively help share risk around the financial system rather than having it concentrated on banks' balance sheets. Therefore, we feel that the growth of risk sharing is a beneficial development for the entire financial system.

Q: How significant are barriers to entry in this market?
A: Barriers to entry are still quite high in terms of the volume of work that investors need to do. These are very complex transactions and investors need to be aware of that.

I think there's a great deal of work required by investors on the underwriting process of these transactions. When we underwrite a transaction, what we're really underwriting is the bank's underwriting of the credits. Therefore, it is key to understand these processes in detail, and how you can compare across issuers.

We are also talking about banks which, in this context, are disclosing sensitive proprietary information and therefore have to carefully manage which investors have access to that.

Q: How do you source deals in this market?
A: We source deals in a variety of ways, the main route being direct conversations with the bank's portfolio management team, discussing where they see their pinch points from a capital perspective. That is really a two-way conversation: we want to see how we can help the banks to execute transactions in the asset classes where they feel they have the most pressure and help them shape their upcoming transaction needs.

Another trend to mention in the sourcing strategy is the increased presence and significance of advisors in this market. I think they’ve played a key role in furthering the development of the market in recent years and helping to connect banks and investors.

Q: How would you describe your relationship with issuers in the SRT space?
A: As alluded to in the previous question, it is fundamental to a successful long-term investment strategy to have a very good relationship with issuers. We certainly value a close and long-lasting relationship, so that we can get to understand how we can work together in a mutually beneficial way.

Issuers really value counterparties who are reliable execution partners. As a team, we can provide banks with early feedback on their transactions and make sure that we communicate clearly our preferences and red lines.

Furthermore, we closely follow the regulatory environment and intimately understand the parameters around the structuring of these transactions, which helps to have productive conversations around transactions with banks.

Q: Is the SRT market in your view still relatively under-invested?
A: I think we are going through quite a rapid transition right now from a niche market into a more mainstream market. Over the last 12 months or so, we have seen a tectonic shift with the broad restart of the US market and also Canadian issuers coming to the fore. Yet I wouldn't necessarily say that the market has been underinvested to date.

We believe it will take some time for supply and demand to rebalance through the course of 2024. However, we think that there will be sufficient supply being generated both from new and existing issuers over the coming years, making risk sharing an attractive asset class to invest in for the foreseeable future.

Q: Do you have specific preferences regarding asset classes or jurisdictions?
A: Chenavari’s DNA is rooted in European credit, which remains our core focus, but we do invest in global large corporate portfolios as well, and these make up a significant part of our invested book. However, with granular portfolios, we generally restrict to European jurisdictions, both core and periphery, although we haven’t been involved yet in the growth witnessed recently in Eastern European jurisdictions.

Looking at asset classes, we invest across both large corporate and granular asset classes, including SME, consumer credit and trade finance. We feel we can really add differential value from what we see in the private credit space across these asset classes. We tend to avoid lumpy and/or long-dated portfolios, and therefore we tend not to be competitive on the more CRE or infrastructure focused deals.

Q: Do you typically prefer blind or disclosed pools and why?
A: We invest across both blind and disclosed pools, which is not so surprising, given our broad asset class coverage. Just over half of our current portfolio mix is made up of blind granular pools.

What is important to us when looking at a non-disclosed pool is that the pool is sufficiently granular and avoids concentrations, so that we can complete an adequate statistical analysis. Through that process, we're essentially simulating the potential outcomes of a transaction, given careful analysis of through-the-cycle historical data and applying macro stressors to that analysis.

In the large corporate space, portfolios are typically less granular. Therefore, we're able to look through and undertake a specific name analysis. Naturally, it is a very different type of analysis and a very different type of investment.

One thing we pay close attention to with disclosed pools is whether we are building up excess concentration to a single name within our overall fund. There are a number of underlying syndicated loan names that can appear across multiple transactions and we need to be very careful that we maintain diversification across our fund exposures.

Q: What does your underwriting approach involve?
A: As mentioned previously, we are really focusing on the bank's underwriting methodologies. We've seen a lot over the past decade, and so can effectively benchmark the quality of the bank's underwriting.

There can be quite a bit of variation in the approach of banks to underwriting and, in particular, the monitoring of their portfolios. For example, in the SME space, we will look at the bank's underlying relationship with those SME borrowers: how much overall business does the SME do with the bank? Has that relationship been long-lasting enough for the bank to form an adequately robust credit opinion on the SME and finally, does the bank utilise the data it has to the fullest extent?

Another thing that we pay close attention to are the bank’s internal ratings. We are trying to make an overall assessment of the quality and stability of those ratings, analysing how they evolve through time. This allows us to form predictors of credit events in a transaction. We are also looking at what the bank does on a downgrade; for instance, what approach the bank might take to avoid that credit ultimately transitioning into a default state.

Q: Regarding the market this year, what specific trends have you identified?
A: We’ve obviously seen the rise of transactions from the US, triggered by the larger banks with significant volumes, particularly in the large corporate space. Going into 2024, we expect slightly more interesting portfolios to come out of those banks. We should also start to see development of the market in the US, as has happened across Europe, where smaller first-time issuers and more regional banks are coming to the fore.

Thinking about transactions in Europe, we are seeing banks take steps to address counterparty risk. Counterparty risk has been an important topic for us since last year’s mini-banking crisis and, as an investor, we're really looking at sharing risk with the bank on their underlying portfolio, rather than taking on that bank’s counterparty risk.

Counterparty risk in the cash securitisation market is quite comprehensively considered and, as the synthetic market evolves, it should be addressed further there as well, particularly across non-systemically important issuing entities. By that I mean being more strict on collateral segregation and potentially setting up backup bank account arrangements for the collateral account on day one.

Finally, regulation will continue to drive issuance. Regulation continues to ramp up, both in terms of complexity and in terms of capital requirements for banks.

Although banks across Europe are currently well capitalised with respect to Basel 3 rules, banks’ ambitious growth plans will quickly induce incremental pressures on capital. We expect regulatory pressures and developments to be an increasingly relevant theme over the next three to five years, at least.

Q: Do you plan to increase your allocation to the sector going forward?
A: In short, yes. To date, we have viewed risk sharing as very much a part of a broader and more diversified private credit strategy. While we still intend to offer our LPs that broad opportunity set, we think the opportunity in risk sharing is now attractive enough to consider launching a single strategy product.

We feel that in terms of risk/reward in this product, this is an ideal time to enter the market. It’s an exciting time to enter the market too because we believe there are going to be real step-changes in terms of growth.

Vincent Nadeau

Structured Finance

Relaunched CMU prioritises securitisation

Market updates and sector developments

The ECB Governing Council has agreed a new roadmap for advancing the Capital Markets Union (CMU), with the aim of making full use of Europe’s capital markets to mobilise the private investment necessary to fund the green and digital transitions, and to enhance the EU’s productivity and competitiveness in a shifting geopolitical landscape. The statement places the growth of the securitisation market at the centre of its recommendations. In particular, the agreement highlights the need to increase private risk-sharing across the euro area.

“It is clear that the EU needs to move beyond broad statements and a piecemeal approach on CMU to a top-down approach, including concrete actions to foster capital market integration and development at the European level. True political will, ambition and follow-up will be critical,” the ECB statement says.

A specific priority is ensuring that the EU securitisation market can play a role in transferring risks away from banks to enable them to provide more financing to the real economy, while creating opportunities for capital markets investors. The statement says that this requires understanding the supply and demand factors relevant for the development of the securitisation market, including reviewing the prudential treatment of securitisation for banks and insurance companies, as well as reporting and due diligence requirements. It also suggests exploring whether public guarantees and further standardisation through pan-EU issuances could support targeted segments of securitisation, such as green securitisations to support the climate transition.

“While many of these initiatives will take time and the Capital Markets Union remains a long-term project, urgent and decisive action is now needed to make real progress in the integration and development of EU capital markets. There are no more low-hanging fruits to pick in this area and the EU must now address the most important and structural challenges,” the statement adds.

In other news…

Large changes in Nationwide, Virgin Money funding mix ‘unlikely’
Nationwide last week agreed to buy Virgin Money UK (Clydesdale Bank) in a £2.9bn deal, which would create the second-largest savings and mortgage provider in the UK. Both lenders have long-running prime RMBS programmes in place: respectively Silverstone (formed in 2008) and Lanark (2007). However, the integration of Virgin Money by Nationwide is expected to be a gradual multi-year process, with Virgin Money continuing to operate as a separate legal entity within the Nationwide group in the medium term – implying that the two programmes may continue to issue for some time still.

“Down the line, moving to just one RMBS programme wouldn’t matter for total RMBS issuance when all else is equal, but the combined entity may have either more or less wholesale funding needs, part of which comes from RMBS. That could then impact overall RMBS issuance,” observe Rabobank credit strategists.

They add: “However, on the face of it, both Nationwide and Virgin Money UK have very similar balance sheets in terms of the distribution between wholesale funding versus deposits as a share of total liabilities (excluding capital and reserves), namely around 76%-77%. This preliminary analysis thus suggests large changes in terms of funding mix as a result of the acquisition are unlikely.”

STS sustainability factors RTS published
The European Commission last week adopted a delegated regulation supplementing the EU Securitisation Regulation with regulatory technical standards (RTS) specifying the content, methodologies and presentation of disclosures relating to the principal adverse impacts (PAI) of assets funded by underlying exposures on sustainability factors. The RTS relate to STS non-ABCP traditional securitisation and for STS on-balance sheet securitisation.

Articles 22(4) and 26d(4) of the Securitisation Regulation provide originators of STS securitisations with the option to voluntarily disclose available information related to the PAI on sustainability factors of the assets financed by residential loans, auto loans or leases. Should originators choose to disclose, it derogates them from the requirement to disclose the available information related to the environmental performance of the assets financed by residential loans, auto loans or leases, according to Norton Rose Fulbright.

Meanwhile, Articles 22(6) and 26d(6) of the Securitisation Regulation empower the Commission to adopt a delegated act specifying the content, methodologies and presentation of this voluntary disclosure. The purpose of this delegated act is to ensure as much consistency as possible with Commission Delegated Regulation (EU) 2022/1288, developed in compliance with the mandate given to the European Supervisory Authorities in the SFDR, which is not directly applicable to securitisations.

The Commission Delegated Regulation remains under review by the European Parliament and the Council for three months, before being published in the Official Journal of the EU. It will then enter into force on the twentieth day following its publication.

Corinne Smith

Structured Finance

CLO strategic partnership inked

Market updates and sector developments

Global alternative asset manager Sagard has begun laying the groundwork to expand its presence in the US CLO market through a new strategic partnership with US CLO manager HalseyPoint. As part of this partnership, Sagard will acquire a 40% stake in the HalseyPoint CLO platform, which will now go by new co-branded platform name Sagard|HalseyPoint.

Upon completion of the transaction, HalseyPoint co-founders and managing partners will hold equal equity ownership stakes alongside Sagard. The remaining minority stake will continue to be held by A-CAP.

Having raised a total of US$3.2bn across seven CLOs since its launch in 2019, the new partnership hopes to turn the HalseyPoint platform into a leading CLO manager and leverage each firm’s expertise to provide Sagard’s investors with broader and more diverse exposures to corporate credit opportunities.

In other news…

Obra launches real estate platform
Obra Capital has hired Pangea Mortgage Capital’s (PMC) real estate origination and servicing team and launched Obra Real Estate. PMC was founded in 2017 as a wholly owned subsidiary of Pangea Properties, a large private REIT.

The team brings with it deep operational and underwriting expertise that will support Obra Real Estate’s investment strategy for insurance and institutional accounts. Over the last seven years, the team has collectively originated in excess of US$780m in commercial real estate loans across over 100 transactions.

Obra Real Estate will be led by Scott Larson, who joins as md, reporting to Blair Wallace, president and ceo of Obra. Larson brings extensive industry experience and most recently spent 13 years at Pangea Properties, where he launched its institutional lending platform.

Michael Bachenheimer also joins as md and will be responsible for deal origination. Bachenheimer spent the last five years at PMC in deal origination and has a 25-year tenure in the real estate industry, including experience as lender, real estate consultant, appraiser and asset manager.

Claudia Lewis, Corinne Smith

Structured Finance

Job swaps weekly: Newmark launches Paris office with raft of senior hires

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Newmark Group appointing two commercial real estate veterans from JLL and CBRE to head up its new Paris office. Elsewhere, Obra Capital has hired an entire team from Pangea Mortgage Capital as part of its launch of Obra Real Estate, while Barclays has named a new head of principal funding and securitisation.

Commercial real estate services provider Newmark Group has made a number of hires to support the launch of its Paris office. The new office, which will initially focus on capital markets and leasing, will be led by JLL veteran Francios Blin and CBRE veteran Emmanuel Frénot, who join as chief business officer and deputy chief business officer respectively. 

Blin leaves his position as director of the Paris team within JLL France’s investment department after 22 years with the firm. Frénot has stepped down as executive director for capital markets at CBRE after 19 and a half years with the business. The pair will work alongside Newmark’s president for France Alexandre Gotti.

Jérôme De Laboulaye has also joined from CBRE and takes up the role of md in Newmark’s Paris-based capital markets team.

Meanwhile, alternative asset manager Obra Capital has launched Obra Real Estate and hired the entire real estate origination and servicing team of Pangea Mortgage Capital (PMC), led by md Scott Larson. Larson, who is based in Chicago and will report to Obra president and ceo Blair Wallace, leaves his role as managing principal at PMC after seven and a half years with the business. He previously spent five years at Pangea Equity Partners.

Michael Bachenheimer – based in Tustin, California – is also among those to have joined Obra Capital. He takes up the role of md overseeing deal origination, leaving his position as principal after five years at PMC. Bachenheimer previously worked at Bedrock Capital Associates, Realty Finance Trust and Latitude Management Real Estate Investors.

Obra Real Estate’s strategy will invest in the lower-middle market CRE private debt segment on behalf of insurance and institutional clients.

Barclays has named Alex Maddox as head of principal funding and securitisation, based in London. He was previously capital markets and digital director at Kensington Mortgages, which Barclays acquired in March 2023. Maddox began his structured finance career in 1992, rising to become md and head of European mortgage trading at Deutsche Bank before joining the Kensington Group in June 2015.

Holland & Knight has rehired Sam Young as partner in its real estate capital markets group, working out of Richmond, Virginia. Young leaves his position as development counsel at Anchor Health Properties, having joined the firm from Holland & Knight (then known as Thompson & Knight) in mid-2021. He is a transactional lawyer who advises on commercial real estate and structured finance transactions. Young previously spent two years at Holland Knight, in addition to spells at Keating Muething & Klekamp and Bass, Berry & Sims.

Law firm Campbells has hired Mourant’s Paul Trewartha as a banking and structured finance partner in its Hong Kong office. Trewartha focuses on debt finance, structured finance and debt capital market transactions, with expertise including advising issuers, subscribers and arrangers on standalone and multi-issuance repackaging note programmes and securitisation vehicles. He leaves his role as partner at Mourant after almost 10 years with the firm, having previously had spells at Morgan Stanley, Clayton Utz and Piper Alderman.

Energy-focused structured finance attorney and Katten Muchin Rosenman partner Don J Macbean has joined Willkie Farr & Gallagher as a partner based in its New York office. Macbean leaves Katten after 10 years with the firm, having previously spent seven years at Linklaters. Willkie has been actively building out its energy team since the start of 2023, having added eight partners across its New York and Los Angeles offices in that time. 

And finally, AS Birch Grove has appointed Todd Duker as md, focusing on managing and developing CLO investor relationships, marketing structured fund products and the structuring and execution of CLOs. Duker brings 18 years of experience in structured products and CLOs, most recently serving as a senior member of the CLO team at Goldman Sachs, where he focused on CLO structuring and origination. Before that, he worked at Guggenheim Securities, where he focused on structured products distribution, and Presidential Bank, where he focused on investments within the CLO asset class.

Kenny Wastell, Corinne Smith