Contents

Structured Finance

SCI Start the Week - 18 March 2024

A review of SCI's latest content

Last week's news and analysis
CLO strategic partnership inked
Sagard partners with HalseyPoint, while Obra launches RE platform
Constructive engagement
What it takes to close a debut SRT trade
Growth expectations
Alastair Pickett, co-portfolio manager of Chenavari's risk sharing strategy, answers SCI's questions
Relaunched CMU prioritises securitisation
New roadmap plus updates on Nationwide’s acquisition & sustainability RTS adoption
Job swaps weekly: Newmark launches Paris office with raft of senior hires
People moves and key promotions in securitisation
Tale of two markets
SRT Market Update
Vintage matters
Adam Castle, partner and portfolio manager at Lord Abbett, answers SCI's questions
Plus
Deal-focused updates from our ABS Markets and CLO Markets services

SCI In Conversation podcast
The latest episode is a special for International Women's Day in which SCI deputy editor Kenny Wastell speaks to Ruhi Patil, a counsel in Dentons' London office, about gender diversity and inclusion in the structured finance industry.
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
ESG Leaders’ Securitisation Summit
16 April 2024, London

2nd Annual Esoteric ABS Seminar
13 June, New York

Emerging Europe SRT Seminar
18 June 2024, Warsaw

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

Regional clamour

Fed approves Truist, Huntington in the market as regionals seek SRT balm

The Federal Reserve this afternoon (March 22) published approval on its website for Truist Bank to have an upcoming CLN, and “certain substantially identical CLN transactions, treated as synthetic securitizations under Regulation Q.”

The trade is a securitization of auto-linked loan, designated Truist Bank Auto Credit Linked Notes, Series 2024-1. It represents Truist’s debut in the regulatory capital relief trade market.

The letter is dated March 12, in response to a submission dated February 1, and is addressed to Mayer Brown, which is acting on behalf of Truist. Mayer Brown has a highly regarded and experienced practice in this market, and has acted for US Bank and Huntington National Bank in a similar manner in the last few months.

Based in Charlotte, North Carolina, Truist is the sixth biggest bank in the USA with around US$550bn in assets. It was created through the 2019 merger of BB&T and SunTrust, and has a presence in 17 states.

In further evidence of the growing importance of the SRT market to US banks, Moody’s has granted provisional ratings to another auto-linked CLN, this time from Huntington Bank.

The US$330m deal, dubbed Bayview Opportunity Master Fund VII 2024-CAR1, consists of six classes of notes rated from Aaa to B3. According to Moody’s the transaction is unique inasmuch that “the source of principal payments for the notes will be a cash collateral account held by a third party with a rating of at least A2 or P-1.”

This is Huntington Bank’s second foray into the CLN-based capital relief trade market. Its inaugural deal was waved through by the Fed in December, and consequently it is not obliged to see separate and specific approval for this latest trade. 

The earlier transaction was also a synthetic securitization of auto loans.

Huntington is an US$187bn bank based in Ohio and is the 27^th largest in the US – showing how deep into the US banking franchise league tablde the SRT mechanism has reached.

Under the new Fed capital rules released last July, banks with US$100bn in assets are now subject to the most exacting requirements. The threshold was hitherto USS250bn.

Simon Boughey

Structured Finance

Motor finance review sparks RWA optimisation

Market updates and sector developments

Close Brothers has unveiled plans to strengthen its capital position by optimising RWAs, including by reducing RWA growth by approximately £1bn through a combination of selective loan book growth, partnerships and significant risk transfer of assets related to its Motor Finance business through securitisations. The move comes amid the UK FCA’s review of the motor finance industry (SCI 6 February), of which the firm says it is preparing for “a range of outcomes”.

In its latest half-year results statement, Close Brothers says: “There is significant uncertainty about the outcome of the FCA’s review at this early stage, and the timing, scope and quantum of any potential financial impact on the group cannot be reliably estimated at present. [Nevertheless,] the board considers it prudent for the group to further strengthen its capital position.”

The firm says it continues to evaluate a range of other actions, including potential risk transfer of other portfolios through securitisation and other “tactical actions” that could enhance available CET1 capital by an estimated £100m. Combined with the decision not to pay any dividends in the current financial year, these measures could strengthen the group’s available CET1 capital by approximately £400m by the end of the 2025 financial year.

Away from motor finance, the firm lends across the asset finance, specialty finance and premium finance segments.

In other news…

Enpal secures ABS warehousing facilities
Enpal has partnered with Bank of America, Barclays, Canada Pension Plan Investment Board (CPP Investments) and Credit Agricole CIB to accelerate the rollout of its integrated financing product for residential solar and heat pump customers. Under the agreement, Enpal has secured total senior refinancing commitments of more than €1bn from the three banks in two separate ABS warehousing facilities, as well as total mezzanine debt commitments of €118m from CPP Investments. These off-balance sheet facilities will provide more than 35,000 German residential customers with an integrated financing solution for new photovoltaic (PV) systems and other renewable energy products.  

Enpal's last sizeable debt fundraise of more than €400m from DWS, Phoenix Group, ING and Black Rock took place in June 2023. The company's total structured refinancing commitments currently amount to more than €3.6bn.

Strategic capital partnership formed
Redwood Trust and Canada Pension Plan Investment Board (CPP Investments) - through subsidiaries of CPPIB Credit Investments - have formed a US$750m strategic capital partnership. The partnership consists of a newly formed US$500m Asset Joint Venture and a US$250m corporate secured financing facility that CPP Investments is providing to Redwood.

The JV will initially invest across the broad suite of Redwood’s residential investor bridge and term loans, targeting more than US$4bn in total acquisitions. Redwood and its subsidiaries will administer the assets on behalf of the JV.

Together, CPP Investments and Redwood will contribute up to US$500m of equity to the JV, with an anticipated split of 80% from CPP Investments and 20% from Redwood. Redwood will earn ongoing fees to oversee the administration of the JV and is entitled to earn additional performance fees upon realisation of specified return hurdles.

Meanwhile, the secured corporate financing will have a total capacity of up to US$250m and carry a two-year term, with a one-year extension option. The facility is structured with revolving capacity to support the continued growth and scale of Redwood’s mortgage banking platforms.

To further promote long-term strategic alignment, CPP Investments will also receive warrants to acquire Redwood common stock in an initial amount of approximately US$15m, with the option to acquire up to an additional US$36m if certain joint venture deployment targets are achieved.

Corinne Smith

Structured Finance

Job swaps weekly: ARMOUR reveals successors to Gruber

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees ARMOUR Residential REIT announce successors to outgoing cio Mark Gruber. Elsewhere, Palliser Capital has hired a securitisation veteran as chair of its US division, while Simmons & Simmons has appointed a new London-based partner in its financial markets practice.

ARMOUR Residential REIT has promoted Sergey Losyev and Desmond Macauley to co-cios, succeeding Mark Gruber, who has stepped down. Macauley will also serve as ARMOUR’s head of risk management.

Losyev joined ARMOUR in 2016 and has served as deputy cio since January 2020. Prior to ARMOUR, he served as an agency MBS portfolio analyst at Deutsche Asset Management, co-managing more than US$25bn of agency MBS assets from 2009 to 2016.

Macauley has served as the director of investment strategies at ARMOUR since May 2013. He has 25 years of experience in the MBS market and prior to ARMOUR, was an md in the MBS Strategy group of RBS Greenwich Capital and a vp in the MBS research group at Merrill Lynch.

Separately, ARMOUR Capital Management (ARMOUR’s external manager) has promoted Shane Rand to senior portfolio manager and head of trading, and Michael Schweizer to portfolio manager.

Meanwhile, Global multi-strategy investment firm Palliser Capital has appointed former Elliott Management Equity partner Steve Kasoff as chair of its US division. Kasoff oversaw global investments spanning structured credit, real estate, ABS and CDOs at Elliot, and left his position as partner and senior portfolio in 2020 after 17 years with the firm.

Kasoff’s appointment is part of Palliser’s strategy to expand into a “broader set of markets and strategies globally”, the firm said in a statement. He will work alongside chief investment officer James Smith in carrying out an evaluation of the firm’s portfolio.

Prior to Elliot, Kasoff had spells working at Lehman Brothers, Merrill Lynch and Deutsche Bank.

Simmons & Simmons has hired Jones Day’s corporate trust and structured finance specialist Hannah Ward as partner in its financial markets practice, based in London. Ward has a history of advising corporate trust and agency clients on multi-jurisdictional finance transactions, in addition to related restructurings, defaults, litigation and special situations.

Monroe Capital is opening a Middle East office in Dubai and has hired former Commerzbank md Waleed Noor to lead the firm’s presence in the region. Noor will take on the role of md and head of Middle East distribution. He left his position as md for structured solutions sales in the Middle East and Africa at Commerzbank in 2022 after nine years with the bank. Noor previously worked at Crédit Agricole CIB and Goldman Sachs.

Newmark has promoted Nick DiPaolo to executive vp and regional md for the southwest, overseeing the southern California, Arizona, and Nevada markets. Based in Los Angeles, DiPaolo joined Newmark in 2021, is promoted from executive vp and market leader for the Los Angeles region, and has been responsible for building out the firm’s capital markets, office leasing, industrial, life sciences, and debt and structured finance teams. He previously worked at Cushman & Wakefield, CBRE and the San Diego Regional Economic Development Corporation.

Axis Capital has promoted Kyle Freeman to head of its insurance-linked securities (ILS) division, working out of its Boston office. Freeman joined the firm from AXA XL in 2021 and is promoted from head of ILS structuring, property. He formerly spent seven years as a nuclear engineer and submarine officer in the US Navy, which was followed by almost 10 years working as an actuary at military-focused financial services organisation USAA. He then worked at AIR Worldwide and JP Morgan, before joining AXA.

And finally, the Mortgage Bankers Association has appointed Madisyn Rhone, currently a member of the board of directors on the Structured Finance Association's Structured Finance Coalition, as vice president of legislative affairs. Rhone leaves her role as director of government & industry relations at Enact Mortgage Insurance after five and a half years with the business.

Notice board
BMO Capital Markets is recruiting for a director, risk and capital solutions, within its Toronto-based capital markets sales and service group. The firm is seeking a candidate to assist in the sourcing, structuring and portfolio management of a variety of risk management and credit portfolio management tools, in line with its risk and capital solutions mandate and capital markets strategy.

Among the skills necessary for the job is fluency with bank capital rules and capital relief techniques. Additional knowledge of insurance capital rules is also beneficial.

Candidates must have 8-10 years of relevant experience at a financial institution in capital markets, with emphasis on investment and corporate banking, trading products, private credit, structured credit, regulatory capital, funding management or credit portfolio management.

The application deadline is 17 April. For more information on the position, click here.

To submit your securitisation-related job posting for publication in SCI’s Job Swaps round-up, e-mail editorial@structuredcreditinvestor.com.

Corinne Smith, Kenny Wastell

Structured Finance

NCSLT found to be 'covered persons'

Market updates and sector developments

In a case involving the CFPB and the National Collegiate Master Student Loan Trust (NCSLT), the Third Circuit has found that statutory trusts used to handle securitisations are considered ‘covered persons’ for purposes of the Consumer Financial Protection Act (CFPA) and thus are subject to CFPB jurisdiction. According to a recent Cadwalader memo, this effectively means that the trusts would be treated like any other lender or servicer, accountable to the CFPB.

NCSLT has been fighting the CFPB on jurisdictional grounds for several years and the parties came close to settling in 2017, but the US District Court for the District of Delaware refused to accept the proposed consent judgment due to pending concerns regarding the constitutionality of the CFPB (SCI 9 June 2020).

Due to two Supreme Court decisions involving the constitutional issues that have plagued the CFPB (including Seila Law and Collins) (4 November 2022), in this decision, the Third Circuit found that even if the CFPB Director’s position was unconstitutional because the Director could not be removed at will by the President, that unconstitutionality did not cause actions taken by the CFPB Director to be void, because the CFPB Director’s appointment had proceeded constitutionally. The other jurisdictional ground that NCSLT challenged the CFPB on was whether the statutory trusts were ‘engaged’ in consumer financial services under the CFPA.

“The purpose of these statutory trusts is to facilitate the transfer of ownership of the loans into securitisation pools. Accordingly, these trusts have no employees and are necessarily engaged in an extremely limited set of activities, all of which occur as a result of automatic processes established by the agreements used to set up a securitisation of loans, and which activities are overseen by a party that does have employees, often called the ‘administrator’,” Cadwalader notes.

The Third Circuit ignored this automatic process aspect of the statutory trusts, commenting in a footnote that “[w]hile the Trusts purport that the Administrator is separate from the Trusts” and is “not subject to the supervision of the [Trusts] or the Owner Trustee”, the Court does not need to “. . . address th[e Administrator’s role]. It is a bridge too far. All we need to determine is whether the Trusts engaged in such agreements.” 

With that viewpoint in mind, the Court found that based upon legislative history, plain language and the language of the administration agreements used in the transactions, the statutory trusts are considered ‘covered persons’ under the CFPA. Covered persons under the CFPA are not only subject to CFPB jurisdiction, but also have primary responsibility for full compliance with consumer financial services laws and regulations.

Due to the proposed consent order between the parties that was made publicly available in 2017, Cadwalader says it has a good idea as to what the CFPB will do with this new-found jurisdiction. “Practically speaking, this means, at a minimum, that going forward statutory trusts used in consumer asset securitisations should themselves have proper policies and procedures in place [for] interpreting consumer financial services laws relating to servicing loans and collecting debts. In addition, to the extent existing securitisation trusts have significant collection lawsuits being filed on their behalf by their servicers, such trusts would be well-advised to direct their servicers to cease filing new collections lawsuits and begin a ‘look-back’ review over those collection lawsuits to ensure that none of the flaws the CFPB noted in the NCSLT case exist, starting with the cases that are pending and then proceeding into lawsuits that have already been concluded,” the firm recommends.

In other words, the decision could effectively completely undermine the non-operating nature of the trusts used in consumer asset securitisations. “Taken to its logical end, this means that trusts could need direct management, operations (perhaps including risk and compliance) and capital to manage the assets and business,” Cadwalader concludes.

In other news…

Crédit Mutuel cited for breaching RWA requirements
The ECB has imposed two administrative penalties totalling €3.54m on Confédération Nationale du Crédit Mutuel after the bank breached requirements set out in two ECB decisions on internal models. Between May 2021 and April 2022, when using its internal models to determine its RWAs, the bank did not apply floors set by the ECB for calculating credit risk for certain exposures. According to the ECB, the bank omitted to take obvious actions to avoid the breaches, preventing the ECB from having a comprehensive view of the bank’s risk profile.

The ECB had set these floors to compensate for the underestimation of RWAs resulting from deficiencies in the bank’s internal models that it needed to fix. Underestimating RWAs means the bank reported a higher CET1 ratio than it should have done.

However, in April 2022, the ECB granted Crédit Mutuel permission to revert to a less sophisticated approach (the foundation IRB approach) for calculating credit risk for these exact exposures. As a result, at present the bank no longer uses those internal models for the exposures and is therefore no longer required to implement these floors.

The ECB classified one of the breaches as moderately severe and the other as minor. The bank may challenge the ECB’s decision before the EU Court of Justice.

Non-neutrality in the balance?
The UK PRA is understood to be considering options to recalibrate the non-neutrality factor (the p-factor) in the SEC-SA framework (SCI 1 February). The move is in response to industry feedback to its discussion paper (DP) on draft rules to replace firm-facing requirements regarding securitisation under the CRR in 2H24 (SCI 1 November 2023), which made it clear that there are significant concerns about the impact of the Basel 3 output floor.

Additionally, while the CRR permits the use of unfunded credit risk mitigation (CRM) in SRT transactions, industry feedback suggested that there is a perception among many firms that the PRA won’t grant SRT in cases where unfunded protection is utilised. As such, the authority is also reportedly seeking to overcome this misperception by clarifying what is acceptable when it comes to effectively mitigating prudential risks, based on information received from the DP and CRM practices in other jurisdictions.

Finally, while respondents expressed some interest in a UK STS synthetics regime, the PRA is believed to have concerns about the benefits of such a regime and whether the associated reduced capital requirements are justified. This is a topic that may be revisited after the securitisation regulations are transferred to the PRA Rulebook.

Scope fined for conflict of interest failures
ESMA has fined Scope Ratings a total of €2.198m for breaches of the Credit Rating Agencies (CRA) Regulation. The authority found that Scope fell short of the CRA Regulation’s requirements on handling conflicts of interest, resulting from structural failures and specific breaches of the conflict of interest obligations in the CRA Regulation.

The five breaches covered by the fine specifically relate to: structural shortcomings in Scope’s policies and procedures, internal control mechanisms and organisational and administrative arrangements; two further specific breaches related to Scope’s failure linked to a potential conflict of interest regarding one particular individual; and to disclose in the final rating report the provision of ancillary services to a rated entity. All breaches were found to have resulted from negligence on the part of Scope. In calculating the fine, ESMA considered both aggravating and mitigating factors provided for in the CRA Regulation.

Corinne Smith