News Analysis
ABS
Not dead yet
Hope remains for a 'vibrant' Indian NPL securitisation market
Developing a vibrant secondary market in loan sales remains possible in India, despite the failure of its ‘bad bank’ National Asset Reconstruction Company Ltd (NARCL) to gain traction. The country has large volumes of bad debt and government policy is committed towards cleaning up these distressed assets. Although gross NPL volumes stood at a multi-year low of 3.2% in December 2023, the Reserve Bank of India notes that a significant risk of macroeconomic exposure to asset quality remains.
Since its establishment in October 2021, NARCL has fallen short of its self-imposed INR50,000 crore origination target, having only acquired INR21,350 crore of outstanding debt. One of the main reasons for this lack of uptake appears to be that NARCL acquires NPLs through a mix of consideration – 15% of the consideration being paid in cash up-front and the remaining 85% being paid through the issuance of security receipts (SRs) backed by a government guarantee up to a cap. Of the INR21,350 crore nominal value of the outstanding loans, NARCL only paid INR4,215 crore, which represents a discount of 82% to the nominal value.
“If NARCL intends to buy bad debt and sell it on, then they need to think about how they’re going to do that and what the pricing needs to look like,” says Nathan Menon, partner at Reed Smith. “The way that they often structure these was for security receipts – which seems a little bit clunky for the market where good opportunities come and go so quickly. NARCL has led itself into a model where it hasn’t been nimble enough to exploit these opportunities when they come up, especially in such a time-sensitive market.”
The general reticence of Indian banks to sell on bad debt or enforce on debt means opportunities don’t come up as often in the jurisdiction as they do elsewhere. “You need a streamlined process in order to take advantage of these opportunities, and especially when you’re a new market entrant and people are unfamiliar with how you operate,” explains Menon.
The success of ‘bad banks’ like NAMA and UKAR in Europe, despite also encountering delays, is often attributed to their tight focus and clear mission statements – qualities which NARCL has been critiqued for not possessing thus far. “With some overhaul to the internal processes, there’s still a decent chance they could issue – but the rest of this year is very critical. “I think the problem with NARCL is that they got the idea for having a bad bank before they knew what the bad bank was going to do, which is why there’s a bit of a disconnect.”
Several options remain on the table for India’s NPLs, as Menon understands the emergence in the future of another organisation similar to NARCL to remain within the realm of possibility. “The other possibility is that one of the state-owned banks in India is designated to be a bad bank, like HSH was in Germany,” he adds.
Whether NARCL brings any new NPL issuance to the market or not, it could still serve to be an important lesson for future bad banks and other domestic or international players in the Indian securitisation market. “A potential upside to NARCL’s struggles is that it may have inadvertently created a more ready market for distressed debt situations and positions for those looking at India more strategically - like US distressed debt special situation funds,” Menon explains. “Asian, US or even European investors could look into the Indian market in a more active way because of this – which for the long term of India’s growth in this market is only a good thing.”
He adds: “India has all the hallmarks of a market where you can have a really vibrant loan sale, loan trading secondary market. [The country has] a relative number of conservative state-owned banks; they have a much wider ecosystem of next generation private banks or non-government owned banks.”
The entry of global heavyweights such as KKR, BlackRock and Goldman Sachs into the region also brings hope for future securitisation issuance in India – whether NPL-backed transactions or not. “There’s a lot of talk about India being the next big thing; it’s a massive market [and] it has massive potential. But while that’s all true, I think we need to dig a little deeper,” Menon suggests.
For the size of the economy, there isn’t the same volume of structured products as there is in smaller economies in Europe. Indian domestic banks have historically been sceptical about structured products, although that attitude seems to be dissipating, coupled with changes at regulatory and legislative levels.
Menon concludes: “There is also a significant pool of high net-worth individuals in the Indian diaspora in the US looking to invest. They’re an increasingly interesting investment group; they’re looking to invest back in India and elsewhere overseas. That diaspora community is redeveloping, having considerable power economically.”
Claudia Lewis
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News Analysis
Capital Relief Trades
Barrier to entry?
SRT allocation under scrutiny
The raft of funded and unfunded buyers seeking to enter the SRT market is driving intense bidding for allocations on deals. Indeed, demand is reportedly rising even for first loss tranches, in an attempt to secure paper.
“Banks will go out to a bunch of investors with a prospective SRT trade and have them do a lot of due diligence. At the end of this process, only one or - at best - a small handful are selected to proceed,” explains a source who works with a smaller investor.
He adds: “A lot of capital was allocated for SRT strategies once the Fed issued its guidance on CLNs last year [SCI 2 October 2023], which is bound to happen when you start spinning up investors and telling them this is a big opportunity. But if there isn’t enough supply, this then leaves a lot of unhappy would-be buyers with nothing.”
Although some SRT transactions can be sized at over US$1bn – like a corporate revolver deal, which the source says JPMorgan is currently out in the market with – only a few investors can complete them. “Smaller, less established investors have raised capital in the interests of buying SRT paper, but some have struggled to deploy it,” he notes.
One solution to this apparent barrier to entry is programmatic deals in which multiple investors can participate, such as Deutsche Bank’s CRAFT transactions. “The potential solution is to have a programme akin to a catered debt offering, where you preview the deal with a handful of investors, garner interest, get some anchors and then offer it out to a broader subset of people. That’s the way bank debt and syndicated debt are done; why shouldn’t that be similar here?” asks another source.
He admits this could be problematic for banks that may prefer to execute a bilateral transaction, given the deal’s complexity. “SRTs are not easy transactions to pull off – they have complexities in the mechanics, in the documentation and for the bank itself, as it needs dedicated infrastructure.”
Another source is less sympathetic, however. He observes: “Part of being an SRT market participant is that sometimes you’re involved in a trade and sometimes you’re not. There are some firms that are ultimately just better set up to operate in the market and do all the work they need to be successful on a deal. If you’re Blackstone or KKR, for example, you just sign the cheque.”
Meanwhile, unfunded deals can benefit from the participation of many counterparties. Indeed, a pair of former Canopius execs have launched a new firm that aims to facilitate (re)insurer access to the SRT market.
Launched with the backing of Beat Capital Partners, Convergence - led by Stephen Pike and Jeremy Hatchuel – is set to meet the growing and largely unaddressed need for portfolio solutions among banks and global financial institutions, specifically targeting the insurance of credit risk portfolios. With an initial focus on Europe and North America, the business is expected to underwrite through a Lloyd’s consortium, led by Beat Syndicate 4242.
Some sources suggest that there may be up to 70 active investors in the SRT market, while others believe the actual number to be smaller than that. Notably, Cheyne Capital re-entered the sector this month, having previously been active from 2004-2018. Following the launch of the latest vintage of its risk transfer strategy, the firm says it fully deployed the capital “immediately into multiple transactions”.
Sean Boland, head of corporate credit and risk transfer at Cheyne Capital, notes that the firm’s re-entry into the SRT market illustrates its conviction that it is a scalable, long-term asset class capable of producing attractive absolute and risk-adjusted returns for investors. "Our multi-decade and cycle-tested history in underwriting and managing credit risk, coupled with our partnership-driven approach, gives issuers and investors confidence in our stewardship and provides us with a substantial pipeline of investment opportunities,” he concludes.
Joe Quiruga
News
Structured Finance
SCI Start the Week - 15 April 2024
A review of SCI's latest content
Tomorrow SCI’s ESG Leaders’ Securitisation Summit in London
Last week's news and analysis
Balancing act
SRT Market Update
Collectibles offered
SFS debuts fine art programme
Job swaps weekly: A&O Shearman promotes two securitisation lawyers to partner
People moves and key promotions in securitisation
Latest SRTx fixings released
Tightening in the spread and volatility indexes
Mr Powell and the banks
B3E looks set to change, but how will it affect US SRT?
Real estate finance platform formed
Blue Owl acquires Prima and Obra launches ETFs
Skills gap?
Lack of specialist SRT talent on the market
Sustainable double
Polish STS SRT completed
Wake-up call?
NCSLT decision spurs documentation improvements
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’).
SRTx benchmark
SCI’s SRTx (Significant Risk Transfer Index), is a 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
30 May, 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
News
Capital Relief Trades
Moroccan debut
SOFAC launches first synthetic securitisation
Back in December 2023, SOFAC Structured Finance – a subsidiary of Moroccan consumer credit company SOFAC – and CIH Bank launched Morocco’s first synthetic Eurobond fund, following the approval of the local regulator (Autorité Marocaine du Marché des Capitaux (AMMC)). The ensuing transaction, FT SYNTHESIUM, references a portfolio of Eurobonds originated by CIH Bank and issued by the Kingdom of Morocco.
In terms of structure, three classes of bonds were issued with payment on the notes linked to financial guarantees issued by FT SYNTHESIUM and covering credit risk under the three series of Eurobonds.
Law firm CMS, acting through its French and Moroccan offices, advised arranger SOFAC Structured Finance on the operation. Regarding the transaction’s execution, Grégory Benteux, partner at CMS in France, highlights the AMMC’s extensive vision.
He notes: “Morocco is a very dynamic market; however, the regulator plays an extremely active role, including on wording and commentaries - in particular, for very innovative deals. This open but prudent approach means that deals can take a long time to close. Furthermore, for this particular transaction, we also had to wait for favourable market conditions.”
Looking ahead, Benteux expects the innovative nature of the transaction to boost local issuance. He concludes: “Generally, the Moroccan securitisation market is very dynamic, with a lot of expertise across the board. Given the success of this transaction, I would be very surprised if we do not see similar structures in the near future.”
Vincent Nadeau
Market Moves
Structured Finance
Job swaps weekly: ELFA names Rinaldi as CLO investor committee co-chair
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees the European Leveraged Finance Association (ELFA) appoint a TwentyFour Asset Management portfolio manager as co-chair of its CLO investor committee. Elsewhere, CBRE has named its new ceo of Germany, while Hometap has hired a new director of structured products.
Elena Rinaldi has taken over from Emeric Chenebaux as the new co-chair of ELFA’s CLO investor committee. Joining fellow co-chair, Denis Struc, TwentyFour AM’s Rinaldi brings her CLO expertise to ELFA to help continue its mission to increase ESG reporting and disclosures in the European CLO market.
Rinaldi joined TwentyFour in 2015 as an analyst, focusing on underwriting and modelling ABS, CMBS, RMBS and CLO transactions. She has progressed into a portfolio management role and is the ABS lead on the firm’s ESG committee.
Meanwhile, CBRE has promoted Kai Mende to ceo of its German advisory business, succeeding interim ceo of Germany Peter Schreppel. Schreppel will return to his role as CBRE’s head of international investment for Germany within its capital markets team, as previously planned.
Based in Berlin, Mende joined CBRE as md within its capital markets division in 2017, leaving his position as md at JLL after 20 years with the real estate advisory and investment firm. He took over the position as city leader in Berlin in 2019, a role he will continue to hold alongside his position as ceo.
Boston-based fintech, Hometap, has appointed a new director of structured products. Diane Wold joins the home equity lending specialist form Wells Fargo where she served as senior vp of its home lending capital markets team. Based in Minneapolis, she will report to Cara Newman, who joined Hometap in the newly established role of head of structured finance in July last year.
Wold will support the mission to build out its securitisation platform. She will coordinate Hometap’s business strategy, finance, data sciences, investment support and capital teams as the firm seeks to produce a sustained flow of MBS issuance.
Morrison Foerster has recruited a new partner, Rhys Bortington, to its global finance group and transactions department. Based in the firm’s office in New York, Bortington’s practice will focus on over-the-counter derivatives, structured derivatives and structured finance. Bortington joins Morrison Foerester from a nine-year tenure at White and Case where he most recently served as counsel, and has more than 15 years of derivatives and structured products expertise across the US, European and Australian markets.
Santander has appointed Enrique Rico as its new global head of trade and working capital solutions. Rico has been with Santander CIB since 2016, when he joined as vp of structured trade and asset mobilisation. Based in Madrid, Rico will report to the previous incumbent, Mencía Bobo, who was recently promoted to Santander CIB’s global head of global transaction banking.
Greystone has appointed PGIM Real Estate’s Alex Chang as senior md of structured products, primarily based in its New York office. Chang will report to Debby Jenkins, co-president of Greystone’s lending business platforms, and will focus on bridge lending and the expansion of the firm’s bank and alternative capital relationships. He leaves his role as executive director at PGIM after two years with the firm, having previously spent 13 years at Freddie Mac.
And finally, battery energy storage company Spearmint Energy has appointed two structured finance professionals as mds. Engie North America’s Rafia Merchant and Barclay’s Michael Gray have joined the company as md for capital markets and md for project finance respectively.
Merchant leaves her role as director for acquisitions, investments and financial advisory at Engie after two years with the firm and previously worked at New York Power Authority, Bank of China, BNP Paribas, Macquarie and JPMorgan. Meanwhile, Gray leaves his position as director for renewable energy investments at Barclays after 14 years with bank, having started his career at Deloitte.
The firm also appointed Jack Clark III as director of regulatory – ERCOT & SPP, and Omar Longou as director of commercial operations.
Claudia Lewis, Kenny Wastell
Market Moves
CLOs
Rithm anchors captive CLO platform
Market updates and sector developments
Sculptor Capital Management has launched Sculptor Loan Financing Partners, the firm’s captive CLO equity investment platform, anchored by a commitment from Rithm Capital Corp. Sculptor Loan Financing Partners will manage investments in the equity tranches of Sculptor-managed CLOs in the US and Europe, and expands the firm’s institutional credit strategies business, which oversees approximately US$15bn in assets under management.
The move comes with the closing of a US$406m US CLO, Sculptor CLO XXXII, the first US CLO transaction issued by Sculptor since partnering with Rithm (SCI 26 July 2023). A controlling equity stake in the transaction was preplaced with Rithm through the Sculptor Loan Financing Partners platform, with a diverse group of leading global institutions invested in the minority equity and rated notes.
“The new platform allows us to be nimble in accessing the CLO market when opportunities arise while continuing to scale Sculptor’s global CLO business across the US and Europe. This strategic investment demonstrates the value proposition that the combined Rithm-Sculptor franchise brings to investors,” comments Michael Nierenberg, chairman, ceo and president of Rithm Capital.
Sculptor CLO 32 is backed by a fully ramped portfolio of primarily senior secured loans and features a five-year reinvestment period and a two-year non-call period. Since the start of 2024, Sculptor has also refinanced three CLO transactions, achieving a more efficient cost of capital for existing investors.
Corinne Smith
Market Moves
RMBS
RFC on agency second mortgage product
Market updates and sector developments
The FHFA has issued a notice of a proposed new product from Freddie Mac to begin purchasing single-family closed-end second mortgages on properties for which it already holds the first mortgage. The proposal allows for the assets to be securitised into guaranteed non-deliverable MBS pools and for credit risk transfer opportunities to be evaluated in subsequent phases.
In the current mortgage interest rate environment, a closed-end second mortgage may provide a more affordable option to homeowners than obtaining a new cash-out refinance or leveraging other consumer debt products, in order to access the equity in their homes. A significant portion of borrowers have low interest rate first mortgages and the proposal would allow those homeowners to retain this beneficial interest rate on the first mortgage and avoid resetting to a higher rate through a cash-out refinance.
Freddie Mac therefore proposes to purchase certain closed-end second mortgage loans from primary market lenders that are approved to sell mortgage loans to Freddie Mac. Purchase parameters would seek to minimise credit risk to Freddie Mac while balancing with potential cost saving to existing homeowners.
Eligible collateral would be fixed-rate fully amortising loans up to a 20-year term on a borrower’s primary residence. The maximum total LTV ratio would be equal to or less than 80% (60% for manufactured homes). Loans would remain in the portfolio for approximately six to nine months until the creation of second mortgage non-TBA guaranteed securities and for systems implementation.
Freddie Mac believes the proposed new product may advance its charter act purposes by providing liquidity and stability in the secondary mortgage market. The agency also believes it could provide a foundation for more consistent liquidity in the secondary mortgage market because of its credit guarantee and experience securitising mortgage loans.
Financial institutions who choose to originate and/or buy closed-end second mortgages could securitise the loans or hold them on their balance sheet. Freddie Mac expects to be able to provide sellers with pricing that would enable them to offer rates competitive with current market rates for closed-end second mortgages.
The agency notes that while current MBS investors may experience slower prepayment speeds if borrowers decided against a cash-out refinance, the retention of the existing mortgage avoids a payoff transaction to the MBS, which could be beneficial to investors by enabling them to realise a more predictable and consistent rate of return.
Corinne Smith
structuredcreditinvestor.com
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