News Analysis
Capital Relief Trades
Efficient frontier
Optimising returns in a post-Basel 4 landscape
With the implementation of Basel 4 (also known as Basel 3.1 or Basel 3 Endgame) looming ever closer[1], banks are yet again facing a shifting regulatory landscape. Against this backdrop, KPMG has put forward a practical solution for advanced banks to proactively manage their capital, notably through the concept of an “efficient frontier.”
The concept is proposed in a recent KPMG report focusing on the output floor and how to effectively manage it, given the framework introduces increased complexity for RWA management. Concretely, the efficient frontier relates to managing portfolios at, or slightly above, the 72.5% of standardised RWAs floor level. Further, it incentivises banks to adopt a centralised model in terms of balance sheet management.
Describing the expected implications for advanced banks of being far below or above the output floor under Basel 4, Alec Innes, partner at KPMG, notes: “If you are, at the moment, a bank with advanced models, then you are able to hold less capital than the standardised banks. At that point, you need to think carefully about your ratios, since you effectively have maximum benefit from those models (72.5%). And if you breach those levels, you end up having to instantly hold more capital.”
He continues: “The efficient frontier demonstrates that in order to optimise returns, banks have to be somewhere close to the floor. And because the floor applies at an overall portfolio level, in order to be on this efficient frontier, banks will need to manage capital at the portfolio level. What it means is that banks will have to dynamically reallocate capital between businesses and manage their balance sheet more centrally.”
Such a centralised model is fundamentally different from the ‘loan-by-loan’ or ‘asset-by-asset’ approach banks have historically taken under Basel 3. Managing portfolios more efficiently will lead to significant changes not only operationally, in terms of the mechanisms and processes for calculating capital requirements and moving capital around within the business, but also culturally, in the way capital is perceived and understood within the business. As such, the report identifies three key areas that banks should embed into their operating model to achieve this strategic change: embedding capital-sensitive performance measures; accelerating balance sheet velocity; and centralising control of financial resource management and allocation.
Regarding the role of SRT transactions within this new regulatory playbook, Innes similarly predicts an increased need for dynamism. He says: “SRTs will become essential for the efficient management of capital in order to remain in that Goldilocks zone. Having such a tool becomes critically important and banks will probably no longer think under the lines ‘I just need a deal at the end of year.’ The speed of execution will become critically more important.”
In essence, Basel 4 means a bank’s revenue model needs to change to one that is much more fee-based - driving return on tangible equity - and much less about the net income spread, according to KPMG. Under this model, banks are effectively recycling capital by looking at the portfolio as a whole, slicing it and segmenting it and then moving risk-sensitive assets on - either internally within the group or externally to yield-searching firms, such as insurers, assets managers and pension funds.
More generally, however, most discussions centred around Basel 4 often go back to examining whether the new framework is fit for purpose. Although the implementation of Basel 4 will inevitably bring about a cultural change within the banking sector, Innes further identifies a calibration and profitability problem moving forward.
He notes: “I think that we are at the point with Basel where the regulators have successfully removed risk from the banking system. Not all risk, but a lot of risk, if you compare it with pre-financial crisis - and appropriately so.”
However, Innes believes that the industry has reached the logical endpoint of what it can do in this regard. Banks are not quite at the point of being close to non-viability, but rather being very hard to invest in.
“This is a profitability issue caused by all the buffers and calibrations that just get added on. Therefore, going forward, as new risks emerge, regulators will need appropriate mechanisms to control new risks. Otherwise, the going banking system will become un-investable,” Innes concludes.
Vincent Nadeau
[1]
The EU authorities propose an implementation date of 1 January 2025. Regarding the UK and the US, banking regulatory agencies propose a six-month delayed start to 1 July 2025.
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News Analysis
Capital Relief Trades
European SRT: Shifting prices – video
Alvarez & Marsal's Robert Bradbury speaks to SCI about pricing dynamics in the European SRT market
Robert Bradbury, md and head of structured credit execution at Alvarez & Marsal, speaks to SCI's Simon Boughey about pricing dynamics in the European SRT market. Bradbury discusses the quality of underlying assets, the growth in prevalence of standardised features, the synergy between growth of supply and demand, the impact of new entrants on the buyer front, and comparisons with pricing in the US market.
SRT Market Update
Capital Relief Trades
US CRT prepped
Citi back in market with a fresh CRT mandate
Citi is prepping another funded synthetic securitisation of corporate loan assets. The US bank is believed to be selling a 0%-13% tranche, with the spread rumoured to land at 6% - suggesting a tightening of 200bps compared to last year’s deal.
According to market sources the deal is going to familiar investors, with Pimco also rumoured to be on the deal. The investment management company declined to comment.
Meanwhile investors have been blindsided by US Bank’s deal – its second in a handful of months (SCI, 9 May). The firm’s Q4 earnings call seemed to suggest no more deals were imminent: “As we move into 2024, we expect earnings to be the primary driver of capital accretion with limited reliance on balance sheet capital-related actions.”
An investor source says they were told US Bank did not plan any deals until Q3-Q4. “I’m a little surprised it’s real.”
US Bank’s second transaction is expected to print even tighter than its first with a 75bps spread squeeze.
Joe Quiruga
Simon Boughey
News
Capital Relief Trades
Double whammy
US Bank back with another but bigger IG CRT
US Bank is soon to close another synthetic securitization of investment grade corporate loans, according to market sources.
The same borrower was in the market about eight weeks ago, but this new deal is a different, and bigger, CRT transaction.
The reference pool said to be US$5bn of IG loans, twice the size of the earlier transaction.
It is selling a 0%-12.5% tranche, and the spread is believed to be just 5%.
The March deal came in at 5.75%, which took some in the market by surprise, but this new deal is even tighter. However, more aggressive pricing appears de rigeur at the moment.
It had been thought that US Bank would be less active in the CRT market in 2024 than in 2023 as it needs to absorb the impact of fewer acquisitions, but this appears not to be the case so far.
In December 2022, US Bancorp completed the acquisition of MUFG Union Bank’s core regional banking franchise to expand its presence on the West Coast for US$8bn.
Elsewhere in the US CRT market, it has been reported that JP Morgan Chase is consulting with investors with regards to perhaps another two mega deals planned for Q4. The face value of the notes sold into the market could total US$2bn, say reports, which would put the size of the combined reference pools at over US$20bn.
This is in line with the large deal that the same borrower brought to the US market in Q4 2023, which were reportedly shared between Ares, DE Shaw, LuminArx, Blackstone and PGGM.
The Wells Fargo deal reputed by some to be imminent has, however, reportedly slipped off the horizon for the time being. Well placed sources say the bank has currently no plans to issue in the CRT sector.
Simon Boughey
Market Moves
Structured Finance
Golub launches insurance solutions team
Market updates and sector developments
Golub Capital has launched an insurance solutions team to be led by newly appointed md and head of insurance solutions Jennifer Potenta. The launch of the team forms part of the firm’s plan to expand its investor partners group, which is focused on supporting the “specialised investment needs of different investor segments”, according to a statement issued by Golub.
Golub says it has a 17-year track record of providing investment services to insurance clients, and has around 120 such clients across its debt and equity strategies.
Potenta joins Golub’s New York office after six years with MetLife Investment Management, where she was most recently senior md and global head of private fixed income and alternatives. She also previously spent nine and a half years at MetLife, but left in 2017 to join New York Life Insurance Company in the role of senior director and head of international focusing on private capital investors.
In other news…
Brookfield buys into Castlelake
Brookfield Asset Management is investing US$1.5bn to acquire a 51% stake in the fee-related earnings of private credit manager Castlelake. The figure includes capital to be invested by Brookfield Reinsurance in Castlelake’s investment strategies.
The transaction is the latest in a number of consolidation plays in recent years that have seen large asset managers buying into the private credit space. Evercore acted as financial adviser to Brookfield, while Paul Weiss Rifkind Wharton & Garrison provided legal advice. Castlelake received legal advisory services from Kirkland & Ellis, while Goldman Sachs acted as lead advisor and Colchester Partners as adviser.
Kenny Wastell
Market Moves
Structured Finance
Job swaps weekly: Western Alliance Trust elevates CLO expert to president and ceo
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees Western Alliance Trust Company appointing a new president and ceo with a background in CLOs, levered loans and securities custody. Elsewhere, Aon has hired an executive md of capital advisory, while Eversheds Sutherland has snapped up a Clifford Chance veteran as a capital-markets-focused partner.
Western Alliance Trust has promoted md Jocelyn Lynch to president and ceo, based in Canonsburg, Pennsylvania. In her new role, she will be responsible for overseeing overall strategy and operations, and focus on CLO trustee, levered loan and securities custody strategies.
Lynch joined the business in early 2022 after a brief stint as senior vp at Computershare. She previously spent seven years focusing on the CLO market at Wells Fargo and 14 years working across a number of areas at BNY Mellon.
Meanwhile, Aon has hired Will Allen as executive md of capital advisory within its reinsurance solutions division. Based in London, he will report to the firm’s head of capital advisory, Kelly Superczynski.
Allen will be responsible for sourcing capital to support Lloyd’s of London programmes, and will work alongside the FAL team in support of risk transfer and capital optimisation programmes. He leaves his role as ceo of London Innovation Underwriters, a company he founded in mid 2023 to invest in the Lloyd’s market, and has previously worked at Macquarie Group, KBW, Fox Pitt Kelton and Bear Stearns.
Eversheds Sutherland has appointed Clifford Chance’s Mohsin Abbasi as a capital-markets-focused partner in its Dubai office. He will focus on transactions spanning debt capital markets and Islamic finance.
Abbasi has a background in structured products, conventional bonds, sukuk, liability management exercises, regulatory capital and ESG issuances. He leaves his role as senior associate at Clifford Chance after 13 years working in the firm’s London and Dubai offices.
MetLife Investment Management’s Jennifer Potenta has joined Golub Capital as md in its New York office, to head up its newly launched insurance solutions team (SCI 9 May). She joins the firm after six years with MetLife Investment Management, where she was most recently senior md and global head of private fixed income and alternatives.
Potenta also previously spent nine and a half years at MetLife, but left in 2017 to join New York Life Insurance Company in the role of senior director and head of international focusing on private capital investors. The launch of the team forms part of the firm’s plan to expand its investor partners group, which is focused on supporting the “specialised investment needs of different investor segments”, according to a statement issued by Golub.
Allen & Overy partner Daniel Shurman has left the firm to take up a new role as partner in Clifford Chance’s equity derivatives and structured products team. The announcement earlier this week came just six days after London-based A&O and New York firm Shearman & Sterling announced they had completed their merger and relaunch as A&O Shearman. Shurman had been with A&O since 1999.
Clyde & Co has appointed Elizabeth Evans from K&L Gates as a partner in its global aviation practice group, based in its New York office. She leaves her role as partner at K&L Gates after four and a half years with the firm, and previously held partner positions at Reed Smith, Dentons, Jones Day, and Weil Gotshal & Manges.
Evans’s expertise spans aviation, project, transportation and aerospace finance. She has worked across transactions including structured finance, leveraged leasing, syndicated loans and both private and public offerings of debt and equity.
Luxembourg-based Maples and Calder has hired AKD Benelux partner Yann Hilpert as partner and co-head of its finance practice. Hilpert focuses on leveraged finance, secured lending transactions, fund finance, debt capital market, securitisation and asset finance. He leaves AKD Benelux after three years with the firm, having previously held senior positions at DCL Avocats, ContourGlobal and Dentons.
And finally, Abu Dhabi Commercial Bank has named Francesca Revelli md, senior head - securitisation and fund finance, based in Abu Dhabi. She was previously senior director - private credit markets at Citi in London, having joined the firm as associate - ABS structuring in May 2004.
Kenny Wastell, Corinne Smith
Market Moves
Structured Finance
CFPB alleges student loan servicing failings
Market updates and sector developments
The CFPB has taken action against the National Collegiate Student Loan Trusts (NCSLT) and Pennsylvania Higher Education Assistance Agency (PHEAA) for multi-year servicing failures, alleging that the defendants failed to respond to borrowers seeking relief from student loan payments, including during the Covid-19 national emergency. The CFPB has filed proposed stipulated final judgments, which - if entered by the court - would require NCSLT and PHEAA to pay US$400,000 and US$1.75m in penalties respectively to the CFPB’s victims relief fund. They would also pay nearly US$3m in redress to harmed borrowers.
In this case, the CFPB alleges that the defendants violated the Consumer Financial Protection Act. Specifically, the complaint alleges that from 2015 until 2021, thousands of borrower requests - often seeking forms of payment relief - went unanswered. These included requests for co-signer release, extension of forbearance or deferment, loan settlement or forgiveness, Servicemember Civil Relief Act benefits, or other forms of payment or interest rate reduction.
As of February 2024, the 15 NCSLT securitisation trusts collectively held approximately 163,000 private student loans with approximately US$907m in outstanding balances. As of December 2023, PHEAA serviced a portfolio of student loans worth roughly US$17.8bn and has been the primary servicer for active loans held by NCSLT since at least 2006.
This marks the CFPB’s second public enforcement action against NCSLT, following the US Court of Appeals for the Third Circuit’s ruling that they are covered persons under the Consumer Financial Protection Act (SCI 22 March). That case remains pending in federal court.
In other news…
Transparency concerns highlighted
Fitch has placed Mount Street US (Georgia)’s CSS3 commercial special servicer rating on rating watch negative (RWN). The move reflects the rating agency’s concerns regarding transparency of information during the workout process, including the timely receipt and reporting of valuations for the BBCMS 2019-BWAY CMBS to all market participants, relative to other Fitch-rated special servicers.
Fitch expects to resolve the rating watch status within six months through a full rating review of Mount Street. The resolution may result in the affirmation, downgrade or withdrawal of the current special servicer rating.
The special servicer rating was assigned a negative rating outlook in January 2024, due to multiple years of high turnover among special servicing employees and slow adoption of the company's asset management application, as the creation of business plans for defaulted loans remains a manual process. Turnover at the special servicer included the former head of servicing, who departed in December 2023 and had been in the role since March 2021.
Corinne Smith
structuredcreditinvestor.com
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