News Analysis
Capital Relief Trades
Attraction stations
SRT relative value in focus
The relative value of SRT transactions is attracting a swathe of new as well as former investors to the space, despite the fact that spreads are tightening. Nevertheless, the creation of an active secondary market remains remote.
Several investors have recently returned to the SRT market after long spells away. For instance, Cheyne Capital last month announced it had deployed capital into multiple transactions after exiting the sector in 2018 (SCI 19 April).
Another such investor explains: “We had a year and a half out of the market, some of which was down to relative value. Direct lending spreads, for example, have become massive and value is currently looking better for SRT.”
The investor adds that last year’s regional banking crisis scared some investors away from the market, while others are waiting for US banks to issue more of the lucrative blue chip corporate deals, such as those issued by US Bank earlier this year (SCI 4 March).
Stephen Pike, founder and ceo of the recently launched (re)insurance-focused Convergence (SCI 22 April), says relative value is not the only consideration. “In terms of the cost of capital, the funded investor community raise capital within a specific mandate and associated target return hurdle. As an unfunded investor, we are also focused on expected losses and not solely a return hurdle, like a fund.”
He continues: “In a higher rate environment, our pricing is stickier and will reflect changes in expected default rates. We offer very flexible capital relief solutions to the banks, that can be tranched or pro rata.”
Rob Ford, recently retired from his front-office portfolio management role at TwentyFour AM, has a different view as his former firm invests across the full range of structured credit products, not just SRT trades. “We’re a full-service asset manager. We can buy right across the capital structure, from large blocks of triple-A, STS senior bonds for treasury-type clients with a focus on liquidity, through investment-grade, and all the way to the other end of the spectrum where we manage non-investment grade and some equity-like assets, including SRT, for clients with higher return targets and a broader risk appetite.”
He adds: “For us, the assets come first. Because we’re a broader investor, we often prefer more granular assets such as consumer/autos or mortgages, where we have lots of comparables and can often look at risker assets such as higher LTV mortgages to first-time buyers, which have higher delinquency rates, which we can model, but that wouldn’t be found in a conventional RMBS deal. Of course, we also look at corporate deals, and we are also a large CLO investor, so these are comparable from a relative value perspective - although we’ll also consider relative liquidity, or lack of it.”
SRT is not the “sole focus” of the strategy and economic conditions have sometimes prompted TwentyFour to look elsewhere. “There have been times like 2018, where the market was really tight, or 2022 where we were concerned about inflation, recession, rate rises and war with Russia, where we might step back for a period of time until we got more comfortable with the broader market evolution.”
This being said, TwentyFour currently views the relative value of SRT as reasonably strong – despite more recent tighter spreads. Ford explains: “If you’re an investor who only buys SRT, there may be a point where spreads compress to the point they’re no longer viable for you to invest in. For example, if 1,000 is cheap but 800 is getting expensive, you might have a hard stop at 750. But for me, if SRT is 1,000 and CLOs are at 1,100, I’ll do the CLOs. They’re fishing in a carp lake and comparing the size of the carp; I’m fishing in the sea and comparing carp, bass and whales.”
Ford clarified carp cannot be found in the sea but, unlike fish, the analogy had legs. For investors with a broad focus, SRT may continue to interest them. For those with a set focus on SRT, a continued strain on spreads may cause them to lose interest – although currently market consensus is there is too much money chasing too few assets.
So, is there a chance the changing market conditions will drive a rise in secondary market activity? Ford says it’s unlikely, as the only possible secondary buyers would be those who had already invested – usually a fairly small group – or perhaps someone who had looked at the deal in the first instance, but had been unable to participate.
He explains: “Say I buy from one of the regular arrangers such as Deutsche Bank or Santander. My relationship is with those banks, and the knowledge of the deal basically remains only with the arranger banks – unlike a broadly distributed RMBS/ABS deal, the other dealers aren’t involved. The details are not distributed among anyone else except the initial investor groups in what might be a 6-12 weeks investment process. The banks will gauge interest, some investors will say no and some will get a term sheet, and then some will trade or drop out.”
This makes the creation of an active secondary market “remote”, in Ford’s view. “Considering what Article Five says on securitisation due diligence, getting up the curve on a deal like this is a huge undertaking. I’ve either got the choice of the other maybe two or three who co-invested or perhaps the arranger bank could reinvigorate someone who wasn’t interested initially.”
He concludes: “The bank may have an investor who wanted to buy but couldn’t originally do so for whatever reason. On the other hand, it's conference season right now and there's lots of investor panels - perhaps if I want to sell something, I should maybe just call a few of my fellow panellists?"
Joe Quiruga
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News Analysis
CLOs
CLOs: Improving arbitrage - video
TwentyFour Asset Management's Elena Rinaldi speaks to SCI about the CLO market and ESG initiatives within the space
Elena Rinaldi, portfolio manager on TwentyFour Asset Management's ABS team, speaks to SCI's Corinne Smith about the CLO market and ESG initiatives within the space. Rinaldi discusses the key drivers behind the record levels of issuance in Q1 2024, how a wave of loan repricings in both Europe and the US are affecting CLO portfolios, the potential impact of the recent Altice downgrade on performance, and the importance of ESG considerations for investors.
SRT Market Update
Capital Relief Trades
SRT Market Update
Issuance overview in April
While March precipitated the first significant wave of SRT transactions of the year – notably through seasoned issuers and longstanding programmes – April was, according to investors, quieter on pricing execution.
Reflecting on last month’s pipeline, one SRT investor notes: “I don't think anything – that I’m directly aware of – has closed in April. However what was relevant is that we’ve seen a number of transactions that are underway and targeted to close in June.”
Such view is similarly echoed by another investor, noting that “a lot of transactions are currently being shown in the market.”
He continues: “It definitely feels like a lot. For example, Santander is almost coming out with one trade every single week at this point, which is somewhat unusual (a UK, Portuguese and Spanish deal are mentioned). Therefore I feel that volumes and supply is relatively heavy.”
Regarding general market themes or observations in April, the investor points to a lack of momentum from the North American market. He says: “Although I know of a couple of American banks closing trades right now (Citi and US Bank), I feel we have continued to experience a certain absence of North American transactions from the market. There is the increased view that these are now targeting year-end and (October in the case of Canada, and December for the US).
Back in Europe, SRT investors report continued and constant issuance. One says: “European banks have continued to come to market, particularly the usual suspects who bring their trades to market at this time of year, with the likes of Santander, Lloyds, Standard Chartered and Barclays.”
He continues: “The one thing we haven't seen this year to date, which we would normally see or expect is a Greek deal.” Regarding the latter point however, Piraeus Bank has currently two trades (SME and consumer loans) for targeted closing in Q2 this year.
Regarding visible issuance in April, SCI understands that Natwest closed its project finance SRT transaction, as well as a synthetic securitisation of capital call facilities. Equally believed to have prices is Nordea’s deal referencing a portfolio of mortgages. Meanwhile, the IFC and BNP Paribas Bank Polska closed Mazurka, referencing corporate loans.
Finally, regarding SRT spreads, investors report a familiar observation of tightening, with one noting: “Spread-wise, people are definitely being quite aggressive. The general feeling is that things have certainly been trending tighter versus last year (a view equally reflected in our latest SRTx fixings).”
Vincent Nadeau
SRT Market Update
Capital Relief Trades
Climate-friendly mortgage programme launched
SRT Market Update
The EIB Group and Deutsche Bank have executed a synthetic securitisation of consumer loans in Germany. The transaction sits within a broader agreement to promote climate-friendly new buildings and energy-efficient home modernisation in Germany.
In terms of structure, the EIB is supporting the mortgage programme by guaranteeing a €150m mezzanine tranche. The transaction frees up regulatory capital for Deutsche Bank, which will pass on the advantages of the transaction to clients in the form of discounted mortgages. The securitisation falls under the framework for simple, transparent and standardised securitisation (STS) of the European Securitisation Regulation.
Deutsche Bank will grant the discounted loans from its private bank through Deutsche Bank, DSL Bank and, from the beginning of June, BHW Bausparkasse. The interest rate advantage currently amounts to 0.2% points per annum compared to standard conditions for the entire first fixed interest rate term, provided this is at least five years.
To be granted a mortgage, borrowers must meet particularly demanding sustainability criteria. For example, individuals looking to finance a modernisation project are required to reduce the property’s primary energy demand by at least 30%.
The comprehensive goal and objective of the programme is to provide more than €600m worth of low-interest mortgages to help individuals in Germany build climate-friendly houses.
In other news…
Polar completes second CRS Fund close
Toronto-based Polar Asset Management Partners has completed the second close of its Polar CRS Fund-1 with US$300m in total commitments. The fund offers qualified institutional investors the ability to participate in SRT transactions with banks in Canada and globally.
Canadian banks have been ramping up their activities in the global SRT market (SCI 29 November 2023) and Polar anticipates secular trends to continue supporting the volume of Canadian transactions, as financial institutions seek to increase balance sheet capacity. Polar has been a leader in Canadian SRT transactions within its flagship multi-strategy fund for eight years, funding approximately US$1bn of SRT transactions.
The Polar CRS Fund-1 – which is expected to be the first in a series of drawdown vehicles, as the SRT market grows – provides investors with direct exposure to this opportunity.
Vincent Nadeau, Corinne Smith
News
Structured Finance
SCI Start the Week - 13 May 2024
A review of SCI's latest content
*CRT Awards 2024*
The submissions period for SCI’s 2024 Capital Relief Trades Awards closes on 31 May. Apply now to secure your chance to be recognised and celebrated by the SRT industry at a gala black-tie dinner at RIBA HQ!
*Please only include information in submissions that is ‘on-the-record’, as SCI reserves the right to use such information in an eventual awards write-up.
*For all the details on the CRT Awards categories and the nominations process, click here.
Last week's news and analysis
CFPB alleges student loan servicing failings
Updates on one legal action as another servicer goes on RWN
Double whammy
US Bank back with another but bigger IG CRT
Efficient frontier
Optimising returns in a post-Basel 4 landscape
European SRT: Shifting prices – video
Alvarez & Marsal's Robert Bradbury speaks to SCI about pricing dynamics
Golub launches insurance solutions team
Updates on Golub’s latest expansion & Brookfield buying into Castlelake
Job swaps weekly: Western Alliance Trust elevates CLO expert to president and ceo
People moves and key promotions in securitisation
US CRT prepped
Citi back in market with a fresh CRT mandate
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
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
Freddie fallout
GSE CES buying would gut private label market, says report
Corroborating industry misgivings, Freddie Mac’s proposed purchase of single-family closed end second (CES) mortgages would take a large bite out of the private securitization market, according to a report by KBRA released last week.
If both GSEs initiated CES buying, no less than 60% of the loans originated and securitized by the private label market would be eligible for the new programme, it says.
As Freddie Mac is likely to offer more favourable terms than the private market then there would be every incentive for all borrowers to go to them rather than private operators.
These new loans would also be eligible for credit risk transfer. There has been a substantial drop in GSE issuance in the last 18 months as activity in new mortgages and refinancings has attenuated. Both GSEs have also relied more heavily on the reinsurance market for CRT as levels in the bond market became uncompetitive.
Around US$8.7bn second lien mortgages were collateralized in Q1 2024, of which US$4.5bn were CES loans. Around US$12bn of cumulative second lien issuance is expected in Q2, according to KBRA data.
“The thrust of this piece was to try to understand what percentage of the market this proposal would affect. Is it 10%, or 20%, which would still be substantial, or is it something greater? It turns out to be something greater and could have a significant impact on the private label market,” says Jack Kahan, head of global RMBS at KBRA in New York.
The original proposal, issued on April 15, received an immediate and hostile response from the industry. The Structured Finance Association (SFA) issued a statement saying the plan is “an unnecessary government encroachment into a sector that has been operating successfully without government involvement.
““It is quite unclear what role the government-sponsored enterprises have in funding these mortgage products, or how that fits into Freddie Mac’s overall government-chartered mission objective,” adds SFA CEO Michael Bright.
Freddie Mac says it wants to offer homeowners a cheaper alternative to the current cash out refinancing market. A borrower with a US$500,000 mortgage wishing to draw down an additional US$100,000 would be obliged to refinance the entire loan at prevailing rates (30-year mortgage rates are currently 7.14%) in addition to all the refinancing charges, so it would be an expensive exercise.
It also says that the capacity to buy and securitize second lien mortgages has been an express portion of its charter for 40 years, while the current securitization market for these loans is not robust.
” Freddie Mac also believes it could provide a foundation for more consistent liquidity in the secondary mortgage market because of its credit guarantee and experience securitizing mortgage loans,” it says in the April 16 proposal.
Of course, it will also earn fees for the origination and securitization of second lien mortgages. It also seems to some observers that the GSE, now it appears free from the threat of an exit from conservatorship, is emboldened to extend the arm of the state into hitherto unexplored regions of the free market.
Onlookers in addition suggest that as in many cases the GSE already owns the first lien mortgage it does not wish the borrower to take on a costly second lien loan, so the proposal serves a risk management function as well.
“If Freddie Mac already owns the borrower’s first mortgage, and the borrower takes a second mortgage, Freddie Mac would gain efficiencies in servicing and risk oversight across both mortgages by owning the second mortgage as well.”
The request for comment period ends May 22.
Simon Boughey
Market Moves
Structured Finance
AI credit analysis project launched
Market updates and sector developments
Stratiphy and Chenavari Financial Group have joined forces to develop custom AI tools aimed at improving the quality of and mitigating the subjectivity within credit analysis. By harnessing the wealth of existing data and employing a range of AI techniques, the project aims to enhance efficiency, pricing capability and precision in forecasting within credit analysis.
Representatives of each company will collaborate to understand the specific challenges facing the credit industry, such as factor analysis, attribution and pricing of complex instruments, including CLOs. The project aims to incorporate cutting-edge AI technologies to solve these challenges in real-world situations in a way that enhances transparency, trustworthiness and widespread adoption.
The initiative is supported by UK Research and Innovation (UKRI) and administered by Innovate UK, a government sponsorship body that promotes industry innovation in key sectors. The project will be led by Dr John Cartlidge at the University of Bristol, providing AI and financial modelling expertise, and Professor Karen Elliott at the University of Birmingham, an expert in the trustworthy application of AI.
In other news…
Arrow inks Amitra acquisition
Arrow Global Group has acquired Amitra Capital from Canada Pension Plan Investment Board (CPP Investments). This acquisition significantly expands Arrow’s footprint in Spain and provides a foundation for future collaboration with CPP Investments, focusing on both current and prospective investment opportunities. CPP Investments retains its current direct economic interest in all of the portfolios managed by Amitra Capital.
With assets under management totalling over €4bn, Amitra Capital specialises in managing European NPLs and real estate investments. The acquisition includes a new five-year servicing agreement between Arrow and CPP Investments. Key management personnel from Amitra Capital will continue to lead the company, ensuring continuity and stability in operations under Arrow.
DC rules set for overhaul
Linklaters has completed an independent review of the structure and governance of the Credit Derivatives Determinations Committees (DCs). The review – which was requested by ISDA - covers the composition, functioning, governance and membership of the DCs (SCI 14 December 2023).
The report makes several recommendations about the changes that could be made to improve the structure of the DCs, such as ameliorating concerns about conflicts of interest by DCs having an independent chairman and up to two other independent members and/or DCs having the ability to refer decisions to an independent panel for resolution. Other recommendations include: the DC rules requiring the provision of reasons for all material decisions; the creation of a governance body with responsibility for overseeing the way the DCs carry out their functions; and an overhaul of the existing funding model to ideally involve a transaction-based levy.
Following a public consultation on the Linklaters recommendations, ISDA will work with its members to propose specific changes to implement any measures that receive broad public support. ISDA will then recommend these solutions to the DCs, which are solely responsible for agreeing and implementing any changes.
Corinne Smith
Market Moves
Structured Finance
Job swaps weekly: Nordic advisory boutique opens
People moves and key promotions in securitisation
This week’s round-up of securitisation job swaps sees a pair of Nordea SRT vets set up a structured credit advisory boutique. Elsewhere, PIMCO has snapped up another ex-Citi SRT alumnus, while a former Deutsche Bank structured finance md has joined an auto finance fintech platform.
Nordea SRT stalwarts Jonas Bäcklund and Viktor Kloos have left the bank and founded a structured credit advisory boutique, specialising in capital management, portfolio optimisation and risk transfer solutions. Bäcklund and Kloos respectively serve as md and director of the new firm, which is called Revel Partners and focuses on performing and non-performing assets across the Nordic and Baltic regions.
Bäcklund joined Nordea as head of group structuring in April 2014, having worked at NatWest and Handelsbanken before that. Kloos was a structured credit manager at Nordea, joining the firm from EY in September 2017.
Revel Partners is part of newly formed Swedish financial services firm Belvere Group, which provides bespoke financing solutions across the real estate and credit spectrums. Belvere is, in turn, led by Tom Johannessen and Christopher Rees.
Johannessen was previously md, financial services and co-head EMEA at Alvarez & Marsal, but among other roles served as deputy group cfo and group treasurer at Nordea and global head, portfolio management and CRT at Barclays before that. Rees was formerly chair of the risk and audit committee at Hoist Finance, but before that was group cfo at Nordea and co-head of DCM and risk solutions group EMEA at Barclays, among other roles.
Meanwhile, DLA Piper’s Juan Gelabert has joined Baker McKenzie as head of banking and finance in its Madrid office. Gelabert leaves DLA Piper after 16 years with the firm and has worked on deals including acquisition, project, restructuring and structured finance transactions, with additional expertise in the sports finance space.
London-based auto finance fintech platform Carmoola has hired former Deutsche Bank structured finance md Frédéric de Benoist as director of capital markets. De Benoist joins the company six months after leaving his position as md and head of asset finance - ABS Europe at Deutsche Bank. He spent a total of 20 years at the bank, with previous roles including head of mortgage finance - ABS Europe and director of mortgage finance - ABS Europe.
Commercial real estate financing advisor Concord Summit Capital has hired industry veteran Manny Brown, previously of Plum Lending, as chief operating officer, based in its Chicago office. Brown left his position as coo at Plum in August 2023 after two years with the business. He previously spent 13 and a half years at Cohen Financial, now part of Truist, where he served as coo, president and partner.
Interpath has recruited Stuart Mogg from EY to head up its financial services debt and capital advisory business in London. The former partner and leader of the financial services debt advisory team at EY will work alongside Interpath’s securitisation lead and fellow recent hire, Jenna Picken, and restructuring lead, Ed Boyle.
KBRA has appointed Gopal Narsimhamurthy as global head of fund ratings, following the resignation of Pramit Sheth, who is leaving the rating agency to pursue other opportunities after more than 12 years of service. Currently an md in the funds group at KBRA, Narsimhamurthy will lead a 25-person team in his new role and work closely with Tom Speller, head of European fund ratings.
Narsimhamurthy has been at KBRA since 2014 and has worked across a number of analytical areas, including ABS, public finance and project finance. Previous to KBRA, he was an associate analyst at Moody’s, where he specialised in higher education and healthcare credit analysis.
PIMCO has named Marc Windfuhr as evp, based in New York. He was previously md, insurance solutions at CIM Group and md - global head GSP FIG solutions at Citi, where he led the execution of bespoke transactions including SRT deals. Before joining Citi in January 2010, Windfuhr worked at Deutsche Bank and Calyon in London.
Finally, STS Verification International has appointed Carlo Barbarisi as senior advisor, responsible for European business development, with a particular focus on Southern Europe. Based in Milan, he has over 30 years of experience in the ratings, banking and credit markets fields.
Joe Quiruga, Kenny Wastell, Corinne Smith, Claudia Lewis
Market Moves
Structured Finance
CFPB funding mechanism 'constitutional'
Market updates and sector developments
The US Supreme Court has issued its decision in the ‘Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd’ case, holding that the CFPB's funding mechanism - as set forth in Title X of the Dodd-Frank Act - is constitutional. In evaluating the CFPB's funding structure against the Constitution's requirements, the Court found that the agency's appropriation mechanism is constitutionally permissible, given that it includes an identifiable source of public money and a designated purpose.
The case arises from a challenge by the Community Financial Services Association of America (CFSA), a non-bank consumer lender trade association, related to certain provisions in final rules adopted by the CFPB related to consumer payment authorisations on higher interest, short-term consumer lending products (SCI 4 November 2022). In its challenge to the CFPB's adoption of the Payday Rule, the CFSA raised a number of arguments, including one that challenged the CFPB's funding mechanism as violative of the Appropriations Cause.
In a client memo, Katten Muchin Rosenman notes that cases that were stayed pending the Supreme Court's decision in this case will now become actively litigated. This includes the payment authorisation provisions at the heart of the CFSA case, as well as other cases that have been stayed or had injunctions issued based upon the Fifth Circuit decision.
“Although it appears that many avenues to challenge the Dodd-Frank Act's statutory provisions as they relate to the creation and administration of the CFPB have now been assessed by the Supreme Court and found to be constitutional, there are still other avenues available to individuals or entities that have bases for challenging the CFPB's actions. For example, as is true in the underlying CFSA case, the facts at issue may support challenges raised in connection with a potential violation of the federal Administrative Procedures Act - whereby federal agency actions can be set aside if they are found to be arbitrary, capricious, an abuse of discretion or ‘otherwise not in accordance with law’,” the memo states.
With this decision, the CFPB is also expected to reignite its enforcement actions, which had likely been limited given this open Constitutional question.
In other news…
Solar forward flow agreement inked
Carlyle has entered into a US$450m forward flow agreement to purchase newly issued residential solar loans from Sungage Financial. In addition, Carlyle made a strategic investment into Sungage Financial, enabling the firm to increase its origination capacity and drive future growth.
Founded in early 2011, Sungage launched the nation’s first asset-backed solar loan designed specifically for residential projects. Today, the firm offers reliable and flexible online financing solutions with low monthly payments available for solar, roof and battery loans.
The transaction was led by Carlyle’s credit strategic solutions (CSS) team, a group within its global credit business focused on private fixed income and asset-backed investments. The team leverages the knowledge, sourcing, structuring and breadth of the entire Carlyle investment platform to deliver tailored asset-focused financing solutions to businesses, specialty finance companies, banks, asset managers and other originators and owners of diversified pools of assets.
CSS has deployed more than US$3.5bn since 2021 and has roughly US$7bn in assets under management, as of 31 March 2024.
Corinne Smith
structuredcreditinvestor.com
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