News Analysis
Regulation
Agile framework
PRA and FCA publish new UK securitisation rules
Last month, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published policy statements and the new securitisation rules. Together, both UK regulators have triggered the countdown to 1 November 2024 when the new UK securitisation framework will come into force.
Structurally, both policy statements thoroughly acknowledge industry feedback (following consultation processes that occurred last year) and meticulously go through points and observations raised by market participants. In terms of legislative architecture, the FCA set out its proposals for firm-facing rules on securitisations to be effectively transferred into the FCA’s rulebooks.
Such approach to the initial consultations is praised by Harjeet Lall, partner at Pinsent Masons. She notes: “Both regulators have listened to market participants and given a six-month window to adapt to the transition and given clarity to the market with grandfathering provisions, which is really helpful. In terms of the dynamic of the regulation, moving these rules to the regulators’ rulebooks clearly allows the regulators to employ a much more dynamic and agile framework.”
Discussing the regulators’ apparent pragmatism and granular feedback, Lall underlines a desire to engage with the market. She says: “With respect to certain points, the regulators have noted that they will consider feedback for future rounds of policy change. For example, a respondent to the earlier consultation requested a change to permit L-shaped risk retention, which is a permitted approach on US transactions. And similarly, for other areas, there are various future policy points for us to monitor.”
Commenting on the notable changes, Lall highlights risk retention for NPE securitisations (when calculating the retention requirements for securitisations of non-performing exposures, the new UK securitisation rules will permit this to be based on the net value, rather than the nominal value of exposures) as a key point (and is no change from the 2023 draft rules). She notes: “Such alignment with the current EU rules will likely be welcomed by the market. However, there is a key distinction, whereby the servicer is not entitled to be the risk retention holder under UK rules (as compared with the EU rules).”
She continues: “There are also some slight differences in terms of the flexibility around the replacement of the risk retention holder. In the EU position, it can be on the basis of exceptional circumstances and there are some further clarifications beyond insolvency in the EU risk-retention RTS such as where the retainer, for legal reasons beyond its control and beyond the control of its shareholders, is unable to continue acting as a retainer. However, not all those exceptions have been followed through in the UK position. I also think there is going to be potentially some further discussion around the sole-purpose test that may get revisited.”
Regarding due-diligence, the regulators clarified the meaning of “before pricing” in the due diligence and disclosure requirements. On this point, Lall says: “On due diligence, I think there were no surprises. An investor investing in third-country originated transactions will have to verify that “sufficient information” has been made available to enable the investor independently assess the risks of holding the securitisation position. It shows a pragmatic approach, and a further review of templates is going to be subject to the outcome of deciding what's a public securitisation versus a private securitisation, which they're going to consult on later this year or early Q1 2025.”
She continues: “The disclosure requirements may be contingent on where they land on that definition. This is definitely one to watch because I think that might mark a departure from where the EU currently is.”
Lall additionally points to the definition of securitisation as a point worth noting. She says: “While one may think this is not such a big point, it actually is an important point on transactions to determine what is within scope. Up till now, we've the definition contained a cross-reference to the CRR with respect to specialised lending exposures. With the new UK rules we've now got in the proposed UK framework, there is a hardwiring of the definition. Given the UK CRR is now under consultation and we don't have the finalised rules yet we anticipate this will not diverge.”
Regarding synthetic securitisations however, there is still a sense of things not entirely adding up just yet. Nevertheless, the new rules extend the ability to hold retention on an unfunded basis (i.e. synthetically) or on a contingent basis such as in the form of a guarantee – and without having to cash collateralise the exposure – beyond credit institutions to certain investment firms subject to prudential regulation (and also insurers and reinsurers).
Finally, reflecting on the overall market reactions to the policy statements, Lall highlights a positive atmosphere, noting that: “Broadly speaking, the UK regulators have demonstrated a market-friendly approach.”
She concludes: “Greater consideration is needed now when we structure deals and post-Brexit, everything was still aligned, but now we are seeing key differences. Furthermore, we have to think a little more carefully about future-proofing transactions and how that's going to play out. However the regulators have clearly shown a commercial responsiveness in their proposals and I anticipate we will see a pragmatic approach taken on the disclosure templates from both the UK and EU regulators.”
Vincent Nadeau
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News Analysis
Asset-Backed Finance
Picking up the PACE
Consumer protection measures bring benefits
The property assessed clean energy (PACE) ABS market could be set for a renaissance, following progress in bolstering consumer protection measures. Nevertheless, C-PACE activity continues to far outweigh that of the R-PACE sector (SCI 20 January 2023).
“We refer to it as PACE 2.0. We’ve built in many consumer protections, including making sure borrowers have the ability to repay financing. It’s still paid with the tax lien, just with better controls on the origination process, in terms of managing the installation process and pricing,” says James Vergara, coo at Home Run Financing.
He continues: “We deal with these very specialised, mortgage-like deals for solar and home improvement. We securitise these and they securitise very well. The actual servicing is done by the municipal government and because of that we have a very low delinquency rate, and because we have this, we are able to lend to lower income and credit borrowers.”
PACE loans have received negative press in the past. For instance, a 2021 segment on John Oliver’s late-night show highlighted the R-PACE programme was often erroneously sold as a government scheme (although the local government sponsors the programme, private companies administer the programme and in practice provide the financing).
Vergara explains: “The government enables the programme, but the work and the funds are all provided by private entities.” PACE loans are paid off by a property tax lien, which some bad actors reportedly claimed would be easily affordable via energy bill savings.
However, this promise often didn’t survive contact with reality, and consumer mortgages would increase by hundreds of dollars, property tax could increase by more than 10x and the property itself acted as collateral (with obvious consequences, should the borrower default).
Among the fallout from this, top R-PACE provider Ygrene received a court order that prohibited it from “providing deceptive information, services or materials” and using property as collateral, while ordering it to provide lien relief to “eligible consumers”.
Recent legislation in states such as Florida and California where PACE is prevalent has required suitability checks, allowing the right to cancel - which wasn’t always available or clear it was available in the programme’s infancy - and ensuring borrowers know the programme is not government-funded. Florida House Bill 927, which is currently making its way to legislation and is applicable to both residential and commercial property, is one example.
The bill requires “the holder or servicer of a mortgage that encumbers an applicant’s commercial property to provide consent … to finance any improvement through the programme”. It also places restrictions on contractors and third-party administrators, among which is a prohibition on kickbacks from administrators to contractors and requires an annual report from local governments on improvement programmes.
However, the bill also expands the scope of what the programme can offer, with wastewater improvements, flood and water damage resiliency and permanent generators all added to the list. At the same time, it removes some energy conservation and efficiency improvements, including EV chargers and efficient lighting equipment.
Stephanie Mah, svp of structured finance research at Morningstar DBRS, explains that last year C-PACE saw US$2.1bn worth of projects completed. R-PACE only reached US$664m. As such, C-PACE is catching up to R-PACE in cumulative funded projects, with US$7.2bn in financings compared to US$9.1bn R-PACE financings.
She explains: “C-PACE has had three solid years of originations, providing much needed capital to commercial real estate projects under development. I think C-PACE has enjoyed greater success relative to R-PACE because there’s a higher sophistication level among the market participants. In addition, lenders’ consent also plays a vital part.”
Some of the difference in market size is due to the nature of the borrowers. Lending to commercial property owners obviously results in a smaller number of borrowers seeking larger amounts of money, in comparison to residential property owners. “It’s not apples to apples,” as Mah puts it.
“There were a handful of bad actors in resi that have since exited the market, and we’ve seen a lot of progress in California and Florida to bolster consumer protection measures. The state has legislated on this and when California enacted these, we saw a significant drop in R-PACE origination – but that’s not necessarily a bad thing. You need to work out the kinks and get folks familiar with the requirements,” Mah explains.
Morningstar DBRS views the increased consumer protection measures as credit positive because it helps imbue borrower discipline.
She adds: “The beauty of PACE is it can serve a variety of different needs for the homeowner and commercial property developers. We see resiliency measures really taking hold – against earthquakes and fires in California, storm protection in Florida – so it offers property owners options to address different concerns they may have. At the same time, the consumer protection measures are written in a way to better assess a consumer’s ability to pay.”
How does the current state of play affect PACE securitisations? “I’m neutral on how it will turn out. In Q1, we saw an uptick in R-PACE ABS issuance, but it’s unlikely resi will maintain this momentum,” says Mah.
This being said, she adds that there are reasons for optimism: “If PACE issuance remains at the pace it has done, we could be at US$1bn by the end of the year. There is a very healthy pipeline of these C-PACE assessments, so that lends itself to a healthy pipeline of underlying collateral which could be securitised in the future.”
She continues: “Last year, we saw a 38% decline yoy for PACE securitisation issuance, approximately US$976.8m of volume. But fixed income bond issuance was also down over the year, so the decline was not unexpected.”
Currently there is C-PACE-enabling legislation in 38 states plus DC, and the programme is active in 30 of these plus DC. However, R-PACE is limited to California, Florida and Missouri, with momentum stalling after the implementation of increased consumer protection measures in California.
Other issues revolve around the politics of the programme. For example, in California - a Democratic stronghold - the product is sold for its green credentials. In Florida, which seems to become more Republican with each passing election, the focus is on storm resilience, with the solar element sold as a means to become independent from the national grid.
The politics expands from the sales of the product to the technicalities and bureaucracy of implementing policy. New York state and Massachusetts, despite their lofty climate goals and years of preparation, still seem to be a way off introducing their own programmes.
Mah suggests that New York is unlikely to see much progress in the programme in the short term. She explains: “There was a lot of hope New York would be the new breakout spot for C-PACE because of the passage of its 2019 Climate Mobilization Act, but the traction there has been slow and the State, in my view, is struggling to implement C-PACE in a meaningful, scalable way. Hence, I think resi will have a longer runway until lift off.”
Massachusetts is anticipated to have more of a chance, given Bill H3950, which stipulates that the state department of energy resources will work with the Development Finance Agency to establish a regulated R-PACE programme.
Joe Quiruga
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European expansion?
As proponents try to expand similar programmes to Europe, there are similar considerations. While some are attracted by the product’s green credentials, others must be convinced on the merits of energy independence.
Gordon Kerr, head of European research at KBRA, observes that the problems go beyond politics. “In general, people are interested in taking out home improvement loans centred on solar and sustainable building projects. The trouble is there’s competition for it with lots of funding sources available.”
He adds: “In Germany, you can get it from any bank with KfW support. In the Netherlands with the NHG guarantee, there’s an additional amount you can take out, provided it’s for green home improvement projects. Then you’ve got other things like some of the larger installers and suppliers, which are tapping into other sources of funding and providing it directly as part of the installation.”
There are also different regulations across jurisdictions over using a home as collateral – and different attitudes to borrowing as well, with some jurisdictions like France taking a dimmer view on debt in general than countries like the UK. “There’s a different approach to that funding of your own projects in Europe than in the US, although that’s changing as homes become more expensive,” Kerr explains.
With PACE in particular, Kerr says to implement the system, the government needs to have a particular tax structure and system of government. “They have had some success in Spain with [the EuroPACE programme]. I could see the UK being suitable for it too because the legal system is well set up to deal with that type of structure, it’s creditor-friendly and you’d be able to collect the taxes through county council tax too. Other European regions are not quite so creditor-friendly, but it wouldn’t surprise me to see it in a number of places, and in particular, you could see it in Ireland.”
He adds that other more regional European countries may already have similar alternatives (such as Germany) or require issuers to negotiate with regions individually – a problem which could perceivably be faced by the highly regionalised Italy.
Mah concludes: “Intuitively, you’d think it would be more successful in Europe because it has a bigger appetite for ESG concerns than the US does. But I would say the challenge is not unlike the one in the US, as you need the localised legislation which must be enacted for PACE to be used as a financing tool.” |
News Analysis
Asset-Backed Finance
MPOWER graduates into securitisation
Provider of loans to international students says deal is first of many
MPOWER Financing, a provider of loans for international university students, has issued its first securitisation, in what it anticipates will develop into a regular stream of issuance. The transaction, MPOWER Education Trust 2024-A, consists of three tranches totalling US$198.1m, which received ratings by KBRA and Morningstar DBRS.
With an underlying collateral pool of US$215.2m, the deal represents the first securitisation of international student loans by a US-domiciled private student lending platform. The A tranches received single-A ratings from both KBRA and Morningstar DBRS.
“For the past 10 years we have shown that international students get As in the classroom and we’ve been looking to prove that they get As in repayment as well,” says MPOWER ceo Manu Smadja. “Now we have two ratings agencies that say that also. In terms of our broader mission, it really is a win for immigrants.”
MPOWER positions itself as a “mission-driven fintech firm” that is looking to “democratise access to higher education”. It has a particular focus on post-graduate students from developing economies including India, Mexico, Brazil, west Africa and southeast Asia, who will typically be in gainful employment and looking to study STEM subjects in the US and Canada.
Goldman Sachs served as structuring agent and joint bookrunner in the offering while Deutsche Bank served as a joint bookrunner. Both banks took part in debt funding rounds for MPOWER in 2023, as did Värde Partners. At the time, this brought the student loans company’s total deployable capital to more than US$300m.
Following last year’s deals, MPOWER told SCI (10 November 2023) that it was looking to issue a securitisation in the first half of 2024. In its announcement this week, the business said the transaction is the “first in a series of programmatic asset-backed securitisation offerings”.
“We’re already pounding the pavements for whole loan sales and flow agreements,” says Smadja. “We want a very diversified toolkit in capital markets. But securitisations are like tattoos – after you get the first one you’re already thinking about the next one. We’ll come back to market next year for our second securitisation. We might then be looking at returning every semester and then, at some point, we’ll get to the scale where we can do quarterly programmatic issuances.”
The approach is part of a long-term plan that saw the company hiring Rob Partlow as CFO from fintech company GreenSky and Christopher Zaki from Above Lending as head of capital markets in 2022. The debut offering was oversubscribed, says Smadja, with investors attracted to the diversification it offered to their securitisation portfolios.
“We had 11 blue-chip investors in the transactions, spanning insurance, pension and credit funds,” Smadja explains. “Being fixed rate in what is hopefully a peak interest rate environment was a plus, as was the fact that these loans in the portfolio are cashflowing, with interest-only payments while in school. And in a world in which there are questions about the future behaviour of the American consumer from a credit standpoint, having the diversification of international students in the mix was positive.”
The diversification that the collateral pool offered to investors was also mirrored with a diverse pool of investors themselves, Smadja explains. Having the deal rated by two agencies proved particularly important in attracting capital for the more highly rated tranches.
“Unsurprisingly, the single-A proved very attractive to insurance companies and pension funds,” says Smadja. “They appreciated the relative value in the A tranche and liked that it was rated by two different agencies, including DBRS, which is a key name in student lending ratings. The B tranche – which was rated triple-B – had more of a mix, with credit funds and some insurance. The C tranche was double-B rated and was also oversubscribed, but essentially made up of credit funds that were able to go very deep into the assets.”
While MPOWER is currently focused on both the US and Canadian markets – with plans to expand into additional markets at a later date – its debut securitisation consisted of a collateral pool of US-dollar-denominated loans to borrowers studying at US universities. Smadja explains that MPOWER’s breakdown between exposure to the US and Canadian markets is currently around 80:20. The firm, which launched more than 10 years ago with a US focus, moved into Canada around five years ago.
“There is a lot of potential for Canada to be as big as the US in our portfolio,” he says. “For this inaugural securitisation we wanted to keep the story as simple as possible and focus exclusively on the US pool. Going forward we can expect more diversification, spanning universities in both the US and Canada. In the longer term, we see expansion into Australia and the UK, which are also very exciting international student hubs.”
Kenny Wastell
News Analysis
Structured Finance
Transition finance: Mobilising capital - video
Morningstar Sustainalytics' Begum Gursoy speaks to SCI about transition finance in the context of hard to abate industries
Begum Gursoy, director at Morningstar Sustainalytics, speaks to SCI's Kenny Wastell about transition finance in the context of hard to abate industries. Gursoy outlines activity levels and deal pipelines in transition finance, the way in which a ratings agency goes about assessing environmental impact in deals, the role of labels in any given transaction, and the importance of being alert to any risk of greenwashing.
News Analysis
Capital Relief Trades
New SRT jurisdiction?
Israeli banks await securitisation regime
While securitisation transactions have been historically scarce in Israel, last year (30 July) the department of justice published the draft regulation of securitisation transactions law for public review. The new regulatory framework had been enacted in order to create a comprehensive legal and commercial framework for securitisation transactions in Israel. Prior to this publication, no coherent legislative architecture existed for the local securitisation market. However and since then, the macro geo-political events, war and uncertainties which have dominated local headlines, have deferred the passing of the new law.
Commenting on the context behind the securitisation law, Jason Smilovitz, an alternative credit specialist says: “Israel has been working on the securitisation law for many years. There is a strong desire by the Bank of Israel for the securitisation law to be completed and passed in order to promote a local securitisation market.”
He continues: “From what I’ve heard, the government’s initial plans were for the new securitisation market to be a plain vanilla securitisation market (MBS, consumer ABS, etc.).
However, Smilovitz notes that local banks have generally voiced an interest and preference for synthetic securitisations. He says: “That is not to say that there aren't other participants in the lending space here – bank or non-bank – that would benefit from a common securitisation form, such as auto ABS for instance. But the banks themselves, for capital relief purposes, would appreciate the ability to perform synthetic securitisations.”
He continues: “Banks need to manage their capital ratios and their risk-weighted assets according to the Bank of Israel requirements and global banking regulations. And so issuing a CLN or some sort of monoline insurance type product that can insure up to 80-85% of the value of a portfolio helps them manage their capital ratios. So for them, it's about the SRT, CRT trades, less so about getting mortgages or auto loans[1] off their balance sheet, which they can just as easily do through a portfolio sale to another institution.”
Naturally, the lack of specific regulation and structure on this matter, is perceived as the main barrier that has prevented the development of a local securitisation market. Nevertheless local banks have found ways, according to Smilovitz, to complete capital relief trades: “There have been capital relief trades by some of the leading banks over the years in the form of one-on-one, private transactions. However these aren’t SRT deals as there is no securitisation regime in place.”
He continues: “But you can perform private deals like issuing credit linked notes, which has been done by a some of the banks. CDS contracts, as I've been told, have been entered into with European counterparties.”
Looking ahead, Smilovitz does not expect, given the current context, the new law to be passed this year (as was originally planned). He concludes: “Obviously, there are a lot more important things going on right now. That is not to say that people aren't working on it, however it is unclear whether there will be a government willing to pick it up as one of the torches they want to bear in this current situation.”
Vincent Nadeau
[1] Back in April, law firm Gornitzky represented corporations within Clal Group in a private securitization transaction for the purchase of a loan portfolio for vehicle financing, in the framework of which Clal Finance was placed in a partnership established and fully owned by companies in the PEMA group. The financing was used by the partnership to purchase a loan portfolio for vehicle financing for a total value of approximately NIS 250m.
SRT Market Update
Capital Relief Trades
SG returns
SRT Market Update
Societe Generale is back in the SRT market with a new Junon deal. Sources say the deal could complete as early as next month, although closing could drag later into the summer.
Last time out, the transaction featured a first-loss tranche with a high single-digit spread and was structured as a CLN (SCI 16 October 2023). One source suggests that the terms of the new deal – the fifth from the Junon programme – are very similar to the previous issuance.
The programme references global corporate loans and Societe Generale typically seeks to casts its net wide for buyers, according to another source. “It has a lot of investors,” as the source puts it.
Joe Quiruga
SRT Market Update
Capital Relief Trades
Irish double
SRT Market Update
Further details have emerged on Bank of Ireland’s latest Mespil SRT deal (SCI 1 May). The transaction is understood to have been joined in the pipeline by one from fellow Irish issuer Allied Irish Bank.
The move comes after AIB Group confirmed that it is “progressing RWA optimisation measures, such as a significant risk transfer transaction” in its 2023 annual financial results released in March. Meanwhile, one source suggests that BOI will retain a “significant” portion of the first loss of its new Mespil trade, with the junior tranche attaching at 0.5%.
The SRT pipeline continues to be dominated by European issuers, as market participants wait for US issuance to come online later in the year. The Canadian market is also somewhat subdued at the moment, although BMO is said to have continued to be “very active”.
Elsewhere, the question of whether multi-strategy investors will stick around if SRT spreads keep tightening remains relevant. Some of the spread tightening has been attributed to so-called “tourist investors” seeking to access the market for relative value reasons.
However, one investor from a specialist SRT fund concludes: “If the fight for syndicated deals remains, these multi-strat investors will stick around. But why would they stay, if they see more value elsewhere? This year has seen significant tightening in the wider market, but there are so many investors looking at every deal, you can see how people would lose interest and look elsewhere.”
Joe Quiruga
News
Structured Finance
SCI Start the Week - 20 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
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Last week's news and analysis
AI credit analysis project launched
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CFPB funding mechanism 'constitutional'
Updates on Supreme Court ruling & a solar forward flow agreement
Climate-friendly mortgage programme launched
SRT Market Update
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GSE CES buying would gut private label market, says report
Job swaps weekly: Nordic advisory boutique opens
People moves and key promotions in securitisation
SRT Market Update
Issuance overview in April
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
Ally entry
Ally Financial in CRT market with new auto-linked CLN
Ally Financial is in the market with a debut CLN regulatory capital relief trade, arranged by JP Morgan, according to well-placed market sources.
The reference pool consists of auto credit-linked notes.
The issuer was granted approval by the Federal Reserve to treat this deal as a synthetic securitization for the purposes of calculating RWA in a letter dated May 2, addressed to Matt Bisanz of Mayer Brown.
The application was made on April 16, so the approval process took a little over two weeks. This is considerably shorter than the approval period required for Truist in the previous transaction, for which approval was sought in a letter of February 1 and granted on March 12.
Ally’s letter also notes “This action also permits Ally and Ally Bank to treat other credit-linked-note transactions as synthetic securitizations for purposes of calculating risk-weighted assets under the capital rule, so long as any such other credit-linked-note transactions are structured and documented in a substantially identical manner to the CLN transaction…”
No other terms of the deal regarding pricing are available yet.
Ally is a digital lender, and is now rated the 17th largest US bank, with total assets of around US$185bn.
Simon Boughey
News
Capital Relief Trades
Agency angle
SRT ratings on the rise?
Ratings for GSE credit risk transfer transactions are commonplace, given the US agencies’ desire to appeal to a wide range of investors. However, the volume of both public and private ratings for non-agency capital relief trades appears to be on the rise, as the market prepares for Basel 3 Endgame.
Andreas Wilgen, group credit officer for global structured finance at Fitch, says ratings in the European SRT market are still unordinary. “At the moment, the highest number of ratings are [for] the US CRT deals from the GSEs. In the European market, the majority of the deals are private and whether we are involved or not is a function of the investor. If the investor is keen on a rating, such as (re)insurance, then we can provide a rating - but usually only on the tranche being referenced or held by the investor.”
He adds: “The general purpose of when the rating agency does or doesn’t get involved is dependent on the investor. The synthetic market is sizeable and most of the time there is no rating agency involved. The banks who are selling the risk have their own inhouse models to assess it.”
However, the number of ratings assigned to capital relief trades is anticipated to rise simply because the volume of deals is increasing as the US non-agency market comes online and because the Basel 3 Endgame rules will increase the rationale to execute SRT transactions. As one well-placed source observes: “No one gets a rating if they don’t need one, but there are multiple reasons for SRT ratings post-Basel 3 endgame and grandfathering.”
The last SRT deal publicly rated by Fitch (together with KBRA) was Syon Securities 2020-2, which referenced a portfolio of owner-occupied residential mortgage loans originated by the Bank of Scotland under its Halifax brand (SCI 19 November 2020). The class A and B notes were rated from BBB-/BBB and BB-/BB (with a stable outlook), while the class Z notes were unrated.
Most recently, Moody’s last month assigned Aaa to B3 ratings to the US$330m class A through F notes of Bayview Opportunity Master Fund VII 2024-CAR1 Series 2024-1, a CLN referencing a pool of fixed rate auto instalment contracts with prime-quality borrowers originated and serviced by Huntington National Bank (SCI 28 March).
Joe Quiruga
News
Capital Relief Trades
Lever up
Back leverage for CRT buying on the rise
It is becoming increasingly common for buyers of positions in synthetic capital relief trades to use leverage, say well-placed market sources.
Not only does this procedure enhance returns at a time of diminishing yields, there is a growing number of banks prepared to advance funds for this purpose.
It is suggested that around 25% to 30% of the current US CRT market is funded through leverage. So, if the current market size is around US$10bn, then some US$3bn might be supported in this way.
Japanese lender MUFG was one of the first to lend to CRT buyers, but Bank of America is also said to be a lender. British High Street bank NatWest is said to have a presence as well.
“Forward thinking banks have been the game changer. It doesn’t matter how much I want leverage if no one is offering I’m not going to get it,” says a source.
MUFG and Bank of America declined to comment while NatWest was unavailable for comment.
The readiness to lend depends on a number of factors, however. The better quality the assets, the more banks are ready to lend.
The conditions of the loan are open to negotiation, from the term of the advance, the amount furnished and the percentage of the stake it constitutes, the rate charged, and whether it is marked to market or not. If the reference pool is entirely or principally investment grade exposure, then banks are prepared to lend up to 50% of the face value of the position.
One of the biggest sticking points is whether the loan can be advanced on a non-recourse basis. Most funds are wary of recourse lending and want to secure the loan only with the position itself. Banks, however, are often reluctant to lend on a non-recourse basis. They are more prepared to do so if the reference pool is comprised of investment grade assets, say sources.
The compression in yields has provided an incentive to fund positions through leverage. Deals are currently being sold at levels 150bp-200bp inside where they would have been priced eighteen months or more ago. Recent CLNs from US Bank, for example, were priced at spreads of only 5.75% and 5%, according to market sources.
The growth of leverage is also a reflection of the fact that there is now more familiarity with the product in the US.
“If there is a need for financial engineering, someone will find a way. This is bigger than it was and is developing,” says a source.
Simon Boughey
Market Moves
Structured Finance
Job swaps weekly: McCarthy Denning appoints CTLA-focused partner
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees McCarthy Denning hiring a former Greenberg Traurig shareholder as a securitisation-focused partner. Elsewhere, Sumitomo Mitsui Finance and Leasing (SMFL) has promoted a long-standing structured finance and corporate banking executive to head up its New York branch, while Offit Kurman has snapped up a former Greenspoon Marder partner as principal.
Helena Nathanson has joined McCarthy Denning as a partner in London. Specialising in the CTLA side of securitisations, she was previously a shareholder at Greenberg Traurig, which she joined in August 2020. Before that, Nathanson led the corporate trust team at Bryan Cave Leighton Paisner and was a structured finance partner at Reed Smith.
Meanwhile, SMFL has promoted Koichi Tanaka to managing executive officer and head of its New York branch. Tanaka moves from SMFL’s Tokyo office and will oversee all US leasing and finance operations. He previously led the firm’s structured finance group in New York and Sumitomo Mitsui Banking Corporation’s Japanese corporate banking division in Düsseldorf.
Offit Kurman has hired former Greenspoon Marder partner Howard Mulligan as a principal in its New York office, working within its business law and transactions group. Mulligan focuses on fund formation and fund transactions, mergers and acquisitions, structured finance, synthetic transactions, real estate, securities law, capital markets and business restructurings. He joined Greenspoon Marder two years ago.
CIC Private Debt has appointed Deodato Lourenço as head of private debt operations, focusing on both the firm’s CLO platform and its European large cap senior debt fund business. Based in London, he was previously avp, CLO operations at Cross Ocean Partners and worked at Alter Domus, US Bank and BNP Paribas Securities Services before that.
TCW has recruited Maggie D’Arcy as svp, securitised products, based in London. She was previously executive director, EMEA securitised products, SRT and CLO syndicate at JPMorgan, which she joined in July 2014 as a finance analyst.
KPMG’s Michael Davidson has joined audit, tax and advisory firm Mazars as banking audit partner, based in Leeds. Davidson leaves his role as audit director at KPMG after 20 years with the business, and will oversee the expansion of Mazars’ audit team in the Yorkshire region. He has worked with audit clients including securitisation vehicles, retail banks and specialist lenders, as well as providing non-audit-related services within the securitisation and structured finance space.
Merchants Capital has appointed Michael Larsen as cfo, as part of its ongoing plans to expand its low-income housing tax credit syndication, multifamily and healthcare securitisation and agency platforms. Larsen left his positions as coo at commercial real estate advisory firm Lument and president at its associated REIT, Lument Finance Trust, last year after five years with the business. He previously spent 15 years with Hunt Mortgage Group.
Appleby has hired former Walkers senior associate Cathryn Minors as an insurance-focused counsel in its Bermuda corporate department. Minors leaves her position at Walkers after two years with the firm, having previously worked at Conyers and pension services group Athora.
And finally, Nuveen Private Capital subsidiary Churchill Asset Management has appointed Marc Gonyea and Chris Davis as business development mds in their New York and San Francisco private credit teams respectively. Gonyea, who will also work with Nuveen’s European subsidiary Arcmont, joins after two years as md at Sycamore Tree Capital Partners and previously worked at Alcentra, Benefit Street Partners and Blackstone. Davis leaves his position as md at Barings after a year and nine months, having previously worked at Fisher Investments and Allianz Global Investors.
Corinne Smith, Kenny Wastell
Market Moves
Structured Finance
GACS 2.0 ABS 'better positioned' than GACS 1.0
Market updates and sector developments
GACS 2.0 NPL securitisations appear to be better positioned than GACS 1.0 securitisations, both from an asset side perspective - in terms of greater accuracy of original business plans, better collateralisation and healthier performance - and from a structural perspective, in terms of higher levels of conversion rates and hedging status. A new Morningstar DBRS commentary suggests that this gap will be further exacerbated in the coming years as increasing levels of credit enhancement will be observed for GACS 2.0 transactions, as a consequence of faster-than-expected deleveraging, while GACS 1.0 transactions will “keep burning cash into senior items repayments” as they approach the tails of the underlying portfolio.
Across the 31 notes that Morningstar DBRS rates that benefitted from the state guarantee, the weighted-average GACS premium paid since issuance was around 0.9% of the senior note balance – accounting for 1.2% and 0.5% for GACS 1.0 and GACS 2.0 transactions respectively. Since issuance, around €437m was paid by the issuers as GACS fees.
For these transactions, considering the latest business plan gross collections from the last IPD onwards multiplied by the average conversion rate observed (at 70%) as a proxy of the remaining collections allocated to guaranteed senior balance repayment, there are currently around €418m of senior notes potentially not covered at maturity. The aggregate original senior note balance issued in the context of these securitisations amounted to around €14.5bn and, as of the last interest payment date, the aggregate senior note balance had amortised by 59.7%.
“The vicious circle embarked by some underperforming transactions in the GACS 1.0 cluster might result in the state guarantee actually being enforced at maturity,” Morningstar DBRS notes. “However, the potential senior balance not covered according to the latest servicers’ projections will only be a percentage of the amount originally guaranteed. Additionally, potential payments of the guarantor to senior noteholders will be offset by the GACS fees paid to the guarantor in relation to transactions that are performing above expectations and will be fully redeemed at maturity and higher GACS premiums paid by underperforming transactions that will have deleveraged at a slower pace than originally expected, and will allocate increasing amount of collections towards the payment of the guarantee as the GACS fee curves ramp up.”
The GACS premium has been generally anchored to a basket of CDS of domestic issuers with the applicable rating. During the first years of a guaranteed transaction, the GACS premium increases over time according to the expected redemption profile of the senior tranche, before dropping to the long-run rate applicable until full redemption.
In other news…
ESMA adds to calls to revitalise securitisation
ESMA has published a position paper on building more effective and attractive capital markets in the EU. Among the 20 recommendations included in the paper aimed at strengthening EU capital markets is one that calls for a revitalisation of the European securitisation market.
ESMA’s recommendations for a well-functioning capital market focus on three aspects: citizens, companies and the EU regulatory and supervisory framework. The section on the securitisation market highlights the fact that the introduction of the Securitisation Regulation and the STS label has not yet produced “all the expected results”.
As such, the paper states that the European Commission should put forward a proposal aiming to revitalise the EU securitisation market “on the basis of a holistic and comprehensive review of the current framework”. While remaining conscious of potential risks to financial stability and investor protection, such a proposal should particularly look at prudential treatment, due diligence rules for institutional investors, reporting requirements for certain types of assets, the consistency of STS criteria and the supervisory process, according to ESMA. The authority further notes that the ESAs will provide advice to the Commission in this respect in 4Q24.
ESMA says it will continue to engage and collaborate with all stakeholders regarding implementation of the recommendations outlined in the paper.
Corinne Smith
Market Moves
Capital Relief Trades
New CAS
Market moves and sector developments
Fannie Mae is in the market with a US$707.6m deal, designated CAS 2024-R04 and its fourth CAS deal of the year.
The reference pool consists of 53,682 residential mortgages with an unpaid principal balance of US$18.6bn. All mortgages have an LTV of between 60.1% and 80%.
Nomura is the structuring lead and Bank of America Securities the co-lead manager.
There are four classes of offered notes – A1, M1, M2 and B1. They are sized at US$220.4m, US$220.4m, US$176.3m and US$90.4m respectively.
CAS 2024-R04 is the first CAS deal issued by Fannie Mae to include an offered Class 1A-1 note.
According to KBRA, “The offered Class 1A-1 Notes benefit from its shared receipt of the Senior Reduction Amount alongside the Fannie Mae retained 1A-1H Reference Tranche.”
Market Moves
Capital Relief Trades
CAS prices
Market updates and sector developments
Fannie Mae’s US$708m CAS 2024 R04, reported to be in the market earlier this week, closed today.
The US$220.4m A1 tranche, rated A+/A+, was priced to yield SOFR plus 100bp, the US$220.4m M1, rated BBB+/A-, yields SOFR plus 110bp, the US$176.3m M2 yields SOFR plus 165bp and the US$90.4m B1 yields SOFR plus 220bp.
Fannie Mae retains a portion of all four tranches and all the B2 and B3 first loss pieces.
The US$18.6bn reference pool comprises mortgages acquired between July and September 2023.
So far this year Fannie has issued US$2.9bn under the CAS programme.
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