Contents

Structured Finance

Five-point plan

EU securitisation reform package mooted

AFME has published a position paper that outlines a five-point plan to revive the securitisation market in the EU. Entitled ‘EU Securitisation back on track’, the paper describes the different ways that securitisation can be used as a tool to support EU growth and strategic objectives, identifies the regulatory hurdles that currently impede its impact and outlines a package of reforms designed to boost the trajectory of EU securitisation.

This package proposes measures that, when combined, should increase both the supply and demand for securitisation by: increasing risk sensitivity within the bank prudential framework; reviving demand from the insurance sector by adjusting Solvency 2 calibrations; adjusting the treatment of securitisation within the Liquidity Coverage Ratio; introducing proportionality for investors conducting regulatory due diligence; and fine-tuning regulatory reporting requirements and simplifying STS criteria for both traditional and synthetic securitisations. The paper argues that these policy recommendations should be implemented early in the next mandate to deliver on the European Council’s ambition.

Indeed, AFME believes that if implemented through sound reforms, securitisation’s utility as a tool used by both the private and public sector should drive competitiveness and growth in the EU across eight areas. In particular, an efficient securitisation framework in the EU will improve access to cost-effective credit for both consumer and wholesale market segments.

Equally, securitisation can create a full spectrum of credit risk from triple-A to equity-like risk, to meet the respective risk appetite of the EU investor base. This range of risk, evidenced by data over the last 40 years, has performed in line or better than fixed income asset classes perceived as more ‘vanilla’.

But the paper also highlights that securitisation can help finance the green transition. According to the European Commission, the scale of funding required is estimated to be €350bn in additional investment per year over this decade to meet the 2030 emissions-reduction target in energy systems alone, alongside the €130bn Europe will need for other environmental goals.

Additionally, AFME points to the utility of securitisation in terms of facilitating the sale of non-performing exposure (NPE) portfolios to non-bank investors specialising in distressed debt assets and efficiently releasing capital by transfering credit risk through SRT outside the banking sector, thereby enabling banks to lend more to the real economy. “It can support the much-needed shift from a European economy relying primarily on financing through banks’ balance sheets to one that is able to mobilise the full potential of capital markets. It does this by acting as a transmission mechanism, enabling borrowers to have indirect access to the capital market and enabling investors to indirectly gain exposure to the EU economy,” the association notes.

Overall, the paper suggests that certain areas of Level 1 framework legislation and Level 2 measures - combined with the development of the relevant Prudential Frameworks - have deviated, sometimes materially, from the apparent intent of global standards. “These deviations typically manifest within the EU regulation through an amplification or ‘gold plating’ of criteria set out in these standards,” AFME observes. “The combined effect of these regulatory and prudential reforms has had the effect of suffocating any revival of the EU securitisation market. The intent of this paper is therefore to identify some of these deviations, highlight areas of the regulation and prudential frameworks that lack risk sensitivity and proportionality and propose a package of reforms to boost the trajectory of EU securitisation, while maintaining the existing safeguards embedded within the regulation that prevents the proliferation of high leverage products under the banner of securitisation that originated in the US in the run up to the Global Financial Crisis.”

At the April European Council, EU leaders called for a ‘new European competitiveness deal’ by advancing the work on the capital markets union and by ‘relaunching the European securitisation market, including through regulatory and prudential changes’. This ambition echoes the recent ECB Statement that suggests ‘reviewing the prudential treatment of securitisation for banks and insurance companies and the reporting and due diligence requirements’. The Eurogroup has also identified securitisation as a topic of priority for developing EU capital markets. In April, both the report by Enrico Letta on the Single Market and the proposals on European capital markets by Christian Noyer stressed the benefits of securitisation as a bridge between bank and capital markets-based funding and as a tool offering unique investment opportunities for investors and additional bank financing capacity. Most recently, ESMA - in its own position paper - advocated an approach to reviving the securitisation market. 

“As policymakers have come to acknowledge the valuable role that securitisation can play, there is increasing recognition that the combined effect of certain provisions within both the EU Securitisation Regulation and the EU Bank and Insurance Prudential Capital Frameworks have disincentivised EU investors and limited utility of the product as a funding tool by EU issuers. This consensus has grown in regard to the contribution securitisation can make to financing EU growth,” concludes Shaun Baddeley, head of securitisation at AFME.

Corinne Smith

Alternative assets

Data dynamics

Investor interest in data centre ABS takes off – SCI esoteric seminar

The number of investors in data centre ABS deals has grown by threefold and there are now about 150-160 involved in the space, according to speakers at SCI’s second esoteric ABS seminar in New York last week.

Insurance companies comprise over half this number, with traditional asset managers also well-represented. But hedge funds, private equity firms, banks and pension funds are also in the mix.

The sector and the interest in it have exploded, agreed speakers. “When I go to cocktail parties, people don’t ask me about CLOs any more, they ask about data centres,” said one panellist.

Buyers have cottoned on the fact that data centres generally capture very high quality assets – “mission critical assets” as one speaker put it - and, in the case of hyperscale deals, only a limited number of tenants.

Not only do hyperscale deals have fewer tenants, the contracts are also often shorter, which further increases their attractiveness.

About 75% of new issuance is now from hyperscale centres and 25% colocation, say speakers. Even though there is often no difference in credit ratings, the market now prices in around a 75bp spread differential between the two.

However, it behoves investors to get to know the market fully before they commit capital to it, added panellists. No two deals are alike: tenants, assets and contracts vary appreciably. “Investors have to dig,” said one.

There are challenges for the sector. Credit ratings are often linked to the ratings of the operators as there is not sufficient data to derive a rating from the assets.

A ceiling on growth may also be imposed by the limitations of the electrical grid. Data centre growth has been so dramatic and they use so much electricity that state grids are sometimes struggling to keep up.

But the factors underpinning growth are irresistibly powerful. The move to the cloud and AI stand at the top of that list.

And while traditional bank lending still has a significant role to play in the provision of liquidity to the sector, the ABS market is now more often than not the chosen vehicle for developers.

“Demand for high quality tenants is off the charts,” said one speaker.

Simon Boughey

Capital Relief Trades

Record breakers

B1 tranches hit all-time low new issue print

Record tight new issue spreads were recorded in GSE-issued CRT B1 tranches in May, according to research conducted by Mark Fontanilla & Co, the leading CRT consultancy and data provider.

The B1 tranche of Fannie Mae’s recently priced CAS 2024 R04 in May came in at SOFR plus 220bp, some 10bp inside the previous record low for a new B1 tranche.

The B2 tranche of Fannie’s CAS 2024-R02, sold in March, also notched up a new low for B2 pricing, coming in at plus 370bp.

Credit spreads across the board have moved narrower this year, but increased credit enhancements (CE) have specifically helped the lower reaches of the GSE capital structure since 2022, says Fontanilla. At that point B1s began to incorporate considerably more than 100bps of CE. This year, B2s have received 100bp of CE, an appreciable uplift from the 10-25bps of CE that was common for these tranches before the pandemic.

Some US$1.7bn of new STACR and CAS paper hit the street in May, making it the biggest month for supply so far this year. However, this was substantially offset by the latest STACR tender offer, completed last week, which took US$1.2bn of paper out of circulation.

To date in 2024, CAS/STACR benchmark issuance is US$4.56bn, virtually matching volumes seen in the same period last year but substantially down on a couple of years ago. In keeping with recent trends, the bulk of issuance has been investment grade. For example, only the B1 tranche of the recent CAS deal was rated non-investment grade, and that comprised just13% of the deal’s issuance size.

Delinquencies continue to be negligible. Overall delinquencies in STACR deals fell 2.4% in sum month on month in May, with 60 of 72 reference pools seeing delinquencies decrease. Delinquencies in CAS issuance also remain very low and have decreased lately as well.

“Returns for GSE CRT are now 5.94% year to date based on the CRTx® index closing value for May.  This pace has certainly been buoyed by firmer new issue spreads this year down the capital stack, in addition to continued tender activity in seasoned paper” says Fontanilla.

The CRTx is the firm’s flagship proprietary index.

Simon Boughey

Capital Relief Trades

Top of the pops

Private risk sharing volumes hit €1trn

Private risk sharing exceeded €1trn of cumulated volumes across over 500 transactions between 2016 and 2023, according to IACPM’s latest annual synthetic securitisation survey. Last year alone saw around €200bn of new issuance from the 40 banks involved in the survey, with over €600bn of bank loans covered by €55bn of junior tranches.

In the EU, €300bn of bank loans were covered by €24bn of first loss and mezzanine tranches. A growing number of trades (50% versus 33% in the prior two years) qualify as STS to benefit from the more favourable capital treatment.

The increasing popularity of SRT came despite anxieties over possible rising default rates – and, in fact, optimism over the stability of loans insured seems to be the norm. Both credit investors and risk-averse pension funds invested heavily in portfolios attaching at 0%. As the market develops, it is piquing the interest of non-life (re)insurers.

The SRT market is developing in tandem with regulatory changes, with the 2022-2023 period seeing a growing share of SA banks enter the fray, in contrast to the IRB banks that have thus far dominated the sector. Which tranches are protected (and how) is also changing. Before 2022, IACPM suggests that deals were structured either as fully funded CLNs or fully collateralised tranches. However, unfunded mezz protection is growing in popularity.

Indeed, the 13 insurer respondents protected more than €1bn of SRT tranches last year and, as close to 90% of insurance protection is syndicated, each participant retained on average one-third of the insured tranche, with an average size of insurance protection of €25m after syndication. Unfunded protection is currently executed mostly on European loans pools (representing 55% in the EU and 30% in the UK), with a growing share of loans to SMEs and large corporates, followed by residential mortgages.

Meanwhile, the average risk-weight of securitised loans held steady at 63% versus the previous survey (SCI 11 July 2023). The proportion of loans referencing corporate and SME assets also remained stable at 80%, but this is shifting as more regional EU and North American banks come online, skewing the market towards retail loans and residential mortgages.

The share of sustainability-linked trades - through underlying assets, use-of-proceeds and incentives in the deal structure - is also gradually increasing, mainly in Europe, reaching 11% in 2023 up from 6% in 2022.

The total proportion of European and UK banks involved in the market has declined, numbering 80%-90% up to 2019 and around 60% in 2022-2023, due to the increased appetite of North American banks. The survey points out that the American market differs, with structuring differences arising from the maturity of the practice, capital being absorbed by underlying assets, regulatory standards and depth of local investors’ private markets.

This manifests in difference in tranche thickness on corporate loans, with North American deals seeing 0% to 12.5%, compared to 0% to 8%-9% on UK or European deals. The main risk transfer instruments also differ, with UK or European deals consisting of collateralised guarantees, CLNs with embedded guarantees and unfunded credit insurance. Meanwhile, North America mostly sees CLNs with embedded CDS.

In both regions, the market has been slowly moving away from SPVs - although this is a recent development for North America, after the Fed last year agreed to release capital on direct CLNs. While Europe has no regulator-imposed volume limits, in North America it is decided bank by bank (on direct CLNs only).

Based on the results of the survey, the increasing number of banks and securitised asset classes and investors’ appetite, IACPM estimates that by the end of 2024 around €75bn of aggregated capital will have been raised by private risk sharing - assuming the final Basel 3 regulations across different jurisdictions enable effective capital release. The association concludes that the “robustness and resilience” of the market will largely depend on the existence of standards such as STS and the “professionalism and stability” of large pool protection providers that act as long-term partners of banks.

Joe Quiruga

Structured Finance

Treasury survey underlines regulatory constraints

Market updates and sector developments

AFME has published the results of a survey undertaken to examine bank treasuries’ asset allocation drivers in relation to securitisation. The results of the survey demonstrate how various regulatory constraints prevent bank treasuries from fully utilising securitisation as part of their liquidity stress buffer. 

Of the 25 respondents to the AFME survey, 80% invest in securitisation in general and 80% of those invest in securitisation for High Quality Liquid Assets (HQLA) purposes. A key finding of the survey is that reduced appetite for securitisation for HQLA purposes is predominantly due to regulatory constraints, such as haircut levels, LCR eligibility criteria and limited eligible asset availability. 

The survey also highlights that the sovereign debt crisis, Covid-19 and the UK’s Liability-Driven Investment (LDI) crisis are all recent liquidity stress events which affected respondents’ HQLA books. Additionally, mixed views on the liquidity of the European ABS market were expressed - likely driven by a recognition that on one hand, lack of supply and a reduced investor base create a shallow secondary market, while on the other hand, an investment grade floating rate product can be a strong source of liquidity in certain stressed scenarios, such as the UK’s LDI crisis when ABS proved to be very liquid. 

Finally, respondents cited a number of factors that would facilitate future investments in ABS, including: better treatment of securitisation under the LCR; increased issuance; better return on regulatory capital; and a larger investor base. 

AFME has long advocated for the revision of the treatment of securitisation under the LCR and has cautioned against drawing definitive conclusions about market participants’ appetite for securitisation based solely on the current (low) levels of investment activity. The association argues that the LCR - which forms a critical part of the EU securitisation prudential framework - can play a key role in assisting the restoration of the EU securitisation market, if properly calibrated.  

In other news…

CLO good practices report released
IOSCO has published its final report on good practices in the leveraged loans and CLO markets, reflecting the results of a public consultation launched last September (SCI 14 September 2023). The organisation says it has been following the evolution of these markets, including significant shifts in market practices that emerged during the ‘low-for-long’ interest rate environment. In its analysis, IOSCO has focused on examining the impact of fewer and looser covenants on investor protections, whether there is adequate transparency in these markets and the scope for potential conduct-related issues to arise.

As such, the final report describes in detail 12 good practices that are designed to support market participants in their decision-making when operating in the leveraged loans and CLO markets. These practices are grouped into five themes: origination and refinancing based on a sound business premise; EBITDA and loan documentation transparency; strengthening alignment of interest from loan origination to end investors; addressing interests of different market participants throughout the intermediation chain; and disclosure of information on an ongoing basis.

ECAF acceptance for Scope’s ABS ratings
The ECB has accepted Scope’s ABS ratings in the Eurosystem, after last November’s recognition of the rating agency as a new external credit assessment institution (ECAI) in the Eurosystem Credit Assessment Framework (ECAF). This recognition included sovereign, corporate, financial institutions and covered bond ratings. However, the application process for ABS followed a separate, specific procedure, which has now been completed.

The complete technical implementation of Scope’s ratings by the ECB is expected shortly, making them eligible for monetary purposes. The rating agency says the move creates a more diversified and competitive rating landscape, enhancing the stability and performance of European financial markets and in particular supports the European securitisation market.

ECAF aims to harmonise credit assessment standards across the euro area, ensuring consistency and fairness in how collateral is assessed. With ECAF accreditation, Scope’s credit ratings can be used to fulfil credit quality requirements of marketable assets that are eligible as collateral in Eurosystem monetary policy operations.

Golub, Nassau team up
Nassau Financial Group and Golub Capital have entered into a strategic partnership, whereby Nassau will receive a US$200m minority non-voting common equity investment from Golub Capital. Nassau and Golub Capital will also enter into a long-term investment management agreement that will provide Nassau’s insurance subsidiaries with access to Golub Capital’s middle market direct lending strategies, through tailored capital-efficient solutions. The arrangement provides capital to support Nassau’s growth strategy, including through organic growth and acquisitions, and further strengthens its balance sheet.

With this transaction, Golub Capital will be the largest minority equity holder in Nassau, following investments from Fortress Investment Group in 2023 and Wilton Reassurance Company and Stone Point Credit in 2021. Nassau was founded with an initial capital commitment along with subsequent growth capital provided by Golden Gate Capital, which remains Nassau’s majority controlling equity holder.

The transaction is expected to close in 2H24 and is subject to customary closing conditions, including receipt of regulatory approvals.

Corinne Smith

Structured Finance

ILS opportunity set revealed

Market updates and sector developments

A recent SIGLO Capital Advisors study estimates that the global ILS market is slightly over US$100bn in size and, as such, equates to roughly 20% of overall global risk-bearing reinsurance capital. The private ILS market segment accounts for around 60% of this total, while the public catastrophe bond market segment accounts for the remainder. The top 20 ILS managers were reportedly overseeing US$81bn, as of June 2023.

The SIGLO study collected key characteristic data of investable open-ended ILS funds, as of June 2023, and analysed the data received from 52 different funds equating to US$27bn of managed assets exposed to ILS. Of these funds, 16 have at least 90% of their NAV derived from investments in public cat bond transactions, while 16 others consist of investments that are almost exclusively exposed to private ILS transactions. A further 20 funds consist of a mixed allocation to cat bonds and private ILS transactions.

The study found that the typical open-ended ILS fund size is less than US$500m and almost half of the funds offer a no-loss return that ranges between 10%-15% per annum, relating to an expected loss range of 2%-4% and a CVaR 99% between -20% to -40%. About half of the risk (expressed as expected loss) is driven by US wind and the remainder by US earthquake, other natural catastrophe, European wind and Japanese wind perils. Finally, cat bond funds demonstrated a more homogenous modelled risk profile than funds with an allocation to private ILS transactions.

The aim of the SIGLO study is to provide the investor community with a detailed overview of the investable ILS product landscape, supporting the need for more transparency and comparability by objectively describing the investment opportunity set, as well as corresponding risk and challenges. “The heterogeneity of the ILS market can be a hurdle for investors to gain interest and trust in the asset class. The investor community may find it challenging to build an informed opinion to assess and compare the attractiveness and risk of the different products and consequently to design and build an ILS investment portfolio tailored to their specific needs,” the firm observes.

In other news…

Aira inks heat pump ABS
Clean energy firm Aira has secured €200m in debt commitments from BNP Paribas, whereby the firm is set to pioneer the heat pump securitisation asset class. The warehouse financing facility will facilitate the installation of Aira heat pumps in thousands of homes across Germany by what the firm describes as “supercharging” its zero upfront, consumer financing model.  

Transforming residential heating and moving Europe off fossil fuel-based boilers will require substantial financial investment - not only to develop and install the technology, but also to make it accessible and affordable. The BNP Paribas facility therefore represents the beginning of Aira’s ambition to bridge this financing gap.

“Clean and affordable home energy solutions is a crucial component in the transition to an inclusive net-zero economy. We are pleased to support Aira on this important initiative to accelerate heat pump adoption and the energy shift. This partnership not only aligns with our strategic goals of fostering sustainable investments but also represents the opportunity to develop an innovative asset class in Europe," comments Eirik Winter, ceo of BNP Paribas Group Nordic region.

Ambac acquires controlling stake in Beat
Ambac Financial Group has acquired a 60% controlling stake in Beat Capital Partners for approximately US$282m, up to US$40m of which will be paid in shares of Ambac common stock. The remainder will be paid in cash and is subject to closing adjustments, with the transaction expected to close in 3Q24, subject to regulatory approvals.

Pursuant to the agreement, Ambac will purchase 60% of Beat from existing shareholders, including Bain Capital and Beat’s management team. Consistent with Ambac’s philosophy of financial alignment of interests with its business partners, Beat’s management team and Bain Capital each will retain an equity stake of approximately 20% in Beat. 

Beat partner and chairman John Cavanagh will continue to manage the business as part of the senior leadership team. Since its inception in 2017, Beat has launched 13 underwriting franchises and MGAs. In addition, it has the management rights for Syndicates 4242 and 1416 at Lloyd’s and an exclusive capacity relationship with a Bermuda reinsurer (Cadenza Re).

Beat’s businesses produced US$533m in combined gross premiums and approximately US$17m in EBITDA in 2023. With the addition of Beat, Ambac’s specialty property and casualty insurance platform is projected to generate in excess of US$1.4bn in gross written premiums on a combined full-year 2024 pro forma basis.

Corinne Smith

Structured Finance

Job swaps weekly: Paul Hastings poaches private credit team

People moves and key promotions in securitisation

This week’s round-up of securitisation job swaps sees Paul Hastings poach a team of restructuring, private credit and special situations lawyers from King & Spalding. Elsewhere, Apollo-allied credit solutions provider Cadma Capital Partners continues to beef up its leadership team, while Kirkland & Ellis has lured a structured private credit lawyer to its debt finance group.

Collectively, the King & Spalding team brings extensive experience to Paul Hastings, representing diverse clients ranging from private credit funds and BDCs to banks, financial institutions and CLOs. The team includes Jennifer Daly - who was co-head of the global finance and restructuring practice at King & Spalding - Roger Schwartz, Matthew Warren, Christopher Boies, Zachary Cochran, Peter Montoni, Geoffrey King, Lindsey Henrikson and Robert Nussbaum. Daly, Schwartz, Boies, Montoni and Nussbaum will be based in New York; Warren will split time between Chicago, where he will be joined by King and Henrikson, and Houston; and Cochran will work out of the Washington, DC and New York offices.

Meanwhile, Cadma Capital Partners has named Dan Long md and head of structured finance, based in New York. He was previously md, head of venture credit at Cohen & Company Asset Management, which he joined in 2019. Long began his career in credit and ABS structuring at Barclays in 2006, before moving to Resource America and then co-founding PeerIQ in 2014.

Michael Urschel has joined Kirkland & Ellis as a partner in the debt finance group, where he will lead the firm’s structured finance and structured private credit practice. Urschel advises sponsors, credit funds, initial purchasers, institutional investors, investment banks and borrowers on a broad array of structured finance transactions, ranging from whole business securitisation to digital infrastructure and energy asset securitisation. He was previously a partner in Milbank’s New York alternative investments practice.

Expert witness firm SEDA Experts has appointed Vadim Verkhoglyad as md. Verkhoglyad is vp and head of research at dv01 and in that role has published research highlighting performance and origination trends across multiple credit markets, along with macroeconomic reports, geographic analysis and other ad-hoc projects. He was previously a structured credit portfolio manager at Tricadia Capital, where he worked for 12 years covering RMBS and ABS, having begun his career as an analyst at Bear Stearns in 2005.

Finally, Seyfarth Shaw has recruited partner John Domby to its real estate department in Charlotte, North Carolina. Domby joins Seyfarth from Katten Muchin Rosenman, where he was a partner in its real estate finance and lending practice. A real estate finance attorney with experience in all phases of the economic cycle, from originations to workouts, Domby advises banks and funds on structured commercial real estate financings, with an emphasis on closing new originations of floating-rate bridge loans and CMBS loans.

Corinne Smith