News Analysis
Asset-Backed Finance
Stairway to securitisation
Alternative lenders taking UK forward flow market by storm
Forward flow transactions continue to rise in popularity, with the private market serving as both a useful tool for existing participants in the structured finance market and a gateway into securitisation for a growing number of alternative lenders in the UK.
“Over the last few years, we’ve seen this funding product become more and more popular,” says Sarah Caldwell, partner at Reed Smith. “We have received a rapid increase in the amount of requests from both seller/servicer and investor clients to advise on forward flow transactions – and now not only is everyone talking about these types of transactions, but many market participants are finding them their preferred route for investing in asset classes they may not otherwise have exposure to and for sellers/servicers with established origination platforms earning revenue from originations they would not otherwise be able to fund.”
Forward flow transactions have been around for a long time. They fell out of favour for some time, with people opting instead for the likes of securitisation and receivables financing, but their popularity is once again on the rise.
Despite the opacity of the market due to the private nature of transactions, forward flows are bilaterally negotiated – making for a speedy and efficient method of moving things off balance sheet versus the popularly used securitisation mechanism. Indeed, there is some correlation between the resurgence in forward flow activity and the securitisation market according to another partner at Reed Smith, Nathan Menon.
“We’ve advised on a number of forward flow transactions, and to some extent this stems from a period in time three to four years ago when the securitisation markets were a bit slower,” he explains.
In particular, forward flow transactions have proven to be a very popular choice for smaller, alternative lenders – a space that has seen several newcomers in recent years.
“The ticket size of forward flows hits the sweet spot for these alternative lenders,” Menon says. “Because of the bilateral nature of these deals, you’re not necessarily relying on the same force of will required to get a securitisation over the line from an arranger or joint lead manager.”
He continues: “These smaller specialty providers can use forward flows as a way of driving their transaction volume, either because they want to buy the assets and want greater exposure to them, or because they want to get rid of whatever they’ve got on their balance sheet. There’s a real commercial driver to all this.”
Interestingly, for many of these smaller niche lenders, forward flows serve as an effective gateway into securitisation issuance.
“Some of the newer players who don’t have enough volume may forward flow first, and then flip that into a securitisation later on,” says Caldwell. “We’ve worked on transactions where it’s a forward flow into potentially an SPV financed by an investor – like a warehouse, but on a forward flow basis – and once you’ve built up enough assets, you can then flip that into a securitisation.”
For others active in the forward flow market, these transactions are pursued alongside a securitisation strategy – often as a way to diversify their means of raising capital and liquidity.
She adds: “There are lots of ways forward flows can be used, depending on the client – whether it’s a stand-alone deal or to later flip into a securitisation. We often see provisions baked into the servicing agreement, and sometimes even the mortgage sale agreement, that if there is a securitisation the originator will get some sort of upside or fee from the securitisation issuance – as they’ve obviously been helpful in originating and completing the initial forward flow.”
Indeed, for some clients, forward flows can be used as a controlled means of gaining exposure to a new asset class of risk. However, forward flows are not only an attractive choice from the sell-side, but the buy-side too.
“You have two parties with a need,” says Caldwell. “One’s got the money, and the other has the platform. We can bring them together to do forward flows, which can be completed fairly easily and quickly. You can match two people up in the market, which ends up with a great outcome for both parties.”
Forward flows can be done with an array of asset classes and in an array of jurisdictions. However, the UK market is reportedly at the forefront in terms of issuance volumes. As the hub of mortgage assets, it is hardly surprising that many forward flows are completed in the residential mortgage space.
“Certainly, with recent clients, we’ll look at the asset class through the forward flow,” says Menon. “If we think it’s something we can grow into a new business or product line, then we’ll already have some exposure to the book and understand how the business operates. We’ll have seen a lot of the information that comes through via the reporting channels. They can look at that and make much more detailed commercial decisions off the back of that.”
He continues: “Mortgages have long terms, they’re relatively straightforward to model and they have a relatively manageable number of delinquencies compared to other asset classes. That provides a stable cash flow model that is well suited to securitisation. All the hallmarks that make it suitable for securitisation, also make it suitable for forward flows. So, participants familiar with RMBS or CMBS will be familiar with mortgage forward flows – and vice versa.”
The UK has seen a large uptick in the number of niche alternative lenders in the residential mortgage space of late. Some of these lenders have already been active in issuing securitisations and forward flow transactions. However, there remains significant plurality in the UK mortgage lender and originator space versus the rest of Europe – which has remained far narrower post-GFC.
It is not just residential mortgages being used in forward flows. Other popular assets seen in the forward flow world are also those that are prominent in the securitisation space, such as consumer receivables and loans. Yet, despite the connection to the securitisation market, the forward flow market is expected to remain private – mostly as a result of the bespoke nature of the deals.
“The forward flow market is nascent and doesn’t yet have the same level of sophistication seen in the loan market with, for example, the Loan Market Association” says Menon. “As such, the documents are bespoke, so it would be tricky to develop more standardisation.”
New regulation
The lack of standardisation in the forward flow universe is unlikely to change anytime soon – nor is the market expected to be affected by the new securitisation regulation due to hit the UK later this year.
“Provided a forward flow has a single originator and it’s not tranched in any way, it shouldn’t trigger the securitisation regulation as it stands,” Menon explains. “In some ways that is a positive thing as it makes the analysis quicker, and limits the regulatory burden on the transaction as a whole.”
Of course, if greater divergence from EU regulation is to occur later down the line, this would however have some impact on the market going forward. Indeed, on the whole, parties typically choose to steer clear of falling under the securitisation regulations for forward flow transactions – although mindful structuring is often needed to avoid this.
Caldwell explains: “When you fall into the realms of securitisation regulation, you’ve got risk retention and reporting to consider – so you’re adding in a layer of additional compliance obligations that are costly, and the 5% risk retention will see someone having to put the cash in from an originator perspective.”
As the forward flow market continues to expand, many stress the importance of collaboration between the purchasers and sellers in transactions. Caldwell notes that time-frames for completion vary – she has seen some negotiated in just eight weeks while others have taken six months – but strong collaboration is important.
“It’s a bilateral negotiation – so the quicker you can get a deal done, the cheaper it will be for both parties,” she says. “I always advise my clients to get their heads of terms agreed before they start working on any documentation. Spending time getting heads of terms nailed down, even with lawyers, can be very helpful, as when it comes to negotiations there will be less back and forth. But it will mean having to do lots of turns and redrafts so it ends up being a lot more efficient.”
Menon adds: “Because you don’t have the joint lead manager, arranger type entity that’s really pushing the transaction forward, getting the commercials and the operations side nailed down early really helps smooth out the transaction negotiation timeline.”
Claudia Lewis
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News Analysis
Capital Relief Trades
Growing up fast
CEE SRT benefitting from breadth and depth
The Central and Eastern Europe (CEE) SRT market is on the cusp of maturity, benefitting from a clear regulatory framework and increasing issuer and investor interest. Indeed, auto and consumer loan portfolios, for example, are being referenced sooner than is usual for a developing synthetic securitisation market.
“Before Covid, there was some sporadic activity [in the CEE region], which tended to be on the true-sale for funding side. But it has grown a lot in the last two to 2.5 years and there is now breadth and depth in the market,” confirms Wasif Kazi, a member of the securitisation team at UniCredit.
By breadth, he means that multiple SRT transactions are known to have been issued in every CEE jurisdiction except Slovenia and that investments are now being carried out more frequently by private investors as opposed to multilaterals. Meanwhile, depth is clear in the success and prolificness of Polish issuers.
Kazi adds that there are other clear signs of maturity: “Reoccurring programmes is a hallmark of a maturing market. The SRT investor base is smaller than, say, covered bonds. So investors and issuers build closer relationships, meaning investors really understand the issuer and then when a name comes into the market and they have a transaction which has worked over a period of time, it makes the next transaction all the easier.”
This has something of a snowballing effect on the market’s development: “Repeat issuers are entrenched in the marketplace and that also helps the next Polish bank which comes along, as investors know the practices in the jurisdiction are holding up well. So, you will have the accumulation of investors every year, which helps the market grow gradually,” Kazi continues.
Pawel Turek, counsel at DLA Piper, says that this could also be beneficial for investors around for the long term, even if that is in other securitisation markets: “Banks are currently focused on synthetics with no funding angle, but the market changes. So, from this perspective, the investors would like to be there from the very beginning and then develop those relationships.”
Another benefit is that each CEE jurisdiction is a member of the EU. This means issuers can work with a proven SRT regulatory framework, namely the STS classification. Many Polish deals have followed this framework, including the Polish corporate deals from BNP Paribas (see SCI’s CRT Deal Database).
Kazi explains: “The EU regulations happen the same way, no matter which EU country you’re talking about, so it makes it easier for banks from those smaller jurisdictions to come in because everyone is following the same rules.”
Like other jurisdictions, regulation is an important driver in market growth, with issuers looking to satisfy capital requirements as Basel 4 looms. As such, Turek expects more issuers to come to the market.
Other sources suggest one such bank may be the partially state-owned PKO Bank (SCI 12 June), although this may be to diversify capital management tools rather than to meet Basel requirements.
Most deals in the region still reference the corporate and SME loan asset classes, although other portfolios are growing in popularity too. Kazi opines that auto and consumer loans are being referenced “earlier than usual” in the market.
“Corporate and SME portfolios in CEE can look different than elsewhere. You have smaller corporations involved and a lot of them have development bank guarantees, which makes them less attractive for SRT,” he says.
He adds: “The lending is done on revolving credit rather than large term loans. So, we see more granularity and we’ll see more of these revolving credit overdraft facilities. I don’t see loads of scope for large corp transactions and I don’t think the project finance or renewable energy books have enough volume – maybe they would on a multi-jurisdictional level, but this would affect STS.”
STS is of increasing importance in the region, both for the profitability of deals from the issuer perspective and to ensure deals meet Basel 4 guidelines. “When STS first came in, there was a degree of trepidation. But the rules are workable and people always want clarity. I think it’s working pretty well,” Kazi explains.
He concludes: “I think the cliff edge aspect worries people – if you have one asset which doesn’t fit in, that jeopardises the classification – but when it’s achievable, it improves the profitability of transactions. It’s equally possible for everyone to get STS, so the benefit of getting the lower risk weight on the senior can flow through. It has helped the broader market and given solid support to the CEE market.”
Joe Quiruga
News Analysis
Structured Finance
SCI In Conversation Podcast: Chris Hentemann, 400 Capital Management
We discuss the hottest topics in securitisation today...
In this episode of the SCI In Conversation podcast, SCI US editor Simon Boughey speaks to Chris Hentemann, managing partner and chief investment officer of 400 Capital Management, about where he sees value today. Hentemann discusses the types of assets and regions of issuance that are of most interest; the attraction to France, Iberia, and northern Europe; the extent to which European regulators have been quicker than US counterparts to put banks into suitable capital regimes; and more.
Hentemann explains that US consumer assets, particularly in the residential space, have favourable fundamentals, while in Europe there has been an uptick in activity around consumer and SME portfolios in recent years. He also discusses being a day-one investor in the GSE-issued CRT space and the recent valuation shifts in this market, as well as his views on the esoteric markets.
This 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').
News Analysis
Structured Finance
Northern green light
Norwegian securitisation to benefit from 'plug-and-play' scenario
The EEA’s long-awaited passage of the EU Securitisation Regulation should finally open the door for Norway’s securitisation market (SCI 14 June). Indeed, the jurisdiction is expected to hit the ground running.
Markus Nilssen, partner at BAHR, explains: “Banks here are exposed to higher capital requirements than elsewhere in Europe; for example, a 4.5% systemic risk buffer on Norwegian exposures. This is higher than most other European jurisdictions and means securitisation in some ways makes more sense for a Norwegian bank than other European banks without such exposures.”
He adds: “It has been a long wait where Norwegian banks have lacked an important capital management tool, which has put them at a disadvantage compared to their European peers. I think we will see a number of banks dig into this and see what opportunities await.”
Jonas Bäcklund, ceo of Revel Partners, adds: “The Norwegian banking market is relatively concentrated. We see no reason why the situation in Norway should not develop as it has done elsewhere in Europe and help to reduce systemic risks, allow for banks to better manage their capital position and in the end provide capacity for more lending to support the real economy.”
The Norwegian securitisation market has seen false dawns before. While the Securitisation Regulation became effective in the EU in 2019, the EEA (which also includes Liechtenstein and Iceland) has struggled to adopt the regulation for its purposes, prevented in part by a substantial backlog of financial regulations and a perceived lack of political interest in facilitating securitisation. However, Nilssen believes that this may ultimately be to the benefit of Norway’s market.
He explains: “The EU securitisation market has grown at a slower pace than what the EU was hoping for when SecReg was passed, and the European regulators have consistently worked on improving the legal framework to facilitate growth. The EU’s Green Deal and its ambitions for a Capital Markets Union requires the establishment of a viable securitisation market in Europe, which should motivate further improvements.”
He continues: “The regulatory landscape for securitisation has therefore changed for the better, and it is now a more viable funding or credit risk management tool compared to in 2019. Coming into 2025, we’re looking at the implementation of both Basel 4 and the SecReg in Norway, and I believe this will present Norwegian banks with some interesting opportunities.”
While this will present “a learning curve”, the passage of an improved SecReg alongside improved Basel regulations means the jurisdiction could avoid teething problems seen in the EU: “In Europe, they have been building it stone by stone, and the Norwegian banks should benefit from these efforts once our securitisation market opens.”
Bäcklund agrees: “There’s more regulatory clarity now, in addition to more transactions that can be used as benchmarks. The starting point is better than it has been for most other European markets, with a more plug-and-play solution.”
The SecReg, of course, still requires the approval of the Norwegian parliament. Nilssen believes this is a foregone conclusion. Although it’s run by a minority government and left-wing parties have a strong presence, he says: “It’s a technical financial regulation which isn’t high on the political agenda. I think the debate has already been had before and, at the end of the day, this is an EU law we have to implement.”
If the law passes during the autumn of 2024, it is expected to be in force from 1 January 2025. Regulators, however, may still pose a challenge.
Nilssen says the Norwegian regulators haven’t publicly expressed a view on the regulation, but is hopeful the legal framework in its current form addresses the risks which the regulator was previously worried about. However, SRT will be scrutinised “particularly carefully” to make sure risk has effectively left bank balance sheets.
This could mean flowback risk, which was a source of anxiety for regulators elsewhere in the Nordic region, may also worry the Norwegian one (SCI 28 March).
Bäcklund describes this as consistent with “prudent banking”, saying: “In my view, it is reasonable to have concerns about flowback risk. When banks rely on these instruments for sourcing capital, they should have a clear and articulated view for how the bank intends to address this aspect in line with their overall risk appetite and governance. Originating banks are expected to be able to communicate their views on these topics comprehensively.”
SCI understands that some banks are already seriously looking at SRT deals in the region, meaning synthetics should come before cash deals. Larger banks with large Norwegian portfolios that already have their funding needs met by covered bonds should take the lead, and it is expected these will be Nordic giants rather than multinationals.
Bäcklund observes: “International banks operating in Norway already have the option to do SRTs referencing their Norwegian assets through the ECB channels. That’s not going to change, but levels the playing field by opening up the possibility also for FSA-regulated banks.”
He adds: “Banks are generally well-capitalised and have anticipated the implementation of SecReg. We don’t see a huge wave of transactions coming in January 2025, but we anticipate a gradual development of the Norwegian securitisation market similar to the trends observed elsewhere in Europe.”
The first synthetic deals should reference corporate loans. This is the norm in developing SRT markets, but Nilssen explains there will be some differences: “I would think corporate loans will be the first ones; for instance, to SMEs or corporate real estate, where the risk weight is sufficiently high to justify a transaction. The relatively high capital requirements associated with some of these asset classes could make SRT transactions even more appealing to Norwegian banks with large exposures to these sectors.”
Bäcklund also notes that Norway has a considerable shipping industry. He adds any such deal would likely be unable to achieve STS but also that a “non-STS transaction still does the job”.
Smaller and mid-size banks may find cash deals more interesting; in particular, those with large granular portfolios, like auto loans.
“Everyone expects formal approval this autumn, so I think it is about time for issuers, investors, sponsors and other market participants to start thinking about what Norwegian deals can look like. It takes some time to get from term sheet to closing date, especially for first-time issuers, so there’s no need to wait until the law is finally printed. Interested parties should get stated on their homework,” Nilssen concludes.
Joe Quiruga
SRT Market Update
Capital Relief Trades
Sustainable SRT debuts
SRT Market Update
Banco Sabadell has completed its inaugural sustainable synthetic securitisation, with the aim of releasing capital to keep boosting its investment in renewable energy projects.
The transaction references a €1.1bn portfolio of loans to projects mostly related to renewable energy. Up to 78% of the assets hedged under this transaction are solar, wind and PV installations.
Sabadell placed the 10% junior tranche, equivalent to €110m, among institutional investors. With this securitisation, the bank is committed to financing operations linked to renewable energy for the amount of €110m. Moreover, the securitisation enables it to transfer the risk associated with the portfolio and optimise capital.
Sergio Palavecino, head of financial management at Banco Sabadell, confirms that the bank has been prepping the transaction since the beginning of this year. Under its sustainability strategy, it has proposed allocating €65bn in sustainable financing solutions over five years, having already allocated more than €40bn.
Sabadell has more than 25 years of experience in investing in and financing projects in the renewable energy project finance sector.
Corinne Smith
SRT Market Update
Capital Relief Trades
Continued growth
SRT Market Update
As both Q2 and the first half of the year come to a close, SRT investors highlight a consistent and continued growth in issuance.
Reflecting on the level of volumes seen in the last six months, one SRT investor expects figures to show a “15% growth” year-on-year. He notes: “There have been a lot of transactions, with most of the activity coming out of Europe. However the general expectation is that Canada and the US are getting started from an issuance perspective and we expect quite a bit of momentum from North America in the second half of the year.”
Commenting on the overall market tightening experienced in pricing so far this year, the investor points to an increase in the risk appetite rather than the supply vs demand dynamics.
He says: “While the macro background presents less uncertainties than a year ago, there is still risk out there, you understand where its arising and you have the ability to adjust portfolios for it. I think that this combination of enhanced risk appetite and general market tightening has led to the spread compression we have experienced so far.”
Looking at the upcoming pipeline, the investor confirms that German bank Helaba is in market with a deal referencing a EUR2bn portfolio of corporate loans. Regarding execution, the investor expects the transaction to close in September, following the summer hiatus (“it is not in any position to close in June or beginning of July”).
Finally, details have emerged on Santander’s UK Colossus SRT programme, with Colossus 2024-1 and Colossus 2024-2. Rating agency Scope released the transactions’ structures: the former features five synthetic senior tranches which amortise pro-rata until the occurrence of the subordination event and a synthetic junior tranche which amortises sequentially after the senior tranches, with the reference portfolio comprising 868 reference obligations and 660 borrower groups. The reference portfolio notional amount is £680m, 59% of which is SME exposures, while the remainder is CRE exposures. The latter includes six synthetic senior tranches which amortise pro-rata until the occurrence of the subordination event and a synthetic junior tranche which amortises sequentially after the senior tranches. It also includes Class E CLNs and Class F CLNs. The reference portfolio notional amount is £1,625m, 90% of which is SME exposures, while the remainder is CRE exposures. The weighted-average remaining life is 2.6 years.
Commenting on the deal, the investors suggest that two tranches – junior and mezzanine – were offered, with the junior landing at in the “11 area”.
Vincent Nadeau
SRT Market Update
Capital Relief Trades
Landmark transaction
SRT Market Update
The EIB group has revealed another transaction, this time with Romanian bank Banca Transilvania (BT). The landmark transaction becomes BT’s first securitisation transaction as well as the first capital relief transaction between BT and the EIB Group.
The transaction aims to provide capital relief for BT in relation to a portfolio of assets subject to the standardised approach, freeing up lending capacity that will be used to support Romanian small and medium-sized enterprises (SMEs) and mid-caps.
In terms of structure, it follows the typical pattern of the EIB group, with the EIF providing protection on a mezzanine tranche worth more than RON 324m that in turn is counter-guaranteed by the EIB. The EIF is also offering protection on a senior tranche worth over RON 1.67bn, 50% of which is in turn counter-guaranteed by the EIB. The structure is derived of a portfolio of micro, SME and corporate loans with a total outstanding balance exceeding RON 2bn.
Under such partnership and arrangement, BT pledges to supply fresh lending of more than RON 2.64bn to SMEs and mid-caps over a three-year period. At least 20% of this financing will be allocated to projects aligned with climate action and environmental sustainability, highlighting the commitment of BT and the EIB Group to supporting the transition to a low-carbon economy.
Vincent Nadeau
News
Capital Relief Trades
Super settlement week
Santander, Ally and Huntington CLNs settle in 7-day period
Three auto credit CLNs from Santander, Ally and Huntington, which were reported to be in the market, have all settled in the last week, according to reports.
These were debut transactions for all the borrowers.
The US$235m Santander Bank Series 2024-A referenced a US$2.312 bn portfolio of prime auto loans and joint bookrunners were JP Morgan and Santander USA Capital Markets. The trade settled today (June 27) and priced on June 18.
There were six tranches, ranging from AAA-rated to B3-rated with an additional unrated tranche. The AAA tranche was priced to yield 95bp over the interpolated curve, for an all-in yield of 5.67%. The US$23m unrated tranche yields 875bp over the curve, or 13.388%, while the US$52m B3 tranche yields 575bp over the curve, or 10.388%.
The deal was approved as a synthetic securitization by the Federal Reserve for the purposes of risk weighted asset calculation in a letter of December 9 2023.
Ally Bank’s US$330.337m debut prime auto CLN, 2024-A, was upsized from an original US$275.337m, and led by JP Morgan. It also settled today, June 27, and priced on June 13. The portfolio is worth US$3.003bn.
It was structured very similarly to the Santander trade, with six rated tranches ranging from an A2 senior AAA tranche to a B2 tranche with one unrated tranche. The US$ 43.5m unrated tranche was priced to yield 825bp over the interpolated curve, or 13.09%, while the US$13.5m B2 came in at 525bp over the curve, or 10.09%.
This trade, which was first reported to be in the market over a month ago, marks Ally’s debut in the synthetic securitization market. It was approved by the Federal Reserve in a letter dated May 2.
Finally, Huntington Bank’s US$478m prime auto CLN, designated 2024-1, was upsized from US$358.5m, referencing a US$4bn pool of auto loans, and settled on Friday June 21. It was priced on June 14. Joint bookrunners were JP Morgan and Bank of America.
There were four rated tranches, designated B1, B2, C and D, rated A3, A3, Ba2, B3 respectively, with an additional US$18m unrated tranche. The B1 is sized at US$300m, the B2 at US$100m and the C and D at US$30m each.
The two A3 tranches were priced to yield 140bp over the interpolated curve, or 6.23%. The C and D tranches came in at plus 315bp and plus 525bp respectively, while the unrated tranche was at plus 825bp. All these prices were appreciably inside guidance.
Approval for this deal was granted in a letter by the Fed in December 2023.
Simon Boughey
Talking Point
Capital Relief Trades
CEE it to believe it
Three major talking points from SCI's Emerging Europe SRT Seminar in Warsaw
Over 100 SRT practitioners gathered in the Polish capital for SCI’s inaugural Emerging Europe SRT Seminar last week. Panellists spoke about their excitement for the market, barriers to entry for new players and everyone’s favourite villain - regulations.
- A booming market
“Since Covid and somebody in the Kremlin, who shall remain nameless, Europe was forced to think about its own financial system in greater detail. We had a glut of assets and a glut of capital, which allowed regulators to think about SRT as a major tool,” explained Harry Noutsos, md at PCS.
This explosion in SRT adoption has, of course, also expanded to Central and Eastern Europe (CEE) - with around 20 synthetic securitisations completed in the last year, according to Georgi Stoev, head of northern Europe and CEE securitisation at EIF. Stoev opined that the more transactions a market sees, the better: “When you do a transaction, you can leverage the knowledge to do more of them.”
But the knowledge does not only come from within the CEE, with multinational banks spreading knowledge from their other jurisdictions which can be picked up by local banks.
So, what are the benefits and pitfalls of the CEE as an SRT region? Some aspects of the region’s banking system are a benefit, according to panellists.
While western European banks can often have antiquated computer systems that make it difficult to successfully implement the data used in SRT transactions, eastern European banks have an advantage in this respect. Stoev explained: “Because the eastern European banking sector basically started afresh in the 1990s, the data is much easier to extract.”
But other factors also pose challenges. The first is that while Poland is a large economy and similar to Germany’s, other CEE jurisdictions are not quite so large or modern. There is also the matter of zloty, the Polish currency - which is “not local to many jurisdictions, and can also be more volatile”, according to Robert Bradbury of Alvarez & Marsal.
- Barriers to entry and things to consider
Data is the frequently cited concern of issuers before bringing their first transaction. However, some other, even simpler considerations are not always properly thought through.
Bradbury said: “For inaugural issuers, the actual binding constraints tend not to be data quality, but instead deciding what is the actual capital requirement. When doing an SRT, you need to consider what you actually want to achieve, which banks don’t always initially do.”
He continued: “This can get very political, because there are a lot of different opinions within the bank, but you need to talk through the RWAs and get everyone singing from the same hymn sheet. You also need to consider what investors need – bilateral or STS, for example.”
One such example, which SCI has heard from other sources, is PKO Bank. The partially state-owned outfit had a post-election change of management and SCI understands it subsequently needed to convince the new managers of the benefits of SRT.
- Regulation
The CEE has a lot of benefits in that it shares the Securitisation Regulations with the rest of the EU – but there are also some shared problems.
As Noutsos put it somewhat hyperbolically: “The regulators want to agree on a consistent guideline, but 25 have seen only one or two transactions. And the job of the regulator is not to grow the market, it’s for no deal to fail.”
He described this as a “fear factor” and said there is only one solution: more deals of all kinds, which will expose the regulator to the product. This fear factor seems to be lessening over time, with EIF cio Alessandro Tappi describing his first securitisation in the market decades ago as a “headache”.
Another headache can be STS, which - while described as a beneficial “game changer” for both regulators and issuers when possible - can be scuppered by homogeneity rules in circumstances like cross-jurisdictional deals, which allow CEE issuers to aggregate portfolios big enough to securitise.
However, regulation also allows the market to exist. UniCredit’s Wasif Kazi explained: “The CRR was the best thing to happen to securitisation because it fortified strong rules with RTSes and gave everyone something to adhere to. The EU’s very meticulous regulation enabled SRT to operate the same way across the globe. Before the regulation, it was not always the case that these deals were actually offsetting risk and without it, I think we’d have very sporadic transactions.”
Joe Quiruga
Market Moves
Structured Finance
FHFA approves second mortgage pilot
Market updates and sector developments
The FHFA has provided conditional approval for Freddie Mac to engage in a limited pilot to purchase certain single-family closed-end second mortgages (SCI 14 May). The aim of the pilot is to explore whether such a product effectively advances Freddie Mac’s statutory purposes and benefits borrowers, particularly in rural and underserved communities.
The conditional approval of the pilot includes several limitations on the product, including: a maximum volume of US$2.5bn in purchases; a maximum duration of 18 months; a maximum loan amount of US$78,277, corresponding to certain subordinate-lien loan thresholds in the CFPB’s definition of Qualified Mortgage; a minimum seasoning period of 24 months for the first mortgage; and eligibility only for principal/primary residences. Upon the pilot’s conclusion, FHFA will analyse the data on Freddie Mac’s purchases of second mortgages to determine whether the objectives of the pilot were met.
In a separate statement issued in connection with the pilot, FHFA director Sandra Thompson argues that such a new product is in the public interest. As of December 2023, over 95% of enterprise-backed single-family mortgages had mortgage rates below current market rates, with the majority at least three percentage points lower. Meanwhile, national home prices have doubled in less than a decade, leading to significant amounts of equity for many homeowners.
Freddie Mac’s purchase of closed-end second mortgages is therefore intended to allow borrowers to maintain their low interest rate first mortgage while accessing a portion of the equity in their homes. Many borrowers – particularly low-income borrowers and those in rural and underserved communities – have struggled to access equity in their homes through the private home equity market. In an environment of elevated mortgage rates, they are either forced to give up their below-market rate and obtain a cash-out refinance with a higher mortgage rate across the entire loan balance or are forced to sell their home when a financial need arises.
Additionally, the FHFA believes there are segments of lenders that have struggled to access a secondary market for home equity products outside of cash-out refinances eligible for sale to the enterprises. As such, the agency is interested in learning whether this offering will be utilised by small community financial institutions that have more limited access to securitisation markets. If so, it could support broader lending in underserved communities, while promoting greater competition among lenders and greater choice for consumers.
Nevertheless, the SFA continues to believe that the more prudent course of action would be to disallow the GSEs from purchasing closed-end second mortgages. “That said, we appreciate the FHFA limiting the scale and scope of the programme, with many of the newly announced limits coming directly from SFA members. SFA looks forward to our continued engagement with the FHFA and other policymakers on this issue," comments Michael Bright, ceo of SFA.
In other news…
Landmark LTAF launched
Arcmont Asset Management has received regulatory approval from the UK FCA to launch a first-of-its-kind Long-Term Asset Fund (LTAF), with Carne Global Fund Managers (UK) as the LTAF’s authorised corporate director. The LTAF is open-ended, providing an element of liquidity to investors and exposure to European direct lending opportunities via a Luxembourg fund.
Through the LTAF, a wide range of investors - including UK Defined Contribution schemes - will be offered an alternative to traditional fixed income investments and an opportunity to enhance portfolio diversification via exposure to private debt, thereby tapping into the illiquidity premium available in private markets. Access to the LTAF is approved for professional investors only.
The LTAF, the first offered by a specialist private debt asset manager, will leverage Arcmont’s dedicated direct lending expertise and 13-year track record of providing direct lending solutions to European upper mid-market businesses. “As Defined Contribution pension fund managers increasingly turn to private markets to drive enhanced risk adjusted returns for members, we are seeing growing interest in the LTAF structure, with investors recognising the compelling benefits the structure can bring in providing investor exposure to the private markets opportunity,” comments Ben van den Tol, director, business development at Carne Group.
Pillar 3 disclosure formats released
The EBA has published a final draft implementing technical standards (ITS) on public disclosures by institutions that implement the changes in the Pillar 3 disclosure framework introduced by the amending Regulation (EU) 2024/1623 (CRR 3). These ITS are designed to ensure that market participants have sufficient comparable information to assess the risk profiles of institutions and understand compliance with CRR 3 requirements, further promoting market discipline.
CRR 3 introduced new and amended disclosure requirements stemming from the latest Basel 3 Pillar 3 reforms, as well as a mandate for the EBA to develop IT solutions - including templates and instructions - for the disclosure requirements laid down in the banking regulation. The new ITS implement the CRR 3 prudential disclosures by including new requirements on output floor, credit risk, market risk, CVA risk, operational risk and a transitional disclosure on exposures to crypto-assets. In addition, they aim to provide institutions with a comprehensive integrated set of uniform disclosure formats.
These ITS constitute the first Pillar 3 deliverable included in the EBA roadmap on strengthening the prudential framework published in December 2023. Later this year, the EBA intends to complement these ITS with the CRR 3 disclosure requirements that are not directly linked to Basel 3 implementation; in particular, the extension of the disclosure requirements on ESG risks to all institutions in accordance with the proportionality principle and new disclosure requirements on shadow banking.
The EBA will also publish a technical package - including data point model (DPM), validation rules and taxonomy - that shall be used by institutions to submit this information to the EBA Pillar 3 data hub.
Corinne Smith
Market Moves
Structured Finance
Job swaps weekly: Crescent promotes three to senior leadership team
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees Crescent Capital Group bolstering its senior management team with a number of promotions. Elsewhere, S&P Global Ratings has named a successor to president Martina L Cheung, who is to be promoted to president and ceo of S&P Global, while Man Group has hired a credit-risk-sharing-focused head of structuring.
Crescent Capital Group has made a number of additions to its senior leadership team, including the promotion of md and head of private credit Christopher Wright to president and the appointment of chief operating officer Joseph Viola as chair of its operating committee. The business has also appointed the md and ceo of Crescent Capital BDC, Jason Breaux, to its operating committee.
The moves are part of a growth plan at Crescent as it looks to expand its reach, with co-founders and managing partners Mark Attanasio and Jean-Marc Chapus continuing in their roles. Wright, who joined the business 23 years ago, will work alongside Attanasio and Chapus. Viola has also been with Crescent for 23 years and will be responsible for “streamlining the operating committee’s functions”, according to a statement.
S&P Global Ratings is to promote Yann Le Pallec to president, taking over from Martina L Cheung, who will be elevated to president and ceo of S&P Global. Le Pallec, who is based in Paris and will take up his new role at the start of November, is promoted from executive md and head of global ratings after almost 25 years with the firm. Cheung has been with S&P for 14 years, having joined in 2010 from Mitchell Madison Group, where she was partner and manager.
Man Group has hired former Barclays structured credit specialist Tessa Orlebar as head of structuring focusing on credit risk sharing. Orlebar left Barclays in February after nine years. She previously worked at Dimensional Fund Advisors.
James Shannon has joined GoldenTree Asset Management as md, based in New York. He was previously a vp at Blackstone Alternative Asset Management, focusing on SRT investing. Before moving to Blackstone in 2022, Shannon worked at MUFG, HSBC and NYLIFE Securities.
Corporate and structured finance lawyer Paul-Michael Rebus has joined technology-driven law firm Pierson Ferdinand, as a founding partner in the firm’s new London office. Starting in January, the firm began serving clients around the world from 23 key markets in the US. Dual-qualified in English and New York law, Rebus was previously a partner at FisherBroyles, having begun his career as an associate at Clifford Chance in 2000.
Japanese law firm, Atsumi & Sakai, has bolstered its structured finance expertise with the hire of industry veteran, Akiko Hosokawa. Based in Tokyo, Hosokawa joins the firm’s banking and finance practice as partner. She joins the firm after 27-years at Baker McKenzie where she was made partner in 2006.
French reinsurer, SCOR, has poached ILS structurer Tony Nguyen from Goldman Sachs in a bid to expand its risk partnership and third-party capital capabilities. Nguyen will be based in SCOR’s New York office, and will serve as vp of third party capital. Nguyen has worked in the ILS structuring business since 2017, including most recently on the insurance structured finance team at Goldman Sachs.
Paul Nicholson has rejoined residential-focused real estate investment, development and operating platform The Amherst Group as deputy chief investment officer from Santander US Capital Markets. Nicholson will lead the firm’s MBS business and work alongside chairperson, ceo and chief investment officer Sean Dobson in developing and executing investment strategies. Nicholson leaves his position as chief risk officer at Santander US Capital Markets after two years, having taken up the position in 2022 when Santander completed the acquisition of Amherst Pierpont. He originally joined Amherst in 2004 as co-head of the MBS trading desk.
And finally, Abu Dhabi Investment Council has hired Michael Phillips from Teacher Retirement System of Texas as head of corporate credit. Phillips spent six years at TRS and leaves his role as head of credit – special opportunities.
Kenny Wastell, Corinne Smith, Claudia Lewis
structuredcreditinvestor.com
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