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Capital Relief Trades

Third Merchants deal revealed

SRT Market Update

Merchants Bank has revealed details of its third CRT, which closed at the end of March. Called MBMF 2024-C1, the US$543.5m transaction references a portfolio of 41 performing multifamily bridge loans secured by 53 properties.

The deal is the second multifamily CRT completed by Merchants Bank, but the first to be structured as a bilateral CDS. Under the transaction, the bank purchased US$76m in credit protection from Magnetar Capital as a first-loss risk transfer.

The reference pool comprises a total of 7,040 units located across 14 states, the largest concentrations of which are in Indiana, South Carolina and Illinois. The loans were originated between 4Q19 and 4Q23.

ATLAS SP Partners served as financial advisor and sole structuring agent on the transaction. ATLAS had previously worked with Merchants on its MBHC 2023-CL1 deal, which was structured as a CLN (SCI 31 March 2023).

Corinne Smith

ABS

Ears pricked

Interest returning to CRE market as conditions improve

Alternative real estate investors say securitisation is set to remain a key tool to increase market share amid persistent interest rate challenges.

In particular, CRE lending is poised to become a primary focus, as buyers leverage securitisation to capitalise on emerging opportunities and also negotiate market complexities.

Rajesh Soni, director, private markets at Acuity Knowledge Partners, highlights the importance of securitisation in the CRE marketplace: “One of the crucial benefits that securitisation offers is helping mitigate the impact of economic fluctuations by providing liquidity and a mechanism for refinancing and managing debt, ensuring stability, especially in the current market conditions.”

While ABS issuance greatly overshadowed that in the CMBS and RMBS markets last year, Soni understands the tide to be turning.

“Many real estate managers and investors believe that there will be a modest increase in dollar volume in real estate securitisation in 2024 and the following year, and that ABS and CLO issuance will likely remain strong,” he explains.

Current market conditions where lenders are opting to extend rather than refinance due to the prevailing higher cost of borrowing offer challenges even to those most adept in CMBS and CRE CLO transactions.

“While extensions may lead to a decrease in refinancing volume, all loans will need to be refinanced over the next few years. The issue is who will refinance and at what price?” Soni considers. “As loan-to-value (LTV) and interest coverage ratios (ICRs) have worsened, and existing bad loan performance has impacted the sector, banks have been leery about CRE lending. This presents a compelling opportunity for experienced investors to resolve the liquidity crisis impacting CRE.”

Nevertheless, securitisation remains an important component of CRE financing, enabling real estate managers to strategically expand market presence. Indeed, securitisation is expected to play a vital role in the 29% increase in commercial loan originations in 2024 projected by Voya Investment Management earlier this year.

Moreover, the CMBS and CRE CLO markets have enjoyed the greatest change in investor sentiment - around 36% - this year, according to data from the CRE Finance Council. Securitised CRE debt also grew by 0.5% QOQ, although this was an overall decrease of 12.1% from Q1 2023.

Soni also notes that fluctuating valuations significantly impact the securitisation of CRE assets and loans, introducing challenges for collateral valuation and subsequent refinancing.

“This can affect the market liquidity and risk perception of the overall sector, eventually reducing investor confidence,” Soni states. “Despite these challenges, there are opportunities for strategic investments, particularly in sectors showing resilience, such as industrial/logistics, or in assets that may be undervalued due to current market conditions.”

The multi-family and industrial/logistics sectors are poised to be an attractive asset for CRE securitisations due to strong fundamentals and reliable income streams.

“This attractiveness is reflected in the significant portion of securitised loans allocated to these sectors,” Soni states.

He continues: “Of the debt that is set to mature in 2024 and 2025, multi-family properties represent the largest asset class of maturing loans in the next 24 months. Furthermore, there has been some modest increase in the first quarter in terms of new origination. Considering types of investment, commercial mortgage-backed securities loans saw a 93% increase in dollar volume, and in terms of the type of property, the industrial sector saw a 63% increase in origination, while multi-family witnessed a 7% decrease.”

The CRE sector faces further challenges from soaring insurance costs. In the US, these rose by an average of 27.7% per unit last year and there has been an enormous 129% jump since 2018, according to 2023 SFA data.

However, Soni says there are several means of reducing the impact of rising insurance costs. “Actively negotiating with insurers, reassessing coverage needs and leveraging technology to predict the accurate insurance pricing could help in reducing and limiting costs. Additionally, insurance pooling, combining multiple properties into a single insurance policy, and alternative risk transfer may help manage the impact of rising insurance costs by CRE owners and investors,” he says.

Overall, investor sentiment in the CRE market is on the up, with more stability than a year ago as interest rates are now thought to have now peaked.

“Investors are still cautious; however, they have started returning to the CRE market after a quiet 2023,” understands Soni.

“According to a Q1 2024 survey from the CRE Finance Council, there was a noticeable cooling in expectations compared to the previous quarter, but investors remain positive. The industry’s overall sentiment appears to be stabilising, with 84% of respondents being positive or neutral, an increase from 81% in Q4 2023,” he concludes.

As the challenging interest rate environment continues to demand expert navigation from participants in the CRE marketplace, securitisation should remain a cornerstone of growth and stability for alternative real estate debt investors.

Claudia Lewis

Capital Relief Trades

Goldie synthetic

New capital call CRT targets sub-500bp

Goldman Sachs is the latest US bank to enter the synthetic securitization fray, on this occasion referencing a US$2bn capital call loan book, say sources.

The deal has not yet closed, and they add that the issuer is targeting pricing south of 500bp.

As Goldman is selling a first loss tranche of 0%-12.5%, this provides evidence of how much the market has tightened recently. The only buyers who can make this worth their while are the relatively new entrants who can summon a significant degree of leverage, observe those close to the market.

The deal is a traditional SPV CRT, unlike the CLNs which some banks have favoured lately.

Unlike recent issuers such as Valley National and Pinnacle, Goldman is of course a GSIB.

There has been a flurry of NA deals lately, but, the run rate is still a little lower than was enthusiastically expected at the beginning of the year, say market experts.

“It’s still significantly slower than markets were expecting, given the pace last year. This is worth noting,” says one.

Simon Boughey

Capital Relief Trades

Pinnacle peaks

Pinnacle, a US$50bn bank, gets in on the CRT game

Pinnacle Financial Partners, a regional bank based in Nashville, Tennessee, has completed a debut CRT transaction referencing mortgage assets, according to reports.

The trade is in the form of a US$86.5m CDS contract that references a US$1.73bn mortgage portfolio and was executed in Q2 2024.

This transaction is noteworthy as this is not only a debut from Pinnacle, it is, by some measure, the smallest US regional bank to come to the CRT table. Its total assets were just under US$50bn at the end of Q2, placing it well below the US$100bn threshold at which the sternest measures of capital adequacy apply.

It’s about the 45^th biggest bank in the USA, indicating that the CRT mechanism is gaining traction deep into the ranks of lesser-known regional institutions.

The CDS deal is reported to have been carried out as part of a balance sheet repositioning in connection with Pinnacle’s sale of a US$894m securities portfolio.

The securities sale will result in a mark-to-market loss of US$72.1m in addition to the termination of US$500m resell agreement, but this will be partly offset by the reduction in RWA through the CRT transaction, according to the firm’s Q2 income statement.  

Tranche thickness is only 5% and the annual fee paid to the counterparty is 7.95%, according to the report.

In addition, mortgage assets carry a 50% risk weighting under the standardized approach compared to 100% for most other loans.

Pinnacle Credit Union is also about to merge with Peach State Credit Union.

The investor in the trade is thought to have been EFJ Capital, an asset manager headquartered in Washington, DC, with about US$5.9bn AUM.

Is also probable that a third-party intermediary absorbed the credit risk of the counterparty, and this is likely to have been a GSIB such as Goldman Sachs or Bank of America.

Simon Boughey

Capital Relief Trades

Valley vaults

Valley, another regional, does CRT on auto loan book

As further evidence of the growing reach of the CRT product into deeper regions of the US regional bank market, Valley National Bank announced at the end of last week in its quarterly results that it had completed a CRT transaction referencing a US$1.5bn pool of auto loans. 

The bank’s entire portfolio of car loans is worth US$1.8bn.

Though not disclosed, it seems that this was a CDS-based CRT deal as well, as there is no evidence that Valley has sought or received clearance from the Federal Reserve to issue a CLN.

The bank suggested that annual fees paid to the investor will be in the region of 6% pa.

Valley National Bank, based in New Jersey with branches across six states, has about USD62bn in assets – making it larger than Pinnacle but once again below the US$100bn cut-off point at which the most onerous capital restrictions and regulatory oversight begins.

Simon Boughey

ABS

WAM understatement hits FFELP SLABS

Market updates and sector developments

Moody's has placed 12 tranches from nine FFELP student loan securitisations administered by Nelnet and 61 tranches from 11 FFELP ABS serviced by Nelnet on review for downgrade. The rating actions follow Nelnet's disclosure of a collateral data reporting approach that appears to have understated the remaining term of loans in Income-based Repayment Plans (IBR).

Nelnet last week disclosed that starting with its servicer reports posted on or after 25 August, it will include an alternate calculation of weighted average remaining term to maturity (WAM) to address the treatment of the remaining term of FFELP loans that are in IBR. Until now, Nelnet is understood to have calculated and reported WAM for IBR loans based on the loan term at origination minus the time in repayment, an approach that the firm refers to as ‘current WAM’. However, Moody’s notes that most borrowers generally either stay in IBR-PFH (partial financial hardship) or transition to the IBR-Permanent-Standard (IBR-PS) plan, which typically extends the borrower's remaining repayment term.

In its recent announcement, Nelnet says that it will start reporting both the ‘current WAM’ and an ‘alternate WAM’ that will be based on the remaining term of IBR loans consistent with the terms of the IBR plans. This alternate WAM is significantly longer than the current WAM for many transactions, according to Moody’s.

As such, the rating agency’s review actions take into account the increased likelihood that certain notes issued before 2016 will not pay off by their legal final maturity dates, due to the extension of the remaining term on some of the underlying loans. “Longer remaining loan terms adversely impact collateral cashflows and can have material adverse impact on amortisation of the notes prior to their legal final maturity dates. Notes that have long legal final maturity dates are less susceptible to this risk,” it explains.

During the review period, Moody’s will assess the likelihood of the bonds being paid off prior to the legal final maturity dates based on its updated cashflow modelling - reflecting the alternate WAM calculation for loans in IBR reported by Nelnet, where applicable, and updated prepayment and performance information.

The affected transactions comprise: Academic Loan Funding Trust 2012-1 and 2013-1; ALG Student Loan Trust I (2004 Indenture) and II (2007 Indenture); College Loan Corporation Trust I (2002 Indenture), II (2007 Indenture) and 2005-2; Student Loan Consolidation Center Student Loan Trust I (2002 Indenture); KeyCorp Student Loan Trust 2004-A, 2005-A and 2006-A; Nelnet Student Loan Trust 2006-3, 2007-1, 2012-1, 2012-2, 2012-4, 2012-5, 2013-2 and 2013-3; and Wachovia Student Loan Trust 2005-1.

Corinne Smith

Structured Finance

Hayfin inks MBO

Market updates and sector developments

Hayfin Capital Management has entered into an agreement with private investment firm Arctos Partners to support a management buyout of the business, acquiring British Columbia Investment Management Corporation’s (BCI) majority stake. The new partnership delivers Hayfin’s long-term objectives of greater team ownership, alignment and incentivisation, as well as generating superior and consistent risk-adjusted returns for both Hayfin’s and Arctos’ respective investors.

Via its Keystone strategy - which provides strategic partnership to leading financial sponsors, through bespoke growth capital and liquidity solutions - Arctos has underwritten 100% of the funding and will facilitate the Hayfin team becoming the majority owners of the common equity. BCI will remain a strategic limited partner in certain Hayfin funds.

Founded in 2009, Hayfin specialises in providing European and North American credit and private equity investment solutions to a global investor base. BCI acquired a majority stake in the firm in January 2017 and, since that time, Hayfin has experienced strong sustained growth and momentum - quadrupling its AUM (which now stands at circa €31bn), adding senior talent and diversifying and expanding its strategies. The firm’s product offering now spans direct lending, special opportunities, tactical solutions, high yield/syndicated loans, healthcare opportunities, maritime yield and private equity solutions.

Hayfin has a diverse international team of over 200 experienced industry professionals, with offices globally, including headquarters in London. 

Corinne Smith

Structured Finance

BNPP set to acquire AXA IM

Market updates and sector developments

AXA has entered into exclusive negotiations to sell its asset manager AXA Investment Managers (AXA IM) to BNP Paribas for cash proceeds of €5.1bn. Under the terms of the proposed transaction, AXA and BNP Paribas would also enter into a long-term strategic partnership, under which BNP Paribas would provide investment management services to AXA.

Additionally, AXA would receive a €300m consideration from the sale of the Select business to AXA IM, prior to the closing of the proposed transaction. As such, the total estimated transaction value is expected to be €5.4bn, representing a multiple of 15x 2023 earnings.

AXA says its intention to exit the asset management business is in line with the group’s strategy to simplify its business model and focus on core insurance activities, although its customers would still benefit from continued access to an alternatives asset management platform. Indeed, the firm retains full authority over product design, asset allocation and asset-liability management decisions.

The combination of AXA IM and BNP Paribas would create a leading European asset manager, with total AUM of €1.5trn. Completion of the transaction is expected to be finalised by 2Q25.

In other news…

LibreMax agrees fintech partnership
LibreMax Capital has entered into a partnership with fintech platform iCapital to offer wealth managers and advisors globally access to LibreMax’s investment strategy via the iCapital Marketplace. iCapital Marketplace connects wealth managers with a broad selection of alternative investments from leading asset managers on a single platform.

Founded in 2010 by cio Greg Lippmann, LibreMax is a US$10.5bn securitised credit specialist investing across both public and private markets. Under the agreement, the firm aims to bring its investment strategy to a new cohort of investors seeking portfolio diversification.

“Securitised credit is a complex, high barrier to entry market that is well suited to those with the experience and access to data to effectively source, underwrite, execute and manage such investments,” comments Lippmann.

Corinne Smith

Structured Finance

Job swaps weekly: DWS boosts alts franchise

People moves and key promotions in securitisation

DWS has appointed Max Elliott-Taylor as CLO portfolio manager. Based in London, he reports to Dan Robinson, EMEA head of alternative credit at the firm.

Elliott-Taylor joins DWS from CIFC Asset Management, where he was most recently a portfolio manager. He managed five active CLOs alongside other related asset strategies. Prior to this, Elliott-Taylor worked at Investcorp Credit Management (ICM) and Legal & General.

His recruitment follows the key hires of Vlado Spasov as head of capital solutions in April, Roscoe Roman as senior investment manager for EMEA alternative credit in March and Robinson himself in November 2023. These appointments are part of DWS’s strategic initiative to grow its €108bn alternatives franchise, which has a 50-year plus track record, with expertise in real estate, infrastructure and liquid real assets.

Watson Farley & Williams assets and structured finance partner, Emily Widdrington, is set to relocate to the UAE in a bid to strengthen its offering in the Middle East. Having served in the firm’s London office since 2008, Widdrington will move to Dubai in August to support the firm’s ship finance practice in the region.

Interpath Advisory has recruited securitisation specialist, John Midgley, to launch its new Loan Portfolio Diligence (LPD) offering. Based in the firm’s office in Leeds, Midgeley joins with close to 25 years’ experience in the structure finance industry, having most recently worked at KPMG supporting the expansion of its securitisation services in the UK and UAE.

Holland & Knight welcomes new structured finance partner, Taylor Speers, to its financial services team in Dallas, Texas. Speer represents clients on a range of structured finance transactions, including residential mortgage loan, servicing right and servicing advance financing. Previously, Speers was a partner in the capital markets group of Cadwalader, Wickersham & Taft before joining Winston & Strawn in 2023.