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ABS

Australian ABS branches out

IFM Investors' Wanigasekera shares insights on growth and diversification in Australian ABS market

Diversification and growing interest from global investors are fueling innovation in the Australian ABS market, according to Hiran Wanigasekera, co-head of diversified credit and debt investments at IFM Investors. 

Since 2021, IFM Investors, with approximately €6bn in securitised assets, has significantly diversified its focus from primarily RMBS to a broader range of ABS. "We have expanded a lot more into ABS,” says Wanigasekera, “including auto loans, personal loans, equipment financing and more esoteric credits such as insurance premium funding and BNPL, because the mortgage market became too competitive and saturated."

The Australian ABS market has experienced a notable increase in interest from Asian and European investors over the past two years, according to Wanigasekera. He points out that a significant number of Japanese investors have entered the market, driven by their search for attractive opportunities across different regions, with Australia being a particularly appealing option. 

“As a result, Australian investors have had to broaden the types of collateral they consider for securitisation,” says Wanigasekera. “Traditional assets like auto loans and personal loans still attract a lot of investor demand, but to meet growing interest and stand out, investors have begun exploring more unconventional and diverse collateral classes.”

He continues: “For instance, they are now considering assets in agriculture, which are typically not publicly rated or issued in the primary market. This push towards innovative collateral includes looking into more esoteric credit options. An example of this trend is the securitisation of livestock, which is something we have been doing privately for several years, even though it’s a relatively new concept in other markets.”

Furthermore, there has been a considerable influx of retail and high-net-worth capital, drawn to the perceived stability and high yield of the ABS market compared to corporate credit. He notes: “This perception of greater stability is making the ABS market increasingly attractive to these investors.”

Regulatory changes within RMBS and CMBS revival

On the RMBS market front, the recent revision of S&P’s rating criteria for Australian RMBS is expected to have a positive impact, according to Wanigasekera, who says that "for 70 to 80% of the market, it's a positive change," suggesting that the easing of penalties will benefit both investors and issuers.

Looking ahead, IFM’s diversified credit head identifies another key trend likely to influence the market landscape: the potential for a CMBS revival. He predicts: “We might see more CMBS issuance coming out in Australia," attributing this to banks' growing reluctance to fund real estate risks and the need for non-bank lenders to scale up.

"The market is evolving,” says Wanigasekera, “and we are at the forefront of these changes, driving new opportunities and delivering value to our investors."

Selvaggia Cataldi

Capital Relief Trades

Echo in

SRT market update

BNP Paribas is rumoured to be in market with a fresh SRT transaction entitled “Project Echo”.

The deal, which references leveraged loans, will have a tranche thickness of around 3-11%, and a targeted spread in the region of 8%. The notional portfolio size is US$2-3bn and the WAL is between two and three years.

The bank has issued at least two other synthetic transactions this year – Broadway, a first loss tranche CLN referencing US and Canadian corporate loans in March (SCI, 22 March), and the Polish Marzurka deal in April which was invested in by IFC (SCI, 10 April).

Joe Quiruga

Capital Relief Trades

Focus on Ally

SRT market update

Ally Bank has released further details on its debut CRT transaction, ABCLN 2024-A, in its Q2 earnings report.

Ally retains the senior and first loss tranches, while protection has been bought on a 1.5-12.5 attach/detach mezzanine tranche. The average coupon is 7.18%, however SCI hears there is a range across the tranche with the most junior slice (1.5-3%) pricing at around plus 825bp over SOFR while the most senior (9-12.5%) priced at a much lower spread.

The CLN-structured deal, which references “high credit quality retail” auto loans, generates 11bps of CET 1 benefit in Q2, reducing the RWA on its US$3bn reference pool from 100% to 38%. Proceeds from the notes are deposited in a cash collateral account with a double-A bank that earns interest. The WAL is 1.59 years.

The capital benefit will amortise as the loans pay down.

Joe Quiruga

Capital Relief Trades

Tight Morgan CRT

Morgan Stanley in the market with another ultra-thin CRT

Morgan Stanley is in the market with a US$5bn CRT transaction referencing subscription line facilities, and, like the recently reported Goldman Sachs trade, is seeking a sub-500bp yield for a 0%-12.5% first loss position, say sources.

The trade has not yet closed, and, also like the Goldman deal, is issued via an SPV in the traditional manner.

The last authorization by the Federal Reserve to treat a CLN as a synthetic securitization for capital relief purposes was issued on June 5^th to Merchants Bancorp.

The tightness of the levels at which Goldman and Morgan Stanley have sought to issue CRT deals recently has aroused disquiet in the traditional buyer base.

They say that only by summoning a significant degree of leverage do these deals make sense. The big asset managers that have recently entered the market are able to do this, but the established specialist investors less so.

The market needs investors that understand the market, the assets, the issuer and are going to be there for the long term, they explain.

Splitting the first loss position into a 0%-6% tranche and a 6%-12.5% tranche to secure broader distribution and reduce reliance on the large, non-specialist names has been suggested to the bank issuers, they add, but to no avail.

The banks take the view that they don’t need to take that step as they are able to sell first loss pieces at what are now the tightest levels seen for years.

The situation is further complicated by the fact that reinsurers are not able to take unfunded guarantee positions – as they do increasingly frequently in Europe – as they do not qualify as eligible guarantors in the USA.  

Morgan Stanley declined to comment on the transaction.

Simon Boughey

Capital Relief Trades

In its prime

Debutants boost auto CLN volumes

US$1.36bn across four prime auto loan CLN issuances has been placed so far this year, according to JPMorgan figures. The transactions have included debut deals, as well as repeat issuance from Santander.

Indeed, Santander’s latest auto CLN – June’s US$239m SBCLN 2024-A - represents its seventh from the series. The bank is already considered the market benchmark, primarily due to its subprime auto loan programmes SDART and DRIVE. However, its CLN programme references prime auto loans.

Debutants include Ally, Huntington Bank and Bayview, albeit the latter’s transaction references prime auto loans originated by Huntington (SCI 28 March). They seem to have entered the market at a good time, as prime auto loan CLN reference pools this year have tended to boast stronger credit characteristics, tracked better than expected and well below triggers compared to cash ABS deals of the same underlying asset class.

For example, Huntington’s June debut – the US$478m HACLN 24-1 - has a higher quality reference pool than February’s ABS HUNT 24-1. JPMorgan notes in its latest Securitised Products Research Weekly that HACLN’s weight average FICO at closing was 801, versus 784 for HUNT. The CLN also had a lower LTV (87% versus 90%) and more seasoning (16 months versus 11 months).

Additionally, Moody’s expects the cumulative net loss to be 0.50%, compared to a lifetime expected CNL of 0.65% on the ABS.

This is not to say such performance is true across the market. Ally’s US$330m ABCLN 24-1 in June had a higher weighted average FICO compared to the cash ABS ALLYA 2024-1 (749 versus 735), but it also had a weaker LTV (103% versus 96%), as well as a higher concentration of used vehicles (65% versus 60%).

Ally also introduced loans backed by medium to heavy duty trucks, a segment which Moody’s believes is underperforming. The CNL expectation for ABCLN is 1.3%, while ALLYAs is 1.1%.

The rating agency also highlights that this is somewhat mitigated by the higher proportion of loans in the strongest Ally score category, S, which clocks in at 82.1% of the portfolio compared to 55.1% in the ABS deal.

JPMorgan securitised product research analysts expect that both the newer auto CLNs and traditional ABS will remain attractive options for banks to optimise capital and funding strategies. “CLN issuance will also likely pick up as more banks seek capital relief, with regulatory approval uncertainty and the US$20bn reference cap as limiting factors,” they conclude. 

Joe Quiruga

CLOs

Reset boost

Portfolio quality upgraded amid European CLO resets in H1 24

The portfolio credit quality of European CLOs that were reset in the first half of 2024 were improved compared with the original transactions, according to Fitch Ratings’ latest Monthly European CLO Index report.

“Before the resets, the portfolio average triple-C exposure was 2.8%, consistent with other Fitch-rated reinvesting EMEA CLOs, and with defaulted assets accounting for no more than 1%,” Fitch stated.

More broadly, Fitch notes that recent European CLOs have been structured with smaller cushions on the tests and less excess spread available, reducing the default rate cushion on the identified portfolio.

Based on a stressed portfolio shaped in line with the portfolio profile and collateral quality tests, most EMEA CLO tranches benefit from a cushion against downgrades in the underlying portfolio. 

For instance, Fitch notes that all notes have cushions except the class E notes based on the stressed portfolio for Invesco Euro CLO VIII.

The report notes: “The increased cushion on the identified portfolio is mainly due to the decrease in the PCM hurdle rate between the stress and identified portfolios. This is due to the cushions that CLO managers incorporate in the collateral quality and portfolio profile tests when structuring a transaction.”

Fitch points out that the average triple-C exposure of these deals at the reset closing date declined to 1.7%, and nearly no defaults were observed in portfolios. 

These transactions have normally been reset by – or in proximity to – the end of their reinvestment periods and are part of the 2022-2023 vintages launched amid unfavourable spread market conditions.

In the first half of the year, up to mid July, 17 CLOs (amounting to €7bn) were reset. Eight of these upsized their target par balances from €25m to €200m. 

Fitch highlights that only Carlyle Euro CLO 2022-5 reduced its target par balance. This is due to the outstanding CLO trading below par.

“When a CLO is upsized, the transaction typically includes an effective date determination requirement condition including the satisfaction of portfolio profile tests, collateral quality tests, coverage tests and the collateral principal amount with defaults carried at the collateral value being above par,” Fitch said.

The majority of these resets showed rising levels at closing, in line with new deal levels, reaching 90% or above. 

However, Fitch said two outliers – Rockford Tower 2018-1 and Grosvenor Place 2022-1 – showed ramp levels of between 80% and 90% due to deleveraging and substantial cash balances, respectively. The portfolios of non-upsized deals were closer to par.

Camilla Vitanza

ABS

Angel in ETFs

Angel Oak's active structured credit ETF takes off

Angel Oak Capital Advisor’s securitized credit-focused active ETF platform, launched in October 2022, has now over US$1bn in assets and is on course to hit US$2bn soon, possibly before the end of 2024, Ward Bortz, ETF portfolio manager, told SCI.

A 2019 change in regulations allowed ETFs to take positions in securitized credit and Angel Oak Capital Advisors, based in Atlanta, was one of the first movers to take advantage of the new conditions.

It calculated that active ETF buyers would want to take exposure to the securitized credit, and this has been emphatically endorsed. It originally targeted just US$200m in its first two years but has exceeded that figure by more than fivefold in less than 22 months. Moreover, growth is accelerating.

“I thought platforms that utilize ETFs will want active exposure to structured credit. I was more right than I thought I’d be,” says Bortz.

Until the change in rules only mutual funds could invest in structured credit, and there are many available with a structured credit component. These frequently outperform funds devoted to non-securitized products.

There are four strategies that fall under the ETF umbrella. The first is devoted to short duration, high credit investments such as AAA-rated and AA-rated ABS assets such as auto loans, consumer loans and credit cards.  

About 20% of the portfolio is in Treasuries and agencies and the remainder is in credit products. “About 65%-80% of credit is securitized, so it’s very overweight securitized credit. The mandate is wide but we tend to allocate to ABS, mortgages, some CLOs,” says Clayton Triick, head of portfolio management of public strategies.

Over 40% of total investment in ETFs is invested in this bucket, and it will return about 6.5% this year.

Until Angel Oak offered structured credit through an active ETF platform, only mutual funds had had access to securitized credit in bundled format, but these tend to be the preserve of larger, more sophisticated institutional buyers. The firm believes it is forming a bridge to greater and more widespread ownership of structured credit exposure.

These clients comprise money managers, insurance companies, family offices, larger IRAs and some banks and are based all over the country.

“People did really want fixed income solutions that you could only do in mutual funds. They were not going to buy a mutual fund, for whatever reason, and they said ‘You guys are the ones that introduced the solution that has the cool stuff that I want,’” says Bortz.

It also offers a longer duration, but high yield strategy, an income focused solution with some high yield exposure and some investment grade exposure and a high yield solution.

Angel Oak has US$17bn in assets under management, and is considered a leading structured credit boutique investor. It was this expertise that led Bortz, previously of Invesco, to approach it with the idea of an actively managed ETF devoted to securitized credit. The results have borne out the wisdom of this idea.

Simon Boughey

Asset-Backed Finance

Esoteric excellence

Reed Smith doubling down on esoterics

Top structured finance law firm Reed Smith has a developed esoteric practice, but is looking to beef up even more, says newcomer Jeffrey Stern.

“This is one of the focuses within the structured finance practice, and I expect to see significant growth in our activity in these asset emerging classes. There’s going to be a significant push here,” he told SCI.

Stern joined the firm three weeks ago from Winston & Strawn as a partner in the Financial Institutions Group.

He mentions oil and gas financing and also CFO CLOs as likely growth areas.

 The strength of the firm in leasing transactions was a one of many inducements to join. “A lot of funky esoteric deals will have a complex leasing component, and having strong leasing support at Reed Smith is a terrific advantage. This is going to be huge for a lot of my clients,” he says.

Reed Smith is also strong in transport and insurance related asset securitization, both of which be of benefit to his existing clients. The esoterics area of the practice also includes litigation funding, equipment loan finance, consumer loan finance, music royalties and specialty finance.

Private credit will continue to play a robust role in the structured finance market and one that is only likely to expand even further, Stern believes.

The reintroduction of operational risk within structured finance is increasing, he adds, and this requires specialized skills and also heightens barriers to entry.

“In general asset managers have become increasingly active. Added operational risk creates higher barriers to entry so that it is easier both to get and to preserve reasonable returns on investment,” he says.

The oil and gas market, CRE CLOs and vessel financing are a few examples of asset classes which require enhanced operational expertise from sponsors and in which there are significant opportunities to introduce additional liquidity.

Stern spent nine and a half years with Winston & Strawn, most latterly as co-head of the structured finance practice. He has over 30 years of experience in structured finance and derivatives, including working extensively on Latin American and Caribbean cross-border assets and cash flow financings.

Simon Boughey

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Structured Finance

Job swaps weekly: Blackstone names new head of international at BXCI

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Blackstone appointing a new head of international for Blackstone Credit & Insurance (BXCI). Elsewhere, Paul Hastings has lured a structured finance partner from Weil, Gotshal & Manges, while Milbank has added a number of Latham & Watkins professionals to its alternative investments team, including a new partner.

Blackstone has named Dan Leiter head of international for Blackstone Credit & Insurance (BXCI), reporting to Gilles Dellaert, global head of BXCI. In this role, Leiter will lead the activity and expansion of BXCI in EMEA and APAC. Additionally, Michael Carruthers is appointed as European head of private credit, reporting to Leiter.

Leiter was previously global head of securitised products trading in Morgan Stanley’s fixed income division. Carruthers was previously co-cio for BXCI’s European and APAC private credit businesses, having joined the firm in 2006.

Meanwhile, structured finance lawyer Brian Maher has joined Paul Hastings as a partner in London. He joins from Weil, Gotshal & Manges, and brings team members Sophie Bainbridge and Emily Firmston with him to Paul Hastings.

Maher advises banks, credit funds and private equity firms on a broad range of structured finance matters, including all forms of securitisation and asset-based lending, CLOs and performing and non-performing loan portfolio acquisitions and financings. He is reunited on the Paul Hastings platform with former Weil structured finance colleague Shawn Kodes, who joined the firm in New York in April, alongside partner Matthew Nemeth (SCI 12 April).

Bainbridge joins as of counsel at Paul Hastings after 10 years at Weil, while Firmstone joins as an associate having spent eight years at Weil.

Alex Martin has joined Milbank’s London office as a partner in its alternative investments practice. He brings with him a significant team, including Kristine Kozicki, who joins the firm as special counsel.

Martin’s practice focuses on CLOs and he represents a number of top-tier CLO managers, arrangers, credit funds and asset managers. He was previously a partner in Latham & Watkins’ structured finance and securitisation team, which he joined in September 2021. Before that, he worked at Weil, Gotshal & Manges and Allen & Overy.

Holland & Knight has hired Otterbourg P.C. asset-based lending specialist Nneoma Maduike as a partner based in New York. Maduike's experience focuses on secured and unsecured loan transactions, including ABF, cash flow and structured finance, syndicated and mezzanine financings, loan workouts and restructurings. She leaves her role as partner at Otterbourg after 10 years with the business, having previously worked at Troutman Sanders, Greenberg Traurig and DLA Piper.

KBRA has appointed Min Xu as md in its funds team, focusing on research activities related to CLOs, ABS and structured credit. She is based in New York and leaves her role as executive director in the credit risk department at Natixis CIB Americas, where she spent six years, having previously spent 12 years in Moody's CLO and structured credit group.

Loomis Sayles is to expand its structured finance capabilities in Europe, with the hire of two senior ABS portfolio managers – Sébastien Andre and Alexandre Boulinguez. Joining the firm in Paris from Ostrum Asset Management, Andre and Boulinguez will lead the Loomis Sayles mortgage and structured finance team’s venture into European ABS. The pair will report to head of the firm’s mortgage and structured finance team, Alessandro Pagani, and will manage two European ABS strategies – totalling €215m in combined asset value.

Obra Capital has appointed Vlad Sorokulov as md, portfolio management and pricing. In this role, Sorokulov will be responsible for supporting the investment team across Obra’s portfolio of both life settlements and life insurance.

He will be based in New York and report to Blair Wallace, president and ceo of Obra Capital. Sorokulov brings over 20 years of experience in insurance and life settlements, having previously served as a principal at Jade Mountain Partners, where he oversaw the valuation process of portfolios exceeding US$1bn in assets under management.

Investec has recruited structured finance professional, Robbie McColl, as a senior originator to its energy and infrastructure finance team for the UK and Europe. McColl will lead the origination of transactions in the infrastructure and energy industries and will report to head of energy and infrastructure finance for the UK and Europe, Anupam Sharma. McColl joins the firm from Edmond de Rothschild Asset Management where he led the creation, structuring, execution and management of private credit portfolios as senior investment director in the infrastructure and structured finance team.

Harry Burgess, former director in CBRE’s operating real estate debt and structured finance team in London, has been poached by 2015-founded build-to-rent business, Platform_. Burgess, who was promoted to director in July 2023 after joining CBRE in 2021, will now serve as a corporate finance executive at Platform_ to help support its growth as an integrated investor, developer, operator, and asset manager.

And finally, UK advisory firm, Quantuma, has recruited former RBS structured finance expert Scott Peters to lead its corporate finance and national debt advisory practices in the Midlands. Peters will be based in Quantuma’s offices in Birmingham, and joins the firm’s growing national corporate finance team as an md from Cattaneo Corporate Finance.

Corinne Smith, Claudia Lewis, Kenny Wastell