News Analysis
Capital Relief Trades
New programme
SCI catches up with Mike Strevens, head of structured guarantees at the British Business Bank, to discuss their expanding SRT plans and activity.
Central to the British Business Bank’s debt financing activities is the ENABLE Guarantee programme, which aims to increase SME lending capacity among specialist UK banks. The guarantee is structured as an unfunded SRT with the most senior part of the SME reference portfolio protected and the first loss/junior portions and a vertical slice of the remaining portfolio retained by the originator. This protects originators from 75% of losses in excess of a pre-agreed first loss. It also has the ENABLE build programme which covers SME housebuilders.
The British Business Bank mostly focuses on lenders, including specialist banks outside the UKs big five. These banks tend to calculate RWAs on a standardised approach rather than an internal ratings-based (IRB) model. This makes it more difficult for these banks to access traditional SRT markets, with Strevens pointing out it takes tranche thicknesses of around 20-25% to complete transactions, compared to around 10% for IRB banks.
Strevens explains: “The capital usage on small business lending is quite inefficient, so we started guaranteeing SME portfolios around November 2014. We aim to halve RWAs on SME loan portfolio by guaranteeing a portion of the portfolio on a second loss basis, allowing the beneficiary bank to deduct the first loss from capital or risk weight it at 1,250%, meaning the economics for the issuer’s small business lending work better and giving them more leverage and thus enabling more lending to smaller businesses.”
It charges issuers a fee for protection, with the guarantees directly supplied by the Secretary of State for the Department for Business and Trade or the Ministry of Housing, Communities and Local Government, essentially meaning losses beyond those agreed by the counterparties would be funded from government coffers. Portfolios have long replenishment periods where eligible loans can be added before they start to amortise down.
The first transaction was completed in 2017, but British Business Bank needed to rebuild momentum post-Covid when the government loan schemes had “basically created a subsidised first loss version of what we do” and rendered the Structured Guarantee temporarily moot.
The British Business Bank already supports lenders with significant risk transfers by guaranteeing mezzanine and senior portions of banks’ SME loan portfolios. But it doesn’t guarantee the junior tranches, which is why the government-owned firm is looking to expand to more traditional SRT investors.
Strevens tells SCI: “We guarantee the senior for simplicity and because we can. If you do a traditional guarantee, the riskiest portion is protected and [in the case of funded UK SRT] collateralised by the cash of an investor who wants a juicy yield. But there’s only so much yield a portfolio can produce so you usually guarantee the riskiest piece.”
This creates regulatory hurdles: “It’s really difficult to prove, as a standardised bank that you’ve actually transferred the risk, whereas because our guarantees are direct from government we can provide an uncollateralised guarantee, taking a large exposure for a commercially acceptable lower yield. The CRR theoretically reads that lenders wouldn’t really need to go to the PRA regarding the trades, although we obviously always recommend they do.”
He adds that, with the UK market well-established, proving SRT was achieved is more difficult for issuers than the structuring of transactions.
The British Business Bank also emphasises diversity and additionality of finance, another reason smaller issuers are the focal point. As an independently run government institution it is a purely domestic-focused player, which differentiates its programme from the guarantees offered by multi-lateral development banks which have a more international focus and a tendency to work with larger banks.
The programme is evolving with the regulatory wind. Currently, the SME supporting factor and retail factor automatically reduce the RWA for loans to companies of a certain size. Strevens explains this is around 76% for corporates benefitting from the SME supporting factor, and 56% for retail exposures. However, Basel 3.1 regulation looks set to increase RWAs for this type of loan.
He explains how the British Business Bank is preparing for this: “If that happened, we’d expect there to be more demand, so we’re proposing an SRT investor takes the previously issuer-retained first loss so you free up the whole stack of capital. Given there are more investors coming in and spreads are tightening, we think investors will be interested in these portfolios – and perhaps riskier portfolios to get the yields they’re accustomed to.”
This may develop further over time: “The next stage we expect after this is the banks become more sophisticated and they prove the SRT, we take a strip above the SRT investor and we can guarantee bigger portfolios with less exposure. We’d like to get banks to the point where they first go through the ENABLE Guarantee, then bring in the private investor which brings more rigour, and then finally traditional SRT structures which bring additional PRA and potentially rating agency considerations.”
As a more conservative investor, portfolio size is carefully considered: “We’ve also got some larger transactions where we cap out on the exposure we can take to them, so if we have a transaction with a bank and it gets to a certain size and it’s enough but we still want to help the bank, we can take a smaller portion and the issuer can still sell the junior tranches.”
In the British Business Bank’s recent annual report it announced it had supported over £4bn worth of SME lending since its inception through its ENABLE Guarantee and Build programmes.
Strevens gave an example of a recent deal: “One interesting one was Oxbury Bank in March. We increased the guarantee from £100m to £200m, and they also have a good sustainability ethos there and support the farming sector which we think is important, so we made sure if they do ESG lending they get a discount on their guarantee fee. We thought that was quite novel.”
Joe Quiruga
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News Analysis
ABS
Backup power
Fallout from Gedesco deal could have positive impact on wider market
Servicer defaults can happen, and when they do it is important to keep operations running smoothly. However, this isn’t always possible, such as in the case of Gedesco, where broader struggles were at play.
Commentary from Morningstar DBRS earlier in August took a deeper look into the circumstances surrounding the servicer’s default in the Gedesco Trade Receivables 2020-1 DAC transaction, detailing the timeline of events leading up to the crisis, which escalated in March to April of this year.
“I think it’s a one off event,” says Christian Aufsatz, md for European structured finance ratings at Morningstar DBRS.
The default of the servicer in this transaction has been exacerbated by the criminal investigation into management of Gedesco, further clouding the future of the transaction. Indeed, the issuer has reportedly also discussed potential litigation to recover funds for noteholders.
“The entire situation wasn’t actually servicing related, but Gedesco related,” states Aufsatz, “what worked well was the servicer replacement by the backup servicer – which is actually a really positive sign for the market.”
Litigation is no stranger to any financial market, so there is no sign of this triggering any mass hysteria or concern. In fact, Aufsatz considers it to have the opposite effect on the market – and understands the successful intervention by the back-up servicer in this case could reinforce greater confidence in similar structures moving forward.
“There are several positive things to mention – like the servicer replacement working correctly, and despite all of the troubles the class As being fully repaid. In fact, a very large part of the portfolio was actually repaid in a reasonable amount of time,” he adds.
The class A notes have now been repaid in full, with most borrowers able to meet their repayment obligations. Morningstar DBRS credits the back-up servicer’s swift step-in for keeping things running smoothly and allowing the transaction to continue. However, the commentary also noted that the other tranches may have been impacted differently – depending on their risk profiles.
Gedesco served as both servicer and originator for the transaction – an arrangement understood to be a cause for concern, as the Gedesco case study confirms.
“As a smaller lender, you’re always more reliant on one particular funding source, so I don’t think it’s uncommon,” Aufsatz explains. “Maybe uncommon was the need for continuous funding as the borrowers needed to roll over their short-term debt, which they could do as long as the securitisation was in its revolving period. We just analysed what can go wrong when there is reliance on one funding source and continuous funding needs.”
Aufsatz also notes that, despite there being multiple issues at play, the whole episode has served to showcase the resilience of securitisation, with a significant portion of the debt still managed to be repaid.
“Ultimately, a lot of the problems were operational and happening at the originator and servicer level – and yet still a large part of the debt was repaid. So, for me, it worked to a big extent as intended by a securitisation structure.”
Back-up servicer provisions are a common feature of transactions in more public markets – such as the securitisation market. “Usually within these structures the smaller the initial servicer is, the tighter the servicing continuity provisions are,” he explains.
Although these provisions aren’t a feature of all deals – particularly in scenarios where the servicer is highly related or indeed a larger bank. These provisions can vary in the details, with some specifying trigger-events for replacement of the servicer.
As Morningstar DBRS concluded, the Gedesco situation serves as an important case study for the structuring of future transactions, emphasising the importance of tighter servicing continuing provisions. Indeed, given the nuances and unique circumstances of the deal, the rating agency also highlighted the need for greater caution in the market’s approach to servicing playing the dual roles of both servicer and originator moving forward.
Claudia Lewis
The Structured Credit Interview
CLO Managers
CLO manager corner: Antares Capital
Katzenstein and Pitke discuss the firm's liquid credit platform and plans for the future
Antares Capital’s liquid credit platform, which launched last year and today is a BSL CLO issuance platform, is a “natural extension” of its private credit CLO platform, allowing the company to offer a broader opportunity set of products to clients, according to the firm.
Speaking about its business plan, Seth Katzenstein, head of liquid credit at Antares tells SCI: “We intend on being a frequent and programmatic CLO issuer. We issued two last year, we've already issued one this year and moving forward we hope to issue two to three CLOs per year. Down the road, we intend to introduce commingled funds and separate managed accounts focused on senior secured loans as well.”
Katzenstein highlights that one of the differentiating aspects of the liquid credit platform is that it can draw knowledge and insights on what’s happening in the economy.
“We do this from trends we are seeing with our 465 portfolio companies in our private credit portfolio. Often we can do that before it shows up in economic data and so we're able to use that knowledge base, with appropriate safeguards, to better manage our investments,” he says.
However, there are also challenges that are systemic to setting up a new platform. “You need to have a track record,” says Katzenstein. “So, one advantage we have is credibility because Antares has been managing private credit assets for nearly three decades. That being said, it's not a liquid credit track record and so there are certain investors for whom we wouldn't necessarily qualify despite our long tenure. So, we leverage our existing relationships to help us with investors.”
It is also important to consider the current market environment, in particular the arbitrage for CLO equity, according to Katzenstein. “We think this is very attractive right now, particularly given the significant triple-A tightening this year,” he explains. “Also, with deals amortising, banks are getting back capital and losing paper, so we almost can't issue CLOs fast enough.”
He adds: “The limited supply of collateral has caused some issues there as well. But, overall, we think the arbitrage is attractive, but that will create times where issuance might be slower or collateral won't be available.”
Katzenstein outlines that we are in a market right now where new issue supply is very limited. May was a very active month for loan issuance, he says, while June was also active. “But we saw issuance start to slow down in June and net issuance was relatively low even though gross issuances were quite high. I do think that provides some technical challenges that many businesses will face.”
Mak Pitke, senior vice president at Antares Capital notes that for its BSL investor base to grow the most important thing is its experience with middle market CLOs. Around the middle of last year, he says, the firm had around 77 unique investors that were involved in its middle market CLOs. However, Antares has been seeing a number of crossover investors who used to only invest in BSL CLOs start to expand into middle market CLOs.
“With each transaction we are expanding our base of middle market CLO investors,” says Pitke. “That's a trend I think we’ll continue to see as investors get more comfortable with the private credit product. For investors who are already invested on the middle market side of our platform, it's natural for them to also look at our liquid credit BSL business and that's been a nice synergy between the two platforms.”
Overall the CLO market is still fairly constructive, Pitke says. There was a brief period after the recent market volatility when spreads widened, but he sees that the top of the stack has mostly recovered. Lower mezz, in slight contrast, remains slightly wider with dispersion across manager tiers.
“Year to date, however, the overall cost of debt for CLOs has come in materially,” says Pitke. “We believe amortisation of triple-A tranches from older deals, a scarcity of new issue loan collateral leading to less true new issue BSL CLO creation, and a tight credit spread environment have all contributed to a busy issuance year for CLOs, including refis and resets.”
Ramla Soni
Market Moves
ABS
NYSEG eyes recovery bond
Market updates and sector developments
New York State Electric and Gas (NYSEG), a subsidiary of Avangrid, is moving ahead with what will be the inaugural recovery bond issued by a New York state utility, say sources.
It is currently putting together a petition for a financing order and has hired both advisor and counsel. A bond issue is expected before the end of the year, they add.
Earlier this month, Governor Kathy Hochul signed into law “The New York utility corporation securitization act”, otherwise known as NY senate bill S9339. This passed the assembly and senate on June 7 and was presented to Governor Hochul on August 14.
Recovery bonds are an increasingly popular securitization tool by which state utilities can recover infrastructure expenditures, but they need official sanction from state authorities. About half the states in the union have now passed the requisite legislation, and some US$2bn of issuance is anticipated this year.
NYSEG was in the news last week after hundreds of customers complained about substantially higher bills following the installation of smart meters.
Simon Boughey
Market Moves
Structured Finance
Job swaps weekly: Norton Rose Fulbright adds Paris-based partner
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees Norton Rose Fulbright adding a partner to its banking and finance practice in Paris. Elsewhere, CBRE has lured a new executive director to its European debt and structured finance team from Rothesay, while Alantra has appointed a structured-finance-focused senior advisor.
Norton Rose Fulbright has strengthened its banking and finance practice in Paris with the arrival of new partner Jeremy Grant. With over 20 years' experience in capital markets, structured finance and banking, Grant advises both investment grade and non-investment grade clients on capital markets and financing transactions. A substantial part of his practice is devoted to ESG-related matters, particularly green and sustainability-linked bonds and loans.
Prior to joining Norton Rose Fulbright, Grant was a partner at Stephenson Harwood, where he led the firm's debt capital markets practice. He began his career at Linklaters in 2001, where he practised in the London, Moscow and Paris offices before joining De Pardieu Brocas Maffei as a partner in 2016.
Meanwhile, CBRE has hired Rothesay’s Nicolas Brandebourger as executive director in its European debt and structured finance team, reporting to Chris Gow. Brandebourger leaves his role as head of CRE origination for UK and Europe at Rothesay after three years, and previously spent 11 years at Wells Fargo.
Jeremy Hermant has joined Alantra as a senior advisor, supporting the firm’s clients with structured finance solutions, including arranging and executing SRT transactions. He was previously head of capital markets at Allica Bank, which he joined in June 2022, having worked at British Business Bank and Santander before that.
Rabobank senior ABS and covered bond analyst Cas Bonsema has been appointed senior financials analyst. Based in Utrecht, he joined the bank as a junior ABS analyst in September 2018, having previously been a junior fund manager at BMO Global Asset Management. Rabobank is reportedly yet to find a replacement for Bonsema.
Solvar, the automotive finance business focusing on Australia and New Zealand, has appointed Craig Parker, formerly of Westpac Banking Corporation, as an independent non-executive director. Parker retired from Westpac – where he oversaw the group’s global structured finance and securitisation activities – at the start of last year, after 18 years with the bank. He will take up his new role on 18 September.
And finally, David Fann has joined private investment firm VSS Capital Partners as head of investor relations. In this role he will also oversee fund raising for VSS, and brings to the job extensive experience in private equity transactions and various private market strategies. Fann joins VSS from Apogem Capital, a wholly owned subsidiary of New York Life Investment Management, where he was vice chairman. In a long career, he has held a variety of senior positions in private market funds that have invested over US$50bn for institutional clients.
Corinne Smith, Kenny Wastell, Simon Boughey
Market Moves
Capital Relief Trades
Freddie Mac in with STACR
Market updates and sector developments
Freddie Mac is in the market with an US$825m STACR, via joint bookrunners Bank of America and Nomura, and is expected to price next week.
The trade, designated HQA2, consists of three tranches. The US$316m A1 is rated A1/BBB, the US$316m M1 is rated A3/BBB and the US$221m M2 is rated Baa3/BBB.
It will settle week beginning 10 September.
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