Contents

Capital Relief Trades

Region' new heights

Key themes from SCI's recent regional banks webinar

Activity in the US CRT market is picking up, though it is yet to reach the levels that many market participants expected at the start of the year. With a number of regional US banks turning to the space, SCI’s Kenny Wastell hosted prominent industry professionals for a webinar on the challenges and opportunities presented.

The impermanence of CRT capital relief is a key concern for would-be issuers, according to panellists. The short-dated nature of it means issuers need to think about completing transactions programmatically, and also plan for the long-term – with considerations around what happens if spreads widen.

This may have some influence over which asset classes US regional CRT issuers choose to reference, as one panellist outlined. Corporate loans are usually easier to manage as reference portfolios of this kind tend to come with replenishment periods over a few years, although once the deal has amortised down it becomes similar to consumer loans. 

This also means issuers should take a leaf out of the books of their European colleagues and find long-term partners. 

The state of regional bank balance sheets will also determine whether they become programmatic or sporadic issuers. Jeffrey Hinkle, senior managing director at EJF Capital, explained: “Its short-duration, cleaner assets which tend to be chosen, but regional banks don’t typically have a lot of those on their portfolios. Therefore, the super regionals are thinking about CRT programmatically, while other regional banks may look at it as a bridge solution,” using longer duration loan pools on their balance sheets.

Where the market stands
Hinkle said some US regional banks are currently in a “wait and see approach” with potential rate cuts in the offing. 

Other participants pointed out the underlying market drivers have not gone away, with challenges including Basel 3 Endgame, a long-term debt rule which affects incremental and secured debt needs, horizontal capital reviews and liquidity reviews. 

Kaelyn Abrell, co-portfolio manager at ArrowMark Partners, explains: “We witnessed material issuance from very large institutions, but the characteristics and slower pace differed from original expectations.”

She refers to “direct, traditional CRT issuance”, explaining that a more unique form of CRT has had more success in the US: “Collateral types that are already securitised in the ABS market are relatively easy to issue in a CRT format. The CRT transaction is a combination of a private and public securitisation and the development of this part of the market is unique to the US.”

Structure of choice
Julie Gillespie, partner at Mayer Brown, says issuing banks could structure deals as SPVs, CDSes, CLNs, or a mixture of all three. She explains: “The structure of choice for many banks will be to enter into a CDS with a counterparty, SPV or not, and if it’s an SPV it will be fully collateralised, and the counterparty may in turn issue CLNs.”

However, while direct issue CLNs are “likely more favourable from a pricing perspective, particularly if the bank is able to do a capital markets-style CLN”, she says the Fed’s current position is that it doesn’t meet the full requirements of Regulation Q. Obtaining a reservation of authority from the Fed for a direct issue CLN would mean more work for issuers. 

A direct issue CLN is also an issue for banks that are primarily regulated by the FDIC – around a third of the regional banks are. “They have recently informally indicated they won’t give the desired capital treatment on direct issue CLNs,” Gillespie said.

You can watch the full webinar here. SCI will host its inaugural annual regional bank-CRT seminar in Chicago on September 24.

Joe Quiruga

Capital Relief Trades

Oh Canada

SRT market update

Toronto Dominion is reportedly back in market with a repeat issuance of its inaugural trade and programme, which closed in February last year.

Like 2023’s deal (TD CRT), the underlying portfolio is backed Canadian and US high yield corporate loans, described as “below IG”. The spread is expected to land at plus 1050bp - 100bp tighter than the previous iteration. The 2023 deal had a tranche size of $600m.

Additionally, Bank of Montreal is also reported to be the final execution stages of its latest corporate trade.

In other news

Nordea's corporate deal is rumoured to have priced. Three investors are said to be involved, with the final spread thought to be in the mid-high 800-900bps range. This is, at least, the Nordic bank's second transaction of the year, following a mortgage SRT trade in March.

Joe Quiruga

Capital Relief Trades

Lofty heights

SRT market update

LOFT 2024-1, the latest issuance from Deutsche Bank’s established leveraged loans SRT programme, is set to close this month.

While SCI understands that the deal has a similar structure to its predecessor, distinctions include a different tranching and a tighter spreads (in line with recent market developments).

The deal references 0-18% of a portfolio, split between a 0-14% junior and 14-18% senior tranche. Investors are understood to be hedging a 0-18% vertical of the whole portfolio.

LOFT 2024-1’s coupon across the vertical is thought to be 9%, compared to around 13% last time out. The junior tranche is expected to price around SOFR plus 1050bp, while the senior will be around plus 375bp. This is difficult to compare as LOFT 2022-1 had three tranches, a first loss of SOFR plus, a junior mezz of 750bp over and a senior of 600bp over.

Such tightening goes well beyond the current market average of 100-200bps, however sources suggest the same market conditions, including a wider tightening in the broader public credit markets, are to blame with nothing dramatic causing the drop. Previously sources had suggested LOFT would price tighter than other deals simply because it was falling from a loftier place.

It has in some ways still fetched a better price than other transactions, which SCI understands is due to the riskiness of leveraged loans compared to other assets.  

Deutsche Bank has confirmed the aim is to close LOFT 2024-1 by the end of September.

Joe Quiruga

ABS

TGIF terminated as WBS manager

Market updates and sector developments

The control party for TGIF Funding Series 2017-1 has declared a manager termination event, following the failure of the manager - TGI Friday’s (TGIF) - to furnish a report of the independent auditors or back-up manager summarising the findings of certain agreed-upon procedures within a certain time period. The move represents the first instance of a manager termination event for a WBS issued following the financial crisis, according to KBRA.

In accordance with the management agreement between the issuer and manager, the trustee has terminated TGIF as the manager. Following the manager termination event, the transaction will remain in rapid amortisation and the back-up manager (FTI Consulting) will serve as the successor manager, working with the servicer (Midland Loan Services) to implement a transition plan until a successor manager has been appointed. The transaction has been in rapid amortisation since 2Q20, following the breach of a system-wide sales-related trigger.

Until a successor manager has been appointed, the back-up manager will take over various management responsibilities, including exercising inspection and audit rights against the securitisation entities, restructuring and re-negotiating transaction documents those entities entered into, implementing personnel decisions and liquidating collateral if reasonably necessary. Management functions include calculating and collecting amounts pertaining to franchise agreements and transaction documents, providing pre-opening and post-opening support to franchisees, overseeing certain advertising and marketing functions, complying with certain reporting requirements and administering various services to protect transaction intellectual property.

TGIF Funding Series 2017-1 is the only securitisation outstanding that is collateralised by TGIF’s existing and future franchise agreements, existing and future company-operated restaurant royalties, license agreements, existing and future intellectual property and related revenues. KBRA notes that the US$375m class B note is the only class outstanding, has a note factor of 36.7% and is rated single-B. The securitisation’s class A1 note was paid off in full on 2 May 2022.

As of 2Q24, the DSCR for the transaction was 7.45x, largely due to one-time proceeds received from the sale of licensing rights to Kraft Heinz in 1Q24.

“With the current inflationary environment on menu prices over the last several quarters pressuring the casual dining industry in traffic and same-store sales, this transaction has experienced several downgrades. However, the rated security has continued to receive timely interest payments,” KBRA observes.

The rating agency says it will continue to monitor developments in the transaction, including any performance trends and transition plans.

Corinne Smith

Structured Finance

MV Credit acquisition agreed

Market updates and sector developments

Clearlake Capital Group is set to acquire pan-European private credit specialist MV Credit from Natixis Investment Managers. Founded in 2000 and headquartered in London, MV Credit has US$5.1bn in assets under management and provides tailored fund solutions to investors across senior direct lending, subordinated direct lending, hybrid and CLO strategies.

MV Credit has deployed more than US$11bn since its inception, leading over 500 bespoke transactions of up to US$500m with sponsors such as EQT, Nordic Capital, Cinven and Bain Capital. The firm is differentiated by its experienced senior management team, whose members each have more than two decades of investment experience across multiple credit cycles.

Upon closing, Clearlake’s credit business will have over US$28bn AUM, as well as firmwide AUM of over US$90bn. Following the acquisition, the firm’s team will consist of more than 230 professionals with offices in Santa Monica, Dallas, Dublin, London, Singapore, Abu Dhabi, Paris and Luxembourg.

The acquisition is expected to close in 4Q24, subject to customary closing conditions.

In other news…

Aussie RMBS indices launched
Intercontinental Exchange has launched a suite of indices for the Australian RMBS market. Designed to provide comprehensive and transparent benchmarks for tracking the sector’s performance, the indices are administered by ICE Data Indices and are accessible in ICE’s Custom Index Tool.

The new index family comprises: ICE Australian RMBS Composite Index (ARMBS); ICE AAA Australian RMBS Index (ARMBSAAA); ICE BBB and Lower Australian RMBS Index (ARMBLOW); ICE AAA Prime Core Australian RMBS Index (ARMBSA3P); and ICE AAA-AA Prime Australian RMBS Index (APRMBHI). Each index is market cap weighted, accrues interest assuming next-day settlement, retains cashflows from bond payments until the end of the month and is rebalanced on the last calendar day of the month.

ICE’s fixed income index offering now includes over 6,000 standard indices tracking more than US$100trn in debt spanning the global bond markets, with debt represented across 43 currencies.

CLO MNPI charges settled
The US SEC has settled charges against New York-based Sound Point Capital Management for failing to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material non-public information (MNPI) concerning its trading of CLOs. To settle the SEC’s charges, Sound Point agreed to pay a US$1.8m civil penalty.

According to the SEC’s order, as a significant component of its business, Sound Point managed CLOs and traded its own CLOs, as well as CLOs managed by third parties. Sound Point also had a credit business for which it often participated in lender groups or creditors’ committees. As a result of this business, on occasion, the firm came into possession of MNPI about companies whose loans were held in the CLOs that Sound Point traded.

After an incident in July 2019, Sound Point began conducting pre-trade compliance reviews of the potential impact of MNPI about loans in Sound Point-managed CLOs, though it did not adopt a written policy for these reviews until July 2022. The firm did not establish, maintain or enforce any written policies or procedures concerning the potential impact of MNPI about the loans in third party-managed CLOs until June 2024. 

The SEC’s order finds that Sound Point violated Sections 204A and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. In addition to the US$1.8m penalty, Sound Point agreed to a cease-and-desist order and censure.

Corinne Smith

Structured Finance

Job swaps weekly: The 'Art' of launching

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees two industry veterans join forces to launch Art Capital, a structured finance advisory business. Elsewhere, Citi has boosted its Oceania operation with a new head of asset-backed securitisation, while Cushman & Wakefield has hired a head of capital markets for the Americas from Five Horizons Partners.

Stuart Blieschke and Tim Vaughan have formed a new London-based structured finance advisory business, with the aim of connecting capital with real estate opportunities. Called Art Capital, the firm is backed by ACRE Capital, RX London and TTB Partners.

Blieschke previously founded Curatic Capital in October 2019, having worked in special situations and private credit-related roles at KKR, PAG, Deutsche Bank, Credit Suisse and Ferrier Hodgson before that. Vaughan was previously md at Brotherton Real Estate, which he joined in January 2019, having worked in real estate finance and workout-related roles at Deutsche Pfandbriefbank, Deutsche Postbank, RBS, Alliance & Leicester and Barclays before that.

Meanwhile, Citi has appointed Peter Hext as head of asset-backed securitisation for Australia and New Zealand in its latest recruitment round as it seeks to boost its presence in the region. Working alongside six other new appointments across Oceania, Hext – currently head of Citi’s commercial asset-backed securitisation practice in New York – will relocate to lead Citi’s ABS and financing division from its offices in Sydney.

Cushman & Wakefield has hired Miles Treaster to serve as its new head of capital markets for the Americas as it works to scale its offering in the region. Treaster joins as president of capital markets for the Americas from Five Horizons Partners, and brings extensive expertise across institutional real estate debt, equity capital markets and investments to its leadership team. Treaster will be based in the firm’s office in San Francisco, from which he will oversee the capital markets group and focus on expanding the firm with the use of data and AI.

Kelly Mellecker has joined global law firm Kirkland & Ellis as a partner in its debt finance group. She will advise sponsors, credit funds, investors, and banks on a range of structured finance transactions, including securitisations and private placements. Mellecker previously served as a md at Goldman Sachs, where she specialised in telecom and digital infrastructure finance. At Goldman, she was instrumental in pioneering the non-contracted fibre-to-the-home securitisation asset class, structuring deals for first-time issuers such as Metronet, Frontier and Ziply.

Addleshaw Goddard Ireland has appointed John Kearns as partner in its finance team, establishing the group's structured finance and debt capital markets offering. Based in Dublin, Kearns was previously a counsel at Dentons Ireland, which he joined in December 2020. Prior to this, he was at Simmons & Simmons in the Middle East and a member of the capital markets team at Arthur Cox. Kearns has experience in all types of structured finance and DCM transactions on the issuer, bank and trustee sides.

Phoenix Merchant Partners has appointed Jacques Barouhiel as md in its investment team. He will lead structuring across the platform, strengthening the firm's investment capabilities and addressing companies’ financings needs.

Previously, Barouhiel was an md at Tembo, overseeing structuring for renewable energy projects in Sub-Saharan Africa. With over 20 years of experience, he developed structured solutions at Barclays for over a decade, focusing on risk mitigation and capital optimisation. Prior to Barclays, he was head of structuring at Orchard Global Asset Management and began his career as a credit structurer at JPMorgan.

Chorus Capital has hired ArrowMark Partners’ Penny Tan as a director and senior originator working out of its London office. Tan leaves ArrowMark – where she was a senior member of the structured credit team focusing on risk sharing transactions – after four and a half years. She previously spent a combined six years at Deutsche Bank and HSBC.

Daria Burger has joined Guy Carpenter’s mortgage and structured credit team as svp, based in the firm’s Zurich office. Burger brings extensive expertise in structuring funded and unfunded SRT transactions, most recently at Credit Suisse and prior to that at Raiffeisen Bank International.

NatWest has appointed James Plunkett as head of capital and risk distribution, based in London. Plunkett was previously a director at Alantra, acting as transaction lead for both buy- and sell-side clients on a number of capital management and SRT transactions, including the first STS synthetic mortgage securitisation. Before that, he worked at KPMG and 400 Capital Management Europe.

JLL has poached another structured finance professional from Cushman & Wakefield’s team in London. Max Borchert joins JLL in Amsterdam as EMEA debt and structured finance director to lead the expansion into the Benelux and expand its European debt and structured finance offering.

Holland & Knight has recruited a new partner, Paul Libretta, to bolster its financial services team’s structured finance and asset-backed lending services in New York. Libretta brings experience in the structured finance space, having previously served as counsel at Winston & Strawn, across an array of asset classes including credit accounts, marketplace loans, auto loans, mortgages, MSRs, student loans and life settlements.

And finally, Flora Go has joined multinational law firm Paul Weiss as a partner in its finance group, where she will lead the fund finance practice. Based in New York, Go brings extensive experience in providing sophisticated financing solutions on various fund-level financing, including private equity, real estate, infrastructure and other strategies. Previously, she was a partner with Fried Frank, where she handled high-profile financing deals for major asset managers.

Corinne Smith, Claudia Lewis, Marta Canini, Kenny Wastell

Capital Relief Trades

US$853m STACR prices

Market updates and sector developments

Freddie Mac has priced the US$853m STACR, designed HQA2, which was reported to be in the market last week.

The A1 priced at SOFR plus 125bp, the M1 at SOFR plus 120bp and M2 at SOFR plus 180bp.

It will settle next week.

Bookrunners are Bank of America and Nomura.