Contents

Capital Relief Trades

Called to the Barr

CRT still makes sense for US banks despite slimmed down B3E

The significant retrenchment of Basel III Endgame (B3E), the details of which were announced in a speech by Federal Reserve vice chair of supervision Michael Barr this morning, will not materially affect issuance of reg cap deals by US banks, say market experts.

“You’ll still see a need for CRT at all levels, maybe not as pronounced but still there,” says Matt Bisanz, a partner in Mayer Brown’s banking and finance practice.

Increased capital requirements been scaled back to 9% from an original estimated 20%, but this will affect only the top tier institutions and is largely a result of an increase to the G-SIB surcharge.  The threshold for the most onerous strictures has also been taken back to US$250bn in assets rather than US$100bn as in the July 27 2023 proposals.

However, these relaxations will not bring the growing regional US bank use of CRT to a halt, believe those close to the market.

“I don’t think this makes it less likely that regional banks will do CRT deals. The original proposal affected banks that were US$100bn or more, so there are a lot of banks that are below US$100bn which need CRT and still do. The re-proposal affects banks of US$250bn or more and that change really affects 20 banks, so it’s a fairly modest change in scope,” adds Bisanz.

Terry Lanson, md at Seer Capital in New York, agrees that the announcement today will not have a great bearing on CRT usage as no one expected the original proposals to be implemented in full and that an increase of 9%-10% is broadly in line with what was expected.

“No one planned reg cap issuance for the actual Endgame proposal because everyone expected it to be rowed back,” he says.

He adds that the Basel III Endgame is but one factor in the mix, and the most influential recent development in the US has been the much-celebrated clarification of the rules surrounding CLN issuance in the Fed FAQ of September 2023. Since then, issuance by regionals has increased appreciably, with names such as Huntingdon, Merchants and Ally receiving approval for CLNs to be treated as synthetic securitizations.

US regionals are facing capital challenges irrespective of the Basel III Endgame, while the largest US banks are facing pressure from their global rivals to optimize balance sheet usage, not simply to improve capital ratios, Lanson adds.

The proposal to include unrealized losses and gains in security positions in the calculation of required capital remains in place and will affect banks over US$100bn. This is the item from the original proposal which has most impact upon the banks below G-SIBS.

Its inclusion in the original plans was result of the failures of Silicon Valley Bank (SVB) and Signature Bank in spring 2023 These banks incurred significant losses in the long-term Treasury book as rates rose, which also made short-term deposits more expensive.

“For other large banks that are not G-SIBs, the impact from the re-proposal would mainly result from the inclusion of unrealized gain and losses on their securities in regulatory capital, estimated to be equivalent to a 3%/4% increase in capital requirements over the long run. The remainder of the re-proposal would increase capital requirements for non-GSIB firms still subject to the rule by 0.5%,” said Barr in his speech today at the Brookings Institute.

Once again, the inclusion of unrealized losses and gains in capital requirements increases the attraction of CRT business.

But Barr made no mention of the p factor in his speech, raising the possibility that it will remain at 1.0%. This would be a deterrent to greater use of synthetic securitization. The level of 1.0% is twice as high as that imposed by EU regulators and has been much criticized by those in the industry. At the moment, however, it looks as if it is still in place, and this is unwelcome to the industry.

The July 23 proposals released a firestorm of criticism perhaps unmatched in the history of bank capital regulation. Foreshadowing today’s announcement, Fed chairman Powell in an address to the House Financial Services Committee in April said that there would be “broad and material changes” to the original plan.

“We have spoken with a wide range of stakeholders, including banks, academics, public interest groups, consumers, businesses, other regulators, Congress, and others… This process has led us to conclude that broad and material changes to the proposals are warranted. As I said, there are benefits and costs to increasing capital requirements,” said Barr today.

The plan announced will likely be subject to a 60-day comment period, and final adoption might not be until 2025. However, a Republican victory in November could imperil the whole process. Republicans are hostile to the idea of greater capital restraints and B3E, which has swallowed many thousands of hours and gallons of ink, might be consigned by Congress to the regulatory waste bin.

Simon Boughey

Capital Relief Trades

Regulating mood

Advisory's insights on how to remove SRT regulatory barriers

SCI catches up with Jonas Bäcklund, ceo of Revel Partners, to analyse suggestion on how regulatory tweaks could bolster growth to the European SRT market.

The conversation comes as Mario Draghi, former president of the European Central Bank, emphasised this week the need for a well-functioning securitisation market to address Europe’s investment gaps in infrastructure and sustainable projects. Draghi’s view is securitisation can act as a lever to channel private sector investment into long-term sustainable projects, thus stimulating economic growth and addressing funding shortfalls.

Although Europe is the dominant synthetic SRT market, and is continuing to grow in importance, securitised assets currently account for less than 1% of the total held by European “significant institutions”, with only 0.22% of total bank equity released annually. Bäcklund claims this figure could be five or even 10 times larger if regulations were changed to enable market development.

But Bäcklund also notes a “marked shift in tone” from the central European regulator and a continuing recognition that the tool can enable SME funding, strengthen the real economy, and help to finance the green transition. However, he adds that adjustments are needed if the European market is to keep pace with the growing SRT issuance in the US and Asia. Draghi’s recent proposal to revitalise the European securitisation market could offer the key to overcoming these challenges. Draghi suggests that securitisation could play a critical role in financing long-term projects, including infrastructure and green transition ones, allowing banks to unlock capital for further lending. Backlund’s observations about the under-utilisation of high-quality assets like infrastructure loans in securitisation dovetail with this, reinforcing the case for regulatory reform that would allow banks to use securitisation as a growth engine for the real economy.

There are a number of factors behind the lower size of the European securitisation market, relative to the US. Despite this, synthetic securitisation is still growing and is in many ways more relevant to the European market: “The US and Europe have different banking traditions so there is a need to find a European way to do securitisation. We have the covered bond framework, but if you want to achieve the overarching European targets we’ve discussed, then you need to take steps to improve the on-balance-sheet market. European banks are relationship-defined with their corporate loans and don’t want to sell them to a third party, so you really want a model that accommodates for that.”

He says: “In terms of developing a fully functional capital markets union, the recognition of securitisation as a powerful means to reach international objectives is a positive development. The SecReg and STS have also improved things on the synthetic front, but it’s still very marginal. A further simplification and standardisation of structures, which we have dubbed as STS 2.0, is needed together with a change to the current diverging SRT approval processes which aren’t centralised with the ECB are still obstacles which prevent banks from issuing more frequently.”

Bäcklund also points out that the RWA’s attached to securitised assets underlying transactions mean that issuers are only incentivised to reference the riskiest elements of their portfolios. This means that low-risk high quality assets, such as infrastructure and mortgage loans, are often left untouched despite constituting a large portion of bank balance sheets and being among the most relevant assets to achieve government goals. Bäcklund says his call for a more inclusive approach to risk-weighting, particularly for assets linked to sustainability and infrastructure, seems to reflect a growing consensus. Draghi’s vision for a revitalised securitisation market aligns with this, particularly in how it could be a mechanism for driving investment into Europe’s green economy. Reforming risk-weighting rules for green and sustainable assets could open up a new avenue of funding for projects that are crucial to the EU’s climate goals.

Additional issues can spring up on a jurisdiction-by-jurisdiction basis. In Europe the SRT market is regulated by a central authority on the continent, and market observers have previously stated this is a factor which has made it easier CEE to come online compared to others in Asia and LatAm. However, the EU has often been accused of ‘gold-plating’ the Basel framework, leading to an overly restrictive and cautious regulatory environment for banks. Similarly, Bäcklund points out individual jurisdictions, such as some in the Nordics, have gold plated capital regulations which place additional difficulties.

He is very clear the consequences of this are obstruction of the growth of the European market: “If you want a capital markets union this is not consistent with having different approaches across jurisdictions, with gold plating of regulation or allowing banks to get capital benefit and then hitting them on the pillar 2 somewhere down the line.”

So, what are the solutions here? Bäcklund notes that STS is one part of the regulation which could be improved: “STS was a step forward, but we can build on that further. There needs to be a standardisation of the application process with a centralised capital markets union, without gold plating by some FSAs. There’s a lot of bespoke transactions, but we could create a standardised covered bond-like system with set structures and documentation so banks are certain they will achieve the capital relief benefits. Additionally, an SRT programme with a master agreement, under which new deals can be issued on a tap basis, could further enhance standardisation and simplification for both banks and investors.”

He adds the homogeneity criteria could benefit from being more inclusive and this would enable more banks to achieve STS classification, without compromising investors’ ability to assess portfolios’ riskiness, especially tier 2 banks who do not have the same breadth of loans to choose from compared to larger banks.

Another solution would be changing the securitised risk weight on certain asset classes: “You can currently only push the risk weight down to 10-15%, so this effectively pushes you to look at corporate assets because for loans like mortgages which already have a risk weight of 20-25% it just isn’t worth it. Say you could push that down to 5% it opens up a whole new market to securitisation.”

He concludes: “Of course, there is nuance there, but at the moment it’s not commercially viable to securitise these assets because the weights aren’t risk sensitive enough.”

Joe Quiruga

RMBS

Engineering efficiency

Structural changes afoot across UK RMBS market

The UK RMBS market continues to evolve as new innovative transaction features emerge with issuers seeking to tackle inefficiencies – an inch at a time. New developments include the use of back-up swap structures to manage counterparty risk, trigger-specific liquidity management mechanisms and the return of pro-rate amortisation – which was last seen pre-GFC.

Fitch Ratings’ latest analysis of the UK RMBS sectors exposes these structural evolutions and explores their potential impact on counterparty risk, liquidity and credit enhancement in new transactions. 

“We cover these features in our new issue and presale reports – but with this report we’re trying to bring all of those together and shed some light on some of the more unique factors that we’ve seen in transactions of late,” explains Drew Smith, associate director at Fitch Ratings.

Such adaptations are considered to be a natural evolution of the marketplace, and while some risks are involved, they generally appear to be well mitigated.

Within the report, Fitch highlights Duncan Funding 2024-1, which introduced a back-up swap arrangement in lieu of the more commonly used back-to-back swap structure. In this transaction TSB Bank, which is not rated by Fitch, serves as the primary swap provider. The counterparty risk is mitigated through use of a suitably rated counterparty engaged through a back-up swap which would be activated in the event of one of the documented triggers occurring, such as the insolvency of TSB Bank, mitigating exposure to the non-rated swap provider.

“If you compare to before the global financial crisis, the transactions at that time were very different to how they are now – and through time, new ideas and new ways to become more efficient have been implemented,” says Smith.

Another structural element making an appearance in UK RMBS transactions of late is pro-rata amortisation – which made its comeback in London Wall Mortgage Capital Series 2024-01. 

“Interestingly, the pro rata item we cover in the piece is actually something which was used frequently before the financial crisis, so it’s come full circle in this regard,” explains Smith. “With some of these features investor demand can be a driving factor for their implementation as well.”

The pro-rata amortisation allows principal payments to be shared among note classes based on their size. Although the junior noteholders would receive principal earlier, this could be at the detriment of senior noteholders by delaying credit enhancement build-up. However, Fitch understands this downside to be mitigated by carefully considered triggers, such as the transaction step-up date – providing some protection for the senior noteholders.

Additionally, Fitch’s report identified innovation in the realm of liquidity management mechanisms used in UK RMBS in the shape of trigger-based liquidity. For example, the liquidity reserves in the 2024 refinance of Trinity Square 2021-1 will only be funded once general reserves drop below a specified threshold – allowing enhanced liquidity protection in the instance of credit loss or if the general reserve is drawn for liquidity support. This more dynamic method of managing liquidity enables timely payment of interest – especially in instances of servicing disruptions.

“From our perspective we’re looking for full liquidity coverage throughout the transaction’s life,” comments Smith. “In our criteria we cover the ways that we would typically see that being achieved, but we will consider any proposal that’s put forward to us. Using this transaction as an example, the same amount of coverage has been achieved through different means.” 

Despite the introduction of these new and innovative features, Fitch expresses little concern. There is of course caution surrounding the implementation of new structures, however the risks identified in the analysis of these new features appear to be generally well mitigated.

“Anytime we’re seeing something that’s new or different, we pay special consideration to it,” says Smith. “We want to see the risks adequately mitigated in each case – and if that’s done in a slightly different way which we don’t see as presenting additional risk then there doesn’t need to be a negative rating impact associated with this.”

A common feature seen in some UK RMBS transactions is the notion of balance-guaranteed swaps, which can be a helpful protective feature in the presence of volatile interest rates. Versus the alternative of fixed-notional swaps, balance-guaranteed swaps offer greater predictability for hedging – although they are more expensive given the prepayment risk borne by the counterparty.

“We aren’t in control of how the transactions are structured, but if a certain risk is mitigated with how the transaction has been set up, then this could be beneficial in the rating analysis,” Smith continues.

Unlike other asset classes where there is greater standardisation, the UK RMBS market possesses much more room for manoeuvre  – allowing for adaptations and improvements to be made in individual transactions as and when they are identified. 

“Compared to other sectors, you don’t see the same kind of standardisation in UK RMBS,” adds Smith. “Some movements have been made towards that – as with the standardised Bank of England data template which we receive for each new transaction. That’s a step along the way, but compared to CLOs or US RMBS, there’s still a lot more standardisation and further movement towards that which could be achieved in the UK RMBS space.”

Of course, as a mature sector, any major issues in the UK RMBS market have been worked through over the last couple of decades. Thus, the innovations and adaptations we’re seeing today are more about building on existing structures and boosting efficiencies. 

“It’s not a sector that has any clear issues that need to be structured away,” says Duncan Paxman, senior director at Fitch Ratings. ”It’s much more about these sort of incremental movements where issuers can make transactions more efficient around the edges.” 

Paxman continues: “Pro-rata potentially has more room to grow on as it’s the first time it’s come back post financial crisis. It’s come back in a limited way compared to how it was done before. So potentially there is more space for innovation there. But on things like cash reserves, the approach is already very developed.”

Moving forward, while we do not yet know the specifics related to further fine-tuning of future transactions, it is only a matter of time before we get to see what innovations the banks try next. 

Claudia Lewis

Capital Relief Trades

Sub-par

SRT market update

The impact of new entrants – otherwise commonly or derogatorily referred to as tourist investors – is continuing to split opinion in the SRT market, with some saying spreads are becoming unreflective of risk.

In this context, certain market observers and participants believe tightening spreads are simply an evolution of the market. With more investors coming into the market, spreads are tightening, primarily due to increased demand and the attractiveness of the historical performance of SRTs. However, others suggest that it also reflects an influx of investors who do not understand the product as much as the old guard. This is especially true of sub-line referencing portfolios.

While spread tightening somewhat is reflective of all securitisation markets, SRT seems to be a special case. One source explains: “Spreads have tightened in a lot of markets, but a bit more so in SRT because of the new investors. While sophisticated SRT investors assess the risk, these tourist investors will come in and take the deal as is and price aggressively. But I think they need to be more cautious. You cannot just assume there’s no risk on the portfolio.”

The source is particularly concerned with the recent pricing of sub-line trades, which on average has tightened to the lowest spread: “Historically, this is a no-loss asset class, but it’s wrong to assume that just because they have very rarely suffered losses that they never will. What if there is a fraud or something on those lines?” Others have expressed identical concerns and question whether the resulting coupon is worth pursuing. In other words, is the risk properly priced?

Joe Quiruga

ABS

Off to a flier

Busy week points to standout September for European and Australian ABS and MBS

As the third quarter of 2024 winds down, September is shaping up to be a standout month for the European and Australian ABS and MBS markets. According to a recent JP Morgan report, the ABS market roared back to life in the first week of the month, following a volatile August marked by recession risks and central bank uncertainty.

JP Morgan's research strategists point to a surge in primary market activity in Europe, with 12 deals placed with investors in just seven business days, making it one of the busiest weeks of the year.

The report notes that YTD European ABS issuance has now surpassed last year’s total, with €67.8bn in distributed issuance. 

JP Morgan’s research strategists say: “With the current YTD total now also sitting just €8.7bn below the prevailing post-crisis record of €76.5bn set in 2018, and with another nine transactions already in the pipeline, it’s exceedingly likely that supply will reach a new, post-GFC annual record by the end of this month.”

Similarly, the JPM research team points out that Australia is experiencing a boom, with issuance exceeding €31.7bn and nearing last year’s record of €33.2bn.

As mentioned by the report, the momentum is particularly strong in sectors like auto ABS and UK buy-to-let RMBS. 

“Investors seem to be relatively eagerly digesting the available paper, with outsized demand for non-senior risk still a particularly prevalent theme. In the UK, BTL RMBS issuance continues to impress.”

The report adds: “Meanwhile, primary activity in the Eurozone over the past two weeks has been heavily focused on the auto sector, [with] six auto deals from as many jurisdictions, including Austria, France, Germany, Italy, the Netherlands and Spain.”

As September unfolds, the market's resilience is clear. Despite potential macroeconomic headwinds, the depth of demand suggests that new records could be set before year-end, making this truly a September to remember.

On the secondary market front, JP Morgan’s strategists state that spread performance in recent weeks has also been benign.

“With indicative levels on senior risk in the Eurozone and the UK having tightened 5-10bp and 4-8bp, respectively, since 9 August, and non-senior risk in both regions 20-25bp tighter over this period, current levels are now flat to or modestly tighter than levels recorded at the end of July – thus confirming (at least so far) our expectation that the quick sell-off in early August did not mark the start of a more prolonged widening trend.”

Looking ahead, JP Morgan’s strategists are still concerned about potential weaknesses. This is “particularly with regard to ongoing recession risks and the trajectory of central bank easing, while the continued influx of ABS primary supply in the coming weeks can test the depth of the investor base and their resolve to absorb paper.” 

The report adds: “With this in mind, though we don’t expect spreads to move materially from current levels over the near-term (in either direction), we continue to believe that some caution is warranted in the coming weeks.”

Selvaggia Cataldi

Structured Finance

Silver lining

Optimism around strong growth in RMBS and ABS at S&P conference

Market participants shared widespread optimism at S&P Global Ratings' European Structured Finance conference, buoyed by robust growth and the resilience of the European and UK ABS and MBS markets. Despite global economic challenges, issuance in these markets is experiencing strong momentum, performing even more favourably than 2023.

Panellists and attendees at the event noted that the primary beneficiaries of improving market conditions are RMBS, especially in the UK, and CLOs. "If nothing's changed in UK RMBS, I'm happy," one panellist commented. 

S&P states that despite some headlines suggesting otherwise, the asset class has held up well over the past nine months and steered clear of major turbulence.

The agency explains that the stability in the UK RMBS market has been primarily driven by factors such as low unemployment rates, tight affordability regulations, consumers' considerable - albeit hard to quantify - savings buffers, wage growth, and forbearance measures, with lenders engaging early if borrower stress arises. Additionally, UK RMBS has benefited from consumers' financial prudence and their focus on prioritising mortgage payments. 

“Most borrowers fixed their mortgages for three years or longer when a rise in interest rates became increasingly likely,” one panellist said. “Given the recent path of borrowing costs, long-term fixed-rate mortgages could come to the fore, enabling borrowers to lock in rates for longer than the current typical limit of five years.”

Panellists at the conference also emphasised the importance of monitoring the emergence of hybrid products, such as combinations of repayment and interest-only mortgages or interest-only mortgages with an equity release plan. “Even though these products aren't particularly popular yet, partly because advice is thin on the ground, they are garnering increasing attention,” said one.

The momentum is also impacting other asset classes across the board, including the ABS sector, which is already booming.

In terms of credit risk, S&P says: “Panellists agreed that the slight deterioration over the past 18 months constitutes a normalisation, after a period of exceedingly benign conditions. Affirmations and upgrades accounted for most rating actions year to date.”

They continue: “ABS benefits from low unemployment rates in Europe and supportive structural features, including tight triggers and the relatively short average life of transactions. Most consumers continue to prioritise paying off debt, a trend that started during the COVID-19 pandemic and hasn't reversed since.”

Additionally, the commentary notes: “Risk exposure in auto ABS transactions will remain lopsided, with battery electric vehicles most exposed to residual value risk. That said, a potential decline in demand for internal combustion engine vehicles could eventually constitute an inflection point that would see residual value risk shift away from electric vehicles. Government subsidies could play a key role in this transition.”

S&P highlights that government subsidies could be pivotal in supporting this transition and, in the long term, non-traditional collateral, including data centres, solar projects, salary sacrifice auto schemes and buy-now-pay-later financing, may become more prominent in the ABS market. “For now, however, scarcity and regulatory restrictions prevent a more significant pick-up.”

Signs of CRE recovery signal stability for CMBS
The CMBS sector presents a different narrative, as it is one of the few areas exhibiting signs of stress, though some signs of stabilisation are beginning to emerge. Panellists have observed that value declines are exhibiting indications of moderation across all CRE sectors.

S&P says: “More forward-looking surveys of investor sentiment also herald improvement, and recently subdued activity means there are close to record levels of ‘dry powder’ in CRE globally. The UK market could recover faster than the rest of Europe. This is partly because value corrections materialised more quickly but also due to the better political stability from having recently installed a new government.”

The commentary underscores that loan refinancing has been challenging due to rising rates and tighter lending standards, but it also points out that there have been few loan enforcements, and only one CMBS loan rated by S&P is in special servicing, suggesting that the CMBS market, though impacted by broader CRE challenges, is not facing severe distress.

Selvaggia Cataldi

Asset-Backed Finance

Prodigal student standards

Standard and Prodigy announce US$24m student loan partnership

Standard Bank has announced a US$24m funding partnership with Prodigy Finance to support African students intending to pursue postgraduate studies at international universities. The partnership includes US$22m from Standard Bank, with additional first-loss protection provided by Allan and Gill Gray Philanthropies. 

Prodigy Finance, which provides flexible loans to international postgraduate students, will use Standard Bank's funding to expand loan origination through an asset-backed structure. 

This initiative, part of the newly launched African Boost Programme, aims to break down the financial challenges often hindering less affluent African students from accessing higher education overseas. The funds will be allocated to an orphan special purpose vehicle (SPV), designed to only back loans meeting the African Boost Programme's eligibility criteria. 

The key risk management feature is the first loss tranche, which has been made available to the SPV together with Standard Bank’s senior facility, resulting in Standard Bank’s investment being over-collateralised by the portfolio of loans. The over-collateralisation is calibrated according to anticipated losses based on Prodigy’s historical loan performance. 

This structure also includes regulatory protections and a revolving credit facility for ongoing student support.

"This structure is a step towards creating an increased number of sustainable structures that can mobilise institutional capital towards addressing the supply requirements, which are already underserved," says Justine Crommelin, svp, securitisation debt capital market at Standard Bank. 

With Africa's demand for postgraduate education funding expected to surge — with graduates projected to exceed 160 million by 2050 — this partnership is designed to directly tackle the growing need for financial support.

"Our hope is to continue to expand the programme and ultimately develop this into subsequent capital-market-facing structures that can open up fresh liquidity from institutional investors," adds Crommelin. 

The partnership aims to generate long lasting impacts by supporting a generation of graduates poised to drive Africa's economic development and growth.

Marta Canini

CLOs

Ringing the bell for CLO ETFs

Palmer Square Capital Management launches two CLO credit ETFs

Asset manager Palmer Square Capital has launched two exchange traded funds (ETFs), both of which provide retail investors with access to structured credit markets. Palmer Square Credit Opportunities ETF (PSQO) and Palmer Square CLO Senior Debt ETF (PSQA) began trading today and the firm rang the opening bell at the New York Stock Exchange on Thursday to mark the occasion. 

PSQO is an actively managed multi-asset credit strategy, whereas PSQA is an indexed collateralised loan obligation (CLO) vehicle designed to provide access to triple-A and double-A tranches of the US CLO market.

The company said PSQO will enable investors to simplify portfolio construction and improve access to relative value opportunities across corporate and structured credit, including CLOs, investment grade and high yield corporate bonds, ABS and bank loans.

On the other end, PSQA gives passive access to the CLO market through a research-driven CLO Senior Debt Index (CLOSE) that creates an investable way of tapping into Palmer Square's capabilities within the senior tranches of the CLO market.

Chris Long, Palmer Square chair and CEO, said in a statement: "As the creator of the first public Senior and Debt CLO benchmarks in 2015 and our position as a top issuer in the global CLO market, we have laid the groundwork to continue providing investors with high-quality access to the landscape of credit assets through a multitude of products, which will now include ETFs."

The funds are the latest in a wave of ETF launches providing access to the CLO market. According to analysis published by PGIM in June, CLO ETF assets under management had – at the time – almost quintupled in value since 2023, reaching more than US$11bn. The following month, Janus Henderson's second CLO ETF reached $1 billion in AUM (SCI 15 July), further reinforcing the steady momentum behind ETFs.

In August, a CLO trader told SCI (SCI 12 August) that the resilience in the CLO market in the lead-up to summer was attributed to "substantial inflows into US ETFs and specialised European real money funds, which continued to buy despite tightening conditions."

Camilla Vitanza

ABS

Seeds of evolution

illimity's Lionetti answers SCI's questions

Tech-focused Italian banking group illimity recently announced the structuring of two new loan securitisation programmes to support SMEs and agricultural businesses in Italy, following on from the launch of its first securitisation programme last year. Claudia Lewis speaks to Fabiano Lionetti, head of investment banking at the bank, about its partnership with alternative-finance-focused fintech advisor Crescitalia and the evolution of its programmes. 

Q:  What are the key motivations behind the launch of the new securitisation programmes with Crescitalia?
A: Since its inception, illimity has accompanied and supported SMEs in their growth paths – and [through] securitisation programmes we are able to help entrepreneurs meet their investment and working capital needs. Established in 2023, our collaboration with Crescitalia and the consortium of  Confidi (Confidicoop Marche, Confeserfidi and Garanzia Etica) has demonstrated a successful trajectory, allowing us to reach a healthy number of SMEs.

The territorial presence of these three consortia joining with Crescitalia's technology, has been an optimal combination – not only confirming the bank’s commitment to supporting Italy’s entrepreneurial fabric but the real economy too with the innovative origination model.

Q: What are the key takeaways from the initial €150m securitisation programme illimity launched last year?
A: The operation aimed to create a new model to bring alternative finance to the region through fintech technology – which it did. However, technology alone – without a human presence – is complex for Italian SMEs to use. This is the ‘why’ behind the partnership illimity and Crecitalia – two important digital financial realities – have signed with Confidi,  and why the partnership has become a strategic one. In fact, it is through the territorial networks of Confidi that it is possible to reach Italian SMEs located across the region.

Q: And how does this new programme differ from this initial programme?
A: While the new programme is closely aligned with the initial one, we’ve made minor adjustments to better address observed needs, such as extending the investment duration and expanding the scope of the target group to include agricultural enterprises.

Q: What is the intended aim of the new €50m securitisation programme?
A: The main aim is to support Italian agricultural enterprises that are increasingly struggling to receive full support from the traditional banking sector. This programme is really a first test to approach this specific segment of enterprises, and for the first time to verify the response of this market to the services offered by more digital operators.

We hope that the agricultural sector will seize this opportunity, especially at a time when the industry is in dire need of investment to support the transition to clean energy and the widespread adoption of sustainable practices.  

Q: What challenges are SMEs and agricultural businesses across Italy currently facing?
A: The sector’s experiencing many transformational challenges, from climate risks to the ESG revolution. The primary aim  of the programme is to support businesses and entrepreneurs with their investment and growth plans. This positions illimity, Crescitalia, and Confidi as an attractive alternative to traditional investors, as we can offer a renewed approach to partnership and support.

Q: How do these securitisation programmes align with illimity’s broader goals?
A: illimity supports an array of Italian SMEs by providing them with access to fast financial instruments designed for the day-to-day needs of businesses. Therefore, these two new programmes align seamlessly with illimity’s overarching mission to provide innovative solutions tailored to the needs of SMEs. 

Q: Moving forward, what is the hope for illimity’s securitisation business and scope for future securitisation programmes?
A: We’ve found securitisation to be a tool which can be a very flexible and efficient vehicle for cooperation with third-party players. The plan is to increasingly utilise these structures to attract additional investors who align with illimity’s objectives. It is the adaptability of these instruments which is crucial for supporting the real economy and offering the banking system the valuable opportunity to partner with businesses and ultimately accelerate their growth.

Claudia Lewis

CLOs

Strength on several fronts

Ninety One's Barua answers SCI's questions

New issuance CLO volumes are on course to challenge previous full-year records and the market is well-positioned to weather any recessionary fears, according to Rondeep Barua, securitised products analyst at Ninety One. Barua speaks to Camilla Vitanza about the asset class’s prospects and anticipated trends for the rest of the year

Q: How would you summarise 2024 so far for the CLO market?
A: It’s been a strong year for the CLO market on several fronts. We’ve had a busy year of CLO issuance so far and new issuance volumes look set to challenge previous full-year records in the US and in Europe. The supply has been well absorbed, and strong demand has helped spreads tighten through most of the year. The return of bank demand for example has helped pull triple-A spreads tighter after a couple of years of subdued appetite. New issue CLO equity has reportedly become easier to syndicate as well, after a couple of years where most deals relied on strategic solutions such as retention funds or internal capital from managers.

In the secondary market, CLOs outperformed most comparable fixed income products in the first half of the year. Floating rate CLO coupons benefited from rising risk-free rates, while a combination of accelerating CLO liability amortisation and more frequent call and refinancing activity helped pull most bond prices up to or above par. Although CLOs have struggled to keep up with fixed rate peers through the summer rate rally, they remain among the better performing credit asset classes year-to-date.

Q: What do you think the prospects for CLO spreads look like going forward?
A: We think CLOs consistently offer attractive spreads for the credit risk, as evidenced by the significant, persistent spread pick-ups available relative to equivalently rated corporate bonds for example. Aside from credit risk, CLO investors also need compensation for higher liquidity risk, extension risk and structural complexity than corporate bonds, which explain those spread pick-ups to an extent. However, for much of the period since the UK LDI crisis in late 2022, CLOs – and particularly European CLOs – have traded wide even by their own standards relative to comparable corporate credit products.

Triple-B Euro CLOs for example have traded at spread levels close to European high yield corporate bonds for most of the last decade. At the start of this year however, triple-B CLOs offered over 100bps of spread pick-up versus high-yield corporates. While that has narrowed through the year, we think there is still some room for further compression. 

Our main downside concern is that spreads across a broader range of corporate credit products look fairly tight by historical standards, while default rates are normalising back to long term average levels. While much of the CLO market looks attractive on a relative basis in our view, a broader repricing of credit risk would still likely push spreads wider across the capital structure.

Q: How exposed is the CLO market to growing recessionary fears?
A: On the whole, credit fundamentals are holding up well in CLOs. CLO managers tell us they have been pleasantly surprised with how well earnings have held up over the last few quarters in the leveraged loan market, despite the negative impact of higher rates on borrowing costs. If we do see the macroeconomic backdrop deteriorate, CLOs are at a good starting point, with average triple-C/Caa buckets still around 4-5% in Europe for example, and relatively low defaulted exposure. Most deals have several percentage points of cushion on their junior overcollateralisation tests.

At current valuations, and with the normalising default rates mentioned earlier, we’re positioned a bit higher in the CLO capital structure than we have been for a while. Nevertheless, from a credit risk perspective we know that CLOs have a strong track record through several business cycles, with loss rates comparable – or better for some rating categories – to corporate bonds and loans. We’re comfortable that you get compensated well for the credit risk across the debt tranches.

Q: How do you think CLOs will perform in a rate-cutting environment
A: As we have seen through the summer, CLO total returns struggle to keep up with fixed rate counterparts in periods of rallying rates. Undoubtedly, CLO demand has benefited from inflows prompted by the rising rate environment of most of the last three years, and there is some risk of investors rotating back into duration products as rate cuts begin. Having said that, there is a lot priced into forward curves, and any disappointment on the scale and pace of central bank rate cuts could continue to provide support to floating rate products like CLOs.

We also think for most investors active in CLOs, the rate outlook is just one of several investment factors to consider. As mentioned above, the credit spreads on offer in parts of the CLO market still look relatively attractive within fixed income products. In addition, there is a potential tailwind for the market via falling rates and easing borrowing costs for leveraged loan borrowers. Ultimately, how CLOs fare in a rate-cutting environment will depend on a range of factors including, significantly, what kind of macroeconomic growth environment accompanies those rate cuts.

Camilla Vitanza

Structured Finance

Job swaps weekly: Chatham AM appoints four for new CLO management team

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Chatham Asset Management establishing a CLO management business with four key hires. Elsewhere, Freddie Mac has selected a new ceo, while Arini has named a CLO portfolio manager to replace Evangeline Lim, who is retiring from the industry.

Chatham Asset Management has established a CLO management business - called CTM Asset Management – with a capital commitment to fund its initial CLO issuance. The new unit comprises distinct portfolio management, research analyst and operations teams.

The CTM leadership team includes Thomas Flannery as group head and cio. With over 25 years of experience at Credit Suisse Asset Management, Flannery has managed more than 70 CLOs in his career and was most recently senior portfolio manager and md at CSAM. He was also the cio of CSAM’s syndicated loan and high-yield bond mutual funds.

Matthew Sosland and Andrew Chatham will also be part of the team, as portfolio manager and head of structured credit respectively. Sosland has worked for 27 years in leveraged credit and has focused on building CLO platforms and managing loan portfolios since 2006. He previously held roles at Advent Capital Management, Morgan Stanley Investment Management, Assurant, 3i Debt Management and Fraser Sullivan Investment Management.

Chatham previously worked as a portfolio manager at Assured Investment Management, specialising in CLO tranche investing, CLO structuring, document negotiation and capital markets.

Finally, Chuck Chakrala will be CTM’s head of CLO operations and compliance, having previously served as global head of CLO and loan operations/analytics at Sound Point Capital Management.

The firm expects to hire an initial team of six to eight credit research analysts.

Meanwhile, Freddie Mac has selected Diana Reid to serve as the company’s ceo, as well as a member of its board. President and interim ceo Michael Hutchins will continue as the company’s president.

Reid brings more than four decades of banking, real estate, capital markets and affordable housing experience to Freddie Mac, most recently serving as an independent director and advisor to several organisations. She spent nearly 12 years leading PNC Financial Services Group’s real estate business division through the financial crisis and on to a period of significant growth.

Prior to that, Reid founded Beekman Advisors, where she provided real estate finance company owners, ceos and boards strategic advice and M&A execution. She spent nearly 20 years at Credit Suisse First Boston in mortgage trading, DCM and financial institutions advisory.

Arini has promoted deputy CLO portfolio manager Ben Rothberg to portfolio manager, while incumbent CLO portfolio manager, Evangeline Lim, has resigned from her role due to personal circumstances and will be retiring from the industry. 

A spokesperson for the firm told SCI that Rothberg, who was recently promoted to deputy CLO portfolio manager, will continue to collaborate closely with Medhi Kashani, head of structured credit, and Jeysson Abergel, head of trading, to oversee portfolio management and trading for Arini's CLO platform. Rothberg has 15 years of buy-side experience in the European leveraged loan and high yield market

Lim, who has served as CLO PM since May 2023, will remain available to ensure a smooth transition. No key person clauses have been or will be triggered on existing deals during this transition. The company intends to continue building its European CLO platform and consistently issuing new European deals, and anticipates the pricing and closing of European CLO IV in Q4 2024.

Yannick Breuer has made a comeback to the more traditional world of structured finance as he joins CIBC Capital Markets as an executive director in London. The former Citi vp joined European sustainable finance rating agency, EthiFinance, last year to serve as  its head of business development for the UK. In his new role at CIBC, Breuer will focus on fund finance, structured credit sales and originations.

Daniel Peart and Eoin Redmond have founded Pillar Point Advisory, an advisory firm that supports private capital sponsors throughout the investment lifecycle, including structuring, diligence and transaction management guidance on securitisation, back leverage and capital relief products. Headquartered in Dublin with a presence in London, Peart and Redmond have a combined 50 years of experience in financial services and asset management.

Peart was previously general counsel and principal at Blackstone’s EMEA BREDS division, based in London. Before that, he was a partner at Matheson and a director at RBS.

Redmond was previously md within BlackRock Asset Management’s EMEA financial markets advisory division, based in London. Before that, he was cfo at Carne Group and a director at LBBW Asset Management.

KBRA has added three new senior staffers to its bench of over 70 analysts dedicated to funds and private credit-related ratings and research. Scott Duggal joins KBRA’s fund ratings team as a senior director, with more than 20 years of experience in credit, with a core focus on CLOs, RMBS and ABS. He was most recently lead ABS portfolio manager and head of European consumer ABS, RMBS and CLO research at Abrdn.

John Sage, senior director, will lead KBRA’s private credit research efforts in collaboration with its corporates, funds, financial institutions and structured credit teams. Sage was previously a journalist at Bloomberg, covering the private credit industry. Before that, he worked at Goldman Sachs in both the credit and investment banking functions.

Finally, Min Xu joins KBRA’s funds team as an md, focusing on research efforts. Xu previously worked at Natixis, where she was the credit risk officer responsible for approving CLO/ABS warehouse financing and capital call facilities.

Colliers Mortgage in Seattle has added Mark Plenge to its capital markets team to cover multifamily MBS and CMBS for the western US amid anticipated increases in demand for multifamily and commercial financing. Plenge joins from Walker & Dunlop, where he served as md for its capital market division, and brings extensive experience in the multifamily and CRE finance world – including particular expertise in Fannie Mae, Freddie Mac, HUD and life insurance company lending.

Pathlight Capital has hired Doug Nicholson as md, with the remit of collaborating with the firm’s originations team to source new transactions. Nicholson joins Pathlight from JPMorgan, where he served as a portfolio manager in the chief investment office for over 15 years, heading the group's investing in non-mortgage securitised credit across a multi-billion-dollar portfolio. His expertise includes sourcing and overseeing CLOs backed by private credit and broadly syndicated loans, as well as ABS backed by a range of consumer receivables, including auto loans, personal loans and student loans.

Priority Capital Advisory has hired CRE industry veteran, Katie Rodd, to serve as md and head of execution in Los Angeles. Rodd has held senior roles at George Smith Partners, Capmark Finance and Well Fargo. She joins PCA from Argentic Investment Management where she sourced, structured and closed non-recourse debt financings through CMBS and CLO transactions as a commercial loan originator.

Santander has recruited Jamarr Delauney as md, CMBS trading, based in New York. He was previously managing partner at NewOp Ventures, having worked in CMBS trading roles at BTIG, UBS and Credit Suisse before that.

And finally, Texel has added two new brokers to its team in Singapore, including capital solutions and structured finance professional Davis Ng. Ng joins Texel Asia with special expertise in private capital transactions and experience serving in structured finance and private credit related roles in both Singapore and Hong Kong – at firms including Arcor Capital, SMBC, GE Capital and ANZ Bank. In his new role, Ng will report to Texel Asia md Angela Chang.

Camilla Vitanza, Corinne Smith, Claudia Lewis

Capital Relief Trades

New partnership

Market moves and sector developments

GP stakes firm Armen and Chorus Capital (Chorus) have announced a strategic partnership. As part of the partnership, Armen will acquire a 16% minority equity stake in Chorus Capital. The transaction – which is targeted to close by the end of the month – represents the third investment by Armen GP Stakes Fund I and its first in the alternative credit space.

Through this partnership, Chorus is looking to further accelerate its growth and expand its presence in the SRT market. Additionally, this follows Chorus’ successful raising of its latest fund at US$2.5bn earlier this summer.

A significant portion of the investment proceeds will be allocated by Chorus’ senior management to co-invest in the firm’s upcoming fund. Significantly, Chorus’ strategy, management and investment process will remain unchanged following this transaction.

Vincent Nadeau