Contents

CLOs

In demand

ETF CLO growth gathers pace as firms ramp up offerings

Demand for floating rate assets with robust surplus yield outlook is driving ETF (exchange-traded fund) CLO growth, according to asset manager Janus Henderson, with firms ramping up their offerings.

In July, Janus Henderson B-BBB CLO ETF (JBBB) surpassed $1 billion in AUM (SCI 15 July). This was followed two months later by Palmer Square Capital launching two ETFs (SCI 12 September), one of which exclusively focusing on CLOs. 

According to analysis published by PGIM shortly before these developments, CLO ETF assets under management had – at the time – almost quintupled in value since 2023, reaching more than US$11bn.

John Kerschner, head of US securitised products and portfolio manager at Janus Henderson, tells SCI the growth of the ETF CLO market and the continued attractiveness of CLOs for banks are contributing to favourable market conditions. 

"Changes in capital requirements for high-quality floating rate assets like CLOs are expected to support the CLO market further,” he says. “Looking ahead, we anticipate a strong year for CLO issuance in 2024, albeit not as robust as 2021."

Kerschner notes that following the success of the VNLA ETF in 2016, the company introduced JAAA, one of the first CLO EFTs. Building on JAAA success, the company launched JBBB in January 2022 and introduced JSI, Janus Henderson's Securitized Income ETF, last November (SCI 21 August 2023).

"I believe the demand for ETFs will continue to grow. In particular, JBBB was launched based on the success of JAAA,” Kerschner says. “We were confident that CLOs belonged in an ETF wrapper. Many investors interested in JAAA were looking for something with a little more yield further down the capital structure, even though it comes with added volatility.” 

Kerschner highlights JBBB was introduced to cater investors who could handle more volatility but wanted a higher yield. "Despite the unfavourable timing of JBBB's launch in January 2022, just four weeks before Russia invaded Ukraine, causing market dislocations and volatility, we were able to build a track record for the ETF," he adds.

Kerschner also notes that, whilst there are already concerns about cracks within the corporate credit market, uncertainties in the US and European economies are also contributing to a somewhat turbulent market. 

In relation to CLO activity Kerschner says he expects new issuance and reset pace to remain steady. "This trend is likely to continue until the end of the year, with many attributing the rush to the upcoming US election and concerns about potential market volatility,” he says. “Despite this, there is still significant interest in this space, particularly for floating rate assets tied to the short end of the yield curve. We believe there is room for growth in this market due to the higher yields compared to other investment options.”

However, Kerschner adds that as the market matures, he expects the rate of growth to slow down. "The market for CLOs has seen record-breaking issuance this year. A significant portion of the CLO market is entering its reinvestment period, leading to increased pay downs and reinvestment of funds back into the CLO market.”

Camilla Vitanza

Asset-Backed Finance

Renewables prioritised

Coventry's PACE, solar efforts gain momentum

Coventry Structured Investments, a Los Angeles-based asset management firm specialising in niche debt and equity solutions, is set to purchase up to US$600m in residential solar loans under a forward-flow agreement with Almika Renewable Finance. The agreement reinforces Coventry’s prioritisation of renewables as key growth areas over the next six to 18 months, including the roll-out of its own C-PACE origination platform.

Almika, an energy provider operating in several states - including Texas, Arizona, South Carolina and Oklahoma - turned to Coventry for financing, due to a shift in market events resulting in them seeking new partners for its programme. “It was a mutually beneficial deal for all the parties involved,” says Derrick Hur, co-founder and managing principal of Coventry.

The deal also involved a family fund as an equity partner and East West Bank as a senior lender for part of the transaction. “The deal involved parties that were excited about the opportunity with Almika and worked collaboratively on a multi-party transaction, in order to align interests for the success and growth of the programme,” says Rasool Alizadeh, co-founder and managing principal of Coventry.

Prior to founding Coventry in 2022, Hur and Alizadeh gained extensive experience in rating agencies, capital markets and specialty finance through their roles at S&P, FortiFi Financial and Ygrene Energy Fund, among others, which enabled them to act as their own advisors in the deal.

Before finalising the agreement, they thoroughly reviewed Almika’s operations. "It's challenging to manage a loan product with multiple installers and contractors while safeguarding consumers," says Alizadeh.

Ensuring the quality and reliability of the contractors and installers involved was crucial to protecting consumers and maintaining loan repayments. “We helped to bring best market practices to Almika’s already high-quality standards before investing in the company,” explains Alizadeh.

As with any asset class, underwriting is a crucial component. “If assets are properly underwritten, the risk profile and credit become more predictable,” says Hur.

Coventry’s due diligence process involves deep dives into company backgrounds, financials and compliance. “We ensure companies meet regulatory requirements and conduct appropriate reviews to ensure this,” says Alizadeh.

Coventry is now looking to aggregate and securitise up to US$600m in assets acquired, aiming to establish a capital markets presence for itself and Almika. “We were impressed with Almika’s servicing platform and saw opportunities to buy assets and move servicing to it over time,” says Alizadeh.

Coventry’s founders believe the solar financing market remains underinvested - a conviction reinforced during their attendance at the RE+ conference in Anaheim, California, earlier this month. “We could see many companies with a lot of products and services at the conference, but they still had a lot of need for capital in order to efficiently grow their businesses to the next level,” says Alizadeh, noting the need for continued liquidity in the market.

While Coventry is US-based, the founders see opportunities beyond the region and plan to diversify in the future. Their strategy focuses on specialisation, which they see as a growing trend in the market.

“Specialised companies are thriving, as larger firms - with idle capital - are often constrained by rigid lending criteria. This opens up opportunities for firms like Coventry to step in and provide creative and adaptive solutions without taking on additional risk,” adds Alizadeh.

Over the next few years, Coventry plans to capitalise on this shift by focusing on niche sectors and bringing flexibility to the market. As interest rates stabilise and potential cuts are discussed, the founders highlight a renewed focus on hedging interest rate risk - with many market players now emphasising the importance of protection, after some faced significant losses from neglecting hedging during the previous low-rate period.

"We think you're going to see a lot more focus on interest rate risk. Even though we think we're going to be in a position of interest rates being cut, you never know what's going to happen and we view hedging as a cost to doing business,” says Hur.

Looking ahead, Coventry’s next big move is launching its own C-PACE origination platform, to compliment commercial real estate needs during a period of substantial refinancing ahead of them. With volatility in valuations and senior lenders requiring additional equity or mezzanine capital, the firm sees a major opportunity for C-PACE to be an alternative solution for this gap.

“We've seen a lot of opportunity potentially in that space, and we already have a couple hundred-million-dollar pipeline being built for ourselves,” says Alizadeh.

The platform has already been soft-launched and approved in four states, and it will allow Coventry to manage costs more efficiently by handling underwriting in-house. In the next six to 18 months, the company plans to focus heavily on C-PACE and residential solar loans, prioritising renewables as key growth areas.

Marta Canini

Capital Relief Trades

Coming up next...

SRT market update

As the SRT market heats up for a busy year end, SCI hears that UK banks, NatWest and Lloyds, are preparing trades.

A NatWest corporate trade is reportedly in the market, with the bank also preparing another project finance infrastructure trade from its Nightingale programme. There are further rumours it could also issue a leveraged loans deal, although sources suggest this transaction is in an earlier stage of development.

Meanwhile Lloyds has also been looking at gearing up its SRT issuance. Fontwell (SCI, 3 July) is thought to be imminent with the 2016 debut of the agricultural loans referencing programme due to mature this year. An additional Salisbury transaction may also be in the works. This would be at least the eight transaction from its established UK SME programme (SCI, 5 December 2023).

Other programmes in the market include Cedar, the global corporate loans programme from Credit Agricole which already issued an iteration, Cedar 7, in March this year.

Additionally, Banks in the Gulf are also reportedly showing an interest in SRT transactions, with a government-owned bank in Kuwait and a Saudi bank lending to the Vision 2030 projects reportedly showing interest. A realistic timeline however for such potential transactions to take place, would be years and not months.

In other news…

Market tightening continues with multi-strategy funds needing to deploy funds. This, and the supply and demand imbalance in the market, has resulted in spreads which may be as much as plus 400-500bp lower compared to last year, and an erosion of relative value in the asset class compared to other forms of securitisation.

The recent Loft transaction, which is expected to price this month (SCI, 6 September), has been described as a “game changer” by one market insider. Loft’s 2024 transaction will price plus 850bp tighter than the previous iteration two years ago.

SCI previously reported there are multiple investors on the deal however now understands one took half the allocation. Such allocation is rumoured to have brought spreads even tighter. With such a large share taken by one investor, expect ripple effects across the whole market. “I think there will be a lot of transactions, but they will be overbid,” one source says.

Capital calls are another indicator of this trend with Goldman Sachs and another US bank offering CRT transactions which will price even tighter than other recent transactions which were in the 500s. While it is historically a low-loss asset class, one source says such a small coupon means deals are pricing very close to the return of the underlying asset class.

Joe Quiruga

Capital Relief Trades

How low can you go?

SRT market update

Morgan Stanley’s latest CRT transaction referencing subscription lines is reportedly about to price even tighter than originally thought.

The spread is now thought to be in the low to mid 400s. As reported previously it’s a funded deal with 0-12.5% first loss position (SCI, 6 August).

It follows a slew of tight subline deals, including Goldman Sachs and at least one other US issuer. Market insiders say spreads have been tightening even more dramatically in response to a combination of factors, including heavy supply, demand imbalance and funds needing to deploy.

There has been a steady drip of interest away from CRT and many funds may go undeployed.

Joe Quiruga

ABS

Records to fall

European and Australian ABS markets approach post-crisis issuance records amidst autumn surge

Primary markets in Europe and Australia are showing significant momentum as we head into autumn. According to research strategists at JPMorgan, YTD issuance totals in both regions are nearing post-crisis records.

Europe’s YTD issuance stands at €71.5bn, with Australia at €32.9bn, just shy of their respective post-crisis records of €76.5bn and €33.

This has led the bank’s strategists to revise their FY 2024 Eurozone issuance forecast from €48bn to €53bn. They now foresee €95bn in total European ABS issuance, including €41bn from the UK, while maintaining their Australian forecast at €45bn.

JPMorgan’s research notes the robust performance of recent transactions, with demand for non-senior bonds remaining strong. However, there has been some softness in senior bond pricing. “Issuers have perhaps left some spread on the table as the supply/demand imbalance has become less favourable at the top of the capital structure,” the strategists note.

The secondary market in Europe has also shown signs of strain, as spreads in various sectors have widened modestly. Eurozone auto ABS and consumer ABS paper have seen spreads widen by 3bp and 5bp, respectively. JPMorgan’s strategists point out that ‘supply fatigue’ seems to have seeped into the market, contributing to the widening spreads. Despite these developments, UK risk has remained broadly unchanged, as supply dynamics have appeared more favourable there.

JP Morgan’s strategists further comment on the ECB’s recent decision to cut the Deposit Facility Rate by 25bp to 3.5%, which did not seem to deter deal flow. "The region’s issuers clearly didn’t view this week’s ECB meeting as a potential source of uncertainty," they observe.

Selvaggia Cataldi

ABS

Resilience amidst volatility

European and UK ABS and MBS markets displayed resilience in August, despite widespread volatility.

The European and UK ABS and MBS markets in August demonstrated resilience in the face of volatility, according to monthly European and UK factsheets monitored by SCI.

August saw widespread volatility, which notably affected both primary and secondary markets. According to TwentyFour AM Momentum Bond Fund’s managers, despite this turbulence, primary markets demonstrated resilience, especially in the UK BTL sector, with Santander successfully issuing £500m triple-A-rated RMBS bonds. "While this did not see impressive coverage,” TwentyFour says, “it shows strong resilience for primary markets in the face of widespread volatility."

This sentiment is echoed by Aegon European ABS Fund’s managers, who note that despite the broader volatility, European ABS markets performed strongly, driven by favourable supply-demand technicals. "Carry again contributed the most (~95%) as spreads moved sideways to slightly wider," Aegon states.

However, Amundi’s portfolio managers highlight a temporary spread widening in both senior and mezzanine ABS tranches during early August, albeit with a quick recovery. "Spreads on senior ABS tranches widened by about 5-6 bps,” Amundi reports, “but quickly retraced to July levels."

A key area of divergence between the three portfolio management firms lies in the outlook for spreads. Aegon is somewhat cautious about the potential for spreads to tighten further, noting that "there is limited upside for spreads to go tighter on a standalone basis," suggesting any spread movements will likely be driven by idiosyncratic events or central bank actions. Aegon highlights that the European ABS market has seen spreads hovering around the tights of the past three years, signalling limited room for further tightening.

In contrast, TwentyFour expresses a more optimistic view on spread tightening. "The pipeline of new transactions is very large, but early prints show that there is a lot of demand for high-quality paper," the firm says.

Meanwhile, Amundi points to significant demand for mezzanine ABS tranches, which continue to be oversubscribed by up to 10 times, despite some temporary widening. This strong demand has kept spreads attractive for investors in mezzanine tranches, even if volatility creates opportunities for spread widening in the short term.

Although RMBS issuance was relatively muted in August, with just three new issues, TwentyFour foresees a substantial increase for the current month: "We expect RMBS issuance to pick up in September, both with repeat issuers and new entrants."

Similarly, Aegon highlights that while issuance slowed in August, the YTD figure still stood at over €95bn, with RMBS making up 35% of total issuance, followed by CLOs (34%) and consumer ABS (27%). Aegon European ABS Fund’s managers expect the remainder of the year to see sustained issuance, underpinned by "early redemptions and amortisations of ABS structures.”

Amundi, on the other hand, reports a surge in activity toward the end of August, with approximately 10 deals marketed in the last 10 days of the month, including two auto ABS deals in Germany and the Netherlands.

Looking forward, Aegon strikes a more cautious tone: "Surprises will come from central bank communications, incoming data, or the flaccid geopolitical environment."

In terms of fund management, managers at Aegon European ABS Fund’s say: “Overall, we continue to increase our ABS holdings and decreasing our CMBS exposure[…] We have increased our Dutch, Belgian and Finish allocations, while decreasing our UK exposure. Our positioning senior/non-senior decreased slightly to around 61/39.”

In contrast, TwentyFour is more opportunistic: "The PMs are opportunistic about the ability to add good quality risk at attractive prices," although the firm also warns against issuers with weaker collateral locking in funding during favourable conditions. “The team continues to prefer established issuers with a long track record,” it says.

Meanwhile, Amundi appears to be actively navigating both primary and secondary markets. “We participated in the Auto ABS transactions that priced at the end of the month, the Dutch one from Lease plan and the one from Bank 11 in Germany,” it says. “In the secondary market, we sold some portfolio assets to cope with the exits of some investors following the global volatility in the credit markets at the beginning of the month. We also opportunistically bought mezzanine tranches that were offered for sale by some counterparties.”

Fund specifics:

Aegon European ABS Fund returned +0.33% in August 2024. YTD: 5.36%
Fund size: € 6.63bn. ABS/MBS allocation: 72.1%

Amundi ABS returned +0.25% in August 2024. YTD: 4.79%
Fund size: €1.02bn. ABS/MBS allocation: 58.50%

Janus Henderson ABS Fund returned +0.42% in August 2024. YTD: 5.31%
Fund size: £365.2m ABS/MBS allocation: 89.32%

TwentyFour AM Monument Fund returned +0.40% in August 2024. YTD: 5.63%
Fund size: £1.82bn. ABS/MBS allocation: 59.28%

Selvaggia Cataldi

Asset-Backed Finance

Set for take-off?

Increased volumes, improving fundamentals boost aircraft ABS

A handful of US aircraft ABS worth US$2.87bn have priced so far this month, taking the total number of deals printed this year to eight. With improving fundamentals post-pandemic, the sector stands out when compared to railcar and container ABS.

Indeed, aircraft ABS currently offers the highest yield among the three asset classes, driving analysts’ preference towards this sector. “With respect to the three sectors, if we look at aircraft, it's going to have the most spread and the most yield. That would be the driving factor as to why we prefer aircraft over container and railcar ABS,” says Theresa O’Neill, head of ABS research at BofA Securities.

PK AirFinance’s US$633m PK ALIFT Loan Funding 2024-2, which priced yesterday (18 September), marks the fifth aircraft ABS to print this month. The preceding deals comprise Global Jet Capital’s US$617m Business Jet Securities 2024-2, BBAM Aviation Services’ US$556m Horizon Aircraft Finance IV, PIMCO’s US$497m Navigator 2024-1 and SKY Leasing’s US$570m SLAM 2024-1.

Before that, AASET 2024-1 and PK ALIFT Loan Funding 2024-1 priced in June (for a total of US$1.24bn), while the US$575m Business Jet Securities 2024-1 printed in April. In comparison, two aircraft ABS worth US$734m closed during the whole of 2023.

The increased volume in aircraft ABS issuances compared to previous years is helping price discovery and boosting investor confidence, according to O’Neill. “The fundamentals are stronger in aircraft now than during the height of the pandemic and that has certainly helped demand for this particular product,” she adds.

Nevertheless, there is some uncertainty about whether this momentum will continue into 2025. Factors including a supply-demand imbalance in the aircraft sector, interest rates, Fed policy and the “aggressiveness” of alternative funding sources could potentially affect future volumes.

“Aircraft financing was happening before; it just wasn't happening in the ABS market. That's certainly indicative of alternative funding sources that folks have available to them. Whether that continues remains to be seen,” says O’Neill.

With five-year single-A rated aircraft ABS paper offering about 190bp, compared to 155bp for railcar and 140bp for container bonds, BofA nonetheless expects the sector to continue to offer attractive relative value. “We foresee spreads staying range-bound, with a bias towards tightening as economic clarity improves,” concludes O’Neill.

Marta Canini

Capital Relief Trades

Latest SRTx fixings released

SRT market sentiment re-adjusts after financial markets experienced significant volatility.

The latest fixings for the SRTx (Significant Risk Transfer Index) have been released. If August got off to an rough start (The S&P 500 lost more than 6% in the early days of August, erasing nearly US$3tn in market value), as fears mounted about an economic slowdown in the US, recession concerns dissipated as quickly as they arose. While market pricing of interest rates is currently quite aggressive central banks have reiterated that they are very much data-dependent. For instance, ECB projections now show a much weaker demand-side of the economy, but that having a muted impact on core inflation. This is interesting development, especially as their external factors are largely unchanged. The priority of inflation over growth could leave them playing catch up soon. Regarding the SRT market, market data and sentiment still suggest that regulatory and business pressures on banks globally continue to drive growth in issuance. Spreads for most European first and second loss deals remain in the high single digits, reflecting some overall tightening over the past 6-12 months. The latest SRTx fixings have clearly re-adjusted from last month’s volatility, aligning with recent string of relatively strong datapoints pushing back against the heightened recession fears from earlier in August.

SRTx Spread Indexes have moderately widened across the board, with the European (+9.1%) and US (+6.7%) corporate segments leading the way. As for the SME sector, the figures reflect an even more slight widening (+2.5%) in Europe and +0.4% in the US). Market data for certain parts of the credit market, which happen to be in the credit rating category that the SRTX benchmark deal looks like, suggest a broader spread widening.

The SRTx Spread Indexes now stand at 1,003, 667, 1,025 and 1,038 for the SRTx CORP EU, SRTx CORP US, SRTx SME EU and SRTx SME US categories respectively, as of the 9 September valuation date.

While volatility initially presented clear challenges, as the month progressed market sentiment began to improve. Consequently, as far as sentiment, the SRTx Volatility Index values have softened month-on-month. The latest data shows a tightening across the board  (Large corporate: EU -12.5%, US 13.3%; SMEs: EU -6.7%, US -16.7%).

The SRTx Volatility Index values now stand at 58, 65, 58 and 63 for the SRTx CORP VOL EU, SRTx CORP VOL US, SRTx SME VOL EU and SRTx SME VOL US indexes respectively.

Regarding liquidity, the SRTx Liquidity Index values generally denote an incremental tightening. As summer comes to an end, market indicators and commentaries predict an extremely robust 4th quarter. If conceptually liquidity is about deal flow, then the latest SRTx data points signal such shift: (Large corporate: EU -8.0%, US -20.0%; SMEs: EU -8.3%, US 0.0%).

The SRTx Liquidity Indexes stand at 46, 45, 46 and 50 across SRTx CORP LIQ EU, SRTx CORP LIQ US, SRTx SME LIQ EU and SRTx SME LIQ US respectively.

Finally, The SRTx Credit Risk Indexes tightened significantly across the board (Large corporate: EU -20.0%, US 20.0%; SMEs: EU 20.0%, US 33.3%), directly suggesting that the outlook in credit risk is going to hold steady for the next foreseeable future. All figures sit precisely on the 50 benchmark.

The SRTx Credit Risk Indexes now stand at 50 for SRTx CORP RISK EU, 50 for SRTx CORP RISK US, 50 for SRTx SME RISK EU and 50 for SRTx SME RISK US.

SRTx coverage includes large corporate and SME reference pools across the EU and US economic regions. The index suite comprises a quantitative spread index - which is based on survey estimates for a representative transaction (the SRTx Benchmark Deal) that has specified terms for structure and portfolio composition - and three qualitative indexes, which measure market sentiment on pricing volatility, transaction liquidity and credit risk.

Specifically, the SRTx Volatility Indexes gauge market sentiment for the magnitude of fixed-spread pricing volatility over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating volatility moving higher.

The SRTx Liquidity Indexes gauge market sentiment for SRT execution conditions in terms of successfully completing a deal in the near term. Again, the index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that liquidity is worsening.

Finally, the SRTx Credit Risk Indexes gauge market sentiment on the direction of fundamental SRT reference pool credit risk over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that credit risk is worsening.

The objective of the index suite is to depict changes in market sentiment, the magnitude of such change and the dispersion of market opinion around volatility, liquidity and credit risk.

The indexes are surveyed on a monthly basis and recalculated on the last trading day of the month. SCI is the index licensor and the calculation agent is Mark Fontanilla & Co.

For further information on SRTx or to register your interest as a contributor to the index, click here.

Vincent Nadeau

Capital Relief Trades

Soar like an Eagle

Eagle Point makes mark in SRT

Eagle Point Credit, based in Greenwich, Connecticut, is not, perhaps, a veteran of SRT investment but it’s also got more road under the tyres than some of the more recent, big name, arrivals in the market.

The firm, which describes itself as an investment manager focused on “niche, income-oriented credit strategies in inefficient markets”, was founded in 2012 and started investing in SRTs in earnest with the hiring of Karan Chabba a decade later. In the last two years, it has invested US$350-400m in synthetic reg cap securities with 12-15 different counterparties, says Chabba, principal and head of RCR/specialty finance – RCR standing for regulatory capital relief.

The initial focus - and one that remains the fulcrum of Eagle Point’s investment strategy - was the CLO market and in particular CLO equity tranches. However, about five years into its life, the firm began to diversify investment. The move to SRT was part of that expansion, and Chabba was hired from KLS Diversified Asset Management to bring accumulated expertise and market relationships.

His experience in structured products in general, coupled with the firm’s history in CLOs, has helped extend Eagle Point’s subsequent reach in the SRT market, so that it now is able to take positions in a range of structures and assets. “The CLO business has helped with disclosed pools and the ABS business helps with blind pools. Some people often do one and not the other,” says Chabba.

Though based in the US, Eagle Point has principally dealt with European and Canadian counterparts to date.

Deals from US issuers have tended to offer tighter spreads than in Europe for the same kind of collateral pools, which is part a reflection of US deals exhibiting thicker tranches and also comprising lower risk reference pools. Spreads on some recent US deals have been in the region of SOFR plus 400bp-450bp, which is around half where similar deals were done a year or so ago.

Spreads in European product have tightened as well, of course, but Chabba points out that this has occurred across asset classes. “What can investors turn to? Spreads have not tightened in a vacuum. Double B ABS used to get you plus 800bp and are now plus 400bp. Double B CLOs used to be plus 950bp-1000bp and are now plus 600bp. Everything has tightened,” he says.

Much was expected of the US market this year, and while issuance has been significantly greater than in the past it has not reached the heights that was hoped for. Does this mean that SRT investors have had to turn elsewhere?

Chabba doesn’t think so. Traditional SRT investors have fixed pools of capital they allocate to the space and so don’t really have room to go anywhere else. Of course, other asset managers can go to alternative forms of private debt transactions but he says he has not heard that happening a great deal either.

The decision by the Federal Reserve, announced in a speech by vice chair of supervision Michael Barr last week, to row back on the most excessive initial strictures of Basel III Endgame, raises the possibility that US issuance will not be as voluminous going forward as was once thought likely. Chabba says that a revision of the original B3E proposals was largely expected by the market and that issuance will likely still be significantly greater than in the past.

Eagle Point has also been on the other side of deals with Canadian banks, four of which last year joined pioneer Bank of Montreal in the market. The Canadian financial year ends on March 31, so the next two quarters should see renewed issuance from these counterparties.

Although Chabba brought a host of contacts to Eagle Point, and he stresses that it takes a long time to develop these relationships, the core CLO business brings new names to the table as well.

 “SRT is an attractive asset class. Issuance should continue to grow. It gives investors a chance to get into an asset class which we see as relatively low risk without excessive volatility in the underlying assets. And yet we see returns remaining relatively attractive as well,” he concludes.

Simon Boughey

CLO Managers

CLO manager corner: Sculptor Capital Management

Adeel Shafiqullah, head of European CLO management, discusses launch of manager's new captive CLO equity platform in context of its other strategies

The launch of Sculptor Capital Management’s captive CLO equity platform in April, secured by an anchor commitment from Rithm Capital Corp., is a “strong validation” of the firm's support of Sculptor’s CLO management business as well as the ability to be “opportunistic and nimble” with capital.

Speaking to SCI, Adeel Shafiqullah, head of European CLO management at Sculptor, says: “Having access to committed CLO equity capital that is able to provide warehouse equity, and ultimately CLO equity, for Sculptor’s CLO platform allows us to be responsive and flexible in a variety of market conditions. For example, we can be opportunistic in terms of being able to capture periods of dislocation in the market, as well be patient in terms of ramping and securitising.”

The launch of the captive CLO equity platform not only gives visibility to Sculptor’s CLO issuance program and growth, Shafiqullah notes, but also provides an attractive combination of stable and flexible capital that can be deployed over a credit cycle. “The long-term and stable profile of CLO equity capital enables us to capture both the optimal asset purchasing period as well as the securitisation period for issuing a deal.”

When it comes to unique differentiators as a manager, Shafiqullah highlights Sculptor’s ability to work together as a cohesive team across different investment strategies and geographies. He says: “A culture of strong collaboration across various investment strategies has been in the DNA of the firm since its inception. As a leading alternative asset manager that has deep experience in corporate credit, asset-based finance, long/short equities, convertible and derivative arbitrage and real estate, we have access to investment teams that are experts in various sectors, geographies and across the entire capital structure. Therefore, when we are underwriting a new transaction or monitoring an existing credit in our CLO portfolios, it's important for us to reach out to our colleagues on other teams and get their input and views on a critical theme or aspect of our investment thesis.”

Shafiqullah notes another differentiator as a manager is Sculptor’s emphasis on active portfolio management facilitated by constructing a liquid underlying portfolio and overlaying structural optimisation using proprietary analytics apps. “We typically prefer more liquid capital structures because it's important to have the ability to trade a portfolio actively. As underlying fundamentals or valuations change, our investment thesis may change and it’s important to be able to translate that into actionable trading decisions.”

He adds: “Then when it comes to CLO management, a key aspect is continually optimising the portfolio to the CLO structure and actively managing it to achieve the best results for all investors. This includes a thorough understanding of CLO documentation and having robust systems from a portfolio analytics perspective. When you overlay all of that together it enables us to be proactive in terms of managing the lifecycle of our CLOs.”

Shafiqullah says that it is also important to be cognisant of potential downside risks in CLO portfolios. “A key risk that we are highly focused on when we're underwriting a new loan, conducting portfolio reviews, and monitoring our existing deals is to understand where the weakest links are in the market in terms of loan documentation. I think some of the “LMEs” (Liability Management Exercises) that we've seen in the loan markets and some of the resultant recoveries have pushed us to raise the bar in terms of getting comfortable with both credit as well as the structure and documentation of a loan.”

This will continue to be a focus going forward, Shafiqullah highlights, because of the poor outcomes seen for lenders, where documentation combined with weak credit has led to some cases of low recoveries.

Additionally, one trend Shafiqullah says is topical in the market this year is the shrinking of the CLO market in terms of net new issuance. “You had more deals getting called than net new issuance. I think that trend starts stabilising and we go back to a growing market as CLO formation continues to pick up from where it is today.”

On the liability side, Shafiqullah believes CLO liabilities will continue to remain an attractive option for investors across the capital stack from triple-As all the way down to junior mezzanine notes. “The primary driver for that is that the all-in carry that investors are looking at from the CLO product remains attractive on a relative value basis. And then when you overlay the outlook from a macro perspective, in terms of a slowing economy, more visibility on rates, the risk/return should still look attractive for CLO liabilities.”

“As the rates cycle pivots, we think the second half may be more constructive than the first half of this year, as we have already seen a significant rally in spreads,” Shafiqullah concludes.

Ramla Soni

Structured Finance

Job swaps weekly: EIF exclusive

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees SCI exclusively reveal that the European Investment Fund’s chief investment officer is retiring from his role after almost three decades with the fund. Elsewhere, Performance Trust Capital Partners has poached three executives from Pagaya, while ELFA announces its ceo is to step down from her role.

Alessandro Tappi is to retire from his role as chief investment officer at the European Investment Fund, SCI has learned. It is understood that Tappi will be replaced by colleague and current deputy chief investment officer and head of guarantees for the securitisation and inclusive finance division, Marco Marrone, before the end of the year.

Tappi has been with EIF for 29 years, joining the institution in its start-up phase in 1995 and taking up the role of chief investment officer in 2018. He was responsible for building out the fund’s capital presence and its activity in SME securitisation. Prior to joining EIF he was a senior analyst at SanPaolo Bank.

Marrone has been with EIF for 19 years, having previously worked at Herbert Smith and Gianni Origoni & Partners. He was promoted to his current role in 2018, after spending three years serving as head of regional mandates – guarantees, securitisations and microfinance.

Meanwhile, Performance Trust Capital Partners (PT) has poached three Pagaya execs - Benjamin Blatt, Paul Limanni and Gregg Davis - to lead its new ABS banking team, based in New York. The trio brings decades of experience in the structured products sector, combining a blend of banking, business development, trading, distribution and operational experience. This diverse skillset will enable them to help expand PT's current ABS capabilities, providing a blend of both originator and investor perspectives.

Blatt and Limanni have been named co-heads of ABS banking at the firm. Blatt was formerly chief business officer at Pagaya - which he joined in October 2017 - and Limanni was previously chief capital officer, having joined Pagaya as head of capital markets in July 2020. PT has appointed Davis as a director, having previously been head of treasury at Pagaya.

ELFA is to bid farewell to incumbent ceo, Sabrina Fox, later this year after she announced her decision to step down following five years of service. Fox led ELFA from its inception as ceo, and during her tenure led the organisation to make significant improvements to the standardisation of ESG disclosures across the leveraged finance universe.

Upon the appointment of her successor later this year, Fox will continue her efforts in the structured finance market by delivering education on debt documentation through her self-founded online covenant training platform, Fox Legal Training. She will also continue to support women’s empowerment endeavours through her organisation, Good Girl to Goddess.

UMB Bank, a subsidiary of UMB Financial Corporation, has expanded its CLO trustee and loan administration team by hiring Henry Brigham, Willis Hwang, and David Knecht from Wilmington Trust.

Brigham will serve as the team manager and lead senior relationship management for the CLO group. He previously worked as the vice president of CLO, borrowing base, and loan administration services at Wilmington Trust.

Hwang will support senior relationship management. At Wilmington Trust he held the position of vice president – senior relationship manager, CLO trustee.

Knecht, who was the senior vice president in the CLO transaction servicing team at Wilmington Trust, will be in charge of UMB Bank’s CLO business solutions and intelligence.

Miller has announced two new appointments to its growing reinsurance practice, with Steven Rance joining as head of reinsurance strategy and innovation and Charlotte Lowe joining as an account handler. Rance will report to Shaun Sinniah, Miller’s head of reinsurance and capital, and work with the global team to support the expansion and shape the strategy of the broker’s reinsurance offering.

Rance joins from Price Forbes Re, where he led its specialty division, and has more than 35 years of experience in global financial services. This includes six years as a managing partner at Gallagher Re, which he joined in 2017 to establish and lead its global mortgage risk reinsurance division. Rance has particular specialisms in credit-risk related services, such as portfolio structuring and SRT generation, and has held a number of senior roles across mortgage and credit risk insuring, broking and consulting.

Lowe joins from Price Forbes Re, where she was a broker. She has experience across housebuilders and captives, having previously worked for Gallagher Re.

Two Harbors Investment has made two new senior appointments as it seeks to enhance its operational business. James Campbell and Chris Hurley join the firm as head of servicing at RoundPoint Mortgage Servicing and chief technology officer respectively. 

Campbell joins Two Harbors with more than thirty years of experience in servicing from Flagstar Bank where he was head of servicing. Previously, Campbell also operated as head of servicing (and post-closing) at Caliber Home Loans, and prior to that was the head of asset management for the RMBS group at Deutsche Bank. 

Hurley joins with similar levels of expertise in his field, bringing more than 20 years of experience working on servicing systems and platforms. He joins from Newrez/Shellpoint Mortgage Servicing where he was senior vp, head of servicing technology.

And finally, The Brattle Group has recruited Edmond Esses to its New York office as a principal in its bankruptcy and restructuring practice. He brings nearly two decades of experience advising clients on complex bankruptcy and restructuring disputes, including Puerto Rico's debt recovery plan and the Lehman Brothers bankruptcy, on behalf of RMBS trustees. Esses was previously a senior director in Kroll’s expert services practice, which he joined in December 2010, having worked at Dynamic Credit Partners before that.

Claudia Lewis, Corinne Smith, Ramla Soni, Kenny Wastell

Capital Relief Trades

New CAS

Market moves and sector developments

Fannie Mae has priced a US$708m CAS deal, its sixth of the year, via joint bookrunners Bank of America and Cantor Fitzgerald.

The trade, designated CAS 2024 R06, consists of four tranches, including an A+/A+ rated US$212.5m A1 tranche priced to yield SOFR plus 115bp.

Further down the capital stack, the US$212.5m BBB+/A1 rated M1 yields SOFR plus 105bp, the US$165m BBB-/BBB rated M2 yields SOFR plus 160bp and the US$118m BB-/BB+ rated B1 yields SOFR plus 205bp.

The reference pool consists of approximately 50,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately US$16.6bn, all of which have low LTVs of between 60% and 80% and were acquired between October and December 2023.