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Capital Relief Trades

Recalibrating the agenda

The LMA is experiencing fresh SRT member growth

The loan market association (LMA) – the authoritative voice of the loan market in EMEA – is ramping up its SRT focus. We catch up with them and investigate the LMA’s role, views and prospects regarding the asset class.

While membership of the LMA has historically included banks – ranging from the large international investment banks to regional and local entities – and buy-side institutional investors, the association is further experiencing new member growth from technology firms, asset managers, credit funds, (re)insurers, and single-strategy funds with a dedicated SRT focus.

Describing this recent adjustment, Scott McMunn, ceo of the LMA, describes a clear repositioning and acknowledgment. He says: “I took over as ceo about a year ago and one of the main attractions for me was to re-point the LMA to represent more what was happening in the loan markets rather than what the loan markets were maybe 5, 10 or even 20 years ago.”

He continues: “I would not necessarily say it’s a new focus area (the SRT market) as we have always been involved in the periphery, but I think there is a recognition that it is an increasingly important asset class. And as I just outlined, it follows our strategy to reinvigorate the LMA and cover a broader continuum of the loan (and second-order) markets.”

More comprehensively, the LMA’s key objective is centred around improving liquidity, efficiency and transparency in the primary and secondary loan markets in EMEA. Reflecting on this mandate, notably during the last 12 months and specifically for SRT market guidelines and documentation, Amelia Slocombe, md and head of legal at the LMA, highlights a common denominator. She notes: “A key point is about the loan-backed part of the asset class. Generally, the issues that people encounter when it comes to improving efficiency and liquidity in the market is often a result of the loan documentation which sits beneath it. Whether we talk to insurers, credit portfolio managers or SRT investors, the points that they want us to help with are largely the same, including confidentiality and transferability restrictions, etc. Those are all loan documentation points which we can do our best to try and either highlight to the market or try and resolve, whether it be by guidance or improve drafting for those kinds of provisions as best we can.”

She continues: “I would say the projects that we're focusing on at the moment revolve around a deep dive into who is part of that product cycle, what bottlenecks they experience as they go through the process, and then as an organisation, identify what we can help with specifically.”

Another fundamental mission of the LMA concerns mitigating any possible negative impacts on the loan product through dialogue with local regulators. On this aspect, McMunn points to the LMA’s broader advocacy and interconnectivity with regulators. He says: “Recently we witnessed negative and strong stories (from renowned outlets) about SRTs (and CRIs) and the recycling of risk across banks. I think our role is to debunk some of those myths and come up with the facts and the truth. And how we do that is by the luxury of our membership base, where we have the ability to gather market intelligence and use it to demonstrate types of assets, performance and hopefully give the regulators more clarity on the bank and the non-bank market of where that risk is actually residing and demystify concerns around systemic risk.”

Regarding market outlook, the LMA shares the widely accepted view that there are supporting market tailwinds for the continued use of SRTs. Analysing recent market and member feedback, Slocombe alludes to increased issuance, growing investor base and diversification of the underlying asset pool as defining trends. On the latter point, she says: “Regarding the asset diversification side, I think people are looking at more sectors and geographies. This makes sense because as more investors come in, means there is going to be a broadening interest in different types of underlying loans. I also think that, as the product increasingly starts to show a proven track record, the risk profile becomes a little bit more understandable. And when people get comfortable with that, it is only natural that more investors will come into this market.”

Finally, McMunn views single-strategy funds as playing an increased and fundamental role in this sector. He concludes: “I think that given the returns, there is going to be increased funds raised from single strategy funds which can customise risk based on asset cost, attachment point, and based on yield characteristics. There is a lot of really interesting asset classes that these funds can take exposure to.”

Vincent Nadeau

RMBS

Building on a niche

Specialist lenders continue to drive growth in UK RMBS

Specialist lenders in the UK are making good on their promises to serve the underserved while ramping up RMBS issuance – and are showing no signs of slowing down. Following the GFC, the speciality lending sector (SLS) redefined its approach to lending and – between the first transaction in 2016 and 2023 – the share of UK RMBS issuance accounted for by SLS RMBS surged from just 6% to 37%. 

“The sector has really proven itself, both in terms of the volume of originations and performance,” states Kali Sirugudi, md at KBRA Europe.

A recent report from KBRA highlights the swift rise in SLS RMBS issuance in the UK. Specialist lending itself has grown from £18.2bn to £20.5bn in the last decade, demonstrating the sector’s resilience and persistence through challenging times. The pandemic, rising interest rates and cost-of-living pressures have all tested the market, but SLS has remained robust – underpinned by RMBS.

“Securitisation is a key source of funding in this sector, and post-covid volumes ticked the box in terms of proving its lending capabilities,” says Sirugudi.

Despite this growth, current market data shows some potential reduction in the SLS RMBS market share for this year, as the pace of new lending has slowed. As borrower affordability issues mount and prime lenders recover,  KBRA anticipates a slight decrease in market share for 2023-2024 as a result of stresses on originations. However, issuance volumes are expected to be bolstered by refinancings – as long as spreads remain attractive. 

These niche lenders have demonstrated keen abilities to meet the demands of the ever-changing market through constant innovation. Later-life lending is a significant area of focus for these specialist lenders, and has gained much traction as the age of borrowers in the UK continues to rise.

SLS lenders have evolved to meet the needs of the market given such demographic shifts and financial challenges by developing new products, which can meet the needs of underserved borrowers – such as with interest-only retirement mortgages.

“Specialist lending has developed into a position where these lenders are originating loans from across the credit spectrum,” explains Sirugudi. “That includes prime loans where their performance is now comparable to that of the banks and the building societies.”

He continues: “And they’re also active on the other end of the spectrum too, where the risks are higher, and they mitigate these higher risks of defaults and losses with lower LTVs and robust servicing capabilities.”

More growth is still to come for the sector too, according to KBRA. There remains significant scope for more issuance to be seen yet in the later-life, second-lien loan, and bridging finance sections of the market.

“As interest rates come down, you can expect that borrowers in the later stages of life – around 55-60 plus – are motivated to lower interest rates on their current mortgages,” Sirugudi says. “Just as we saw with the first issuance from LiveMore, the interest-only retirement product is pretty attractive to UK mortgage prisoners. So that volume is likely to continue to grow.”

At a different end of the spectrum, second-lien loans have also seen some growth. While these loans carry greater risks, specialist lenders mitigate said risks through lower LTV ratios and strong early-arrears management.

“Second lien lending – I certainly expect to see that grow, given the high costs of living and high interest rates,” comments Sirugudi. “These loans bear higher interest rates,  which incentivise borrowers to pay down the loan as quickly as possible.”

Furthermore, activity in the bridging finance space could also grow, despite no UK issuance seen thus far backed by these loans.

“There are some issues originators are working on with banks and others to understand the risks in those types of issuances,” Sirugudi notes. “In that sector, if there’s an issuance that stands the test of the rating agencies [and] regulation – and the investors are accepting of that type of asset – that would push more and grow issuance in that area.”

This particular corner of speciality lending, by its very design, means working with borrowers who the banks and building societies are less likely to serve.

“The underserved segment by nature means that these speciality lenders are taking a share of the lending potential from the banks and building societies,” states Sirugudi. “Although these banks aren’t looking at the finer details on the borrower, it doesn’t mean such a lender shouldn’t take the risk at all.”

Specialist lenders have also shown resilience in managing delinquencies. Delinquencies in the SLS sector have remained low – ranging from near-zero to 2.8% – given the challenges of the broader economic environment. Repossession levels have also remained low and major losses have been avoided through proactive approaches seen across the SLS, strong loan performance bolstered by low LTV originations, and robust servicing. 

“The bottom line is that specialist lenders have created a niche for themselves lending to the underserved segment, which exists because banks and building societies aren’t able to due to their reliance on automated decision models and inability to offer riskier mortgage products,” comments Sirugudi. “The SLS sector relies more on manual underwriting, which provides the best possible insight to the under-served segment. This style of lending can look to mitigate risks that the banks and building societies simply cannot take on.”

Specialist lenders will continue to work to meet the demand from such borrowers. While banks and building societies are unlikely to ever touch these types of products, according to Sirugudi, the dawn of AI in the structured credit space – specifically in underwriting – means it may be too soon to tell for sure.

As the market continues to evolve, the ability to innovate and adapt to changes will become more critical for lenders. As specialist lenders continue to serve this decreasingly niche corner and leverage securitisation for funding, they are likely to remain an integral part of the UK RMBS landscape.

Claudia Lewis

ABS

Resilient tapestry

Maddi Rowlatt at Challenger navigates the dynamic ABS and MBS landscape, balancing investor demand with macroeconomic challenges.

The ABS and MBS landscape continues to be dynamic and resilient, supported by strong investor demand and favourable macroeconomic conditions. In this swiftly changing market, Maddi Rowlatt, portfolio manager overseeing UK, European, and US ABS at Challenger, closely monitors broader macroeconomic and geopolitical risks that could affect performance.

With cautious optimism, she notes: “The market has benefited from a relatively favourable macroeconomic backdrop. Volatility has been limited since the LDI crisis in 2022, and this has given both investors and issuers a lot of confidence.” 

However, Rowlatt is aware of potential risks on the horizon: “There are some macro and geopolitical themes we need to be cautious of, but the confidence in the asset class and the need for funding from issuers remain high.”

With record issuance levels and strong investor demand, Rowlatt is confident about the prospects for European and UK ABS and MBS moving forward. “We’re seeing high demand, particularly in the mezzanine part of the capital structure,” she explains. “Spreads have tightened over this year but we continue to see a lot of competition for non-senior bonds. The strong investor base for ABS, demonstrated even during periods of volatility, provides opportunities for us as investors to find value and position ourselves strategically.”

However, Rowlatt remains mindful of potential triggers for volatility: “While volatility can be tricky for the asset class, it has been quite resilient in recent years. We’re focused on ensuring that transactions perform within our performance expectations, as well as being mindful of market liquidity.”

Discussing the UK non-conforming and buy-to-let sectors, Rowlatt notes the challenges but also sees pockets of opportunity: “There’s been stable performance across most asset classes, but we’ve seen pockets of deterioration, particularly in legacy UK non-conforming RMBS. Given the floating rate underlying collateral, borrowers have faced significantly higher payments in the current interest rate environment.”

As the market adjusts, Rowlatt emphasises the importance of staying selective and informed: “We regularly speak with issuers and conduct in-person due diligence. Whether it’s auto ABS or RMBS, it’s critical to understand how collateral is being underwritten and how that’s affecting borrower behaviour.” This hands-on approach ensures that her team remains ahead of market trends and makes informed decisions on positioning within the capital structure.

As for liquidity in the secondary ABS market, Rowlatt sees it as robust: “Secondary market volumes have held up well, even with high levels of supply in the primary market. We’ve seen strong execution for those looking to rotate assets.” With tightening spreads and healthy investor demand, it’s clear that the ABS market remains buoyant.

Looking ahead, Challenger clearly believes diversification is key to navigating the upcoming complexities and challenges of the ABS market. “The key is to focus on understanding the underlying collateral and ensuring that we’re being appropriately rewarded for the risk,” Rowlatt says. “The global nature of our strategy, spanning the UK, Europe, US, and Australia, gives us the flexibility to find value wherever it presents itself.”

Selvaggia Cataldi

Asset-Backed Finance

C-PACE renaissance

Carlyle, North Bridge partnership highlights opportunity

Carlyle last week announced a minority investment in North Bridge, a real estate financing provider, to support the origination of up to US$1bn in C-PACE loans. This landmark partnership represents the largest collaboration between a C-PACE originator and a private credit firm, underscoring the rapid evolution of this emerging asset class.

“It’s a really interesting partnership that leverages Carlyle’s strategic growth in real estate and asset-backed finance expertise,” says Shawn Kodes, co-chair of the ABF practice at Paul Hastings, which advised on the transaction. “We built a versatile structure adaptable to different types of C-PACE loan products, whether in bond or loan format, allowing us to scale up in a turnkey fashion while addressing jurisdictional issues.”

Carlyle’s investment arrives at a time when the C-PACE sector is gaining traction. “This presented a great opportunity in an asset class being C-PACE that’s still in its infancy phase, with potential for growth,” says Kodes.

Indeed, recent regulatory developments have bolstered the appeal of C-PACE financing. A private letter ruling from the Internal Revenue Service (IRS) recently clarified that C-PACE assessments qualify as ‘qualified mortgage loans’, making them eligible to be securitised within Real Estate Mortgage Investment Conduits (REMICs).

According to Dentons, this ruling is expected to enhance the attractiveness of C-PACE assets to secondary market investors, offering additional funding streams and potentially accelerating the growth of C-PACE programmes.

“C-PACE was valued under US$2bn three years ago. It surged to around US$5bn in 2022 and US$7bn in 2023. We see that growing, with 40 states plus Washington DC having enabling legislation,” says Kodes.

In May, SCI reported that the PACE ABS market could be on the verge of a renaissance, driven by C-PACE activity, far outpacing that of its residential counterpart R-PACE (SCI 22 May).

“The R-PACE market continues to face challenges to growth,” confirms James Vergara, coo and cio at Home Run Financing, citing regulatory hurdles and increasing competition as key factors driving this industry-wide shift.

“Other lenders in the market are offering lower-margin and/or higher risk products that are very hard to match, and new regulatory requirements make the origination process more complex compared to non-PACE lenders,” explains Vergara, whose company is considering a strategic pivot towards C-PACE, with plans to focus on small and medium-sized commercial properties in 2025.

“With our existing network of installers and the way we originate the residential business, I see an opportunity to capitalise on that infrastructure to tap into some of the smaller commercial deals,” he adds.

Reflecting the growing interest in this asset class, SCI recently reported that Los Angeles-based alternative asset manager Coventry Structured Investments is set to launch its own C-PACE origination platform (SCI 20 September).

C-PACE’s scalability and versatility also make it an attractive opportunity for institutional investors seeking long-term ESG-aligned investments. “C-PACE offers a low-leverage, secure financial instrument appealing to both ESG and financial mandates. We think we’ll see meaningful growth from the private credit side, especially in C-PACE, where you can create investment-grade rated products for institutional investors like insurance companies looking for long-term capital deployment,” Kodes concludes.

Marta Canini

Asset-Backed Finance

ABF push

Apollo, BNP Paribas ink strategic collaboration

Apollo last week unveiled a US$5bn strategic financing and capital markets collaboration with BNP Paribas, as it seeks to expand its securitisation and asset-backed finance operations, including ATLAS SP Partners. The deal signals a surge in activity in the private credit market, marked by a growing trend of partnerships between banks and non-bank entities adapting to meet the demand for innovative funding solutions.

“This deal is a prime example of how non-banks like Apollo are stepping in to provide equity and expertise but still need back leverage, which is where banks like BNP Paribas come in,” a source familiar with the transaction tells SCI. “It’s about banks providing leverage for those taking on the mezzanine and first-loss positions.”

With BNP Paribas anchoring a US$5bn day-one commitment, set to grow over time, the transaction is the largest bilateral financing deal for directly originated credit assets. The collaboration supports investment-grade, asset-backed credit originated by Apollo and ATLAS, alongside a capital markets collaboration to support securitisations sourced by Apollo and ATLAS issuer clients.

“This collaboration leverages our leading securitisation structuring and distribution capabilities to support ATLAS in financing the real economy, while also being complementary to the client franchise and growth objectives of both firms,” says John Gallo, head of global markets Americas and global head of the institutional client group at BNP Paribas.

Unlike broadly syndicated loans involving multiple lenders, this structure creates a streamlined relationship between a single lender, BNP Paribas, and a single borrower, Apollo. Such a collaboration combines the strengths of both parties: banks provide the necessary capital, while asset managers like Apollo contribute equity and expertise in credit markets.

“As a fully integrated and scaled origination platform, ATLAS is ideally positioned as an institutional borrower’s partner of choice for warehousing and other investment-grade asset-backed solutions,” says Carey Lathrop, interim ceo at ATLAS.

SCI’s source further explains: “The ultimate goal in these collaborations is to achieve better long-term financing through securitisation. It’s not just about providing loans; it’s about creating structures that provide long-term, efficient capital.”

Regulatory pressures, such as the evolving Basel 3 rules (SCI 24 September) and the need for more efficient capital structures, have led traditional banks to retreat from certain lending markets – particularly those involving companies with smaller EBITDA, which larger banks are often hesitant to finance directly. This shift has opened the door for non-bank institutions to step in and fill the gap.

“Banks don’t want the loans on their balance sheet, and non-banks need the leverage,” says SCI’s source, highlighting the mutual benefit of these partnerships.

As smaller and regional banks scale back lending, the private credit market is poised for rapid growth, with expansion expected to accelerate from the US into Europe. At the beginning of 2024, the private credit market was valued at around US$1.5trn, up from approximately US$1trn in 2020, with forecasts suggesting it could reach US$2.8trn by 2028.

“This transaction shows how Apollo and ATLAS continue to expand relationships with leading global financial institutions, and builds on Apollo’s existing collaboration with BNP Paribas to provide inventory finance solutions through the Eliant platform,” says Apollo’s co-president Jim Zelter.

In 2022, Apollo, together with its subsidiary Athene, and BNP Paribas, launched Eliant Inventory Solutions, a platform providing flexible financing solutions for working capital and supply chain needs. Their latest collaboration solidifies that existing relationship, further establishing Apollo and BNP Paribas as key players in the private credit market.

Marta Canini

Capital Relief Trades

Endgame resistance

B3E implementation hits another bump in the road

The Basel 3 Endgame has hit another bump in the road. A re-proposal from the Fed (SCI 10 September) has been met with resistance from at least three of five FDIC directors opposing the suggested measures.

It seems something of a ‘kumbaya’ moment in US politics, with Democrat Rohit Chopra joining the two Republican board members in opposition to the measures. SCI understands that the re-proposal had a comment period of 60-120 days and thus it was always likely that implementation could hit another banana skin.

The changes in the re-proposal were not hugely impactful for securitisation on the whole. While the re-proposal maintains the rise in the p-factor from 0.5 to 1.0, it was suggested that banks with over US$250bn assets on balance sheet would face the largest restrictions, not those over US$100bn as originally proposed, which would see fewer than half of the banks affected.

This may mean more regulatory uncertainty for CRT issuers, with the exception of small regional banks. The inclusion of unrealised losses in capital calculations is expected to remain, which has been credited as a driver for smaller regional banks that have issued, such as Valley and Pinnacle (SCI 10 September).

Joe Quiruga

Structured Finance

Job swaps weekly: Toorak and Merchants parent names new coo

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Roemanu hire a former Finance of America Home Improvement president as its new coo. Elsewhere, Redding Ridge Asset Management has elevated a senior director to ceo in order to lead its CLO management businesses globally, while Cushman & Wakefield has appointed a co-head of EMEA equity, debt and structured finance.

Roemanu, the holding company for Toorak Capital Partners and Merchants Mortgage & Trust Corporation, has appointed Charles Macintosh as coo. Macintosh will be a key part of the Roemanu executive committee, overseeing several key areas of the business from its headquarters in Tampa and offices in Summit, New Jersey. He will report to Roemanu ceo John Beacham, who also serves as ceo of Toorak.

Macintosh has over 25 years of experience in fixed income, capital markets and investment banking in the mortgage industry. He was most recently president of Finance of America Home Improvement. Previously, he served as md of FirstKey Holdings, md and head of RMBS trading at Raymond James, and director and head of RMBS trading at Merrill Lynch.

Meanwhile, Joe Moroney has been named ceo of Redding Ridge Asset Management. In his expanded role as ceo, he will focus on the growth and oversight of the CLO management businesses globally.

Moroney has served as an md at Redding Ridge while concurrently a partner and co-head of the global corporate credit business at Apollo, after joining the firm in 2008. His investment management career spans 30 years, with experience at various financial services firms, including Aladdin, Merrill Lynch Investment Managers and MetLife Insurance.

Cushman & Wakefield has promoted David Gingell to co-head of its EMEA equity, debt and structured finance team in London. Gingell joined the firm in 2022 as international partner from PGIM Real Estate where he operated as head of senior debt for Europe. Gingell will work alongside existing team head, Maud Visschedijk.

Allica Bank has promoted Cole Degnian to head of capital markets, based in London. He was previously senior manager - capital markets at the bank, which he joined in November 2022. Before that, Degnian was an associate - securitised products at Santander.

Heartland Bank has appointed structured finance professional Andrew Dixson as its new ceo in Auckland, New Zealand. Effective from the start of October, Dixson will replace Jeff Greenslade who announced his intentions to retire and step down from the role of ceo earlier this year. Dixson has served as cfo at Heartland since 2010, and during his tenure was instrumental in multiple milestones for the bank – including the acquisition of Challenger Bank earlier this year.

Morgan Lewis has recruited structured finance veteran, David Sylofski, as a partner to its practice in New York. Sylofski joins from Sidley Austin where he jointly led its RMBS team, and is the latest addition to the firm’s global structured finance practice.

And finally, Finastra has appointed Sandrine Markham to lead its global Sustainable Finance solutions. With more than 20 years’ experience in financial data and technology, Markham has worked in transformational roles to deliver key technology in the loan and bonds markets. Applying the company’s business mantra of ‘doing well by doing good’, Markham will focus on sustainable solutions sales – including Finastra ESG Service, a cloud-native SaaS solution that streamlines sustainability-linked financing – and harnessing Open Finance for the greater good.

Corinne Smith, Claudia Lewis