News Analysis
ABS
Rating reverberations
S&P's revised RMBS criteria and Fitch's growing influence in Australia spark key investor discussions
Recent updates to S&P's rating criteria in Australia are reshaping the landscape for RMBS, sparking discussions among Aussie investors about the evolving standards for credit ratings. As S&P aligns its regional methodology with its global framework, the implications for the structured finance market are becoming clearer.
S&P's revised criteria, detailed in its report named Global Methodology and Assumptions: Assessing Pools of Residential Loans, are designed to create consistency across jurisdictions. A notable change is the incorporation of property value indexation into its methodology. With property prices in Australia having risen significantly over the past decade, S&P’s alignment with global standards is likely to influence RMBS structures and ratings going forward.
With these criteria in place, up to 2% of Australian RMBS will potentially face downgrades, moving down by one notch, which suggests a relatively moderate level of risk. However, these changes are still at a preliminary stage and based on testing.
“There is a range of factors that may contribute to this, including some adjustment to treatment of loans in arrears, seasoning and also some cashflow modelling scenarios may have been adjusted,” a spokesperson for S&P tells SCI.
The spokesperson also explains that Australia being a full-recourse market has a significant impact on how its global RMBS framework is applied.
“The global methodology considers the lender recourse provisions as a key factor in establishing the mortgage market assessment and ultimately the foreclosure frequency levels,” they say. “Borrower behaviour is incentivised differently between full-recourse and limited-recourse markets. The mortgage market assessment would generally be a lower overall risk assessment for full-recourse markets such as Australia.”
One senior executive at an Australian bank tells SCI that these changes could result in rating upgrades for a substantial portion of RMBS transactions. They also suggest that thinner tranches, representing smaller slices of risk in securitisation deals, could emerge in new deals, possibly leading to a shift in how these securities are perceived by investors.
S&P's spokesperson says that issuers of existing RMBS in Australia should not view the methodology changes as a shift in how the agency perceives the risk in the Australian market. Instead, the changes reflect a transition to a common global approach that aligns with S&P’s evolving RMBS methodology. This alignment, however, raises questions about how other rating agencies might respond, especially as investors evaluate the differences in methodologies between S&P, Moody's, and Fitch.
Fitch's growing role and investor perception
Amid these shifts, some Australian investors have noticed an increase in the use of Fitch ratings in structured finance deals, particularly in ABS deals. This trend has raised questions among investors about how Fitch's methodologies compare with those of its competitors and what this growing reliance could mean for credit assessments and investor protection.
An Australian investor told SCI that while they had seen some deals move to Fitch Ratings, investor sentiment remained cautious, shedding light on evolving investor sentiment.
They observed that investors, particularly in RMBS, tend to be more demanding, with Fitch-only ratings on RMBS deals being unusual. "Going Fitch-only on an RMBS deal would be unusual and would cause issues for investors who expect two triple-A ratings or who want a tougher agency down the stack," they explain.
In the ABS space, however, Fitch’s influence appears to be more prominent. The investor notes that they had personally passed on deals that switched to Fitch ratings, citing lower coverage ratios for deals that moved to Fitch down the stack. They suspect that Australian RMBS investors may have higher expectations compared to ABS investors.
This discrepancy between RMBS and ABS perceptions could be driven by Fitch's perceived leniency. However, the investor emphasises that they could not definitively prove this, noting that "originators are better placed to answer" questions about why some deals opt for Fitch.
Pricing, investor confidence, and potential regulatory concerns
The impact of Fitch's perceived leniency extends beyond investor sentiment, with potential implications for pricing, investor confidence, and deal structuring. "I've heard Fitch are cheaper as well as applying less stringent criteria," the investor remarks, adding that this could be one factor driving the increased use of Fitch in ABS deals. Cheaper ratings might attract originators, but investors who prefer more conservative risk assessments may remain sceptical.
When asked whether Fitch's perceived leniency could lead to regulatory concerns, the source was unsure. They highlighted the upcoming annual securitisation conference in early December as a potential venue for discussion.
While Fitch has become more prominent in the ABS space, investor trust in the long term may hinge on how Fitch’s ratings evolve in comparison to those of Moody’s and S&P.
"For instance, a tranche rated triple-B by Fitch might only garner a double-B plus rating from Moody’s or S&P," the investor explains, noting that this discrepancy could have a significant impact on margins and investor decisions.
Another market observer echoes these sentiments, noting that while Fitch may be viewed as less stringent in the ABS market, this perception is not as prominent in the RMBS sector. However, they add: “Investors often scrutinise deals rated solely by Fitch,” prompting further discussion about why certain deals rely more heavily on its ratings.
They continue that Fitch’s greater influence in ABS deals, compared to RMBS, is primarily due to issuers engaging in "rating shopping", where they select the criteria that yield the most advantageous capital structure for their deals. “Fitch’s criteria for RMBS can be punitive based on things like DTI. Seeing that S&P's new criteria which gives benefit to indexation of LVRs come out tighter on mezzanine tranches.”
The market observer explains that Fitch Ratings remains less prevalent in public issuance transactions, making it harder to gauge any definitive changes in how investors perceive Fitch compared to Moody’s or S&P. Fitch has a smaller share of the ratings market, meaning they have less influence overall, particularly in public deals.
They also note: “I don’t believe there has been a material weakness in Fitch’s approach to ABS ratings that would make them stand out versus Moody’s. They have been a bit more aggressive regarding base case assumptions but have held the line on other areas.”
Any impact Fitch's ratings might have on pricing, investor confidence, or deal structuring in the ABS space, they expect to be minimal: “Maybe a handful of basis points in pricing differential. But I note this is quite heavily driven by market conditions. The market right now is quite strong with oversubscriptions being significant on all issuance.”
According to the source, this preference for Fitch ratings is unlikely to lead to regulatory concerns or interventions: “Ratings are only accessible in Australia by institutional investors and the risk associated here is low compared to other priorities. So, I doubt it would attract regulatory intervention unless they are found to have been negligent and some investors incur losses.”
Fitch’s response to market concerns
In response to the increased attention on its role in structured finance, Fitch issued a statement clarifying its approach to credit ratings. The agency emphasised its commitment to transparency, stating that its credit ratings are forward-looking opinions on the relative ability of entities or obligations to meet financial commitments.
Fitch Ratings’ website has an education hub that explains the role of credit ratings, criteria and methodology – along with more sector-specific information such as a structured finance encyclopedia. The agency also encourages market participants to consult its conduct & ethics, and related policies for guidance on how it manages potential conflicts of interest.
The statement reflects the agency’s awareness of discussions surrounding its growing presence in the market. As the use of Fitch Ratings continues to rise, particularly in certain segments of structured finance, investors are likely to pay close attention to how these ratings compare to those of other agencies.
As S&P implements its updated RMBS criteria and Fitch’s role in the market continues to grow, the Australian ABS and MBS landscape is undergoing significant shifts. For investors, understanding the nuances between the methodologies used by different rating agencies remains essential to making informed decisions in this evolving environment. The debate over how Fitch's ratings compare to those of Moody’s and S&P is likely to persist, particularly as the market adapts to new standards and frameworks.
Selvaggia Cataldi
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SRT Market Update
Capital Relief Trades
Secondary innovation
SRT market update
In addition to its rumoured upcoming CRT transaction, Bank of America is reportedly looking into the secondary securitisation market.
SCI understands this would involve taking down the mezzanine tranche, getting a portion of it rated which would subsequently be sold on, and retaining the unrated portion. Such structure would resemble the deal Bayview made with SoFi Technologies, where the former took on a portfolio of the latter’s student loans origination.
Several sources believe BofA’s upcoming CRT debut will reference a portfolio of subscription line loans. Deals of this type have recently gained a lot of interest from investors looking to deploy capital.
Market sources further suggest that upcoming issuance from BMO will be conditional on the call dates of previous CRT deals. Reportedly some are due next month, and these would likely be from the Manitoulin Muskoka programme which have previously referenced secured and unsecured corporate loans and leveraged loans.
Other Canadian banks, with the exceptions of Toronto Dominion and ATB Financial who have issued this year, may be waiting for external factors to issue according to one source: “Canada was an early adopter of Basel IV so the banks have already been forced to get up their capital levels. I think as banks change their balance sheets with acquisitions or something like that, it will lead to more activity. But for now they are in a more stable position.”
Joe Quiruga
News
ABS
Different beats
European ABS slows as Australian market surges, marking contrasting dynamics.
ABS activity in Europe slowed during the final week of September, while Australia experienced a surge in issuance in the same period, according to figures issued by JP Morgan research strategists. While in Europe the slowdown offers a welcome breather after a hectic month, the acceleration in Australia highlights a sharp – although potentially temporary – contrast between the two markets.
In Europe, the ABS primary market cooled with only two deals coming out of the Netherlands, totalling €882m supply. This, according to JP Morgan’s strategists, marks a much-needed pause after a hectic few weeks that saw cumulative September issuance hit €13.2bn. This figure surpasses last year’s September total and makes it one of the busiest post-crisis periods on record.
JP Morgan’s report notes that, despite the brief slowdown, European YTD distributed ABS issuance is nearing a record high of €75.8bn, just €655m short of the 2018 record of €76.5bn.
“We do expect October to also be a busy month for new supply, particularly in the first few weeks, noting the possibility that activity could wane towards the end of the month as the US Presidential election in early November draws closer,” the report states.
In contrast to Europe’s slowdown, the Australian ABS market was buzzing, with four deals priced last week raising €2bn. JP Morgan highlights that this makes it the busiest week for Australian primary supply since late June: “Australian issuance of €35.7bn has already eclipsed the previous high-water mark for the jurisdiction.”
A key feature of the Australian market has been robust demand across the capital structure, with all four deals last week upsizing from their initial targets. Nearly 50% of Australian securitisation deals this year have upsized. “Put another way, the additional A$19.1bn (€11.8bn) of bonds issued via these upsizes have contributed to roughly one-third of total distributed Australian securitisation issuance in 2024 YTD,” strategists highlight.
In Europe, the pricing dynamics seen throughout September remained consistent, JP Morgan’s report states, with weaker demand for senior paper compared to non-senior risk. STS-compliant senior bonds, especially from sectors like Eurozone auto ABS and Dutch prime RMBS, faced widening spreads, pushing them to the wider end of their one-year range. On the flip side, non-senior bonds have continued to attract stronger demand, leading to a flattening credit curve.
Australia, however, bucked this trend, with all four deals from last week experiencing strong demand and tightening spreads across the capital structure. The senior pricing of Australian auto ABS bonds, in particular, has remained attractive on a XCCY-adjusted basis compared to core Eurozone auto ABS deals, providing a substantial pickup in spread.
Discussing the European secondary ABS market, JP Morgan’s research strategists observed a continued widening in select high-quality sectors, particularly among senior bonds from sectors like Eurozone auto ABS and Dutch prime RMBS. Increased BWIC activity, totalling €180m last week, has driven further spread widening as investors switch out of cash-surrogate risk after a flood of new supply.
Notably, Dutch and French prime RMBS seniors widened by 4bps, while Eurozone auto ABS seniors saw a 2bps widening. “The cumulative retracement seen over the past month has pushed spreads on Dutch prime RMBS seniors and Eurozone auto ABS seniors in particular to the wider end of their 1Y spread ranges,” the report notes.
Selvaggia Cataldi
News
Asset-Backed Finance
Private securitisations grow
Latest EBE report highlights market expansion
Over 67% of European private cash securitisations fund sellers in the EU and over 74% directly fund the real economy, according to the latest European Benchmarking Exercise (EBE) report. The latest report provides aggregated transaction-level data on over 500 securitisation positions gathered from 12 banks across six countries during 2H23, covering €79bn of reported financing volumes and an estimated €231bn of total market volume.
Of all transactions by volume, 79% were undertaken by sellers with ratings of triple-B and below at inception. Of these transactions, 88% achieved ratings in the range of single-A to triple-A, demonstrating that private cash securitisations provide a cost-effective financing option, especially for lower-rated sellers.
However, while the previous EBE report (SCI 11 April 2023) highlighted an increase of triple-A rated transactions, this trend did not persist in the second half of 2023, with triple-A-related transactions dropping by 8%.
Over that period, the increase of committed amount has slowed to 1%, while funding increased by 2.4% after a 4.6% drop in 1H23. ABCP commitments remained flat, in contrast to balance sheet funding which saw a 7% rise.
In terms of regional distribution of sellers, UK-seller transactions declined by 5% and French sellers saw a 7% drop, while German-seller transactions increased by 6%. Despite the decline, the UK remains the second-largest market, behind Germany and ahead of France and Italy.
Private securitisations backed by trade receivables, auto loans or leasing contracts account for 74% of the observed market, and with consumer loans and equipment leasing included, these four asset classes account for 88% of the total. Auto loans and leasing, consumer loans and equipment leasing are experiencing their highest funding levels since the start of the EBE in 2021.
Finally, the share of STS-compliant assets kept rising consistently, with the last period’s increase of 4.3% being above the long-term annual rate of 2.7%. Overall, commitments to STS transactions have grown by 11%.
Despite ongoing macroeconomic challenges, the results indicate steady growth in Europe’s private securitisation market.
BayernLB, BNP Paribas, Commerzbank, Credit Agricole, DZ Bank, Helaba, HSBC, ING, LBBW, Natixis, RBI and UniCredit contributed data for the EBE on a voluntary, anonymised basis across Austria, France, Germany, Italy, the Netherlands and the UK. This latest report is the sixth in the biannual EBE series, a market-led initiative organised by AFME, European DataWarehouse and True Sale International, which aims to increase data transparency in the private securitisation market.
Marta Canini
30 September 2024 17:21:38
News
Asset-Backed Finance
CNI boost
European data centre ABS poised for growth
The UK's data centre sector recently received a major boost, with the government last month officially designating it as critical national infrastructure (CNI). The move has sparked anticipation of further data centre securitisation issuance, following the debut European deal, Vantage Data Centres UK 2024-1 (SCI ABS Markets Daily - 30 April).
“The UK government’s designation of data centres as critical national infrastructure underlines the significant importance of this asset class to our everyday lives and, importantly, how technology is now depended upon in almost all other sectors,” says Ashley Thomas, head of structured finance at ARC Ratings.
The CNI designation highlights the growing importance of data centres to the UK economy and global operations, and coincided with technology secretary Peter Kyle’s announcement of a £3.75bn investment in Europe’s largest data centre to be built in Hertfordshire. The project is expected to create over 700 local jobs and support nearly 14,000 data and tech positions across the country.
The global importance of data centres and impact of tech disruptions became even more evident with the July CrowdStrike outage, which affected up to eight and half million computers running Microsoft systems worldwide.
While the US has long led the charge in data centre securitisation, Europe is now seeing promising growth. The recent £600m Vantage Data Centres UK 2024-1 deal served as a landmark transaction for the sector, highlighting the growing appetite for data centre securitisations in the region (SCI 2 July 2024).
“Many market participants have identified to ARC how securitisation provides an effective funding mechanism for data centres. If we look at the US, they have a significant number of ABS issuances in this sector, demonstrating the potential for growth in this asset class in Europe and the UK,” says Thomas.
Some of the key credit considerations in these transactions include obsolescence risk (the loss of value due to the data centres no longer being of use), location, connectivity, facility age, cost and efficiency of power, portfolio diversification and tenant credit quality. “The key will be the issuer and investor relationship and the availability of market participants to properly assess the risk-reward dynamics from both perspectives,” adds Thomas.
Market participants are now anticipating more deals, as data centres - bolstered by designations like the UK’s CNI status - become a more attractive and investable asset class. Indeed, as the sector continues to evolve, new transaction structures are expected to emerge, tailored to address jurisdiction-specific risks and portfolio characteristics.
“We believe that the existence of CNI will likely result in more data centre transactions in the UK, due to the CNI making it a more investable asset class, along with increased focus on the performance requirements to ensure that the data centres are best-in-class for those seeking the highest ratings,” concludes Thomas.
Marta Canini
News
Capital Relief Trades
Winds of change
Key talking points from SCI's inaugural regional banks conference in Chicago.
SCI’s maiden regional bank CRT seminar took place in the Windy City last week. Top of mind was market potential, Basel Endgame, and how to convince hesitant regulators.
- Great potential
It’s no secret that, since US banks have stepped up their use of CRTs, in the longer term, the US market will evolve to resemble its European counterpart. One speaker estimated that the market had between US$14bn-US$72bn worth of untapped potential. With the dampening confidence of protection sellers, caused by the tightening spread environment, this should be cause for celebration. However, panellists clarified that champagne should be kept on ice for the time being.
All across the US CRT market, issuance has left something to be desired. After the infamous collapse of Silicon Valley Bank, expectations ran high. One panellist said issuance from regional banks with over $50bn of assets on balance sheet has been underwhelming, and while GSIBs have been somewhat hungrier for issuance the market is still not supporting the tidal wave of investors which have entered it.
Some of this is due to the incomplete Basel Endgame, which would require “large regionals to be regulated the same way that JP Morgan is”. The incompletion of the regulation means a crucial market driver is rendered an investor’s fantasy. There was also some worry that “it will come to a point where investors will prefer to invest in more liquid asset classes, like ABS”.
However overall, there was optimism for regional bank issuance, with banks of this type historically underperforming the S&P 500 and the desire of banks to keep their assets on balance sheet. Likewise, the non-permanence of CRT deals is not a dealbreaker for regional banks as it is for GSIBs “because many of them are just looking to get from point a to point b.”
- Endgame concern
As anyone with a small understanding of the market is already aware, every US CRT practitioner is greatly interested or worried in the outcome of Basel Endgame. SCI’s Chicago conference was no different, with the matter still considered up in the air until the conclusion of next month’s election.
There was some disagreement about how much an incoming Trump administration could change the regulations (answers ranging from not much to completely). There was total agreement that the p-factor will still be raised to 1.0 despite persistent resistance from the market issuers. With most regional banks well capitalised, it will take a shift in regulation to push them to action.
- Back leverage and other trends
One panellist warned market participants against too much back leverage: “Anything that looks circular will raise eyebrows in Washington, so you need to be mindful of how it’s done. Given how decentralised the regulators are, someone could hold up the stop sign if it moves too quickly.”
Observers have seen how regulators’ narratives can gum up the progression of the CRT market. Following the GFC, the scare about bad assets being securitised rendered the market dormant.
Another panellist observed that currently most CRT transactions reference corporate loans. A change may be underway, as seen by the uptick in subscription line issuance.
Joe Quiruga
Market Moves
Structured Finance
Job swaps weekly: Blackstone lures two new partners
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees Blackstone adding two new partners to its infrastructure and asset-based credit platforms. Elsewhere, ING has hired an industry veteran as head of asset securitisation for wholesale banking in APAC, while Castlelake has strengthened its existing European leadership with the appointment of a new partner.
Blackstone is expanding its infrastructure and asset-based credit platforms with two new partner hires, according to a source familiar with the matter.
Aneek Mamik will join the New York office as a senior md, head of financial services, focusing on global asset-based finance investments. Previously, Mamik was partner and global head of financial services and diversified private credit at Värde Partners – which he joined in September 2016.
Meanwhile, Christopher Yonan, based in London, will join as senior md, head of European infrastructure, focusing on energy funds. Yonan was previously co-head of power, utilities, and infrastructure in Jefferies’ investment banking division since September 2018.
Lionel Koe has joined ING as head of asset securitisation for wholesale banking APAC, based in Singapore. In this role, he will continue to develop the bank’s existing footprint within the Asia Pacific securitisation market, delivering funding and capital solutions to its clients.
Koe has over 20 years of experience in the Australian securitisation market. He was previously executive director, securitisation originations at National Australia Bank, which he joined in May 2006. Before that, he was an associate at S&P.
Castlelake has appointed Alexander Curcio to partner, strengthening the firm’s existing European leadership and underscoring its focus on the investment opportunity in the region.
Since joining Castlelake in 2018, Curcio has played an important role in enhancing the firm’s European asset-based investment activity and capabilities. With more than two decades of experience in the European specialty finance markets, he has expertise in sourcing, structuring and managing investments in small and medium-sized enterprise finance, consumer credit and residential mortgage finance.
Eversheds Sutherland has poached a Rutgers & Posch structured finance trio to bolster its structured finance practice in the Netherlands. Kees Westermann and Vasco Hoving join the firm to serve as senior partner and partner, respectively, and will be joined by principal associate Maarteen Ahsmann.
SAIL Investments has appointed Mihail Belostennyj as its new head of origination in the Hague. Belostennyj holds more than two decades of structured finance experience in Luxembourg, including Intertrust, TMF, and most recently at Lux Kapitalmarkt Management where he served as md/ceo.
Anthony Lombardi has joined Dechert as a fund finance partner in London to support the expansion of its expertise and presence in Europe. Lombardi holds extensive experience across fund finance, with a special focus on NAV deals, and has previously held positions at Schulte Roth & Zabel and DLA Piper, where he most recently served as a partner.
Structured finance lawyer Ed Bellamy has joined Fox Williams as a partner in its financial services team, based in London. He was previously counsel at Dentons, which he joined in January 2023. Before that, Bellamy worked at Insight Investment, Paul Hastings and Skadden, having begun his career at Cadwalader.
Stonebriar Commercial Finance has named Nicholas Sandler as its new ceo. Sandler currently serves as president at Stonebriar, having joined from Guggenheim Partners in 2016. Sandler will succeed fellow co-founder Dave Fate, who has served as ceo at the firm since 2016. Fate will continue to operate as a senior advisor and vc of Stonebriar through 2025.
And finally, Moody’s has promoted Andrea Durante to vp on its structured finance team in Milan. Durrante returned to Moody’s as an assistant vp in 2023 after leaving his role as a structured finance specialist at the ratings agency in 2021 for BFF Banking Group, where he was a sales manager.
Claudia Lewis, Corinne Smith, Marta Canini
structuredcreditinvestor.com
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