News Analysis
Capital Relief Trades
How does it end?
Lawyers discuss how the US' Basel Endgame will be implemented, the implications for the CRT market, and what could stop it.
Despite the recent and potentially exponential growth of the US CRT market, regulatory clarity is still out of reach. So how will the Basel Endgame regulation be implemented and when can investors expect to see it?
Recent re-proposals from the Federal Reserve (Fed) looking to reshape the regulation have already been rejected (SCI, 24 September) in a saga which has seen unusual twists and turns such as regulatory capital receiving negative advertising campaigns in mainstream spots such as bus shelters and baseball games.
Matt Bisanz, the financial regulatory partner at Mayer Brown, believes the final regulation will not be implemented until the end of 2026 (although the Fed itself gives a more optimistic prediction of mid-2026). He explains: “There are challenges beyond the rejection of the re-proposal. The Fed just made a big rate cut and may be planning another rate cut in the next few months. Plus, there is a reluctance for the regulators to make big proposals before an election as you don’t want to affect the result. Then, depending on how the election goes, there may be a new comptroller, which would impact how the re-proposal is finalised.”
Politics could also throw a spanner into the works. The election of the Republican Party in November would probably lead to the shelving of changes to capital requirements or even a modest reduction in line with the tailoring rule, which in turn would be a slight dampener on the CRT market. However, as Bisanz points out, “The current capital rules, risk weights which aren’t granular enough, and other market drivers like a high rate are still ongoing and will be regardless of the regulation.”
Congress could theoretically veto the rules within 60 days of its adoption however this would require the legislature and executive to agree to do this. In this polarised political environment this would likely mean the Republicans have to win the White House, House of Representatives and the Senate – or for an incoming Harris administration to turn against the regulation.
A more likely alternative is a new comptroller of the currency, appointed by a winning Republican president, to completely stop the implementation of the regulation. As Bisanz explains: “You don’t need to use congressional mechanisms as they are clunky and don’t work in the same way for the Fed as they do for other agencies the President doesn’t directly control. But the most likely scenario is they just stop the rules dead.”
Furthermore, a panellist at SCI’s recent conference In Chicago (SCI, 2 October) pointed out the key people in the Fed are unlikely to change regardless of who sits in the Oval Office come 2025.
However, despite the changes, it seems as if the inclusion of unrealised losses in capital calculations will remain. This has been credited as a driver for smaller regional banks who have issued CRT, such as Valley National Bank and Pinnacle Financial Partners.
Bisanz explains: “That will be in the final proposal no matter what. I also think the change in market risk to go from value at risk to expected losses, is a fundamental change to the market risk formula but the way it happens it subject to change. The way people think of market risk has changed since 1996. And the other big one which will come through is there will be some change to operational risk capital.”
The rules were first finalised in 2017 and proposed by US regulators in July 2023. They were delayed by Covid, ensuring the rules were compliant with the Collins Amendment and Section 939 which restrict how US regulators design capital requirements, and criticism of the increasing p-factor, and various surcharges and add-ons which were only applicable to US banks and considered by many industry insiders to be unnecessarily punitive.
Jo Goulbourne Ranero, banking regulatory lawyer at A&O Sherman, tells SCI the gold plating of US regulation has also made implementation of Basel Endgame more complicated in the US: “US Basel implementation is comparatively gold plated for the big banks that are actually subject to it which means the regulation has a bigger impact for them. For example, a US specific floor (the Collins floor) stops the Basel derived standards from undercutting the US domestic standardised approach, internal modelling is only permitted in relation to market risk, and external credit ratings can’t be used for prudential purposes.”
She also notes: “In relation to securitisation, specifically, the US is also playing catch up, in that it has not implemented post-GFC reforms to the securitisation risk weighting framework that were introduced in the EU and UK in 2019. The US is also not proposing to implement the Basel securitisation STC framework, which offers favourable prudential treatment to simple, transparent and comparable securitisations (the UK has implemented STC via the simple, transparent and standardised (STS) framework, the EU has implemented it and extended it to synthetics).”
She adds that the market risk framework is the biggest consideration in the US as it is an economy funded by capital markets, as opposed to the UK and EU which are primarily funded by banks. The biggest potential disruption in the UK and EU is the output floor, but this is not a consideration in the US due to the Collins floor and absence of credit risk modelling.
Changes in the re-proposal are not expected to be hugely impactful for securitisation. The p-factor is still expected to rise from 0.5 to 1.0 – which is not a doubling in capital requirements but “it’s bad for banks” according to Bisanz. Banks which have over US$250bn assets on balance sheet will face the largest restrictions, and not those over US$100bn as originally proposed. This reduces the number of banks impacted from 36 to 16.
Other changes which would have an impact include the expansion of institutions with high quality corporate assets with access to a reduced risk weight (from 100% to 65%). This would affect pension funds without public debt positively. The re-proposal also suggests reducing the US surcharge on residential mortgage loans, which will filter through to RMBS, and calculating bank’s fee income on a net basis rather than gross revenue – which will impact major loan servicers and administrators of securitisation.
Joe Quiruga
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News Analysis
Asset-Backed Finance
Capital call debut
SFF securitisation could mark 'the beginning of a new market'
Goldman Sachs is in the market with what is believed to be the first publicly-rated cash capital call securitisation - the US$475m Capital Street Master Trust Series 2024-1. Synthetic capital call securitisations have been more widely issued to date (see SCI’s CRT Deal Database), but the growing use of ratings in the fund finance market and increasing investor appetite for exposure to the sector on a diversified, term basis is driving interest in true sale transactions.
"Whenever there’s a new type of securitisation, one never knows how the market will respond, but capital call loans have had a good track record - marked by very stable performance and low default history, if any," says Stuart Rothenberg, svp at Morningstar DBRS. “I think this may be the beginning of a new market, but you never know. It’s still early to say how many more transactions of this type we’ll see.”
Morningstar DBRS has assigned provisional triple-A and double-A ratings respectively to the US$450m class A and the US$25m class B notes to be issued by Capital Street Master Trust Series 2024-1. The notes are supported by the transferor interest, acting as the first loss tranche and providing credit enhancement.
The master trust structure is collateralised by a revolving pool of capital call loans (also known as subscription finance facilities (SFF)) and is managed by Capital Street as the servicer. "A revolving portfolio of capital call loans is innovative," says Rothenberg. "Capital call loans are typically short. A revolving portfolio allows for flexibility as loans are paid off [and] new receivables are added, keeping the deal fully funded."
An SFF is a credit line extended to a private capital fund, which is typically secured by a first ranking lien over the uncalled capital commitments of the fund’s limited partners (LPs). Capital calls can occur at any time, as funds can request immediate capital injections from investors. As a result, the revolving mechanism in the Capital Street deal ensures that as loans are called and paid off, new ones replace them.
In addition, the master trust structure enables future series of notes to be added to the trust, with pro-rata sharing of capital call loans ensuring continuous collateral backing for issued notes.
During the 18-month reinvestment period, each new asset undergoes a new credit analysis to ensure that the transaction’s ratings remain stable. "New capital call loans are reassessed," notes Rothenberg. "We have a process in place to evaluate new capital call loans, so our credit ratings reflect the impact of new loans.”
Morningstar DBRS applied analytical judgement in assigning the provisional credit ratings, as its structured finance CDO restructuring methodology typically addresses static pools of assets, not revolving ones. As such, the revolving nature of the capital call loan pool led to a deviation from the standard approach.
When assessing asset quality, Morningstar DBRS analysed each capital call receivable individually, focusing on the underlying pool of LPs. Key factors included diversification, ensuring no large uncalled capital commitment came from a single LP, and included an evaluation of the LPs' credit ratings and industries. The analysis also considered LP recovery treatment based on the fund's jurisdiction, applying adjustments for factors like sovereign immunity.
“We look at the uncalled capital commitments and the credit quality of each LP as key considerations when conducting our analysis,” explains Sharon Shen, senior analyst at Morningstar DBRS. “The fund manager's experience and strength in handling capital calls are also critical in the evaluation process.”
SFFs have been utilised since at least the early 1990s and are now used by most funds for general liquidity management. The market has grown significantly to approximately US$900bn, as of 2024, according to Fitch figures - driven by the growth of private capital markets and increased adoption of SFFs.
“Regulatory changes, such as Basel 3.1, are driving more transparency through credit ratings, as these subscription lines shift from being unrated to rated, which is envisioned to make them more competitive in the current landscape,” observes Ashley Thomas, head of structured finance at ARC Ratings. “Historically, subscription lines have been generally very low-risk products, with loss rates being close to zero. This is due to the LPs typically being large institutional investors, such as pension funds, insurance companies and sovereign wealth funds.”
Goldman Sachs Lending Partners acted as the initial originator, subservicer and administrator on the Capital Street transaction. Citi served as the account bank, master collateral agent and indenture trustee, while Virtus Group LP is collateral administrator.
Marta Canini
News Analysis
Asset-Backed Finance
Heating up
Potential for heat-pump-backed ABS in Europe's energy transition
The wait for Europe’s first public heat pump-backed ABS transaction may soon be over, as the demand for sustainable heating solutions grows amid Europe’s energy transition. Securitisation is proving to be an increasingly integral tool in the fight against climate change, with solar ABS and utility ABS in the US supporting the transition away from fossil fuels – heat pumps are no exception.
A recent report from Morningstar DBRS explores how heat-pump-backed ABS could help overcome the financial barriers preventing more widespread adoption of this renewable energy technology. Just as with solar PV loans, heat pumps carry high initial installation costs, and securitisation is considered to be an optimal solution for reducing the burden of these upfront expenses on customers (SCI, May 2023).
Decarbonising the heating and cooling sector is integral to meeting climate targets, as it accounts for close to half of the EU’s total energy consumption. Within heating and cooling, 70% of the bloc’s consumption still relies on fossil fuels according to European Commission data.
In fact, following the success of initial solar ABS warehouse transactions from the likes of German renewable energy firm Enpal, heat pump financings are considered ‘next in line’ among the green asset classes to be securitised singularly.
“Enpal has completed two private securitisation transactions that include heat pump loans as well as solar loans,” comments Béla Schramm, director of securitisation at Enpal. “Total commitments for these transactions exceed €1bn.”
Enpal broke new ground in offering the German market an embedded heat pump financing product, which is fully funded by ABS. However, it may not be alone in the market for much longer. “We expect there to be more companies following our example (such as AIRA recently) as the benefit of such embedded financing options for customers and heat pump sellers are huge,” adds Schramm.
Indeed, the first financing facility solely dedicated to heat pump securitisation emerged earlier this year from Swedish start-up, AIRA, securing €200m in debt commitments from BNP Paribas (SCI 6 June). The facility is designed to support German consumers by removing the upfront costs of installation.
“ABS is perfectly suited to fund such strategies as it enables young companies to raise substantial volumes of funding for such products and investors continue to be highly interested in investing in such products,” Schramm says.
The credit risks associated with heat pump-backed ABS transactions are not unfamiliar, given both their existing presence in mixed ABS transactions and similarities with other collateral, including solar PV loans. The typically prime-nature of borrowers of heat pump loans and the likely extra disposable income generated through the energy savings from the heat pumps, both lower the likelihood of default. Nevertheless, macroeconomic volatility could certainly undermine such benefits. Longer term, Morningstar DBRS does hold some concerns regarding future technological advancements which could render heat pumps obsolete before loans are repaid.
“We don’t see any specific challenges that would make a heat pump loan securitisation difficult,” furthers Schramm. “However, we expect that it will take longer for a public heat pump loan securitisation to happen than a public solar loan deal. The solar asset class is already well-established in the US and the first EU private solar loan warehouse securitisations happened already in 2022.”
Policy developments have made Europe a friendlier environment for heat pump lending, thus providing conditions for the heat pump ABS market to blossom in the continent. The REPowerEU plan from the European Commission has set a target of doubling the heat pump deployment rate by 2030, supported by subsidies, tax rebates, grants and other incentives.
However, structural elements of the market quash the possibility for even greater takeoff as manufacturing bottlenecks, supply chain issues and lack of skilled installers all persist, limiting the market’s potential for the time being. In order to facilitate the growth that ABS funding could bring to the sector in the energy transition struggle, these challenges need to be addressed.
Despite a 6.5% depreciation in sales last year, the market seemingly shares an optimism for the growth of the heat pump lending industry and heat pump-backed ABS, as close eyes are kept on the likes of Enpal and AIRA.
The heat pump sector is once again highlighting the valuable role of not just securitisation, but the broader need for private capital investment to fund Europe’s green transition. Heat pump ABS transactions could spur on similar financing mechanisms to accelerate the continent’s green transition – if successful.
Claudia Lewis
News Analysis
CLOs
SCI In Conversation Podcast: Volker Gulde, Moody's Ratings
We discuss the hottest topics in securitisation today...
In this episode of the SCI In Conversation podcast, SCI head of content Kenny Wastell speaks to Volker Gulde, senior vice president at Moody’s Ratings, about the European market for private credit CLOs. Gulde discusses why the asset class is yet to take off in the continent, when we might expect that situation to change, and more.
Gulde says that, while there has been no public issuance of private credit CLOs in Europe to date, there are many efforts and discussions about deals. He also discusses the similarities and differences between the landscapes in the US and Europe; what rating methodologies Moody’s would use for any eventual transactions; and the challenges of growing the asset class in a market that spans multiple jurisdictions and currencies.
This episode can be accessed here, as well as wherever you usually get your podcasts, including Apple Podcasts and Spotify (just search for 'SCI In Conversation')
SRT Market Update
Capital Relief Trades
Transactions and tightening
SRT market update
New issuers of corporate and project finance SRT in Germany, SME trades from Spain and Greece and an auto trade out of Scandinavia are among the deals coming to market in Q4.
SCI understands in particular three of the big four Greek banks (Alpha Bank, Piraeus Bank and Eurobank) are in the market. This would be Piraeus’s first trade since December 2022, when it completed “Emris Capital VI”, which referenced corporate and SME loans. Eurobank and Alpha both issued in December last year, coming into the market with corporate/SME and shipping loans deals respectively. Alpha also completed a shipping loans SME last July.
The Nordic auto loans deal is reportedly not being issued by Nordea, who instead are rumoured to be planning a transaction for next year. The two German issuers are understood to be debutants.
BNP Paribas’ Resonance has also reportedly closed. The transaction had gone silent and then reportedly re-emerged as a much bigger transaction, perhaps explaining its delay (SCI 22 July).
Meanwhile, spreads seem to be tightening to a point of stability – although not necessarily at the point of widening again. However there still seems to be too much firepower in the market with large funds taking up full allocations of transactions.
For some investors, the solution will be to contact issuers directly and create bilateral deals. One source believes this may become more common: “I think we will see so many investors out there competing for the same deal and big investors who really want to do a deal will approach a bank with a really compelling offer to try and get it done and take it off the market. I think we will see more of that to be honest as there are a lot of investors with cash burning holes in their pockets, and going into syndicated deals doesn’t work for them.”
Another option will be sticking to the smaller banks, for whom SRT makes sense but which are less interesting to large PE investors. This may be the path which leads to wider spreads.
Joe Quiruga
News
Asset-Backed Finance
Flexible financing
Apollo warehouse loan facility rated
Further details have emerged regarding the transaction at the core of the recent strategic financing collaboration between Apollo Global Management and BNP Paribas (SCI 27 September). The resultant borrower vehicle, AGF WHCO 2-A Trust, entered into a senior secured revolving loan facility collateralised by warehouse loan obligations originated by ATLAS SP.
“This trade is very innovative and unique. The underlying collateral consists of warehouses that are investment-grade equivalent credit quality,” says Ashley Thomas, head of structured finance at ARC Ratings, which assigned double-A minus ratings to the vehicle.
Although elements of the underlying collateral are securitised, the transaction was ultimately structured as a corporate loan, meaning it technically didn’t qualify as a securitisation. UK and EU securitisation regulations prohibit tranching within asset pools, yet this structure allowed BNP Paribas and Apollo to navigate regulatory constraints while retaining the flexibility and financial benefits typically seen in securitisation transactions.
The facility is primarily secured by the borrower’s equity interests in three asset-holding subsidiaries - AGF WHCO 2-A1 LP, AGF WHCO 2-A2 LP and AGF WHCO 2-A3 DAC. These subsidiaries are, in turn, secured by a US$4.98bn (US$6.085bn committed) portfolio of 46 assets spread across 12 different industry designations, including aircraft, container, equipment, railcar and unsecured marketplace loans.
The largest industry concentration is solar (accounting for 17.09% of the portfolio), followed by credit cards (14.73%), ‘other’ (13.30%) and non-US RMBS (10.66%). The largest issuer accounts for 7.1% of portfolio notional, while the largest 10 issuers account for 48.2%.
The majority (80.37%) of the portfolio is denominated in US dollars, with some sterling (10.66%), Canadian dollar (4.47%) and euro (4.50%) exposures. Non-US dollar advances are funded and repaid in their native currency to mitigate FX risk.
Based on the vehicle’s LTV test, the senior advance rate is 85%, thereby providing 15% hard credit enhancement. The revolving period lasts for three years following the closing date but is extendable, subject to lender approval of the additional commitment, with the final maturity date due to occur 45 years from the closing date.
The underlying warehouse transactions are structured as lending facilities to bankruptcy-remote SPVs, with a significant portion having recourse to the borrower for credit and market price movements. Covenants on the sponsor/originator or servicer are required to ensure adequate liquidity and capitalisation, and if there are material changes to underwriting guidelines, ATLAS SP would typically have consent rights to review assets before they are pledged to a facility.
ARC’s double-A minus rating reflects the credit quality of the collateral and the robust underwriting standards applied. “The investment-grade equivalent credit quality warehouses align with the underwriting standards of the manager, as well as the eligibility criteria and concentration limits,” notes Thomas.
As well as senior lender, BNP Paribas is administrative agent on the transaction. The investment manager is Apollo subsidiary AASP Management, while the sub-advisor is Atlas Securitized Products Advisors and the servicer provider is Redding Ridge Asset Management.
Marta Canini
News
Capital Relief Trades
Doubling down
Deutsche Bank finalises two SRT trades
Deutsche Bank completed two SRT trades in September. The first transaction concerns the well-documented LOFT 2024-1 deal (marking the third issuance from the LOFT platform), which references a US$3bn portfolio of US and European leveraged loans. The synthetic securitisation was upsized from an initial portfolio US$2bn, following notable investor demand and a fairly widely syndicated process.
Oliver Moschuering, global portfolio manager for strategic corporate lending at Deutsche Bank, highlights that, even following the US$3bn upsize, the deal was significantly oversubscribed.
The latest LOFT featured a dual-tranche structure with a first loss (0-14%) and mezzanine (14-18%) tranches, which priced at SOFR plus 10.5% and SOFR plus 3.75%, respectively. As a result, the blended spread totals 9.0% for the US$540m of issued credit linked notes, compared to 13.2% for LOFT 2022-1.
Additionally, the German multinational lender executed another CRAFT transaction, following CRAFT 2024-1 earlier this year. Once again, the deal (CRAFT 2024-2) landed significantly tighter than its predecessor, with the US$340m first loss tranche pricing at SOFR plus 8.25% (compared to 9.25% in March).
In terms of upcoming pipeline, Moschuering notes that in addition to consistent issuance under our CRAFT and LOFT programmes, the bank intends to issue regularly under its midcap, trade finance and consumer synthetic SRT shelves going forward.
Vincent Nadeau
Market Moves
Structured Finance
Job swaps weekly: KBRA rings the changes
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees KBRA making multiple senior structured finance appointments including a new global head of ABS and RMBS. Elsewhere, a c-suite executive at PACE Funding Group has left the firm and transitioned away from structured credit with a move to Greenday Finance, while specialty finance company Encina Lender Finance has made two senior hires and promoted three.
KBRA has announced several senior structured finance appointments, including the promotions of Jack Kahan to global head of ABS and RMBS and Yee Cent Wong to lead analytical manager for structured finance.
Based in New York, Kahan takes on his new role as head of RMBS after more than nine years at KBRA, where he most recently operated as the global head of RMBS. Kahan will continue to lead RMBS, while industry veterans Edward DeVito and Patrick Gervais handle day-to-day operations.
Wong returns to New York after four years in Dublin, where she served as co-head of Europe, and will manage the analytical efforts across KBRA’s structured finance platform. She will continue to report to global head of structured finance Eric Thompson.
Additionally, KBRA’s former global head of ABS, Eric Neglia, will head up the agency’s global funds business in a bid to support increased interest in asset backed lending in the private credit space. Neglia is based in New York and most recently served as a senior md, leading on consumer ABS after Thomas Speller took over ABS analytical efforts in 2021. He specialises in fund finance transactions and in his new role will continue to lead KBRA’s European funds business.
Meanwhile, James Vergara has left his role as chief operating officer/chief investment officer at PACE Funding Group (formerly Home Run Financing) and taken over as chief financial officer at Greenday Finance. This marks a departure from the securitisation field, with Vergara instead focused on power purchase agreements.
Vergara spent seven years at PACE and previously had stints at Spruce Finance, Deutsche Bank Prager Sealy & Co and Swap Financial Group.
Specialty finance company Encina Lender Finance (ELF) has made two new hires and promoted three senior team members to drive its next growth stage. Neha Banthia has joined the firm as chief risk officer, overseeing credit risk, asset-level collateral analysis, and post-close surveillance, while also serving as a voting member of the investment committee. Previously, Banthia worked as vp, head of lending at Rocket Loans, and director, head of personal loans at Avant.
Chris Pickett has joined ELF as principal and co-head of asset management and infrastructure. Pickett was previously director of analytics and quantitative solutions at BlackRock, which he joined in 2014.
Additionally, ELF has promoted Geoff Beard to ceo and cio, Joe Ressa to cfo and coo, and Jeff Carbery to md and co-head of asset management. Edward Chang has transitioned from co-ceo to a senior advisor role.
ELFA has announced a round of new co-chairs to multiple committees as the search for its new ceo continues. Stuart Fuller has joined ELFA’s leveraged loan committee as co-chair, and holds more than two decades of experience in the industry. He presently serves as a global loans portfolio manager at Muzinich & Co in London.
Nils Weber, the Frankfurt-based Pemberton origination team md, has joined as the new co-chair of ELFA’s private debt investor committee. Finally, Patrick Kersting, research analyst within Morgan Stanley Investment Management’s high yield practice, will serve as the new co-chair of ELFA’s disclosure and transparency committee.
BNP Paribas has recruited a Credit Suisse veteran to lead its structured products team in Hong Kong. KK Wai has joined BNP Paribas Wealth Management’s investment team after more than 17 years at Credit Suisse, where he was co-head of structured products advisory and equities sales. Wai will report to head of investment services for the region, Gabriel Chan.
Andrews Kurth has recruited Alan Cunningham and Richard Skipper as partners in its asset finance practice in London. The duo join the firm from EY Law, which they joined in 2022. Prior to this, they led DLA Piper’s asset finance team as partners. Their background includes expertise in securitisation and forward flow transactions across aviation, shipping, rail, defence, automotive, energy and other asset classes.
Debt capital advisory firm Armentum Partners has hired senior banker, Andrew Fineberg, to its royalty and credit opportunities fund in New York to bolster its royalty capabilities. Fineberg joins the business from OrbiMed Advisors, and prior to this held senior structured finance positions at multiple companies including SVB securities.
And finally, former Silver Point Capital md Steven Sasson has taken up his new position as co-head of structured credit at New York-headquartered alternative investment firm Millennium. Sasson joined Silver Point in early 2022 to expand the firm’s CLO strategy and left in June this year. He previously spent nine and a half years as md at Anchorage Capital.
Claudia Lewis, Marta Canini, Joe Quiruga, Kenny Wastell
structuredcreditinvestor.com
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