News Analysis
Capital Relief Trades
SRT Journal: Moving parts
The second of five essays compiled in SCI's inaugural SRT Journal explores US regional bank CRT activity
CRTs are becoming increasingly attractive to US regional banks, having historically remained almost exclusively the preserve of the so-called global systemically important banks (G-SIBs) in the country. Yet a much anticipated wave of issuance in 2024 has not fully materialised, with players entering the market more gradually and deliberately as they negotiate various challenges.
The growing interest had been partly attributed in some quarters to Basel 3 Endgame and the touted lowering to US$100bn of the total assets threshold over which the sternest capital adequacy measures were expected to apply to US banks. In September, this incentive was diminished when Federal Reserve vice chair of supervision Michael Barr announced banks with between US$100bn and US$250bn would no longer be subject to some of those measures (SCI 10 September). Yet, as SCI reported at the time, sources close to the market believe the relaxations will not bring regionals’ use of CRT to a halt, with only around 20 institutions falling within that bracket.
Another – arguably key – catalyst for issuance has been the Fed FAQ of September 2023 (SCI 29 September 2023), which included Regulation Q clarifications over the recognition of directly issued CLNs under the capital rule. Under the FAQ, a Fed-regulated institution can recognise the credit risk mitigation of the collateral on a reference portfolio within the rules for synthetic securitisations, provided that the operational and due diligence requirements are met and that the transaction satisfies the definition of ‘synthetic securitisation’.
The direct CLN route potentially offers a more straightforward pathway to CRT for banks compared with structures requiring execution of a credit default swap or financial guarantee with a counterparty – often an SPV, which will then issue CLNs. This clarification has proven, at least to some extent, to be a driver of activity. Issuance by regional banks has since grown, with Huntington, Merchants and Ally among those receiving approval for direct CLNs to be treated as synthetic securitisations.
Yet many investors will likely look at the bank risk associated with direct CLNs – which is more pronounced with smaller regional banks compared with G-SIBs – and conclude that it is not for them.
In July this year, Pinnacle Financial Partners and Valley National Bank entered the market with transactions – notably both SPV CLN or CDS-based, rather than direct CLN-based deals – referencing mortgage and auto loan assets respectively (SCI 29 July and 29 July). Both banks have below US$100bn in assets, meaning they would have fallen below even the formerly anticipated threshold for Basel 3.
Matthew Bisanz, a partner in Mayer Brown’s regulatory practice, says regional banks have the same need for capital enhancement as larger banks – if not greater. However, many are still negotiating the various barriers to entry into what is a complex arena.
Bisanz explains that regionals have a lower level of familiarity with the product. Typically, those that have used CRT have done so because they hired or were advised by somebody who happens to have the relevant expertise. While they have needed capital relief, he says, it has almost been by “happenstance” that they stumbled into CRT.
“For many of these regional banks, it is difficult to access capital markets in other ways,” says Bisanz. “The two other main options are selling equity and selling assets. If you are a small regional bank in Illinois, for example, there isn’t a high demand for your equity – you’re not going to get a premium on it and it will be dilutive to existing shareholders. If you sell assets, you will take a lot of losses because of the change in interest rate and potentially lose control of part of the customer relationship. Your two go-to strategies right now probably aren’t going to work.” This makes CRT very appealing.
The relative lack of CRT activity in the US – compared with the European market – is partly due to a lack of historical need. Indeed the development and growth of synthetic securitisations in Europe was largely driven by banks' requirement to recapitalise in the aftermath of the global financial crash. US banks, as a whole, did not face the same scale of task in having to develop such instruments to build up capital.
It is also partly due to a lack of awareness of the product, says Angela Ulum, partner and co-leader of the banking and finance practice at Mayer Brown. US players with a financial markets focus have been conscious of activity in the space, she says. However, awareness among regional banks only started growing recently, accelerated by coverage of the topic creeping into mainstream financial news outlets.
“To somebody with a structured finance background, CRT is one option for banking seeking capital optimisation,” says Ulum. “Many investors are agnostic as to whether they acquire exposure to a portion of assets through a credit risk transfer, a portfolio sale or an off-balance-sheet securitisation, all of which can have the effect of reducing a bank’s required capital. Looking at these as various tools, some of the benefits of CRT aren’t present with portfolio sales, off-balance-sheet securitisations or by reducing origination flow. So we’re likely to see CRT used more strategically.”
Barriers to entry
Nonetheless, Ulum says the wider industry had expected to see significantly more CRT issuance from regional banks in 2024 than there has been to date. In part, she attributes this to challenges banks face in putting together portfolios that could both benefit from capital relief and offer an attractive risk profile for investors. Portfolios of commercial real estate, for instance, would prove challenging.
Additionally, selecting among direct CLNs and eligible CDS structures – which may or may not include the issuance of SPV CLNs – can prove intimidating, as can navigating any resultant regulatory questions and operational challenges. Questions remain as to whether banks have the required historical loss and delinquency information and whether they are able to track losses and recoveries as required in CRTs. Reporting systems as a whole may require significant investment. There are challenges for banks to produce the loan-level information required and to evaluate and confirm eligibility criteria for reference assets that matter to investors.
“As banks are considering different asset classes and different portfolios, or even getting into the market, it’s important they are on board with investing in the operational challenges to be able to do that,” says Ulum. “There are a number of different companies trying to provide solutions, but that has been one of the more intimidating factors as banks think about getting into this market or expanding into different asset classes – even when they are already out with one asset class.”
There is a temptation among some banks, Bisanz says, to attempt to avoid some of the costs of entering the market – specifically the six-figure sums associated with hiring experienced financial advisors to help structure economic terms. Avoiding such hires is a course he cautions against.
“If you haven’t done one of these before, it’s often prudent to hire a knowledgeable financial advisor or broker,” says Bisanz. “Put aside the fact that you won’t negotiate as good a deal versus a more sophisticated counterparty. How are you going to get the data from your loan portfolio or even pick your loan portfolio [without those expertise]?” Many who look to cut corners may find themselves falling behind their peers, Bisanz fears, in a bid to avoid making a hire that would cost “a few hundred thousand dollars”.
The challenges of transitioning into the CRT market, more often than not, also involve selling the vision and potential benefits within banks themselves – not least to senior management, who themselves may be naturally resistant to a new unfamiliar financial product. A lot of time and energy is required, Ulum explains, in the organising of different stakeholders within the institution to come on board.
“Typically, the people who are worried about capital or cost of equity may be in one department, treasury is in a different department, and the line of business that actually touches the assets is in a third,” Ulum says. “Somebody has to have the vision and the force of personality to get those different groups together to understand the value proposition for CRT – and be able to invest the upfront cost in building the systems and understanding the structure. Once you do the first deal, there are many economies of replicating a transaction multiple times.”
It follows that, for those banks that do reach a consensus in favour of CRT, the benefits could become incrementally more significant over time. Ulum argues that, as more programmatic issuers start providing proof of concept and are able to determine the terms they care about and those they do not, pricing should start to tighten.
Identifying candidates
Once a consensus is reached – or as part of that process – the task is identifying portfolios that are best suited to CRTs. Bisanz highlights that there are a small number of regional US banks with auto loan portfolios that justify a CRT such as that executed by Valley National. That deal, he points out, was issued on US$1.5bn of loans, a strikingly high percentage of the bank’s US$1.8bn total auto loans portfolio. There may be some other regionals in a position – and of an inclination – to follow this lead, according to Bisanz, but not many.
“There are a small handful of regional banks with a significant non-bank lender, fund finance or specialty finance business,” says Bisanz. “That’s a very desirable portfolio. Commercial real estate can also be attractive, but it has to be the right kind. If you have a lot of rent controlled apartments or urban rental office space, for example, that isn’t good. But unregulated multifamily or seasoned owner-occupied are more interesting. A lot of people look at doing resi mortgages, which is a good CRT candidate, although it is less capital efficient because of how US capital rules work.”
Key to selecting a portfolio from the bank’s perspective, Ulum adds, is a reference portfolio with the critical mass required to justify the transaction costs involved. Many regionals are currently in the process of assessing which portfolios meet this criteria while also having losses that are low enough or predictable enough to be attractive to investors, she says.
“A lot of banks are trying to determine what the relative merits are of different portfolios between operational ease, the risk weights they’re holding and how attractive these assets are for investors,” Ulum says. “Some assets – such as auto loans – might be the easiest from an investor perspective, but they require a fair amount of operational systems work. A portfolio that has a hundred commercial loans, on the other hand, is small enough that you could have a human do the reporting manually.”
One touted approach to building portfolios of suitable scale, is that clusters of banks pool their portfolios into larger transactions. Bisanz feels that, as a potential approach, it would not carry many risks. The key challenge, he says, is finding small banks that are willing to work together with investors.
In a typical non-pooled transaction, investors may have to rewrite terms of a deal they have agreed with one bank in order to satisfy the requirements of another bank, or vice versa. In the context of a multi-bank deal these dynamics can become more challenging, as Bisanz explains: “When you get five banks in a room, and say, ‘we are going to do this with one of you and the other four of you are going to have to accept the terms that have been negotiated,’ the others are likely to say they would just rather not do the deal.”
He continues: “It requires five banks who are highly motivated to do a deal to be willing to agree to the same terms. When you find five banks in that position, what is the likelihood that they have some commonality, whereby they all have a multi-family CRE problem, for example? There are only around 100 regional banks in the US that we are talking about. So you quickly stratify them into different categories.”
Bisanz says he believes pooling will happen eventually, but that it will require a level of compromise over terms – a willingness that is yet to become apparent. Ultimately, what is needed is a shift in outlook in order for regionals to embrace the efficiencies of the multi-bank deal.
Despite the challenges or the approaches adopted, recent CRT issuance in the US tells us that momentum is building, albeit more slowly than many anticipated at the start of 2024. Regional banks have a very present need for capital enhancement and CRTs provide a tangible path to achieving this. With a handful of their peers issuing over the past year, the next wave now has case studies that can be presented to investors – once the internal questions have been answered.
Kenny Wastell
SCI’s SRT Journal is sponsored by Arch MI and Mayer Brown. All five essays can be downloaded, for free, here.
12 November 2024 10:16:23
News Analysis
Asset-Backed Finance
Fund finance milestone
Investec and Ares ink 'first of its kind' subscription lines securitisation
Investec Fund Solutions, the fund solutions arm of Investec Bank, has recently inked a landmark partnership with alternative investment firm Ares Management to launch what is believed to be the first-ever subscription lines securitisation. The bespoke funding structure will allow Investec to scale its offering in response to the growing demand for subscription lines among private equity firms.
“In a nutshell, the innovation just comes down to the fact that it's the first securitisation that's been done within the fund finance space," says Grant Crosby, head of fund solutions at Investec.
As private equity firms have rapidly expanded in recent years, their need for subscription lines – also known as capital call facilities – has surged to levels that often exceed the capacity of a single bank’s balance sheet.
“Our primary motivation for this partnership wasn’t regulatory or capital-driven, but rather a strategic imperative to grow alongside our clients and access liquidity smoothly to support that growth,” explains Crosby.
The securitisation is structured in multiple layers, with the senior tranche funded by a group of UK banks, followed by mezzanine and junior tranches, with Ares managing the junior one.
“This facility has the potential to grow significantly beyond its current size, and it can do so efficiently, making things easier for us,” notes Crosby. “Managing over US$450bn in AUM, we’re confident that if we decide to upsize, Ares will have ample liquidity to support those needs.”
Beyond flexibility and liquidity benefits, the partnership also leverages Ares’ established market presence and network in the private equity sector, creating synergies for both firms.
“We’re very fortunate to be partnering with Ares, which has a strong brand presence in the market, and deep connections within the private equity sector,” says Crosby, mentioning some overlap in their client bases.
This partnership is set to increase Investec’s lending capacity across its core markets, including the UK, Europe and the US, with a bias towards the former two.
Demand in the US remains comparatively lower due to Investec’s newer presence there, but the structure is flexible enough to adjust as demand grows.
“In the short term, the fundraising environment in the UK and Europe seems relatively subdued,” says Crosby. “However, I believe this will change in the medium to long term as interest rates decrease and we see more assets exit from funds.”
Looking ahead, he sees strong potential for increased fundraising activity and rising demand for fund finance facilities as private equity becomes a more prominent asset class for institutional, high-net worth investors and family offices.
“As demand rises, these private equity funds will need more fund finance facilities and capital call lines,” says Crosby. “In the medium to long term, I see a positive trend for fund finance facilities as larger funds are raised.”
In an increasingly competitive market, Investec’s partnership may prompt other institutions to follow suit with similar models.
Crosby notes: “We expect other banks to follow. We certainly don’t assume we’ll be the only ones pursuing this path. Our aim is to continue leading and innovating to stay ahead.”
Although not currently a priority, Investec remains open to exploring similar partnerships to further expand its funding capabilities in the future as market demand evolves.
Marta Canini
12 November 2024 14:01:19
News Analysis
ABS
Zilch eyes zero-cost credit via ABS
Zilch paves the way for financial inclusion with plans for public ABS and IPO
In a bid to disrupt the revolving debt burden that impacts millions of consumers, London-based fintech Zilch is eyeing the next stage in its ambitious growth strategy with plans to expand its ABS facilities and eventually launch an IPO. The company, which says it has already saved customers £500m in interest fees since its inception four years ago, seeks to empower consumers by turning traditional credit costs to ‘zilch.’
“We wanted to look at the world and see how we could make a legacy impact in consumer payments,” Ryan Mendy, cco at Zilch, tells SCI. “Brands spend billions to capture our attention, yet consumers end up paying around $150bn in fees and interest annually in the UK and US alone. Our goal is to bring that figure down to zero, or ‘zilch’. Just in the UK, consumers pay £15bn annually in interest and fees on credit, and we want to democratise access to financial inclusion.”
Zilch's model differs significantly from traditional BNPL services by offering a regulated product that allows consumers to finance purchases while avoiding the compounding debt trap of conventional credit cards. This structure has propelled Zilch’s rapid growth, establishing it as a frontrunner in the consumer payments landscape and prompting the company’s move towards a public market securitisation.
A novel ABS structure for fast-paced growth
Unlike traditional credit models that accumulate interest-bearing balances, Zilch’s model offers a unique approach, providing credit as individual, amortising loans with each transaction.
The company’s cfo, Hugh Courtney, says this structure contributes to the company's agility. “Our book turns over about 21 times a year, which allows us to generate high volumes of commerce with a relatively small receivables position,” says Courtney. “This model enables us to be very capital efficient and support our growth trajectory.”
In June, Zilch closed a £100m securitisation facility led by Deutsche Bank, which was quickly upsized by an additional £50m after attracting interest from two of the world’s largest credit funds. This facility can potentially expand to £400m, translating into £10bn in annual loan origination capacity or otherwise new sales for retailers, which supports Zilch’s ambitious growth plans.
The decision to onboard new credit funds through Deutsche Bank’s network reflects Zilch’s desire to work with flexible partners capable of adapting to the company’s evolving product offerings. Courtney highlights the importance of aligning with dynamic partners: “It was about selecting partners who could adapt to our evolving needs,” he says. “The flexibility to accommodate new features and longer-dated transactions was crucial, as was their track record in consumer finance.”
While the existing facility is expected to support the firm’s growth through 2026, Zilch’s long-term plan could include issuing its first publicly rated ABS. Courtney says this step would allow the company to attract a broader array of investors, drive down costs, and diversify funding sources.
“As we grow, a public ABS could enable us to bring in multiple noteholders from various sources,” Courtney explains. “We’ve experienced consistent 100% year-on-year growth, and a public ABS structure would provide the flexibility needed to support our pace.”
Furthermore, a public ABS could align closely to bring multiple noteholders from various sources. Courtney notes the interconnected nature of the two pathways: “The ABS vehicle and IPO will likely run in parallel as we expand,” he says. “From day one, we’ve focused on strong corporate governance and a structure capable of supporting public market entry. This dual approach could reinforce our strategy and extend our impact.”
Rates, broadening consumer finance exposure, and the road ahead
When asked about the effects of the current high-interest rate environment, Courtney expresses confidence in Zilch’s resilience, given its rapid loan turnover. “Interest rate fluctuations aren’t a major concern because we turn the book so quickly,” he notes. “We’ve already improved pricing since transitioning to the securitisation model, and we’re well positioned to continue optimising it.”
Zilch’s future ABS structures could include tranching, where loans are grouped based on different credit profiles. This would make the ABS products attractive to a variety of investors seeking exposure to diverse consumer finance assets.
Courtney explains that Zilch’s loans, which range from daily consumer purchases to longer-term items like insurance, would lend themselves to a tranching structure. “We serve customers across the credit spectrum,” he says. “As our scale grows, tranching will likely become an attractive, straightforward option. It aligns well with our product and enhances investor appeal.”
With a public ABS on the horizon and an IPO as part of its growth strategy, Zilch continues to innovate within the financial industry. Its model has not only captured investor interest but also – the company says – saved consumers hundreds of millions in fees, potentially positioning the company as a pivotal force in consumer finance.
By challenging conventional credit structures and reducing consumer costs, Zilch’s forward-looking approach promises to create value across the financial ecosystem – and potentially make a lasting impact on consumer debt burdens worldwide.
Selvaggia Cataldi
14 November 2024 14:00:04
News Analysis
ABS
SCI In Conversation Podcast: Gregor Burkart, Enpal
We discuss the hottest topics in securitisation today...
In this episode of the SCI In Conversation podcast, SCI's Selvaggia Cataldi speaks to Gregor Burkart, leader of the refinancing division at Enpal, about the company’s recent milestone in Europe’s renewable energy sector. Burkart shares insights into Enpal’s first residential solar securitisation program, which raised €240m, and discusses the company’s strategy, innovative financing methods, and their impact on investors, customers, and the climate.
Burkart outlines Enpal’s the frequency with which the company expects to issue securitisation transactions. He also discusses the pace of the company’s growth; the potential for heat pump securitisations; unexpected challenges in issuing for a new asset class without available benchmark deals; and more.
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')
14 November 2024 17:31:38
SRT Market Update
Capital Relief Trades
Stiff competition
SRT market update
As we approach year-end, tightening spreads continue to raise the eyebrows of many investors across the SRT market.
Investors have been particularly vocal about Barclays’ sixth Colonnade deal, which priced last month at SOFR+9.05%, according to a source close to the deal (SCI 1 November). “All products have tightened this year - it’s basic economics,” one source close to the deal noted, and emphasised that the SRT is of no exception to these trends. The source did also pinpoint these frustrations, acknowledging that spreads have tightened as much as 200bps in the past two years.
The SRT market is continuing to thrive, with 2024 expected to close with a similar 20% annual growth on the books seen each year since 2010. However, the long-anticipated explosion in the US market is still some way off according to multiple market insiders who understand that, even with strong supply and demand, the market requires greater maturity before such growth can be seen.
According to one US-based asset manager, the dynamics in the US market are unlikely to shift dramatically under the new administration next year. Reportedly, investment strategies have already adapted to account for any tariff and interests rate adjustments – as asset selection processes began shifting after Trump was announced as the Republican nominee in July.
Going in hand with the underwhelming expectations for any rapid growth in the US next year, participants in the US are reporting a shift away from sustainability investing in the SRT space already as Trump’s regime is promised to focus on a new strategy of ‘energy abundance’. However, multiple sources have reported their excitement over the prospect of future deals from the IFC coming through in the ilk of Project Patagonia as early as next year. In addition, one source close to the impact investment action revealed there to be credible interest in the SRT space from a major development bank currently in talks of its inaugural synthetic securitisation issuance, although no portfolio has been set up as of yet.
Further north in the Americas, CIBC is reported to be working on its next CRT deal alongside fellow Canadian big-bank Toronto Dominion which reportedly still has its next transaction in the works – with both expected to ready for market in 2025.
Claudia Lewis
15 November 2024 18:17:02
News
Asset-Backed Finance
Italian revival
Private credit in real estate finance gaining traction
AXA IM Alts recently acquired a portfolio of Italian real estate loans from an international bank through a securitisation structure, while Société Générale has syndicated another portfolio of Italian real estate loan exposures to a leading international asset manager’s fund. Both transactions – for which A&O Shearman acted as advisor – signal that partnerships between banks and private credit firms are growing in Italy and in Europe more broadly, suggesting that this momentum could fuel further deals by year-end.
“We’re witnessing a clear revival of real estate financing within private credit,” says Pietro Bellone, partner at A&O Shearman. “As banks look to de-risk and free up capital for new lending, private credit funds are returning to the market, particularly in Italy, where they now see renewed opportunity.”
Bellone notes that his team has successfully closed several deals in 2024, with additional transactions in the pipeline. “These trends will certainly continue through the end of the year, and I expect they’ll be even more robust next year,” he says. “We recently closed this deal and similar ones, and we’re actively working on more.”
The AXA deal was part of a broader de-risking strategy between the international bank involved and the alternative investment manager, and spanned multiple jurisdictions. By leveraging an SPV, AXA’s funds - which aren’t licensed for direct lending in Italy - were able to gain exposure to the real estate loans.
“Under Italian law, such funds can't hold loans unless they are structured as corporate bonds or securitisation notes,” explains Bellone. “By establishing a securitisation vehicle, we enabled AXA’s funds to acquire multiple loan exposures from the bank, effectively assuming the same rights and benefits as if they had been direct lenders.”
The transaction utilised a ‘fronted’ securitisation structure – an approach that has gained traction since sub-participation in loan exposures has faced regulatory scrutiny in Italy since 2019. The securitisation structure, which is compliant with Italian law, enables efficient access for alternative funds to Italy’s real estate finance market.
In another deal, SG leveraged a similar securitisation structure to syndicate a portfolio of Italian real estate loan exposures to a leading international asset manager’s fund.
Bellone emphasises that these transactions signal a broader shift in the private credit landscape across Europe, particularly in real estate financing. “Banks are increasingly viewing private credit not as competition, but as a valuable partner in meeting capital demands and regulatory pressures, especially as Basel 4 requirements tighten,” he says. “We’re seeing private credit sit at the table with banks from the beginning of the deal, particularly in direct lending via securitisation SPVs.”
Beyond real estate, the demand for private credit is also growing in infrastructure financing, particularly in capital-intensive projects like data centres, where banks often struggle to meet rising financing needs. “Data centre projects require extremely large financing. You can’t think that a bank can afford the growing demand for digitalisation. We expect that private credit will step in alongside banks to fill these gaps,” notes Bellone.
As regulatory demands and capital requirements continue to evolve, the emerging collaborations between banks and private credit firms reflect a broader strategic alignment of interests. “Over time, we anticipate deeper partnerships that could set a new standard for collaboration in European lending,” Bellone concludes.
Marta Canini
14 November 2024 17:46:15
News
Capital Relief Trades
Auto II for Huntington
Second auto loan CLN in 2024 for Huntingdon
Huntington Bank last week settled a prime auto loan CLN reg cap trade, referencing a US$4.072bn portfolio.
Joint bookrunners were Bank of America and Morgan Stanley (structuring leads) and JP Morgan.
Huntington sold US$486.65m into the market in five separate tranches, but the largest by a margin was the US$342m A3-rated B1 tranche which came in SOFR plus 135bp.
The US$65m A3-rated B2 also came in at SOFR plus 135bp, while a US$30.5m Ba2-rated C tranche was priced to yield SOFR plus 260bp, the US$30.5m B3-rated D yielded SOFR plus 400bp and a US$18.3m unrated E tranche yields SOFR plus 750bp.
The transaction represents Huntington’s second auto-CLN of the year. It first tapped the market in June.
Huntington’s deal also initially came to the market within a day or so of Ally Bank’s latest auto CLN, and it appears that auto loans represent the assets of first choice for regional bank CLNs at the moment.
Simon Boughey
14 November 2024 20:54:17
News
Capital Relief Trades
Latest SRTx fixings released
SRTx figures display continuity
With market sources continuing to report a tightening in spreads for new issue trades (repeat benchmark deals from established issuers are seeing bids 100+ basis points tighter than comparable transactions from earlier in 2024), the latest SRTx fixings present a generally stable and coherent narrative, in line with the positive risk tone that has been prevalent since the summer and broader macro developments.
In this context of spread compression, one SRT investor notably highlights deals referencing subscription lines. They note: “I am often asked whether the current tightening in spreads is increasing or boosting issuance. My view is that, in certain cases, it has certainly accelerated issuance. For instance, subscription lines trades have recently priced very tightly and clearly some banks have sped up or looked at certain trades that maybe they didn't think would have been interesting otherwise.”
Most subscription lines are funded by banks on balance sheet and until recently, most of this lending used advanced modelling, meaning the level of RWAs is unique to each bank. However, a growing number of banks are seeking to use the standardised approach under Basel IV where credit ratings (subscription lines are undergoing an significant change, with a growing number of facilities in the UK and Europe obtaining credit ratings from agencies) can help to ensure an appropriate level of RWAs are allocated based on the credit risk, versus an exposure which is unrated. Furthermore, credit risk has been historically low for subscription lines and the asset class has attracted the large multi-strategy funds.
However in such environment, some investors begin to warn that from a risk-return perspective, certain transactions could soon not make a lot of financial sense.
SRTx Spread Indexes have tightened across the board, reflecting the broader and ongoing investor struggle between attractive yields and tight spreads (Large corporate: EU -12.0% US -6.7%; SME: EU -10.9%, US -8.1%).
The SRTx Spread Indexes now stand at 858, 594, 993 and 942 for the SRTx CORP EU, SRTx CORP US, SRTx SME EU and SRTx SME US categories respectively, as of the 8 November valuation date.
Unsurprisingly and spurred by the recent US presidential election, the volatility values highlight elevated market volatility month-on-month. As such, the volatility outlook is incrementally higher on the broader scale (Large corporate: EU +14.3% US +10.0%; SME: EU +14.3%, US +20.0%).
The SRTx Volatility Index values now stand at 57, 69, 57 and 75 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 display once again very little change sentiment month-on-month. While European sentiment is incrementally stronger (Large corporate: -15.4%; SME:-15.4%) than it’s US counterpart (Large corporate: 0.0%; SME: -4.8%), with every figure standing comfortably on the south-side of the 50 benchmark, the outlook remains positive.
The SRTx Liquidity Indexes stand at 39, 44, 39 and 42 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 continues to reflect an incrementally worsening sentiment (Large corporate: EU +18.8% US -7.7%%; SME: EU +12.5%, US +5.8%). Nevertheless, while the sentiment remains biased asymmetrically higher, the figures continue to come off the lows of 2023 (across all sectors).
The SRTx Credit Risk Indexes now stand at 68 for SRTx CORP RISK EU, 60 for SRTx CORP RISK US, 64 for SRTx SME RISK EU and 69 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
14 November 2024 09:57:41
News
CLOs
Ex-Accunia exec to launch Euro CLO equity investment platform
Grane speaks to SCI about building a new London team and seeking investors
Christian Grane, the former head of investments at Accunia Credit Management, is aiming to launch a dedicated European CLO equity investment platform in the second or third quarter of next year.
Speaking to SCI, Grane, who left Accunia in September after five years, says he is currently in the process of speaking to potential investors and partners to launch the new venture.
On building the team and firm he says: “Depending on where I get capital from to launch and how much of a platform I need to build, ideally to begin with I will look to have at least one or two people join the investment team, in London where I will launch.”
Despite current geopolitical tensions such as the wars in the Middle East and Ukraine, as well as US elections, according to Grane there is room for new equity investors coming into the European market considering the growth of the CLO market.
“The equity investors in Europe have not changed that much over the last couple years. There haven't been many new entrants coming into this market. And I think with the way I've been managing the equity fund at Accunia, which has done quite well in terms of returns, there should be space to do it.”
Grane adds: “The reason for doing it now is following 2022 and 2023 where returns were great, but there was not a lot of new activity in the market, the market is slightly different now where the arb still works, but it's a little tougher to make it work. On the other hand, you have a really well functioning market right now. There's a lot of new issuance going on, and as this continues funds are increasingly raising risk retention capital, but that's not easy for them.”
So, both for the funds that have a dedicated risk retention vehicle for the equity and for the funds that rely on third party, given the growth of this market, Grane believes there is room for a dedicated entrant in the European market.
“Essentially," he says, "I want to create the European version of (US CLO equity investor) Eagle Point and that's the goal of this venture.”
Ramla Soni
13 November 2024 14:31:05
Market Moves
Structured Finance
Job swaps weekly: Senior Pemberton CLO exec launches Auctus Strategies
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees a former Pemberton Asset Management director launching her own sustainability consulting business. Meanwhile, Atlas SP has given its interim ceo the role on a permanent basis, while Climate First Bank has appointed a former 12five Capital veteran as president of its newly-created structured finance division.
Ex-Pemberton Asset Management director Naomi Prasad has founded Auctus Strategies, a sustainability consulting business. Targeted at leveraged loan and high yield portfolio managers, the firm creates customised investment strategies that promote long-term sustainability while optimising returns.
Prasad joined Pemberton in August 2022 as lead credit research analyst for the firm’s Indigo CLO platform, for which she designed and implemented a sustainability strategy, having gained sustainability qualifications from University of Cambridge Institute of Sustainable Leadership. Before that, she worked at State Street, ICG, MetLife and AIB in a variety of high yield and leveraged loan analysis roles.
Apollo-owned warehouse finance and securitised products business Atlas SP has appointed Carey Lathrop as ceo, following his tenure as interim ceo and chair of the executive committee since August 2024.
Lathrop, who has been with the firm since its inception in February 2023, brings more than 30 years of expertise in credit and securitised products. He most recently served as partner and coo of Apollo’s credit business, a role he held since October 2022. Prior to that, he was md at Citi, where he held various senior leadership positions from 1998 to 2022.
Climate First Bank has appointed Ryan Jaskiewicz as president of its newly-created structured finance division, based in Chicago. He will be responsible for overseeing and expanding the bank's structured finance products, initially focusing on factoring and asset-based lending.
Jaskiewicz left his role as chief strategy officer at Breakout Finance in May after eight months with the firm. He previously spent 17 years at 12five Capital, leaving his position as CEO in June 2023.
Criterion Real Estate Capital has hired Adam Matos as md and Ben Milde as chief operating officer, based in New York. The pair will focus on originating structured high-yield debt, participating loans, preferred equity, senior equity and joint venture equity transactions.
Matos leaves his position as senior vice president at Safehold after seven and a half years with the firm, having previously worked at iStar for 15 years. Milde joins Criterion from Richbell Equities, which he joined in 2020 as md, having previously had spells at TPG Global, Allegiant Real Estate Capital and Citi.
And finally, hedge fund Elliott Management has reportedly appointed CLO specialist Pat Frayne to its management committee. Frayne focuses on structured credit investments, in addition to currency and interest rate trading. The appointment comes as the firm also appoints its first ever female partner, with Samantha Algaze – a portfolio manager in the credit investment team – being promoted to the position.
Corinne Smith, Kenny Wastell, Marta Canini
15 November 2024 13:51:32
structuredcreditinvestor.com
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