News Analysis
Capital Relief Trades
SRT Journal: A growth market
The fourth of five essays compiled in SCI's inaugural SRT Journal examines the growth of unfunded mortgage SRT
Mortgage insurance is as old as the hills, but the provision of financial guarantees or insurance policies on pools of home loans to secure capital relief as a tool of the significant risk transfer (SRT) market is of much more recent vintage. SCI looks at the growth and structural developments in the unfunded mortgage SRT market, but also the reasons as to why unfunded insurance provided to private banks in the US is still subdued.
Arch wrote an unfunded mortgage SRT transaction with ING in 2018, and this is generally thought of as the starting point of the market. Supranationals like the European Investment Fund had provided guarantees before this date, but Arch started the ball rolling for private insurance and reinsurance companies.
Arch Capital Group Ltd writes insurance, reinsurance and mortgage insurance on a worldwide basis with a focus on specialty lines. The business is Nasdaq-listed and a member of the S&P 500 index.
Since the first unfunded trade in 2018, other names such as Munich Re, Fidelis and Renaissance Re have entered the space as well, but Arch remains a leader with a circa 35% market share in 2023, based on data from the International Association of Credit Portfolio Managers (IACPM). The same body also says that protection provided by insurance companies on tranches in 2023 totaled about US$1bn.
Although these firms provide guarantees or policies on a variety of portfolios, including, for example, high quality corporate and SME loans, mortgage remains very much a core asset class for SRT transactions. All of the trades written by Arch to date in 2024 have provided protection on mortgages for issuers across Europe.
This is an asset class Arch understands intimately; it’s in its DNA. It makes sense that this is where it is most comfortable playing.
“Mortgage is a key tenet of Arch’s overall strategy,” says Ruairi Neville, head of European origination for Arch International Mortgage. “We’re the largest and only globally diversified mortgage insurer in the world. Along with our European SRT business, our global presence includes primary mortgage insurance operations in the US and Australia along with our GSE Credit Risk Transfer business in Bermuda.”
Since its first transaction in 2018, Arch has completed almost 30 unfunded SRT transactions and has now about US$1bn of limit out in the market. Arch has the flexibility to write SRT as either a Financial Guarantee or an Insurance Policy and has concluded trades using both formats, says Neville. It is at the banks’ discretion as to how they wish to classify the trade. In some regulatory jurisdictions, guarantees work better, and in others insurance policies are preferred.
Mortgage SRT is typically transacted on an unfunded basis. Insurers make use of their generally robust credit rating to execute these deals and keep liquid assets on the balance sheet. Arch and Renaissance Re are both rated A+ by S&P and Munich Re has an AA S&P rating.
Asset management firms are not usually as well rated as this. Ares is rated BBB, for example. They are obliged to do funded SRT deals, but generally also have disposable capital at hand and run bespoke SRT funds.
Insurers also have a greater appetite for longer-dated assets than asset managers.
“Arch is very comfortable covering long-dated risk,” Neville says. “Many of the SRT trades Arch has written have maturities in excess of 10 years.”
The average asset manager which likes SRT investment would have wanted to invest and reinvest this capital several times in this passage of time.
Insurers also tend to have a lower cost of capital than traditional funded buyers, so they achieve more efficient funding at lower coupons. This, clearly, is a large advantage to a lender seeking to attain capital relief on a portfolio of mortgages.
Arch usually works directly with the bank owning the assets. Many of the SRT trades the insurer wrote in the last 24 months have been repeat trades with existing clients.
“Building a strong network of trusted partners is critical to our success in the SRT arena,” says Neville.
Although it participates across all levels of the capital stack, Arch typically tends to cover lower or upper mezzanine risk, or a combination of the two. “The structures of transactions are very much deal-specific and depend on the banks’ individual motivations. We are agile in the cover we can provide. Our bank partners very much value this flexibility. The vast majority of our trades involve the bank retaining a thin First Loss layer and/or excess spread. We can attach from ground up and do this occasionally for trades which necessitate this type of structure, but this is very much trade-specific,” states Neville.
However, like many insurers in this market, they are conservative and favor granular pools of lower risk assets. “The scope where (re)insurers are interested is much narrower. Their risk appetite tends to be lower. They generally prefer low risk pools like mortgages or vanilla corporates, often with a focus on granularity and consistency. They’re also generally more interested in the more risk-remote pieces of risk like senior mezz and not first loss, while noting their ability to transact the most junior tranches is steadily increasing as familiarity grows,” says Robert Bradbury, head of structured credit execution and advisory at London-based Alvarez and Marsal.
Arch’s SRT trades are written from both Dublin and Bermuda. Arch has invested significantly in its European SRT operations over the last few years with key hires in the underwriting, legal and actuarial teams, while also having the benefit of being able to leverage the expertise in mortgage credit that exists across the broader Arch Group.
Insurers also claim that pricing can be very competitive compared to funded investors. They say they have less volatile premium requirements and can offer more consistent pricing on an ongoing basis. This is especially pertinent in an era when a new raft of relatively untried investors has entered the SRT market, sowing discord among the more established, and perhaps more trusted, buyers. These newcomers will perhaps fade away into the distance when SRT investment loses its lustre in comparison to the alternatives, say the critics.
The reach of the unfunded insurance guarantee is extending into further reaches of the SRT market as well. In 2022, Arch secured a mortgage SRT transaction with a large Spanish bank and since then has done several trades with Iberian counterparties. It is now the largest provider of unfunded mortgage protection in the region.
In the same year, it wrote two unfunded mortgage deals with counterparties in central Europe and this year did the first mortgage trade with a Nordic bank. Italy has been a core market for the firm since it began providing cover for Mortgage SRT.
This is still, however, a relatively small corner of the European SRT market. The entire unfunded market, which includes guarantees of other assets in addition to mortgages, constitutes, perhaps, between 5% and 7% of the whole.
“It’s only a small proportion of the overall deal flow. Insurer appetite for risk is lower and there are fewer broadly relevant deals as a result,” says Bradbury.
The relatively small size of the mortgage SRT market is also relevant because there are some disadvantages to unfunded protection provided by insurers. Firstly, EU regulation currently disallows these deals from STS qualification. The framework for “simple, transparent and standardized” securitization was introduced in early 2019, and it set out the process by which certain institutional investors could benefit potentially from more favorable regulatory capital treatment for STS securitization exposure.
Certain investors, including insurers, were excluded from these provisions. As law firm Norton Rose Fulbright has written in its guide to STS securitisation, “The SPR (Securitization Preferential Treatment), which focuses on CRR (Capital Requirements Regulation) regulated credit institutions and investment firms, does not afford the same STS capital relief to other institutional investors such as pension funds, insurance and reinsurance undertakings.”
In the same guide, it also notes that while the European Commission (EC) has made “encouraging noises” about extending STS capital relief to insurers, the effect of the new STS framework “may be muted if insurers are effectively excluded from benefitting from preferential capital treatment.”
Some six years after this piece was written, the adumbrated encouraging noises have not yet been transfigured into action. Things happen slowly in EC regulation.
The lack of STS categorisation also makes tranching and structuring less efficient as it changes the risk weighting floor adversely and removes more favourable regulatory inputs, notes Robert Bradbury.
Neville is aware that this is a problem.
“The fact that insurers are not currently considered eligible protection providers for the purposes of the STS framework is a disadvantage,” Neville says. “Insurers represent highly regulated and well-capitalized counterparties who can bring significant diversity to the total investor base. The exclusion of insurers from STS trades is not conducive to furthering securitization in Europe, and we hope this will change in the near future.”
In addition, issuers must hold counterparty risk weight against unfunded guarantors, further reducing the efficiency of the transaction. However, argues Neville, this is a relatively minor burden for issuers.
“The protected tranche may only be about 5% and the bank will need to hold capital against our A+ rating, so it’s not a huge number,” he says.
Despite the caveats, the provision of guarantees or insurance by insurers is a growth market. Once banks have done one deal, they are likely to do more. Putting all the pieces in place before an unfunded SRT deal can go ahead is a considerable internal labour, and it doesn’t make a lot of sense to do one and then retreat from the sector.
“Each year, we onboard new counterparties. All the banks we deal with have done multiple deals or are looking to do multiple deals,” Neville says.
In the US, as is not uncommon, things are very different. Insurers and reinsurers, including Arch have worked with GSEs to provide credit risk transfer of exposure to mortgage assets since 2013 through the agency credit insurance structure (ACIS) programme at Freddie Mac and the credit insurance risk transfer (CIRT) programme at Fannie Mae.
In August 2024, Freddie Mac concluded its 100th ACIS transaction, and in the last 11 years has protected more than US$2.5 trillion of unpaid principal balance of mortgage loans via UD$35 billion of ACIS coverage with more than 60 (re)insurers. Each deal normally has about 25 insurers and reinsurers.
Fannie Mae has executed five CIRT deals so far in 2024, the fifth deal in late June transferring US$337 million to 27 insurers and reinsurers. Since the inception of CIRT, the GSE has acquired approximately US$27.6 billion of insurance coverage.
But unfunded insurance provided to private banks a la the European model hasn’t got to first base.
According to section 12 CFR 172.2, the portion of Regulation Q that deals with capital adequacy, insurance companies are not permitted to act as “eligible guarantors”. These rules were devised in the wake of the financial crisis of 2008/2009, in which several firms that provided mortgage insurance failed.
Insurers could participate in the mortgage CRT market in the US by providing cash collateralized positions in the CLN market, but for the bulk of insurers it doesn’t make sense to lock up capital for the duration of a deal.
One possible way around this is for a European subsidiary of a US insurer to write the protection as they are not required to comply with US law.
“If a London branch of a US bank bought a guarantee from an eligible insurance company in London, this would tick the boxes for reg cap treatment in the US,” explains Matt Bisanz, a partner in Mayer Brown’s banking and finance practice.
However, Bisanz says, there is currently little inclination among bank issuers to devote the time and resources to explore this particular avenue.
So, for the time being, this leaves the mortgage CRT market in the U.S. high and dry. A potentially vast pool of capital is locked out of the space. As Michael Shemi, North America structured credit leader at Guy Carpenter in the US notes, “I think reinsurance companies are a huge source of steady capital for CRT as buy-and-hold counterparties. If the GSE CRT market plateaus, or even declines over the next year, then reinsurers would be looking to deploy their capital elsewhere, and bank CRT would be a great place to do it. Some feel that the market would benefit from further clarity about the treatment of reinsurers as eligible guarantors in the US regulatory framework.”
But for the time being, the mortgage CRT market outside that written for the GSEs is high and dry, and it will be until there is regulatory change. Not unlike their European counterparts, however, US regulators tend to move slowly and unpredictably.
While it would be a mistake to describe the European mortgage CRT market as yawning, it is growing and offers a new and different outlet for lenders seeking to achieve capital relief of mortgage assets. In 2023, Arch provided guarantees and insurance for lenders in northern Europe, southern Europe and the DACH region (Germany, Austria and Switzerland). In all, it has clients for unfunded capital relief transactions in 11 different EU and non-EU geographies.
These lenders will prove to be repeat customers, so the pool is set to expand. Not dramatically, perhaps, but inexorably.
Simon Boughey
SCI’s SRT Journal is sponsored by Arch MI and Mayer Brown. All five essays can be downloaded, for free, here.
25 November 2024 16:49:15
News Analysis
Capital Relief Trades
Take the highway
Auto loans CRTs make good fit for regionals, but is the end in sight?
A significant portion of recent risk sharing transactions from US regional banks have referenced auto loans, but the tap could be turned off next year, warn some in the market.
Two weeks ago, Huntington Bank settled its second prime auto loan synthetic securitisation of the year, this time referencing a US$4bn portfolio. This followed a deal in June which also referenced prime auto loans. The deal came in the same week as two more prime auto loan CLNs from Ally Bank and Santander – both of which were also first time issuers.
Ally hit the market in October again with another auto loan CLN while New Jersey-based Valley Bank securitised almost its US$1.8bn entire auto loan book in June.
There are several reasons what prime auto loans are appealing to regional banks for CRT deals. Firstly, they generally represent a higher proportion of overall loan exposure than is the case at the tier one banks – although JP Morgan did execute a couple of auto loan deals in 2020.
Moreover, that proportion vis-à-vis other asset classes on the balance sheet may well be increasing. “Mortgage originations are way down, people are still buying cars and regional bank portfolios perhaps got too heavy on autos. You can imagine the CFO saying, ‘We need to lower the credit exposure to autos,’” says a market analyst.
Car loans are also generally term loans of between four and seven years. This makes them more suitable than 15-year or 30-year mortgages, which lock banks into a long-term issue without knowing how regulations may change and how less, or more, capital efficient these deals will become.
They are also term assets which amortize to zero over the term of the loans. This gives them an appealing and predictable cash flow for payments to investors. This contrasts to credit cards, for example, in which the repayment schedule is lumpy and unpredictable.
They are, of course, very capital efficient. Car loans carry a 100% risk weighing under standardized treatment, but the loss history is well known and well understood. Banks have a long history in securitizing car loans. It’s possible to design a loan portfolio in which the lender can be confident that losses will not exceed 1% or 2%. This makes them ideal for risk sharing CLNs.
“Banks can unlock a lot of capital on low-risk assets and investor can have confidence in the losses. Auto loans are very safe. People will be evicted from their house before they give up their car,” says Matt Bisanz, a bank regulatory partner in Mayer Brown’s financial services practice.
This contrasts with assets such as commercial real estate, say, where it is possible to take losses well in excess of capital and investors get wiped out.
In its 2023 year-end 10Q filing, Huntington Bank noted its CET1 risk-based capital ratio had improved to 10.25% from 9.36% a year earlier. This was due to increased earnings but also a decrease in RWAs, and the latter was attributed to its CRT business.
“The decrease in risk-weighted assets was largely driven by a synthetic CRT related to an approximately $3bn portfolio of on-balance sheet indirect prime auto loans,” says the filing.
Finally, auto loan pools comprise thousands of small loans of US$20,000 or US$30,000 each. The average monthly payment for a new car is US$725. There are often in the region of 20,000 separate loans in a pool of prime auto credits, in contrast to a pool of tens of corporate loans. Investors don’t have to do due diligence on every borrower or consider replacement risk.
However, the flood of auto loan CLNs could be about to dry up, or least grow less plentiful. Researchers say that there are 33 banks with an auto loan portfolio of US$1bn or more. Anything smaller than this will not generate enough market size for a synthetic securitisation.
The biggest bank in the list is JP Morgan, and though they have been to the market with these assets it’s a long time ago and it is likely that they have bigger fish to fry. Some of the smaller lenders on the list, such as community bank systems, are unlikely to have to sufficient expertise or staffing to put together a risk sharing deal.
Several banks have already done auto loan deals. Ally has done two, Huntington has done two (the last one on a US$4bn portfolio) so they have already securitised large slabs of the loan book. Valley Bank took out pretty much all its car loan portfolio with its one trade in June.
There are couple of contenders for new deals. Truist, a US$523bn net asset lender based in North Carolina, reported an indirect auto loan book of US$22bn in its 3Q 2024 filing. It is a top ten commercial lender.
Buffalo-based M&T Bank is another possibility as well, but there are not many more names on this list. So, we might be approaching the end of the line. “This trend might not continue. There just aren’t enough banks with a significant enough auto loan portfolio,” says Bisanz.
Simon Boughey
25 November 2024 20:53:05
News Analysis
Asset-Backed Finance
Asset-backed finance: Emerging at pace - video
ARC Ratings' Ashley Thomas speaks to SCI about asset-backed finance
Ashley Thomas, head of structured finance (UK) at ARC Ratings, speaks to SCI's Marta Canini about asset-backed finance (ABF). Thomas discusses what ABF is, the key drivers behind the growing interest in the asset class, comparisons between the European and US markets, and more.
28 November 2024 14:01:26
News Analysis
ABS
Australian auto ABS accelerates ahead
Australian auto loan ABS thrives on strong performance and parallels evolving trends seen in EMEA markets
The Australian auto loan ABS market has become a cornerstone of the country’s structured finance landscape, distinguished by its unique characteristics and strong performance record. While S&P Global Ratings in a recent in-depth analysis offered insights specifically into the Australian market, Fitch Ratings, in one of its latest press releases, provided a broader perspective, focusing on trends and performance in the EMEA region.
Auto loan ABS in Australia typically involves the securitisation of loans used for vehicle purchases, including passenger cars, commercial vehicles, and motorcycles. Issuers range from banks and non-bank lenders to the captive finance arms of car manufacturers. These transactions are underpinned by amortising, fixed-rate loans, usually with tenures of three to five years.
“The market benefits from a high degree of granularity, as pools are composed of small, geographically diversified loans,” S&P Global Ratings notes.
Australian auto loan ABS has maintained strong performance, driven by low delinquencies, effective servicing, and structural credit enhancements.
“Delinquencies and losses have remained low, reflecting the stable economic environment and well-managed portfolios,” S&P says.
However, risks are evolving. Rising interest rates and the growing adoption of electric vehicles (EVs) pose new challenges. In particular, residual value (RV) risk may increase as the market transitions toward EVs, potentially impacting the resale value of older vehicle models.
The Australian auto ABS market mirrors trends observed in Europe, the Middle East, and Africa. Fitch Ratings recently reported that arrears in EMEA auto ABS are plateauing, with the three-month average 30+ day delinquency index in Q3 2024 at 1.06%, up just 1 basis point from Q2. Meanwhile, the annualised loss index rose to 0.50%, remaining low in absolute terms.
“The pace of decline in used car prices significantly slowed in Q3 2024, leading to overall stabilisation,” Fitch notes. This stabilization benefits RV risk and recovery levels, reducing downward pressure on sale proceeds of loans originated during periods of unusually high used car prices.
In Australia, similar trends in used car prices may provide relief for recovery rates. With delinquency rates already at historic lows, issuers and investors remain optimistic about sustained performance.
Globally, regulatory challenges are shaping auto ABS markets. In EMEA, the Financial Conduct Authority (FCA) is consulting on extending the response time for complaints related to commission disclosure, following a Court of Appeal ruling.
“This could set a precedent that leads to significant liabilities for lenders,” Fitch highlights, noting the potential for large reimbursements or loan rescissions in cases of inadequate disclosure.
Although such issues have not emerged in Australia, the global emphasis on transparency serves as a reminder for issuers to ensure robust compliance with local regulations.
Auto ABS issuance remains strong across markets. Fitch reports that EMEA issuance reached €8.1bn in Q3 2024, exceeding historical averages. This trend reflects robust investor appetite and confidence in the sector's stability.
In Australia, green securitisations tied to EVs and hybrids are gaining traction. “Sustainability is becoming a key focus for issuers,” S&P notes.
The outlook for Australian auto loan ABS remains positive. “With low delinquency rates, stable recovery levels, and growing investor interest, the market is well-positioned for continued growth,” S&P states.
Lessons from EMEA markets, such as the plateauing of arrears and stabilisation of used car prices, offer additional confidence in the resilience of auto ABS. Fitch affirms this sentiment, noting: “Auto ABS continues to demonstrate strong fundamentals, even amid macroeconomic uncertainty.”
Selvaggia Cataldi
29 November 2024 11:03:29
SRT Market Update
Capital Relief Trades
Synthetic debut
SRT market update
Inbank, a financial technology company with an EU banking license, has completed its first synthetic securitisation with the European Investment Bank Group (EIB). Founded in 2010 in Estonia, Inbank established its first branch in Poland in 2017.
The transaction is backed by PLN 635m (€147m) in solar panel loans to private individuals aimed at accelerating Poland’s green energy transition and supporting green lending. In cooperation with the EIB and the EIF, this landmark transaction will provide capital relief and enable Inbank to provide up to PLN 701m (€163m) in new, more competitively priced loans to private individuals in Poland over the next three years.
Structurally, the executed transaction was a three-tranche structure supplemented by synthetic excess spread. The EIF offers protection on the senior, or the least risky tranche, worth over PLN 549m (€127m), half of which is counter-guaranteed by the EIB. In addition, the EIF further provides protection on more than PLN 76m (€18 million) of mezzanine tranche, which is counter-guaranteed by the European Commission’s InvestEU programme. The junior tranche – worth around PLN 10 million (€2,318 million) – is retained by Inbank.
Such collaboration becomes the EIB’s first entirely green InvestEU securitisation in Poland. Alvarez & Marsal acted as arranger on the transaction.
Vincent Nadeau
25 November 2024 10:21:30
SRT Market Update
Capital Relief Trades
In with the new?
SRT market update
If the context of spread compression has been heavily reported on (and sometimes deplored), SRT investors expect levels to remain tight in 2025.
In the US, volumes have been spotty so far this year. While the regulatory momentum experienced in September 2023 triggered an initial wave of issuance, many participants in the US remain disappointed by 2024 not being the year the CRT market took off, as one investor in the know shared early estimates for 2024 issuance volumes to sit around an 8-9% increase on last year, building on the 6-7% rise seen in 2023. While this remains far off the steady 20-25% annual growth seen in Europe over the last decade, 2025 is expected to remain no different in the US. Market participants all seemingly agree the only cause for a major increase in issuance volumes next year to be the result of large, singular transactions rather than a sharp increase in deal numbers.
Although a good flow of new transactions are reported to be on the cards for next year, the SRT market is growing increasingly more in line with the wider credit markets – and many in the market are wary of how this may affect how growth appears going forward.
“We had one of the best credit cycles for a generation,” said one asset manager. “But as the performance data comes out, we need to take it with a grain of salt.”
Looking to 2025, investors are expecting to see the same standardised issuances from the European and North American markets. In addition, following the success of auto and CRE-backed SRT transactions, the exploration of asset classes not yet and lesser utilised in SRT transactions is expected to continue as banks look to utilise asset classes not yet seen in SRT transactions.
Claudia Lewis
26 November 2024 14:43:51
SRT Market Update
Capital Relief Trades
ESG blueprint
SRT market update
BBVA and Dutch pension fund investor PGGM have completed a €2bn synthetic securitisation, uniquely structured with an ESG-linked pricing mechanism that ties 40% of the portfolio to ESG performance metrics.
In linking capital costs to sustainability targets, the SRT sets a benchmark for integrating ESG factors into capital markets. The transaction’s ESG-linked pricing mechanism adjusts the cost of capital based on the underlying companies' progress toward key sustainability goals (including reducing greenhouse gas emissions, enhancing water efficiency, and improving gender diversity in leadership positions, among others).
Structured to meet the EU’s STS criteria, the transaction delivers 81% capital relief for BBVA. The global portfolio comprises loans to large corporate clients across the United States, Spain, and other European markets. The transaction marks BBVA and PGGM’s fourth partnership.
Commenting on the trade, one SRT investor highlights a lot of “market interest and enthusiasm.” They note that the trade’s coupon step-down mechanism on green criteria acts a “blueprint” for the market. They add: “This is key as this is how you get rid of most of the greenwashing risk.” Moving forward this can prove a catalyst for further issuance, notably for corporate portfolios where ESG points of reference are more easily identifiable. The investor further argues that large asset managers and (re)insurers (with significant ESG allocation and sustainability goals) will be able to afford a 15-20bps coupon step-down.
Vincent Nadeau
27 November 2024 13:59:20
SRT Market Update
Capital Relief Trades
CEE launch
SRT market update
UniCredit Bank Czech Republic and Slovakia (UniCredit CZ&SK) and PGGM have completed an SRT referencing a €1.7bn portfolio of corporate loans SRT.
The transaction, labelled as Project ARTS Morava, marks the SRT debut of UniCredit CZ&SK as an issuer. Additionally, this is the first-ever directly issued CLN by a Czech bank, as well as the first STS-compliant transaction in Czech Republic and Slovakia.
Its €1.7bn reference portfolio consists of corporate exposures granted to clients in both Czech Republic and Slovakia. The capital structure includes retained first loss and senior tranches, and a second loss tranche purchased by PGGM on behalf of its client PFZW, the Dutch pension fund for the healthcare sector.
The transaction also includes ESG reporting, which reflects UniCredit CZ&SK’s commitment to sustainability and provides an accurate and transparent assessment of the ESG profile of its portfolio
The resulting capital relief benefits, achieved both at group and local level, confirm UniCredit’s strategy to increasingly use SRT as an effective tool to increase capital efficiency, with the ambition to expand it further to new asset classes and new legal entities in the group in Central and Eastern Europe.
Vincent Nadeau
28 November 2024 10:46:29
SRT Market Update
Capital Relief Trades
Views from the market
SRT market update
While pricing is certainly tighter than it has historically been, investors report that the SRT market is in a “good place”. One investor unsurprisingly contends that the current spread environment has triggered a pickup in issuance, which in turn, should pull pricing back up and provide some equilibrium in the market.
Of course, some investors have reported that the current compression undeniably affects the risk/return appeal and have suggested potentially exiting the market. And while consistency of capital is beneficial to the market, the fact that rates will probably remain higher for longer (notably given inflation figures in the UK and US), should compensate to an extent for tighter spreads. At the same time, one investor notes that: “Overall, coupon-wise, as opposed to spread-wise, you're still better off than where you were three years ago.”
While covering securitisations, discussions around regulations or regulatory frameworks are never distant. On this topic, the investor says: “Most of the chatter these days is around where Basel 3.1/4 is going to end up: Whether the US just now drops it all together or dilutes it further and what does Europe and the UK do for competitiveness purposes?”
They continue: “There is not a whole lot of time left and something has to change. There is a decent amount of lobbying going on in that respect.”
Similarly, market sources have reported that certain issuers are fearing revisions in the treatment of the synthetic excess spread, resulting in a rush of issuance.
On this topic, the investor says: “I don't think that is impacting issuance outside of consumer (loan) transactions. And there aren't a lot of consumer transactions or sizable ones. Therefore I don’t feel this is quite meaningful in the context of the overall market (it probably affects like 5% of trades that get done).
They conclude: “The uncertainty around the treatment of the synthetic excess spread has gone on for about two years. However you have very strong lobbying for EIF to push back on this since all of their transactions depend on the synthetic excess spread, otherwise they can't get the tranching to show that their position is investment ready for that.”
Vincent Nadeau
28 November 2024 16:13:43
SRT Market Update
Capital Relief Trades
Two-in-a-row
SRT market update
Sustainability is making a comeback in the synthetic securitisation market this week, as the European Investment Bank Group (EIB) closes on its second climate transition-linked transaction this week (SCI 25 November).
In partnership with Santander, the EIB signed today on a €183m transaction intended to support the improvement of the energy efficiency of the housing in Portugal. Santander will receive €91.6m of unfunded protection to an upper-mezzanine tranche from the EIB, which they will then double in new financing for green mortgages. The transaction’s lower mezzanine tranche is protected by private investors.
Following their successful partnership in 2023, the agreement will provide individuals, homeowners’ associations, SMEs and mid-caps with the funds necessary to support the construction of new and the renovation of existing buildings to meet the increasing energy efficiency standards. Projects supported can receive up to €25m, with a limit of €12.5m in financing per project over a minimum two year period.
Claudia Lewis
29 November 2024 10:49:26
SRT Market Update
Capital Relief Trades
Final countdown
SRT market update
Santander is gearing up to close on another unfunded UK mortgage-backed SRT (around the £1bn mark) before year-end, according to new market intel. After news of the bank closing on a synthetic trade with the EIB, focuses have shifted towards Santander’s next steps. Although only one further SRT is expected from Santander this year, 2025 is expected to bring more innovative transactions alongside tried and true programmatic deals.
The next transaction on the horizon is believed to be a large funded SRT secured by a portfolio of major corporations in the US and Europe. However, consumer deals are expected to remain off the table in the immediate term.
In addition, participants in the know are also hinting at the forthcoming execution of Aracataca trade, rumoured to be coming soon.
Claudia Lewis
29 November 2024 17:09:00
Market Moves
Structured Finance
Strategic alliance
BC Partners Credit joins forces with Piper Sandler
BC Partners Credit, the US$8bn credit arm of global investment firm BC Partners, has formed a strategic alliance with investment bank Piper Sandler to take advantage of an imminent wave of refinancing.
With five-year callable notes issued in 2019 and 2020 nearing maturity over the next 12-18 months, the partnership aims to provide solutions to clients negotiating this landscape amid varying rate predictions.
“Piper Sandler’s extensive relationships with thousands of small and mid-cap financial institutions, paired with our underwriting expertise, positions us to help navigate upcoming debt maturities effectively,” says Sam Reinhart, head of FIG solutions at BC Partners.
Unlike traditional approaches reliant on major rating agencies, BC Partners prioritises internal fundamental credit analysis. “We’re credit underwriters at heart,” says Reinhart, explaining that the firm’s approach is well-suited to Piper Sandler’s clients, many of whom have issued unrated or minimally rated notes often by rating agencies outside the big three of Moody’s, S&P and Fitch.
“We have the ability to effectively underwrite these hundreds of small community bank regional bank and non-bank financial offerings that may be coming down the pipeline, and we can get in early with Piper Sandler in terms of structure, pricing, to deliver execution certainty and confidence to their clients,” he adds.
The partnership has already closed several transactions, with a strong pipeline of deals expected through the remainder of 2024 and into 2025. “Post-Thanksgiving, we anticipate significant activity, with multiple transactions coming to market by year’s end,” says Reinhart.
In addition to refinancing, the alliance aims to support increased merger and acquisition (M&A) activity in the banking sector because of regulatory and economic changes. “M&A often involves balance sheet restructuring, and we’re well-positioned to provide the asset expertise and capital needed for these transitions,” he explains.
Another area of focus for the collaboration will be a joint exploration of SRTs, as these products gain traction among smaller and regional institutions.
“It’s not a matter of if, but when, smaller and regional institutions will adopt these tools. Our role is to help educate and structure these opportunities for clients as the market matures,” notes Reinhart.
The alliance also makes sense in terms of BC Partners Credit’s strategic focus on insurance solutions and specialty finance. Piper Sandler’s client base, which spans community banks, asset managers, and fintech companies, complements BC Partners’ expertise in securitisation, asset-based lending, and structured credit products.
“Our strategic focus is in this space is twofold: insurance solutions and specialty finance. The Piper Sandler alliance is a perfect fit for both,” explains Reinhart. “It gives us the opportunity to leverage their broad client base and expand our efforts in these key areas.”
The collaboration will enable innovative financing solutions, particularly in specialty finance as many assets are securitisable, says the firm.
"We’re excited about creating tailored solutions that bring securitisation expertise into the conversation. Senior tranches will pair nicely with our and our clients’ insurance capital and junior tranches will fit nicely into our opportunistic funds, supporting the borrowers broader financing needs,” he notes.
The alliance also reflects BC Partners Credit’s broader growth strategy, including the firm’s recent acquisition of Runway Growth Capital, an established venture lender.
“This partnership, much like our acquisition of Runway, opens up new opportunities to deliver innovative capital solutions,” concludes Reinhart.
Marta Canini
26 November 2024 15:32:43
Market Moves
Structured Finance
Job swaps weekly: Weil names new partners
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees Weil Gotshal & Manges promoting three structured finance and derivatives specialists to partner. Meanwhile, Kirkland & Ellis has snapped up a veteran fund finance specialist as partner, while White & Case has made a number of promotions to local partner and counsel.
Weil Gotshal & Manges has promoted three structured finance and derivatives specialists to partner, as part of the election of 18 new partners. Andrew Lauder (pictured) has been promoted in London, while Jeffrey L Dawidowicz and David M Jackson have been promoted in the New York office.
Lauder joined Weil in early 2019, having previously spent eight years at Allen & Overy and five years at Simmons & Simmons. He has a particular focus on TRS and repo-linked funding structures, synthetic securitisations, CLOs, repackaging transactions and other asset-backed financings.
In New York, Dawidowicz, who has been with the firm for 11 years, advises issuers, underwriters, placement agents, lenders and collateral managers in all aspects of structured finance transactions. Jackson joined Weil in 2016 and advises issuers, underwriters, borrowers, lenders, administrative agents, placement agents and investors in all aspects of secured loan financings and 144A offerings.
Elsewhere, Kirkland & Ellis has appointed Clifford Chance veteran and fund finance specialist Andrew Husdan as partner. Husdan leaves his role as partner at Clifford after 20 years with the firm. His practice includes syndicated and bilateral fund financings, manager/GP facilities, subscription/capital call facilities, continuation fund leverage and NAV-based facilities.
White & Case has promoted Daniel Sander and Marcin Zawadzki to local partner in its capital markets practices in Frankfurt and Dubai respectively, and Narissa Lyngen to counsel in its tax practice, based in New York. The elevations are part of a wave of promotions comprising 22 new local partners and 27 new counsels.
Sander joined the firm nine years ago and focuses on equity and debt capital markets transactions including issuance programs for bonds, certificates and other structured products, standalone issuances, registered bonds and Schuldscheindarlehen.
Zawadzki has been with White & Case for three and a half years, having previously spent 10 years at Clifford Chance. He specialises in public and private conventional and Shari'ah-compliant capital markets transactions, as well as on public and private structured finance transactions.
Lyngen joined the firm in 2013 after graduating from Harvard Law School. She focuses on cross-border and domestic taxation related to mergers and acquisitions, securities offerings, securitisations and financing transactions.
Hamilton Insurance Group’s Bermuda-based insurance and reinsurance underwriting platform Hamilton Re has hired Validus Reinsurance’s Sergio Lottimore to serve as vice president in its newly created credit, bond and political risk reinsurance division. Lottimore leaves his position as vice president and financial lines underwriter at Validus after three years with the business, having previously spent 15 years at MS Amlin. In his new role, he will report to Peter Riihiluoma, senior vice president and head of specialty reinsurance at Hamilton Re.
Kenny Wastell
29 November 2024 07:01:08
structuredcreditinvestor.com
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