Contents

ABS

Music ABS: the loudest topic in IP securitisation

SFVegas speakers hailed music as a 'non-correlated asset with infrastructure-like stability'

Discussions around the next frontier of intellectual property (IP) securitisation at the SFVegas conference last week spanned from film and TV financing to drug and pharmaceutical royalties. However, one topic kept stealing the spotlight: music ABS. With its rapid growth since the Bowie bonds era and rising investor confidence, music royalties have solidified their place as a core, infrastructure-like asset class.

One of the defining characteristics of music ABS is its long duration. Paul Sipio, md at Apollo Global Management, likened music copyrights to infrastructure assets: predictable, stable and deeply ingrained in everyday life.

“At its core, it’s about intellectual property – the artist and songwriter’s contributions to modern music,” said Sipio. “At Apollo, we invest in other esoteric asset classes, from aviation to pharmaceuticals, but we certainly like music. Its ubiquity underpins its investment appeal.”

Scipio illustrated this concept with an analogy: “Most of you flew here to attend this conference and listened to music in the meantime.”

Music benefits from extended longevity

Music royalties are largely non-correlated with broader market movements. Even in downturns, people listen to music through streaming services, radio or background play. 

Unlike film or TV financing - which face higher obsolescence risks - music catalogues enjoy extended longevity and often gain renewed value through sync licensing and streaming playlists. “Music, unlike pharmaceutical patents, doesn’t have an expiry date in the same way, but audience engagement patterns do shift over time,” noted Yezdan Badrakhan, md at MUFG.

Unforeseen events, such as Taylor Swift’s decision to re-record her early albums, exemplify how artist-driven actions can impact the value of original recordings by shifting fans’ preferences. Understanding consumption trends and predicting longevity is critical for investors looking to securitise these assets effectively.

Bob Valentine, ceo of Concord Music, pointed out that nostalgia plays a powerful role in music monetisation. “I’m not just selling music royalties, I’m selling a rent on nostalgia,” he explained.

Streaming services and social media virality continuously unlock revenue from past hits, making them financial assets with recurring and sticky cashflows.

Concord’s success in placing three songs in the latest Super Bowl’s 42 sync placements exemplifies the industry’s ability to actively manage and maximise value from its catalogues.

Chris Baffa, senior director at KBRA, emphasised that music generates revenue in numerous ways beyond just streaming. “Platforms like Peloton integrate music into their business models, making it a key revenue driver rather than just a secondary feature,” he noted.

Growing investor confidence in valuations 

The surge in music ABS issuances in past months reflects investors' growing comfort with the asset class and a deeper understanding of its valuation dynamics, which depend on factors such as portfolio vintage, growth projections and how terminal value is determined. The involvement of major players – including Apollo, Barclays and many other institutional investors – in the asset class has bolstered confidence, while data transparency from streaming platforms has improved valuation precision.

The Covid-19 pandemic, which temporarily suspended live performances, underscored the resilience of recorded music and publishing revenues. Panellists reflected on how music publishing functions on a hybrid model, balancing consumption-based revenue with active rights exploitation, making it a flexible and adaptable financial asset.

AI-generated content and potential shifts in IP rights could impact music valuations, however. SFVegas speakers expressed optimism about finding the right balance between AI’s benefits and creator protections, but the legal framework remains a moving target.

Another challenge is market saturation. With streaming accounting for two-thirds of music revenue, continued growth hinges on global expansion, new licensing opportunities and innovative monetisation models.

As digital adoption rises, emerging markets like India and Brazil are poised to offer significant opportunities for growth in music ABS. As Valentine put it, “unlocking value for artists” through monetisation is not just a financial play, it’s a fundamental shift in how society values music.

Marta Canini

ABS

Expanding horizons for renewable ABS

As investor interest and regulatory support surge, the European renewable ABS diversifies beyond solar, exploring new green asset classes

The European renewable ABS market is poised for significant growth, driven by increasing investor interest, regulatory tailwinds and evolving financing needs. In a recent discussion hosted by KBRA, Gregor Burkart, head of structured finance at Enpal, Erik Welin, loan officer at the EIB, and Barclays’ Gordon Beck, md of securitised products solutions, shared their perspectives on the market's evolution and the future of renewable ABS beyond solar.

The success of Enpal’s Golden Ray transaction, the first public securitisation of residential solar loans in Europe – a key focus of the latest episode of SCI’s In Conversation podcast, where Burkart appeared as a guest – has paved the way for further developments in the sector. During KBRA’s discussion, Burkart emphasised the importance of diversification, stating: “One key objective for us for the next 24 months is to expand beyond solar into heating solutions and smart energy platforms. Heat pumps, in particular, present a major growth opportunity.”

Heat pumps are gaining traction as governments push for more energy-efficient home heating solutions. Enpal has already entered the market and, according to Burkart, installed c. 4,500 units in Germany in 2024 alone. The company also has expansion plans across Europe, leveraging regulatory support and rising consumer demand for lower-carbon heating technologies.

Beck highlighted the growing role of corporate and industrial solar financing, drawing parallels with trends seen in the US: “We do expect the theme of commercial and industrial (C&I) solar to translate into Europe, as corporates and SMEs continue to roll out renewable energy solutions across their estates. Pricing dynamics now strongly favour renewables over fossil fuels, which is an important driver.”

According to Beck, ABS structures provide an attractive alternative to project finance, particularly as renewable energy projects mature and cash flows become more predictable. Barclays has already executed private financing transactions incorporating both C&I and residential solar and expects further ABS issuance in these segments.

Beyond solar: emerging green asset classes

A crucial factor in the market’s expansion is investor appetite and risk considerations. Welin explained why the institution chose to invest in the Golden Ray transaction and how it aligns with their mandate: “We saw a historical opportunity to be involved in the first public European solar ABS. Green financing is at the core of what we do and this transaction ticked multiple policy goals, from supporting renewable energy to fostering capital market development.”

Welin also noted the challenges posed by long-tenor loans (up to 25 years) and the importance of detailed due diligence in understanding the risk profile. The EIB has also supported renewable ABS through synthetic securitisations, including a deal in Poland financing solar installations via the Estonian bank, Inbank.

Beyond solar and heat pumps, there are emerging opportunities in other green asset classes. Smart meters, for instance, are gaining regulatory support across Europe, making them a viable candidate for future securitisation. Burkart pointed out:
“Smart meters and other digital infrastructure will be key areas of growth. Regulation is driving adoption and these assets provide stable, long-term cash flows suitable for ABS structures.”

The discussion also touched on the broader shift from project finance to ABS in the renewables space. Beck noted that while project finance remains the dominant funding mechanism, ABS offers a complementary avenue, particularly for assets with established performance histories.

The European renewable ABS market is set to expand beyond solar, with heat pumps, smart meters and C&I solar financing emerging as key areas of growth. Investor interest, regulatory support and evolving financing structures will shape the next wave of issuance, creating new opportunities for issuers and investors alike. As Burkart aptly summarised: “It can’t be an Enpal-only market. We need more issuers to establish this asset class and build a strong investor base. The more participants, the stronger the market.”

Selvaggia Cataldi

CLOs

CLO investors face rising risks

Declining credit enhancements, increased warehouse activity, and the need for stress testing shape the market

CLO investors are grappling with declining credit enhancements and tighter spreads, raising concerns about risk assessment and future returns. Speaking to SCI, market sources highlight challenges for mezzanine and equity investors as attachment points weaken.

Despite these pressures, increased warehouse activity suggests stronger European CLO issuance ahead. SCI’s sources emphasise the importance of stress testing and careful credit selection, while warning that deflation remains an overlooked risk in the current market.

“One issue that concerns investors is the significant decline in credit enhancements over recent years,” according to a senior CLO trader.

“This presents a bigger problem because if you purchase a double-B credit today with a 9% attachment, you would have been buying single-Bs coming out of COVID with a 10% attachment. This raises concerns; we know that these attachments have decreased, and now investors are facing tighter spreads with less favourable bonds,” he explained.

The senior trader noted that this situation is particularly problematic for those investing in mezzanine securities or equity. However, he remains optimistic about equity investments, considering the timeframe for recovering their value.

“Interestingly, purchasing some equity today seems to be less risky than investing in double-Bs due to their current pricing. If I expect to get my money back in about four years, that’s historically not a bad timeframe,” he said.

The senior trader highlighted that in this challenging environment, taking on what may appear to be more risk could actually involve less risk when evaluating cash flow profiles.

Increased warehouse activity signals higher CLO issuance

From a CLO arranger’s perspective, one of the main factors currently affecting the CLO market is the increase in number of warehouses opened this year.

The head of CLO primary at a European bank told SCI: “I believe new issuance volume in Europe will be significantly higher than last year.”

“While we need assets for those warehouses that may have a longer lifespan, our current numbers of incorporated warehouses compared to last year suggest we are much better off. Additionally, as we look at resets, there are certain vintages that are almost forgotten or overlooked, but they're going to be ready to come into play very soon.”

He predicted that this year could resemble the vintages of 2018, 2020, and 2021 when it comes to triple As, which are now in the low 120s in Europe.

Importance of stress testing

Tightening spreads and credit quality are also key drivers in the CLO market, while portfolio stress testing has become an essential tool for managers to measure resilience, enhance performance, and adapt to changing conditions.

The senior trader goes on to explain that stress testing can be approached in two ways: by evaluating yields or through fundamental analysis.

“When deciding which bonds to buy, my choice could depend on either the bond's yield or its quality. We run stress tests on all options to see if the results align with expectations. Sometimes, bonds can act like different types. For example, you might encounter a double-B rated bond that behaves more like a single-B rated bond, lacking the expected characteristics,” he said.

The fundamental analysis approach may lead to the decision not to purchase any bonds at all and instead keep funds in cash, returning them to investors. In this scenario, fundamental analysis helps determine whether it's the right time to invest.

“Over the last 20 years, we've experienced zero interest rates. Back in the 1980s and 1990s, the default rate hovered around 5%. It's somewhat surprising that we haven't seen more defaults, though they may be on the horizon,” the senior trader added.

Deflation: An underestimated risk?

On potential risks in the CLO sector, SCI was told that deflation risks are often underestimated.

"One aspect that isn’t often considered but poses a potential downside risk is deflation. We have observed deflation in China, and while it isn’t widely expected in the US, there are valid reasons for this outlook,” the senior trader explained.

“The US has productivity growth, whereas the UK and Europe do not. Therefore, we cannot completely rule out the possibility of deflation in some G7 economies, which could certainly pose a risk for investors."

Regarding potential improvements in the European CLO market, the senior trader emphasised the importance of timing when buying credit, especially in CLOs where the majority of holdings are in leveraged loans.

"If you buy at the wrong moment, you risk losing money. It is crucial to know what to buy and when to buy it. At this stage in the economic cycle, merely being invested is not sufficient; you must be aware of potential pitfalls. Prices have risen significantly, and spreads have tightened, leading to a shift in how risk is assessed today compared to three years ago. Consequently, it is essential to approach the market with caution at this time,” he concluded.

Camilla Vitanza

CLOs

February CLO market update

European CLO market surges in early 2025 with record issuance, tighter spreads, and a growing ETF presence

Deutsche Bank’s latest CLO monthly report highlights how February was another busy month for the European CLO market, with new issuance totalling €9.1bn across 19 deals, while reset volumes reached €2.2bn from five transactions. This brings year-to-date (YTD) new issue volumes to €12.2bn from 26 deals across 24 managers—double the volume compared to the same period last year. Reset and refinancing activity has also accelerated, with €4.8bn across 11 deals, a significant increase from 2024 levels.

The first two months of 2025 are aligned with Deutsche Bank’s projected €50bn full-year forecast, requiring a steady €5-6bn monthly run rate. February saw a mix of both established benchmark and emerging CLO managers, indicating healthy participation across the spectrum. Notably, Palmer Square’s PSTET 2025-1X stood out with a €635m print, marking the largest European CLO of the 2.0 era and adopting a more highly levered approach to a static deal, the bank highlighted.

Despite overall tightening, further spread compression may face headwinds, according to the German bank. US AAA spreads reached 113 bps in January and have plateaued since, limiting further narrowing in Europe. Adjusting for the currency basis, European AAAs still trade wider than their US counterparts, with a spread pick-up in the high teens (19 bps).

Mezzanine spreads tighten, but at a slower pace
The most notable shift has been in mezzanine tranches, where spreads have tightened significantly since December 2024. Investment-grade (IG) tranches are 35-50 bps tighter, while non-IG have compressed by 110-125 bps. However, the pace of tightening slowed in February, contributing only 5-20 bps for IG and 15-30 bps for non-IG, Deutsche Bank reports.

Pipeline outlook suggests continued issuance momentum. Acer Tree is preparing to price its second deal following a three-year hiatus, supported by a partnership with Ymer, a seasoned Nordic CLO investor. This quasi-captive equity arrangement highlights an emerging trend—equity backstopping by long-term investors—which remains critical in a market facing ongoing spread compression on the asset side.

The reset and refinancing market has also maintained its strong momentum. So far, 11 deals accounting for €4.8bn have reset, with February contributing 46% (€2.2bn) of the total. While the run rate remains below Q4 2024 levels, Deutsche Bank forecasts €40bn in reset/refi volume for 2025, with risks skewed to the upside if spreads remain tight.

Much of the reset activity is focused on 2022 vintage deals, which represent 42% of all resets, followed by 2023 vintages at 24%. Notably, 38 deals achieved debt cost savings of 50-155 bps, while 31 deals experienced a cost increase ranging from 10 to 62 bps. This wide range of outcomes underscores the selective nature of reset economics, especially as tightening pressures persist.

CLO ETFs: A growing presence
Another key development was Invesco’s launch of two new European-based CLO ETFs, including Europe’s first USD-denominated AAA CLO ETF. These ETFs are now listed on major European exchanges, including the London Stock Exchange (LSE), Deutsche Börse, Euronext Milan, and the SIX Swiss Exchange. This follows the recent introduction of Janus Henderson’s European CLO ETF and Palmer Square’s planned suite of three European CLO ETFs in Q1 2025.

While these new vehicles represent a positive development for market demand, their impact will take time to materialise. Historical precedent from US CLO ETFs suggests that it may take a sustained period for these products to scale and drive incremental demand for AAA European CLOs.

Year-to-date redemptions in the European CLO market stand at €3.9bn, and Deutsche Bank expects fewer paydowns in 2025 compared to the €26bn recorded last year. Currently, 14 deals are exploring liquidation, which could add €3.5bn of further CLO debt paydowns in addition to the €3bn already amortised in Q1.

An active and competitive outlook
Deutsche Bank’s forecast for 2025 reset and refi activity remains €38bn and €2bn, respectively. However, if the rapid spread tightening seen at the beginning of the year continues, a larger share of deals could become economically viable for reset—potentially pushing these figures higher.

Despite a challenged CLO arbitrage on a stand-alone basis, the market remains active, supported by tightening liability spreads, innovative financing structures, and the emergence of new vehicles like CLO ETFs. With strong issuance, an expanding pipeline, and ongoing reset momentum, 2025 is set to be another dynamic year for the European CLO market.

Ramla Soni

ABS

Cleco calling

Lousiana utility in the market with US$305m recovery bond.

Cleco is in the market with price guidance for a US$305m two-tranche recovery utility bond, dubbed Cleco Securitization II, via JP Morgan (structuring) and SMBC, say reports.

The deal is expected to settle on 12 March. The US$100m A1 tranche matures December 2034 and will price in the region of 65bp over the five-year Treasury, while the US$205m A2 tranche is due June 2045 and will price to yield around 80bp over the 20-year Treasury.

Both tranches are rated AAA.

The interest rate payments are supported by electric utility payments imposed upon customers by Cleco – formerly the Central Louisiana Electric Company. The bond has been issued to pay for plant retirement, say sources.

This is a debut issue from Cleco, which serves 300,000 customers in Louisiana.

In other news from this sector, the Arizona state legislature is poised to pass the necessary law to allow storm recovery issuance from state utilities.

Pacific Gas & Electric (PG&E) are awaiting a decision on its request for a US$2.3bn securitization to cover vegetation management costs, add sources.

While the cost of the recent ruinous LA wildfires has yet to be ascertained, estimates have ballooned to US$250bn and insurers are on the hook for only a portion of the damage. West coast utilities are likely to be making increasing use of the storm recovery securitization market.

Simon Boughey

Structured Finance

FT snaps up Global ABS and ABS East

Sale of Invisso by Delinian sees structured finance conferences come under FT Live banner

The Financial Times has acquired Invisso, parent company of structured credit conferences Global ABS and ABS East, from Delinian. The deal will see the transfer of Invisso’s full portfolio – also including the Central & Eastern European Forum, the Covered Bond Congress and the Global Borrowers and Bond Investors Forum – to the FT Group.

The transaction comes two years after private equity firms Astorg and Epiris completed the acquisition of Euromoney and separated the business into two entities, with Astorg taking control of Fastmarkets and Epiris retaining the remaining Euromoney assets. Euromoney was subsequently rebranded under the Delinian name.

Under the terms of the latest acquisition, Invisso’s events will be integrated into the Financial Times’ events arm, FT Live, which is known for bringing together global leaders across the financial markets to discuss pressing issues.

According to the companies, the schedule for the upcoming conferences – including Global ABS in June and ABS East in October – will remain unchanged during the transition.

“We are thrilled to bring our events under the recognised financial media presence of the Financial Times,” stated Invisso md, Alex Grose, on the transaction. “This acquisition provides a natural fit for our structured finance, bonds, and private credit portfolios.”

Delinian’s divestment of Invisso is expected to complete at the end of March, with all events from the beginning of April set to fall under the FT Live brand.

Claudia Lewis

Risk Management

Insurers trade new products to relieve downgrade pain

DelphX CM unveils instruments to address ballooning capital charges

Two deals are being currently negotiated between four insurers and hedge funds with the use of a new product designed to hedge increased capital charges, according to Patrick Wood ceo and president of DelphX Capital Markets (DCM)- creator of the innovatory instruments.

The transactions are expected to settle imminently and are worth US$3bn in notional principal. It is hoped they will be the forerunner of many more by insurance firms seeking redress against often punitive increases in capital in the event of downgrades of bonds they hold.

The firms involved are “two of the largest insurance companies in the US and two household name hedge funds." 

The structured instruments are what DCM, a Toronto-based provider of debt management tools, calls its Credit Rating Securities (CRS). These are the collateralised put obligations and the collateralised reference notes, but both are short-term 13-month positions intended to reimburse insurers and portfolio managers for suddenly much greater capital charges.

“We decided to query The Street, and specifically the insurance industry, to ask where their current pain points were. What we found out is the biggest pain point is capital charges. When bonds are downgraded, especially from investment grade to non-investment grade, capital charges skyrocket,” Wood tells SCI.

The increases in capital in a downgrade are eye-watering. If a bond is downgraded from triple-B to double-B+, the National Association of Insurance Commissioners (NAIC) imposes an increase in capital from 1.52% to 3.15%, meaning capital has increased by 1.63%. This is bad enough, but insurance firms frequently impose additional internal risk metrics of X4, so the 1.63% increase would become a whopping 6.52%.

Insurance firms base their entire business models around risk-based capital, so increases of this kind are very damaging. But, the DCM collateralised put option allows them to cover the additional charge and not have to adjust internally.  

At the moment, the credit default swaps (CDS) represent one of the only hedges against downgrade risk. The buyer of protection pays a bi-annual fee, calculated as a spread over SOFR. But the position only pays out if the reference entity defaults while CRS pays out in the event of a downgrade.

“What is unique is this has a defined payout related to the downgrade and capital charges. It’s not like CDS, which is a spread/duration product. There have been very few new products from Wall Street in the last 10 years and the lack of innovation created a window for us,” says Wood.

Similar, however, to the CDS contract, the buyer of protection pays a premium to the hedge fund which sits on the other side of the trade. DelphX sits between the two as the issuer through a collateralised SPV using the Section 4 (a) (2) statutory private placement exemption language. The custodian is US Bank. The protection buyer has one chance to exercise the note, or put.

“Insurance firms say CDS won’t help. We give them the option to hold on to the bond to ride out the rough weather,” he adds. Boeing, for example, is unlikely to default so CDS will not pay out, but is quite likely to be downgraded. Although in that case the value of the CDS position would increase it is in comparison to CRS a crude instrument and would not compensate the bond holder the exact amount of extra capital it would incur.

The US corporate bond market is worth US$9trn, and almost US$4bn is rated triple-B. Although the product has been developed with insurers in mind, it could be of use to any firm which holds bonds and is vulnerable to increased capital charges as a result of downgrades.

It has taken DCM over five years and cost an estimated US$5m to develop the suite of products.

Simon Boughey

Capital Relief Trades

SEC-OCRA: simplifying the prudential framework

New approach aims to address supervisory formula distortions

A new paper presents a methodology for simplifying the prudential framework for synthetic securitisations while maintaining the current level of required capital and ensuring a consistent level of non-neutrality, regardless of transaction structure. By proposing the SEC-Overall Capital Requirement Approach (SEC-OCRA), the paper introduces a simplified and risk-sensitive framework tailored for synthetic securitisations.

The authors of the paper – ECB senior advisor Fernando González Miranda and Granular Investments md Giuliano Giovannetti – believe that SEC-OCRA addresses the distortions embedded in the current supervisory formulas, such as the outdated 8% base capital charge and the controversial p-factor capital surcharge. “By linking capital relief directly to a bank's overall capital requirement (OCR) and replacing complex RWA density formulas with straightforward thresholds, SEC-OCRA ensures consistent post-securitisation buffers while promoting transparency and regulatory flexibility. It also connects to macroprudential policy through a simple non-neutrality factor, which can be adjusted according to the level of risk aversion or appetite for securitisation (e.g. in response to macroeconomic and financial changes),” the pair note.

The existing capital requirements framework is constrained by structural inefficiencies, such as limited adaptability to macroprudential needs and the difficulty of establishing an intuitive relationship between the RWA density of an underlying portfolio and the capital surcharge mandated by the framework. The SEC-OCRA proposal offers a clear path to simplifying the capital requirement framework, fostering economic benefits and aligning regulatory practices with modern macroprudential policy goals, according to Giovannetti and González Miranda.

The existing prudential frameworks for securitisation – SEC-IRBA and SEC-SA – determine the RWA density for securitisation tranches, differing only in how the p-factor is calculated. A key feature of securitisation is the possibility to replace the RWA density of a tranche with the RWA density of its guarantor if the tranche is guaranteed by unfunded protection (i.e. not collateralised) or 0% in the case of a funded (cash-collateralised) guarantee.

However, there is no easy way to determine what, if any, capital surcharge or discount has been introduced by the securitisation transaction. These approaches determine the RWA of a securitisation tranche, but the formulae and parameters used to calibrate tranche RWA are not clearly connected to the actual capital requirements of the original pool.

Further, the 1,250% maximum density level is linked to a supposed 8% capital requirement for banks, which is enshrined in Level 1 legislation and has not been updated as regulatory capital requirements have evolved. Additionally, the calibration of the p-factor and the risk weight floor is fixed and lacks transparency.

Risk aversion versus economic benefits

In the EU, in particular, Level 1 legislation requires approval by legislators who lack clarity on the level of capital surcharge imposed on securitisation transactions above that of the underlying pool. “Legislators should ideally be provided with a simple choice in the trade-off between their risk aversion to securitisation and the economic benefits it provides,” the paper argues.

It adds: “The current SEC-IRBA and SEC-SA have so many flaws that it is impossible for anyone to judge whether a securitisation will end up with more or less loss-absorbing capacity than the portfolio had before, after junior tranches have been transferred or guaranteed – let alone by how much. In this context, discussions to fine-tune parameters such as the p-factor are meaningless because there is never a clear target that we are solving for.”

By calculating capital requirements based on the OCR instead of the static 8% benchmark, SEC-OCRA aims to rectify distortions present in the current framework. The OCR is a key bank solvency parameter, representing the sum of the total Supervisory Review and Evaluation Process (SREP) capital requirement, capital buffer requirements and macroprudential requirements, expressed as own funds requirements. The OCR encompasses the bank-specific capital requirements under Pillar I, Pillar II and various buffers, including Capital Conservation (CCoB), Globally Systemically Important Institution (G-SIB), Counter-cyclical (CCyB) and Systemic Risk (SyRB) buffers. It reflects the amount of capital supervisors deem necessary for a bank to hold against each unit of RWA.

As of 1Q24, the average OCR across EU reporting institutions was 14.3% of RWA, according to the ECB’s ‘Aggregated results of SREP 2023’ - excluding Pillar 2 guidance CET1, which is not part of the OCR. In contrast, the 8% base capital charge has remained fixed since the implementation of the Basel I Accord.

The difference between the base capital charge and the OCR introduces distortions, as banks must hold more than 8% capital, causing a tranche with an RWA density of 1,250% to absorb more capital than its size. By assigning an unrealistic amount of capital to the junior tranche, less capital than required is allocated to the mezzanine and senior tranches (assuming the p-factor is disregarded).

“Crucially, under CRR Article 249, a junior tranche of €10m, which had been allocated €14m of capital, could be protected by an investor and be cash-collateralised with €10m, reducing the capital allocation back to €10m. However, the €4m difference is not redistributed to the mezzanine and senior tranches, resulting in a lower total capital in the transaction. This capital buffer reduction is counterbalanced by a large p-factor (typically 70%-100%, halved for STS deals), but the combined effect is highly uncertain. The supposed non-neutrality could sometimes be positive but may also be negative,” the paper explains.

Giovannetti and González Miranda’s proposal involves deducting from capital (or assigning an RWA of 1/OCR) for all retained tranches attaching up to a Benchmark (dubbed “Kocra”) and assigning 0% RWA to all retained tranches attaching above that level. The Benchmark level could be the RWA density of the original pool, multiplied by the bank’s OCR, and further increased by an extra 5%-10% to account for non-neutrality, depending on whether the transaction is STS-eligible.

Introducing an adjustable p-factor

Under SEC-OCRA, the p-factor becomes an easily understandable and adjustable 5%-10%, which can be adjusted up or down based on regulators’ changes in preference or aversion to non-neutrality. “The key message is the need to connect capital relief directly with risk-sensitive measures of solvency,” the paper states.

Since the RWA on tranches above Kocra would be zero, they will all be retained and no other bank will invest in those tranches, removing the risk of a cliff effect on synthetic securitisation. Rated mezzanine or senior tranches may be available to third-party banks in traditional securitisations outside of SEC-OCRA, but these are typically externally rated, so the cliff effect is already addressed by the RWAs in SEC-ERBA. Furthermore, under SEC-OCRA, with no RWA floors, any asset class could potentially be available for risk- and capital-sharing without distortions.

While SEC-OCRA may initially appear more stringent for banks than SEC-IRBA, the paper notes that observations from a large sample of transactions across several years and asset classes show that the average SEC-IRBA transaction has a p-factor of 70%-80%. At that level, and with bank OCR in line with the EU average, SEC-IRBA and SEC-OCRA produce similar requirements for loss-absorbing capacity. However, SEC-OCRA achieves this transparently, whereas SEC-IRBA reaches it through a double distortion: overallocation of capital to junior tranches and unrealistic oversizing of the p-factor, with no clarity on the combined outcome.

SEC-OCRA also offers benefits to banks compared to SEC-SA, though there may be a slight reduction in capital efficiency compared to current STS transactions.

Under SEC-OCRA, a bank could afford to retain very junior risk and only place a junior mezzanine tranche that attaches at a relatively higher level compared to today’s standards (for example, at 3%-4% instead of 1%) and detaches at Kocra. This approach allows banks to manage risk differently and potentially reduce costs. It could also appeal to protection sellers targeting lower risks and coupons compared to the majority of today’s SRT players.

Corinne Smith

Structured Finance

Job swaps weekly: Accunia bolsters Copenhagen team

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Accunia Credit Management adding two structured finance pros to its Copenhagen office. Elsewhere, Pallas Partners has snapped up two partners from Kasowitz Benson Torres, while fintech firm Inbank has elected a senior structured finance executive from Spectrum Principal Asset Management to its supervisory board.

Accunia Credit Management has hired two senior executives with securitisation expertise in its Copenhagen office. David Altenhofen has joined as head of investments, while Tiberio Carboni joins as a senior analyst. 

Altenhofen leaves his position as senior portfolio manager at PensionDanmark after six years, during which he focused on high-yield bonds, leveraged loans and CLOs. In his new role he will report to md Jacob Jensen. Carboni joins from BNP Paribas where he served as a global ABS and CLO trading strategist, and in his new role will focus on CLOs, as well as CLNs and ABS.

Meanwhile, Pallas Partners has hired two New-York-based partners with structured finance expertise – Mike Hanin and Jill Forster – from Kasowitz Benson Torres.

Hanin leaves his position as litigation partner at Kasowitz after 20 years with the firm. He focuses on complex financial products, securitisations, financing, securities, real estate, and cryptocurrency.

Forster was a partner at Kasowitz, where she spent five years, having previously spent six years at Brown Rudnick. She represents investment funds and commercial real estate owners in contract, commercial tort and bankruptcy litigations related to ABS, CMBS, complex financial products and mortgage loan purchase agreements.

Fintech company Inbank is to elect Spectrum Principal Asset Management’s Isabel Faragalli to its supervisory board on a three-year term. Based in Zurich, Fargalli joined Spectrum in December 2023 and is European head of investments, with particular expertise in structured finance, investment banking and asset management. She previously spent six years at Credit Suisse, in addition to stints at EFG Bank, Swiss Re and Man Investments.

The appointment will take effect from the beginning of April and also coincides with the election of Sergei Anikin, who has expertise in technology and angel investing, to the board. The development is part of Inbank’s international expansion plans and its goal of transitioning to become a public company.

400 Capital Management has recruited Andrew Fox as director, private credit. He was previously md at Arrow Global Group, which he joined in January 2014 from Merrill Lynch.

Camille Mcleod-Salmon has started a new role as portfolio manager for European CLOs leveraged loans at Fidelity Investments. Mcleod-Salmon makes the move over to Fidelity Investments from Fidelity International, where she served as a portfolio manager on its leveraged finance team since 2021.

Corinne Smith, Kenny Wastell, Claudia Lewis

Alternative assets

Number four for 400CM

Market updates and sector developments

400 Capital Management (400CM), a New York-based alternative credit asset manager, today (March 4) announced that its fourth private credit fund – Asset Based Term Fund IV – has closed with over US$1.39bn in commitments. The initial target was US$1bn.

The fund was launched in December 2023 and has drawn investment from a variety of institutional players interested in exposure to private credit strategies, says the firm.

The original Asset Based Term Fund was launched in 2017 with a mandate to invest in idiosyncratic credit opportunities in private and public European and US markets. The funds are primarily exposed to residential real estate, CRE, consumer finance and so-called specialty finance markets.

That fund has now closed but 400CM launched additional funds in 2019 and 2021.

Simon Boughey