SCI CRT Awards Issue Oct 19

structuredcreditinvestor

Securitisation innovation in focus

Capital Relief Trades

Awards 2019


DEALS

CHANGE,

VALUES ARE

A CONSTANT.

Everyone has different needs. And they

change all the time. What doesn’t change

is the value of relationships.

You can’t put a price on trust.

As a mutual we are wholly devoted to

our policyholders and partners:

providing continuity and assurance in

an unpredictable world.

For Mutual Advantage

libertyspecialtymarkets.com

Liberty Specialty Markets (LSM) is a trading name of the Liberty Mutual Insurance Group (LMIG).

For more information and the Privacy Notice, please see libertyspecialtymarkets.com.


Editorial

London, October 2019

The aim of the inaugural SCI Capital Relief Trades Awards

is to recognise excellence in, and help bring mainstream

attention to, the risk transfer industry. The phenomenal

response and high-quality pitches the SCI team received

during the submissions period for the awards are certainly

testament to the former. At the same time, our hope is to shine a light

on the excellent work that those involved in the capital relief trades

market are undertaking to dispel the stigma that remains associated with

synthetic securitisation in some quarters and to emphasise the utility of

the technology – not only as a risk management tool, but also as a way of

mobilising private capital for environmental and social gains.

We believe that our awards roll of honour on page five of this magazine reflects the

vibrancy and innovation evident across the risk transfer market over the last 12

months. Our congratulations to the deserving winners and honourable mentions of

this year’s awards, as well as to the industry as a whole for its many achievements.

We would also like to thank everyone who submitted a nomination and our

awards advisory board – comprising Kaelyn Abrell of ArrowMark Partners, Robert

Bradbury of StormHarbour, Steve Gandy of Santander and Kaikobad Kakalia

of Chorus Capital (each of whom was recused from judging an award that they

could be nominated for) – for its valuable input. Final selections were made by the

SCI editorial team, based on the pitches we received, colour from other market

participants and our own independent reporting. The qualifying period for the

awards was the 12 months to 30 September 2019.

Looking to the next 12 months, at least one area remains ripe for improvement – the

industry would undoubtedly benefit from being a touch more open. To paraphrase

one investor recently, the best way to grow risk transfer volumes is to increase

publicity around the deals. While it isn’t necessary to reveal every single detail of a

trade, notifying the market that a given transaction has been executed in a given asset

class in a given jurisdiction would inform other issuers about what is plausible.

SCI certainly intends to continue its efforts to help in this regard!

All the best for the year ahead,

Corinne Smith

Editor

Editor

Corinne Smith

+44 (0)20 7061 6331

cs@structuredcreditinvestor.com

Design and Production

Andy Peat

andy@andypeatdesign.co.uk

Contributors

Richard Budden

Stelios Papadopoulos

Mark Pelham

Managing Director

John Owen Waller

jow@structuredcreditinvestor.com

Subscriptions Account Manager

Jon Mitchell

+44 (0)20 7061 6397

jm@structuredcreditinvestor.com

Business Development Manager

David Zaher

+44 (0)20 7061 6334

dz@structuredcreditinvestor.com

© SCI. All rights reserved. Reproduction in any form is

prohibited without the written permission of the publisher.

ISSN: 2043-7900

Although every effort has been made to ensure the accuracy

of the information contained in this publication, the publishers

can accept no liabilities for inaccuracies that may appear.

No statement made in this magazine is to be construed

as a recommendation to buy or sell securities. The views

expressed in this publication by external contributors are not

necessarily those of the publisher.

Printed in England by Print Spin Limited, Jarodale House,

7 Gregory Boulevard, Nottingham NG7 6LB

www.printspin.co.uk

SCI is published by Cold Fountains Media.

Subscription rates:

UK: £1550 + VAT for an annual subscription

ROW: $2480

www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

03


Contents

CONTENTS

05 Roll of Honour 21 Law Firm of the Year

06

Issuer of the Year

24

Credit Insurer of the Year

09

12

14

Arranger of the Year

Transaction of the Year

Impact Deal of the Year

26

28

Advisor/Service Provider

of the Year

Personal Contribution

to the Industry

18

Innovation of the Year

30

CRT News

19

Investor of the Year

35

CRT Data

04 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


SCI Capital Relief Trades Awards 2019 Roll of Honour

Issuer of the Year

SANTANDER

Honourable mention

Lloyds

Arranger of the Year

CREDIT SUISSE

Honourable mention

Banca IMI

Transaction of the Year

SYON SECURITIES 2019 (LLOYDS)

Honourable mention

Santa Fe Synthetic CLO (Mayer Brown, Santander)

Impact Deal of the Year

ROOM2RUN (AFDB, LATHAM & WATKINS, MARINER, MIZUHO)

Honourable mention

FCT Jupiter 2019 (Mariner, SG)

Innovation of the Year

FCT JUPITER 2019 (MARINER, SG)

Honourable mention

Simba (ING Bank)

Investor of the Year

EIF

Honourable mention

D. E. Shaw

Law Firm of the Year

CLIFFORD CHANCE

Honourable mention

Latham & Watkins

Credit Insurer of the Year

ARCH CAPITAL GROUP

Honourable mention

Liberty Specialty Markets

Advisor/Service Provider of the Year

SCOPE RATINGS

Honourable mention

Aon

Personal Contribution to the Industry

MASCHA CANIO, PGGM

www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

05


Issuer of the Year

ISSUER OF THE YEAR

WINNER: SANTANDER

Santander was one of the banks

that actively participated

in efforts to extend the STS

designation to synthetic securitisations,

which culminated

in the EBA consultation paper on STS

synthetics that was published in September.

However, it is the Spanish lender’s

prolific issuance and innovative structural

achievements that render it SCI’s Issuer of

the Year.

According to Steve Gandy, md and head of

private debt mobilisation, notes and structuring

at Santander Corporate and Investment

Banking: “We’ve participated in working

groups bilaterally and with AFME to provide

our views on the merits of extending STS

to synthetics, as well as providing our views

on the EBA’s SRT discussion paper as they

prepare to formalise the paper into a formal

consultation paper. Furthermore, the ECB

has asked for our views on the workings of the

STS framework.”

Indeed, Santander has helped to develop

the securitisation market more broadly. It

is a founding shareholder of the European

DataWarehouse and continues to have a


THE EXPERIENCE WE’VE GAINED

IN ONE REGION OR ASSET CLASS

CAN BE APPLIED ELSEWHERE, SO

YOU DON’T NEED TO REINVENT

THE WHEEL


representative on the board, as well as a founding

member of PCS, with a representative on

the market committee.

As one of the market’s most prolific issuers,

Santander has issued 13 capital relief trades

– both traditional and synthetic – totalling

€25.6bn, across nine countries (US, Latin

America and Europe) and six different asset

classes (SME, large corporate, auto, consumer,

project finance and CRE) since September

2018. In the first half of this year alone, the

bank printed €940.6m of SME tranche

notional, representing Santander’s largest

annual SME synthetic securitisation placement

to date.

Gandy notes: “Santander has a federal

structure, with subsidiaries being responsible

for their own funding and capital management

in coordination with the group. Hence the

wide variety of assets and geographic scope

of the bank’s SRT transactions. Nevertheless,

the experience we’ve gained in one region or

asset class can be applied elsewhere, so you

don’t need to reinvent the wheel.”

Such significant issuance activity mirrors

the bank’s wide distribution strategy and

Santa Fe Synthetic CLO structure diagram

Senior

tranche

Reference portfolio

Guaranteed

tranche

Premium

IFC

First loss

tranche

Financial guarantee

protection

Source: Santander

06 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


Issuer of the Year

SSPAIN 2019-A structure diagram

Portfolio – new and used vehicle loans

to individuals

SANTANDER CONSUMER, E.F.C., S.A.

(Originator / service)

CDS premium

CDS protection

Santander de Titulización,

SGFT, S.A.

(Management company)

FT Santander

Consumer Spain

Synthetic Auto 2018-1

(Issuer - Securitisation

Fund under

Spanish law)

Cash collateral

BANCO SANTANDER

CONSUMER, S.A.

(Account bank)

Cash collateral

Interest

Senior

tranche

CLN

(sold)

First loss

Cash collateral

Investor

Source: Santander

prevalence of publicly syndicated deals. “We

are committed to transparency and want

to improve liquidity in the market through

listing. Furthermore, some of our transactions

– such as the consumer SRTs – have a

funding component, so we’re not just selling

the first loss.”

In particular, Santander has placed €3.5bn

of first loss and mezzanine tranches with 40

different investors, including asset managers,

hedge funds, pension funds, insurers and

global multilateral development banks.

The bank strives equally for both size

and innovation. For example, Santander

veered into unknown territory when it

completed Santa Fe Synthetic CLO, the first

synthetic securitisation transaction ever

executed in Mexico, and the first synthetic

securitisation of auto loans – dubbed FT

Santander Consumer Spain Synthetic

Auto 2018-1.

The bank continued its breakthroughs in

the auto space with the execution of SSPAIN


SOME OF OUR TRANSACTIONS

– SUCH AS THE CONSUMER SRTS

– HAVE A FUNDING COMPONENT,

SO WE’RE NOT JUST SELLING THE

FIRST LOSS


2019-A, which features an unusual CLN

structure, whereby notes are issued directly

by Santander rather than through an SPV. The

structure achieves two goals at once, given

that it’s a format that is both tax efficient and

enables the bank to broaden its investor base

to US Reg S investors.

Innovation has also been reflected in the

cash market. Kimi VII, Santander’s true sale

securitisation of Finnish auto loans, provided

both senior funding and capital relief to the

issuer and was uniquely structured to suit

investors across the capital structure while

also satisfying regulatory requirements on

significant risk transfer. The key structural

feature involved the removal of excess spread

below the class A note, as stipulated by regulatory

guidance.

HONOURABLE MENTION: LLOYDS

Lloyds is another CRT issuer that stood

out for its innovation and deal flow during

the awards time period. Highlights of the

bank’s activity include:

• Multi-asset class approach targeting risk

transfer in core portfolios to support new

business activity and returns.

• Risk transfer transactions supporting

Lloyds Bank’s commitments to the ‘Help

Britain Prosper’ initiative, supporting

customer lending in key segments such

as SMEs and first-time buyers.

• Securitisation management teams with

over £45bn under management across

20 live transactions, of which £14bn

across 11 transactions relates to risk

transfer activities.

www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

07


Capital Relief Trade Valuation

Defensible valuations with full disclosure

and transparency

SCI Valuations undertakes individual hand pricing with a detailed rationale for harder-to-price

bonds that are impossible to value using pricing algorithms.

We specialise in pricing Capital Relief Trades, pre-crisis and peripheral € RMBS.

We enhance the pricing file we deliver to you with our full rationale as standard for these bonds.

100% responsive & committed

Direct email and phone access to our analysts immediate and

direct response for the QA process. And as we only value

structured credit all our attention, learning and client value is

centred on improving your valuations in Capital Relief Trades.

We are dedicated sector experts.

Quality of service provided is paramount

SCI Valuations is based on best practice analytics. We employ

industry standard dynamic cash flow modelling supported by

collateral pricing and market colour from the SCI PriceABS service.

Multiple default & prepayment scenarios are analysed. Our deep

experience and knowledge of structured credit means more

accuracy and thorough back-up analysis.

SCI Valuations

+44 (0)20 3911 6440

55-63 Goswell Road, 3rd floor south

London, EC1V 7EN, UK

email Simon Crabb: sc@structuredcreditinvestor.com

web www.scivaluations.com

SCI Valuations is a boutique pricing business aimed at servicing

the needs of particpants in securitised markets globally.


Arranger of the Year

ARRANGER OF THE YEAR

WINNER: CREDIT SUISSE

Credit Suisse is SCI’s Arranger

of the Year in recognition of

the variety of structures it

has placed and the breadth of

its investor base. Since September

2018, the bank has arranged five

capital relief trades providing protection

on approximately €15bn of reference assets

with an aggregate tranche size of approximately

€850m.

The transactions included both equity and

mezzanine tranches, featuring flexible guarantee

facilities and dual-tranche structures with a range

of counterparties and investors. Equity tranches

were generally CDS/CLN structures, while mezzanine

tranches included CDS/CLN, financial

guarantee and unfunded insurance structures

placed either directly or via an SPV.

Credit Suisse arranged bilateral trades,

as well as placements of CLNs with multiple

investors. Investors spanned pension funds,

hedge funds, family offices and insurance and

reinsurance firms. Reference portfolios comprised

income-producing real estate loans,

senior unsecured loans and similar products

provided to corporate clients.

Hannes Wilhelm, md at Credit Suisse,

states that the bank’s investor universe is very

large and diversified, thanks to its preference

for executing broadly syndicated trades

through both the investment bank and the

private bank. For instance, 36 investors

participated in the Sfr2.6bn Elvetia 8 deal

from 4Q18 (resulting in efficient pricing of

Libor plus 7.75%) and 37 participated in the

Sfr5.6bn Elvetia 10 deal from 2Q19 (resulting

in efficient pricing of Libor plus 7.9%).

“We typically try to syndicate deals due to

cost efficiencies and the opportunity to attract

not only the traditional CRT buyers, but also

new investors – including, for example, family

offices, for which such transactions are an attractive

alternative investment,” Wilhelm says.

He continues: “We have also tried to make

the documentation understandable for nonlawyers,

which is another way of broadening

the investor base. New entrants need to be

able to fully understand a deal.”

However, syndication is not always possible

if the time is short – which was one of

the motivations behind two unfunded deals

from 4Q18 and 2Q19 on a Sfr1bn portfolio


WE TYPICALLY TRY TO SYNDICATE

DEALS DUE TO COST EFFICIENCIES

AND THE OPPORTUNITY TO ATTRACT

NOT ONLY THE TRADITIONAL CRT

BUYERS, BUT ALSO NEW INVESTORS


each, which were executed with an insurance

company as counterparty.

The transactions hedge the risk of a

portfolio of short-term (less than two-year)

mortgage loans. Credit Suisse retains the first

0.15% of losses in both deals, after which the

following 4.35% of losses are hedged.

The innovative feature of these two transactions

is that they operate similarly to a facility

and therefore the transaction sizes are not static,

but can vary depending on the situation. “This

type of facility has never been structured before.

Because it’s bilateral, the insurer can provide

the necessary flexibility to accommodate the

Facility approach

Variable size mortgage portfolio

Protection buyer

Reference portfolio

20% side-by-side retention

Source: Credit Suisse

Senior

4.5%-100%

(retained)

capital needs throughout the term of the deals –

which couldn’t be achieved via a note issuance,”

explains Wilhelm.

Another stand-out deal is the Sfr4.5bn

Elvetia 11 from 3Q19, which features a

dual-tranche structure and aims to expand

insurer involvement in the SRT market. The

Sfr202.5m equity tranche is a funded CLN

issuance bought by a single institutional

investor, while Sfr67.5m unfunded mezzanine

tranche protection is provided by a syndicate

of insurance companies.

The insurance policy terms are common

for all insurers and the bank has a direct claim

Financial guarantee

Re-insurance firm

Guarantee fee amounts

Mezzanine

0.15%-4.5% Mezzanine risk

Guarantee payment

0.15%-4.5%

Equity

amounts

0%-0.15%

(retained)

www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

09


Arranger of the Year

Elvetia 11

Credit Suisse

(Switzerland) Ltd

Reference portfolio

Collateralised

Deposit

CHF[202.5m]

20% side-by-side retention

6%-100%

(retained)

Mezzanine

tranche

4.5%- 6%

CHF 67.5m

Equity tranche

0%- 4.5%

CHF 202.5m

CS has a direct claim under the insurance policy

CDS

Spread

Protection

payments on

mezzanine tranche

Spread

Protection

payments on

equity tranche

SPV

Premium

Loss insurance

Coupon

CHF 202.5m

issuance price

Insurance policy

CHF 67.5m

Credit linked notes

CHF 202.5m

Syndicate of

insurance

companies

Sold to sole

investor

Note proceeds

Source: Credit Suisse

against the insurers. The transaction is callable at

the bank’s option quarterly from October 2022.

Wilhelm anticipates that insurers will

become increasingly more active in the capital

relief trades space, especially in mezzanine

tranches. “Insurance appetite for risk transfer is

important for banks because under the standardised

approach, banks must be able to hedge

thicker tranches of 15%-20%. Insurers are able

to transact on an unfunded basis and have the

required rating of single-A minus or above.”

Wilhelm suggests the fact that his team is

based in the corporate bank is a significant differentiator

in terms of structuring capital relief

trades. “Often we’re executing risk transfer

transactions for our commercial bank: the


INSURANCE APPETITE FOR RISK

TRANSFER IS IMPORTANT FOR BANKS

BECAUSE UNDER THE STANDARDISED

APPROACH, BANKS MUST BE ABLE

TO HEDGE THICKER TRANCHES


core difference is that the deals reflect how the

business works and the products being offered.

It’s a bottom-up approach in that we construct

the CDS to fit the credit risk management and

recovery processes of the underlying portfolios,”

he concludes.

HONOURABLE MENTION: BANCA IMI

Banca IMI is the leader in the Italian CRT

market, demonstrating significant capacity

for innovation, development and execution.

From September 2018, the bank’s Global

Markets Solutions & Financing team acted

as financial advisor and structurer on capital

relief trades referencing €14bn of underlying

portfolios across SME, midcap, large corporate

and residential mortgage assets. Around

€5.5bn of total RWA was released at closing of

these deals, which involved six investors for a

total of circa €850m of junior tranches sold.

As well as placing two synthetic

securitisations for Intesa Sanpaolo, the bank

executed two landmark deals for Banca

Popolare di Bari and UBI Banca’s second

CRT during the awards period, with a handful

of transactions in the pipeline.

10 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


Close to clients

Close to clients

since 1856.

since 1856.

Credit Suisse has been building client relationships for generations, working with

its clients closely to help them achieving their goals. For 163 years.

Credit credit-suisse.com Suisse has been building client relationships for generations, working with

Credit its clients Suisse closely has to been help building them achieving client relationships their goals. for For generations, 163 years.

working with

Credit its credit-suisse.com

clients Suisse closely has to been help building them achieving client relationships their goals. for For generations, 163 years. working with

its credit-suisse.com

SCI

clients

Capital

closely

Relief

to

Trades

help them

Awards

achieving their goals. For 163 years.

credit-suisse.com

Arranger of the Year 2019

SCI Capital Relief Trades Awards

SCI Arranger Capital of Relief the Year Trades 2019

Awards

SCI Arranger Capital of Relief the Year Trades 2019Awards

Arranger of the Year 2019

Copyright © 2019 Credit Suisse Group AG and/or its affiliates. All rights reserved.


Transaction of the Year

TRANSACTION OF THE YEAR

WINNER: SYON SECURITIES 2019

Lloyds Banking Group’s

synthetic UK RMBS Syon

Securities 2019 was motivated

by prudent risk management

as part of the bank’s broader

plan to support the UK economy, rather

than potential regulatory capital benefits.

However, Syon’s innovative use of a

capital relief structure to achieve those risk

transfer aims, combined with the deal’s

scalability for the issuer and repeatability

for other UK mortgage lenders gives it

potential benchmark status and makes it

SCI’s Transaction of the Year.

Lloyds Bank Corporate Markets (LBCM)

Securitised Products Group acted as sole

arranger and lead manager for Syon, a synthetic

securitisation of a UK owner-occupied

residential mortgage loan book originated by

Bank of Scotland under the Halifax brand.

The £1.07bn reference portfolio comprises

5,674 prime repayment mortgages with LTVs

greater than 90%, originated between October

2018 and June 2019. The non-replenishing

transaction provides credit protection for

seven years, with a 2.5-year tail period, subject

to a 10% clean-up call.


OVERALL, THE SYNDICATION

PROCESS WAS VERY MUCH AN

EDUCATIONAL ONE, GIVEN THE

ARRAY OF INVESTORS INTERESTED


In aggregate, £150m of credit-linked notes

were placed with five investors from both

Europe and the US, comprising a mix of those

familiar with capital relief trades and those

familiar with RMBS and mortgage assets.

During marketing, Lloyds had opened its data

room to 37 accounts and conducted 17 due

diligence sessions.

Overall, the syndication process was very

much an educational one, given the array

of investors interested. Typical cash RMBS

investors were sometimes unfamiliar with

synthetic structures, some were able to use

GSE credit risk transfer deals as a comparable

and regulatory capital investors had typically

not considered transactions featuring

residential mortgages for some time, so had to

re-familiarise themselves with the asset class.

Syon is an economic hedge, including a

modified pro-rata amortisation schedule, where

the protection is reduced at a rate slower than

the amortisation of the portfolio to ensure

adequate coverage for the increased loss density

expected towards the end of the protection

period. Additionally, the transaction allows

for the removal of loans that are considered

‘de-risked’, as a result of customer payments

and house price inflation, and which no longer

contribute to the relevant risk metrics.

As noted above, the transaction does

not provide Lloyds with regulatory capital

benefits, thanks to the minimum risk weight

c.6.5%

retention by

Lloyds of

underlying

exposures

£1bn

Maximum

Reference

Portfolio

Notional

Amount

(c.93.5%

vertical slice)

Mortgage

Loans

c.£1.07bn

(incl. vertical

retention)

100%

15%

0%

(4)

Senior

Tranches

(retained)

(1)

SPV

(4) (5)

(1)

(2) (3)

(1) CLN Proceeds

(2) Junior Protection

(3) CLNs

(4) Reimbursement of

realised losses

(5) Redemption of CLNs

£150m Credit

Linked Notes

(Protected

Tranche)

sold to five third

party investors

Deposit

Account

Source: Lloyds

12 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


Transaction of the Year

Note

Rating

(Fitch/Kroll)

AP DP Size Basis Margin Status

A A-(sf) / A(sf) 11.25% 15.00% £37.5m SONIA 3.00% Placed

B BBB-(sf) / BBB(sf) 6.75% 11.25% £45.0m SONIA 3.50% Placed

C BB-(sf) / BB(sf) 3.75% 6.75% £30.0m SONIA 4.00% Placed

D B(sf) / B+(sf) 2.50% 3.75% £12.5m SONIA 5.00% Placed

Z NR 0.00% 2.50% £25.0m SONIA Undisclosed Placed

Total

£150.0m

Source: Lloyds

requirements for securitisation positions. As

the lowest risk weight available in the securitisation

regime under the CRR is higher than

risk weights for low risk mortgage portfolios,

such capital relief is generally not available at

an acceptable cost of capital using partially

funded synthetic securitisation.

Instead, Syon is intended to manage risk to

support Lloyds’ ‘Helping Britain Prosper Plan’,

which includes UK first-time buyer targets.

The UK government’s Help-To-Buy scheme

supports the deposit-constrained first-time

buyers seen as important to the health of the

UK housing market. The Help-to-Buy scheme

deposit top-up is only available to new-build

house purchases though.

Syon enables Lloyds to provide similar

support to first-time buyers of second-hand

homes; collateralised protection on the loans

reducing the lender’s risk profile to a level

similar to Help-to-Buy loans. Consequently, it

is anticipated to be the first in an ongoing risk

management initiative relating to higher LTV

mortgage lending for both Lloyds and other

UK lenders.

The transaction priced on 23 July and settled

on 1 August 2019. The Class A to D notes

are rated by both Fitch Ratings and Kroll

Bond Rating Agency.

Capital structure and investor participation

Sold to

investors Retained

Source: Lloyds

Senior tranche

(85.0%)

Protected tranches

(15.0%)

Investors in

virtual dataroom

37

Investors

with DD

sessions

17

Final

allocation

5

HONOURABLE MENTION: SANTA FE SYNTHETIC CLO

Santander’s Santa Fe Synthetic CLO was

an undoubtedly innovative and standout

deal in the awards time period. Deal

highlights include:

• First synthetic securitisation transaction

ever executed in Mexico

• Referenced a portfolio of Mexican

SME loans, providing support to the

real economy

• Rating obtained on the senior tranche

from local rating agency Verum, enabling

Santander to achieve capital relief at both

the local and group level

• Unfunded credit protection purchased

from the International Finance Corporation

(IFC) following a competitive auction

with several investors, providing strong

execution to the issuer

• Santander conducted a competitive

auction with several investors, finally

agreeing attractive terms with the

International Finance Corporation (IFC) on

a bilateral basis.

www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

13


Impact Deal of the Year

IMPACT DEAL OF THE YEAR

WINNER: ROOM2RUN

As the first-ever synthetic

impact securitisation with

a multilateral development

bank (MDB), Room2Run

helped to free up vital

capital for the African Development Bank

(AfDB) to fund infrastructure projects

across multiple African countries. As well

as setting the benchmark for how risk

transfer technology can be deployed innovatively

and to positive effect, the transaction

overcame a number of structural and

regulatory hurdles in the process and so is

a worthy winner of SCI’s Impact Deal of

the Year award.

Swazi Tshabalala, vp and cfo at the Af DB,

comments: “The Room2Run transaction has

attracted tremendous interest from institutional

investors across the world, and this

opens new pathways for the Bank and other

MDBs to further explore the possibility of

freeing up and recycling their scarce capital

resources by unlocking a pool of financing

from investors that have previously not considered

African risk.”


THE ROOM2RUN TRANSACTION

HAS ATTRACTED TREMENDOUS

INTEREST FROM INSTITUTIONAL

INVESTORS ACROSS THE WORLD


Mariner Investment Group acted as anchor

investor on Room2Run and Molly Whitehouse,

director at the firm, says that the transaction “surpassed

our expectations”. She adds: “It energised

the impact investing arena and the development

bank community, sparking a number of

conversations with other MDBs. Even a year on,

the deal is still top of mind within many MDBs.”

The transaction, Whitehouse says,

required perseverance on all sides, “but it takes

time to lay such significant new pathways.”

The parties, she adds, sought to be mindful of

the precedent that Room2Run would set for

future MDB securitisations and the tremendous

impact this would have for development

finance as a whole.

Furthermore, adds Whitehouse, with

the foundation now in place, Room-

2Run has changed the landscape; other MDBs

are evaluating similar strategies, looking to

build on Room2Run as a proven and replicable

model. The deal wasn’t straightforward, of

course, and Mariner learnt several lessons.

One was learning “how important it is to

get buy-in from senior management and public

shareholders within MDBs in order

Structure overview

AfDB non-sovereign portfolio

Structure (RPA)

Retained senior

$727.5m

Loan Retention (10%)

$1bn reference

portfolio corresponding

to seasoned,

pan-African loans,

consisting of project

finance (50%) and

loans to financial

institutions (50%),

including development

finance institutions

EC guarantee fee

$100mn EC guarantee

Initial Exchange Amount

$152.5m

USD 3ML +

interest margin

Retained junior

$20m

14 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


International

Infrastructure Finance

Company Funds

Mariner Investment Group

salutes the many extraordinary

participants in the SRT market,

the contributions of whom

have added strongly to the

industry’s growth over the last

five years.

We are proud to be an active

member of the SRT market,

working alongside our many

talented peers and colleagues.

Please contact IIFC@marinercapital.com for more information.


Impact Deal of the Year

to ensure the success of such a transaction,”

says Whitehouse. “As a first-of-its-kind deal,

we all came up the learning curve, from investors

to bank management to advisors and

rating agencies.”

Suzana Sava-Montanari, counsel at

Latham and Watkins, the leading law firm on

Room2Run, adds that her firm, too, was “especially

pleased to have engaged successfully

with a visionary MDB and investors who were

inspired and ready to be the first to do such a

transaction. It was also certainly a success in

that the deal freed up a significant amount in

lending capacity to fund African infrastructure

and other projects.”

Structurally, the deal can also be seen as an

achievement, says Sava-Montanari, because

completing the deal with an MDB was similar

to creating a hybrid transaction. Due to the

adjustments that had to be made, it was not

like a typical commercial bank SRT trade.

She explains: “For one thing, there was

no regulator involved, which meant we had

to incorporate a more flexible structure and

to adopt other features in order for the bank

to be able to achieve the required capital

release benefits.”

Mizuho International acted as financial

advisor to Af DB on the transaction. Juan-

Carlos Martorell, md, co-head of securitised

products and structured finance at Mizuho,

comments that his firm was also “very happy”

with the transaction. Particularly, he adds,

because it pioneered the use of synthetic

securitisation for capital relief for the MDB

community and also achieved the reduction

of RWA under S&P’s rating agency methodology,

because MDBs are unregulated banks.

Martorell adds that a number of hurdles

also had to be cleared and that “for a first-time

issuer there is always the challenge to engage

all the stakeholders of the bank” across origination,

risk, IT, special situations, legal and

accounting. Furthermore, he says that working

with S&P to accommodate the transaction

to its criteria was also challenging but that,

“overall, everybody did a great job and rowed

in the same direction.”

In terms of the lasting impact of the transaction,

it freed up US$650m in extra lending

capacity, which the bank has committed to

deploy in renewable energy developments in

African countries. Whitehouse says: “Based

on the significant due diligence our team

conducted on the bank, we perceived their

processes to be quite robust, both for extending

credit and for measuring the social and

environmental impact of a project. The core

mandate of Af DB is to help improve infrastructure

and boost economies across Africa,


FOR A FIRST-TIME ISSUER THERE

IS ALWAYS THE CHALLENGE TO

ENGAGE ALL THE STAKEHOLDERS

OF THE BANK



FUTURE TRANSACTIONS SHOULD

HAVE FEWER HURDLES, NOW THAT

THE MODEL OF ROOM2RUN HAS

BEEN ESTABLISHED


so the positive impact of capital liberation is

quite direct.”

Whitehouse adds that collaboration was

also key for the deal to succeed and that

Mizuho International did “a terrific job as

Af DB’s financial advisor, especially in its

work interfacing with the credit rating agencies.”

She notes that this work was an “integral

component of the deal, with Room2Run

establishing a framework that future deals

could also follow. S&P also put in significant

intellectual resources and time on the

transaction to develop a methodology for

incorporating SRT into its MDB capitalisation

analysis.”

Looking ahead, all the parties share optimism

about the future use of risk transfer methods

for impact investment. Whitehouse comments:

“Future transactions should have fewer

hurdles, now that the model of Room2Run has

been established. Although there is certainly

room for additional efficiencies, as within any

new market, we are proud to have served as the

anchor investor in opening the door.”

On a similar note, Martorell says that

MDBs are constantly looking to enhance their

balance sheet and Room2Run has opened a

new market and several MDBs are working

on potential transactions, although nothing is

imminent. Whitehouse concludes: “The SRT

market has expanded significantly over the

past few years across new geographies, sectors

and issuers. Among these opportunities, we

believe that some are more interesting for our

Limited Partners, especially in more esoteric

investments, such as Room2Run.”

HONOURABLE MENTION: FCT JUPITER 2019

Societe Generale’s US$3.4bn FCT

Jupiter 2019 transaction also stands

out for introducing a number of groundbreaking

structural innovations in

connection with the redeployment of

released RWA. The deal not only frees up

a dedicated capital envelope, whereby

capital can be reallocated in favour

of positive impact finance assets, but

also debuts a pricing reduction feature

incentivising the Bank to participate in

new Positive Finance lending. The credit

protection is structured as a funded

financial guarantee and covers a low

mezzanine tranche, which was privately

placed with Mariner Investment Group’s

International Infrastructure Finance

Company Strategy.

16 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


Title in Univers Condensed Light

Sub heading in Univers Bold

Date | Time: Univers Bold

Location etc. in Univers Roman

Additional text/ RSVP in Univers Roman

Partnering with you

on the journey ahead

With our global presence and local expertise,

we work side by side with you as your committed

financial services partner to deliver a world

of opportunity.

mizuho-emea.com


Innovation of the Year

INNOVATION OF THE YEAR

WINNER: FCT JUPITER 2019

Societe Generale’s US$3.4bn FCT

Jupiter 2019 transaction has won

SCI’s Innovation of the Year

Award for introducing a number

of ground-breaking structural

innovations in connection with the redeployment

of released RWA. The deal not

only frees up a dedicated capital envelope,

whereby capital can be reallocated in

favour of positive impact finance assets,

but also debuts a pricing reduction feature

incentivising the Bank to participate in

new Positive Finance lending.

The credit protection is structured as a

funded financial guarantee and covers a low

mezzanine tranche, which was privately placed

with Mariner Investment Group’s International

Infrastructure Finance Company Strategy

(IIFC Strategy), while Societe Generale retains

unhedged the thin first-loss tranche and the senior

tranche. The credit protection is ‘mutualised’

across the obligors, enabling it to cover a wide scope

of assets across Societe Generale’s business units.

The portfolio references more than 250

diversified specialised lending assets from

both project finance (energy, infrastructure,

metals and mining) to asset finance (shipping,

aircraft, real estate) and corporate assets in

over 40 countries. The transaction features a


THE TERMS OF THE

TRANSACTION INTRODUCE

A PRICING INCENTIVE FOR

ADDITIONAL IMPACT ALLOCATION


four-year replenishment period, during which

amortisation of the underlying assets can

be compensated for by the addition of new

eligible assets of the same type.

As well as being one of the largest synthetic

risk transfer deals referencing infrastructure

assets, Jupiter distinguishes itself through significant

innovation in the impact investment arena

via embedded conditionality requirements.

Through a first-of-its-kind Positive Impact Capital

Allocation factor, the Bank has committed to

dedicate 25% of the risk-weighted asset reduction

within three years to reduce the capital burden

for new Positive Impact Finance lending.

The Positive Impact Capital Allocation

feature, whereby credit risk transfer effectively

frees up a dedicated capital envelope, serves to


JUPITER DISTINGUISHES

ITSELF THROUGH SIGNIFICANT

INNOVATION IN THE IMPACT

INVESTMENT ARENA


absorb and offset some of the RWA density of

Societe Generale’s impact lending book. This,

in turn, enables the Bank to proactively attribute

a lower effective risk weight for borrowers

whose projects correspond to certain positive

impact transactions.

Furthermore, the terms of the transaction

introduce a pricing incentive for additional

impact allocation. If Societe Generale redeploys

50% of the RWA release towards Positive

Impact Capital Allocation factor by the end of

the replenishment period, the coupon on the

transaction will be reduced, thereby enhancing

its capacity to originate Positive Impact

Finance projects.

By reallocating the released capital from the

legacy loan book and dedicating it to enhance

the capacity to lend to positive impact sectors,

the parties aim to strongly advance the UN

Sustainable Development Goals.

This transaction helps Societe Generale increase

lending headroom, while also enabling the

Bank to pursue its commitments related to posit ive

impact. It is hoped that the framework will also

serve as a model for transactions in the future,

both for the IIFC Strategy and other investors.

The transaction is structured in compliance

with the new Securitisation Regulations

and significant risk transfer rules.

HONOURABLE MENTION: SIMBA

ING Bank’s capital relief trade for its German

subsidiary ING DiBa was noteworthy for being

the first unfunded significant risk transfer

transaction executed between a European

bank and an insurance counterparty (Arch

Mortgage Insurance). Dubbed Simba, the deal

references a €3bn subset of a German

residential mortgage loan portfolio and was the

first mortgage SRT to be approved by the ECB.

The transaction helps ING future-proof

its lending businesses by ensuring it has the

flexibility to address changes in the regulatory

and competitive landscape in the future,

and by creating an additional balance sheet

management tool that is being considered for

other portfolios in the future. By transferring

the economic risk on asset portfolios, the tool

releases capacity for additional lending.

18 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


Investor of the Year

INVESTOR OF THE YEAR

WINNER: EUROPEAN INVESTMENT FUND

The European Investment

Fund (EIF) provides an

unparalleled level of support

to the capital relief trades

market in Europe, bringing

numerous synthetic securitisations

across the line. The EIF is not only a key

driver of innovation, participating in

numerous benchmark transactions across

jurisdiction and asset class, but it has also

helped open up the risk transfer market

to a broader range of participants. The

multilateral development banks is SCI’s

Investor of the Year.

In terms of benchmark deals, one standout

during the awards period was BCC Grupo

Cajamar’s €972.1m significant risk transfer

transaction, IM BCC Capital 1, which will

provide over €1bn for new investment in

SMEs in rural areas and agri-food companies.

This was the first cash SRT issued by a standardised

bank and the first risk-sharing transaction

by a standardised bank that involved both

the EIF and private investors.

The EIF’s securitisation team notes: “It also

featured a number of different players, including

the EIF, EIB and ICO, which was unusual

and it is not always easy to balance the different

interests of all the different parties. It was

a very important deal for a standardised bank

and sets a template that can be imitated by

other banks, particularly because it provided

funding and capital relief.”

Equally notable, the EIF closed the firstever

synthetic trades in Poland – which, in

a non-euro currency, helps to build market

confidence in the use of synthetic securitisation

across Europe. The fund executed

guarantees on senior and mezzanine

tranches for Alior Bank and one of the largest

Polish banks, thereby enabling both to

release regulatory capital and enhance their

capacity to provide SME financing with

improved terms.

As well as trendsetting transactions, the

EIF has helped to broaden the universe of

participants involved in the capital relief

arena. The team explains: “We have done

such a good job that we have now expanded

to the point that we are now needing to bring

in external credit funds to spread the load, so

to speak. As well as this, we are even talking


IT ALSO FEATURED A NUMBER OF

DIFFERENT PLAYERS, INCLUDING

THE EIF, EIB AND ICO, WHICH

WAS UNUSUAL AND IT IS NOT

ALWAYS EASY TO BALANCE THE

DIFFERENT INTERESTS OF ALL THE

DIFFERENT PARTIES


to insurers that are thinking about entering

the risk transfer market.”

As part of this process, the EIF will front

the whole capital structure and transfer the

first loss position – and sub-investment grade

tranches – to the credit fund, while the originating

bank will hold onto the senior notes.

The EIF will still be very much involved with

the transaction and the entire process will

be very transparent, as per the EIF’s working

principles.

The team comments: “We are piloting

three such transactions utilising a third-party

credit fund, all backed by SME loan collateral

from three different jurisdictions. They should

be announced before the end of the year.”

The team continues: “There are certain

logistical challenges involved in taking on

third parties, and we generally have to do

reshuffles every so often. Incorporating thirdparty

funding is part of the mandate under

Basel 4.”

Internally, the EIF has streamlined the

deal timeline through the development of new

technology, developed by the legal team. As

such, the relevant documentation can now be

put together in a matter of minutes through

the use of templates, rather than writing everything

from scratch.

The EIF’s securitisation team explains:

“Now we can put together 80% of the deal

almost instantly, leaving just the 20% to do


WE ARE PILOTING THREE SUCH

TRANSACTIONS UTILISING A THIRD-

PARTY CREDIT FUND, ALL BACKED

BY SME LOAN COLLATERAL FROM

THREE DIFFERENT JURISDICTIONS


www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

19


Investor of the Year

Transactions completed by EIF during the awards period

Transaction Signed Date Amount (€) On-lending to SMEs (€)

Ceska Sporitelna Jun-19 75,000,000 300,000,000

Banco BPM Jun-19 55,000,000 330,000,000

Unicredit Social Impact (EASI) 2 Jun-19 5,200,000 50,000,000

Santander Magdalena Jun-19 50,000,000 200,000,000

Caixa Mar-19 100,000,000 600,000,000

Large German Financial Intermediary Dec-18 99,750,000 399,000,000

Banca Nazionale Del Lavoro Minerva Dec-18 100,000,000 600,000,000

BBVA Vela 2018-2 Corporates Synthetic Securitisation Dec-18 59,999,332 359,995,991

Cajamar Dec-18 610,000,000 1,516,400,000

Alior Synthetic 2018-1 Dec-18 335,945,548 445,085,218

Polish Financial Intermediary Dec-18 494,341,285 973,551,385

Source: European Investment Fund

manually. We obviously still get everything

checked over carefully before execution, but

the technology has certainly sped up the whole

process from months, to a matter of weeks.”

In terms of the future for the EIF, ESG

is now a big focus and the fund is working

proactively to incorporate this into its business

strategy – not only in the risk transfer

space, but also in traditional securitisation

and in supporting projects across Europe. The

fund emphasises that it will generally invest in

smaller, more granular portfolios, as opposed

to larger, chunkier portfolios, such as in big

infrastructure transactions.

The team adds: “On the social side of

things, we have done – and continue to do

– a lot of work in supporting microfinance

firms across Europe, both in synthetic deals


NOW WE CAN PUT TOGETHER

80% OF THE DEAL ALMOST

INSTANTLY, LEAVING JUST THE 20%

TO DO MANUALLY


and other straightforward securitisations, or

through other guarantee mechanisms.”

Finally, the role of educator continues to

be a big focus for the EIF. The team concludes:

“Generally, too, as an institution that supports

securitisation as a crucial funding tool for

the European economy, we do a lot of work

in dispelling the stigma associated with the

mechanism that still lingers from the financial

crisis.”

HONOURABLE MENTION: D.E. SHAW GROUP (DESCO)

A major investor in capital relief trades

since 2007, DESCO launched a dedicated

regulatory capital optimisation strategy

in 2017 and has completed a number of

significant transactions, distinguishing

itself by focusing on the most innovative

structures and ideas across all, or parts, of

a bank’s or insurer’s capital structure. The

firm has pushed the boundaries across

multiple deals in the last 12 months, in the

following ways:

• CVA hedging: the firm incorporated the

first standardised-floor-compliant hedge

of derivative exposures, partnering with a

pension fund

• Mezzanine tranches of synthetic

securitisations – DESCO was the largest

investor in mezzanine tranches on UK

portfolios in 2Q19

• DESCO provided the hedge on the first

leveraged loan revolver transaction,

preceding the growth of these deals

• The firm developed the first leverage ratiodriven

transaction on CDS books

• WARF risk margin transactions for insurers:

DESCO has helped develop innovative

transactions that pay off when the WARF of a

portfolio of corporate bonds increases or the

underlying ratings of the corporate bonds fall

• The firm invested in the first synthetic

securitisation issued in Ireland and has

helped to boost secondary liquidity in

the sector.

20 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


Law Firm of the Year

LAW FIRM OF THE YEAR

WINNER: CLIFFORD CHANCE

Clifford Chance has been

involved in the capital relief

trades market from the

beginning and the past year

has underscored the firm’s

dominance and influence across all sectors

of the CRT business.

Explaining the firm’s dominance in this

sector, partner Jessica Littlewood says: “We

have always been very active in this market,

even before the financial crisis. In the aftermath

of the crisis many of the people involved

in synthetic securitisation moved on to other

things. However, we continued to treat it as

a strategic priority, which meant we were

perfectly placed to help banks and investors as

they have re-entered the market over the past

five or six years.”

Both Littlewood and fellow partner Timothy

Cleary, also attribute the firm’s success to its

hands-on approach, and unique ability to

combine both transactional and regulatory

expertise, as well as diverse geographical

coverage, into a single offering to meet clients’

needs. As a result, Cleary says: “With our

long history in the sector, we have seen pretty

much everything. That extensive experience,

combined with an in-depth focus and deep

resources are what give us the edge.”

More recently, the extent of Clifford

Chance’s reach has become very clear. With

the exception of France and Italy (where there

are a number of local firms who are active

acting for originators), the firm has acted as

originator and drafting counsel on the vast


MANY OF THE PEOPLE INVOLVED

IN SYNTHETIC SECURITISATION

MOVED ON TO OTHER THINGS.

HOWEVER, WE CONTINUED TO

TREAT IT AS A STRATEGIC PRIORITY


majority of synthetic securitisation transactions

in the market over the past 12 months.

This has included transactions for banks

in the UK, Spain, Germany, Singapore, Japan,

Canada, Switzerland and the US, as well as the

ground-breaking transaction for the African

Development Bank. In addition, in cases

where Clifford Chance has not acted for the

originator, it has often acted for protection

sellers, such as EIF and IFC, as well as various

hedge funds and pension funds.

The CRT and synthetic securitisation

team is anchored by partners Littlewood

and Cleary in London, both of whom have

been active in the market for many years.

They are backed up by key partners in other

offices – including Jose Manuel Cuenca

(Madrid), Gareth Old and David Felsenthal

(New York), Oliver Kronat (Frankfurt), Mark

Mehlen and Steve Jacoby (Luxembourg),

Francis Edwards (Hong Hong), Paul Landless

(Singapore), Lounia Czupper (Brussels),

Tanja Svetina (Milan), Jonathan Lewis (Paris)

and Leng-Fong Lai (Tokyo) – and a large

team of associates across the network with

relevant expertise.

Clifford Chance’s primary strategic goal

is to “remain the ‘go to’ firm for all market

participants looking to execute risk transfer

transactions, whatever their jurisdiction,

the transaction type or the relevant regulatory

framework”. The all-encompassing list

of transactions across every asset class it has

been involved with indicates that goal has

been achieved.

Notably, the firm has worked on all of the

key innovative transactions seen in the market

over the past year, including:

• Room2Run (African Development

Bank) – the first synthetic securitisation

by a multilateral development bank

• SSPAIN 2019-1 CLN (Santander) –

the first synthetic securitisation of a

portfolio of US auto loans.

• Syon (Lloyds) – the first full synthetic

securitisation of a portfolio of residential

mortgages

• All of the significant risk transfer

portfolio credit insurance transaction

executed in the past year (other than

the Agency transactions in the US)

Jessica Littlewood, partner


THAT EXTENSIVE EXPERIENCE,

COMBINED WITH AN IN-DEPTH

FOCUS AND DEEP RESOURCES

ARE WHAT GIVE US THE EDGE


www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

21


Law Firm of the Year


IT WILL BE INTERESTING TO

SEE IN THE NEXT YEAR OR SO

WHETHER THE HOPED-FOR

OPENING UP OF THE MARKET IN

THE US AND ASIA WILL HAPPEN


Timothy Cleary, partner

• NASIRA (FMO) – the first microfinance

synthetic securitisation

• Santander Mexico’s synthetic securitisation

with the International Finance

Corporation (acting for IFC).

As issuers have been exploring different

transaction structures (such as multi-tranche

transactions, greater interest in credit insurance

as a form of risk transfer, increased use

of credit-linked notes as an alternative to

full SPV issuance, etc), Clifford Chance has

been at the forefront of documenting and

negotiating these transactions. It has also

been instrumental in inf luencing many of

these trends, acting as trusted advisors to

banks as they search for the most appropriate

transaction structure to achieve their

particular goals.

As part of this, Clifford Chance has also

continued to invest significant time and

resources in coming to terms with, and participating

in advocacy relating to the implementation

of the EU Securitisation Regulation. At

the same time, the firm is extensively involved

in discussions with all major regulators and

works closely with industry bodies such

as AFME, IACPM and PCS in relation to


WE APPEAR TO BE AT THE END

OF THE RAPID GROWTH PHASE IN

EUROPE, BUT IT DOES NOW FEEL

THAT THE MARKET IS HERE TO STAY


the continued evolution of the regulatory

landscape. All of which means there is no

firm better-placed to advise originators on

risk transfer transactions, as reflected by its

dominant market position.

That position looks unlikely to change

any time soon and Cleary is positive about

the future for the market as well. “We appear

to be at the end of the rapid growth phase in

Europe, but it does now feel that the market is

here to stay, and synthetic securitisation has

become an important tool used by most large

European banks as part of their balance sheet

management strategy. The strong performance

of the market in recent years also now

seems to be leading to a more positive attitude

from regulators towards synthetic securitisation,

which is a good sign”.

Beyond Europe, Cleary is more cautious:

“It will be interesting to see in the next year or

so whether the hoped-for opening up of the

market in the US and Asia will happen. We

have spent a lot of time talking to banks in

both places about potential transactions, but

there is still some reticence from regulators, so

whether we’ll see real growth there remains a

difficult one to call.”

HONOURABLE MENTION: LATHAM & WATKINS

While Clifford Chance’s dominance of the

CRT market is unquestionable, Latham

& Watkins came in for some very high

praise for its work on the investor side

of the business. The whole team are

well thought of from the senior partners

to junior associates, but Paris counsel

Suzana Sava-Montanari was given

particular praise.

Notable among Latham & Watkins’ work

over the past year was to act as adviser to

Mariner as lead investor on the Room2Run

deal. There, the firm saw its role as two-fold:

educational and innovative.

First, the Latham team worked to

dispel the stigma associated with synthetic

securitisations, educating the MDB on the

nature of this capital management tool.

The team also set out to communicate

that CRTs are based on a relationship of

mutual trust between the bank and private

investors, setting the stage for a long-term

risk-sharing programme that transcends the

purely transactional.

Second, the firm had to consider how

the transaction provided a capital benefit

for the MDB and find a unique solution

for measuring the capital benefit and

determining objective circumstances outside

AfDB’s control that would change this

benefit, such as rating agency methodology

changes. Latham also designed a

sophisticated mechanism to address AfDB’s

policies while ensuring protection for the

investor’s collateral similar to that found in

other CRTs.

22 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


CLIFFORD CHANCE – LAW FIRM

OF THE YEAR

Over the past 12 months, Clifford Chance has retained its position

as the dominant law firm in the synthetic securitisation and capital

relief trades market, as has been the case for every year going back

at least as far as the financial crisis of 2008-2009. We have acted as

drafting counsel on the vast majority of transactions in the market,

across the full range of legal structures. Our expertise covers the entire

market, from “full” synthetic securitisation structures involving a special

purpose vehicle acting as protection seller and note issuer, to bilateral

transactions between the originator and investor (structured as either

a financial guarantee, credit default swap or credit insurance policy)

and credit-linked notes issued by the originator bank directly. We are

extensively involved in discussions with regulators and work closely

with industry bodies such as AFME, IACPM and PCS in relation to

the continued evolution of the regulatory landscape. We have worked

on all of the key innovative transactions which have been seen in the

market over the past year, including the first synthetic securitisation

by a multilateral development bank. Our team is anchored by partners

Jessica Littlewood and Timothy Cleary in London, both of whom have

been active in this market for many years.

www.cliffordchance.com


Credit Insurer of the Year

CREDIT INSURER OF THE YEAR

WINNER: ARCH CAPITAL GROUP

Arch Capital Group Ltd

(ACGL) is SCI’s Credit

Insurer of the Year in recognition

of its position as

global leader in mortgage

credit risk transfer and the completion of

a first-of-its-kind transaction with ING.

With US$300bn of assets under cover

already, the firm has significant capacity in

place to grow its presence further.

Based in Bermuda, ACGL had approximately

US$12.49bn in capital at 30 June 2019

and provides insurance, reinsurance and

mortgage insurance on a worldwide basis

through its wholly owned subsidiaries in Australia,

Europe, Hong Kong and the US. It has a

single-A plus rating from S&P, Fitch and AM

Best and an A2 rating from Moody’s.

Beyond traditional flow mortgage insurance,

Arch is able to meet the unique needs of industry

participants, including portfolio lenders,

government agencies and institutional investors.

For example, in October 2018, Arch Insurance

(EU) DAC (previously Arch Mortgage Insurance

DAC) completed a unique capital relief

transaction on a €3bn subset of a residential

mortgage loan portfolio originated by ING in

Germany. Dubbed Simba, the deal was groundbreaking

in that it was the first unfunded

significant risk transfer trade executed between

a European bank and an insurance counterparty

and the first mortgage SRT approved by the ECB.

“Arch feels that the transaction can be

replicated in other geographies and, as such,

represents a valuable new tool for financial

institutions in managing their regulatory

capital. The transaction also demonstrates

our commitment to supporting mortgage

lending in Germany and highlights our focus

on bringing innovative products to market,”

observes Ruairi Neville, chief underwriting

officer at Arch Insurance (EU) DAC.


WE HAVE BOTH THE CAPACITY

AND APPETITE TO PARTICIPATE

IN WELL-STRUCTURED RISK

TRANSFER TRANSACTIONS


Also in 2018, Arch formed Arch MRT,

designed in collaboration with Fannie Mae

and Freddie Mac to address key risk issues

and reduce costs related to procuring and

managing certain forms of credit protection.

The structure was developed specifically

to: allow the GSEs to select and manage

their exposure to counterparties; broaden

the sources of first-loss credit protection

to include more highly rated and diversified

counterparties; bolster counterparty

strength with collateralised agreements; and

eliminate the cost of obtaining third-party

credit protection that meets GSE origination

and servicing guidelines.

As such, Arch MRT encourages more reinsurers

to participate in the US housing finance

industry, providing the GSEs with access to

additional private capital totalling approximately

US$565bn of proven, permanent,

entity-based, equity capital globally.

Arch was a participant in the first GSE

credit risk transfer transaction placed in 2013

and has remained actively engaged in CRT

transactions since then. Major reinsurers and

other interested parties have also tapped Arch

Credit Risk Services’ deep understanding of the

US mortgage market, as well as existing systems

and professionals to expedite their entry into

the growing CRT field, without having to build

out analytics and processes or hire staff.

For instance, Arch Credit Risk Services

last year entered into a multi-year agreement

with Munich Re to provide mortgage

credit assessment and underwriting advisory

services related to Munich Re’s involvement in

CRT programmes offered by Fannie Mae and

Freddie Mac.

A further example of Arch’s leading presence

in mortgage risk transfer is its Bellemeade

issuances, which allow the firm to programmatically

transfer risk through a fully funded

insurance-linked note (ILN) structure. Under

the Bellemeade programme, Arch’s mortgage

insurance subsidiaries enter into a reinsurance

contract with a special-purpose insurer that

issues ILNs to fund its obligation to Arch.

As of 31 July 2019, the Bellemeade programme

has completed nine transactions with

international capital markets investors totalling

more than US$4.1bn in issued securities

and has provided protection on US$333bn of

insured mortgages.

Looking ahead, Neville anticipates that

increasing bank capital requirements under

Basel 3 will lead to significant future growth

in the risk transfer market. “Insurers will be

important participants in this space. At Arch,

we have both the capacity and appetite to

participate in well-structured risk transfer

transactions and see this sector as an area of

growth going forward,” he concludes.

HONOURABLE MENTION: LIBERTY SPECIALTY MARKETS

Liberty Specialty Markets’ Structured

Risk Solutions team has made significant

risk transfer a core part of its strategy and

since 2015 has worked on over 15 complex

structured portfolio transactions. The team

closed its first SRT transaction this year and has

more deals in negotiation, providing unfunded

protection on an excess basis, focusing on

senior mezzanine layers. Combined with

Liberty’s ability to consider a wide range of

asset classes – including emerging asset

classes, such as trade finance and project

finance – and geographies, this has enabled

the team to make a significant contribution to

the market in a relatively short period of time.

24 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


INNOVATIVE CAPITAL

OPTIMISATION

SOLUTIONS

Our capital relief transaction with ING is the first of its kind in the European

mortgage market for this asset class and represents a valuable new tool for

financial institutions in managing their regulatory capital.

Arch Insurance (EU) dac is pleased to announce the

completion of a capital relief transaction on a €3

billion subset of a residential mortgage loan

portfolio originated and serviced by ING in the

German market.

Arch is committed to bringing innovative products to the European

market and taking a leadership role in providing capital relief

solutions on residential mortgage loans globally.

Arch Insurance (EU) dac

Level 2, Block 3, The Oval

160 Shelbourne Road

Ballsbridge, Dublin 4

Call us today at +353 1 669 9700

or email michael.bennett@archinsurance.eu

or rneville@archinsurance.eu

Visit archcapgroup.com

© 2019 Arch Insurance (EU) dac is authorised by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority.

Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. MCGL-B00230G-092519


Advisor/Service Provider of the Year

ADVISOR/SERVICE PROVIDER OF THE YEAR

WINNER: SCOPE RATINGS

Scope Ratings has been selected

as SCI’s Advisor/Service Provider

of the Year, thanks to its

involvement in innovative risk

transfer transactions in unusual

asset classes, such as project finance,

and standardised bank deals. The rating

agency’s work has been aided by a multidisciplinary

approach to ratings.

According to Guillaume Jolivet, head of

Scope Ratings: “The rating of these transactions

requires not only structured credit expertise,

but also a deep understanding of the risks at

asset level. It’s not easy to combine the two.”

He continues: “However, Scope analysts

don’t work in silos, thanks to our ability to

deploy the right skills. The focus on diverse

expertise has been reflected at governance

level, through our use of multidisciplinary rating

committees since the very beginning.”

York 2019-1 CLO structure diagram

Originator/

servicer

Ring-fenced

portfolio

1,268 SMEs

£3.08bn

Source: Scope Ratings

Guarantee

premiums

Collateralised

guarantee under

the Credit

Protection Deed

Class A

£2,395m

AAASF

Class B

£264m

ASF

Class C

£96m

BBBSF

Class D

£124m

BBSF

Class E

£233m

NR


STANDARDISED BANKS MAY

INDEED DEMONSTRATE STRONG

UNDERWRITING STANDARDS


An example of the application of this

approach is project finance, where Scope has

been particularly active. Very few project

finance deals have been rated, due to idiosyncratic

risks, which increase the complexity of

the analysis. However, a deep dive analysis

of the specific assets can prove fruitful in

this case.

Scope was also one of the few rating agencies

to have rated a dual-tranche transaction,

Issuer

York 2019-1

CLO DAC

(Orphan

SPV)

Senior cash

deposit

CLN interest and

cash collateral

principal release

Junior cash

deposit

Credit protection

payment

Fully funded

A Notes -

CLN

B Notes -

CLN

C Notes -

CLN

D Notes -

CLN

E Notes -

CLN

Retained by

Santander

Placed with

investors

such as Santander’s York 2019-1 CLO. Rating

analyses of senior mezzanine tranches aim

to render the deals more comparable to public

transactions.

Jolivet notes: “SRT investors who conduct

the due diligence are often sophisticated and

such structures are generally non-standard,

meaning they are not exactly comparable with

flow transactions. Even so, we assess these

transactions using a comparable expected

loss approach, which is the core of our rating

methodology.”

Indeed, Scope applies a consistent rating

methodology across transactions, including

those originated by standardised banks.

Jolivet states: “Our analysis of a deal incorporates

the quality of the structure and the risk

profile of the assets. Whether a bank is under

a standardised or IRB approach may result in

different constraints on our analysis. But this

makes no difference, as long as the quality of

data available to analyse the assets meets our

standards and standardised banks have shown

they can meet those standards.”

He concludes: “Standardised banks

may indeed demonstrate strong underwriting

standards. These banks may actually sometimes

share less sophisticated but more

detailed information about their assessment

of risks. What remains a key driver of

asset quality, however, is the quality of asset

origination.”

HONOURABLE MENTION: AON

Aon has raised awareness of risk transfer

technology through education and

training initiatives with global institutional

clients that resulted in over US$600m of

commitments to risk transfer strategies

over the awards period. Aon has positioned

capital relief trades as an alternative private

debt solution that fits with its clients’

broader strategic allocation to private debt,

either to meet income requirements or

provide a higher and more attractive return

on a risk-adjusted basis, compared to other

illiquid credit strategies. As part of these

efforts, the firm structured a vehicle for one

client with capacity for €1bn in risk transfer.

26 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


Award-winning excellence

in Structured Finance.

Scope Ratings awarded best service provider of the year on Synthetic

Risk Transfers by Structured Credit Investor.

Unparalleled execution on complex and nonstandard transactions for

the benefit of issuers and investors. Scope Ratings brings depth and

transparency to credit investment decisions by offering an inside-out

perspective on European credit markets.

www.scoperatings.com

Scope

Ratings


Personal Contribution to the Industry

PERSONAL CONTRIBUTION TO THE INDUSTRY

WINNER: MASCHA CANIO, Head of Credit

& Insurance Linked Investments at PGGM

Heading up a team responsible

for one of the largest

investment portfolios in

the sector that has driven

market growth while setting

a benchmark that others follow would

perhaps be enough. But Mascha Canio’s

personal contribution extends further as

one of the most long-standing and visible

investors and an advocate for a focus on

risk-sharing and transparency to ensure

the capital relief trade market’s future

sustainability.

PGGM typically invests in first-loss

tranches and calls these ‘risk-sharing transactions’

(see box), to highlight the fundamental

principle of sharing of the credit risk with the

originating bank. By classifying capital relief

trades as such, the aim is also to avoid the

negative connotation created by the harmful

practices of arbitrage synthetic deals in

the past.

“We feel strongly that the ethos of

risk-sharing is important, both in terms of

the numbers and the relationship behind

them,” says Canio. “While regulations have

stipulated 5% since 2013, we have always

required the risk-sharing bank to retain a

minimum 20% of each loan referenced in

the transaction and have done deals at even

higher levels.”

She continues: “We would regard it as very

odd if the issuer cannot hold more than 5%

of their portfolio and it would certainly raise

a red flag. Usually, we are only dealing with a

proportion of the bank’s overall loan book and

so it isn’t an issue. Again, if it was the whole

book, that would be a concern.”

In any event, the risk-sharing relationship

is constructed so that there is no danger of

adverse selection from either side. Canio

explains: “Typically we work with issuers

who have already understood and believe

in alignment of interest on carving their

portfolio from outset. That is done on a

blindfold (i.e. non-discretionary) basis and is

restricted to the bank’s core activities, as they

are most likely to receive full attention to

ensure ongoing high quality and successful

risk management.”


WE FEEL STRONGLY THAT

THE ETHOS OF RISK-SHARING

IS IMPORTANT, BOTH IN TERMS

OF THE NUMBERS AND THE

RELATIONSHIP BEHIND THEM


While risk-sharing is an immediately

logical approach, Canio’s public support

of transparency in a highly private market

initially appears counterintuitive. However,

she argues that transparency shouldn’t be allencompassing;

instead, there is a good balance

to be found.

She explains: “It is a question of determining

where there is value in a deal remaining private

and where there is value

in a deal becoming public.

For the market to continue

to grow, it needs to

show soundness and that

requires transparency.”

Canio says there

are multiple themes

underlying her belief

in transparency. First,

there is the relationship

with regulators.

“If there is no transparency,

it makes it difficult

for regulators to work

with the market, which

benefits both them and

issuers,” she continues.

“It’s logical to know what

deals are being done and

what they have achieved;

it is illogical that passing

this information on is not

yet an automatic process.

If such information

continues to be collated

at the highest level, as it

was for the EBA, surely no-one could object

and the proprietary aspects of deals would

be safeguarded.”

Second, there is the information provided

to investors. “The EBA is looking at the

standardisation of transaction structures, a

next step which will be useful for the market is

to ensure the right type and quality of data is

shown to investors. At the same time, it must

28 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


Personal Contribution to the Industry

PFZW active credit risk sharing transactions as at 31 December 2018

Year Deal name Originator Indication of market value Size of reference portfolio Asset Class

2018 Sumeru III Standard Chartered Bank $250-500m $3bn Corporate loans

2018 Shangren IV Standard Chartered Bank $250-500m $4bn Trade finance

2018 Resonance III BNP Paribas €500m-1bn €7.7bn Large corp and midcap loans

2018 Guilden XVII Credit Suisse $100-250m $1.8bn Corporate loans

2018 Guilden XVI Credit Suisse $100-250m $1.8bn Corporate loans

2018 Colonnade Global II Barclays $100-250m $2.3bn Corporate loans

2017 Renew Project Finance I Santander €250-500m €2bn Project finance loans

2017 Guilden XI Credit Suisse $250-500m $4bn Corporate loans

2017 Nightingale I National Westminster Bank £250-500m £4.6bn SME & Commercial/Residential IPRE loans

2017 Orient I Credit Suisse $250-500m $2.4bn Corporate loans

2017 Pommes II Rabobank €100-250m €3bn Corporate loans

2016 Colonnade UK I Barclays £250-500m £3.5bn Corporate loans

2016 Colonnade Global I Barclays $250-500m $5.6bn Corporate loans

2016 Elvetia IV Credit Suisse Sfr50-100m Sfr2.2bn SME and IPRE loans

2016 Resonance II BNP Paribas €100-250m €5bn Large corp and midcap loans

2016 Archean I Nordea Bank €250-500m €8bn SME & corporate loans

2015 Metrix I HSBC $100-250m $5bn Corporate loans

2015 Darts III Deutsche Bank €250-500m €4.5bn Corporate loans

2015 Terra VI Citi $100-250m $3.5bn Corporate loans

2015 Victoria I Santander €50-100m €2.3bn SME loans

2014 Pommes I Rabobank €50-100m €3.2bn Corporate loans

Source: Stichting Pensioenfonds Zorg & Welzijn (PFZW)

PGGM IN NUMBERS

PGGM has had a dedicated mandate to invest

in balance sheet synthetic securitisations

since 2006, on behalf of its client, Stichting

Pensioenfonds Zorg & Welzijn (PFZW), the

€225bn pension fund for the Dutch healthcare

sector. As at 30 June 2019, PGGM had

around €5.8bn invested in credit risk-sharing

transactions referencing around €70bn of

loan portfolios related to a diverse group of

geographies (more than 90 countries) and asset

types across the world.

In 2018 alone, PFZW invested €1.5bn

spread over six credit risk-sharing transactions

with four different banks, referencing

over €19bn in global loan exposures, ranging

from developed market large corporate loans

to emerging market trade finance. All of these

transactions were entered into with long-term

partners of PFZW, with several of the relationships

dating back more than 10 years.


IT’S NOT ABOUT TELLING PEOPLE

WHAT THEY SHOULD DO; RATHER,

IT IS SHOWING THEM WHAT THEY

CAN DO


also consider the ability of investors to check

that data.”

Third, there are the ramifications of the

increasing number of market participants and

the need to attract more. “Deals are now often

syndicated or subject to central bidding, so

many more people know about deals than in the

past. The wider the array of participants there

are, the greater the need for the education of new

entrants. With transparency, it is easier for people

to learn lessons from deals in terms of what

can and can’t be done in practical terms.”

Last, but not least, are the benefits of passing

on details of deal structures. “If issuers

were more open about structures, it would

help other issuers and encourage investors.

You can show that there are so many buttons

you can push to effect the risk/return profile

of a deal.”

As Canio concludes: “It’s not about telling

people what they should do; rather, it is showing

them what they can do. That will only help

to continue sound growth and ensure the market

remains sustainable going forward.”

www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

29


CRT News

SCI CRT News

Nascent stages

| 3 October

The pace of growth of the risk transfer market is likely to be tied to the

development of the synthetic mezzanine risk market, which is currently

at a nascent stage (SCI 9 August). Traditional capital relief trade investors

have limited appetite for mezz, as absolute returns are low, even though

the risk/reward proposition is compelling.

“There is an interesting opportunity to create and scale a new mezz

investor base, by attracting asset managers and insurance companies that

currently invest in mezz ABS and CLOs. A different type of capital – targeting

3%-4% returns, rather than 8%-10% – is required,” says Kaikobad

Kakalia, cio at Chorus Capital.

Robert Bradbury, head of structuring and advisory at StormHarbour,

agrees that growing CRT mezzanine tranche volumes arising from dualtranche

structures may find demand from three types of investors: those

seeking risk-adjusted returns (such as insurers); those with a mandate

which includes bespoke transactions that offer relative value to comparable

traded instruments (such as some CLO mezzanine investors); and/

or those with very good access to leverage (such as real money investors

that can borrow with cheap funding rates). While demand from the latter

is less likely due to the lower expected returns from these tranches (and

hence a smaller difference between the tranche return and the cost of the

leverage), the natural place for insurers to play in is mezzanine, as riskadjusted

returns are often more important to them than absolute returns.

Kakalia concurs: “The scale in this segment will most likely come

from insurance companies. They are likely to find the risk/return interesting.

However, most insurers will require ratings and banks are yet to

issue rated mezzanine tranches.”

The investor base for mezzanine tranches needs time to evolve.

Although synthetic mezz risk presents an attractive risk/reward profile,

there is an opportunity cost – the decision whether to tie up cash

long term in a lower risk but lower yielding asset is not an easy one for

many investors.

As such, a slew of mezzanine-only rated deals is unlikely; rather,

they’ll emerge on a case-by-case basis. “The overall analysis becomes

more complex and expensive for publicly rated CRTs. Among several

possibilities for transactions adding mezzanine protection to an existing

structure (as opposed to incorporating the dual-tranche aspect from the

outset), one possible approach may simply involve a standard structure

and a mezzanine guarantee that incorporates the notes issued by the

SPV,” Bradbury concludes.

Corinne Smith

Issuance wave

| 2 October

Opel and Sabadell have settled their first full-stack significant risk transfer

transactions. The true sale deals are the latest in a slew of such issuance,

following the introduction of the STS framework this year (SCI

27 September).

The €900m Opel deal, dubbed E-CARAT 10, is backed by German

auto loans. According to Boudewijn Dierick, head of ABS markets at

BNP Paribas, which acted as arranger on the transaction: “It’s the first

full-stack E-CARAT deal that has been done for both funding and capital

relief purposes. Eight tranches have the effect of optimising capital,

rather than three, and the plan is to replicate the structure for future fullstack

transactions.”

Rated by DBRS and S&P, the transaction consists of €797.4m A A A/

A A A rated class A notes (which priced at one-month Euribor plus 70bp),

€21.6m A A/A A rated class B notes (plus 70bp), €18m A A/A rated class

C notes (plus 110bp), €18m A/BBB rated class D notes (plus 150bp),

€18m BBB/BB class E notes (plus 235bp), €9m BB/B- class F notes (plus

350bp), €9m B/CCC+ class G notes (plus 500bp) and €9m unrated class

H notes (which priced at a fixed 7%). Classes A to G were placed, but Opel

bank retained 5% of each note for risk retention purposes.

The deal features pro-rata amortisation, with triggers to sequential,

and a 2.2-year weighted average life. The pro-rata feature ensures that

capital efficiency does not erode after the end of the replenishment period

and permits banks to extend the duration of a deal.

Alex Garrod, svp at DBRS, notes: “The deal references German auto

loans where losses have been extremely low and tranches are very thin, so

there was sensitivity over the structural features. Overall, net losses have

been under 1% and the portfolio is granular compared to other German

captive portfolios.”

He continues: “However, the length of the pro-rata amortisation may

be an issue, given the sensitivity of the cashflows to a change in pool performance.

However, various triggers to sequential mitigate this. If you

didn’t have them, it could be difficult to pay the notes in full as an elongated

pro-rata period would allow more principal to the subordinated

notes compared to a sequential redemption.”

Additionally, the transaction suffers from limited levels of excess

spread. Garrod comments: “The starting yield is 2.6% and, following the

end of the revolving period, there is a 2.5% floor on the asset side. However,

higher levels of excess spread could be used to cure the principal

deficiency ledger and thus lengthen the pro-rata amortisation. Furthermore,

there’s nothing surprising about low yield levels, given that Opel

30 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


CRT News

bank is a captive lender and offers financing primarily to support new

vehicle sales for their respective OEM.”

Meanwhile, Sabadell’s SRT – dubbed Sabadell Consumo One – is a

€1bn true sale securitisation that is backed by Spanish unsecured consumer

loans. Rated by Moody’s and DBRS, the transaction consists of

€875m Aa3/A A rated class A notes (which priced at three-month Euribor

plus 41bp), €35m Baa3/A rated class B notes (priced at three month

euribor plus 140bps), €35m Ba2/BBB rated class C notes (plus 245bp),

€25m B1/B rated class D notes (plus 385bp), €30m unrated class E notes

(plus 575bp) and €9m unrated class F notes (plus 598bp).

The deal also includes an €80m excess spread securitisation position

at the bottom of the capital stack (class Z) that was sold with the rest of

the tranches. Further features include pro-rata amortisation, a two-year

weighted average life and a one-year revolving period.

Sergio Palavecino, Spain cfo at Sabadell, notes: “The transaction is our

first full-stack deal and capital relief trade. By selling the whole stack and

the excess spread position, we achieve both funding and capital benefits

and surrender any excess spread benefits or risks.”

However, although the excess spread has been sold, Moody’s notes

that the transaction does feature excess spread in trapped form. Alberto

Barbáchano, vp at Moody’s, explains: “If there are no defaults, then the

most junior investor will benefit from excess spread rather than the originator.

Yet, if not, the structure benefits from an artificial write-off that

traps the available excess spread to cover any losses.”

He continues: “In this respect, the deal benefits from strong default

definitions, compared to other Spanish consumer deals. The full amount

of the loan will be artificially written off, if it has been six months

in arrears.”

The ECB’s latest QE decision and spread levels were key drivers

behind the decision. Palavecino states: “We chose to come out this year,

due to tight spreads. So, before the summer, we estimated that we could

release efficient levels of capital. Six months ago, spreads would have been

wider, so the cost of capital would have been prohibitive. The ECB’s QE

decision was also already discounted by the market, so it made a lot of

sense for the economics of the deal.”

Looking ahead, Palavecino concludes: “We intend to originate one to

two transactions per year and we won’t be restricted to consumer loans.

SMEs is another potential candidate, since we have a large exposure to

the asset class.”

Stelios Papadopoulos

Cover opportunities eyed

| 27 September

BPL Global is to launch a new reinsurance platform and has hired Gregory

King-Underwood as director to spearhead the firm’s growth strategy.

This is driven by increased demand for portfolio-based risk weighted asset

(RWA) solutions from financial institutions, which the firm hopes can be

met by combining reinsurance and synthetic securitisation strategies.

James Esdaile, md at BPL Global, comments that King-Underwood’s

hire came at a time of increasing overlap with the reinsurance market,

alongside a rise in synthetic securitisation – creating BPL Global’s own

reinsurance platform therefore seemed like a “natural move.” He adds

that the firm has been receiving a number of enquiries from clients on the

use of captives, which prompted the firm to provide additional support to

cater for this interest.

Esdaile comments that by bringing reinsurance experience in-house,

it allows the firm to remain competitive and offer portfolio-based

cover for efficient risk transfer and better use of capital to its financial

institution and corporate clients. He adds that King-Underwood’s

extensive experience and knowledge harnessing these functions makes

him best placed to lead the global reinsurance and portfolios solutions

platform.

King-Underwood comments that the firm is “definitely” looking

to grow out its synthetic securitisation business, as “the demand from

our clients for portfolio-based risk-weighted asset (RWA) solutions is

increasing and the pool of reinsurers comfortable with providing this

type of protection is growing correspondingly.”

He continues: “While the need to better manage capital has always

existed, the implementation of the IRB output floors as well as the IFRS 9

impairment provisions mean the focus on synthetic securitisation will be

much more acute over the coming years.”

Likewise, he notes that BPL Global has long discussed how financial

institution clients can leverage insurance to better manage risk and so

the firm now aims to do the same in this developing area too. Currently,

says King-Underwood, there is a relatively low level of awareness around

securing this type of coverage using the insurance and reinsurance markets

– this something that he hopes to help remedy by encouraging dialogue

with regulators and other market participants around the various

applications and benefits.

At the heart of BPL Global’s approach is innovating around portfolio-based

cover, in part as a result of increased enquiries about this from

financial institutions. As such, the firm aims to tap the credit (re)insurance

market to service this demand.

King-Underwood says that the (re)insurance market is much better

positioned to assess and understand the wide spectrum of risks associated

with project and object finance portfolios, which fall within specialised

lending exposures under the Basel framework. He adds that the

firm will also be incorporating the other non-technical market practice

aspects of the (re)insurance market, such as the confidentiality it provides,

which reduces the market noise of a transaction.

He continues: “In time, we hope to foster deep and long-term relationships

between financial institutions and (re)insurers allowing for more

stable synthetic securitisation market development.”

In terms of the future of the synthetic securitisation, Esdaile says that

while it has a chequered history, it has nonetheless survived the test of

time and remains an important tool for financial institutions to manage

their loan portfolios. He says: “Indeed, the current market for funded protection

for the more standardised asset classes is very sophisticated. That

said, we expect the (re)insurance market to be able to also provide cover

for less liquid asset classes such as project finance, where it has greater

insight into the risks involved.”

www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

31


CRT News

Esdaile concludes: “Looking beyond the synthetic securitisation market,

a portfolio-based approach to providing credit risk transfer would

also be beneficial for those companies providing credit who are not (yet)

financial institutions, such as Paypal and Square.”

Richard Budden

STS synthetics framework unveiled

| 25 September

The EBA has published its long-awaited discussion paper on its proposals

for an STS framework for synthetic securitisation (SCI 20 September). The

discussion paper aims to enhance transparency and further standardise

risk transfer trades – although, for the moment, STS synthetic securitisations

won’t benefit from preferential capital treatment via a reduction in

senior tranche risk weights.

According to Christian Moor, principal policy officer at the EBA: “The

discussion paper was created from scratch, although we incorporated features

from the discussion paper on significant risk transfer and our 2015

paper on synthetic securitisations. It aims to further standardise the market

– including its structural features – and enhance transparency.”

Indeed, as part of the effort to enhance transparency, the EBA carried

out a data exercise with the International Association of Credit Portfolio

Managers (IACPM). Data supplied by the association’s 22 member

banks constituted the main source of the performance data that are presented

in paper. IACPM data were supplemented by rating agency data

and supervisory data on significant risk transfer transactions.

The paper uses lifetime default rates to show how synthetic securitisations

have performed better than traditional securitisations for all asset

classes. Demonstrating the strong performance of risk transfer transactions

was the most important hurdle from the EBA’s perspective.

The idea of a discussion paper on STS synthetic securitisations was

considered highly improbable over a year ago, but several factors have

forced a paradigm shift on this issue. Moor explains: “STS came into

force this year and supervisors had the chance to look at the first STS

deals and they got comfortable with the label, but they realised that they

had no data on synthetics. So supervisors saw this as an opportunity to

standardise the market and help facilitate significant risk transfer, due to

concerns over excess spread and other issues.”

Nevertheless, the discussion paper doesn’t currently envisage any

preferential treatment for STS synthetic securitisations. Moor notes:

“At this stage, it was too early to opine on that. The STS market has just

started this year, so more evidence is needed to see if it works.”

He continues: “Our work has provided more clarity on transaction

performance, although defaults usually happen somewhere between

three to five years and the data collected is limited. The CRT market, on

the other hand, has picked up over the last two years.”

Moor notes that Basel also doesn’t have a framework for this and

supervisors have found it difficult to come up with recommendations that

deviate from it. “However, the data shows that synthetic securitisations

perform well – which is one of the arguments to consider for a preferential

capital treatment. We are waiting for industry feedback on the topic.”

The discussion paper’s most salient features concern provisions over

counterparty credit risk, early termination, synthetic excess spread and

credit events.

The counterparty credit risk provisions are in line with Article 270 of

the CRR, which states that STS synthetic securitisations should reference

SME loans and be carried out with an SSA or cash collateralised

with private investors. However, the discussion paper attempts to balance

the risk between the investor and the originator, since if the collateral is

deposited with the originating bank it can be lost under a bankruptcy scenario.

Consequently, the paper notes that the collateral should be deposited

in an account of a third-party credit institution or held in a trust.

Typically, under a bankruptcy scenario, contract clauses allow investors

to terminate the protection, since that scenario exposes them to a

bank’s deteriorating servicing standards. However, from a supervisory

perspective, the capital that was previously released after the completion

of a capital relief trade and the achievement of SRT hasn’t been replaced

following the termination of the protection. Hence, the discussion paper

specifies that the protection cannot be terminated when the originator

goes bankrupt.

The paper also prohibits the use of synthetic excess spread, since it’s

a “complex structural feature”. According to the paper, the complexity

arises with respect to the quantum of committed excess spread, its calculation

and allocation mechanism.

However, from an issuer perspective, synthetic excess spread should

not hinder significant risk transfer. Banks have noted in the past that

excess spread is not a balance sheet item, given that it is future income and

therefore there is no need to hold capital against it, as per CRR requirements.

Consequently, if there is no impact on the capital position of the

bank, then using it to absorb losses should not hinder SRT (SCI 1 March).

Finally, the document states that credit events have to incorporate

restructuring events. Moor states: “For a synthetic framework, you need

a balance between investor and originator risk and, in this case, a restructuring

event would give the originator room to cover any losses.”

Looking ahead, Moor concludes: “We won’t see an STS synthetic

securitisation until 2021. But in the meantime, the paper should help educate

supervisors on the risk transfer benefits of synthetics, while facilitating

the SRT assessment of transactions and help banks comply if we end

up with a regulation in two years’ time.”

The consultation ends on 25 November and a public hearing will take

place at the EBA’s premises in Paris on 9 October. Beginning in December,

the authority will be assessing market feedback and deliver a report with its

recommendations to the European Commission by June next year.

Stelios Papadopoulos

32 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com


CRT News

Legacy SRT call possibility

| 20 September

Banks could potentially call legacy capital relief trades (CRTs) next year,

as higher senior risk weights for these deals kick in, following the end of a

one-year grandfathering period. Higher senior risk weights could render

the deals less efficient and justify calling and restructuring a transaction,

but whether calls are exercised or not will depend on what counts as a

regulatory change and the specificities of each trade.

Legacy capital relief trades that were completed before January 2019

have received a one year grandfathering period that ends on 31 December

2019. The revised Capital Requirements Regulation (CRR) stipulates

higher risk weights for the retained senior tranches, unless transaction

criteria match article 270 of the CRR.

According to the article, STS risk weights can only be provided to

synthetic securitisations that reference SME portfolios where the counterparty

is an SSA, such as the European Investment Fund or an institutional

investor who provides funded protection.

Additionally, new rules that specify escalating risk weights based on

the maturity of a tranche have the potential of further reducing the efficiency

of the transactions. The EBA’s guidance on tranche maturity, in

particular, artificially produces longer weighted average maturities for

funded deals (see SCI 23 August).

CRTs that were completed after January 2019 have addressed the

higher risk weights that the new regulations demand through the application

of structuring techniques, such as the dual tranche technique (SCI

26 January 2018). However, such tweaks may not solve the issue for all

legacy transactions given the specificities of each deal.

Consequently, banks could potentially call their risk transfer trades and

issue new ones. According to Jo Goulbourne Ranero, consultant at Allen

and Overy, “the new requirements for legacy deals could well facilitate the

exercise of regulatory calls but depending on their precise terms, such as

whether retained senior risk weights increase significantly, especially given

the absence of offsetting STS-related reductions in capital requirements.”

She continues: “There is a clear change of law and a potential impact

on the distribution of economic benefits derived from the transaction by

any of the parties in the transaction, as required for a valid regulatory call.

However, the regulatory calls are exercised at the originator’s discretion

and whether they will be triggered or not will depend on several factors

including investor or reputational concerns.”

Steve Gandy, md and head of private debt mobilisation, notes and

structuring at Santander Corporate and Investment Banking comments:

“The new regulations will reduce the efficiency of legacy deals so

regulatory calls could potentially be triggered. In that scenario we would

have to issue new transactions and sell additional tranches or opt for

SSA and/or unfunded insurer deals, if existing investors aren’t willing to

accept the lower returns that come with thicker tranches. The returns will

have to be reduced, otherwise we will be paying the same premium for a

lower amount of capital relief.”

Santander has already utilised the SSA option in its last Magdalena

deal (SCI 9 July), where the EIF stepped in to finance the senior mezzanine

tranche and, as a result, the Spanish lender introduced an additional

mezzanine tranche that provides additional capital relief and lowers the

cost of capital. However, if portfolio characteristics imply shorter maturities

for the senior retained tranches – and lower risk weights - then selling

additional tranches may be unnecessary.

Nevertheless, several issuers are more certain of a scenario that

doesn’t involve any triggering of regulatory calls. An issuer comments:

“I suspect most banks will attempt to sell additional mezzanine tranches

over and above the initial ones instead of exercising any regulatory calls. I

reckon that only legacy SRTs printed before 4Q17 may be called since the

revised securitisation framework was finalised then and therefore might

be deemed a change of regulation when considering a call trigger.”

Similarly, an md at a large European bank remarks: “We issued mezzanine

tranches on top of our equity so there was no need to call a deal.

We chose this option because the deals were performing well so we were

confident that we could get an attractive pricing.”

However, much will depend on what counts as a regulatory change

and that remains far from clear. According to a legal expert, “if you issued

a deal this year, when the revised CRR was already in force, then there

would arguably be no regulatory change when the revised risk weights

come into effect in 2020 because the change occurred in 2019 – it’s just

that part of that legislation had a forward start date.”

The legal expert continues: “If you issued pre-2019 when the legislation

was in draft form, then you might be able to argue that there is a

change. However, if the contractual wording has regard to what is in the

issuer’s contemplation at the time of issuance then there could be less of

an argument, if the provisions of the draft legislation on the issue date and

the final legislation are similar. Yet if they do differ one could say that the

issuer knew that there would be changes.”

Finally, banks will have to consider the specificities of each deal.

A structurer at a large European bank concludes: “If the change in the

Securitisation Regulation was not contemplated at the time a transaction

was executed, you still have to show that the change in regulations has an

adverse impact on the efficiency of the deals. However, the impact of the

new regulations on a grandfathered deal will depend on the specificities

of each deal; some deals may actually benefit from the new regime.”

Stelios Papadopoulos

www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

33


Leading Structured Finance Information

PriceABS

CLO CDO ABS RMBS CMBS

Structured Credit Investor’s PriceABS secondary

market pricing service tracks secondary market trading

• Pricing data

• Discount Margin

• Yield

• WAL

• Attachment point

• Detachment point

• CPR, CDR

• Daily market commentary

Enter < APPS SCI > GO on Bloomberg to launch SCI PriceABS as a fully integrated app.

Get the Bloomberg App for a hassle-free, 1-click onboarding process:

• No new 3rd party licensing required – just add the App to your existing Bloomberg contract

• No 3rd party invoicing – BBG will invoice you as part of your normal process each month

For a free trial please email sc@structuredcreditinvestor.com or contact us on +44 (0)20 3911 6440


Data

Capital relief trades by jurisdiction September 2018 to September 2019

10

9

9

Deals issued

8

7

6

5

4

3

2

1

6

5 5

4

3

2 2 2

1 1 1 1 1 1 1 1 1 1 1

0

Africa

Africa, Dubai, India, UK

Asia

Czech Republic

Europe

Europe/US

Finland

France

Germany

Global

Global developed markets

Italy

Poland

Portugal

Spain

Switzerland

UK

Unconfirmed

US

US/Canada

Source: SCI capital relief trades deal database

Capital relief trades by asset class September 2018 to September 2019

Deals issued

13

12

11

10

9

8

7

6

5

4

3

2

1

0

5

Auto loans

Commercial real estate loans

Consumer loans

Corporate & SME loans

Source: SCI capital relief trades deal database

12

3 3

3

1 1 1 1 1 1 1 1

Corporate loans

Corporate, SME & retail loans

Infrastructure loans

Leveraged loans

Non-performing loans

Project finance loans

Residential mortgages

Senior secured/unsecured corporate loans

SME and mid-cap loans

11

4

SME loans

Trade Finance

www.structuredcreditinvestor.com

SCI Capital Relief Trades Awards | October 2019

35

More magazines by this user
Similar magazines