SCI CRT Awards Issue Oct 19

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
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