Sector developments and new hires in structured finance

Acquisitions

Franklin Templeton has acquired Benefit Street Partners, expanding its fixed income capabilities to include an array of alternative credit strategies. The combination of BSP’s experience and capabilities with Franklin Templeton’s global scale and extensive resources in more liquid credit investing is expected to enhance the firm’s origination capabilities and increase its expertise across the leveraged finance market. The transaction is expected to close in Franklin Templeton’s second quarter of fiscal 2019. Following the acquisition, the firm’s alternative offerings will represent more than US$40bn in assets under management.

CLO debut

Rockford Tower has prepped its first Euro-denominated BSL CLO, totalling €407m. Dubbed Rockford Tower Europe CLO 2018-1, and has provisional ratings from Fitch on the class A1 (three-month Euribor plus 103bp) and A2 notes (plus 120bp) of triple-A. Fitch notes that, unlike other European CLOs, the frequency switch event is reversible once the frequency switch obligations are less than 20%. The transaction may therefore switch back from semi-annually to quarterly even if a majority of obligations are still paying on a semi-annual basis. In which case, the liquidity stress is addressed by the interest smoothing account.

Credit risk first

Fannie Mae has prepared its first credit risk sharing transaction to be issued using a real estate mortgage investment conduit (REMIC). Dubbed Fannie Mae Connecticut Avenue Securities (CAS) 2018-R07, the transaction features an offered amount of US$921,887,000m and references a pool of 98,657 prime, fixed-rate mortgages, totalling approximately $24.3bn. According to Fannie Mae, the transaction is designed to promote the continued growth of the market by expanding the potential investor base for these securities. It achieves this by making the CAS programme more attractive to real estate investment trust (REIT) investors, as well as other investors.

Additionally, the REMIC construct provides noteholders with reduced counterparty risk exposure to Fannie Mae through a cash securitisation. While Fannie Mae will act as transaction trustor and administrator, the offered notes represent obligations of CAS Trust 2018- R07, a REMIC trust, not Fannie Mae. Payments to the Notes will be governed in part by the CAA and the CCA between the Issuer (credit protection seller) and Fannie Mae (credit protection buyer). The CAA and the CCA represent unsecured contractual obligations of Fannie Mae.

Europe

Axa IM has hired Yannig Loyer as global head of trading, based in Paris. He will report to Daniel Leon, head of engineering and trading, and will manage the fixed income, equity, and FX trading globally. He will be responsible for the leadership, development, oversight, and performance of AXA IM’s execution capabilities while the derivatives and security financing teams will continue to report to Daniel Léon. Loyer was previously md, global markets senior relationship manager, continental Europe at Bank of America Merrill Lynch and prior to that md, head of EMEA credit structuring at the bank.

Hurricane impact?

Analytics firm TheNumber has run the cashflows for Freddie Mac’s STACR 2018-DNA3 30-year securitisation through a custom credit option-adjusted spread model developed specifically to incorporate historical weather data, along with 24 different hurricane simulation models published by the National Oceanic and Atmospheric Association to estimate the impact of hurricanes on credit risk transfer deals. The firm found that there are no likely scenarios where a single event, or even a single bad year of weather, would result in any meaningful impact to bondholders in isolation. However, using the average of the 24 different hurricane model predictions (which predicts a circa 175% increase in Power Dissipation Index) over 30 years, the 2018-DNA3’s M1 and M2 tranches lose all interest and some principal, while the subordinate B1 and B2 tranches are completely wiped out. Based on the worst-case scenario of the 24 models (a circa 350% increase in PDI) over 30 years, the M2s are wiped out completely and the AH tranche takes losses of over US$1bn.