Sector developments and company hires

Credit system a positive for China SF deals

China’s plan to establish a comprehensive, nationwide credit information system by 2020 is credit positive for the country’s structured finance deals, because this system will reduce the risk of loan defaults and bolster recovery prospects, according to Moody’s. The rating agency says this development will also help break down credit information barriers in China, which will improve the quality of loan underwriting, thereby reducing the risk of defaults in loans backing structured finance deals.

The aggency adds that a comprehensive credit information system will deter negative credit behavior and make it easier to identify people with poor credit records. This, combined with the fact that authorities in China have the power to restrict certain social benefits for people with poor credit records, will reduce the propensity to default. In addition, some people who have previously defaulted on loans may be more inclined to repay the previously defaulted debts to clean up their negative credit records, which will bolster recovery prospects on defaulted loans.

Cov bond conversion credit positive

Lloyds' bondholders recently approved the conversion of covered bond Series 2018-3 from Libor to Sonia – the first UK covered bond or structured finance note to do so. Moody’s comments that the bondholder approval  is credit positive for the issuer's covered bonds and other Libor linked covered bond and structured finance securities because it paves the way for the significant stock of legacy notes that will need to transition to alternative benchmark rates before Libor’s demise at the end of 2021. It also indicates the required spread adjustment between the benchmark rates and bondholders' support of the issuers’ efforts to a transition away from Libor. 

SF partner appointed

Seyfarth Shaw has appointed partner Paul Kruger to its corporate department in New York as global chair of the firm’s structured finance group. He joins from Katten Muchin Rosenman, where he was a partner in its structured finance and securitisation group in New York. For more than 25 years, Kruger’s structured finance practice has focused on representing financial institutions, sovereign wealth funds, private equity investors, funds and corporations in a wide variety of financing transactions across the US, Asia, Europe and the Middle East. His arrival marks a significant step in Seyfarth’s strategic plan to expand its corporate presence in New York and across the US.

WSJ article questioned

KBRA has responded to a Wall Street Journal article published on 7th titled “Investors Should Fear More Competition Among Ratings Companies.” The firm says that, most notably, the author of the article incorrectly states that in his defined time period (June through September) the three European CLOs rated by KBRA had the highest levels of debt relative to equity.

KBRA states that this this is false and that a cursory review of the non-KBRA rated European CLO universe in this time period indicated at least six deals with higher leverage, and there may indeed be more. The article also says KBRA requires lower enhancement on tranches for European CLOs, by highlighting three deals in a time period that “saw dozens of CLOs rated and issued.”

KBRA adds that, given variances in structures and portfolio composition, it is impossible to infer from such a small sample size whether the deals had higher or lower credit quality than other deals in the market. Further to this point, notes KBRA, the agency’s rated deals were for three of the largest, most seasoned managers in the European CLO market, which is generally a credit positive. Another factual error - says the agency - in the article is in the lead-in chart, which is inaccurate and misleading. KBRA did not assign ratings on the AAA tranche of the three deals named in the article, nor was it asked for feedback on enhancement levels for those AAA tranches.

The agency says further that it is also unclear what data the author used to calculate the average enhancement for the most senior tranches on KBRA-rated deals. The correct average subordination for the AAA tranches of the KBRA-rated European CLO transactions is 38.17% - 34.83%, as reported - which is actually higher, not lower, enhancement than the reported subordination on AAA tranches of non-KBRA rated deals (37.71%). Finally, KBRA challenges the premise of the article that competition should be feared, and strongly believes that delivering higher quality information to investors creates positive outcomes for the market.