Sector developments and company hires

CLO stress scenario updated
Fitch is set to apply an updated stress scenario to all CLO portfolios involving issuers with greater vulnerability to disruptions caused by coronavirus. The agency’s previous scenario focused on seven industries vulnerable to impacts from the pandemic, but will be expanded to include issuers with loans in CLOs from the automobile industry, as well as all corporate issuers on negative outlook regardless of industry sector.

Fitch says the new stress scenario results in average default projections within portfolios of 7% for the first year and 8% for the second year for EMEA CLOs, and 7.5% and 9% for US CLOs. At the same time, as Fitch projects default rates to increase, it also expects recoveries in the eight vulnerable industries to decrease. The agency therefore will also apply a haircut to recovery assumptions in its updated stress scenario.

As a result, Fitch expects that increased numbers of CLO ratings will be placed on rating watch negative (RWN), with the greatest exposure at the sub-investment grade rating levels. For EMEA CLOs, the agency expects that the majority of sub-investment grade ratings will be placed on RWN. Most investment grade ratings are expected to be resilient under the expanded sensitivity stress, but some may be placed on negative outlook if the sensitivity stress shows a small shortfall.

The agency will test the entirety of its CLO note ratings using this new sensitivity approach and expects to publish the results of the review over the next two weeks.

In other news…

ABS CDOs transferred
Dock Street Capital Management has been appointed replacement asset manager to four ABS CDOs. The firm replaces Princeton Advisory Group as asset manager on Silver Elms CDO and CDO II, as well as Ischus Capital Management on the Coda CDO 2007-1 and Ischus Synthetic ABS CDO 2006-2 transactions. For more CDO manager transfers, see SCI’s database.

CECL delay urged
The US SEC and FASB will not be revising or suspending any accounting standards, including the current expected credit loss (CECL), despite Congress and the federal banking regulators granting insured depository institutions the option to delay CECL implementation (SCI 31 March). As of end-March 2020, large non-bank financials must begin reporting using the CECL standard, which requires lenders and investors to reserve for estimated life-of-loan losses on day one of origination or acquisition. The CRE Finance Council has submitted a letter recommending that the SEC and FASB delay the CECL standard and extend the optional relief to all companies.

Dividend cancelled
In light of the ongoing uncertainty caused by the Covid-19 pandemic, Volta Finance has cancelled the dividend payment that was planned for 28 April to “avoid sales of assets at unattractive prices” and remove financing risks. The fund notes that the dividend payment was to be financed predominantly from the payments from its CLO positions (mostly CLO equity pieces) that are expected in the coming weeks. In normal market conditions, these cashflows would have been in the region of €9m to pay a dividend that amounts to €5.6m. However, it says there is a growing uncertainty regarding these short-term cashflows because of the rapidly accelerating pace of rating agency downgrades.

EMEA
Ranajoy Basu has joined McDermott Will & Emery’s London office as a partner. He was previously a partner at Reed Smith and has a background in structured finance, derivatives, debt capital markets and debt restructurings.

Reserve fund upped
Following the spread of Covid-19, Bpifrance Financement has agreed with the French government to introduce a mandatory six-month moratorium on principal and interest payments of all its SME loans. As a result, any repayments on securitised loans will be suspended for a six-month period and the maturity of the associated loans will be lengthened by six months. In this context, the transaction documents for FCT Bpifrance SME 2019-1 have been amended to include a temporary increase of the reserve fund from €4m to €10.8m to cover class A and B interest payments, as well as fund expenses during a six-month period. The extra €6.8m will be reimbursed to Bpifrance Financement starting from January 2021, according to Scope, which has confirmed that no rating action is warranted.

Retail CMBS rating actions
Fitch has taken negative rating actions on five UK and three Italian retail CMBS, reflecting the impact of Covid-19 containment measures. All the notes of Intu Metrocentre Finance, Meadowhall Finance and Trafford Centre Finance were downgraded and placed on rating watch negative, while Westfield Stratford City Finance No. 2 notes have been placed on RWN and there is a negative rating outlook on the class A notes of Land Securities Capital Markets. Meanwhile, the agency has downgraded all classes of Emerald Italy 2019 and Pietra Nera Uno and placed them on RWN, and downgraded the Deco 2019-Vivaldi class B, C and D notes and placed all notes on RWN. Separately, Fitch placed the A and B tranches of CPUK Finance, the Center Parcs whole business securitisation, on RWN.

UK SLABS downgraded
Fitch has downgraded by a notch the class A1 notes of Income Contingent Student Loans 1 (2002-2006) (ICSL1), as well as the class A1 and A2 notes of Income Contingent Student Loans 2 (2007-2009) (ICSL2) to double-A minus. The action follows Fitch’s downgraded of the UK's long-term IDR to double-A minus (negative outlook) from double-A on 27 March. The ratings of the class A1 notes of ICSL1 and the class A1 and A2 notes of ICSL2 are capped at the UK's long-term issuer default rating, due to a combination of operational risk and direct reliance on the UK government's credit strength. In particular, the repayment mechanism implies that collections can only be performed by the UK tax authorities, while the transaction benefits from government indemnifications of the issuer for certain key loan-term modifications.