Sector developments and company hires

CLO manager performance assessed
JPMorgan has issued its latest CLO manager quarterly reports for both the US and Europe.

72% of US CLOs are now failing their S&P triple-C test and 38% are failing their Moody’s Caa1 test, but there are still three managers passing both tests in all of their transactions: Blackrock, DFG/Vibrant, and Silvermine. Meanwhile, JPMorgan CLO research analysts note: “European ratings are less onerous than in the US, but the monthly reporting deteriorated very recently. Overall, the percentage of CLOs exceeding triple-C haircut thresholds has risen to 19% and 35%, failing Moody’s and S&P respectively.”

They continue: “Par build (or burn) has been in focus through the crisis as managers trade leveraged loan market volatility and experience defaults.” The US average par change was -14bp in April and -31bp year-to-date. Only 19% of managers built par both in April and YTD. Of those, nine managers (GoldenTree, New York Life, Eaton Vance, Credit Suisse Asset Management, Sculptor, Invesco, PGIM, Pinebridge and Neuberger Berman) did so while “keeping a lid on risk” (i.e. with below average WARF).

Among the 45 European CLO managers JPMorgan assessed, 49% built par in April, compared to an overall average -5bp par burn. On a YTD basis, 40% built par, compared to overall average of -9bp. Again, there were nine managers that built par in 2020 YTD and currently have below average WARF across portfolios: Black Diamond, Hayfin/Kingsland, Apollo/Redding Ridge, BNP Paribas, King Street, Invesco, Commerzbank, GSO/Blackstone and Natixis.

In other news…

CMBS delinquencies spike
The majority (96%) of remittances for May within the Fitch-rated US CMBS conduit universe have been reported, showing that 30-day loan delinquencies increased exponentially, rising 12 times as much as for April. Approximately US$13.5bn across 733 loans was newly categorised as 30-days delinquent this month, of which nearly 78% by balance were hotel and retail loans. An additional US$924m across 49 loans was added to Fitch's delinquency index as 60-days delinquent. These delinquencies are expected to contribute nearly 20bp to the agency’s overall delinquency rate, which was 1.32% in April, with US$1bn reported as 30-days delinquent.

Korean ABS Act to be updated
South Korea’s Financial Services Commission (FSC) is set to amend the country’s Asset-backed Securitization Act, taking into account feedback from market participants at an industry meeting this week. The FSC acknowledges that due to reforms in the registered securities system being delayed, the securitisation market has been unable to fully accommodate diverse demand.

Among the necessary improvements highlighted by the FSC are: introducing a risk retention rule, requiring asset holders to retain 5% of credit risk to prevent conflicts of interest; establishing a consolidated information system to facilitate transparency in data management; improving the ABS-specific credit evaluation system; removing the double-B rated credit requirement for businesses when issuing ABS; allowing multi-seller programmes to facilitate securitisation of receivables; and including intangible property rights and future assets as ABS underlyings. The government also plans to test run intellectual property (IP) royalty-backed ABS by establishing a KRW20bn IP investment fund.

Separately, the government, the Bank of Korea and the Korea Development Bank are creating a KRW10trn SPV to help stabilise the country’s corporate bond market, with the possibility of increasing its size to KRW20trn. Funding sources comprise KRW1trn equity capital from KDB, KRW1trn in subordinated loans from KDB and KRW8trn in primary loans from BOK. Double-A to double-B rated corporate bonds (including junk-rated bonds that were downgraded from investment grade, due to Covid-19) and A1 to A3 rated CP and short-term debt with a maturity of up to three years will be purchased under the facility.

North America
Jonathan Green has stepped down from the Annaly Capital Management board, upon the scheduled expiration of his term at the company’s annual meeting of stockholders held yesterday (20 May). Green joined the board prior to the company’s IPO in 1997 and had been serving as a vice chair alongside Annaly’s co-founder Wellington Denahan, as well as chair of the corporate responsibility committee and a member of the compensation committee and risk committee. Following the annual meeting, Denahan assumed the role of chair of Annaly’s risk committee, while independent director Katie Beirne Fallon replaces Green as chair of the corporate responsibility committee.

RFC on GSE reg cap
The FHFA is seeking comments on a notice of proposed rulemaking that establishes a new regulatory capital framework for Fannie Mae and Freddie Mac. The proposed rule is a re-proposal of the NPR published in July 2018 and comments will be due 60 days after the notice is published in the Federal Register. The enhancements in the new proposal preserve the mortgage risk-sensitive framework of the 2018 proposal, while increasing the quantity and quality of the GSEs’ regulatory capital and reducing the pro-cyclicality of the aggregate capital requirements. The re-proposal is also a critical step towards responsibly ending the conservatorships, according to the FHFA.