Sector developments and company hires

Equity opportunities?
Despite a lack of visibility and liquidity and with cashflows likely to deteriorate further into upcoming July payment dates, there may be some opportunities in the CLO equity space, according to a new research report from JPMorgan.

It finds that while NAVs remain negative, there has been some improvement between March lows and late 2019. Equally, cashflow performance has not “completely fallen off a cliff”.

For US CLOs with a January/April/July/October payment schedule, quarterly equity cashflow returns declined to 2.79% in Q2 from 3.44% in Q1 and 3.89% in 4Q19. “A significant drop in Libor is in large part responsible for this decline (three-month Libor dropped from 1.90% in January to 0.36% currently),” the report says.

European CLOs with the same payment schedule experienced similar declines in quarterly equity cashflow return, dropping to 3.18% in April from 4.07% in January.

The report continues: “It’s difficult to call ‘the bottom’ in CLO equity, but there may be some interesting optionality in better-quality, assuming some variant of a V- to U-shaped economic recovery. Many scenarios generate large principal write-down on the equity notional, but relative value is more about pull-to-par potential in the underlying portfolio. The second-order effect of reinvesting into wider spread loans helps.”

…And in Euro deals?
Meanwhile, research from Bank of America published last week analyses the current differences between US and European CLOs higher up the stack. They find several pros and cons for CLOs on both sides of the Atlantic.

“European CLO double-B bonds have a higher credit enhancement versus US double-B (10% versus 8%), although there is also increased idiosyncratic risk in EUR CLOs. For instance, the top 100 loans account for 20% of a US CLO portfolio versus 46% in EUR CLOS,” the BofA CLO research analysts say. However, they add that the increased tail risk in US, coupled with lower OC cushions currently (1.5% for US double-Bs versus 4.4% for European double-Bs) imply a greater OC breach ratio and estimate 33% of US CLOs are breaching at least one ID/OC test compared to only two EUR deals breaching their tests.

As a result, the BofA CLO research analysts conclude: “We believe that at present, European CLOs offer a higher spread pick-up versus US, adjusting for currency hedging. Across the IG stack, European CLOs offer a 15bp-40bp spread pick-up, adjusted for currency hedges. European CLO double-Bs offer similar spread pick-up versus US CLO double-Bs - although with a lower tail risk and higher OC cushions, we prefer European double-Bs currently.”

In other news…

Ashbourne offers withdrawn
Three of the offers accepted for the purchase of 12 care homes underlying the Ashbourne loan, securitised in the Eclipse 2006-1 and 2006-4 CMBS, have been withdrawn following the Covid-19 outbreak. Due to the lockdown of the care home sector, the anticipated timeframes for progressing the remaining offers are expected to extend. Of the portfolio, five closed properties remain, comprising one exchanged contract (for the Warren Park property) on a conditional basis and four other properties that are currently being evaluated for alternative uses. A further 10 care homes are being marketed for sale.

HVF II downgraded on bankruptcy
Moody's has downgraded 11 tranches of rental car ABS issued by Hertz Vehicle Financing II (HVF II), affecting approximately US$4.3bn of securities. All 11 tranches remain on review for possible further downgrade. The rating action is primarily prompted by: Hertz's Chapter 11 bankruptcy filing without a pre-negotiated plan with noteholders to amend the lease and the high likelihood of a liquidation of all or a large portion of its vehicle fleet (SCI 28 May); increased risk around the amount of proceeds that will be derived from the sale of the vehicle fleet and sale timing, given the challenging market conditions that the used car market continues to face as a result of Covid-19; and uncertainty related to the outcome of the bankruptcy. Earlier last month, Fitch downgraded all its ratings on outstanding ABS issued by HVF II, totalling US$6.04bn of securities. After Hertz was unable to make the May operating lease payment to the ABS trust, BONY as trustee drew on the letter of credit and reserves supporting the securitisations to pay the May interest to noteholders and passed through the vehicle sales proceeds for principal.

Madden clarified
The OCC has finalised the ‘valid when made’ rule (SCI 27 November 2019), clarifying that a bank may transfer a loan without affecting the legally permissible interest term. The rule supports the orderly function of markets and promotes the availability of credit by answering the legal uncertainty created by the Madden decision, according to the agency. The ruling is expected to improve liquidity for marketplace loans in the whole loan and ABS markets by removing the uncertainty on the validity of loan terms originated by a bank and sold across state lines to a non-bank.

North America
Lockton Capital Markets has appointed Ken Pierce as ceo, leveraging his 30 years of experience in the insurance and alternative asset management industries. In 2019, Pierce founded and began serving as ceo of Vanpoint Advisors, which originated and structured asset portfolio financing transactions for alternative asset managers, as well as closed block reinsurance, sidecar reinsurance and surplus notes. He also previously served as co-founder of Vanbridge, as well as in leadership roles at Mayer Brown, Morgan Stanley and Lehman Brothers. The assets of Vanpoint will be merged into Lockton Capital Markets.

Underpayment to be rectified
Principal was underpaid on eight of the 12 classes of notes issued by the Dublin Bay Securities 2018-MA1 RMBS on the IPDs between 4Q18 and 3Q19, due to an incorrect allocation of revenue and principal receipts. The underpayment will be rectified on the forthcoming June IPD from funds to be paid to the issuer by the class R noteholders, which were overpaid.

Watchlisted loans spike
US CMBS servicers added US$29bn conduit loans to their watchlists and transferred US$4.7bn to special servicing during the May remittance period, according to Wells Fargo figures. This marks the largest monthly inflow of watchlisted loans ever, surpassing the prior peak of US$21bn in May 2008, when the conduit universe was roughly twice its current size. Of the US$4.7bn, US$1.9bn was on the servicer’s watchlist in April, while US$2.8bn transferred directly to special servicing. In comparison, US$12bn transferred in May 2009 following the bankruptcy of General Growth Properties (SCI 13 May 2009), with 2009’s average monthly volume reaching US$4.5bn.