Sector developments and company hires

Positive signs for CLOs
US CLO manager metrics have begun to improve or stabilise, according to JPMorgan’s Q2 report on the sector, published today. “In the very latest reported data, the percent of US CLOs failing the junior-most OC test (double- or single-B) dropped from 20% a few weeks ago to 16% - likely due to higher triple-C loan market values, par build and more stable default performance in recent vintages,” it says.

The average junior OC cushion is now 1.77% across 101 managers, ranging from -3.39% to 4.80%. The 16% of US CLOs failing is concentrated in 40 managers breaching in at least one transaction. The majority (61 managers) are passing all of their junior OC tests and JPMorgan predicts most (roughly 85% of reinvesting CLOs) US CLO equity tranches will be paid a cashflow on the July quarterly payment date.

Meanwhile, triple-C loan exposure continues to rise, albeit at a slower pace. As of the latest data, JPMorgan reports 86% of CLOs are failing their S&P triple-C test and 53% are failing their Moody’s Caa1 test, compared to 89% and 48% a few weeks ago.

As the report concludes: “If the rate of collateral distress continues to slow with economic improvement and massive central bank liquidity, we suspect our upcoming performance reports could very well indicate that the peak has been passed. Right now, however, it’s unclear if some of the green shoots we are seeing can grow. In our view, the meaningful leading indicator will be company guidance as earnings season kicks off, especially how sectors and companies are handling the risk of re-emerging lockdowns.”

In other news…

Agency MBS fund launched
Bridge Investment Group has launched its Open-Ended Agency Mortgage-Backed Securities strategy via the Bridge Agency MBS Fund Manager. The strategy is led by cio Mohit Chandarana, who joined Bridge in September 2019 to expand its real estate-backed fixed income strategies franchise. Prior to joining the firm, Chandarana managed Fannie Mae’s agency MBS and CMO portfolio. He is supported by Krishna Gudavalli, with whom he has worked for 16 years. Gudavalli joined Bridge as an md and will be responsible for hedging and portfolio management activities, having previously served as senior director, capital markets at Fannie Mae.

CMBS delinquencies jump
The US CMBS delinquency rate last month posted the largest single month-over-month increase since the inception of Fitch’s loan delinquency index nearly 16 years ago. Loan delinquencies surged by 213bp in June to 3.59%, from 1.46% a month earlier, with all property types reporting substantially higher delinquency rates. New delinquencies of US$10.8bn significantly exceeded resolution volume of only US$172m.

Green ABCP debuts
Crédit Agricole CIB has placed with a leading ESG investor what is believed to be the industry's first green ABCP issuance financing electric vehicles (EVs) in client auto loan and lease pools. The US$25m note was issued by La Fayette Asset Securitisation, a multi-seller ABCP programme sponsored by the bank, which expects it to be the first of numerous green note issuances from its Atlantic, La Fayette and LMA conduits. It plans to introduce new eligible green asset categories over time in alignment with the Green Bond Framework.

Hertz motion repudiated
The SFA has filed an amicus brief with the US Bankruptcy Court for the District of Delaware related to the Hertz bankruptcy that is intended to educate the court on how a ruling can impact both the rental car ABS and broader securitisation markets. The association suggests that Hertz’s motion for an order rejecting certain unexpired vehicle leases raises critical legal and policy issues that impact not only the creditors of Hertz whose claims are at stake, but market participants involved in securitisations across the automotive rental and other industries.

In particular, the SFA submits that Hertz’s position on the divisibility of master leases related to securitisations is contrary to the intent and expectations of the parties in typical rental car ABS and risks establishing a precedent that will “ripple across the economy as lenders and credit agencies reassess the risk profile of such transactions”. It adds that, in turn, companies like Hertz will lose access to more affordable forms of credit than their credit ratings would likely attract, as severing the master lease in this type of transaction would “undermine the fundamental premise that if there is a default on the lease payments, the noteholders may cause the liquidation of the entire pool of leased vehicles to the extent necessary to pay back the noteholders in full, not some percentage of the cars that the operating company has deemed to discard”.

Libor powers ‘credit positive’
HM Treasury is set to give the UK FCA additional regulatory powers to deal with a small number of legacy contracts that cannot be transitioned from Libor, since they either have no alternatives or only inappropriate ones, with no realistic ability to be renegotiated or amended. Moody’s notes that the move is credit positive for UK RMBS with exposure to contracts referencing Libor because it reduces any related uncertainties when the index is wound down by year-end 2021. The rating agency says the UK government is showing a clear willingness to provide the FCA with sufficient powers to ensure the orderly wind-down of Libor, including altering its methodology and prolonging its use for those contracts with limited possibilities to transition to another rate.

Yield hurdle missed
KBRA notes that Taurus 2019-3 UK, a single-borrower CMBS secured by 21 purpose-built student accommodation assets in the UK, failed to meet the debt yield hurdle of 8% for the current 2019/2020 academic year, as of the June payment date. This failure has triggered a cash trap event and a class X interest diversion trigger event.