Sector developments and company hires

EBA SRT report released
The EBA has published its long-awaited report on significant risk transfer in securitisations, which includes a set of detailed recommendations to the European Commission on the harmonisation of practices and processes applicable to the SRT assessment. The EBA proposals aim to enhance the efficiency, consistency and predictability of the supervisory SRT assessment within the current securitisation framework.

The SRT report makes recommendations in three key areas where greater harmonisation of supervisory practices would enhance the efficiency and improve convergence outcomes of the supervisory SRT assessments: the assessment of structural features of securitisation transactions; the application of the SRT quantitative tests; and the supervisory process for assessing SRT in individual transactions.

The recommendations on supervisory process are designed to facilitate and speed up supervisory decision-making on SRT, without compromising the quality and thoroughness of the assessment. The clear classification of complex structural features between those ineligible for SRT and those that need to comply with a set of safeguards for a fast-track assessment should provide clarity to market participants and support an effective supervisory assessment.

In addition, the EBA has identified shortcomings in certain CRR provisions currently in force that are significantly detrimental to the effectiveness of the supervisory assessment of SRT. Accordingly, the report sets out several recommendations on desirable amendments to the CRR that could correct those shortcomings and improve the SRT framework.

In other news…

Combo concerns
Kamakura Corporation has highlighted concerns over the assessment of CLO combo notes in a new research report from its North American client team.

“Through creative structuring and the legerdemain of agency rating models, combo notes are consistently awarded a higher rating than their underlying CLOs,” the report states. “The underlying loan collateral is identical, but combo notes restructure the tranches so that monthly interest payments are applied to pay down principal rather than disbursed as coupon payments to combo noteholders.”

It continues: “This permits insurance investors to buy and hold lower-rated CLO collateral at ratings grades that avoid higher corresponding capital charges... It seems there’s a certain amount of wilful visual impairment going on here [or] at the least, ratings agency attitudes toward CLOs and combo notes have been quixotic and are sometimes inexplicable.”

Consequently, Kamakura argues that while the idea of pooling and securitising loan debt has considerable appeal from an investor perspective, the true risk of correlated default must be accurately evaluated. Further, risk analysis must proceed from the individual loan level and loan obligor default probabilities, rather than from reliance on the estimation of conditional default rates or credit ratings assigned to the senior tranches of CLOs.

EMEA
BNP Paribas Asset Management (BNPP AM) has strengthened its private debt and real assets (PDRA) investment division, headed by David Bouchoucha, with four appointments that are based in Paris. Mohamed El Jani has joined the firm’s structured finance team as an investment manager, reporting to Michel Fryszman, head of structured finance. El Jani was previously a quantitative analyst within BNP Paribas CIB’s securitised products group and before that, worked in Societe Generale’s model risk management department.

Additionally, Stéphanie Passet has been appointed cio for infrastructure debt, reporting to Karen Azoulay, head of infrastructure debt at BNPP AM. Passet was previously executive director, infrastructure capital markets at Credit Agricole, and has also worked at ABN AMRO and Coface.

Romain Linot has been appointed cio for real estate debt, reporting to Christophe Montcerisier, BNPP AM’s head of real estate debt. Linot was previously head of real estate finance, Continental Europe, at Aviva Investors and has also worked at AXA and RBS.

Finally, Irene Bárcena has joined BNPP AM’s SME lending team as an analyst, reporting to Christophe Carrasco, head of SME lending. Bárcena was formerly an associate in BNP Paribas CIB’s EMEA corporate coverage team.

Euro CLO switch first
Penta CLO 2 has become the first European CLO to trigger its payment frequency switch to semi-annual, with the manager Partners Group (UK) Management doing so at its discretion, according to Fitch. This change will be applicable until the legal maturity of the deal, as its documentation does not allow a reversal to quarterly payments.

“The switch is in line with our observation of many corporates, in response to the coronavirus pandemic, switching their payment frequency of loans to semi-annual,” the rating agency says. “The proportion of such loans currently represents 32% by notional of the portfolio, compared with 18% before the outbreak of the pandemic in February 2020.”

The switch is credit-neutral for Fitch’s analysis of the deal as the basis risk is mitigated by the current negative interest-rate environment and the notes’ interest index being floored at zero.

Moratoria usage assessed
The EBA has published its first assessment of the use of Covid-19 moratoria and public guarantees across the EU banking sector, based on data disclosed by banks as of 30 June 2020. The report shows that a nominal loan volume of €871bn was granted moratoria on loan repayments, comprising about 6% of banks’ total loans and close to 7.5% of total loans to households (HHs) and NFCs. In total, 16% of SME loans were granted moratoria, followed by 12% of commercial real estate (CRE) loans and 7% of residential mortgage loans.

The use of moratoria was widely dispersed across countries and banks, with a few banks reporting that almost 50% of their total loans to NFCs and HHs were subject to moratoria. Cypriot, Hungarian and Portuguese banks reported the highest share of loans subject to moratoria. French, Spanish and Italian banks reported the highest volumes of loans subject to moratoria.

As of June 2020, around 50% of the loans under moratoria were due to expire before September 2020, while 85% of the loans were due to expire before December 2020. However, due to the second wave of Covid-19, some countries have already announced an automatic extension of the moratoria beyond year-end.

While the non-performing loan ratio for loans subject to moratoria was 2.5%, around 17% of loans under moratoria were classified as stage 2, which the EBA notes is more than double the share for total loans.

Meanwhile, newly originated loans subject to public guarantees amounted to €181bn, representing 1.2% of the total loans. These loans were granted predominantly to NFCs.

Banks in Spain had the highest share of new loans subject to guarantees relative to total loans, while banks in France, Italy and Portugal also reported material volumes. Banks in other European countries reported low volumes and some countries had none.

The reducing effect of public guarantees on RWAs varied significantly across banks and countries. On average, banks reported RWAs to be 18% of the exposure value for loans subject to guarantees. This compares with an average risk weight of 54% for banks’ overall loans to NFCs, according to the EBA.

North America
Fitch has appointed md Michael Paladino to the position of head of North America structured finance. He will report to Rui Pereira, who is analytical global group head of structured finance. Paladino joined the structured finance leadership team from the rating agency’s US leveraged finance platform.