Sector developments and company hires

CLO liquidity complexity examined
CLO secondary market activity is booming across the board, but the underlying liquidity picture is a complex one, according to a new report by JPMorgan CLO research analysts.

CLO BWIC trading volume has already reached an all-time annual high in 2020 at US$48.1bn for the US and €11.7bn for Europe, the JPMorgan report says. However, it adds that while this may suggest rising market depth, it’s important to note indicative ‘float’ (volume/market size) in mezzanine is much higher than in senior, which is probably due to the more buy-and-hold triple- and double-A investor base.

At the same time, the report notes that 2020 year-to-date TRACE volumes are US$175bn, the highest level since JPMorgan began tracking the data. That represents 23% of the outstanding US CLO market, which is the highest proportion since 2013’s 25%.

Nevertheless, the JPMorgan research analysts observe: “The broader point on liquidity isn’t so much trading activity, but the provision of CLO liquidity to loans. In this respect, with the lowest yield for the Loan index since April 2015, the market for the linchpin CLO equity buyer will be important as the traditional 'teens IRR' benchmark is taken into context of negative to low inflation-adjusted real yields on higher quality debt products.”

They continue: “While Libor floors will benefit US CLO equity, there is still a sizable portion with 0bp floors or no floors (41% of existing loans contain a Libor floor at 100bp), and CLO equity also needs to be compensated for the illiquidity and MTM risk. While difficult to compare, we observe indicative price volatility to similar-yielding triple-C leveraged credit (currently yielding around 10%).”

The report also notes that there is correlation between CLO manager platform size and absolute volume, though 'manager liquidity' is “in the eye of the beholder”. The top five traded US CLO managers are all first quartile AUM (CSAM, CIFC, PGIM, Carlyle and Octagon), but when normalising trading volume for AUM, the activity is highest for 3rd/4th quartile AUM. The top five traded managers as a percent of their AUM are Allianz, Ore Hill, Deutsche Asset Management, Birch Grove and Tortoise Credit.

In other news…

EMEA
Cadwalader has promoted Alexander Collins to special counsel within its London capital markets team. Collins focuses on structured finance, with an emphasis on CLOs. He has acted on a wide range of cross-border structured finance transactions and, in respect of CLOs, has represented arrangers, asset managers and warehouse finance providers in connection with a variety of European CLO 2.0 transactions and warehouse facilities.

NPL ABS completed
Phinance Partners has completed, as arranger and advisor of the securitisation SPV POS, the purchase without recourse from Banca Sella of a portfolio of unsecured non-performing retail loans, for a total gross book value of approximately €24m. The transaction marks the fifth NPL portfolio purchased by POS, bring its total GBV close to €400m, representing almost 30,000 debtors.

Portfolio management will be entrusted to NPR Management, a subsidiary of Phinance that monitors portfolios of non-performing loans on behalf of institutional investors.

With this latest purchase, the value of the portfolio of NPLs securitised by Phinance is approximately €1.2bn across gas and power receivables and financial receivables and loans, representing circa one million positions.

The securities issued by the POS SPV will be subscribed by institutional and professional investors. Centotrenta Servicing will be the master servicer of the securitisation, while 130 Finance will take on the role of calculation agent. The legal aspects of the transaction have been handled by DLA Piper.

QM final rules released
The CFPB has issued two final rules related to qualified mortgage (QM) loans, which aim to support a smooth and orderly transition away from the GSE Patch and maintain access to responsible, affordable mortgage credit upon its expiration. One of the rules - the General QM Final Rule - replaces the current requirement for general QM loans that the consumer’s DTI ratio not exceed 43% with a limit based on the loan’s pricing. The other rule creates a new category for QMs - Seasoned QMs.

In adopting a price-based approach to replace the specific DTI limit for General QM loans, the bureau determined that a loan’s price is a strong indicator of a consumer’s ability to repay and is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone. Additionally, conditioning QM status on a specific DTI limit could impair access to responsible, affordable credit.

Under the General QM Final Rule, a loan receives a conclusive presumption that the consumer had the ability to repay if the annual percentage rate does not exceed the average prime offer rate for a comparable transaction by 1.5 percentage points or more, as of the date the interest rate is set. A loan receives a rebuttable presumption that the consumer had the ability to repay if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points.

In addition, the General QM Final Rule: provides higher pricing thresholds for loans with smaller loan amounts, for certain manufactured housing loans and for subordinate-lien transactions; retains the General QM loan definition’s existing product-feature and underwriting requirements and limits on points and fees; and requires lenders to consider a consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts and provides more flexible options for creditors to verify the consumer’s income or assets.

The Seasoned QM Final Rule creates a new category of seasoned QMs for first-lien, fixed-rate covered transactions that meet certain performance requirements, are held in portfolio by the originating creditor or first purchaser for a 36-month period, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements. Specifically, the loan can have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period. The creditor or first purchaser also generally must hold the loan on portfolio until the end of the seasoning period.

The General QM Final Rule will have a mandatory compliance date of 1 July 2021.

RMBS placed on watch positive
Fitch has placed 1,209 US RMBS classes on rating watch positive and has revised the rating watch for an additional 16 classes to positive from negative, following an update to its US RMBS surveillance and re-REMIC rating criteria. All of the classes placed on RWP are from transactions issued prior to 2010.

The criteria changes include the following revisions: treatment of interest shortfalls; treatment of small pool concentrations; a revision to the treatment of loan documentation for loans originated prior to 2009; and the removal of a rating upgrade constraint based on expected months to pay off. The criteria also added additional flexibility for analysts to make model over-rides without it being considered a criteria variation, although this change is not expected to result in any immediate rating impact.

Strategic partnerships
Carlson Capital has reached a strategic agreement with Jefferies Group and Hildene Capital Management to support the new issuance of CLOs on Carlson’s Cathedral Lake platform. Under the terms of the agreement, Jefferies and Hildene will provide CLO equity capital to support the new issuance of four Carlson CLOs within the next three years. As strategic investors, Jefferies and Hildene will share in the growth of the Cathedral Lake CLO platform.

CANDRIAM and its affiliate New York Life Investments Alternatives (NYLIA) have entered into a strategic partnership with Kartesia Management and acquired a minority stake in the firm. Terms of the transaction - which are subject to certain customary closing conditions - were not disclosed, but it is anticipated to close by year-end.

Under this partnership, Kartesia will retain its existing management and investment autonomy, while benefiting from the operating and financial resources, distribution network and scale of both CANDRIAM and NYLIA to enter a new phase of development. In Europe, the partnership will add European private credit to CANDRIAM's multi-specialist offerings and in the US complement the strong US private credit capabilities of NYLIA.