Sector developments and company hires

Equity return boost touted
US CLO equity is poised to deliver double-digit returns to investors this year, paring back the underperformance seen over the past four years, according to new research from Bank of America.

Analysts at the bank base their expectations on the fact that CLO equity market prices continue to lag, despite CLO NAV and interest distributions coming back to pre-Covid levels. “Thus, despite the rally, we think there remains some value trapped in equity through refi/reset optionality; improving fundamental assumptions on defaults and recoveries, as companies are able to raise equity from other sources of capital; and offering one of the best carry trades with a 20%-30% dividend yield.”

Further, the BofA analysts observe that with a large share of assets being restructured, CLOs now hold a large quantity of reorg equity/warrants. “CLOs typically mark such assets at zero, but with a rally in equity prices, these can provide significant upside to CLO valuations,” they note.

“CLO arbitrage levels appear very attractive versus historical periods, as liabilities have reached close to post-crisis tights and loan spreads remain relatively wide,” they add.

In other news…

Aussie SSPEs reprieved
Among the amendments to the European Securitisation Regulation passed last week (SCI 26 March) was the replacement of the ban on EU entities investing in securities issued by SSPEs domiciled in an OECD Annex II jurisdiction with a requirement for European investors to notify the competent tax authority of the member state where they reside for tax purposes. As such, the Australian securitisation market will not be cut off from European investors.

However, BofA Global Research analysts note that the amendment adds an administrative burden to investors in Australian securitisations, from which investors in covered bonds are exempt. They add that it is unclear what the penalty might be for an investor omitting to notify the respective tax authorities of such an investment, as well as how the respective tax authority is required to respond upon receipt of such a notification. Further, it is unclear whether the onus is on the investor to confirm or to the tax authority to investigate that there are no inappropriate tax benefits derived by the investor from such an investment.

The BofA analysts suggest that the ultimate solution is the removal of Australia from OECD Annex II. The Australian government has reaffirmed its commitment to addressing the tax issue that caused the jurisdiction to be included in Annex II.

New York passes fallback legislation
The New York legislature last week approved legislation that will help the transition of legacy financial contracts linked to Libor that are set to mature after 30 June 2023, for securities that do not have a fallback provision or have fallback language that references Libor (SCI 22 January). For these contracts, the legislation would insert fallback language recommended by the ARRC and provide a safe harbour from litigation for the use of the recommended benchmark replacement. Only financial contracts that are governed by New York state law will be covered by this legislation. 

Third-country obligations outlined
The European Supervisory Authorities (ESAs) have published a joint opinion on the jurisdictional scope of the obligations of non-EU parties to securitisations under the Securitisation Regulation (SECR), with the aim of improving the functioning of EU securitisation markets. The purpose of the opinion is to facilitate the understanding of certain SECR provisions in cases where third-country entities become parties to a securitisation, as well as to clarify the potential obligations of those third-country parties.

The ESAs set out their common view on the practical difficulties faced by market participants in these scenarios: securitisations where some, but not all, of their sell-side parties are located in a third country; securitisations where all sell-side parties are located in a third country and EU investors invest in them;investments in securitisations by subsidiaries of EU regulated groups, where those subsidiaries are located in a third country; and securitisations where one of the parties is a third country investment fund manager. The joint opinion recommends that these difficulties should be addressed, where possible, through interpretative guidance from the European Commission.

Separately, the ESAs have published a Q&A that is designed to clarify topics in relation to the application of the Securitisation Regulation to help market participants comply with their obligations and to foster cross-sectoral consistency in the implementation of securitisation requirements across the EU. In particular, the Q&As clarify: the content and the format of the information that should be disclosed by a securitisation originator, sponsor and SSPE; the transaction documentation of an STS securitisation that should be made publicly available to facilitate investors’ compliance with its due diligence requirements; and the type of STS certification services that can be provided by third-party verifiers to the securitisation parties.