Sector developments and company hires

US CLOs assessed
As US CLO primary volumes continue to fall, JPMorgan CLO research has taken stock of the market’s current standing. It finds the US$1trn benchmark is edging within sight, despite a deceleration in the number of new managers, and strong risk/reward credentials keeping the CLO space attractive.

JPMorgan reports that global CLO market outstanding notional is currently US$970bn, of which US CLOs account for around 80%, or US$785bn. It adds that despite record refinancings this year, new issue supply remains strong and US CLO net supply of +US$26bn year-to-date is on pace for its full year forecast of +US$100bn net, which would result in an all-time high.

However, JPMorgan research analysts note that despite record volumes, only two new managers came to the US market in 2020 and none have so far in 2021, after 11 new ones in 2019. The new managers that first issued in 2019 have since grown to a total US$20bn CLO AUM in under two years, accounting for about 3% of the total CLO market size. Historically, 81 managers first entered the market in the 2.0 era, which account for 35% of current market size.

Meanwhile, the analysts find that based on JPMorgan’s CLOIE index’s annualised total return and volatility on a monthly basis over the last five years to 30 April, CLO debt return and risk/reward is broadly comparable to US credit; though recently, after a strong rally in high yield and leveraged loans, the CLOIE return lags. However, as they conclude: “In the search for yield as the reopening/recovery trade gains steam, CLO mezz (BB-B) yields around 8-9%, whereas only around 6% of the leveraged loan index trades above 8% yields.”

In other news…

Analytics offering expanded
Confluence and JPMorgan have partnered together to deliver a multi-asset portfolio analytics solution to fund managers and service providers. At the start of 3Q21, Delta - Confluence’s risk and performance solution - will expand coverage powered by JPMorgan’s proprietary analytics to include US securitised products, which will also be available through JPMorgan’s platform. The enhancement completes the global coverage of Delta across all asset classes, enabling front-to-middle office decisionmakers to manage risk and performance.

Delta became available to JPMorgan clients in June 2019 during the first phase of the collaboration between JPMorgan and StatPro, prior to Confluence’s acquisition of StatPro in October 2019. 

Emissions limits pose ‘nominal’ CMBS risk
Approximately 13% of US CMBS assets are located in New York City and about 80% of these properties are - in the absence of owner remediation - on track to incur Local Law 97 (LL97) fines that would impair property cashflows, according to Moody’s. However, for the majority of properties, such fines would amount to less than 2% of net operating income (NOI). Furthermore, only 10 large properties - most of which have highly energy-intensive operations - would account for a significant share of the potential fines: 59% in 2024 and 23% in 2030.

Indeed, potential fines pose nominal loan risk in 2024 and moderate risk from 2030, with the onset of stricter emissions limits. In the majority of cases, potential erosion of NOI for LL97 non-compliant properties will be nominal relative to the DSCR of the CMBS loans they secure. But because multifamily assets tend to have lower DSCRs and less flexibility to make improvements to comply with LL97, Moody’s suggests that additional costs will push some marginal borrowers into distress without mitigating actions.

The agency notes that owners can avoid fines by increasing energy efficiency, using renewable energy and retrofitting their buildings. “Although such investments will yield additional benefits, such as lower energy costs, higher cost retrofits will create financial strain for borrowers without access to capital for such building improvements,” it adds.

LL97 will see groundbreaking greenhouse gas emissions limits phase in over the coming decade across New York.

RFC on NPL data templates
The EBA has published a discussion paper to facilitate a review of the standardised non-performing loan data templates. The NPL data templates are expected to play an important role in providing a common basis for data exchange in secondary markets, which forms part of the overall strategy to tackle NPLs in the EU.

The current revision of the template is based on user feedback and responds to the European Commission’s Communication on tackling NPLs in the aftermath of Covid-19 that requests the EBA to review the templates during the course of 2021. With this consultation, the EBA is seeking comment on a number of aspects of the templates, such as the design, data fields to be included, as well as their criticality and availability.

The objective of this revision is to make these voluntary data templates simpler, more proportionate and more effective, as well as making them available to all market participants by end-2021. The aim is to enable price discovery in a consistent way across the single market.

However, the EBA notes that the adoption of the proposed Directive on credit servicers, purchasers and recovery of collateral may mandate the EBA to turn these data templates into implementing technical standards (ITS), for which the EBA would have to publish a consultation paper.

The consultation runs until 31 August 2021.