Sector developments and company hires

ETL waiver requested following cyberattack
European truck lease provider Fraikin SAS was subject to a ransomware attack that started on 11 May. S&P notes that the credit quality of its two securitisations - FCT Eurotruck Lease II and FCT Eurotruck Lease III (ETL II and III) - is unlikely to be affected, providing the company can make a swift return to normal operations.

To contain the threat presented by the cyberattack, Fraikin took some of its systems and applications offline. It also had to activate its business continuity plan in France, where it is based and which represents about 60% of its revenue, in order to continue to operate without the support of its main business management software in its French agencies.

The company believes that the attack has not resulted in any data breach or losses. In particular, the last backup of its data and systems was performed on 9 May and is uncorrupted. S&P understands that Fraikin’s UK and Spanish subsidiaries were not affected and continue to operate as usual.

Fraikin anticipates a return to normal business operations within four weeks. However, it does not expect to be able to compute the borrowing base for the upcoming 15 June payment date, as required under the transaction documents for ETL II and III.

As such, it has requested noteholder consent to freeze the computation of the borrowing base and to grant a waiver for any resulting facility event of default. Given that there is a cure period of three business days, it must receive the waiver by 3 June to avoid a facility event of default and thus avoid early amortisation of the transactions.

The company expects the processes related to the securitisations will be back to normal by the beginning of June and therefore expects to be able to determine the relevant borrowing base for the July interest payment date. If it gains noteholder consent and the borrowing base is frozen, it would only need to pay the interest and fees due and payable on 15 June on the two transactions' facilities and notes.

In other news…

Covid cost of risk compared
The cost of risk (CoR) of EU banks rose from 0.45% in December 2019 to 0.82% in June 2020, while the CoR of US banks jumped from 0.54% to 2.16% in the same period, according to EBA figures. The authority has published a thematic note comparing provisioning practices in the US and the EU during the peak of the Covid-19 pandemic.

Based on data from the past 13 years, following an economic shock, loan loss provisions of EU banks tend to be less volatile than those of US banks. In a similar vein, in the first two quarters of 2020, the CoR of US banks was much higher compared to that of EU banks. However, in 2H20, the CoR of US banks fell more rapidly compared to their EU peers.

The impact of the pandemic on macroeconomic variables helps explain some of the differences in CoR. The US suffered a higher increase in unemployment in the early stages of the pandemic that might contribute to the sharper rise in CoR, compared to EU banks. Similarly, a faster economic recovery in the US might explain the faster fall in 2H20.

A preliminary analysis also reveals a riskier loan portfolio composition of US banks. The share of the portfolios potentially more affected by social distancing and containment measures, such as commercial real estate or consumer credit, over total loans granted is higher in the US. This could be a further explanation for the higher CoR at the onset of the pandemic.

Different accounting rules can also lead to differences in CoR. Under CECL, banks recognise lifetime ECL for all financial assets, whereas under IFRS 9 the 12-month ECL is recognised for Stage 1 loans. At the onset of a crisis, the IFRS 9 impairment model presumably resulted in a rise in CoR because of loan migrations from Stage 1 to Stages 2 or 3, for which lifetime ECL were recognised. However, this effect seems to be less material than the impact of applying the CECL approach to all financial assets.

Malt Hill tender offer underway
UK Mortgages (UKML) has completed the sale of the second portfolio of loans originated by the Coventry Building Society that had been securitised in the Malt Hill No. 2 RMBS. The proceeds (net of expenses and future commitments) will be distributed through a tender offer and the subsequent repurchase of ordinary shares by the company.

Having carried out a full review of its liquid resources, future cash requirements, commitments and costs, UKML has concluded that the tender offer will comprise a capital return of £20m. Under the offer, up to 13% (or 26,666,666) of the ordinary shares will be repurchased at a price of 75p per share, which represents a 7% discount to the net asset value per ordinary share of the company.

The tender offer opens today (28 May) and closes on 21 June, with the results announced on 22 June.

RFC issued on synthetic STS reporting templates
ESMA has published a consultation paper (CP) on draft regulatory technical standards (RTS) implementing the amended Securitisation Regulation (SECR), in connection with the requirement that STS securitisations must be reported using standardised templates for STS notification published on ESMA’s website. The CP sets out ESMA’s proposed draft RTS and implementing technical standards (ITS), specifying the content and the format of the standardised templates for STS notification of on-balance sheet (synthetic) securitisations.

It builds on the existing technical standards for STS notification of traditional securitisations, while taking into account specific features of synthetic securitisations. The CP also includes targeted technical amendments to the STS notification templates for traditional securitisations.

ESMA has published interim synthetic STS templates that may be used on a voluntary basis until the RTS becomes applicable. The consultation is open for feedback until 20 August and the draft RTS and ITS will be submitted to the European Commission for endorsement by 10 October.