Sector developments and company hires

Euro CLOs could still soften
European CLO new issue triple-A spreads are now out to 87bp-88bp from their post-Covid tights of 79bp-80bp. While there appears to be considerable support at current levels, technicals could yet push them to the low-90s, according to Bank of America European CLO research analysts.

Offsetting factors currently at play include broader credit market direction, rates moves and volatility, the BofA analysts note. Notably, despite an increasingly strong global investor base at the top of the European CLO stack, they also cite reduced non-Euro CLO investor demand, currency rates and relative value over US dollar paper as other challenges.

“While the overall Japanese demand for European CLOs is difficult to quantify, we note how the cost of currency hedging investments in CLOs is changing because of recent rate and currency moves,” the analysts say. “From a Japanese perspective, the cross-currency swap basis is declining for both euros and dollars (therefore lowering the cost of hedging for both). However, it narrowed more versus US dollars and that might incentivise US paper purchases over euro ones.”

On a relative basis, the analysts continue to see European triple-As as more attractive for US investors, taking into account the benefits of both the Euribor floor and a negative euro/US cross-currency basis swap. However, they add: “The recent-month moves in rates (euro yields climbed more than US ones) has reduced the basis swap and the related benefits (from a US investor perspective) of hedging euro paper.”

Further, the analysts report: “The benefits of the Euribor floor can decline as European rates creep higher. Finally, the significant appreciation of the euro/US dollar spot rate over the last months might also negatively impact the unhedged demand for European paper.”

In other news…

Average CMBS loss severity ‘remains flat’
Just under US$2bn in US CMBS loans were resolved with a loss last year, compared to US$5.3bn in 2019, according to Fitch’s latest annual US CMBS Loss Study. Average loss severity for loans that were resolved with losses in 2020 was 55.5%, down slightly from 57.8% in 2019. However, the cumulative average loss severity for loans resolved with a loss remained flat at 47.1% in 2020 from 46.6% in 2019.

Loss severities among retail, hotel and multifamily properties were similar at 59.4%, 59.2% and 59% respectively. Hotel properties have reverted to the mean from 2019’s sharp spike (75.9%), and office and industrial losses have also decreased from 2019. Other property types (retail, multifamily and other) exhibited higher loss severities in 2020.

In all, US$7.8bn in loans were resolved in 2020, with US$5.9bn resolved with minimal to no losses. In comparison, only US$2.2bn were resolved with minimal to no losses in 2019. Many of these ‘no loss’ 2020 resolutions were returned to the master servicer after being modified or granted some type of consent or forbearance, as result of a request for relief from coronavirus-related disruption.

Capital reforms timeline released
The Australian Prudential Regulation Authority has released a letter to authorised deposit-taking institutions (ADIs) on the implementation of the capital framework reforms, which will come into effect from 1 January 2023. This letter follows the December 2020 consultation on the ADI capital framework, aimed at reinforcing the industry’s capital position and improving the flexibility of the framework to respond during periods of stress.

The letter sets out a clear timeline to finalise the consultation phase and to support the banking industry’s implementation of the reforms. The timeline covers key policy releases, reporting requirements, industry workshops and the process for capital model approvals.

Over the course of 2021, APRA intends to: conduct a targeted data study to assess potential changes to the calibration of the prudential standards; initiate regular workshops with the industry as the standards and guidance are finalised to provide a forum for updates and FAQs; and release final prudential standards, draft prudential practice guides (PPGs) and initial details of reporting requirements by the end of the year. Over the course of 2022, APRA intends to finalise the PPGs and reporting requirements, with a parallel run of capital reporting on the new framework occurring in late 2022.

EMEA
Charles Wakiwaka has joined McGuireWoods as partner in the firm’s securities and capital markets practice in London. Wakiwaka advises buy- and sell-side market participants on complex derivative and structured finance transactions. He joins McGuireWoods from Clifford Chance, where he was a senior derivatives lawyer.

Ocorian has appointed Mike Hughes as global head of service lines, with full responsibility for the group’s client segments. He will work collaboratively with the client teams to set the strategy and identify opportunities for growth across all of Ocorian’s service lines. Hughes joins Ocorian from JPMorgan, where he ran its US$30trn global custody business with a staff of more than 3,000 people covering services in 98 markets.

Green RMBS bond debuts
Kensington is in the market with the UK’s first green RMBS issuance. The Finsbury Square 2021-1 Green transaction is aligned with the ICMA Green Bond Principles of 2018 and contributes towards meeting the UN Sustainable Development Goals.

Only the senior tranche - class A-GREEN, which is sized at 85.25% of the deal – is labelled green. Proceeds will be used to purchase a specific pool of loans originated by Kensington designated as eligible green projects, which will have as a minimum standard an EPC ‘B’ rating. ISS ESG was appointed to provide an external review in the form of a second-party opinion on Kensington’s Green Bond Framework.

The transaction features a five-year revolving period, during which excess available principal over the class A target notional amount can be used to purchase additional eligible mortgages originated by Kensington. The deal also envisions a pre-funding element representing 24% of the total maximum issuance size available between closing and the first IPD in September 2021, for a potential maximum total transaction size of £750m.

The provisional collateral pool includes 57.5% owner-occupied and 42.5% buy-to-let mortgages, with an average loan size of £173,800 and average CLTV of 71.2% after nine months of seasoning. Sole arranger on the deal is BNP Paribas, which is joined by Lloyds and NAB as joint lead managers.

Private asset units combined
Schroders has united its specialist private assets investment capabilities under the newly launched Schroders Capital brand, with the aim of delivering an enhanced service for its clients. Schroders Capital will encompass the existing range of private equity, securitised products and asset-based finance, private debt, real estate, infrastructure, ILS and BlueOrchard.

The combined unit manages £46.1bn of assets on behalf of its clients. The firm says that each asset class within Schroders Capital will continue to maintain a high level of autonomy, while also benefiting from enhanced knowledge-sharing and collaboration with the other asset classes within the new brand and across the Schroders Group.

North America
Eagle Point Credit Management has appointed Nate Morse as head corporate trader, reporting to managing partner Thomas Majewski and principal and portfolio manager Dan Spinner. Morse will be responsible for all trading, other than CLO securities. Prior to joining Eagle Point, he spent five years as a credit trader at Aristeia Capital and has previously held credit trading roles at Jefferies, Citadel Securities and Citi.

Nishil Mehta has joined First Eagle Alternative Credit as md. He was previously md, head of capital markets and CLO portfolio manager at Prospect Capital Management, which he joined in May 2010. Before that, Mehta worked at CIT Asset Management and Wachovia.

Varagon Capital Partnershas named Suraj Panjwani md, business development and investor relations. He was previously md, alternatives consultant relations at Invesco, and has also worked at Chenavari Investment Managers, Och-Ziff Capital Management and BlackRock.