Sector developments and company hires

Auto turnover dampens DFP issuance
Accelerated dealer auto inventory turnover has resulted in insufficient collateral available for US dealer floorplan (DFP) ABS master trusts in 2021, Fitch reports. The agency notes that this is indirectly accounted for by deal structures, for the most part, through the use of excess funding accounts (EFAs). EFAs are meant to protect trusts against inventory volatility and help mitigate lower cashflows, but can introduce negative carry risk if cash in EFAs increases to high levels and is relied on to make note payments.

EFA caps vary by trust, but most are limited to 30%. If exceeded, there is usually a three-month cure period before an early amortisation event is triggered and the trust pays down the notes.

Securitisation sponsors routinely add to or remove cash from EFAs to manage changes in inventory volume by providing liquidity if there is not enough trust collateral for sufficient hard credit enhancement. Recently, trust asset balances started to decline to historically low levels and sponsors are addressing this by adding more cash to EFAs to ensure adequate credit enhancement levels. Most of the time, EFA account levels are close to 0% across the eight DFP ABS trusts rated by Fitch, but ranged up to approximately 24%, as of the May 2021 reporting date.

While the agency expects that issuers will have no difficulties paying down outstanding transactions when they mature, it believes there will be lower new issuance volume until inventory levels return to pre-pandemic levels. Auto dealership inventories have plummeted, due to very strong customer demand and limited new production supplies as a result of semiconductor chip shortages.

Inventory shortages are likely to persist at least into 4Q21. Due to the relatively long lead-times needed to ramp up chip production, it could be a year or more before vehicle production and supply normalise.

CO2e declining across German auto ABS
The average estimated CO2 emissions at closing for German auto ABS portfolios have decreased by about 6% for issuances in 2021, compared with deals from the 2019 vintage, according to Fitch. The decline was less pronounced than observed in new car registrations, where emissions decreased by 20% in the same period.

The agency ranks German auto ABS portfolios by their emission levels, which are estimated using publicly available data from the German Federal Motor Transport Authority and pool data from the European DataWarehouse. The study finds that the main driver for the different speed of decreases in emission levels is the composition of auto ABS pools, which mostly include a meaningful share of used cars. Even cars tagged as ‘new’ can be a couple of months old at transaction closing, as these vehicles were new only at loan or lease origination.

New car registrations reflect the most recent cars, which are typically becoming increasingly more emission-efficient. In addition, the shift to battery-electric cars in registrations is not yet fully reflected in most auto ABS pools.

Domi rating error amended
Moody's has affirmed the ratings of 14 notes issued by the Domi 2020-1 and 2020-2 Dutch buy-to-let RMBS, following the correction of an error. In prior rating actions for these transactions, the rating agency mistakenly assumed that the reserve fund amortises after the first optional redemption date, in line with the outstanding balance of the class A notes. However, the transaction documents provide that after the first optional redemption date (five years after transaction closing), the reserve fund target level is set to zero and the reserve fund is released into the principal waterfall.

In both transactions, the reserve fund release amounts after the first optional redemption date are fully available to turbo amortise the most senior outstanding notes, which is overall positive for all notes, according to Moody’s. However, as a result, the reserve fund cannot provide liquidity to the structure after the first optional redemption date in order to mitigate servicer financial disruption risk.

Nevertheless, Moody's cites a number of mitigating factors, including that Stater Nederland and HypoCasso - as delegate servicer and delegate special servicer respectively - are obliged to continue servicing the portfolio after a master servicer termination event. Given these factors, servicer financial disruption risks are deemed sufficiently low to maintain the existing ratings without further mitigants.

EMEA
Luca Giancola has joined Cairn Capital to lead the repositioning of its private structured credit business, which will continue to play an important role in the firm’s growth within a broader credit opportunity offering. Giancola joins from NatWest, where he spent 11 years in various roles, most recently as head of corporate portfolio structuring - a team focused on structuring regulatory capital (significant risk transfer) and CLO transactions. Cairn Capital is expected to close its merger with Bybrook Capital within the next quarter (SCI 3 February).

RBS International has appointed Neal King as senior director, to oversee new business from NatWest’s Trustee and Depositary Services traditional fund management clients. Based in London, King has over 30 years’ experience in the industry, having held several prominent roles at HSBC. He was most recently global head of corporate trust and loan agency product, implementing the firm’s strategy across 15 existing and eight new markets.

Hertz restructuring plan approved
The bankruptcy court has confirmed Hertz Global Holdings' plan of reorganization, clearing the way for Hertz to emerge from Chapter 11 by end-June. The plan unimpairs all classes of creditors and was approved by more than 97% of voting shareholders.

As a result of the restructuring, Hertz will emerge from Chapter 11 with a substantially stronger balance sheet and greater financial flexibility than it had prior to the onset of the Covid-19 pandemic. The plan will eliminate over US$5bn of debt, including all of Hertz Europe's corporate debt, and will provide more than US$2.2bn of global liquidity to the reorganised company.

Hertz also will emerge with: a new US$2.8bn exit credit facility, consisting of at least US$1.3bn of term loans and a revolving loan facility; and an approximately US$7bn asset-backed vehicle financing facility. The plan provides for the payment in cash in full to all creditors and for existing shareholders to receive more than US$1bn of value.

Multi-borrower CMBS stress-tested
Most high investment-grade rated US CMBS bonds are able to withstand downgrades under a hypothetical stress test conducted by Fitch. The stress test considers severe declines in cashflows for certain properties across the four major property types, should they not recover and/or decline further post-coronavirus.

Fitch reduced property-level net operating income (NOI) for a representative sample of 2013-2018 vintage multi-borrower transactions to assess ratings sensitivity to a stress that layers an office stress on top of coronavirus stresses on lodging, retail and multifamily currently applied in its surveillance analysis. The stress scenario implies a valuation decline from current estimated market levels of between 15% to 30%, based on property type-specific stressed NOI declines, and a further 15%-40% value decline from applying higher capitalisation rates than prevailing rates.

The stress scenario results in hypothetical losses to tranches rated in the triple-B category and below. Approximately one-third of triple-B bonds would experience losses or be downgraded to below single-B minus.

Most super-senior triple-A ratings (86%) would remain unchanged, with the balance migrating at worst to the single-A category. Only 7.8% of bonds currently rated investment grade would be downgraded to below investment grade, with 3.9% of such bonds incurring losses.

The 2013-2015 vintages are less affected by the stress scenarios than the 2016-2018 vintages, due to their build-up in credit enhancement from paydown and/or defeasance since issuance, according to Fitch. Of the more seasoned vintage triple-A ratings, 86% would remain unchanged, versus 72% of less seasoned triple-A ratings.