Sector developments and company hires

Insurer appetite for CLO mezz on the rise
A new New York Fed Staff Report documents an increasing preference among insurance companies for CLO investments vis-a-vis corporate bond investments, based on data regarding their asset holdings during 2003-2019. The report shows that the preference is particularly strong for investment grade rated mezzanine tranches, which it suggests is driven by a search for yield.

“Conditional on the credit rating of the security, insurance companies tend to purchase a higher fraction of CLO tranches compared to corporate bonds the larger is the difference in the yields carried by the two asset classes. Similarly, we find that the share of new securities in a portfolio represented by CLO tranches grows for increasing levels of the yield differential,” the report states.

It goes on to note that insurance companies have become an important class of investors in CLO securities, representing roughly half of the investor base in CLO mezzanine tranches rated investment grade. The demand for mezzanine tranches is, in turn, critical for the issuance of CLOs as their junior position allows for the creation of senior tranches rated triple-A.

The report also finds that CLOs that benefit from greater insurer investment are characterised by a larger share of mezzanine tranches rated investment grade and are more likely to be refinanced. Overall, this suggests that insurance companies played an important role in the expansion of corporate loan securitisation observed over the last decade.

Finally, the report provides three interrelated economic insights. First is that regulation is able to strongly affect firms’ incentives to take on risk.

Second, the results show that insurance companies have been playing a complementary role to banks in the securitisation of corporate loans and, by extension, in the growth of the shadow banking sector. Third, corporate loan securitisation, together with the differences between bank and insurer capital regulation has contributed to the transfer of a substantial portion of credit risk from the banking sector to the insurance sector.

In other news…

Criteria update to have positive impact
Fitch has published an exposure draft in connection with changes to its CLO and corporate CDO rating criteria, which the agency expects will result in a modestly positive impact on ratings. Notes currently rated double-A may be upgraded by one notch, while single-As and lower may be upgraded by one to two notches. Overall, approximately 4% of US CLO ratings and 30% of EMEA CLO ratings will be affected, but no downgrades are expected from the criteria update.

Key changes being proposed include: an update to Fitch’s base-case probability of default assumptions to reflect additional data and the continued decline in observed default rates and resilient performance over multiple cycles; a shorter risk horizon by up to one year than the maximum permitted WAL that reflects observed performance; and updating default timing and distribution assumptions to better account for observations/performance expectations. Among other changes are updated industry categories and specific scenarios for CLO notes backed by static portfolios.

EMEA
Tyron Eng has joined Standard Chartered’s global credit CLO trading team, based in London. He was previously a member of KNG’s credit sales and trading team, prior to which he was head CLO trader, EMEA at Nomura. Before that, Eng worked at BTG Pactual, Ares, Commerzbank and Deutsche Bank.

North America
Ocorian has expanded its capital markets team with the appointments of Paul Belson and Gennie Bigord as vps in the Cayman Islands. The pair are responsible for a portfolio of Cayman Islands-domiciled structured finance vehicles, as well as supporting the growth of the wider Ocorian capital markets platform.

Belson has experience in the provision of legal and corporate services during his tenure at international banks and global financial services providers. Previously a senior manager at Vistra, he has specialisms in structured and asset finance, trust and corporate administration and project management. 

Bigord has over 15 years of experience in fiduciary and company administration services, specialising in a range of asset and structured products, including securitisations and CLOs. She was previously a vp at Walkers and has also worked at Intertrust and Five Continents Financial.

Prime jumbo benchmark launched
dv01 has launched a prime jumbo benchmark, with the aim of providing investors and issuers with actionable insights into the market. The benchmark consists of prime jumbo RMBS data representing 44,382 loans with a total original balance of over US$36bn. The new offering will track the performance of approximately 65% of the market’s securitised issuance since the beginning of 2019 and, going forward, will onboard all new prime jumbo deals to the platform at the point of issuance in real-time.  

Using the benchmark as a market proxy, dv01 has released a research report illustrating how issuance of prime jumbo loans slowed during the pandemic, but simultaneously increased in credit quality across virtually every collateral attribute - indicating a risk-off sentiment from issuers during uncertain times. In addition, the report finds that unlike the non-QM and CRT markets, total impairments in prime jumbo have virtually returned to pre-pandemic levels. Overall prepayments are also shown to have declined in 2021 from their record pace in 2020, keeping in line with rising mortgage rates.