Sector developments and company hires

APAC ILS issuance on the rise
Continued efforts from Asia Pacific reinsurers to source alternative capital through the ILS market is anticipated, following on the heels of the seven catastrophe bonds that were issued using Singapore-domiciled vehicles through July. Indeed, the first Hong Kong-domiciled catastrophe bond is being prepped.

The Singapore cat bonds issued in 2021 comprise: Security First Insurance Company’s US$225m First Coast Re III; Universal Property and Casualty Insurance Company’s US$150m Cosaint Re Series 2021-1; Tokio Marine & Nichido Fire Insurance Co’s US$150m Kizuna Re III; Palomar Speciality Insurance Company’s US$400m Torrey Pines Re Series 2021-1; St Johns Insurance Company’s US$120m Putnam Re Series 2021-1; Tokio Marine & Nichido Fire Insurance Co’s Umigame Re Series 2021-1; and Frontline Insurance & First Protective Insurance Company’s Astro Re Series 2021-1. In addition, MS Amlin Asia Pacific launched a locally domiciled special purpose reinsurance vehicle named Phoenix 1 Re in January (SCI 27 January), becoming the first Singapore-domiciled sidecar transaction to solely feature APAC (excluding Japan and Australia) catastrophe risks.

Hong Kong is also progressing its plans to become a regional hub for the insurance-linked market, with the regulator introducing a grant scheme that covers some of the costs of issuing a catastrophe bond in the region. Greater Bay Re has since been registered as an ILS SPV to issue a catastrophe bond on behalf of China Reinsurance in Hong Kong, according to Fitch.

“We think potential catastrophe bond issuers will be from countries whose reinsurers have lower profitability, such as Japan and China, given the urgency to lower the cost of capital. On the other hand, reinsurers in Indonesia and Korea may enter the market later,” the rating agency suggests.

Fallback language updated
The Alternative Reference Rates Committee (ARRC) Securitization Working Group has released a supplemental update to its recommended contractual fallback language for US dollar Libor securitisations. In March, the ARRC confirmed that announcements by ICE Benchmark Administration (IBA) and the UK FCA constitute a benchmark transition event, with respect to all US dollar Libor settings, officially beginning the transition process. The supplemental update amends the definition of a benchmark transition event within the recommended fallback language to acknowledge its occurrence as a result of the March 2021 IBA/FCA announcements.

NN IP acquired
Goldman Sachs is set to acquire NN Investment Partners from NN Group for approximately €1.6bn. The transaction is expected to close by end-1Q22, subject to regulatory and other approvals and conditions.

NN Investment Partners has approximately US$355bn in assets under supervision and approximately US$70bn in assets under advice. The firm employs more than 900 professionals in 15 countries and combines the use of data and technology with fundamental analysis in its investment processes.

NN Investment Partners’ employees will join Goldman Sachs Asset Management following the closing of the transaction, with the Netherlands becoming a significant location in Goldman’s European business. The bank believes that NN Investment Partners’ expertise will strengthen its fund management and distribution platform across retail and institutional channels in Europe, particularly in investment grade credit and green bonds.

As part of the agreement, Goldman Sachs Asset Management will enter into a long-term strategic partnership agreement with NN Group to manage an approximately US$190bn portfolio of assets, reflecting the business’ global insurance asset management capabilities and alternatives franchise.

Pro-rata loss allocation warning
Rules on pro-rata loss allocation in some non-Fitch-rated EMEA multi-loan CMBS expose senior bonds to risks inconsistent with their high ratings, Fitch reports. The agency notes that senior investors in affected CMBS could share exposure to loan losses with holders of notes rated multiple categories lower.

Fitch-rated multi-loan CMBS preserve the loss-absorbing capacity of junior classes by being fully or substantially sequential, becoming permanently sequential upon any loan defaulting or adjusting pro-rata pay for actual or deemed loss. However, Fitch warns that credit enhancement (CE) in some other multi-loan CMBS could collapse, depending on when loans potentially default and others pay off.

The agency cites an example where, prior to a performing loan paying off, another loan defaults and recovers some principal (sequentially) while suffering a loss. When the performing loan pays off (pro rata), the most senior notes then outstanding will share a portion of the prior loan losses with junior classes.

“This results from not netting off actual or deemed loss from notes’ principal amount outstanding (PAO) used to weight pro-rata distributions,” Fitch explains. “Performing principal will therefore continue to be paid pro rata to classes that would otherwise have been written off. Adverse outcomes - such as jump-to-default of class A notes - become possible, given the volatility of risk drivers caused by this structural flaw.”

Not all EMEA multi-loan CMBS featuring pro-rata allocation of performing principal expose senior notes to this risk. In the Fitch-rated Taurus 2021-4 UK, for example, if one loan defaults and returns some recoveries, the notes’ PAO reduces for two amounts - the actual amortisation caused by sequential allocation of principal recoveries, and the reverse-sequential allocation of the loan’s actual or deemed loss.

Reducing junior note classes’ PAO – and the principal paid to them pro rata from the performing loan – ensures they absorb loan losses, although this does not fully eliminate risks from pro-rata pay.

Upscale hotels hit hardest by business travel dip
US conduit CMBS lodging delinquencies continue to decline from early pandemic highs, but remain elevated at 19.5%, according to KBRA figures. A review of these loans undertaken by the rating agency indicates that delinquency levels continue to be negatively influenced by the higher delinquency rates of hotel chains that focus on business and conference travel.

The KBRA study shows that within the chain scales, the upper upscale chain had the highest delinquency rate (at 23% of outstanding principal balance), with Sheraton, Marriott and Hilton posting some of the higher delinquency rates (up to 46.8%). The high delinquency rate parallels the upper upscale chain’s revenue per available room (RevPAR) performance, which also had the largest RevPAR decline (38.7%) among the chain scales, when comparing June 2019 to June 2021.