Sector developments and company hires

Fraud charges for Honor Finance pair
The US SEC has announced fraud charges against James Collins and Robert DiMeo, the former principals of Honor Finance, for misleading investors about the subprime automobile loans that backed its US$100m offering. The SEC's complaint, filed in US District Court for the Northern District of Illinois, alleges that the pair were responsible for false and misleading statements about, and engaged in deceptive conduct regarding, Honor's servicing practices in connection with the Honor Automobile Trust Securitization 2016-1 (HATS).

According to the complaint, Collins and DiMeo took various steps designed to artificially inflate the value of the collateral underlying HATS. Specifically, the complaint alleges that: ineligible loans were included in the deal; loan repayment dates were extended without borrower knowledge; and payments due from delinquent borrowers were forgiven. The complaint claims that because of these improper practices, the servicing and performance information Honor provided to investors at the time of the offering and in later monthly reports was false.

The complaint charges the defendants with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC is seeking permanent injunctions, officer and director bars, disgorgement with prejudgment interest and civil penalties.

In other news…

EMEA
Addleshaw Goddard has strengthed its structured finance practice with the hire of partner Carl Posern. With almost 14 years' experience in both London and Frankfurt, Posern is also German-qualified, enabling him to work alongside the firm's Germany team. He was previously a partner at Pinsent Masons and, before that, a managing associate at Linklaters.

Fortrum has launched a suite of ESG services to enhance its existing range of due diligence services for the mortgage and securitisation market. The effort will be led by new hire Gary Killick, who has been named senior ESG consultant. Prior to joining Fortrum, Killick was senior ESG executive at Prudential, focusing on climate risk and responsible investment issues.

Loyalty ABS performance ‘stronger than expected’
Airline loyalty programme securitisations have exhibited stronger than expected performance as the underlying cashflows rebounded significantly during the past year, Fitch reports. The rating agency notes that such performance can be attributed primarily to robust consumer spending and, to a lesser extent, the return of leisure and business travel thus far in 2021.

Over the past 18 months, US airlines raised approximately US$30bn in capital backed by their loyalty programmes, which provided liquidity to weather pandemic-related volatility (SCI 8 February). While issuance was dominated by US airlines during the height of the pandemic, this new asset class may unlock additional financing options for airlines globally, according to Fitch.

Based on the most recent quarterly performance data, loyalty programmes’ cash collections have increased more than 65% since the lowest points observed in 2020. For instance, United’s MileagePlus and Delta’s SkyMiles securitisations’ cash collections nearly doubled since their lowest point in May and June 2020 respectively.

Overall, cash collections are currently trending closer to Fitch’s expectations for performance in 2022, but still remain 25%-45% below 2019 levels. The agency’s base case expectations are for cash collections related to loyalty programmes and air traffic to reach near 2019 levels by year-end 2023.

As of the most recent quarterly payment dates, United, American and Delta’s loyalty programmes saw DSCRs of 2.13x, 1.29x and 1.89x respectively – all well above the 0.75x (American and Delta) and 1x (United) peak DSCR thresholds defined in transaction documents for the period. “Given DSCR headroom, loyalty programmes have enough excess cashflow to cover redemption costs associated with managing the programmes and to provide operating cashflow to the airlines to help manage cash burn and/or low margins,” Fitch concludes.