Sector developments and company hires

US insurer CLO exposure ‘relatively small’
The NAIC has released stress testing results on US insurers' exposure to CLOs, as of year-end 2020. The stress tests examined the resilience of CLOs under three different scenarios and mirrors findings from the year-end 2019 stress test, wherein normal CLO single-A rated tranches experienced losses under the worst-case scenario. In comparison, the year-end 2018 stress test resulted in no losses on normal CLO tranches rated single-A and higher under the three scenarios.

The year-end 2020 results showed that normal tranches rated double-A and higher did not experience any losses under the three scenarios tested. Nevertheless, NAIC analysis also showed that a few insurers have concentrated investments in combo notes and low-rated tranches.

The report finds that CLO exposures grew as of year-end 2020 to US$192.9bn from about US$156.9bn, as of year-end 2019. Overall, CLO exposure for the US insurance industry remains relatively small, at about 2.6% of total cash and invested assets. The majority (78%) of these investments are rated single-A or above, so the NAIC does not believe the CLO asset class currently presents a risk to the industry as a whole.

In other news…

Increased APRA buffer ‘credit positive’
The Australian Prudential Regulation Authority's increased interest rate buffer is credit positive for new RMBS because it will lower the amount mortgage applicants can borrow, according to Moody’s. This, in turn, will reduce the risk of loan defaults and losses for new mortgages.

Under new rules, APRA expects banks to assess whether new home loan applicants can meet mortgage repayments at interest rates that are at least three percentage points higher than actual loan interest rates, up from the 2.5 percentage points buffer that banks most commonly use. The authority has also asked banks to review their appetites for lending at high debt-to-income ratios.

APRA tightened the minimum interest rate buffer to curb mortgage market risks in an environment of rapidly increasing house prices and very low interest rates. The higher interest rate buffer is expected to reduce average mortgage applicants’ maximum borrowing capacity by around 5%.

“However, the regulatory change may erode Australia’s housing market sentiment and make refinancing more difficult for existing borrowers, particularly those with high debt-to-income ratios - which will increase the risk of borrower defaults for outstanding RMBS. This risk of higher losses is tempered by the rapid house price growth over the past five years, which decreased the loan-to-value ratios for existing borrowers,” says Jacqui Dredge, a Moody’s analyst.

Australian house prices increased an average 20.3% over the year to September 2021. According to APRA, more than one in five new mortgages banks approved in the June quarter were at more than six times borrowers’ income

“The regulatory change will likely reduce borrowing capacity for housing investors more than owner-occupier homebuyers. This is because banks will use the higher interest rate buffer to calculate loan applicants’ capacity to meet repayments for both the amount of the new loan and any other outstanding debt amounts,” adds Dredge.

North America
Josh Soffer has joined Prospect Capital Management, based in New York. Soffer was previously co-founder and portfolio manager at 1L Investments, focusing on CLO mezzanine securities. Before that, he worked at companies including Ad.net, Adrenalads, Rion Capital, Level Global Investors and UBS.