Sector developments and company hires

Irish reperforming RMBS stress tested
S&P has conducted a scenario analysis of seven of the Irish reperforming RMBS it rates, to investigate the impact of the rising cost of living, since legacy mortgage loans are particularly vulnerable to rate increases as the borrowers in these transactions predominantly (94%) pay variable interest rates. The combination of an expected increase in debt servicing costs and previously compromised performance implies that late-stage arrears could materially increase for these transactions.

S&P’s scenario analysis examines the impact of a low, medium and high performance shock - reflecting progressively strenuous scenarios resulting from the increased cost of living - on Irish reperforming RMBS, covering a series of hypothetical stress scenarios of increased arrears. For each transaction, the agency considered loans that are now current but have been in arrears since January 2020 as a starting point for each stress level.

When arrears are applied, the loans lose any seasoning benefit and attract a foreclosure frequency adjustment - which is applied as 2.5x to 30-60 days in arrears, 5x to 60-90 days in arrears and a 100% probability of default to loans in 90-plus days in arrears. The analysis indicates greater rating migration further down the capital structure.

Single- and double-B rated tranches are most vulnerable to rating changes, suffering the most frequent downgrades with the added arrears, because they have less credit support to protect against performance changes and rely more on excess spread. By contrast, triple-A to triple-B tranche ratings are expected to remain largely stable. Low investment-grade ratings showed rating migration of one to two notches, primarily in the most severe scenario.

However, S&P notes that the severity of the impact on ratings is limited, given that many of the loans in the reperforming portfolio already have high foreclosure frequency assumptions. Other borrower and loan characteristics - including high proportions of interest-only and buy-to-let loans - also play a role.

Further, the rating agency reports that all the Irish reperforming RMBS it rates include various structural features that should help mitigate short- to medium-term liquidity stresses caused by increased arrears.

In other news…

CLO ESG questionnaire launched
The European Leveraged Finance Association (ELFA) has launched a new CLO ESG Questionnaire, designed to improve the quality of ESG reporting and data in the CLO market. The current lack of standardisation in ESG disclosure by CLO managers makes relative comparisons very difficult for CLO investors, according to the association.

ELFA’s CLO Investor Committee has collated key questions that CLO investors ask CLO managers about ESG composition and investment framework to compile a comprehensive questionnaire in two parts: one targeted at the manager level and the other aimed at gathering information on the CLO managers’ investment framework. It is intended for arranging banks to distribute the CLO ESG Questionnaire at the time of the CLO offering, to create efficiencies for both CLO managers and those involved in the syndication process.