Sector developments and company hires

Chinese CMBS ‘structural deficiencies’ eyed
The recent near-default of a Chinese CMBS issued by Yango Group - together with the two previous defaults of PKU TechPark and Hongbo Exhibition Center - expose several structural deficiencies in Chinese CMBS transactions, according to Fitch. Such deficiencies include low DSCR and collateral quality - due to weak underlying cashflow - limited protection through external credit enhancement and highly correlated counterparty risks.

A trustee report for the Yango Group CMBS earlier this month indicated that the single borrower had failed to transfer the required funds to the trust account, leading to insufficient underlying cashflow to cover the senior class B’s scheduled interest payments and senior class A’s scheduled principal payments. However, a noteholder meeting passed a proposal to waive an EOD and adjust the repayment schedules. This follows defaults of the single-borrower CMBS issued by PKU TechPark and Hongbo Exhibition Center in March 2020 and October 2018 respectively.

Fitch notes that single-borrower CMBS in China often include lower-grade properties in the tier-1 and tier-2 cities, with more cyclical and volatile cashflows. DSCR can also be overstated, as recurring expenses are sometimes borne out of the trust and not included in the calculation.

To compensate for the weak underlying cashflow, most Chinese CMBS feature external credit enhancement in the form of a commitment by the borrower to provide liquidity support. “However, such arrangements had failed to provide additional protection in the three CMBS defaults and near-default. The external credit enhancement providers also faced financial hardship when the borrower went into distress, implying a high correlation in default risk,” the rating agency observes.

Lack of fund segregation is another common issue, as collection funds are often commingled with borrowers’ funds until they are transferred quarterly or semi-annually. In the three cases, the borrowers failed to transfer such funds due to financial hardship, reflecting elevated counterparty risk.

Finally, Fitch suggests that the limited progress on their recoveries years after two previous defaults highlights complications in the workout process. For example, the recovery process on the PKU TechPark deal has stalled due to insufficient noteholder votes to agree upon the special resolution plan.

As of end-June 2022, 288 CMBS have been issued in China, mostly via private placements - with the most common underlying assets being malls, office, hotel, other retail and logistics storage.

In other news…

EMEA
Arrow Global has appointed Daniele Patruno as ceo of its Europa Investimenti business in Italy. Patruno has worked at Europa Investimenti since 2009, most recently as head of credit strategy, and he was at Barclays before that. As Europa Investimenti’s new ceo, Patruno will focus on maximising distressed opportunities that are increasingly presenting themselves in Europe’s largest non-performing loan market.

Incumbent ceo Stefano Bennati will in his role as chairman of Arrow Global Italy. Patruno will be supported by Armando Ranucci in his capacity as general manager.

M&G Investments has appointed Anuj Babber as head of structured and private asset research and analysis. He was previously head of securitisation credit, fixed income at the firm, which he joined in August 2003. Before that, Babber was a securitisation associate at Morgan Stanley.

ESG indices launched
Bloomberg has launched the Bloomberg Global Aggregate Green, Social and Sustainability Bond Indices. The indices utilise the flagship Bloomberg Global Aggregate Index, the Bloomberg Sustainable Finance Group’s green, social and sustainability bond indicators, and fields that show alignment with ICMA’s Green Bond, Social Bond and Sustainability Bond Principles and Guidelines.

By launching the indices with datasets from Bloomberg’s ESG data team, Bloomberg Terminal clients will also benefit from transparency into underlying bond documentation - such as use of proceeds allocation to the eligible project categories and subcategories, as well as alignment to the UN Sustainable Development Goals - offering more seamless integration across portfolio management workflows, including for performance and attribution.

The universe of eligible instruments - ranging across corporates, sovereign, supranational and agency bonds (SSAs), municipals and structured products - are individually researched and maintained by a dedicated Bloomberg fixed income and ESG data team to ensure securities are reviewed and appropriately tagged. All securities are further reviewed to ensure ongoing reporting is confirmed through the filing of impact and allocation reports by the issuer.

The indices are now available for benchmarking, asset allocation and product creation purposes. The indices can be further customised to meet specific individual investor needs using additional fields, such as specific exclusions, regulatory ‘aware’ fields - including SFDR and EU Taxonomy inputs - and sector-specific weightings.