Market updates and sector developments

JPMorgan securitised products research analysts estimate that the potential size of the US CLN market could amount to US$220bn, as banks become more comfortable with issuing the notes for capital relief purposes, following the Federal Reserve’s clarification of what defines a synthetic securitisation (SCI 29 September). Indeed, they suggest that the move may mark the beginning of a new sector in mortgage credit.

The JPMorgan analysts base their projection on GSE CRT activity: the GSEs issue roughly 5% of their 60%-97% LTV production through CRT. The total outstanding balance of GSE MBS is about US$6.5trn, roughly 80% (US$5.2trn) of which can be delivered into CRT. Approximately 5% of US$5.2trn, or US$260bn, is therefore the theoretical CRT market size.

“Along the same lines, we estimate that banks have US$2.8trn loans on their balance sheet. Assuming that banks sell 10% CLN on similar 60%-97% LTV collateral, the potential size of the CLN market could roughly amount to US$220bn,” the analysts note.

They add: “Clearly, not all banks will issue CLNs and as we understand, the Fed might impose caps on how much CLN banks can sell. However, we believe that bank CLN has the potential to grow in size, proportional to CRT.”

CLNs allow banks to reduce risk weights on ≥40% RWA mortgage loans to 15% RWA for senior securitisation exposures under the Basel 3 Endgame. While the proposal is currently in a comment period and the revised regulation will not be fully implemented until 2028 (starting in 2025), capital relief will nevertheless be a priority for banks.

In other news…

Aquarian strengthens Obra offering
Aquarian Holdings is set to join Obra Capital as a strategic partner. The firm has acquired a minority equity ownership stake, replacing Reverence Capital, which has been an investor in Obra since 2019. RedBird Capital will maintain its current ownership stake.

With the new capabilities and team expansion, Obra is working towards launching a dedicated CLO platform (SCI 21 July). For its part, the transaction provides Aquarian with access to additional alternative investment capabilities, thereby strengthening its expanding financial services platform.

Assets controlled by Aquarian-owned companies exceed US$16bn, as of 30 September 2023.

NPL ABS reaches indemnity settlement
Italian NPL ABS 2Worlds has reached an agreement with the originator to repurchase certain positions and settle for a lump-sum indemnity amount. Scope has confirmed that the move will not impact the current ratings of the class A and B notes.

The transaction is a static cash securitisation of secured and unsecured non-performing loans originated by Banco di Desio e della Brianza and Banca Popolare di Spoleto (which have merged). The issuer intends to sign two agreements with the originator to settle certain indemnity requests. The agreements provide for the repurchase of €22.4m of gross book value, as of 31 March 2023, by the originator and the payment of €33.8m GBV by the originator to indemnify the issuer for some other positions.