Market updates and sector developments

The UK FCA last month announced a review of the historical commission structures across several auto lenders in the UK, with a warning that should widespread misconduct be found, appropriate redress measures will be taken to compensate customers. While the overall credit risk profile of UK auto ABS transactions is unlikely to be negatively affected, the investigation exposes the sector to considerable uncertainty, according to Morningstar DBRS.

Indeed, the rating agency foresees two potential sources of risk arising from the investigation that may adversely affect existing transactions: set-off risk, which may be invoked by securitised borrowers; and a remote risk of loan cancellations and/or variations. Set-off risk could arise due to customers being owed a debt (the potential redress amount) by the seller. Typically, transaction documents provide for extensive indemnification obligations by originators when set-off claims arise.

Similarly, if a loan were to be voided or had its customer rate reduced, there are often structural protections in place to mitigate such risk. Morningstar DBRS cites as an example VW’s inclusion in the skilled person review undertaken by the FCA, following which the issuer has advised that it does not expect any potential penalties to have an impact on its going concern assessment and that it expects to live up to its obligations under the transaction documents in connection with the Driver UK 6 and 7, as well as the Private Driver UK 2020-1 securitisations (ABS Markets Daily - 30 January).

“If a significant number of loan contracts were subject to the exercise of set-off rights or be voided or amended to reflect a lower rate of interest, this could result in the reduction of amounts due under the purchased receivables or the timing of the availability of funds,” the agency observes. “Such outcome may adversely affect the respective issuer's ability to make full and timely payments due on the notes issued. Adequately sized liquidity reserves may alleviate the short-term liquidity stress presented.”

The volume of loans affected by the investigation in UK auto ABS is limited, due to discretionary commissions being banned with effect from January 2021 and the relatively short life span of auto loans.

In other news…

Dexia outsources legacy bond portfolio
Mount Street is set to take over the servicing of Dexia’s €17bn legacy bond portfolio and incorporate a team of eight of the firm’s Dublin-based bond management experts, acting as Dexia’s exclusive outsourced service provider for portfolio management services. Under the terms of the five-year contract, Mount Street - through its regulated business, Mount Street Portfolio Advisers (MSPA) - will undertake a range of services, including asset management, trade execution, portfolio market data and valuation, and strategic advisory.

The €17bn portfolio comprises a range of bonds, financial instruments and credit products from issuers in the public finance, local municipality, utility, social housing and related sectors, across various jurisdictions in Europe and North America. The transaction enables Dexia to pursue the management of its loan and bond portfolio in run-off in an orderly manner.

The new mandate builds on Mount Street’s outsourcing track record, following its acquisition of EAA Portfolio Advisors in 2017 (SCI 23 January 2017) and its role as independent portfolio manager for Helaba’s HLB Private Markets platform.