Francesco Di Costanzo, head of structured credit at Hoist Finance, answers SCI's questions

Q: How and when did you become involved with securitisation?

A: We are a licensed credit market institution, regulated as a bank, which gives us the advantage of low cost and consistent funding. However, this means, of course, that we are subject to bank capital requirements.

Over the years we have bought unsecured non-performing loan portfolios, to which a 100% risk-weighting had typically been applied. However, in December 2018, our regulator, the Swedish Financial Supervisory Authority (SFSA), changed its interpretation of Article 127 of the CRR to fall in line with an updated view of the EBA.

That meant the SFSA would impose a 150% risk weight on our unsecured NPL portfolios, resulting in a CET1 decrease from 13% to 9.7% over night. So it quickly became obvious that we had to act and we felt that securitisation was the best avenue to pursue.

Q: What did you do?

A: We decided on a two-step approach – first launching an unrated transaction (Pinzolo – SCI 1 August 2019) and then rolling it into a more innovative rated structure (Marathon – SCI 7 November 2019).

The idea behind the split was to maximise the efficiency of the whole process. The simpler unrated nature of the first transaction enabled us to move quickly and free up capital fast.

The second transaction would obviously require extensive discussions with the rating agencies and take more time in general to structure because of its innovative nature. But we felt it would be worth it, as ultimately it would provide an even better deal for us and the investor – CarVal.

Pinzolo referenced a €225m portfolio of Italian unsecured non-performing loans with a stretched senior note representing 95% of book value placed with CarVal at the end of July 2019. Hoist retained the 5% junior tranche and booked a CET1 deduction, fully provisioning the tranche and enabling the related RWAs to be removed from our prudential balance sheet, thereby releasing capital for new acquisitions.

With that in place, we could fully focus on Marathon and while the Italian NPL market typically utilises GACS-like transactions - where issuers replicate terms because rating agencies have seen them before, so it is easier to get a deal to market - we wanted to go further. So beyond being the first-ever rated securitisation backed exclusively by unsecured NPLs, Marathon had two innovative features.

First, we implemented a pro-rata amortisation mechanism between senior and mezzanine notes, accelerating the repayment of the mezzanine notes. Second, we built a strong alignment of interest between noteholders as Hoist continued to service the portfolio and is entitled to the excess collections after repayment of the junior notes.                                                                                               

Once the rating and investor processes concluded, the assets from Pinzolo were transferred into Marathon, which closed on 5 December 2019. The deal now had a gross book value of €5bn, the total notes issued were €337m split into 85% of senior notes and 15% mezzanine and junior notes.

The senior notes were retained by us and rated investment grade by DBRS Morningstar, Moody’s and Scope. The mezzanine and junior notes were placed at par with CarVal featuring a capped target return.

The transaction resulted in a significant reduction in the RWA attributed to our post-transaction exposure (using the SEC-ERBA). To be clear, we are not circumventing the current capital adequacy regulation as significant risk is actually transferred.

Q: How did this affect your business?

A: Put simply, it has changed and improved our business dramatically. We moved from the end of 2018 with a concerning capital issue to the end of 2019 where we had sorted out that situation and were able to deploy our capital elsewhere. Our successful and innovative entry into the securitisation market has really put us on the map and opened up new opportunities.

For example, thanks to our much improved CET1 ratio and freed-up capital, we were able to execute our largest portfolio acquisition ever with the purchase of a French non-performing mortgage portfolio with more than 3,500 claims and an outstanding balance of approximately €375m (SCI 19 December 2019). As a result, we are now the largest NPL servicer in France.

Q: What is your strategy going forward?

A: We view securitisation as not only a means to solve problems and structure capital relief trades, but also as providing a tool-kit for running our business in the future, including underpinning our funding and capital management needs. Securitisation is now an intrinsic part of our strategy and we’re looking forward to doing more deals.

Marathon’s focus was on the back book to enable us to show our shareholders what was possible to achieve. However, we don’t intend to stand still and view all our other asset acquisitions, existing and future alike, as capable of being incorporated into our securitisation framework.

Q: Which challenges/opportunities do you anticipate in the future?

A: Obviously the biggest challenge is the same one facing everyone – Covid-19. We are fortunate enough to be able to have a reasonably positive outlook on the future. Due to the size of deals, we don’t need large numbers of investors to get involved and those that we are in touch with are capable of seeing beyond the turmoil to the opportunities that lie ahead.

Mark Pelham

About Hoist Finance

Hoist Finance was founded in 1994 and has subsequently shown strong, profitable growth. It now operates in 11 European countries with more than 1,700 employees. Hoist Finance has become one of the leading debt management companies in Europe and was listed on Nasdaq Stockholm in 2015.

The company purchases both performing and non-performing loans from its partners, international banks and financial institutions, to enable them to free up resources for their respective core business. In addition, Hoist Finance contributes to upholding a sustainable, fair and stable credit market by helping banks to offload their balance sheet, so that they can meet their regulatory requirements.