Market Wrap

Excess Spread - The season of SRT, first time buyers, even more Rizwan

Owen Sanderson's avatar
  1. Owen Sanderson
11 min read

Tis the season for risk transfer 

The end of the year is the traditional deadline for the sorts of transactions that flatter bank balance sheets, as a financial close before December 31 will lock in the most beautiful version of the institution’s financial metrics for the next year.

As such, December usually sees a flurry of Significant Risk Transfer (SRT) activity ahead of year-end — only some of which ever breaks the surface. 

But there certainly were a few trades knocking around this year — Greece’s Alpha Bank, for example, did its first synthetic securitisation, a green deal based on a €1.9bn SME book, and partly subscribed by the European Bank for Reconstruction and Development (EBRD), which did €10m of the €152m guarantee tranche. AnaCap and Christofferson Robb did the remainder.

The Greek market was something of a success story in 2021, led off by Piraeus Bank, which did a €1.4bn SME deal with Christofferson Robb in the spring, the first deal in Greece. Eurobank also joined in the fun, announcing a €1bn SME and large loan deal with Magnetar Capital at the end of the year.

This was quickly followed with a European Investment Fund guarantee on an €700m SME book towards year end, with the guarantee backed out to the European Investment Bank’s European Guarantee Fund.

The National Bank of Greece doesn’t seem to have done a deal yet, for the full Greek quad, but surely can’t be too far behind.

One could be forgiven for perhaps caring little about which particular pot of European money is guaranteeing synthetic transactions at any one moment, but the role of the European Guarantee Fund is set to be sizeable, and is pretty recent, with state aid approval for the securitisation instrument only granted in August this year. 

The fund has €25bn in firepower, which would cover an awful lot of first loss tranches were it all to land in SRT deals, though European authorities have ‘only’ earmarked €1.4bn of this for synthetic securitisation — it has a variety of other channels to use for supporting the European economy, such as staking credit funds and VCs, and direct loan participations.

Risk transfer powerhouse Santander was first to use the securitisation leg of the scheme with a deal for its Polish unit in December — previous deals between Santander Poland and the European Investment Fund have been backed instead by the European Fund for Strategic Investments, which is the central part of the “Investment Plan for Europe”. This fund also provided capital into a Nordea SRT deal earlier this year, as well as into a deal for Deutsche Bank — an unusual move for DB, which usually places its SRT deals with the private sector.

State support for a reasonably successful private market is…..controversial. Is the point for the European money to undercut the private sector on price, or just to add to the total financing volume? Is the public sector money just taking deals away from the risk transfer funds, or enabling deals to happen that would never have existed?

Probably the answer is a mix of everything — the European Investment Fund has long enjoyed a dominant position in guaranteeing small cap SME deals, with a better reach into some of the smaller Italian banks than the big risk transfer funds. 

But that doesn’t necessarily matter too much, as most of the volume in SRT is still driven by big global investment bank-type institutions, hedging multiple billions at a time, and often with their own sophisticated credit portfolio management and structuring units. There’s a tier of regular issuers below that, but at a certain size it’s no longer worth the time and cost of structuring a private deal when the EIF is right there.

Happily, the market has been growing fairly rapidly over the last few years (it remains absurdly secretive, so it’s hard to know for sure, but more jurisdictions are involved, more banks are doing deals, and existing issuers are doing more and larger issues).

That means there’s been plenty of issuance for the existing risk transfer funds, plus new entrants in the insurance and reinsurance space, to get involved in — softening the impact of the public sector swallowing up the SME transactions.

2021 also saw the introduction of the Simple Transparent and Standardised (STS) regime for synthetic transactions, which gives us another source of info on the market. 

The European Securities and Markets Authority’s list of STS Synthetic notifications, features a natty 15 transactions from the second half of 2021 — three of them notified on December 31.

The level of transparency on display is so impressive that ESMA discloses not even the country of the issuer, never mind deal size, bank name or, god forbid, the cost of the protection or attachment points.

But we can see that 11 of the 15 STS deals use funded credit protection structures — meaning they’re likely to be true private sector deals, as the supranationals use unfunded guarantees. Nearly all the deals are corporate risk, with five large corporate deals, two SME deals, and seven mixed deals. The remaining transaction is a CRE portfolio.

All but one of the structures are financial guarantees, rather than credit derivatives — but that’s been true for a few years now, if memory serves it helps the tax and accounting treatment in some obscure but important way.

Slightly more info can be gleaned from PCS, an STS verifier, which does at least give the country — but only covers a small slice of the market, as third party verification is unlikely to be a priority in bilateral risk transfer deals. The Alpha Bank trade is in there, as are a few Spanish and Portuguese corporate deals. The issuer for the latter isn’t disclosed, but Steve Gandy, who runs Santander’s risk transfer unit, also chairs the PCS Market Committee (and helped found the organization) so…..presumably he sees the value in verification? 

Banks don’t do deals, except when they do

Much wailing and anguish has accompanied the effective withdrawal of the biggest banks in the UK and Europe from the securitisation funding market, as they’ve mostly chosen to take cheap central bank cash instead of using their ample asset portfolios to borrow in securitised format.

There will still be a trickle of UK funding deals this year, and maybe more — expect a Silverstone and a Lanark deal, and fingers crossed for a Holmes or Permanent, though probably in limited size.

But capital relief is the secret sauce of securitisation, and the crucial way it can out-compete funding-only products like covered bonds. 

For UK banks, one of the favoured capital relief trades appears to be first-time buyer mortgages, which are often high LTV and therefore given tough regulatory capital treatment (especially as they have little track record to go on). Lloyds led the way with its Syon Securities synthetic programme, running for three years now, and a little less hush hush than the bilateral synthetic deals discussed above — probably to the pricing benefit of Lloyds.

But Santander, with Blitzen Securities 2021-1 last summer, and Barclays with Pavillion Mortgages 2021-1, priced just before Christmas, have followed suit, selling down the capital structure to get first time buyer mortgages off balance sheet. Barclays is hanging on to the class ‘A’ notes at 40 bps, according to deal docs, but selling the portfolio call rights and the rest of capital structure, apart from a risk retention.

FTB mortgages are in the sweet spot for selling risk transfer deals — the market recognises these as low risk, but the regulatory models disagree, maximising the capital benefit from selling these assets out as securitisations.

EU-regulated banks have tended to lean on auto or consumer loans for their cash capital relief securitisations, and Santander, Societe Generale, BNP Paribas and Credit Agricole between them have been massive issuers over the past year — potentially thanks to different regulatory treatments of excess spread in risk transfer deals between the PRA and the Single Supervisory Mechanism.

Consumer deals tend to kick off a ton of excess spread, meaning, if the regulator allows it to count, a ton of protection for the most junior tranche in the deal, reducing the cost of obtaining the capital relief. 

The PRA doesn’t exactly ban excess spread as a credit support, either in synthetic deals or in cash, but it takes a pretty tough line

But the question is….who’s next on the UK side? 

If the trade, or something like it, works for Lloyds, Santander, and Barclays, there’s every reason to think it would work for Nationwide, which remains an active securitisation bank in the funding market via the Silverstone programme, and even HSBC, the UK’s best rated bank, which has generally disdained own-issued RMBS in the past.

Just like the others, HSBC has a ton of liquidity and capital trapped inside its ring-fenced bank in the UK — anything that lightens the load could be a deal worth doing...

Tripling down (yet more Rizwan)

I once referred to myself as the country’s foremost amateur Rizwanologist….a title which I no longer think I can claim. The court cases and attacks are multiplying and lengthening to the point where Rizwanology requires a dedicated team of full-time professionals — it is becoming a valid sub-discipline of securitisation law in its own right.

For those less involved in the story, the short version is that Rizwan Hussain, a former securitisation banker who worked at RBS and at StormHarbour, plus a rotating cast of associates, have attempted to seize control of various securitisation transactions through legally dubious tactics such as pretending to be appointed as administrators, directors, pretending to settle bond tenders and the like — here are 11 of the court judgements trying to stop him.

This has been running for more than three years, briefly interrupted by a spell in prison, and has, indeed, ramped up in intensity lately.

Even Christmas Eve wasn’t safe — a notice on December 24 confirmed that Rizwan and the various associates were having a go at Stratton Mortgage Funding 2019-1, a Davidson Kempner-sponsored UK non-conforming RMBS.

This is actually one of the few mortgage portfolios Rizwan genuinely once had an interest in — a good chunk of this book was in the BAML-sponsored vehicle Moorgate Funding 2014-1, for which a Rizwan-linked entity, Kilimanjaro Asset Management, fulfilled a risk retention role (more details). 

It wasn’t an economic interest, as such — Kilimanjaro’s role amounted to taking a £10k fee for helping BAML thread the regulatory needle — but it still existed. Not that it has much bearing on the Stratton situation though. 

The approach of Rizwan et al appears to be the standard playbook of pretending to replace SPV directors, in this case Intertrust, presumably then intending to use this position to direct various actions. The main novelty is that it’s a new vintage RMBS issue, rather than a knocked-about pre-crisis portfolio.

More classic is the attacks recently launched on several Eurosail RMBS deals (famous among securitisation and restructuring cognoscenti for the lengthy balance sheet insolvency litigation following the collapse of Lehman).

These take a relatively new approach, also seen in an attack on Mansard Mortgages, of attempting to charge the structures a “consultancy fee” (from the Italian, “with insult”). 

To quote from the notice: “On 7 December 2021 the Defendants received copies of correspondence addressed to the Cash/Bond Administrator and to Citibank N.A. purporting to advise that on 6 December 2021 each of the Relevant Eurosail Issuers had entered into consultancy agreements with [Rizwan vehicle] Kessa, for an upfront fee of £300,000 (net of taxes) and a further £150,000 (net of taxes) per month purportedly payable by each Relevant Eurosail Issuer to Kessa.”

It’s not a bad idea, as far as scams go — it only takes one cash administrator asleep at the wheel to generate a payout, and they’re an underloved and overlooked crucial element of the securitisation process. I’m sure there are various procedures and safeguards in place, but whipping up official-looking documents and legal letterheads is all part of the standard MO by this point.

Citi, who, bless ‘em, are the paying agent here, sent $900m to some hedge funds by mistake only two years back, so expensive accidents do happen, and one can assume the funds would quickly be spirited offshore beyond the jurisdiction of the UK courts if they ever got transferred.

Hoping for a permanent spot in the waterfall seems a little optimistic to me, especially at £150k per month per deal, but if you don’t ask, you don’t get, I suppose.

But anyway, add these attacks to the existing Business Mortgage Finance litigation, the Clavis suits and countersuits, the still-outstanding injunctions from Fairhold, the Symphony International attack, the Hurricane Energy business — the man just loves going to court, and will presumably continue to do so right through his second contempt of court hearing, coming up towards the end of this month.

I suspect all of his schemes will continue their unbroken record of failure, but the relevant question for the broader market is, who pays for “Rizwan risk” going forward?

Trustees, SPV administrators, paying agents — these are supposed to be straightforward roles, mostly administrative, with few headaches and little risk attached. 

Yet thanks to Rizwan, a bunch of people from Mann Corporate Services, Sanne Group, Vistra, Intertrust (possibly others too) have been dragged through court proceedings, targeted with personal lawsuits, forced to hire expensive counsel and instruct expensive barristers, and generally given all kinds of grief.

Administrators are traditionally not paid the kind of money to compensate them for this sort of legal headache — but perhaps will demand this in future? The system has held firm against a very sustained round of attacks, but someone’s had to pay for all the legal work — and if they didn’t, would that have compromised the crucial plumbing that sits behind the securitisation industry?

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