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Thursday, 23 November 2017

US Structured Finance House: Bank of America Merrill Lynch

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Changing times

In a year that saw many banks retreat from parts of the structured finance market as new industry-wide regulations took hold, Bank of America Merrill Lynch stayed the course and brought stability and innovation to the sector. It is IFR’s US Structured Finance House of the Year.

Bank of America Merrill Lynch helped rewrite the DNA of the US securitisation market in 2016 with a series of innovations to cope with the sweeping reforms of the post-financial crisis era.

One of the first large banks to safely put its losses and fines from the crisis behind it, the bank helped lead the way into the next generation of securitisation.

“The investor community, I think, appreciated that we were trying to get ahead of the rules so that the market could continue without disruption,” said one senior BAML banker. “Somebody had to do it. So why not let it be us?”

In August, the bank teamed up with Wells Fargo and Morgan Stanley, combining some of their commercial property loans into a conduit CMBS – and keeping a 5% vertical slice of the deal.

The transaction was a kind of test case for new risk-retention rules coming into effect on December 24 and was followed by a second such trade in October.

And while it is not a given that the structure will eventually pass muster with regulators, both deals were a solid hit with investors.

The buyside liked being a part of deals whose sellers had “skin in the game”, and the transactions achieved some of the year’s tightest pricing in the sector.

But risk retention was not the only area where BAML was at the forefront of innovation in the market.

The bank was a top player in credit-risk transfer bonds aimed at reducing taxpayer exposure to the large residential mortgage loan portfolios of Freddie Mac and Fannie Mae.

BAML continued making markets in Fannie and Freddie’s CRT issuance, helping the sector mature.

CRT supply has increased each year since the first transaction in 2013, with US$10.8bn issued in 2014, US$12.7bn in 2015 and already US$13.2bn in 2016, according to the bank’s data.

And there was also a new wrinkle this year, as Fannie Mae opted to pay for ratings on bonds that had already been issued and sold without ratings.

That helped expand the investor base for the bonds and increase their liquidity.

“Any little thing that adds even a handful of new demand is helpful when you are talking about such big programmes,” said a second banker familiar with the strategy.

Because new issuance of private mortgage bonds has slowed since the crash, the CRT sector has become a major source of liquidity.

“These programmes are critical for the agencies to continue to originate in volume,” the banker said. “Even high-yield and other fixed-income investors – they are watching it.”

But BAML’s success this year was about more than just innovation.

The bank fine-tuned its strategy in the structured space and, instead of backing away from capital-intensive areas that other banks rejected, it opted to focus on bringing more high-quality names to market.

In that vein BAML was responsible for introducing one of the newest and biggest names to the ABS market.

Wireless carrier Verizon hired BAML as the sole structuring lead to help it bring a new breed of bonds backed by cell phone payment plans.

The debut US$1.1bn deal in July was followed by a US$1.4bn trade in November (although the second deal was priced after the IFR awards period), and set the template for other telecoms companies to participate in what could eventually become a roughly US$50bn asset class, according to Moody’s estimates.

The bank was able to muster some US$12bn of demand for the inaugural trade as it held in-person, group and telephone meetings with more than 160 investors.

It was the first new type of asset-backed deal to be awarded Triple A ratings out of the gate from two major credit rating agencies since the financial crisis.

“Bank of America has taken the view that there were other firms backing away from fixed income broadly,” the first banker said.

“But we have not. While there might be less overall activity, we will pick up a greater market share.”

To see the digital version of this review, please click here.

To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com

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