Asia-Pacific Structured Finance Issue: FlexiGroup’s A$260m Green ABS

Early in the year, the jitters were amplified even further by an overhang of some £13bn in legacy Northern Rock mortgages, which Cerberus Capital Management bought from the UK government in November 2015. From the start, most knew the US private equity giant planned to securitise the assets. But many worried that, if the massive chunk of supply was sold at once, it would flood the market and badly distort technicals. When the trade emerged in April, much of it was already pre-sold, drawing a sigh of relief from the market. Although some criticised the sponsor for leaving mere “scraps” for public syndication, most participants agreed that the UK sterling market simply did not have the depth to absorb over £6bn in senior and mezzanine mortgage bonds without significant efforts to pre-place bonds. But Cerberus defied the odds – and market volatility – to successfully close the £6.2bn transaction, pulling off the largest public UK RMBS deal since the financial crisis. “We know how the sterling market is and we know it can lack depth at times,” said Dimitri Kavour, head of structuring for Morgan Stanley’s deleveraging and lending group, including syndication of bespoke transactions. “If for any reason that transaction had failed, it would have had huge implications for the market.” Notably, the involvement of deep-pocketed Japanese investors lifted hopes that demand for large chunks of UK paper could be found elsewhere, without disrupting the supply dynamics in the European market. Structurally, Cerberus also found a workaround to a common issue plaguing sponsors looking to securitise legacy mortgages, which often carry thin margins over the base rate. To make the economics work, the issuer introduced a weighted average coupon cap, a structure that essentially means what is paid to mezzanine bondholders cannot exceed the net WAC of the underlying mortgages. The feature opens the door to potentially receiving less than the stated coupon as the mortgage pool amortises, which has ruffled feathers in the market. But the controversial feature has also provided a blueprint for other sponsors looking to make the economics of legacy portfolios work. Ultimately, the trade’s structure and execution have eased nerves about the market’s capacity to absorb large chunks of supply, particularly as it braces itself for the sale of some £17bn in buy-to-let Bradford & Bingley mortgages. Morgan Stanley was sole arranger and joint lead together with Bank of America Merrill Lynch, Credit Suisse, Lloyds and Natixis. 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 <object id="__symantecPKIClientMessenger" style="display: none;" data-install-updates-user-configuration="true" data-extension-version="0.4.0.129"></object>

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 <object id=

Perched above the Hudson River on Manhattan’s West Side, the 52-storey building was arguably more than half a century in the making. And the US$1.2bn financing package that finally brought it to life was easily IFR’s North America Structured Finance Issue of the Year. Real-estate magnate William Zeckendorf Sr first proposed developing the site in the 1950s. But he was just the first of many to fail to make it work. It took The Related Group – one of the largest real-estate conglomerates in the US – to transform the property and nudge the heartbeat of New York ever-so-slightly west. Expected to be completed in 2025 with more than 17m square feet of mixed-use space, the site will be the largest (in terms of square footage) private real-estate development in the US since the Rockefeller Center, according to Moody’s. “It is helping to modernise a city that needs to be modernised,” said Matt Borstein, global head of commercial real estate at Deutsche Bank, which has led US$3bn in financing at the site. Deutsche supplied about 70% of the US$900m 10-year senior debt on 10 Hudson, which will not even be the largest building at the property when complete. Goldman Sachs accounted for the remainder, according to Moody’s. The two banks acted as joint bookrunners and co-leads on the main CMBS, which packaged two-thirds of the debt – mostly as Triple A rated securities – and achieved some of the tightest pricing levels of the year. The other US$300m was dropped into four separate conduit CMBS deals to give investors in multi-loan pools the rare chance to buy bonds anchored by such a prestigious asset. In a novel twist, Deutsche and Goldman also sold US$300m of mezzanine debt to South Korean investors – an insurance company and pension funds – that bought shares in a fund that holds the loan. And despite a difficult year at the German lender, it committed a further US$1.5bn towards a proposed 1m-square-foot retail centre at the site. When completed, the site will host dozens of office, retail, residential and cultural spaces, and link up with the popular High Line walkway and a new extension to New York’s subway. “The ability to be involved in the newest, most innovative, environmentally efficient modern building in New York City is what really makes the transaction super-special,” Borstein said. “When the client has his most important transaction of the year – maybe in their company’s history – who is that client going to call?” he said. “In this case, we were the phone call.” 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 <object id="__symantecPKIClientMessenger" style="display: none;" data-install-updates-user-configuration="true" data-extension-version="0.4.0.129"></object>