The top stories of 2018
December 31, 2018 10:17 PM
Risk retention rolled back for open-market CLOs
Nevertheless, the CLO industry adapted.
Since late 2014, when the rules were issued, smaller managers have teamed up with larger players and collectively raised billions of dollars from third-party investors to help finance their skin in the game. Issuance of CLOs reached a near-record $124 billion in 2017, feeding a frenzy for floating-rate debt that has allowed junk-rated companies to borrow large sums on increasingly favorable terms.
That doesn’t make legal victory any
In March, the Court of Appeals for the D.C. Circuit sided with the Loan Syndications and Trading Association, an industry trade group; it held that Dodd-Frank does not authorize federal agencies to subject CLO managers who acquire collateral for deals on the open market to risk retention regulation, because those managers are not “securitizers.”
Residential PACE retreats, C-PACE builds steam
Resi PACE originations, which had largely been confined to California, fell sharply as providers grappled with new consumer protection regulations in that state. The regulations include income verification and ability-to-pay rules that extended the time and effort required to obtain financing for energy and water efficiency improvements from now more than 30 to 45 minutes to multiple days.
Renovate America and Renew Financial, two of the largest providers of programs that finance energy-saving home upgrades, also faced more
Unlike earlier lawsuits, this one does not allege that the providers of Property Assessed Clean Energy Financing violated consumer protection laws. A U.S. District Court
Meanwhile, C-PACE providers continued to boost production, with CleanFund debuting in the securitization market with the sector’s first
Going forward, DBRS as well as Morningstar Credit Ratings expect PACE production to get a boost from the
Fannie Mae issued CRT as a REMIC to expand investor base
The latest CAS, which priced in October, is structured instead as a
“This has been a huge goal for us, practically since the beginning of the program,” said Laurel Davis, Fannie Mae’s vice president, credit risk transfer. “It’s a
Dubious Honor: 1st subprime auto ABS downgrade post-crisis
Michael O'Keene/mokee81 - stock.adobe.com
Despite the high rate of default among borrowers with poor credit, investors are snapping up billions of dollars of auto loan-backed securities with below investment grade ratings – in some cases as low as single-B. They are willing to do so in large part because lenders are putting up additional loans as collateral for the bonds, and because credit rating agencies believe that this overcollateralization will insulate investors from expected losses.
Problems at Honor Finance, an Evanston, Ill., lender backed by CIVC Partners, show that this form of credit enhancement
Honor isn’t alone in using this practice however; analysis by S&P Global Ratings indicates that extension rates at a number of other subprime auto lenders are
Though none are nearly as high as those of Honor, it’s a trend that bears watching, particularly for holders of the riskiest securities issued in subprime auto securitizations.
FHFA halts program expanding GSEs' role in rental market
"What we learned as a result of the pilots is that the larger single-family rental investor market
As short-lived as it was, the program still had a
Loans under regulatory scrutiny
The ex-capital banker expressed dismay over deteriorating credit quality and maintenance covenants on the business loans extended by Wall Street to junk-rated companies, the speculative-grade segment of U.S. corporate borrowers that have more than $1.3 trillion in outstanding bank loans held by investors, including buyers in collateralized loan obligations.
“There are a lot of weaknesses in the system,” she told the Financial Times’s FT.com site, “and instead of looking to remedy those weaknesses I feel things have turned in a very deregulatory direction.”
She was not alone. The head of risk surveillance and data at the Fed, Todd Vermilyea, used the venue of a New York industry conference to express the Fed’s rising concerns over the rising debt levels of non-investment-grade firms. He also said the board would take a “closer look” at business debt levels that a subsequent Fed financial stability report in November would note had grown to “near-record levels” relative to gross domestic product.
The same report noted that 35% of outstanding corporate bonds were issued from the lowest end of the investment-grade scale, meaning a trove of downgrades could push much of that $2.25 trillion in loans and bonds in junk status.
Much of the rise in loan debt was fueled by investor tolerance for risk because of the high yields available in the class. But the risk appetite sharply dissipated by year’s end.
The year-long warnings took their toll on the market at year’s end, with no high-yield bond offerings issued in November and December, and investors pulling nearly $9.9 billion from actively and exchange-traded loan funds in the final five weeks of the year.
Private equity dives into MM CLOs
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GSO/Blackstone, Bain Capital and Guggenheim Securities were among a rush of large private-equity firms that launched first-time middle-market collateralized loan obligations, after lengthy experience with issuing and managing open-market broadly syndicated CLOs.
“For businesses that have robust CLO franchises, and have a robust direct lending franchise, it’s kind of natural to pursue something in middle market CLOs,” said Michael Herzig, a managing director with THL Credit, another firm that provides direct lending to lower middle market firms.
The opportunity arose for these firms as banks have retreated from originating SME loans (usually under $100 million), leaving the business to a clubby field of private lenders such as Ares Management, The Carlyle Group, Golub Capital Partners and Churchill Asset Management who originate the loans and collateralize them in middle-market CLOs.
Private equity firms are lining up major capital commitments for middle-market lending. Blackstone, for instance intends to raise $10 billion for direct lending operations through 2019. Direct lending already makes up the bulk of Ares' $87 billion in assets under management for its credit unit.
More private funds were formed in the last year to pursue direct-lending opportunities worlwide: according to Prequin, nearly $80 billion globally (about half of all capital being sought in private funds) were targeted for direct-lending purposes.
Through the end of the third quarter, middle-market CLO issuance had been on pace for a record volume of nearly $15 billion in 2018.
