Reckoner Capital Management recently announced its intention to launch in September a business providing risk-retention financing for securitizations. It joins at least two other firms that have hired executives away from the long-time leader in the specialty financing niche to launch competing businesses.
Anna Di Pietro will officially join Reckoner in September as an executive director focused on risk-retention financing, following two years as an associate director at Nearwater Capital, the top provider of the financing since the firm's inception in 2017.
Other Nearwater executives have recently left the firm to join competitors, Jonathan Kitei started last November at middle-market lender PennantPark. He previously ran Nearwater's risk retention financing business for three and a half years.
More recently, according to Octus, Nordic alternative credit fund Ymer has hired Theo Fleishman, formerly a managing director at Nearwater, as part of its new risk-retention financing business.
Reckoner estimates the risk-retention financing business to be upwards of $4 billion in size annually across CLO, asset-backed securities (ABS), residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) securitizations.
Employee-owned and partnered with RedBird Capital Partners, a $14 billion private equity firm, Reckoner Capital has established a revolving credit to fund the risk-retention financing with what John Kim, co-founder and chief executive officer of Reckoner Capital, described as a large bank.
Risk-retention demand
Issuers in the U.K. and Europe must retain at least 5% of securitized assets. Collateralized loan obligations (CLOs) in the U.S. that securitize broadly syndicated loans (BSLs) are exempt from such a requirement, unless a portion of the transaction is sold to European investors. In that case, issuers must abide by Europe's risk retention requirements.
While that does incur an additional cost, including demand from European investors could serve to tighten liabilities, improving the CLO's arbitrage.
"CLO managers are concerned about delivering great equity returns on the underlying assets and liabilities, and that tends to drive the decision," said John Kim, co-founder and chief executive officer of Reckoner Capital.
Private-credit CLOs and other securitizations in the U.S., in which the issuers originated the loans, must abide by the 5% risk-retention rule established by the Dodd-Frank Act. That can be a portion of the first-loss layer, or a "vertical strip" across each tranche of the offering.
"You're not allowed to sell that exposure, but you can finance it from a third party," Kim said.
Issuers typically are asset-management firms that may have insufficient capital to retain that risk. That creates a market for third party finance providers, Kim said.
