Resurrecting Libor, putting more fin in fintech: Talk of SFIG Vegas
From efforts to fix the London Interbank Offered Rate to changes in online lenders' funding programs, here are some of the highlights of the Structured Finance Industry Group's 2018 confab in Sin City.
Reports of Libor's demise have been greatly exaggerated
Timothy Bowler, president of the ICE Benchmark Administration, which has been responsible for calculating the indexes since mid-2013, argues that there is a strong case for keeping them going — just not all 35.
While banks will no longer be compelled by U.K. regulators to submit quotes for the calculation of Libor after 2021, there is nothing preventing them from doing so.
“The vast majority of participants we engage with — banks, borrowers, investors — have encouraged us to find a framework for retaining Libor over the long term," he said.
This would be a much smaller set of benchmarks than the five currencies and seven maturities currently published. Bowler said the ICE is surveying panel banks, other global banks and end users about which currencies and tenors are the most important to them.
Stacks of coins with the letters LIBOR isolated on white background
So far, efforts to find a suitable replacement for the London interbank offered rate have largely considered the impact on investors, lenders and other financial market counterparties.
Lenders and servicers need try to limit any harm to consumers — and any potential liability. So they are wary of making any decisions about replacing the benchmark on outstanding loans until the Consumer Financial Protection Bureau weighs in.
FHA eyeing further action on mortgages with PACE liens
Acting commissioner Dana Wade said the agency is "vigilantly" watching whether it needs to take action on PACE assessments placed on mortgages after they are endorsed by the agency.
Small is beautiful
Residential PACE securitization is expected to slow this year, but providers of property assessed clean energy financing for commercial properties could pick up some of the slack.
The first transaction, completed by Greenworks Lending in September, was just $75 million, and the bulk of the notes were sold to a single investor, TIAA Investments. Jessica Bailey, Greenworks’ co-founder and CEO, said that despite the deal’s small size, “the execution was good enough that it made economic sense.”
Attractive funding wasn’t the only reason for coming to market sooner rather than later, however. Greenworks was also keen to find out whether rating agencies and re investors were comfortable with the way that the company is originating and underwriting.
It could have been a lot worse
The Trump administration’s decision to impose a tariff on imported solar panels will have a relatively limited impact on residential installations.
Katya Baron, a managing director at Mosaic, noted that panels account for just 15% to 20% of the total cost of a residential rooftop installation; much of the rest of the cost is labor and marketing. That means the total price of installation will not rise by the same percentage as the tariff itself. “The overall impact will be fairly muted” on residential demand for solar panels, she said.
David Ridenour, of counsel at DLA Piper, and another panelist at the Structured Finance Industry Group’s annual conference in Las Vegas, went so far as to call the president’s action a "bit of a win” for the U.S. solar industry. He noted that the U.S. International Trade Commission had recommended a 50% tariff.
Putting more 'fin' in 'fintech'
Last year, LendingClub, Marlette Funding and other marketplace lenders developed their own securitization platforms, rather than relying on whole loan sales to large investors. They also invited some of these investors to contribute seasoned loans to collateral pools for these in-house deals.
Mindful of how much this broadened their investor bases, both lenders are looking at additional changes to both their securitization and whole loan sale programs — including revolving funding periods, interest-only strips, and exchange-traded funds.
Breaking Pool Balls on green table
Petkov - Fotolia
Mortgage credit risk transfer as a capital substitute
Expect more private mortgage insurers to follow Arch Capital’s lead and offload some of their exposure to potential defaults by homeowners to capital markets investors.
"It’s an interesting way to think about capital," said Adam Budnick, a managing director at AIG, which invests in credit risk transfer securities issued by both the GSEs and private mortgage insurers.
On the one hand, “you can think of it as shedding risk,” Budnick said. But transferring credit risk through the capital markets can also be seen as a way of replacing capital, because the less risk on a company's books, the less capital it needs to set aside. “If the cost is attractive, that can make a lot of sense,” he said.
Dealer Vehicles in Stock. Brand New Cars Awaiting Clients on the Dealer Parking Lot. New Cars Section.
Tomasz Zajda - stock.adobe.com
What, me worry?
Despite riskier terms, rising delinquencies and falling used-car values, investors keep buying bonds backed by prime and subprime auto loans and leases.
"For the most part, we don’t hear [about] credit concerns” from investors, said Amy Sze, an executive director and fixed-income research analyst for JPMorgan.
CLOs more fun with skin in the game
CLO managers cheered a Feb. 9 decision by the DC Circuit Court that they do not need to hold “skin in the game” of their deals.
But some investors in collateralized loan obligations see little to celebrate.
“We were sad to see them go,” said Kevin Croft, a senior vice president and portfolio manager for the Des Moines-based insurer American Equity. “We were very happy to have risk retention in place.”
So was William Moretti, a managing director who heads the investment portfolio of MetLife’s structured finance group. “In general we favored risk retention as part of more global reform and a healthy securitization market along with transparency and good governance,” Moretti said. “It’s something that’s applied across all structured finance, but it’s difficult to have a customized solution for each different asset class."
Flying straight and narrow
Last year, aircraft lessors introduced more complexity to pools of collateral backing securitizations; turbo-props and corporate jet fleets are increasingly being thrown in the mix. But unlike some other asset classes, where diversity boosts investor confidence, aircraft ABS buyers are more interested in keeping things simple.
Differing contract terms, markets, maintenance requirements and average age of regional or specialty aircraft can make pricing ABS deals “a little challenging for us,” said Keith Allman, a vice president for Loomis Sayles & Co. “It’s hard to see how sometimes securitization can actually be a good tool [for smaller planes]. They’re used in a lot of restructurings, [and] restructurings are quite volatile when you’re looking for consistent cash flow.”
The ideal in asset uniformity even boils down to the mix of short-haul narrowbody aircraft versus long-haul widebody jets. The fastest-growing aircraft markets are for narrowbody aircraft in domestic markets in China, Asia, North America and Europe, said Allman.
The $310.47 million GLS Auto Receivables Issuer Trust 2020-4 collateralizes 13,316 loans with an average borrower FICO of 573. That is lower subprime territory, but is slightly higher than any of GLS’ most recent securitizations, according to a report from DBRS Morningstar.
The third offering of bonds secured by non-guaranteed private student loans has a senior-note weighted average life of just 3.44 years, compared to over five years each for two prior Navient SLABS deals this year.