This article provides an overview of collateralized loan obligations (CLOs) as securitizations backed by diverse portfolios of senior secured leveraged loans, their historical performance and default rates, and how they differ from other securitization vehicles. It explains the resilience of the asset class, due in part, to covenants that limit risk exposure and offer early identification of stress. This article also discusses the deterioration of covenant quality in leveraged loans and the benefits and drawbacks of covenant-lite loans. The authors refute concerns that CLOs will be the next source of a financial crisis and explain the regulatory and investor scrutiny they are subject to. The European CLO market is well regulated, transparent, and has improved liquidity, with increasing interest in investment-grade tranches. Issuers have adapted and innovated in response to crises, leading to new structural modifications and ESG adoption. The market is expected to remain robust due to its ability to adapt and the improved investor base.
The 12th Annual Investors’ Conference on CLOs and Leveraged Loans was held on April 17–18, 2023 at the Marriott Marquis hotel in New York. It was very well attended. Some sessions were standing room only. Key themes at the conference included: 1) macroeconomic risks (both inflation and a possible recession); 2) the prospect of rising loan defaults; 3) manager tiering; 4) increasing performance dispersion under stress conditions; and 5) the LIBOR to SOFR transition. The mood was cautiously optimistic, despite looming macroeconomic headwinds. Sessions Covered Monday, April 17 Sessions IMN and FIIN Welcome Remarks CLO and Leverage Loan Market Outlook Applications of ESG to CLOs Manager Tiering and Consolidation Trends Technology, Innovation, and the Future of CLOs Investor Insights: Opportunities across the Capital Stack Tuesday, April 18 Sessions Fireside with Apollo: Perspectives on Structured Credit Risk CLO Manager Roundtable Documentation Developments Keynote Economic Outlook, with Mark Zandi CLO Debt vs. Equity Trustee Evolution and the Role of Collateral Administration
This article provides an overview of ESG investment considerations in the context of the broader capital markets, with a focus on structured finance. Perspectives differ on defining an “ESG transaction,” both from an asset class and a market perspective. Various regulatory pronouncements have taken the market a long way in understanding the factors, though more work is to be done. Unique characteristics matter for structured credit investors, as examples herein show, and efforts to expand the use of ESG framing tools have certain inherent limitations, such as data. Greenwashing is a broad market issue to which structured credit financing is not immune. This article also explores examples within the universe of structured products where ESG principles are or can be integrated into an investment framework.
FIIN (the Fixed Income Investor Network) has developed a practitioner-oriented structured finance testing and certification program in-house to address the current vacuum of educational opportunity to learn best practices. It is an obstacle not only for structured finance practitioners to seek continuous professional development, but also to the further development of depth, liquidity and coverage in the structured finance market itself. Since its formation in 2018, FIIN has viewed education as mission critical. The support for education is there in FIIN’s motto: Better Investors Make Better Markets. Having grown rapidly in the past five years, to 550 individual members from more than 250 firms, and drawing on the talents of veteran buyside and structured finance-specific training talent, FIIN is uniquely positioned to offer professional certification. And given that the buyside always pays when structured securities are not rated or priced for fully-loaded risk, FIIN is the obvious entity to take the lead in setting educational standards for the market. The target date for the Beta launch is October 2023.
The consumer ABS market provides a large and growing source of funding to the US economy. Historically the market consisted primarily of auto loans, credit card receivables, and student loans. Over the past decade, esoteric ABS issuance has proliferated, as more markets are able to securitize cash flows to unlock a lower cost of funding relative to comparable corporate alternatives. Sectors that did not exist 10 years ago have grown to be large and liquid market sectors, including marketplace lending, solar, property assessed clean energy, and consumer handset receivables. This trend has been aided by a pullback in bank lending, driven by post-great financial crisis (GFC) regulation and capital regime changes. The Fed's imposition of higher interest rates throughout 2022 and into 2023 is designed to slow the economy and reduce inflation, but is also likely to put pressure on consumer performance in the coming months. While consumer balance sheets remain relatively healthy, excess savings accumulated during the pandemic have been eroding, and delinquency rates are expected to rise. While performance is expected to deteriorate, consumer ABS structures have gotten safer since the GFC-including via more credit enhancement and better-quality collateral-and some of the longer- standing structures have shown their ability to withstand a variety of macroeconomic environments without taking a loss. Despite the more robust structures, performance of newer esoteric asset classes will be watched closely as we enter a more volatile macroeconomic environment. The ABS market will continue to evolve in the coming years, as large structural change has tended to correspond to material changes in macroeconomic conditions. Regardless of the changes, we expect the market to remain an integral source of funding for the US consumer.
This article discusses the outlook for the US housing market and its expected impact on the trading dynamics of residential mortgage-backed securities (RMBS) in 2023. Despite the current reduced affordability of housing due to higher mortgage rates and surging home values, single family home prices are unlikely to experience a sharp decline, with growth expected in the second half of the year. The limited housing supply will lead to increased upward pressure on home prices and stronger performance in RMBS. Non-qualified mortgage products may face a challenging year in 2023, with delinquencies and losses expected to rise. Credit performance will be critical, and demand for affordability products is likely to increase. Overall, the outlook for the RMBS market remains challenging due to rising interest rates, tightening monetary policy, and the expected increase in the supply of mortgage-backed securities. However, the high level of home equity in the US housing market will create skin in the game for borrowers, as well as higher collateral values to protect against credit deterioration.
This article reflects on the author’s experience working in the mortgage-backed securities (MBS) sector during the 1970s, 80s, and 90s on Wall Street, and the evolution of the market that eventually led to the 2007 mortgage meltdown and the 2008 financial crisis. MBS emerged as a promising type of investment, offering high returns and lower risks than products from other fixed-income sectors. However, the gradual erosion of “the mortgage gets paid first” assumption was somehow overlooked during the boom years, as demand increased, underwriting guidelines got looser, and new affordability products emerged. Meanwhile, credit managers and MBS experts combined to become deal managers, leading to a whole new sector of the markets: collateralized debt obligations (CDOs). The market for CDOs grew, and new buyers of subordinate MBS tranches contributed to a rapid expansion in the issuance of MBS backed by subprime and alt-A mortgage loans. The whole episode raises important questions about the responsibility of market participants and the role of regulations in the evolution of the MBS market.
1. Tom Lemmon 1. is the deputy securitization editor at GlobalCapital in London, UK. (tom.lemmon{at}globalcapital.com) The following is a selection of highlights from GlobalCapital for the fourth quarter of 2022 compiled and curated by GlobalCapital deputy securitization editor, Tom Lemmon
Over the past years, France has been rocked not only by violent demonstrations in the banlieues (city outskirts) but also by raging debates regarding the place of “postcolonial studies” in the French archive and in current scholarship. The dispute over postcolonial studies in this European venue is symptomatic of disagreement about the status of French colonial history and the category of race in the construction of contemporary national narratives. The varied and conflicting understandings of both postcolonial studies and the nature of empires entail fierce disagreement over the status of race and immigration in France (if not Europe) today. This introductory essay reviews the arguments presented in the main articles, discussion papers, and Doxa essays included in this special issue. The author enters the debate by arguing against the notion that postcolonial studies can be summarized as a theoretical form. Because postcolonial studies has produced compelling accounts of the epistemological bases for the production of difference and historical forms of regulation, its intellectual force lies in the constant postulation of alternative narratives and counter-histories in a relentless effort to displace the fault lines of power-knowledge. However, to what extent can this contemporary scholarship rid itself of the categories of nineteenth-century academic disciplines? By considering the third languages of the postcolonial world, one can address this predicament of thinking and reasoning in the language of the educator, the statesman, the colonizer, the slaver, the exterminator. In the end, though, an epistemological rupture would entail more than differential languages; it requires that significance no longer be located in historical inscription.
The 1st Annual Middle Market CLOs and Direct Lending Conference attracted more than 700 registrants and was held on June 15, 2022, at Chelsea Piers in New York. Panelists generally expressed cautiously optimistic views for the sector. Key themes at the conference included uncertainty about inflation, the potential for a recession, the rapid growth in middle market (MM) lending, the increasing size of loans originated through private-credit/direct-lending channels, and the strong performance of MM collateralized loan obligations (CLOs) (and their underlying loans) during the COVID-19 pandemic. In addition, several sessions discussed new regulatory initiatives and the growing importance of environmental, social, and governance (ESG) considerations in MM CLOs. Sessions Covered Middle Market Finance Primer Co-Hosts’ Welcoming Remarks Middle Market Finance Strategies and Trends The Direct-Lending Landscape: Opportunities and Threats on the Horizon Key Regulatory Developments for CLOs and Private Credit Health Check: Taking the Temperature of the Middle Market Sector Key Considerations for Investing in Middle Market CLOs: Equity and Debt Investor Roundtable Middle Market CLO Manager Roundtable: Poised for Growth Middle Market Private-Credit Investing: Why are LPs Allocating to the Sector? Emerging Middle Market CLO Trends, Strategies, and Structures
1. Tom Lemmon 1. is the deputy editor at GlobalCapital in London, UK. (tom.lemmon{at}globalcapital.com) The following is a selection of highlights from GlobalCapital for the second quarter of 2022 compiled and curated by GlobalCapital deputy editor, Tom Lemmon. > By Tom Lemmon > > June 30,
India is taking steps to decarbonize its economy and set a target of building 450 gigawatts of renewable energy capacity by 2030. Project finance has a critical role to play in enabling this transition to a carbon-resilient economy. The opportunity has attracted diversified institutional investors but has not resulted in a lower project cost of capital. To address this problem, this article presents a qualitative risk assessment model. The results show that risk drivers such as high debt-to-equity ratios (D/Es), technology disruptions, and inherent information asymmetry in the contractual bundles that plagued thermal power financing still remain unaddressed. Rethinking how project finance is applied is thus necessary. The author provides three suggestions: D/Es need to be optimized by sculpting them against cash flows; projects need the discipline of global capital markets and institutions over their life cycle; and financial institutions need to actively incorporate climate risk into their internal rating models to price credit risk.
An unexpected result of the COVID-19 pandemic was the resurgence of private-label securitization (PLS) in 2021. This article reviews the effect of the two-year pandemic on single-family mortgage volume and performance with a focus on PLS and a view into some of the lasting impacts. PLS issuance in 2021 was the largest since 2007, with four-fifths backed by prime jumbo and Alt-A non-QM product. Fast-rising home prices expanding the jumbo loan population and record low mortgage rates triggering a refinance boom and pay-off acceleration supported new issuance. Although borrower financial distress precipitated a spike in delinquency rates, delinquencies at the end of 2021 were generally below levels two years earlier except for long-term delinquency (more than fifteen months past due). PLS delinquency varies substantially across the nation, with states hit particularly hard by the pandemic, recession, and natural hazards having serious delinquency rates of more than 25% above the national level.
The recent 27th Annual ABS East Conference at the Fontainebleau in Miami Beach attracted roughly 1,500 attendees from issuers, investors, and government entities. The conference started on Monday, December 13, 2021, and ran through Wednesday, December 15, 2021. The conference was a hybrid event that allowed remote participation via the Internet. The overall mood was strongly positive. This report covers 18 sessions from the event, including the general sessions on Tuesday and breakout sessions covering ESG, the pandemic, mortgage-backed securities, consumer ABS, equipment lease ABS, and aircraft ABS. SESSIONS COVERED Monday Sessions ESG Hub: Analyzing and Implementing a Taxonomy Distressed Credit Trading Opportunities in the Commercial MBS Market ESG Hub: Applications to MBS FIIN Task Force: Consumer ABS Pandemic Recovery Assessment: The RMBS Market Tuesday Sessions IMN & FIIN ABS East Welcoming Remarks The Corporate World Re-Emerging: Pandemic Recovery and Moving Towards a Sustainable Finance Agenda Defining the Real Risks to Our Economy Today Keynote Fireside Chat: The Big Gender Short—Presented by 100 Women in Finance Trends in Non-QM MBS Single Family Rental: A Market Heating Up or Prone to Overheating? Outlook for GSE Mortgage Credit Risk Transfer FIIN Task Force: RMBS Sector Update: Aircraft ABS Wednesday Sessions The Fixed Income Investor Roundtable: Focus Areas for a Post-Pandemic Market Keynote Fireside Chat: Life Insurance Premium Finance—Evolution of a New ABS Asset Class Sector Update: Equipment Leasing Blockchain for ABS: Digitization and Automation Developments in Online Lending
The United States faces a shortage of housing supply, estimated to be millions of units. This shortage is especially acute in the affordable sector. Although the causes of the supply shortage are many, we focus on one major set of constraints: financing. In particular, we focus on how to improve financing for the three types of affordable single-family housing where we see the most potential: manufactured housing (MH), accessory dwelling units (ADUs), and housing preservation. We argue that these financing issues constrain production; improving financing will grow consumer demand for affordable housing and preservation and prompt builders and manufacturers to respond by increasing supply. Finally, we try to quantify the potential impact in each of these areas to increase housing supply. Overcoming these financing hurdles would remove a major roadblock facing MH, ADU, and housing preservation and allow for the addition of a significant number of units of affordable housing supply.
The recent 28th Annual ABS East Conference at the Fontainebleau in Miami Beach attracted roughly 4,500 attendees. The conference started on Monday, October 17, 2022, and ran through Wednesday, October 19. Key themes at the conference included higher interest rates, inflation, the prospect of a recession in 2023, stagnating home prices, the transition from LIBOR to SOFR, NAIC initiatives, student debt relief, and ESG issues. The overall mood was slightly negative. This article covers 12 sessions from the event, including the general sessions on Tuesday and Wednesday, as well as breakout sessions covering residential MBS, autos, CLOs, CMBS, and student loans. Sessions Covered Monday Sessions RMBS Auto ABS Tuesday Sessions Market Overview Investor Roundtable Economic & Political Assessment CLOs CMBS Non-QM RMBS Student Loan ABS Wednesday Sessions ESG Legal and Regulatory LIBOR Transition to SOFR
Fintechs to rely heavily on ABS despite switch to banking By Jennifer Kang 07 Jan 2021 Online lenders have sought ways to transform themselves into banks to gain regulatory clarity and forge long term customer relationships [ ]of the status change, the securitization market will remain a vital funding source to the challenger banks, sources say “Fintechs are still going to see what type of private capital markets funding is needed, and I would anticipate that even chartered institutions are going to have a mix of different funding sources to ensure growth and find a sweet spot in deal flow ” [ ]regulators have shown they are still hesitant about granting money to fintechs given their short track record, making it even more necessary for these soon-to-be-banks to keep a steady stream of securitizations According to Deutsche Bank, 2020 issued deals eligible to refi and reset account for $40bn
Modified duration and average life are financial measures belonging to the mathematics of discounting. They are frequently confused, even by financial experts. The likely source of confusion is the failure of quantitative credit studies to have developed in tandem with market risk studies. Instead, mathematical ideas have been imported wholesale from trading and used in credit engineering without sensitivity to their different risk polymorphisms. But while market risk is short-term, credit is a long game where the key determinants of value are time and quality. A good incentive for building an authentic quantitative credit layer is the capital value and risk that remain buried in the mathematics of discounting.
Major academic research related to cryptocurrencies has been developed by technologists who mainly focus on feasibility and security. Research in the area of economics and finance has provided limited insight in guiding investors to profit from cryptocurrencies, however, this article proposes a framework that depicts how rational investing can be achieved with the help of historical information published by cryptocurrency projects. Trading strategies based on fundamentals can generate economically significant gains relative to a buy-and-hold position.
