IFR 03.21.2020

International Financing Review March 21 2020 41

STRUCTURED FINANCE

INTOûTHEûLEVERAGEDûLOANûSECTORûHELPEDûTOû

DISTORTûPRICESûANDûWEAKENûCOVENANTSû

designed to protect lenders.

But CLO bankers argued that the

comparison with sub-prime was misguided,

not least because of the structural

protections built into CLOs. They also

pointed out that pre-2008 CLOs weathered

that crisis well.

“Structural features can offer CLOs a good

degree of protections against the risk of

asset downgrade or default,” BofA Global

Research said on Monday, noting that

OVERCOLLATERALISATIONûTRIGGERSûAREûWELL

PLACEDû

to shield debt tranches from default risk.

h%QUITYûDISTRIBUTIONSûHOWEVERûMAYûSUFFERû

should market shocks last longer or

intensify.”

And according to a note from TwentyFour

Asset Management: “Central bank and

GOVERNMENTûSUPPORTûGLOBALLYûISûNOWûAûLOTû

more timely than it was in 2008, and we

DONTûEXPECTûDEFAULTSûORûEVENûLEVERAGEDûLOANû

DOWNGRADESûTOûBEûASûSEVEREûASûWEûHAVEûSEENû

from the worst crisis of modern history.”

The portfolio quality triggers built into

#,/SûLIMITûMANAGERSûTRADINGûmEXIBILITYû

once they are breached, meaning deals are

LIKELYûTOûEFFECTIVELYûBECOMEûSTATICûIFûTHEREûISû

a wide swathe of loan downgrades.

4HATûISûTYPICALLYûUNDERSTOODûTOûBENElTû

senior noteholders, whose bonds pay down

lRSTûASûTHEûVEHICLESûSTARTûTOûDELEVERûANDû

HARMûEQUITYûHOLDERSûBECAUSEûLEVERAGEûISû

reduced and managers are less able to

generate trading gains, BofA said.

But the effect on more junior rated

tranches is less clear.

h/NûTHEûONEûHANDûLESSûTRADINGûmEXIBILITYû

CANûPREVENTûAGGRESSIVEûTRADINGûANDûRELATEDû

potential further weakening of the portfolio

credit quality,” BofA said. “On the other

hand, it will reduce the manager’s ability to

replace deteriorating assets or to build par

THROUGHûACTIVEûTRADINGv

US MBS

FITCH MAY DOWNGRADE 15 HOTEL

SASB CMBS

Fitch said last Thursday it might downgrade

15 commercial mortgage-backed securities

deals secured by standalone North

!MERICANûHOTELûLOANSûASûTHEûCORONAVIRUSû

pandemic has forced the closures of many

hotels and resorts.

&ITCHSû.EGATIVEû7ATCHûMOVEûCOVEREDû

CMBS single-asset, single-borrower

exposure that consists of transactions,

secured by hotel loans totalling US$5.7bn.

Thirteen of them are backed by an

INDIVIDUALûHOTELûPROPERTYûANDûTWOûBYûHOTELû

portfolios.

The hotel properties range from high-end

resorts in Hawaii to affordable lodgings

operated by a couple of national chains.

“Fitch expects many of the hotels in the

ûTRANSACTIONSûWILLûEXPERIENCEûSIGNIlCANTû

DECLINESûINûPROPERTY

LEVELûCASHmOWûINûTHEû

SHORTûTERMûWITHûSOMEûTURNINGûNEGATIVEvûTHEû

ratings agency said in a statement.

&ITCHSûMOVEûFOLLOWEDûAûLOWERINGûOFûITSû

OUTLOOKûONûTHEûHOTELûINDUSTRYûTOûNEGATIVEûONû

March 13.

Spreads on single-asset, single-borrower

#-"3ûHAVEûWIDENEDûSHARPLYûINûRECENTûWEEKSû

as a part of a credit market rout, as the

pandemic triggered an expanding shutdown

OFûTRAVELûANDûOTHERûBUSINESS

RELATEDûACTIVITIESû

worldwide.

Triple A SASB paper spread was 255bp,

WHICHûWASûBPûWIDERûTHANûAûMONTHûAGOû

while Triple B– SASB spread was 520bp,

which was 371bp wider than a month

earlier, according to Wells Fargo.

4HEûGOVERNMENTSûCALLûFORûSOCIALû

distancing that has accelerated the decline

in demand for hotel rooms, Deutsche Bank

analysts said.

“Hotel occupancy will clearly be under

some pressure due to steep drops in business

TRAVELûANDûTOURISMvû$EUTSCHEûANALYSTSû

wrote in a research note this week.

(ISTORICALû#-"3ûHOTELûCASHmOWûSHOWEDûAû

2.0–2.5 times change in hotel occupancy,

meaning a 5% occupancy decline should lead

TOûATûLEASTûAûûDECLINEûINûCASHmOWûTHEYû

said.

In anticipation of a cash squeeze, a couple

OFûHOTELûOPERATORSû(ILTONûANDû7YNNûHAVEû

drawn on their credit lines to build their

cash holdings.

h(OWEVERûOVERûTHEûLONGERûTERMû&ITCHû

BELIEVESûTHEREûISûINHERENTûVALUEûINûTHEû

assets,” it said.

LIKELY CASHFLOWS DROP

%LEVENûOFûTHESEû3!3"ûHOTELûLOANSûHAVEû

upcoming maturities in 2020, according to

Fitch.

It said on March 13 it expected the

borrowers would exercise their next one-

YEARûEXTENSIONûOPTIONûONûTHEIRûLOANSûhGIVENû

that liquidity to the sector is likely to be an

issue”.

4HEûmOATING

RATEûHOTELûLOANSûINûTHESEû3!3"û

DEALSûCANûWITHSTANDûDROPSûINûNETûCASHmOWSû

ranging between 47% and 84% before its

DEBTûSERVICEûCOVERAGEûRATIOûFALLSûBELOWûû

WHICHûWOULDûSIGNIlCANTLYûRAISEûITSûDEFAULTû

risk, it said.

&ORûTHEûONEûlXED

RATEûHOTELû3!3"û

TRANSACTIONûITûCANûWEATHERûAûûDECLINEûINû

NETûCASHmOWSûBEFOREûITSûDEBTûCOVERAGEûRATIOû

break below 1.0, Fitch added.

-EANWHILEû&ITCHûSAIDûITûWOULDûREVIEWûITSû

CMBS multi-borrower conduit transactions that

HAVEûHOTELûCONCENTRATIONSûGREATERûTHANû

h&ITCHûWILLûBEûASSUMINGûSIGNIlCANTûNEAR

TERMûCASHmOWûDECLINESûFORûTHEûHOTELSûANDû

REVIEWûTHEûDEPTHûANDûEXPERIENCEûOFûTHEû

hotel ownership,” the ratings agency said.

US ABS

US SECURITISATION MARKET LITTLE

MOVED DESPITE STIMULUS

0RIMARYûACTIVITYûINûTHEû53ûSTRUCTUREDûlNANCEû

market was minimal last week as the

&EDERALû2ESERVEûIMPLEMENTEDûSWEEPINGû

MEASURESûTOûSUPPORTûlNANCIALûMARKETSûANDû

Washington cobbled together a US$1trn aid

PACKAGEûTOûAVERTûAûDEEPûRECESSION

A few securitisations backed by

GOVERNMENT

BACKEDûCREDITûMANAGEDûTOûHITû

the market: a US$1bn multi-family loan

securitisation from FREDDIE MAC and a US$1bn

deal from the US SMALL BUSINESS

ADMINISTRATION.

This paled when compared with more

THANûTENûOFFERINGSûTOTALLINGûOVERû53BNû

THATûHITûTHEû53ûINVESTMENT

GRADEûCORPORATEû

bond sector.

“Issuance is on pause at the moment

across securitised sectors,” said Ralph

Saturne, senior research analyst at Income

Research and Management.

The outlook turned dour as more

businesses reduced or temporarily shuttered

in response to more announced or

considered guidelines to curb residents from

LEAVINGûTHEIRûHOMESûINûANûEFFORTûTOûSLOWûTHEû

TRANSMISSIONûOFûTHEûCORONAVIRUS

Department store operator Macy’s last

Tuesday joined a growing number of US

retailers to close their stores due to falling

SHOPPERûTRAFlC

h7EûHAVENTûSEENûTHEûMARKETûBOTTOMû

yet,” said Tracy Chen, portfolio manager at

Brandywine Global.

)NûAûBIDûTOûALLAYûINVESTORûJITTERSûTHEû&EDû

relaunched three credit programmes to

restore liquidity in money markets that

US ASSET-BACKED SECURITIES

BOOKRUNNERS: 1/1/2020 TO DATE

Managing No of Total Share

bank or group issues US$(m) (%)

Excludes MBS.

Source: Refinitiv SDC code: F14

1 JP Morgan 22 7,680.46 11.8

2 Wells Fargo 21 4,654.39 7.2

3 Citigroup 20 4,222.37 6.5

4 Barclays 15 3,720.03 5.7

5 RBC 14 3,566.27 5.5

6 Credit Suisse 15 3,334.89 5.1

7 BofA Securities 14 3,187.98 4.9

8 MUFG 12 2,880.11 4.4

9 Deutsche Bank 15 2,876.67 4.4

10 TD Securities 10 2,615.93 4.0

Total 113 65,027.08

6 IFR Bonds 2325 p 23 - 45 .indd 41 20 / 03 / 2020 19 : 59 : 41