Risk Retention and Stockholm Syndrome

After three years of waiting, we now have our Risk Retention Rule.  All six of the Agencies responsible for the Rule – the FDIC, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Department of Housing and Urban Development, the Federal Housing Finance Agency and the SEC – have finally managed to agree, albeit with significant dissent at the FDIC and the SEC, on a Final Rule.  Note that Richard Cordray of the Congregation for the Doctrine of the Faith (in Progressive Causes) …er…the Consumer Financial Protection Bureau, apparently had a heavy finger on the scales, which is why there was material dissent at the FDIC and SEC.  So, after all those years of waiting, we have “it.”  “It” of course is another five hundred some odd pages of commentary and bloviating and a relatively few pages of actual Rule which, as we study it more, will inevitably have left much that will need to be subsequently clarified.  We have already found technical inconsistencies between the commentary and the Rule.  Continue Reading

PACE Yourself

Property Assessed Clean Energy (PACE) loans allow property owners to finance clean energy improvements to their properties generally secured by property liens senior to mortgages through tax assessments.  Moody’s recently released a special comment expressing some concerns and not-so-subtle hints that it thinks that lenders and securitizers should take PACE programs seriously. Continue Reading

Securitization in the Sand – ABS East Turns Twenty

By: Daniel Wohlberg and Sean Solis

On Sunday, September 21st through Tuesday, September 23rd, almost 3,500 industry insiders descended upon Miami Beach for the 20th annual ABS East Conference at the acclaimed Fontainebleau Hotel. The enthusiasm and excitement was palpable considering the record setting year the market had so far, especially in the CLO space.  The general tenor was cautious optimism as many believe the roaring market would continue for the next few years, but saving a bit of hesitation for some of the regulatory pitfalls up ahead.  Most were comfortable, however, considering the market’s resilience in dealing with the recent implementation of the Volcker Rule.

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The Grand Illusion: A Strategy

Have you heard the following thought expressed recently in one way or the another, “I’m less worried about what new black swans might swim onto our screens and more worried that we will just wake up one day, peer out of our bunker of habituated indifferences to the drumbeat of troubling news and decide, suddenly, that things actually are terrible!”  Bad news seems to pile upon bad news in the larger world.  We are off the map of the known universe in terms of monetary and fiscal norms, and yet when the last worse headline comes across the ticker, and the newsreaders do their level best to create drama, the debt and equity markets seem to, well, yawn.  What happens if one day we wake up and all of a sudden all that which was benign yesterday is terrible today?  It’s like one of those sci-fi movies where the doughy earthlings encounter a race of beautiful, peaceful people and then, in a blink, see them as the multi-arm, walking crustaceans with eyes on stalks and a distinct preference for space hero tapas that they really are.  Continue Reading

CLO Market Update: S&P Recovery Ratings, More’s the Merrier

While leveraged loan ETF and money market funds face an unsteady near-term future amidst ongoing retail investor outflow, the CLO market is rolling towards its busiest year ever.  With year-to-date global issuance at approximately $98 billion (with $89 billion or so in the U.S. alone) as of mid-September, many market commentators see $125 billion in total U.S. CLO issuance by year-end as a real possibility.  Recent reports calculate that CLOs accounted for nearly 60% of new issue institutional leveraged loan demand in the first half of 2014.  As new collateral managers continue to enter the market and the industry has recovered from the Volcker Rule chill of mid-winter, market actors are now preparing to deal with the challenges that the forthcoming U.S. risk retention rules will inevitably present.

With all of the above news dominating the CLO headlines, some market observers may have missed a less heralded development in the CLO market, which is very likely to have an impact on both the CLO market and the leveraged loan market.  On August 1, 2014, S&P released an updated CLO rating methodology that provides for a more nuanced classification of recovery assumptions related to the assets acquired by CLOs.  The challenges and opportunities presented by the updated S&P methodology are worthy of attention. Continue Reading

Liquidity Coverage Ratio Rule: Birds Gotta Fly, Fish Gotta Swim…and Regulators Gotta Regulate

With apologies to Jerome Kern and Oscar Hammerstein, and in the afterglow of a relatively amiable final AB Rule, we are reminded this week that our business remains hogtied to a regulatory establishment that can’t seem to stop regulating.  When a member of the regulatory apparatchiki hears someone observe, “Well, if I don’t get out of bed, I’ll never be in a car accident,” he or she starts thinking, well, maybe…a nice little rule could do wonders…! Continue Reading

Final REG AB Rules: Man Bites Dog

I am congenitally pessimistic and some have, shockingly, called me cynical. Early last week, while we waited for Reg AB, I would have bet more than a dollar that there would have been a number of things in this final Rule which would disappoint.

Well, I was broadly wrong. The Rule as published, with its commentary (nearly 700 pages) is frankly… just not bad. Having been through it for a first go (and it is a slog) it is more notable for what it doesn’t do, than for what it does. It does not extend Reg AB to the 144A market as was suggested by the republished preliminary rule from 2011. It does not include the whacky waterfall computation program from that prior missive. It does not require all the transaction documents to be filed by the date of the preliminary prospectus. It does not impose its own bespoke version of risk retention as a condition to shelf registration. It does not turn some poor bastard who happens to be the CEO of the depositor into a guarantor of the success of the offering, and it does not continually reset a five-day pre-pricing requirement for the delivery of the final prospectus supplement when any late deal change occur. Continue Reading

Complexity Is Not The Enemy

I’m getting pretty annoyed at the calumny heaped upon “complexity.”  Everyone wants to “hit the ball down the middle of the fairway”; “keep it simple, stupid”;  “Stick to the knitting…”; “Plain vanilla only, please.”  Don’t do anything not in the precedent.  Oh, please.  Okay, I’ll admit I’m talking my book here, but this is an inapposite choice of chief villain for the little morality play called “What Went Wrong.” 

There were plenty of dumb things done in the capital markets before the Late Unpleasantness.  There were indeed some deals and structures that could not be easily understood.  There were some bad choices made about, shall we call them, “opportunities” presented by the application of super complex rating criteria.  Then, of course, complex machinery was sometimes left in the hands of those ill equipped to manage it.  Continue Reading

A Mid-Year Report Card on the Commercial Real Estate Capital Markets

We at Crunched Credit have taken a bit of a pause of late.  It is, of course, the dog days of summer.  But it’s time to get back into the fray.  Let’s start by noting the doldrums seem to have taken a pass.  From where we sit, the markets seem to be in robust health.  As we look over this complex web of transactions, deal structures, innovations, capital flows, business plans, business goals, failures and successes that is our market, things look pretty damn good.

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