Structured Products and Derivatives

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It’s been barely six weeks since the EMIR trade reporting obligations came into effect on 12 February and, as the regulatory dust begins to settle, parties to derivative transactions are still in the process of assessing their duties under the new regime.  In the lead up to the February deadline, bank and securities firms were busy implementing their client outreach programmes whilst we were busy putting out client alerts and blogging about the new requirements under EMIR.  We continue to help clients with their questions on this significant change to the EU regulatory landscape.

Two aspects of the new trade reporting regime in particular repay some close attention to avoid potential trip-ups.  First, the rules relating to what has been termed ‘backloading’, or, in other words, the requirement to transaction report historic trades.  After some uncertainty in the lead up to implementation, the requirements are now clearer.  Broadly, counterparties need to ensure that all historic trades that were either ‘live’ on 12 August 2012 (the date EMIR came into force), or subsequently became live prior to 12 February 2014 (the date the reporting requirements came into force), are reported.  For these trades, the deadline for reporting will range from just one day to a period of three years after the reporting obligations became effective, depending on the date of the trade and, if applicable, its termination date.  Our client alert sets out these timeframes in more detail.

Continue Reading Back(loading) to the Future – the Nuances of EMIR Transaction Reporting Requirements

Time for a spring clean?

Institutions holding non-performing loans (“NPLs”) have been and continue to be, under increasing pressure to divest these and “clean up” their balance sheets in order to free up capital, de-risk and preserve market reputation. Usually, a loan facility becomes non-performing when either payments of principal and interest are past due by 90 days or more, or where payments are less than 90 days overdue, it is expected that payments will not be made in full. Alternatively, other loans can also be regarded as non-performing if they are value impaired (e.g. if the borrower has breached key covenants in its facility or if repayment terms have been altered).

Where a borrower is in financial trouble, it may first look to a lender for restructuring options such as extending its facility, foregoing interest payments or deferring repayments. From a bank’s point of view, holding on to NPLs causes a real issue since they increase a bank’s management costs, with frequent analysis required to monitor the financial position of the borrower and its underlying assets. There are also broader repercussions to consider given that NPLs may tend to limit a bank’s ability to lend. It also potentially drives up interest rate margins thereby creating uncertainty. Divesting NPL portfolios at a discount benefits banks who recoup some value, gain liquidity and distance themselves from the risk factors associated with holding onto distressed assets, such as a potential downgrades in its credit rating or a greater chance of bank insolvency.

Why take on a bad apple?Continue Reading NPLs – Car Boot Sale!

EMIR’s trade reporting obligations come into effect on 12 February and counterparties to derivative transactions are currently scrambling to ensure they have all the appropriate systems in place to ensure compliance. For large financial institutions, this has already involved many months of hard work and, even still, many are not optimistic about meeting next month’s deadline. At the other end of the spectrum, the administrative burden on one-off or low volume commercial counterparties should be relatively light, and ensuring that the reporting obligations are covered not therefore too taxing.

What then of SPVs – which are neither operational goliaths like their derivative counterparties nor autonomous commercial entities capable of assessing the implications on cost, resources and time of each option open to them?
Continue Reading You Don’t Need EMIRacle – Trade Reporting for SPVs Made Easy

So called ‘sunshine backed bonds’ are one of the newest and most exciting asset classes to enter the asset-backed securities market since the financial crisis. The resurgence of the market has led to a number of esoteric ABS issuances in recent months but it was solar energy that seemed most ripe for applying securitisation techniques (which provide an especially powerful financing tool). Indeed, given how this financing technique revolutionised the mortgage finance market 30 years ago, it now seems poised to play a role in transforming the renewable energy markets across Europe.

The case for securitising solar

In essence, securitisation allows companies to access the capital markets and in so doing to bring down their cost of capital and improve liquidity. Pools of illiquid assets are sold to bankruptcy-remote vehicles which then issue bonds to investors which are backed by the pool of assets. The originator of the assets is able to turn illiquid assets into saleable securities and in so doing shift those assets, and the risk of ownership, off its balance sheet in return for new finance.
Continue Reading Sunshine backed bonds – time to look on the sunny side?

Quite apart from its economic merits, the attractiveness of ABS for investors has become something of a hostage to financial regulation.  On 26 September 2012, Jonathan Faull,  director-general, Internal Market and Services at the European Commission wrote to Gabriel Bernardino of EIOPA (the European insurance regulator) suggesting that capital requirements under Solvency II for “long-term investment”, such as investment in infrastructure projects, could be reduced, including where such investment is made in the form of securitisation.  It has been reported that the ECB is promoting the idea that certain ABS be eligible for inclusion in the liquidity buffer under Basel III. Both of these changes could greatly increase the liquidity and hence the attractiveness of certain types of asset-backed security. 
Continue Reading Are regulators waking up to the need to encourage securitisation?

I suspect I may have been alone amongst viewers of the recent Singapore Grand Prix in that, rather than marvelling at the brilliance of Sebastian Vettel’s driving skills, my thoughts instead were on the world’s largest bankruptcy – Lehman Brothers. For those who have not been living and breathing the consequences of the financial sector’s greatest ever failure, the link between the cars and glamour of F1 and an insolvent investment bank may not be immediately obvious. However if you were to know that Lehman Brothers is still the second largest shareholder in the sport, with a 15.3 per cent stake in Formula One’s holding company, then the connection becomes clearer. Given the fourth anniversary of the bank’s demise was a few days ago, it is also a good time to think about how far we’ve come since the dark days of Autumn 2008, a time when many thought the world as we knew it was coming to an end. So, four years on, what have we learnt?
Continue Reading Lehman Car Crash

In times when banks are facing balance sheet pressure and rating downgrades, it seems sensible for their clients to review the Credit Support Annex (“CSA”) terms under which they have entered into (or are looking to enter into) interest rate swaps with such bank counterparties. This is the main protection for a swap counterparty against counterparty credit risk so it is important that the terms actually address the current state of play.

In the past, when the banks were seen as almost indestructible, it was not unusual for the CSA to be completely absent or one-sided, relieving the banks of the need to post collateral, eliminating their funding risk or shifting it entirely onto the other swap party in the case of a one-sided CSA.

Having witnessed the difficulties that highly rated banks can run into – in some cases without any warning – and the impact it can have on their swap positions, clients should again consider the credit risks that they face in terms of what they can, and should, do to protect themselves when negotiating the swap terms.
Continue Reading CSAs: when and why to negotiate?

Further to proposals by the European Securities and Markets Authority (“ESMA”), the Prospectus Directive regime in Europe, particularly the requirements in relation to the form of prospectuses, transaction summaries, final terms and supplements have undergone some major changes. These changes have been brought about by amending the Prospectus Directive and the Commission Regulation (EC) No 809/2004 (the “Amending Regulations”), which came into effect on 1 July 2012. As a result, issuers with established programmes or those looking to establish new programmes will have to carefully consider the implications of the new requirements.
Continue Reading The EU Prospectus Directive Regime – Winds of Change

As we approach the final quarter of the year, it is clear that during the course of 2012 the CRE industry has really begun to find its feet and take some significant steps towards counteracting the excesses of the past. Indeed last week saw the long awaited completion of the restructuring of Opera Finance (Uni-Invest) CMBS thus heralding in a new era for the restructuring of CMBS. Meanwhile Deutsche Bank is set to bring Europe’s first CMBS agency deal since 2007 to market (a circa €650m to €700m German multi-family CMBS). Given that agency deals such as this have been seen by many as one of the solutions for the refinancing void market participants will be keen to see this price well.
Continue Reading 2012 – the year of the NPL