Weekly Wrap: Qualifying what ‘QM’ means

S&P Global Ratings reported that credit quality strongly deteriorated across broadly syndicated collateralized loan obligations in the second quarter.

Corporate borrowers either suffered declining revenues or had a drastic ramp-up in leverage as firms sought more capital to ride out the coronavirus pandemic.

As a result, the ratings agency has downgraded 55% of 640 speculative-grade companies with debt held in U.S. CLOs since the COVID-19 outbreak in March. Among those firms, leveraged has increased 1.3x, S&P notes.

“Due to changes in companies’ capital structures (issuance of additional debt and resulting increased leverage, full draw of revolver, etc.), a number of corporate recovery ratings…dropped in the second quarter,” S&P’s report stated.

The proportion of underlying loans in CLO portfolios showed a growing proportion (43%) now have negative outlooks or are on a negative credit watch for downgrades. That compares to 32% at the end of the first-quarter.

Year-to-date issuance of whole-business securitizations by the restaurant and retail sector is down over 70% from the same period a year ago.

According to a report from Deutsche Bank, only $1.9 billiion in deals have been issued in 2020, compared to $6.58 billion through the first eight months of 2019. The year-end volume for franchise-fee securitization was $9.1 billion.

Deal volume this year has been spread across only four issuers: Arby's, Sonic, Driven Brands and a debut issuance by Fat Brands Royalty 1 LLC in March.

The lack of deals is largely cited on investor concerns over how quick-serve restaurants (primarily dine-in) and specialty retailers have fared due to economic constraints on pandemic lockdowns and soaring levels of unemployment.

Arby's transaction in July – it's first whole-biz deal since 2016 – benefited from the parent company's focus on improving take-out and drive-thru food delivery even prior to the outbreak, according to a report from S&P Global.

Other issuers, most notably Applebee's/IHOP and TGI Friday's, have struggled with maintaining primarily dine-in operations hampered by local closings or social-distancing measures that limit seating capacity. The $425 million in asset-backed notes for TGI Friday's outstanding 2017 securitization underwent a third ratings downgrade on Sept. 1.

The Structured Finance Association on Monday raised concerns to the Federal Home Finance Agency about its proposed enterprise regulatory capital framework for Fannie Mae and Freddie Mac.

In its letter, the SFA outlined its "overarching" issues with the re-proposed capital rule framework's impact on existing Fannie and Freddie MBS and credit-risk transfer programs of Fannie Mae and Freddie Mac,

The trade group stated in a formal response letter that the new rules would not incorporate a "full-faith and credit guaranty" on legacy and new-issue agency MBS before exiting conservatorship.

"The capital rule assumes resolution and clarity on a number of outstanding policy issues. Unfortunately, such resolution does not exist," the letter states.

The SFA also argued the new capital would would "unnecessarily " penalize CRT programs with a 10% floor on the retained catastrophic risk piece of a credit-risk transfer along with risk weighting and leverage ratio applications that "represent double-counting of mortgage-related assets."

The proposed treatment of CRT "would in all likelihood effectively eliminate the use of CRT by the GSEs," the SFA's letter stated.

Hotels remain a trouble spot for most commercial mortgage-backed securitizations. Prospects for a near-term recovery for the industry remain remote, as well.

In a study released this week by the American Hotel & Lodging Association, the industry remains in poor economic condition six months into the COVID-19 pandemic. Five out of 10 hotel rooms across the country are empty, and almost two-thirds of hotels remain at or below half-capacity with few Americans traveling overnight or planning vacations (only 38% stated they would do so by the end of year).

Occupancy rates are low in urban markets (38%) as well as near airports (just 45%).

Maintaining at least 50% capacity is critical for many hotel operators to break even and pay their debt obligations, the AHLA stated.

For this Labor Day weekend, only 16% of American plan to travel, the AHLA survey shows. Hotel reservations are down 65% from the 2019 holiday weekend.

Issuers filing ABS-15G registrations for the week of Aug. 28-Sept 3 (per Finsight.com):

CIG Auto Receivables Trust 2020-1 – CIG Financial (Auto subprime ABS)
Exantas Capital Corp. 2020-RSO9 – Exantas Capital Corp. (MBS)
New Residential Mortgage Loan Trust 2020-3 – New Residentail (MBS)
SoFi Alternative Trust 2020-A – SoFi Corp. (ABS)
Legacy Mortgage Asset Trust 2019-RPL1 – GS Mortgage Securities Corp. (MBS)
Angel Oak Mortgage Trust 2020-6 – Angel Oak Mortgage (MBS)
Imperial Fund Mortgage Trust 2020-NQM1 – Imperial Fund 1 (MBS)
HIN Timeshare Trust 2020-1 – Holiday Inn Club Vacations Inc. (Esoteric/Timeshare)
TAL Advantage LLC 2020-1 – TAL International Container Corp (Esoteric/Container ABS)
FREMF 2020-K115 – Freddie Mac (MBS)
Textainer Marine Containers Ltd. 2020-2 – Textainer Marine Containers VII (Esoteric/Containers ABS)
Wheels SPV LLC 2020-1 – Wheels Inc. (Esoteric/Fleet lease)
COLT 2020-1R – Caliber Home Loans (MBS)