ema asset management’s valuation webinar series...• eba figures as of fy2019, considered a...
TRANSCRIPT
© 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
EMA Asset Management’s Valuation Webinar Series
8 July 2020
Credit and structured finance investments
© 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
James CalvertDirector, Corporate FinanceKPMG in Ireland
t: +353 1 410 1001m: +353 87 744 1001e: [email protected]
Elena NagyPartner, iRadarKPMG in Germany
t: +49 69 9587 1495m: +49 174 343 4476e: [email protected]
Ivo RaschlDirector, Valuations & Debt AdvisoryKPMG in Netherlands
t: +31 206 568 807m: +31 646 748 621e: [email protected]
Speakers
Laurent DahanDirector, Credit & Market Risk LeaderKPMG in France
t: +33 1 55 68 88 82m: +33 6 15 61 89 73e: [email protected]
Moderator Panellists
Carlos RubiPartner, Global co-Head of Portfolio Solutions GroupKPMG in Spaint: +34 914 51 31 62m: +34 629 86 26 07e: [email protected]
© 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 3
Contents
1 Introduction
2 Valuation of retail loan portfolios
3 Structured finance investments
4 Non-traded corporate debt
5 Portfolio solutions
6 Q&A
© 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 4
Introduction
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Shutdown of nonessential business across the US and Europe severely impacted corporate’s revenue. Transportations, energy, leisure and retail are sectors that are impacted the most.
Sharp rise in unemployment rate and reduction in personal income. US/Canada unemployment’s rate spiked to a record high of 13%-14%. That of the Euro area rose to 7.3%, although each country is impacted
differently.
Significant reduction in demand for discretionary goods and services.
Unprecedented intervention from central banks across the globe via quantitative easing, asset purchase program and stimulus package
The magnitude and speed of recovery for each sector and country are varying and remain uncertain. Second wave of infections in major economies could lead to further lockdowns and prolong recession.
Economic background
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0
2
4
6
8
10
12
14
16
Jan 2008 May 2009 Sep 2010 Feb 2012 Jun 2013 Nov 2014 Mar 2016 Aug 2017 Dec 2018 Apr 2020
Unemployment rate
US
EU
6
Economic background: unemployment effect
Source: Reuters
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Economic background: impact on credit spreads
0
0,2
0,4
0,6
0,8
1
1,2
1,4
1,6
1,8
2
Jan 2019 Apr 2019 Jul 2019 Oct 2019 Jan 2020 Apr 2020 Jul 2020
AA Credit Spreads
10Y
Source: Reuters
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Valuation of retail loan portfolios
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Performing Non-performing
Valuation of retail loan portfolios – Discounted Cash Flow Analysis
Discount rates
Loan-by-loan or on portfolio level
Discount rates
Portfolio level discount rates based on financing of NPL portfolios
Behavioral elements – expected cash flows
For example, prepayments (non contractual)
Expected recovery timing
Timing of foreclosures
Contractual terms of the underlying individual loans
For example, coupon rates, contractual maturity, amortization and other payment features
Recovery based cash flows
Mortgage loans: Property values versus loan amount
Expected credit losses
Considering the credit risk in the loan portfolios
Expected recovery rates
Expected development of property prices
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01
03
03
‘Top down’ approach discount rate
Estimate discount rate based on prevailing retail rates in the market
The investor’s alternative: new origination
Dependent on market infrastructure and disintermediation
Financing based approach discount rate
Estimate discount rate based on financing cost to fund an NPL portfolio (secured funding plus equity return)
02
Performing Non-performing
Valuation of retail loan portfolios – Discount rates
‘Bottom up’ approach discount rate
Estimate discount rate based on sum of cost and risk premia, including cost of funding
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Amended contractual terms of retail loans (payment holidays)…
Top down discount rates impacted by retail market dynamics (supply and demand). Bottom-up discount rates impacted by market developments (funding rates) and risks
….and more uncertainty around behavioural elements (prepayments), leading to more uncertainty regarding expected cash flows
Credit risk properly reflected in prevailing retail rates (top down approach) or estimation uncertainty (bottom-up approach)
Uncertain recovery scenarios, given the development of the real estate market…
Development of secured financing options (securitisation) impact cost of funds
….and uncertainty around recovery timing
Performing Non-performing
COVID-19 impact: key observations
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Structured finance investments
© 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
COVID-19 impact on Securitization Market (1/2) – Reduction in values
13
Source: Refinitiv LPC’s, : Fitch U.S. Leveraged Loan Default Index
Potential deterioration of
the securitization
values
Source: Refinitiv LPC’s, : Fitch U.S. Leveraged Loan Default Index
Source: JP Morgan
Structured Finance spreads have doubled/tripled in March
Weakening in collateral’s credit quality
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20
US Leveraged loan Default Rate
050
100150200250300350400
3/31/16 9/30/16 3/31/17 9/30/17 3/31/18 9/30/18 3/31/19 9/30/19 3/31/20
Spread Development for selected SF Markets
UK RMBS AAA 5y GBP UK Cards AAA 5y EUREurope CMBS AAA 5y EUR Europe Auto AAA 2y EURUS CLO 3.0 EUR CLO 2.0
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COVID-19 impact on Securitization Market (2/2) – Increased valuation uncertainty
Rising number of loan downgrades to CCC will increase CCC exposure, leading to failure in OC test and trigger cash diversion
Loan downgrades
CLO Collateral’s concentration on B- rated loans of from lodging/leisure, energy, transportation and retail needs closely monitoring
CLO collateral concentration
Credit correlations among entities of the same sectors increasedEstimating correlation even more judgemental
Credit correlation
123
Average exposure of CLO collateral to COVID 19 sectors:
Auto, Oil/Gas, Hotel/Gaming, Transportation, Retail & Durables
Junior/equity tranches would be impacted the most from increased credit risk. Elevated prepayment risk and early amortizations are expected for the senior notes.
Source: Moody’s
0%
2%
4%
6%
8%
10%
12%
14%European CLO exposures by
Vintage
0%
5%
10%
15%
20%
25%
2001
2006
2007
2010
2012
2013
2014
2015
2016
2017
2018
2019
US CLO exposures by Vintage
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Special topics: XVA and Fallen Angels
− Increased CDS spreads
− Drop in interest rates
− CDS-bond basis spreads widened
The Importance of XVA − XVA values are increasing
− Wrong-way risk in XVA gains more relevance
− USD 200bn Corporate debt downgraded to sub-IG.
− Mostly US entities from five sectors.
The Rise of Fallen Angels
− Increased challenges in portfolio management when governing rules may forbid or limit exposure to non-IG assets.
− Corporate debt with BBB-/negative credit watch carry highest risk and are vulnerable in prolonged recession.
Energy (Oil&Gas)
41.0%
Auto 16.8%
Food, Beverage and
Tobacco14.7%
Natural resources
9.4%
Transportation9.1%
Retail6.1%
Natural Gas and Propane
1.7%
Chemicals 0.9% Diversified
Manufacturing0.3%
Source: Fitch Ratings
Risk category Sector
High Airlines, Gaming, Lodging & Leisure, Metals & Mining, Non-food Retail, Oil & Gas, Restaurant
MediumAerospace, Auto, Chemical, Construction, Consumer products, Div.Man.& Capital Goods, Homebuilding products, media, midstream, technology, transportation
Low Defence, Food retail, Healthcare & Pharma, Packaged Food, REITs, Telecom, Utilities and Power
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Non-traded corporate debt
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Non-traded Corporate Debt
The initial yield is calibrated to the transaction price. This is often split into (1) a base rate, (2) the credit spread for the concluded rating, and (3) an alpha premium. Estimate changes in the components thereafter.
DCF using contractual (Discount Rate Adjustment, “DRA”) or expected cash flow (“ECF”).
0.6%
2.4%
3.0%
Calibrated Yield
Risk-free rate Comparable Bond Margin Alpha Premium
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Evidence of Increased Stress/Distress
0
0.5
1
1.5
2
2.5
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
30/09/201919/11/201908/01/202027/02/202017/04/202006/06/2020
USD Corporate Bond Yields
B BB BBB US T-Bond
Source: S&P CapitalIQ
0.0% 2.0% 4.0% 6.0% 8.0% 10.0%12.0%14.0%16.0%
EnergyRealEstateIndustrials
NonFinConsumerStaples
ConsumerDiscretionaryHealthcare
TelecommunicationServicesInformationTechnology
MaterialsFinancials
10Y BB Corporate Bond Yields
31/12/2019
31/03/2020
Source: S&P CapitalIQ
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Analysing a Distressed Credit
What is the cause of the decline in performance, e.g., is there a fundamental operating issue or is the leverage unsustainable?
What is the magnitude of the deterioration in financial performance and position, e.g., does the debt exceed the enterprise value? Where does “value break”?
Is a change in valuation technique required, e.g., can market yields continue to be used or is an enterprise value analysis required?
What is the value of the collateral?
Legal issues, e.g., ability to enforce, priority of claims (e.g., HoldCo versus OpCo debt), jurisdictional issues (e.g., Chapter 11), position of other creditors, timing, etc.
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Portfolio solutions
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Type of Investors involved by typology of assets
• NPLs, UTPs and Single Names: Distressed Debt funds and Structured finance investors
• REOs: Private Real Estate Investment Funds and REITs
• Performing/Reperf. Portfolios: Assurance companies, Pension Funds and Investment banks
• Unsecured debt: Industrial players and JVs of financial investors + servicers
Size of market, deal flow and dry powder
available
• EBA figures as of FY2019, considered a weighted non-performing loan ratio of 3.1% totaling €529bn (mainly in France, Italy, Spain and Greece).
• At the peak of the previous crises in Q4 2014, NPL ratio stood at 7.1%***.
• Activity peaked in 2018, with over €200bn face value of Portfolios sold in Europe(**), in 2019 €103bn sold. To date in 2020 €16bn sold.
• Dry powder of $68bn at Distressed debt funds, 20% allocated to Europe (*)
How will the market evolve?
• Securitizations are making this market much more transparent, with recurrent performance reports from rating agencies being published.
• Areas of special interest:
o Pre existing NPLs/REOs: performance analysis
o New NPLs: challenges to transact(*) According to EBA: “THE EU BANKING SECTOR: FIRST INSIGHTS INTO THE COVID-19 IMPACTS”(**) According to Debtwire data(***) According to Preqin data
Portfolio Solutions: what covers? and how the market is evolving?
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Questions & Answers
© 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
James CalvertDirector, Corporate FinanceKPMG in Ireland
t: +353 1 410 1001m: +353 87 744 1001e: [email protected]
Elena NagyPartner, iRadarKPMG in Germany
t: +49 69 9587 1495m: +49 174 343 4476e: [email protected]
Ivo RaschlDirector, Valuations & Debt AdvisoryKPMG in Netherlands
t: +31 206 568 807m: +31 646 748 621e: [email protected]
Speakers
Laurent DahanDirector, Credit & Market Risk LeaderKPMG in France
t: +33 1 55 68 88 82m: +33 6 15 61 89 73e: [email protected]
Moderator Panellists
Carlos RubiPartner, Global co-Head of Portfolio Solutions GroupKPMG in Spaint: +34 914 51 31 62m: +34 629 86 26 07e: [email protected]