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Adapting to market changes

The end of 2018 introduced a number of regulatory changes, which affected us as a regulated entity. In order to adapt, and protect the business model, a plan was laid out. This plan included the below four areas, and has been very successfully delivered upon.

Securitisation

De-risking our prudential balance sheet by transferring portfolios to new vehicles financed through a combination of Hoist Finance and third party investors.
 

IRB

Using our comprehensive database of NPL LGD (recovery) observations to develop our own, more accurate risk assessment models.

 

Co-Investments

Working with co-investment partners in order to create synergies and diversify our acquisitions, accessing larger and more diverse portfolios.

 

Change in Asset Mix

Continuing to pursue our strategy of expanding into new asset classes, which continue to benefit from more favourable risk weights and less aggressive scheduling for the NPL Prudential Backstop.

Securitisation

The recent regulatory changes has required us to adjust our business model to ensure future growth. Securitisation is a key pillar of this process, permitting both the reduction of our risk weighted assets, and mitigation against the NPL Prudential Backstop through holding rated notes on our balance sheet instead of NPL assets.

Unrated securitisation

We successfully completed the inaugural EUR 225 million securitisation transaction backed by Italian NPLs. The transaction involved the issuance of two classes of unrated notes by an Italian securitisation vehicle to purchase the NPLs from Hoist Finance. The senior notes, representing 95 per cent of the issued amount, were fully subscribed by an external investor, and the junior tranche, representing 5 per cent of total issuance, were retained in full by Hoist Finance.

Rated securitisation

The fourth quarter saw the successful completion of the first-ever Italian investment grade rated transaction backed by unsecured NPLs. The transaction involved the issuance of EUR 337m notes across three tranches issued by the Italian securitisation vehicle Marathon SPV S.r.l. to finance the purchase of the NPL portfolio. The senior notes (Class A) were retained by Hoist Finance. The mezzanine (Class B) and junior notes (Class J) were to 95 per cent subscribed by an external investor, and the remaining 5 per cent were retained by Hoist Finance in order to comply with the risk retention requirements of the Securitisation Regulation.

1) DBRS / Moody's / Scope
2) Gross Book Value (GBV) of the securitised assets at closing was 5,027 MEUR
3) Up to the target IRR of 15%

Notes Ratings 1)Amount (MEUR) % of notes  % of GBV 2) Coupon % Legal Final Maturity 
 Class ABBB/Baa2/BBB+286.5855.71.8Oct. 2034
 Class BB (high)/B1/BB 33.710 0.78.0Oct. 2034
 Class JNR16.950.315.0 +
variable return 3)
Oct. 2034

All the notes were placed at par. Excess collections from the assets will serve as credit support to all outstanding notes and thereafter be paid to Hoist Finance as deferred purchase price. In connection with the closing of this transaction, the notes of the unrated securitisation were redeemed in full and its assets refinanced through the rated securitisation.

The transaction is structured with a view to achieve significant risk transfer in accordance with Article 244 of Regulation (EU) No 575/2013 (as amended) on prudential requirements for credit institutions and investment firms.

Securitisation as a Sustainable Business Model

With the completion of a rated and unrated securitisations in 2019, we remain on track to ensure the sustainability of our business model. We strongly believe that our securitisation programme will allow us to better serve our key financial stakeholders – Banks, Investors and Regulators – as well as providing Hoist Finance with a competitive advantage in the market. 

Creating stakeholder value through securitisation of NPL assets

Banks:

  • Best prices
  • Scope for large transactions
  • Ability to sell all asset classes 
  • Outsourcing of structuring
  • Reliable servicers

Regulators:

  • Liquid market
  • Standardised transactions
  • Strong oversight of process
  • No "backlog" of NPLs
  • Reliable servicers

Investors:

  • Access to NPL market without requiring servicing capability
  • Familiar (rated) risk profiles
  • Flexible investment amounts
  • Reliable servicers

IRB

A bank’s regulatory capital requirement can be calculated based on Standardised Approach or Internal Ratings-Based (IRB) approach. Hoist Finance currently applies the Standardised Approach, whereby the risk weights are set externally by regulators. It is for this reason that the EBA’s new interpretation of the CRR required us to increase our risk weight for unsecured NPLs.

In order to calculate internally calculated risk weights, Hoist Finance needs to apply for an IRB permission. Banks with IRB permission are responsible for developing and maintaining their own models to estimate Probability of Default (“PD”), Percentage Loss Given Default (“LGD”) and Exposure at Default (“EAD”), which in turn allow the calculation of a bank’s total Risk Weighted Assets (“RWA”). The total capital which must be held is then calculated as a fixed percentage of the RWA. Typically, it would be expected that a bank that is awarded an IRB permission would lower its capital requirement compared to the Standardised Approach.

In 2019, Hoist Finance recruited an IRB specialist to conduct a pre-study to assess the viability of Hoist Finance applying for an IRB permission. The pre-study covered the regulatory aspects for a financial institution like Hoist Finance and a quantitative assessment of the impact of Hoist Finance capital requirement based on our extensive pool of NPL LGD data. In 2020, further IRB specialists are to be recruited in order to produce an IRB application that will be assessed by regulators upon submission to regulators.

Co-Investments

Without any mitigating actions, the change to our unsecured NPL risk weights compels us to allocate more capital both to the portfolios that we have already acquired, and those that we will acquire in future. This had the short term impact of reducing our available capital base and also means that we are less able to diversify our capital allocation.

We are addressing both of these issues through an increased emphasis on Co-Investments, working collaboratively with a select pool of Investors around opportunities to acquire portfolios on a shared basis. Even before the risk weight change, Co-Investments were already a part of our strategic agenda as we look to access larger and more complex transactions. Hoist Finance targets investor partnerships with clear mutual synergies, with Hoist Finance retaining the servicing of portfolios but benefitting from Co-Investors’ market reach and knowledge.

Future Co-Investments will focus on front-book opportunities, allowing us to ensure we maintain a diversified asset base despite the change to our risk weights. This workstream also has clear synergies with our Securitisation workstream as we adjust our business model to incorporate new external Investors.

Co-Investment Pillars

The Case for Co-Investments

  • Capital considerations: Allows for participation in higher investment tickets, through different capital setups
  • Additional Income: Offers fee-based income from servicing and/or underwriting.
  • Business Development: Strengthens relationships, presents new opportunities and continues to gather data.

Change in Asset Mix

Expanding our acquisition and servicing capabilities into new asset classes remains a key strategic focus for Hoist Finance. Our desire to pursue these assets is primarily driven by the needs of our client banks and financial institutions, for whom we aim to be a holistic restructuring partner, as well as being a cornerstone of our growth strategy.

Our newer asset classes (Performing and Secured NPLs) provide a further benefit to our business since they are unaffected by the risk weight change, which applies only to Unsecured NPLs. This means that, through 2019 and beyond, we remain able to invest in these asset classes based on the same capital requirement as in 2018. This in turn provides scope for improved returns and increases the relative attractiveness of Performing and Secured NPL portfolios when compared with Unsecured NPLs (prior to mitigating actions).

Annual total acquisition composition by asset class %

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- Annual Report 2019 -
- Årsredovisning 2019 -