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Analysis Regulation
New structured credit products challenge regulatory norms
by Kathryn Gaw & Lisa Fu
Apollo’s USD 25bn AMAPS programme has put multi-collateral structured credit in the spotlight, but the NAIC’s proposed rules could reshape insurer demand, capital treatment and market growth
The National Association of Insurance Commissioners (NAIC) is in the process of deciding how to define an emerging class of multi-collateral structured credit products, in a decision which could shape the future of these innovative deals.
Although Apollo’s AMAPS is not the only mixed-collateral product to hit the market, it has arguably had the loudest launch. Announced in May by Apollo’s CEO Marc Rowan during the company’s earnings call, the product was described as the ‘next generation’ of CLOs.
On the same call, Rowan teased the imminent roll-out of APADS — a longer-duration vehicle that would also contain mixed collateral. Although similar products have been discussed and privately arranged, nothing has sparked conversation like AMAPS, particularly when it comes to categorising them.
Agencies struggle to classify hybrids
Chris Hodgeman, managing partner at Belstan Capital, says that AMAPS vehicles lie somewhere between a CLO and a CFO, and has proposed that they are referred to as CFLOs instead. Indeed, the ratings agencies can’t seem to decide how to categorise the vehicles either. Moody’s and KBRA have opted to rate the vehicles using their CFO analysis as a base point, while Fitch treats them like a CLO, and S&P uses its CDO modelling.
“I wouldn’t say that we just view it as either a fund or a CLO transaction,” says Matt Mitchell, a managing director at S&P Global Ratings. “I think we truly view it as a hybrid, and not as a pure fund finance transaction or a pure CLO transaction. We use our CDO models and a similar kind of approach for assessing expected loss in the portfolio with our CDO models, but we want to make sure that the analysis captures… those additional risk factors associated with this type of structure.”
The NAIC must now decide whether vehicles that use a wide variety of asset classes as collateral can sit in the same category as CLOs that are backed primarily by just one asset class — leveraged loans.
In an August meeting, the NAIC proposed updating its rules to address the recent emergence of these multi-collateral structured credit products, highlighting the risk of asset-liability mismatch (ALM) as a reason not to classify these products as bonds.
AMAPS is the next generation of CLOs
Marc Rowan
CEO
Apollo Global Management
Currently, multi-collateral structured credit products such as AMAPS benefit from favourable bond-category capital charges, which appeals to insurers. In fact, the largest backer of AMAPS is Apollo’s insurance arm, Athene. When asked underneath a LinkedIn post how he would define AMAPS investments, Athene CEO Grant Kvalheim simply replied: “ABS”. Apollo and Athene declined to comment.
Creditflux has previously reported that, following the roll-out of AMAPs earlier this year, other large asset managers were looking at creating similar products of their own. However, incoming regulation could stall any progress here.
“Right now, because the regulatory landscape doesn’t contemplate these kinds of structures and create the limits, it’s a little bit of a blue sky in terms of where this could or might go,” says Dallin Merrill, head of policy at the Structured Finance Association.
CLO managers innovate around capital rules
The new products coming to market combine securitisation and structuring technology to give insurers exposure to a variety of collateral types without triggering existing capital-charge rules.
For years, insurance companies chasing higher investment yields to cover liabilities have battled rules requiring certain investments deemed riskier to be offset by holding more cash on hand. These rules often limit the amount of higher-returning investments an insurer can take on, but asset managers have learned to innovate within the current guidelines.
These products have the potential to offer more yield, mitigate idiosyncratic risks, and lower the cost of funds to borrowers and for insurance investors. If done correctly, these structures can help insurers reduce premiums for policy holders and better compete in the market, Merrill says.
The bottom line is that managers are creating these new products and structuring them based on what investors want. This demand has naturally led to mixing and matching a broad range of assets as collateral and these multi-collateral structured credit products that do not fall squarely into any existing regulatory box.
Because the regulatory landscape doesn’t contemplate these kinds of structures, it’s a little bit of a blue sky in where this could or might go
Dallin Merrill
Head of policy
Structured Finance Association
“There is a lot of interest now across all different GPs in looking to different types of underlying collateral in a similar structure [to AMAPS],” says S&P Global’s Mitchell. “Looking to use securitisation technology overlaid in the fund space is a very common and increasing theme over the past 24 months.”
In fact, the NAIC has been working with the industry for years to better understand emerging structured technologies.
Since 2021, the NAIC has focused on trying to ensure transparency and insight into the assets, to identify over-concentration and understand structures as this market has evolved. The roll-out of initiatives such as the Principles-Based Bond Definition can be seen as a response to fund managers getting creative with the use of securitisation and structure, Merrill says.
“If you look at the proposal, it discusses the particular risk that they were most concerned about, in this case, relating to asset-liability mismatch,” says Robert Fettman, a partner at law firm DLA Piper. “[The previous] definition was never intended to address this particular risk.”
Hodgeman adds that correctly defining these vehicles will help to dictate how investors can expect these products to behave under times of stress.
“The big thing about rating any sort of CLO or CFO, or any sort of securitisation really, is the correlation between the assets,” says Hodgeman. “How does that work, especially in times of stress? It’s unclear to everybody.”
As the latest NAIC proposal goes through its comment period, one thing is for certain; a final decision on which products are excluded from the ‘bonds’ category — and how punitive the capital treatments — will shake up the current world order. The impact can be far-reaching, depending on how wide or narrowly the NAIC ultimately defines this segment of multi-collateral structured credits.
Investor demand drives product
To date, Apollo has raised more than USD 25bn across its first five AMAPS vehicles, in a demonstration of the appetite for these types of products. Others have raised capital in the private market for similar vehicles, and the category could potentially include more widely adopted products such as rated feeder notes, CFOs and others, depending on how the NAIC chooses to define them.
“Maybe they are wanting to eventually focus on certain specific things, but what they have described, so far, captures a large universe,” says Bill Cox, managing director and chief ratings officer at KBRA.
So far, the sophisticated investors buying these emerging multi-collateral credit products have been the ones to set the standards.
Insurance companies have arguably been driving this particular innovation, working with asset managers to back products that can meet their exacting regulatory requirements while delivering competitive returns.
The NAIC’s proposed redefinition of these products could impact insurer demand for these new instruments, as many of them may have made investments under the assumption that these structures will receive better regulatory treatment under the bond classification.
However, some insurers may be willing to live with a more burdensome capital charge because they feel these new instruments are still a good investment, Fettman adds.
The market does not really want the NAIC to default to treating these new multi-collateral structured credit products as equity vehicles, Merrill says.
But insurers need clarity around questions that include what constitutes sufficient diversity in the underlying collateral, how much over-collateralisation is necessary, and what is an allowable amount of cashflow variability.
Having clear answers to these questions will allow managers to adjust the structure and design elements of these new products to meet regulatory requirements.
“Making sure that there is a good dialogue throughout that process will help ensure a favourable outcome,” Merrill concludes.
