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Scope Ratings maintains the review for downgrade on Herrenhausen Inv. – Compartment 1’s BBB- (SF)

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Scope Ratings maintains the review for downgrade on Herrenhausen Inv. – Compartment 1’s BBB- (SF)

Scope maintains the BBB- (SF) rating under review for downgrade of the credit-linked note (Inhaberschuldverschreibung) issued by Herrenhausen Investment SA via its Compartment 1. Ongoing restructuring of one delinquent loan remains in process.

Scope Ratings has taken the following rating action on the credit linked notes issued by Herrenhausen Investment SA – Compartment 1:

Inhaberschuldverschreibung, EUR 21.3m: BBB-SF review for downgrade

Scope used quarterly investor reporting up to 28 February 2018 and the annual loan-by-loan portfolio update as of February 2018.

Rating rationale

The review for downgrade reflects the continued uncertainty over the ongoing restructuring of one delinquent loan, as reported by the issuer on February 2018. Scope has taken into account that the operational restructuring and re-letting of the property underlying the delinquent exposure is in line with the restructuring plan. The debt service ability is almost restored and the re-letting resulted in a reduction of the vacancy rate to 15%. The tenant base is more granular than before the restructuring and has an average lease term beyond the maturity of the loan. In addition, an updated valuation from April 2018 shows an increase of the property value to 42.3m, up from 35.5m from last reporting. Scope will resolve the review as soon as possible, following the successful restructuring of the delinquent loan.

The action takes into account the performance of the overall transaction, which exhibits increased portfolio concentration through asset amortisation, partially mitigated by a marginal increase in credit enhancement of subordination to 1.45% from 1.22% at last monitoring.
Scope maintains a stable outlook on the German commercial real estate (CRE) market. The French and Dutch CRE market are also evolving positively. The later markets are however characterised by higher levels of price volatility, which Scope took into account.

The stable credit profile of Deutsche Hypothekenbank AG, the transaction’s account bank and holder of the notes’ cash collateral, supports the current rating.

Key rating drivers

The rating drivers remain unchanged from closing, including updates from previous monitorings.

Rating change drivers

The rating can be affected positively, if the largest-sized and worst-quality assets in the portfolio prepay or if their credit quality materially increase.

The rating can be negatively affected if the German CRE market deteriorates and refinancing conditions change adversely leading to lower than anticipated recovery rate upon loan default In addition, an erosion of credit enhancement from portfolio losses will also reflect negatively on the rating.

Stress testing

Stress testing was performed by applying rating-adjusted recovery assumptions.

Rating sensitivity

Scope tested the resilience of the ratings against deviations of the portfolio’s tenant quality and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results for the rated instrument changes when the portfolio’s tenant quality deteriorates by three notches, or the portfolio’s expected recovery rate reduces by 10%, respectively:

The CLNs sensitivity to tenant quality assumption is, one notch; sensitivity to recovery rates, four notches.

Quantitative assumptions and cash-flow analysis

Scope derived the default distribution of the reference portfolio loan-by-loan from a Monte Carlo simulation. For each loan, Scope estimated a default probability (taking into account the default over the loan’s term and at refinancing), a recovery upon default and asset correlations between the loans. The resulting portfolio default distribution was then used to perform a cash flow analysis to compute the expected loss and expected life of the rated instrument, reflecting the transaction’s amortisation and loss-allocation mechanisms, as well as the credit enhancement of the credit-linked note.

Scope has assumed for the outstanding portfolio an average default probability of 14.4% for a weighted average life of 4.9 years. This assumption is the result of loan defaults associated with i) tenant defaults, and ii) the failure to renew property lease contracts that end before the maturity of the related loans. The portfolio default rate also accounts for high probabilities of refinancing failure for some loans, driven by Scope’s long-term market-value-decline assumptions.

Scope has assumed a rating-conditional average portfolio recovery rate of 92.3%. This considers a BBB rating-conditional stress for the assumptions on the properties’ market value declines and accounts for distressed-sale discounts of 12.5% to 15%, liquidation costs of 12.5% to 16%, and an absolute recovery-rate cap of 98% loan by loan.

Scope has applied pairwise asset correlations ranging from 5% to 45%, which incorporate a common factor, the property type and location, and the exposure size to reflect a more concentrated portfolio than at closing.

The probability of default accounts for the property quality as represented by Scope’s property grade, the tenant credit quality, the contracted lease length and the loan-to-value at the time of default. The recovery rate is driven by the loan-to-value at the time of default, the property grade and the property liquidation costs.

Scope considers the average property quality to be good, reflected in an average property grade of PG2. Scope’s property grades account for a property’s distinct characteristics (type, location and attributes) to ascertain its condition and attractiveness to the market. Scope examines: i) maintenance costs and capex (historical and expected); ii) vacancy rates (historical and expected); iii) micro and macro location; iv) age; and v) the expiry of lease contracts. The analysis uses information from: i) on-site visits; ii) valuation reports from established industry experts; and iii) market studies from reputable sources. The highest property grade is PG1, e.g. a prime landmark building in a micro/macro location ideal for its usage type. The lowest is PG5, e.g. a property in poor condition in a degraded or undeveloped/unconsolidated location.

For the tenant quality, Scope made the assumption that the average tenant credit quality is commensurate with a BB rating. The assumption on tenant credit quality is based on the average default frequency observed in Germany, France and the Netherlands for corporates and households (based on the statistical offices of Germany, France and the Netherlands), and is stressed by one rating notch equivalent.

Scope assessed the contracted lease length based on weighted average underwritten lease terms (WAULT) reported for the different properties, either in the form of tenant lists or aggregated data. The portfolio shows an average WAULT of 10.5 years. Scope assumes a 50% probability of default in the year of lease expiry for loans, where the WAULT for the related property is shorter than the maturity of the loan.

The recovery upon default of a single loan is driven by the outstanding loan balance at default and the corresponding market value of the property, net of recovery costs. Scope analysed the market value declines for each loan, depending on the development of each regional market and the loan’s time to maturity. Scope’s rating conditional market-value-decline assumptions range from 12% to 32%, reflecting the current states and expected long-term developments of the property markets in the relevant countries. Scope compared a mean reversion of current property prices with the development of long-term historical prices.

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Three questions the financial services industry must answer in 2021

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Three questions the financial services industry must answer in 2021 1

Xformative, a Mastercard Start Path recipient, shares what these questions mean for fintech partners and their innovations

This year, fintechs and institutions alike pushed the limit on how fast, innovative, and digitally-savvy they could be. Buzzwords like cloud and faster payments made headlines, but 2021 will be about refining best practices and putting them into action. Xformative believes that more industries should benefit from digital payments and that it’s not just about faster payments, but the option to offer multiple methods.

  • Which industries are lagging in the digital payments space and why? The pandemic forced financial institutions and their partners to move digital transformation into a new phase of maturity. But this doesn’t mean every industry has transformed, there are still laggards. According to a survey of more than 1,400 American freelancers and contractors, conducted by Bill.com, more than half said they were still receiving their money in the form of a physical check. Checks still exist in spaces like Property and Casualty, though we did see some reassuring industry changes this year. The year ahead will require businesses to offer more payments flexibility outside of physical checks to meet the payment needs of their gig workers, freelancers, and contractors. Businesses will rely on technology partners to bring them up to speed and simplify the payments process.
  • How can fintechs overcome the challenges of building in the cloud? Most businesses want to architect using a select cloud provider, or at least offer cloud-based services, to remain competitive in today’s fast-paced, disruptive landscape. There are assumptions that cloud architecture will inherently be less expensive to operate than legacy mainframe systems, but for many, these assumptions have turned upside down when developers fail to understand cloud cost optimization principles. As fintechs look to build in the cloud, they should ensure their technology is highly optimized, only leveraging real-time capabilities and transactions when required. Responsible fintechs should focus on balancing customer experience and economics with a mix of batch and real-time capabilities, constantly asking themselves, “is real-time the best choice?” Just because real-time can be offered doesn’t mean it should, and 2021 will be about drawing the line between utilization and optimization.
  • Why is offering more payment choices important? Emerging faster payments are working in parallel, not as a replacement for other methods. People want options to be able to pay however they like, whether it’s with Zelle, Venmo, Apple Pay, or traditional methods like cash or card, and financial institutions need to be prepared to meet this demand. The card that consumers once kept in their wallet was a key component of the bank’s and/or program manager’s brand value, as well as potentially communicating the cardholder’s lifestyle and socioeconomic status. 2021 will reinforce the value of financial institutions having partnerships with fintechs who can help them evolve their brand value to include the broad scope of emerging payments.

It’s time fintechs and institutions partner to digitize payments and offer choices. 2021 is about building smart and partnering for capabilities that can open the door to new opportunities at a financial institution.

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2020: The paradoxical year that has reshaped the future of motor insurance and related sectors

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2020: The paradoxical year that has reshaped the future of motor insurance and related sectors 2

By Alan Inskip, Tempcover CEO & Founder

There’s no doubt that 2020 will be remembered as the year that changed the world. Whether that overall change was for the better or for the worse is a matter of perspective. One thing is for certain, 2020 has been the year of immense innovation and adaptability in the face of seemingly insurmountable adversity caused by the COVID-19 pandemic. In this piece, I’ll touch on some of the greatest challenges that could have had a potentially crippling effect on the economy but instead were overcome and ultimately paved the way for increased resilience and innovation.

Public transport shunned in favour of private vehicles, but driving patterns dramatically shift

With ten months of varying national and regional lockdown restrictions, passenger numbers on public transport have plummeted[1] as many people continue to work remotely, and with most opting for the safety of travelling by private vehicle when they do need to get out and about. But because of restrictive travel measures, motorists have been using their vehicles far less frequently.

This posed a major challenge for traditional motor insurers that were not able to swiftly adapt to this change, with many coming under fire for failing to adjust annual premiums in line with new driver trends[2]. As motorists became increasingly frustrated having to pay the same premiums or sometimes even more despite their vehicle usage being substantially minimised, the relatively new and still largely unfamiliar InsurTech industry was able to rise to the occasion.

In short, InsurTech involves the utilisation of the latest technological innovations such as data analysis, cloud computing, artificial intelligence and machine learning to enable insurance products to become more agile and flexible in line with modern consumer demand – all while remaining price competitive.

Being fully-digital and technology-driven, InsurTechs demonstrated the flexibility and agility that enabled them to adapt to the huge shift in customer demand and step change in how insurance is purchased and consumed. They did this by offering an entirely digital user experience in near real-time, with temporary policies tailored to the time actually needed – anywhere from 1 hour to 28 days.

In a time of furlough and economic uncertainty, this meant that many motorists who were not using their vehicles regularly did not have to take drastic action like declaring their vehicle SORN to achieve short-term financial relief. Nor did they have to risk driving uninsured or committing to an annual policy that they could ill afford at the time.

The rise of the digital dealership offering temporary insurance as part of the purchase journey

In the automotive retail market, dealerships were forced to make drastic changes to their operating models to comply with social distancing guidelines. Showroom footfall and subsequent sales initially plummeted[3]. But in the face of this immense adversity, we witnessed the rise of the digital dealership, a concept that would have been unfathomable even just a year ago.

Cazoo was the first fully-digital platform to enter the vehicle dealership market in late 2019, and there has also been significant investment this year in new entrants such as Cinch and Carwow. Traditional dealerships such as Arnold Clark, Cargiant and Motorpoint have extended the digital aspects of their purchase journeys with services including home delivery and Click and Collect as alternative options to the full show room experience.

InsurTech has been instrumental in ensuring that car insurance supports this shift to digital, as several national blue-chip dealerships, with both physical and digital showroom floors, now offer temporary driveaway insurance policies that cover the vehicle for a fixed-term, usually between five to seven days.

Alan Inskip

Alan Inskip

The entirely online one-step user experience is the first of its kind in the traditionally outdated and inflexible driveaway insurance industry and it is dramatically simplifying the process of how insurance is purchased and consumed. Due to the flexibility and agility of the digital solution, each retailer has its own unique URL, where the customer can obtain a simple single-cost policy in just 90 seconds through an entirely digital process, which fits in line with the evolving consumer purchase trends.

This takes the stress out of searching for annual insurance on the spot and provides the driver with near instant cover so that they can immediately drive their new car while giving them the opportunity to thoroughly research the best annual policy to suit their needs. It’s also an ideal solution while the car is under its money-back warranty, as the driver does not have to commit to an annual policy on a car that might be returned. Another benefit is there’s no risk to any existing No Claims Discount, as it’s a separate and standalone policy.

Declining brand loyalty and a demand for a more personalised and convenient user experience

Insurance has an unenviable reputation for being inflexible and even unwilling to adapt to shifting consumer trends – making it confusing for most customers. Even pre-COVID, there was a clear trend that brand loyalty was in decline, as modern day consumers are no longer prepared to remain blindly loyal to any company for a long-term period. Instead, they will reward businesses that offer a simple and convenient user experience at best value. COVID accelerated this trend and many large insurers have struggled to adapt accordingly.

Conversely, this has enabled InsurTech to thrive, as the products and user journeys are developed with direct input from customers to ensure that they are receiving a straightforward and fit-for-purpose solution that best fits their needs and requirements. Just some examples of this are simplified terms and conditions, near-instant and paperless policy documentation via the web or dedicated app, and data-driven customer engagement initiatives that offer personalised discounts and communication via email and text messaging. The end result is a user experience that is easier, more convenient and better value for potential consumers in the market.

Cautiously optimistic (if somewhat uncertain) future

Even in the most stable periods, it’s a challenge to accurately predict future market trends. And with 2020 completely rewriting the rulebook on how business is conducted, it would be remiss of me to make outright predictions. One thing is for certain, the days of slow, inflexible and costly motor insurance are numbered. It is important to note that this doesn’t mean that InsurTech is gaining the upper hand at the expense of the traditional insurers in a bid to replace them.

Instead it is there to fill a gap and act as a complementary add-on to provide the best possible value to the consumer. Industry players that enter new collaborative partnerships will dramatically improve the consumer experience, leading to new business wins and return custom, which ultimately impacts positively on the bottom line. But those that fail to adapt will be left behind.

I believe that we can look forward to a futuristic economy in 2021, where ground breaking technology continues to advance at an unprecedented rate to adapt to rapidly evolving consumer lifestyles and subsequent purchasing habits. The real winner will be the consumer and that is in everyone’s best interest.

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Leadership and management in a WFH world

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Leadership and management in a WFH world 3

By Carolyn Moore, SVP of People at Auth0

Although many of us will have settled into some kind of groove, having worked away from the office for the best part of a year, there are still numerous challenges that businesses and their workforces face in this new reality.

One particularly pertinent challenge is the one faced by people managers, especially those managing virtually for the first time. How can you ensure productivity from those in your charge when you don’t have direct oversight? How do you have those more difficult conversations over a video call? Some of your team may be handling remote working better than others, so how differently should you be handling them day-to-day?

For the majority of businesses these will be questions they’re still grappling with. When the pandemic hit, we happened to be in the fortunate position of being a remote-first business, where 60% of our nearly 700 employees were already working from home. As a result, the uptick to 100% was far less taxing for us. In seven years of working from home, we’ve learned a lot about managing teams remotely, a few of which may help leaders who are still navigating the transition.

Keeping communication channels open to build trust

Leading a remote team is wholly different to the usual, in-office set up. Strict hierarchy, and any notion of presenteeism do not translate well into the remote working environment. You have to accept that your employees’ domestic life will necessarily overlap with their professional one.

Leading a virtual team requires trust and a philosophy of work based on results, and managers need to learn to give them more freedom to do work on their own terms, as long as they produce the intended results.

Building trust is best managed with regular communication. Frequent written communications from leaders regarding strategy, objectives, and organisational learning is crucial. It’s natural when working remotely for team members to isolate themselves and get wrapped up in their own workload. Managers need to help their teams understand how their work impacts on the broader corporate objectives. At Auth0, we adopted and adapted a technique created by Google called ‘Objectives and Key Results’ (OKRs) to enable this.

Now more than ever, make it a priority to regularly check in with your employees and always be up to date and aware of what their needs are. One of the first initiatives we kicked off in an effort to do so was our Slack ‘Coronabot’. This is a tool we integrated with our main form of communication that allows employees to self-identify if their work capacity was impacted by the pandemic. Another way that we tried to better understand the concerns and needs of our employees was holding listening sessions. From these listening sessions, we’ve rolled out a couple of initiatives to combat burnout, including Slack-free weekends and no internal meeting Fridays.

Make flexibility a priority

As the worlds of home life and work life collide, the traditional ‘9 to 5’ workday needs to evolve. Leaders need to encourage their team to devise their own schedules and complete work at those times when they’re most productive.

If in doubt, ask your employees how best you can help and trust that their answers will be honest. In our own experience we saw a need for a different approach when it came to supporting our employees who are caregivers. With childcare much less accessible, caregivers are doing double duty. We rolled out a survey to these individuals to hear directly how best we could support them and used the feedback to plan future programmes and supports.

We have encouraged these employees to take advantage of flexible working hours, should they need to adjust due to the pandemic, and are using tools like Clockwise or Slack that allow our employees to set their working hours and snooze notifications when they’re offline. This alleviates the pressure to respond, and we’ve found employees are actually happier and more productive this way, especially if you have a team spread across several time zones.

Put your culture front and centre

When you work remotely interactions between management and staff become increasingly transactional. Leaders need to avoid making decrees without explaining the reasoning behind them, and the thought process that led to them. Failure to do so can create a secondary culture within the workforce composed of rumours and hearsay, which can lead to mistrust.

Leaders therefore need to firstly be clear in the reasoning for their decisions, but also explicit about the culture they want to create. Your corporate culture must be written down and communicated frequently so employees can use them to guide their everyday work.

Carolyn Moore

Carolyn Moore

This is particularly beneficial for multinational companies spread across geographies and timezones and encompassing multiple cultures. Whether your teams are based in Singapore or San Francisco, they all have a code of conduct to adhere to This is crucial for dealing with conflict in a productive way and creating teams that collaborate and respect each other.

Create virtual spaces to socialise

Leaders mustn’t forget the more pastoral benefits of the workspace. Spontaneous water-cooler chats may seem trite, but they’re an essential means of colleagues building rapport and learning about one another’s lives outside of work.

Socialising should not disappear when you transition to remote work. That would be bad for business, productivity, and employee wellbeing. Instead, I would encourage you to get creative and use different functionalities of the collaboration tools you’re probably using daily. We use Donut within our Slack channels, that randomly pairs three employees together and schedules them for a meeting. The intention is to bring employees together that otherwise may never interact and have them connect on topics beyond the workplace, such as life, family, etc. Donut has been a fantastic aid in keeping our distributed workforce feeling connected. We’ve also utilised the results of both our semi-annual engagement survey and more frequent pulse surveys to give us insight into how effective these engagement programmes have been and where we could tweak them to make them even better.

Don’t neglect security

Security should always be a top priority, especially especially as people are logging into more services remotely. Your business’ IT and Security teams should have set up multi-factor authentication as the minimum standard. As new apps are connected to better enable any of the measures described above, your IT teams and managers should also be educating their teams about the access third-party providers have to their data.

Managers have a crucial role to play as evangelists of security best practice. They should be monitoring whether their teams are completing their security awareness training and, if new apps or technology are being introduced, ensuring that the appropriate channels are open for them to ask questions. The pandemic has been a lucrative time for cybercriminals, who have taken advantage of some lapses in security best practice. Ensuring security is everyone’s business, but it starts from the top.

Building for the future

For many businesses the move to remote working will have been, and is continuing to be, a difficult transition. Admittedly, remote work is not a perfect substitute for personal communication. When circumstances allow, we would recommend managers meet with their teams in-person at least once a year. managers meet with their teams at least once a year.

However, even whilst the pandemic still hampers our ability to travel and meet face to face, it is still possible to have a distributed team that is productive, collaborative, and happy. If leaders take the time and make the effort to foster a culture built on trust, it will open up opportunities for you in the long-term, no matter what that future may be.

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