A review of securitisation activity over the past seven days

Market commentary
Robust demand was seen in both the European and US CLO markets last week (SCI 9 October). Equity arbitrage reached 16% in the European CLO market, with a zero percent default rate for some portfolios.

“This is an equity investor’s best-case scenario,” said one trader, “short of a crisis situation.”

Spreads moved up in Europe because of the volume of deals in the pipeline. Meanwhile, US CLO spreads tightened, with fresh primary market issuance emerging daily (SCI 11 October).

European primary ABS activity also picked up last week, with the latest RMAC RMBS grabbing the spotlight (SCI 8 October). “The collateral backing the deal was tied up with the Clifden legal stand-off earlier in the year,” another trader explained.

The week ended with a handful of BWICs out for the bid in the European ABS secondary market (SCI 12 October). “Auto ABS is holding up quite firmly and the sector is looking positive compared with the wider market,” said one portfolio manager. “We are still under a lot of pressure from UK RMBS; the sector needs some space.”

Away from the UK, the portfolio manager points to concerns over the Spanish and Portuguese RMBS markets, in which spreads are expected to widen.

Transaction of the week
FloodSmart Re Series 2018-1 appears to be the only catastrophe bond to have been impacted by damage inflicted by Hurricane Florence, which is estimated by Moody’s to be between US$38bn-US$50bn (SCI 11 October). The US$500m transaction is a national flood insurance bond that was issued in July by FEMA via a Hannover Re facility.

Morton Lane, president of Lane Financial, says: “While the storm was happening, it seemed as though it would cause a loss to investors and some holders of FloodSmart started thinking about selling. They certainly were not buying any more, so bids in the secondary market dropped.”

He continues: “Once people realised the claims were not going to be as big as they thought, the bids went back up. Often there is a mark-to-market reaction in the secondary market, but in this case it was contained, limited and reversed.”

At landfall, bid prices for the FloodSmart A and B tranches dropped to 90 and 75 respectively. By end-September, the A tranche returned to par and the B tranche was bid at 91. The B tranche incepts at an occurrence loss of US$5bn.

The ‘insured loss’ was not as extensive as the overall damage, however. Most estimates are between US$2bn and US$5bn.

Other deal-related news

• Freddie Mac’s recent STACR 2018-DNA3 RMBS marked a further evolution of its credit risk transfer programme in terms of structure and leverage (SCI 9 October). In a first for STACR deals, the DNA3 transaction extended the term from 12.5 years to 30 years, with a 10-year call option. It also introduced a solution to the convexity risk posed by MACR interest-only securities.
• LCM Asset Management’s latest CLO – the US$409.9m LCM 28 – seeks to address the phase-out of Libor via reference rate flexibility (SCI 12 October). The coupon paid on the notes can be based on one-month Libor, three-month Libor or “any other applicable reference rate”.
• The rent on the principal BMI Healthcare leases securing the THEAT 2007-1 and THEAT 2007-2 CMBS wasn't paid on 1 October, constituting a default. However, a restructuring proposal is supported by all stakeholders, which have entered into a lock-up agreement. The obligor is consequently requesting deferrals of rent and counterparty payments due on the 15 October IPD, as well as a waiver of subsequent defaults. For more on CMBS restructurings, see SCI’s CMBS loan events database.

Data

Pipeline composition by jurisdiction (as of 12 October)

Pricings
ABS dominated last week’s pricings, across auto and consumer collateral. There were also a few RMBS prints.

The auto-related new issuance comprised: US$1bn BMW Vehicle Lease Trust 2018-1, US$234m CPS Auto Receivables Trust 2018-D, US$572m DT Auto Owner Trust 2018-3, €815m Globaldrive Auto Receivables 2018-A, US$437.35m NextGear Floorplan Master Owner Trust Series 2018-2, €667m PBD Germany Auto 2018 and US$1bn World Omni Auto Receivables Trust 2018-D. The US$286.78m Avant Loans Funding Trust 2018-B, US$186.94m Amur Equipment Finance Receivables VI Series 2018-2, US$1bn Citibank Credit Card Issuance Trust 2018-7, US$734m Dell Equipment Finance Trust 2018-2, US$300m First National Master Note Trust Series 2018-1, US$383.5m FREED ABS Trust 2018-2 and US$350m Sierra Timeshare 2018-3 Receivables Funding made up the remainder of last week’s ABS prints.

The RMBS pricings consisted of £343m Castell 2018-1, £233m RMAC No. 2, A$700m Series 2018-1 Harvey Trust and US$237.5m SPS Servicer Advance Receivables Trust series 2018-T1. Finally, among the CLOs that were issued last week were US$736m CIFC 2014-III (refinancing) and €411.7m Oak Hill European Credit Partners VII.

BWIC volume

Source: SCI PriceABS

Conference
Less than 50 seats remain available for SCI’s 4^th Annual Capital Relief Trades Seminar, which is taking place tomorrow (16 October) at One Bishops Square, London. Hosted by Allen & Overy, the event will explore how regulatory change is being reflected in deal structures, as well as examine issuance trends and how the market could expand further in the future. For more information on the seminar, or to register, click here.