A review of securitisation activity over the past seven days

Market commentary
European CMBS BWIC activity swelled after the Taurus 2018-3 DEU deal priced last week (SCI 12 December). Unusually, noteholders were offered an early prepayment on 14 December as an incentive to price the transaction before the end of the year.

The market remains soft as conditions refuse to buck the widening spread trend. Several European dealers have decided to wait out the remaining few weeks until the end of the year.

Heavily discounted premium is being ignored as the year comes to its conclusion. "Even if we show bonds at very cheap levels, nobody is interested," commented one trader. "In the past, when spreads were similar, you still had buyers and sellers balancing each other. Now it is a one-way market."

In the European CLO secondary market, traders were also focusing on BWIC activity last week. "[We've seen] a bit of a turn-around in terms of BWIC activity, although the market is still a little weak and cautious," another trader noted (SCI 14 December).

CLO bonds were pricing significantly wider compared with other asset classes, as a result of recent uncertainty around STS and Brexit. The trader remained optimistic, however, and challenged comparisons with the market slowdown of a couple of years ago.

"Spreads are sliding wider each day," he observed. "We have not seen any panic selling just yet and there have not been any big waves like we saw in 2015/2016. In my opinion, it is not quite as bad as it was then."

Similarly, there was a spike in selling of investment grade paper on the US CLO secondary market, coming mostly from the insurance sector (SCI 11 December). "We are not sure if it is year-end cleansing or if this is more of a market call," one trader remarked. "It is good to be a buyer right now."

Meanwhile, regarding the primary market, the trader said: "It is easier to print the mezz tranches a bit wider, if you need to get deals done quickly. Sourcing loans is easier at the moment."

Transaction of the week
A Brookfield Asset Management entity, BSREP International II (A), is the sponsor of a new £367.5m UK single-asset single-borrower CMBS, dubbed Salus (European Loan Conduit No.33). The transaction comprises a first-lien interest-only mortgage loan originated by Morgan Stanley and backed by the landmark City of London property, Citypoint (SCI 11 December).

The mortgage loan comprises a senior loan which will be securitised in the transaction and makes up the class A, B, C and D notes, totalling £349.1m, while a VRR loan, retained by Morgan Stanley for risk retention purposes, equates to £18.4m, and makes up 5% of the whole loan balance. The floating rate loan has an initial three-year term with two, one-year extension options and requires quarterly interest-only payments based on three-month Libor plus a spread of 2.15%.

Proceeds from this £367.5m mortgage loan, along with £91.9m of mezzanine debt, were used to refinance £436m of existing mortgage debt. It also funded £16.9m of capital expenditures, leasing commissions, letting agent costs, tenant incentives and pay closing costs.

The total debt of £459.4m includes a £16.9m capex facility, which was funded into the capex reserve account at closing. The facility comprises a £13.5m portion that is pari-passu to the senior loan and a £3.4m portion that is pari-passu to the mezzanine loan.

The prior financing of £436m was originated by Morgan Stanley to facilitate the sponsor's acquisition of the property in 2016. Prior to that, the sponsor purchased a £106m junior loan associated with the property from Mount Kellett Capital Management in 2014.

The junior loan was associated with a £429m senior loan that was originated by Morgan Stanley in 2007 and securitised in the Ulysses (European Loan Conduit No. 27) transaction. The senior loan was transferred to special servicing in February 2012 due to a payment default but was paid off in full in January 2017, following the sale of the property to the sponsor, with no principal losses to the bondholders.

The transaction also marks the first European CMBS rated by KBRA, which has assigned provisional ratings, alongside DBRS, of triple-A/triple-A on the £211.3m class-A notes, double-A/double-A on the £66.29m class Bs, single-A minus/single-A (low) on the £52.4m class Cs and triple-B plus/triple-B on the £19.135m class D notes. There is also an unrated £100,000 class X note which collects excess interest from the transaction.

Other deal-related news

• ILS market participants are re-evaluating whether the pricing of wildfire risk in catastrophe bonds is adequate, after the 8 November US wildfires caused between US$9bn-US$13bn worth of damage (SCI 13 December). However, the picture is likely to only become clear over 2019 as the claims are counted and the full scale of loss across multiple perils is measured.
• Banco BPM announced last week a non-performing loan securitisation with Elliott International and Credito Fondiario for a nominal value of €7bn-€7.8bn, while Intesa Sanpaolo and Intrum completed a similar transaction the previous week (SCI 14 December). The agreements involve the sale and co-ownership of servicing platforms, which is part of a broader trend in Italian NPL disposals.
• Pillarstone has arranged a €174m restructuring in Greece for Famar, one of Europe's largest providers of contract manufacturing and development services to the pharmaceutical and health and beauty industries. The agreement is considered a landmark, given that restructurings are an exceptional occurrence in the Greek non-performing loan market (SCI 14 December).
• The facility agent for the THEAT 2007-1 and 2007-2 CMBS requested that the master servicer facilitate amendments to the propco facility and intercreditor agreements in connection with the restructuring of the lease. For more CMBS restructurings, see SCI's CMBS loan events database.

Regulatory round-up

• The EBA has published its final guidelines regarding a harmonised interpretation of the criteria for securitisations to be STS-eligible on a cross-sectoral basis throughout the EU (SCI 13 December). The guidelines – developed for both ABS and ABCP – will provide a single point of consistent interpretation of the STS criteria for all entities involved in STS securitisation, including originators, sponsors, investors, competent authorities and third-party STS verifiers.
• The Alternative Reference Rates Committee (ARRC) has issued a public consultation on US dollar Libor fallback contract language for securitisations, which outlines draft language for new contracts that reference Libor to ensure these contracts continue to be effective in the event that Libor is no longer usable (SCI 11 December). The consultation proposes one specific hardwired approach regarding triggering events and the waterfall for rate determination, and addresses the challenges presented by securitisation asset and liability components.
• Illinois Attorney General Lisa Madigan has announced a US$17.25m settlement with Wells Fargo as a result of the bank's misconduct in its marketing and sale of risky RMBS leading up to the 2008 economic collapse (SCI 11 December). The settlement with Wells Fargo resolves an investigation by Madigan's office over the bank's failure to disclose the true risk of RMBS investments. Under the settlement, Wells Fargo will pay $17.25m to the state that will be distributed among the teachers retirement system of the state of Illinois, the state universities retirement system of Illinois, and the Illinois state board of investment, which oversees the state employees' retirement system.
• The ECB has outlined the technical parameters for the reinvestment of the principal payments from maturing securities purchased under its asset purchase programmes after net asset purchases cease at end-December 2018 (SCI 14 December). It expects to reinvest ABSPP redemptions back into the ABS market and CBPP3 redemptions back into the covered bond market. The bank says it will aim to maintain the size of its cumulative net purchases under each constituent programme at their respective levels, as at end-December 2018, although limited temporary deviations in the overall size and composition of the APP may occur during the reinvestment for operational reasons. ABSPP redemptions stand at €7.4bn over the next 12 months, representing approximately 26.2% of the portfolio, according to Rabobank figures.
• The state of Colorado has filed a Second Amended Complaint relating to state court actions against Avant and Marlette, alleging that the platforms have violated its Uniform Consumer Credit Code (SCI 12 May 2017). According to a Chapman and Cutler client memo, in addition to making the same claims against the platforms, the state is suing trustees for the trusts into which Colorado loans made through the platforms had been securitised and the SPEs used to transfer the loans into the securitisation trusts (SCI 12 December).
• The FDIC last week announced multiple initiatives and resources related to the deposit insurance application process for organisers of new banks and to promote a more streamlined process for all applications submitted to the agency (SCI 12 December). One such initiative is the option to request feedback on a draft deposit insurance proposal before filing a formal application, thereby providing an early opportunity for both the FDIC and organisers to identify potential challenges with respect to statutory criteria and areas that may require further detail or support. The agency also wants to streamline its application process and is seeking comments on how that can be achieved. The move has been welcomed as the final step towards enabling fintechs to compete with traditional banks.

Data

Pricings
US new issuance volume appears to be drying up as year-end approaches. Last week's pricings were dominated by international RMBS and SME ABS deals.

The RMBS prints comprised A$1.6bn National RMBS Trust 2018-2, €255m Rural Hipotecario XVIII and €841m Strong 2018, while the SME ABS were €9.3bn Belgian Lion SME III, €5.28bn Brera Sec 2018 and €972.1m IM BCC Capital 1. The US$379.4m Kestrel Aircraft Funding 2018-1 and US$322m Sunrun Athena Issuer 2018-1 rounded out last week's ABS issuance.

A couple of CMBS also priced: US$1.049bn BMARK 2018-B8 and €476m Taurus 2018-3 DEU. Finally, the US$509m Benefit Street Partners CLO XVI transaction was among last week's CLO prints.

BWIC volume