A review of securitisation activity over the past seven days

Market commentary
European and US ABS markets effectively closed last week, with all but a few transactions in the pipeline postponed until 2019.

"Some third-tier US CLO managers are still trying to get deals through," said one trader (SCI 19 December). "This has been a tough time to get the best of deals done, so lower-tier managers are struggling."

However, the trader feels "fairly positive" about 1Q19. In terms of cross-currency basis swaps, the trader pointed out that short-term hedging costs between the Japanese Yen and the US dollar have improved considerably.

"The increased hedging costs - which spiked around 29 September - have subsided and are now roughly back at levels we saw in the summer. This favours US dollar-Yen currency swaps," the trader noted.

Another trader reported last week that nothing has been heard of the Alhambra SME Funding 2018-1 deal (SCI 18 December), which "should have been done and dusted by now" as the only European ABS left in the pipeline. The trader suggested that the transaction may have been postponed until 1Q19, despite it being announced in June (SCI 21 November).

Spreads seem to have stabilised as a result of the lack of new issue paper. "I think people are ready to close the books after the last few weeks and now with Brexit," the trader said. "A break is welcome after a very hectic year."

For UK buy-to-let and non-conforming RMBS, activity in 1Q19 "will depend 100% on what happens with Brexit" (SCI 19 December). A different trader commented: "Unless we have more clarity about how Brexit will play out, investors are going to be very hesitant to invest in long-term paper. That is my gut feeling."

For European CLOs, prospects will depend on the appetite of Japanese investors. "The market will open with Japanese trade and triple-A bonds will likely be bought up. It is very important that demand from Asia continues next year, though we will not know for sure how the market will behave until the first or second week in January," the trader suggested.

Transaction of the week
The first securitisation with liabilities tied to the Sterling Overnight Index Average (SONIA) rate has been issued by Lloyd's Bank, which is opting to retain the deal (SCI 17 December). The £7.6bn transaction, dubbed Elland RMBS 2018, is backed by owner-occupied residential mortgages in England and Wales, originated by Bank of Scotland under the Halifax brand.

While the assets in the transaction are not SONIA-linked, an interest rate swap exchanges the weighted average portfolio fixed rate to SONIA plus a margin, to hedge potential assets and liabilities mismatch. Although there have been four UK covered bond transactions that are SONIA-linked in 2018, this transaction is the first UK securitisation to be structured that references SONIA.

Moody's and Fitch have assigned final ratings on the deal of triple-A on the £1.634bn class A1 notes (SONIA plus 90bp), triple-A on the £1.634bn class A2s (plus 100bp), triple-A on the £1.634bn class A3s (plus 115bp) and triple-A on the £1.634bn class A4 notes (plus 120bp). There is also a £1.064bn class Z note (SONIA plus 50bp) that is not rated.

The transaction is a positive development for the sector, says Moody's, as it reduces uncertainty around the phase-out of Libor and supports the growth of SONIA-linked interest rate swaps. The rating agency adds that Elland RMBS 2018 can serve as a model for future RMBS issuance in the UK.

Moody's highlights, however, that only a small number of instruments using an alternative rate to Libor have so far been issued and this deal follows the current standard for SONIA-based securities and derivatives, with compounding of the daily SONIA rate over the interest rate period. The agency suggests that demand for longer-term rates may lead to a move away from the daily-compounding toward term rates more similar to Libor and the demand for term rates will also arise on the collateral side.

Referencing consumer debt directly to an overnight rate is problematic, Moody's adds, because volatility and daily compounding are not suitable for retail consumers. As such banks' reliance on their own standard variable rate (SVRs) will continue and the agency expects that SVRs will continue to provide the term rate required for retail customers and to provide a buffer against daily price moves.

However, Moody's says that it considers the increase in SONIA-based debt to be a credit positive, although it may be hard to know if the transaction is a result of increased market depth in the SONIA-based interest swap market or whether it will support subsequent growth of the swap market.

Other deal-related news

• A slew of synthetic securitisations hit the market last week (SCI 21 December). The risk transfer issuances include a trio of EIF financial guarantees, one of which is supported by blockchain technology, and a pair of Colonnade deals.
• UBI Banca has completed its second-ever capital relief trade, paving the way for more programmatic issuance in the future (SCI 19 December). Dubbed UBI RegCap2, the €100m financial guarantee references a €2.2bn portfolio of secured and unsecured Italian SME and corporate loans.
• Fannie Mae has completed its first multi-tranche Credit Insurance Risk Transfer (CIRT) transaction, covering a pool of approximately US$10.9bn of existing multifamily loans in the company's portfolio (SCI 19 December). The deal, CIRT 2018-M02, transferred US$273m of risk to nine reinsurers and insurers.
• Cerberus European Residential Holdings is exploring strategic alternatives with respect to the mortgage loans held in the Towd Point Mortgage Funding 2016-Granite1 and 2016-Granite2 RMBS, which will become eligible for optional redemption from April and May of 2019 respectively (SCI 17 December). The firm has engaged Morgan Stanley and Bank of America Merrill Lynch as its financial advisors to assist in evaluating its options.
• Fairhold Securitisation has issued a notice that the new respondents, as set out in the announcement dated 2 November 2018, be joined as additional respondents and be subject to the provisions of the amended order (SCI 21 December). Furthermore, the return date hearing was heard on 18 December and the court made certain orders and amendments, including an extension of the injunction against Clifden and Rizwan Hussain, as set out in a prior order. It further emphasises that unless Clifden and Hussain pay the costs of the issuer's application from 23 July, they must be restrained from issuing or otherwise commencing any proceedings against the issuer or the note trustee and any such proceedings if commenced will be struck out.
• Lloyds has completed a £142.5m 7.25-year financial guarantee referencing a £1.5bn UK commercial real estate portfolio (SCI 17 December). Dubbed Wetherby 2 Securities 2018, the transaction is the first synthetic securitisation to reference the new SONIA interest rate benchmark and the third structured as a dual tranche trade (SCI 26 January).
• The Outlets of Mississippi loan, securitised in MSBAM 2014-C16, has transferred to special servicing due to imminent monetary default. According to Trepp, the leases of 28 tenants at the shopping centre are due to end by December 2019. For more on CMBS restructurings, see SCI's CMBS loan events database.

Regulatory round-up

• The European Commission has stated that it only intends to endorse the draft technical standards on disclosure requirements, under the EU Securitisation Regulation prepared by ESMA, once certain amendments have been made (SCI 20 December). Market participants have suggested that this was not unexpected and could in fact buy more time for firms to install the necessary systems required to comply with reporting standards, when the Securitisation Regulation comes into effect.
• President Trump's nomination of Mark Calabria, currently chief economist for Vice President Mike Pence, to replace Mel Watt as FHFA director when his term ends in January could have a significant impact on the US mortgage market (SCI 20 December). Although Calabria appears to be a proponent of reducing the GSE footprint and has spoken publicly about the current administration's commitment to ending the conservatorship of Fannie Mae and Freddie Mac, substantive changes are unlikely to occur unless Trump wins a second term.

Data

Pricings
A number of deals priced during the week before Christmas, including a trio of CLOs. A pair each of ABS and CMBS accounted for the rest of the issuance.

The CLO prints comprised US$503.15m AIG CLO 2018-1, US$814m Madison Park Funding XXXII and US$403.6m Voya CLO 2018-4. The ABS were US$700m Ford Credit Floorplan Master Owner Trust A series 2018-4 and US$72.63m RFS Asset Securitization Series 2018-1, while the CMBS were US$597m DBWF 2018-GLKS and US$646.48m UBS 2018-C15.

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