News Analysis
Insurance-linked securities
Year of the cat?
ILS issuance and innovation to increase
Vitality Re IV - the first catastrophe bond of 2013 - priced last week as the insurance-linked securities market got up and running. Supply this year is expected to reach new heights, while further innovation and diversification are also forecast.
"To already have a deal in the market is a good start. We are used to seeing deals coming early in the year, ahead of the renewal season for US retrocession contracts, so Vitality Re should soon be followed by others," says Thierry Berthold, co-head of insurance in the global structured credit and solutions group at Natixis.
He continues: "With favourable market conditions, this year should be an active one. Pricing levels, especially for diversifiers - which are those deals which are not US hurricane or US earthquake - should be quite competitive."
With two-thirds of the cat bond market accounted for by US hurricane or earthquake risk, Berthold believes other perils are being under-represented. Investor appetite remains strong for all those diversifiers, although pricing in the US hurricane market remains affected by the fallout from Superstorm Sandy.
Such strong appetite contributed to 2012 being one of the most active years in the ILS market's history. With rates and spreads in other markets staying low, ILS has looked increasingly attractive.
"There was roughly US$5.8bn of non-life issuance last year, but it was still somewhat below expectations. It was certainly one of the best years for ILS in terms of issuance volume but, given the level of investor interest, the level of supply was barely enough," says Michael Stahel, partner and portfolio manager at LGT Capital Management.
He continues: "On the first ILS placement in 2013, Vitality Re, final pricing ended considerably below the initial indicated target spread. That is a clear indicator that there is abundant interest and demand and that the market is certainly ready for further transactions."
Vitality Re IV, a medical benefit-linked transaction originated by Aetna Life Insurance Company, comprises two tranches - US$105m class A and US$45m class B notes. Arranged by Goldman Sachs and BNP Paribas, the class As priced at 275bp (versus guidance of 350bp-425bp), while the class Bs came at 375bp (versus guidance of 450bp-525bp).
With new participants coming to the market, Sidney Rostan, co-head of insurance in the global structured credit and solutions group at Natixis, believes it will continue to grow. "The total outstanding of the P&C cat bond market is above US$15bn, which is as big as it has ever been. There are more and more investors coming to the market, including more generalist investors, with institutional investors such as pension funds - not directly, but rather through specialised ILS funds."
He adds: "As the size of the market increases and is more and more industrialised, with costs being more and more reduced, it is going to attract more sponsors to the market. It will mean you have not just the usual players, but also more new players."
As well as concerns about whether supply can meet demand, even if that supply were to exceed US$6bn, Stahel notes that the increased investor interest also brings another challenge for the market. He says that the fierce demand could start to adversely affect standards.
When pricing can no longer be moved lower in order to place a transaction, loosening contract wording and adding new exposures is often a way to keep investors engaged, he suggests. Indeed, Stahel points to Mythen Re Series 2012-2 as an example of this.
Swiss Re's Mythen Re deal was an innovative transaction when it came out last year, with the senior tranche exposed to both a catastrophe peril and mortality risk. Rostan notes that it was fairly successfully placed.
"It is interesting because it shows some investors are accepting of such a mix, although it will also put off those investors who have P&C-dedicated funds or only life-dedicated funds," he observes.
Although Stahel also concedes that Mythen Re was fairly well placed, he does not believe it is a structure that investors will be keen to see replicated too often. Many investors are uncomfortable with combining life and non-life risk.
Stahel says: "We manage money on behalf of pension funds, who do not want to expose themselves to any type of life risk, even mortality. They just do not wish to see any life exposure on their asset portfolio, so it is not easy for us to allocate such a transaction within our funds and mandates."
An issuer's attraction to this kind of structure is understandable. While a transaction with pure life risk might have a very low probability of a payout and therefore require the sponsor to pay a comparably high multiple - for example, a 340bp spread for an expected loss of 64bp, as in Vita Capital V E-1 issued in July 2012 - Stahel suggests that adding such an exposure to a non-life transaction may be less expensive.
"If you take a European wind transaction and add a life exposure in there as well, then if you do it right your incremental premium for the extra risk is much lower than if you do the life deal on a stand-alone basis," he explains.
While a repeat of the kind of innovation represented by Mythen Re may only have limited demand, a diversification of perils would be welcomed warmly. So long as a risk can be modelled, there is the potential for it to be used as a cat bond peril.
"The number of eligible perils is increasing. It is difficult to say which might be the next new peril brought to the market, but maybe European flood risk could be a development," says Rostan.
He adds: "If one of the firms providing insurance market data launches new loss indices, then that could trigger the rapid development of the cat bond market. PERILS has been expanding its cover for windstorm in Europe and has launched indices for flood in the UK and should further expand its cover in the future."
UK flood risk is a peril that many market participants seem open to. Stahel also identifies South American and Canadian earthquake risk as attractive potential cat bond classes.
"Canadian earthquake risk could be well worth looking at. The Canadian regulator recently increased the capital requirements for earthquake and we have participated on a couple of transactions on the collateralised reinsurance market on behalf of our mandates, but I would very much like to see a pure Canada earthquake cat bond," Stahel says.
Man-made exposures, such as aviation disasters or another event such as the Deepwater Horizon oil spill, could also potentially be covered in the future. They would cover potentially very expensive events and could also offer investors improved diversification alongside the natural catastrophe market.
A more controversial option that has previously been discussed could be a terror risk cat bond. "A cat bond must cover an event that is sudden, that is unexpected and that causes an extreme monetary loss," says Stahel.
He continues: "Terror would essentially meet all of these elements. Yet it is perhaps one of the more sensitive areas, but one could structure a transaction around the number of casualties, for example, which makes it similar to an extreme mortality investment."
With so many avenues for development, this year should be an exciting one for the ILS market. 2012 was one of the most active on record and Rostan believes that 2013 could reach similar heights.
He concludes: "Last year was very active, with around US$6.3bn of new transactions. This is a growing market and we are optimistic for the further development of the market, which may get up to a similar total this year."
JL
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News Analysis
Structured Finance
Adding value
Noteholder disputes, counterparty downgrades and pricing for amendments discussed
Representatives from leading corporate trust service providers met with SCI in December to discuss trustee independence and the flexibility of corporate trust services. Noteholder disputes, counterparty downgrades and pricing for restructurings and amendments were at the forefront of their minds. (The full SCI Corporate Trust Roundtable discussion can be downloaded here.)
Corinne Smith, SCI: Beginning with flexibility of services, corporate trust service providers' problem-solving abilities have come to the fore since the financial crisis. In which areas are they particularly prevalent?
Helen Tricard, head of restructuring, corporate trust services at BNP Paribas Securities Services: Corporate trust service providers' problem-solving skills are particularly evident on the restructuring side. Trustees have become a lot more proactive and are getting involved at a much earlier stage; frequently in terms of parties asking their views hypothetically on whether it is possible to do X or Y - and, if so, how? Good trustees respond quickly and are likely to be able to indicate whether it will be necessary to consult with noteholders at an early stage in the process.
David Bell, md in BNY Mellon Corporate Trust: Over the last 24 months, the trustee community has developed significant expertise dealing with multiple different types of scenarios - restructurings, ratings downgrades and so on. One of the benefits we've seen as a result is that there are some areas where a trustee can anticipate certain events, which can be brought to the attention of the client.
Edmond Leedham, chief counsel to US Bank's European Corporate Trust Group: I actually think that trustees have successfully dealt with similar issues and scenarios prior to the financial crisis. It is just that the stakes have become higher in this environment.
We are seeing more and more examples of different classes of noteholders investing significant levels of time and resources pursuing interpretations that favour their respective prospects of recovery, and the fine balances with which trustees have always had to deal in respect of difficult issues of interpretation and structural amendments are becoming more and more visible to the market. While on one hand this makes things more difficult for trustees, I think it also has fostered an increased level of respect for the position of trustees and their credibility in framing the issues and possible courses of action to deal with such issues as they arise.
To read more about restructurings, amendments, pricing, litigation, documentation and structural change, download the full roundtable PDF.
Market Reports
CMBS
WINDM X boost for Euro CMBS
Windermere X prices received a boost yesterday, following positive developments in connection with the Thunderbird and Tour Esplanade loans securitised in the deal. Senior European CMBS prices were also generally higher, according to SCI's PriceABS data.
Significantly, the €109.9m Thunderbird loan has been extended to 15 October, with the credit rating defaults waived by the master servicer. In return, the borrower must amortise the loan by €4m, €17m and €41m by the January, April and July 2013 IPDs respectively. It is also required to submit a business plan to the master servicer by the April IPD and evidence of progress by the July IPD.
With respect to the €260.2m Tour Esplanade loan, a new lease (see SCI's CMBS loan events database) has been granted in favour of the French Government for a fixed term of 13.5 years, due to commence on 1 July 2014. The WINDM X-X E tranche was talked in the low-teens on the back of the news, having been talked at 10 area back in September.
Another bond circulating yesterday on positive news was TMAN 7 B, which was talked in the low-90s. A sale and purchase agreement for €1.01m has been signed for the Eschborn property, underlying the €468.1m GB Mozart loan. The tranche was previously covered at 92.58 on 11 January.
Meanwhile, the TAURS 4 A and DECO 2007-E5X A2 tranches were talked in the low-90s during the session. SCI's PriceABS archive shows that the former was covered at 85.8 on 11 June, while the latter was talked in the high-80s on 20 November.
Junior bonds fared less well yesterday, however. The EPIC DRUM D and DECO 2006-C3X C tranches were talked in the single-digits and low single-digits. This compares to the mid-singles and low-teens respectively back in December and July.
CS
Market Reports
CMBS
AMs, AJs dominate varied CMBS session
US CMBS secondary volume was up yesterday. AM and AJ tranches dominated the session, although there was a mix right down the stack to E and F classes.
SCI's PriceABS data displays 91 US CMBS line items from the session, with vintages from 2004 to 2013 cropping up. BWIC volume was estimated to stand at just under US$500m.
Trepp notes that spreads had finished Friday - the previous session before Tuesday, as the market paused for Martin Luther King Day - unchanged to a point or two wider. The bellwether GSMS 2007-GG10 A4 bond was at 134bp over swaps, 4bp wider than the day before.
The D tranche of the US$600m Queens Center Mortgage Trust 2013-QC deal, which priced only two weeks ago, was among those circulating as dealers returned to their desks yesterday. The US$5m QCMT 2013-QCA D piece was talked in the mid/high-100s.
Meanwhile, the US$5m MOTEL 2012-MTL6 C tranche was talked wider at 200 before being covered at 175. It was previously covered in November at 225 over swaps.
There was plenty of other recent paper out for the bid during the session, including lower down the capital structure, where notes such as MSC 2012-C4 F were talked in the high-500s and covered in the mid-500s. Other F tranche paper includes BSCMS 2007-PW15 F, COMM 2012-CR2 F and WFRBS 2011-C4I F - which were respectively talked in the very low-singles, covered in the high-500s and covered in the very high-500s.
AM and AJ notes were once again the most commonly seen. A couple of interesting names include a US$17.98m slice of the CSMC 2007-C3 AM tranche (which was covered at 335) and a US$15m piece of JPMCC 2006-CB17 AJ (which was covered at 57).
A host of new issues are expected to price this week, which Trepp notes will likely prove a distraction for investors. Their reception will give a good indication of just how durable the recent CMBS 3.0 rally has been, the firm adds.
JL
News
Structured Finance
SCI Start the Week - 21 January
A look at the major activity in structured finance over the past seven days
Pipeline
Last week ABS was in the minority for once in terms of new additions to the pipeline. A single ABS - an auto deal - was joined by two RMBS, two CMBS and a CLO.
The ABS was Volkswagen's €952.5m Driver Ten auto loans securitisation. The RMBS comprised €526.5m Dutch MBS XVIII and €752.2m STORM 2013-1.
The CMBS were US$1.49bn COMM 2013-LC6 and US$860m GSMS 2013-GC10. Finally, the US$519m LCM XIII CLO rounded out the deals being marketed.
Pricings
More auto ABS printed last week than the total number of deals joining the pipeline. In addition, a further four non-auto ABS, two RMBS, five CLOs and an ILS priced.
The auto ABS new issue comprised: US$1.566bn AmeriCredit Automobile Receivables Trust 2013-1; US$1bn BMW Vehicle Lease Trust 2013-1; US$940m Capital Auto Receivables Asset Trust 2013-1; US$187m First Investors Auto Owner Trust 2013-1; US1.725bn Ford Credit Floorplan Master Owner Trust Series 2013-1; US$950m Hertz Vehicle Financing Series 2013-1; US$1.25bn Honda Auto Receivables 2013-1 Owner Trust; and US$500m SMART ABS series 2013-1US Trust.
The non-auto ABS prints were: CARDS II Trust Series 2013-2 (credit cards); US$93.56m Diamond Resorts Owner Trust 2013-1 (timeshare); US$1.15m HLSS Servicer Advance Receivables Trust series 2013-T1 (servicing advances); and US$540m State of North Carolina State Education Assistance Authority Series 2013-1 (FFELP student loans).
The RMBS consisted of €3.288bn Orange Lion 2013-8 and US$398m Sequoia Mortgage Trust 2013-1. The CLOs were: US$515m Longfellow Place CLO 2013-1; US$614.25m Marathon CLO 2013-5; US$394m OFSI Fund V; €588m PYMES Banesto 3; and US$827.5m Symphony CLO 2013-11. Finally, the US$150m Vitality Re IV medical benefits transaction printed last week.
Markets
A spike in subprime bid-lists boosted US RMBS supply early last week, as SCI reported on Wednesday (SCI 16 January). Non-agency BWIC supply for Tuesday's session was almost US$900m. SCI's PriceABS data shows subprime names such as HASC 2007-HE1 2A3 were being talked higher than previous levels, while levels for prime names such as JPMMT 2006-S4 A5 were holding steady.
US CMBS analysts at Citi note that optimism in the CRE sector is continuing to rise. That rising optimism has helped 2007-vintage dupers reach 85bp, which is 155bp tighter since mid-year. However, they say there is still not enough B-piece demand, with only a handful of B-piece buyers active in the sector.
The European CMBS market is continuing to trend upwards, meanwhile. Deutsche Bank analysts report that high quality single loan/single asset front-pays are trading in the mid-100s DM. Money-good second-pays from European conduits are trading in a total return range of 4%-5%, they add.
There were signs at the start of the week of the European CLO market levelling off, as SCI reported on Tuesday (SCI 15 January). One trader describes it as "a buyer's market", with spreads for triple-A paper below 150 DM and below 400 DM in the single-A space. Even JUBIL VIII-X C paper traded at 380 DM, so paper is now reaching levels that the trader notes are surprising.
Deal news
• Deutsche Annington has agreed partial refinancing transactions of €785m for the GRAND CMBS. Net of costs and other cash usage, this represents 71.5% of the principal amount needed to comply with the restructuring conditions for 2013.
• Absent a payout from Bank of America on alleged rep and warranty breaches or an increase in intercompany support facilities, it is unclear how MBIA will continue to pay claims on its structured finance exposures. Indeed, the insurer's recent consent solicitation (SCI 28 November 2012) indicates that it might be preparing for a restructuring in the event that a settlement to its claims cannot be reached.
• The US$742m DRA/Colonial Office Portfolio loan - split pari passu between the BSCMS 2007-PW17, BSCMS 2007-PW18 and MLMT 2007-C1 CMBS - has received an extension modification. The move is being hailed as a positive, given that sales from better-performing properties will be used to fund reserves.
• AIG and some of its affiliates last week filed a complaint in New York State Supreme Court seeking a declaration from the court as to the proper interpretation of a contract it entered into with Maiden Lane II. AIG sold in December 2008 approximately US$20bn in RMBS tranches that it had purchased between 2005 and 2007 to Maiden Lane II, as part of the Federal Reserve's bailout of AIG.
• Windermere X prices received a boost last week, following positive developments in connection with the Thunderbird and Tour Esplanade loans securitised in the deal. Senior European CMBS prices were also generally higher, according to SCI's PriceABS data.
• PIMCO is set to transfer its collateral management responsibilities for Crystal Cove CDO to Vertical Capital. The most senior class in the transaction is currently rated single-C, indicating that default appears inevitable for the notes.
• S&P believes that, in specific circumstances, the remarketing of reset-rate notes (RRNs) issued in connection with certain US student loan ABS might result in an upgrade of the notes' ratings. If RRNs are remarketed into US dollars, it would terminate the existing swap agreement and thereby eliminate the class' direct exposure to counterparty-related risk.
• Fitch has affirmed 32 tranches, upgraded four tranches, revised the rating watch on four tranches to positive, placed three additional tranches on rating watch positive and downgraded 26 tranches of 52 Spanish structured finance (SF) transactions. 66 tranches of 31 Spanish RMBS transactions remain on RWN pending a full review of the performance of their collateral portfolios, given the deteriorating conditions in the housing market.
• S&P has placed or kept on credit watch negative its ratings on 100 tranches in 33 European SME CLOs, following an update to its criteria that addresses credit quality of the securitised assets and payment structure/cashflow mechanics (SCI 11 January). The move affects approximately 33.6% (by number) of the European SME CLO tranches that the agency currently rates.
Regulatory update
• The CFPB has issued its final mortgage servicing rules, which the majority of servicers must adhere to by 10 January 2014. The final rules are based on the servicing standards set by last year's national servicer settlement and the OCC consent order issued in April 2011 (SCI passim).
• The DTCC has filed a comment letter with the CFTC expressing concern over the lack of clarity as part of an overall arbitrary and inconsistent rulemaking process to determine the regulatory reporting structure for OTC derivatives. The letter details the most recent in a series of what the DTCC says are CFTC missteps that have "raised serious questions about decision-making at the agency".
• New credit rating agency rules - CRA 3 - have been approved by the European Parliament (SCI 6 December 2012). They allow rating agencies to issue unsolicited sovereign debt ratings only on set dates and enable private investors to sue them for negligence. Agencies' shareholdings in rated firms will also be capped, to reduce conflicts of interest.
• The OCC has issued a cease and desist order against JPMorgan Chase for unsafe and unsound practices and violations of law or regulation related to derivatives trading activities conducted on behalf of the bank by the chief investment office (CIO). The CIO's credit derivatives trading resulted in more than US$6bn in losses for the bank (SCI 15 May 2012).
• The CFTC has issued an order granting a request made by Ice Clear Credit (ICC). The order sets forth terms and conditions under which ICC and its clearing members that are dually registered as futures commission merchants and broker-dealers may hold credit default swaps and security-based CDS in a cleared swaps customer account, as well as portfolio margin such contracts held in the cleared swaps customer account.
• TALF is being wound down, following the repayment of the programme with interest. Accounting for interest and other gains above principal, repayments to date from the programme total US$173m - with additional payments expected in the future.
Deals added to the SCI database last week:
FREMF 2012-K24; MSBAM 2013-C7; Nissan Auto Receivables 2013-A Owner Trust; QCMT 2013-QC; Santander Drive Auto Receivables Trust 2013-1; Sequoia Mortgage Trust 2013-1.
Deals added to the SCI CMBS Loan Events database last week:
BACM 2007-3; BSCMS 07-PW17, BSCMS 07-PW18 & MLMT 07-C1; BSCMS 2006-T24; COMM 2006-C7; CSMS 2007-C3; CWCI 2006-C1; DECO 2005-C1; ECLIP 2006-1; ECLIP 2007-1; EURO 19; EURO 21; EURO 23; EURO 27; GRND 1; JPMCC 2004-CBX; LBUBS 2006-C7; MALLF 1; MLCFC 2007-7; MSC 2007-IQ14; MSC 2007-IQ15; OPERA CMH; PROMI 2; TITN 2006-1; TITN 2006-3; TITN 2006-CT1; TITN 2007-2; TITN 2007-3; TMAN 3; TMAN 4; TMAN 5; TMAN 6; TMAN 7; WINDM VII; WINDM X; WINDM XI; WINDM XIV; WTOW 2007-1.
Top stories to come in SCI:
Structured finance recruitment trends
2013 ILS outlook
News
CMBS
GRAND progress beats expectations
Deutsche Annington has agreed partial refinancing transactions of €785m for the GRAND CMBS. Net of costs and other cash usage, this represents 71.5% of the principal amount needed to comply with the restructuring conditions for 2013, according to CMBS analysts at Barclays Capital.
The largest portion of the new financing (€657m) will be provided by Berlin Hyp, which plans to syndicate parts of the loan with German saving banks. DAIG also secured two loans from other sources, amounting to €130m in aggregate.
Which GRAND REF note issuers will be refinanced is yet to be disclosed. But, based on information released by the sponsor on the locations and number of residential units affected, the Barcap analysts believe that Kennedy (Munich), Jefferson (Augsburg), Madison (Cologne), Nixon (Essen), Hoover (Rhineland), Cleveland (Rhine Ruhr), Adams and Harrison were likely refinanced by Berlin Hyp. The two additional loans are expected to be secured by one REF note issuer's properties each - most likely Eisenhower (Kassel) and Carter (Nuremberg). Other combinations could also include Lincoln (Heimbau), Truman (Regensburg) and/or Washington (Frankfurt).
The refinancing is anticipated to be applied pro rata on the April IPD. Based on these assumptions, seven issuers remain in the portfolio, including the two largest (McKinley and Garfield).
The analysts reckon that only five of these note issuers, representing an outstanding securitised balance of approximately €300m, are relatively straightforward to refinance and that Garfield will need to be de-levered first. For the largest borrower, McKinley, DAIG plans to conduct a corporate restructuring before starting the refinancing activity.
Nevertheless, this latest move implies that the refinancing of GRAND could occur faster than was estimated initially, with DAIG likely to meet the first year's amortisation target. The analysts believe that the first refinancing activity of the McKinley portfolio will start in 2H14. For the Garfield borrower (MIRA portfolio), refinancing is expected to occur in 2016 or 2017, following deleveraging from its current relatively high LTV.
Based on this projected debt reduction, the permitted distribution conditions - which are relevant for a potential IPO - could be met in early 2014. The faster-than-expected refinancing is clearly positive for GRAND as a whole, but in particular for mezzanine and junior notes that currently do not trade above par, according to the analysts.
CS
Job Swaps
Structured Finance
Sukuk group names chairman
Giambattista Atzeni has been named as chairman of the Gulf Bond and Sukuk Association's (GBSA) steering committee. Atzeni is MENA and Turkey vp for corporate trust at BNY Mellon and takes over as chairman from Andrew Dell, who is HSBC's head of CEEMA DCM.
The GBSA is the regional trade association representing the Arabian Gulf bond and sukuk market. It acts as a focal point for the fixed income market in the region, working with governments, regulators and market players to promote best practices and address cross-border issues.
Job Swaps
Structured Finance
Private debt fund launched
Tikehau Investment Management has launched its first private debt fund accessible to retail clients. The Tikehau Financement Privé fund is invested mainly in equity-linked mezzanine financial securities.
The new fund will accept investments from 31 January to 31 July 2013. It gives private investors access to the financing of mid-sized companies and allows any investor to gain exposure to this asset class for a minimum initial investment of €20,000.
Job Swaps
Structured Finance
Asset manager adds Germany chief
BlueBay Asset Management has appointed Steven Bayly as head of sales for Germany. His primary focus will be to target the local institutional investor base.
Bayly joins from BlackRock, where he was head of institutional business for Germany and Austria and a member of the firm's German executive committee. Before that he was head of domestic fixed income at Deutsche Investment Trust.
Job Swaps
Structured Finance
Continuum, Grosvenor tie-up announced
Continuum Investment Management and Grosvenor Capital Management have formed a strategic partnership. It is the third such partnership Grosvenor has entered into since it launched its emerging manager programme at the start of last year.
Continuum seeks to capitalise on prepayment and credit-centric market opportunities across RMBS, CMBS and other ABS opportunities. It is led by cio Kevin Scherer, who was previously at Citadel Investment Group and has over 20 years of experience in structured products.
Job Swaps
CDO
ABS CDO transfer on the cards
PIMCO is set to transfer its collateral management responsibilities for Crystal Cove CDO to Vertical Capital. The most senior class in the transaction is currently rated single-C, indicating that default appears inevitable for the notes. In addition, the transaction is no longer in its reinvestment period and all overcollateralisation tests have been failing.
The manager's capabilities are consequently no longer a rating factor for the deal. Accordingly, Fitch does not expect the appointment of Vertical Capital as collateral manager to result in adverse action with respect to the current rating of the notes.
For other recent CDO manager transfers, see SCI's database.
Job Swaps
CLOs
Permacap completes fund raise
Greenwich Loan Income Fund has placed 11,917,000 new ordinary shares at a price of 50p per share to raise gross proceeds of £6m. Arranged by Panmure Gordon, the placing represents 10% of the company's issued ordinary share capital.
The net proceeds, together with other capital available for investment, are expected to be used to fund the equity element of future funding vehicles in GLIF's US business. The company says it continues to see excellent primary and secondary opportunities in the US market for senior secured loans.
Job Swaps
CMBS
Hatfield ceo moves on
Clarence Dixon has become the latest in a string of high-profile departures from Hatfield Philips. He is understood to be leaving his position as ceo of Hatfield International to go to CBRE.
Job Swaps
Risk Management
Collateral alliance established
Five central securities depositories - the ASX, Cetip, Clearstream, Iberclear and Strate - have formed the Liquidity Alliance, with the aim of providing solutions to the global collateral shortage through the optimisation of collateral pools. The founding members embrace open architecture and are therefore looking to integrating new members going forward. The plan is for participants to meet each quarter to discuss partnership plans, key developments, commercial opportunities in collateral management and to share individual market news while also investing resources in studies and industry research.
Job Swaps
RMBS
More foreclosure settlements reached
Goldman Sachs and Morgan Stanley have reached agreements in principle with the Federal Reserve Board to pay US$557m to help mortgage borrowers. The agreements are similar to those announced two weeks ago between 10 servicers and the OCC and Fed (SCI 9 January).
Goldman Sachs and Morgan Stanley had been subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing. The US$557m payment consists of US$232m in direct payments to borrowers and US$325m of assistance such as loan modifications.
Job Swaps
RMBS
False ratings claims case settled
Egan-Jones Ratings Company (EJR) and its president Sean Egan have agreed to settle charges which were brought by the US SEC last year (SCI 25 April 2012), without accepting or denying the claims. The SEC claimed EJR and Egan made wilful misstatements and omissions when registering to become an NRSRO for ABS.
EJR and Egan have consented to an SEC order which found EJR falsely stated that the firm had been issuing ratings on ABS and government securities since 1995, when in fact it had issued no such ratings prior to its application. When the application was made in July 2008 they claimed to have 150 outstanding ABS issuer ratings and to have issued ratings on a continuous basis for 13 years.
EJR also violated conflict-of-interest provisions. EJR and Egan will be barred from rating ABS or government securities as an NRSRO for at least 18 months and must correct the deficiencies identified by the SEC in 2012 before submitting a report detailing the steps the firm has taken to remedy them.
News Round-up
ABS
Aircraft ABS eyed for yield
Aircraft ABS prices rallied during the third and fourth quarter, as investors sought to add risk, especially in assets that provide extra yield. ABS analysts at Wells Fargo note that the aircraft ABS market has neatly bifurcated by vintage, with limited overlap in the investor bases for the two different types.
Older pre-9/11 deals now price at or near the estimated market value of the collateral. Therefore, in many cases, upside is limited to better-than-expected aircraft sales or changes in cashflow timing.
Meanwhile, single-tranche bonds from the 2006 and 2007 vintages now trade at spreads of 200bp to 300bp. These bonds are more actively traded.
The Wells Fargo analysts say their top pick for the sector is the Aircastle 2007-1 bond. Expenses have been lower for the name as a percentage of revenue than other similar vintage bonds.
"Investors should be aware of a higher concentration in freighter aircraft in Aircastle 2007, but we believe this is mitigated by servicer expertise, as Aircastle specialises in the freighter market," the analysts observe. "BBAIR has recently posted a sharp uptick in accruals to the expense account; we believe investors should closely monitor this trend."
News Round-up
ABS
Future of ABCP to be determined
US ABCP outstandings are likely to remain flat or modestly decline, according to S&P, until the SEC clarifies the extent to which the Volcker Rule will apply to ABCP conduits. If the SEC determines that the Volcker Rule will apply in all respects to ABCP conduits, the agency projects outstandings to decline from US$308.9bn to US$230bn-US$250bn by end-2013. However, if the SEC fully exempts ABCP conduits from the regulation, the market is expected to begin recovering - although still be susceptible to economic risks.
US ABCP outstandings reached a peak of US$1.2trn in July 2007, but have declined sharply since then. Nevertheless, over the last two years S&P has rated eight new conduits - the most recent being RBC's Bedford Row Funding Corp in December -and continues to receive proposals for new ones.
The agency notes that some sponsors are attempting to benefit from increased investor demand by offering a broader range of options - including puttable, investor-option extendible and floating-rate ABCP - with more sponsors anticipated to follow suit. In addition, an increase in new issuance via collateralised commercial paper (CCP) conduits is forecast.
SEC Rule 2a-7 considers repurchase agreements with maturities greater than seven days to be illiquid and thus limits the amount of such investments. But CCP conduits enable money market funds to invest indirectly in repurchase agreements with maturities greater than seven days. Over the last two years, these vehicles have added US$33.1bn in outstandings to the market.
On a more negative note, approximately US$14.5bn of ABCP outstandings will exit the market by January 2014 with the expiration of Straight-A Funding, the largest ABCP conduit. Straight-A Funding was created in 2009 to fund FFELP student loans and had US$40bn in ABCP outstandings at its peak in 2010.
Sallie Mae, for one, is expected to continue issuing FFELP student loan ABS this year to finance the redemption of the loans it sold into the Straight-A programme.
News Round-up
ABS
Tobacco bonds on review
Moody's has placed under review with direction uncertain a number of term tobacco settlement revenue bonds. The transactions are securitisations of payments that major tobacco manufacturers owe to 46 states and certain territories, pursuant to the 1998 Master Settlement Agreement (MSA).
The rating actions are a result of credit implications of the proposed agreement announced on 18 December 2012, to settle payment disputes for the years 2003-2012 between major tobacco manufacturers and 17 states and two territories. The new agreement remains subject to approval by an arbitration panel.
If approved, several provisions of the agreement will reduce cashflow to most term bonds in the securitisations sponsored by states joining the agreement. On a net basis, the joining states will receive only 54% of the approximately US$4bn share under dispute - significantly less than the 100% that Moody's had expected.
In addition, by setting forth a new formula for addressing future payment disputes, the agreement suggests that similar payment disputes and concomitant settlements at less than 100% could continue for a long period of time - potentially for the entire term of the bonds. These two provisions of the agreement also indirectly impact the securitisations sponsored by the non-joining states because they set a precedent that their recoveries of future disputed amounts can be less than 100% and that the payment disputes will continue for a long period of time, both credit negatives.
Moody's is currently in the process of correcting certain errors in the cashflow models used in rating tobacco settlement revenue bonds. The agency expects that in some cases the correction will have a positive credit impact on the term bonds; in other cases, the correction will likely have a slightly negative credit impact on the bonds.
News Round-up
ABS
Fall in bankruptcies bodes well for performance
Personal bankruptcies in the US fell by over 14% last year, exceeding Fitch's forecast of 11%. This marked the second annual decline since the Bankruptcy Abuse Prevention and Consumer Protection Act was passed in 2005.
Fitch projects bankruptcies to fall by another 6%-7% in 2013. This comes as the amount of consumer credit continues to rise.
Total consumer credit reached nearly US$3trn in November 2012, up by 6% over 2011. Of that number, nearly US$2trn came from non-revolving credit sources, such as auto and student loans.
"Though consumers are taking out a record number of car and student loans, they continue to do a commendable job of paying that debt off," comments Fitch md Michael Dean. "Momentum in both the housing and equity markets should also help drive personal bankruptcies lower."
This continues to bode well for ABS collateral performance, which has been stellar for both credit card and auto ABS. Nevertheless, credit card delinquencies and charge-offs are expected to begin inching up towards historical norms in the coming months, with the same historical levelling-off also holding true for auto loans.
News Round-up
Structured Finance
Russia primed for covered bond expansion
The covered bond market in Russia is expected to expand rapidly as the instrument proves to be an effective funding source for the country's residential mortgage market. Moody's last month assigned a first-time Baa1 rating to the series 09-IP covered bonds issued by DeltaCredit Bank, the first rating issued in the jurisdiction under the agency's covered bond methodology.
Covered bonds issued under the Russian legal framework offer the same fundamental protections as other covered bonds rated by Moody's, with investors benefiting from both recourse to the issuer and to a cover pool. The subject cover pool in the DeltaCredit deal consists of 2,124 prime residential mortgage loans originated by the bank as of 31 December 2012, with a total outstanding balance of RUB5bn. The properties securing the loans are all in Russia.
Russian law differs from other typical covered bond laws in a number of ways, however. On the credit positive side, issuer discretion to materially change the credit quality of the cover pool is restricted and the legal framework discourages the issuance of multiple bonds out of a single programme. On the credit negative side, covered bonds accelerate after issuer default, which increases refinancing risk.
Furthermore, given that the covered bonds immediately become due upon issuer default, it is very unlikely that timely payments to investors will continue in such a scenario. This risk is reflected by the assignment to the bonds of Moody's lowest timely payment indicator (TPI) of 'very improbable'. The TPI of 'very improbable' for this transaction constrains the rating of the covered bonds to A3, with the foreign-currency ceiling for Russian transactions at A2 and the local currency ceiling at A1.
The collateral score of 17.9% indicates average credit risk for the collateral in the cover pool compared with Russian RMBS transactions that Moody's has rated. By global comparison, however, this collateral score is relatively high for a purely residential mortgage-loan portfolio backing a covered bond.
"We expect the Russian covered bond market to act as an important funding source for the Russian residential mortgage market in the near future," Moody's concludes. "The initial investor interest that the issuer reportedly has received indicates that covered bonds are increasingly seen as a viable alternative to the RMBS issuance that has dominated the Russian securitisation market thus far."
News Round-up
Structured Finance
CRA work plan released
The European Securities and Markets Authority (ESMA) has published its '2013 CRA Supervision and Policy Work Plan', which sets out the key elements of its supervisory programme for the 19 registered and one certified credit rating agencies (CRAs) in the EU. The aim is to embed good practices internally at CRAs and to ensure that they meet the requirements of the CRA Regulation.
The key areas of supervisory focus in 2013 are: thematic reviews on the rating processes for structured finance products and sovereign credit ratings; raising standards of compliance with the obligations of the CRA Regulation; ensuring small and medium-sized CRAs meet the required standards; and 'policing the perimeter' to ensure that all firms operating within the scope of the CRA Regulation are registered and subject to supervision.
The bulk of ESMA's policy work, meanwhile, will be driven by the new CRA 3 legislation. In particular, the Authority will focus on producing the draft Regulatory Technical Standards regarding the development of the European rating platform, the fees charged by CRAs to their clients and the new provisions on the transparency requirements for structured finance ratings. In addition, it will implement the new supervisory tasks on the prevention of conflicts of interest regarding CRAs' significant shareholders and the new provisions for sovereign debt ratings.
News Round-up
Structured Finance
Regulatory change could spur Aussie issuance
Regulatory changes could have a significant impact on Australian structured finance issuance in 2013, Fitch says. Specifically, the potential revision of Prudential Standard APS120 would have a direct impact on issuance levels by determining the capital treatment of securitisations and potentially opening up new issuance structures.
A draft paper on APS120 is expected early this year. The possible changes mooted by the Australian Prudential Regulation Authority include allowing date-based call mechanisms and allowing an issuer to own more than 20% of its own issuance if securitisation is used for funding purposes.
As a result, the changes may allow the introduction of RMBS master trusts for Australian issuers. If so, at least the major Australian banks - already the dominant RMBS issuers in the country - can be expected to make use of the new structures, which will provide them with greater flexibility and speed in coming to market.
"If the APS120 revisions are forthcoming, we would expect an even greater increase in Australian SF supply this year, on top of the 10%-20% growth we already forecast," Fitch notes. "This forecast reflects more competitive pricing following a period of spread tightening, and potentially higher demand for Australian RMBS by offshore investors."
These pricing and demand considerations also apply to non-bank issuers. If spreads continue to tighten, the agency anticipates non-banks in both the prime and non-conforming RMBS space to increase originations of loans with more confidence of continuity of funding. This, in turn, can be expected to result in greater issuance towards the end of 2013 and into 2014.
Australian SF volumes in 2012 totalled A$18.5bn, with RMBS the dominant asset class once again, accounting for A$13.4bn in issuance. ABS is expected to have a strong year and continue to grow its market share of issuance.
News Round-up
Structured Finance
LEI implementation awaited
Fitch Solutions says that the introduction of global legal entity identifiers (LEIs) in March 2013 - designed to accurately identify which legal entities are involved in financial transactions - is a critically important step, but the rate of adoption by global regulators will determine the timeframe in which the benefits are fully realised.
LEIs are expected to provide many benefits, such as improved data aggregation and analysis, making it easier to combine and verify data within individual firms to support micro- and macro-prudential risk assessment. They will also facilitate enhanced regulatory supervision through improved information-sharing about legal entities between regulators and across borders. This is key for cross-border firms, whose business lines are overseen by multiple regulators.
In addition, banks are anticipated to benefit from reduced operational costs. Large US banks reportedly spend US$250m-US$1.25bn annually on processing non-standard, faulty or duplicated data.
However, the transition is likely to be slow and potentially difficult, according to Fitch. "Ultimately, the full extent of these benefits will only be realised when the LEI has been shown to be functional and effective, and regulators - with a combined critical mass of entities within their jurisdictions - mandate their use. Market participants will also need time to conduct the mapping exercises and system upgrades required."
As of 10 January, the LEI Implementation Group charter had been endorsed by the G20, 45 authorities had assented to the charter and a further 15 authorities acting as observers meet the criteria for the formation of the Regulatory Oversight Committee (ROC). The ROC will take full responsibility for the global LEI system in late January.
The ability to quickly and efficiently map LEIs to a proprietary universe of entities will vary by institution, but quality of existing entity reference data will be critical. Matching to internal systems is likely to be based on official (legal) name, headquarter and formation address. This process is expected to be a manually-intensive and costly process, with coverage gaps and inconsistencies across market participants for at least the short term.
News Round-up
Structured Finance
Assured wraps targeted
Moody's has downgraded the ratings of 225 classes of US structured finance securities wrapped by Assured Guaranty Municipal Corp (AGM), Assured Guaranty Corp (AGC) and their affiliated insurance operating companies. The affected securities include certain RMBS, ABS, structured notes and Trups CDOs.
The action is solely driven by the agency's downgrade of the insurer's insurance financial strength (IFS) ratings (SCI 18 January). Moody's ratings on structured finance securities that are guaranteed by a financial guarantor are generally maintained at a level equal to the higher of: the rating of the guarantor; or the published/unpublished underlying rating.
News Round-up
Structured Finance
Spanish counterparty review completed
Fitch has affirmed 32 tranches, upgraded four tranches, revised the rating watch on four tranches to positive, placed three additional tranches on rating watch positive and downgraded 26 tranches of 52 Spanish structured finance (SF) transactions. 66 tranches of 31 Spanish RMBS transactions remain on RWN pending a full review of the performance of their collateral portfolios, given the deteriorating conditions in the housing market.
The rating actions come after a review of the transactions' counterparty exposure, reflecting Fitch's SF counterparty criteria. The tranches were placed or maintained on RWN in July 2012, following counterparty downgrades and in the absence of associated remedial actions as envisaged in the transaction documentation (SCI 17 July 2012). The agency says it has taken rating actions as adequate time to implement remedial actions has now elapsed.
Fitch has discussed the counterparty positions with the transaction parties over recent months and understands that further modifications to transaction structures may still be made. The agency will consider the effects of any further remedial action that is completed and may adjust its ratings accordingly.
News Round-up
Structured Finance
CRE CDO late-pays end 2012 up
Though a decline since the previous month, US CRE CDO late-pays finished the year higher than at year-end 2011, according to Fitch's latest index results for the sector. CRE CDO delinquencies for December came in at 13.4%, down from 13.7% in November.
However, they are higher than the 12.5% observed in December 2011. The historical high-water mark for CRE CDO delinquencies remains 14.8% in April 2011.
As of year-end 2012, only two Fitch-rated CRE CDOs remained in their reinvestment periods, both of which are currently failing overcollateralisation (OC) tests. Total CRE CDO collateral is down by US$2.9bn since 2011.
Loans secured by land remained the property type with the highest delinquency rate at 43% to close out 2012. However, hotel loans now have the second highest delinquency rate at 20%. The most significant decline is attributable to multifamily properties, which have dropped to a 7% delinquency rate from 14% in 2011.
News Round-up
Structured Finance
CRA 3 approved
New credit rating agency rules - CRA 3 - have been approved by the European Parliament (SCI 6 December 2012). They allow rating agencies to issue unsolicited sovereign debt ratings only on set dates and enable private investors to sue them for negligence. Agencies' shareholdings in rated firms will also be capped, to reduce conflicts of interest.
In addition, the rules ensure that ratings are clearer by requiring agencies to explain the key factors underlying them. Ratings must not seek to influence state policies and agencies themselves must not advocate any policy changes.
Further, unsolicited sovereign ratings can be published at least two but no more than three times a year, on dates published by the rating agency at the end of the previous year. These ratings can be published only after markets in the EU have closed and at least one hour before they reopen.
By 2020, no EU legislation should directly refer to external ratings and financial institutions must no longer be obliged to automatically sell assets in the event of a downgrade. The European Commission should also consider developing a European creditworthiness assessment to reduce the over-reliance on ratings.
News Round-up
Structured Finance
Assured IFS ratings hit
Moody's has downgraded the insurance financial strength (IFS) rating of: Assured Guaranty Municipal Corp (AGM) to A2 from Aa3; Assured Guaranty Corp (AGC) to A3, from Aa3; and Assured Guaranty Re (AGRe) to Baa1 from A1. At the same time, the agency downgraded the senior unsecured debt ratings of both Assured Guaranty US Holdings and Assured Guaranty Municipal Holdings to Baa2, from A3. The outlook for the ratings is stable.
The rating action reflects Moody's downward reassessment of Assured's business franchise, expected future profitability and financial flexibility. "Assured operates in an industry that has not recovered from the financial crisis and - like its peers - will continue to struggle in the face of declining fundamentals, including a dramatic reduction in insurance usage, modest profitability and still-meaningful legacy risk," the agency notes.
While the characteristics of Assured's insured portfolio's credit quality and its capital adequacy generally remain strong, the insurer's positioning on key dimensions of financial strength - namely franchise strength, profitability and financial flexibility - have weakened over time, largely as a result of changes in the financial guarantor industry and the broader economic environment. The combination of these characteristics - along with some residual uncertainty with respect to the potential for outsized losses relative to capital in the existing insured portfolio, as well as more general unknowns with respect to future insured portfolio production and capital retention - lead to the overall A2 IFS rating assessment of the lead operating company.
Moody's assessment of AGM's franchise value and strategy balances the insurer's position as the sole active financial guarantor to survive the financial crisis intact against the dramatic decline of the industry. Structured finance business has virtually disappeared, according to the agency, and the target market for insuring US public finance issuance has also declined.
In terms of portfolio characteristics, AGM's insured portfolio is somewhat bifurcated from a risk perspective, with a historically low-loss core municipal book as well as exposure to certain sectors and credits experiencing material credit stress. In particular, the portfolio has material exposure to legacy mortgage-related risks.
Regarding capital adequacy, Moody's assessment of AGM's point-in-time capital adequacy is very strong, reflecting the relative emphasis on municipal risks as well as loss-mitigation activities related to RMBS. Finally, while the insurer sustained large losses during the financial crisis as a result of claims related to RMBS, profitability has rebounded in recent periods.
For the three years ended 31 December 2011, AGM recorded an average statutory return on equity of 15.7%, aided by representation and warranties recoveries from mortgage originators and sponsors of RMBS. Profitability has also been enhanced by large opportunistic purchases of AGM-insured RMBS securities at deep discounts, which are financially beneficial but suggest a lack of investor confidence.
Evaluated over longer time horizons, however, profitability has weakened notably, with 5-year and 10-year average statutory returns on equity at 0.5% and 6.8% respectively. Given the low levels of new business production, Moody's believes AGM's profitability will remain under pressure.
News Round-up
CDS
Edison auction results in
The final price for Edison Mission Energy CDS was determined to be 48.5. At an auction held yesterday, 12 dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the entity.
News Round-up
CDS
LCDS auction due
An auction to settle the credit derivative trades for Pages Jaunes Hold Co (Mediannuaire) LCDS is to be held. The date of the auction will be advised in due course.
News Round-up
CDS
Europe leads sovereign CDS rally
Global sovereign CDS prices tightened by 16% in 4Q12 overall, as fears of a euro exit were allayed, according to CMA (part of S&P Capital IQ). The firm's latest Global Sovereign Debt Credit Risk Report names its top-ten most and least risky sovereigns, as well as the best and worst performers of the quarter.
The report states that Western Europe continued rallying from Q3 into Q4, with spreads tightening by 19% overall. "Nordic countries ended a strong quarter, with Sweden, Norway, Finland and Denmark occupying the top four places in the table of the ten least risky sovereign credits, and Sweden edging Norway off the top spot with five-year CDS at 19bp," says Jav Bose, head of data products at CMA.
Austria and the Netherlands enter the table, with spreads - at 45bp and 46bp respectively - aligning with the strong economies of Germany and Switzerland. Spain and Italy - seen as the key economies in Southern Europe - tightened by 23% and 19% respectively, while Ireland tightened by 31% to close the year at 218bp.
As the US fiscal cliff and debt ceiling concerns continued into the year end, meanwhile, US CDS spreads remained relatively stable and range-bound - ending the year at 38bp. However, the US slipped down two places in the rankings to fifth least risky sovereign credit.
According to CMA's data, the only sovereign to widen significantly in the quarter was Argentina, with spreads widening by 52%. "Investors in Argentinean debt faced a roller-coaster ride in Q4 as five-year CDS prices - expressed in upfront terms - reached a high of 4832bp at the end of November, but dropped 10% in a day on 29 November," comments Bose. "This was due to concerns of a default following an appeal court ruling allowing Argentina more time to pay 'hold-out investors'." Ending the quarter on 1450bp, Argentina occupies the position of most risky sovereign credit in Q4.
News Round-up
CLOs
Euro SME CLOs on review
S&P has placed or kept on credit watch negative its ratings on 100 tranches in 33 European SME CLOs, following an update to its criteria that addresses credit quality of the securitised assets and payment structure/cashflow mechanics (SCI 11 January). The move affects approximately 33.6% (by number) of the European SME CLO tranches that the agency currently rates.
The originator's internal SME scoring system is used as a building block in S&P's rating analysis. Therefore, the criteria apply where such an internal tool exists and has ranking power considered suitable for conducting the analysis. Based on the criteria, originators may be required to provide additional data in order to determine the average portfolio assessment.
S&P has placed or kept on credit watch negative the ratings on transactions where the agency believes there is at least a one-in-two chance that ratings on the transaction will be lowered, following the application of the criteria. It intends to complete the resolution of the credit watch placements over the next six months.
News Round-up
CMBS
CMBS pay-offs analysed
About 72% of the universe of US conduit CMBS loans that were due to pay off in 2012 and were still outstanding as of July 2011 paid off last year, according to Trepp. Of that number, 37% paid off in the six months prior to maturity, 19% paid off on the balloon date, 9% paid after the maturity date and 7% paid off with a loss of less than 2% of the loan balance. Of the 28% of the loans that did not pay off, 18% remain at large, 5% have experienced a loss and 5% have been modified.
News Round-up
Risk Management
SDR 'bundling' concerns raised
The DTCC has filed a comment letter with the CFTC expressing concern over the lack of clarity as part of an overall arbitrary and inconsistent rulemaking process to determine the regulatory reporting structure for OTC derivatives. The letter details the most recent in a series of what the DTCC says are CFTC missteps that have "raised serious questions about decision-making at the agency".
In its letter, the DTCC urged the CFTC to address inconsistencies regarding the conclusion of its recent swaps data reporting public comment period, as well as to publicly address how it plans to consider third-party comments and questions raised about the impact of the CME's proposed Rule 1001. The letter also asks the Commission to extend the review period by an additional 45 days in order to appropriately analyse the novel and complex issues associated with Rule 1001. The rule provides that all swaps cleared by CME's clearing division shall be reported to CME's swap data repository.
The DTCC says that the rule would allow "inappropriate commercial bundling" of swap data repository (SDR) and clearing services by CME and other DCOs, and eliminate the ability of market participants to choose their preferred SDR. The rule would require, as a condition for using CME clearing services, that all CME customers have their cleared trades directed to CME's own captive SDR. This would undermine the intent of Dodd-Frank's provisions on fair and open access, market protection, trading transparency, risk mitigation and anti-competitive practices, according to the DTCC.
In addition to the comment letter, it submitted a NERA report, which outlines guidance for the Commission as it considers the anti-competitive and cost-benefit ramifications of Rule 1001.
News Round-up
Risk Management
Data coverage expanded
The Fitch Research product now includes proprietary market-based data and fundamental financials for over 9,500 new unrated entities. The aim is to provide subscribers with further insights into the direction of credit risk for entities where the availability of independent data may be more limited, Fitch Solutions says.
The data covers CDS spreads, CDS implied ratings and other market-based indicators. "With the investable credit universe ever expanding, especially in emerging markets, subscribers will now be able to leverage Fitch Solutions' spectrum of credit risk indicators and overlay with longer-term fundamental research to gain a transparent and comprehensive view of credit risk for a large portion of the market," comments Gloria Aviotti, md at Fitch Solutions.
News Round-up
Risk Management
Due diligence enhancements introduced
Principia has released system enhancements aimed at addressing the US Market Risk Final Rule securitisation investment guidelines. The ruling, which came into force on 1 January 2013, implements due diligence requirements for US banks that must now demonstrate adequate independent credit analysis, risk management and timely reporting when investing in structured finance assets.
Version 6.8 of Principia's Structured Finance Platform delivers enhanced cashflow forecasting analytics and asset interfacing capabilities to fully integrate and utilise market pricing, collateral performance and cashflow models from the leading data providers in the ABS industry. Consolidating the universe of data into a single coherent portfolio, risk and operations platform is fundamental to satisfying the requirements of the Market Risk Rule, Principia notes.
The American Securitization Forum in December released an implementation guide for its members, following consultation with the market about how to best address the operational requirements of the due diligence standards. Tom Deutsch, executive director of the ASF, comments: "Securitisation investors need the operational capabilities to access and make use of all the relevant data that will allow them to understand, manage and report on the key structural features and collateral performance of transactions. The Dodd-Frank Act has forced the US bank regulators to a system where credit ratings cannot be used as a benchmark for creditworthiness for ABS and MBS."
News Round-up
RMBS
'No major suprises' in servicing rules
The CFPB has issued its final mortgage servicing rules, which the majority of servicers must adhere to by 10 January 2014. The final rules are based on the servicing standards set by last year's national servicer settlement and the OCC consent order issued in April 2011 (SCI passim).
New protections under the rules for struggling borrowers include: restricted dual-tracking; notification of foreclosure alternatives; direct and ongoing access to servicing personnel; a fair review process; and no foreclosure sale until all other alternatives have been considered. The rules also aim to bring greater transparency to the market by mandating: clear monthly mortgage statements; early warning before interest rates adjust; and the provision of options for avoiding costly "force-placed" insurance. Finally, the rules ensure that: payments are promptly credited; requests to pay off balances receive prompt responses; errors are corrected and information is provided quickly; and servicers maintain accurate and accessible documents and information.
MBS analysts at Bank of America Merrill Lynch note that there are no major surprises in the final rules and point out that a high percentage of the servicing industry has many of the standards already in place. "We believe the rules related to the servicing of delinquent borrowers and loss mitigation practices will continue to have the largest impact on the mortgage servicing industry," they add. "The 120-day period servicers must wait before filing for foreclosure, prohibition of dual-tracking and strict guidelines on when and how loss mitigation options are offered to distressed borrowers may extend timelines and make the foreclosure process more costly."
Recognising that small servicers approach servicing quite differently, the CFPB made certain exemptions to the mortgage servicing rules for small servicers that service 5,000 or fewer mortgage loans that they or an affiliate either own or originated. These servicers are mostly community banks and credit unions servicing mortgages for their customers or members.
News Round-up
RMBS
Clarity on downpayments required
Fitch says that the recent qualified mortgage (QM) announcement (SCI 11 January) is a positive step toward finalising risk retention and premium capture rules for securitisers of residential mortgages. Given that the QRM definition for exemption from these rules is linked to that of the QM, the back-end debt-to-income (DTI) requirement for a QRM is now clear. However, a key component of the QRM guideline not addressed by the CFPB is the downpayment requirement.
The agency believes that finalisation of the QRM hinges on that definition, which is expected to be determined sometime in 2013. It says that ultimately the re-start of the private label RMBS market depends on this definition, as well as clarity on risk retention rules, the application of Basel 3 and other liquidity rules, and a decision on agency guarantee fees.
With respect to non-subprime mortgage lending, the future is more uncertain, Fitch notes. The final rule makes a meaningful distinction between two types of mortgages based on their risk profile and pricing. For 'higher priced' mortgage loans generally made to riskier borrowers, the final rule provides for a rebuttable presumption, allowing for borrowers to take legal action against the lender and its assignees if they can show that there was insufficient income to meet living expenses at the time the loan was originated.
In defining QM, the CFPB established legal protection for lenders if a loan meets certain standards. Specifically, a lender will be presumed to be in compliance with the ability-to-repay requirement and, thus, given a safe harbour from legal action if a mortgage loan is not a higher priced mortgage, is underwritten to eight factors and meets a number of criteria.
The 43% DTI threshold casts a wide net for qualifying jumbo prime and possibly strong alt-A credit quality borrowers, according to Fitch. Roughly 83% of the loans underlying recent RMBS would likely comply with the QM standard.
News Round-up
RMBS
Rental 'equity' structures critiqued
A legal structure that potential issuers have proposed for transactions backed by cashflows from single-family rental properties poses substantial credit risks, according to Moody's. In the so-called 'equity' structure - which differs from the legal structure for most ABS - investors will not have the benefit of a direct lien on the underlying collateral. Instead, these structures provide investors with a lien on the equity of the entity that owns the single family homes.
Moody's notes that such a structure would expose investors to significant risks not present in typical securitisations, including the risk of: the deal not having senior rights to the properties following a sponsor's bankruptcy; the unauthorised sale of the properties; and other liens trumping the securitisation's claim on the properties. As a result, although these structures are more economical for the issuer owing to the lack of mortgage origination and registration costs, the credit quality of these structures is unlikely to be strong enough to support bonds with a rating higher than Baa, absent strong mitigating factors such as a highly rated sponsor.
If a sponsor were to become bankrupt and the bankruptcy court were to substantively consolidate it with the issuing entity that owned the properties, mortgages would preserve the investors' rights to the properties, but mere equity interests in the issuer would not. Further, the upside of a successful substantive consolidation is much greater for a sponsor's creditors with an equity structure rather than a mortgage structure. A mortgage structure is a strong deterrent to legal challenges, Moody's reports.
Further, the lack of mortgages on the properties exposes investors to the risk of unauthorised sales of properties and addition of liens, eroding the issuer's value in the properties. These risks are less significant than bankruptcy risk because in the normal course the whole pool is unlikely to suffer these issues, only a portion of the pool.
A transaction with an equity structure and a low- or unrated sponsor will consequently need to have significant third-party oversight in place for the bonds to achieve Baa ratings. Such oversight would include regular attestations as to compliance with SPV covenants, as well as monitoring of the issuer's ownership of the properties. Transactions with highly rated sponsors have the ability to achieve higher ratings even with an equity structure because of the reduced risk of a sponsor bankruptcy.
Moody's suggests that the type of structure will likely hinge on whether sponsors believe that investors' willingness to pay for the additional protection that having mortgages affords will outweigh the costs of originating and registering the mortgages. Arguably, mortgages - which may be very expensive to originate - are not necessary to make the mechanics of a single-family rental property securitisation work. Even without mortgages, an equity structure allows the securitisation to foreclose on the equity interest of the issuer and sell the properties if the income from renters is insufficient to pay off bondholders, albeit with substantial additional risk borne by the investors.
News Round-up
RMBS
TBA liquidity underlined
The presence of the to-be-announced (TBA) market provides greater liquidity to agency MBS, according to a recent New York Fed study. Authors James Vickery and Joshua Wright document in their report the market's robust liquidity, even during the financial crisis.
The authors also present preliminary evidence that the liquidity of the TBA market raises MBS prices and lowers mortgage interest rates. This analysis makes use of the fact that not all agency mortgages and MBS are TBA-eligible. Based on this suggestive evidence, the liquidity benefit of TBA eligibility for agency MBS yields and mortgage interest rates is of the order of 10-25bp, as observed in 2009 and 2010.
The authors suggest that "evaluations or proposed reforms to US housing finance should take into account potential effects of those reforms on the operation of the TBA market and its liquidity".
News Round-up
RMBS
Volume of aged loans in foreclosure falls
The number of aged loans in foreclosure fell for most servicers of US RMBS in 3Q12. This is a promising trend for servicers, according to Moody's, and indicates that servicers are finally putting behind them the operational and regulatory issues that plagued them in the past and are taking the steps necessary to address their backlogged foreclosure inventory.
However, foreclosure timelines continued to extend for all servicers. Some additional third-quarter trends noted by Moody's were that cure and cashflow rates worsened for most servicers, collections metrics for Alt-A and subprime loans improved and modification re-default rates increased as re-modifications rose.
In the jumbo sector, all servicers except CitiMortgage (which has by far the smallest volume of aged loans in foreclosure in the jumbo sector) saw a slight uptick in the third quarter. In the subprime sector, while the overall volume of aged loans in foreclosure dropped by 2.1%, Bank of America (which has the largest volume in the sector) experienced a 3.2% increase quarter over quarter.
Timelines for completed foreclosures continued to lengthen in the third quarter as servicers worked their way through the aged pipeline. In addition, court systems in judicial states such as New York, New Jersey and Florida remained overwhelmed by the sheer number of cases to be processed. REO sale timelines remained virtually unchanged over the past three quarters.
The improvement in the economy and the success of previous modifications resulted in the improved current-to-worse roll rates for all servicers, with the exception of CitiMortgage, in their jumbo and Alt-A portfolios.
As the pool of potential candidates continues to thin, a drop in servicer modification volumes caused the total cure and cashflowing rate metric to decline for most servicers and loan types. Only Ocwen's subprime portfolio and Chase for all loan types experienced an increase in the third quarter over the second quarter.
Re-modifications rates rose for the majority of servicers and products from the previous quarter. In particular, GMAC's re-default rate for jumbo increased to 45% as its level of re-modifications increased and Ocwen's subprime re-default rate rose to nearly 55% - mainly due to the performance of distressed portfolios that it had previously acquired.
News Round-up
RMBS
'Higher-priced' mortgage appraisal rules set
The US Fed, CFPB, FDIC, FHFA, NCUA and OCC have released the final rule that establishes new appraisal requirements for 'higher-priced mortgage loans' under Dodd-Frank. Mortgage loans are higher-priced if they are secured by a consumer's home and have interest rates above certain thresholds.
For higher-priced mortgage loans, the rule requires creditors to use a licensed or certified appraiser that prepares a written appraisal report based on a physical visit of the interior of the property. The rule also requires creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.
If the seller acquired the property for a lower price during the prior six months and the price difference exceeds certain thresholds, creditors will have to obtain a second appraisal at no cost to the consumer. This requirement for higher-priced home-purchase mortgage loans is intended to address fraudulent property flipping by seeking to ensure that the value of the property legitimately increased.
The rule exempts several types of loans, including qualified mortgages, temporary bridge loans and construction loans, loans for new manufactured homes and loans for mobile homes, trailers and boats that are dwellings. The rule also has exemptions from the second appraisal requirement to facilitate loans in rural areas and other transactions.
The rule will become effective on 18 January 2014. The regulatory agencies intend to publish a supplemental proposal to request additional comment on possible exemptions for 'streamlined' refinance programmes and small dollar loans, as well as to seek clarification on whether the rule should apply to loans secured by existing manufactured homes and certain other property types.
News Round-up
RMBS
Mortgage market index debuts
Fitch has begun publishing a new quarterly mortgage market index, which measures the percentage of loans that are seriously delinquent among US private label securitised mortgage loans. The aim is to highlight performance trends in legacy and new issue RMBS, house price conditions and mortgage market developments.
Fitch's 60+ day delinquency index improved to 28.6% by end-4Q12, compared with 30.6% at end-4Q11. Driving the improved delinquency rate is positive trends for both Alt-A and subprime RMBS, along with post-2005 prime deals.
"Perhaps the most notable factor driving improved delinquency performance has been positive selection among remaining borrowers, along with loan modifications and positive home price trends," comments Grant Bailey, md at Fitch.
Home prices increased by roughly 5% nationally and by over 7% in California from the start of 2012 to the beginning of 4Q12. Helping the price increase was low mortgage rates and a lower percentage of distressed property liquidations.
That said, Fitch still sees risk in certain regions. "The Northeast, in particular, has not yet seen the significant declines seen in the rest of the country and as such is vulnerable to further home price declines," Bailey adds.
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