News Analysis
Structured Finance
Counterparty conundrums
Investors, issuers adapting to swap-related dilemmas
Given the difficulty of replacing counterparties and expense of posting collateral for cashflow securitisations, high volumes of swap-related rating agency confirmations look set to continue, potentially eroding investor protections in their wake. At the same time, investor acceptance of AA/A rated senior paper is growing, together with appetite for deals without embedded derivatives risk.
Peter Nowell, head of ABS trading at BNP Paribas, says that the Eurosail-UK 2007-3BL case (SCI 10 May) prompted a great deal of scrutiny around derivatives risk in European cashflow securitisations. Equally, rating agencies have become very conservative in their treatment of derivatives, requiring downgraded swap counterparties to post additional collateral.
"The average bank rating is single-A, which is close to the rating agency threshold. Only a few players with the requisite ratings remain, so counterparty functions are increasingly difficult to replace. For deals with sovereign caps, there is little point in replacing a downgraded counterparty anyway because the transaction is highly unlikely to return to being rated triple-A," Nowell notes.
He adds: "Given that it's becoming more expensive for banks to act as swap counterparties, transactions are emerging in Europe that don't have derivatives embedded, such as fixed-rate auto ABS. Similarly, because cross-currency swaps are prohibitively expensive, dollar-denominated issuance is drying up."
Adding to the difficulty of acting as a swap counterparty is the fact that rating agencies have a different approach to counterparty risk, if they have one at all. Nowell suggests that - with the EU encouraging more rating agencies to enter the market - if the established agencies are seen as overly restrictive regarding derivatives risk, it could encourage issuers to mandate the newer entrants instead.
Moody's recently published a request for comment that replaces its initial July 2012 RFC on assessing the linkage to swap counterparties in cashflow securitisations (SCI 23 July 2013). No substantive changes have been made to the original approach, albeit there is no longer a distinction between swap counterparty 'linkage' and 'delinkage' (see separate box).
Nevertheless, research undertaken by ex-Moody's svp William Harrington shows that the agency has issued 96 rating agency confirmations (RACs) covering 177 ABS transactions between the release of the two documents. For at least 78 of the RACs, the swap counterparty successfully petitioned Moody's to be allowed to amend an existing derivative contract with an ABS transaction so as to avoid posting collateral and/or finding a replacement counterparty.
The RACs were issued to 25 swap counterparties: 20 to Barclays; 12 to RBS; seven RACs each to BNP Paribas, UBS and Morgan Stanley; five RACs each to Banco Santander and Natixis; four RACs each to Deutsche Bank and Bank of America Merrill Lynch; three RACs each to JPMorgan and UniCredit; two RACs each to Banca IMI, SG, Credit Agricole, Goldman Sachs and DZ Bank; and one RAC each to Banca Intesa, Standard Bank of South Africa, Banque AIG, Merrill Lynch Derivative Products, National Bank of Greece, Erste Abwicklungsanstalt, Capital Home Loans, Bankia and Intesa Sanpaolo.
Harrington suggests that such actions by Moody's are essentially "giving swap providers a free pass to unilaterally write-off long-standing contractual obligations without obtaining consent of ABS noteholders or providing consideration in the form of alternative protections or compensation". He points to 20 near-identical RACs covering 38 ABS transactions that were obtained by Barclays so as to avoid posting collateral, despite having been downgraded to A2 in June 2012.
Given the go-ahead by Moody's RACs, Barclays lowered collateral triggers in these transactions to below A2, effectively one or more full rating notches lower. Harrington cites a RAC issued by Moody's with respect to Hercules (Eclipse 2006-4) as an example.
Moreover, 14 of the Barclays RACs covering 29 ABS transactions contained the caveat that a downgrade of affected ABS may follow the implementation of the swap comment request. One example of this is a RAC issued with respect to Sherwood Castle Funding 2006-1. Interestingly, Moody's also assigned new Aaa ratings in April to Permanent Master Issuer series 2013-1 with a similar caveat - that a downgrade may follow the implementation of the swap comment request.
The seven RACs provided to Morgan Stanley, meanwhile, were related to seven ABS transactions. Harrington notes that in each case Baa1-rated Morgan Stanley was obliged to find a replacement counterparty for a deep-in-the-money swap but instead retained the swap on its own book, leaving the ABS exposed to making a termination payment in the event of a Morgan Stanley insolvency. A RAC in respect of Broadgate Financing is one example here.
He adds that other noteworthy Moody's RACs have been issued for: Felsina Funding (where the swap counterparty - Banca IMI - unilaterally removed the swap triggers from the swap agreement); Claris Finance, Marche Mutui and BCC Mortgages (where the swap counterparty - SG - failed to post collateral, with the caveat that a downgrade may follow completion of the RFC); and 16 RESI and RESIX transactions issued from 2003 to 2006 (where the swap counterparty - Bank of America - took no actions following its downgrade of June 2012).
Meanwhile, Fitch and S&P also continue to issue RACs, covering all asset classes and jurisdictions. Over the last year, for example, these have involved structural/waterfall changes, account additions/removals, counterparty changes and changes to credit support.
Neither is Moody's the only rating agency that assumes zero risk interest rate, currency and basis derivatives when assigning new triple-A ratings. "The other rating agencies have already diluted their swap methodologies in order to kick the can down the road rather than address rating implications for ABS," Harrington explains.
He says that the key sticking point in rating methodologies is the 'too big to fail' assumption with respect both to swap providers and structured finance transactions that is used explicitly by Moody's and implicitly by other agencies. "At present, Moody's senior unsecured ratings of swap providers are typically rated two to three notches above 'standalone' ratings on the explicit assumption that they will receive government support. DPC ratings are also based on this assumption."
Harrington explains that ABS ratings also embed 'too big to fail' assumptions via 'linkage' to a swap provider. "For the vast majority of new ratings, Moody's and competitors assign an expected loss of zero to a derivative contract and assume that a swap provider will never default and leave an ABS either unhedged or owing a termination payment. For remaining ABS ratings, the swap provider's own 'too big to fail' rating often serves as a basis for capping linked ABS ratings. Hypothetically, if a failed bank isn't bailed out, the rug could be pulled out from under this assumption - with many ABS being impacted at once."
Assessing derivatives risk in securitisation structures could therefore present an opportunity for a second generation of evaluators. "Given that hedges are assumed to remain intact through the life of a transaction, valuations that take counterparty risk into account were historically never modelled. Breaking out asset risk and servicer risk are commonplace in the valuations process, but questioning assumptions regarding derivative risk has only recently emerged. Concentration risk of the swap provider, flip clauses and event risk are the main areas that valuations providers should consider in this regard," Harrington says.
Adding to concerns about securitisation swaps is the apparent failure of the industry (so far) to secure regulatory confirmation that the instruments can't be cleared, which leaves an open question as to the swap's enforceability. Together with rating agency swap linkage requirements, this may potentially drive some dealers to stop writing swaps for securitisations, according to Harrington.
"It's still early days, but it's possible that some players will become more selective about their ABS counterparties or won't write a contract without hitting all of the compliance checks. It depends on a dealer's franchise value of writing securitisation swaps," he observes.
He adds: "In particular, the already moribund 'replacement' market may shrivel further. Taking compliance risk for the sake of new business is one thing; doing so for a portfolio of legacy swaps with an impaired or defunct swap provider is quite another."
At present, only three major swap dealers in the US, one DPC affiliate, a few major European banks and a small number of smaller European banks write new securitisation swaps - and only a handful of these also 'replace' existing securitisation swaps. "Given the concentration by asset class and geographical region, the impact of one provider failing has the potential to impact the entire ABS market," Harrington continues.
Meanwhile, investors are increasingly comfortable with owning downgraded senior tranches with the correct subordination and structure, according to Nowell. "Many legacy European ABS bonds are no longer triple-A rated due to sovereign caps. We've seen many familiar bonds being downgraded, yet still performing well."
In order to access this opportunity and not have to rely on the moribund new issue market, he suggests that the investment guidelines for many European ABS investors will have been relaxed. "Many accounts still want to purchase what are perceived to be safe assets like Granite senior RMBS bonds, which are now split AAA/A rated. In contrast, Asian investors are typically more cautious and still only buy triple-A rated European bonds with Moody's and S&P ratings."
With respect to the primary market, Nowell cites the recently-priced Berica PMI as an example of how investors are increasingly willing to look at new issues that don't carry triple-A ratings. Rated by Fitch and DBRS, the transaction is the first publicly placed Italian SME ABS since 2005. The double-A plus class A1X tranche was upsized to €980m and priced at 240bp over three-month Euribor, having been 1.3 times covered.
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Counterparty criteria explained
Moody's latest RFC on its approach to assessing swap counterparty linkage is substantially the same as last July's proposal (SCI 3 July 2012), but with a few important refinements. The agency is seeking to create a more comprehensive framework and reduce the instances where a case-by-case analysis is necessary (which was common in the first iteration).
The approach also moves away from the current delinkage framework, which consists of a rigid set of criteria regarding rating triggers and collateral formulas. "If these criteria were met, no further modelling of counterparty exposure was required, which is relatively straightforward where banks are highly rated," explains Edward Manchester, svp at Moody's. "But counterparties are finding it more difficult to sign up to these triggers now. Market experience has also showed that these triggers don't necessarily work."
The idea is to replace these rigid criteria with a framework that quantifies the rating impact of linkage, taking into account any enhancements that will absorb or mitigate swap-related losses. Quantifying the impact of the hedge by referencing multiple factors allows for a more flexible and sophisticated approach, according to Manchester.
"The approach allows one to dig deeper and derive the incremental expected loss relating to swap linkage. We add this to the expected loss of the deal and map the result to our rating scale," he explains.
He adds: "The incremental expected loss relating to swap linkage depends on both the probability of becoming unhedged and the expected severity of loss resulting from becoming unhedged. The probability of becoming unhedged primarily depends on the rating of the counterparty, as well as the applicable rating trigger levels and how the relevant remedial actions - such as collateral posting requirements - are defined."
Severity of loss largely depends on the type of swap. Basis swaps typically have a lower severity than cross-currency swaps, for example. Credit enhancement also reduces the impact of losing a hedge.
Finally, the rating of a tranche is relevant: the higher the rating, the more sensitive it is to linkage, given that there is little tolerance for incremental loss.
Moody's notes that swap counterparty exposure has not resulted in significant losses to structured finance investors and has rarely resulted in negative rating actions. For most swaps entered into since the publication of its framework for delinking swap counterparty risks, transaction parties have included robust provisions that significantly mitigate counterparty credit risk, the agency says. Rating triggers have typically been set in the single-A range, with downgraded counterparties committed to take remedial action, such as posting collateral or transferring their obligations to higher-rated replacements. |
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News Analysis
RMBS
STACR stacks up
Risk-sharing programme to aid RMBS price discovery
Freddie Mac upsized and priced its inaugural risk-sharing transaction last week (SCI 17 July). The structure was welcomed for protecting taxpayers from certain risks by transferring them to the private market, as well as for providing the GSEs with a way to achieve risk-based pricing of the guarantee fee.
Importantly, the deal is expected to achieve this without affecting the agency MBS market. "We believe that if this issuance from the GSEs evolves into a programme, then it should help in price discovery of the credit risk on well-defined, liquid and large cohorts of loans. This would provide a series of benchmarks against which private-label deals could price new issuance," RMBS analysts at Barclays Capital observe.
The deal - dubbed STACR 2013-DN1 - effectively involves the issuance of credit-linked notes, with the cashflows mimicking a first-loss piece on the underlying reference collateral. Credit Suisse was structuring lead and sole bookrunner, while Barclays Capital was joint lead.
The transaction includes two mezzanine tranches that were offered to investors: US$250m M1 notes with a 2.2-year WAL and a coupon of 340bp over one-month Libor (attaching at 1.65% and detaching at 3%); and US$250m M2s with a 8.2-year WAL and a coupon of 715bp over (attaching at 0.3% and detaching at 1.65%%). The structure also features four reference tranches - AH, M1H, M2H and BH.
Interest is paid pro-rata to both mezzanine bonds and between the senior and the subordinate bonds. However, principal is paid sequentially, with the M1 class receiving principal first.
Additionally, two tests must be satisfied for any subordinate bonds to receive unscheduled principal. First, the senior credit enhancement must be at least 3%.
As losses erode the balance of subordinate bonds, credit enhancement will fall below this threshold. At that point, unscheduled principal will be redirected to the senior tranche until the enhancement returns above 3%.
The second trigger is hit if cumulative credit events rise rapidly, ahead of a predetermined schedule. Again, principal will be redirected to the senior class in this case. The bonds could be called early if the balance falls below 10%.
The securities are general obligations of Freddie Mac, with cashflows calculated based on the payments of a US$22.6bn reference pool of mortgages. Instead of traditional defaults, write-downs will be allocated based on credit events, defined as 180-day delinquency or short sale/REO. In practice, this means that once a credit event occurs, the relevant loan will drop out of the pool and create an immediate loss.
Rather than basing severity on liquidation proceeds, a flat severity of 15% will be used. If cumulative credit events exceed 1% of the starting balance, the severity will increase to 25%; if cumulative credit events cross the 2% threshold, the severity increases to 40%.
The structure accounts for modifications of the underlying loans, so that the issued notes do not take a loss for balance forgiveness modifications. Adjustments are also made for rep and warranty repurchases by reversing losses. Finally, the notes are called at the end of ten years, so Freddie retains the risk of defaults beyond that point.
The Barcap analysts expect cumulative defaults on the pool over the first ten years to be about 82bp in their base case and to increase to about 1.7% in a severe stress scenario. If home prices drop by 20% over the next three years before recovering, they project defaults on the pool over 10 years to be about 3.5%.
From a relative value perspective, RMBS strategists at JPMorgan believe the bonds look favourable compared to other credit products. In particular, the M1 class offers yield pick-up for a relatively short average life. They estimate that defaults would need to reach upwards of 1.5 CDR to impact the tranche - which is unlikely to occur, given the pristine collateral.
The M2 bond is cuspier, however, with a yield similar to that of subprime floaters. However, even under a severe loss scenario, the yield remains above 7% - assuming Libor remains flat. Any realisation of the forward curve could make this bond even more attractive, according to the JPMorgan strategists.
"In addition to the excellent yield profile, these bonds are floaters, which are in high demand as investors seek protection from rising rates," they explain. "Generally, we think that both STACR bonds were offered cheap and expect to see future deals trade tighter and the discount margin on these bonds to tighten."
Four more deals are scheduled for the remainder of 2013, with programmatic issuance expected to begin next year. Nevertheless, securitisation research analysts at Deutsche Bank question who the natural buyer base of such assets will be, especially since the securities are unrated.
"Assuming programmatic issuance will closely mirror the STACR structure, we'd expect to see a significantly different buyer base develop in the senior and junior mezzanine classes. We think real money investors will be the more likely holders of M1 risk, while fast money players will likely be the holders of junior mezzanine risk," they note.
Another issue that could curtail investor appetite for the bonds is ERISA eligibility: the senior mezzanine class is ERISA-eligible, while the junior mezzanine class is not. This could preclude large pools of insurance and pension money from investing in the securities.
If the GSEs sell the risk on all their ongoing issuance, the risk-sharing programmes could ultimately reach annual issuance of about US$20bn-US$25bn. However, a limited investor base will impact the market's ability to absorb this potential supply.
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News
Structured Finance
SCI Start the Week - 5 August
A look at the major activity in structured finance over the past seven days
Pipeline
Three CMBS remained in the pipeline at the end of last week. The transactions comprised: US$1.79bn JPMBB 2013-C14, US$1.1bn WFRBS 2013-C15 and US$150m Wireless Capital Partners.
Pricings
A diverse range of deals priced last week, as investor focus remained on the new issue ABS market. In fact, US benchmark issues were consistently oversubscribed.
Among the upsized transactions was US$1bn CarMax Auto Owner Trust 2013-3, which was joined by US$196.64m American Credit Acceptance Receivables Trust 2013-2 in the auto ABS sector. Two credit card ABS also priced: US$875m Citibank Credit Card Issuance Trust 2013-A3 and US$925m Citibank Credit Card Issuance Trust 2013-A4.
Included in the more esoteric prints were the US$250m Hilton Grand Vacations Trust 2013-A and US$250m MVW Owner Trust 2013-1 timeshare deals. These were joined by a tax lien transaction (US$91.37m NYCTL 2013-A Trust) and a catastrophe bond (US$200m Northshore Re Series 2013-1).
In addition, a pair of servicer advance transactions was issued last week - US$200m HLSS Servicer Advance Receivables Trust Series 2013-T4 and US$200m HLSS Servicer Advance Receivables Trust Series 2013-T5. RMBS issuance comprised two retained deals: €864m Courtine RMBS 2013-I and £163m Thrones 2013-1.
Two CMBS also printed during the week: US$1bn COMM 2013-CCRE10 and US$856m MSBAM 2013-C11. Finally, the US$416.9m CIFC Funding 2013-III CLO rounded out the pricings.
Markets
Activity in the US non-agency RMBS market remained fairly elevated last week. BWIC volume fell to approximately US$3bn on the week from the more typical US$5bn-US$6bn, according to RMBS analysts at Wells Fargo.
"Insurance companies and money managers continued to be active, while hedge funds seemed more ambivalent, not selling and only adding selectively. Overall, prices finished unchanged to marginally lower on the week, following Thursday's rate sell-off," they note.
Meanwhile, US CMBS spreads tightened across the board, as positive economic news boosted the market. In legacy CMBS, 2007 last cashflow dupers tightened by 8bp to swaps plus 107bp, while 2007 AMs compressed by 15bp to plus 215bp and 2007 AJs rallied by 65bp to plus 875bp.
"Legacy spreads have improved since reaching their widest levels in late June, compressing 18bp in 2007 LCF and 255bp in 2007 AJ," CMBS analysts at Barclays Capital observe. "However, they are still only halfway towards recovering their lost basis points from the tights in May. We continue to like 2007 LCF, which we feel has room to tighten."
US CLO trading remained quiet last week, with under US$200m of BWIC volume coming to the secondary market. Bank of America Merrill Lynch CLO analysts note that the majority of BWIC items came from junior classes at or below triple-B, with the largest portion being equity tranches, contributing to almost half of the total volume by dollar amount. Around half of line items were reported to not have traded.
CLO 1.0 spreads concluded the week at 120bp, 160bp, 240bp, 315bp and 550bp across the capital stack. Triple-B and double-B spreads firmed up by 10bp and 25bp, while triple-A to triple-B spreads remained unchanged. Compared to end-May, double-B spreads have retraced most of their widening from 535bp to 600bp, while triple-As remain 30bp wider than their tights of 90bp.
Finally, lower trading volumes were also observed in European secondary ABS. Spreads closed broadly unchanged on the week, with a mild tightening bias in benchmark UK and Dutch RMBS seniors.
Deal news
• Freddie Mac has upsized and priced its inaugural risk-sharing transaction (SCI 17 July). The structure was welcomed for protecting taxpayers from certain risks by transferring them to the private market, as well as for providing the GSEs with a way to achieve risk-based pricing of the guarantee fee.
• National Mortgage Insurance Corporation has agreed to insure approximately US$5bn in residential mortgages in its first risk transfer transaction with Fannie Mae, with an expected effective date in 3Q13. The transaction is contingent on National MI receiving regulatory approval of the pool policy of insurance by the District of Columbia Department of Insurance, Securities and Banking.
• Given the difficulty of replacing counterparties and expense of posting collateral for cashflow securitisations, high volumes of swap-related rating agency confirmations look set to continue, potentially eroding investor protections in their wake. At the same time, investor acceptance of AA/A rated senior paper is growing, together with appetite for deals without embedded derivatives risk.
• The pick-up in CLO issuance has accelerated structural innovation on either side of the Atlantic. At the same time, regulatory pressures continue to shape the market.
• Ocwen's acquisition of the servicing portfolio of GMAC Mortgage is said to be credit negative for related fast-pay subprime RMBS bonds due to Ocwen's policy of lower advances and its greater focus on modifications, as opposed to liquidations. Bonds will receive less up-front cash if the advancing rate on the GMACM portfolio falls from its current level of about 65% to around 10%, the rate at which Ocwen advances.
• Generic CMBS 3.0 XA tranche prices have widened by 75bp from their early-May tights of swaps plus 110bp, underperforming corresponding 10-year dupers that have sold off by only about 25bp. A number of emergent trends that could cause tiering between some individual XA tranches are consequently worth paying close attention to.
• CREFC Europe has released Watchlist Criteria for Europe, which forms part of the European Investor Reporting Package (E-IRP). The Watchlist Criteria aims to help improve clarity in the identification of loans to be placed on the Watchlist by allowing the application of pre-determined standards, the association says.
• Fitch has introduced property price indexation to its Australian RMBS criteria, assessing indexed property values for over 818,000 loans in 131 rated public securitisations. This has resulted in an improved weighted average loan-to-value (WALTV) ratio of 57.4%, compared with 63.3% prior to indexation.
Regulatory update
• ICE Clear Europe is set to introduce client clearing for European credit default swaps after receiving regulatory approval in the UK and US. The service is expected to launch on 7 October and will be available for 43 European index and 121 corporate single name CDS instruments. Twelve clearing members will participate in the pre-launch testing.
• Ex-Goldman Sachs executive Fabrice Tourre has been found liable in the US District Court for the Southern District of New York for misleading investors in the Abacus 2007-AC1 CDO. The jury found against him on six of the seven claims brought by the SEC in April 2010 (SCI passim).
• MF Global Capital has become the latest firm to file an antitrust suit alleging that swap dealers conspired to control the credit derivatives market (SCI passim). The complaint - filed in Illinois Northern District Court - names Bank of America, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, ISDA, Markit, Morgan Stanley, RBS and UBS as defendants.
• IOSCO has published its final report on supervisory colleges for credit rating agencies, which recommends establishing supervisory colleges for internationally active credit rating agencies (CRAs) and provides preliminary guidelines on how to constitute and operate them. The recommendations are aimed at improving the integrity of CRAs, the organisation says.
Deals added to the SCI database last week:
American Express Credit Account Master Trust Series 2013-1; CR Volterra 2; CSMC Trust 2013-6; Dignity Finance (third tap); Dutch Mortgage Portfolio Loans XI; Emerson Park CLO; Ford Credit Auto Owner Trust 2013-C; GE Equipment Small Ticket 2013-1; Globaldrive (Italy) IV; JGWPT XXVIII series 2013-2; JP Morgan Mortgage Trust 2013-3; Master Credit Card Trust II Series 2013-3; Mercedes-Benz Auto Receivables Trust 2013-1; MetroCat Re series 2013-1; Nissan Auto Receivables 2013-B Owner Trust; North End CLO; Ocean Trails CLO IV; OHA Loan Funding 2013-2; Ohio Phase-In-Recovery Funding; Rural Hipotecario XVI; Sequoia Mortgage Trust 2013-10; Series 2013-1 REDS Trust; Sonic Capital series 2013-1; STACR 2013-DN1; STORE Master Funding series 2013-2; Trinity Rail Leasing Series 2013-1; VCL Master Compartment 1 series 2013-1.
Deals added to the SCI CMBS Loan Events database last week:
BSCMS 2007-BBA8; CD 2007-CD4; COMM 2006-FL12 & CSMC 2006-TF2A; DECO 2006-E4; DECO 2007-E5; DECO 7-E2; DECO 9-E3; ECLIP 2006-1; EMC IV; EMC VI; EURO 23; FLTST 3; GCCFC 2006-GG7; JPMCC 2005-CB11; JPMCC 2013-JWRZ; LBUBS 2005-C7; MLCFC 2007-9; MSC 2006-HQ10; MSC 2006-IQ12; OPERA CMH; THEAT 2007-1 & THEAT 2007-2; TITN 2005-CT2; TITN 2006-2; TITN 2006-CT1; TITN 2007-2; TITN 2007-CT1; TMAN 6; TMAN 7; Various; WFRBS 2011-C3 & WFRBS 2011-C4; WFRBS 2012-C6; WINDM VII; WINDM VIII; WINDM X; WINDM XIV.
News
CMBS
XA tiering opportunities touted
Generic CMBS 3.0 XA tranche prices have widened by 75bp from their early-May tights of swaps plus 110bp, underperforming corresponding 10-year dupers that have sold off by only about 25bp. While remaining positive on these triple-A rated senior IOs, Barclays Capital CMBS analysts recommend paying close attention to some emergent trends that could cause tiering between some individual XA tranches.
"We believe much of this underperformance has been due to an increase in the liquidity premium charged for IOs, caused primarily by the volatility in rates. As such, as broader rate markets stabilise, we expect some compression of this basis between the duper and IO tranches," the Barcap analysts note.
On a fundamental level, higher rates imply slower pay-downs and a higher likelihood of extensions, both of which are accretive to IOs that are priced to a 100 CPY convention. But IO tranches are also more leveraged to higher default assumptions than P&I bonds.
Having analysed a sample of XA tranches from recent conduit issuance, the analysts find that certain bonds have an increased sensitivity to higher default scenarios, with yields dropping off sharply at slightly faster liquidation rates. They suggest that these tranches should price wider than XAs from other deals that do not show the same sensitivity.
While IO notionals decrease faster under a higher default scenario, this is not the primary cause for tiering between bonds: the sample set shows roughly the same pace of notional decline in stress versus zero CPY scenarios. Neither is the migration of collateral WAC a major issue: deal WACs remain broadly stable across the life of the deals.
The primary cause for the increased sensitivity of certain XA tranches appears to be the weighted average coupon of the P&I tranches, which can increase substantially over time for some deals. Since the IO receives a coupon equal to deal WAC minus the weighted average triple-A rate, this can lead to a steep fall in the rate paid to the IO, the analysts observe.
They identify three main drivers of this fall in IO coupon: a steeper coupon gradient between the front- and last-cashflow triple-A bonds; a narrower IO strip at issuance; and relative sizing of the front- and last-cashflow triple-A tranches. For example, the GSMS 2013-GC13 five-year tranche pays a 2.8% rate, while the 10-year duper and AS classes pay close to 4.2%. In MSBAM 2013-C10, the relatively small size of the five-year versus the 10-year duper class leads to a sharp drop in coupon on the senior IO tranche.
"Pricing levels do not appear to reflect this implied leverage embedded in certain IO bonds, with most X-A bonds trading together," the analysts conclude.
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News
RMBS
Sustainable future for BTR investing
Mortgage strategists at Morgan Stanley believe that the burgeoning buy-to-rent (BTR) business is sustainable and has a long runway for growth. Institutional players are buying assets below replacement cost and realising material home price appreciation (HPA) today, with the prospect for strong cashflow growth over time.
Although initial net yields - at 5%-6% after capex - may fall short of WACC, the Morgan Stanley strategists reckon that BTR must be evaluated on a total return basis. "In the near-term, we expect HPA to augment cashflow and drive ROIC over 10%," they explain. "In the long-run, HPA may be less of a tailwind, but we see upside to rents and expect margin expansion to drive sustainable double-digit ROIC. As such, we believe today's circa US$17bn institutional BTR industry can continue growing and perhaps reach over US$100bn over the next several years."
Institutional investors so far have targeted specific property types within certain states as part of their BTR strategy. Over 80% of homes have been purchased for less than US$200,000 and over 75% measure between 1,000 and 2,500 square-feet.
Activity has been heavily concentrated within California, Arizona, Florida and Georgia. In general, investors are attracted to locations with sharp price declines that offer steep discounts to peak market values and an overabundance of properties available at distressed prices.
Indeed, over the past three years, investor activity has removed significant amounts of distressed supply from Southern California, Phoenix and Las Vegas. Consequently, select MSAs in Florida, the Midwest and the Northeast now constitute a greater proportion of the nation's distressed properties - making them potentially more attractive to institutional BTR investors.
As such, from a non-agency RMBS perspective, the strategists prefer securities with outsized exposure to Florida and other MSAs with strong buy-to-rent prospects. "Legacy non-agency RMBS - particularly front-pay tranches - will likely benefit from institutional investors providing a backstop to liquidation recoveries, thus putting downward pressure on loss severities," they conclude.
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Job Swaps
ABS
Securitisation chief named
Mark Pain has joined Santander Consumer Finance UK as head of securitisation, responsible for its ongoing auto ABS programme. Before a year's stint as a consultant, he worked in a variety of front office roles with the US and European principal finance business of Investec Bank. His role included credit analysis and cashflow modelling of granular cashflow transactions, including RMBS, SME ABS, CDOs and CLOs.
Job Swaps
Structured Finance
Due diligence firm adds in management
Rockstead has recruited Jane Bebb as operations manager, heading up a team of analysts and auditors. She was formerly senior project leader/auditing consultant at Clayton Euro Risk.
Job Swaps
Structured Finance
Aussie advisory felled by lawsuits
Australian advisory firm Oakvale Capital entered voluntary administration at the end of July after 25 years of operation. The company faces five lawsuits filed against it by local councils in New South Wales - three of which were filed as recently as June - and consequently was no longer able to operate, according to a client memo from Amicus.
"Following judgements against ABN Amro, Lehman Brothers Australia, Local Government Financial Services and S&P, there have been additional claims and lawsuits against nearly every advisory firm that recommended structured investments or structured credit funds (such as Basis Capital) and every distributor of structured products prior to the financial crisis," the firm notes. "The complete list of legal action taken by investors over the past five years against advisors, banks and brokers is exhaustive and much of it never reaches the public domain because it is settled quietly between the parties with confidentiality agreements involved."
However, Amicus points out that litigation hardly ever provides a full recovery for losses. "Even in the ABN Amro, LGFS, S&P and Lehman cases, investors have received no monies as yet because both decisions are being appealed and an out-of-court settlement in the Lehman Brothers Australia case has been blocked by Lehman's parent company in New York," it explains.
Job Swaps
Structured Finance
Ares unveils strategic partnership
Ares Management and Alleghany Corporation have announced a new strategic partnership. Under the agreement, Alleghany invested US$250m for a 6.25% equity ownership interest in Ares and committed to invest up to US$1bn of capital in various existing and new Ares investment strategies.
Through its relationship with Ares, Alleghany seeks both to participate in Ares' strong business prospects and to enhance the returns of its committed capital through Ares' alternative asset expertise. The US$250m investment will be used by Ares as sponsor capital in its investment vehicles, which aim to deliver compelling risk-adjusted returns for investors through differentiated investment strategies.
Job Swaps
Structured Finance
Pending civil charges disclosed
Bank of America has disclosed in an SEC quarterly filing that the US Department of Justice and other government agencies intend to recommend civil charges against it in connection with MBS. The bank says it has been in active discussions with senior staff of each government entity in connection with the respective investigations and to explain why the threatened civil charges are not appropriate.
While the DOJ intends to file civil charges in relation to one or two jumbo prime securitisations, the SEC has advised that it intends to recommend civil charges concerning one of those transactions. Moreover, the New York Attorney General has advised that it intends to recommend filing an action against Merrill Lynch arising from an RMBS investigation. The SEC has also advised that it is considering recommending civil charges against Merrill Lynch arising from a CDO investigation.
Job Swaps
Structured Finance
Asset manager beefs up
Douglas Charleston joined TwentyFour Asset Management last month as a portfolio manager. He has seven years of ABS structuring and fund management experience, most recently at Lloyds.
Another recent addition to the team is Luca Beldi, who has been recruited as an analyst. He is a Masters graduate in economics from the University of Milan.
In addition, the firm's heads of retail and institutional business - John Magrath and Alistair Wilson respectively - have been named as partners.
Further hires are planned ahead of the firm's fifth anniversary in September.
Job Swaps
CDO
Tourre found liable in Abacus case
Ex-Goldman Sachs executive Fabrice Tourre has been found liable in the US District Court for the Southern District of New York for misleading investors in the Abacus 2007-AC1 CDO. The jury found against him on six of the seven claims brought by the SEC in April 2010 (SCI passim). According to the regulator, Tourre deliberately made material misstatements and omissions in connection with the synthetic CDO.
Job Swaps
CDO
ABS CDO transferred
Vertical Capital has replaced Strategos Capital Management as collateral manager on Kleros Preferred Funding. Moody's has confirmed that the move will not result in the withdrawal, reduction or other adverse action with respect to the ABS CDO's ratings. In reaching this conclusion, the agency considered the experience and capacity of Vertical Capital to perform the duties of collateral manager to the issuer.
Job Swaps
CDO
UBS settles over ACA 07-2
The US SEC has charged UBS Securities with violating securities laws while structuring and marketing the ACA ABS 2007-2 CDO by failing to disclose that it retained millions of dollars in upfront cash it received in the course of acquiring collateral for the CDO. UBS agreed to pay nearly US$50m to settle the charges.
The SEC's investigation found that UBS received US$23.6m in upfront payments in the process of acquiring credit default swaps as collateral. Rather than transferring this cash to the CDO when the collateral was transferred, UBS retained the full amount of upfront payments in addition to its disclosed fee of US$10.8m.
Not only did UBS go on to market the deal using materials that omitted any reference to its retention of the upfront payments, but the materials also inaccurately represented that the CDO had to acquire all collateral at either fair market value or the price it was acquired by UBS. This representation was inaccurate because the CDO did not receive the US$23.6m in upfront cash kept by UBS as an additional undisclosed fee and the collateral was not acquired at fair market value, the SEC notes.
Job Swaps
CDS
Index trading chief added
Citi has recruited John Mann as head of credit index trading, based in New York. He was previously at Goldman Sachs and will report to Brian Archer, head of global credit trading, in his new role.
Job Swaps
CMBS
MS beefs up CMBS research
Richard Hill has joined Morgan Stanley's US securitised products group to lead CMBS and CRE debt research, reporting to Vishwanath Tirupattur. He was previously director of CMBS and CLO strategy at RBS.
Job Swaps
Risk Management
DTCC leadership changes announced
The DTCC has made a number of executive management appointments, effective from 1 September.
Alexander Broderick is joining the company as ceo, DTCC Deriv/SERV. Based in London, he will oversee DTCC's OTC derivatives global post-trade processing and trade reporting services.
Broderick is currently ceo of New York Portfolio Clearing (NYPC) and over the coming months will have dual responsibilities and continue to lead NYPC as he transitions to his new role.
Meanwhile, Stewart Macbeth moves to the newly-created position of chief product development officer. He is currently ceo, DTCC Deriv/SERV.
Other leadership appointments within DTCC Deriv/SERV include: Chris Childs, Deriv/SERV's global coo, who expands his responsibilities to include all derivatives business and product management; and Marisol Collazo, who assumes the position of US ceo for the DTCC Data Repository (DDR). Peter Tierney continues as the head of OTC Derivatives, Asia.
Job Swaps
RMBS
MBS portfolio manager named
Cerberus Capital Management has appointed Daniel Choquette as a mortgage portfolio manager in its MBS group. He was previously md and portfolio manager, US securitised mortgage products at Putnam Investments.
Job Swaps
RMBS
BofA charged with fraud
The US SEC has charged Bank of America and two subsidiaries with defrauding investors in an RMBS by failing to disclose key risks and misrepresenting facts about the underlying mortgages (SCI 5 August). The SEC alleges that the bank failed to tell investors that more than 70% of the mortgages backing the offering - called BOAMS 2008-A - originated through the bank's wholesale channel of mortgage brokers unaffiliated with Bank of America entities. Bank of America knew that such wholesale channel loans - described by its then-ceo as "toxic waste" - presented vastly greater risks of severe delinquencies, early defaults, underwriting defects and prepayment, according to the SEC.
These risks directly impact the returns to all RMBS investors; however, Bank of America only selectively disclosed the percentage of wholesale channel loans to a limited group of institutional investors. Bank of America never disclosed this material information to all investors and never filed it publicly as required under the federal securities laws.
The Department of Justice has announced a parallel civil action against Bank of America for violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The complaint alleges that a disproportionate concentration of high-risk wholesale loans and the inclusion of a material number of loans failing to comply with internal underwriting guidelines resulted in BOAMS 2008-A suffering an 8.05% cumulative net loss rate through June 2013 - the greatest loss rate of any comparable BOAMS securitisation. This resulted in losses of nearly US$70m, with anticipated future losses of approximately US$50m.
News Round-up
ABS
Abenomics strategy outlined
The impact of the Japanese government's revitalisation strategy on consumer loan ABS in the country is credit positive, according to Moody's Structured Thinking Asia Pacific report. Disclosed on 14 June as part of the 'Abenomics' initiative, the government will promote smooth job transitions for workers - in particular, irregular employees - through subsidies and support programmes under the strategy. The government aims to reduce the number of those unemployed for more than six months by 20% in the next five years.
Japanese consumer loan ABS transactions have a higher proportion of irregular employees as borrowers, compared with other ABS asset classes, Moody's notes. Consumer loan lenders target higher risk borrowers, such as irregular workers, and charge a higher interest rate for the increased credit risk. As a result, the default rates for consumer loans have been shown to be higher than those of other asset classes such as credit cards.
The recently revised Money Lending Business Act has reduced the proportion of irregular employees in consumer loan ABS transactions by: limiting the maximum amount that lenders can lend based on a borrower's income; and lowering the maximum interest rate that lenders can charge, making it less attractive for lenders to lend to irregular workers, who are considered to be of higher credit risk because of their low and irregular income. However, irregular workers still comprise at least 20% of typical consumer loan ABS transactions, of which Moody's rated approximately ¥253.8bn at end-March.
With the government's support, the transition times of irregular employees to new jobs is expected to be shorter, thereby leading to more stable incomes and a lower probability of defaults. Even if an employee's hourly rate does not increase at the new job, the uncertain time period between jobs will be mitigated, which means that the total hours worked and income will increase over a given period. In addition, the government's initiatives are aimed mainly at increasing the skill-sets of irregular workers to help them obtain higher paid jobs.
Currently, about one-third of all Japanese employees are considered as irregular workers; they are employed in a part-time or contract capacity. In general, these are lower paid workers that earn less than ¥3 per annum.
News Round-up
ABS
Drop in bankruptcies buoys consumer ABS
US personal bankruptcy filings are poised to drop for a third consecutive year in 2013 and may in fact fall to a level seen only twice before in the last two decades, according to Fitch. Personal bankruptcy filings totalled 532,290 at the end of 1H13, 13.7% lower than a year earlier (616,911).
Fitch senior director Steven Stubbs attributes the sizeable year-over-year decline to various macro factors. "Consumers are continuing to lower their personal debt levels as the growth in the US economy is gaining momentum. Personal income levels are also on the rise, as are home values."
For this year, Fitch is projecting a 13%-15% drop in personal bankruptcy filings for 2013 from full-year 2012 levels. Furthermore, personal bankruptcies may dip below the one million threshold for just the third time in nearly 20 years.
Lower personal bankruptcy filings are positive for consumer ABS collateral. Performance for both credit card and auto loans has been at or near historic levels during 1H13.
News Round-up
ABS
Timeshare relative value touted
Investors seeking incremental yield in ABS typically move down in credit or expand into non-benchmark sectors. Another potential source of incremental yield can be found in structural inefficiencies that create cheaper-than-expected cashflows and good relative value opportunities.
Exploiting differences between assumed and realised prepayment speeds - especially in new issue deals - is one way of achieving this outcome, according to ABS strategists at Wells Fargo. They cite the prepayment behaviour of US timeshare ABS as an example.
The Wells Fargo strategists surveyed the realised prepayment speeds from 2010-2013 for Sierra Receivables Funding Company (SRFC) and found that one-month prepayment speeds on post-crisis deals were significantly faster, on average, than the assumed pricing speed. For example, the SRFC 2013-2 class A note was priced at a 15% CPR: at a 25% CPR, the average life falls to 2.22 years from 3.11 years and the pricing spread would increase by 25bp to plus 175bp from 150bp. Faster realised speeds compared to the pricing speed would yield cheaper cashflows, they note.
"In our view, this result is completely unsurprising, at least based on basic bond maths," the strategists observe. "However, we believe that the market may overlook opportunities if it becomes complacent about prepayment assumptions used to price consumer ABS. There may be other sectors, such as auto ABS, where market prepayment conventions do not fully account for realised outcomes."
Triple-A US consumer ABS spreads tightened by 2bp-5bp last week, driven by revived new issue activity. The strategists indicate that the sector overall remains cheap, with room for spreads to tighten further.
News Round-up
ABS
Auto ABS underwriting eyed
US prime auto ABS continue to be originated at a strong clip. But unique elements are being introduced into the market that may give some investors pause, according to Fitch.
The agency notes that underwriting is slowly declining for prime auto ABS deals. While weighted average pool FICO scores remain strong, an incremental increase in the composition of the lowest tier FICO scores is occurring.
Further, LTVs are softening and issuers are extending loan terms to help manage monthly payments. These will likely lead to higher losses on prime auto ABS loans over time - albeit historical loss rates are low, so structurally the deals can absorb higher losses.
Meanwhile, growth has been explosive in subprime auto ABS, leading to hyper-competition in the space. Fitch reports that issuance in the sector has increased more than ten-fold from 2009, with 55 deals originated between January 2012 and 2Q13 - a stark contrast to just five in all of 2009.
"These new deals may present an issue for smaller, more thinly-capitalised companies, whose business plan relies heavily on efficient execution of ABS to meet their growth targets," the agency concludes.
News Round-up
Structured Finance
Currency swap criteria updated
Fitch has updated its criteria for rating currency swap obligations of an SPV in structured finance transactions and covered bond programmes. The updated criteria are not expected to result in rating actions.
The key driver for the rating of swap obligations is the rating of the related reference notes. SPV obligations to swap counterparty and noteholders should and usually rank pari passu.
Fitch also expects the currency swap to have terms and conditions that are no more onerous than those of the related notes. The agency will review the swap documentation to identify circumstances in which a termination payment may become payable by the SPV.
Termination payments that become due as the result of non-performance by the swap counterparty itself or a non-credit event are not addressed by the rating analysis, however. Any other events giving rise to a potential termination payment will be identified and analysed within the scope of the rating, Fitch says.
Any change to the rating of the corresponding notes will likely lead to an equal change in the rating of the SPV's currency swap obligations. The rating sensitivity will be driven primarily by the rating analysis applicable to the corresponding notes.
The rating of the SPV's currency swap obligations will be withdrawn if the currency swap agreement is terminated due to non-performance by the swap counterparty or a non-credit related event.
News Round-up
CDO
ABS CDO auctions announced
Public sales have been scheduled for next week for two ABS CDOs - Jupiter High-Grade CDO IV and West Trade Funding CDO I.
Cross Point Capital has been retained to act as liquidation agent for the former deal, for which three auctions are due on 13 August. The first sale comprises subprime securities; the second comprises ABS CDO, CMBS, prime and Trup securities; and the third consists of zero factor CDO and RMBS bonds.
Meanwhile, Dock Street Capital Management will act as liquidation agent for West Trade Funding CDO I. Three auctions for the transaction are due on 14 August, with the first sale also comprising subprime securities; the second comprising ABS CDO, prime and Trup securities; and the third consisting of zero factor CDO and RMBS bonds.
News Round-up
CDS
Telecom Italia spreads surge
Credit default swap spreads on Telecom Italia (TI) are widening as Italy's largest phone company battles a weak economy and price pressure from competitors, Fitch Solutions reports. Fitch Ratings downgraded TI's long-term issuer default rating (IDR) to triple-B minus, outlook negative, from triple-B on 5 August 5.
The price of credit protection on TI's debt over a five-year horizon is 82% higher than the broader sector, based on Fitch Solutions' CDS index for Italian telecoms. CDS liquidity for the issuer remains high, trading in the eleventh global percentile, indicating a high level of market uncertainty over the company's credit prospects.
Meanwhile, Fitch's one-year probability of default (PD) for Telecom Italia has climbed to 11.2%, significantly underperforming the 1-Year PD Index for Western European telecoms, which currently stands at 1%. This represents a 152% surge from its level a year ago, reflecting an increasingly negative sentiment from the equity market.
News Round-up
CDS
Cengage results in
The final price of Cengage Learning Acquisitions Inc LCDS was determined to be 74 during yesterday's auction. Nine dealers submitted initial markets, physical settlement requests and limit orders to the auction. Due to a zero net open interest, there was no subsequent bidding period, so the inside market midpoint value is the final price.
News Round-up
CDS
Cengage auction due
An auction to settle the credit derivative trades for CENGAGE LEARNING ACQUISITIONS INC LCDS is to be held tomorrow (6 August). ISDA's Americas Credit Derivatives Determinations Committee last month resolved that a bankruptcy credit event occurred in respect of the name (SCI 11 July).
News Round-up
CDS
Client clearing due for European roll-out
ICE Clear Europe is set to introduce client clearing for European credit default swaps after receiving regulatory approval in the UK and US. The service is expected to launch on 7 October and will be available for 43 European index and 121 corporate single name CDS instruments. Twelve clearing members will participate in the pre-launch testing.
The buy-side clearing solution will include trade-date clearing of index and single name CDS, and provide for segregation of customer funds and enhanced position and margin portability. It permits firms to retain important trading and contractual relationships, including accepting transactions from a range of competitive existing execution models.
To date, ICE has cleared 1.38 million CDS trades globally, totalling US$42.96trn in gross notional value for North American and European CDS instruments. Global open interest is US$1.44trn trillion as at 26 July.
News Round-up
CLOs
Survey blasts CLO retention rules
The Loan Syndications and Trading Association has submitted a comment letter to the Fed, the OCC, the FDIC, the SEC, the FHA and the Department of Housing and Urban Development. The letter prominently features a new survey - polling 35 CLO managers that collectively manage US$228bn in 509 CLOs - conducted by the LSTA, which shows that new risk retention rules would dramatically shrink the market.
The managers - representing more than two-thirds of the US CLO market - estimate that the number of CLOs they manage would drop from 500 to approximately 70, if the rules are implemented as currently written. The rules would require managers to retain 5% of the fair value of a CLO. Fully half the respondents said they couldn't or wouldn't issue a new CLO under these circumstances.
Critically, the survey also showed that financing the retention is not a reasonable solution. Only 20 respondents said they could not raise funding; of the 12 that said they could raise funding, just two said that they would raise funding.
Moreover, even if a CLO manager was willing to finance the retention, it does not appear that such financing would be forthcoming. The LSTA spoke with bankers representing over half the prime brokerage market and a number of the term lenders. Generally the term lenders said they would lend between 50% and 75% of the value of the triple-A or double-A rated notes - and nothing further down the capital structure.
This means that - even if the CLO manager could access term financing - it would still have to provide over half the required retention amount out of its own pocket. Critically, this loan would be recourse to the CLO manager, meaning that their business could be at risk if just one CLO deteriorated.
The prime brokerage option is even less feasible, according to the LSTA survey. Prime brokers indicated that they lend short-term against a percentage of highly liquid securities. Not only would these securities be subject to haircuts, but they would also face daily margin calls. In addition, there must be a liquid secondary market where these securities can be traded immediately, and the security must be of a type that the prime lender can rehypothecate overnight.
Because CLO securities are not sufficiently liquid and because the risk retention rules themselves would not permit them to be rehypothecated, the prime brokerage option simply is not an option, the LSTA says.
News Round-up
CLOs
Euro CLO supply 'exceeding expectations'
European CLO issuance this year has already exceeded the majority of observers' expectations, S&P says in its 2Q13 European CLO Performance Index Report. So far in 2013, 10 European CLOs have priced, bringing total issuance for the year to €3.4bn. In addition, the agency estimates that the sector will see at least another €1.4bn of new issuance in Q3.
However, this figure is small compared with the overall size of the European leveraged loan market. Furthermore, many outstanding CLOs are now or very soon to be beyond their reinvestment period.
"In our view therefore, despite 2013's new issuance levels being a very positive signal, CLO issuance still has some way to go before it can provide a very meaningful financing solution for the European speculative grade-corporate market," S&P notes.
The agency observed a number of performance trends in May. Among these is that the percentage of triple-C rated assets increased for all of the vintages tracked in its European CLO performance index. The 2004, 2005 and 2008 European CLO cohorts reported increases in the percentage of defaulted assets.
In addition, senior overcollateralisation ratios increased across all of the vintages tracked in S&P's European CLO performance index. Subordinate overcollateralisation ratios increased for four of the vintages tracked, while only the 2008 vintage reported a decrease.
News Round-up
CLOs
GSO/Blackstone retains top spot in CLOs
Moody's has updated its CLO manager league tables, as of 30 June. The data are for only CLOs that the agency has publicly-rated and which consist of both broadly syndicated loan (BSL) CLOs and SME CLOs.
In the US CIFC continues to lead the CLO market by deal count, with 30 CLOs and US$11.2bn assets under management, followed by GSO/Blackstone, managing 27 deals totalling US$10.6bn. Ares and Carlyle, who manage 26 deals each, share third place in the league table.
With one deal closed in 2013 and a lower redemption rate, Highland remains the leader by dollar amount, managing nearly US$11.9bn. Carlyle moved into the top three by number of deals, with the addition of three deals closed in first-half 2013.
ING added US$1bn in two CLOs so far this year, which brought its total assets under management to US$6.7bn in 15 CLOs, replacing Invesco in the top ten for the first time.
Invesco, Pramerica, MJX, Pinebridge, Halcyon, Neuberger Berman, Black Diamond, Octagon and Golub manage ten or more CLOs each. Each of these managers closed one or more CLOs before the end of June 2013.
In Europe Alcentra remains the largest CLO manager by number of deals rated, followed by Carlyle, Intermediate Capital Managers (ICG) and GSO/Blackstone - each of which manages 12 CLOs. ICG remains in the top spot by assets under management (€4.9bn). By taking over a Bankia deal, BNP Paribas moved up the ranks by both deal count and assets under management (see SCI's CDO transfer database).
Private equity firms dominate the global CLO market: GSO/Blackstone remains the global CLO powerhouse, managing 38 CLOs totalling US$15.9bn. Carlyle follows closely by both deal count and assets under management, having added three new deals in the first half of this year. Ares took the third spot in the global ranking.
Carlyle and Credit Suisse Asset Management have been the most active managers in post-crisis deals, according to Moody's, with each one closing eight CLOs amounting to US$4.5bn since 2010.
News Round-up
CLOs
CLO risk-retention features highlighted
Moody's discusses in its latest CLO Interest publication a number of novel features contained in KKR Financial CLO 2013-1 that are intended to comply with both current and forthcoming European risk-retention rules. The US deal is structured so that the originator of the assets retains the equity, which provides incentives for European investors to purchase the deal's notes.
In their current form, these features seek to eliminate risk to the deal that would result from the originator's bankruptcy and are credit neutral, in Moody's view. But the agency suggests that other CLOs could well follow suit to attract European investors, which could boost the nascent revival in Europe's CLO market.
The structure of the CLO requires one of KKR Financial Holdings' subsidiaries to act as the risk-retention provider by holding at least 5% of the nominal value of the CLO's assets in the form of equity. In this case, the retention provider is intended to qualify both as a third-party investor under the current guidelines and as an originator under the proposed European technical standards because the CLO can purchase assets only from the retention provider.
One potential issue with a retention provider that both sells the assets and holds equity in the buyer is whether, in the event of the retention provider's bankruptcy, a court would re-characterise the sale of the assets as secured lending - which would subject the cashflow of the deal's assets to the automatic stay of the bankruptcy case and could allow for a claw-back. However, such a re-characterisation by the courts seems unlikely in this CLO, given the size of the retention provider's equity interest, which remains limited relative to the size of the deal.
A true sale legal opinion that deal counsel Milbank Tweed rendered at the CLO's closing provided a bankruptcy analysis that also reached the conclusion that the transfer of the assets would be absolute.
News Round-up
CMBS
Multifamily bridge programme launched
Walker & Dunlop has launched a large loan bridge programme, through which it will originate adjustable-rate loans on multifamily properties that do not currently qualify for permanent financing but will be candidates for funding through Fannie Mae, Freddie Mac, HUD, CMBS or life company channels once stabilised or repositioned. The programme is funded with capital from a large Canadian institutional investor and a premier US real estate investment manager.
Walker & Dunlop is also a 5% investor in the programme, which will have over US$850m in lending power, inclusive of leverage. The parties may elect to increase capacity to meet demand.
The programme will focus on loans sized at US$30m and above, with terms of up to three years. Walker & Dunlop will receive an asset management fee for managing the programme and servicing the loans.
News Round-up
CMBS
CMBS pay-offs hit five-year high
The percentage of US CMBS loans paying off on their balloon date registered 74.1% last month, the highest reading in almost five years, according to Trepp. December 2008, which saw 84.9% of loans paying at maturity, was the last month with a higher level.
The July reading was more than 15 points better than June's 58.5% and is well above the 12-month moving average of 61.5%. By loan count as opposed to balance, 71.3% of loans paid off. The 12-month rolling average by loan count is now 63.8%.
Trepp notes that the July 2013 reading is difficult to compare to numbers from 2012, when many of the loans maturing were five-year balloons from the 2007 vintage. The majority of loans reaching their maturity now are 10-year balloons loans that were originated in 2003.
News Round-up
CMBS
AS tranches 'thinning'
As US CMBS triple-A credit enhancement increases due to a combination of increased leverage and concentration, Fitch reports that the junior triple-A class size is 'thinning'. If junior triple-A credit enhancement (CE) continues to increase and the super-senior triple-A level remains at a 30% attachment point, the loss given default may grow more rapidly than investors expect, the agency warns.
In August 2011, as the senior portion of the US CMBS 2.0 market expanded to the public markets from a 144a structure, super-senior triple-A classes were initially issued at 30% CE. Issuers indicated the intention was to provide increased cushion for investors that would not receive the same level of data as 144a investors.
The first 2.0 Fitch-rated transaction with a super senior class was DB 2011-LC3, the junior triple-A tranche of which had 20.875% CE and a thickness of 9.125%. Fast forward to 3Q13, as average Fitch LTVs have increased above 100% from the 91.9% in DB 2011-LC3 and junior triple-A CE has increased into the 21%-24% range, the junior triple-A class thickness has shrunk to as little as 6%.
As junior triple-A credit enhancement approaches 25%, Fitch says it would not be surprised to see super-senior investors look for subordination levels to increase in order to achieve the same level of cushion between the junior and super-senior CE levels as they saw in the earlier 2.0 deals.
News Round-up
CMBS
Bifurcated AJ prices observed
US CMBS AJ prices appear to be bifurcating in the wake of recent principal write-downs hitting two originally triple-A rated legacy bonds for the first time (SCI passim), according to Interactive Data. Generally, higher evaluated prices are observed for bonds with higher LCR and lower special serviced percentages, and vice versa. While this relationship held true for most bonds with LCRs below 2x, moving above this inflection point yielded less useful observations for nearly all bonds commanding evaluated prices north of par.
Interactive Data examined the population of bonds currently evaluated below US$70 to identify whether some or all of these securities could be potentially at risk of write-down in the future. The sample included LBUBS 2007-C2 and MSC 2007-HQ13, the respective AJ tranches of which experienced REO liquidations and principal losses last month and in May.
Interestingly, the LBUBS security is currently evaluated in the low US$70s, with the price having actually risen last month. "The main difference is the much lower special service percentage of just 0.5 compared to 22.4 for MSC2007-HQ13, suggesting that the LBUBS collateral group is in considerably better shape going forward, having almost entirely flushed the delinquency pipeline," the firm concludes.
News Round-up
CMBS
CMBS 2.0 term defaults 'unlikely'
US CMBS 2.0 term defaults are unlikely as long as the economy continues to strengthen, according to the latest 'Fitch Voice: Structured Finance' publication. While CMBS loans that come due in 2022 and 2023 will likely do so in a higher rate environment, overall they have been reasonably underwritten.
Should the broader economy reverse direction, any downgrades to CMBS 2.0 deals would be a by-product of the economy's downturn, Fitch suggests. What is a greater concern, however, is maturity risk.
"There are substantially more variables at play that could determine the ultimate success of CMBS 2.0 loans refinancing," the agency notes. "For instance, if income growth matches the growth in debt service required by the new mortgage rate environment, the chances of successful refinancing are much better for CMBS 2.0 loans. However, an interest-only loan may require a fall in underwriting standards to refinance on the same metrics but for the higher mortgage rate."
News Round-up
CMBS
CMBS delinquencies nudge 2010 lows
For the third time in the last four months, the Trepp CMBS delinquency rate fell significantly. The rate dropped by 17bp in July, bringing the delinquency rate for US CMBS loans to 8.48%, the lowest reading since the September 2010 rate of 8.45%. The Trepp delinquency rate is now 123bp lower than where it began the year.
The meaningful decline can be largely attributed to a high level of CMBS loan resolution, Trepp notes. In July loan resolutions totalled US$2.05bn - up sharply from US$1.25bn in June and US$858m in May. Removing these distressed loans from the delinquent asset bucket last month created 38bp of downward pressure on the delinquency number.
But about US$2.39bn in newly delinquent loans were also reported in July - almost twice the total posted in June. This put upward pressure of 44bp on the delinquency rate.
Helping to offset these new delinquencies were US$1.08bn of loans that cured during the month. These loans put 20bp of downward pressure on the delinquent loan reading.
News Round-up
CMBS
Watchlist criteria released
CREFC Europe has released Watchlist Criteria for Europe, which forms part of the European Investor Reporting Package (E-IRP). The Watchlist Criteria aims to help improve clarity in the identification of loans to be placed on the Watchlist by allowing the application of pre-determined standards.
Watchlists are compiled by servicers based on the criteria defined by CREFC Europe and include comments on loan performance. The criteria for placing a loan on the Watchlist can include: coverage ratio (ICR/DSCR/LTV) issues, decline in occupancy, significant tenant rollover, loan/hedging maturity, deferred maintenance, natural disasters and borrower issues. The information gathered within the Watchlist is important in assisting industry professionals to understand and monitor performance issues and potential future loan defaults.
The E-IRP Committee is currently actively engaged in discussions and input on the ECB CMBS template, as well as working with and testing the European DataWarehouse. In addition, the User Guide, E-IRP version 2.1 data fields are under review. The committee is in the process of creating a survey designed to obtain user feedback on the current used reports and expectations, which will assist in greater transparency in the overall reporting package, the association says.
News Round-up
CMBS
TRIPRA impact analysed
Fitch has released a report discussing some potential economic and credit rating effects for the property/casualty insurance industry and CMBS market if the Terrorist Risk Insurance Program Reauthorization Act (TRIPRA) is not renewed or coverage substantially declines. Legislation was recently introduced in the US House of Representatives to extend the Act, which expires on 31 December 2014.
Over the last decade, commercial property insurers have enhanced their ability to measure and model exposure to terrorism events. Net exposures are managed currently through the availability of large reinsurance limits through TRIPRA. Withdrawal of TRIPRA reinsurance protection without readily available substitute coverage could lead insurers to exclude terrorism from property coverage to manage risk aggregations.
Although private market stand-alone terrorism coverage has increased over time, it is unlikely that substantial private market capacity would arise as a substitute to TRIPRA coverage if the programme is allowed to expire, Fitch suggests. Likewise it is difficult to predict whether financial and property markets have a greater propensity to adapt to an environment without a government-sponsored terrorism insurance programme compared to the market conditions that existed in 2002 (before TRIPRA).
Insurers are not allowed to exclude losses from terrorism-related perils in workers' compensation policies. Workers' compensation is statutorily required in almost every US jurisdiction and exclusions and limitations of this product line are generally prohibited. TRIPRA expiration or meaningful programme changes therefore may have significant effects on workers' compensation insurance coverage availability and pricing.
Terrorism insurance has also been an important structural protection for CMBS bondholders. Fitch says it may decline to rate or cap its ratings on CMBS transactions with inadequate terrorism insurance.
This would most likely occur on a high-profile property in a single-asset CMBS. However, it is more difficult to determine the ratings effects that a lack of terrorism coverage might have on multi-borrower CMBS pools, the agency notes.
Material changes or elimination of TRIPRA will require some insurers to significantly adjust underwriting portfolios to reduce gross terrorism exposures. Specialty or monoline workers' compensation or commercial property writers that focus on larger urban markets would likely have the greatest credit sensitivity to reductions in available terrorism reinsurance protection.
News Round-up
Insurance-linked securities
New cat bond sponsors, peril welcomed
S&P has rated US$3.55bn of natural peril catastrophe bonds so far this year, compared to US$2.1bn, US$1.6bn and US$3.3bn for the same period in 2010, 2011 and 2012 respectively. Full-year issuance totals for 2010, 2011 and 2012 were US$4.3bn, US$3.8bn and US$4.8bn.
The first seven months of 2013 saw five new sponsors enter the ILS market: American Coastal Insurance Co, the Turkish Catastrophe Insurance Pool, the Metropolitan Transportation Authority, Renaissance Reinsurance and Axis Specialty. S&P rated its first bond featuring a parametric trigger linked solely to storm surge - MetroCat Re (SCI 15 July). It also rated Bosphorus 1 Re, which has a parametric trigger linked to earthquakes in Turkey, marking the first time since 2007 that the agency has rated a bond covering this peril.
S&P points to other deals hitting the market this year that tested the willingness of investors to accept longer maturities, some unmodelled risks, early call provisions and variable-reset mechanisms.
In general, cat bond pricing has tightened significantly over the past few months, partially driven by an influx of capital into the cat bond market this year from alternative sources such as hedge funds and pension funds. The multiple of the interest spread (premium) to annual expected loss has in recent years been about 6x-8x, but for many deals in 2013 this has contracted to about 3x-4.5x. Furthermore, it appears that some deals have an interest spread below traditional reinsurance pricing.
Hurricanes continue to be the predominant natural catastrophe peril in the US, with all but two bonds exposed to it. One newly defined peril is 'named storms', which covers hurricanes, as well as tropical cyclones that are no longer hurricanes and tropical cyclones that never reach hurricane strength but are given a name by the US National Hurricane Center.
This change in event definition was made following Superstorm Sandy: there are conflicting views as to whether Sandy was technically still a hurricane when it made landfall in New Jersey, yet it caused significant damage once it came ashore. "To cover such occurrences in the future, the event definitions in several transactions that closed since Sandy have been updated to include all named storms, not just hurricanes," S&P explains. We expect this to have a greater effect on aggregate bonds than on per-occurrence bonds because storms that don't reach hurricane strength could still cause losses above the minimum deductible amount we typically see in aggregate bonds, though not at the levels needed to trigger the bonds as we see in per-occurrence bonds."
Meanwhile, in June the SEC proposed to tighten money market fund (MMF) regulations by suggesting two reforms that it could adopt either alone or in combination with other requirements. This could result in the net asset value of an MMF veering away from the standard US$1 share price.
The proceeds from most cat bonds are invested in MMFs. If an MMF has an NAV of less than US$1, S&P warns that it could take a rating action on the issue owning this fund, since there is the potential for investors to receive less than 100% of the original principal balance at maturity.
News Round-up
Insurance-linked securities
Reset boosts cat bond's rating
S&P has raised its rating on Munich Re's Queen Street V Re to double-B minus from single-B plus. The move follows the release of a reset report detailing the new attachment and exhaustion points for the catastrophe bond.
For US hurricanes, the updated attachment point is 110,944 (up from 104,000) and the updated exhaustion point is 143,863 (from 136,000), as calculated by AIR Worldwide Corp. For European windstorms, the attachment point is 13,067 (down from 16,569) and the exhaustion point is 16,174 (from 20,414).
Since the issuance of the Queen Street V Re notes on 27 February 2012, Munich Re has shifted its European exposures toward the UK from France and Germany. In addition, there has been an increase in PERILS' market penetration for its industry exposure database.
This led to a change in pay-out factors for the different CRESTA zones in Europe. Coupled with AIR's disaggregation process, this has resulted in a lasting change in the shape of the exceedance probability curve over time. Based on S&P's adjustments, it has raised the implied catastrophe risk rating to double-B minus from single-B plus and consequently has also raised the rating on the Queen Street V Re notes in tandem.
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Risk Management
ICE unveils SEF plans
IntercontinentalExchange is set to launch a swap execution facility (SEF) - dubbed ICE Swap Trade - in 3Q13. So far, Citi, Morgan Stanley, SG and UBS have signed up to provide firm pricing for the platform.
ICE Swap Trade will offer index and single name CDS across North American and European corporates and sovereigns, with a choice of trading cleared and bilateral contracts. Functionality will include request for quote (RFQ) and central limit order book.
The platform expects to register as a SEF with the CFTC and SEC, and as a multilateral trading facility (MTF) in Europe.
Bloomberg's SEF (BSEF) was the first entity to receive temporary registration by the CFTC. Javelin Capital Markets and MarketAxess are among a number of other firms that have filed SEF applications with the Commission.
News Round-up
Risk Management
FVA methodology unveiled
Numerix has unveiled a new methodology for calculating funding value adjustment (FVA) for vanilla and exotic deals, at both the trade and portfolio level. Available within its CrossAsset pricing and risk analytics suite, the universal framework proposes an efficient, practical implementation of the FVA calculation, the firm says.
The methodology proposed by Numerix for FVA expands upon Barclays quantitative research head Vladimir Piterbarg's framework for valuation in the presence of real collateral. It allows for the computation of the FVA calculation for arbitrary instrument types, as well as efficient deal-by-deal computation.
An American Monte Carlo approach is employed to determine the distribution of prices under future dates, resulting in accurate, real-time FVA computations for both exotics and vanilla instruments. The Numerix approach simplifies Piterbarg's complex formula to create a derived and numerically justified fast-approximated methodology.
News Round-up
Risk Management
Margin calculator integrated
Bloomberg has become the first financial information platform to integrate LCH.Clearnet's margin calculator - SwapClear Margin Approximation Risk Tool (SMART). LCH.Clearnet's Bloomberg Professional service subscribers can now access the tool to simulate their portfolios' exposure to risk factors and perform instantaneous, consistent margin approximations, prior to clearing.
News Round-up
Risk Management
Swaps trade workflow questioned
Even as the CFTC's swap execution facility (SEF) rules go into effect on 2 October, execution models are emerging that will help the buy-side preserve their existing workflow for swaps trading, according to TABB. The firm suggests that the CFTC's decision to reduce the RFQ requirement to two/three from five, in tandem with the voice trading provision, favours buy-side firms that want to keep trading swaps in size with a few trusted counterparties.
"A voice RFQ SEF represents the most familiar trading protocol for many buy-side and sell-side traders, who wish to continue transacting in size," says Will Rhode, director of fixed income research at TABB. "The new rules favour the pre-existing swaps trade workflow."
Interdealer brokers (IDBs) seem to be the best positioned to launch a voice RFQ SEF, since much of their business is voice-based and they can demonstrate an ability to execute in size. However, they still face the challenge of getting the buy-side onto their platforms.
Nearly a quarter of the swaps market will trade via voice RFQ by 2015, according to the 165 industry participants surveyed in TABB's latest SEF Industry Barometer report. Some market participants question how voice RFQ SEFs fit with the original 2009 G20 agreement that 'all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms'.
TABB indicates that participants who have waited three years to challenge traditional swaps players may be feeling a sense of unease. "The swaps market transformation is likely to be slower than imagined," says Rhode.
News Round-up
RMBS
Foreclosure timelines to continue lengthening
RMBS investors face increased carrying costs because most servicers' completed foreclosure timelines will continue to lengthen in the foreseeable future, according to Moody's latest Servicer Dashboard report. Loans in judicial states remain far more elevated than those in non-judicial states, but timelines for non-judicial states will increase at a faster rate than those for judicial states because of changes in foreclosure regulations in a number of key states.
"Timelines for pending foreclosure inventory remain significantly longer than those for completed foreclosures, which means foreclosure timelines will continue to increase," confirms Bill Fricke, a Moody's svp. "Some servicers, however, have brought down the average age of the loans in their pending foreclosure inventory - meaning that the rate of increase in foreclosure timelines should start to slow."
GMAC was the only servicer whose current-to-worse roll rate rose in the first quarter for all product types, including subprime, the report notes. Conflicting priorities at GMAC - including the first-quarter transfer of GSE loans to Walter Management Corp, the pending integration of staff and systems to Ocwen, and the overall uncertainty regarding its operations in the future - have led to the worst roll rates among the servicers included in the Dashboard.
Results for total cure and cash flowing rates in the first quarter were mixed. For example, lower modification volumes drove declines in Chase's rates across product types. Conversely, BAC's rates continued to improve through transfers of non-performing loans to specialty sub-servicers.
Both BAC's and Wells Fargo's re-modification volumes rose in the first quarter as they sought to meet the performance goals set in their settlement with the states' Attorneys General. Ocwen's re-modification rate declined along with its delinquent loan population, but will likely rise following the servicer's acquisitions of the Homeward and GMAC portfolios.
Moody's expects that timelines will continue to lengthen, as they did in the first quarter, because court systems in judicial states such as New York, New Jersey and Florida remain overwhelmed by the sheer number of cases waiting to be processed.
News Round-up
RMBS
Wave of Irish restructurings forecast
Fitch expects long-term restructurings of Irish mortgages to become more prevalent now that a cohesive and credible framework for dealing with arrears has taken shape. The agency anticipates that tools such as split mortgages or trade-down products for borrowers in negative equity will be used first, followed by personal insolvency arrangements (PIAs). Repossession or voluntary surrender is likely to be a last resort.
The latest version of Ireland's Code of Conduct on Mortgage Arrears (CCMA) and the Personal Insolvency Act came into effect last month, and the Land and Conveyancing Law Reform Act also passed into law. While it is still early to estimate how many mortgages will be subject to the three main options of restructuring, PIA and repossession, Fitch says initial assessments can be made in terms of how they will interact.
The Land and Conveyancing Law Reform Act reopens the repossession route and the agency expects the number of repossessions to rise as a result. But it also believes that the act will create incentives for lenders and borrowers to agree longer-term alternative repayment arrangements.
Fitch notes that lenders have started deploying longer-term strategies, as the short-term arrangements common in Ireland - such as principal payment holidays - have often failed to restore borrowers to performing status. Furthermore, the central bank has set targets for lenders to achieve sustainable solutions for mortgages in arrears.
By allowing more borrower contact and widening the definition of non-cooperation, the new CCMA should accelerate discussion of arrears problems between borrowers and lenders and limit the risk that the prospect of debt relief reduces willingness to pay.
"Discussions with lenders suggest they will deploy their own restructuring tools first, before moving on to a PIA if necessary," Fitch says. "They view a PIA as a niche product, most suitable where a borrower has various creditors and types of debt. We maintain our view that PIA is not an easy route to debt forgiveness, as it would be likely to entail relatively stern restrictions on living costs."
Meanwhile, repossession is likely to be a final resort because the number of borrowers in negative equity means that lenders may not want to repossess a distressed property and crystallise a larger loss. Nevertheless, all three options are likely to involve losses for mortgage pools - if not through recovery shortfall, then through debt write-off.
Predicting the impact of longer-term alternative repayment arrangements on RMBS transactions will be difficult until implementation data is available, which may not be for several months. Alongside the stronger CCMA, such arrangements may begin to halt the rise in arrears, as would an increase in foreclosures on long-term problem borrowers.
"Broadly, we would expect the warehoused portion of a split mortgage to translate into a debit on principal deficiency ledgers. Trade-down mortgages may lead to a mild prepayment increase, although it is not yet clear if these will be widely used by banks," Fitch notes.
The agency continues: "Earlier recognition of a loss can benefit RMBS noteholders because excess spread can be used to clear the loss. But deals cope less well when losses are concentrated and it remains to be seen if longer-term arrangements will be treated consistently across transactions."
News Round-up
RMBS
Aussie swap risk highlighted
Moody's notes in its latest Structured Thinking Asia Pacific publication that a number of Australian RMBS closed in or prior to 2007 are at risk of additional expected loss due to a high reliance on swap providers. Swap documentation for the affected deals don't have adequate remedial actions to reduce the likelihood of a transaction becoming unhedged upon the initial swap provider's default.
The key missing remedial actions include: an obligation on the swap provider to use commercially reasonable efforts to find a guarantee or replacement, typically at a loss of A3 or Prime-2 ratings; and execution of a CSA at transaction close. If a transaction becomes unhedged, the additional loss to the transaction and/or tranche will depend on the type of the swap, Moody's notes.
Currency swaps, which cover both principal and interest payments, can result in a higher loss to a transaction compared to fixed-rate and basis swaps. As such, the ratings of RMBS with a high reliance on currency swap providers are most likely to be affected.
The rating impact is expected to be limited to one to three notches, but could be greater for some RMBS, particularly those with large exposures to lower-rated counterparties. The rating impact will depend on the current rating of the swap provider and the current rating of the tranche.
News Round-up
RMBS
Ginnie launches loan-level initiative
Ginnie Mae has begun releasing loan-level data for newly issued single-family MBS on a daily basis. The disclosure file will contain 36 data elements, including information regarding borrowers' debt-to-income ratios and credit scores.
"We are committed to increasing the transparency of the mortgage loans backing Ginnie Mae securities," comments Ginnie Mae president Ted Tozer. "Improving our securities disclosures helps us attract global capital. It also ensures alignment with industry best practices and allows us to more effectively meet the needs of our investors so that they can make informed investment decisions."
Ginnie Mae anticipates adding to its loan-level disclosure by releasing a monthly disclosure file for all existing, active single-family MBS by year-end. Together, the daily and monthly files are expected to provide a comprehensive set of data on the loans backing Ginnie Mae securities.
News Round-up
RMBS
Fannie risk-sharing deal on the cards
National Mortgage Insurance Corporation has agreed to insure approximately US$5bn in residential mortgages in its first risk transfer transaction with Fannie Mae, with an expected effective date in 3Q13. The transaction is contingent on National MI receiving regulatory approval of the pool policy of insurance by the District of Columbia Department of Insurance, Securities and Banking.
The transaction was offered through a formal bid process to private mortgage insurers. Fannie Mae selected National MI as the insurer based on its favourable terms and conditions, as well as beneficial risk share attributes, the firm says.
National MI began writing business in April. Both Fannie Mae and Freddie Mac approved National MI as a qualified mortgage insurer in January.
News Round-up
RMBS
Lower advances weigh on GMAC bonds
Ocwen's acquisition of the servicing portfolio of GMAC Mortgage is said to be credit negative for related fast-pay subprime RMBS bonds due to Ocwen's policy of lower advances and its greater focus on modifications, as opposed to liquidations. Bonds will receive less up-front cash if the advancing rate on the GMACM portfolio falls from its current level of about 65% to around 10%, the rate at which Ocwen advances, Moody's notes in its latest ResiLandscape report.
"Such a drop would outweigh any benefits that those bonds would receive from an increase in modification resolutions, which we expect, or even liquidations - which we do not," the agency says. The lower advance rate is credit negative for affected bonds because they will receive fewer scheduled payments from delinquent loans, leaving them more likely to be outstanding upon credit support depletion, when they must begin sharing principal payments with other bonds.
The affected transactions will receive some additional up-front cashflow if Ocwen steps up liquidations. However, the rise in liquidations in the GMACM portfolio since April will be short-lived because Ocwen focuses more loan modifications than on liquidations. The current up-tick could be due to short sales and REO liquidations that GMACM had left uncompleted, Moody's suggests.
Ocwen will be motivated to modify many of its newly acquired delinquent loans to collect previously made advances. However, since those cashflows will go only to Ocwen until it fully recoups the advances, they won't benefit fast-pay RMBS except to the extent that they generate monthly payments on loans that would not have produced any cash flow until liquidation.
Meanwhile, Ocwen's tight advancing policy is expected to have little impact on fast-pay RMBS backed by the Homeward-serviced loans the company recently acquired because Homeward's advancing rate was already low, at around 20%.
News Round-up
RMBS
Price indexation lifts Aussie WALTV
Fitch has introduced property price indexation to its Australian RMBS criteria, assessing indexed property values for over 818,000 loans in 131 rated public securitisations. This has resulted in an improved weighted average loan-to-value (WALTV) ratio of 57.4%, compared with 63.3% prior to indexation.
The aim of indexation is to provide a more accurate picture of the value of security backing underlying loans, as well as a better assessment of regional variations in house prices when assessing recoveries, Fitch notes. Indexation will be applied conservatively, with the agency giving credit for just 50% of increase in valuation and 100% of any reduced indexed valuation. Indexation will not affect the default probability of a loan, but may affect the level of loss given default of an individual loan.
Indexation will be applied using third-party data sourced from indices produced by RP Data/Rismark. Fitch will index property values based on 76 Fitch-defined regions across Australia, based substantially on the Australian Bureau of Statistics' (ABS) statistical subdivisions. Separate indices will be used for houses and units. Indices will be updated on a periodic basis.
While the WALTV of the entire Fitch-rated portfolio has improved with indexation, the outcome is dependent on the vintage and location of the underlying loans. The index analysis shows that 23.5% of properties overall have decreased in price since settlement. However, almost all the transactions benefit from an overall increase in property indexation.
The regions that suffered the largest house price declines from their peak to 30 June 2013 are East Gold Coast (-18.6%), Logan City (-11.3%) and Ipswich City (-11.2%) in Queensland; Hume City (-9.3%) and Boroondara City (-8.9%) in Victoria; and Northern Adelaide (-5.7%).
Property price indexation has also been introduced to the New Zealand RMBS criteria.
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