Contents

CMBS

CMBS spreads flat, supply up

Generic US CMBS spreads were unchanged yesterday. BWIC supply remained restricted due to IMN's ABS East conference but did increase to over US$150m, with SCI's PriceABS data showing a number of covers from the session.

For example, BACM 2006-6 A3 was covered at mid-102. The tranche was first covered in the PriceABS archive on 12 July 2012 at 108.56. Other BACM tranches out for the bid yesterday include BACM 2005-5F, BACM 2006-1 A1A and BACM 2007-2 A4.

Meanwhile, the BSCMS 2004-PWR5 A5 tranche was traded at mid-102. Its only previous appearance in the PriceABS archive comes from 11 December 2012, when it was covered at plus 44. BSCMS 2005, 2006 and 2007 tranches were all also out for the bid, with BSCMS 2007-PW16 A1A trading in the 90 area.

A cover of around 110 was seen for the CD 2006-CD2 A4 tranche, which had been talked last month at between 100 and 125 and which was covered twice in August - first at 100 and then at 102. CD 2007-CD5 A4 was also covered during the session.

In addition, the CWCI 2007-C3 A4 bond was covered at around 125, while COMM 2006-C8 AM was covered at 130. The latter tranche was covered at 124 last month and the month before. Other COMM tranches available yesterday included COMM 2006-C7 F and COMM 2006-C7 G.

A number of JPMCC tranches were also circulating, including JPMCC 2005-LDP5 AM, which was covered at mid-90. The tranche was covered in the low/mid-90s in September, at 90 in June and at 79 on 19 December 2012 - having first appeared in the archive with a cover at 218 on 31 May 2012.

Also of interest from the session were a number of MSC tranches. MSC 2006-HQ8 J was talked in the low/mid-singles and MSC 2006-T23 C was talked at around 400, with MSC 2006-IQ12 A4 covered at 100 area. One of the many WBCMT tranches out for the bid was WBCMT 2005-C20 AMFX, which was covered at mid-90.

A moderately sized list of seasoned investment grade AJ bonds is set to trade this afternoon, with price talk ranging from plus mid-100s to low-200s. In addition, a large list of 2006 vintage multifamily-directed A1A bonds is due out tomorrow.

JL

RMBS

RMBS BWIC supply picks back up

US non-agency RMBS secondary market activity was solid yesterday, with US$556m of bonds offered on bid-lists. Non-agency BWIC volume was up considerably from Tuesday's levels, with subprime paper leading the charge, although agency supply was light.

The ABFC 2007-WMC1 A2B tranche was one such subprime name out for the bid in the session. It was talked yesterday in the low/mid-60s, having been talked in the low-60s in the previous session. It was also in the low/mid-60s when it made its debut in SCI's PriceABS data back on 14 February.

Another ABFC tranche - ABFC 2005-HE2 M3 - was also circulating. It was talked in the high-70s, having been talked between the mid-70s and low-80s last month. PriceABS shows two covers for the tranche, with the latest on 16 January in the mid-70s.

In the Alt-A space, BAFC 2005-H 3A1 made its first appearance in the PriceABS archive and was talked in the low-80s. The option ARM CWALT 2006-OA12 A2 tranche was talked in the high-50s, having been talked in the very high-50s in the prior session and in the low-60s back in May. When it first appeared in PriceABS on 14 August 2012 it was talked in the low/mid-40s.

In the fixed space, BSABS 2003-AC4 M1 was talked in the high-80s and CFLX 2006-2 A5 was talked in the low/mid-90s. The former tranche was talked in the mid-80s back in July 2012, while the latter was a new addition to the archive.

The only recorded DNT from the session was RAMP 2004-RS9 MII1. There were successful trades for CWL 2005-BC5 M1, FFML 2005-FF6 M1 and MSHEL 2005-2 M3.

JL

Structured Finance

SCI Start the Week - 7 October

A look at the major activity in structured finance over the past seven days

Pipeline
Many deals joined the pipeline last week only to price soon afterwards. By the end of Friday, only two new ABS, one RMBS, one CMBS and two CLOs remained.

The ABS were Eagle Credit Card Trust Series 2013-1 and €732m Red & Black Auto Germany 2, while the RMBS was US$500m Springleaf Mortgage Loan Trust 2013-3. The CMBS was US$675m Madison Avenue Trust 2013-650M and the CLOs were US$141m CIFC Funding 2014-I and €340m Grosvenor Place CLO 2013-1.

Pricings
After easing off in the previous week, last week saw the pace of new issuance pick back up. As well as eight ABS prints, six RMBS, one CMBS and six CLOs priced.

The ABS new issues comprised: US$181m Direct Capital Funding V Series 2013-2; US$500m Dryrock Issuance Trust Series 2013-1; £392m E-CARAT 2; €2bn FADE Series 18; C$704.33m Ford Auto Securitization Trust Series 2013-R4; US$330m Grain Spectrum Funding Series 2013-1; C$500m Hollis Receivables Term Trust II 2013-1; and €515m Kimi 2013-1.

The six RMBS prints consisted of: £1.138bn Brass No.3; €4.85bn Dolphin Master Issuer Series 2013-2; A$290m Pinnacle Series Trust 2013-T1; US$507.8m PMT Loan Trust 2013-J1; A$750m Series 2013-2 WST Trust; and A$1.25bn SMHL Series Securitisation Fund 2013-1. As for CMBS, the US$1.2bn COMM 2013-CCRE11 priced.

Finally, the CLO prints were: US$413m BlueMountain CLO 2013-3; US$411m Cent CLO 19; US$414m Galaxy XVI; US$360m Ivy Hill Middle Market Credit Fund VII; US$519m OHA Credit Partners IX; and US$315m Saratoga Investment Corp CLO 2013-1.

Markets
US ABS spreads last week tightened by 2bp-5bp for all consumer sectors except credit cards, according to Wells Fargo ABS analysts. "Consumer ABS spreads remain stuck in a trading range that has prevailed since about mid-June," they say.

Credit card floaters were 2bp-3bp wider, while fixed-rate credit card bonds were unchanged. Investor demand appears strongest for auto paper.

The US CLO secondary market kept up pace with the week before, with close to US$600m of BWIC volume. Bank of America Merrill Lynch securitised products strategists report that the bulk of the activity was concentrated in 1.0 deals, with about 40% of the volume coming from senior triple-A tranches.

US agency RMBS tightened further last week, with lower coupons particularly continuing to outperform Treasury hedges, according to Barclays Capital RMBS analysts. "FN 3.5s-4.5s were up by 4-6 ticks, while 5s increased by almost 9 ticks," they note.

The US non-agency RMBS witnessed solid secondary activity, as SCI reported on 3 October. SCI's PriceABS data recorded a number of tranches from Wednesday's session, with subprime paper attracting price talk in the 60s and 70s.

The US CMBS market was quiet last week, not least because of the partial government shut-down. Spreads were flat and secondary cash volume remained under US$2bn, say Deutsche Bank CRE analysts.

"BWIC volumes subsided from the elevated levels of [the previous week] to US$1.5bn, a third of which came from a Freddie multi-family directed list and overall trading volumes totaled US$6.4bn," they note.

The European CMBS market was also quiet and dominated by talk, as SCI reported on 4 October. One trader reports positive market sentiment, but no significant pick-up in activity predicted until the US debt ceiling is resolved.

He says: "BWICs are still trading at good levels, but they have continued to be driven by the dealers. Clients tend to know which names they are interested in and which they are not, and we have not been seeing a rush from people looking to get involved."

Deal news
• The percentage of US CMBS conduit loans paying off on their balloon date reached 74.5% by balance in September, which is the highest reading since December 2008, says Trepp. It is more than two points higher than the 72.1% reading for August and well above the 12-month moving average of 63.9%.
• EMEA CMBS servicers are set for a busy month, according to Fitch. Of the 37 loans which the agency rates that are maturing in this quarter, 36 fall due in October.
• Another auction has been scheduled for Trainer Wortham First Republic CBO IV, which was previously on the block in July (SCI 3 July). The next auction will take place on 23 October, when the collateral will only be sold if the sale proceeds are greater than or equal to the auction call redemption amount.
• An auction has been slated for Longport Funding II on 21 October. The trustee shall sell the collateral debt securities only if the sale would result in proceeds sufficient to meet the auction call redemption amount.

Regulatory update
• The Reserve Bank of Australia (RBA) has released for consultation draft reporting templates for CMBS and ABS to be eligible for repo. The Australian Securitisation Forum notes that the new information requirements reflect the RBA's desire for more comprehensive information about the securities.
• The working group led by Georges Duponcheele has published two research papers dealing with key aspects of its proposed arbitrage-free approach (AFA) to securitisation capital. They cover the applicability of the AFA and the impact of maturity effects.
• A Federal Court in New York has ruled that the FDIC can proceed with its claims against several major banks in connection with US$388m of RMBS purchased by the now-defunct Colonial Bank (SCI 15 August 2012).
• Changes to credit card and unsecured credit rules in Singapore finalised last month are set to improve the credit quality of securitisation receivables. The changes are expected to improve underwriting standards and the overall quality of obligors, providing securitisation transactions with greater protection against the default of weaker obligors.
• ESMA has published final guidelines on reporting obligations for alternative investment fund managers (AIFMs). Under the guidelines, hedge funds, private equity and real estate funds must regularly report certain information to national supervisors.

Top stories to come in SCI:
Risk retention ramifications for US CLOs

ABS

Further fines for Catalyst leadership

The UK FCA has fined two more Catalyst Investment Group executives after previously fining former compliance officer Alison Moran and censuring the company (SCI 7 October). Timothy Roberts has been fined £450,000 and Andrew Wilkins has been fined £100,000.

Catalyst ceo Roberts has also been banned from the industry. Wilkins is a former director at the company and the FCA has prevented him from holding senior roles in the future.

The FCA found both men failed to act with due skill, care and diligence, with Roberts' conduct demonstrating "a lack of integrity". Roberts and Wilkins have referred their cases to the upper tribunal, which may uphold, vary or cancel the FCA's decision.

Structured Finance

Merger to create full service boutique

The Seaport Group and Global Hunter Securities plan to merge their firms to create a full service global investment bank. The unification is set to be completed by year-end and the new entity will be headquartered in New York and New Orleans.

Building on Seaport's distressed debt expertise, the companies will create a full service boutique investment bank offering clients advisory, sales and trading services across all fixed income products and markets. Global Hunter ceo Daniel Conwill and Seaport chief Michael Meager will serve as co-ceos of the new firm.

Structured Finance

Securitisation group expands

Clayton Holdings has promoted Dan Pinero to director of securitisation for operations and Joe Ozment to director of securitisation for client services. Pinero has spent almost 10 years at Clayton, while Ozment joined in 2011 and has previous experience from Lender Processing Services and Goldman Sachs. The pair will manage an expanded securitisation team at the firm and report to Scott Mowry, svp and head of transaction management.

Separately, the US Department of Justice is understood to have launched an investigation in connection with the firm's RMBS activities.

Structured Finance

Asian credit sales head appointed

Jimmy Ye has joined Société Générale in Hong Kong as head of credit sales for Asia ex-Japan. He was previously head of credit sales for China at Nomura and has also worked in Chinese and Taiwanese fixed income roles for Credit Suisse and in Greater China flow credit sales for Calyon.

Structured Finance

Neutral fixed income market prepped

SunGard and DelphX are teaming up to provide Financial Information eXchange (FIX) connectivity through SunGard's Global Network (SGN) to create CentralX. CentralX will be a neutral, centrally-cleared global facility allowing for anonymous all-to-all interaction of orders entered by SGN users and buy-side and sell-side subscribers to DelphX.

SGN offers trade automation and connectivity for listed derivatives, fixed income and other products. DelphX provides real time fair value pricing, matching and clearing services for corporate bonds, ABS and RMBS.

Structured Finance

French credit sales chief selected

Christian Chardot has joined RBC as head of credit sales, France. He is based in London and joins from Lloyds TSB, where he also held a credit sales role, and has previously worked at RBS, Lehman Brothers and CDC. He has experience in structured products and credit derivatives.

Structured Finance

London legal partners appointed

Mayer Brown has added two securitisation partners to its banking and finance group in London. Richard Todd and David O'Connor join from Berwin Leighton Paisner and Allen & Overy, respectively.

Todd has worked at Mayer Brown before, as well as at Lloyds, JPMorgan and VTB Bank. He specialises in trade receivables and auto loan ABS as well as RMBS.

O'Connor's practice includes RMBS, CMBS and covered bonds and he also has investment banking experience from a stint at Deutsche Bank. His practice also includes CMBS restructurings, on which he will work alongside Ashley Katz, Devi Shah and Alistair Graham, who joined the firm earlier this year.

Structured Finance

Firm censured for ABS sales

The UK FCA has censured Catalyst Investment Group for misleading investors while selling bonds between November 2009 and May 2010. Former compliance officer Alison Moran has also been fined £20,000.

Catalyst would have been fined, but is in default and unable to pay. The firm offered life insurance securitisation bonds issued by ARM Asset Backed Securities despite knowing that ARM did not have a licence from its local regulator, the CSSF.

ARM had applied for a licence but the CSSF's decision was still pending and ARM had been asked to stop issuing bonds in the meantime. Catalyst continued to accept funds from investors without disclosing ARM's position or the risk that ARM could be liquidated if its licence application failed.

Structured Finance

Chenavari launches listed company

Chenavari Capital Solutions has closed an IPO for an aggregate of 130,300,000 ordinary shares, raising gross proceeds of £130.3m. The strategy of the listed investment company is designed to allow European banks to reduce their risk-weighted assets under the Basel 3 rules via capital solutions transactions, while providing attractive returns to investors.

Advised by Chenavari Investment Managers, the company is targeting a net total return on invested capital of over 12% per annum. It is seeking exposure to a range of underlying credit risks, including mortgage, corporate and SME loans, ABS, derivatives and counterparty risks.

Applications have been made to the London Stock Exchange and the CISX for the entire issued share capital of 130,300,000 shares to be admitted to trading.

CDO

CDO sale on the cards?

Another auction has been scheduled for Trainer Wortham First Republic CBO IV, which was previously on the block in July (SCI 3 July). The next auction will take place on 23 October, when the collateral will only be sold if the sale proceeds are greater than or equal to the auction call redemption amount.

CLOs

CLO strategic partnership formed

Sound Harbor Partners and Macquarie Credit Investment Management have formed a strategic partnership to launch a series of CLO funds. The deal brings the scale and resources of Macquarie to the boutique investment house's investors, enabling Sound Harbor to expand its client base, investment talent and assets under management.

CLOs

Investment manager targets Dexia

New York Life Investments is set to acquire full ownership of Dexia Asset Management for €380m, expanding the company's reach into Europe and Australia. New York Life already has eight CLOs and the acquisition will further strengthen its credit credentials.

CMBS

Law firm adds CMBS pros

Winston & Strawn has added Christine Spletzer and Bola Oloko to its capital markets real estate practice in New York. The practice includes an array of real estate transactions and CMBS.

Spletzer has worked at Winston & Strawn before and joins from Paul Hastings. She focuses her practice on CMBS and has particular experience in mezzanine financing.

Oloko was previously of counsel at Duval & Stachenfeld. He also has a focus on securitisation, including issues arising out of legacy CMBS and other securitisation transactions.

Insurance-linked securities

ILS manager adds research director

Jennifer Norris has joined Elementum Advisors as director of research in Chicago. She was previously an associate at Sidley Austin, where she spent five years, and joins the ILS investment manager in a newly-created role.

Insurance-linked securities

Collateralised reinsurance firm formed

Montpelier Re Holdings has filed a registration statement with the US SEC relating to the proposed IPO of its Blue Capital Reinsurance subsidiary. The newly-formed Bermuda reinsurance holding company will primarily offer collateralised reinsurance in the property catastrophe market by underwriting a diversified portfolio of short-tail reinsurance contracts and investing in insurance-linked securities. The number of shares to be offered and the price for the proposed offering are yet to be determined.

Insurance-linked securities

Software firm buys ILS market access

SS&C Technologies Holdings has bought Prime Management Limited, a fund administrator and service provider to investment structures, sponsors and managers in the ILS market. The acquisition builds SS&C's ability to administer ILS and the funds which invest in them.

Risk Management

NewOak partners with risk specialists

NewOak Advisors has formed a strategic alliance with Smith Regulatory Strategies (SRS). The alliance will combine NewOak's market expertise with SRS's risk management and regulatory compliance capabilities.

The alliance will initially focus on Basel 3 risk-based capital compliance, including stress testing, asset valuation, risk assessment and model validation. The firms will also work together on bank-owned life insurance separate accounts and commercial and industrial lending and investing.

RMBS

Common GSE platform progresses

A year after the FHFA released a white paper on a proposed framework for a common securitisation platform for Fannie Mae and Freddie Mac (SCI 5 October 2012), the joint venture is closer to becoming a reality. Among other developments, a certificate of formation has now been filed in Delaware to establish Common Securitization Solutions (CSS) as a limited liability company.

Filing the certificate of formation marks a significant milestone towards reshaping the RMBS market. CSS has also leased commercial space in Bethesda, Maryland and retained an executive recruitment firm to identify candidates for the roles of ceo and chairman.

RMBS

Collaboration produces OAS model

Deutsche Bank has partnered with Bloomberg to launch a new option-adjusted spread (OAS) model. Together with the bank's prepayment model, the OAS model seeks to provide a standard, accurate way to value agency RMBS and CMOs.

The Bloomberg OAS model enables users to generate future interest rate paths using methods that significantly reduce the risk of negative rates. Users are able to preserve a wide range of possible outcomes while using only 256 interest rate paths, providing real-time results in seconds.

OAS valuations can then be derived by inputting these paths into Deutsche's prepayment model. The service has been made available to Bloomberg Professional service subscribers.

RMBS

Servicing standards lawsuit filed

New York Attorney General Eric Schneiderman has filed a lawsuit against Wells Fargo so that the bank can be compelled to honour its commitments under the 2012 National Mortgage Settlement. Wells Fargo is accused of multiple violations of the servicing standards outlined in the settlement.

Violations of the timeline servicing standards increase the likelihood of distressed homeowners losing their homes. Schneiderman's office has also suspended a similar enforcement action against Bank of America, which has agreed to implement a robust set of systemic reforms to ensure the compliance of its servicing standards.

Bank of America has committed to designate high-level staff with decision-making authority to relevant parts of its business to work to reach prompt resolution on all pending or delayed loan modification requests and will also reassess its communication with borrowers. Bank of America has also agreed to stop transferring New York mortgage servicing rights to third parties when borrowers are already in negotiations for a loan modification or are making trial payments on a loan modification.

ABS

P2P ABS debuts

National Alliance Capital Markets and Waterford Capital have completed what is believed to be the first securitisation of peer-to-peer consumer loans - Eaglewood Consumer Loan Trust 2013-1 - for Eaglewood Income Fund I, a consumer credit fund managed by Eaglewood Capital Management. The transaction comprises US$40m class A notes and US$12.8m class Bs, and features a revolving period whereby collections will be reinvested in additional loans post-closing.

The securities are backed by prime unsecured consumer loans that were purchased by the Eaglewood fund from LendingClub Corporation, which will also service the loans on Eaglewood's behalf. The pool has a weighted average borrower FICO score of over 700, weighted average borrower income north of US$90,000 and a weighted average interest rate of 12%-14%. All of the loans have a 36-month term.

Eaglewood specialises in investing in online lending strategies and the ABS represents approximately half of the assets under management in the Eaglewood Income Fund I. Jon Barlow, the firm's ceo and cio, comments: "We expect our investors to benefit from the transaction in several ways as it diversifies our borrowing sources, matches our liabilities with our assets and fixes the interest rate on a material portion of our debt. We also think the transaction will lower our borrowing costs and generally increase lender confidence in our fund. As investor interest in online lending strategies continues to grow, we believe that institutional demand for similar securitisations that are properly structured will increase going forward."

ABS

Aircraft ABS issuance weighed

Fitch expects recent positive trends in aircraft leasing to pave the way for increased new operating lease ABS issuance in the near term. However, evolving risks in the sector could impact long-term performance and warrant continued consideration.

Lessors have steadily grown their share of the aircraft finance market. Meanwhile, record expected aircraft deliveries and tightened financing sources have created the need for increased capital markets activity. The market has seen three aircraft lease securitisations or similar facilities so far this year.

Steadying airline industry and aircraft ABS performance is also making future issuance more likely. The improved health of commercial airlines in some regions has helped to lower default-related pressures in the near term. At the same time, lease rates and values on aircraft have firmed up following deterioration over the last several years.

"Lease rates are closely tied to long-term interest rates, so securitisations with fixed-rate liabilities could be buoyed by a rising interest rate environment," says Fitch senior director Bradley Sohl.

However, proposed accounting changes regarding the treatment of operating leases have the ability to shift the characteristics of lease demand in the future. Additionally, new technology and increased narrow-body competition could usher in new risks to aircraft securitisations.

Nearly all recent ABS portfolios comprise current generation narrow-bodies. While demand will remain strong for these aircraft into the next decade based on the sheer volume of the fleet, Fitch notes that new technology calls for increased scrutiny regarding long-term lease rate potential, aircraft useful life and the amortisation profile of ABS structures.

Nevertheless, the agency anticipates stable asset and rating performance for recent vintage operating aircraft ABS securitisations in the near term.

Structured Finance

2.0 structuring tool launched

Lewtan has launched a structuring tool geared towards the 'securitisation 2.0' environment. Dubbed ABSNet Modeler, the firm says that the offering is unique due to the transparency of the cashflow waterfall and resulting output.

The tool is designed to assist users at each step of the deal structuring process with advanced cashflow analytics to run deal, pool, tranche and loan-level analysis using stochastic and deterministic methods. Capital structures can be optimised under various rating agency stress scenarios to ensure that issuers minimise funding costs.

Structured Finance

RBA updates securitisation reporting templates

The Reserve Bank of Australia (RBA) has released for consultation draft reporting templates for CMBS and ABS to be eligible for repo. The Australian Securitisation Forum notes that the new information requirements reflect the RBA's desire for more comprehensive information about the securities.

The templates require transaction-level and security-level templates for CMBS and ABS and are comparable to those finalised for RMBS earlier this year (SCI 25 April). The cash flow waterfall template for RMBS will apply to both CMBS and ABS.

Anonymised loan-level reporting is also required for CMBS, together with a separate pool-level template. Loan-level reporting is not required for ABS, although a separate pool-level template is proposed to capture the general characteristics of the financial contracts backing the securities.

The RBA is also proposing some changes to the RMBS loan-level template to further safeguard the privacy of borrowers whose loan information is reported in the template. Additionally, the RBA has also proposed replacing the postcode information used in the RMBS loan-level template with a broader Australian Bureau of Statistics statistically defined area.

The draft reporting templates and changes relating to privacy are now open for comment. Comments should be received by 28 October.

CDS

Codere auction scheduled

The auction to settle the credit derivative trades for CODERE FINANCE (LUXEMBOURG) S.A. CDS is to be held on 9 October. The move follows the determination of a failure to pay credit event on the name (SCI 19 September).

CDS

SEF licensing agreements signed

Markit has licensed its Markit CDX North America IG, Markit CDX North America HY and Markit iTraxx Europe indices to four swap execution facilities (SEFs). As of 2 October - the first day of SEF trading under CFTC rules - Bloomberg, MarketAxess, Tera Exchange and Tradeweb Markets are licensed to facilitate trading in Markit's CDS indices. The firm says that licenses are being made available to all SEFs under the same commercial terms.

CDS

European client clearing launched

ICE Clear Europe has introduced client clearing for European credit default swaps, with five clients actively clearing trades and five clearing members signed up. ICE's client clearing solution covers 47 European index and 121 corporate single name CDS instruments.

The clearer says its client clearing solution permits firms to retain important trading and contractual relationships, including accepting transactions from a range of competitive existing execution models. As a middleware and connectivity provider for CDS execution, ICE Link connects dealers, inter-dealer brokers and over 790 buy-side firms - enabling product standardisation and integrated post-trade processing.

CLOs

CLO manager concentration highlighted

The ten largest CLO managers manage over 50% of US CLOs and 30% of European CLOs, Moody's notes in its latest CLO Interest publication. Nevertheless, the entrance of new managers to the market appears to have more than offset the consolidation of managers that prevailed between 2009 and 2011.

The number of US managers declined by roughly 23% to 120 in 2011, from 156 before consolidation activity began. This number rose to 131 by mid-2013, with the addition of 18 new managers since early 2012, according to Moody's. The new managers account for US$13bn of the US$82bn in assets backing the 180 deals rated by the agency in 2012 and the first half of 2013.

Despite the US$93bn in new issuance, total assets under management declined by about US$9bn from end-2010 to mid-2013. Roughly 30% of the outstanding deals at end-2010 had redeemed.

Unless conditions change dramatically, Moody's expects new managers to continue entering the market. At the same time, manager consolidation continues in Europe.

The number of European CLO managers declined by 23% to 46 as of June 2013, from a pre-consolidation peak of 60. Assets under management declined to €61.6bn in June 2013 from €73.2bn in January 2011. Two new firms entered the market in the second half of 2012, taking over management responsibilities for three CLOs.

European CLO management remains less concentrated than in the US, however. Large managers in Europe controlled 31%, just under a third of assets under management as of June 2013, accounting for 49 of the 181 transactions. There were only four large managers in the European market in mid-2013, up from two in January 2011.

Large US managers - those with 10 or more CLOs - control 50.5%, or just over half of all assets under management, across 335 of the 665 US CLOs. There were 20 large managers in the US market in mid-2013, compared to 17 in January 2011.

The concentration of assets under management by large US CLO managers suggests that the distribution of managers in the US market is barbelled, with sizeable numbers of both small and large managers.

Moody's notes that the return of existing CLO managers to the market since the financial crisis has been gradual: more than 40% of CLO 1.0 managers have yet to manage a CLO 2.0 transaction. During the first half of 2013, 15 existing managers issued their first CLO 2.0, accounting for 16 deals worth almost US$6.5bn. In comparison, 25 managers returned to the CLO market in 2012, closing 38 deals worth about US$15bn.

In total, 81 managers - who currently manage 87% of the US$270bn CLO market - had taken on CLO 2.0 deals prior to end-June 2013. These include the top 35 managers by assets under management and 18 new managers that entered the market since 2012. At the same time, 50 managers were still managing only CLO 1.0 deals, with about three-quarters of these controlling CLOs amounting to US$1bn or less.

CLOs

PFI CLO restructured

NIBC Bank has restructured its project finance CLO, Adriana Infrastructure CLO 2008-I, and placed the entire £477.8m class A1 notes with Aviva Investors. The £620.6m transaction is backed by sterling-denominated loans to operational public-private partnership projects across 47 borrowers in the UK originated by NIBC.

The restructuring involved an increase in the credit enhancement of the class A1 notes (from 6.75% to 23%), provided via subordination of the class A2 and class B notes, as well as restrictions on the portfolio replenishment and a tightening of the eligibility criteria. Moody's upgraded the class A1 notes to Aaa from A3, following the restructuring.

Of the capital structure, 77% is now rated Aaa, with a WAL of approximately 10 years. The class A1 carries a coupon of 120bp over six-month Libor.

At original close in April 2008, the class A1 notes were sized at €962.8m and priced at 50bp over six-month Euribor (see SCI's new issuance database).

CLOs

CLO manager handbook released

Fitch has published the first edition of its US CLO Asset Manager Handbook, which contains profile reports for 46 active US CLO managers. The reports are designed to provide investors with a consistent framework for evaluating and benchmarking managers.

The reports contain a combination of key manager facts and attributes, including corporate structures, key personnel, assets under management and CLOs under management. In the case of 19 managers, Fitch conducted operational risk assessments and reviewed the managers' investment processes.

CMBS

Bulk of EMEA CMBS loans coming due

EMEA CMBS servicers are set for a busy month, according to Fitch. Of the 37 loans which the agency rates that are maturing in this quarter, 36 fall due in October.

Fitch notes that around 75% of the loans due are highly levered, with LTVs above 80%. Timely repayment for those is unlikely and the agency expects 14 of the loans maturing this quarter to have negative equity.

There are already six loans in default and special servicing and they are expected to generate a loss. Most borrowers are unable to refinance, making maturity extensions and standstill agreements an option in many cases, particularly outside the UK.

CMBS

Japanese CMBS, autos improve

Japanese CMBS and auto loan ABS performance continued to improve in July and August, according to Moody's Japan. High job security is expected to keep performance trends stable.

The CMBS default rate fell to 17.6% in August, down from 21.8% in July and down from 33.1% a year earlier. The annualised auto loan ABS default rate for July fell to 0.66%, although August figures are not out yet.

CMBS

Conduit balloon payoffs highest in years

The percentage of US CMBS conduit loans paying off on their balloon date reached 74.5% by balance in September, which is the highest reading since December 2008, says Trepp. It is more than two points higher than the 72.1% reading for August and well above the 12-month moving average of 63.9%.

By loan count, 70.1% of loans paid off, which is a little lower than the August reading. The 12-month rolling average by loan count is 66.8%.

Payoff rates in 2013 have been consistently higher than those last year, which were dominated by 2007-vintage loans with five-year balloons. Many of the loans reaching their maturity now are 10-year balloons that were originated back in 2003.

CMBS

High Q4 default probability predicted

Moody's expects European CMBS loan repayment rates for loans maturing in 4Q13 to be no better than the four-quarter rolling average of 37%. The agency projects a high refinance default probability for 55% of the 31 loans - worth €2.3bn - that will mature in the fourth quarter, based on the increased number of loans with high Moody's LTV ratios and lower average Moody's debt yield. In addition, 39% of the loans are secured by retail and mixed property portfolios, which have been the worst performing property types.

The repayment rate for loans securitised in CMBS transactions surged in 3Q13, as 50% of the 44 loans - worth €7.8bn - with scheduled original maturity dates during the quarter prepaid or repaid at maturity. The higher repayment rate was driven by the refinancing success of the large loans secured by German multifamily assets and by the overall lower number of loans, with high Moody's LTV ratios compared with previous quarters.

But if the 11 multifamily loans in the Quokka transaction were effectively treated as two loans due to certain structural features, the repayment rate would be 37%. This still represents an improvement over the record low 2Q13 repayment rate of 25%, however.

The outcomes of the 3Q13 loan maturities were polarised between the refinancing success of the German multifamily loans and the continued low repayment rate for the remaining loans, Moody's notes. Excluding all the German multifamily-backed loans that had original maturity dates in the third quarter, the repayment rate for the remaining loans is only 29%. Additionally, more loans repaid with a loss in the quarter compared with previous quarters and fewer loans were extended.

CMBS

Retail property prices outperforming

Retail properties continue to be the best performing US core commercial real estate sector, with prices increasing by 23.3% over the last 12 months, according to the latest Moody's/RCA CPPI report. The national all-property composite index increased by 1.2% in August, driven by a 1.7% increase in its core commercial component. Apartment prices nationally increased by 0.1% during the month.

"Investor demand for apartment and commercial properties has helped the national all-property composite recover nearly two-thirds of its peak-to-trough loss," says Moody's director of commercial real estate research Tad Philipp. The index has increased by 43.8% since its December 2009 trough and now stands 14% below its December 2007 peak.

Even though apartment price growth continues to cool, six non-major apartment markets - led by Denver - have topped their pre-crisis peak. Among the non-major apartment markets, Miami and Las Vegas were the furthest below their pre-crisis peaks, each falling by more than 50% and recovering less than half the loss.

Prices in non-major markets have grown by 12.9%, outpacing growth of 10.2% in major markets over the last 12 months.

Risk Management

Customised stress-test options offered

Moody's Analytics has added customisation options to its Portfolio Analyzer (PA) suite of stress-testing products, including Mortgage Portfolio Analyzer (MPA), Auto Portfolio Analyzer (APA) and PA-ABS, a credit model for asset-backed securities. The aim is to allow financial institutions to create custom credit models using their own historical data and lending patterns, thereby reflecting the needs of their own data sets. The firm says that customisation options provide the flexibility to adjust model parameters at the individual-loan level or for the entire portfolio, and can also be used to incorporate user assumptions and to reflect loan modifications.

Risk Management

Validation tool enhanced

Interactive Data has released a new set of transparency and workflow enhancements to its Vantage solution. The enhanced Vantage Price Validation Workflow module aims to enable buy- and sell-side firms to more efficiently manage their price review process, thereby reducing the operational cost of meeting current regulatory requirements.

The module is designed to serve as a central hub for client validation activities by replacing the typically manual spreadsheet- and paper-based price review process. Additionally, it automates the loading of portfolio, market and exceptions data files, enabling users to review a range of market and assumptive data alongside Interactive Data's content within a user-friendly interface.

RMBS

ESAIL 2007-5 restructuring proposed

Meetings for all Eurosail UK 2007-5NP noteholders have been scheduled for 31 October to consider an extraordinary resolution to approve the sale of the transaction's remaining claims against Lehman Brothers and an associated restructuring proposal. The restructuring proposal revises the original sale proposal, which was approved by the class A noteholder in July 2012 but never implemented.

Out of a stipulated claim totalling US$170m, approximately US$56.4m has been received to date, according to European asset-backed analysts at RBS. The extraordinary resolution would, among other things, authorise Agfe to act as the auction agent for the claims. The restructuring includes the re-denomination of the class A1a euro tranche into sterling and amendments to the capital structure, including a potential partial write-down of subordinated notes and splitting the senior notes into fast-pay and slow-pay tranches.

It is anticipated that the aggregate fees for the appointments of the auction agent and additional service providers, as well as legal fees, costs and expenses of the directing instrument holders will be approximately £600,000.

RMBS

Colorado storms affect RMBS bonds

Severe storms, flooding, landslides and mudslides in nine Colorado counties adjudged by the Federal Emergency Management Administration (FEMA) as eligible for Federal assistance have affected 1.08% of the entire US non-agency RMBS universe, reports Morningstar. More than 75% of the affected houses were securitised between 2005 and 2007.

The overall exposure of non-agency RMBS properties to the event is relatively small and insurance proceeds should help cover losses, but the rating agency notes prime bonds with less credit support could be impacted. In an extreme scenario with 100% loss severity, losses could be as high as 34% of current senior credit support.

RMBS

Modification performance analysed

At least 31% of the US mortgage loans that were seriously delinquent in December 2008 have been modified at least once and performed much better than those that weren't modified, according to Moody's latest Servicer Dashboard publication. The 2Q13 report focuses on the status, as of June 2013, of approximately 1.1 million loans that were 60-plus days delinquent and in foreclosure in December 2008.

Among modified loans by servicer that Moody's analysed, Ocwen's loans performed the best when considering volume and quality. "The performance of Ocwen's modified loans could reflect the company's higher propensity to re-modify loans versus other servicers," says Moody's vp and senior credit officer William Fricke.

Of all the servicers analysed, Ocwen modified the highest percentage of loans that were seriously delinquent in December 2008, at 35%. Ocwen's percentage of modified loans that are current today was second highest, at 41%; it also had the lowest percentage, at 22%, of modified loans that are delinquent today.

Although Chase had the highest percentage of modifications that are current today, at 44%, it had the lowest number of modifications overall - at 30%. "Chase took a more conservative approach to modifications than its peers and focused on performance rather than volume," Fricke observes.

At 43%, GMAC liquidated modified loans at the highest rate of all the servicers. Although this may be attributed to possible flaws in its modification decision process, it could also reflect that the composition of its delinquent loan portfolio in 2008 may have been better suited to short sales, Moody's suggests.

GMAC's performance has improved since transferring servicer operations for its GMACM loans to Ocwen in 1Q13. Previous loan modifications and improved economic conditions also boosted performance.

Of the 69% of seriously delinquent loans that were not modified, 45% were already in foreclosure in December 2008. "Even though modified loans performed better than those that were not modified, it is difficult to halt the foreclosure process once it has been started," comments Fricke. "Servicers, at least initially, chose to modify loans with fewer operational challenges and legal hurdles."

RMBS

LMI sensitivity examined

Moody's says that most Australian RMBS transactions with lenders' mortgage insurance (LMI) insuring the mortgage loan payments are insensitive to changes in the credit quality of mortgage insurers. The agency analysed 215 Australian RMBS notes with LMI and found that the ratings of only 11 senior and two mezzanine tranches were reliant on the credit quality of mortgage insurers.

The conclusions were made after it conducted collateral and cashflow analyses on 118 Moody's-rated term Australian RMBS transactions. In order to determine the sensitivity of the note ratings to the credit quality of the mortgage insurers, the agency compared the ratings of each note to its MILAN model-implied ratings, which do not give benefit to LMI support.

If the model-implied rating was equal to the note rating, the tranche was deemed insensitive to changes in the credit quality of mortgage insurers. However, if the model-implied rating was lower than the note rating, the notes were deemed to be sensitive to changes in the credit quality of mortgage insurers.

Moody's reports that the factors that impact MILAN Aaa credit enhancement include weighted-average scheduled loan-to-value ratios, property types, documentation types and portfolio diversification. The transaction parameters that affect expected losses include capital structure and payment priorities and triggers.

RMBS

Extraordinary expenses impact ratings

How US RMBS transactions account for extraordinary expenses has implications for both potential credit loss and potential rating volatility, reports Kroll Bond Rating Agency. Extraordinary expenses can fluctuate considerably, making them hard to anticipate.

One way of treating extraordinary expenses is as amounts paid by the trust fund for the benefit of all noteholders which therefore should be borne by all noteholders, such as when a deal is structured to allow these expenses to come out of the net weighted average coupon (WAC). Alternatively, they can be treated as being caused by a credit event which should therefore come from available funds, with any shortfalls shouldered by the subordinate bonds.

Since the financial crisis, most RMBS transactions have been structured in the former manner, which reduces net WAC rather than available funds. As net WAC is used to determine the interest rate paid to bondholders it has the potential to cause senior notes to receive a lower coupon than the nominal fixed coupon, but would not be considered an interest shortfall and so would have no rating impact.

Interest-only certificates are particularly sensitive to such shortfalls since their coupons tend to be a fraction of the excess net WAC over a prefixed coupon. Kroll believes senior noteholders need to be aware of this potential risk to the receipt of the normal coupon.

The latter methodology, using payments from available funds before interest and principal payments, results in any shortfall being borne first by the most subordinate bondholders. This can lead to interest shortfalls or bond writedowns, which could lead to rating volatility. Kroll notes that a number of transactions it has rated this year are using this structure.

RMBS

Fannie debuts risk transfer deal

Fannie Mae is in the market with its inaugural risk transfer transaction. Dubbed Connecticut Avenue Securities Series 2013-C01, the US$675m RMBS references a pool of 117,745 high-quality prime mortgage loans acquired by the GSE during 3Q12.

Arranged by Bank of America Merrill Lynch and Credit Suisse, the deal comprises two tranches: US$337.5m class M1 floating-rate 10-year hard bullet notes, rated triple-B minus by Fitch; and US$337.5m class M2 notes. The capital structure also includes four retained reference tranches for a total of US$27.38bn.

The objective of the transaction is to transfer credit risk from Fannie Mae to private investors with respect to a US$28bn pool of mortgage loans currently held in previously-issued RMBS guaranteed by Fannie Mae, where principal repayment of the notes are subject to the performance of a reference pool of mortgage loans. Fitch notes that while the transaction structure simulates the behaviour and credit risk of traditional RMBS mezzanine and subordinate securities, the GSE will be responsible for making monthly payments of interest and principal to investors.

Weighted average combined LTV, debt-to-income and credit scores of the reference pool are 75.9%, 31.7% and 765 respectively. All loans were underwritten with full documentation. The reference pool also benefits from significant geographic diversity.

One of the unique structural features of the transaction is a fixed-loss severity schedule that is tied to cumulative net credit events. If actual loan loss severity is above the set schedule, Fannie Mae will absorb the higher losses. The fixed severity also offers investors greater protection against natural disaster events where properties are severely damaged and there is limited or no recourse to insurance.

However, Fitch believes the loan defect risk is greater for this transaction than for recently issued US private label RMBS. Notably, neither Fannie Mae nor an independent third party will conduct loan file reviews for credit events, and Fannie Mae will not conduct any reviews of loans from a seller once it has filed for bankruptcy. The rating agency incorporated this risk into its analysis by treating all historical repurchases as if they were defaulted loans that were not repurchased.

Fitch also believes the structure is vulnerable to special hazard risk as there is no consideration for payment disruptions related to natural disaster events in the credit event definition. As such, credit protection in the transaction may be eroded by natural disasters that may cause extended delinquencies but where borrowers ultimately cure.

RMBS

Clydesdale redress 'credit neutral'

The UK Financial Conduct Authority's recent judgment against Clydesdale Bank is anticipated to be credit neutral for its post-crisis Lanark Master Issuer and Lannraig Master Issuer RMBS. A payment system error in place since 2005 led 22,000 borrowers to underpay on their loans, some of which are securitised in Lanark 2011-1 and 2012-1, as well as Lannraig 2012-1, 2012-2 and 2013-1.

The FCA fined Clydesdale £9m for failing to treat customers fairly after discovering the miscalculation. The bank has also agreed to write off - and compensate the affected transactions for - any principal shortfall resulting from borrower underpayment.

Clydesdale says the redress exercise: has no effect on the amount of interest and principal payments which have been paid by the issuers; and will not affect the ability of the issuers to make payments of interest and repayments of principal in full when due on the notes.