Contents

ABS

Action seen in secondary US ABS

US ABS secondary supply remained moderate yesterday, with BWIC volume reaching US$180m. The focus was on student loan and credit card paper, including five block-sized bonds from the CHAIT shelf out for the bid.

Among those bonds, SCI's PriceABS data shows that CHAIT 2012-A5 A5 traded during the session, with price talk in the mid-teens. The tranche was covered twice last month, first at plus 20 and then at plus 19.

Discover credit card paper was also circulating yesterday, with DCENT 2012-A3 A3 talked in the low-20s and covered at plus 20. The tranche was covered last month at plus 17 and twice in May at plus 12.

Meanwhile, NCSLT 2007-1 A3 was among the student loan bonds available during the session, talked in the mid/high-70s on its first appearance in the PriceABS archive. NCSLT 2007-2 A3 was also out for the bid and talked in the mid-70s, having last appeared in PriceABS last year, when it was covered at 66.75 on 13 December.

The aircraft ABS sector was represented by a couple of PALS tranches, which also accounted for the only recorded DNTs in the session. PALS 2000-1 A2 had been talked in the mid-30s, while PALS 2001-1A A1 had been talked in the low-40s.

Finally, in the auto space, NALT 2012-B A4 was talked at around 30 and covered at plus 35.

JL

ABS

Autos lead ABS volumes higher

US ABS BWIC volume rose yesterday to over US$60m. Much of the supply came from auto names, but credit card bonds and a pair of whole business tranches were out for the bid as well.

SCI's PriceABS data displays tranches from five auto deals issued in the last two years, with covers for each. AMCAR 2013-4 A2 and FORDO 2013-A A3 were respectively covered at 33 and 21 yesterday, while VWALT 2012-A A3 was covered at 21, having been covered in the 20s earlier in the month.

The HAROT 2013-1 A3 bond was covered at 19. The tranche was covered at 99.92 on 4 October and talked at plus 19 in September.

The other auto tranche was TAOT 2012-B A3, which was covered at 15. Price talk on Monday of last week was at plus 18 and the tranche was talked in the low/mid-teens in January.

As for the credit card ABS circulating during the session, AMXCA 2012-2 A was covered at 16 and CCCIT 2009-A4 A4 was covered at 12. The latter tranche was talked at around 10 on 2 October and covered at 103.16 on 4 October.

GCCT 2012-5A A was also out for the bid and covered at 32. Price talk for that tranche had been in the mid-20s in May.

Both of the whole business tranches seen yesterday come from deals originated by Domino's. Covers were recorded for both DPABS 2012-1A A2 and HNGRY 2013-1A A2.

The former was talked in the high-180s and covered at 187, having previously been covered at plus 205 on 27 August. The latter tranche was talked at around 230 and covered at 227, having been covered at plus 255 on 23 July and at 212 on 5 June.

JL

CMBS

Spread tightening boosts AMs, AJs

US CMBS spreads narrowed last week, with the GSMS 2007-GG10 A4 bond ending Friday at 164bp over swaps. The big gainers were AM and AJ tranches, with plenty of covers for both types of bonds observed yesterday, as spreads continue to grind tighter.

For the AMs, SCI's PriceABS data shows that BACM 2006-2 AM was covered in the mid-90s during the session. The tranche was last covered at 99 on 12 August.

The GCCFC 2006-GG7 AM tranche was also out for the bid during the session and was covered in the low/mid-100s. It last traded on 18 June and first appeared in the PriceABS archive in June last year, when it was covered at swaps plus 410.

LBUBS 2006-C6 AM was also circulating and was covered in the mid-90s. The tranche was covered last month at 104 and in June at 110.

Of the many AJ tranches trading yesterday, CD 2006-CD2 AJ was talked in the low-90s and low/mid-90s and covered at 92.5. The tranche previously traded on 22 July, when price talk was at 93 and at low-800.

In addition, MLCFC 2006-3 AJ was covered in the mid-500s. Talk on Friday for the bond had been in both the low/mid-500s and mid-400s.

A cover was also recorded for the WBCMT 2006-C29 AJ tranche, which was talked at 94 and in the mid-90s and covered at high-94 handle. It was covered on 17 October at 695 and on 4 September at 90.5.

Meanwhile, a couple of DNTs were seen in the segment, such as for COMM 2006-C8 AJ (which was talked in the mid-90s and high-90s) and JPMCC 2006-CB16 AJ (which was talked at 575 and in the mid/high-90s). JPMCC 2007-CB20 AJ, which was not a DNT, was talked at around 400.

Several A4 bonds were also circulating during the session, such as CD 2007-CD4 A4, which successfully traded. That tranche was last covered a week earlier at 99, when it was also talked at 103.

COMM 2006-C8 A4 was traded during the session, while WFCM 2013-LC12 A4 was covered at 94 and MSC 2006-IQ12 A4 was covered at 93. The latter tranche was covered earlier this month at around 100 and at the end of July at 97.

Another MSC tranche - MSC 2007-HQ13 A3 - also traded yesterday. The tranche was recorded as a DNT in both May and March, but did trade twice last year.

Paper from further down the capital structure also proved popular, with GSMS 2013-GC14 D covered at swaps plus 380. The tranche was recorded as a DNT on 11 September, when price talk was in the low/mid-400s.

Likewise, the COMM 2012-CR² E tranche was talked in the mid/high-300s and at swaps plus 340, before being covered at swaps plus 340. It was covered in the mid/high-300s on 6 August and before that at 290 on 24 April.

Finally, a number of multifamily names were out for the bid yesterday, including Fannie Mae's FN AM3782 and FN AM3783 (which were each covered at 74) and FN AM4126 (which was covered at 75). FN AM3548, FN AM4040 and FN AM4029 were each covered at 77.

JL

Structured Finance

LCR impact weighed

The Federal Reserve has proposed a rule that would for the first time in the US create a standardised minimum liquidity requirement for large and internationally active banking organisations and systemically important non-bank financial companies. The proposal presents two key issues for the securitisation market: the Level 2 treatment of GSE securities and the assumed 100% draw-down of commitments to SPVs.

Under the proposal, institutions would be required to hold minimum amounts of high-quality liquid assets (HQLA) - such as central bank reserves and government and corporate debt - that can be easily converted into cash. Each institution would be required to hold liquidity in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a 30-day stress period. The ratio of the firm's liquid assets to its projected net cash outflow is its liquidity coverage ratio (LCR).

Securities designated as Level 1 liquid assets under the rules may be included in the LCR calculations without a limit. Level 2A assets are subject to a 15% haircut and, together with Level 2B assets, may not exceed 40% of qualified liquid assets.

Ginnie Mae securities have been designated as Level 1 assets under the proposal and conventionals as Level 2A assets, despite intense advocacy from across the industry over the past few years. In order to comply with the proposed rule, SFIG suggests that banks will likely migrate away from GSE securities and invest more heavily in Treasuries and GNMAs.

"Given the integral role that GSE securities play in bank investment portfolios, this movement could have negative implications for bank liquidity risk management. Additionally, reduced bank demand for GSE securities could lead to a widening in spreads with a negative impact on the US mortgage market," the association observes.

But Bank of America Merrill Lynch RMBS analysts note that banks are "flush with liquidity" and their driving investment hurdle remains the supplementary leverage ratio rules. "Whether banks lean towards Ginnies or conventionals in their MBS portfolios will be a complex function of the various capital, leverage and liquidity rules. We believe that there will be limited reallocation in MBS portfolios in the near-term and banks are more likely to deleverage across assets over the next few quarters to meet their supplementary leverage ratio targets," they explain.

Meanwhile, the proposed rule assumes 100% usage of all liquidity and credit commitments to SPVs and the loss of all funding provided to the bank by any SPV. The only exception would be for commitments that could not be drawn within the next 30 days and funding from an SPV that could not be withdrawn during that period. SFIG warns that the move may consequently force banks to reduce, or exit completely, securitised credit facilities on which corporate borrowers rely.

The LCR would apply to banking organisations with US$250bn or more in total consolidated assets or US$10bn or more in on-balance sheet foreign exposure. The proposal would also apply a less stringent modified LCR to bank holding companies and savings and loan holding companies that are not internationally active, but have more than US$50bn in total assets.

The liquidity proposal is based on a standard agreed to by the Basel Committee and would also establish an enhanced prudential liquidity standard consistent with section 165 of the Dodd-Frank Act. The proposed rule is more stringent in several areas than the Basel Committee's LCR standard, however, including the range of assets that will qualify as HQLA and the assumed rate of outflows of certain kinds of funding.

In addition, the proposed transition period is shorter than that included in the Basel agreement, reflecting a desire to maintain the improved liquidity positions that US institutions have established since the financial crisis. Under the proposal, US firms would begin the LCR transition period on 1 January 2015 and would be required to be fully compliant by 1 January 2017.

The proposed rule was developed in conjunction with the FDIC and the OCC. Comments are invited through to 31 January 2014.

SFIG expects to partner with SIFMA and other trade associations to develop two separate comment letters regarding the proposal. One comment letter will contain a comprehensive response to the proposed rule and the other will have a more targeted focus on the aspects of the proposal that have particular importance to the securitisation markets.

CS

Structured Finance

SCI Start the Week - 28 October

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

Pipeline
Last week was slightly quieter in terms of new deals joining the pipeline. Six new ABS deals were announced, as well as one RMBS and one CLO.

The ABS consisted of: Driver UK Master Compartment 2; US$280m Global Container Assets 2013; US$450m LATAM 2013-1; US$300m Sierra Timeshare 2013-3 Receivables Funding; €740m Silver Arrows Compartment 4; and £265m Temese Funding 1. The RMBS was RUB3bn ITB 2013, while the CLO was US$515m Benefit Street Partners CLO III.

Pricings
A plethora of deals priced last week, with a typically long list of ABS prints joined by seven CLOs. One RMBS and one CMBS were also among the week's issuance.

The US ABS prints comprised: US$759.48m Ally Auto Receivables Trust 2013-2; US$197.8m Credit Acceptance Auto Loan Trust 2013-2; US$850m Discover Card Master Trust 2013-A5; US$550m Discover Card Master Trust 2013-A6; US$1.007bn Ford Credit Auto Lease Trust 2013-B; US$721.5m GEEMT 2013-2; US$1.5bn Honda Auto Receivables Owner Trust 2013-4; US$685m Nissan Auto Lease Trust 2013-B; US$132.8m Silverleaf Finance VII series 2013-A; and US$744.29m World Omni Auto Receivables Owner Trust 2013-B.

The European ABS new issues consisted of: €280m abc SME Lease Germany Compartment 1 and €1bn SC Germany Vehicles 2013-1. The RMBS was A$300m AFG 2013-2, while the CMBS was US$1.2bn COMM 2013-CCRE12.

Finally, the CLO pricings were: US$523m CIFC Funding 2013-IV; €304.8m Credico Finance 14; US$439m Crown Point CLO II; US$412m Fortress Credit BSL 2013-2; US$556m Golub Capital Partners CLO 17; US$415m KVK CLO 2013-2; and US$447m Wind River 2013-2.

Markets
Moderate supply was observed in the US ABS secondary market last week, as SCI reported on SCI 25 October. BWIC volume reached US$180m on Thursday's session, with SCI's PriceABS data capturing price talk and covers on a variety of credit card, student loan, aircraft and auto ABS names out for the bid.

Meanwhile, the US non-agency RMBS market rallied as broader risk assets set highs. "As equity indices set successive highs, cash prices in the non-agency space were up for all sectors. Option ARM and jumbo FRM SSNRs were up half a point each, while jumbo hybrid, alt-A FRM and Alt-A Hybrids rose one point," comment Barclays Capital RMBS analysts.

US CMBS BWIC volumes almost doubled to US$2bn for the week. Deutsche Bank analysts note that much of that supply came from more than US$400m of A1As from Freddie Mac on Wednesday. More than US$1bn of multifamily-directed bonds came from Fannie Mae towards the end of the week.

The US CLO secondary market remained quiet, however, with BWIC volumes picking up towards the end of the week. "Line items were evenly split between CLO 1.0 and 2.0 tranches. About one-third of [last] week's line items came from the 2007 vintage, for which about 44% of the broadly syndicated deals have exited reinvestment and the remaining 56% are expected to all have exited reinvestment by the end of January 2015," note Bank of America Merrill Lynch securitised products strategists.

The European CLO market started the week strongly, as SCI reported on 22 October. A large US credit hedge fund bid-list hit the market, with several successful covers observed for what were mainly mezzanine tranches.

Deal news
• Shellpoint Partners has scrapped its planned Shellpoint Asset Funding Trust 2013-2 RMBS in favour of selling the underlying whole loans. The move comes after the transaction was revised during the marketing process.
• Losses on even the most recent Freddie Mac K-series CMBS notes are expected to be low, despite signs of weakening underwriting quality. There are also signs that issuance for the sector may have peaked in 2Q13, with higher rates and the FHFA mandate to reduce originations expected to drive volumes lower over the coming months.
• Spirit has made an offer to tender and swap its existing A1 and A3 bonds into newly-issued A6 and A7 bonds. The tender and swap offer is for up to 50% of the A1 bonds and 70% of the A3s, with the remainder left outstanding and amortising in line with the existing schedule.
• Eurosail UK 2007-5NP has received US$5.42m from Lehman Brothers Special Financing Inc and US$5.84m from Lehman Brothers Holdings Inc in respect of the issuer's class 4A and 9A claim. The amounts represent 3.18% and 3.43% respectively of the transaction's US$170m stipulated claim for failure of the hedging contracts.
• The US SEC has charged Harding Advisory and its owner Wing Chau for misleading investors in a CDO and breaching their fiduciary duties. The SEC alleges Chau and Harding compromised their independent judgement as collateral manager on Octans I CDO in order to accommodate trades requested by a third-party hedge fund - Magnetar Capital - whose interests were not necessarily aligned with the debt investors.
• An auction for the Trainer Wortham First Republic CBO III transaction is scheduled for 14 November. The collateral shall only be sold if the proceeds, together with the balance of all eligible investments and cash in the accounts, are greater than or equal to the auction call redemption amount.

Regulatory update
• The Federal Reserve has proposed a rule that would for the first time in the US create a standardised minimum liquidity requirement for large and internationally active banking organisations and systemically important non-bank financial companies. The proposal presents two key issues for the securitisation market: the Level 2 treatment of GSE securities and the assumed 100% draw-down of commitments to SPVs.
• Trustees for investors including BlackRock, PIMCO and DoubleLine Capital are appealing US District Judge Charles Breyer's dismissal of the Richmond eminent domain case (SCI 24 September). They have asked a federal appeals court in San Francisco to review the ruling.
• Further details have emerged about Pomona, California's eminent domain proposal. The plan is the same as the one put forward by Mortgage Resolution Partners in other cities, with one exception: it will now allow short sales with a sale and lease-back option for homeowners after their mortgage has been taken from the private label RMBS trusts.
• The US District Court for the Southern District of New York last week denied a motion by several banks to compel the FHFA to produce approximately 22,000 documents related to the agency's lawsuits against the banks. The move was in connection with the FHFA's actions against 17 financial institutions involved in the packaging, marketing and sale of RMBS purchased by Fannie Mae and Freddie Mac between 2005 and 2007 (SCI passim).
• Chinese ABS activity appears to be back on track, after the country's regulatory authorities re-committed themselves in August to its credit asset securitisation (CAS) pilot programme. It is estimated that the move could result in as many as 20 participating institutions collectively issuing up to US$49bn in securities during the first half of 2014.
• Mexico's Lower House of Congress has passed the fiscal reform bill proposed by President Enrique Peña Nieto last month (SCI 16 September). The Senate is likely to expedite approval of the bill, which would take effect next year.
• CLO risk retention rules enacted in Europe and proposed in the US could increase balance sheet leverage for asset managers that need to obtain financing to comply with the regulation. For those managers without the financial resources or market access to comply, this could result in their exit from the CLO market or push them to seek an acquisition by a larger manager.

Deals added to the SCI New Issuance database last week:
Ableco Capital; Bluestep Mortgage Securities No. 2; CarFinance Capital Auto Trust 2013-2; Chrysler Capital Auto Receivables Trust 2013-A; Dolphin Master Issuer series 2013-2; Eaton Vance CLO 2013-1; First National Master Note Trust series 2013-2; Flagship Credit Auto Trust 2013-2; FTA Santander Consumer Spain Auto 2013-1; Navistar Financial Dealer Note Master Owner Trust II series 2013-2; Pepper Residential Securities Trust No. 11; Prima Capital CRE Securitization 2013-III; Red & Black Auto Germany 2; Red & Black Consumer France 2013; Rochester Financing No. 1; Springleaf Mortgage Loan Trust 2013-3

Deals added to the SCI CMBS Loan Events database last week:
BACM 2004-2; BSCMS 2007-BBA8; BSCMS 2007-T26; COMM 2003-LB1A; CSFB 2005-C1; CSMC 2006-C4; CSMC 2006-C5; CSMC 2007-C1; CSMC 2007-C3; CSMC 2007-C4; CWCI 2007-C2; DECO 2005-C1; DECO 2006-C3; DECO 2006-E4; DECO 2007-E7; DECO 7-E2; ECLIP 2006-3; ECLIP 2007-1; EMC 3; EMC VI; FLTST 3; FOX 1; GCCFC 2005-GG5; GCCFC 2006-GG7; JPMBB 2013-C14; JPMCC 2004-LN2; JPMCC 2005-LDP2; JPMCC 2005-LDP5; JPMCC 2006-LDP9; JPMCC 2007-C1; JPMCC 2007-LD12; LBUBS 2003-C8; LBUBS 2004-C1; LBUBS 2005-C5; LBUBS 2006-C7; MLCFC 2007-8; MSC 2005-HQ7; MSC 2007-HQ11; MSC 2007-T27; MSC 2007-XL9; OPERA GER²; PROUL 1; REC 6; SOVC 2007-1; TITN 2006-3; TITN 2006-CT1; TITN 2007-2; TITN 2007-3; TITN 2007-CT1; TMAN 5; TMAN 6; WBCMT 2005-C20; WBCMT 2007-C30; WBCMT 2007-C33; WINDM VIII; WINDM X; WINDM XI

Top stories to come in SCI
Risk retention ramifications for US CLOs
Focus on Singapore
Relative value in RRBs

CLOs

Single-B benefits bring buyers

CLO single-B tranche supply has totalled US$731m so far in 2013. The nascent market segment offers attractive yields while retaining more protection than equity.

JPMorgan CLO strategists note that 68 single-B tranches have been issued year-to-date, mainly in the US. Investors have bought the paper both for its high current coupon and convexity and also alongside equity as a hedge, with tranches tending to be 1.5%-2% in size and to yield 7%-9%.

The equity in CLOs with single-B pieces is more levered than typical equity, making returns more volatile. "CLO equity offers upfront cashflows and is typically a good buy in an upside case - wide reinvest spreads, low defaults, continued Libor floors and/or a favourable curve. But whether high/low levered equity, single-B or double-B is 'most optimal' depends on the structure and views on cashflow diversion, debt loss, debt extension risk, fees [and so on]," the JPMorgan strategists observe.

While the high yield loan market has allowed CLO managers to pick up spread in recent syndications and in secondary trading, AMG loan fund flows have slowed and equity returns are expected to decrease towards the single-B level. Single-B tranches would become riskier with less excess spread available, although there is also potential upside for current CLO equity if risk retention and CLO bid uncertainty leads to continuing loan market volatility.

Additionally, equity tranches are faced with interest rate risk, potentially enhancing the appeal of single-B paper. There is downside risk for equity from Libor rises as US CLOs typically have a large portion of the pool floored at around 1%, so a 100bp shift in the forward curve would affect equity returns, bringing them close to single-Bs at lower CDRs.

While default rates are expected to remain low, single-Bs have WALs of seven to nine years, so stresses could affect the sector. Under the analysts' base case of 2%-2.25% CDR, equity would come within range of the single-B level, while the single-B return is only a little stronger and suffers even at fairly low CDRs under 2%.

If loan defaults spike or the recovery rate drops, single-B tranches offer more protection, however. Managers can also build par before the credit cycle turns, with less-leveraged equity becoming less sensitive, as well as double-Bs.

"There is a dearth of fixed income assets with the potential for double-digit yields, which explains high equity pricing recently. That said, the nascent single-B tranche market offers the opportunity to reach for similar yields with the benefit of some subordination," the strategists conclude.

JL

CMBS

PROUL 1 basis highlighted

The sale of three assets from the LCP Proudreed CMBS portfolio will result in a £9.17m partial prepayment of the transaction at the November IPD (see SCI's loan events database). This is the latest development in a series of recent actions that suggest the borrower is preparing to refinance the larger of the two loans backing the deal - LCP Real Estate - at its August 2014 maturity.

Deutsche Bank European securitisation analysts point to the inclusion of an additional £12.3m of property and £13.5m of cash in August to maintain the required 70% LTV ratio, following a 9% downward revaluation of the portfolio, as further signs. Combined with earlier asset additions and purchases of junior notes, they estimate that the sponsors have contributed over £50m of capital to the transaction since 2010. While refinancing negotiations are reportedly progressing well on the Proudreed loan, a business plan is understood to be underway on the LCP loan, focusing on asset sales and principal reduction.

"This continued strong sponsor support, combined with the relatively modest leverage - both loans have LTVs below 70%, based on recent valuations - causes us to reaffirm our earlier conviction that we expect both loans to repay on or about their scheduled August 2014 maturities, resulting in a full redemption of the CMBS stack," the Deutsche Bank analysts note.

Significant UK CMBS pay-downs have shrunk the investable universe to around £14bn. Of this, there are only a handful of rated transactions that are not non-performing loan pools to a lesser or greater degree, including PROUL, DECO 2012 MHLX and ESTON.

However, PROUL class As indicatively trade around 200bp wider than DECO 2012 MHLX and ESTON class As, at an estimated DM of 336bp. The analysts say they cannot comprehend this basis, given the strong support the sponsor has provided to date.

CS

Structured Finance

Law firm continues expansion

Mayer Brown has appointed two partners to its banking and finance team in London. Trevor Wood joins from Berwin Leighton Paisner and Mayank Gupta joins from White & Case.

As well as structured finance and leveraged finance, Wood's practice covers syndicated and bilateral lending. He has also worked for Jones Day and Clifford Chance and has experience across Europe, Asia and in emerging markets.

Gupta has broad leveraged finance experience and focuses on emerging markets and has also worked for Gadens Lawyers. The appointments follow the recent additions of securitisation partners Richard Todd and David O'Connor (SCI 7 October) and Bruce Bloomingdale and Jeremiah Wagner (SCI 19 September).

CDO

New manager appointed

Cairn Capital North America has been appointed successor collateral manager for Neptune CDO 2004-1. The transaction was originally managed by Fund America Management Corporation.

Moody's notes that the agreement does not alter the responsibilities, duties and obligations of the collateral manager in a meaningful way. Having considered the experience and capacity of Cairn to perform these duties, the agency has determined that the move won't affect the ratings on the notes.

For other recent CDO manager transfers, see SCI's database.

CLOs

Successor CLO manager proposed

Natixis Asset Management is set to propose its appointment as successor collateral manager for Vallauris II CLO. The move follows notice given by the current manager - Natixis - that, in accordance with a letter of resignation dated 24 October, it intends to resign in accordance with clause 9.1 of the collateral management agreement.

For other recent CDO manager transfers, see SCI's CDO manager transfer database.

Insurance-linked securities

Life settlement vet takes ILS role

Sundance Strategies has appointed Matthew Pearson as coo. He brings 25 years of experience across the life settlement industry, corporate finance and real estate brokerage and will oversee the acquisition, securitisation, ownership and management of senior life settlement policies.

Pearson joins from life settlement securitisation company EHI. He has also worked for Evolution Capital Partners.

Risk Management

OTC products leader joins SEF

ICAP has named Laurent Paulhac as ceo of ICAP SEF, reporting to ICAP's group ceo Michael Spencer. Paulhac will be based in New York and take responsibility for leading ICAP's SEF initiative and strategic direction with regard to regulatory reforms and the company's partnerships with exchanges and CCPs.

Paulhac joins from CME Group, where he was senior md for interest rate and OTC products and services. He has also served as ceo of CMA, where his focus was on credit derivatives.

RMBS

BofA liable for 'hustle'

A federal jury in New York has found Bank of America's Countrywide unit liable for civil fraud in the first mortgage-fraud case brought by the US government to go to trial. Countrywide executive Rebecca Mairone has also been found liable for fraud.

The lawsuit was filed last year (SCI 25 October 2012), alleging that Countrywide implemented a loan programme known as 'the hustle', which effectively eliminated the underwriting review of mortgage loans that Countrywide originated and sold to Freddie Mac and Fannie Mae. The lawsuit sought damages and penalties of over US$1bn, but the amount of any civil penalty remains to be decided, according to a Lowenstein Sandler memo.

RMBS

Further PLS settlement for FHFA

The FHFA has reached a settlement with JPMorgan and related companies for US$4bn to address claims of alleged violations in the sale of private-label mortgage securities purchased by Fannie Mae and Freddie Mac. JPMorgan will pay approximately US$2.74bn to Freddie and US$1.26bn to Fannie.

The claims relate to securities sold between 2005 and 2007 by JPMorgan, Bear Stearns and Washington Mutual. JPMorgan has separately settled representation and warranty claims with the GSEs, under which it will pay US$1.1bn.

RMBS

FHFA suits progress

The US District Court for the Southern District of New York last week denied a motion by several banks to compel the FHFA to produce approximately 22,000 documents related to the agency's lawsuits against the banks. The move was in connection with the FHFA's actions against 17 financial institutions involved in the packaging, marketing and sale of RMBS purchased by Fannie Mae and Freddie Mac between 2005 and 2007 (SCI passim).

In the course of discovery, the FHFA withheld or redacted the documents on the basis of either the bank examination privilege or the deliberative process privilege, according to Lowenstein Sandler. In denying the defendants' motion, US District Judge Denise Cote found that the FHFA's regulation of the GSEs implicates the same concerns present in the realm of banking regulation that justify the bank examination privilege. The court further rejected the defendants' arguments concerning the deliberative process privilege, but ruled that they could submit for in camera review examples of any specific documents that the banks believe do not meet privilege requirements.

Separately, the FHFA has requested permission to transfer a US$1.2bn dispute with Lehman Brothers Holdings Inc from bankruptcy court to a federal district court, claiming that the matter is centred on a federal non-bankruptcy statute. The agency has also asked the bankruptcy court overseeing Lehman's remaining bankruptcy proceedings to stay this matter until a ruling is made on its request.

The FHFA argues that Lehman's alleged failure to pay back US$1.2bn, plus interest, on loans issued by Freddie Mac a month before it entered bankruptcy in September 2008 entitles the agency to a priority claim to recover that amount, according to a SFIG memo. The FHFA says that it is authorised under the Housing and Economic Recovery Act of 2008 (HERA) to avoid and recover any transfers by a debtor that hindered the repayment of an entity regulated by the FHFA and that those rights are superior to any other party's rights in a bankruptcy proceeding. The agency contends that since the disputes rest on HERA, a federal non-bankruptcy statute, the US Bankruptcy Code requires that the matter be removed from bankruptcy court and handled by a federal district judge.

ABS

Used vehicle values boost auto ABS

US auto ABS performance continues to exceed expectations, even at a time when performance is historically weakest, according to Fitch's latest index results for the sector. The agency reports that an unexpected bounce in used vehicle values - up by nearly 2% versus September 2012 - last month supported higher recovery rates, contained loss levels and supported auto ABS asset performance.

At 0.32%, annualised net losses (ANL) were flat for prime auto loan ABS last month, largely driven by the used vehicle market's somewhat unusual resiliency. Used vehicle values typically begin to soften as summer comes to a close and endure its weakest period during the autumn months.

Prime 60+ day delinquencies ticked up to 0.36% in September, a 9% increase month-over-month (MOM), but down 7.7% compared to 2012. In the subprime sector, 60+ day delinquencies stood at 3.45% for the month, up by 7.5% compared to August but virtually unchanged versus a year ago.

The subprime ANL index unexpectedly declined to 8% in September MOM to 4.84%, 14% below year-ago levels. The decline in losses was primarily driven by a sale of charged-off post-bankruptcy accounts undertaken by a single issuer and the proceeds from the sale benefitting the trusts.

Subprime auto ABS losses are likely to rise as the year comes to a close, though asset performance should remain within expectations going into 2014.

Fitch has upgraded 35 outstanding classes of prime auto loan ABS notes so far in 2013. This represents a 40% jump from the 25 upgrades issued in 2012. The agency expects this positive trend to continue into 2014, given current asset performance and low loss rates currently tracking below initial expectations.

ABS

ABS downgrades hit post-crisis low

Fitch has published a study analysing US credit card, auto and student loan ABS rating performance through the first half of 2013. Downgrades affected 1% of the universe, the lowest level seen in over five years, while 3% of ratings were upgraded during the period.

Credit card ABS transactions were the lynchpin of stability, according to Fitch. For the second consecutive period, the asset class exhibited 100% rating stability, with no downgrades or upgrades reported in the first half of this year. This follows the zero volatility pattern seen for the full-year 2012.

In addition, 13% of credit card ABS transactions paid in full during the first-half 2013 period.

No downgrades were recorded across auto ABS transactions, continuing the trend that started in 2011. Upgrades were relatively unchanged compared with last year, with 6% of ratings improving in first-half 2013, while 14% of bonds paid off.

Meanwhile, rating downgrades for student loan ABS transactions moderated in the first half of this year, with 2% being lowered.

No impairments were seen across auto, credit card and student loan ABS transactions in the first half. Even when factoring in the economic downturns, consumer ABS transactions have historically exhibited low impairment levels, with the average annual rate reaching 0.3% over the 1990-1H13 period.

Structured Finance

Chinese pilot programme back on track?

Chinese ABS activity appears to be back on track, after the country's regulatory authorities re-committed themselves in August to its credit asset securitisation (CAS) pilot programme. SFIG estimates that the move could result in as many as 20 participating institutions collectively issuing up to US$49bn in securities during the first half of 2014.

China's Pilot Measures define a securitisation framework that is generally similar to that in the US. Among the stipulations that they provide for are: ABS should be issued by a special purpose trust administered by an independent trustee; investors are entitled to decide major matters that have an influence on their interests through investor meetings; the property of the special purpose trust is legally isolated from the property of both the sponsor institution and the trustee; the trustee is required, without first having received a demand from the investors, to enforce representations and warranties against the sponsor and compel the repurchase or substitution of non-conforming assets; and the securitisation must receive ratings from at least two qualified credit rating agencies and investors must establish an internal credit rating system.

"One of the goals of the pilot programme is to remove assets from bank and large finance company balance sheets, enabling those entities to make more loans. If successful, the pilot programme could draw more lending back into the larger, more regulated institutions and away from the shadow banking sector," SFIG notes.

The association adds that China's current stock of assets eligible for securitisation appears to be heavily weighted towards non-consumer debt, particularly local government and state-owned enterprise debt. Such assets could be securitised through CLO-type transactions, as well as NPL securitisations.

Alibaba Group executed a Rmb500m ABS offering in August backed by short-term micro-loans that Alibaba Finance provided to clients on its e-commerce platforms. The Alibaba transaction was undertaken using a special asset management plan (SAMP).

Structured Finance

Zenith refinancing completed

Weil, Gotshal & Manges has advised Zenith on the refinancing of its senior credit facilities and associated securitisation financing. The refinancing is the result of a rapid deleveraging of Zenith's business over the last three years, following the acquisition by Morgan Stanley Global Private Equity (MSGPE) of a stake in the company in 2010.

Weil's structured finance team in 2011 helped Zenith establish what it describes as an innovative fleet financing structure, utilising both asset-based lending and ABCP conduit financing. As a result of the refinancing, new facilities sit alongside over £500m of asset finance facilities. The firm's improved capital structure is expected to enable it to pursue future strategic growth opportunities.

Structured Finance

Disintermediation driving reallocation

New research conducted by Bishopsfield Capital Partners highlights that disintermediation is firmly underway, with less liquid assets becoming more acceptable to fixed income investors. Private placements and structured credit are the main winners under this investment reallocation and sovereigns the main loser, according to the report.

"The results of our survey clearly illustrate that in the search for yield investors are amending their investment strategies," says Steve Curry, partner of Bishopsfield Capital Partners. "Investors are again showing appetite for less 'vanilla' assets and are more flexible on the format and liquidity of the underlying instrument, which is a sure sign that confidence is returning."

The report is based on a survey of 29 fixed income investors, representing European insurers, pension funds, asset managers and banks. The survey was conducted in September and focused on participants' expected investment strategies for the following 18 months.

A number of key themes emerged from the survey results, such as that the search for yield, search for relative value, increasing risk appetite, macroeconomic uncertainty and regulatory change are the main factors which drove changes in investment strategies in the last 18 months. Investors intend to shift their fixed income allocation away from sovereigns, large corporates and financial institutions towards medium-sized corporates, private placements and structured credit over the next 18 months.

Investors also expect to place more emphasis on non-vanilla asset types - including less liquid and/or more structured instruments and flexibility in the format of assets - but are not signalling a wholesale shift down the credit curve in the hunt for yield. Additionally, they believe that banks will become more active in disposing of assets in the next eighteen months. Finally, the survey suggests that investors do not believe that additional regulation is actually benefitting them.

Of the investors polled, 52% and 56% said they expect to increase their allocation towards loans and private placements respectively. "This may indicate an easing of the emphasis that fixed income investors have placed on the need for highly liquid instruments since the onset of the financial crisis in 2007. Other factors that may be contributing to the appetite for private placements and loans is the gap left by banks exiting certain markets and the ability for investors to create more value for themselves by being involved in transactions earlier," the report concludes.

Structured Finance

SFR deals critiqued as debut progresses

Fitch says that insufficient history, along with a number of structural challenges, prevent it from considering triple-A ratings on single-family rental (SFR) securitisations at this time. The agency's comments come as the debut SFR transaction is expected to begin road-showing this week.

Fitch notes that it would more likely cap its ratings on such deals at the single-A level. Among the reasons for this is that operating firms in the sector have limited track records and their business models/strategies have not been tested under a down cycle. Historical data for market rents, tenant renewals, vacancy rates and supply and demand are also limited.

The agency says its concerns are further heightened by the number of operators concentrating their investments in a handful of states and metropolitan statistical areas (MSAs), which - based on most business models - are at the neighbourhood level. "Because of the specific demographic targeted by these institutional buyers and the inelasticity of rents, transactions are highly vulnerable to unknown variables that could potentially impact the cashflows and yields," it explains. "Among them include repair and maintenance expense, capital expenditures, rising property taxes, homeowners association restrictions, or the potential for municipality involvement. Unlike other asset classes, SFRs do not have the benefit of historical performance over several business or housing cycles that would otherwise flush out some of these uncertainties."

Further, in stress scenarios, Fitch has concerns about refinancing risk or the absence of a bulk purchaser. If liquidations are needed to pay off a bond at maturity, retail sales may be the only exit strategy. The impact of a large-scale listing at the neighbourhood level could have a significant impact on market clearing prices.

Given the operational nature of the underlying assets, collateral cashflow and value will also be affected by the quality and success of the operator. Dependence on a single operator subjects a transaction's performance to manager continuity. Fitch notes that while some participants have the financial wherewithal to withstand declining rents or rising costs, none are yet to fully demonstrate their commitment to this asset class - which may leave investors shouldering a disproportionate amount of the risks, should the operators' motivations and abilities become compromised.

The agency also believes investors' security interest in the SFR homes could impact recovery upon enforcement. While mortgages provide investors with first lien and perfected security interest in the actual homes, an equity pledge structure limits recovery to the sponsors' equity in their investment.

Should a transaction underperform or face refinancing challenges at maturity, sponsors subject to potential enforcement may be more likely to consider bankruptcy protection. If a bankruptcy court allows the sponsor to incur post-petition debt secured by the properties, the value of the sponsors' equity and investors' recovery prospects diminishes. Given the incremental risk associated with transactions secured only by the sponsors' equity, Fitch would likely cap ratings at the triple-B rating category, absent offsetting mitigants.

The agency says it may consider higher ratings as more clarity is gained and the viability of the SFR asset class is better demonstrated, market participants become more fully established and additional performance data becomes available.

Blackstone is believed to be behind the SFR deal due to hit the market this week. It is expected to be sized at US$500m, with JPMorgan, Deutsche Bank and Credit Suisse rumoured to be the lead-managers and ratings anticipated to be provided by Kroll, Morningstar and Moody's.

Structured Finance

'Milestone' set for Chinese securitisations

The Alibaba SME CLO - which securitised a large number of the small loans on Alibaba's books through a revolving mechanism (SCI 24 October) - set an important milestone for China's renewed interest in securitisations, Moody's says. The transaction was novel in the sense that it was underwritten by a securities firm, Orient Securities, and the senior tranches are traded on the Shenzhen Stock Exchange. Chinese securitisation programmes have historically been led by banks and listed on the interbank market.

Moody's notes that among the deal's salient aspects that point to a successful emergence of loan securitisations in China is the credit quality of the underlying loans, as well as the size and diversification of the pool. The agency notes, however, that the performance of SME loans tends to be quite volatile over credit cycles and China has not experienced a significant full credit cycle in recent years.

As such, the strong performance of Alibaba and its well-established credit assessment and servicing platforms - as well as the involvement of a few notable clients - will play key roles in the success of the transaction. Future performance depends critically on the rigor with which new loans are originated and the ongoing servicing of payments on existing loans. In addition, Moody's expects that the company's existing origination and servicing system, procedures and long-term relationships with key clients will continue to improve and so support SME lending through securitisation.

The transaction has a revolving structure and new loan assets can be purchased as the older assets are repaid and retired during each of the revolving periods. The revolving structure allows for the provision of a longer-term funding capability for shorter-term loans. It is protected through performance triggers, such that the replenishment of the assets is subject to the assets meeting certain credit performance conditions.

The deal structure is such that 75% of the issuance is for the first senior tranche, 15% for the second senior tranche and the remaining 10% for the subordinated tranche. There is also a strong alignment of interest between the sponsor and the note investors in the sense that the subordinated tranche is retained by the sponsor, plus a subsidiary of the sponsor provides partial payment guarantees on the loans.

Based on its assessment of SME securitisations in advanced economies and its observations of the Chinese SME sector, Moody's highlights three key credit considerations when evaluating the credit quality and performance of Chinese SME CLOs. These are: assessing loan performance data and performance characteristics; loan underwriting, origination and servicing; and transaction credit enhancements and structural features.

"It is important to address these key credit considerations in advance in order to support investor confidence, as well as ensure the healthy and sustainable development of such structured products," the agency observes. "Looking ahead, SME CLOs will only become a successful funding tool if there are healthy and sufficient economic incentives for originators to securitise SME loans, and if there is a diverse group of domestic and even international investors comfortable with taking on the risks that are commensurate with the returns offered in such transactions."

CDO

CDO auctions due

Auctions have been scheduled for the Crystal Cove CDO and Margate Funding I deals on 18 and 19 November respectively. The collateral shall only be sold during the two sales if the proceeds are greater than the respective auction call redemption amounts.

CDO

Trups CDO on the block

An auction has been scheduled for the Libertas Preferred Funding I CDO on 20 November. The collateral shall only be sold if the proceeds are greater than or equal to the total senior redemption amount.

CDO

ABS CDO on the block

An auction for the Trainer Wortham First Republic CBO III transaction is scheduled for 14 November. The collateral shall only be sold if the proceeds, together with the balance of all eligible investments and cash in the accounts, are greater than or equal to the auction call redemption amount.

CDO

PF CDO approach outlined

Moody's has published its approach to rating CDOs backed by project finance and infrastructure assets (PF CDOs), following its recent RFC (SCI 14 August). Based on preliminary analysis, the agency expects that the rating impact on existing transactions will be limited to up to two notches, which may affect one or two PF CDO transactions.

The approach is in line with the main assumptions used by Moody's in its analysis of the outstanding PF CDO transactions. The scope of the proposed changes is limited to the update and additional standardisation of correlation and recovery assumptions.

The agency says its analysis of a typical PF CDO is conducted in two stages. The first stage would involve the assignment of public ratings or credit estimates to the assets in the CDO portfolio by the project and infrastructure finance team. The results of the asset level analysis are then used to review the structure at the level of the CDO issuing vehicle and assign the ratings to the vehicle's liabilities.

CDS

Telekom Austria CDS underperform

The CDS market is signalling concern over Telekom Austria, whose spreads have widened by 17% over the past month, according to the latest case study from Fitch Solutions. This is in contrast to the firm's European Telecom CDS Index, which moved 9% tighter during the same time period.

"This widening is likely due to Telekom Austria's recent debt-financed €1bn acquisition of new telecoms spectrum, which will allow it to provide higher speed and broader coverage to its customers," comments Diana Allmendinger, director at Fitch Solutions. "After historically trading in the triple-B space, as indicated by its CDS Implied Rating, CDS on Telekom Austria are now pricing in line with triple-B minus levels."

CDS liquidity for the company has also increased, moving from the 22nd regional percentile to the 14th, signalling increased CDS market uncertainty over future pricing levels.

CDS

JCP CDS hit record wides

Significant widening in JC Penney's five-year credit default swap (CDS) spreads underscores continued investor concern as the retailer struggles to find its footing, according to Fitch Solutions. The firm reports that JCP CDS spiked by more than 300bp over the course of the last week and are now trading at record wide levels, reflecting a higher risk of default.

Earlier this week, the company scaled back its partnership with Martha Stewart Living Omnimedia and last week denied rumours of bankruptcy.

Fitch downgraded JC Penney Co Inc and JC Penney Corporation Inc's issuer default ratings to triple-C from single-B minus on 2 October, reflecting higher-than-expected cash burn in 2013 and Fitch's concern that the projected free cashflow shortfall in 2014 will require additional external funding, even with an over US$3bn liquidity injection so far this year and a US$850m draw on its revolver.

Fitch now projects cash burn of US$2.8bn-US$3bn in 2013, a billion dollars higher than its mid-May projections. This reflects EBITDA of negative US$1bn-US$1.2bn - versus prior projections of negative US$500m - and higher-than-expected working capital use in excess of US$500m.

Beyond 2013, the agency estimates that the company will have to generate a minimum of US$750m-US$875m in EBITDA to fund ongoing capex in the US$400m-US$500m range and cash interest expense of US$360m-US$375m. This would require the company to return sales to about US$13.4bn-US$13.6bn - 14%-16% above 2013 projected levels - and realise gross margins in the 39%-40% range, assuming a relatively flat cost structure.

"This scenario appears highly ambitious, given the significant execution risk," Fitch observes. "While the reintroduction of coupons and critical private brands such as St. John's Bay in major categories should stem the significant pace of decline in the business that occurred in 2012 and 1H13, the upfront investments in inventory, capex and promotional activity are significant and we have yet to see positive traction."

The agency says that a negative rating action could occur if comps and margin trends continue to erode, indicating that JC Penney is not stabilising its core business. A positive rating action could occur if the company generates sufficient EBITDA to cover its projected capex and cash interest expense.

CDS

Credit swaps submitted for MAT

Tradeweb's TW SEF has submitted to the CFTC a self-certification determination for interest rate and credit default swaps to be made available to trade (MAT), becoming the first applicant to cover CDX.NA.IG, CDX.NA.HY, iTraxx Europe and iTraxx Crossover five-year contracts. The list of swaps also includes a range of tenors in interest rate derivatives for US dollars, euros and sterling.

The firm says the derivatives it has submitted to be made available to trade constitute approximately 80% of overall standardised swaps volumes based on available market data. It notes that the proposed list of swaps effectively addresses six factors identified by the CFTC, including a willing number of diverse market participants, frequent transactions, significant trading volume, relatively consistent bid/ask spreads and an average number of bids and offers.

CLOs

Euro CLO asset composition analysed

S&P's 3Q13 European CLO performance index report considers how assets in post-crisis CLOs differ from those in pre-crisis deals. Assets rated above the single-B rating level are more prominent in pre-crisis CLOs. These pre-crisis transactions also contain more lower-rated assets, in the triple-C and single-D category.

In addition, European CLOs are predominantly invested in loans to borrowers operating in the UK, Germany and France. Unsurprisingly, the major difference between the geographic distribution of CLO 2.0 and CLO 1.0 transactions is that more CLO 2.0 portfolios are invested in German borrowers and less with Spanish borrowers.

Business equipment and services industry borrowers represent the largest industry in which European CLOs are invested for both the post- and pre-crisis transactions. The collateral portfolios for European CLO 2.0s contain a larger percentage of assets invested in the most common industries, such as healthcare, cable and satellite television, and telecommunications.

Among the performance trends S&P observed from May 2013 to August 2013 is a decrease in the percentage of assets rated in the triple-C category for all European CLO cohorts. However, the percentage of defaulted assets in collateral portfolios increased for all of the cohorts.

The senior overcollateralisation ratio cushions increased for all cohorts, while three of them reported a decrease in the subordinate OC test cushions.

CMBS

JCP distress unlikely to impact CMBS

If JC Penney's financial challenges result in the closure of a portion of its stores, some malls would likely struggle to replace the retailer, Fitch says. The agency does not expect such a move to impact rated CMBS deals, however, because they represent relatively small amounts of those transactions.

One mall that could struggle if its JC Penney anchor were to close is Riverbirch Corner Shopping Center in Sanford, NC, which could have difficulty finding another retailer to take over the large space currently held by the company. The loan on the mall is US$12m, accounting for 0.3% of CGCMT 2007-C6.

Other malls would have less difficulty in replacing a Penney store. Fitch believes, for example, that Aventura Mall in Miami, Florida, could manage a closure of its JC Penney anchor promptly.

The mall has several stronger anchor tenants, including Nordstrom and Bloomingdales, and a favourable location in the northern Miami suburb. Should the JC Penney store in that mall close, the agency suggests it would be possible for the mall to find another tenant. The loan on that mall is in LBUBS 2007-C7.

Loans on many properties with JC Penney stores are in conduit deals with vintages dating back to 2001. Two large single-borrower mall transactions also contain JC Penney as an anchor - QCMT 2013-QC and JPMCC 2011-PLSD. Both of the underlying properties are located in strong locations at or above 95% occupancy, according to Fitch.

CMBS

SASB performance meets expectations

US single-asset and single-borrower (SASB) CMBS performance is on track to meet expectations for cumulative lifetime defaults, according to a review undertaken by Moody's. Approximately 95% of 4- to 5-year-old SASB tranches originally rated Aaa and more than half of those originally rated in lower investment grade categories stayed within their original rating category through the end of 2012.

Part of Moody's ratings approach for SASB transactions involves determining a Moody's Loan to Value (MLTV) ratio that is distinct from the loan-to-value ratios used in the underwriting of a loan. Unlike the current market cap rates used to determine value in the appraisals that support underwritten LTV, the values the agency use to determine the 'V' in its MLTV ratios reflect cap rates that prevailed for extended periods of time historically.

"This ensures our assessment remains consistent across vintages and interest rate environments, as well as appropriate for analysing refinance risk," comments Tad Philipp, director of CRE research at Moody's. The 40% peak-to-trough commercial property price decline that occurred post-crisis is shown to be within the level of protection afforded investment grade classes of the SASB deals Moody's rated.

Another important part of Moody's analysis is the establishment of recovery values under different stress scenarios. While large size or high value of loan collateral can sometimes serve as a proxy for collateral quality - and by extension income and value stability - it is by no means reliable or uniform across SASB deals, the agency notes.

"Other market participants sometimes apply a recovery-based tranching approach to weaker collateral, such as malls with low sales productivity," says Philipp. "However, we believe this approach runs the risk of a near total loss in value that is inconsistent with assigning investment grade ratings."

CMBS

CMBS collateral quality 'barbelled'

A decline in Moody's debt service coverage (MDSCR) has led to an increase in conduit credit risk in the US CMBS transactions the agency rated in Q3, it reports. MDSCR fell to1.59 in the third quarter from 1.68 in the second quarter, and is expected to continue falling in the fourth quarter.

"The levels of debt service coverage are still high enough to align credit quality with that of the 2005 vintage," comments Tad Philipp, director of CRE research at Moody's. "However, as MDSCR declines, credit quality will be closer to that of the early 2006 vintage."

The average Moody's loan to value (MLTV) ratio in the third quarter held relatively steady, increasing to 103% from 102.6% in the second quarter. The up-tick in loan coupons that commenced with the spike in the 10-year Treasury rate in May therefore caused the decline in MDSCR.

The increase in conduit risk has led to an increase in Moody's credit enhancement levels. The average Baa3 credit enhancement for the transactions the agency rated in the third quarter was 7.63%, up by 180bp from the 5.83% level in 1Q11.

The quality of collateral backing the loans was barbelled in the third quarter, with trophy assets providing highly durable cashflows on one side, offset by assets with more volatile business models or higher loss given default potential on the other. "Issuers continue to originate loans backed by weak malls, even as first-generation loans backed by similar collateral have realised large losses," says Philipp. "This exemplifies why we need continued diligence on these transactions."

Underwritten cap rates held steady at 6.5% in the third quarter and have been relatively 'sticky', increasing by only 16bp between Q1 and Moody's pipeline for Q4. Meanwhile, loan coupons rose by 90bp over the same timeframe.

Most of the slack between cap rates and Treasuries has been absorbed, according to Moody's. Going forward, the agency expects cap rates to increase by about 50bp for every 100bp increase in the 10-year Treasury.

CMBS

Decline in CMBS default rate continues

Fitch's cumulative default rate for US fixed-rate CMBS declined by 2bp in the third quarter to 13.7%, as new issuance remains healthy and defaults stabilise. During 3Q13, 93 loans totalling US$1.1bn were newly defaulted, compared to 97 loans (US$1.4bn) in the previous quarter and 119 loans (US$2.2bn) in 3Q12.

Larger balance loans have defaulted less, according to Fitch, with 82 of the 93 newly defaulted loans being under US$20m. An equal number of office and retail loans (31 each) were newly defaulted in 3Q13. By balance, office loans led at US$512m (45%), with four of the 11 loans being over US$20m.

The largest office default was the US$146.5m COPT Office Portfolio, securitised in GCCFC 2007-GG9 (see SCI's CMBS loan events database). The loan has been current on debt service, but is classified as in foreclosure. The properties in this portfolio are located in Maryland and Colorado, with high tenant exposure to major government contractors and the General Services Administration (GSA).

Retail defaults for 3Q13 totalled US$348m (31%). Newly defaulted retail loans ranged in size from US$993,000 to US$94m.

The largest was the US$94m Rushmore Mall, securitised in BACM 2006-3. The borrower has requested a loan modification in order to potentially reconfigure the space.

An additional 56 loans - with an original securitised loan balance of US$390m - in Fitch's portfolio did not refinance at their third-quarter 2013 maturity date. Of these loans, 15 (totalling US$102m) in original securitised loan balance had paid in full by the end of the quarter.

Risk Management

Liquidity aggregator introduced

BNY Mellon has rolled out what it calls the Liquidity Aggregator via its Liquidity DIRECT portal. The tool is designed to help clients gain a new level of insight into their investments, by monitoring and helping to control liquidity risk exposures, as well as manage funding needs. Clients can leverage the new dashboard across their entire investment portfolio to view, among other things, the largest holdings by security type and issuer, with the ability to determine shared securities.

Risk Management

RFC issued on leverage ratio disclosure

The EBA has launched a consultation on draft implementing technical standards (ITS) on disclosure for the leverage ratio, which seek to provide institutions with uniform templates and instructions. These draft ITS include all the items that are relevant for disclosure under the provisions set out in the Capital Requirements Regulation (CRR) and are aligned with the Basel disclosure framework.

The disclosure framework set out in the ITS consists of four templates: a table that reconciles the figures of the leverage ratio denominator with those reported under the relevant accounting standards; a table that provides a breakdown of the leverage ratio denominator by exposure category; a table that provides a further breakdown of the leverage ratio denominator by group of counterparty; and a table that provides qualitative information on leverage risk.

The deadline for the submission of comments is 24 January 2014.

Risk Management

Counterparty classification tool launched

ISDA, the British Bankers' Association, the Investment Management Association and Markit have launched an EMIR Counterparty Classification Tool on ISDA Amend, ISDA and Markit's online service that facilitates compliance with certain EMIR and other regulatory requirements. The tool provides an online system that will allow all businesses to classify themselves according to the EMIR taxonomy by answering a series of questions.

Risk Management

Index tranche trades compressed

TriOptima says it has worked with industry participants to implement an advanced triReduce compression methodology for legacy index tranche trades with non-standard coupons, as well as the more recent index tranche trades with standard coupons. Eliminating these trades reduces gross notional exposures and results in higher leverage ratios and lower capital charges, the firm notes.

Compression cycles eliminated 25% (or €35.9bn) of iTraxx and 56% (or US$189.6bn) of CDX index tranche legacy notionals. Total notionals eliminated in the triReduce index tranche cycles were €80.4bn and US$281.3bn respectively, including trades with standardised and non-standardised coupons.

RMBS

Italian, Spanish RMBS downgrades likely

S&P has requested comments on proposed changes to its methodology and assumptions for rating Italian and Spanish RMBS. The agency says the aim is to increase the comparability of RMBS ratings globally and across sectors, as well as to enhance the rating analytics.

The key aspects of the proposed criteria are: to adopt the global framework and methodology for analysing the credit quality of RMBS; and to revise the modelling and cashflow assumptions for typical Italian and Spanish RMBS transactions. Application of the proposed criteria, together with S&P's current framework for analysing sovereign risks and its counterparty criteria, would negatively affect less than 40% of ratings outstanding on Spanish RMBS - with downgrades of between two and four notches in 60% of the cases. Similarly, slightly more than 10% of the ratings on Italian RMBS would likely be lowered, by one to three notches in 75% of cases.

Comments are invited by 20 December.

RMBS

Further stipulated claims received

Eurosail UK 2007-5NP has received US$5.42m from Lehman Brothers Special Financing Inc and US$5.84m from Lehman Brothers Holdings Inc in respect of the issuer's class 4A and 9A claim. The amounts represent 3.18% and 3.43% respectively of the transaction's US$170m stipulated claim for failure of the hedging contracts.

RBS European securitisation analysts note that the deal has previously received 33.18% of the stipulated claim amount in May and October 2012 and May 2013. The amounts will be held by the issuer either for application towards payment to a suitably rated replacement hedge counterparty or as per the transactions contemplated by the consent solicitation memorandum published earlier this month (SCI 8 October).

RMBS

Richmond ruling appealed

Trustees for investors including BlackRock, PIMCO and DoubleLine Capital are appealing US District Judge Charles Breyer's dismissal of the Richmond eminent domain case (SCI 24 September). They are asking a federal appeals court in San Francisco to review the ruling. A SFIG memo notes that lawyers for the trustees allege the majority of the targeted loans are still performing, while the plan will harm investors and disrupt the US housing market if the housing plan is allowed to proceed and other communities follow suit.

RMBS

Canadian MBS pricing offered

Thomson Reuters has rolled out evaluated pricing for Canadian MBS to assist customers in accessing accurate end-of-day pricing. The new pricing offering is part of Thomson Reuters Pricing Service (TRPS) and employs a mark-to-market methodology to price the universe of Canadian MBS pools on a daily basis, providing coverage for approximately 10,000 fixed and floating rate instruments.

RMBS

Italian RMBS recoveries examined

Some Italian residential mortgage loans that defaulted as long ago as 2004 are still not resolved, highlighting the long recovery times compared with other jurisdictions, Fitch reports. An analysis undertaken by the rating agency shows the impact of the higher expected loss assumptions that result from long recovery times.

Historical data provided by the nine originators of ten Fitch-rated Italian RMBS deals closed between Q411 and August confirms that Italian recovery times remain among the longest in Europe. It typically takes between four and seven years from instructing lawyers to setting an auction date for a foreclosure sale of a property in Italy. This compares with 15 months in the UK, which is among the fastest in Europe, together with the Netherlands and Norway.

The data shows that on average only 70% of loans that have been in default for eight years or longer have been fully closed. In addition, 'cash in court' in Italy may take years before being distributed to creditors after the successful sale of the underlying properties.

Fitch ran a sensitivity analysis on the Italian RMBS transactions rated since Q411 to quantify the impact of recovery times on its expected loss assumptions for RMBS deals in Italy compared with the jurisdictions where they are significantly faster. This shows that if Italian recovery periods were in line with the UK, for instance, the corresponding expected loss assumptions could be reduced by one-third on average.

The unresolved defaulted claims and the slow recoveries are partly offset in most Italian RMBS transactions, as defaults are immediately provisioned for with excess spread from performing loans and therefore the note balance is repaid accordingly. However, when excess spread is not sufficient, this creates a negative cost of carry for Italian SPVs.

Actual recovery rates on fully resolved positions are high: in the base case, model-driven recoveries used in rating new deals may be 85%-90% for loans with a current LTV of about 55%. However, the legal departments of some Italian banks seem to take longer than anticipated to fully resolve their defaulted claims.

The few outstanding Italian NPL transactions rated by Fitch also highlight long recovery periods. In their regular business plan updates, the engaged special servicers typically postpone recoveries without haircutting them significantly, providing further evidence that the key challenges lie in long recovery timings rather than in low recovery amounts.