Contents

CLOs

Ringing the changes

CLO risk retention to open door for BDCs

Risk retention proposals for US CLOs will bring significant changes in the market. The regulatory requirements are set to affect not only the issuer base, but also how deals are structured.

"The risk retention requirements are not perhaps being embraced by investors, but they are understood. In some ways CLOs are collateral damage here, but regulators have decided that by the rules, CLOs are securitisations and therefore risk retention is applicable," says David Preston, CLO analyst at Wells Fargo.

Smaller managers are expected to struggle to issue CLOs once risk retention requirements bite. The retention piece would take up a proportionally larger piece of those managers' revenue, so they may look to sell their existing contracts and leave the market.

Other market players could replace the smaller managers that drop out and pick up the slack in issuance. Business development companies (BDCs) have been touted as one possible replacement for those smaller managers.

"Asset managers and structuring experts may find combinations of funds and managers that work in a post-risk retention world. BDCs may become more involved in the CLO sector as on-balance sheet CLO issuers and as loan originators," says Preston.

One CLO manager who is not expecting risk retention to hinder their own issuance does, however, agree that smaller competitors may be forced out of the market. If that happens, he sees BDCs as a natural fit for the space.

"If other managers do drop out, then BDCs could definitely step up and that would change the complexion of the market," he says. "The BDCs could certainly have an advantage and they are often large equity participants anyway, because they like the large cash-on-cash returns."

The manager adds: "However, it is still very hard to predict. There remains considerable ambiguity as to how all of this regulation ends up because nobody wants to damage what is a vital source of capital for corporations."

BDCs could function not only as issuers, but also as loan originators. That would mark a more significant shift in their role.

"BDCs will likely have an easier time satisfying loan originator risk retention rules, specifically by satisfying the 5% loan arranger risk retention option. This would increase the value of their collateral (as it would be CLO eligible) and may lead to an increase in BDC loan originations as a potential replacement for the CLO capacity," says Preston.

There would, however, be challenges for BDCs issuing CLOs - not least that they would be required to consolidate their leverage for GAAP purposes, which could push a BDC above its 1:1 debt to equity limit. Their mandate could expand to include internal managers, or Preston notes that other structures - such as REITs - could become CLO issuers.

He adds: "It is also possible that long-term investors, such as insurance companies and pension funds, could form joint ventures with loan arrangers and asset managers in such a way that may satisfy risk retention requirements. Recent examples such as Golub's Senior Loan Fund have shown that a BDC can form a joint venture with an outside investor to invest in senior secured loans."

Longer reinvestment periods are also expected as a response to risk retention requirements. There have been suggestions of a return to seven-year reinvestment periods, possibly with a complete cessation of any reinvestment after the reinvestment period ends.

Once the risk retention rules are approved, there will be a two-year window before they come into effect. A rush of issuance is expected before that deadline as managers look to complete deals.

"That may coincide with managers calling existing deals in order to issue with new structures. However, for those managers that might struggle to meet retention requirements when they come into force, investors may be wary about investing in a deal if they do not know what the manager will look like four or five years down the road," says Preston.

The manager agrees that a spike in deal issuance is possible, but he is less convinced that there will be a slew of deals being called. He says: "One major obstacle would be that often it is not clear who holds call rights, so theoretically calls make sense but there are practical difficulties to that, which I do not think everyone has factored in."

No significant changes are expected to be made to the risk retention proposals. While that may disappoint several market participants, the manager notes that one of the CLO market's main strengths has been in adapting to change, whether through step-up structures or fixed tranches.

Preston concludes: "There can often be an inertia to the regulatory process, so there may not be enough time for these proposals to be reshaped. It can be hard to get amendments to a large document that several agencies have come together to produce, but the LSTA and SFIG have produced quite comprehensive comment letters to point out the problems with these regulations."

JL

CLOs

Variety on show in US CLOs

Yesterday proved a varied session for the US CLO secondary market, as the 2005-2013 vintages and all parts of the capital structure were represented. SCI's PriceABS data shows that prices remain slightly higher than in previous weeks.

At the top of the stack, tranches such as BLACK 2005-1A A1 were talked at 98 handle, 99 handle, around 99, at low/mid-99 handle and in the mid/high-99s during the session. The bond was also covered at 99 handle, having been covered at 99.719 on 10 September.

The SARA 2006-1A A1 tranche was covered at 99.13, while the STANE 2006-1A A2 tranche was covered at 99.03. Also out for the bid was WOODS 2006-6A A1A, which was talked by various sources at or around 99 and covered at 99.38.

Further down, AVCLO 2006-3A B2L was talked in the low/mid-90s, mid-90s, at 96 handle and in the mid/high-90s. The bond traded during the session, just as it traded on 11 September when price talk was in the low- and mid-90s.

There were C tranches circulating, such as PRSP 2006-1A C and CECDO 2007-15A C. The former was talked between the low-90s and 95 area and covered at 93.05, while the latter was talked in the low-90s, low/mid-90s, at 92 handle, at 94 handle and in the mid-90s before being covered at 92.05.

Notable D tranches included ATRM 5A D - which traded during the session, with price talk in the low/mid-90s, mid-90s, at 95 handle and in the high-90s - as well as NACM 2006-1A D and VENTR 2006-7A D, which were covered at 98.63 and at 88.51 respectively. Among the D tranches out for the bid was also TRAL 2013-1X D, which did not trade.

TRAL 2013-1X E was a DNT for the E tranches, as was the KVK 2013-1A E tranche, which was talked at 94 handle, around 94, in the mid-90s and at 95 handle. That latter tranche was last successfully covered on 6 August at mid-93 handle.

Other 2013-vintage E tranches were covered successfully, however, including LONGF 2013-1A E - which was talked at 94 handle, in the mid-90s, at 95 handle, around 95, at 96 handle, around 96 and at 97 handle and covered in the low-95s. VENTR 2013-13A E was talked between the low-90s and 94 and covered in the low/mid-94s, having been previously covered on 2 October at 93.05.

Older-vintage E tranches such as BALLY 2006-2X E were also out for the bid. That tranche was talked in the low-90s, low/mid-90s and mid/high-90s and covered at 95 handle, having first appeared in the PriceABS archive on 19 February, when it was talked in the high-80s.

Both the CALD 7A SUB tranche and the CALD 7X SUB tranche were talked and covered at around 70. The ALM 2012-6A SUB tranche was talked in the mid/high-90s, high-90s, very high-90s to low-100s and at around 110 and covered at 104.67. Price talk in July for the ALM bond ranged between around 80 and the low-100s.

Finally, a pair of CGMS sub tranches - CGMS 2012-1A SUB and CGMS 2012-2A SUB - were also covered. The 1A tranche was talked in the 80s, low-80s and mid-80s and covered at 86.51, while the 2A tranche was talked in the high-90s, 100s and around 110 and covered at 103.05.

JL

RMBS

Subprime boost seen

US non-agency RMBS supply picked up yesterday, boosted by a mix of senior and mezzanine subprime floaters. Option ARM bonds were also well represented.

Among the subprime names out for the bid during the session, JPMAC 2007-HE1 AV2 was talked at low/mid-80s, according to SCI's PriceABS archive. In the Alt-A fixed-rate space, the RALI 2006-QS2 1A4 tranche was also talked at low/mid-80s, while MARM 2007-2 A1 was talked at mid-80s in the Alt-A hybrid segment.

Meanwhile, SEMT 2013-6 A2 made a rare appearance yesterday, talked at mid-90s. Also of note, CAS13-CO1 and STACR13-DN1 bonds continue to rally. Offer levels for the M1 and M2 tranches tightened by 11bp-16.5bp during the session, according to Interactive Data.

Structured Finance

SCI Start the Week - 4 November

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

Pipeline
All securitised asset classes were well represented in the pipeline last week. The new entrants included the first-ever single-family rental securitisation (US$500m Invitation Homes 2013-SFR1) and Freddie Mac's second risk transfer deal (US$245m STACR 2013-DN2). Rounding out the RMBS announced transactions was US$941.1m Citigroup Mortgage Loan Trust 2013-J1.

The CMBS joining the pipeline comprised: US$345m BAMLL 2013-DSNY, US$1.1bn GSMS 2013-GCJ16, US$1.14bn JPMCC 2013-C16 and £185m Unite (USAF) II. In ABS, two auto deals (US$900m AmeriCredit Auto 2013-5 and £378.7m Turbo Finance 4), a credit card deal (€560m Master Credit Cards PASS Compartment France) and one student loan deal (US$746.8m SLMA 2013-6) were announced.

Finally, three CLOs began marketing: €310.75m Avoca Capital CLO X, €180m Euro Galaxy III and US$400m Keuka Park CLO.

Pricings
New issuance was also varied last week. However, ABS was the dominant asset class once again.

Among the auto ABS to price during the week were €736m Auto ABS2 FCT Compartiment 2013-A, US$750m BMW Vehicle Owner Trust 2013-A, US$1bn CarMax Auto Owner Trust 2013-4 and US$688.31m Porsche Innovative Lease Owner Trust 2013-1. Credit card issuance comprised US$700m CCCIT 2013-10 and US$700m CCCIT 2013-11, while an equipment deal (US$92.37m Navitas Equipment Receivables Series 2013-1) and a timeshare deal (US$300m Sierra Timeshare 2013-3 Receivables Funding) also printed.

RMBS pricings consisted of A$322m ConQuest 2013-1 Trust, €1.09bn Lunet RMBS 2013-I, £399m RMS 27 and NZ$67.8m Sapphire V NZ Series 2013-1 Trust. In addition, the €361.55m Grosvenor Place 2013-1, US$516m Benefit Street Partners III and US$410m Flatiron CLO 2013-1 CLOs printed.

Finally, the CMBS new issues comprised US$1.54bn FREMF 2013-KF02 and US$900m WFRBS 2013-C17, with the US$279.25m Global Container Assets 2013 rounding out issuance.

Markets
US non-agency RMBS secondary trading volumes were modest last week, with US$5.4bn in non-investment grade bonds, US$800m in investment grade bonds and US$2.2bn in derivatives trading through Thursday, according to Bank of America Merrill Lynch estimates. Washington Mutual shelves continued to appear on many BWICs and have seen increased turnover - at a sizable premium - since reports of settlements began to surface the previous week.

However, the most substantial price movement last week was seen on GSE risk-sharing transactions. Through Tuesday, Fannie Mae's Connecticut Avenue deal had tightened by 53bp on the M1 tranche and by 120bp on the M2. Similar trends were seen on Freddie Mac's STACR deal as well.

US consumer ABS secondary spreads also tightened last week, by 1bp-10bp. Wells Fargo analysts note that triple-A spreads tightened by 1bp-4bp across various sectors, while spreads on subordinated bonds were 3bp-10bp tighter.

Supply has been light, with roughly US$400m in BWIC activity recorded during the week, compared to average weekly volumes of US$800m for the prior three months. SCI's PriceABS data shows that auto names, credit card bonds and even whole business tranches were well represented.

Meanwhile, the rally in US CMBS continued last week, even as some signs of near-term exhaustion appeared and the possibility of a December taper by the Fed regained some supporter. Most of the spread tightening emerged in the 2.0 and 3.0 markets, with the credit curve on the latter sector continuing to flatten.

"The market in our view remains poised to continue the spread tightening trend over the remainder of the year, but will be challenged in the near term primarily by an increased amount of new issues," Deutsche Bank strategists observe.

Deal news
• The much-anticipated debut single-family rental (SFR) securitisation has hit the market, with the senior tranche carrying triple-A ratings from three rating agencies. The US$479.14m Invitation Homes 2013-SFR1 is secured by the income streams and values from 3,207 leased properties owned by Blackstone subsidiary Invitation Homes.
• The interest shortfall experienced by the Titan Europe 2006-3 class A notes has resulted in a note event of default (see SCI's CMBS loan events database). Class A notes have not previously experienced an interest shortfall in such a large European CMBS.
• Freddie Mac has begun securitising performing HAMP modified mortgage loans held in its mortgage-related investments portfolio under the Modified Fixed Rate PC and Modified Step Rate PC monikers. To be eligible for securitisation, modified loans must be current for at least six consecutive months at issuance of the related PC.
• European CLO 1.0 bonds are generically priced to a 20% CPR scenario, but significant return upside could emerge from higher realised repayment rates. Deleveraging in the sector is anticipated to run well into 2014 and continue to enhance returns for senior and senior mezzanine tranches.
• Three common attributes have been identified among the 67 loans included in the upcoming CWCapital Asset Management auction (SCI 16 October), which could serve as a road map for special servicer behaviour going forward. The loans are primarily REO, securitised in deals with higher losses and of a larger size.
• Rate reduction bonds (RRBs) continue to offer spreads that are comparatively wide for the credit risk they represent. Volumes have declined recently, but the sector still provides a natural home for total return accounts.
• 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.
• 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.
• ISDA's EMEA Determinations Committee has ruled that certain Assicurazioni Generali Solvency 2 bonds can be used as reference obligations for the group's sub CDS, thereby solving a deliverable problem at the group. Previous legal guidance indicated that Solvency 2 bonds were not deliverable into sub CDS due to the contingent nature of their maturity date.
• 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.

Regulatory update
• LSTA has urged federal regulators to recognise a category of higher quality leveraged loans that would not attract risk retention, based on the low loss experience on these loans, the robust underwriting process undertaken by CLO managers for the loans they select and the fact that virtually all CLO managers are registered advisors subject to strict federal securities laws. In addition, the association suggests the agencies permit third-party investors to be the sponsor, assuming they hold a significant portion of the CLO's equity and have an active role in the development of the CLO's asset selection criteria.
• CRE Finance Council and SIFMA have submitted comments to federal regulators in response to the re-proposed rulemaking on credit risk retention. The associations express support for many of the changes that have been made to the proposed rules, but believe that further refinement of the rules is required.
• Representative Mel Watt's nomination as FHFA director suffered a setback last week as a motion to bring his nomination to a vote was defeated. Watt is not out of the running completely and several possible outcomes remain.
• ICAP is said to have asked the CFTC to issue formal guidance on Footnote 513 of its swap rules. Some dealers have interpreted the rule to mean that swaps with foreign clients are exempt from the rules, providing the deals are booked through a US bank's overseas affiliates.

Deals added to the SCI database last week:
abc SME Lease Germany Compartment 1; AFG 2013-2 Trust; Ally Auto Receivables Trust 2013-2; Carlyle Global Market Strategies CLO 2013-4; CIFC Funding 2013-IV; COMM 2013-CCRE12; Credico Finance 14; Credit Acceptance Auto Loan Trust 2013-2; Crown Point CLO II; Discover Card Execution Note Trust 2013-5; Discover Card Execution Note Trust 2013-6; Ford Credit Auto Lease Trust 2013-B; Fortress Credit BSL 2013-2; FREMF 2013-K33; FREMF 2013-KGRP; Galileo Re Series 2013-1; GE Equipment Transportation series 2013-2; Golub Capital Partners CLO 17; Honda Auto Receivables Owner Trust 2013-4; JPMBB 2013-C15; KVK CLO 2013-2; Nissan Auto Lease Trust 2013-B; SC Germany Vehicles 2013-1; Silverleaf Finance XVII series 2013-A; THL Credit Wind River 2013-2; World Omni Auto Receivables Trust 2013-B

Deals added to the SCI CMBS Loan Events database last week:
BACM 2004-1; BACM 2007-1 & JPMCC 2007-LDPX; BACM 2007-1, JPMCC 2007-LDPX & GECMC 2007-C1; BSCMS 2007-PWR16; COMM 2013-WWP; DECO 2006-E4; DECO 2007-E6; DECO 2007-E7; DECO 8-C2; DECO 9-E3; EMC IV; EMC VI; GCCFC 2005-GG3; GCCFC 2007-GG9; JPMCC 2005-LDP4; JPMCC 2006-FL2; LBUBS 2004-C4, COMM 2004-LB3 & GSMS 2004-GG2; MLMT 2005-MCP1; TAURS 2006-2; TITN 2006-3; TITN 2007-CT1; TMAN 5; WBCMT 2007-C34; WINDM VIII

Top stories to come in SCI:
European CMBS issuance trends
Single-family rental developments

CLOs

Euro CLO 1.0 upside eyed

European CLO 1.0 bonds are generically priced to a 20% CPR scenario, but significant return upside could emerge from higher realised repayment rates. Deleveraging in the sector is anticipated to run well into 2014 and continue to enhance returns for senior and senior mezzanine tranches.

Tighter loan spreads and CLO 2.0 ramp activity are expected to support high loan repayment rates, while default rates should remain range-bound. Senior bonds in deals past their reinvestment period have on average paid down at an annualised rate of 29%, while some 17% of such bonds have seen their principal balance decline by at least 50% in the last year, according to Deutsche Bank figures.

Deutsche Bank European securitisation analysts note that the vast majority of CLO 1.0s (83%) continue to fail reinvestment criteria. Some 76% of CLO 1.0s are currently past their reinvestment period, a number that is expected to rise to 97% by the end of 2014. Among the 47 deals that are 24 months past their reinvestment period end dates, 34 have seen their deleverage rate increase by an average of nine points over the last year.

Against this backdrop, the analysts believe that senior mezzanine bonds in post- reinvestment CLO 1.0 deals will look increasingly better supported as they de-lever. "The current AA-AAA spread basis at circa 60bp and A-AAA basis at circa 150bp indicates the attractive spread pick-up to move down the capital structure in deleveraging deals. In the absence of bond-specific pricing, we emphasise safety of principal and potential upside from faster repayment," they explain.

Among originally-rated double-As, the analysts highlight ADAGI IX B2 (which is expected to be fully paid down by December 2014) and ORX 1X B (which is expected to see an increase in attachment point from 34% to 73% by December 2014). Among original single-As, they favour AQUIL 2003-1A C and SILBR 1X C, with the former expected to pay-down fully and the latter expected to see a steep increase in attachment point from 42% to 63% by end-2014, if CPR remains around 20%.

Deleveraging is not expected to significantly increase returns in the lower part of the capital structure in the near term, however. While these bonds still present attractive yield opportunities relative to any other European credit asset class, outperformance is contingent on the benign risk environment continuing for leveraged loans, although selected opportunities may materialise due to call exercises as CLO 2.0 deals ramp up.

CS

CMBS

Auction exposure quantified

Morgan Stanley CMBS strategists have decoded three common attributes of the 67 loans included in the upcoming CWCapital Asset Management auction (SCI 16 October), which they assert serve as a road map for special servicer behaviour going forward. The loans are primarily REO, securitised in deals with higher losses and of a larger size.

Of the properties up for sale in the auction, 87% of them are REO, while 80% of them are securitised in deals in which the current loss has reached at least as far as the tranche originally rated double-B. This is significantly higher than the 30% concentration in the remainder of the REO portfolio not included in the auction, according to the Morgan Stanley strategists.

The final common attribute shared by the loans is that the average balance is US$41m, compared to US$17m for the remaining REO loans that are not part of the auction. Other factors - such as months in REO, cumulative ASERs and most recent appraisal value - were generally consistent across CWCapital's portfolio of REO loans, suggesting that they were not motivating factors for inclusion in the auction.

The strategists applied these three characteristics to five other special servicers to identify deals with the greatest potential exposure to an auction. They found that 447 REO loans totalling US$8.1bn are securitised across 95 deals where the losses have reached at least as far as the tranche originally rated double-B. Of these loans, 108 totalling US$5.4bn securitised across 56 deals are larger than US$20m.

The strategists define these loans as being at 'high risk' of auction, with eight LNR specially-serviced CMBS having greater than 10% exposure to 'high risk' REO loans. Another 12 deals have between 5% and 10% exposure to 'high risk' REO loans.

"Distressed sales may accelerate as special servicers take advantage of rising property valuations. This provides an opportunity for CMBS investors to proactively sell or buy bonds off of deals they believe may have sizeable exposure to REO auctions," the strategists conclude.

CS

CMBS

Class A EoD for Euro CMBS

The class A notes of the Titan Europe 2006-3 CMBS experienced an interest shortfall last week, constituting a note event of default (see SCI's CMBS loan events database). Class A notes have not previously experienced an interest shortfall in such a large European CMBS.

The event of default at the issuer level was confirmed on 30 October, following expiration of the cure period. The shortfall was principally caused by the deal's largest loan - Target - currently being under a debt service moratorium imposed by the French courts. That loan accounts for almost half of the pool, but did not repay at its July maturity date.

The borrower sought court protection under France's sauvegard provisions, preventing Hatfield Philips as servicer from accelerating the loan and enforcing on the collateral. Restructuring discussions are ongoing, but there are no loan-level cashflows while the discussions take place.

The deal's liquidity facility was being used to make interest payments on the class A notes but is now completely depleted. Although the issuer also had €2.8m of available revenue to help pay the class A notes, the class X notes rank pari passu and were paid €2.6m.

The class A and class X notes were each paid 59.8% of the interest they were owed. Bank of America Merrill Lynch European securitisation analysts highlight that the class X note is unaffected by the note event of default and will continue to receive interest under the post-enforcement waterfall.

"Titan Europe 2006-3 highlights the significant legal and jurisdictional complexities that can arise in pan-European transactions. Even in the absence of a cashflow shortfall at the underlying loan level, such complexities alone can cause investors to experience missed coupons and a consequent potential decline in bond prices," says Anant Ramgarhia, ABS specialist at ECM Asset Management.

He adds: "[This] development also brings to fore, once again, the mechanics of excess spread monetisation in European CMBS - notwithstanding the availability of circa €2.6m in excess spread, class A noteholders nonetheless suffered a circa €91,000 interest shortfall on the October 2013 IPD."

Interest shortfalls are expected to continue until the seven loans backing the CMBS - all of which have defaulted - are worked out and losses allocated. The transaction's final maturity date is July 2016 and there is not thought to be enough time for the loans to be resolved by that point, raising the possibility that an administrator for the deal may be appointed and the loans sold off as NPLs.

JL

RMBS

Waiting for Watt?

Representative Mel Watt's nomination as FHFA director suffered a setback yesterday as a motion to bring his nomination to a vote was defeated. Watt is not out of the running completely and several possible outcomes remain.

"This may be only a temporary reprieve for MBS vulnerable to changes in HARP and other FHFA policies. The Obama administration now can go in a number of directions to try to replace current FHFA acting director Ed DeMarco," note Deutsche Bank RMBS analysts.

Senate majority leader Harry Reid can re-propose voting on Watt's nomination, although more bipartisan support would be needed for that to be successful. Alternatively, the White House could nominate a different candidate or use a recess appointment to make Watt the director at the end of the Congressional session in December.

There is also the option of elevating one of acting director Ed DeMarco's deputies to the position. The final option would be to do nothing and leave DeMarco in the position.

Unless DeMarco stays, HARP and other refinancing programmes would likely be revisited. DeMarco has resisted pressure to extend HARP eligibility, but a replacement director may take a different view.

"Rising mortgage rates and rising home prices have limited the potential impact of change, however. Primary mortgage rates are still more than 80bp above the lows reached in fall 2012. Nonetheless, higher coupons that still have substantial refinance incentive and high LTVs would be impacted by moving the date forward," the Deutsche Bank analysts observe.

Principal forgiveness would likewise be a candidate for reconsideration, although it is an issue that has receded over the last few years. Similarly, while the FHFA under DeMarco has been increasing guarantee fees, there is no certainty that a replacement director would follow the same strategy, nor that they would take the same approach to risk transfers.

"More lead time and a steeper learning curve for a new director might be better for higher coupon MBS performance than less. With more time, HARP and principal forgiveness should continue to decline in significance, though the fate of guarantee fees and risk transfers will remain significant," the analysts conclude.

JL

RMBS

Further forbearance losses recognised

At least 28 RMBS serviced by Chase (EMC) took losses related to past forbearance modifications, according to the October remittance. The affected transactions come from the BALTA, BSABS, BSMF, GPMF, HMBT, PRIME and SAMI shelves.

The average write-down for the month was 0.6%, ranging from 0.0%-6.3% across deals, according to Bank of America Merrill Lynch figures. For some transactions, Chase (EMC) was only a partial servicer, which helps explain some deals with very low percentages of forbearance recognition. Wells Fargo was the master servicer for all of the deals and the trustee for a number.

The majority of deals recognised full losses in the October remittance period, which has been the most common method used in recent months to account for unrecognised forbearance. However, the four deals with the largest write-downs did not have any losses reflected in the October remittance report released by Wells Fargo. Instead, remittance reports for these deals were restated back to March 2013, which is the month where most of the losses are now being reflected.

To gauge the impact of the delay in recognising forbearance as a loss, BAML RMBS analysts compared realised losses and principal and interest payments for BSMF 2006-AR5 in the restated remittance reports - after forbearance losses were realised in March - with the original remittance reports where forbearance losses were not recognised. P&I is now being paid pro-rata, losses are sequential and there are no subordinate tranches remaining. By not originally recognising forbearance losses, the A1 tranches appear to have been underpaid, while the A2 and IO tranches have been overpaid.

Outside of AHM and Aurora deals, the analysts note the majority of deals that have recognised forbearance in recent months have had Wells Fargo as the master servicer. "The percent of unrecognised forbearance for Wells Fargo master serviced deals has declined steadily over the last few months, while other portfolios have remained relatively stable," they observe. "We see deals with Wells Fargo as master servicer as having a comparatively higher likelihood of recognising forbearance. We also continue to see deals that have recently transferred to new servicers as being at higher risk."

CS

RMBS

Modified loan trends analysed

Of the 3.2 million currently outstanding mortgages in the Loan Performance database originated between 2004 and 2007, 1.2 million have been modified at least once, according to Morgan Stanley estimates. Given the variation in modification types, securitised product strategists at the bank have put together some heuristics to help investors evaluate performance prospects within modified deals.

The Morgan Stanley strategists suggest that the magnitude of decrease in a borrower's monthly P&I payment is correlated with six-month re-default rates on first time modifications. The larger the payment reduction, the less likely a borrower will re-default over the modification's first six months.

However, the relationship between the magnitude of payment reduction and performance appears to weaken as modifications reach over a year of performance or if a loan is modified more than once. The one constant seems to be the relative outperformance of modifications that receive a monthly payment decrease in excess of 50%.

Borrowers who receive a modification before experiencing a later stage of delinquency - 90-plus days past due, foreclosure or REO - show lower cumulative re-default rates compared to borrowers whose loans are modified after they are seriously delinquent.

The impact of lower re-default rates from modified loans is not uniform across the non-agency capital structure, however. An investor's position in the capital structure determines their view on the implications of post-modification performance.

The strategists point to considerable variability amongst Alt-A and subprime deals in the concentration of early-stage modifications and modifications that include a 50% cut in the borrower's monthly payment. "We note that pools with 'better' modifications are not necessarily better for all bondholders in a given deal," they observe. "For certain parts of the capital structure - for example, some front-pay tranches that are currently cash flowing - stronger post-modification performance may result in the adverse effect of duration extension. In some cases, quicker recognition of recoveries could be what investors are looking for."

CS

Structured Finance

Structured credit desk expands

Cantor Fitzgerald Europe has further expanded its European structured credit desk with the appointment of Sheil Aggarwal as md. Based in London, he will focus on ABS, MBS and CLOs.

Aggarwal joins Cantor from Pamplona Credit Opportunities, where he was a partner (SCI 25 June 2008). Before that, he was a senior md at Bear Stearns, overseeing the trading and syndication of European structured credit.

Structured Finance

Origination exec promoted

Barclays Capital has promoted Martin Attea to co-head of securitised products origination in its Americas global finance and risk solutions group. He will work alongside Cory Wishengrad and report to head of DCM Jim Glascott and head of global securitised products trading Scott Wede.

Wishengrad will continue to lead the esoteric group, reporting to head of global leveraged finance JF Astier. The esoterics group will become part of the global leveraged finance business.

Former co-head of securitised products origination Diane Rinnovatore has left the firm.

Structured Finance

Sukuk specialists look to Europe

Amanie Advisors has appointed Noel Lourdes as head of its European advisory division as the firm seeks to grow its presence in the region. He will work closely with teams in Dubai and Kuala Lumpur while being based in Dublin, reporting to group president Mohd Daud Bakar.

Before joining Amanie, Lourdes advised the Central Bank of Ireland to help create an awareness of Islamic finance as a source of capital and he has also worked for KPMG. Amanie advised on a structured sukuk in 2010 (SCI 14 July 2010).

Structured Finance

Management strengthened amid reshuffle

BlueBay Asset Management has recruited Luc Leclercq as partner, coo and a member of the management committee. The move comes ahead of a planned reorganisation in 2014 aimed at further strengthening the firm's management team.

Leclercq was previously an svp at State Street, where he was responsible for managing client relations in the middle office business, with a focus on the asset management sector. He has also worked at JPMorgan and F&C Asset Management.

Effective 1 January 2014, Hugh Willis will become executive chairman of BlueBay, while Mark Poole will become executive chairman of its investment and asset allocation committees. Alex Khein (currently coo) will succeed Willis as BlueBay's ceo, with Raphael Robelin and David Dowsett succeeding Poole as co-cios of the firm. Robelin and Dowsett will retain their responsibilities as co-heads of the investment grade and emerging markets businesses respectively. Nick Williams (cfo), Erich Gerth (global head of business development) and Natalie Benitez-Castellano (head of HR) will remain in their current management positions.

Structured Finance

Trader joins lobbyist

Caitlin Kline has joined Better Markets as a derivatives specialist. She previously worked as a flow and structured credit derivatives trader in Credit Suisse's emerging markets group for five years until 2011. Prior to that, she was an analyst with the bank's fixed income index and analytics group.

Since 2011, Kline has been a financial reform advocate, providing expert guidance to Congressional committees in connection with derivatives regulation and market practice.

Better Markets is an independent, non-profit, non-partisan organisation that promotes the public interest in financial reform in the domestic and global capital and commodity markets. The organisation now has 12 staff in Washington DC, where it is based, as well as senior fellow Robert Jenkins in London and staff in Brussels.

Structured Finance

Broker beefs up in structured finance

Sterne Agee has expanded its structured products offering with the addition of seven new staffers. Joining the company's New York office in various positions are: Katya Baron, David Jacob, Brendan Keane, Mike Krull, Dariush Pouraghabagher, John Rozario and John Woodruff.

Jacob and Krull join Sterne Agee as co-heads of CMBS trading in the structured products group. The pair will focus on trading CMBS, CRE CDOs, small balance commercial, CTL and CRE mezzanine loans/B-notes. They report to Adam Robison, co-head of structured products.

Pouraghabagher has been named md and head of residential mortgage credit trading in the structured products group. He will focus on trading non-agency RMBS and whole loans.

Woodruff becomes vp in the structured products group and will be working with Pouraghabagher on the residential mortgage credit trading desk. The pair also report to Adam Robison.

Finally, Keane, Baron and Rozario form Sterne Agee's newly established structured finance solutions group. Led by Keane, the group is tasked with generating business from a variety of structured finance-related sources, including asset securitisations, portfolio advisory and valuation assignments and specialty finance-oriented transactions. The team will report to Bill Fedyna, co-head of structured products.

Baron, Keane and Woodruff were previously at Gleacher & Co, while Jacob and Krull were at StormHarbour Securities. Pouraghabagher joins from Ally Financial.

Structured Finance

Law firm eyes frontier markets

Fasken Martineau has appointed Elizabeth Uwaifo and Francis Nwokedi as partners in the firm's London banking and finance group. They each have over 20 years' experience in derivatives and structured finance, and have been brought in to enhance the firm's offering of customised financing solutions, especially in the nascent frontier markets. Uwaifo was previously a partner at Sidley Austin, while Nwokedi was a director at UniCredit.

CDO

Trups CDO manager resigns

Cira SCM (formerly known as Strategos Capital Management) intends to resign as collateral manager on Libertas Preferred Funding I. The firm has provided 90 days' written notice of its intension.

The issuer intends to appoint a successor collateral manager, but if one isn't found within 60 days, the controlling class of noteholders has the right to appoint a successor manager that satisfies the replacement manager conditions. Cira SCM's resignation shall not be effective unless a successor collateral manager has been appointed.

CDS

Exchange union delayed

IntercontinentalExchange (ICE) and NYSE Euronext have postponed the closing date of their agreed merger (SCI 21 December 2012) from 4 November to a later date which is yet to be announced. The postponement will allow additional time for European regulators and ministries to process and issue their approvals.

ICE and Euronext anticipate closing the proposed transaction within two business days after receiving final regulatory approval, which they expect in the coming days. No substantive issues are expected to be raised in the wait for these approvals.

CLOs

CLO pro takes structuring role

Peter Melichar has joined Deutsche Bank as a senior structurer, based in London. He has 13 years of experience in ABS, CDOs and CLOs and was most recently at Maybird Consulting.

Melichar was md at Maybird, focusing on European CLOs and corporate credit. He has also served as head of structured products at Key Capital and in structuring roles at Société Générale and Citigroup (SCI 18 July 2007).

CMBS

CRE partner recruited

Paul Hastings has hired commercial real estate specialist David Ryland as a partner in its London office. He joins the firm from SJ Berwin, where has was also a partner.

RMBS

RMBS vet to lead agency effort

Brian Cohane has joined Société Générale as an agency RMBS trader, reporting to head of MBS trading Tae Park. He will lead the agency desk in New York, which has been launched to complement the bank's existing RMBS and CMBS trading capabilities. Cohane has previously served as head of RMBS trading at UBS and at its affiliate Dillon Read Capital Management.

RMBS

FHFA suit set for bankruptcy court

The judge overseeing Lehman Brothers Holdings' liquidation has told attorneys for Freddie Mac and the FHFA that they are unlikely to succeed in their bid to have their claim against the estate heard in a federal court, which the FHFA had argued for on the basis that the case rests on a federal statute (SCI 24 October). US Bankruptcy Judge James Peck disagreed and the US$1.2bn claim is now likely to be heard in a bankruptcy court.

All other claims lodged in the Lehman proceeding have been handled within bankruptcy courts and the judge says the provisions of the federal statute in question - the Housing and Economic Recovery Act of 2008 - are not unusual from the perspective of a bankruptcy tribunal. A SFIG memo notes that the matter of which court hears the case will be decided in a hearing on 22 November.

ABS

Upside potential for Spirit A7s

Spirit has released the results of its tender offer for its class A1 and A3 bonds (SCI 22 October), with £126.2m tendered in the A1s (87% of the outstanding) and £107.8m of the A3s (92% of the outstanding). The pubco will accept 80% of those tendered for the A1s and 54% for the A3s to reach the original target acceptance ratio of 70% for the A1s and 50% for the A3s.

Barclays Capital securitisation analysts believe the new class A7s offer upside potential from the initial price of 104/106, which on the offer side provide a spread of 320bp. "In our view this looks cheap, since we expect the bonds to migrate to investment grade over the next 12-18 months," they explain. "Underlying performance in the transaction shows a minimum free cashflow DSCR of 1.6x versus Fitch's hurdle rates for triple-B of 1.55x for managed and 1.6x for tenanted. The strong level of operating performance in the first eight weeks of FY14, with like-for-like sales up 4% in the managed business and net income down 0.3% in the leased portfolio, also supports this view."

ABS

Near-term student loan risks unlikely

Rising student loan default rates are unlikely to present risk to federal student loan ABS over the near term, Fitch says. The US Department of Education recently announced that the 2011 two-year national cohort default rate increased to 10% from 9.1%, while the rate for the Federal Family Education Loan Program decreased from 6.5% to 6.26%.

Over the longer term, Fitch believes that more increases in the two-year national cohort default rate are possible if the job market for recent graduates remains tepid and college costs resume their increases. The College Board reported that published tuition and fees rose by 2.9% for in-state students at four-year public colleges and at 3.8% for private colleges while student aid dropped. However, the federal government has taken steps to make colleges more accountable for their cost and outcome, as they increasingly tie federal grants and loans to performance. Such efforts could rein in defaults in the future, Fitch suggests.

The DOE reported the CDR for proprietary schools rose from 12.9% in 2011 to 13.6%. For public colleges, the rate rose from 8.3% in 2011 to 9.6% and private institutions' rate stayed the same at 5.2%.

ABS

Cards extend positive performance

US credit card ABS performance extended its positive trend during the September collection period, according to Fitch's latest index for the sector. 60+ day delinquencies remained flat month-over-month and charge-offs descended to levels only observed once before in the 23-year history of the indices.

The Fitch Prime 60+ Day Delinquency Index increased by 1bp month-over-month (MOM) to 1.28% and remains 25% lower year-over-year (YOY). The slight up-tick in September is attributed to seasonality and is consistent with historical patterns, the agency notes.

At the same time, the Fitch Prime Credit Card Charge-off Index dropped to 3.12% for the September collection period. The charge-off rate now stands 2bp above the all-time low for this index, which was reached in March 2006. Charge-offs fell by 6.3% from the prior month and are also down by 25% YOY.

The index is now 73% below its peak of 11.52%, reached in September 2009. Fitch believes that a material increase in charge-offs is unlikely prior to year-end. In addition, the agency does not anticipate a near-term revision to mean delinquency or charge-off levels for securitised credit card receivables during 2015.

Meanwhile, the Fitch Prime Gross Yield Index was up by 4.59% in September to 18.69% and remains a healthy 3.89% above September 2012 levels. Fitch's Three-Month Average Excess Spread Index registered 12.78%, a MOM increase of 3.31%.

During the September collection period, the Fitch Prime Monthly Payment Rate (MPR) Index declined to 25.29%, a 3.73% decline from the all-time high seen this past August. However, MPR remains nearly 17.5% above the level observed last September.

Elsewhere, late-stage retail credit card ABS delinquencies rose for the fourth straight month. As per Fitch's Retail 60+ Day Delinquency Index, delinquencies reached 2.59% - a 7% jump from the previous month, though still over 4% below the levels from one year ago and significantly below its longer-run average of 3.89%.

However, the increased level of late-stage delinquencies has not yet translated to increased charge-offs, with the Fitch Retail Charge-off Index registering 5.74% for the September collection period - a six-year low for this index. The index is down 5.59% from the previous month and remains nearly 13% lower than one year ago.

The Fitch Retail Gross Yield Index increased by 26bp in September to reach 27.37%, while Fitch's Retail Three-Month Average Excess Spread Index increased by 7.88% to 17.93% - 20% above the levels observed in 2012. During September Fitch's Retail MPR Index weakened slightly, however, declining 3.14% from the previous month to end at 15.1%. But retail MPR remains above its long-term average of 13.97%.

Structured Finance

Benchmark indices tweaked

Barclays has amended its benchmark fixed income indices, after concluding its annual index review and governance process last month. The governance process has resulted in a number of rule and methodology changes that will take effect next year.

Under the amendments, agency CMBS will become eligible for the US Aggregate and Global Aggregate Indices, as of 30 June 2014. Barclays intends to launch a standalone US Agency CMBS benchmark early in 2014, prior to US Aggregate Index inclusion.

The minimum amount outstanding for US MBS Index constituents will also be raised from US$250m to US$1bn, as of 31 March. Current index constituents will continue to group similar eligible MBS pools by agency, programme, coupon and vintage.

Based on feedback received during the governance process, however, the Barclays index group intends to review the current index pricing methodology of fixed-rate MBS and explore enhancements that can better reflect the variability of MBS pool characteristics present within its existing index structure.

Structured Finance

TRACE expansion proposed

FINRA last week filed a proposed rule change with the US SEC to amend the TRACE dissemination protocols to include additional ABS transactions and to reduce the reporting periods for such securities. The agency also proposes to re-name as 'securitised products' the broad group of securities currently defined as 'asset-backed securities' and to redefine the term asset-backed security more narrowly. FINRA proposes that transactions in asset-backed securities, as re-defined, be disseminated - including Rule 144A transactions - to increase transparency.

As redefined in proposed FINRA Rule 6710(cc), the term 'asset-backed security' means a type of securitised product collateralised by any type of financial asset. However, three types of instruments are specifically excluded from the term asset-backed security: agency pass-through MBS that are traded to be announced (TBA) or in specified pool transactions, SBA-backed ABS traded TBA or in specified pool transactions and CMOs.

FINRA is also proposing to reduce the period to report such transactions. Initially, the reporting period will be reduced from the end-of-day on the trade date during TRACE system hours to no later than 45 minutes from the time of execution. After approximately six months, the reporting period will be reduced again from no later than 45 minutes from the time of execution to no later than 15 minutes from the time of execution.

The agency analysed the distribution of ABS transactions to determine an appropriate dissemination cap and proposes setting a US$10m dissemination cap. For a transaction in an ABS of less than US$10m, the actual size will be disseminated; for a transaction in an ABS greater than US$10m, '$10MM+' will be disseminated.

Finally, FINRA proposes not to disseminate the dealer/customer and buy/sell indicators to protect sensitive information regarding the trading strategies, identities and positions of investors while not exposing dealers to additional risk in providing liquidity.

Structured Finance

Retention refinements recommended

CRE Finance Council and SIFMA have submitted comments to federal regulators in response to the re-proposed rulemaking on credit risk retention. The associations express support for many of the changes that have been made to the proposed rules, but believe that further refinement of the rules is required.

SIFMA notes that the re-proposal represents a significant improvement over the original proposals in terms of preserving the ability of securitisation to support access to mortgage, consumer and business credit. However, it also believes that further refinement of the rules is required to ensure that the final rules meet the goal of aligning interests, while remaining balanced against the costs of implementation.

In particular, SIFMA is concerned that the re-proposed risk retention rules risk harming the ability of the CLO market to fund corporate lending. The association notes that CLOs are fundamentally different from other types of ABS in that they are not originate-to-distribute transactions and do not present the same risks as other securitisations. Current market practices in the CLO market involve elements of risk retention that should be recognised in any final rules, it adds.

SIFMA has filed two comment letters on the risk retention standards. One letter - filed jointly with the Financial Services Roundtable, the American Bankers Association and the ABA Securities Association - presents the views of its member firms that act as securitisation sponsors or issuers. The second letter presents the views of investor members of SIFMA's Asset Management Group.

Meanwhile, in its comments, CREFC urges regulators to modify the rules to provide the industry with optionality and flexibility in how it achieves the risk retention mandated by the rule. The association says that a number of the rule's implementing provisions are unnecessarily restrictive on CMBS lenders and will cause capacity constriction, requiring more capital to make the same amount of loans as is currently required.

CREFC estimates that the rules would impose a cost on borrowers estimated to be 40bp-50bp in additional loan rate for a typical financing. This translates into an increased cost of funds to borrowers of 8%-10% percent at the current fixed rate market borrowing rates of 5%.

Structured Finance

SFR securitisation debuts

The much-anticipated debut single-family rental (SFR) securitisation has hit the market, with the senior tranche carrying triple-A ratings from three rating agencies. The US$479.14m Invitation Homes 2013-SFR1 is secured by the income streams and values from 3,207 leased properties owned by Blackstone subsidiary Invitation Homes.

The transaction comprises six classes of notes: US$278.7m class As rated Aaa/AAA/AAA (Moody's, Morningstar and Kroll), US$34.4m class Bs rated Aa2/AA/AA, US$47.1m class Cs rated A2/A/A, US$31.5m class Ds rated Baa2/BBB+/BBB, US$46.01m class Es rated NR/BBB-/BBB- and US$41.53m class Fs rated /NR/BB. It is arranged by Deutsche Bank, whose German American Capital Corporation extended a two-year floating-rate loan - extendable to a total of five years - on the portfolio.

Managed by Invitation Homes subsidiary THR Property Management, the underlying properties are distributed across five states, with 89% of the portfolio located in California (40.1%), Arizona (34.0%) and Florida (14.9%). The average cost basis per property before rehabilitation is US$148,158 and the average age of the properties is over 25 years old. The majority of the properties have three or more bedrooms.

Kroll says it used a hybrid analysis to evaluate the transaction, incorporating elements of both its CMBS and RMBS methodologies, given that the underlying real estate contains commercial and residential characteristics. As the properties generate a cashflow stream from tenant rental payments, CMBS methodologies were used to determine the loan's probability of default. To determine loss given default, the agency assumed the underlying collateral properties would be liquidated in the residential property market.

Moody's analysis, meanwhile, is based on the approach it applies to large loan CMBS backed by multifamily housing. The agency says it relied on this methodology to analyse the expenses incurred from and cashflows generated by the underlying properties and to assess the probability of the loan's default during its term, while stressing the recovery value from properties at a time of refinancing or liquidation. However, the collateral value analysis is based on the lower of the recent broker price opinion values subject to further haircuts and the purchase price partially adjusted for renovation completed by Invitation Homes, instead of its usual cashflow analysis based on cap rates.

Moody's says its concerns related to equity foreclosure were mitigated for this deal because both mortgages and pledges of the borrower's equity secure the loan. The agency was therefore able to assign high investment grade ratings to the senior notes.

Finally, Morningstar determined its ratings by performing a quantitative and a qualitative collateral and structural analysis. This analysis utilised its SF Rental Subordination Model, which involves a number of property-level stresses. The rating for a tranche was determined by the most severe rating stress scenario that the tranche could survive with no interest or principal shortfalls.

Structured Finance

Asset-based lender accelerates growth

Visio Financial Services (VFS) has closed US$40m in institutional debt capital, which will be used to expand its loan portfolio and help build an innovative online lending platform. The firm expects to more than triple its outstanding loan balance over the next nine months.

VFS' asset-based lending model enables it to originate, close and fund a loan in as little as 72 hours. "There is a growing need for affordable homes in [the US]," comments Jeff Ball, ceo of VFS. "Many distressed homes can and should be brought back to productive use, but there is limited capital available to finance their purchase and renovation. We are changing that by offering loans that rely exclusively on the value of the home."

The debt facilities were provided by multiple institutional lenders and were facilitated in part by Grenadier Capital. The funds are available immediately for both purchase and refinance loans.

CDO

Lehman scheme of arrangement agreed

Lehman Brothers Australia creditors last month voted to accept the 'insurance only' scheme of arrangement on the terms negotiated by the liquidator PPB. Amanda Banton of Piper Alderman and David Proudman of JWS have been voted on to the committee of inspection, which will oversee the operation of the scheme by PPB on behalf of the creditors.

After a 21-day appeals period against the court's 31 October approval of the decision, PPB will begin to progress the scheme. An appeal is not anticipated, according to an Amicus Advisory client memo.

The acceptance of the scheme will necessitate a claims filing process, which will occur over the next few months. "Our understanding is that claimants will need to prove they were in substantially the same position as the lead litigants - Parkes, Wingecarribee and Swan councils - for their claims to be accepted by the liquidator," Amicus suggests. "This is because the liquidator, PPB, will be applying the principles and reasoning laid down by Justice Rares in his judgement in the case against Lehman Brothers Australia when determining the validity of claims. Investors will need to prove more than they simply purchased CDOs from Lehman to have a valid claim."

Amicus adds that claimants should aim to have all materials organised ahead of an anticipated claims filing in February or March 2014. For investors who are part of the representative action by Piper Alderman and funded by IMF, their funding agreements with IMF are expected to cover this work.

CDS

Toys R Us spreads hit highs

Credit default swap spreads for Toys R Us have widened by 20% over the past month, according to the latest case study from Fitch Solutions. Credit protection on Toys R Us is now pricing at the highest levels observed since 2009.

"The widening CDS seems to be signalling mounting market concern as Toys R Us continues to face increasing competition from online retailers and discounters," comments Fitch director Diana Allmendinger.

CDS liquidity for Toys R Us has decreased over the past two months. CDS referencing Toys R Us is now trading in the 18th regional percentile, compared to seventh at the end of August.

"The decline in CDS liquidity may be indicative of market participants' hesitation to take positions on Toys R Us at wider spread levels," adds Allmendinger.

CDS

Generali ruling sets precedent

ISDA's EMEA Determinations Committee has ruled that certain Assicurazioni Generali Solvency 2 bonds can be used as reference obligations for the group's sub CDS, thereby solving a deliverable problem at the group. Previous legal guidance indicated that Solvency 2 bonds were not deliverable into sub CDS due to the contingent nature of their maturity date.

When Generali called its €6.9% 22NC12 bonds in 2012, it was widely regarded as having removed its last sub CDS deliverables. But the insurer's Solvency 2-qualifying €10.125% 42NC22s can now be substituted for the group's Solvency I structured €6.9% 22NC12s as sub CDS reference obligations.

Morgan Stanley strategists believe that this specific DC ruling does not extend automatically across the sector, however. This includes other Generali Solvency 2-qualifying LT2s, as well as other insurers lacking deliverables (for example, Swiss Re) or with impending deliverable issues (for example, Hannover Re, if it calls the €5.75% 24NC14s as expected).

"But it clearly sets a precedent," the Morgan Stanley strategists note. "If an insurer no longer has any subordinated deliverables outstanding, then the door is open for future DC decisions to create some by substituting economically-equivalent obligations."

They add that the ruling is in line with their view that changes could occur to ensure insurance sub CDS retain value.

CDS

Guidance requested on Footnote 513

ICAP is said to have asked the CFTC to issue formal guidance on Footnote 513 of its swap rules. Some dealers have interpreted the rule to mean that swaps with foreign clients are exempt from the rules, providing the deals are booked through a US bank's overseas affiliates, according to a SFIG memo.

"The banks' assertion is focused on what the footnote does not say, rather than on what it does say," the association explains. "It mentions bank 'branches' - which generally are part of the parent company - and not 'affiliates' - which are considered legally separate. The banks are taking the omission to mean that deals set up in the US and booked in their foreign affiliates can escape many CFTC rules."

ICAP is believed to disagree with this interpretation, while other brokers have accepted the banks' position and continue to trade swap contracts outside of the new regulatory system.

CLOs

CLO risk retention alternative mooted

The LSTA has submitted comments to federal regulators objecting to the re-proposed risk retention rules on CLOs. The association has suggested alternative solutions that would prevent the harmful consequences the current re-proposal poses to the CLO market and the broader economy.

A survey of top CLO managers has indicated that the imposition of risk retention would reduce CLO formation by more than 75%. LSTA also notes that CLOs performed very well through the recent financial crisis, experiencing virtually no defaults during that time: over the past 16 years, there have been impairments on less than 1.5% of CLO notes and most were cured with no losses to noteholders.

In its comment letter, LSTA provides a proposal for mitigating the harmful consequences of the imposition of risk retention on the CLO market. As the agencies did in the mortgage market, LSTA urges the agencies to recognise a category of higher quality leveraged loans that would not attract risk retention, based on the low loss experience on these loans, the robust underwriting process undertaken by CLO managers for the loans they select and the fact that virtually all CLO managers are registered advisors subject to strict federal securities laws.

In addition, the association suggests the agencies permit third-party investors to be the sponsor, assuming they hold a significant portion of the CLO's equity and have an active role in the development of the CLO's asset selection criteria.

CMBS

CWCapital note sales due

CWCapital Asset Management has disclosed plans to sell US$665m of CMBS assets through Auction.com on 9-11 December, in addition to the US$2.6bn REO liquidation. The forthcoming note sales appear to be distributed across multiple deals, although COMM 2006-C7 and MLCFC 2007-5 account for nearly 40% of the assets, according to Barclays Capital estimates.

Among the largest loans out for the bid are the US$67m HSA Memphis Industrial Portfolio (securitised in MLCFC 2007-5), the US$53m North Charlotte Office Portfolio (COMM 2006-C7) and the US$43m DHL Perimeter (CWCI 2006-C1). Several distressed loans from 2003-2004 vintage deals are also on the list.

"These have relatively few non-defeased assets that remain outstanding. As such, investors in the seasoned mezz space could potentially track bids on individual loans scheduled for auction in December to get an early read on potential losses and cashflows into the trust," Barcap CMBS analysts note.

CMBS

CMBS delinquencies drop again

For the first time since early 2010, the Trepp US CMBS delinquency rate fell below the 8% level in October, marking the fifth consecutive month of improvement. The rate dropped by 16bp over the course of the month, bringing the 30+ day delinquency rate to 7.98%. The percentage of loans seriously delinquent now stands at 7.69%.

Almost US$1bn in CMBS loans were disposed with losses in October, as servicers continue to work through troubled loans, especially in the retail sector. Much of the improvement in the retail delinquency rate comes from this 'cleaning out' of the distressed pipeline, Trepp notes. CWCapital's impending sale of more than US$2.5bn of distressed assets could result in a further 50bp decrease.

"In addition to the distressed assets that were recently identified for sale, a large number of note sales are expected from the servicer," comments Manus Clancy, senior md of Trepp. "As CW stated that it is looking to sell these before year-end, this could result in the removal of a number of loans from the delinquent category over the next 60 days."

Liquidation volume registered US$960.1m last month, up by 10% on September, but still well below the 12-month moving average of US$1.23bn and 53% below July's US$2.05bn. Loss severity stood at 38.58% in October, down from September's 43.3% and below the 12-month moving average of 43.78%.

The number of loans liquidated in October was 76, resulting in US$370.43m in losses. These liquidations translated to an average disposed balance of US$12.63m, above the 12-month average of US$11.39m.

Since January 2010, servicers have been liquidating at an average rate of US$1.17bn per month.

CMBS

German MFH correction expected

The high volume of sales of German multifamily housing (MFH) blocks this year indicates that investor demand remains strong, even as prices per square-metre continue to rise and prime yields drop below 4.5%. While low yields provide investors with little protection against interest rates normalising, Fitch's says its analysis of MFH CMBS transactions incorporates a sizeable buffer, which should help stabilise ratings in this scenario.

The first three quarters of 2013 saw €8.2bn worth of transactions involving the purchase of more than 50 MFH units. This is close to the high levels seen in 2012 and the full-year volume is expected to match last year's. Moreover, while activity last year was dominated by three very large portfolio sales, trades in 2013 have mostly been in mid-sized portfolios.

New supply is likely to remain low because constructing affordable housing is currently not very profitable, Fitch notes. But regulations restricting rental increases for existing leases dim the prospects of real income growth for sponsors that fail either to make savings in operating costs or invest heavily in the physical stock.

The net yield for core multifamily properties is now below 4.5%, according to CBRE data. This leaves investors with a pick-up to German 10-year Bunds of around 2.6% as compensation for the operational workloads involved in maintaining the stock, managing a diverse pool of tenants and contractors and dealing with challenges stemming from the regulations.

Fitch doubts whether investors will continue to regard yields lower than 5% - which are closer to 3% in real terms - as adequate when business confidence improves and bond yields rise. To compete with growth assets, defensive sectors like core German MFH would have to offer higher yields than at present, the agency suggests.

Fitch assumes the rate at which it capitalises rental income for the highest quality assets reverts to 5.75% in its single-B rating scenarios, which preserves a real yield of over 4%. This is a more sustainable level compared to longer-term average yields on 10-year German public sector bonds, both fixed income and index-linked.

The Bundesbank recently asserted that high quality German housing in top cities is overvalued by some 20%-25%. The 5.75% floor in Fitch's prime capitalisation rate assumption means its ratings are cushioned against a correction of that magnitude, were prime yields to rise to that level from their current 4.5%.

CMBS

Refi divergence expected for UK office

Current high levels of refinancing risk will disparately impact the UK CMBS office sector, Moody's says. The majority of the UK CMBS portfolio - around 78% by loan balance - is expected to remain unaffected by refinancing risks, as it is made up of high quality assets located in the much sought-after London areas of the City, the West End and Canary Wharf.

This prime portion of the portfolio has been buoyed by strong demand from cash-rich overseas investors, coupled with the resilience of the London economy, which outperformed the national economy in 2012 - in terms of both GDP growth and the decline in unemployment. Moody's expects that this trend will continue for the next five years.

Conversely, the agency anticipates that the remaining loans (around 22%) in the UK CMBS office sector - which are backed by poor quality assets located in secondary and tertiary areas across the UK - to suffer losses of around 24%, as a result of refinancing risk. London exposure still represents a significant portion of these remaining loans, although they are backed by poorer quality properties in less desirable locations.

Moody's expects that the UK commercial real estate sector will continue to struggle from a shortage of bank financing until at least 2015. This is particularly true for worse than "good secondary assets", for which values are unlikely to stabilise before that time.

The UK CMBS office portfolio includes 30 loans representing a current outstanding securitised balance of £6.7bn. The loans are secured by office properties, some of which are part of mixed-use property pools where the office portion is greater than 50%.

CMBS

Japanese CMBS performance examined

Fitch reports that 55% of its rated Japanese CMBS loans have defaulted over the past five years, although most of the notes previously rated triple-A have been paid in full. A total of 87% of defaulted loans defaulted at maturity.

The agency cites downsizing of the operations of foreign securitised lenders, falling real estate prices and general lack of refinancing opportunities as drivers of the defaults. Payment defaults before maturity were limited, however, because the collateral generated enough cashflow to pay loan interest.

Fitch expects no losses for the remaining notes previously rated triple-A, partly because most transactions have been repaid sequentially and are effectively controlled by the most senior noteholders. Defaults of notes that were previously highly rated are primarily attributable to idiosyncratic factors, while low- or non-investment grade notes were more impacted by the cyclicality of the real estate market.

A total of 21 CMBS transactions experienced a principal loss on their rated notes. However, loss amounts were small compared with their original note issue amount, except for some cases with atypical properties. The loss ratio on CMBS transactions subject to write-down averaged 8%.

Fitch suggests there is no clear evidence that a conventional two-year tail period in Japanese CMBS is too short. To date, there have been no defaulted loans whose properties remained unsold at the legal final maturity.

No clear relationship between length of work-out period and sales value has been observed either. The average work-out period of the 63 defaulted but fully recovered loans was less than 10 months.

Because of the high loan default rate and a significant decline in real estate prices, Fitch says it regards the Japanese CMBS environment from 2008-2013 to be equivalent to a triple-B stress.

Risk Management

Data distribution agreement signed

Bloomberg and Markit have entered into a non-exclusive agreement to distribute their pricing and reference data through Markit's Enterprise Data Management (EDM) platform and Bloomberg PolarLake respectively. The EDM and PolarLake offerings provide enterprise data management solutions that enable the acquisition, validation, storage and distribution of data in a consistent, fully audited environment.

John Randles, ceo of Bloomberg PolarLake, comments: "In today's demanding regulatory environment, financial institutions want a data governance process that reduces costs, mitigates risk exposure and enhances data quality. This agreement enables Bloomberg PolarLake to deliver a more comprehensive data management solution as an installed or hosted EDM service, in order to better meet the needs of our financial services clients."

Risk Management

CreditLink adds further FCMs

Traiana has added the support of a further seven futures commissions merchants (FCMs) to its CreditLink service in time for today's regulatory deadline for pre-trade screening of SEF trades. The service now has a total of 15 FCMs supporting it.

The newly-added FCMs include BNP Paribas, BNY Mellon, Deutsche Bank, RBS, UBS and Wells Fargo. These are in addition to Barclays, Bank of America Merrill Lynch, Citi, Goldman Sachs and JPMorgan.

CreditLink is connected to or being implemented by SEFs and designated contract markets, including Bloomberg's SEF, GFI Group, ICAP/iSwap, ICE Swap Trade, Javelin, MarketAxess, SwapEx, TeraExchange, Tradeweb Markets, Tradition/Trad-X, trueEX and Tullet Prebon/tpSWAPDEAL.

Risk Management

Singapore reporting ahead of schedule

ISDA has submitted a letter to the Monetary Authority of Singapore (MAS) on behalf of 20 industry participants to drive trade reporting of OTC derivatives in Singapore ahead of the mandatory reporting timeline of 1 April 2014. The signatories to the letter are committed to begin trade reporting of OTC derivatives by 3 February 2014 for standardised interest rate and credit derivatives transactions.

The signatories are: Bank of America, Morgan Stanley, Barclays Bank, BNP Paribas, Citibank, Credit Agricole, Credit Suisse, DBS Bank, Deutsche Bank, JPMorgan, Nomura, Oversea-Chinese Banking Corporation, Societe Generale, Standard Chartered Bank, Standard Chartered Bank (Singapore), HSBC, RBS, UBS, United Overseas Bank and Wells Fargo. This initiative supports MAS' efforts to meet the G20 objective of strengthening regulatory oversight of the OTC derivatives through trade reporting.

RMBS

Shortfall trends reviewed

Morningstar has reviewed monthly occurrences of US RMBS interest shortfalls for the year to date through end-3Q13. The data shows that interest shortfalls continue to slowly trend higher across different collateral types, tranche types and vintages, with the likelihood of repayment being impacted by both the amount and duration of the interest shortfall. Smaller and shorter shortfalls are expected to be more likely to recover.

The analysis included 3,740 deals from the Morningstar RMBS database. The agency focused on 21,630 bonds with an active balance as of September 2013 to determine how their interest shortfall statuses changed over time from the beginning of the year.

From January to September 2013, incidences of interest shortfalls in the sample increased by 25.1% at the tranche level. The data shows that 7% of all classes had an interest shortfall in September, up from 5.6% in January. Interest shortfalls continue to be more likely to occur in subprime bonds.

However, since the beginning of 2013, interest shortfalls in prime and Alt-A classes increased by 58.1% and 63.6% respectively. From August to September, interest shortfalls in prime tranches increased from 2.4% to 3.2%.

Junior tranches had the largest nine-month increase, of 46.8%, when analysing by tranche type.

The data also shows that 80.6% of the sample continued to have an interest shortfall in September 2013. Of the shortfalls recorded in August, 89.4% remained in September.

To learn more about the drivers for the repayment of interest shortfalls, Morningstar examined the 10.6% of classes (147 tranches) that had an interest shortfall in August and fully recovered in September. They were found to have an average interest shortfall of US$26,706, while the classes that did not repay had an average interest shortfall of US$73,404.

The length of the outstanding interest shortfall also appears to play a role. On average, the tranches had 2.6 consecutive months of shortfall before being repaid.

RMBS

IABF unwind to boost Alt-A supply

ING has reached an agreement with the Dutch state to unwind the Illiquid Assets Back-Up Facility (IABF), which was established in 2009 to reduce the risk and uncertainty for the bank from a portfolio of US Alt-A RMBS. The bank says that market developments now allow for the securities to be sold, with a cash profit for the Dutch state.

Under the IABF, the Dutch state took on the risk on 80% of ING's portfolio of US Alt-A RMBS with a nominal value of €24bn, receiving all interest and principal payments from the securities. To fund this purchase of economic ownership, the state received a loan from ING equal to 90% of the nominal value, to be repaid over time.

The state also pays ING fees for funding the loan and managing the portfolio. In return, ING pays the state a guarantee fee.

Since the start of the arrangement, market prices for the securities have recovered to around 71%. The total nominal value of the portfolio has decreased to €9bn as of 30 September, predominantly through regular repayments on the underlying mortgages by homeowners. The state has used all repayments and net fees received to pay off the loan from ING, reducing the amount outstanding from €21.6bn in January 2009 to €6bn at 30 September 2013.

Under the latest agreement, the IABF will be terminated, regular fee payments will be settled and the other restrictions as part of the IABF agreement will no longer be applicable. The Dutch state intends to sell the Alt-A securities in the market in the coming year.

At current market prices, the portfolio has a market value of approximately €6.4bn. Proceeds of divesting the securities at that price would enable the state to pay off the remaining loan from ING, leaving a direct cash profit for the state of approximately €400m. In addition, ING will transfer to the state €400m of the remaining provision it formed in 2009 for the additional guarantee fees.

RMBS

EverBank MSR sale agreed

Walter Investment Management Corp has entered into a series of definitive agreements through its Green Tree subsidiary with EverBank Financial Corp. The firm also expects to finalise in the near term the establishment of a delinquency flow outsourcing arrangement, wherein it will provide outsourced default servicing on a flow basis to EverBank from its mortgage portfolio.

Under the agreements, Green Tree is set to purchase approximately US$10.2bn unpaid principal balance of Fannie Mae- and Freddie Mac-backed residential servicing assets and approximately US$3.3bn UPB of private-label residential servicing assets, as well as rights to sub-service an approximately US$5.2bn UPB Ginnie Mae forward portfolio and a US$1.7bn UPB whole loan portfolio from EverBank. Additionally, it intends to assume EverBank's default servicing platform and offer employment to a significant number of related employees.

The portfolio of assets acquired and sub-serviced consists of over 179,000 loans that are projected to be approximately 75% current at transfer. The transaction will have an economic closing as of 30 October and the bulk of the servicing transfers will take place during 1Q14.

RMBS

HAMP mods to be securitised

Freddie Mac has begun securitising performing HAMP modified mortgage loans held in its mortgage-related investments portfolio under the Modified Fixed Rate PC and Modified Step Rate PC monikers. To be eligible for securitisation, modified loans must be current for at least six consecutive months at issuance of the related PC.

Step-rate HAMP modified loan PCs will have 'HA-HD' prefixes under the programme, while fixed-rate HAMP modified loans will have 'MA-MD' prefixes. The instruments will not be TBA deliverable, but are eligible for new Freddie Mac Giant PC securities.

"This programme facilitates securitisation of HAMP modified loans that are re-performing into Freddie Mac mortgage participation certificates (PCs), creating potential for liquidity and transparency of pricing for HAMP loans," says Adama Kah, Freddie Mac vp of distressed assets management. "This initiative clears the path for securitisations of larger portions of the distressed assets portfolio and will lead to new, additional investment options for investors."

Freddie Mac will provide substantial new pool-level and loan-level disclosures specific to the Modified Fixed Rate PCs and Modified Step Rate PCs. Additional disclosures will include mortgage loan attributes at origination (before modification), at time of modification and at time of securitisation. Freddie Mac also will provide pool-level disclosures of payment history covering up to 36 months prior to issuance.

RMBS

Rating withdrawal process detailed

Moody's has outlined its global process to determine the minimum number of borrowers in the pools underlying RMBS, below which excessive exposure to the idiosyncratic credit risk of a few borrowers may prevent it from assigning or maintaining ratings. The implementation of this process will result in the immediate withdrawal of two ratings in Asia Pacific and of 312 ratings in the US, based on September remittance reports.

As RMBS transactions near the end of their lives, their supporting pools may become excessively exposed to a low number of underlying borrowers. Structural features, such as a build-up in credit enhancement or cash reserves, may be able to fully or partially offset the increased exposure to single borrowers. However, when credit linkage between single obligors and the rated securities exceeds Moody's ability to monitor ratings, the agency says it will withdraw its ratings on the relevant transactions.

The process applies globally for RMBS and, for US RMBS, replaces the previous rating withdrawal rule for small pools.

RMBS

ESAIL 2007-5 restructuring approved

The extraordinary resolution to approve the sale of the remaining claims against LBSF and LBHI and an associated restructuring proposal was approved by all classes of Eurosail UK 2007-5NP notes on 31 October (SCI 8 October). The resolution will now be implemented by the issuer.

The proposal relates to the sale of the remaining outstanding claim against LBSF and LBHI from a stipulated claim totalling US$170m, of which approximately US$56.4m has been received to date, according to RBS figures. The resolution also authorises Agfe, as auction agent, to solicit bids and manage an auction process.

In addition to the sale, the extraordinary resolution affects a restructuring of the RMBS, including re-denominating the class A1a euro tranche into sterling and amendments to the capital structure (such as a partial write-down of the subordinated notes and splitting the senior notes into fast-pay and slow-pay tranches).

RMBS

MSR flow sale agreed

Two Harbors Investment Corp subsidiary Matrix Financial Services Corporation has entered into a flow sale agreement with PHH Mortgage Corporation for the purchase and sale of mortgage servicing rights. Under the agreement, PHH Mortgage may sell to Matrix the MSRs on 50% or more of PHH Mortgage's newly-originated residential mortgage loans that are eligible for sale, subject to the parties' mutual agreement on quarterly pricing for the MSRs. The agreement has an initial term of two years and can be extended upon mutual agreement.

The parties have also entered into a sub-servicing agreement pursuant to which PHH Mortgage will act as the sub-servicer of the mortgage loans underlying the MSRs sold under the flow sale agreement. During the term of the sub-servicing agreement, PHH Mortgage will be entitled to receive sub-servicing income and other ancillary servicing fees related to the MSRs. The sub-servicing agreement will remain in effect so long as mortgage loans underlying the MSRs remain outstanding.