News Analysis
Structured Finance
Driving disintermediation
Credit availability facing further headwinds?
Global regulatory initiatives are fostering bank disintermediation in the securitisation market. But creeping oversight of the shadow banking system could also further reduce the availability of credit.
The recession has played out unequally, according to Tamara Box, head of structured finance at Reed Smith. "If a borrower is in prime territory, they're fine; otherwise, they're not. Current monetary and economic policies are making the playing field even more unequal. This is reflected on a pan-European level as well: regionalisation is producing tensions and the political response is centralised intervention."
Such intervention is being mirrored by centralised banking supervision, bringing with it the risk of unintended consequences. While a significant number of reforms have been enacted, the question is whether they're functioning properly.
A central issue is regulators' desire to measure and control the hidden leverage in the system, in an attempt to ensure global financial stability, according to NewOak Capital ceo Ron D'Vari. He says that since the financial system wasn't created based on a master plan, it's difficult to overhaul in a coherent way because there are multiple sets of overlapping regulations.
"It's only possible to properly assess the risk of a structure if you have the master blueprint," D'Vari explains. "The regulators are trying to move the system to where they want it to be, yet a consensus needs to be developed over time as to what is practical and guard against unintended consequences."
He adds that the issue of accountability or corrective wisdom becomes blurred because each participant is viewed as biased or their agenda is perceived to be driven by their constituents. "Each regulator's starting point is different: not even the crisis was 'hard' enough to create a single, unified vision."
Indeed, the market currently appears to be paralysed by a continuous cycle of regulatory adjustment. "The 2009 G20 Summit statement outlined the issues that needed to be addressed by regulators and generally there was acceptance of these measures," says Claude Brown, partner at Reed Smith. "But if you look at the regulatory timetable since then, so many other items have been added to the agenda - which aren't necessarily connected to reform - and there doesn't appear to be an end in sight. For instance, FATCA and the financial transaction tax are essentially revenue raising exercises and don't address systemic issues."
He adds that the momentum of the regulatory agenda is resource-sapping and shows little contemplation of the disproportionate impact it's having on productivity. "Implementation of Dodd-Frank rules, for example, limited many banks' creative output and reduced competitiveness because of the focus it required. This, in turn, provided significant advantages to institutions that weren't impacted by the regulations."
While banks are supposed to provide credit and liquidity, they're in limbo until the risk capital rules are determined, D'Vari suggests. "Current stress tests are showing that they need even more capital than initially expected. The more stringent capital requirements and the Volcker Rule will restrain the banks from certain market-making activities that require risk taking."
He continues: "This all means that liquidity will become even more severely constrained: the financial system is a network, so setting up regulatory barriers doesn't actually improve the flow. This could, in turn, have an unintended impact of increasing risk in volatile times."
D'Vari cites as an example the fact that liquidity is yet to return to certain securitised asset classes because the new rules haven't been finalised. "In particular, the market needs to understand which liabilities need to be accounted for when involved in the securitisation business - whether it's from the perspective of a rating agency, intermediary, servicer or packager. Certain reforms essentially entail a 100% re-underwrite of the loans."
Against this backdrop, the banking sector has shrunk and become increasingly parochial, with banks divesting their debt in non-domestic jurisdictions and repatriating resources. These assets are, in turn, shifting into non-banks - which are acquiring the resources and expertise (often from banks) to manage them.
"The current regulatory regime is driving debt from banks to shadow banks - which potentially have different objectives - without considering the consequences," Box observes. "Ultimately, bank disintermediation could mean that recent regulatory efforts become irrelevant. Certainly it's distorting the credit market and driving credit from its natural home."
She says she wouldn't be surprised if regulators now turn their attention to the shadow banking system, the growth of which is itself a consequence of the regulatory focus on banks. The issue that would then arise is who would originate credit, which is so fundamental to the health of the economy.
D'Vari points out that regulators already have their sights set on the shadow banking system. For instance, the SEC has begun collecting data on hedge funds, such as with Form PF.
A recent example of bank disintermediation is the Debussy CMBS, which was arranged by Cairn Capital. One of a proliferation of advisors that are close to investors, the firm is said to have more mandates in the pipeline.
Box concedes that Debussy was a special case because it refinanced Vanwall Finance and the investors were familiar with the assets. But she notes that currently the European CMBS market is (prime) borrower-led and, as the borrowers know the investors, they don't necessarily need the services of an investment bank for distribution.
"Historically banks had the know-how and distribution capabilities for securitisations, but that know-how is transiting and the way of distributing notes has changed, so a huge sales force is no longer necessary. In addition, deal sizes have reduced, which again feeds into the disintermediation," Brown observes.
Another trend towards bank disintermediation is the rise of whole loan funds and direct lending (SCI 14 November). Whole loan funds require neither leverage nor structuring, for instance, and enable the originator to continue servicing the underlying assets and thus maintain their customer relationships.
Nevertheless, Box believes it's unlikely that banks will be disintermediated entirely because banking licenses are necessary to undertake arranging and distribution roles in certain jurisdictions. In addition, bank expertise is expected to still be required for structuring whole business securitisations and more complicated ABS, as well as transactions where a broader distribution is needed. Banks also remain actively involved with their own programmes in the auto, credit card and RMBS segments.
Meanwhile, other sectors are increasingly employing securitisation techniques, such as the commodity finance and trade finance markets. Trade finance largely remains with banks because they run the underlying lines of credit. BNP Paribas' Lighthouse programme and Standard Chartered's Sealane deals are examples of trade finance ABS.
Similarly, commodity trading companies are turning to securitisation as a way to finance - via SPVs or master trust-style structures - their inventories in the medium term. But originators and investors in the sector are typically sophisticated enough not to require a bank to structure and distribute the deals.
"Many commodity finance deals are privately placed because the investor base is well known," confirms Brown. "They are usually unrated because investors have expertise in assessing the refining and warehousing risk associated with the sector, whereas rating agencies may not. The security taking technology is also different."
Away from commodity and trade finance, progress appears to be being made in one area at least. D'Vari suggests that banks and regulators are keen to put 'legacy' issues behind them, hence the recent spate of RMBS settlements.
"The fall-out from the financial crisis has become a background noise: both sides want a resolution, so they can move on," he concludes.
CS
28 November 2013 09:16:42
Market Reports
CLOs
CLO attention turns to triple-Bs
Thanksgiving has all but shut down secondary market activity on both sides of the Atlantic, but European CDO trading appeared to already be winding down. One bright spot is emerging in the form of CLO triple-B paper, however.
"The number of BWICs has certainly decreased. There have been some ABS CDO lists, but in general the prices there are now so high that our clients have lost interest," says one trader.
He reports that prices have fallen below 300 DM for some bonds. CLO investor attention had turned to ABS CDO bonds for the yield, but now the sector is so well bid that it no longer makes sense.
"Meanwhile, in the CLO sector the story has changed from being all about single-As to all about triple-Bs. A couple of weeks ago single-As were priced at 270-310 and now they are at 250-270, so there has been major tightening in secondary," says the trader.
Many loans are becoming currently investment grade, which is encouraging real money investors to make bids. While that has provided a boost for single-As, the trader believes that the same scenario is set to happen for triple-Bs too.
"Triple-B paper is the next big one. If you buy it now and keep it for a bit, it will be the next bond to cross over to investment grade, so it is a good area to be in for trading gains," he says.
Looking ahead, the trader says the winding-down process that began earlier in the month will continue through to year-end. He believes that dealers have completed most of the business they wanted to complete and that, although the market will not shut in December, it will quieten down.
"With Thanksgiving today, our clients have a good excuse to take some time off. There was a big rush of activity earlier in the month and strategically it is better to get business done in November, which is exactly what most people managed to do," says the trader.
SCI's PriceABS data captured a few European CLO names out for the bid yesterday. Among them was the DALRA 1-X B tranche, which was covered at mid/high-96, with price talk in the mid-90s, at 95 handle and at 95.6.
JL
28 November 2013 11:24:30
Market Reports
RMBS
Subprime starts RMBS reawakening
Secondary market activity was sluggish across the board to start the week as traders returned to their desks. US non-agency RMBS was one of the more active markets, with around US$225m in BWIC volume and a range of names captured by SCI's PriceABS data.
Subprime and option ARM paper dominated supply yesterday, with Countrywide bonds accounting for a significant share of each of those sub-sectors. There were other subprime names out for the bid too, such as BMAT 2006-1A A3, which was talked at mid/high-70.
Among the many Countrywide tranches circulating on Monday's bid-lists was CWL 2004-13 MV5, which was talked at mid-80. The tranche was talked in the 60 area and mid-60s in June.
CWL 2005-13 MV1 was talked at mid-70. It was talked in the mid-40s and high-60s in March.
The CWL 2005-2 M4 tranche was also talked at around 70, having first appeared in the PriceABS archive on 16 August 2012, when it was talked in the low/mid-30s. Additionally, CWL 2006-12 2A3 was talked at mid-60.
On its first appearance in the PriceABS archive, CWHL 2006-3 2A2 was talked in the low/mid-40s, mid-40s and high-40s. Among the option ARM names circulating during the session, CWALT 2005-56 4A2 was talked between 21 and 23, as well as in the low-20s and mid-20s.
CWALT 2005-56 5A3 was similarly talked between 19 and 21, as well as at around 20 and in the low/mid-20s. The CWALT 2005-3CB 1A10 tranche was also covered at 95 handle - the same level at which it was last covered on 18 November.
Beyond the Countrywide shelves, there were a few other names of interest, such as NAA 2006-S5 A1 - which was talked in the mid/high-80s and covered in the low-90s. The tranche was talked in the mid-50s as recently as September. NAA 2007-1 2A3 was also out for the bid, with talk in the high-50s.
Several other new additions to the archive were recorded, such as MSM 2007-1XS 2A4C, which was talked in the low-60s. Another debutant - BALTA 2005-4 23A2 - was talked at around par, while BALTA 2005-9 11A1 was talked in the low/mid-70s, a little higher than the very low-70s talk it attracted on 6 November.
Elsewhere, the AMSI 2004-R4 M2 tranche was talked at low-60s (having been talked in the low/mid-50s and mid/high-50s in September), while SASC 2005-7XS 2A1A was talked in the low/mid-90s (having been talked at 91, in the low-90s and in the low/mid-90s in October). CSAB 2006-4 A6A was talked in the low/mid-60s, having been talked in the mid/high-50s on 22 August.
Finally, SAMI 2007-AR4 A6 was talked at low/mid-20 and at around 23. The bond was talked at around 10 on 8 November and in the mid-20s in the session before that.
JL
News
Structured Finance
SCI Start the Week - 2 December
A look at the major activity in structured finance over the past seven days
Pipeline
The market finally took a breather last week as Thanksgiving arrived. The number of deals joining the pipeline was markedly lower, amounting to three ABS, one RMBS and one CLO.
The ABS entering the pipeline comprised Atlantes Finance 6, €268m Bee First Finance Compartment Edelweiss 2013-1 and €657m FCT Ginkgo Sales Finance 2013-1. The RMBS was A$250m RESIMAC Bastille Trust Series 2013-1NC.
The CLO was the only US deal announced last week. It is the latest offering from Sound Point Capital Management - US$395m Sound Point CLO IV.
Pricings
The number of last week's prints was about half of what had come in the week before. Issuance consisted of five ABS, three RMBS, three CLOs and four CMBS.
The ABS pricings comprised: €196.4m Auto ABS German Loans Master Series 2013-1; US$250m Bavarian Sky Korean Auto Receivables 1; €696.2m Cars Alliance Auto Loans Germany V Series 2013-1; C$465m CNH Capital Canada Receivables Trust 2013-2; and C$264.551m Glacier Credit Card Trust series 2013-1.
The RMBS prints consisted of US$290.91m CSMC Trust 2013-IVR5, €1.3bn IM BCG RMBS 2 FTA and A$150m Sapphire XII Series 2013-1. CLO issuance included US$390.5m Figueroa 2013-2, US$518m ING IM 2013-3 and US$713m Octagon XVIII.
Finally, the CMBS prints were: US$867m CGCMT 2013-GC17; US$1.53bn FREMF 2013-K35; €360m Gallerie 2013; and US$1bn MSBAM 2013-C13.
Markets
While Thanksgiving all but shut down secondary market activity on both sides of the Atlantic, European CLO triple-B paper received a boost last week, as SCI reported on 28 November. Single-A tightening over the last couple of weeks has seen attention shift down to the triple-B level, which one trader believes is a good option for trading gains.
European ABS and RMBS secondary spreads ended the week unchanged on the back of relatively thin flows, according to analysts at JPMorgan. They add: "€68bn of distributed paper has been issued so far in 2013, in line with last year at the same point in time: Australia and the Netherlands account for 26% and 22% of volumes respectively, while the largest asset class is RMBS at 54%, followed by Auto ABS at 24%."
European CMBS activity was also down, but those tranches that were available were generally well bid, report structured products strategists at Bank of America Merrill Lynch. Most notes were from first- or second-pays and were bid at prices in the 90s.
"In general paper continues to be well bid and spreads tightened further [last] week. However, we saw some weakening in the pricing of senior and second-pay notes rated below investment grade, which had been bid up recently to prices in the high-90s. The bid price of the DECO 10 class A2 notes, rated double-B minus by S&P, declined from 95.5 to 95.0 this week," they note.
US CMBS secondary spreads continued to tighten at the start of last week after a long period without changing, as SCI reported on 26 November. A mix of vintages were captured by SCI's PriceABS data during Monday's session, with tranches such as BACM 2007-2 AM and BACM 2008-1 AM covered at 124 and 170 respectively.
Deal news
• Eurosail-UK 2007-5NP bondholders last week duly passed the extraordinary resolutions relating to the proposed restructuring of the £662m RMBS and the issuer is set to implement the first stage of the process (SCI 6 November). The transaction is the second UK Lehman RMBS deal to be restructured to resolve 'broken swap' issues, but the first to have required bondholder meetings to vote on the proposals.
• Malaysia Building Society Berhad (MBSB) is in the market with the debut issuance under a new RM3bn structured covered sukuk commodity murabahah programme. Dubbed Tranche 1 Structured Covered Sukuk, the RM495m transaction is notable for being supported by a portfolio of securitised assets.
• Punch's latest financial results raise the probability of the group removing its support of its securitisations as another round of restructuring proposals begins next month. Without an agreement on the restructuring, a borrower event of default in Punch A and B would follow.
• Fitch last week reissued a presale report on MSBAM 2013-C13, following the removal of the Chicago Mixed Use Portfolio loan from the pool. The asset was previously the ninth largest loan backing the CMBS.
• S&P has placed its respective double-B minus and single-B plus ratings on the US$100m Queen Street II Capital and US$150m Queen Street III Capital ILS on credit watch with negative implications. The move follows principal losses caused by the liquidation of the MEAG Queen Street II and MEAG Queen Street III funds due to investment eligibility events.
• The recently priced US$614.5m Venture XV CLO is notable for the fact that the equity was preplaced. Lead manager and co-placement agent StormHarbour Securities also arranged a warehouse line (including warehouse equity) for the deal, thereby allowing the manager - MJX Asset Management - an extended period of time to ramp the portfolio.
• Auctions for three CDOs - Trainer Wortham First Republic CBO V, Kleros Preferred Funding and Libertas Preferred Funding I - have been scheduled for 19 December. This follows an auction scheduled for the Pinetree CDO on 18 December. The securities will only be sold if the proceeds are greater than or equal to the senior redemption amount.
Regulatory update
• Global regulatory initiatives are fostering bank disintermediation in the securitisation market. But creeping oversight of the shadow banking system could also further reduce the availability of credit.
• The Bank of England's Financial Policy Committee (FPC) signalled its support of the securitisation market in its latest Financial Stability Report. The committee says it intends to "assess and, where necessary, act to develop approaches to promote a better functioning securitisation market in the UK".
• Credit Suisse's former global head of structured credit, Kareem Serageldin, has been sentenced to 30 months in prison for his part in hiding more than US$100m in losses in an MBS trading book at the bank (SCI 20 February 2008). The bonds included subprime RMBS and CMBS.
• The CFTC has issued a time-limited no-action letter that provides relief to swap dealers (SDs) registered with the CFTC that are established under the laws of jurisdictions other than the US from certain transaction-level requirements under the Commodity Exchange Act. The no-action relief lasts until 14 January.
• The new ability-to-repay (ATR) rule and qualified mortgage standards under the US Truth in Lending Act could mean that tight access to mortgage credit will continue. Beginning with loan applications accepted on 10 January 2014, the rule will require loan originators to make a reasonable, good faith determination of a borrower's ability to repay a loan. It also creates liabilities for originators and assignees of any loans covered by the rule if the originator fails to originate loans meeting the ATR standards.
Deals added to the SCI New Issuance database last week:
ALM VIII; AMMC CLO XIII; Auto ABS DFP Master Compartment Germany 2013; Babson CLO 2013-II; Capital Auto Receivables Asset Trust 2013-4; Cavalry CLO III; CGCMT 2013-GC17; Driver UK Master - Compartment 2; Dryden 29 Euro CLO 2013; Education Loan Asset-Backed Trust I series 2013-1; Fastnet Securities 9; Ford Credit Auto Owner Trust 2013-D; FTA PYMES Santander 7; Gallatin CLO VI 2013-2; Gallerie 2013; Globaldrive Auto Receivables 2013-A; Gracechurch Card Programme Funding Series 2013-1; Gracechurch Card Programme Funding Series 2013-2; Gracechurch Card Programme Funding Series 2013-3; Hertz Fleet Lease Funding Series 2013-3; Hilton USA Trust 2013-HLT; HLSS Servicer Advance Receivables Trust series 2013-T7; Master Credit Cards Pass Compartment France; Mercedes-Benz Auto Lease Trust 2013-B; MSBAM 2013-C13; OZLM Funding V; Precise Mortgage Funding No. 1; Private Driver Espana 2013-1 FTA; PYMES Santander 6; Sapphire XII 2013-1 Trust; Venture XV CLO; Welk Resorts 2013-A; WFRBS 2013-UBS1
Deals added to the SCI CMBS Loan Events database last week:
BACM 2007-1; BSCMS 2006-PW13; CSMC 2006-TF2A; DECO 2006-C3; DECO 2007-E7; DECO 7-E2; ECLIP 2006-1; ECLIP 2006-3; ECLIP 2007-2; GMAC 2004-C2; GSMS 2006-GG6; GSMS 2007-GG10; JPMCC 2006-CB16; LORDS 2; MSC 2007-HQ11; MSCI 2006-IQ12; TAURS 2007-1; TITN 2006-3; TITN 2007-3; TITN 2007-CT1; TMAN 6; WBCMT 2007-C30; WBCMT 2007-C31; WBCMT 2007-C33
Top stories to come in SCI:
European CMBS resolution expectations
Developments in solar ABS
Job Swaps
ABS
New home for Euro ABS trader
Daniel Turner has joined Ellington Management Group as md in London. He takes responsibility for European ABS.
Turner was previously a partner at Chenavari Investment Managers, where he focused on European ABS and RMBS. He has also worked at European Credit Management, ING and Capital Economics.
28 November 2013 11:15:57
Job Swaps
CLOs
Credit platform coming together
Covenant Credit Partners, the credit investment platform set up by Livermore Investments Group, has wasted little time assembling a team. The unit is led by Marc Boatwright (SCI 5 September) and is understood to be planning to issue a series of deals.
Andrew Chung, Matt Raubach, Nick Lawson and Christopher Brogdon have all joined in analyst positions and will be based in Charlotte, North Carolina. Chris Bodnar, Martin Wai and Jami Nolan are all also understood to have joined.
Chung was previously vp at Oak Hill Advisors. He spent almost seven years at Stone Tower Capital, where he was a senior analyst, and has also worked at Lazard.
Raubach was previously an associate at Bank of America. He has also worked at Jefferies, Wachovia Securities and Piper Jaffray.
Lawson was previously at Coker Capital Advisors. His prior roles saw him employed at NationsHealth, CogniPower and Wachovia Securities.
Brogdon was previously at Wells Fargo and has also worked for Bank of America. Meanwhile Bodnar, Wai and Nolan are understood to have joined from DV Investment Strategies, Moody's Analytics and Apollo Global Management, respectively.
Job Swaps
CMBS
Real estate group targets MENA
Carlton Group has hired Edwin McClendon to lead its new Middle East and North Africa unit. He is based in Dubai and has over 30 years of experience in real estate and investment banking, including as ceo of McClendon, Morrison & Partners.
McClendon has particular experience of senior credit facilities and mezzanine financings. He will work with vp Chase Chehade, who will be based in New York, to provide local investors with access to major markets in the US and Europe.
Job Swaps
RMBS
Freddie settles BAML claim
Freddie Mac has entered into a settlement agreement with Bank of America concerning the GSE's claims related to representations and warranties on single-family loans it was sold. Under the terms of the agreement, Bank of America agreed to pay Freddie Mac a total of US$404m, less credits of US$13m for repurchases already made and for reconciling adjustments.
Freddie Mac, subject to specified limitations and exclusions, will release Bank of America from certain existing and future repurchase obligations for approximately 716,000 loans originated primarily between 2000-2009 and subsequently purchased by the GSE. The payment also compensates Freddie Mac for certain past losses and potential future losses relating to denials, rescissions and cancellations of mortgage insurance.
News Round-up
ABS
Stable outlook for global ABCP
ABCP market participants remain focused on evolving regulatory requirements, meaning that growth in outstandings is unlikely in any meaningful magnitude next year, according to Fitch. The agency has a stable outlook for global ABCP in 2014.
US ABCP outstandings stood at US$248bn through last month, 18% lower than year-end 2012 levels and 80% lower than the US$1.2trn peak seen in July 2007. "ABCP conduit sponsors have been keeping busy proactively preparing programmes for operations in the new regulatory environment," says Fitch senior director Kevin Corrigan.
One region where there may be a more pronounced rate of growth is Canada, where ABCP market outstandings grew by over 10% this year. "Canadian banks are actively funding core asset classes like credit cards, trade receivables and autos, while residential mortgage transactions are finding favour within certain ABCP vehicles as well," Corrigan observes.
Over in Europe, the outlook for major European banks is predominantly stable, though institutions in countries experiencing significant financial strain will be under pressure. "Existing European sponsor banks appear committed to maintaining ABCP programmes, while the pipeline of new transactions has been consistent," says Corrigan.
Fitch's stable outlook for ABCP in 2014 is consistent with the outlook for the global financial institutions that act as support providers to ABCP programmes. ABCP rating actions - if taken - will most likely reflect the health of sponsors, support providers and other relevant counterparties, the agency notes.
News Round-up
ABS
Timeshare delinquencies up on seasonality
Total US timeshare ABS delinquencies for 3Q13 were 3.14%, up slightly from 3.05% in 2Q13, according to Fitch's latest index results for the sector. The increase reflects the seasonal trend that takes hold in the autumn and winter. Nevertheless, delinquencies are down from 3.28% in 3Q12 and have largely normalised at their historical levels following the dramatic increases of 2008 and 2009.
Monthly defaults for 3Q13 registered at 0.64%, a decline from 0.72% during 2Q13, though up slightly from the 0.6% observed at the same time last year. The third-quarter improvement in defaults follows the decline in delinquencies earlier this year, as timeshare default trends typically lag those of delinquencies.
On an annualised basis, defaults are 8.17% for 3Q13, down from the 8.3% observed last quarter. Although off from its all-time peak of 9.36% in January 2010, the annual default rate remains elevated from the 4%-6% levels seen pre-recession. Fitch expects annual defaults to continue trending back towards historical levels in the medium term.
The agency's rating outlook for timeshare ABS remains stable, due in part to the de-levering structures found in timeshare transactions and ample credit enhancement levels.
News Round-up
Structured Finance
Economic improvement to boost esoteric ABS
The improving US and global economies will generally boost collateral performance of US commercial and esoteric (C&E) ABS in 2014, Moody's says. Real estate values, technological obsolescence and idiosyncratic factors are also expected to drive credit performance across the sector.
"Collateral performance of securitisations backed by equipment loans and leases will benefit the most from the modestly improving US economy," says Amy Tobey, Moody's vp and senior credit officer. "As one of the largest and most active asset classes in C&E ABS with wide exposure to the domestic economy, transaction performance will be boosted by stabilising business conditions in the agricultural and construction, small-ticket and trucking sectors."
Aircraft securitisations are also poised to benefit from the improving global economy, especially in Asia, Africa and the Middle East, where increasing growth should counterbalance still-tepid business in developed markets. Furthermore, growing intra-country trade in Asia and still significant - though slowing - growth in China will have a positive impact on lease rates and utilisation levels for shipping container lease ABS.
Conversely, credit implications for sectors backed by real estate will vary, Moody's notes. US tax-lien securitisations have benefited from the rebound in US housing prices, particularly those with higher concentrations in residential properties. The rise in housing prices will also increase recovery rates on foreclosed properties. However, low commercial property values - which still trail pre-crisis levels - will continue to hamper performance of US small business ABS, keeping delinquencies high and recovery rates low.
In terms of the fleet lease sector, although credit quality of new transactions will be strong, Moody's suggests that the addition of new types of leases in master trusts will cause a slight increase in collateral risk. The modest pace of economic growth should limit improvements in transaction performance.
Regarding insurance premium finance ABS, credit performance of new and existing securitisations is expected to be slightly better in 2014, as small businesses benefit from the improving economy. Underwriting standards will be similar to those of 2013, resulting in similar transaction performance.
Credit profiles for rental car sponsors are anticipated to remain weak but stable next year, while those of auto manufacturers will remain mixed but stable. Credit risks for rental car ABS include the possibility that sponsors will default on their lease payments to the securitisation trusts, Moody's says. However, stable credit strength of auto original equipment manufacturers will reduce the risk of a drop in vehicle resale values.
Meanwhile, modest revenue growth in the restaurant industry drives Moody's stable outlook in the restaurant whole business securitisation sector. However, leverage of new transactions is likely to increase slightly - given historically low interest rates - and investors seeking higher yields will likely tolerate greater risk.
For structured settlements ABS, asset performance will remain stable next year, reflecting Moody's outlook on the life insurers whose annuities back the bulk of the securitisations in the sector. The agency says that credit quality of new transactions will not change significantly from those seen this year.
Stabilising delinquency and charge-off rates and the slowly improving US economy underpin Moody's stable outlook for timeshare ABS. Furthermore, strong structural features should continue to boost transaction performance.
However, the agency's mixed outlook for tobacco settlement securitisations reflects a credit positive arbitration ruling resolving a dispute between certain states and tobacco companies, but also incorporates risks such as the continuing decline in cigarette consumption. Cigarette consumption is the main driver of revenue for tobacco settlement securitisations and thus any decline could impact the performance of such bonds.
Credit quality also remains high for utility cost recovery charge assets, driving Moody's stable and strong outlook for the sector. Legal frameworks and steady cashflow should maintain credit quality, while the enactment of new securitisation legislation in New York, Hawaii and West Virginia in 2013 will lead to new issuance.
The agency's positive outlook for wireless tower securitisations reflects increasing demand for wireless services. Issuance should continue, though from existing master trusts as opposed to new issuers or new issuance vehicles created by existing issuers.
Finally, the first solar contract securitisation was issued this year by SolarCity. Although solar ABS contain obsolescence, contract and sponsor risk, along with performance degradation risk of solar panels, SolarCity transaction's relatively low advance rate and shortened scheduled maturity date mitigate these risks.
News Round-up
Structured Finance
BRRD to have neutral counterparty impact
Fitch does not expect its counterparty criteria for structured finance (SF) and covered bonds (CVB) to change if the European Bank Recovery and Resolution Directive (BRRD) is implemented as currently drafted by the European Council. The agency says it considers the proposed directive to have a largely neutral impact upon the seniority of counterparty exposures.
Fitch believes that eligible rating thresholds based on bank issuer default ratings (IDRs) remain an appropriate basis for the mitigation of counterparty risk in its rating analysis. There could, however, be a potentially positive impact for some CVBs if the final BRRD allows - and subsequent country-by-country implementation confirms - that any under-collateralised liabilities of CVBs will be exempt from a 'bail-in' scenario.
The draft BRRD contains discretionary options whereby a resolution authority may, under certain circumstances, exclude derivatives from the allocation of losses. However, based upon the current draft directive, Fitch expects that systemically important counterparties - such as clearing houses - would have priority for any such exclusions, as opposed to derivatives with individual SF and CVB issuers.
The draft directive excludes CVB liabilities from bail-in as long as the value of the cover pool assets is sufficient to cover the amount of the bonds. However, an unmitigated counterparty default may reduce the value of assets available to the bonds. The extent to which any under-collateralised portions of bonds are excluded from the allocation of losses - and therefore further protected from the risk of counterparty default - remains to be finalised.
The development of a resolution framework and expected reduced propensity for sovereign support of banks may impact the IDRs of bank counterparties themselves. Fitch's counterparty criteria expect counterparties to implement remedial actions upon a downgrade below certain IDR thresholds.
News Round-up
Structured Finance
Stable outlook for APAC ratings, performance
Fitch expects both the ratings and asset sector performance of Asia-Pacific (APAC) structured finance (SF) transactions to remain stable over the course of next year. Most public long-term ratings on APAC SF transactions are anticipated to remain at their current level throughout 2014. Of the 10 non-stable outlooks in place at end-3Q13, six were on positive outlook and four were on negative outlook.
APAC SF is dominated by Australian SF transactions. The Australian economy is currently experiencing stable, although slightly subdued economic growth, stable unemployment and historically low interest rates.
Fitch expects a slight rise in the Australian unemployment rate during 2014 to 6.2% from 5.7%. This increase is likely to lead to an upturn in delinquency levels, although such an increase is not anticipated to affect ratings.
The agency also forecasts Australian interest rates to fall to 2.3% in 2014 from 2.5% currently. With interest rates already very low, Fitch does not believe this decline will significantly improve loan serviceability or RMBS delinquencies. However, it acknowledges that a rising interest rate scenario in 2014 is a significant downside risk.
Australian residential property prices have risen strongly in some regional markets, particularly in Sydney, where house prices rose by 12.7% over the year to October 2013 to new peak levels. Fitch expects prices to continue to rise next year, albeit at a lower rate.
Affordability has improved in the country since September 2012, reflecting falling mortgage rates. In terms of sensitivity to Fitch's outlooks, a rise in interest rates and house prices during 2014 would negatively affect affordability. Nevertheless, the agency believes that borrowers should be able to absorb greater stresses due to the underwriting practices of mortgage lenders, which include buffers to current interest rates.
Both rating and asset sector outlooks in other countries in the APAC region are also stable, with the exception of the outlook for asset sector performance in India. In India, Fitch expects a slowing economy and rising fuel prices to feed through to increased delinquencies. However, the growth to date in credit enhancement means that Indian transactions are likely to be able to absorb the expected increase in delinquencies, resulting in a stable rating outlook.
Elsewhere in the region, the agency anticipates that interest rates will rise slightly and that the effect of this will be absorbed by outstanding transactions, with no expectation of widespread downgrades.
News Round-up
Structured Finance
Statistics portal launched
IOSCO has launched a statistics web portal that provides the public with a global overview of specific securities markets. The objective of the new portal is to provide a centralised point for monitoring global trends, risks and vulnerabilities within these markets.
The portal allows access to key statistics, charts and indicators on a number of securities markets, including: covered bonds; securitised products (including issuance since the crisis); Islamic finance (sukuk bonds, with more products to be covered in the coming months); and housing price indices of selected countries. The portal will be updated on a monthly basis, with further refinements/additions to be made in the coming months.
28 November 2013 11:39:21
News Round-up
Structured Finance
APAC CPT covered bonds mulled
Fitch believes that conditional pass-through (CPT) covered bond programmes could become a feature of established APAC covered bond markets. This is contingent on strong ongoing investor appetite, however.
CPT programmes generally have lower overcollateralisation and, by eliminating liquidity gap risk, they also facilitate higher ratings than would otherwise be the case (SCI 21 October). In addition, they allow for a maturity extension equating to the date of the latest maturing loan in the cover pool, at the time when the bond is expected to mature. This maturity extension is triggered where the issuer defaults on its obligation to repay at the expected maturity date, or where a breach of the programme's amortisation test has occurred.
Later maturing covered bonds outstanding under the same programme may remain unaffected and continue to be paid according to their terms. Maturity extension of the remaining bonds will occur, should they not be repaid on their future expected maturity dates.
An investor in CPT covered bonds is therefore exposed to significant extension risk beyond the expected maturity date. The investor also becomes exposed to prepayment risk in the event of such extension, reflecting the variable speed with which underlying borrowers choose to repay their loans.
In Fitch's view, the main difference between a CPT covered bond and a traditional covered bond is that it avoids the need for the stressed liquidation of the cover assets, to ensure timely repayment by the legal final maturity in the event of an issuer default. Provided there are sufficient cashflows to meet ongoing interest payments, the postponement of principal payment in this way removes the risk of payment interruption.
Post-issuer default, CPT covered bonds are designed to behave in a similar fashion to pass-through securitisations. Given the extension and prepayment risks, they therefore appeal less to traditional covered bond investors that expect balance-guaranteed repayment on a specific date and more to structured finance investors that are more familiar with these risks.
CPT covered bonds are attractive to issuers for two reasons. First, they generally have lower OC for a given rating level because timely payment does not rely on the sale of assets, which is a drain on OC if it takes place below par. This increased collateral efficiency is a benefit for smaller issuers, where the volume of cover assets is limited by regulation.
Second, CPT covered bonds avoid certain contingent liquidity provisions, such as the pre-maturity test seen on hard bullet covered bonds. This prevents a drag on the issuing bank's liquidity ratios when hard bullet covered bonds are due to mature and if the issuer rating has fallen below the pre-maturity test breach trigger threshold.
Caps on cover assets or issuance amounts of covered bonds are in place for all APAC jurisdictions currently issuing covered bonds, Fitch notes. They are likely to be a feature of future covered bond regulation in the region and, as such, the ability of an issuer to efficiently use assets secured for funding will be an important consideration for smaller banks looking to use covered bonds as part of their funding strategy.
The agency believes that market issuance of CPT covered bonds in APAC is possible, but depends on strong ongoing investor appetite. "We therefore feel that any likely development in CPT covered bonds in APAC will be contingent on further and sustained market issuance globally, support for the product and acceptance of the risks by investors both domestically and in offshore markets," it concludes.
29 November 2013 11:06:41
News Round-up
Structured Finance
BofE signals support for securitisation
The Bank of England's Financial Policy Committee (FPC) signalled its support of the securitisation market in its latest Financial Stability Report. The committee says it intends to "assess and, where necessary, act to develop approaches to promote a better functioning securitisation market in the UK".
In particular, the FPC says it will examine impediments to market-based finance, including securitisation markets and financing for SMEs. "Better functioning and safe and robust securitisation markets have the potential to diversify banks' funding sources and create securities that are better tailored to the needs of non-bank investors, such as insurers and pension funds. Securitisation can also transfer risk outside the banking sector," the report states.
As well as temporary factors - such as the availability of cheap alternative funding and uncertainty over the final form of regulations relating to securitisation - the Committee pointed to structural factors as impediments to the development of a well-functioning securitisation market in Europe. These could include: the lack of standardisation of structures and information about asset performance; the difficulty of modelling cashflows of underlying asset classes; and the lack of mechanisms for smaller issuers to pool assets to overcome the fixed costs of issuance.
The report noted the lack of a central repository of information about SMEs' creditworthiness as a shortcoming and identified the creation of a central credit database for SMEs as a possible solution. Accessed by a range of potential lenders, such a register could improve SMEs' access to credit in a number of ways. For example, better data on the prepayment and default history of SME borrowers could potentially support securitisation of SME loans.
Separately, the BoE intends to refocus the Funding for Lending Scheme (FLS) towards supporting business lending starting next year. It says that there is no longer a need for FLS to provide further broad support to household lending. Instead, the FLS extension will only generate additional allowances from new business lending, with incentives heavily skewed towards lending to SMEs.
Consequently, the capital offset for corporate lending will be extended until 30 January 2015. But the capital offset for household lending will end on 31 December 2013.
29 November 2013 11:39:49
News Round-up
Structured Finance
Euro ABS fund launched
SCIO Capital has launched the Partners Fund II, with initial commitments from European pension funds, targeting a total size of €100m. The fund aims to take advantage of the dislocation in the European ABS market.
As Europe's 'bad banks' continue to de-lever their balance sheets for non-economic reasons, they are offering attractive investment opportunities for experienced buyers. SCIO works with European banks, often on a bilateral basis, to dispose of non-core capital-intensive structured credit assets to reduce the banks' capital costs. SCIO advises its funds and accounts to invest in exposure to these tranches of credit and also high returns offered by these securitised products.
29 November 2013 11:47:18
News Round-up
Structured Finance
CRA supervisory colleges inaugurated
The supervisory colleges for S&P, Moody's and Fitch held their inaugural meetings on 5-6 November in New York. The colleges for S&P and Moody's are chaired by the US SEC and the college for Fitch is chaired by ESMA.
The establishment of the colleges follows recommendations that IOSCO made in its final report on Supervisory Colleges for Credit Rating Agencies (FR08/13), which was published in July. CRA colleges create a mechanism for sharing and discussing information regarding: CRAs' compliance with local or regional laws and regulations; implementation and adherence to the IOSCO Code of Conduct for CRAs; and the establishment and operation of rating models and methodologies, internal controls, procedures to manage conflicts of interest and procedures for handling material non-public information.
The aim is to promote a better understanding of the risks faced or posed by an internationally active CRA and how relevant supervisors are addressing these risks.
28 November 2013 10:30:36
News Round-up
CDO
CDO trio on the block
Auctions for three CDOs - Trainer Wortham First Republic CBO V, Kleros Preferred Funding and Libertas Preferred Funding I - have been scheduled for 19 December. The securities will only be sold if the proceeds are greater than or equal to the senior redemption amount.
28 November 2013 11:05:12
News Round-up
CMBS
Refi challenge forecast for 2014
Over €10bn of outstanding loans backing the European CMBS that S&P rates could be in need of refinancing in 2014. The agency notes that over €13bn of loans are scheduled to mature next year, of which about €3bn have already prepaid.
While the refinancing challenge is not expected to be as acute next year as it was this year, 2014's loan maturities will follow a year in which the number of loans in special servicing increased to just under 50% of S&P's remaining CMBS universe. This could increase the difficulties facing loans maturing next year, as they compete with these specially serviced loans for the limited amount of available refinancing opportunities.
News Round-up
CMBS
CMBS criteria updated
Moody's has updated its approach for rating EMEA CMBS, following a request for comments period (SCI 14 October). The methodology includes a newly incorporated element of minimum yields in the analysis. It is not expected to have a rating impact on currently outstanding ratings, however.
News Round-up
CMBS
CMBS liquidations return to form
After two months of relatively low US CMBS liquidation volume, November brought a return to average levels, according to Trepp. Liquidation volume came in at US$1.2bn last month, up from US$960m in October and US$870m in September.
Volume registered on par with the 12-month moving average of US$1.18bn. Further, the majority of liquidated loans fell into the greater-than-2% loss severity category.
November loss severity landed at 48.1%, up considerably from October's 38.58% and above the 12-month moving average of 44.34%. The number of loans liquidated during the month was 105, resulting in US$579.64m in losses. These liquidations translated to an average disposed balance of US$11.48m, in line with the 12-month average of US$11.43m.
Since January 2010, servicers have been liquidating at an average rate of US$1.17bn per month.
News Round-up
CMBS
High DSCRs to support CMBS
Moody's expects the credit quality of loans backing US conduit CMBS to decline in 2014. However, high debt service coverage ratios (DSCR) and recovering property markets should keep performance from dropping to the low levels of loans originated in 2007.
Although weaker underwriting standards caused Moody's loan-to-value (MLTV) ratio to increase during 2013, it will end the year 15% below the peak level reached in 2007. Buoyed by high DSCR and recovering property markets, the credit quality of new transactions aligns with that of the 2005 vintage.
"Increasing competition between CMBS loan originators raises the risk that they will further lower underwriting standards from the more stringent practices used in early second-generation (CMBS 2.0) deals," says Moody's director of commercial real estate research Tad Philipp. "Furthermore, DSCR will decline as long-term interest rates increase, realigning the credit quality of 2014 loans more closely with that of the 2006 vintage."
Rising long-term rates will pose several risks to CMBS credit quality. Typically, rising interest rates limit the amount of leverage issuers can take on, because capitalisation rates rise as well.
"However, the LTV and DSCR used to underwrite current loans gives issuers room to increase leverage while staying within their underwriting guidelines," adds Philipp.
Rising 10-year Treasury rates and the resulting higher loan coupons will also lead to a decline in DSCR, increasing the risk of default during the loan term. "Moreover, 10-year loans originated in 2006 and 2007 - many of which were of low credit quality - will mature in 2016 and 2017, and higher interest rates will be a headwind for refinancing them," says Philipp.
Nevertheless, Moody's expects issuance to remain brisk in 2014, with US$80bn in conduit and single-borrower issuance and US$20bn backed by Freddie Mac multifamily loans. "Issuance will be strong at the start of 2014, as borrowers try to lock in low interest rates," Philipp continues.
The credit quality and ratings of seasoned CMBS transactions are anticipated to be stable next year. The proportion of delinquent and specially serviced loans should decline, but remain within a few percentage points of current levels.
News Round-up
CMBS
Pulled loans augur bondholder risk
The removal of loans from two recent US CMBS could be an early warning sign of risk for bondholders, Fitch notes. The agency suggests that borrowers' eagerness to lock in historically low interest rates and originators' enthusiasm to maintain volumes are putting pressure on securitisations to come to market quickly, raising the risk of errors in loan oversight.
Recently a US$47.5m loan backed by Midwestern shopping centres was removed from GSMS 2013-GCJ16 after the deal priced. The loan was the fifth largest in the pool and was pulled due to concerns over terms of a discounted payoff of a prior financing. Additionally, the ninth largest loan in a mixed-use pool in Chicago was removed from MSBAM 2013-C13 just two days after its launch (SCI 26 November).
"In our view, pressure may already be building on originators," Fitch says. "US CMBS volumes in 2013 are widely expected to be US$87.5bn by year-end, up 81% from 2012's US$48.4bn. The rapid increase in originations raises the question of whether origination teams are vulnerable to losing track of important pieces of information because they are understaffed."
As part of its rating process, Fitch conducts originator and file reviews. The agency says that if it sees further occurrences of these types of issues, deals would attract higher subordination levels.
If origination pressure continues, other cracks could be expected to form. Historically, record loss severities have been realised when new properties drive seemingly stable properties out of business.
This situation has occurred when lenders did not have sufficient time or resources to understand the local real estate market, the property's competitive profile, the property's competition or the potential for new competition. For example, two Apple stores recently vacated two high quality CMBS 2.0 properties mid-lease. Apple left both The Palisades Center mall in West Nyack, New York and the Gateway District mall in Salt Lake City for new spaces at nearby competing centres.
News Round-up
CMBS
Resolutions drive delinquency decline
The Trepp US CMBS delinquency rate continued its impressive turnaround in November, which marked the sixth consecutive month of improvement. With a decrease of 32bp, the delinquency rate now stands at 7.66%.
Last month's rate decrease was driven by almost US$1.2bn in previously delinquent loans being resolved with losses. By removing these delinquent loans from Trepp's numerator, the rate saw 22bp of improvement.
Loans that cured totaled about US$2.2bn in November, resulting in 40bp of downward pressure on the delinquent loan percentage. New delinquencies totaled just over US$2bn in November, compared to US$1.6bn in October. These loans pushed the rate up by 38bp.
Loans that were previously delinquent but paid off without a loss totaled almost US$245m in November, resulting in a 5bp decrease in the delinquent loan percentage.
The Trepp delinquency rate has dropped by 268bp since reaching an all-time high of 10.34% in the summer of 2012.
News Round-up
Insurance-linked securities
Aspen forms sidecar
Aspen Reinsurance's capital markets division has established Silverton Re, a Bermuda domiciled special purpose insurer formed to provide the firm with additional collateralised capacity. Silverton Re will be capitalised initially at US$65m, with US$15m of funding provided by Aspen Re and additional funding secured from third-party investors.
Silverton Re will enter into a quota share retrocession agreement with Aspen, under which it will reinsure a proportionate share of Aspen's globally diversified property catastrophe excess of loss portfolio. Aon Benfield Securities acted as the placement agent.
News Round-up
RMBS
Spanish severities highest in tourist belt
Moody's loss severity calculations on repossessed Spanish properties show highest loss severities on the Mediterranean coast, Andalucia and the Canary Islands - albeit within its assumptions for defaulted loans. While this is not expected to lead to any rating actions on Spanish RMBS, high loss severities on repossessed mortgaged properties are credit negative, the agency notes.
Moody's compared the prices of repossessed properties sold between 2010-2013 to the regional house price decline from the peak reported by the Spanish Statistics Institute (INE). The results show that repossessed property prices were significantly lower than the corresponding decline in the INE regional house price index since 1Q07.
This difference is mainly the result of the forced sales process of these properties, which took an average of 1.9 years. During this time, the properties likely worsened in condition, hurting sales prices.
Depreciation on repossessed properties is decoupled from INE house price trends. While Moody's linked Murcia, Valencia, Andalucia and the Canary Islands to the highest depreciation of repossessed properties, the INE indicates declines in property price below national average for these same regions. Despite the INE covering a larger sample than Moody's, the agency notes a difference in regional findings between the INE index and its sample.
Loss severities on mortgage debt associated to repossessed properties remain within Moody's assumptions for defaulted loans. Loss severities on mortgage debt associated to repossessed properties average 71% across the Mediterranean cost, the Canary Islands and Andalucia.
28 November 2013 10:57:41
News Round-up
RMBS
Dutch IO exposure to decline
The exposure of the Dutch RMBS market to full interest-only (IO) loans is moderate, Moody's says. Moreover, the agency expects the percentage of full interest-only loans in the Dutch RMBS market to decline, with amortising loans becoming the market standard.
Moody's notes that the limited vulnerability of the Dutch RMBS market to full IO loans stems from the small contribution that such loans make to mortgage debt in the Netherlands, at less than 30%. While full IO loans have bullet principal repayment profiles and are typically structured without a repayment policy, most Dutch IO loans are linked to repayment policies such as savings, life insurance or investment. The purpose of these attached repayment policies is to accumulate the capital of the mortgage loan throughout the life of the loan.
Due to recent changes to tax deductibility, annuity loans are the new market standard for loan origination. As a result, IO loans no longer come with the benefit of interest rate tax deductibility. Although borrowers with current IO loans will still benefit from tax deductibility, borrowers of newly originated IO loans will not.
Moody's also notes that Dutch RMBS exposure to full IO loans with refinancing risk is limited. Full IO loans with high loan-to-foreclosure values comprise under 5% of the Netherlands' total lending.
These loans are considered the riskiest because they are more exposed to refinancing risk as they are often in negative equity following house price declines of 20% since mid-2008 and they lack any direct repayment policy that would allow the build-up of capital at maturity. Nevertheless, the overall impact on the Dutch RMBS market from the refinancing risk of full IO loans with high loan-to-foreclosure value is minimal, as they make up a small proportion of total lending. The risk of default on these loans remains modest, given the strong credit culture and stable recourse environment in the Netherlands, the stringent underwriting criteria for this segment and its good performance.
News Round-up
RMBS
Distressed exchange for ESAIL juniors
Fitch has downgraded the single-C rated B1c, C1c and D1c classes of Eurosail-UK 2007-5NP to D, following the restructuring of the transaction (SCI passim). In addition, it has placed the double-C rated A1a and A1c classes on rating watch positive (RWP).
The RMBS received US$35.1m on 21 November through an auction of its remaining claims against the Lehman Brothers bankruptcy estate in respect of the transaction's terminated EUR/GBP currency hedging agreement. Combined with prior claims received to date of US$67.7m, the issuer has now received all of its expected recoveries, equivalent to 60% of its agreed claim amount as stipulated in the termination and settlement agreement with the Lehman estate.
Subsequently, the issuer applied all of these proceeds towards a restructuring of the transaction. This involved converting the recoveries to a sterling equivalent amount of £63.5m and subsequently aggregating this with the transaction's existing fully funded £16.1m cash reserve.
As part of the restructure, the A1a tranche was redenominated at the spot rate (as of 26 November) to sterling from euros, leading to an outstanding class A1a balance of £348.3m (previously €415.6m). Simultaneously, each of the mezzanine and junior B1c, C1c and D1c tranches have been written-down by 27.7% to a remaining outstanding amount of £21m, £13.5m and £9.6m respectively.
Although the write-down on these notes is apparently voluntary, Fitch has determined that a distressed debt exchange (DDE) has occurred. It says that the write-downs have effectively brought forward a probable final payment default on these notes and will, by definition, cause a reduction in the original economic terms from the noteholders' perspective. It is therefore considered by the agency to be distressed in nature, resulting in a downgrade to D.
In contrast, in the agency's view, the restructuring of the class A1a notes does not constitute a DDE, given the fairly favourable terms of the redenomination to sterling for these notes and the lack of any write-down.
The redenomination was conducted at the spot rate of 0.838 GBP = 1 EUR, which is higher than the original rate of 0.701 GBP = 1 EUR. The notes will also receive three-month Libor instead of three-month Euribor, with a 7bp increase in margin, which represents an increased coupon at current rates.
The RWP is thus reflective of potential upgrades following the notable increase in credit enhancement levels for the senior notes.
On the upcoming payment date falling on 13 December, available cash will be applied towards payment of restructuring costs, payment to residual certificate holders, establishment of a smaller £4.1m reserve fund and partial redemption on each class of notes.
News Round-up
RMBS
Recourse rankings implemented
Moody's reports that the European housing market remains full recourse in nature in that, following default and foreclosure, borrowers are still liable for any remaining shortfall after the property sale. That said, considerable variation exists within different European jurisdictions in terms of the use of bankruptcy procedures and the efficiency and timing of the foreclosure process.
To reflect these differences, Moody's has ranked the European countries from weak to strong based on the efficiency of the legal framework supporting recourse and the bankruptcy discharge period, in combination with the practical application of the full recourse standard. These three factors represent the agency's recourse ranking. A subset of the recourse ranking is the legal ranking, which is made up of the first two factors.
In Spain and Ireland, recent government initiatives have weakened the efficiency of the full recourse standard and have thus changed the recourse ranking of these countries. Spain, for instance, has recently introduced legal reforms to assist borrowers that are unable to remain current on their mortgage payments, potentially facing eviction. These reforms - which are a result of growing social pressure on the Spanish government to support distressed borrowers - have weakened the efficiency of the full recourse standard and have changed Spain's ranking from strong to average.
Similarly, in Ireland the introduction of Personal Insolvency Arrangement and other debt forgiveness measures have weakened the efficiency of the full recourse standard. While it is still too early to assess the impact of debt forgiveness measures in Ireland, evidence of moral hazard already exists. As a result, Ireland now ranks as the weakest of all European countries in terms of Moody's recourse ranking.
However, the agency notes that unlike the US, Ireland will remain a recourse market because the country's legal framework still allows lenders to pursue defaulted borrowers. Conversely in the US, lenders - even in states where a recourse framework applies - often choose not to pursue borrowers in an attempt to avoid reputational damage and high costs.
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