News Analysis
Structured Finance
Bright spots
Mixed fortunes in structured finance recruitment
Certain areas of the structured finance recruitment sector are growing, but large parts remain muted. European activity is all but moribund, while the picture in the US is mixed.
The US securitised markets show several areas of growth, not least in CLOs. While the CMBS and RMBS sectors are mixed, the ABS market is anticipated to become even quieter going forward.
"Hiring in US ABS is most likely going to be down this year. We will certainly not be focusing on ABS because we expect activity to be fairly steady but without robust hiring or growth," says Chadrin Dean, consultant at Integrated Management Resources.
He continues: "Likewise for US RMBS we are expecting a bad year. Just the mention of tapering has pushed the 10-year treasury to 3% and, as mortgage rates increase, there will be a decline in the number of people looking for mortgages. Tight credit has made it very hard to get a mortgage and we expect the RMBS market to decrease 10% to 20% this year."
The US CMBS market is expected to see more activity than it did in 2013, but the level of hiring is likely to remain low. Last year was a slow one and what hiring does take place this year is expected to be for replacement purposes rather than a case of teams building up.
The brightest spot in US structured finance recruitment is in CLOs. "Last year was a bumper one for CLO hiring and while 2014 might not quite match it, we do expect this year to be hot as well," says Dean.
He continues: "A caveat to that would be ongoing developments with the Volcker rulings, which keep coming out. There is the potential for Volcker changes to curtail banks' interest in the CLO market, which could dramatically affect hiring."
Dean notes that most of the interest he has seen in the US has come from the buy-side and issuers. Individuals with structuring knowledge are in high demand, as are credit analysts.
"Last year there were a lot of groups building out and they will continue to grow this year," he says.
In contrast, hiring within the European securitisation market remains flat. Market performance improved last year, but this was not reflected in the world of recruitment.
"There have been several improvements in the European securitised markets, but those have not been reflected in the jobs market. Our focus is increasingly on other sectors because the structured finance recruitment market remains subdued," says one London-based headhunter.
He adds: "Issuance has been OK and the people we talk to are increasingly optimistic about the market's prospects, but that is yet to lead to any kind of recruitment drive. It is a different story in the US, where they are making a decent fist of it, but here in Europe things remain quiet."
The European headhunter notes that hiring has been ongoing, but only at a very low level. Banks are not typically hiring and neither are rating agencies.
"Where we are seeing people changing jobs, it is generally in lower-level positions. The more senior guys - where they have not actually left the market - are not changing firms like they used to," he says.
Many former market participants have exited securitisation and now work in other sectors. If they are now two or three years down an alternative career path, the headhunter warns that it is unlikely that they will return even if the market does pick up, which represents a lot of lost talent.
RBS is one of several banks that the headhunter suggests has let staff go and he says the bank is set to shrink its structured finance team further. The biggest obstacle to the market's return is the ongoing regulatory uncertainty, he adds, noting that the European market is being "strangled" by regulation.
He continues: "It is just impossible to structure around all the regulation when the goalposts keep shifting. Until they are in the ground solidly and the market knows where it stands, this issue is going to rumble on."
Last year was a quiet year for recruitment in securitisation and more of the same is expected for 2014. "People are positive at conferences, but those conference speakers are no longer the bank heavyweights that they once were. This European market is stuck until something changes and change is not on the horizon," the headhunter observes.
One previously expected trend was for private equity players to become more involved in the market, but outside of the CLO space that does not seem to have transpired. "There is still huge reticence from the buy-side to move into the market right now," adds the headhunter. "I still believe that structured finance is a necessary part of the financial market, but it continues to be strangled. Until the regulatory framework is in place and the policy framework is sorted out, I do not anticipate the situation to change."
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Market Reports
ABS
Autos boost ABS supply
US ABS BWIC volume rose markedly yesterday to US$219m. Offering levels were down slightly for auto loan bonds, which dominated supply, with several tranches debuting in SCI's PriceABS data.
Among the auto ABS tranches out for the bid that had not previously been picked up by PriceABS was HUNT 2012-1 B, which traded during the session. Also circulating during the session was CARMX 2013-4 C, which was covered at plus 90. HDMOT 2011-1 A4 was covered at plus 25, while NAROT 2012-A A4 was talked at plus 19.
Most of the auto names available yesterday were from 2012-vintage deals, with SMAT 2012-4US A4A covered at plus 77, TAOT 2012-A A3 covered at plus 10 and TAOT 2011-B A4 talked at plus 18. However, there were also slightly earlier-vintage bonds, such as HART 2010-A A4, which was covered at plus 22 - having previously been covered at 25.
HART 2010-B A4 was covered at plus 19, having previously been covered at plus 18. The HART 2011-C A4 and HART 2012-A C tranches were also covered during the session.
Among the more recent-vintage tranches to be covered was AMCAR 2013-5 C, which was covered at plus 115. That tranche was previously covered at 100.27 on 19 November 2013.
FORDL 2012-A A4 was talked at plus 23, having not appeared in the PriceABS archive since June 2012, when it was talked in the 30 area. The FORDO 2013-B D tranche was, meanwhile, covered at plus 77.
In addition, a few equipment ABS tranches were out for the bid, such as GEET 2012-2 C - which was covered at plus 99. The MMAF 2011-AA A4 tranche was, meanwhile, covered at plus 58.
A pair of CNH tranches - CNH 2011-A A4 and CNH 2013-B B - were also circulating. The former was covered at plus 27 and the latter was covered at plus 85, with neither having previously appeared in the PriceABS archive.
Also of interest from the session was price talk on SLMA 2006-B B. Talk on the bond was in the low/mid-80s. A week earlier the tranche was talked in the low/mid-80s, low-80s and high/mid-70s.
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Market Reports
CMBS
Good start for Euro CMBS
The European CMBS secondary market has made a positive start to 2014. SCI's PriceABS data shows several covers from yesterday's session, while one trader predicts that increased activity should drive spreads tighter in the coming weeks.
"Last week was still fairly quiet as everyone returned to their desks, but this week has been better. There have been more trades and we have sold a lot of mezzanine bonds to clients already," the trader says.
He continues: "Outside of mezzanine, we have found that clients have not been super active, although the Street is certainly aggressive and senior bonds have been bid up. My guess now is that clients are holding out to see where levels land."
If some market participants are indeed waiting on the sidelines, others have wasted little time. Bid-list supply yesterday included many distressed senior tranches, with PriceABS capturing a range of price talk and covers.
"Yesterday's BWICs were trading higher than price talk. There is still some resistance from the larger asset managers to get involved in the market, but hedge funds as always are active in the yieldier paper and we are seeing small asset managers getting involved," says the trader.
Among the names out for the bid yesterday was BUMF 3 M1, which was talked at around 96 and at around 97 and covered at 97.4375. That tranche was previously covered at 92.1 on 4 September 2013.
Covers for DECO 2006-C3X A1B and DECO 6-UK2X A2 were also seen at high-83 handle and high-84 handle respectively. The DECO 2007-E5X A3 tranche was talked in the low/mid-90s, at 95 handle and at high-95.
EURO 26X G was talked in the low-90s and at low-93 and covered at 92.01. Additionally, covers were recorded for EPICP DRUM A, EURO 25X A, SANDW 1 B, TITN 2006-3X A and TMAN 5 A, with price talk on several more bonds.
"Activity today and tomorrow will probably be lower than it has been so far this week. But if this general level of activity holds for a week or two, then more people could come into the market. Barring any shocks, I think we are going to see things tighten," the trader concludes.
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Market Reports
CMBS
US CMBS tightens further
US CMBS spreads continued to tighten yesterday as bid-list activity grew. BWIC volume reached around US$219m, with a large number of 2.0 and 3.0 below-investment grade bonds circulating.
SCI's PriceABS data shows a range of vintages out for the bid, with deals issued as long ago as 2005 and as recently as last year represented. Included among these names was the CD 2005-CD1 AJ tranche, which was talked at 155 and covered at 149. That tranche traded on 5 December 2013, when it was talked at 175, and was covered before that at 219 on 24 September. Price talk on the tranche on 8 January 2013 was in the low-200s.
Also out for the bid during the session was BAYC 2006-2A A2, which was talked in the mid-80s and also traded in the mid-80s. It was covered almost a year ago - on 17 January 2013 - at 73.28 and first appeared in the PriceABS archive in November 2012, when it was covered at 71.22.
Many of the tranches circulating yesterday were from 2007 issuances, including BSCMS 2007-PW17 AJ, which was talked in the low/mid-500s and covered at 530. The tranche was covered at 565 on 3 December and was talked at between the mid/high-80s and low-90s last January.
BSCMS 2007-PW15 AM was talked in the low-300s and covered at 299. The bond was covered at 392 in September and first appeared in the PriceABS archive on 13 July 2012, when it was talked at around 900.
Additionally, CSMC 2007-C5 AM was talked in the mid/high-300s and covered at 388. The tranche was talked in the low-500s in August 2013 and covered at 635 in September 2012.
GSMS 2007-GG10 AM was talked in the low-400s and covered at 380. The tranche was talked in the low/mid-400s in November and in the low/mid-500s in August. When it first appeared in the PriceABS database in July 2012, it was covered at 760.
The 2010-vintage JPMCC 2010-C2 A1 tranche was covered at 58, meanwhile, while the 2012-vintage MOTEL 2012-MTL6 D tranche was covered at 250. The former previously appeared in PriceABS when it was talked at 35 on 9 October 2012, while the latter was covered in March 2013 at 269.
As for deals issued only last year, COMM 2013-CR11 A4 was covered at 87, while ICOT 2013-IRV A1 was covered at 88. The latter tranche had been covered at 108 on 10 September.
GSMS 2013-KYO C was talked at 100.06 and covered at 100.19, while GSMS 2013-NYC5 F was covered at 282. The latter tranche was covered in May last year at 275.
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News
Structured Finance
SCI Start the Week - 13 January
A look at the major activity in structured finance over the past seven days
Pipeline
The pipeline has begun to grow again as new deals have already been announced to kick off 2014. Last week saw one ABS, one ILS, three RMBS and a CMBS added.
The ABS entrant was ¥25.2bn Driver Japan Three and the ILS was US$200m Vitality Re V Series 2014-1. The RMBS were US$705m CAS 2014-C01, US$300m HLSS Servicer Advance Receivables Trust 2013-T1 and US$200m HLSS Servicer Advance Receivables Trust 2013-T2, while the CMBS was US$535m JPMCC 2014-FBLU.
Pricings
A handful of deals also printed last week. New issuance comprised two ABS and two CMBS.
The ABS new issues were US$204.82m American Credit Acceptance Receivables Trust 2014-1 and US$1.066bn Santander Drive Auto Receivables Trust 2014-1, while the CMBS were US$1.38bn COMM 2014-CCRE14 and US$1.056bn FREMF 2013-K714.
Markets
The European CMBS secondary market has made a positive start to 2014 and spreads are expected to tighten in the coming weeks, as SCI reported on 9 January. "There is still some resistance from the larger asset managers to get involved in the market, but hedge funds as always are active in the yieldier paper and we are seeing small asset managers getting involved," says one trader.
Barclays Capital US CMBS analysts note that spreads have, as expected, tightened in that market in early January. However, the magnitude of spread tightening has been more limited than in previous years. Generic 2007 LCFs are 8bp tighter than last month at swaps plus 106bp, while AMs and AJs from the same vintage are tighter by 30bp-50bp.
The US non-agency RMBS market picked up quickly last week, as SCI reported on 8 January. "The non-agency market has jumped right back to full throttle mode in the first full week of the year," confirm Wells Fargo structured products analysts. Weekly trade volume was US$7.6bn and BWIC volume was around US$2.2bn.
Auto and credit card bonds dominated US ABS secondary supply early in the week (SCI 7 January), but as the week wore on volume was up and spreads narrowed across asset classes. JPMorgan analysts believe robust technicals and fundamentals mean there is room for further tightening.
Deal news
• Separate meetings for all classes of Eurosail-UK 2007-6NC noteholders have been convened on 10 February to consider an extraordinary resolution to approve the sale of the remaining Lehman claims, as well as a restructuring proposal. If successfully implemented, this will be the third restructuring of a UK Lehman RMBS to resolve 'broken swap' issues (SCI passim).
• The Dutch State Treasury Agency has announced its intention to continue a competitive auction process to sell the non-agency RMBS underlying the ING Illiquid Assets Back-up Facility (IABF). BlackRock Solutions will execute the sale of the securities via a competitive auction process through a number of selected broker-dealers.
• An Interactive Data analysis of last month's US$5.1bn IABF sale suggests that the DSTA divested itself of the riskier holdings first. The firm notes that while pre-BWIC dialogue and information-sharing on the sale appeared to be robust, post-trade market colour was limited.
• CMBX.7 is expected to launch on 27 January. While its exact composition is yet to be confirmed, the index is predicted to compare favourably to CMBX.6 in terms of credit enhancement and JC Penney exposure - although credit metrics may point to slipping underwriting standards.
• Cairn Capital North America has been retained to act as liquidation agent for Altius I Funding. The move comes after an EOD occurred last month, following a default in respect of the payment of interest due and payable on the transaction's class A and B notes.
Regulatory update
• SIFMA has submitted a comment letter to the SEC on FINRA's proposed rule change relating to TRACE reporting and dissemination of transactions in additional ABS (SCI 5 November 2013). The association requests that FINRA not implement this proposal and instead engage in further discussion with the industry as to how best to preserve ABS market liquidity and re-propose this proposal after such discussions.
• A unanimous ruling by a four-judge bench of the Supreme Court of the State of New York holds that the six-year statute of limitations on representation and warranty breaches applies to private label securitisations from the date of a deal's closing. If it stands, the move could reduce investor recourse for both legacy and new issue RMBS.
• As part of its efforts to improve transparency in the Indian securitisation market, the Securities and Exchange Board of India (SEBI) has issued a circular requiring reporting and clearing of trades to be implemented by 1 April. Reporting platforms will provide data to include issuer name, ISIN number, face value, maturity date, current coupon, last price reported, last amount reported and last yield reported. Exchanges shall also provide access to offering documents and disclosures.
• The swearing in of Mel Watt as FHFA director on 6 January marked the official end to the DeMarco era. While there is little context for Watt's views on specific issues at this stage, how he re-shapes the agency has significant implications for agency MBS (SCI passim), including increased policy uncertainty.
• JPMorgan last month filed suit in the US District Court of the District of Columbia against the FDIC in connection with the Washington Mutual estate. The bank is seeking to recover payments to the FHFA to repurchase loans sold to the GSEs by WaMu, as well as payments made to private investors under securities law claims on RMBS deals originated by WaMu.
• Smaller US residential mortgage servicers are expected to be challenged by the increased costs of new servicing requirements as they seek to opportunistically grow through strategic acquisitions. The new requirements, issued by the Consumer Financial Protection Bureau (CFPB), became effective on 10 January.
Deals added to the SCI New Issuance database last week:
Access To Loans For Learning Student Loan Corp series 2013-1; ALM X; Auto ABS Swiss Leases 2013; Bankia PYME I; CIT CLO 2013-1; Crusade ABS Series 2013-1 Trust; CVS Lease-Backed Pass-Through Series 2013 Trust; DivCore CLO 2013-1; Highbridge Loan Management 3-2014; IBL CQS 2013; JPMBB 2013-C17; KKR Financial CLO 2013-2; Loma Reinsurance series 2013-1; MidOcean Credit CLO II; Piazza Venezia; Queen City Re series 2013-1; RBS 2013-GSP Trust; Resource Capital Corp CRE Notes 2013; Selkirk No. 1; Selkirk No. 2; SoFi Professional Loan Program 2013-A; Spirit Master Funding VII series 2013-1; Spirit Master Funding VII series 2013-2; Svensk Autofinans WH 1; The Co-operative Bank RMBS Trust series 2013-1; Tradewynd Re series 2013-2; Turbine Engines Securitization series 2013-1; VenTerra Re series 2013-1; Windmill I Re series 2013-1
Deals added to the SCI CMBS Loan Events database last week:
BACM 2004-3; BACM 2005-3; BACM 2006-4; BBUBS 2012-TFT; BRUNT 2007-1; BSCMS 2007-PW16; CD 2006-CD2; CD 2007-CD4; COMM 2004-LB3A & GSMS 2004-GG2; CSFB 1999-C1; CSMC 2006-C4; CWCI 2007-C2; DECO 2005-C1; DECO 2006-E4; DECO 2007-C4; DECO 2007-E7; ECLIP 2006-4; EPC 3; EPICP BROD; FLTST 2; FOX 1; GCCFC 2004-GG1; JPMCC 2004-PNC1; JPMCC 2005-CB12; JPMCC 2005-CB13; JPMCC 2005-LDP5; JPMCC 2006-CB15; JPMCC 2006-LDP9; JPMCC 2007-LDPX; JPMCC 2012-CBX; LBUBS 2004-C4; LBUBS 2007-C6; LBUBS 2007-C7; MLCFC 2006-1; MLCFC 2006-4; MLMT 2006-C1; MSC 2006-IQ12; MSDWC 2003-TOP9; OPERA GER2; TITN 2006-1; TITN 2006-2; TITN 2006-3; TITN 2006-5; TITN 2007-1; TITN 2007-CT1; TMAN 6; TMAN 7; WBCMT 2004-C12; WBCMT 2005-C18; WBCMT 2006-C28 & CWCI 2006-C1; WBCMT 2006-C29; WBCMT 2007-C30; WBCMT 2007-C32; WBCMT 2007-C33; WINDM X; WINDM XIV; Wrightwood Capital Real Estate CDO 2005-1
Top stories to come in SCI:
Corporate trust roundtable
News
Structured Finance
Foundation for continued growth?
The US CLO and CMBS sectors saw impressive issuance in 2013, as the recovery in the asset classes continued apace. European volumes, meanwhile, reflect the growing diversity of jurisdictions on offer across the region's ABS market.
Last year proved to be impressive for US CMBS 3.0 issuance, with conduit volumes totalling US$53.1bn, a 65% increase from US$32.2bn in 2012. US single-borrower/single-asset transactions posted US$24.1bn in issuance, an all-time high for the sub-market, according to Barclays Capital figures. Some larger loans that were previously securitised in the conduit market are finding their way into single-borrower deals, as conduits are generally smaller in size than in 2005-2007.
Floating-rate deals remain relatively scarce, however, with about US$1.5bn in issuance seen last year. In total, US$78.7bn of private-label CMBS issuance took place in 2013.
Barcap CMBS analysts expect the sector to continue to grow, predicting US$75bn in conduit issuance in 2014 as credit spreads continue to tighten and conduits take a larger share of multifamily originations from the agencies. On the other hand, the single-borrower segment may shrink slightly to US$15bn-US$20bn, as higher rates hurt the competitiveness of single-borrower deals versus less rate-sensitive issuers such as insurance companies.
The US CLO market also experienced heavy issuance during 2013, with US$5.1bn from 11 new deals coming in the second half of December alone. All together, 183 US CLOs priced over the year for a total of US$87.1bn, according to JPMorgan figures.
While 2013 CLO supply is US$7bn behind 2006's record issuance at US$94bn, the 183 US deals issued last year was enough to best the previous US deal count record of 178 US CLOs set in 2006. Combined with the 21 European CLOs issued for €7.76bn (US$10.3bn), this amounts to the third highest annual global issuance total on record behind 2006 (at US$135bn) and 2007 (US$130bn).
US non-agency RMBS issuance also climbed, in tandem with the strong housing market recovery. Deutsche Bank figures put total 2013 volumes at US$27.2bn, an 86.6% increase over 2012.
Prime jumbo transactions accounted for the majority of the issuance, at US$14.4bn, compared to US$3.6bn the previous year. Redwood Trust, Credit Suisse and JPMorgan were the top-three issuers in the segment, originating in aggregate US$8.1bn, US$4.6bn and US$2.5bn respectively.
As well as jumbo RMBS, US$3.3bn of NPL, US$2.9bn of seasoned performing, US$4.4bn of servicer advances, US$1.8bn of loss-sharing and US$479m of single-family rental transactions were issued in 2013. Last year was notable for the debut issuances of the latter two types of securitisations.
In contrast, US ABS issuance stood at approximately US$183bn at year-end - down by about 7% from 2012 volumes - according to Barcap. ABS analysts at the bank expect issuance to increase modestly this year by around 5%.
They estimate that total outstandings in the US ABS universe increased by around US$6bn during Q4 to US$650bn. This is comprised of: US$113bn non-traditional ABS; US$162bn auto ABS; US$23bn equipment ABS; US$228bn student loan ABS; and US$124bn credit card ABS.
Meanwhile, JPMorgan calculates that Europe saw €73.26bn of distributed issuance in 2013. This is split across: auto ABS (at €17.31bn), credit card ABS (€1.12bn), CDOs (€1.91bn), CMBS (€8.77bn), consumer ABS (€1.56bn), lease ABS (€795m), 'other ABS' (€2.89bn), RMBS (€38.82bn) and whole business securitisations (€87m). By jurisdiction, Austria accounts for €260m of the volume, Finland €939m, France €2.3bn, Germany €15.19bn, 'global' €75m, Ireland €500m, Italy €1.69bn, the Netherlands €15.27bn, Norway €906m, Portugal €627m, Slovakia €1.24bn, Spain €775m, Sweden €156m, Switzerland €506m and the UK €13.12bn.
As secondary spreads grind tighter, primary issuance from the periphery is anticipated to tick up, adding to the growing core primary market. As such, Bank of America Merrill Lynch analysts foresee a pick-up in new issue volume to €120bn-€140bn in 2014.
Finally, JPMorgan figures put distributed total issuance in Australia at €19.7bn-equivalent for 2013. This figure breaks down into €1.27bn-equivalent for auto ABS, €137m-equivalent for CMBS, €160m-equivalent for consumer ABS, €291m-equivalent for lease ABS, €260m-equivalent for 'other ABS' and €17.58bn-equivalent for RMBS.
CS
News
CMBS
CMBX.6 lessons learnt?
CMBX.7 is expected to launch on 27 January. While its exact composition is yet to be confirmed, the index is predicted to compare favourably to CMBX.6 in terms of credit enhancement and JC Penney exposure - although credit metrics may point to slipping underwriting standards.
Morgan Stanley CMBS strategists expect CMBX.7 to reference the 25 most recent CMBS 2.0 deals issued in the second half of last year. Assuming these deals form the index constituents, the strategists estimate that credit enhancement of the six CMBX.7 sub-indices would be an average of 9bp higher than in CMBX.6. Tranche thickness would be an average of 20bp greater.
Many CMBX.7 credit metrics are similar to those of CMBX.6, but rising rating agency stressed LTVs and more properties located in secondary loans appear to be in the new index. The Morgan Stanley strategists also point to increased IO loans and a rise in loans with pari passu and subordinate debt. Additionally, they suggest that the continued rise in property valuations last year could result in CMBX.7 referenced loans having a riskier credit profile.
Collateral exposure to JC Penney would be less than half of CMBX.6 exposure and would still be 45% lower when shadow exposure is considered, according to the strategists. Nine malls secure US$522m of loans across the seven predicted CMBX.7 referenced deals that have been identified as having the highest risk of JCP-related store closings. In comparison, CMBX.6 has 17 malls securing US$1.1bn of loans across 10 deals with the highest risk of store closings.
The strategists note that the lessons learned from CMBX.6 provide a roadmap for CMBX.7: while CMBX.6 proved to be an attractive hedge and pushed spreads wider, it eventually offered attractive relative value to the referenced cash bonds, which resulted in spread tightening across CMBX tranches. "As non-dealers increasingly added risk across the CMBX.6 capital structure, the index began to trade much more efficiently, with spreads inversely related to risk demand," they conclude.
JL
News
RMBS
Light shed on IABF sale
An Interactive Data analysis of last month's US$5.1bn IABF sale suggests that the Dutch State Treasury Agency (DSTA) divested itself of the riskier holdings first. The firm notes that while pre-BWIC dialogue and information-sharing on the sale appeared to be robust, post-trade market colour was limited.
The sale comprised primarily pay option ARM bonds (totalling around US$4.8bn), with the remainder made up of various derivative securities (SCI passim). Based on a sample of price guidance from seven major broker dealers, Interactive Data found that average price talk for the principal and interest line items ranged from the mid-US$20s to very high-US$70s.
"Seasoning, as well as structural seniority appeared to play a significant role in dictating expected clearing levels, with older collateral vintages and senior/super-senior tranches commanding higher average price talk," the analysis observes. "Interestingly, the range of average price talk across seven dealers for the more senior securities was generally narrower at around eight points versus more than 13 points for the senior support/mezz portion."
No cover levels were broadly distributed and re-offers were seemingly limited. The reported FINRA-Interactive Data STAR figures show that only about two-thirds of the ING bonds had been placed with investors, as of the close of business on 11 December. A total of US$5.5bn US non-agency RMBS was sold by customers, while only US$3.7bn were purchased, leaving the Street long by roughly US$1.8bn.
Five dealers were awarded the bonds. Based on the award weightings provided by the DSTA, Interactive Data estimates that the largest residual position on the Street is approximately US$623m, with the smallest being US$208m.
"Over the last two weeks of the month, non agency RMBS trading volume steadily declined amid slightly better customer buying. However, by year-end the dealer community still appeared to be working to distribute the bulk of the remaining third," the analysis notes.
The remaining IABF portfolio contains a higher concentration of fixed-rate collateral, with generally better performing collateral and hence higher evaluated bonds. On a weighted average basis, the first batch of bonds sold had an evaluated price of roughly US$60, whereas the remaining portfolio is notably higher at about US$84, according to Interactive Data figures.
CS
News
RMBS
Counterparty relationships under pressure
The implementation of the US Treasury Market Practices Group's (TMPG) margin practices appears to have met its near-term goal of covering a significant amount of agency MBS trading volumes (SCI 16 April 2013). However, the broad-based implementation of the guidelines could have an unexpected impact on the structure of counterparty relationships across the Street, according to Deutsche Bank MBS analysts. In particular, counterparties could become more concentrated as the costs associated with striking a margin agreement with a new counterparty starts to outweigh the incremental liquidity that party might provide.
The TMPG indicates that roughly half of eligible MBS volumes were covered by margin agreements, as of November, with another 30% anticipated to be covered by the end of last year. Based on anecdotal evidence, it appears that dealers have made additional progress since November, with approximately 60% of total volume accounted for. The Deutsche Bank analysts note that dealers appear to have been able to strike agreements with their largest counterparties to substantively fulfil this requirement.
While liquidity in the agency MBS market seems to have remained intact, the analysts anticipate some longer-term issues emerging. First, they point to substantial customer opposition to being subject to margin requirements on forward-settling agency trades.
"Most of the push-back from accounts is that they are not bound by the TMPG as a regulatory body," they explain. "Additionally, since these are only best practices based on a dealer's assessment of counterparty credit risk, there could be certain dealers that may require margin while others may not. This, in turn, could lead to competitive imbalances in terms of pricing - especially in the CMO market."
Many accounts also will likely not be inclined to maintain margin relationships with a large number of broker-dealers, given the significant operational costs associated with maintaining these relationships. "In all likelihood, accounts with limited infrastructure will select a handful of dealers to do business with. The incremental costs associated with maintaining relationships with a large number of dealers would significantly outweigh the incremental liquidity they would receive from those relationships. This may cause particular friction for primaries who are trying to increase their footprint in the MBS space, as accounts will likely award margin relationships based on past performance rather than potential future results," the analysts continue.
In addition, account concentration may become problematic in CMO deal execution and risk management. For example, if a dealer is able to strike margin agreements in place with a large number of banks but very few insurance companies or pension funds, they would potentially be able to sell front cashflows but have limited outlets for selling longer duration bonds. This would ultimately force a dealer to take down significant duration or sell bonds through the Street, impacting deal execution.
Customers have reportedly challenged the TMPG's authority to issue bright-line guidance and enforce practices, which will likely cause divergence in how dealers apply these standards.
CS
Job Swaps
Structured Finance
Securitisation pro to take top role
Securitisation specialist Pat Quinn is set to take over leadership responsibilities at Cadwalader, Wickersham & Taft alongside Jim Woolery. Quinn will serve as managing partner and Woolery will serve as chairman, with the pair replacing current chairman Chris White from the start of next year.
Quinn will focus on managing the firm's operations. He is currently co-chair of the firm's capital markets department and is a member of its management committee. He has been with Cadwalader for 25 years and has extensive securitisation experience, having counselled clients with respect to every major business and regulatory development in the securitisation markets during that time.
Job Swaps
Structured Finance
Bank boosts Hong Kong SF team
Vincent Moge has joined HSBC in Hong Kong as asset and structured finance md. He was previously partner and ceo of the Singapore office at StormHarbour Securities and has served as head of EMEA structured credit sales and solutions at Bank of America Merrill Lynch in London.
Job Swaps
Structured Finance
Front office offering bolstered
Markit has expanded its front office offering by acquiring thinkFolio. The London-based firm offers portfolio management software, including sophisticated order management, portfolio modelling, compliance and cash management capabilities for the cash and derivative markets across multiple asset classes including bonds, commodities, equities and foreign exchange.
thinkFolio will operate as a separate business unit alongside Markit's other solutions. thinkFolio ceo and founder Andrew Walsh will join the enterprise software management team at Markit.
Job Swaps
CDS
Analytics platform adds CDS
Capital Market Exchange has enhanced its investment grade bond analytics platform to include CDS. Clients can now apply the platform's sentiment adjusted spreads to identify negative basis and pure arbitrage trades in the CDS market.
The enhancement allows teams to filter for the most attractive CDS contracts. Investment teams can customise and analyse opportunities identified by the sentiment-based analytics and in context of their own views.
Job Swaps
CLOs
Manager adds capital markets head
The Carlyle Group has appointed Boris Okuliar as head of capital markets for global market strategies, which is a newly created position. He will also serve as head of capital markets for Carlyle GMS Finance.
Okuliar was previously md and head of leveraged capital markets in London for UBS, but will be based in New York at Carlyle. He has also worked for Barclays Capital as head of high yield capital markets and syndicate and at Banc of America Securities in syndicated finance and high yield capital markets.
Job Swaps
CLOs
Manager adds former Citi chief
Napier Park Global Capital has named John Havens as non-executive chairman and partner. He was most recently president and coo at Citigroup. Havens has also worked at Morgan Stanley for almost two decades and began his career as a trader at Kidder Peabody.
Job Swaps
CMBS
REIT vet joins CRE advisory
Situs has grown its West Coast team with the appointment of Eric Smith as business development leader. He will be based in San Francisco and report to Kenneth Segal and Eric Lindner.
Smith also currently serves as an independent director at KBS Strategic Opportunity REIT. He has 25 years of experience in the industry, having previously worked at Loan Value Group, Credit Suisse and First Boston, covering both RMBS and CMBS.
Job Swaps
CMBS
Law firm promotes real estate pair
Danielle Schechner has been elected to partner in the real estate group of Pryor Cashman, while Benjamin Teig has been named as of counsel. Both are based in New York.
Schechner has been at the firm since 2006. She has also worked at Millennium Inorganic Chemicals and Fried Frank.
Teig focuses on commercial real estate and was previously a real estate associate at the firm. Before that he worked for Warshaw Burstein.
News Round-up
ABS
Card performance hits 'historic' levels
Fitch reports that most of its prime credit card ABS indices touched historic levels in 2013. The Fitch Prime 60+ Day Delinquency and Charge-off Indices may be approaching their troughs, however.
Fitch's Prime 60+ Day Delinquency Index increased by 2bp in December to 1.27%, albeit 60+ day delinquencies remain relatively low compared to one year ago when they were 1.73%. Meanwhile, Fitch's Prime Credit Card Charge-off Index increased by 3bp to reach 3.01%. Charge-offs have declined by 24.37% year-on-year and now stand 74% below their historical high of 11.52%, reached in September 2009.
Fitch's Prime Credit Card Gross Yield Index declined by 4bp to 18.17% for the November collection period. The agency notes that the number is in-line with its 2013 average of 18.23% and not far off the historical average of 18.52%.
Three-month average excess spread has reached an all-time high of 12.97%, likely driven by the decline in charge-offs, as well as reduced interest expense. Fitch's Prime Credit Card Monthly Payment Rate Index also declined month-on-month, falling to 24.49% from last month's historic high of 26.55%. However, MPR has remained up by 9.97% YOY and is over 35% higher than levels reached during the financial crisis.
Fitch's Retail Credit Card 60+ Day Delinquency Index increased for the sixth straight month to 2.73%, a 2.25% increase MOM. A steady increase in late-stage delinquencies caused a rise in losses, according to the agency.
Fitch's Retail Credit Card Charge-off Index increased to 6.65%, compared to 6.24% the previous month, but remains nearly 1% lower YOY and 50% lower than its peak reached in March 2010. Fitch's Retail Credit Card Gross Yield Index increased by 72bp to 27.86%, representing a 5% increase YOY, while the Retail MPR Index decreased by almost 1% to 15.46% - a decline of 1.5% YOY.
News Round-up
ABS
RFC issued on life settlement criteria
AM Best has requested comments on its draft life settlement securitisation criteria report. The report reflects changes and refinements the agency made to an earlier draft, released in September, after receiving comments and having discussions with market participants.
The changes and refinements to the initial draft criteria report include: an assumption that the excess mortality ratings produced by medical underwriters or implied by the life expectancies issued by such underwriters begin to wear off after the seventh duration or earlier, depending on the age of the insured; and an assumption that by attained age 95, excess mortality is completely worn off. The changes and refinements were extensive enough to warrant a reissuance of a new draft criteria report, AM Best says.
Comments on the draft should be submitted no later than 10 February.
News Round-up
ABS
Auto recoveries set to fall
Average recoveries on defaulted auto loans in both prime and non-prime ABS pools will fall over the next 12 months and start to stabilise at the beginning of 2015, according to Moody's. Based on an analysis of Manheim Index data, the agency expects recoveries on defaulted auto loan ABS to decline to 50%-60% in the prime segment and to 40%-50% in the non-prime segment
"As the supply of used vehicles on the market grows, used car prices are going to soften," says Aron Bergman, a Moody's avp. "And the softening is going to trigger declines in recoveries in both prime and non-prime pools, even though they'll remain high by historical norms."
Recoveries have averaged 68% since the beginning of 2011 and 65% over the past 12 months for prime, and 50% since 2011 for non-prime. After 2014, recoveries should stabilise at around 55% for prime loans and 42% for non-prime.
In addition, the recoveries of captive finance originators in the prime segment are likely to be slightly higher on average than those of non-captives, owing to the captives' ability to offer very low or even zero percent APR, which leads to faster pay-down of a loan each month. Still, recoveries in both prime captive pools and non-captive pools will likely fall back to their historical averages in the coming months.
In light of the increasingly important role of recoveries in projecting the performance of auto ABS, Moody's has developed a new interactive graphing tool, which compares data from the Manheim Index that highlights these trends. The new graphing feature consolidates recovery performance data from securitisations the agency has rated since 2000 into its existing Auto Loan ABS - Sector Summary report. The tool allows users to view recoveries by segment or type of originator (whether prime, non-prime or all) and in the prime sector, whether US or foreign captive, or non-captive.
News Round-up
ABS
French consumer lending change 'negative'
French consumer lenders are now offering credit to borrowers on temporary employment contracts who were not previously eligible for loans. This loosening of underwriting criteria is credit negative, says Moody's, because it allows personal loans to be granted to borrowers who carry a higher risk of credit default.
However, lenders are adding conservative terms and conditions to the loans, which will limit the negative effects on the performance of French consumer loan-backed securitisations. The move to expand credit to borrowers on temporary work contracts also remains a limited phenomenon at this time, further limiting the impact on French ABS.
News Round-up
ABS
ABCP to feel regulatory squeeze
Global ABCP credit quality should be stable in 2014, says Moody's. Regulatory uncertainty remains a challenge on both sides of the Atlantic, with European sponsoring banks feeling the squeeze first.
The credit quality of US ABCP should remain stable this year. Bank credit quality has improved and the continued economic and financial recovery is expected to support steady asset performance.
Canadian ABCP programmes also exhibit strong credit quality. The rating agency expects the credit quality of new transactions to be the same as existing transactions and notes performance remains strong and stable for all the asset types in Canada.
The credit quality of ABCP issued by EMEA conduits will be linked primarily to the credit quality of the sponsoring banks, which will be largely stable in 2014. However, Moody's does retain negative outlooks for key jurisdictions such as France.
Although the US market has been so far unaffected by regulation, Moody's believes the cumulative effect of regulatory change will increase the cost of using ABCP as a funding mechanism, resulting in a drop in total outstandings. European sponsoring banks will also be greatly impacted over the next few years, with Basel 3 increasing the costs of supporting or operating an ABCP programme, largely as a result of new liquidity and funding requirements.
News Round-up
ABS
Green bond principles supported
A consortium of investment banks has announced their support for a set of green bond principles developed to serve as voluntary guidelines on the recommended process for the development and issuance of green bonds. The principles encourage transparency, disclosure and integrity in the development of the green bond market, which will use both direct project exposure and securitisation.
A green securitised bond would be collateralised by one or more specific projects, including ABS, covered bonds and other structures. This would include ABS of rooftop solar PV assets, for instance.
The consortium includes Bank of America Merrill Lynch, BNP Paribas, Citi, Crédit Agricole, Daiwa, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Mizuho Securities, Morgan Stanley, Rabobank and SEB. The principles are designed to provide issuers with guidance on the key components involved in launching a Green Bond, to aid investors by ensuring the availability of information necessary to evaluate the environmental impact of their green bond investments and to assist underwriters by moving the market towards standard disclosures which facilitate transactions.
The four banks which served as a drafting committee for the principles - BAML, Citi, Crédit Agricole and JPMorgan - will propose in 2014 a governance process that will allow for diverse stakeholder input into the green bond principles. It is anticipated that an independent third party will be designated to serve as a secretariat whose administrative duties will include facilitating information exchange with issuers, investors, underwriters and other stakeholders.
Meanwhile, the European Investment Bank has issued the first European green bond deal of the year, a €350m tap of the Climate Awareness Bond due 15 November 2019. The total size after the increase is a record €1.5bn, which makes it the largest climate-themed bond outstanding in any currency.
News Round-up
ABS
Punch restructuring proposal published
Punch has released the full terms of its restructuring proposal, which represents the culmination of 14 months of stakeholder engagement. The restructuring is conditional upon the approval of the Punch A and Punch B securitisation noteholders, as well as certain other securitisation creditors. Consent solicitation documents relating to each securitisation and a notice of noteholder meetings to be held on 14 February have also been made available.
The restructuring proposals are final. Punch says that failure to effect a restructuring is expected to lead to default in the near-term, at which point securitisation cash resources (used to facilitate the restructuring) are expected to be severely depleted with the mandatory prepayment of £188m of available cash to class A notes at par and loss of the £52m group cash contribution.
The proposed terms of the restructuring reflect a number of changes to the proposals announced last month, as requested by stakeholders. These include: fixed or target amortisation schedules for all senior notes; modified Spens protection on all senior notes for any prepayments ahead of the amortisation schedules; increased PIK coupons on junior notes; and senior noteholder appointed independent observers to the boards of the borrower companies in each securitisation.
News Round-up
ABS
Master ABS structures examined
French auto originators have over the past 12 months made increasing use of master ABS structures, which provide for the possibility of additional note issuances out of an existing structure. Moody's notes in its latest Credit Insight publication that the use of such structures has credit positives and negatives for French ABS transactions because while these structures provide some protective features for noteholders, they also introduce additional sources of uncertainty, such as potentially large and rapid changes in asset portfolio composition.
Moreover, the cost of future note issuance is not known at closing, which makes the benefits of excess spread harder to predict. While structural mitigants serve to reduce noteholders' exposure to credit risk, there remains uncertainty in relation to the timing of repayments.
Master structures provide for multiple note issuances, up to a maximum programme amount, which may result in large increases in portfolio size compared to closing. In addition, there exists more flexibility for asset retransfer and therefore rapid reductions in portfolio size. Consequently, there is less certainty about the future risk characteristics of the portfolio compared to standard revolving transactions, Moody's says.
Master structures may partially mitigate this increased uncertainty by way of conditions precedent to additional asset purchases or note issuance, dynamic enhancement level mechanisms, the random selection of retransferred assets, global portfolio limits and eligibility criteria. Similarly, to reduce uncertainty regarding excess spread, transaction documentation has various conditions precedent to note issuance, including upper limits on the future note coupon. In addition, the transaction may place certain requirements on the hedge arrangements of future floating rate issuances.
Although many notes issued out of master structures have target bullet maturity dates, structural features intended to minimise noteholders' risk of loss may lead to the notes being redeemed before or after the expected maturity. Moody's notes that the concept of mandatory partial redemption results in partial early repayment if the amount of cash in a transaction has increased above a specified level. This feature is credit positive as it minimises the possibility of negative carry due to an accumulation of cash.
In most cases, the note will be redeemed at its expected maturity only if refinanced by additional issuances. The consequences of such failure to redeem may differ across transactions, resulting in either an early amortisation of the entire structure or just a prioritisation of future cashflows to the note that has passed its expected maturity. In either case, features allowing for the repayment of notes after the expected maturity are a benefit to noteholders as they serve to lessen the possibility of loss in the event of a failure to refinance the notes at that date.
News Round-up
Structured Finance
Basel 3 agenda creeps forward
The Basel Committee's oversight body, the Group of Governors and Heads of Supervision (GHOS), has endorsed a number of important steps in the completion of the Basel 3 agenda. Although the move entails a dilution of some of the proposed rules, the debate on appropriate capital levels on a risk-weighted and a non-risk based approach is expected to continue.
First, the GHOS endorsed proposals on a common definition of the leverage ratio, which has been formulated to overcome differences in national accounting frameworks that have previously prevented ready comparison of bank leverage ratios across borders. The final calibration, and any further adjustments to the definition, will be completed by 2017, with a view to migrating to a Pillar 1 (minimum capital requirement) treatment on 1 January 2018.
According to a SFIG memo, technical modifications to the leverage ratio include the use of the same credit conversion factors that are used in the standardised approach for credit risk under the risk-based requirements, subject to a floor of 10%, to convert an off-balance sheet exposure to an on-balance sheet equivalent. Additionally, cash variation margin associated with derivative exposures may be used to reduce the leverage ratio's exposure measure, provided specific conditions are met.
To avoid double-counting of exposures, a clearing member's trade exposures to qualifying central counterparties (QCCPs) associated with client-cleared derivatives transactions may also be excluded when the clearing member does not guarantee the performance of a QCCP to its clients. For written credit derivatives, the effective notional amounts included in the exposure measure may be capped at the level of the maximum potential loss, with some broadening of eligible offsetting hedges likely.
Fitch suggests that the diluted rules are likely to ease capital pressure for global trading banks. The changes reduce the assets included in the calculation and make it easier for banks to meet leverage ratio requirements, depending on the final rules adopted by national regulators.
Nevertheless, on- and off-balance sheet exposures are expected to reduce as trading banks make progress in meeting leverage ratio requirements, particularly for European institutions. Fitch anticipates global trading banks' balance sheets to continue to shift and where and how business is booked to continue to evolve as final rules emerge and banks optimise their capital and liquidity.
The revisions allowing some netting appear to be a compromise between US GAAP and IFRS, the agency adds. But the extent to which the US will adopt the Basel definitions when it finalises its supplementary leverage ratio remains unknown.
The US supplementary leverage ratio requirement will be double the Basel minimum at 6% for systemically important bank subsidiaries (5% at consolidated holding company level). If the Basel 3 leverage ratio definitions are not applied consistently across banks globally, this could undermine the comparability and usefulness of this ratio, according to the Fitch.
Meanwhile, the GHOS also endorsed proposed changes to the net stable funding ratio (NSFR), on which the Basel Committee will shortly commence consultation. The main revisions to the NSFR seek to reduce cliff effects within the measurement of funding stability, improve its alignment with the liquidity coverage ratio (LCR) and alter its calibration to focus greater attention on short-term potentially volatile funding sources. Finalising the NSFR has been designated as a priority for the Basel Committee during 2014 and a consultative document will be released shortly.
Additionally, the Committee has been asked to undertake further work in three areas related to the LCR: disclosure requirements; the use of market-based indicators of liquidity to supplement existing measures; and the interaction between the LCR and the provision of central bank facilities. In relation to disclosure, the GHOS has endorsed Basel Committee proposals regarding minimum requirements for liquidity-related disclosures. It also endorsed the Committee's intention to publish further guidance on how national authorities can utilise market-based indicators of liquidity within their own frameworks for assessing whether assets qualify as high quality liquid assets (HQLA) under the LCR.
The Committee has reached the view, which the GHOS endorses, that committed liquidity facilities of a type already recognised for jurisdictions with insufficient HQLA could have a role to play within the LCR. The inclusion of these facilities, which may be provided at the discretion of monetary authorities, would however be subject to a number of constraints. Revisions to the LCR will be released shortly to give effect to this change.
Finally, the GHOS reviewed and endorsed the Committee's strategic priorities for the next two years. Apart from completing the crisis-related policy reform agenda as a matter of priority, the Committee will focus on three other broad themes: continuing to deepen its programme of monitoring and assessing the implementation of the agreed reforms; further examining the regulatory framework's balance between simplicity, comparability and risk sensitivity; and improving effectiveness of supervision. All of these will involve significant work during 2014 and 2015.
News Round-up
Structured Finance
China risk retention update 'credit positive'
The People's Bank of China and the China Banking Regulatory Commission last month jointly updated the 5% risk retention rule on Chinese securitisations. The update expands the types of notes that are part of a securitised transaction that originators must retain beyond just the equity tranches to include potentially 5% or more of all tranches, according to Moody's latest Credit Outlook publication.
Under the new rule, originators must retain: at least 5% of an entire ABS issuance; at least 5% of the issued equity tranche of the ABS notes; and part of every non-equity tranche, if they hold any non-equity tranche. In addition, the ratios of all non-equity tranches retained by originators should be the same as the ratios of all the issued non-equity tranches. The risk retention period should be at least the legal final maturity of the notes
The agency says that the measure is credit positive for securitisations in China because it allows for better alignment of interest between originators and investors of various debt tranches than under the previous rule, which focused on equity tranches only. Transactions in which the originator retains a portion of all the issued tranches offer better interest alignment among all debt tranche investors, who face more tail risk, than transactions in which the originator retains the equity tranche. The latter transactions have a stronger interest alignment with the equity tranche investors only.
However, among all debt tranche investors, investors holding the thickest tranche will enjoy the strongest interest alignment protection because the originator will look after its largest holding, which is the largest tranche in the structure. The updated rules require the originator to have a proportionate holding of the non-equity tranches in case they hold any non-equity tranche.
Under the updated rules, originators will have a stronger incentive to consistently monitor securitisation programmes and avoid selecting excessively risky assets for pools - something that could occur if they only hold a portion or all of the equity tranches. If originators hold the equity tranche only, originators are likely to have a higher risk appetite in the underlying asset pool because they can boost the equity yield by taking on excessive risk in the asset pool.
Moreover, originators will have more incentive to better service the securitisations to reduce the losses they could suffer from the retained tranches, Moody's notes.
News Round-up
Structured Finance
Italian SME review released
Fitch has published its latest SME market review, focusing on the Italian SME securitisation sector. The majority (99.9%) of enterprises active in the Italian economy are SMEs, accounting for 81% of the workforce. Yet SMEs in the country face an unfavourable business environment: the 2013 World Bank Doing Business survey ranked Italy 30 out 31 OECD countries in the ease of doing business, with Italy faring particularly poorly in the areas of contract enforcement, tax payments and getting credit.
The review notes that in July 2013 the yearly annual negative growth rate of bank loans to Italian non-financial companies (NFCs) reached a record low for the second consecutive month of 4.1%, compared to a less harsh contraction of 1.1% relating to bank loans granted to households. The spread charged by lending banks to their SME borrowers has reached record high levels of around 4%, which mainly reflects the increase of financing costs faced by Italian banks.
As of July 2013, the stock of gross bad loans as a percentage of the overall balance of outstanding loans is equal to 11.3% for NFCs, compared to 6% for consumer households. The count-based new bad loan ratio is highest for NFCs and stands at 3.2%, while the corresponding amount-based figure is 4.5%. Such a high level has not been seen since the historical peak recorded in the early 1990s, when Italy experienced a severe economic downturn.
With Italy's debt equal to 127% of GDP in 2012, the government has had limited room to manoeuvre for releasing its austerity policies undertaken since the eurozone sovereign debt crisis began. Nevertheless some measures to support the Italian economy have been implemented, including: a moratorium scheme for SME's amortising loans and lease financing contracts; changes in the regulation; increased endowment of the Central Guarantee Fund, which resulted in an unprecedented growth of its operations; and changes to the regulations of Cassa Depositi e Prestiti, which is now allowed to use postal savings to fund medium- to long-term loans to banks that in turn on-lend the proceeds to Italian SMEs.
News Round-up
Structured Finance
FINRA urged to revisit TRACE proposal
SIFMA has submitted a comment letter to the SEC on FINRA's proposed rule change relating to TRACE reporting and dissemination of transactions in additional ABS (SCI 5 November 2013). The association requests that FINRA not implement this proposal and instead engage in further discussion with the industry as to how best to preserve ABS market liquidity and re-propose this proposal after such discussions.
While SIFMA members agree that there may be benefits to price discovery as a result of dissemination of ABS trade information, the association also says it is concerned that negative impacts of price dissemination that have extended to the high-yield bond market and more recently the TBA and specified pool market will extend to the proposed classes of ABS as defined in the proposal.
"Both our buy- and sell-side members have consistently noted impairment of liquidity in the TBA MBS markets since dissemination was introduced in 2012 and we have raised these concerns to FINRA staff. To summarise the concerns, members believe the implementation of dissemination of trade information for TBAs has contributed to an overall decrease in liquidity in this market, due in large part to a decrease in the willingness of market makers to take on risk," the association explains.
Market makers are less willing to take on large trades from their buy-side counterparties when the identity of their position becomes immediately known, SIFMA says. The association suggests that the benefits of improvements to price discovery in the MBS specified pool and high yield corporate markets have been far outweighed by the cost of decreased liquidity, and urges FINRA to revise the dissemination paradigm it has created.
In particular, SIFMA believes that further consideration of market dynamics is needed before the proposal is implemented. "We do not see a net benefit to any of investors, market makers or issuers if diminished liquidity is the outcome of TRACE dissemination."
The association says its members are generally in agreement with the proposed re-definition of ABS that includes securities backed by consumer or student loans, a lease or a secured or unsecured receivable. However, the inclusion of CDOs, CLOs and non-agency CMBS is "pressing the revised definition of ABS beyond what is appropriate".
The comment letter highlights that CDOs and CLOs share more similarities with RMBS than ABS and so should be treated differently. Similarly, non-agency CMBS are far more similar to agency CMBS than other ABS asset classes and so should be grouped with agency CMBS.
The letter goes on to say that unlike the consumer ABS with which they are currently grouped, credit analysis on non-agency CMBS, CLOs and CDOs requires extensive analysis and an in-depth study of the real estate or other assets collateralising the securities to formulate an opinion on the value of the tranche. "Dealers and investors generally must perform intensive credit work on the assets that back the securities to formulate opinions of value," it explains. "Opinions on the assets often vary, in many cases by multiple points. If prices were disseminated to the market on these securities without appropriate consideration, it would likely be the case that inexperienced investors could use the trade print in one junior bond as a proxy for a nominally similar piece of paper. However, the reality is that each deal and its assets are very unique and require a separate analysis."
Additionally, SIFMA points out that TRACE prices may not always reflect the fundamental credit risk of a security, but may instead be influenced by technical factors. The association requests that FINRA revise the definition of ABS to exclude non-agency CMBS, CDOs and CLOs, and include them in the proposal for the dissemination of RMBS, agency CMBS and other mortgage products after further discussion with industry participants.
News Round-up
Structured Finance
Underperformance for directional strategies
Hedge funds gained an average of 1.2% in December and ended 2013 returning 9.2%, according to eVestment figures. In comparison, 2012 and 2011 returned 7.4% and -3.1% respectively.
However, last year credit strategies posted their third lowest annual return (6.26%) since 1998, besting only 2011 (2.3%) and 2008 (-8.7%). "Performance was dragged down by directional credit strategies underperforming in the second half of the year," eVestment observes. "However, within the universe, there were a few segments that provided solid returns."
MBS-focused strategies lagged their 2012 performance, but still rose by double-digits in 2013. Funds investing broadly across securitised credit markets were up by over 12% and those targeting distressed securitised credits gained over 15%.
News Round-up
CDO
Trups CDOs get Volcker reprieve
The US Fed, the FDIC, the OCC, the CFTC and the SEC have approved an interim final rule to permit banking entities to retain interests in certain Trups CDOs under the Volcker rule. The move comes after the American Bankers Association agreed to delay advancing a lawsuit on the issue until 17 January (SCI 2 January).
Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if: the Trups CDO was established and the interest issued before 19 May 2010; the banking entity reasonably believes that the offering proceeds received by the Trups CDO were invested primarily in qualifying Trups collateral; and the banking entity's interest in the Trups CDO was acquired on or before 10 December 2013.
The banking agencies have also released a non-exclusive list of issuers that meet the requirements of the interim final rule. Qualifying Trups collateral is defined as any trust preferred security or subordinated debt instrument that was: issued prior to 19 May 2010 by a depository institution holding company that, as of the end of any reporting period within 12 months immediately preceding the issuance of such an instrument, had total consolidated assets of less than US$15bn; or issued prior to 19 May 2010 by a mutual holding company.
The interim final rule also provides clarification that the relief relating to these Trups CDOs extends to activities of the banking entity as a sponsor or trustee for these securitisations and that banking entities may continue to act as market makers in Trups CDOs.
News Round-up
CMBS
Collaborative bid-list platform launched
Trepp has launched a collaborative workflow solution to provide bid-list management, analysis and colour tracking for traders and other market participants. The offering is dubbed TreppTrade and is designed to help workgroups spend less time collecting data so they can focus on other tasks.
TreppTrade features robust bond screening, team-oriented workspaces and powerful yield tables. The solution is designed to enable teams to price bonds, access data and monitor news and colour all on a collaborative platform.
News Round-up
CMBS
CRE prices continue to rebound
Central business district office properties in major markets have performed the best of the office segments in the Moody's/RCA Commercial Property Price Indices since the January 2010 trough, increasing around 97%. Major market prices have recovered nearly all of their peak-to-trough loss, while non-major markets have recovered more than half of their loss.
Growth in office prices in Manhattan has been almost double the national average. Larger suburban property price recovery has outpaced smaller properties in both major and non-major markets.
Prices for apartment properties increased 0.6% in November, while core commercial was flat. The former accounts for about 28% of the national all-property composite index while the latter accounts for around 72%, so the overall increase in the CPPI in November was 0.1%.
Retail performed the best of the core commercial properties; it was up 4.5% over the last three-month period and up 22.9% over the last 12-month period. Industrial property performance lagged and prices over the last 12 months were up just 5.8%.
News Round-up
CMBS
Japanese CMBS defaults surveyed
From 2Q08 to end-September 2013, 147 loans backing Japanese CMBS transactions rated by S&P defaulted. The agency surveyed loan- and property-level data for these loans and found that the recovery process for 138 of them was completed by the end of the period, leaving only nine outstanding defaulted loans.
The simple average recovery rate of the 134 loans with completed collections, as of June 2013, declined slightly to about 87% from 90% as of June 2012. Of these 134 loans, 65 loans incurred principal losses, while the remaining 69 loans were fully recovered.
The proportion of CMBS loans incurring principal losses has been increasing and S&P expects this trend to persist. This is because servicers tend to prioritise collection for loans that they deem fully recoverable through the liquidation of the collateral properties, and collections for most of such loans were completed at early stages. Meanwhile, collections for those loans deemed unrecoverable were completed relatively late or the loans are still outstanding.
The simple average sales price-to-underwriting value ratio for the 626 properties with available sales prices as of June 2013 declined slightly to 63% from 65.5% as of June 2012, according to the survey. By property type, the same ratio for retail properties was 53.4% and that for hotels was 51.9% - both far lower than the same ratio for all 626 properties.
Meanwhile, apartments for lease represented the only property type with a simple average sales price-to-initial underwriting value ratio that, at 66.7%, exceeded the same ratio for all properties. By location, the same ratio for properties in Tokyo (68.2%) was higher than that for properties outside Tokyo (60.5%), indicating that the declines in market values for properties in Tokyo were smaller than the declines for those outside of the city.
News Round-up
CMBS
CMBS pay-offs dip
The percentage of US CMBS loans paying off on their balloon date hit 76.5% in December, a modest decline from the November rate of 81.3%, according to Trepp. Last month's pay-off percentage is well above the 12-month moving average of 67.9%, however.
By loan count as opposed to balance, 74.6% of loans paid off in December, also a slight decline from November's 79.6% rate. The 12-month rolling average on this basis is now 69%.
Trepp notes that the December percentage is consistent with the trend of relatively higher pay-off rates in 2013 compared to 2012. In 2012, many of the maturing loans were five-year balloons from the 2007 vintage. Most loans that are reaching their maturity now are 10-year balloons that were originated around 2003.
News Round-up
CMBS
CMBS resolutions to continue apace
The US CMBS delinquency rate could fall by another two percentage points to below 4% by year-end, should the pace of resolutions continue and new issuance remain strong, according to Fitch. Delinquencies improved by roughly two percentage points in 2013, having started the year at 8% and expected to close it out at just under 6%.
A continuation of the pace seen last year assumes that new issuance keeps pace with portfolio run-off, holding the denominator roughly fixed (as it did in 2013). Further, Fitch assumes that resolutions for loans less than US$100m would remain at their 2013 pace, while resolution timing for loans greater than US$100m are considered on a case-by-case basis.
The expected 4% mark also assumes that the US$3bn Peter Cooper Village/Stuyvesant Town loan will not be resolved this year. The servicer is expected to market the asset in mid-2014 and Fitch believes that - due to the size of the asset - a sale may not occur until 2015. If a 2014 resolution did occur, the delinquency rate could fall to below 3.5% by year-end.
Several key factors will likely contribute to a 2014 drop in delinquencies. Notably, the CWCapital bulk asset sales could send the delinquency rate roughly 50bp lower within the next couple of months. In addition, the inventory of real estate owned (REO) assets has grown to over 50% of all delinquent loans tracked by Fitch. As these assets are sold off, the late-pay rate will decline sharply.
Finally, the volume of Fitch-rated loans maturing in 2014 will be relatively small (at under US$20bn), consisting mostly of loans originated in 2004 and 2005 with coupons over 5.5%. This should result in only a modest amount of new maturity defaults (though the approximately US$3.3bn in Fitch-rated seven-year loans originated in 2007 will be monitored closely).
By property type, hotels could potentially see the largest drop in delinquencies in 2014. Relative to the size of its universe, hotels have a disproportionately large share of REO assets over US$100m. Most of those assets are expected to be sold in 2014 and could send the hotel late-pay rate down by almost four percentage points to around 3% by year-end.
Delinquency rates for the other major property types are expected to fall by around two percentage points each. However, multifamily stands to see a nearly 5.5 percentage point drop, should the Peter Cooper Village/Stuyvesant Town loan be resolved in 2014, which could send the multifamily late-pay rate to below 1.5%.
News Round-up
CMBS
CMBS losses projected
S&P has published its expected loss projections for the North American conduit-fusion CMBS transactions that it rates. The report addresses losses by transaction, vintage, property type and MSA.
"Our estimates of projected losses focus on our observed performance of CMBS transactions over time," notes S&P credit analyst Barbara Hoeltz. "They incorporate up-to-date performance information provided by the master and special servicers and our most recent analysis of the individual transactions. In addition, the projections reflect our view of the migration of delinquent loans and our current expectation for realized losses."
Based on the results of the study, the agency expects the 2006, 2007 and 2008 vintages to experience the highest total transaction projected losses - exceeding 10% - with the 2005 vintage not far behind at just over 6%. Lodging is likely to have the highest total transaction projected loss at 11.9%, as the segment continues to have higher loan loss severity rates than the other four major property types. The metropolitan statistical areas (MSAs) that are designated as secondary markets will have higher near-term and total transaction projected losses than primary and even tertiary markets.
News Round-up
CMBS
Insurer CRE participation polled
Preliminary results for the CREFC/Trepp Portfolio Lender Survey of commercial mortgage investment performance within the insurance company sector have been released. The survey was used to gather previously unavailable industry data for use in assessing investment performance and general benchmarking purposes.
The results indicate the continuation of the superior investment performance achieved by US insurance companies through allocations to commercial mortgages.
The average commercial mortgage holdings of companies participating in the survey was 11.06% of total invested assets, ranging from a high of 17.28% to a low of 4.21%. This is approximately a 60bp increase when compared to mortgage holdings reported as of year-end 2012.
Total realised net losses in the general accounts and subsidiary entities of the participating companies were recorded at 0.05%, as of 2Q13. When compared to the losses reported in 2012, these losses were almost at the same level of the mid-year 2012 realised net losses of 0.04% but much lower than the year-end 2012 figures, which were at 0.17%.
Total loan delinquencies (30 days or greater) recorded by participating companies within their general account holdings and subsidiary entities averaged 0.22% in 2Q13. This is down by 0.22% from year-end 2012.
Reported problem loans remained at 0.17% in the current cycle. This is the same level that was reported in 2012.
Insurance companies are using a wide range of options to deal with troubled assets, including foreclosures, note sales and discounted pay-offs. For the realised losses that were recorded, 41.97% were generated from write-downs, 30.9% from distressed note sales, 19.84% from discounted pay-offs and 7.20% from foreclosure.
Both non-distressed sales and restructurings only accounted for 0.09% of the total realised losses. Realised losses arising from distressed note sales rose significantly by 10.62%, while realised losses from the 'write-downs and other' category decreased by about 8.57% when compared to losses recorded as of year-end 2012.
Over the last couple of years, there have been sustained improvements in the average reported portfolio loan-to-values and debt service coverage ratio. The average commercial mortgage LTV held within participating company portfolios is 57.3% at end-2Q13. Approximately 1.93% of loan exposure for all companies is above a 100% loan-to-value.
The average DSCR within portfolios is 1.94 times. About 94.1% of all exposure held was above a 1.0 times debt service coverage ratio. In comparison with year-end 2012, the average portfolio LTV is down by 0.9% and DSCR is up by 4bp.
The average liquidity of near-term maturities held by insurance companies also appears strong, with an average reported debt yield of 14.80% for loans maturing in the next 12 months.
Insurance companies, representing nearly half of the industry's total mortgage exposure with US$161bn in combined commercial mortgage assets, took part in the survey. Participating companies contributed mid-year data for Q1-Q2 2013, covering both their general account and any subsidiaries.
News Round-up
CMBS
CRE expectations surveyed
US commercial property finance professionals are increasingly focused on how high and how quickly interest rates will rise, as well as how commercial and multifamily loan underwriters will react, according to the inaugural CRE Finance Council 2014 Outlook Survey.
"Commercial real estate finance industry participants are watching for market reaction as the Fed begins its tapering programme of government bond purchases. The consensus among CREFC members is that interest rates will move modestly higher in 2014," comments CREFC president and ceo Stephen Renna.
He adds: "As long as the rate increase is gradual and correlates to growth in the economy, the market should be able to absorb it. It's the sudden rate increases resulting from capital market dislocation - such as a debt ceiling crisis - that are most problematic."
The majority of CREFC members believe that cap rates will rise by at least 20bp-30bp over the next year as interest rates rise and dampen commercial real estate sales prices. A rise in interest rates is expected to result in the tightening of loan underwriting standards in 2014.
CREFC members believe that the multifamily sector will see the largest percentage increase in conduit lending in 2014. Meanwhile, an increase in the volume of interest-only loans represents the "most concerning trend" in new CMBS issuances, according to the survey.
Finally, the multifamily, office and hotel sectors should experience the largest increase in rental-rate growth nationally this year. The office sector will lead the market in returns, following on expected declines in office property vacancies nationally.
News Round-up
CMBS
Special servicer rankings released
DBRS suggests that there is now enough data and performance history to control for the important differences across US CMBS special servicing portfolios. As such, the agency has put together a quantitative ranking of special servicer performance.
Torchlight Investors comes top in the rankings, followed by ORIX Capital Markets, Midland Loan Services, Wells Fargo Bank and Situs Holdings. The results are based on legacy loan work-out results, with particular attention paid to recovery given loss, frequency of loss, cashflow reporting, liquidation time and age of portfolio. The ranking is controlled for differences across special servicing portfolios of vintage, loan size, property type and DBRS' market rank.
Based on the study, it is clear that some servicers prefer longer work-outs, while others are more direct and expedient in their approach. Both types of strategies are justified under different circumstances and for different portfolios.
The findings imply that prolonged work-out strategies are costly and afford little added value. At the same time, however, quick dispositions (for example, note sales) have historically provided the worst recovery rates.
Quick modifications seem to be very effective, but may only be an option under the best scenarios and may also leave the special servicer with an aging portfolio that masks its ultimate performance. The very best servicers are able to work out loans quickly with high recoveries.
On an absolute basis the amount of fees charged by special servicers are relatively low. Torchlight Investors is at the high end of the spectrum, charging CMBS trusts approximately three times as much in fees as ORIX Capital Markets, which is at the low end.
DBRS notes that the ultimate performance of legacy CMBS will in large part be determined by the market conditions after 2015, when the majority of scheduled loan maturities occur. The agency adds that reporting is the most straightforward way to improve the rankings: cashflow that is captured by the special servicer during the work-out period is not only highly correlated with value recovery, but also indicative of the level of liquidation expenses that the work-out will incur. As such, special servicers that report cashflows during the liquidation period and those that can work with master servicers to have those cashflows show up in the Commercial Real Estate Finance Council Investor Reporting Package provide a valuable level of transparency.
As of 4Q13, 13,451 legacy CMBS loans (representing US$240bn) have at one time been specially serviced. Of these, 9,432 have been fully resolved and have paid out of their respective trusts. 3,829 loans remain outstanding, 3,259 of which are presently specially serviced, while 570 have been returned to the master servicer.
News Round-up
Insurance-linked securities
AlphaCat sidecar formed
Validus Holdings has joined with other investors in capitalising its AlphaCat 2014 collateralised sidecar, which fully deployed its capital for the 1 January 2014 renewal season. The vehicle was funded with US$160m of equity capital, with third-party investors contributing US$138m and the balance provided by Validus. AlphaCat Managers will underwrite business for AlphaCat 2014, for which it will be paid a commission for originating the business and a profit commission based on the vehicle's underwriting results.
News Round-up
Risk Management
Clearing set to see more efficiency
Increased efficiency in the clearing of swap trades and increased clearing costs for swap investors will be two key trends to watch in the global derivatives markets in 2014, according to a new Greenwich Associates report. Entitled 'The Top 10 Market Structure Trends to Watch for 2014', the report identifies major changes coming in the year ahead, including the coming of age of swap execution facilities (SEFs) and progress in European regulatory reform.
As part of learning how to clear more efficiently, the market is expected to see a push towards margin optimisation. "The infrastructure will finally come up to speed with the opportunities presented by the clearinghouses and customers will begin to realise how expensive clearing is compared to the old bilateral world, driving an adoption of margin best practices," the report explains. "Clearing workflow issues will smooth out significantly. The block trade workflow, credit hub usage and sponsored access approach will all move towards business-as-usual status."
Once an institutional investor has legal documents and pipes in place with a clearing member or two, the likelihood of switching due to costs and operational complexities is small, according to Greenwich Associates. Most swap clearing members have been under-pricing their offerings to gain market share since inception, but the report suggests that this is about to end. Charges for capital usage, overnight funding and position maintenance are expected to start showing up on clearing statements, increasing swap clearing costs in 2014.
News Round-up
Risk Management
Data reconciliation tool offered
Traiana has launched a new service that reconciles client reference data from disparate sources provided by CCPs, SEFs, futures commission merchants (FCMs), buy-side firms and swap data repositories. Using technology provided by Duco, the offering aims to ensure that clients are not prevented from trading by clerical errors or mismatches in static data regarding accounts, limits or SEF trading identifiers. The service is currently being rolled out to all Harmony CreditLink and CCP Connect customers for rates and CDS.
News Round-up
Risk Management
Further repo impact from tapering
Tapering and financial regulation will impact the US tri-party repo market again in 2014, says Fitch. The tri-party repo market dropped US$257bn in 2013 and all eyes are now on interest rates and how banks adjust to the Basel 3 leverage ratio.
The US tri-party repo market as a whole declined to US$1.61trn at end-2013. Agency RMBS repo fell by 28%, while Treasury repo fell 10%. The interest rate sensitivity of the collateral means agency RMBS and Treasury repos were more affected as rates started to rise in May 2013 on the expectation of tapering of quantitative easing and the interest rate environment will remain a source of uncertainty in 2014.
Tri-party volumes have also been hit by tougher financial market regulations and deleveraging in the financial sector as institutions adjust to Basel 3 rules being phased in. Regulatory constraints on banks' trading activities may reduce their repo funding needs and their repo intermediation services.
Fitch says that the Basel Committee's recognition of limited bilateral netting within the leverage ratio could ease some of the regulatory capital pressures on banks that participate actively in the repo market, but the impact on repo will depend on how the changes are implemented. Minimum leverage ratio standards have yet to be finalised by national regulators and could therefore vary across jurisdictions.
The decline last year in agency RMBS and Treasury repo was partially offset by moderate increases in structured finance, equity and corporate repo collateral. These forms of collateral increased by 18%.
News Round-up
RMBS
Risk transfer deal differs
Fannie Mae's US$750m CAS 2014-C01 transaction is broadly similar to the CAS 2013-C01 issue, but there are some notable differences. Weighted average voluntary prepayments are 41bp lower and cumulative defaults are 3bp higher than in the 2013-C01 transaction.
The M1 tranche of the new transaction has initial subordination of 165bp and the M2 tranche has 30bp of original credit enhancement. Weighted average loan balance is US$7,500 higher than last year's deal and the weighted average mortgage rate is 21bp lower.
CAS 2014-C01 also has a 3% higher concentration of loans in California than the 2013 deal. An eminent domain buyout provision was included in the transaction, reducing some esoteric risk.
Bank of America Merrill Lynch analysts calculate that the high credit quality of the portfolio means the M1 and M2 tranches will only take losses under certain stress scenarios with a 2.5% probability. The portfolio has 76% CLTV, 765 FICO and 31.5% debt-to-income.
When priced at par the analysts estimate the M1 has a risk-adjusted spread of 165bp and the M2 tranche has a risk-adjusted spread of 424bp. Early indications from the market suggest price talk on the former is at one-month Libor plus 160bp-170bp and on the latter is at plus 440bp-450bp.
News Round-up
RMBS
JPA sought to implement eminent domain
The city council of Richmond, California has adopted a resolution to seek other cities with which to form a Joint Powers Authority (JPA) that would be able to use eminent domain to acquire underwater mortgages in private label RMBS. Such a move could enable the council to sidestep existing barriers.
While the city council has failed to achieve a super-majority vote in favour of the eminent domain proposal (SCI passim), a super-majority of the JPA council would likely be sufficient to implement eminent domain, believe Barclays Capital RMBS analysts. However, it is unclear whether other cities are willing to join the JPA considering Richmond has been publically seeking partners for some time with no success.
"We continue to believe that eminent domain seizure of mortgages is unlikely and even if seen on a small scale will be contested in courts. However, should one city be able to implement such a program successfully, there is some risk that it could spread quickly," note the analysts.
News Round-up
RMBS
Statute of limitations in focus
S&P says that investor recourse may be limited with or without sunset representation and warranty provisions, following the ACE Appellate ruling (SCI 7 January). As such, to mitigate the potential impact of limited post-default remedies, the agency expects prudent investors and market participants to consider any applicable statute of limitations (SOLs) and continue to focus on upfront due diligence.
The ACE Appellate ruling affects most investors in legacy RMBS because the applicable six-year SOL for contractual claims in New York has expired on transactions with closing dates prior to 1 January 2008, which make up the majority of the outstanding non-agency market, according to S&P. The ruling could affect many pending lawsuits with similar SOL claims, as well as limit new R&W claims.
"Although the ruling is not binding on courts applying the laws of other jurisdictions, we believe it could signal the direction that other jurisdictions might take under similar circumstances, depending on the applicable SOL," the agency observes. "The ACE Appellate ruling further demonstrates that just as sunset provisions are a key consideration in our R&W analysis and could limit investor remedies, so might other limitations, such as the applicable jurisdiction's SOL."
News Round-up
RMBS
Ocwen settlement to hurt investors
S&P suggests that the potential impact of the Ocwen servicing settlement (SCI 23 December 2013) on US RMBS transactions is similar to that of JPMorgan's settlement with the Department of Justice (SCI 17 December 2013). As such, investors are expected to bear the losses that result from modifications executed under the agreement.
Ocwen last month entered into an agreement with the Consumer Financial Protection Bureau (CFPB), state authorities and the District of Columbia in which it will provide US$2bn in consumer relief to homeowners. In addition, the servicer will pay approximately US$127m into a consumer relief fund, of which about half (pursuant to indemnification and loss-sharing provisions of applicable acquisition documents) is to be funded by the former owners of certain servicing portfolios that Ocwen had acquired.
The loan modifications in the JPMorgan settlement only apply to first-lien loans, except for principal forgiveness, which can apply to second-lien loans as well. In contrast, the mods in the Ocwen agreement must consist only of principal forgiveness on first-lien loans.
In both cases, the companies must provide this consumer relief by end-2017 or pay the unmet commitment amount in cash. However, the Ocwen agreement allows for a deadline extension if there is a material change in market conditions that makes Ocwen unable to meet its commitment.
The JPMorgan settlement gives a 125% credit for loan modifications in the "hardest hit areas" as defined by the US Department of Housing and Urban Development, a 115% "early incentive" credit for loan modifications before 1 October 2014 and a 50% credit for loans in securitisations. Ocwen receives a dollar-for-dollar credit toward the US$2bn consumer relief amount for modifications made under the requirements of the agreement.
Under the Ocwen agreement, it would take US$2bn in principal forgiveness for loans in securitisations to receive US$2bn in credit. But, under the JPMorgan settlement, it would take US$4bn in principal forgiveness for loans in securitisations to reach the same US$2bn of credit.
Ocwen's consumer relief requirements also include some specific loan modification criteria not present in the JPMorgan settlement. The servicer will receive credit for every dollar forgiven that lowers the LTV ratio for a borrower below 120% and where the borrower was 30-days delinquent or at imminent risk of default, the pre-modification LTV was greater than 100%, the post-modification principal and interest payment is at least 10% lower than the pre-modification payment, the payment on an owner-occupied property translates to a debt-to-income ratio of no more than 31% and the borrower stays current for 90 days under the modified terms.
Ocwen can also receive credit through a principal forbearance programme that includes the same requirements, except that the borrower's post-modification LTV can be no greater than 95% and the modification allows for the forgiveness of the forborne principal within three years, with at least one-third of it forgiven annually if the borrower remains current.
S&P notes that, as with the JPMorgan settlement, a large increase in modifications for any particular transaction can result in an immediate increase in losses and a decrease in credit support due to principal forgiveness or forbearance. The Ocwen agreement gives no credit for interest rate reductions, but loan modifications would likely still include interest rate reductions in conjunction with principal forgiveness or forbearance. This is because these reductions would help meet the specific requirements for loan modifications under the agreement.
An increase in loan modifications could result in a decrease in delinquent loans and a corresponding increase in re-performing loans, the agency observes. Current loans could also be modified and end up as re-performing.
"Most significantly for US RMBS investors, and as is the case with the JPMorgan settlement, securitisation investors would bear the losses that result from modifications to loans in securitisations. The eventual negative or positive impact of loan modifications on any particular transaction will depend on the timing and extent of the modifications and the resulting loan performance," S&P concludes.
News Round-up
RMBS
IABF auction scheduled
Six broker-dealers have been invited to submit bids for the second IABF auction, based on the strength of their reverse inquiries (SCI 7 January). The dealers are: Bank of America Merrill Lynch, Barclays, Citi, Credit Suisse, Goldman Sachs and Morgan Stanley.
The auction will comprise US$4.27bn current face across 360 non-agency RMBS. Bids are due on 16 January and the decision to allocate will be based on the strength of the final bids.
News Round-up
RMBS
Second ESAIL restructuring on the cards
Separate meetings for all classes of Eurosail-UK 2007-6NC noteholders have been convened on 10 February to consider an extraordinary resolution to approve the sale of the remaining Lehman claims, as well as a restructuring proposal. If successfully implemented, this will be the third restructuring of a UK Lehman RMBS to resolve 'broken swap' issues (SCI passim).
The sale relates to ESAIL 2007-6NCX's remaining outstanding claim against LBSF and LBHI by way. So far, US$57.71m has been received out of the stipulated claim totalling US$145m.
The extraordinary resolution would allow the sale of the remaining claims by mandating Agfe as the auction/FX agent to solicit bids from prospective purchasers and manage an auction process, as well as agree the conversion of the sale proceeds from US dollar to sterling. The first stage restructuring proposals include: the conversion of each class of note from euro to sterling; amending the outstanding principal amount of the class B, C and D notes; increasing the margin applicable to the junior notes by 25bp; amending the priority of payments, whereby the class A2a notes will act as senior to class A3a notes; reducing the reserve fund to £1.78m; and creating a liquidity reserve fund. Distribution of the converted realised termination amounts is expected to occur before March, according to European asset-backed analysts at RBS.
Following the first stage of restructuring, the directing noteholders intend to undertake a further restructuring, which may involve amendments to the capital structure and tranching of the notes. However, this further restructuring won't to be approved by extraordinary resolutions.
News Round-up
RMBS
Dutch RMBS default drivers examined
High loan-to-foreclosure values (LTFV) will remain the key default driver in 2014 for Dutch RMBS, according to Moody's. Secondary drivers include employment type, larger loans and affordability - each of which will have a more pronounced impact on performance than in 2013.
"High LTFVs are likely to remain a key factor for Dutch loan default because these loans are generally interest-only and house prices declined substantially since mid-2008 (-18%)," says Jeroen Heijdeman, a Moody's avp-analyst.
Default rates are 1.1% for high LFTV (over 100%) benchmark loans, which is 5.7 times that of the 'lower' LTFV benchmark loans (below or equal to 100%). Similarly, repossessions of properties for high LTFV benchmark loans are currently 8.7 times higher than those for 'low' LTFV benchmark loans.
"In 2014, we expect that mortgage arrears across Dutch RMBS will remain low compared with arrears across other European RMBS. The lenders we surveyed as part of our report have not observed the emergence of new payment problem trends. We believe that if no large shocks to unemployment and interest rates materialise, arrears will increase only slightly in 2014," explains Heijdeman.
Moody's says that secondary drivers of default - including employment type, larger loans and affordability - will have a more pronounced impact on Dutch RMBS performance in 2014 relative to 2013. Currently, the highest default frequencies stem from loans to self-employed borrowers, large loans (over €250,000) or those originated with high loan-to-income (LTI) multiples (over five times).
Such borrowers respectively experience default rates of 1.9, 1.9 and 1.7 times higher than that of borrowers who are employed, have small-sized loans or have mortgages with the benefit of low LTI multiples. In Moody's view, elevated income multiples will continue to impact default rates of existing borrowers, whereas first-time buyers will be better positioned due to significantly tightened underwriting criteria in recent years.
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