Contents

RMBS

RMBS BWIC volumes creep up

The US non-agency RMBS secondary market remains subdued, with a little under US$400m of P&I bonds on BWICs yesterday. Focus was on Alt-A hybrids and option ARMs as fixed-rate supply was light.

SCI's PriceABS data shows a range of names out for the bid, including a few fixed-rate names. The prime 30-year fixed-rate CWHL 2005-28 A4 tranche was one example as PriceABS captured price talk in the low/mid-90s.

The CWHL 2006-13 1A24 and CWHL 2006-16 2A1 tranches were also on yesterday's BWICs. Each tranche was talked in the low-90s.

There were also Alt-A 30-year fixed-rate tranches such as WMALT 2005-3 1CB3. That tranche was talked in the high-70s, having been talked in the mid-70s on its previous appearance in PriceABS.

Similarly, the WMALT 2006-3 4CB tranche was talked in the mid/high-60s and covered at 68 handle. The tranche was also talked in the mid/high-60s during Monday's session.

Another WMALT tranche was also picked up from the session. WMALT 2006-AR5 4A was talked in the low-60s and covered at 69 handle, having previously been covered in November in the mid-60s.

The bulk of the session's supply came from hybrids and option ARMs. One such option ARM tranche was DBALT 2007-OA3 A1, which was talked in the mid-80s.

The DBALT tranche was covered in the mid-80s on 6 February and was talked several times in the low-, mid- and mid/high-80s in December. The tranche first appeared in the PriceABS archive on 19 July 2012, when it was talked and covered in the mid-60s.

The session also brought a series of DNTs. Many of these came from a list containing senior option ARM IOs from the RALI shelf.

RALI 2005-QO2 X, RALI 2005-QO5 X, RALI 2006-QO5 XC and RALI 2006-QO5 XN all appeared in PriceABS as DNTs. Price talk on those tranches was at low-6, high-7, high-6 and mid-7, respectively.

Among the other DNTs from the session were AMSI 2005-R² M6, CWALT 2007-5CB 2A1, JPMAC 2007-CH3 M3 and RAMP 2006-RS3 A4. The latter tranche was also a DNT on its only previous appearance in PriceABS back on 26 November, when price talk was in the low/mid-60s.

JL

RMBS

Spark returns to US RMBS market

US RMBS secondary market activity finally picked up yesterday, as a US$678m bid-list traded. Non-agency BWIC volume reached over US$1bn for the session, with SCI's PriceABS data capturing 80 unique RMBS bonds.

Interactive Data notes that the US$678m list "has all the hallmarks of being from one of the GSEs", although nothing has been officially confirmed. As with past liquidations, the list contained mostly entire tranche sizes and comprised mostly better performing, higher dollar price paper.

"Post trade transparency was high, as has been the case for previously observed bid lists of a similar nature. Most bonds reportedly changed hands, as only eight line items Did-Not-Trade (DNT). Execution outside of these few appears strong with average cover levels exceeding average price talk," IDC comments.

The bulk of the session's supply came from 2004- to 2007-vintage paper and among the bonds out for the bid in the busy session was BAFC 2005-F 4A1, which was covered in the low/mid-80s. The tranche was talked in the very high-80s on 15 January and first appeared in PriceABS in November 2012, when it was talked in the mid-70s.

INDX 2005-AR²3 2A1 was covered in the low-80s. The tranche was talked in the mid/high-70s on its last four appearances in PriceABS. The INDX 2005-AR13 3A1 tranche, meanwhile, returned as a DNT.

CWL 2005-17 3AV2 was covered in the low/mid-90s, while CWHEL 2006-RES 4N1B was covered in the mid-80s. Neither tranche had appeared in the PriceABS archive before.

As for 2007-vintage paper, CWALT 2007-8CB A9 was covered at 84 handle. The tranche was previously picked up by PriceABS in January when it was talked in the mid-80s.

ELAT 2007-2 A2D was traded during the session, while GSAMP 2007-HE1 A2B was covered in the mid/high-90s. The last recorded cover for the ELAT tranche came from 19 December, at 63 handle.

Although the FFMER 2007-1 A2C tranche came back as a DNT, the FFMER 2007-3 A2B and FFMER 2007-3 A2C tranches were successfully traded. There was also a cover at 59 for FFMER 2007-4 2A4.

MSAC 2007-NC3 A2B was covered in the mid/high-60s, having been talked in the high-50s back in November. Its first recorded cover comes from 3 October 2012 in the mid/high-40s.

Meanwhile the SABR 2007-BR² A2 tranche was covered at mid-50 and the STARM 2007-2 2A1 tranche was covered in the very low-80s. Price talk on the latter tranche was in the mid-70s in November.

Price talk was also observed on the ACE 2002-HE3 A1 tranche, which was talked in the mid/high-90s. The tranche's previous appearance in PriceABS was with price talk at around 90.

Other early-vintage paper such as CWALT 2003-12CB 2A1 was also circulating. That tranche was talked at around 102 or 103, having been covered two days before at low/mid-100, while the EQABS 2003-1 AV1A tranche was talked in the high-90s on its first appearance in the PriceABS archive.

JL

CMBS

New benchmark needed?

Meaningful shifts in cashflow, structure and collateral performance for GSMS 2007-GG10 may mean that consideration of other transactions as the benchmark US CMBS is warranted. Although the GG10 duper is still the largest in the sector, recent loan liquidations have seen a number of other tranches being written down.

In fact, Interactive Data notes in its Monthly Market Insight publication that net proceeds have reached a level where the benchmark US$3.3bn A4 tranche has started to receive principal cashflow, with its spread tightening in response by 70bp since the beginning of the year. Most notable as a catalyst for the liquidations was the CWCapital bulk asset sales, of which nearly one-third were for loans securitised in the GG10 deal (see SCI's loan events database).

Mainly as a result of these asset sales, the A3 and AAB tranches were fully paid down, as of the February remittance. Correspondingly, write-downs wiped out the lower-rated portion of the capital structure, including and below the D tranche. As a result, the C tranche is now the first loss piece.

Credit enhancement levels for the AJ, AM, B and C tranches have reduced by around 9% since the start of the year. In light of this recent activity, Moody's last month downgraded the tranches to Caa3, B2, Ca and C respectively, citing the "realised and anticipated losses from specially serviced and troubled loans" as the main reason for the rating action.

The rapid impact to the overall structure of GG10 has prompted some participants to consider placing a lower relevancy on the benchmark. Interactive Data observes that the current support for the A4 tranche stood at only 27.22% as of the March remittance, as opposed to the 33.9% average for all 2007 legacy dupers.

Further, the overall GG10 deal delinquency percentage and specially serviced percentages ended -8% and -10% below the broader universe respectively. The liquidations have also caused the GG10 A4 to become a current-pay tranche, while most 2007 vintage dupers remain locked-out from principal payments, thereby further drawing a distinction between the benchmark and the cohort that it is meant to represent.

Interactive Data suggest that bonds that are more representative of the broader cohort include CGCMT 2007-C6 A4 (with a US$1.57bn balance), JPMCC 2007-LD11A4 (US$1.18n) and GECMC 2007-C1 A4 (US$930m).

CS

Structured Finance

Securitisation pro to lead sales

BNP Paribas Securities Services has appointed Jamie Pratt as head of debt market services sales in the Americas. He brings with him a strong track record in securitisation.

Pratt was previously at Barclays Capital, where he was a director in the New York structured finance department. Before that he was based in London and worked as a securitisation banker at Deutsche Bank.

CDO

CSO manager resigns

The portfolio manager and portfolio verification agent for Athenée CDO series 2007-10 Hunter Valley CDO II are set to resign from their respective appointments. As such, the reference portfolio will become static. Pursuant to the written resolution of the noteholder, the issuer has consequently entered into a deed to effect these variations to the portfolio management agreement.

CDS

ISDA ceo stepping down

ISDA has announced that ceo Robert Pickel will step down later this year. In the meantime he will continue in office during a transition phase as the board looks to appoint a successor.

Pickel has spent almost 17 years at ISDA, working in several different roles. He has played a central role in ISDA's adaptation to OTC derivatives reform and was also a key driver in the development of the ISDA novation protocol in 2005 and the completion of the big bang protocol in 2009.

CLOs

Key man confirmed

Peter Goody has replaced Paul Carman as a key person on the Harvest CLO III to IV transactions. The replacement was confirmed for Harvest CLO II last month, when Moody's determined that the move would not cause its ratings on the notes to be reduced or withdrawn (SCI 24 March).

RMBS

Monoline, bondholders gain settlement

A settlement has been agreed between an ad hoc group of bondholders of nine FGIC-insured Countrywide RMBS trusts, Bank of America, FGIC, Freddie Mac and BNY Mellon. It will provide US$950m in cash payments to the RMBS trusts and FGIC to settle mortgage repurchase claims.

The settlement is the first of its kind involving a monoline insurer and bondholders working together to resolve mortgage repurchase claims. More than US$365m is being paid from Bank of America to the RMBS trusts, while FGIC has received approximately US$584m.

Bondholders will also recover their pro rata share of the US$584m FGIC settlement when it makes future distributions to policyholders as part of its plan of rehabilitation. The settlement was structured and negotiated by Fir Tree Partners and does not require court approval.

RMBS

Allstate ends RMBS lawsuit

A stipulation of discontinuance has been filed in New York state court, ending a lawsuit brought by Allstate Insurance Company concerning US$167m of RMBS purchased from Merrill Lynch. The stipulation did not disclose a settlement amount, notes a Lowenstein Sandler memo.

The lawsuit was filed in March 2011, when Allstate alleged that the quality of the loans which were underlying the RMBS was misrepresented. Allstate's complaint stated that although most of the certificates it bought were originally rated triple-A, 97% were below investment grade by the time of the complaint.

RMBS

SFR leader appoints pair

Blackstone's real estate portfolio company Invitation Homes has appointed John Schissel as cfo and Leslie Fox as evp and coo. Last year the company named Bryce Blair as a member of the board and Gary DeLapp as president.

Schissel joins from BRE Properties, where he served as evp and cfo until its recent merger with Essex Property Trust. He has further multifamily experience from his time at Carr Properties and also spent 13 years at Wachovia Securities.

Fox joins from American Residential Housing Communities, where she was coo. She also served as evp of affordable housing at Equity Residential and as cio at Asset Investors Corporation & Commercial Assets Inc.

ABS

Diesel prices hit Indian ABS

Fitch expects the performance of Indian ABS transactions backed by commercial vehicle (CV) loans to deteriorate further in the near term, after weakening significantly over 4Q13 and 1Q14. The deterioration has been affected by the general slowdown in the Indian economy and the significant hike in diesel prices, which have squeezed margins and undermined the debt-servicing capacity of CV loan obligors.

Average 90+ days past due rates of Fitch-rated CV loan ABS transactions have risen rapidly, to 3.7% for the February 2014 collection period, from 2.5% in September 2013. Transactions most affected by the deterioration in performance are those with significant proportions of loans originated in 2012.

One key indicator is the average diesel price for Mumbai, Chennai, Delhi and Kolkata, which had risen by 14.8% to 59.7 rupees per litre by end-March 2014 from a year earlier. This is the highest price in the past 10 years and is attributable partly to rupee depreciation, Fitch notes. The high diesel and other input prices have continued to undermine CV operators' debt-servicing capacity, despite generally higher freight rates in India.

These economic stresses mean that originators are taking longer to collect receivables. Fitch expects 180+ day delinquencies to rise modestly from the current rate of 1.1% for the February 2014 collection period, yet rating performance of most transactions should remain stable, due to the sequential amortisation structure of the notes and significant build-up in credit enhancement since origination.

Current credit enhancement stands at an average of 71% for 2012 transactions and 24% for 2013 transactions. It is strengthened further by excess spread, high recoveries from cash collection and the strong incentives to avoid foreclosure by the underlying small road transport operators, for whom their commercial vehicle is the primary source of their family income.

ABS

Auto subprime lenders 'more cautious'

US subprime auto lenders have become more cautious in granting loans to increasingly risky borrowers, says Moody's. However, no major slowdown in subprime lending is anticipated.

Borrower credit scores improved for used auto loans in 4Q13 for the first year-over-year improvement since 2010. There was also slower growth in the share of subprime lending provided by banks, credit unions and captive finance companies.

The declining competition from non-traditional subprime lenders puts less pressure on independent finance companies to lend to weaker borrowers in order to maintain their lending volumes, Moody's notes. Continued caution should translate into stabilising loan losses.

Interest rates on subprime loans are also rising in another indication of increased caution. This reverses the trend where strong competition led to APRs falling despite declining credit.

However, rising LTVs and loan terms suggest lenders are not shying away from taking on increasing risk. Moody's expects new loan volumes to remain high through 2015 as market conditions remain favourable for increased lending.

ABS

Punch notes downgraded on uncertainty

Moody's has downgraded notes from both Punch Taverns' Punch A and Punch B securitisations. The downgrades are a result of the delay in the restructuring of the securitisations and the uncertainty accompanying it.

The noteholders and creditors have been asked to agree to a DSCR covenant waiver (SCI 15 April). The waiver would give the issuer and transaction parties more time to agree a restructuring but Moody's is concerned that even this extra time may be insufficient.

For Punch A, the A1(R) and A2(R) notes have both been downgraded from Baa3 to Ba1. The M1 notes have been confirmed at Caa1 and the M2(N) notes have been confirmed at Caa2.

Punch A's B1, B2 and B3 notes have been affirmed at Ca and the C(R) notes have been affirmed at C. The D1 notes are not rated by Moody's.

For Punch B, the A3, A6, A7 and A8 notes have all been downgraded from Ba2 to B1. Meanwhile, the B1 and B2 notes have been confirmed at Caa2, while the C notes have been affirmed at C.

ABS

Criteria tweak for FFELP SLABS

Fitch has published an exposure draft with respect to its criteria for rating US FFELP student loan ABS. The main proposal upon which feedback is sought is the appropriation of standard default rate assumptions.

The exposure draft discloses the standard default rate assumptions Fitch uses for cashflow modelling when issuer-specific data is not available. These assumptions are based on 22 years of industry FFELP loan performance.

Recent performance data indicates higher defaults for certain loan and college types. As such, the agency proposes to increase its default assumptions for these variables to reflect the performance data.

Fitch also uses industry performance data to derive default timing curves when issuer-specific data is unavailable. Recent data indicates that the default timing of consolidation loans are evenly distributed over a longer period of time of at least eight years than Fitch's initial assumptions of five years. The agency therefore proposes to extend its curve to reflect performance data.

Minimal to no impact is expected on existing ratings from these proposed changes, given multiple compression and other quantitative factors considered in Fitch's analysis. Feedback is invited by 30 May, with the finalisation of the revised criteria anticipated in June.

ABS

Student loan business acquired

CIT Group has entered into three separate loan sale agreements with Nelnet, through which Nelnet will acquire the firm's student lending business. Pursuant to the agreements, CIT will sell to Nelnet certain subsidiaries that hold its residual interests in securitisation trusts with approximately US$2.6bn of student loans and the related student loan asset-backed debt. A further US$950m of student loan receivables are also included in the sale, as well as all of CIT's remaining government guaranteed student loan assets and servicing rights.

CIT expects to receive an aggregate cash payment of approximately US$1.1bn, the majority of which will be used to repay existing debt secured by student loans. The transactions are expected to close by 25 April.

ABS analysts at Bank of America Merrill Lynch believe that Nelnet will look to securitise the loans it acquired that have not yet been securitised. They expect no impact from the transfer on the servicing quality of the asset-backed notes that were sponsored by CIT.

According to the BAML analysts, the offering documents for the outstanding CIT Education Loan Trust securitisations show one or more of the following entities as sub-servicer: Education Loan Servicing Corporation d/b/a Xpress Loan Servicing (XLS); Great Lakes Educational Loan Services; Pennsylvania Higher Education Assistance Agency (PHEAA); and Xerox Education Services. CIT entered into a servicing agreement with PHEAA in January 2011. Under the terms of the agreement, CIT outsourced to PHEAA all of its student loan servicing activities that were being provided by its subsidiary XLS.

ABS

Solar securitisation standards adopted

Mercatus has formally adopted the solar access to public capital (SAPC) working group standard contract documents for both residential and commercial solar. The investment platform has been heavily involved in SAPC's efforts to define risk and credit parameters.

The SAPC working group was convened last year to enable securitisation of solar PV assets and associated cashflows (SCI 20 March 2013). Mercatus believes the SAPC can help kickstart the solar securitisation market and also intends to support the Solar Energy Finance Association (SEFA) in its efforts to advance the availability of capital and financing options for the solar and renewable energy industries.

Structured Finance

SME platform debuts

BNP Paribas, BPCE, Crédit Agricole, HSBC and SG have established Euro Secured Notes Issuer (ESNI). Billed as a new form of securitisation, the programme is secured by bank loans to SMEs meeting the eligibility criteria for Eurosystem refinancing operations.

ESNI is open to all European banks and issued its first Euro Secured Notes (ESN) on 11 April for an outstanding amount of €2.65bn and maturities of up to three years. Further issues are expected in the coming weeks.

ESNI is formed as a securitisation company under French law, with an independent compartiment allocated to each institution participating in the programme. Private loans transferred as part of a collateral arrangement in favour of ESNI shall continue to be managed by the banking groups that granted them and the securities shall not be issued in tranches.

Bank of America Merrill Lynch European securitisation analysts note that ESN bonds must be collateralised by high quality credit claims. Eligible assets are assessed by Banque de France's rating system or banks' internal ratings-based models. Pools are dynamic and loans can be modified as often as twice a week to allow short-term lending and to deal with prepayments.

Some overcollateralisation must be maintained at levels consistent with Banque de France's haircuts. While the model ensures clear segregation across issuers and assets and liabilities are fully matched, the BAML analysts note that there is no liquidity support mechanism to prevent any cashflow disruption in case of a bank default.

Structured Finance

Heavy hedge fund allocations continue

Investors continued to allocate heavily into hedge funds in March. The US$18.3bn influx of new capital during the month lifted 1Q14 net flows to US$55.1bn, a level last surpassed in 2Q07, according to eVestment.

Credit fund flows continue along an uneven, albeit positive path. Inflows of US$9.6bn in Q1 were higher than in 4Q13, although directional credit fund flows were negative in March, marking the fourth month of redemptions in the last six.

Asset flows into relative value credit and MBS-focused strategies were both positive last month (at US$1.46bn and US$610m respectively) and in the first quarter (US$4.25bn and US$800m respectively). "MBS-focused funds appear to be a bellwether of investor sentiment towards credit exposure," eVestment notes. "The universe saw swift and large redemptions shortly after the May/June 2013 rate increase, but in the last two months have since seen flows shift back to positive and the group has performed well as the US Treasury 10-year has bounced down below 3%."

Asset flows into distressed strategies totalled US$550m for March and US$2.62bn.

CDO

CDO auctions due

A couple of CDO auctions have been scheduled so far for next month. The first is for the Trups CDO Preferred Term Securities XII on 1 May. Stifel Nicolaus has been appointed auction agent for the sale.

The second auction is for Trainer Wortham First Republic CBO III on 14 May.

CDS

Tesco CDS wider on profit concerns

Tesco's five-year credit default swaps have widened by 18% over the past month and by 48% since the beginning of the year, to trade at the widest levels observed since August 2012, according to Fitch Solutions in its latest case study. Worsening market sentiment for the food retailer has likely been driven by concerns over falling profits.

"Over the past month, the Fitch Solutions European Retail CDS Index has tightened 1%, signalling overall stability for the sector. Tesco has deviated from that trend. After consistently outperforming the index at least since early 2012, Tesco CDS are now pricing 1bp wider," comments Fitch director Diana Allmendinger.

Tesco has the strongest profit margin of its close food retail peer group, but this has been shrinking for several years. Fitch suggests that the company may now be pushed to rethink its pricing in order to defend market share, which has come under pressure as evidenced by the latest financial results.

On average, Fitch's CDS implied ratings for European retailers are 1.4 notches higher than their respective Fitch issuer default ratings, reflecting a positive market bias towards the sector as a whole. Tesco's CDS implied rating has declined by three notches so far this year to align with its IDR at triple-B plus. Whereas a year ago Tesco CDS were pricing tightest relative to its peers, they are now trading firmly in the middle of the cohort.

CLOs

Strong credit enhancement continues

With 2014 off to a strong start for new US CLO issuance, a notable constant has been strong credit enhancement, according to Fitch in its latest quarterly update on the sector. The agency reports that 40 US CLOs totalling US$20.6bn came to the market in 1Q14.

Credit enhancement for senior notes in these CLOs has remained stable at 37.7%, compared to 37.9% in 4Q13. In fact, credit enhancement levels for senior CLO notes appear to have stabilised within a relatively tight band since the second quarter of last year. This follows a period of steady increases in credit enhancement after a low of 34.9% recorded in 1Q12.

Elsewhere, further clarification of the Volcker Rule led to CLOs being issued last quarter with provisions for springing bond buckets - a trend that Fitch believes is likely to continue for the foreseeable future.

CMBS

Online revolution for CMBS market

US CMBS special servicers were instrumental in generating acceptance for online auctions as distressed loans and REO assets flooded the market in 2009. The volume of US CMBS distressed assets may now be shrinking but the legacy of online CRE brokerage tools will live on, says S&P.

The rating agency believes that the commercial real estate (CRE) finance industry will continue to be dramatically changed by the internet, with broad and potentially disruptive implications for many market participants. Growth areas for internet use in CRE include non-US, non-auction format and leasing, while crowd funding and investor chat rooms are also changing the industry.

The internet should provide a less expensive, more effective forum for reaching a broad pool of potential buyers. Investors have been able to search for distressed CRE assets, but CMBS traders and bond analysts have also used auction bidding to determine the value of assets in transactions.

Auctions are also changing the front end of the lending business, as is shown by Oaktree Capital Management's recent NPL securitisation, ORES 2014-LV3 (SCI 16 April). S&P notes that many of the assets in that deal were bought at auction.

Auctions are a particularly useful solution in peak times of stress and their use is likely to decrease as economic conditions improve. However, S&P does not think they will disappear from the market.

This decrease in auction use can already be seen. Although sales for properties backing US$144m in CMBS loans are scheduled on auction.com over the next two months, use of the site dropped markedly in March.

S&P believes the decline in use of the site could be caused by the fact that distressed situations are no longer growing. The better auction candidates may also already have been auctioned, while it is also possible that special servicers are spreading their business to other providers that are not monitored quite so closely by CMBS analysts.

Outside of the US the use of auctions has been more limited but could yet expand. The idea has been tried in Germany, but cultural factors will be crucial in whether other countries adopt auctions as eagerly as the US has done.

Another area where the technology of auctions could expand is leasing. Online technology - either with or without auctions - can provide value for lessors and lessees. This would require the role of brokers to adapt and processes and products to develop, but something similar was seen in the retail industry when Amazon.com launched, S&P notes.

Among the other expected developments in the market is further integration of CRE data. This will include participants having easier access to geographic information systems (GIS) data providing enhanced property analysis and Google's investment in auction.com (SCI 12 March) suggests this is an area which will develop over the coming years.

The emergence of peer-to-peer securitisation (SCI 7 March) also provides a clue to the future role of online technology in the CRE market. Although the peer-to-peer market has not yet used CRE collateral, as it becomes more engrained in the securitisation market it is likely to become more relevant to CMBS.

Lastly, another example of the internet already shifting the balance of power in the market is chat rooms. CMBS buyers are already using investor chat rooms to exchange information about transactions, benefiting investors through greater informational symmetry.

CMBS

CMBS loan disposals examined

US CMBS loan disposal volume has reached US$76.6bn over the past four quarters, according to Trepp. Many of these loans (43%) fell into the prepayment category, the majority of which prepaid in the open period before the note's maturity date.

Disposed loans fell into two major categories: prepayment/paid at maturity (accounting for 58%); and paid post-maturity/disposed of with loss (42%). A fifth of all loans (21%) were disposed of with a loss. Losses were distributed evenly across the major property types, with retail topping the list in terms of loss severity (56%).

On a positive note, CMBS dispositions show a 2:1 ratio of loans prepaying prior to maturity versus losses. Losses only represented 21.4% of the loans disposed of during the past four quarters.

With the distressed loan market slowing down, Trepp expects originators, underwriters and leasing brokers to increasingly redirect their attention to refinance and sales opportunities.

CMBS

CMBS property auctions due

Properties backing US$188m of distressed CMBS loans are scheduled for sale via Auction.com in May and early June. The largest loan with assets out for the bid is the US$113m Trinity Hotel Portfolio, securitised in BACM 2006-5, according to Barclays Capital CMBS analysts.

From the Trinity portfolio, the Price Holiday Inn and the Renton Holiday Inn Select are scheduled for auction, with an origin US$22m in allocated balance. The Barcap analysts expect overall losses for the assets to reach over US$58m, based on the latest appraisal of US$54.6m.

Meanwhile, the largest single property in the auction is the US$40m Eastland Mall, securitised in LBUBS 2007-C1. Special servicer commentary indicates that the borrower has agreed to a sale of the property, while the auction document mentions that seller financing may be available, which could indicate that the servicer is open for a modification/assumption resolution strategy.

The second-largest property up for auction is the US$33.1m Blackwell I suburban office property securitised in GCCFC 2007-GG9. The property was most recently appraised at US$13.4m in August 2013 and has US$1.8m of advances and US$3.2m of ASER outstanding, implying that losses could total over 75%.

CMBS

Record high for CMBS 2.0 leverage

US conduit CMBS loans had an average Moody's loan-to-value (MLTV) ratio of 107.3% in 1Q14, a record high for CMBS 2.0 deals, according to Moody's. In addition, the share of conduit loans that receive a Moody's cashflow haircut of greater than 10% has jumped from the low single-digits to the mid-teens. This is partly due to the inclusion of income that the agency views as above market or unsustainable.

"Conduit pools continue to show a trend towards loans with higher leverage and with more subordinated debt behind them," says Tad Philipp, Moody's director of commercial real estate research.

Roughly 25% of conduit loans in 1Q14 had MLTV ratios within five percentage points of the 117.5% level that Moody's recorded in 3Q07, the pre-crisis peak. In the first quarter, approximately one in five conduit loans had underwritten LTVs of roughly 75%, which is typically the maximum for lending programmes.

This share will likely exceed one in four during 2Q14. As a result of rising conduit leverage, Moody's credit enhancement levels have increased.

Although MLTV has risen to a level consistent with underwriting from the second half of 2006, overall credit quality aligns more closely with that of late 2005 to early 2006, owing to recovering property market fundamentals and high levels of debt service coverage (DSCR) and amortisation. "An above-average DSCR lowers the risk of default during the loan term and increases the likelihood that amortisation occurs as planned, helping to mitigate refinancing risk," adds Philipp. "Moody's DSCR, which fell to 1.44x in 1Q14 from 1.48x in 4Q13, may bounce back slightly in the second quarter of 2014."

CMBS

Retail spin-off planned

Vornado Realty Trust is set to spin off its shopping centre business - consisting of 81 strip shopping centres and four malls - into a new publicly traded REIT, the 2014 net operating income of which is estimated to be approximately US$200m. Three of the malls and a large number of the strip centres back CMBS, but no credit fall-out is expected from the move in the short term.

Vornado also plans to retain for disposition in the near term 20 small retail assets that do not fit the REIT's strategy, valued at approximately US$100m. Further, the firm has disclosed that the Beverly Connection and Springfield Town Center properties are both under contract for disposition.

The affected properties total approximately 16.1 million square-feet and had average occupancy of 95.5%, as at 31 December 2013. The malls that are included in the spin-off are the US$300m Bergen Town Center (securitised in WFCM 2013-BTC), US$130m Monmouth Mall (MSC 2006-T21), US$120m Montehiedra Town Center (GCCFC 2006-GG7) and the Las Catalinas Mall (not securitised). Barclays Capital CMBS analysts note that the Montehiedra property is already in special servicing and is likely to be modified, given that Vornado intends to reposition the asset, with a 120,000 square-foot expansion planned in 2014 (see SCI's CMBS loan events database).

A large number of the affected strip centres are included in the US$616m VNO Portfolio securitised in the Vornado DP Trust 2010-VNO transaction. Some of the other smaller assets are also spread across various legacy CMBS deals.

The Barcap analysts believe that an immediate credit fall-out is unlikely, but note that it is unclear whether the spin-off significantly increases the likelihood of losses on these properties. "This is clearly a strategy to focus the parent company on the better performing core Northeast office property portfolio, by jettisoning the under-pressure retail properties," they observe. "However, it can be argued that these assets may not have fared differently even in a consolidated entity - retail REITs have been fairly aggressive in handing back the keys on underperforming properties. As such, the financial strength of the sponsor often has little correlation with the ultimate resolution of a loan, especially in the retail sector."

After the dispositions and the spin-off, Vornado's business will be concentrated in New York City and Washington, DC, comprising high quality office portfolios and the largest, most valuable portfolio of Manhattan street retail assets. The firm says that the REIT's portfolio will be well positioned to deliver both internal growth through active asset management and redevelopments and external growth through acquisitions and selective new developments.

The initial Form 10 registration statement relating to the spin-off is expected to be filed with the SEC in 2Q14, with completion due in 4Q14. Jeffrey Olson - who is currently ceo of Equity One - will become the REIT's chairman and ceo. Robert Minutoli, evp of Vornado's existing retail segment, will become its coo. Vornado's retail management team and personnel will also remain with the REIT.

CMBS

TRIPRA changes could hurt CMBS

The US Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) expires at end-2014. Although Congress is expected to renew it, S&P notes that the new version might contain significant changes, including what is expected to be scaled-back coverage.

"If history is any guide, CMBS credit and liquidity issues could develop if TRIPRA is not renewed or is cut back substantially," S&P explains. "Either could cause a property's insurance premium to jump, leading to declines in property net operating income and value. And the longer the uncertainty of re-enactment, the perceived risk of unaffordable or unavailable insurance increases, which could negatively affect property valuations."

In addition to potentially shrinking a CMBS loan's underlying collateral value and triggering a negative credit event, liquidity issues could develop. This could arise if a borrower fails to maintain the required insurance coverage and the master servicer decides to force-place the insurance.

CMBS issuance could also fall, as occurred in 2002, when it dropped by almost 25% from 2001 levels. It was during this time that more than US$15.5bn worth of real estate projects in 17 states were stalled or cancelled because of a continuing scarcity of terrorism insurance. CMBS issuance resurged in 2003, jumping by 50% after the Terrorism Risk Insurance Act (TRIA) was signed into law in November 2002.

S&P says it was asked to look at close to US$4bn of New York City office collateral that is intended for securitisation in 1Q14, compared with US$5bn for all of 2013. The agency would expect that the longer the re-enactment is delayed, the metro areas that might be viewed as more prone to a terrorist attack will see increased CMBS financing activity.

If TRIPRA is not re-authorised, the number of property insurers willing to continue offering terrorism insurance is likely to decrease and higher pricing for terrorism insurance could result. Existing loan collateral could run into technical default if a borrower is unwilling or unable to pay for post-TRIPRA insurance coverage.

Since 9/11, most commercial lenders have required terrorism insurance to secure mortgage loan collateral. To preserve a property's cashflow, annual terrorism premium caps are common. However, based on S&P's review of several New York City properties' premium cap requirements, they vary significantly by asset, vintage and latitude that a borrower may or may not have in its loan documents.

CMBS

Unusual refi strategy highlighted

Simon Property Group recently refinanced West Ridge Mall via a US$53.9m loan securitised in the COMM 2014-CCRE16 CMBS. The property was one of the first to be identified as part of the company's spin-off and had been expected to be difficult to refinance.

West Ridge Mall was previously encumbered with nearly US$65m of outstanding debt securitised in BACM 2004-4. Morgan Stanley CMBS strategists had projected a valuation of US$68.9m - based upon full-year 2012 NOI of US$5.95m and a cap at a rate of 9% - implying an LTV of 94%.

The property was re-appraised at US$67.8m, which implied that over US$20m of equity would be needed to refinance on a standalone basis. Instead, Simon pooled the property with another nearby strip centre (West Ridge Plaza) that was previously unencumbered.

The loan on the two combined properties resulted in US$54m of total proceeds, consisting of US$43.2m allocated balance to West Ridge Mall (at a 63.7% LTV) and US$10.8m allocated balance to West Ridge Plaza (75% LTV). This, in combination with US$12.1m of new equity, allowed West Ridge Mall to refinance.

The Morgan Stanley strategists suggest that this refinancing strategy may demonstrate a commitment by the Simon SpinCo to assets that fit their target profile. As such, a similar resolution could be used for the US$65m Chesapeake Square loan securitised in JPMCC 2004-LN2, which is scheduled to mature in August.

"Our analysis suggests that the property would also require significant recapitalisation in order to refinance on a standalone basis. However, Simon could employ a similar strategy by using Chesapeake Center - a nearby strip centre - as additional collateral for a loan, given that it is not currently encumbered (according to the company's 2013 Annual Report)," the strategists conclude.

Insurance-linked securities

Turkish cat bond affirmed

S&P has affirmed its double-B plus rating on the US$400m class A notes issued by the Bosphorus 1 Re catastrophe bond. The sponsor Turkish Catastrophe Insurance Pool did not elect to reset the bonds' probability of attachment. In addition, the agency reviewed the creditworthiness of the rating on the collateral that will be used to redeem the principal on the redemption date and it remains unchanged.

Risk Management

RFC issued on macro hedging

The IASB is seeking public comment on its portfolio revaluation approach (PRA), which aims to better reflect dynamic risk management activities (macro hedging) in financial statements. Although IFRS 9 'Financial Instruments' is in the final stages of completion, the IASB has decided to treat as a separate project the macro hedging component of these reforms in order to elicit views from a broader range of constituents.

Under the PRA: exposures that are risk-managed dynamically would be revalued for changes in the managed risk through profit or loss; fair value changes arising from risk management instruments that are used to manage this risk (derivatives) would also be recognised in profit or loss; and the success of an entity's dynamic risk management is captured by the net effect of these measurements in profit or loss. Fair valuation of the risk exposures that are dynamically managed would not be required.

The PRA also addresses the needs of users by providing a more comprehensive set of disclosures concerning an entity's dynamic risk management activities.

The discussion paper - 'Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging' - is available for comment until 17 October. The IASB is also undertaking an outreach programme designed to obtain feedback, including live webcasts on 29 April.

Risk Management

CDS valuation best practices surveyed

SCI has launched a survey to gather intelligence on best practices in CDS valuation. Respondents will be able to benchmark their department's activities by comparing their answers against the industry average, as per the survey results.

The survey canvasses the opinions of professionals within independent price verification (IPV) divisions of financial institutions. SCI is seeking data that captures: the key internal and external forces that drive IPV desks to use more than one CDS pricing source; why this is best practice for the financial institution; and intelligence around what constitutes an ideal pricing control environment.

SCI will also offer respondents a free three-month subscription to its daily news service, which includes news and analysis across the credit derivatives and structured finance sectors globally. Click here to start the survey.

Risk Management

Swap rules proposed

The US SEC has proposed new rules for security-based swap dealers and major security-based swap market participants. The proposal covers recordkeeping, reporting and notification requirements for security-based swap dealers and major security-based swap participants and would establish additional recordkeeping requirements for broker-dealers to account for their security-based swap activities. Public comment on the proposed rules is invited for 60 days following their publication in the Federal Register.

RMBS

Resi servicer snapshot debuts

Fitch has launched its inaugural US residential mortgage servicer snapshot. The report contains key information for most of the active RMBS servicers, including portfolio size and trend information, as well as links to full servicer reports.

Notably, the snapshot will also provide the names of RMBS servicers currently assigned to transactions in an easy-to-use cusip reference format. While the majority of active RMBS bonds are included in this published list, Fitch expects to continue to expand its coverage.

The agency plans to provide regular updates to the report, including any rating actions or significant servicer changes. All portfolio size data will be updated on a quarterly basis.

RMBS

RMBS prepays reach post-crisis lows

Prepayment rates for US RMBS loans have declined to the lowest levels since the crisis, says Fitch. Voluntary and involuntary prepayment rates are both likely to decline further if mortgage rates continue to rise and liquidation rates continue to fall as expected.

In the first quarter of the year, the CPR for prime jumbo, Alt-A and subprime loans fell to 14.7%, 10.3% and 8.8%, respectively. Prime CPR is now at the lowest level since early 2009, while Alt-A and subprime are near all-time lows.

The slower prepayments are being caused by higher interest rates and fewer distressed liquidations. Fitch notes that mortgage rates are up around 100bp from late 2012 and so borrowers not taking advantage of historically low rates may not be able to refinance their mortgages.

Although voluntary prepays have traditionally provided the bulk of CPR, involuntary prepays from distressed loan liquidations have constituted an increasing share. The majority of non-prime CPR since 2009 has been involuntary liquidations and only a third of Alt-A and a fifth of subprime CPR has been voluntary.

RMBS

Non-QM methodology finalised

Kroll Bond Rating Agency has released its methodology for assessing non-qualified mortgage risk in US RMBS. The agency says that the methodology relies on its fundamental analysis of mortgage risk, augmented by stressed assumptions regarding a borrower's propensity to engage in litigation against an originator and potential losses resulting from a successful borrower claim. These assumptions are derived primarily from limited data on litigation-related mortgage losses.

Although the methodology focuses on non-QM loans that have prime credit quality, KBRA would also consider rating RMBS backed by non-prime non-QM loans. However, this collateral would pose additional considerations regarding whether the non-QM status when combined with less affluent and perhaps less sophisticated borrowers posed a heightened risk of successful challenges under the QM rule.

The qualified mortgage (QM) rule adopted under Dodd-Frank provides lenders with a safe harbour against litigation for mortgages that meet certain standards. Non-QM loans possess certain characteristics that fall outside the QM guidelines set by the Consumer Financial Protection Bureau and, therefore, do not enjoy the same protections as QM loans. As such, they are at greater risk of litigation-related losses, KBRA observes.

The key components of KBRA's non-QM rating methodology consist of: loan originator and servicer reviews; loan file review; loan analysis and RMBS modelling; non-QM risk assessment; evaluation of securitisation structure; and surveillance.

KBRA published a request for comment in December on its non-QM methodology (SCI 6 December 2013). The agency notes that three comments in particular - which dealt with the success rate of claims, legal expenses and a borrower's propensity to make a claim - were deemed to warrant consideration and inclusion in its methodology.