News Analysis
RMBS
Colour-blind conundrum
RMBS valuations complicated by lack of bid-list activity
US RMBS secondary market supply has dried up over the last several weeks in a way that ABS and CMBS volumes have not. The lack of market colour has made bond valuations more difficult.
A large bid-list last week broke what had been a lengthy run of low BWIC volume in the US non-agency RMBS market (SCI 17 April). However, that list is believed to have come from one of the GSEs and did not spark a notable revival of activity in its wake.
Scott Burg, portfolio manager and cio at Deer Park Road, notes that there are three key reasons for the lack of supply. He says: "The most obvious one is more of the macro geopolitical concerns. In our market, when you have situations such as Ukraine and equity market concerns come up, people just sit on their hands."
Burg continues: "The second reason I hear quite often is that paper has moved into stronger hands. That means that in times of uncertainty or stress, the guys holding the paper are not pressured to sell."
The third reason Burg cites is the recent Citi settlement (SCI 8 April). Further settlements involving Morgan Stanley or Wells Fargo RMBS shelves are anticipated (SCI 24 April).
Burg notes that many Citi RMBS bond prices were up by 100% overnight. If there is a chance that noteholders could benefit from similar settlements affecting Morgan Stanley or Wells Fargo bonds, then they will want to hold onto their paper rather than putting it out for bid.
Bruce Lohman, senior md at Houlihan Capital, agrees that there is ongoing settlement exposure in the market. He notes that another significant factor is the large appetite of the Federal Reserve, as its bid for agency paper has provided support to the non-agency market as well.
"Even with tapering, the Fed continues to be a major buyer of agency RMBS. It also appears to be lengthening the duration of its investment and buying longer-dated paper," says Lohman.
He continues: "The question is whether the market would be able to step in and fill demand if the Fed stopped buying. We will have a clearer picture on both agency and non-agency pricing over the coming six months."
With secondary market supply of non-agency paper constrained, the task of finding accurate valuations has been all the more difficult. One way to work around the lack of colour is to gain access to bank offer lists, although this might not be possible for some participants.
"If you can gather third-party information, then that is a bonus and sourcing bank offer lists is an effective way to do that. However, that is not a process that everyone - particularly smaller investors - can rely on and I do not think bank offers could be a replacement for other methods," says Lohman.
He continues: "The other problem with bank offers is that those lists are not transparently reported. That means you are still going to need other sources to confirm your valuations."
Burg also notes the importance of BWICs in providing transparency. With that said, Deer Park Road is less reliant on bid-list colour than some of its competitors and so are perhaps less affected by the situation.
"Some firms do 70% or 80% of their business through BWICs, but we are the opposite; we do maybe 20% of our business through BWICs. We rely on our broker-dealer network instead and they can give us exclusive looks or limited competition looks," says Burg.
The other obvious source of valuations is pricing models. In the absence of transparent market prices, those are what firms will often rely on.
"You would like broker sheets, but if you do not have those, then you are going to need a model. Without liquid pricing, though, you are going to become more conservative in your valuations and that could also affect how active you are," notes Lohman.
On a positive note, prices do not seem to have drifted too far since the market slowdown. Old BWIC prices therefore probably provide a good indication of current prices.
"Back in February, if you put out a bond, there would be eight people going at it and bidding it up. Demand still outweighs supply, but this lack of supply is not bidding things up and in fact we have not seen a push in either direction for pricing," says Burg.
He adds: "New funds are starting up and could add fire to the market, but so far we are not seeing that."
The other potential push the market could receive is from GSE liquidations. Last week's large list bears all the hallmarks of a GSE liquidation and further such sales could rejuvenate activity.
"Both the GSEs and the regulatory community are concerned to make sure that the markets do not dry up. The regulators want a functioning marketplace, even if it is a significantly smaller market. So, if the GSEs have to participate to create or enable liquidity, then that is something they may look to do," Lohman concludes.
JL
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Market Reports
ABS
US ABS supply inches higher
US ABS BWIC volume was subdued yesterday, just creeping above US$50m. SCI's PriceABS data shows supply dominated by auto ABS paper, although a mix of other collateral types also appeared on bid-lists.
Most of the action was in the auto space, where the AESOP 2012-3A A tranche was talked at 100 handle and covered at 99.34. The tranche was previously covered last month at plus 59, when price talk had been in the very low-60s.
AMCAR 2013-1 E was also out for the bid and was talked at around plus 180 and covered at plus 125. The tranche had only previously appeared in PriceABS on 15 March 2013, when it was talked in the low-200s.
The AMCAR 2013-2 E tranche was also talked at around plus 180 and was covered at plus 140. Meanwhile, another AMCAR tranche - AMCAR 2013-5 A2B - made its debut in the PriceABS archive with price talk at Libor plus 25.
The CARMX 2012-3 A3 tranche was talked at plus 15 and covered at 100.07, while the FORDO 2012-D A3 tranche was talked at plus 12 and covered at 100.09. That Ford tranche had been covered at 12 on 17 January and at plus 11 on 18 December 2013.
Similarly, the FORDO 2013-A A3 tranche was talked at plus 14 and covered at 100.11. It was previously covered at 21 on 29 October 2013.
A raft of Santander paper rounded out the auto supply; SDART 2012-3 A3 was talked at plus 24, SDART 2012-4 A3 was talked at plus 26 and SDART 2012-6 A3 was talked at plus 25. From 2013-vintage Santander paper, the SDART 2013-2 A3 tranche was also talked at plus 25.
Supply beyond auto paper was more sparse. PriceABS picked up one aircraft tranche, a container tranche, a credit card tranche, an equipment tranche and two student loan tranches.
The aircraft tranche was ACST 2007-1A G1, which was talked at 95 handle. The tranche was talked at around 96 earlier in the month and was covered on 24 April 2013 at 93.
CRNN 2012-2A A accounted for the container paper and was talked at 100 handle. The tranche was covered in October at 100.44 and was talked just over a year ago on 12 April 2013 at around 230.
As for the credit card supply, the DCENT 2012-A3 A3 tranche was talked at plus 14, having been talked at plus 16 on 2 April and covered at 15 on 21 February. The equipment tranche, meanwhile, was CNH 2012-C A3, which was talked at plus 20.
Lastly, the student loan tranches were BRHEA 2011-1 A2 and KWFSL 2010-1 A, each of which were talked at 101 handle. The BRHEA tranche had been talked at 100 handle on its first appearance in the PriceABS archive on 27 November 2013.
JL
Market Reports
CMBS
New paper in secondary CMBS
US CMBS secondary market spreads were generally unchanged yesterday, although legacy conduit fixed AMs and AJs did tighten in. A few decent sized lists circulated as BWIC volume passed US$220m.
SCI's PriceABS data shows a wealth of pre-crisis paper, but there were also a few 2014-vintage names out for the bid yesterday. By contrast, the earliest-vintage tranche captured by PriceABS was BACM 2004-6 J, which was talked at around 20.
Price talk on the BACM 2006-3 AM tranche was at around 300 and at swaps plus 300, while it was covered at swaps plus 264, having previously been covered at 331 in February. The BACM 2007-5 AM tranche, meanwhile, was talked at around 200 and covered in the high-100s.
There were a couple of other AM tranches of note from the session. The JPMCC 2007-C1 AM tranche was talked at around 200 and at swaps plus 200 and was covered at swaps plus 197.
That JPMCC tranche was talked the day before in the 200 area and had been covered on 9 April at 205. Before that it was covered in December at swaps plus 323.
The MSC 2007-IQ15 AM tranche was also out for the bid and was traded in the mid-100s. Price talk had been at around 180 and the tranche's previous cover was on 18 February at 179.
As for AJ paper, the CGCMT 2007-C6 AJ tranche was talked at around 96 and in the mid/high-90s and was covered at 95.88. The tranche was previously covered on 30 January at 93 handle.
Meanwhile, the WBCMT 2006-WL7A J tranche was talked in the low-90s and covered at 96 handle. The tranche had only appeared in PriceABS once before - in February - when it was covered at 88.
There were also a few post-crisis tranches on yesterday's bid-lists. Among them was the COMM 2012-CR3 XA tranche, for which PriceABS recorded a trade and a cover price of plus 97.
Freddie Mac's FREMF 2012-K23 B tranche was talked in the low-160s and at swaps plus 155 and was also covered at swaps plus 157. The tranche was covered on 11 February at 180 and on 29 January at swaps plus 185.
There was even more recently issued paper such as the COMM 2014-UBS2 D tranche. It was talked at around 240 and at swaps plus 340 and was also covered at swaps plus 340.
Another 2014-vintage tranche out for the bid was GSMS 2014-NEW D. That tranche traded on what was its first appearance in the PriceABS archive.
JL
Market Reports
RMBS
Secondary surge for non-agency RMBS
US non-agency RMBS secondary market supply picked up considerably yesterday as BWIC volume soared to more than US$900m. SCI's PriceABS data shows a range of unique non-agency tranches out for the bid, with 20 successful covers.
Bid-list volume had been just US$155m on Monday and has been subdued for weeks (SCI 25 April). That changed yesterday as supply was up across fixed-rates, hybrids, option ARMs and subprime.
Dealer offering levels were mostly unchanged. Fixed-rate supply focused on senior current paying prime and Alt-A bonds, while senior Alt-A hybrids and option ARM bonds accounted for adjustable rate supply and subprime was dominated by mezzanine floaters.
The Alt-A 30-year fixed HMAC 2004-6 M2 tranche was one of those out for the bid. It was recorded by PriceABS as successfully traded.
In the subprime space, the HEAT 2005-6 M4 tranche was also traded. That tranche had been covered at 65.11 on its previous appearance in the PriceABS archive, which was back on 21 May 2013.
There were other HEAT tranches out for the bid. HEAT 2005-5 M1 was successfully traded, while HEAT 2005-7 M2 was recorded as a DNT.
POPLR 2007-A A2 was another subprime name circulating on yesterday's lists. It was covered in the mid-70s, having been talked in the 70 area in December.
The POPLR 2005-B M1 tranche was also out for the bid. It too was covered.
There were also several other names of interest during the session, such as the BOAMS 2005-3 1A24 tranche. That tranche had not appeared in PriceABS before but was covered yesterday at 104 handle.
The CARR 2006-NC3 A3 tranche, meanwhile, had appeared in PriceABS a few times, including on 3 April when it was covered at 62 handle. The tranche was covered again yesterday, this time in the low/mid-60s.
There was a cover in the mid-80s for CWL 2007-12 2A3. The tranche was covered on 5 February in the low-80s and price talk during 2013 ranged from the mid-60s to the low-80s.
Also of interest was the OOMLT 2006-1 M1 tranche, which was covered in the low/mid-60s. That tranche was talked in the high-30s when it first appeared in PriceABS in October 2012 and was talked in the low/mid- and mid-40s later that year, before price talk reached the mid-50s in March 2013.
OOMLT 2007-3 2A3 was also out for the bid and covered in the high-50s. The tranche was talked at around 50 on its only previous PriceABS appearance.
JL
News
Structured Finance
SCI Start the Week - 28 April
A look at the major activity in structured finance over the past seven days
Pipeline
Several new deals joined the pipeline last week once Easter had passed. Among them were an ABS and two ILS, as well as three CLOs, five RMBS and five CMBS.
The newly-announced ABS was US$134m PFS Tax Lien Trust 2014-1, while the ILS were US$150m Armor Re Series 2014-1 and US$600m Sanders Re Series 2014-1. The CLOs, meanwhile, comprised €300m Arbour CLO, US$360.75m Ares XXX and US$518.91m LCM XVI.
The RMBS entrants consisted of: CAS 2014-C02; €1bn CFHL-1 2014; Genesis Trust II Series 2014-1; £510m Moorgate Funding 2014-1; and £242.5m Newstone Mortgage Securities No.1.
Finally, US$1.2bn COMM 2014-CCRE17, US$1.4bn JPMBB 2014-C19, US$535m PFP III 2014-1, US$126.2m RIAL Series 2014-LT5 and US$1.3bn WFRBS 2014-C20 joined the pipeline.
Pricings
Fewer deals priced post-Easter. Together with two ABS and one RMBS, four ILS printed during the week.
The ABS new issues were US$719.8m Nelnet Student Loan Trust 2014-3 and US$1.25bn Volkswagen Auto Loan Enhanced Trust 2014-1, while the RMBS was A$700m Integrity Series 2014-1 Trust. The ILS prints comprised: US$50m Citrus Re Series 2014-2; US$1.5bn Everglades Re Series 2014-I; US$250m Kilimanjaro Re Series 2014-1; and €190m Lion I Re.
Markets
US CMBS secondary market spreads were largely unchanged last week, although legacy conduit fixed AMs and AJs tightened a little in the middle of the week, as SCI reported on 24 April. SCI's PriceABS data recorded a wealth of pre-crisis paper out for the bid during Wednesday's session, but also picked up more recently issued tranches, such as COMM 2014-UBS2 D and GSMS 2014-NEW D.
The dearth of US RMBS secondary market activity (SCI 25 April) continued last week, with Tuesday's session marking a slight pick-up in activity (SCI 23 April). Focus during that session was on Alt-A hybrids and option ARMs.
Meanwhile, the US ABS market started the week more positively, as SCI reported on 22 April. Monday's increase in supply was driven by auto ABS paper, with BWIC volume reaching around US$70m. Equipment and whole business tranches were also circulating on bid-lists.
Secondary market activity in the European CLO market was limited last week, note Bank of America Merrill Lynch analysts. "Much of the trading activity was in off-the-run bonds. Overall spreads appeared to move sideways at the double-A and single-A levels, based on the few bonds that traded, while triple-B spreads appeared to widen slightly," they add.
The European ABS and RMBS markets were also quiet. JPMorgan analysts comment: "Spreads closed the week unchanged on thinner flows, as the market remains in holiday mode after the long weekend."
Deal news
• Anticipation is growing over similar settlements occurring for Morgan Stanley and Wells Fargo RMBS shelves, following the US$1.13bn Gibbs & Bruns agreement with Citi (SCI 8 April). Some senior CMLTI RMBS bonds appear to already be pricing in a 60%-70% probability of trustees accepting the latter agreement.
• 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.
• CRISIL has rated the first Indian CMBS, which is being issued by DLF Emporio and DLF Promenade. The transaction represents a milestone in the increasing sophistication of India's bond market and should open a new fundraising avenue for the real estate sector.
• An assignee of the controlling class representative for Taurus CMBS (Germany) 2006-1 has unexpectedly exercised a purchase option under the €114.19m Bewag Berlin loan. The senior tranche of the loan has consequently been acquired from the issuer for €78.3m.
• 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.
• 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).
• 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.
• 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, while the second auction is for Trainer Wortham First Republic CBO III on 14 May.
• 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.
Regulatory update
• 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.
• SFIG's Latin America and Canada Committee has submitted a comment letter to the Canadian Securities Administrators (CSA) in response to its request for comments on the proposed amendments to 'National Instrument 45-106 Prospectus and Registration Exemptions'. The proposed amendments would require short-term securitised products to comply with a number of new conditions and disclosure requirements, including extensive disclosure of ABCP transactions.
• 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.
• The US Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) expires at end-2014. Although Congress is expected to renew it, the new version might contain significant changes, including what is expected to be scaled-back coverage.
• Barclays Bank has settled a private-label mortgage-backed securities lawsuit brought by the FHFA for US$280m. The FHFA has now reached settlements in 13 of its 18 PLS suits (SCI passim).
• 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.
Deals added to the SCI New Issuance database last week:
2013 Popolare Bari RMBS; AFG 2014-1 Trust; American Credit Acceptance Receivables Trust 2014-2; B&M CLO 2014-1; BMW Vehicle Lease Trust 2014-1; Capital Auto Receivables Asset Trust 2014-2; Cedar Funding III CLO; Chase Issuance Trust 2014-4; CIFC Funding 2014-II; Claris RMBS 2014; Colony American Homes 2014-1; Colony Mortgage Capital Series 2014-FL1; Credit Acceptance Auto Loan Trust 2014-1; Darrowby No.3; Driver Twelve; Dryden 33 Senior Loan Fund; DT Auto Owner Trust 2014-2; Element Rail Leasing I Series 2014-1; Flagship Credit Auto Trust 2014-1; FREMF 2014-KF03; Golub Capital Partners CLO 19; Great Lakes CLO 2014-1; Halcyon Loan Advisors Funding 2014-2; Harley-Davidson Motorcycle Trust 2014-1; Jubilee CLO 2014-XII; Kubota Credit Owner Trust 2014-1; Liberty Series 2014-1 Trust; Magnetite VIII; Marathon CLO VI; MMCA Auto Owner Trust 2014-A; Motor 2014-1; NewStar Commercial Loan Funding 2014-1; NXT Capital CLO 2014-1; Octagon Investment Partners XII; OneMain Financial Issuance Trust 2014-1; Penarth Master Issuer 2014-1; Pepper Residential Securities Trust No.12; Santander Drive Auto Receivables Trust 2014-2; Santander Drive Auto Receivables Trust 2014-S1; Santander Drive Auto Receivables Trust 2014-S1; Santander Drive Auto Receivables Trust 2014-S1; Santander Drive Auto Receivables Trust 2014-S1; Santander Drive Auto Receivables Trust 2014-S1; Santander Drive Auto Receivables Trust 2014-S2; Saranac CLO II; Shackleton 2014-V CLO; STACR 2014-DN2; Telos CLO 2014-5; Tombac No.1; Voba No. 5; Washington Mill CLO; WhiteHorse VIII; World Omni Auto Receivables Trust 2014-A.
Deals added to the SCI CMBS Loan Events database last week:
BACM 2001-1; BACM 2004-4; BACM 2006-5; BSCMS 2004-PWR3; BSCMS 2006-PWR14; BSCMS 2007-PW17; BSCMS 2007-PW18; BSCMS 2007-T26; CD 2006-CD2; CGCM 2007-C6; CGCMT 2004-2; CMLT 2008-LS1; COMM 2007-C9; CSFB 2005-C2; CSMC 2007-C1; CSMC 2007-C4; CSMC 2007-C5; ECLIP 2006-3; ECLIP 2007-1; GCCFC 2004-GG1; GCCFC 2007-GG9; GECMC 2003-1; GMAC 2002-C3; GMAC 2004-C1; GSMS 2007-GG10; GSMS 2013-GC10; JPMCC 2004-LN2; JPMCC 2006-CB17; JPMCC 2006-CIBC14; JPMCC 2006-LDP7; JPMCC 2007-CB20; JPMCC 2007-LDPX; JPMCC 2011-C3; LBCMT 2007-C3; LBUBS 2005-C2; LBUBS 2005-C3; LBUBS 2006-C1; LBUBS 2006-C6; LBUBS 2006-C7; LBUBS 2007-C1; MLCFC 2006-2; MLCFC 2007-5; MLMT 2005-CIP1; MLMT 2008-C1; MSC 2006-HQ9; MSC 2006-IQ12; MSC 2007-HQ12; MSC 2007-IQ16; MSC 2007-T25; MSDWC 2000-LIFE; OPERA GER2; PROMI 2; PROUL 1; TAURS 2006-1; TAURS 2006-2; THEAT 2007-1 & THEAT 2007-2; TITN 2007-1; TITN 2007-3; TITN 2007-CT1; TMAN 5; TMAN 7; UBS 2012-C4; VNO 2010-VNO; WBCMT 2003-C7; WBCMT 2005-C21; WBCMT 2006-C23; WBCMT 2006-C25; WBCMT 2007-C32; WCMT 2007-C33; WFCM 2013-BTC, MSC 2006-T21 & GCCFC 2006-GG7; WINDM X; WINDM XI; WINDM XIV.
News
CLOs
Language limiting Volcker extension?
An LSTA interpretation of the language used by the US Fed in its extension of the CLO conformance period under the Volcker Rule (SCI passim) could mean that relief for the asset class is even narrower than previously envisaged. At issue is the phrase 'in place'.
Only CLOs in place as of year-end 2013 are eligible for the extension. Initially, 'in place' was assumed by many to mean 'issued', but the LSTA suggests that it actually refers to being in place on a bank's balance sheet. Specifically, the LSTA states that "the Fed meant to attach the conformance extension to notes held by banks on 31 December 2013".
Consequently, structured product strategists at Wells Fargo believe that in practical terms the CLO market should treat July 2015 as the de facto deadline for Volcker compliance. "Essentially, the Fed has granted an extension on specific bank holdings, rather than the actual CLO," they explain. "It appears that if the CLO is sold, the conformance period extension would not apply. Thus, the only CLOs eligible for the extension are those CLOs owned by banks as of year-end 2013, and only if owned by those banks."
The Wells Fargo strategists expect dealers to be severely constrained in owning non-Volcker-compliant CLOs after July 2015, due to a combination of punitive capital charges and inclusion in the firm-wide exemption. "As such, equity investors and managers should understand that non-Volcker-compliant CLOs likely will be much less liquid as July 2015 approaches and will likely trade at a discount to Volcker-compliant CLOs. Therefore, non-bank holders of CLOs may see more of an effect, since they may have more exposure to mark-to-market differences than banks," they observe.
However, if banks face increased pressure to bring holdings into compliance, equity holders' negotiating position may be enhanced. Indeed, they may push for several concessions to offset the loss of bond buckets.
One likely concession by senior note investors may be tighter spreads, according to the strategists. "The market is only beginning to see data on how much Volcker compliance may be worth on a refinanced triple-A tranche. This basis may increase as investors worry more about secondary liquidity."
Another likely concession may be looser WAL test limits. Deals issued with covenant-lite loan limits of 30%-40% may be amended to allow larger holdings of cove-lite or second-lien loans.
Meanwhile, the House of Representatives yesterday passed H.R. 4167, the 'Restoring Proven Financing for American Employers Act' (the Barr Bill). The move sends a bipartisan message to the regulators that the House believes issues surrounding CLOs under Volcker still exist and need to be addressed, Bank of America Merrill Lynch CLO analysts observe.
However, they note that in order for this potential solution to progress further, the measure would have to be taken up by the Senate. Given that there is no current Senate version of the bill, it could be "an uphill battle to get a corresponding bill introduced and passed, let alone it becoming law".
CS
News
CMBS
Landmark CMBS ruling issued
A judgement has been delivered on directions sought by US Bank as trustee with respect to the Titan Europe 2007-1 (NHP) CMBS. The judgement provides guidance on the termination without cause of the appointment of a servicer and confirms that a contrary disclosure in an offering circular should not modify the terms of contractual securitisation documents.
US Bank sought direction on the interpretation of contractual provisions of the servicing agreement dealing with the special servicer's replacement for Titan Europe 2007-1 (NHP) CMBS, after a noteholder dispute erupted over appointment conditions (see SCI's loan events database). It is the first judgement in English law to deal with the interpretation of contractual provisions relating to the termination of a special servicer without cause in the context of European CMBS.
Capita, as special servicer, commenced a sales process in November 2013 and disclosed an updated valuation of the properties underlying the Libra whole loan, which showed that their value had declined to the point where there was unlikely to be sufficient value to cover any class of notes below class A. Anchorage Illiquid Opportunities Offshore Master III, which was presumed to be the controlling class representative, then instructed the note trustee to issue a conditional notice of termination to the special servicer, with the notice to become effective following satisfaction of all applicable 'conditions precedent'. However, a group of class A noteholders opposed this conditional termination.
This group was concerned that the conditions for termination could not be satisfied and that attempting to do so would only "chill" the sales process that the special servicer was trying to complete, notes Paul Hastings in a client alert. The group was also opposed to out-of-the-money noteholders manipulating the special servicer termination in a way that could delay the sale of the properties.
The note trustee sought legal guidance on how to exercise discretion in remedying the conflict in the instructions given by the class A and junior noteholders. The resulting judgement covers the proper construction of relevant documents and thus provides a clear framework for this and for the interpretation of provisions.
The transaction's servicing agreement referred to the controlling party as the representative of the A loan, while the offering circular referred to the controlling party as the controlling class representative, which would be the entity appointed by the class E notes. The judgement holds that where contractual documents are not ambiguous, their stipulations must be applied, even if alternatives might make greater commercial sense.
"The key analysis of the judge was based on the fact that the offering circular is not a contractual agreement and that if the underlying contractual documents do not accord with the disclosure of the offering circular, the ordinary meaning of the contractual documents must take precedent over the disclosure in the offering circular," notes Paul Hastings. The judge added that the result of having the issuer as the controlling party is neither commercially absurd nor, as Anchorage argued, a mistake in the drafting of the servicing agreement.
Further, the judge ruled that the servicing agreement provided for two separate requirements that must be satisfied before the termination of the appointment of the special servicer can take place, in that a successor must have relevant experience and the issuer and note trustee must approve the successor. Therefore the issuer and note trustee can withhold approval, even if the successor is experienced.
Another condition of the termination of the special servicer was that the advance provider also be replaced. The judge ruled that the special servicer cannot be effectively terminated unless the advance provider is replaced at the same time.
The judge also ruled on rating agency confirmations, particularly where rating agencies decline to give such confirmation. Fitch has stated that it will not provide rating agency confirmation in relation to a special servicer's replacement, which complicates transactions where securitisation documents specifically require such a confirmation.
The servicing agreement states that if a rating agency confirmation is required but declined by the agency, then the provision should be read as though such confirmation is not required. "The judge relied on this provision in that it gave a clear indication of the commercial intention of the parties in the event that a rating agency stopped issuing rating confirmations. The judge noted that it would not make any commercial sense for the parties to have agreed that the servicer or special servicer could no longer be terminated (nor even terminate their respective appointment), if one rating agency declined to provide a confirmation in circumstances where the other two rating agencies were willing to give such confirmation," notes Paul Hastings.
Moody's gave verbal confirmation but did not put it in writing. The judge ruled that this was acceptable, as there had not been a specific reference to a rating confirmation to be provided in writing by Moody's in the servicing agreement.
JL
News
RMBS
Value seen in Italian RMBS
A number of Italian RMBS that were previously retained by their originators have been remarketed and publicly placed in recent months (see SCI's issuance database). This trend is expected to continue, with the ECB encouraging issuers to rely less on repo financing.
JPMorgan European securitisation analysts estimate that retained Italian RMBS issuance totalled just over €170bn between 2008 and 2013, with some €67bn of retained paper remaining, including €9.3bn and €5.2bn of MONTE and CARIP bonds respectively. Barclay's MERCU programme alone accounts for 20% of all outstanding retained paper.
Overall Unicredit accounts for 31% of all outstanding Italian RMBS paper, mostly due to the large CORDR deals issued in 2006 and 2007. Of the other five largest issuers, only two - Veneto Banca and BP Vicenza - have been active on the public market post-crisis.
At 160bp, as at end-March, the JPMorgan analysts note that Italian RMBS spreads sit between plain vanilla jurisdictions (UK prime at 50bp and Dutch at 63bp) and other peripheral jurisdictions (Irish, Spanish, Portuguese and Greek at 175bp, 190bp, 230bp and 450bp respectively). They believe that Italian RMBS offers value compared to both Irish and UK prime RMBS.
Irish RMBS performance is significantly weaker than Italian RMBS, with 90-day plus arrears running at over 11 times those of Italian pools and loss severities also likely to be much higher, given the significant correction in Irish house prices. At the same time, while UK RMBS offers greater liquidity, 90-day plus arrears are at a similar level to those of Italian RMBS.
"Even considering the improving UK economy - compared to a still-fragile Italian one - and the risk of payment holiday schemes masking higher arrears, we believe that thanks to lower household debt, Italian borrowers have weathered the storm relatively well so far and are likely to continue doing so," the analysts observe.
Although Portuguese and Greek RMBS spreads are wider than Italian ones, their weaker collateral performance and the limited amount of paper outstanding - at €26.7bn and €2.6bn respectively - also means that they are a less attractive proposition for investors looking to gain sizeable exposure, according to the analysts.
CS
News
RMBS
MS, Wells settlements anticipated
Anticipation is growing over similar settlements occurring for Morgan Stanley and Wells Fargo RMBS shelves, following the US$1.13bn Gibbs & Bruns agreement with Citi (SCI 8 April). Some senior CMLTI RMBS bonds appear to already be pricing in a 60%-70% probability of trustees accepting the latter agreement.
The limitation of the Citi settlement to the CMLTI shelf could be due to the fact that the other Citibank shelves required two-thirds of the certificateholders and two-thirds of the residual holders to direct the trustee to take any action against the lender, according to RMBS analysts at Barclays Capital. They suggest that in many of the deals Citi entities are likely the residual holders.
Morgan Stanley and Wells Fargo are the other two banks to which investors sent a notice of non-performance to servicers through Gibbs & Bruns on US$28bn and US$45bn of RMBS collateral respectively. The Barcap analysts estimate that the institutional investor group held more than 25% of 50%, as required, on about US$15bn of Wells and US$5bn of Morgan Stanley deals. It held less than the 25%/50% of the voting right on the remainder, as of the September 2012 notice.
Based on various PSAs for the Wells Fargo and Morgan Stanley deals, the analysts note that some transactions require 51% of outstanding certificates to force the trustee to act. "While this is a higher bar than the 25% on some other deals that we have seen, it is still not as high as the CMALT shelf deals and - more importantly for investors - does not include residuals in the voting rights calculation. However, we believe that investors should be mindful of these distinctions, since there is some chance that any prospective MS/Wells settlement could have different treatment for deals where they cross the hurdle rate versus ones where they do not," they observe.
Settlement amounts may also be limited due to other factors. For example, for Morgan Stanley RMBS, rep and warranties were passed through from the originator to the deal - unless the originator was Saxon (which is owned by the bank). Consequently, any payment by Morgan Stanley may differentiate between Saxon-originated loans versus third-party loans, similar to the JPMorgan settlement (SCI passim).
Wells Fargo may have limited liability due to its generally cleaner collateral and better servicing practices, the analysts suggest.
SCI's PriceABS data recorded a cover of 70-24 for the CMLTI 2006-WFH1 M5 bond on 10 April. This compares to talk in the mid-single digits for the tranche on 11 October 2012.
CS
Job Swaps
Structured Finance
Firm adds asset management vet
DoubleLine Capital has appointed Ignacio Sosa as a director for its newly-formed product solutions group. He will lead the group in developing new investment products, engaging with clients on existing offerings and building new business, particularly outside the US.
Sosa was previously global bond product management evp at PIMCO. He has also worked at Voras Capital Management, OneWorld Investments and its successor Globalis Investments, BankBoston Corporation and Bankers Trust.
Job Swaps
Structured Finance
Kinetic reinforces to deal with zombies
Kinetic Partners has made Jess Shakespeare a member in its forensic and dispute advisory team in the Cayman Islands. The team is being strengthened to reflect the increase in zombie fund assignments.
Kinetic's focus with zombie funds is to support clients to expedite positions by implementing bespoke exit strategies for investors. Shakespeare has spent three years at Kinetic and previously worked for MaplesFS and KPMG.
Job Swaps
Structured Finance
Industry vet boosts info firm
Algomi has appointed Hugh Willis as a strategic advisor. He is also an investor in the firm. Willis is co-founder of BlueBay Asset Management, where he currently serves as executive chairman and will help Algomi to expand and enhance its offering.
Job Swaps
Structured Finance
Credit vet joins European push
Tikehau Group has appointed Debra Anderson to its private debt business. She will be based in London and take responsibility for expanding the credit business on a pan-European basis alongside Patrick Marshall, who joined last year (SCI 6 September 2013).
Anderson was most recently senior md at GSO/Blackstone, where she established Blackstone's CLO business and co-managed GSO's European customised credit strategies business. She has over 27 years of credit lending experience and has also served as leveraged loan portfolio manager at Intermediate Capital Group and has worked at Abbey National, Dresdner Bank and NatWest Markets.
Job Swaps
CDO
Asset manager adds CDO pro
Structured products specialist Maxime Malaure has joined Napier Park Capital as a director in its European credit strategies team. He will be based in London.
Malaure was previously at Commerzbank, where he worked in the securitised products group. He joined Commerzbank through Dresdner Kleinwort, where he was an md working on cash CDOs and he has also worked on CDOs for Bear Stearns.
Job Swaps
CDS
Credit derivatives trader moves on
Nadia Egorova is joining Deutsche Bank's high yield credit trading team. She will be based in London.
The credit derivatives trading specialist joins from BNP Paribas, where she spent three and a half years. Egorova has also worked for Credit Agricole, Rule Financial and Morgan Stanley, where she focused on credit derivatives structuring.
Job Swaps
CDS
Trade matcher rebrands, expands
Trax - formerly Xtrakter - has appointed Chris Smith as head of post-trade services and Kevin Swann as head of data. Smith takes responsibility for expanding the firm's post-trade solutions while Swann will develop data products.
Smith has over 30 years of financial markets experience and joins from NYSE Euronext, where he was responsible for the firm's commercial market programme. He has also worked at NYFIX, Tradeweb, Fidelity Investments and Thomson Financial ESG.
Swann joins from Thomson Reuters, where he was head of third-party broker data. He has also held senior roles at DirectFN, Tradeweb and Bloomberg.
Trax has previously been known as Xtrakter. It was bought by MarketAxess last year.
Job Swaps
CLOs
Mizuho adds CLO chief
Mizuho Securities USA has appointed Jim Stehli as md and head of CLOs. He is based in New York and brings over 20 years of experience in structured products.
Stehli was previously securitised products principal at CRT Capital Group. He has also worked at Sirona Advisors, UBS, PaineWebber, Kidder Peabody and JPMorgan.
Job Swaps
CMBS
Real estate group grows strategic unit
The Carlton Group has appointed Kevin Swill to lead its crowdfunding platform alongside Navish Chawla (SCI 25 April). Bill Ohlsen has also joined Carlton Strategic Ventures (CSV).
Chawla serves as cio of the CSV. He was previously at Madison International and BlackRock.
Swill becomes coo and takes responsibility for institutional equity distribution and managing relationships with broker dealers, family offices and high net worth individuals. He is the former president of Kusher Companies affiliates Kushner Properties, Westminster Capital and Westminster Hospitality.
Ohlsen specialises in asset management, valuation and disposition. Reporting to him will be fellow new recruits Bob Hasan and John Donohue.
Ohlsen has spent that last 15 years at LNR and Ocwen Financial Corp. Hasan was most recently at General Electric, while Donohue joins from The Woodlark Companies.
Job Swaps
Risk Management
Risk sales leader added
Lombard Risk Management has appointed John Groetch as regional sales director for the Americas. He will be based in New York and manage the company's growth in the region.
Groetch was most recently at Markit Analytics and has also worked as head of risk sales at Calypso. Previous roles include coo at Razor Risk Technologies and ceo at Treasury Management Systems and he has also held senior roles at Dresdner Kleinwort Benson and Deutsche Bank.
Job Swaps
RMBS
Further PLS suit settled
First Horizon National Corporation, as well as related companies and specifically named individuals, has settled with the FHFA for US$110m. The settlement resolves claims against First Horizon concerning private-label mortgage-backed securities sold to Fannie Mae and Freddie Mac between 2005 and 2007.
First Horizon will pay US$61.6m to Fannie Mae and US$48.4m to Freddie Mac. The FHFA has now reached settlements in 14 of its 18 PLS lawsuits (SCI passim).
Job Swaps
RMBS
US law firm promotes four
Korein Tillery has promoted four attorneys to partner. Steve Berezney, Giuseppe Giardina, Michael Klenov and Tamara Spicer are all based in St Louis.
Berezney specialises in high-stakes commercial, antitrust and intellectual property litigation. He has particular experience in RMBS litigation.
Giardina focuses on complex commercial and securities litigation. Much of his work centres on the fallout from the tribulations of the RMBS market.
Klenov concentrates on antitrust, securities and ERISA litigation. He is currently representing several clients in RMBS litigation across the US.
Lastly, Spicer has over a decade of experience in complex civil litigation such as securities, commercial contracts, business torts, intellectual property and antitrust. She too is currently prosecuting a number of RMBS cases.
Job Swaps
RMBS
Barclays settles PLS claims
Barclays Bank has settled a private-label mortgage-backed securities (PLS) lawsuit brought by the FHFA for US$280m. The FHFA has now reached settlements in 13 of its 18 PLS suits (SCI passim).
The settlement resolves claims against Barclays and specific individuals accused of violating federal and state securities laws in connection with PLS purchased by Fannie Mae and Freddie Mac between 2005 and 2007. Under the settlement, Barclays will pay US$227m to Freddie Mac and US$53m to Fannie Mae.
News Round-up
ABS
CSA urged to revisit ABCP proposals
SFIG's Latin America and Canada Committee has submitted a comment letter to the Canadian Securities Administrators (CSA) in response to its request for comments on the proposed amendments to 'National Instrument 45-106 Prospectus and Registration Exemptions'. The proposed amendments would require short-term securitised products to comply with a number of new conditions and disclosure requirements, including extensive disclosure of ABCP transactions.
The SFIG Committee has four principal concerns with the proposal, the first of which is what it describes as the "significantly increased administrative burden" and cost that would be borne by conduit sponsors in complying with the increased informational requirements. "The increase in the quantity, frequency and level of detail of information reporting is, in our view, unwarranted and not something that investors have been requesting," the association notes. It points to a number of factors that have resulted in a stable and safe market, with sufficient transparency and disclosure to provide the necessary level of protection for investors.
The second principal concern relates to the detailed information that would need to be provided with respect to particular securitisation transactions - in particular, the requirement to disclose the identity of sellers/originators/servicers and other significant parties, which raises privacy, confidentiality and proprietary/market competition issues. SFIG is concerned that such a requirement will reduce the number of such parties participating in the Canadian conduit market.
The third principal concern is the specified content of the required information memorandum and monthly disclosure report, and the manner and timing under which this information is to be provided. SFIG believes that the information memorandum should be a relatively static document, providing a general summary of principal matters relating to the conduit and its securitisation programme, while the monthly disclosure report should address dynamic aspects of the securitisation programme and the asset pools. It adds that the proposal does not properly delineate between these two categories of information and, as a result, compliance with the related requirements will be excessively burdensome for conduit sponsors.
The final principal concern is the risk associated with prescriptive regulations that will not allow for innovation or structural differences, which - while consistent in spirit with the policy objectives of the proposal - are contrary to the prescribed rules and therefore not permissible. "We believe that the level of detail in the proposed amendments relating to structural features and liquidity requirements is inappropriate and that reliance should instead be made on the robust structural framework and the creditworthiness of the eligible liquidity providers. In order to obtain such ratings, the securitisation programme of a conduit must satisfy the relevant rating agency's criteria, and such criteria already encompasses credit enhancement and liquidity support requirements," the association observes.
SFIG says that the proposal fails to strike an appropriate balance between investor interests and the need to facilitate an efficient and viable ABCP market in Canada and will have an unnecessary detrimental effect. The association suggests that the CSA could strike a balance between its concerns relating to which investors participate in the ABCP market and the need to maintain its health and efficiency by introducing a middle ground, alternative prospectus exemption that would allow sophisticated investors to continue to purchase ABCP in an efficient, cost-effective manner, while the proposal (with appropriate modifications) would be in place to protect less sophisticated investors.
Such an alternative exemption would require three conditions be met: a minimum cash purchase price of C$150,000 is paid at the time of purchase, by a purchaser purchasing as principal who is not an individual and who has not been established solely to rely on the exemption; the securitised product has two prescribed minimum short-term ratings; and the securitised product is backed by global-style liquidity from a liquidity provider having at least two prescribed minimum short-term ratings.
News Round-up
ABS
PAYE growth 'ABS neutral'
The rapid growth of the Pay as You Earn (PAYE) plan to cap student loan obligations is neutral for US student loan ABS, says Fitch. The rating agency is uncertain of the chances of the scheme being expanded.
The plan currently only affects federal direct loan borrowers - of which there are now 1,300,000 owing a total of US$72bn - but it could increase prepayments and reduce defaults in FFELP trusts if it is expanded. However, a recent review of the costs associated with that mean that is now unlikely.
The rating agency also notes that the rapid growth of the PAYE plan could slow the growth of private student loan origination. However, no such change has yet been seen.
News Round-up
ABS
'Credit card' ABS first in China
A deal generally being seen as the first credit card ABS in China came out last month, although Moody's notes in its latest 'Structured Thinking: Asia Pacific' publication that the transaction is essentially an auto loan ABS. The deal was sponsored by China Merchants Bank.
CMB's credit card operation originated the receivables, but there are a couple of very different features from credit card deals in more established markets. Firstly, the deal is backed by 93,000 auto loans.
Obligors are all credit cardholders or applied for a credit card alongside the auto loan. The transaction does not securitise the credit card receivables and payment on the auto loans cannot free up the credit limit on the card.
The transaction also has a static structure instead of a revolving pool. Principal and service charge payments on the auto loans will be passed to the securities, making it much like an auto loan ABS. The securities are expected to be fully paid down within around two years.
Moody's believes the transaction has several strong credit characteristics, with the static structure meaning that risk in the collateral pool will decrease as the loans amortise. CMB also has a good understanding of the behaviour of the borrowers due to its credit card operation experience, which stretches back to 2001.
The rating agency says the transaction could pave the way for the development of the credit card ABS market in China and provides an opportunity for additional transparency into the sponsor's credit card operation. "At the same time, the transaction will give the sponsor the opportunity to learn more about data and reporting requirements, as well as about the ongoing operation of an ABS transaction," says Moody's.
News Round-up
ABS
Charge-offs hit new lows
A steady decline in credit card delinquencies coupled with lower bankruptcy rates pushed US credit card ABS charge-offs to new lows in the first quarter, according to Fitch's latest quarterly index for the sector. Average charge-offs fell to 3% for 1Q14 from 3.04% in 4Q13, marking 15 consecutive quarters of improvement, with the level now approximately 25% lower year-over-year.
"Consumers continue to make payments on time, which brought the charge-off index to another record low during the first quarter," confirms Fitch md Michael Dean. "While we expect performance to recede by the end of the year, borrower behaviour is still on track and signs have yet to emerge of that happening."
Additionally, late payments fell to historic lows in 1Q14, with payments more than 60 days past due also improving for the fifteenth consecutive quarter.
News Round-up
ABS
RFC issued on credit card ABS
Moody's is requesting feedback from market participants on proposed changes to its approach to rating securitisations backed by credit card receivables and revolving consumer loans across all jurisdictions. The proposal modifies assumptions about credit card portfolio performance under stress and more explicitly incorporates the credit quality of the sponsor into the agency's rating analysis.
The proposed changes will address key risks in credit card securitisations, especially as they relate to sponsor insolvency. Credit cards and revolving consumer loans are different from many other traditional ABS assets for which performance does not typically depend on the sponsor's ability to continue to fund new receivables.
"This change is prompted by our analysis of the performance of credit card securitisations in cases where the sponsor became insolvent and closed the accounts," says Moody's vp and senior credit officer Luisa De Gaetano. "An insolvent sponsor is more likely to close accounts in a distressed portfolio. Historically, such closures cause further deterioration in the performance of the credit card portfolio."
Moody's expects the proposed changes to have little or no effect on the ratings of most senior notes of outstanding credit card or revolving consumer loan ABS. The effect on outstanding subordinated notes will vary by transaction and structure.
The agency suggests that rating changes of up to three notches are possible, with upgrades more likely than downgrades. For some securitisations with very low levels of credit enhancement, comparatively short amortisation periods and trust structures that do not prescribe the sale of receivables at the legal final maturity of the notes, downgrades of up to three notches for both senior and junior notes could occur.
The proposed changes will systematically incorporate Moody's analysis of performance data on charge-offs, payment rate and yield in prior instances of account closures. Despite having very different portfolios in terms of card type and cardholder performance, in the six cases of early amortisation and portfolio closures, cardholder behaviour was generally consistent once the accounts were closed.
The agency is therefore using its analysis of that behaviour to help determine the assumptions in the proposed methodology. It will also make an explicit adjustment, based on the rating of the sponsor, on the level of credit enhancement consistent with a given bond rating.
"In our proposed methodology, our rating analysis starts with a cashflow model in which we assume the closure of all credit card accounts in the portfolio; we will then reduce the resulting credit enhancement based on the sponsor's rating," says De Gaetano. "By contrast, in the current methodology, although the level of credit enhancement also depends on the sponsor's rating, we arrive at it indirectly via our assumption on the purchase rate."
Over the last several years, five sponsors in financial distress have closed all of the credit card accounts in six transactions that were performing poorly. In these instances, the shut-downs led to significant declines in performance.
In particular, principal payment rates fell, charge-offs rose and yields dropped as cardholders lost the incentive to repay their balances after their charging privileges ended. Moody's proposed modified assumptions include higher values for charge-offs and yield, which tend to offset one another in the analysis, and a lower assumed payment rate.
"As a result, our new stress assumptions will provide more of a benefit to trusts with high excess spread and less of a benefit to trusts with high payment rates," continues De Gaetano. "Overall, the proposed approach allows for more differentiation among trusts based on the quality of the collateral pool, the economics of the trust and the structure of the programme, particularly in the event of account closures."
Feedback on the proposals is invited by 9 June.
News Round-up
ABS
Solid performance for auto ABS
US auto ABS prime and subprime annualised net losses (ANL) respectively sank by 37% and 28% on a monthly basis in March, according to Fitch. The agency notes that strong seasonal patterns kicked in and should position the sector for solid asset performance in the coming months.
March's loss rates were within range of record lows recorded in the 2012-2013 period. Prime 60+ day delinquencies declined by 21% month-over-month (MOM) to 0.61% through 1Q14. ANL declined to 0.31% in March, down from 0.49% in February. Both indices stood 6% below the levels recorded a year earlier in 2013.
Meanwhile, 60+ day subprime delinquencies sank by 100bp to 2.8% through March, a 7% improvement compared to March 2013. ANL declined to 4.96%, 6% below the same period in 2013 and the lowest level since September last year (4.84%).
News Round-up
Structured Finance
TRACE expansion delayed
FINRA is said to be delaying the implementation of ABS price dissemination, with technological changes required for the implementation believed to require additional time. The authority will announce a revised implementation date before 22 August, postponing it from the previous announcement date of 25 April. JPMorgan ABS strategists note that effective dates are typically set at least six months after the announcement.
News Round-up
Structured Finance
Euro performance remains strong
The credit performance of European structured finance over the financial downturn remains strong. Only 1.5% of notes outstanding in mid-2007 defaulted by end-2013, according to S&P's latest quarterly transition study.
Consumer transactions have outperformed corporate transactions by a wide margin, with a cumulative default rate since mid-2007 of only 0.05% and a cumulative downgrade rate of 29.1%, compared with 5.01% and 47.7% respectively for corporate transactions. "We estimate that about two-thirds of notes that were outstanding in mid-2007 have since fully redeemed," comments S&P credit analyst Arnaud Checconi. "This is despite a protracted recession and only a sluggish European economic recovery unfolding in 2013."
Meanwhile, following steady increases between 2006 and 2012, the annual default rate for European structured finance declined in 2013 to 2.6%. This compares with 2.8% in 2012 and a one-year average of 1.3%.
"Rating movements for European structured finance securities continued to have a negative bias, partly reflecting the ongoing weak macroeconomic backdrop and its effects on consumers, corporates and sovereigns. However, the average credit quality fell by only 0.36 notches in 2013 - the smallest decline since 2007. In addition, the annual default rate decreased for the first time since 2004," Checconi continues.
S&P's quarterly transition study analyses cumulative rating transitions and defaults from the beginning of the financial downturn - which is assumed to be mid-2007 - until end-2013, aggregated by original issuance volume. The agency's 2013 annual transition study, meanwhile, refers to numbers of rating movements and defaults during the 2013 calendar year for the pool of ratings outstanding on 1 January 2013.
News Round-up
Structured Finance
APRA to simplify securitisation approach
The Australian Prudential Regulation Authority (APRA) has released for consultation a discussion paper on its proposals to simplify the prudential framework for securitisation for authorised deposit-taking institutions (ADIs). The authority says that the prudential framework for securitisation needs to be "clear and simple for stakeholders to understand".
APRA's proposals take into account the lessons learned from the financial crisis and global reform initiatives to improve transparency and incentive arrangements for securitisation. Its proposed approach includes: a set of key principles that apply to securitisation, rather than an expanded set of prudential requirements; a simple two credit class structure, which reduces the likelihood of opaque risk transfer and enhances benefits for system stability; a simple skin-in-the-game requirement to mitigate agency risks; explicit recognition of funding-only securitisation, with a simple but robust prudential regime that also allows for revolving securitisations or master trusts; simpler requirements for capital relief, matching risk to the amount of regulatory capital held; better integration of securitisation with the ADI liquidity regime; and clarification of the treatment of warehouses and similar structures.
The authority says its proposed reform of the prudential framework for securitisation is intended to assist in the further recovery of this market in Australia. Written submissions on the proposals are invited by 31 July.
Following consideration of submissions received, APRA intends to release a second consultation package in 2015 that will include its response to submissions, as well as a draft prudential standard, prudential practice guide and associated reporting requirements. The authority does not intend to finalise any reforms until, at least, the completion of the Financial System Inquiry now underway.
News Round-up
CDO
CDOs on the block
An auction call redemption auction is to be conducted with respect to the ICONS CDO. The auction call date is scheduled for 8 May, with an auction call redemption occurring on the payment date following the auction call date.
An auction has also been scheduled for the Crystal Cove CDO on 19 May. The collateral shall only be sold if the proceeds are at least equal to the total senior redemption amount.
News Round-up
CDO
Trups deferrals continue to cure
The number of US bank Trups CDO combined defaults and deferrals declined to 24.5% at end-March, compared with 25.8% at end-February, according to Fitch's latest index results for the sector.
In March, 18 banks deferring interest on a total notional of US$523m in 42 CDOs cured. Ten of these banks, or US$391m in notional, were due to reach the end of the maximum allowable five-year deferral period in 2014.
Three issuers, representing US$59m in collateral, deferred interest on their Trups in March. Two defaulted issuers and two deferring issuers - representing US$19m and US$15m in notional respectively - were sold out of four CDOs. There were no new defaults in the month.
Additionally, six issuers representing US$202m in collateral were reclassified as defaulted from deferring. The issuers have voluntarily filed for Chapter 11 bankruptcy for the purpose of completing a sale of assets, in accordance with the Section 363 bankruptcy code.
Across 78 Trups CDOs, 230 bank issuers have defaulted and remain in the portfolio, representing approximately US$6.bn of collateral. Additionally, 226 issuers are currently deferring interest payments on US$2.6bn of collateral. This compares to 312 deferring issuers totalling US$4.2bn of collateral at this time a year ago.
News Round-up
CDO
ABS CDO auction due
An auction has been scheduled for Margate Funding I on 20 May. The collateral shall only be sold if the proceeds are greater than or equal to the auction call redemption amount. The collateral manager, although it may not have been the highest bidder, will have the option to purchase the securities (or any sub-pool) for a purchase price equal to the highest bid.
News Round-up
CDS
Alstom CDS tighter on new bidder
A potential new bidder for Alstom has led to significantly tighter credit default swap (CDS) spreads on the firm in recent days, according to Fitch Solutions in its latest CDS case study. Five-year CDS on Alstom have come in by 42% since last Thursday, with credit protection now trading in line with triple-B minus rated entities.
CDS liquidity for the firm has been falling steadily since March from the 20th to the 38th regional percentile. "The CDS market seems to be reacting favourably to news that Siemens has reached out to Alstom to discuss strategic opportunities, which would potentially put a wrench in General Electric's bid for the French power and transport giant," comments Fitch Solutions director Diana Allmendinger.
News Round-up
CDS
Market appreciates Vivendi disposals
Credit default swap (CDS) spreads for Vivendi have tightened on the back of a series of asset disposals, notes Fitch Solutions. Five-year CDS is 29% tighter since the start of the year and credit protection is now trading two notches higher than its current triple-B IDR.
Fitch notes that Vivendi is likely to end up cash positive after selling its Maroc Telecom stake to Etisalat and French telecom unit SFR to Altice. CDS liquidity for Vivendi has fallen from the 10th regional percentile at the start of the year to the 29th percentile, indicating less pricing uncertainty.
News Round-up
CDS
Argentina tops risk report
S&P Capital IQ has published its first global sovereign debt report for 2014. The paper focuses on changes in the risk profile of sovereign debt issuers, with the aim of identifying key trends and drivers of change.
Argentina remained the most risky sovereign during the first quarter, based on market-implied risk, with its CDS spreads widening by 10%. Meanwhile, Japan exited from the top-10 least risky sovereign credits, due to its spreads widening by 10bp as fiscal stimulus continues to drive the Yen lower in an effort to boost exports.
Elsewhere, Portuguese and Cypriot CDS spreads tightened significantly in 1Q14, while Russian CDS spreads widened to 215bp as the prospect of sanctions by the US and Western Europe threatens economic growth in the country.
News Round-up
CDS
'Souring' sentiment for Jones Group
Widening credit default swap (CDS) spreads for Jones Group indicate souring market sentiment, despite overwhelming shareholder approval of Sycamore Partners' US$2.2bn acquisition earlier this month, according to Fitch Solutions in its latest CDS case study. Five-year CDS on Jones Group have widened by 29% over the past month and by 80% compared to last year.
"The CDS market is still signalling concerns regarding the merger's impact on Jones Group's credit risk profile," comments Fitch director Diana Allmendinger.
CDS liquidity for the retail company remains high, with contracts trading within the top 10th regional percentile consistently since September 2013. "Jones Group's CDS implied rating has dropped two notches over the past year, a sign that the company's credit profile was in decline leading up to the merger," adds Allmendinger.
News Round-up
CLOs
Low CLO exposure to largest default
Energy Future Holdings (EFH) and its subsidiaries filed for Chapter 11 bankruptcy yesterday. S&P LCD says it is the largest loan market default in its history, however CLO exposure is low.
Energy Future skipped around US$119m of coupon payments on 1 April within its Texas Competitive Electric Holding Company (TCEH) subsidiary. It has since reached an agreement with key creditors on a restructuring plan which would reduce US$40bn of debt.
The effect of the default on US CLOs should be minimal, according to Bank of America Merrill Lynch analysts. Many CLOs divested their Energy Future holdings since 2011 in anticipation of an eventual default.
The top 10 US CLO deals with the highest exposure to Energy Future have between 10% and 97% exposure. However, US CLOs only have a weighted average exposure of 0.36% and those with large concentrations have exited their reinvestment period and substantially delevered.
"Over 85% of all US CLO deals by count have less than 1% exposure and all exposures are to loans and not bonds. In light of this, we expect the impact of EFH's default on CLOs to be well contained," say the analysts.
Most deals holding TCEH loans have junior OC cushions which would cover Energy Future's default with the recovery rate haircut applied. From a sample of deals examined by the BAML analysts, only two would fail junior OC tests as a result of applying the haircut.
News Round-up
CLOs
No-action relief for CLO managers
The US CFTC has granted no-action relief to CLO managers for failure to register as a commodity trading advisor (CTA). The no-action letter notes that a manager is engaged by the CLO to provide investment advice for compensation and that the CLO is not a 'commodity pool' pursuant. It also notes that the advice that the manager provides to the CLO regarding hedging transactions is 'incidental' to the manager's core function, is not separately compensated and is a 'peripheral' - rather than an essential - part of a CLO investor's investment experience.
However, Mayer Brown notes in a client memo that the letter expressly declines to provide broader interpretative relief. Specifically, the CFTC has not provided an interpretation of whether a manager's activities rise to a level that requires it to register as a CTA. The Commission has also not provided an interpretation that the CTA registration requirements were never intended to apply to parties and transactions such as those described in the letter.
News Round-up
CMBS
Loan resolutions to 'remain stable'
US CMBS loss severities ticked up slightly year-over-year, while the pace of loan resolutions fell, according to Fitch's latest annual CMBS loan loss study. The agency expects the pace of loan resolutions to remain constant this year and average loss severities to remain stable, compared to 2013.
Average loss severities rose to 51.2% in 2013 from 50.5% in 2012. Special servicers resolved 872 loans, totalling US$16.4bn in Fitch-rated CMBS in 2013 - a decrease of over 28% by number, when compared to the 1,219 loans totalling US$16.6bn resolved in 2012.
"Special servicers are continuing to resolve many over-leveraged CMBS loans, with most of them still coming from the peak years of 2005-2007," comments Fitch md Mary MacNeill.
As for specific property types, retail had the highest average loss severity in 2013, at 62.1%. This represents a 14.5% increase from the 2012 loss severity of 54.2%.
"The 11 largest CMBS losses in 2013 were each in excess of US$50m, with eight coming from retail properties," adds MacNeill.
Conversely, hotels and multifamily loans (both at 36.8%) showed the greatest decline in loss severities, compared to 59.8% and 42.7% respectively in 2012.
News Round-up
CMBS
Open plans hamper office rebound
The increasing introduction of open-plan offices will contribute to vacancies and reduce the ability of some landlords to re-lease their entire spaces, says Fitch. Although the performance of the sector improved in 2013, office properties led US CMBS defaults for the third year in a row.
Fitch recorded 141 loans totalling US$2.6bn in 2013 versus 172 office loans totalling US$3.3bn in 2012, representing a 21% decline. The agency expects the office sector to continue to have a mixed recovery as major metropolitan office markets continue to outperform secondary and suburban markets. In addition to the trend towards open plans, many office markets will continue to be hampered by unemployment, slow job growth and significant rent concessions.
According to a survey by CoreNet Global, companies allocated 225 square-feet per employee in 2010. That fell to 150 square-feet or less per worker in 2013, a reduction of approximately one-third. This trend is expected to continue as open plans are optimised and other companies join the trend.
News Round-up
CMBS
CRE crowdfunding platform launched
The Carlton Group has launched a major real estate crowdfunding platform and website which will provide investors with an opportunity to invest in large, high-yielding commercial real estate investments. The platform further underlines the importance of online technology to the market (SCI 23 April).
The website will give qualified, accredited investors access to proprietary real estate investment opportunities. Deposit monies will be escrowed with an independent party.
Carlton's platform aims to provide greater transparency for investing in real estate and will accept investment amounts from US$1m to US$20m. The crowdfunding effort will be led by Carlton cio Navish Chawla.
News Round-up
CMBS
First Indian CMBS rated
CRISIL has rated the first Indian CMBS, which is being issued by DLF Emporio and DLF Promenade. The transaction represents a milestone in the increasing sophistication of India's corporate bond market and should open a new fundraising avenue for the real estate sector.
CRISIL has rated the CMBS at double-A. The DLF subsidiaries operate malls in south Delhi and CRISIL's analysts say that the CMBS structure "provides a fine balance between the issuer's need for funding and the investor's need for safety".
News Round-up
CMBS
TAURS 2006-1 option exercised
An assignee of the controlling class representative for Taurus CMBS (Germany) 2006-1 has unexpectedly exercised a purchase option under the €114.19m Bewag Berlin loan. The senior tranche of the loan has consequently been acquired from the issuer for €78.3m.
The proceeds will be deposited into the transaction account, with no further amounts collected on the loan. The special servicer has determined that there has been a recovery of all liquidation proceeds and other payments that will ultimately be recoverable on the senior tranche of the Bewag Berlin loan. Further, it has calculated that the final recovery determination is €78.3m.
As a result of the issuer no longer having an interest in the asset, the appointment of the servicer and the special servicer has been terminated.
An updated valuation of the asset was posted at €81.12m, as of 22 August 2013. An EOD occurred on the loan in March 2011, following an LTV covenant breach (see SCI's CMBS loan events database).
News Round-up
Insurance-linked securities
Italian ILS first
GC Securities has closed an innovative European catastrophe bond, sponsored by Assicurazioni Generali. Dubbed Lion I Re, the €190m transaction is the first-ever 144A cat bond to provide indemnity protection against Europe windstorm risks and the first from Italy.
The bond is rated single-B plus by Fitch and priced with a coupon of 2.25%. About 80% of the exposure is located in Germany, France and Austria. The subject business is primarily residential (70%) and commercial (21%), with a modest amount of industrial.
The bond provides three years of per occurrence indemnity protection, split into three risk periods. In the first risk period, principal will be reduced if ultimate net losses exceed the attachment point of €400m.
The notes will reset on 1 January 2015 and 2016. Generali has the option to increase the subject business' total insured limit by 1.1x relative to the subject business' total insured limits determined by the resets during any risk period. On each reset date, the attachment point and probability of exhaustion will be set to keep the modelled expected loss risk at 1%.
Generali can exercise an option to adjust the expected loss in the second or third risk periods, such that it falls in the range between 0.75% and 1.25%. If this occurs, the risk interest spread will be recalculated to reflect the marginal increase or decrease to the level of risk assumed by the noteholders.
Cory Anger, global head of ILS structuring at GC Securities, explains that Lion I Re pioneers a new methodology to allow cedents to access the capital markets at any point the during calendar year but only pay an annual premium rate that adjusts to reflect the commensurate amount of risk contributed for such portion of a partial calendar year period. "Such a feature opens the ability for cedents to access capital markets protection at a different time than their traditional renewal without paying excess premium," he adds.
The notes may be extended for claim development for two additional years, if certain qualifying events occur. However, the notes are not exposed to any further catastrophe events during this extension.
Interest from over 20 investors allowed the deal to be upsized from €150m and to be priced through the initial guidance of 2.5%-3%.
News Round-up
RMBS
Threat of losses despite settlement
Payments received as part of a rehabilitation settlement with FGIC have benefited investors in some closed-end second-lien backed transactions. However, Moody's notes in its latest ResiLandscape publication that payments have been small and many insured bondholders still have sizable unreimbursed losses.
Moody's rates 64 closed-end second-lien backed transactions with tranches backed by an FGIC insurance policy, of which 31 are part of the rehabilitation settlement. Bondholders in 20 of those deals - which are part of Residential Capital's GMACM, RAMP, RASC and RFMSII shelves - received one-time settlement payments at the start of the year ranging from US$36,700 to US$40.5m.
Insured investors in other RMBS have also benefited from the FGIC settlement. These settlement payouts are positive for insured bondholders, but many still have sizable losses which have not been reimbursed.
The settlements with investors in the ResCap shelves were one-time payments made in full. Investors in the other settlements will still be able to file claims after the original payment date, but payment will depend on FGIC having sufficient assets to pay those claims, which Moody's notes is currently uncertain.
Each settlement was negotiated individually but most equate to about 17 cents on the dollar. Some of the 11 non-ResCap transactions are still in negotiations with FGIC about reimbursement claims.
Moody's notes that investors in the ResCap settlements still have sizable losses even after receiving settlement payouts. As they cannot file additional claims, those investors remain vulnerable to further losses.
Separately, an initial cash distribution of US$457.8m as part of the ResCap settlement which was agreed with various RMBS trusts last month is expected to flow through in May. The liquidating trust for the ResCap Estate issued 100,000,000 settlement units, of which 25,900,000 were allocated to RMBS trusts against their rep and warranty and servicing claims on the estate.
Those settlement units are held by an RMBS claims trust for the benefit of all RMBS trusts. The liquidating trust made an initial distribution of US$17.65 per unit in December 2013 and as a result the RMBS claims trust held US$457.8m of cash for the benefit of RMBS holders, note Barclays Capital RMBS analysts.
"Now that the allocation between various trusts has been finalised, we expect the money to have flown from the RMBS claims trust to the individual trusts," say the analysts. "As a result, there is a good chance that the initial settlement distribution will flow to the trusts in the May remittance."
News Round-up
RMBS
Irish RMBS tendered
EBS has commenced a tender offer for €853.81m Emerald Mortgages No. 4 class A, B and C RMBS bonds. Prices are to be determined pursuant to an unmodified Dutch auction, but the minimum purchase price for the paper is 88.5, 42 and 38 respectively. The acceptance amount for each class of notes is also to be determined.
The lender says the offer is aimed at providing liquidity to bondholders, taking into consideration current market conditions. The offer will expire on 9 May, unless extended by EBS. Results of the tender will be announced on 12 May, with the settlement date expected to be on 14 May.
EBS notes that it will hold the bonds purchased in the tender, rather than immediately cancelling them.
News Round-up
RMBS
Aussie RMBS delinquencies decline
Moody's reports that Australian RMBS 30-plus day delinquencies fell by 57bp in 2013 from 2012. Improved performance was observed in 80 out of 87 regions across the country, ranging from 1bp to 133bp.
"Out of the eight states and territories, New South Wales showed the biggest improvement in delinquencies, of 75bp between 2012 and 2013," says Alena Chen, a Moody's avp and analyst. "In the last few years, New South Wales was the worst performing region of all the Australian states and territories. But in 2013, delinquencies had fallen to the national average."
Six other states and territories also saw improvements, while a deterioration was only observed in Northern Territory, which saw delinquencies increase by 13bp in 2013 from 2012. "Mortgage loans in Northern Territory comprise less than 1% of the Australian RMBS portfolio, hence this region is prone to fluctuations in the delinquency level," observes Noirit Zaman, a Moody's associate analyst.
Of the seven regions that experienced a deterioration in performance, Outback Queensland suffered the most, with a 58bp increase in delinquencies. This region experienced an increase in delinquencies because of its large exposure to the agricultural sector, which experienced a fall in employment, Moody's notes.
South Moreton Bay in Queensland and Outback Northern Territory were the other two regions with an increase in delinquencies of more than 50bp. South Moreton Bay experienced an increase because of the Queensland government's job cuts in the healthcare sector, which is the largest regional employment sector. Outback Northern Territory is sparsely populated and therefore experiences larger fluctuations in delinquencies.
Low interest rates have been a major contributor to decreasing delinquency levels, according to Moody's. The bank standard variable rate decreased by 135bp to 5.95% from 7.3% per annum between 2012 and 2013.
For the rest of 2014, the agency expects to see a limited rise in interest rates, which will lead to an up-tick in delinquency levels. However, the increase will only be mild because of Australia's broadly stable unemployment rate of around 6% and GDP growth of 2%-3%.
News Round-up
RMBS
Optimism over Ambac rehab
The Wisconsin Commissioner of Insurance, acting in his capacity as the rehabilitator of Ambac Assurance's segregated account, has sought approval from the Circuit Court for Dane County, Wisconsin to amend the insurer's plan of rehabilitation. The rehabilitation court is currently scheduled to hear the motion on 11 June, which - if approved - could boost Ambac-wrapped RMBS prices.
If the amendments to the plan are approved, holders of permitted policy claims of the segregated account would receive a combination of cash payments and the right to deferred amounts equal to the remaining balance of these claims. The deferred amounts would replace the surplus notes, previously contemplated to be received by holders under the plan (thereby avoiding several tax issues), and would generally accrue at 5.1% annually.
The rehabilitator also intends to increase the percentage of the initial cash interim payment for permitted policy claims from 25% to 45%, with effect from 20 July or the first payment date following the amended plan effective date. Holders of permitted policy claims who have received a 25% interim payment would receive catch-up payments equal to 26.67% of their deferred amounts outstanding on the date on which the interim payment percentage was increased. Additionally, there would be a proportionate redemption of surplus notes, excluding junior surplus notes.
This determination is based on an evaluation of the projected losses versus claims-paying resources, and a notable decline in the perceived volatility of those prospective losses, according to RMBS analysts at Bank of America Merrill Lynch. The financial health of the segregated account has improved over the course of the rehabilitation, with the net par of outstanding insured exposures declining from US$30bn as of 30 September 2012 to US$24bn as of 3Q13, while total claims-paying resources available to pay policyholders increased from approximately US$5.6bn as of 3Q12 to approximately US$5.7bn as of 3Q13. The reduction in projected losses is partially due to successful alternative resolutions with policyholders, such as policy commutations, that were approved by the court.
Using unpaid policy claim balances as of 31 December 2013, total catch-up payments of deferred amounts - together with accrued interest thereon - would be approximately US$1.1bn. Total proportionate payments on the surplus notes would be approximately US$415m.
The BAML analysts note that the proposed amendments to the plan follow the removal of a couple of potential barriers to its success. First, the IRS on 12 March resolved several tax issues that could have had adverse tax consequences on policyholders' ultimate recoveries.
Second, the order confirming the plan was subject to challenges in the Wisconsin Court of Appeals and the Wisconsin Supreme Court. The Wisconsin Supreme Court ultimately denied the pending petitions for review of the Court of Appeals' decision on 17 March.
Base-case losses for the general account and segregated account, prior to any rep and warranty recovery, were estimated at US$600m and US$5.9bn respectively. The base R&W recovery is estimated to be US$2.5bn, discounted for various risks associated with the pursuit of the claims.
The rehabilitator will reassess the appropriate cash payment on at least an annual basis. The analysts suggest that the market has already priced in some optimistic assumptions into Ambac-wrapped RMBS bonds.
News Round-up
RMBS
Remittance moves reported
US non-agency RMBS with prior claims against PMI could see cashflows being reported in this month's remittances. Meanwhile, two SASC 2007-BNC1 loans have recognised debt forgiveness-related losses that exceeded the loan balance.
PMI Mortgage Insurance has increased its partial claim payment on wrapped RMBS to 67% from 55%, with all claims that had previously been settled at 55% trued up in a one-time payment to the increased level. Barclays Capital RMBS analysts note that so far at least one deal, JPMAC 2006-WF1, received around US$1m of payments from PMI in this month's remittances.
At the same time, the SASC 2007-BNC1 loans turned current this month - after being delinquent for almost seven years - with the help of an aggressive modification, whereby the servicer shaved off a large amount of the unpaid principal balance and reported losses that were even higher than the balance of the loans. "While the losses reported on these loans are immaterial since the bonds are implied loss, such cases do highlight the risk to non-agency investors by aggressive modifications by the servicer," the Barcap analysts observe.
Meanwhile, a loan securitised in HVMLT 2005-1 that was liquidated in February saw US$900,000 of additional losses this month, leading to a write-down of US$1.07m on the 2A2 tranche. The analysts note that the loan had an original balance of US$196,000, with total recognised losses on the loan now standing at over 500% the original loan balance.
The loan had been delinquent since 2008 before it was liquidated at for a loss of US$148,000. The loan was most recently serviced by Nationstar, but during most of its delinquent period its P&L was not advanced by the servicer, the analysts add.
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