News Analysis
Structured Finance
Turning tide?
ECB attitude shift provides securitisation lift
The re-emergence of the European securitisation market has been helped by initiatives like the European DataWarehouse (SCI passim). This process could be set for greater impetus from the ECB, particularly if a high quality securitisation (HQS) label is introduced.
The build-out of the European DataWarehouse (ED) has been a key development in the market post-financial crisis. Despite some initial scepticism, concerns about issues such as data protection have been overcome.
"A few of the banks had certain concerns when the ED launched, but those have disappeared as banks have accepted that increased transparency is necessary. The latest potential guidelines from ESMA only underline the importance of transparency and that is something everybody accepts now," says Markus Schaber, ceo, European DataWarehouse.
The platform is still being developed and new templates have been added recently. Auto and consumer ABS templates are now available and Schaber notes that the ED has more than 765 deals and counting.
He adds: "We are also adding data users and increasing data usage over time. It is a process of evolution, not revolution, and we continue to grow and develop."
While such efforts have significantly improved transparency in the market, the ED's other stated goal - to increase securitisation activity - has been harder to meet. Regulators still appear to hold the key, although activity is slowly picking up.
"Increased transparency is a very important part of the puzzle, but it is only one part. As well as increased information, it remains true that the regulatory debate is extremely significant," says Schaber.
He continues: "The priority is capital treatment, but we are not part of that regulatory debate. For what it is worth, however, the strong push for SME securitisation is something which makes a lot of sense to us."
John Christiansen of New Wave Capital, who - alongside Mark Davies and John Sandifer - helped to build the first useable version of a European loan-level data platform while at Cedar Analytics, believes the increased transparency that the ED has brought can only be a good development. But he suggests that the platform is not having as much of an effect as it could. He notes that there are still not enough investors using the ED's loan-level data, for example.
"[That is] either because there is insufficient knowledge of how to use it at a granular level, or because investors have fallen back to being reliant on the third ECAIs (rating agencies), despite the issues that they suffered in the fall-out of the subprime issue from the US. There are plenty of originators generating data, but not enough people are getting enough value from it," says Christiansen.
He adds: "Part of the problem with ED seems to be that there are a lot of people who have put themselves out there as 'experts' but without real industry knowledge and experience and this has led to a lack of credibility and trust from the perspective of the user base: after the debacle of the ECAI issues, this was almost to be expected."
Questions have also been asked about regulators' understanding of the securitisation market, but a far more positive tone from the ECB is now being matched with genuine steps in the right direction (SCI 3 May). Were the ECB to buy senior tranches of SME securitisations through a quantitative easing programme (SCI 11 May), then it might choose to do so alongside a new HQS label - although what would come under that banner is as yet unclear.
Gordon Kerr, svp and head of EU structured finance research at DBRS, indicates that too rigorous a definition of what should qualify as a high quality securitisation could be problematic. "The danger lies in limiting flexibility: it ideally should remain possible to adjust the labelling of HQS to ensure the definition can be adjusted as the market develops. Too tight a definition could restrict the asset class beyond the regulator's intention," he explains.
Policymakers are targeting the SME and CLO sectors to facilitate funding to the real economy. A lot of SME and middle market loans are still held on banks' books, so there is potential for those assets to be securitised to recycle capital for further lending.
"However, smaller banks are unlikely to achieve the economies of scale necessary to regularly securitise their assets. Plus, it is possible for some existing retained deals to be re-offered or recycled back into the market as has occurred in RMBS. Some SME transactions were structured specifically for repo purposes, so may need to be restructured in order for them to be publicly placed," says Kerr.
Although HQS could be helpful from a regulatory perspective, investors are generally sophisticated enough to tell what is high quality or not without a label, while an ECB purchase programme would perhaps be less beneficial than reinvigorating private capital back into the market. In that sense, the most positive change would come from regulations continuing to be revised.
If the punitive proposed capital charges can be amended so that it becomes less expensive to hold securities, then banks would no longer feel compelled to sell them. In ceasing to be sellers they could become net buyers, which would benefit the market regardless of whether or not the ECB also functions as a buyer through QE.
"We see a lot of comment from the ECB that securitisation still has a role to play as a funding source and that is good news," says Christiansen. "The market is coming back. It will be smaller than it was before because there are competing products out there now for money to go to, but there remains a role for securitisation as a funding tool for investors."
If the regulatory aspects can be resolved, then the ED also believes that issuance will increase. "There are good signs and there is hope, but so far the market has not taken off," Schaber notes.
In the meantime, he says that the ED continues to go about its work. In the push for greater transparency, the platform is considering expanding its product range.
"Our experience in ABS is relevant for other markets and we could certainly add more asset classes if that is what the market wants us to do. We do not cover CLOs at the moment, but that is an area we are discussing with the market and it is something we might look to move into," says Schaber.
He concludes: "We are also asking whether covered bonds might benefit from a centralised template for reporting. There are no plans in place at the minute, but it is certainly a consideration."
JL
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Market Reports
ABS
ABS activity leans on auto supply
US ABS bid-list activity picked up yesterday on the back of higher auto and student loan supply. BWIC volume was around US$120m, with auto names accounting for half of the tranches captured by SCI's PriceABS data.
Among the auto ABS out for the bid yesterday were three AFIN tranches, including AFIN 2014-1 A1A, which was covered at plus 30. The tranche was previously talked at around 30 on 28 January.
The AFIN 2013-1 A2 tranche was covered at plus 28, while the AFIN 2014-2 A2 tranche was covered at plus 37. There was also a cover at plus 35 for the AMCAR 2014-1 A3 tranche.
Still in the auto space, the ALLYL 2014-SN1 A2A tranche was covered at plus 24. It was joined by CFCAT 2014-1A D, which was talked in the very high-200s and was covered at 300.
A couple of credit card bonds were also circulating during the session. Neither of them had been seen in PriceABS previously.
The first was the CCCIT 2014-A4 A4 tranche, which was covered at plus 24. It was joined by the DCENT 2014-A3 A3 tranche, which was covered at plus 25.
Also of note were some student loan ABS bonds. These included the KSLT 2004-A 2B tranche, which was talked in the mid-90s and covered at 95.56.
Another KSLT bond - KSLT 2005-A 2C - was talked in the low-80s and low/mid-80s. However, that tranche was not covered and was the only recorded DNT for the session.
Meanwhile, the SLMA 2006-B A5 tranche was talked at around 92 and was covered at mid-92. The bond appeared in the PriceABS archive a couple of times last year, including when it was traded on 4 June.
Finally, SLMA 2007-A A4A was talked at 90 handle and was covered at mid-89. The bond was talked in the mid-80s on 4 December 2013 and was covered at 80.03 a month before that.
JL
Market Reports
ABS
US ABS activity picks up
US ABS BWIC volume approached US$180m yesterday on the back of a couple of quieter sessions. SCI's PriceABS data shows a number of aircraft ABS bonds out for the bid, with the auto and credit card sectors also well represented.
Among the aircraft names circulating yesterday, the ACAP 2000-1A A1 tranche was talked in the high-40s and at around 50. The bond was also talked at around 50 on Monday and was being talked in the mid/high-40s when it first appeared in the PriceABS archive in October 2012.
AERCO 2A A3 was both talked and covered in the mid-50s. The tranche had been talked at that level on Monday as well and was covered on 28 March at 58 handle.
After price talk had been in the low-70s on Monday, the LIFT 1 A1 tranche was talked at around 70 and covered at 69 yesterday. The LIFT 1 A2 tranche, meanwhile, was talked at around 70 but was recorded as a DNT.
Additionally, TAF 1A A1 was talked in the mid/high-40s but was recorded as another DNT. The tranche was also a DNT on 11 March, when price talk for the name had been in the low-50s.
In the auto space, the DTAOT 2012-2A D tranche was talked at very high-103 handle during the session. The bond was talked at mid/high-103 on 11 December 2013 and had been covered at 102.75 two days before that.
Meanwhile, the BACCT 2007-A1 A1 credit card bond was covered at 22.5. Price talk on the tranche had been at plus 30 on 31 October 2013.
Also in the credit card space, CCCIT 2007-A8 A8 was covered at 28. The tranche was talked at plus 31 on 8 April and was previously covered at plus 42 on 12 September 2013.
The BLX 2006-AA A business loan tranche also made an appearance and was talked in the mid-80s. The tranche was covered on 11 April at 83.
Finally, in the whole business space, some Domino's paper was out for the bid. The HNGRY 2013-1A A2 tranche was talked at around 210, in the mid-210s and at around plus 215. The tranche was also covered at plus 211, having been covered last month at 219 and the month before at 227.
JL
Market Reports
RMBS
RMBS gears up for busy week
The US non-agency RMBS secondary market made a solid start to the week as BWIC volume approached US$450m yesterday. Activity has been boosted by a US$1.1bn bid-list that is scheduled to trade tomorrow.
Wednesday's list is said to largely comprise adjustable rate and subprime bonds from the 2005-2007 vintages. The majority of bonds circulating yesterday, meanwhile, came from Alt-A and option ARM deals, with SCI's PriceABS data capturing a range of names out for the bid.
Many tranches traded yesterday, including the Alt-A 30-year fixed-rate LXS 2007-10H 2A1 bond. PriceABS has twice previously recorded price talk for the tranche, most recently in the mid-50s on 20 November 2013.
Trades were also recorded for LXS 2007-10H 2A2 and LXS 2007-14H A211, while PriceABS additionally shows cover prices for LXS 2005-4 1A4, LXS 2005-6 1A1, LXS 2006-14N 1A1B, LXS 2006-5 1A1A, LXS 2007-10H 1A11, LXS 2007-3 1BA1 and LXS 2007-3 1BA2. The latter bond was covered at 68 handle, having been previously talked in the low/mid-60s.
The LXS 2007-7N 1A1A tranche was talked in the mid/high-70s and covered at 77 handle. The last recorded cover for the tranche was at 71 handle on 5 June 2013; it first appeared in the PriceABS archive in July 2012.
The LXS 2007-8H A1 tranche, meanwhile, was covered at 85 handle. The tranche also traded last month, when price talk was in the mid-80s, and was covered at 82 handle in January.
Further Alt-A 30-year fixed paper was out for the bid, including LMT 2006-8 2A1. That tranche was covered at 44 handle, having been talked in the low/mid-50s in May 2013.
The LMT 2006-8 2A2 tranche was talked in the mid/high-20s and covered at 25 handle. At the same time, the LMT 2006-9 3A1 tranche was covered at 19 handle.
Meanwhile, the prime hybrid BAFC 2007-E 4A1 tranche was covered at 79. Among the other noteworthy names from the session were two resecuritisation tranches - JPMRR 2009-7 7A1 and RBSSP 2012-6 1A2 - that both traded.
JL
News
Structured Finance
SCI Start the Week - 19 May
A look at the major activity in structured finance over the past seven days
Pipeline
Seventeen deals remained in the pipeline by the end of last week. They consisted of five ABS, three ILS, three RMBS, three CMBS and three CLOs.
The newly-announced ABS were: €475m Asset-Backed European Securitisation Transaction Nine; €543.5m Globaldrive Auto Receivables 2014-A; US$747m Navient Student Loan Trust 2014-1; US$275m Westlake 2014-1; and the refinanced ZAR825m Transsec securitisation.
The ILS consisted of US$200m Nakama Re Series 2014-1, US$100m Residential Reinsurance Series 2014-1 and US$150m Sanders Re Series 2014-2. The RMBS, meanwhile, were BPCE Master Home Loans, US$1.01bn Invitation Homes 2014-SFR1 and the refinanced ZAR382m Nqaba Finance 1 transaction.
The CMBS were US$1.1bn COMM 2014-UBS3, US$900m GRACE 2014-GRCE and US$974.1m WFCM 2014-LC16. Finally, the ACAS 2014-1, €1.86bn FTA PYMES Santander 8 and US$515m Jamestown CLO IV deals were added to the pipeline.
Pricings
Seventeen deals also left the pipeline last week. The prints consisted of seven ABS, three RMBS, three CMBS and four CLOs.
The ABS pricings were: US$1.3bn American Express Credit Account Master Trust Series 2014-1; US$411m Edsouth Indenture No.6 Series 2014-2; €600m Heathrow Funding 2014; US$1bn Honda Auto Receivables 2014-2 Owner Trust; US$384.5m Nelnet Student Loan Trust 2014-4; US$488.3m Porsche Financial Auto Securitization Trust 2014-1; and US$483.6m Wheels SPV 2 Series 2014-1.
US$482.7m American Homes 4 Rent 2014-SFR1, €927m CFHL-1 2014 and €538m Hypenn RMBS II accounted for the RMBS prints, while the CMBS new issues were US$257.5m CGBAM 2014-HD, US$1.45bn FREMF 2014-K715 and US$535m PFP III 2014-1. The CLO pricings comprised US$570m AIMCO CLO Series 2014-A, US$621m Cent CLO 21, €500m FTA PYMES Santander 9 and US$725.6m LCM XVI.
Markets
US ABS secondary market activity started the week slowly, but picked up on Wednesday, as SCI reported on 15 May. The mid-week session saw BWIC volume of around US$120m and SCI's PriceABS data captured a range of names circulating during the session, including several auto ABS tranches.
The US non-agency RMBS market had one of its busiest sessions in recent weeks when BWIC volume reached US$716m on Tuesday (SCI 14 May). The bulk of that session's supply came from senior and mezzanine subprime floaters.
In US CMBS, the week began with a number of A4 and AJ bonds out for the bid as BWIC volume came in at around US$175m on Monday (SCI 13 May). A large CDO liquidation list of fully written-down legacy subordinated bonds also traded.
Meanwhile, low transaction volumes in the European CMBS market helped to insulate spreads from softening in the broader markets, report Bank of America Merrill Lynch analysts. DMs on legacy CMBS last week stood at roughly 120bp over Libor on first-pay tranches, 170bp on second-pays, 200bp on third-pays and 350bp on fourth-pays.
Deal news
• Further analysis of the mezzanine loan encumbered by Stuyvesant Town-Peter Cooper Village has emerged, following reports that CWCapital plans to foreclose on the asset (SCI 15 May). US$1.4bn of mezzanine debt appears to have been tranched into various components, with Mezz 1-3 accounting for US$300m, Mezz 4-9 totalling US$600m, Mezz 10 totalling US$300m and Mezz 11 totalling US$200m.
• CAS and STACR spreads continued to grind tighter last week, with M2 classes hovering at 225bp-250bp and STACR M3s reaching new tights, coming in by about 20bp-25bp to 288bp-291bp. All classes from the risk-sharing RMBS are now trading above par and some earlier M2 classes are trading at significant premiums.
• The most recent payment report for European CMBS Infinity Soprano shows that the transaction amortised by €31.8m on the May IPD. In an unusual development, proceeds from two EHE loans that failed to pay in January (SCI 28 January) are continuing to be passed through to noteholders.
• Retailer Office Depot is set to close over 400 of its stores, following its merger with OfficeMax. A list of store closures has not yet been made available, but about 380 properties across 355 US CMBS loans are believed to have exposure to Office Depot or OfficeMax.
• A New York state court last week dismissed a fraud action filed by MBIA Insurance against JPMorgan. The suit was filed in 2012 in connection with a US$1.2bn RMBS - GMACM Home Equity Loan Trust 2006-HE4.
• At least two bids for each sub-pool of the DEKANIA CDO II were received from qualified bidders during the auction held on 9 May, which are at least equal to the total redemption amount. An auction call redemption shall consequently take place for the Trups CDO on 23 May, subject to the satisfaction of all requirements in the indenture.
• Auctions will be conducted for the RFC CDO II and III transactions on 2 June. The collateral shall only be sold if the proceeds are greater than or equal to the redemption amount.
Regulatory update
• The US Senate Committee on Banking, Housing and Urban Affairs has passed S.1217, the Housing Finance Reform and Taxpayer Protection Act, by a vote of 13-9. Two manager's amendments, no. 2 and no. 98, passed the Committee to amend the bill.
• Senator Elizabeth Warren has introduced legislation - the Bank on Students Emergency Loan Refinancing Act - that would allow FFELP, FDLP and certain private student loan borrowers to refinance existing loans into new Federal loans at the interest rates offered under the Federal loan programmes. A companion bill was introduced in the House by Representatives John Tierney and George Miller.
• The Reserve Bank of Australia has published updated and more detailed information on how its new reporting requirements for repo-eligible ABS will be implemented. In particular, all data for each securitisation must now be provided on a monthly basis, no later than seven calendar days after an issuer's specified coupon payment date and the equivalent monthly anniversary in non-coupon-payment months.
• The European Securities and Markets Authority (ESMA) has informed the European Commission of its intention to ease certain frontloading requirements under EMIR, with the aim of minimising uncertainty. ESMA says it believes that the frontloading procedure creates uncertainties for derivatives end-users, while the exact terms of the clearing obligation has not been defined, which could have an adverse impact on risk hedging and financial stability.
• The US SEC has charged Rafferty Capital Markets with illegally facilitating trades for another firm that was not registered as a broker-dealer as required under federal law. Rafferty has agreed to settle the charges by disgorging profits and paying a penalty for a total of nearly US$850,000.
Deals added to the SCI New Issuance database last week:
Anchorage Capital CLO 4; Arbor Realty Collateralized Loan Obligation 2014-1; Ares XXX CLO; BA Credit Card Trust 2014-2; Benefit Street Partners CLO IV; CarMax Auto Owner Trust 2014-2; CCG Receivables Trust 2014-1; Chase Issuance Trust 2014-5; COMM 2014-CCRE17; CSMC Trust 2014-IVR2; Ford Credit Auto Owner Trust 2014-REV1; Hildene CLO II; Hyundai Auto Receivables Trust 2014-B; LSTAR 2014-2; Madison Park Funding XII; Medallion Trust Series 2014-1P; Moorgate Funding 2014-1; Newstone Mortgage Securities No. 1; Pelican Finance No. 1; RedZed Trust Series 2014-1; Symphony CLO XIV; TAL Advantage V Series 2014-2; WFRBS 2014-C20.
Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; BACM 2006-4; BALL 2005-MIB1; BSCMS 2005-PWR9; BSCMS 2006-PW11; CMLT 2008-LS1; CSMC 2007-C2; DECO 7-E2; ECLIP 2006-2; EPC 3; EURO 23; EURO 25; EURO 28; GSMS 2013-GG10; JPMCC 2006-CB15; JPMCC 2007-CB18; JPMCC 2007-LD12; JPMCC 2007-LDPX; JPMCC 2012-FL2; LBUBS 2007-6; LEMES 2006-1; MLMT 2005-CIP1; TAURS 2006-3; TITN 2006-3; TITN 2007-CT1.
News
CLOs
CLO hedging discussed
FX risk is an established consideration for the CLO market - especially for European CLOs. JPMorgan CDO analysts note that perfect asset swaps (PAS) can act as a hedge for both assets and liabilities.
The recent softness in US dollar loans has provided opportunities for European CLOs looking to source collateral. Meanwhile, the increasingly globalised investor base can make hedging US dollar tranches a pressing concern in markets where local currency yields are particularly low.
Where euro-denominated loans yield Euribor plus 400bp and US dollar-denominated loans yield Libor plus 410bp, the cross-currency bases would be marginally attractive to buy dollar loans. The JPMorgan analysts suggest that a 10bp move in the euro/dollar cross-currency basis would currently be enough to make a European CLO indifferent between holding euro or dollar loans.
The pound/dollar basis curve is currently similar to the euro/dollar curve across all maturities, so the same holds true for European CLOs buying UK loans. Although European CLOs only rarely issue tranches denominated in pounds, the narrow basis means that a pound-denominated CLO could in theory have a marginal pick-up in yield.
The analysts expect the pound/dollar basis to hover around current levels, which means loan spread will be a more significant driver in choosing between euro or dollar assets - although the issue of asset sourcing must also be taken into account. PAS make sense for CLOs, considering loan prepayment and credit risk.
Investors from markets with low yields are also looking at CLOs. For example, as the Bank of Japan has reduced the stock of government bonds available to private investors, those investors have begun to search for higher yielding foreign assets.
A negative Japanese yen/US dollar cross-currency basis reduces the attractiveness of such transactions because the investor receives the negative basis. However, the analysts suggest that investors can take advantage of the inverted yen/dollar cross-currency basis curve by entering into shorter-maturity swaps and rolling these into newer swaps upon maturity.
"We have a neutral view on the yen/dollar cross-currency basis and favour rolling short-term FX hedges over long-term hedges. On the other hand, while this strategy may be cheaper at the outset, it entails roll risk - which is less suitable for typical buy-and-hold investors in CLO tranches with long average lives. In addition, investors hedging tranches should consider PAS as a better way to access investments, given call probability/other CLO risks," the analysts observe.
JL
News
CMBS
CMBS payments imply unique structure
The most recent payment report for European CMBS Infinity Soprano shows that the transaction amortised by €31.8m on the May IPD. In an unusual development, proceeds from two EHE loans that failed to pay in January (SCI 28 January) are continuing to be passed through to noteholders.
Redemption proceeds were applied modified pro-rata, with the pro-rata portion correcting a previous misallocation of principal on the February IPD. Considering the correction, Barclays Capital European securitisation analysts believe that the transaction is now in sequential pay-down mode.
Most of the principal redemption was related to the defaulted EHE Pool 1A and EHE Pool 1B reference obligations, which received credit event notices in January (see SCI's CMBS loan events database). €10.9m principal proceeds generated by the EHE loans earlier were applied towards the February noteholder distribution, with both the February and May principal redemptions believed to originate at least partially from property sales.
The behaviour of the EHE loans is in contrast to other loans that are subject to a credit event in synthetic CMBS. Principal redemption for those stopped shortly after a credit event was declared, suggesting that Infinity Soprano could be structured differently so that principal recovery proceeds are passed through when they arise, instead of after the settlement of the CDS only.
When the Neumarkt loan in Eclipse 2007-2 experienced a credit event (SCI 3 May 2011), principal redemption stopped shortly afterwards, as is normal for synthetic CMBS. However, unlike Eclipse, Infinity Soprano has no clear provision in the offering circular that a principal reduction will not be passed through to noteholders after a credit event.
The definition of issuer available redemption funds in the Infinity Soprano offering circular is closely tied to the release of cash collateral backing the credit-linked CMBS notes. In turn, cash collateral is released whenever the respective CDS notional is reduced, creating an indirect link between CDS notional reduction and CMBS principal redemption amounts.
"In addition, in the terms and conditions dealing with the 'mandatory redemption in part of the notes', repayments shall be made following the receipt of 'reference obligation repayment amounts'. Reference obligation repayment amounts are very broadly defined as 'the aggregate amount of principal received by or on behalf of the lender during the collection period'," note the Barcap analysts.
As with the EPIC Drummond CMBS, recoveries are not specifically mentioned as an item that could reduce the swap notional balance over time. Ultimately the analysts believe that Infinity Soprano's workings are generally closer to those of EPIC Drummond than Eclipse 2007-2, albeit with a more all-embracing list of principal redemption sources that could result in a reduction in the CDS balance and a mandatory redemption of the notes.
It is unclear whether loan recovery proceeds should be passed through to Infinity Soprano noteholders at the time that they arise after a credit event of a defaulted reference obligation or whether they should be passed through only after a full liquidation of the loans' property collateral and loss determination. However, the analysts believe that as long as the work-out strategy remains gradual, the property disposals are consensual and the borrowers are solvent, recoveries from property sales could continue to be passed through to CMBS noteholders in forthcoming IPDs.
It is also likely that sales proceeds of the last properties securing the loans might not be passed through immediately, so as to reserve for work-out costs that need to be considered in the CDS cash settlement. If loan principal recoveries are passed through in a timely manner, it would reduce overall realised losses on the transaction.
The analysts' base case remains that there will be gradual and consensual property disposals for the EHE loans, which they suggest is likely until shortly before the last property is sold. "In our view, this would make class A of INFIN SOPR resemble more the first-pay bond of a true sale European CMBS transaction and one of the highest-yielding European CMBS first-pay bonds currently. For class B, the ultimate yield still depends on the time period between last property sale and CDS cash settlement."
JL
News
CMBS
Rates encourage CMBS prepays
US CMBS loans have experienced an increase in the number of early prepayments with defeasance or yield maintenance recently. Forward rate expectations are a strong driver of such activity, but higher penalty payments have dampened cash-out refinancings.
Early prepayment volumes are still a long way off the levels seen in 2005-2007, when the gross WAC for new CMBS originations increased by around 100bp. Barclays Capital CMBS analysts note that at that time early prepay volumes nearly doubled to US$4bn a month.
There was also an uptick in monthly early prepays from close to zero in 2012 to US$1.5bn in late 2013. At that time, gross WAC for CMBS loans increased by 80bp-100bp.
Both 2005-2007 and 2012-2013 were periods where high volumes of early prepays coincided with periods in which rates were heading higher. Prepay volumes have subsequently cooled in 1Q14, along with the rally in rates.
"An overwhelming majority of early prepays in 2012-2014 happened on loans which had a positive refi incentive. Hardly any borrowers refinanced early when they faced a negative refi incentive - showing that recent prepay activity was still highly rate driven," the Barcap analysts observe.
This has meant that most of the early prepays have been on loans from the 2003-2005 vintages or from the early new issue deals from 2011, when rates were still comparatively high. However, the analysts note that prepays in 2005-2007 - when the distribution of prepays across refi incentive buckets was wider and a significant share of borrowers refinanced, despite facing negative refi incentives - were not driven by rates.
When property values increase substantially or lenders are willing to give higher LTV loans - as happened in that period - borrowers can often take cash out of the property while refinancing. The potential for a cash-out refinancing could consequently have offset the effect of higher rates.
Loans that prepaid early in 2005-2007 often had more than four years left before their open period began. By contrast, the average for prepays in 2013 was less than two years remaining.
Longer terms should result in higher prepayment penalties, but average penalties paid by borrowers in 2005-2007 were only about six cents on the dollar. Loans prepaying in 2012-2014 faced penalties of nearly 11 cents on the dollar and these high penalties could limit cash-out refinancings.
The reason penalties have become so much more expensive is the move in benchmark rates. The current low rates used as a discounting factor can push up yield maintenance penalties substantially and in some cases now they can reach 20-25 cents on the dollar.
Such higher penalties are an obstacle for cash-out refinancings as the borrower will have to sacrifice a significant share of the potential cash-out simply to service penalties on the original loan. That is why recent prepays have been on loans with only a couple of years left before maturity - the shorter term can make the penalties more manageable.
To calculate how much cash borrowers have been able to extract through early prepays, the analysts compared property balances where loans prepaid out of CMBS conduits before their open date and refinanced into new securitised loans. That difference is then adjusted to account for estimated penalty payments and any B-notes that might need to be paid off.
The analysts estimate that a majority of early prepays in 2005-2007 had 30%-50% of the loan balance returned to the borrower as cash, but that 2013-2014 prepays only extracted cash equal to 15%-25% of the new loan balance. Some of the difference is caused by the higher penalty payments, but also underwriting standards are now much tighter and offered LTVs are lower.
JL
Job Swaps
ABS
NY broker settles SEC charges
The US SEC has charged Rafferty Capital Markets with illegally facilitating trades for another firm that was not registered as a broker-dealer as required under federal law. Rafferty has agreed to settle the charges by disgorging profits and paying a penalty for a total of nearly US$850,000.
The SEC alleges that Rafferty agreed to serve as the broker-dealer of record in name only for approximately 100 ABS trades that were actually introduced by the unregistered firm. That unregistered firm then managed the business and Rafferty had no involvement in the trading or compensation decision while trades were executed on its systems on behalf of the unregistered firm.
Five employees from the unregistered firm went on to become registered representatives with Rafferty, but performed their work in the offices of their own firm, says the SEC. Records of communications with those representatives were not kept by either Rafferty or the other firm, which contributed to a representative concealing trades from Rafferty and led to the firm's books and records to be inaccurate.
Job Swaps
Structured Finance
GKB beefs up in structured products
George K Baum & Company has expanded its taxable fixed income division - which focuses on structured products - with new offices in New York and Bethesda. The group, led by head of structured products Ted Kallina, has also been boosted with six new arrivals.
Kallina was previously coo of Institutional Financial Markets, formerly Cohen & Company, and joined the firm last year. He has since recruited Clayton Brasher, Christopher Drabin, Brendan Fry, Thomas Murray, John Rosa and Miguel Vazquez, who each join as svp.
Brasher is responsible for trading CLOs, CDOs and esoteric asset classes. He was previously at Advisors Asset Management, where he also traded CMBS.
Drabin focuses on mortgage securities and US Treasuries and has particular expertise in agency and non-agency ARMs. He was also previously at Advisors Asset Management.
Fry has coverage responsibilities for a wide range of financial institutions including money centre banks, insurance companies, money managers and hedge funds and has secondary market trading experience in RMBS, CLOs and CDOs. He was previously at Raymond James.
Murray focuses on RMBS and CMBS and other securitised structured products. He was previously at Advisors Asset Management.
Rosa is responsible for trading CMBS and CRE CDOs. He previously traded CMBS at Gleacher & Company.
Vazquez trades non-agency RMBS. He has more than 18 years of mortgage securities experience and was most recently at Knight Capital.
Job Swaps
Structured Finance
Capital markets leader appointed
GE Capital International has recruited Robert Plehn to lead its capital markets team. He will join in July and take responsibility for all strategic capital markets activities across Europe and Asia Pacific.
Plehn joins from Lloyds, where he was most recently head of the asset-backed solutions team. He has also served as head of securitisation and covered bonds at the bank and before that worked in securitisation roles at ING and Sidley & Austin.
Plehn will report to Rich Laxer, president and ceo of GE Capital International and to Stewart Koenigsberg, global head of capital markets at GE Capital. He replaces Ellen Brunsberg, who becomes president of GE Real Estate Europe.
Job Swaps
Structured Finance
Analytics and ratings data combined
S&P Capital IQ has launched S&P Credit Solutions, a new business line enabling investors to leverage the combined data, research and analytics capabilities of both S&P Capital IQ and S&P Ratings Services. Neil Smith has been hired to lead the new venture.
Smith has spent the last three years at Fitch Solutions, where he was global head of products. He has also worked at BNY Mellon as well as Citigroup's alternative investments team in New York and credit structures team in London.
S&P Credit Solutions is a distinct business line within S&P Capital IQ. It is fully dedicated to the commercial distribution of S&P Ratings Services' ratings intellectual property.
Job Swaps
Structured Finance
Bank splits capital markets group
Lloyds Bank Commercial Banking is dividing its capital markets group into two separate teams, with one covering fixed income and asset-backed solutions and the other covering corporate solutions. The move follows the departure of Robert Plehn to join GE Capital International (SCI 20 May).
The fixed income and asset-backed team will be led on an interim basis by Andrew Willett. It will unite fixed income structured and capital solutions activity in one team.
The corporate solutions team is being expanded to strengthen its focus on solutions for corporate, real estate and infrastructure and energy clients. This team will continue to report to Willett.
Job Swaps
Structured Finance
SME service provider adds two
Newtek Business Services has appointed two senior executives. Harold Gartner joins Newtek Business Credit as president and coo and Susan Streich joins Newtek Small Business Finance as chief risk officer and chief compliance officer.
Gartner specialises in structured finance and has experience in receivables finance, asset-based lending and ABS. He has held senior positions at Morgan Stanley, Chase Manhattan, Nomura Securities, Daiwa Securities and ING.
Streich has previously worked at Booz Allen Hamilton, Capital One Bank and Transamerica Small Business Capital. She will be based in Virginia, while Gartner will be based in New York.
Job Swaps
Structured Finance
JV to help wind down bad bank
Natixis and Moelis Asset Management have formed an investment manager as a joint venture. Chamonix Partners Capital Management will initially manage Vallee Blanche Fund Alpha, which will purchase a portfolio of US dollar and euro-denominated structured asset products from Natixis' GAPC.
The fund's limited partners will be external to Moelis and Natixis. It will be a true sale by GAPC, bringing Natixis a step closer to unwinding its non-core asset portfolio.
Chamonix will also seek to raise and manage subsequent funds. It will be overseen by a management board consisting of three representatives appointed by Moelis and another three appointed by Natixis.
The investment committee will be led by Martin St Pierre, who was most recently global ceo of GAPC. Before that he was global head of credit trading at Natixis and he has also worked at Bear Stearns and Credit Suisse.
Job Swaps
Structured Finance
New leadership for GFMA
The GFMA has appointed Samir Assaf as chair and Kenneth Bentsen as ceo. Assaf will serve as chair for a term of two years, while Bentsen will serve a three-year term.
Assaf replaces Blythe Masters, while Bentsen replaces Simon Lewis. Both Masters and Lewis have been in their posts for two years.
Assaf is chief executive of global banking and markets at HSBC. He has also worked at CCF and Groupe Total.
Bentsen is president and ceo of SIFMA. He has held several roles at that organisation and also worked for the Equipment Leasing and Finance Association, having previously served as a member of the US House of Representatives.
Job Swaps
CMBS
CRE info firms unite
Trepp has bought CRE Direct, providing mutual clients with streamlined access to additional CRE information and analysis. Trepp will deliver authorised access to CRE Direct through its TreppTrade, TreppCMBS and TreppLoan products and CRE Direct will continue to operate independently.
Job Swaps
Insurance-linked securities
ART units combine
SCOR has formed a new alternative solutions business within the specialties section of its Global P&C division. The initiative aims to provide insurance and corporate clients with a wider range of hybrid reinsurance solutions for the transformation, financing and transfer of risks.
The business combines the division's expertise in structured risk transfer (SRT), alternative risk financing (ARF) and insurance-linked securities (ILS). It will be overseen by SCOR's SRT/ART committee, comprising Victor Peignet, Benjamin Gentsch and Yvan Besnard.
Vincent Foucart, who has been group corporate secretary since 2010, becomes the director of the alternative solutions unit. Romain Launay, currently senior advisor to SCOR's chairman and ceo, is appointed group general secretary. Vincent Malige, currently group deputy general counsel, will become group general counsel following the departure of Eric Sandrin.
Job Swaps
RMBS
Mortgage services provider adds review chief
LenderLive Network has hired Mark Hughes as review services svp, leading the company's due diligence and loan review business. It is a new position at the company which will entail growing LenderLive's position as a third-party review firm and expanding its offerings.
Hughes will be based in New York and report to ceo Rick Seehausen. He was previously at CoreLogic and has also worked at Bohan Group and Salomon Brothers.
News Round-up
ABS
Tariff deficit criteria finalised
Fitch has released its new criteria for rating Portuguese and Spanish electricity tariff deficit (TD) securitisations, following the publication of an exposure draft (SCI 4 March). There are no rating implications for existing TD securitisations as the criteria framework broadly reflects analytical practices that the agency has already followed when rating these transactions.
Fitch believes that the ratings of TD securitisations cannot be more than three notches higher than the issuer default rating (IDR) of the relevant sovereign - mainly because its central expectation is that macroeconomic trends and regulatory policies have a direct impact on the equilibrium of the electricity system and, in turn, on the recoverability of TD credit rights. "We consider that electricity system revenues are supported and influenced (both positively and negatively) by the economic strength of a country and the stability or volatility of its legal and institutional framework, factors that are indicated by the sovereign IDR as a starting point," it explains.
When determining the distance between the TD securitisation rating and the sovereign IDR, Fitch assesses quantitative and qualitative factors, such as the electricity regulator's powers and independence, the electricity system's financial profile and whether a credible agenda is in place that aims to eliminate TDs within a realistic timeframe.
News Round-up
ABS
Private SLABS index launched
Fitch has rolled out the latest of its series of structured finance index reports - a US Private Student Loan ABS Index. The report - which tracks delinquency and default rates for private student loan ABS, as well as new issuance trends - is updated quarterly.
An improving economy is positioning US private student loan ABS for a more stable performance in the coming months, according to Fitch. Private student loan 90-120 day delinquencies indicate a range between 0.69% and 0.84%, while annualised gross defaults have narrowed, ranging between 2.68% and 2.91% for for-profit lenders and not-for-profit lenders.
News Round-up
Structured Finance
Multi-borrower SFR concerns outlined
Credit concerns related to single-family rental (SFR) securitisations backed by loans to multiple borrowers will differ in several important respects from the single-borrower SFR transactions that have recently been issued, according to Moody's. Such deals - especially when backed by loans to many small borrowers, each of which owns only a few properties - will likely exhibit less default volatility but potentially lower recoveries and more operational risk.
The likelihood of default in a multi-borrower SFR deal will vary according to a range of credit characteristics among the many borrowers. "If the loans in a multi-borrower SFR do default, the recovery rate will be lower than in a single-borrower SFR," says Moody's md Navneet Agarwal. "This is primarily for two reasons: the geographic concentration of the properties backing the loans; and the more complex operational issues for those properties."
These operational issues include differences in the borrowers' management of property renovations and maintenance, the geographic concentrations among the loans on the properties and the quality and flow of property information to the lender. Legal and structural protections similar to those in conduit CMBS can serve as mitigants to these operational issues, Moody's notes. These protections include loan covenants, representation and warranties, and - for large multi-borrower SFR deals - the use of a single-purpose entity structure.
The sponsor's role in managing the operational issues in multi-borrower SFR deals will be critical, Moody's says. "The variability of business practices among borrowers will increase uncertainty about loan performance and make the credit assessment of the SFR more difficult," explains Agarwal. "A sponsor working with other parties can help ensure that the information the borrowers supply is consistent in content and format, both at closing and throughout the term of the transaction."
News Round-up
Structured Finance
Hedge fund AUM hits highs
Investors allocated heavily into hedge funds in April, the third consecutive month of elevated inflows, according to eVestment. The US$17.9bn of new capital added offset the slight asset-weighted performance declines and pushed the industry's AUM to an all-time high of US$2.94trn.
Credit fund flows were positive but near flat for the second consecutive month, albeit AUM remains at an all-time high for the sector. There appear to be differing opinions on the potential value of credit strategies in the current rate environment, despite its industry-leading year-to-date returns. eVestment notes that persistent growth has been driven by the structural shift in the industry's investor base as institutions have overtaken fund-of-funds as primary investors and shown an interest in alternative exposures to familiar markets.
News Round-up
Structured Finance
Irish sovereign ceiling lifted
Moody's has raised the maximum achievable rating for Irish structured finance transactions to Aa3 from A2, following its upgrade of Ireland's government bond rating to Baa1 from Baa3 (stable outlook). Concurrently, the agency raised the country's local and foreign currency bond and deposit ceilings to Aa3 from A2.
An improved outlook for Ireland's medium-term public debt levels, the reduction in government contingent liabilities and the rapid recovery from the euro debt crisis compared to other Baa-rated euro area sovereigns triggered the positive rating action. Moody's will publish the outcome of its deliberations for affected transactions in the coming weeks.
News Round-up
Structured Finance
Green bond issuance accelerating
S&P estimates that the size of the green bond market will double year-on-year to around US$20bn globally in 2014. Green bond issuance appears to be accelerating - not only because it aids diversification, but also because of growing investor interest in implementing environmental, social and governance goals.
As of April 2013, 1,188 investors globally had signed up for the United Nations Principles for Responsible Investment. This represents approximately US$34trn of assets under management, which is over 2.5 times the amount five years previously, according to S&P.
So far, green bonds have mostly been issued in Europe, with investment grade ratings generally of single-A plus or single-A. GDF Suez last week issued the largest-ever green bond: at €2.5bn, the bond accounts for close to a third of the total US$10.4bn volume of green issuance since November 2013. It is almost double the previous record of €1.4bn set by another French power company Electricite de France.
S&P credit analyst Michael Wilkins observes: "As the market continues to develop, smaller environmental projects may be able to attract financing by combining into larger investment offerings that could make them more suitable to larger investors. We think it likely that the next stage of market evolution will see structuring of bonds to enhance credit support and a move to finance environmental projects away from the issuer's balance sheet."
A key distinction of green bonds is that proceeds are ring-fenced and allotted to finance or refinance projects addressing environmental issues. Crucially for investors, the credit risk of a corporate green bond remains on the issuer's balance sheet. This means that - unlike with multilateral bank issuance - investors do not have to sacrifice yield to gain green exposure, nor significantly increase their risk profile.
News Round-up
Structured Finance
Direct lending fund offered
Proventus Capital Partners has raised Skr8.8bn via its third fund, Proventus Capital Partners III. The fund will remain open for further investment until end-3Q14.
Proventus Capital Partners provides loans to midsized companies in need of capital for expansion, acquisition financing, restructurings and refinancing in Northern Europe. It also conducts investments in the primary and secondary high yield bond markets.
"The market for direct lending, outside of the banking system or in combination with banks, is growing rapidly. In this segment, we aim to be a strategic financial partner to the companies we invest in, and not just a supplier of money, and to help them address funding needs that are not suitable for traditional sources of credit. Over time, the best return on our investments will come from assisting companies in making the most of their business opportunities," says Daniel Sachs, ceo of Proventus Capital Partners.
Proventus Capital Partners launched in 2009 with €216m under management. Proventus Capital Partners II and IIB were established in 2011 and 2012, with total capital of Skr7.4bn, and are now fully invested.
News Round-up
CDS
JPC spreads outperform retail index
JC Penney Co five-year CDS spreads have tightened by 36% over the past month, notably outperforming Fitch's North America Retail CDS Index, which moved just 4% tighter during the same period. Fitch Solutions notes that the cost of credit protection on JCP debt is at its lowest level since last July, suggesting increased investor confidence as the department store begins to show some positive traction.
CDS liquidity for JCP has increased in recent weeks to trade in the third regional percentile, signalling that a high level of pricing uncertainty remains - despite improved market sentiment. Early indications that the business is beginning to turn the corner include first-quarter comps coming in at 6.2%, albeit the recovery is expected to remain slow, given the overall weak sales and pricing environment. Gross margin at 33.1% improved sequentially and was up by over 220bp versus the year-ago period, but remains well below pre-2012 levels of 40%-41%.
Fitch on Monday affirmed the issuer default ratings of JC Penney Co and JC Penney Corp at triple-C and assigned a positive outlook. The positive outlook reflects JCP's recently improved liquidity profile.
News Round-up
CDS
Hillshire CDS spikes on acquisition
The Hillshire Brands Co five-year CDS widened by 55% on Monday, according to Fitch Solutions. The move was driven by the food company's definitive agreement to acquire Pinnacle Foods Inc for US$6.6bn. Hillshire intends to finance the purchase with US$4.8bn of incremental debt and the issuance of US$2.1bn of equity.
After steadily pricing in line with triple-B levels for the past year, credit protection on Hillshire's debt spiked out to price in the below-investment grade space. CDS liquidity for the name has risen over the past month, from trading in the 30th regional percentile to the 19th, a sign of growing pricing uncertainty.
Fitch on Tuesday lowered Hillshire's long-term issuer default rating by three notches to double-B and also maintains a private rating on Pinnacle. The downgrade reflects the agency's pro forma leverage estimate and assumption that the transaction has a high probability of completion. The deal is expected to close by September, following regulatory and shareholder approval.
News Round-up
CDS
EFH auctions due
Separate auctions have been scheduled on 21 May to settle the credit derivative trades for four Energy Future Holdings entities - Texas Competitive Electric Holdings Company, EFIH Finance Inc, Energy Future Intermediate Holding Company and Energy Future Holdings Corp. The move comes after a bankruptcy credit event was declared in respect of the entities earlier this month (SCI 1 May).
News Round-up
CLOs
FOIF set to list
Fair Oaks Income Fund (FOIF) has acquired GLI Finance's remaining two CLO investments, with a valuation of approximately US$55m, as at 8 May. The assets will be transferred by GLIF in consideration for a cash element and an issue of shares in FOIF, subject to a two-year lock-in agreement.
Monies from the exit of the CLO portfolios will be deployed into GLIF's underlying SME finance assets. The firm say its current portfolio of interests in ten SME finance platforms will form the core of its future business.
Concurrent to the acquisition, FOIF has announced its intention to seek admission to trading on the LSE's Specialist Fund Market. The placing and offer of ordinary shares up to US$200m are currently expected to close on 6 and 5 June respectively, with admission to trading expected to take place on 12 June.
On the basis of current market conditions, FOIF expects to target a net total return on the issue price of 12%-14% per annum over the five-year (subject to two potential one-year extensions) planned life of the Master Fund. The investment policy of the company is to seek exposure to US and European CLOs or other vehicles and structures that provide exposure to portfolios consisting primarily of US and European floating-rate senior secured loans.
Numis Securities is acting as sole bookrunner and broker in relation to the issue.
Fair Oaks Capital has been appointed investment adviser to FOIF (SCI 7 May). The company's board comprises three independent directors: Claudio Albanese (chair), Jonathan Bridel (chair of the audit committee) and Nigel Ward (chair of the risk committee).
News Round-up
CMBS
Idiosyncrasies drive CMBS 2.0 defaults
The first US CMBS 2.0 loan defaults have surfaced. However, Fitch notes that they were driven by idiosyncratic events and do not appear to be the start of prolonged rising defaults.
Nine loans totalling US$74.9m defaulted last year in CMBS deals issued between 2010 and 2013. Eight of the defaults were on loans for multifamily properties. The causes were largely due to tenant bankruptcies and financially-challenged sponsors, according to Fitch director Brook Sutherland.
"The largest CMBS 2.0 default occurred when a major office tenant vacated before their lease expired," he explains. "The multifamily CMBS defaults were mostly on smaller properties that, despite adequate property performance, were chronically late with payments - possibly because of organisational problems at the sponsor level."
Fitch identified an additional 12 CMBS loans totalling US$157.5m transferring to special servicing but avoiding default. Despite these outliers, the rate of CMBS 2.0 defaults is expected to remain low.
Whereas the average annual default rate for CMBS 1.0 loans (excluding 2005-2007 deals) is roughly 0.7%, the CMBS 2.0 default rate comes in at less than 0.02%. But that number could slowly increase, with higher leverage and more aggressive underwriting taking hold in recent months.
A bigger concern over time will be balloon risk. "If interest rates are substantially higher when the CMBS loan matures, refinancing is likely to be more difficult, unless there is some appreciation in cashflow," says Sutherland.
News Round-up
CMBS
Stuy Town news sparks rally
US CMBS bonds with exposure to the US$3bn Stuyvesant Town-Peter Cooper Village loan rallied yesterday on reports that Fortress is readying a US$4.7bn bid for the asset, while CWCapital may initiate a mezzanine foreclosure. If these moves materialise, the five transactions in which the loan is securitised are expected to take little - if any - A-note losses upon its resolution (SCI 9 May).
A US$18.71m BWIC comprising AJ tranches with exposure to Stuy Town was out for the bid yesterday afternoon. SCI's PriceABS data shows that the MLCFC 2007-5 AJ bond was talked at low/mid-90s and mid/high-90s during the session, but ultimately did not trade. The tranche was previously talked at 88 handle and low-90s, before being covered at 89-30 on 21 February.
WBCMT 2007-C30 AJ was talked at low-300s and low/mid-300s during the session, before being covered at 330, according to SCI's PriceABS data. The archive shows that the bond was previously covered at 385 on 4 March and 27 February.
The remaining deals with exposure to the asset are WBCMT 2007-C31, CWCI 2007-C2 and MLCFC 2007-6. The property was 98% leased, as of April.
Barclays Capital CMBS analysts suggest that a mezzanine foreclosure would make it easier for CWCapital, which is owned by Fortress, to sell the property by removing the mezzanine loans. They add that the move could provide for the US$3bn senior loan to be cured and then acquired, resulting in a speedier liquidation - potentially as soon as 3Q14 - than had been anticipated.
Fortress, is in turn, expected to tap the CMBS market for the majority of the financing for its bid.
News Round-up
CMBS
CMBS property set for condemnation
The property securing the US$22.8m Cahuenga Mixed Use loan in COMM 2012-CR1 has been watchlisted due to the threat of condemnation by the City of Los Angeles. Morgan Stanley CMBS strategists note that it is highly unusual for CMBS properties to be condemned or seized via eminent domain.
The move is in connection with a major redevelopment of Universal Studios, for which a new freeway off-ramp is required that will run through a portion of the collateral property. The condemnation proceeds are, however, expected to be greater than the unpaid balance of the loan.
The property generated US$2.6m of net cashflow during 2013, resulting in a NCF DSCR and debt yield of 1.59x and 11.39% respectively. It was appraised at US$39.1m in November 2011.
The Morgan Stanley strategists expect the loan to be paid off at par in Q2 or Q3. Proceeds will be applied to the most senior class of notes outstanding - currently the A1 class, with a balance of US$33.7m. The XA bond will factor down by the same amount. No prepayment penalty will be payable by the borrower by reason of a condemnation.
News Round-up
CMBS
LDPX delinquencies drop
May remittance reports indicate that 11 loans totalling US$284.5m were liquidated from the JPMCC 2007-LDPX CMBS by LNR, a portion of which is likely due to Auction.com sales. The resolutions resulted in an overall loss severity of 52%, according to Barclays Capital figures.
The largest liquidated loan was the US$103.5m Long Island Marriott and Conference Center loan (see SCI's loan events database), which transferred to special servicing in early 2013 and was most recently appraised at US$63.4m. Gross proceeds for the loan came in at US$66m, which equates to a 40% loss after taking into account selling costs and US$3.2m of advances.
The second largest loan to be liquidated was the US$55m Overland Park Trade Center, which generated US$21.4m of proceeds (close to its most recent appraisal) and led to a 67% loss. Other notable losses include the US$44.3m Fair Oaks Plaza loan, which was written down by US$13.2m (versus its latest appraised value of US$29m), and the US$19.05m Sheraton Charleston - which posted a loss of US$18.4m.
Losses on the deal took out the E, E-S, F, F-S, G and G-S classes, along with part of the D and D-S classes, according to Trepp. Principal proceeds - combined with the pay-off of the US$99m GGP-modified Southland Mall loan - paid down the A2 tranche and 5% of the duper A3 tranche, as well as most of the AM-S tranche. Additionally, interest proceeds repaid shortfalls in the AJ-S, B-E and B-S to D-S tranches.
Processing these losses helped reduce the delinquency rate on the LDPX deal from over 15% in April to 8.3% in May, with the total volume of delinquent loans dropping from US$527m to US$254m. Of note, two large loans remain to be resolved: the US$140m Solana asset and the US$203.4m Skyline Portfolio.
News Round-up
CMBS
Stuy Town mezz interest discussed
Further analysis of the mezzanine loan encumbered by Stuyvesant Town-Peter Cooper Village has emerged, following reports that CWCapital plans to foreclose on the asset (SCI 15 May). CMBS strategists at Morgan Stanley found that US$1.4bn of mezzanine debt was tranched into various components, with Mezz 1-3 accounting for US$300m, Mezz 4-9 totalling US$600m, Mezz 10 totalling US$300m and Mezz 11 totalling US$200m.
Further, an SPE (dubbed PCV-M) controlled by CWCapital as special servicer for the senior lenders owns the Mezz 1-3 portion for the benefit of the CMBS trusts. This beneficial ownership interest arose from a legal settlement with the mezz lender in October 2010.
The Morgan Stanley strategists note therefore that PCV-M is foreclosing on the mezz interest. "If PCV-M is the highest bidder at the auction, it will then take ownership interest in the property for the benefit of the CMBS trusts. Once the SPE owns the property, it can be sold with the proceeds being applied to the CMBS trusts," they explain.
News Round-up
Risk Management
Global SEF, MTF launched
ICAP's UK subsidiary, ICAP Global Derivatives Limited (IGDL), has launched after receiving temporary swap execution facility (SEF) approval from the US CFTC. IGDL is the first global SEF and multilateral trading facility (MTF), regulated by both the CFTC and the UK Financial Conduct Authority.
With this dually-regulated entity, market participants from all key jurisdictions can participate in the same global liquidity pool for ICAP's G3 rates products. The firm is also rolling out a new voice request for quote (RFQ) protocol, dubbed vRFQ 2.0, delivering voice execution services to clients that are specifically designed to be compliant with UK and US regulations. vRFQ 2.0 works seamlessly with i-Swap, ICAP's interest rate swap electronic execution platform.
IGDL will initially focus on G3 rates, with other products continuing to be serviced on ICAP's existing US SEF, ICAP SEF (US). The firm intends to migrate more products to IGDL and will seek additional permissions with relevant regulators to operate the IGDL SEF in more jurisdictions, such as countries in the Asia-Pacific region.
News Round-up
Risk Management
Clearing execution agreement released
ISDA and FIA Europe have published the ISDA/FIA Europe Cleared Derivatives Execution Agreement for principal-to-principal client clearing. The document is designed to be used as a template for market participants when negotiating execution agreements under English law for swaps that are intended to be cleared by central counterparties located outside of the US.
The agreement was developed with the assistance of a working group of both buy- and sell-side institutions in the European cleared OTC derivatives markets. It sets out the rights and obligations of each counterparty to a trade, and describes the process for submitting a trade to a clearing house, as well as the fallback provisions should a transaction not be accepted for clearing.
News Round-up
RMBS
Mortgage trading platform launched
Third-party mortgage administration firm HML has launched the Asset Trading Solutions service, which is aimed at investors that are looking to acquire, manage or sell a performing or distressed mortgage portfolio and maximise its value. The platform supports the entire process of asset trading - from sourcing assets and analysing any associated risks to migrating portfolios and servicing customers effectively and in line with changing regulation.
Paul Fryers, commercial director at HML, comments: "In the last three years alone, we have experienced a 100% successful transition of more than 100,000 accounts from a variety of clients, servicers and platforms. Asset purchasers already either use HML to service assets or have mapped from our iCONNECT system. This makes assets serviced by HML significantly more marketable."
News Round-up
RMBS
Aussie repayment rates examined
Fitch has introduced new indices to monitor Australian repayment rates in securitised prime mortgages. The Australian mortgage market has been characterised by higher prepayment rates compared to other countries, which in turn have led to fast amortisation of Australian prime RMBS transactions.
Over the past decade, Australian prepayment rates have ranged from 15%-25%, according to Fitch. Overseas, this rate has decreased to 5%, compared to 15%-20% prior to the financial crisis.
As of March, the Fitch Dinkum Borrower Payment Rate (BPR) Index - which tracks the average repayment rate in static mortgage pools of public Australian prime RMBS - was 22.2%. This is 350bp higher than historic lows in March 2011, as a result of the strong housing market and competitive lending environment.
Full prepayments or discharges represent the largest component of Australian prime RMBS amortisation in the past seven years and is the major driver for decreasing repayment rates. Fitch estimates that discharges were due to refinancing among 55%-65% of cases of Australian prime RMBS, followed by the sale of the underlying property (at 30%-40%).
Fitch believes that a stagnating housing market and an uncompetitive lending environment are major threats to Australian prepayment rates. The agency estimates that in the past seven years partial prepayments have been low, at 1.5%-2% higher than redraws per annum. Annualised redraw rates over the past 10-plus years have ranged from 3%-5% of outstanding mortgages, exhibiting little volatility.
News Round-up
RMBS
Johnson-Crapo bill passes Committee
The US Senate Committee on Banking, Housing and Urban Affairs has passed S.1217, the Housing Finance Reform and Taxpayer Protection Act, by a vote of 13-9. Two manager's amendments, no. 2 and no. 98, passed the Committee to amend the bill. But an amendment that would prohibit federal entities from purchasing or insuring mortgage loans in municipalities that use eminent domain to seize underwater mortgages was defeated by a 14-8 vote, according to SFIG. The next step is for Senate Majority Leader Harry Reid to bring the bill to a vote by the full Senate.
News Round-up
RMBS
Whinstone tender announced
Northern Rock Asset Management (NRAM) has launched a tender offer for six tranches of its Whinstone Capital Management 1 and 2 synthetic RMBS transactions via a modified Dutch auction. The firm says it is undertaking the offer in order to reduce its funding costs.
The notes included in the offer comprise Whinstone 1 class B1 notes (with a principal amount outstanding of £35.05m), B2s (€67.78m), C1s (£21m) and C2s (€115.2m), as well as Whinstone 2 class C1s (£80m) and C2s (€129m). The minimum purchase price is 100%.
The offer deadline is 27 May, with settlement expected on 3 June.
Separately, EBS purchased €93.2m and €11.9m of classes A and C notes issued by Emerald Mortgages No. 4 at average respective purchase prices of 92.4% and 48.9% in its recent tender offer (SCI 30 April).
News Round-up
RMBS
GSE buyback risk diminished
US residential mortgage lenders will benefit from a reduced risk of loan buybacks, thanks to an easing of borrower performance measures mandated by the FHFA, according to Fitch. The agency says that less uncertainty around repurchase risk should increase mortgage lending to creditworthy borrowers, which will support the housing market recovery. The FHFA announced the measures this week as part of a review of its 2014 strategic priorities (SCI 14 May).
The FHFA's actions are expected to encourage lenders to extend credit to borrowers that may have been viewed as more susceptible to delinquencies, particularly borrowers with the middle tier credit scores and higher LTV ratios. Many lenders have applied credit overlays to Fannie Mae and Freddie Mac guidelines to minimise their repurchase liability, thereby limiting lending to a small segment of super prime quality borrowers.
Fitch does not believe that the expanded relief will introduce additional systemic risk to the residential market. Its analysis of the GSEs' operational risk reviews and risk sharing transactions indicate that they have robust lender approval and monitoring programmes, strong underwriting and loan acquisition processes, an improved credit risk management structure and an expanded loan quality control platform.
Beginning on 1 July, US banks transferring mortgage risk to the GSEs will have two alternatives for relief from repurchases. In one option, if after 36 months borrowers have made 36 consecutive payments and neither been delinquent for 60-days nor more than two 30-day periods, banks will be eligible for relief from repurchase. Alternatively, if the loan is deemed acceptable following a loan file quality control review, repurchase relief will be provided regardless of whether the loan has an acceptable payment history. Loans found to have deficiencies as a result of a quality control review that are cured by the lender to the GSEs' satisfaction also will be eligible for relief.
News Round-up
RMBS
Advancing discrepancies examined
Bondholder payments were delayed in a number of recent transactions due to differences in approaches between bank and non-bank US RMBS servicers, Fitch reports. In particular, over recent months, RMBS collateralised with mortgages transferred from Bank of America to Nationstar Mortgage have incurred bondholder payment disruptions (SCI passim).
Fitch notes that the impact of the difference in missed payment advancing rates on RMBS can be pronounced when loan servicing is transferred from banks to non-banks, particularly when underperforming loans exist within the pools. The new servicer may determine that a portion of the prior advanced amount is non-recoverable and recoup it from the total monthly amounts available for distribution.
Interest shortfalls can occur on the RMBS when a servicer recoups prior advanced amounts. Fitch continues to see this cashflow volatility, particularly when servicing has been transferred to large non-bank servicers with more conservative stop advancing policies.
Bank and non-bank servicers for RMBS transactions typically follow the same general advancing guidelines. However, non-bank servicers generally make the determination to stop advancing earlier than bank servicers.
On average, non-banks advance missed payments on only 40% of delinquent loans in the subprime sector, while banks advance closer to 50%. In the prime and Alt-A sectors non-banks advancing rates for missed payments average 68% versus a bank average of 93%. More conservative assumptions primarily drive the lower non-bank advance rates.
News Round-up
RMBS
Aussie indexed LVRs decline
Moody's says that rising house prices reduced the indexed weighted-average loan-to-value ratio (LVR) in Australian RMBS to below 50% in 2013. The indexed LVRs in individual states ranged from 39% in the Northern Territory to 54% in Tasmania.
"Although the current weighted-average LVR in the Australian RMBS portfolios is 57%, when taking the house price increases into account the indexed weighted average LVR stood at 45%, as of 4Q13," says Georgij Ludmirskij, a Moody's analyst.
On a regional basis, the statistical area of West and North West Tasmania posted the highest weighted average indexed LVR of 59%, whereas North Sydney and Hornsby recorded the lowest weighted average indexed LVR of 34%. "The Australian housing market is diverse, with substantial regional differences, based on different economic set-ups and different natural resources and average income levels available in these areas," adds Ludmirskij.
Since 1Q04, different statistical areas have displayed property price growth ranging from 12% to 187%. The indexed weighted-average LVRs in individual transactions range from 25% to 72%, with Medallion Trust Series 2005-2G recording the lowest and RHG Mortgage Securities Trust Series 2007-2H recording the highest LVR value.
While some regions have posted house price drops, no Moody's-rated RMBS transactions have shown an average deterioration in LVR.
News Round-up
RMBS
Belgian affordability examined
Belgian residential mortgage loans with higher LTVs will be more likely to fall into arrears than those with lower LTVs over the next 12 months, Moody's says. Moreover, because lenders are tightening their mandate acceptance criteria and granting mandate loans to borrowers with better credit quality, mortgage loans are more likely to default than mandate loans.
"While arrears across Belgian RMBS will likely remain stable over the next year, we believe that high-LTV borrowers with stretched affordability will continue to experience pressure," says Emily Rombeau, a Moody's associate analyst.
The agency notes that benchmark loans with an LTV of at least 80% are four times more likely to end up in arrears than those with an LTV below that level. High loan-to-income (LTI) and large loan size will also be key default drivers. Large and high-LTI loans typically display higher LTVs, with 65.6% of large loans and 58% of high-LTI loans having an LTV above 80%, reflecting the weak affordability of the relevant borrowers.
"Affordability will likely remain stretched over the next year on the back of refinancing constraints," says Francesca Pilu, a Moody's avp-analyst. "However, we expect that more recent originations will be better positioned as most Belgian residential mortgage lenders we spoke to indicate that they have tightened their affordability rules."
News Round-up
RMBS
GSE buyback expected
Freddie Mac is set to repurchase certain adjustable-rate mortgage loans on 16 June. The repurchase is due to erroneous loan-level data where the interest-only period on the loan doesn't match that of the security.
The resulting prepayments will be reflected in the July remittance report. For the 58 affected pools, Freddie Mac expects to repurchase US$29m out of US$150m unpaid principal balance - which implies a 90+ CPR average print, according to Barclays Capital RMBS analysts. They add that since most of the pools were originated between 2005 and 2008, the prepayment implication is greater for these cohorts.
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