Contents

CLOs

Growth pains

European CLO market constraints examined

European CLO issuance volume is expected to reach €10bn-€15bn across 30 transactions this year. Risk retention requirements and the availability of collateral continue to constrain the growth of the leveraged loan CLO market, while a number of hurdles are impeding the re-emergence of SME CLOs.

European leveraged loan CLO structures are likely to remain standardised, with tranches rated Aaa to B2 and bond buckets sized at around 5%-10%. Ian Perrin, vp - senior credit officer at Moody's, notes that differentiation comes from the manager and how they deal with risk retention requirements and Volcker Rule compliance.

"Performance is another differentiator, as well as strategies regarding portfolio selection and trading," he adds.

While large CLO managers are typically retaining 5% equity to comply with risk retention, Perrin says that a shift is occurring towards medium-sized managers taking a 5% vertical slice, with arranging banks sometimes providing repo finance. More recently, a third way has emerged - for instance, with the CVC Cordatus Loan Fund III - where the manager is deemed as being the originator of the loans. This, in turn, allows smaller managers to enter the market.

Matthias Neugebauer, md and head of EMEA structured credit at Fitch, agrees that the EBA's retention rules - which effectively allow the asset manager to obtain funding for the retention stake, thereby reducing the amount of capital they require - should help some new smaller asset managers join the market. However, he expects only a limited number of European CLOs to be Volcker-compliant, as being so reduces the investable universe even further.

The first loan-only European CLO deal to attract US bank investors in 2014 was the Harvest IX transaction. The deal was intended to be Volcker-compliant by eliminating bonds and floating rate notes.

With respect to the investable universe, Thorsten Klotz, md at Moody's, observes multiple efforts to address the relative scarcity of CLO collateral in Europe. One method is to recycle collateral into new deals as CLO 1.0 transactions end.

"We've also heard about efforts to increase manager flexibility - such as including multicurrency tranches, as well as peripheral issuer and direct lending collateral - but are yet to see it being borne out. Certainly US investors expect European CLO 2.0 structures to be fairly standardised, and this generally helps liquidity and with regulatory reporting," he adds.

In terms of relative value, Srikanth Sankaran, head of European ABS strategy research at Morgan Stanley, suggests that US CLOs currently offer better value than European CLOs. "The US primary market is more functional than the European market and, from a credit perspective, steeper curves mean that US paper is more attractive. However, European and US mezzanine bonds are the sweet spot because they return mid-single yields."

Meanwhile, SME CLOs aren't expected to gain traction any time soon. Healthy SME activity is being seen in Italy and occasionally in the Netherlands, Germany and Spain. However, the market appears to be waiting for regulatory initiatives to bed down before forays into granular securitisations are made.

"As Europe begins to slowly recover, securitisation could play a more prominent role in helping fund the real economy. Explicit support from policymakers has identified the use of securitisation as a funding tool for SME lending across Europe and - from a credit perspective - we believe this is feasible, given our portfolio of rated SME CLO transactions has largely performed in line with expectations," comments Marjan van der Weijden, md and head of EMEA structured finance at Fitch.

But she says that there are some hurdles to jump before SME CLOs can really take off. "The spreads on the assets, the credit protection and also the spreads investors are expecting are a challenge to make SME CLOs currently economically viable without any support from an external or public entity. Furthermore, other real economy assets - such as residential mortgages, consumer loans and auto loans - are not facing the same hurdles and are currently easier to securitise."

Neil Calder, head of investments - credit, treasury at the EBRD, is concerned that European policymakers have moved from one extreme to another and now appear to view securitisation as the saviour of the economy. "Consequently, it's important that the European securitisation market isn't tainted by the potential failure to single-handedly revive the SME sector," he observes.

Calder points out that SME securitisations are relatively difficult to structure, requiring many data points and a harmonisation of borrower profiles. He notes that the situation is further complicated by the lack of a definition of what constitutes an SME. An SME could range from a sole proprietor business through to an exporting firm with a 200-strong workforce and a turnover of €100m.

Another impediment is that SME networks tend to reside with banks, so it remains difficult to identify which SMEs need funds and to avoid adverse selection. Klotz adds that the direct lending market for SMEs is in its early stages and so portfolios may not be ready to securitise.

"The market needs a bridge between direct lending funds and banks. If private equity players move in, this could be a major step forward because they have the expertise and contacts necessary for SME securitisations," he concludes.

CS

CMBS

Agency names add to CMBS supply

US CMBS secondary market spreads did not move too much yesterday, but BWIC volume was up strongly to reach US$517m. Supply to start the week was boosted by a number of agency securities, with SCI's PriceABS data recording a range of vintages across the segment.

Among the agency CMBS names out for the bid yesterday, the FHMS K006 A1 tranche was covered at plus 25 and the FHMS K009 A1 tranche was covered at plus 24. Price talk was also captured on the FHMS K030 A1, FHMS K032 A2, FHMS K034 A2 and FHMS K035 A1 bonds, while the FHMS KAIV A1 tranche was covered at plus 30.

A cover at plus 25 was also recorded for the FNA 2011-M3 A1 tranche, which had not previously appeared in the PriceABS archive. The FNA 2014-M2 A2 tranche was talked in the high-30s and the FNA 2014-M6 A2 tranche was talked at around plus 30.

Elsewhere during the session, UBSBB 2012-C2 A3 was covered at plus 63 and GSMS 2013-GC13 A4 was covered at plus 69.9. The COMM 2014-LC15 A2 tranche, meanwhile, was covered at plus 50.

Some 2007-vintage paper also circulated, including the WBCMT 2007-C31 AJ tranche. That bond was talked at 320 and covered at 297.

The tranche had been covered at 377 on 6 March, at 375 on 5 March and at 395 on both 19 and 20 February. Before that, the tranche had been covered at 609 last September.

WBCMT 2007-C31 AM tranche was also out for the bid. It was talked at 105 and covered at 103, having previously been covered at 258 on 9 July 2013. Interestingly, the tranche was also covered in July 2012 - that time at 547.

Finally, the WBCMT 2007-C34 AJ was also picked up by PriceABS. Price talk on the bond yesterday was at swaps plus 350, having been at swaps plus 450 in December.

JL

RMBS

Bid-list boosts RMBS supply

US non-agency RMBS volume picked up yesterday to reach around US$788m, ahead of a US$647m bid-list scheduled to trade today. SCI's PriceABS data recorded a mix of bonds out for the bid during the session, including several single-family rental names.

Adjustable rate - particularly senior Alt-A hybrid and option ARM - and subprime tranches drove most of yesterday's supply. Among the Alt-A names captured by PriceABS was CWALT 2005-50CB 1A1, which was talked in the mid-90s, having previously been talked in the mid/high-80s on 9 October. CMLTI 2007-6 1A2A and IMSA 2007-2 1A1C were each talked at low-70s in their PriceABS debut.

The option ARM RALI 2007-QH7 1A1 tranche was covered at very high 70s. It previously did not trade on 19 March, having been talked in the low-70s on 31 October.

Also appearing for the first time in PriceABS was PCHLT 2004-1 M1. The subprime bond was talked at low-90s.

In the prime space, CWHL 2005-16 A1 and SARM 2008-1 A2 were circulating yesterday. The former did not trade (having most recently been talked at mid-80s on 3 April), while the latter was covered at mid-80s (having DNT'd on 8 May and been talked at low/mid-70s on 11 February 2013).

Finally, the AH4R 2014-SFR1 C, CAH 2014-1A B, IHSFR 2013-SFR1 A and IHSFR 2014-SFR1 A single-family rental bonds all debuted in the PriceABS archive during the session. The former was recorded as successfully trading, with the remainder receiving covers.

CS

Structured Finance

Underwriting concerns ABS investors

Underwriting standards continue to trouble ABS investors, according to a JPMorgan client survey. Survey respondents included money managers, insurance companies and banks as well as pension funds, hedge funds and a few others.

More than half of respondents expect full-year ABS supply to range between US$180bn and US$200bn. The year-to-date total is US$93.1bn and full-year 2013 was US$173.5bn.

Investors largely expect 3-year triple-A fixed-rate credit card ABS spreads to tighten slightly. They currently trade at 24bp and 43% of investors expect them to stay between 20bp and 25bp, while 35% expect them to reach 15bp-20bp.

Investors largely prefer non-traditional ABS classes, with 33% picking "other" as their top ABS pick. This was in preference to autos, credit cards, student loans, containers or timeshare.

"Clearly, as rates remain low, investors are looking to higher yielding product to generate returns and as a result, the tiny sectors within esoteric ABS are their top picks. We note that in most of these sectors, some of the spread pickup reflects the liquidity premium," says JPMorgan.

Esoteric ABS was the top pick for 46% of insurance companies, which are less constrained by liquidity. While 33% of asset managers also picked esoteric ABS, 23% of them favoured subprime auto ABS.

However, 44% of respondents said subprime auto ABS is the sector where underwriting standards concern them the most. Underwriting standards have slipped since the first post-crisis pools, partially because of newer issuers entering the market and increasing competition, but JPMorgan believes this is a natural reaction and says improved structures and credit enhancement since 2007 should mitigate possible higher-than-expected losses.

Concern about underwriting standards in consumer loan ABS were also expressed, while 24% of investors were worried about underwriting standards on private credit student loans. While neither Sallie Mae Bank nor Navient, has come to the ABS market with a private credit student loan deal, recent Sallie Mae private credit ABS pools have stayed up in quality, JPMorgan says.

Across the broader securitised products and credit markets, 25% of survey respondents identified CLOs as their top pick and 25% chose private-label CMBS. Another 21% favoured consumer ABS.

JL

Structured Finance

HQS legislation mooted

The EBA is working with other regulators to find the best way to create a definition and appropriate prudential treatment to support high quality securitisation issuance, according to Adam Farkas, executive director at the authority. In the second keynote address at IMN's Global ABS conference yesterday, he also called for the industry's cooperation to prevent past abuses from reoccurring and maintain the current positive regulatory momentum.

Specifically, Farkas said that the EBA is at present preparing a report for the European Commission that aims to move the debate on around the definition of what constitutes "simple and transparent structures", as well as how to calibrate prudential standards to bring about a revival of the securitisation market. The authority is expecting to deliver the report by end-September.

The implication is that the EC is considering a legislative initiative in this area. "There is a good chance that a definitive set of criteria can be developed that will hopefully provide guidance for the market and which can't easily be arbitraged," Farkas said. He added that it is important not to stigmatise ABS products that don't fall within the definition of high quality.

The EBA views securitisation as a channel that will help heal the banking sector, by providing diversification of funding, a balanced maturity profile and cost of funds advantages. It can also contribute to banks' balance sheet reduction efforts through risk transfer. However, Farkas noted that recent positive regulatory developments shouldn't be seen as a "quick fix" and won't revive the market by themselves.

The EBA has also produced a report on the liquidity coverage ratio for the EC, which is expected to release its final LCR standards this month. Farkas warned that based on the EBA's analysis, securitisation is unlikely to "come out positively" and therefore positive treatment under the rules shouldn't be anticipated.

He indicated that the topic needs to be addressed in the future, with the rules potentially being reviewed. "If the industry can work together to improve the liquidity of the securitisation market, the regulators should be open to revising the treatment on the basis of evidence that supports it."

CS

Structured Finance

SCI Start the Week - 16 June

A look at the major activity in structured finance over the past seven days

Pipeline
Conferences in Europe and the US limited pipeline activity last week, although seven CLOs were announced. Two ABS, an ILS, two RMBS and three CMBS were also added to the pipeline.

The newly-announced ABS were A$242.24m Flexi ABS Trust 2014-1 and Hollis II 2014-1. The ILS was Queen Street X.

Berica ABS 3 and the A$490-equivalent Firstmac Mortgage Funding Trust No.4 Series 1A-2014 were the only RMBS to enter the pipeline. Meanwhile, the CMBS comprised US$440m BAMLL 2014-IP, US$343m CG-CCRE 2014-FL1 and US$1.24bn FREMF 2014-K38.

The CLOs consisted of: US$410.3m AMMC CLO XIV; US$514m Apidos CLO XVIII; US$415.4m Cutwater 2014-I; Jubilee CLO 2014-XIV; €300m Mercator CLO IV; US$550m Neuberger Berman CLO XVII; and US$462m West CLO 2014-1.

Pricings
There were considerably fewer deals leaving the pipeline than there had been in the week before. Last week saw nine ABS print, as well as one CMBS and five CLOs.

The ABS pricings comprised: US$1.4bn Ally Auto Receivables Trust 2014-A; US$726.9m GEET 2014-1; €752m Golden Bar series 2014-1; US$350m Hilton Grand Vacations Trust 2014-A; US$603m Nelnet Student Loan Trust 2014-5; US$850m Nissan Auto Lease Trust 2014-A; US$1.25bn Santander Drive Auto Receivables Trust 2014-3; and US$1.035bn Toyota Auto Receivables 2014-B Owner Trust. The £500m Thames Water Utilities Cayman Finance whole business securitisation also printed.

The CMBS new issue was US$878m JPMCC 2014-C20, while the CLO prints consisted of US$618m A Voce CLO 2014-1, US$1.5bn ALM XIV, US$145m Cerberus AUS Levered II, US$723m CIFC Funding 2014-III and €525m Harvest CLO IX.

Markets
The US RMBS market was the most active last week. Two large non-agency lists of around US$1bn each circulated, as SCI reported on 11 June.

The first list contained 24 line items, with a significant amount of subprime paper. Before those lists came out, Tuesday's session brought BWIC volume of close to US$500m, with SCI's PriceABS data showing a mixed bag of bonds out for the bid and supply focused on pre-crisis vintages.

Meanwhile, the low yield environment is pushing up demand for US CMBS bonds with any credit spread on offer, say Barclays Capital CMBS analysts. They add: "This has manifested most clearly in the new issue CMBS space, where triple-Bs are regularly oversubscribed four to six times, while the top of the capital structure attracts significantly less interest from buyers."

Wells Fargo structured product analysts note that US ABS secondary spreads were mainly unchanged last week, with three-year triple-A fixed credit card, one-year triple-A prime auto and 10-year triple-A RRB spreads each tighter by just 1bp. Triple-B prime auto spreads were 2bp tighter.

The US CLO market was also quiet, according to Bank of America Merrill Lynch, with BWIC volumes totalling US$380m. "A number of line items did not trade as sellers' reserve levels were not met. For those that did, levels remained mostly unchanged from a week ago," observe CLO analysts at the bank.

Deal news
• American Bancorp was last month forced into involuntary bankruptcy, marking the first case where Trups CDO holders worked together to enforce their creditor rights. As other bank Trups issuers reach the end of the deferral window for non-payment of interest, further cases of this type are expected to emerge.
• The portfolio underlying the FOX 1 CMBS has been purchased by Kennedy Wilson Europe Real Estate for £296m, which is £48m more than its most recent valuation. The property recovery estimate in September had been £235m (SCI 5 September 2013).
• Deutsche Bank is in the market with a €355m CMBS, dubbed DECO 2014 - Gondola, which is backed by three loans secured on 18 properties across three portfolios in Italy. The portfolios were indirectly acquired by Blackstone in three separate transactions between December 2013 and February 2014.
• The Bryant Park Hotel has been liquidated for US$65m via a fair value purchase option. The property is backed by a US$85m loan securitised in JPMCC 2007-CB18, which was transferred to special servicing in October 2011 due to litigation regarding cash management issues.
• Mount Street has responded to Hatfield Philips International's comments regarding Windermere X (SCI 4 June). The firm says that HPI made "a number of inaccurate statements" that it feels "duty bound" to correct, so that bondholders can make a fully informed decision about the proposed transfer of special servicing.
• The Australian Office of Financial Management (AOFM) has sold four of the RMBS bonds it holds, with a total amortised face value of A$341m. The agency says it is disclosing the details of the transactions in the interests of secondary market transparency.
• GLI Finance says that it transferred two of its CLO investments to Fair Oaks Income Fund (FOIF) for US$20.4m in cash and 34,298,425 in FOIF shares at the issue price of US$1, subject to a two-year lock-in agreement. The move follows FOIF's share placement - which raised US$114.5m - and admission to trading on the LSE Specialist Fund Market last week (see also SCI 19 May).
• Principal losses have been applied to the class E and F notes of Windermere VII after the liquidation of the RedLeaf I loan. S&P has subsequently downgraded those notes to single-D.
• Dock Street Capital Management has replaced Cira SCM as collateral manager to Libertas Preferred Funding II. Moody's has determined that the move will not result in the withdrawal, reduction or other adverse action with respect to any current ratings on the transaction.
• An auction will be conducted for Bluegrass ABS CDO II on 27 June. The collateral shall only be sold if the proceeds, together with the balance of all eligible investments and cash in the accounts, are at least equal to the redemption amount.

Regulatory update
• The EBA is working with other regulators to find the best way to create a definition and appropriate prudential treatment to support high quality securitisation issuance, according to Adam Farkas, executive director at the authority. In the second keynote address at IMN's Global ABS conference, he also called for the industry's cooperation to prevent past abuses from reoccurring and maintain the current positive regulatory momentum.
• The Association for Financial Markets in Europe (AFME) has joined policymakers in calling for the revival of European securitisation to unlock long-term financing and fuel growth. It has released a report, entitled 'High-quality securitisation for Europe', which proposes a five-step action plan to save the market.
• The FHFA has released a request for input on GSE guarantee fee policy and implementation. Among the areas the agency is seeking comments on are: alternatives to risk-based pricing; the effect of increasing g-fees based on credit scores/LTVs; g-fee levels that would improve private-label RMBS economics; and the effect on loan originations, should g-fees increase.

CDS

SROs to provide CDS consistency

The 2014 ISDA CDS definitions have been published and will be implemented in September (SCI passim). One of the main changes from previous definitions is the adoption of a single standard reference obligation (SRO) for standard CDS contracts, which will apply to all trades on a reference obligation at a particular seniority level.

Other significant changes in the definitions include new terms for financial CDS and new deliverables for sovereign CDS. The new financial CDS contract will include a governmental intervention credit event, while sovereign CDS will allow delivery of an asset package.

SROs are being introduced to ensure uniformity across trades, regardless of when they were entered into. The aim is to facilitate clearing and further standardisation across the credit derivatives market.

JPMorgan credit derivatives analysts expect the SRO list will initially focus on bank CDS cleared by a CCP with at least eight clearing members. They note that the deliverability of the restructured reference obligation for banks upgrades the importance of the reference obligation for these trades.

Corporate CDS could be added next, with a focus on including cleared CDS and the names in indices that are cleared. The JPMorgan analysts suggest that an SRO is not vital for these contracts to function, so it might take some time to compile a list of appropriate names.

SROs will be chosen through a rules-based methodology and will be selected on the basis of maturity, liquidity and size of issue. Once a suitable bond is identified, it will be submitted to the legal sub-committee of the determination committee (LDC) to ensure that it is deliverable at the relevant seniority level.

If no deliverable reference obligation is found, then a CDS of a given seniority level can still be part of the SRO list. "If such a name is accepted onto the SRO list, this will effectively determine its seniority level such that if a deliverable bond is issued in the future, it will likely become the SRO," the analysts explain.

Following the introduction of the new definitions, market participants will be able to request a non-deliverable reference obligation to be chosen as the SRO, which could happen if a new name starts to trade. A non-deliverable SRO can also be requested where the previous SRO was also not deliverable for the same reason, such as where they both have the same non-deliverable guarantee - although this will not work for trades originally done on the 2003 definitions.

As the 2014 definitions make the asset package from the restructured reference obligation deliverable, the analysts note the reference obligation will likely be the cheapest-to-deliver for all buckets in an MMR auction. To ensure that protection sellers are not exposed to recovery for bonds beyond their CDS maturity, the SRO chosen for financial transactions will likely be biased to choosing the shortest-dated deliverable obligation.

A protocol is anticipated in the coming months that will allow investors to convert their 2003-definition trades into 2014-definition trades. This protocol is expected to cover all contracts except sovereign and EU bank CDS.

The majority of corporate CDS are expected to move to the new definitions, although a few may be excluded to preserve the economic value of associated trades. US financials are also likely to be part of the protocol, but without the governmental intervention terms.

JL

CDS

Tranche market transitioning

The European credit index tranche market is transitioning from being dominated by legacy positions towards a regime based on on-the-run products. Markit iTraxx Series 21 tranches launched in March are said to have had a good take-up, while interest in bespoke CSOs appears to be re-emerging.

"The current market - based predominantly on the Series 9 portfolio - is unsustainable and will become less important as the S9 10-year maturity in June 2018 comes closer, in our view," JPMorgan credit derivatives analysts observe. "However, there has been recent interest in launching new on-the-run tranche products in Europe. We believe that tighter spreads and low volatility will increasingly push investors towards on-the-run tranche products and the non-recourse leverage they offer."

In terms of tranche positioning for 2H14, the JPMorgan analysts recommend taking equity risk on select portfolios where underlying default risks are limited. "Our preferred trade is to sell protection on the iTraxx S21 June 2017 0%-3% tranche; this tranche offers a running spread of 530bp on a clean investment grade portfolio. We see this as being a very efficient way to gain access to the risk premium inherent in most investment grade spreads."

They also prefer to be long risk through mezzanine tranches and short risk senior tranches, recommending that investors sell protection on the S9 June 2018 9%-12% tranche and buy protection on the 22%-100% tranche. This reflects the view that mid-spread names still have room to rally, whereas the tightest spread names are likely to struggle to rally further, due to capital requirements for certain counterparties serving as a floor on spreads. This trend is reflected by the lack of credits trading below 20bp, despite the strong rally over the past year.

Meanwhile, Markit recently announced that coupons, attachment/detachment levels and quoting conventions for tranches to be traded on the iTraxx Europe Crossover Series 22 index have been preliminarily agreed. Tranches on both iTraxx Crossover and iTraxx Europe will roll in September, after which they will roll annually in September, consistent with CDX tranches.

Year to date volumes in iTraxx tranches are 39% behind the same point last year and down by even more compared to earlier years, according to the analysts. They cite a number of reasons for the fall in volumes.

First, legacy correlation positions have continued to roll off, reducing the need to trade tranches to hedge this risk. Second, the factors that drove client volumes in recent years - such as hedging senior risk through X-100% tranches and the ability to go long peripheral default risk through equity tranches - have largely abated. Finally, the S9 portfolio is a year closer to maturity, with only the June 2018 expiry having any real risk left in it.

CS

RMBS

Investors ignoring Scottish exit risk?

Investors in the UK RMBS market appear to have largely ignored the potential risk of Scotland voting for independence from the UK. While Scotland is expected to vote to remain in the union, a number of fiscal powers could still be transferred to the Edinburgh parliament.

This base-case scenario would have no impact on RMBS transaction cashflows or investor perceptions of UK risk, according to JPMorgan European asset-backed analysts. However, a vote for independence would create uncertainty on both sides and lead to a reappraisal of UK risk with regards to currency, gilts, credit instruments and more.

The proposed date for independence to be completed is 24 March 2016. A general election in the UK the year before would include Scottish MPs, so a further election would be needed after independence, which would present the risk of significant electoral volatility.

The fate of RMBS investors appears largely dependant on whether an independent Scotland retains sterling as the currency. Should the UK and Scotland agree to a monetary union, existing RMBS would effectively become multi-jurisdictional but single currency.

Existing programme documentation already allows for collateral from England & Wales, Scotland and Northern Ireland as three separate countries because of the different legal systems in use. Therefore, there should be little cashflow impact for RMBS noteholders if an independent Scotland retains the pound.

However, without a monetary union, RMBS transaction mechanics would become more complicated. The JPMorgan analysts note that Scottish consumer contracts would likely be redenominated while liabilities would remain in their current currency, resulting in both a multi-jurisdictional and multi-currency pool, with a proportion of asset-liability currency mismatch.

Originators could overcome that situation by repurchasing the affected collateral, which would result in early note amortisation. They could also repurchase and replace the affected Scottish collateral with sterling-denominated mortgages from the UK, which would make the pool single jurisdiction and single currency again and also avoid the prepayment spike of collateral removal.

About 20% each of the Lanark master trust and Leofric 1 standalone deal pools are backed by Scottish collateral, but for most UK RMBS the proportion is closer to 10%. However, partial pool redenomination should not be too high a hurdle for issuers or investors.

"That being said, UK RMBS issues are likely to be the least of the market's worries following a successful 'yes' independence campaign, with September's vote potentially shaking the foundations of multitudes of 'known knowns'," the analysts note. While UK risk would have to be reappraised, there would also be reverberations for other independence campaigns throughout Europe, such as those in Catalonia, Flanders and northern Italy.

JL

Structured Finance

Bank appoints new securitisation leader

Société Générale has appointed Laurent Mitaty as global head of securitisation and distribution solutions. He was previously European head of securitisation and has been with the bank since 1999.

Mitaty replaces Jim Ahern, who left to join Moody's (SCI 3 June), and will supervise the securitisation business for both corporates and financial institutions globally. He will be based in Paris and report to Patrick Menard, global head of capital markets.

Structured Finance

Indices add credit ratings data

Fitch's structured finance ratings have been incorporated into Bloomberg's global bond indices. The data also feeds into specific rating level, customisable criteria that market participants can use to generate their own bespoke indices.

The Bloomberg global bond index family covers 43 currencies and provides independent benchmarks for the global fixed income markets. Fitch's credit ratings data from its corporate, financial institutions, public finance and sovereign groups has also been integrated.

CDO

CDO manager replaced

Dock Street Capital Management has replaced Cira SCM as collateral manager to Libertas Preferred Funding II. Moody's has determined that the move will not result in the withdrawal, reduction or other adverse action with respect to any current ratings on the transaction.

For other recent CDO manager transfers, see SCI's database.

CDS

OTC derivatives tool enhanced

Markit has enhanced its portfolio valuations service by offering clients automatic portfolio updates using a real-time trade feed. It will capture OTC derivative trades processed through MarkitSERV, eliminating the need for customers to build a separate trade feed for valuations.

RMBS

Risk management firm adds RMBS vet

RiskSpan has appointed Kathy Kelbaugh as md. She is based in Philadelphia.

Kelbaugh was most recently vp at Moody's, where she focused on private label RMBS. She has also worked at GMAC, Ultraprise Corporation, GE Capital Mortgage Services, PHH Mortgage Corporation and PSFS.

RMBS

State law RMBS claims continue

A federal judge has ruled in New York that the NCUA can proceed with its state law claims against UBS Securities in one of several actions it filed as liquidating agent of Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union, according to a Lowenstein Sandler memo. The actions are related to RMBS purchases (SCI 25 September 2013).

The NCUA alleges UBS made misrepresentations in the underwriting and subsequent sale of RMBS to the credit unions. UBS moved to dismiss the NCUA's federal and state claims as to two securities, but the judge only dismissed the federal claims.

ABS

'Limited impact' from PAYE proposal

President Obama's plan to expand the PAYE programme for all student loans made by the US government (SCI 10 June) could slow prepayment rates and ABS bond amortisations, say Wells Fargo ABS analysts. Investors should not be too strongly affected.

The analysts note that student loan ABS investors have shown little concern about the pace of amortisation, based on secondary spread movements. As tinkering with repayment options is unlikely to deal with the growing student debt burden, the analysts note other policy options, such as refinancing programmes similar to the HARP and HAMP programmes used for mortgages, might yet be introduced.

ABS

SDART payment error corrected

Santander Consumer USA (SCUSA) last week made a US$71m capital contribution to correct a payment distribution error in the SDART 2013-5 class A2 notes. Moody's notes in its latest Credit Outlook that such servicer error and lapses in transaction governance are operational risks in securitisations that financially strong servicers can remedy, if necessary.

The transaction documents for SDART 2013-5 specify that the class A2A and A2B notes are to receive principal on a pro-rata basis after the class A1 notes have been paid in full. However, SCUSA paid principal solely to the class A2A notes in the SDART 2013-5 transaction over the course of two distribution dates in April and May. As a result, the Class A2B noteholders did not receive any principal that they were owed during those two distribution dates.

"The capital contribution increases the amount of credit enhancement available to investors in the transaction and shows the benefit of a transaction sponsor and servicer that has the ability and willingness to make payments to the securitisation to correct operational mistakes. SCUSA plays both roles in the securitisation," Moody's observes.

The additional cash will bring the class A2B notes into parity with the class A2A notes and correct the payment error in the transaction. The cash injection will also increase the overcollateralisation level to almost 20% of the current pool balance from 15%. The target overcollateralisation is being increased to this higher level, thereby providing additional credit protection to investors.

ABS

Pub acquisition welcomed

Mitchells & Butlers has acquired 173 Orchid pubs for £266m on an EBITDA multiple of 10 times, after taking into account cost savings and synergies. Barclays Capital European asset-backed analysts view the move as a slight positive for the pub securitisation, since assets will be retained within the overall group rather than using group cash for a special dividend.

The acquisition will be funded with cash held at the group level. Group cash stood at £283m, at end-1H14.

"We had thought that the company may consider using group cash to tender for the amortising class B1 bonds to improve cashflows available for dividends," the Barcap analysts observe. "Post-acquisition, we think the probability of the tender has reduced significantly. The class B1s trade flat to the longer-dated class B2s and, as a result, we expect to see little movement in the price of these bonds."

The Orchid assets are weaker than the average Mitchells pubs, as measured by weekly turnover per pub of £15,000 versus £23,000. Mitchells & Butlers intends to convert 96 Orchid pubs into its Harvester, Toby Carvery, Ember, Miller & Carter, Castle and Vintage Inns brands over the next two years. These conversions will cost £35m and are expected to provide strong incremental returns, thereby reducing the acquisition multiple.

The analysts suggest that the pre-overhead acquisition multiple of 9.1 times nevertheless provides some support for managed pub valuations held on balance sheets at between seven times to 11 times for Spirit to Marston's.

ABS

Core auto delinquencies to stay low

The stable macroeconomic outlook for the coming two years and historical delinquency rates mean delinquencies should remain low in core European auto ABS markets, says Moody's. The UK, German and French markets have rebounded strongly since 2009.

Unemployment drove delinquencies in the UK, Germany and France at the height of the financial crisis and the volatility of delinquencies during the crisis is in line with the respective volatility of the unemployment rate in each country. Surprisingly, the higher leverage of private individuals in the UK did not lead to significant further increases in delinquencies.

"However, delinquency rates are not fully reflected in the longer-term trends in unemployment over the past few years. Specifically, comparing portfolio performance before and after the financial crisis, it would seem that changes in underwriting policies and specific portfolio characteristics also play an important role in portfolio performance," Moody's adds.

Structured Finance

Russian framework 'credit positive'

The new Russian structured finance legislative platform is credit positive for the country's securitisation market, says Moody's. The agency notes that the new framework contains the key elements required for a broad range of securitisation and project finance structures and will provide onshore alternatives to securitisation transactions that were previously possible only via offshore issuing vehicles.

"The new legislation limits the risks associated with a number of relevant laws and provides a clearer and more comprehensive legal framework for the issuance of domestic Russian structured finance transactions," says Igor Zelezetskii, a Moody's vp - senior analyst. "Many of the amendments are broadly consistent with similar legal provisions in established structured finance markets and some of them, such as the bankruptcy remoteness framework for SPEs, will have positive credit implications."

The new legislation also introduces new types of SPEs, as well as a framework for bankruptcy-remote SPEs. The laws prescribe bankruptcy remoteness criteria for SPEs, including: prohibitions on borrowing from private individuals, except through issuance of bonds; and reducing charter share capital.

"In line with the powers granted to SPEs, mortgage agents now have broader rights and obligations necessary for the performance of their activities. The legislation explicitly states that a mortgage agent can both purchase cash receivables and issue notes with collateral, removing any uncertainty regarding the issuing capacity of mortgage agents," says Zelezetskii.

Furthermore, the legislation outlines procedures for the replacement of a bankrupt SPE and the transfer of pledged collateral to a new issuer. It also establishes professional standards and limitations for SPEs, ensuring their independence from the originator and SPE shareholders.

In addition, the new legislation strengthens two elements essential to the securitisation of assets backed by movable property: it improves registration and access to information relevant to the movable property collateral; and it increases the protection of bona fide purchasers against third parties' claims. "Previously, Russian law did not provide clear protection to a purchaser of collateral. The new law tries to introduce protection through encouraging greater transparency of the transfer and registration of movable property," Zelezetskii notes.

CDO

Trups CDO defaults remain stable

The number of combined US bank Trups CDO defaults and deferrals remained stable at 24.4% at end-May, compared with the previous month, according to Fitch's latest index results for the sector. Across 78 Trups CDOs, 230 bank defaulted issuers remain in the portfolio, representing approximately US$6.6bn of collateral. Additionally, 223 issuers are currently deferring interest payments on US$2.6bn of collateral.

American Bancorporation accounts for US$37m of notional in three CDOs marked as defaulted in Fitch's bank Trups universe. American Bancorporation had been deferring interest payments on its Trups since May 2008 and reached the end of its five-year deferral period in 2013 without paying interest due. The involuntary bankruptcy filed by the CDO managers to enforce the Trups holders' rights was the first such instance observed in the Trups universe (SCI 11 June).

CDS

iTraxx Financials expansion mooted

Markit is requesting feedback regarding the possible expansion of the iTraxx Financials index from 25 to 30 names during the September 2014 index roll. Providing there is support for the move, the selection of the first 25 entities will continue to be based on the DTCC roll report, but alternative selection criteria would be considered for the additional five names.

Markit is also implementing a number of other rule changes and additions to the Markit iTraxx European index rules that will be used for the September 2014 roll. First, to be considered for constituency, entities must have issued or guaranteed at least €100m of outstanding publicly traded debt securities. Second, the iTraxx Crossover index will be expanded to up to 75 names, depending on the level of further issuance during the relevant 12-month observation period leading up to the September index roll

Finally, in addition to senior unsecured debt, senior secured debt will be used for qualifying entities to be included via the supplementary list.

CDS

Pages Jaunes auction due

LCDS dealers have voted to hold an auction for European LCDS transactions referencing a €2.35bn facility agreement entered into by Pages Jaunes on 24 October 2006 (with subsequent amendments). Markit iTraxx LevX market-makers determined that a failure-to-pay credit event occurred with respect to the referenced facility agreement, based on publicly available information. ISDA will publish the auction terms in due course.

CLOs

FOIF lists

GLI Finance says that it transferred two of its CLO investments to Fair Oaks Income Fund (FOIF) for US$20.4m in cash and 34,298,425 in FOIF shares at the issue price of US$1, subject to a two-year lock-in agreement. The move follows FOIF's share placement - which raised US$114.5m - and admission to trading on the LSE Specialist Fund Market yesterday (see also SCI 19 May).

The CLO investments were revalued at US$54.72m, as at 3 June. GLIF's financial statements for the year-ended 31 December 2013 shows that interest income and dividend revenue relating to the CLO investments amounted to £9.6m.

Monies from the exit of the CLO investments will be deployed into GLIF's underlying SME finance assets. GLIF's current portfolio of interests in ten SME finance platforms will form the core of the company's future business.

CMBS

Delinquencies hit 2009 low

US CMBS delinquencies declined by 16bp in May to 4.97% from 5.13% a month earlier, according to Fitch's latest index results for the sector. Marking the first time the rate has stood below 5% since December 2009, the decline was led by a handful of dispositions from JPMCC 2007-LDPX, including two loans over US$50m (see SCI's CMBS loan events database).

The largest resolutions in May included: US$103.5m Long Island Marriott and Conference Center (securitised in JPMCC 2007-LDPX) for a 40% loss; US$89.4m Gateway I (MSCI 2007-IQ13), which was brought current; US$73.6m Islandia Shopping Center (LBUBS 2007-C6), which was modified and brought current; US$55m Overland Park Trade Center (JPMCC 2007-LDPX) for a 67% loss. The largest new delinquency was the US$60m Clark Tower loan (JPMCC 2007-CIBC20), which fell 60-days delinquent last month. However, the loan has been in special servicing since last September.

In total, resolutions of US$967m in May outpaced new additions to the index of US$465m. Fitch-rated new issuance volume of US$3.7bn outpaced US$3bn in portfolio run-off, causing a slight increase in the index denominator.

By property type, industrial experienced the largest decline in delinquencies last month (at 24bp), followed closely by office (21bp). Retail improved by a more modest 13bp, while multifamily and hotel rates improved by 5bp and 6bp respectively.

Current and previous delinquency rates are: 6.43% for industrial (from 6.67% in April); 5.92% for multifamily (from 5.97%); 5.22% for office (from 5.43%); 5.12% for hotel (from 5.18%); and 4.98% for retail (from 5.11%).

CMBS

Unusual pay-outs reported

The US$20m 4001 North Pine Island Road loan has been liquidated for US$7.5m, resulting in unusual pay-outs for the JPMCC 2006-CB15 CMBS. The loan generated US$7.5m, but the entire balance was used to pay expenses totalling US$7.8m, according to Barclays Capital CMBS analysts.

"Expenses were so high because of a modification applied to the loan in 2009. As a result of this modification, it appears interest shortfalls were being recorded as 'other shortfalls' in the remittance report (instead of P&I advances/ASERs) and these were then repaid before principal in the liquidation proceeds," they observe.

As a result of the liquidation, US$6.7m of interest proceeds was distributed to the trust. Combined with another small liquidation accounting for US$7.3m, the excess interest cashflow paid off all outstanding shortfalls on the first-loss AJ tranche totalling US$740,000.

After this, shortfalls were used to repay the US$5.2m in losses previously allocated to the AJ tranche. Finally, the remaining US$1.5m of interest proceeds was used to repay shortfalls on the zero-balance B tranche of US$300,000 and then US$1.2m of B note losses.

The Barcap analysts note that after the interest was distributed, the liquidations resulted in another US$24.4m in losses being applied to the AJ tranche. The AJ tranche has now had 18% of its balance written off. However, actual losses taken are 15%, as 3% of the original balance was repaid through the loss recoupment this month.

CMBS

Fair value option below appraisal

The Bryant Park Hotel has been liquidated for US$65m via a fair value purchase option. The property is backed by a US$85m loan securitised in JPMCC 2007-CB18, which was transferred to special servicing in October 2011 due to litigation regarding cash management issues.

A liquidation report released by special servicer KeyBank along with the remittance indicated that the controlling class (F class) used the fair value purchase option to purchase the property at a price below the as-is appraisal of US$71m and the stabilised value of US$87m. It is unclear why the fair value determination by the special servicer was below the appraisal, but CMBS analysts at Barclays Capital suggest that this may have been to account for potential high liquidation costs in New York City.

After repaying about US$6m in fees, advances and ASER, loan proceeds totalled US$59m and paid off the A3 tranche and a small portion of the last-cashflow A4 tranche. The Barcap analysts note that the loan reported US$25.7m in losses, but only US$20.8m was applied to the F tranche this month, which now has US$8m remaining outstanding.

"There is little indication why fewer losses were applied at the bond level this month. But, because of this, the deal is now undercollateralised by an additional US$5.5m (total undercollateralisation on the deal is US$8.1m or 20bp)," they observe.

ASER and special servicer fee recoveries led to shortfall repayments on the B and C tranches.

CMBS

Core commercial prices outperforming

US core commercial prices have surpassed apartment prices by four percentage points over the last 12 months, according to the latest Moody's/RCA CPPI report. Core commercial prices have risen to 16.4%, compared with 12.4% for apartments.

"Over the last year, all core commercial sectors have had double-digit price increases, with central business district office performing the strongest," says Moody's director of commercial real estate research Tad Philipp.

Apartment prices increased by 1.2% and core commercial prices by 1.4% in April. Core commercial prices are 9.7% below their pre-financial crisis peak, while apartment prices are 9.6% above peak.

Meanwhile, the national all-property composite index increased by 1.3% in April and now stands 60.1% above its January 2010 trough and 4.8% below its November 2007 peak. Excluding distressed transactions, prices stand 6.8% above their pre-crisis peak levels.

Six of the 23 indices have exceeded their pre-crisis peaks. Suburban office in non-major markets has been the slowest to recover.

Prices in major markets were 7% above their December 2007 pre-crisis peak, while prices in non-major markets were 14% below peak. Major market prices have increased by 16.3% over the past 12 months, while non-major market prices have increased by 14.4%.

CMBS

Windermere notes wiped out

Principal losses have been applied to the class E and F notes of Windermere VII after the liquidation of the RedLeaf I loan. S&P has subsequently downgraded those notes to single-D.

The underlying pool initially comprised 12 loans secured on real estate assets in Germany, France, Spain, and Sweden. The remaining securitised balance on the April IPD was €111.3m.

The properties backing the €24.5m RedLeaf I loan were sold in February and €19.2m in principal losses were subsequently applied in April. As a result the class F notes have been written off and the class E notes have been allocated €2.8m in principal losses.

CMBS

V tranche benefits from hyper-amortisation

The US$58.7m Citizens Bank Portfolio, securitised in BACM 2006-5, has paid off in full almost three years after its anticipated repayment date (ARD) of July 2011. The loan also received US$4.1m in other interest proceeds, which weren't applied to the typical interest waterfall but instead were diverted to the residual V tranche.

Barclays Capital CMBS analysts explain that the V tranche is designated to receive interest proceeds associated with excess interest, which are the extra interest payments due on a loan after the ARD if it remains outstanding. These proceeds accrue and are directed in the PSA to flow to the V tranche when a current loan pays off.

"It does not appear that special servicing fees must be repaid before the V tranche receives cash. In a liquidation, these proceeds are at the bottom of the cashflow waterfall, even after principal," the Barcap analysts observe.

After the Citizens Bank Portfolio loan failed to pay off at its ARD date, the loan began to hyper-amortise, shifting from an IO loan to receiving monthly unscheduled principal payments of US$100,000-US$150,000. These principal payments totalled US$4.1m.

Based on the similar size of the hyper-amortisation payments and the excess interest payment, the analysts suggest that after the ARD date, the interest payment of the loan stepped up and this was used to hyper-amortise the trust loan balance. But the borrower then paid off the entire loan balance and this difference may have led to the excess proceeds.

The loan was performing, but because of a brief stay in special servicing in September to November 2010, a US$591,500 work-out fee was charged. This fee, combined with another liquidation fee, resulted in pushing shortfalls on the CMBS up to the AM level. The AM shortfall should be paid back next month, however.

Risk Management

RFC issued on oprisk AMA

The EBA has launched a consultation on draft regulatory technical standards (RTS) assessing the criteria that competent authorities need to consider before granting institutions permission to use advanced measurement approaches (AMA) for calculating their capital requirements for operational risk. The draft RTS detail the assessment methodology to be used by competent authorities for operational risk AMA models.

In particular, they specify the qualitative and quantitative requirements that institutions are to meet before they can be granted permission to use AMA internal models to calculate their capital requirements to cover operational risk. In addition, they clarify the scope of operational risk, as well as the scope of operational risk loss, and specify common standards for the supervisory assessment of a bank's operational risk governance.

These RTS also lay down criteria for the supervisory assessment of the key methodological components of the operational risk measurement system. The aim is to ensure that banks' actual and potential operational risk is effectively captured, as well as generating reliable and robust AMA regulatory capital requirements that are comparable across institutions.

Finally, the RTS establish criteria for the supervisory assessment of banks' data quality and IT systems, requirements and terms for the 'use test' and terms and the scope of audit and internal validation of the AMA framework.

The deadline for the submission of comments is 12 September.

RMBS

RMBS methodology released

Morningstar Credit Ratings has published a new methodology for US RMBS ratings. In addition to prime jumbo, alternative-A and subprime RMBS, the methodology covers agency risk-sharing securities and securities backed by non-qualified mortgages, non-performing loans and re-performing loans.

The agency says that the rating methodology has been developed to be forward-looking, yet incorporate the lessons learned in differing economic circumstances. For example, one lesson learned is that ratings should include more frequent and more granular monitoring of transactions. Therefore, Morningstar incorporated in its surveillance process monthly loan-level performance data.

The Morningstar Credit Model (MCM), a loan-level model used in the rating process, was built using a robust data set that includes mortgage performance extending through the recent recession. The modelling techniques, which include path-dependent simulations with dynamic transition matrixes, incorporate the latest in quantitative practices.

Five separate sub-models were created in the MCM, based on the product type and the performance history of each respective product type. The model is used with updated inputs as part of the surveillance process.

The rating process will also include reviews of originators, servicers and third-party due-diligence providers. The information gathered in these reviews will be incorporated into the model to help assess the relative risk of the specified pool of mortgages being analysed. Finally, additional stress testing can be performed to incorporate the impact of performance triggers, amortising credit enhancement and tail-end default risk.

RMBS

Bank settlements delayed further

The deadline for acceptance under the proposed JPMorgan rep and warranty settlement has been extended to 1 August to allow the trustees to complete their evaluations of the proposed settlement. At the same time, oral arguments under the motion to reargue that was filed by objectors to the Countrywide rep and warranty settlement have been adjourned from 9 July to 24 September.

Regarding the JPMorgan settlement, Barclays Capital RMBS analysts suggest that the trustees could end up recommending a court approval process to give themselves cover from any potential liability. "However, there are some deals on which lawsuits are ongoing and there could be strong objections from investors on some specific deals. As a result, the risk that the list of deals that are part of this settlement fragments further continues to be high," they observe.

Similarly, the Countrywide adjournment is expected to push back the earliest timeline for investors to receive cashflows to 1H15 at least. "We continue to believe that there is some chance that given that the modification claims that the court carved out of the settlement releases, the US$8.5bn settlement could get delayed further until these are resolved. It is also possible for the list of deals to become fragmented, with some paying out but others holding back until the mod claims are released," the Barcap analysts note.

Meanwhile, Bank of America's settlement negotiations with the US Justice Department are said to be at a US$12bn offer and a US$17bn ask. NewOak notes in a recent client memo that JPMorgan unsuccessfully tried to argue in its negotiations with the government that the penalties on the mortgage activities associated with Washington Mutual and Bear Stearns should not be levied as harshly on the bank as its own mortgage securities business. Bank of America also appears to be trying to have the government distinguish between its activities and the ones that were undertaken by Merrill Lynch and Countrywide.

"Based on how JPMorgan faired with the Justice Department - and because its acquisitions were essentially engineered by regulators - Bank of America finds itself in a tough spot," NewOak observes. "While the acquisitions of both Merrill and Countrywide were meaningful in containing the financial crisis, neither were seen as taking place at the urging of the government. The immediate issue is for the bank to put this chapter behind it, so expect Bank of America to try to reach a deal close to its current offer price of US$12bn."