Contents

CLOs

Steady secondary CLO supply

It was another fairly busy session for the US CLO secondary market yesterday. SCI's PriceABS data captured 26 unique US CLO tranches circulating on Tuesday, with paper from the top to the bottom of the capital stack achieving covers.

Deal vintages ranged from 2005 to 2014. Among the oldest paper out for the bid was the CENTX 2005-10X D tranche, which was talked at 96, 96.2 and in the mid/high-90s and was covered at 96.36.

Similarly, the HARCH 2005-2A D tranche was talked at 98 and 99 and was covered at 97.77. That tranche had been talked between 98 and 99.05 on Monday and was covered early in the year on 13 January at 96.62.

The AIRLE 2006-2A C tranche was talked between the 90 area and low-90s and was covered at 90.11. The EMRSN 2006-1A D tranche was talked between 91 and 92 and was covered at 90.05.

There was a cover at 99.6 for the BALLY 2006-2A D tranche, where price talk had been between 99 and mid-99, while FAIRW 2006-1X A2L was talked at high-99 and from 99.75 to 100.

Among the 2007-vintage tranches out for the bid were three from KKR deals. They included the KKR 2007-1A H tranche, which was talked at 101-103 and in the low/mid-100s. The tranche's last recorded cover was at around 104 on 25 October 2013.

As for post-crisis paper, the APID 2013-16A A1 tranche was covered at around 100, which is also where it was covered last week. Before that it had been covered at very high-99 on 30 May and on 6 May.

Both the NEND 2013-1A SUB and OCTR 2013-4A SUB tranches traded, while OAKC 2013-8A A was talked between the mid/high-90s and 99 area and was covered at 98.81. That OAKC tranche had been covered at 98.65 on 10 April.

There were also a few tranches which failed to trade. Among the session's DNTs were ACIS 2014-3A A1A, BABSN 2006-2A D, GUGG2 2011-1X INCO and NOMAD 2013-1A A1.

JL

RMBS

US RMBS secondary activity stable

US non-agency RMBS BWIC volume hit US$566m yesterday, slightly lower than the total for the prior session. Supply was mainly driven by 2005- and 2006-vintage subprime bonds.

SCI's PriceABS data captured a range of names out for the bid in yesterday's session. Among them was a US$2.053m piece of the ACE 2004-HE4 M2 tranche, which was covered in the mid/high-90s.

That tranche first appeared in PriceABS on 16 November 2012 when price talk was in the mid-80s and high-80s. The tranche also appeared several times last year, most recently when it was talked in the low/mid-90s on 12 September 2013.

A US$5.763m piece of the CWL 2004-1 M3 was covered in the low/mid-90s. When it first appeared in PriceABS in July 2012 it was covered in the 70 area.

There was quite a difference between two First Franklin Mortgage Loan tranches from different vintages. The FFML 2004-FF8 M3 tranche was covered in the mid/high-70s, while the FFML 2006-FF8 IIA3 tranche was covered in the low/mid-90s.

The 2004 tranche was talked almost a year ago on 10 July 2013 in the mid/high-60s. The 2006 tranche, meanwhile, was covered two summers ago in the low-80s on 23 July 2012.

Of the other names of note, MSAC 2006-NC3 A2C was covered in the high-90s, while RAMC 2006-3 AF2 was covered in the mid-60s. The RAMC tranche was also covered in July last year in the low-60s.

Additionally, a US$3.26m piece of the WMALT 2007-OA3 5A tranche was talked and covered in the mid-70s. The tranche first appeared in PriceABS on 1 May 2012, when it was covered at mid-57.

There were also a few tranches which failed to trade. The ABSHE 2005-HE2 M3, CWALT 2005-28CB 2A1, CWALT 2006-26CB A12 and CWALT 2006-J2 A1 tranches were each recorded as DNTs.

JL

Structured Finance

SCI Start the Week - 30 June

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

Pipeline
After a fairly even distribution of new deals added to the pipeline two weeks ago, last week was dominated by newly-announced CLOs. There were two ABS, two CMBS and seven CLOs added to the pipeline.

The ABS were US$400m Ford Credit Floorplan Master Owner Trust A Series 2014-3 and US$1.1bn MBART 2014-1. The CMBS, meanwhile, were US$550m COMM 2014-SAVA and US$1.264bn JPMBB 2014-C21.

The CLOs were: US$415.25m Avery Point V CLO; US$500m CVP Cascade; US$315.5m Eaton Vance CLO 2014-1; the refinanced US$256m Golub Capital Partners CLO 10; US$469m Highbridge Loan Management 4-2014; US$616.4m Octagon Investment Partners XX; and US$414.25m WhiteHorse IX.

Pricings
CLOs again accounted for many of last week's prints. There were two ABS, three RMBS, four CMBS and eight CLOs.

The ABS were US$1.043bn American Express Credit Account Master Trust Series 2014-2 and €330m SC Poland Auto 2014-1, while the RMBS were €1.9bn Berica ABS 3, US$423m Citigroup Mortgage Loan Trust 2014-J1 and US$303.75m JPMMT 2014-2. The CMBS were US$863m COMM 2014-CCRE18, US$1.4bn COMM 2014-KYO, €355m DECO-2014 Gondola and £210m Taurus UK 2014-1.

Lastly, the CLOs were: US$734m Apidos CLO XVIII; €352m Ares CLO VII; €416m Dryden 32 Euro CLO; US$518m MidOcean Credit CLO III; €400m Phoenix Park; US$363m Silver Creek CLO 2014-1; US$416m Trinitas II CLO; and US$518m West CLO 2014-1.

Markets
The US non-agency RMBS secondary market was stable last week, as SCI reported on Thursday (SCI 26 June). BWIC volume for Wednesday's session was US$566m, down slightly on Tuesday's total, with supply driven by 2005- and 2006-vintage subprime bonds.

SCI's PriceABS data captured a number of US ABS tranches out for the bid on Tuesday, with several auto names out for the bid (SCI 25 June). Among them were the ACAR 2014-2 C tranche, which was covered in the low-200s, and the EART 2014-2A C tranche, which was talked in the very high-100s.

US CMBS supply was low at the start of the week (SCI 24 June). BWIC volume for Monday's session was just a little over US$100m and generic spreads were mostly unchanged from the week before.

Secondary activity in the US CLO market was moderate last week, with BWIC volumes totalling US$430m. "Shorter-WAL and especially front-pay tranches saw strong covers such as the 70s DM context seen for a 1.9-year 2007 triple-A line-item on Tuesday. Triple-Bs down to equity tranches also saw strong demands this week although a number of items did not trade as sellers' reserves were not met," note Bank of America Merrill Lynch analysts.

Deal news
• The Westin Falls Church hotel backing a US$62m loan in WBCMT 2006-C28 has been moved into special servicing. The loan switched from IO to amortising payments in November 2012.
• After The Cove at Southern became the first CMBS 2.0 loan to take a loss this month (SCI 19 June), a pair of CMBS 3.0 loans have also entered special servicing. The US$18m Landmark Building office in COMM 2012-CR3 and the US$16m Oakridge Office Park in MSBAM 2013-C7 moved into special servicing this month.
• Fitch has upgraded 78 tranches of the Granite Master Trust programme and three tranches of the Whinstone programme. All other tranches have been affirmed.
• CDS spreads on Anadarko Petroleum Corporation have tightened to levels not seen since 2007, according to Fitch Solutions' latest CDS case study. The seven-year low has been reached on the back of speculation that ExxonMobil may make a takeover bid.
• An auction has been scheduled for Sunrise CDO I on 15 July. The collateral shall only be sold if the proceeds are greater than or equal to the auction call redemption amount.
• The FDIC intends to offer for sale its interests in certain Trups CDOs through a series of auctions. These auctions are anticipated to commence around the week of 14 July.

Regulatory update
• The US SEC has adopted the first of a series of rules and guidance on cross-border security-based swap activities for market participants. The new rules will be key to finalising the remaining proposals.
• ESMA has published its final report on draft regulatory technical standards required under CRA 3 regarding information on transparency of structured finance instruments. The standards will complement the existing regulatory framework.
• A number of large institutional investors last week sued six RMBS trustees in New York state court for breaching their fiduciary duties and failing to force mortgage originators and RMBS issuers to repurchase defective loans. The trustees named include BNY Mellon, Citi, Deutsche Bank, HSBC, Wells Fargo and US Bank.
• The FHFA has reached a US$99.5m settlement with RBS to resolve claims alleging RBS violated federal and state securities laws in connection with private-label mortgage-backed securities (PLS) that were purchased by Freddie Mac between 2005 and 2007.

CLOs

CLO manager diversity shrinking

There have been 34 deals issued from 19 managers since the European CLO market returned last year. Manager diversity has been shrinking, though, and only 22 managers are currently actively managing European CLOs.

Despite three new managers entering the market for the first time among those 19, manager consolidation - particularly between 2010 and 2012 - has shrunk the number of managers that currently have outstanding European CLOs to 46, from a peak of 58 in 2007. The majority of legacy deals are no longer reinvesting, hence the low number of managers that are currently active.

Bank of America Merrill Lynch analysts note that the 2.0 market has largely been restricted to managers with established CLO platforms. Of the 19 managers that have brought 2.0 European deals to the market, nine also manage at least five legacy European CLOs and a further six also had existing US CLO programmes before issuing a European deal.

Risk retention requirements are expected to provide a barrier to smaller managers. Many 2.0 managers are backed by large private equity firms or banks and so have the resources to hold a 5% risk retention piece, but smaller managers may find it difficult to provide the capital for risk retention.

The pace of consolidation has slowed as the primary market has restarted. KKR did acquire Avoca Capital at the start of this year (SCI 21 October 2013), but otherwise manager consolidation has been limited since 2012.

"With very little primary market activity between 2009 and 2012 in Europe, a number of managers increased assets under management by acquiring other managers during this period. Some managers also took over management of deals as replacement managers, as existing managers sold management contracts and exited the market, or went bankrupt," say the analysts.

Other large European CLO managers have expanded their CLO platforms in other ways, such as 3i's acquisition of Mizuho and Invesco's CLO businesses. Others, such as Alcentra, have expanded without acquisitions.

Investors can assess the performance of managers through the crisis and it does appear that those managers which have survived to issue 2.0 deals are those which best managed their legacy deals. However, as competitors have disappeared, diversity has decreased.

The average overlap between deals issued by a single manager tends to be a lot higher than between deals issued by different managers, so a smaller number of managers is likely to result in less diversity in the market.

"Overall, we find that the average overlap between pairs of legacy European CLOs is 20%. This increases to 36% for pairs of deals from the same manager," say the analysts."For managers with more than five deals outstanding, the average overlap for pairs of deals from the same manager ranges from 29% to 62%."

While the regulatory environment makes it difficult for new managers to enter the European market, those that do enter may benefit from investor demand for manager diversity, the analysts note. These new players would likely be existing US CLO managers or other entities with European leveraged loan expertise outside of CLO structures.

JL

Structured Finance

Rating agency vet takes credit role

NewOak has appointed Andrea Bryan as an md in its credit services group. She takes responsibility for credit management and operating advisor services for structured products.

Bryan has more than 20 years of experience in structured finance in the US, Europe and Asia and specialises in CMBS and CDOs. She was previously at S&P, where she was responsible for credit analysis, surveillance and criteria development for early CMBS transactions and analysed a variety of CRE deals ranging from NPLs, conduit and large loan CMBS and CRE CDOs.

Bryan has also served as head of structured finance ratings in Tokyo for the rating agency. She was later regional practice leader for the North America structured credit ratings team responsible for rating pooled credit derivatives transactions.

Structured Finance

Fund adds industry vet

SCIO Capital has appointed Kevin Flaherty as head of syndicate. He will work closely with co-founders Greg Branch and Saul Greenberg to identify new investment opportunities in European structured credit.

Flaherty joins the structured credit fund from Trimast Capital, where he was a managing partner. He has also served as head of structured product syndicate for Europe, Asia and Australia at Deutsche Bank and before that was part of the ABS trading and research team at Barclays Capital.

Structured Finance

Fund manager purchase completed

Standard Life Investments has completed its acquisition of Ignis Asset Management for £390m (SCI 26 March). The purchase strengthens Standard Life's investment capabilities, broadens its third-party client base and increases the range of investment solutions it can offer.

Structured Finance

Law firm adds pair

Dechert has appointed two new partners to the firm. Eleni Skordaki joins the finance and real estate practice in London and Johan Terblanche joins the financial services practice in Luxembourg.

Skordaki's practice focuses on real estate financings and restructurings. She was previously at Olswang and has also worked at Allen & Overy, CMS Cameron McKenna and ACCA.

Terblanche focuses on the structuring of collective investment vehicles. He was previously at Loyens & Loeff and has also worked at Harney Westwood & Riegels and at Maitland & Co.

Structured Finance

Broker-dealer merger lined up

Amherst Securities Group and Pierpont Securities have entered into a definitive agreement to merge. The combined broker-dealer will be called Amherst Pierpont Securities.

The new company will provide clients with access to a broad range of fixed income products, including RMBS, CMBS, ABS and other highly-structured transactions. The firm will also offer analytics, an enhanced trading platform and a broader distribution platform.

Pierpont ceo Mark Werner and Amherst president Joseph Walsh will fill those same roles in the new company. Current Pierpont president Thomas Connor will serve as coo.

CLOs

CLO PM appointed

Highbridge Principal Strategies has hired Jonathan Rabinowitz as a portfolio manager. He will report to portfolio manager David Frey and focus on broadly syndicated loans and CLOs.

Rabinowitz joins from Invesco Senior Secured Management. Before that he was at Morgan Stanley and has also worked for CIBC, Mizuho and Deloitte.

CMBS

Office targets CMBS opportunities

Walker & Dunlop has opened an office in Charlotte, North Carolina. The office will contain much of the credit operations for the firm's new CMBS conduit.

Brett McGuire, vp, will be based in Charlotte, where a large number of commercial real estate loans are set to mature between 2015 and 2017. He has been with Walker & Dunlop since 2008, before which he was at Green Park Financial, e-centives and Wells Fargo.

RMBS

MBS fraud sentence handed out

David Higgs, a former md at Credit Suisse, has been sentenced in connection with a scheme to hide more than US$100m in MBS trading losses. He had previously pleaded guilty and agreed to cooperate with the government's investigation into the losses (SCI 17 April 2013).

The bonds concerned were subprime RMBS and CMBS and contributed to Credit Suisse taking a US$2.65bn write-down of its 2007 year-end financial result. Higgs had been based in London and reported to Kareem Serageldin.

Higgs has been ordered to pay US$900,000 forfeiture, a US$50,000 fine and a US$100 special assessment. Unlike Serageldin (SCI 25 November 2013) he has not been sentenced to time in prison.

ABS

SLABS delinquencies tick down

Delinquencies remain stable to slightly lower for US private label student loan ABS. Fitch's latest quarterly index suggests delinquencies could decline further in the coming months.

There was a very slight decrease in 90- and 120-day delinquencies in the first quarter of the year. Late-pays on for-profit student loan ABS declined to 0.76% in Q1, while late-pays on not-for-profits fell to 0.58%.

The prolonged decline in private student loan forbearance levels is also encouraging. For-profit forbearance fell to its lowest level in a decade - 1.96% - in the first quarter, while not-for-profit forbearance declined to 1.61%.

ABS

Japanese PPR credit positive

A record high principal payment rate (PPR) on credit cards in Japan is credit positive, Moody's notes in its latest Structured Thinking: Asia Pacific publication. The rate means securitisations backed by Japanese credit cards have a reduced risk of losses from defaults.

A high PPR encourages card holders to clear their debt sooner, which shortens credit card ABS maturities and leads to a lower cumulative default rate in the pools through the life of the deals. The PPR for Japanese credit-card ABS increased steadily from 2011 to 2013, hitting a new high in December 2013.

Moody's says PPR will stay at its current high levels as long as the major originators maintain their current payment requirement tables and average loan balances. The rating agency expects the average loan balance to maintain its current level.

Structured Finance

Secured bond defaults rise

Secured bonds have accounted for a greater portion of the high yield default mix in recent years, says Fitch. Secured bonds have comprised 49% of defaults by par value and 41% by issue count since 2010, compared with just 13% and 12%, respectively, between 2000 and 2009.

The number of secured bonds in the high yield space soared from 8% of market volume in 2008 to 23% in 2012 as bond for loan take-outs increased in the aftermath of the financial crisis. Ratings for secured bonds were frequently lower than those for unsecured bonds.

That more aggressive rating profile for secured bonds has been reflected in defaults. The default rate on post-recession secured issues hit a cumulative 8.9% in May, higher than the 1.4% rate recorded across unsecured bonds sold since 2009.

Structured Finance

DDE criteria expanded

Fitch has updated its global criteria for determining distressed debt exchanges (DDEs) in structured finance transactions. The criteria relate to whether a transaction or class of notes should be classified as having experienced a DDE.

The rating agency says key considerations are whether the relevant noteholders will suffer a material reduction in economic terms compared with existing contractual terms and whether the restructuring or exchange will avert a probable payment default on the underlying notes. The latest update expands the report to include a section on contractual options contained in the original note terms, with new language confirming that a DDE is unlikely to be called even if the contractual options disadvantage the noteholder or are exercised to avoid default.

Structured Finance

Higher credit risks raise concerns

There are several trends pointing to potential higher credit risks as the US securitisation market continues its post-financial-crisis resurgence, says Moody's. So far ratings have not been affected as sponsors have built in subordination levels and other structural features to boost credit quality.

Moody's says the degree of weaker underwriting and collateral quality in structured transactions varies from sector to sector. The introduction of innovative deal structures and hybrid asset classes and the entry of new untested issuers to the market also elevate credit risk, the rating agency notes.

Credit quality remains above pre-crisis levels for US CMBS and CLOs. They are the most active sectors and while collateral quality has slipped, it remains high.

"Overall CMBS collateral quality today is similar to that of late 2005-early 2006," says Moody's md Nick Levidy. "While the average Moody's loan-to-value ratio is only about 10 percentage points below its pre-crisis peak, a recovering property market and still-high debt service coverage ratios are helping to lower term default risk, which in turn will help mitigate refinance risk through amortisation."

The level of risk presented by CLO pools continues to rise but is below the maximum level CLO indentures permit. Lower-quality leveraged loan collateral is expected to be a continuing trend but core fundamentals for most industries are stable and default rates for speculative grade debt are at historic lows, while strong subordination in deals and a focus on first-lien, senior-secured leveraged loan collateral have buttressed the credit quality of new deals.

RMBS and credit card ABS credit quality also remains high. The number of new transactions has been limited, however.

Moody's has concerns about underwriting in subprime auto ABS and is also concerned by auto ABS structural innovations. Fitch is also concerned by subprime auto ABS (SCI 25 June).

Structured Finance

PCS criteria revised

Prime Collateralised Securities (PCS) has introduced the first substantial revision of its criteria in relation to high quality securitisations. The move is designed to raise the standard enshrined in the label, with a few criteria being softened or removed when they proved not to add anything to the quality represented by the label or when the market could demonstrate that very high quality securitisations were being issued without these requirements.

Under the changes, a couple of criteria have been clarified. First, that PCS labels can only be granted to homogenous pools has been made much more explicit. Second, the definition of 'residential mortgage' now includes all the types of residential mortgages allowed within the label rules.

A number of additional requirements have also been introduced, including: transactions being listed on a recognised stock exchange; providing for continuity in servicing; and enhanced data disclosure in line with those of the European DataWarehouse. In addition, the requirement for any given rating level has been removed, although the requirement for two ratings remains.

Finally, adjustments to the credit card receivables and auto lease rules have been made to account for certain specificities of these asset types.

The PCS label consists of over 150 criteria, of which on average 55 to 65 apply to each transaction.

CDO

CDO auction due

An auction will be held for Trainer Wortham First Republic CBO IV on 23 July. The collateral shall only be sold if the proceeds are greater than or equal to the auction call redemption amount.

CDO

CRE CDO auction announced

An auction has been scheduled for N-Star Real Estate CDO III on 9 July. The auction is being conducted by Wells Fargo in its role as trustee.

CDO

ABS CDO sale lined up

An auction has been scheduled for Longport Funding II CDO on 21 July. The collateral will only be sold if the sale would result in sale proceeds which - taken with the balance of all eligible investments and cash in the accounts - exceed the auction call redemption amount.

CDO

Trups upgraded due to changes

Moody's has updated its approach to rating Trups CDOs. As a result, 166 tranches in 60 Trups CDOs have been placed on review for upgrade, with senior tranches potentially moving up by as much as four notches and mezzanine and junior tranches moving three notches.

The methodology update includes removing the current 25% macro default probability stress for bank and insurance Trups, expanding default timing profiles from one to six probability-weighted scenarios, incorporating a redemption profile for bank and insurance Trups, giving full par credit to deferring bank Trups that meet certain criteria and raising the assumed recovery rate for insurance Trups.

The update affects ratings on US$11.7bn of securities. Moody's will complete the review of all affected transactions within the next six months.

CDS

Takeover talk tightens CDS spreads

CDS spreads on Anadarko Petroleum Corporation have tightened to levels not seen since 2007, according to Fitch Solutions' latest CDS case study. The seven-year low has been reached on the back of speculation that ExxonMobil may make a takeover bid.

Five-year CDS on Anadarko have tightened 29% over the past month and 64% since the start of the year. Liquidity has increased this week to move it into the fourteenth regional percentile.

CDS

Argentina trigger question rejected

ISDA's determinations committee has rejected a request to rule on whether Argentina has triggered CDS contracts tied to its debt. The question was asked last week on behalf of a CDS holder (SCI 24 June) who claimed a statement by economy minister Axel Kicillof breaches a repudiation trigger.

CLOs

Cov-lite exposure grows

US CLO 2.0 managers have not been fully using their cov-lite buckets, says Moody's. However, cov-lite holdings have grown as buckets have expanded since 2010 and cov-lites' share of the leveraged loan universe has also grown.

CLO managers appear to be using around half of their permitted cov-lite allowance. Cov-lite loan buckets typically constitute 50%-60% of portfolio par in recent deals, while cov-lite loans constitute an average of 26% of portfolio par for the 255 US CLO 2.0s for which trustees report cov-lite loan holdings.

The 26% average share is slightly higher than it was in January 2013, when it stood at 24%. In some deals the cov-lite share of portfolio par is zero and in others it is up to 67% and another difference from January 2013 is that then no deals had cov-lite exposures higher than 45%, whereas now more than 10% of deals do.

However, Moody's notes that there is no standard definition of cov-lite, so there may be cases where cov-lite exposures are being underreported because of narrow cov-lite definitions in CLO documents. Some definitions may also be broader than usual, such as when a loan where maintenance restrictions are unlikely to breached is dubbed cov-lite.

CLOs

CLO credit quality stabilising

The credit quality of new and outstanding CLOs in both the US and Europe has stabilised, after deteriorating somewhat in 2013, according to Moody's. At the same time, rating upgrades have far outweighed downgrades, due to the rapid deleveraging of senior notes.

US transactions have benefitted from strong collateral coverage and adequate buffers for their quality-test covenants, allowing the quality of CLO 2.0 deals to be maintained, despite a decline in the credit quality of new leveraged loan issuers. Heavy bond and loan issuance in the US has enabled many companies to refinance and extend their debt maturity profiles, postponing the debt maturity wall to 2018.

Robust investor demand has outweighed supply, however, resulting in looser underwriting standards for loans and spread compression in CLOs. Moreover, debt issuance with more issuer-friendly structures - such as covenant-lite loans - continues to increase.

Indeed, recent Moody's research shows that the default rate of covenant-lite companies is no longer lower than that of the overall speculative grade population. Although the recovery rates for first-lien cov-lite loans remain consistent with those for 'cov-heavy' loans, the debt cushion for cov-lite loans is eroding. Nonetheless, the core fundamentals for most industries are stable and default rates for speculative grade debt are at historic lows, which helps buttress the credit quality of CLOs.

Deleveraging also continues to push up overcollateralisation levels in European CLO 1.0 deals sharply. Moreover, the speculative grade default rate has more than halved since December 2013 as euro-area economies continue to recover.

CLO issuance is on track to reach an all-time record this year. As of 31 May, 74 Moody's-rated US CLOs had closed, amounting to US$35.8bn. The agency assigned definitive ratings to another 22 US CLOs and provisional ratings to 11 US CLOs last month.

As of 31 May, seven European CLOs that Moody's rated had closed, amounting to €3.2bn - up from €2.3bn for the same number of deals in all of 2013. The average deal amount so far this year is €456m, up from the €323m average for all of last year. Moody's assigned ratings to another five European CLOs in June.

In the US, Moody's recently downgraded the ratings on a small number of CLO tranches, largely because of concerns about some early vintage CLO 1.0s that are approaching their legal maturity and have excess concentrations of loans to particular obligors, industries and risky assets. In Europe, the downgrades affected mostly junior tranches, which are the most sensitive to credit deterioration in their underlying portfolios and sometimes to declining par coverage.

Nevertheless, deleveraging is expected to continue driving upgrades for the rest of the year in both regions.

CMBS

CMBS liquidations drop

The volume of US CMBS loan liquidations dropped to US$932.03m in June from US$1.02bn in May, according to Trepp. Of the loans that were liquidated, 90% by balance fell into the greater than 2% loss severity category.

June loss severity came in at 45.32%, down by 362bp from May's 48.94% and just below the 12-month moving average of 46.8%. The number of loans liquidated during the month was 80, resulting in US$422.4m in losses.

The average disposed balance in June was US$11.65m, compared to the 12-month average of US$14.64m. Since January 2010, servicers have been liquidating at an average rate of US$1.21bn per month.

Of note, a 100% loss was recorded last month for the US$20m 4001 North Pine Island Road loan securitised in JPMCC 2006-CB15 (see SCI's loan events database). The largest loan to be liquidated with a loss in June was the US$112m Senior Living Properties Portfolio loan securitised in GMAC 1998-C1.

CMBS

Canary Wharf II amendments 'credit neutral'

Canary Wharf Group (CWG), the sponsor of the Canary Wharf Finance II CMBS, has sold its interest in the 10 Upper Bank Street property. The building - which is Clifford Chance's London headquarters - was recently re-valued at £780m, up from an estimated £685m in June 2013.

As a result, 130% of the asset allocated loan amount (£577.9m) will be applied to partially repay the class A1 notes on the 22 July IPD. CWG last month cancelled £26.1m and £35.3m of retained B3 and C2 notes, and partially terminated the related interest rate swaps.

Following the reduction in debt amount, the liquidity facility may also be decreased from the current £300m to £225m ahead of the next liquidity facility renewal date in April 2015.

Fitch believes that these amendments are credit neutral. While the debt service coverage ratio will improve to an estimated 1.4x from 0.89x and LTV to 57.6% from 63% in the short-to-medium term, these metrics would worsen towards the end of the transaction's life, given a broadly unchanged balloon balance.

CMBS

Continued improvement for CMBS delinquencies

June marked the thirteenth straight month of improvement in the US CMBS delinquency rate. Dropping by 22bp to 6.05%, the reading is 260bp lower year-over-year and 429bp below the all-time high from 2012, according to Trepp.

Industrial loans saw the most improvement in June, dropping by 55bp, after being the only property type to worsen in May. The retail segment still holds the crown of lowest delinquency of the five major property types, while multifamily remains the highest.

Loan resolutions tallied US$900m in June, with loans that cured offsetting new delinquencies. There is currently US$32.4bn in delinquent loans, down from US$33.6bn the previous month. US$40.9bn in loans are with the special servicer, representing over 2,400 loans.

CMBS

IO switch could ease CMBS loan woes

The Westin Falls Church hotel backing a US$62m loan in WBCMT 2006-C28 has been moved into special servicing. The loan switched from IO to amortising payments in November 2012.

Barclays Capital analysts note that the property's performance fell last year, with DSCR NOI falling to 0.93x, having been 1.43x in 2012. The occupancy rate also fell 2% to 56%.

"The loan is likely a modification candidate, as returning it to IO payments would by itself be enough to return the loan to 1.23x/1.01x DSCR NOI/NCF based on 2013 performance. However, a small hope note or a rate modification is also not out of the question," say the analysts.

If the loan does go delinquent and is assessed an appraisal reduction then interest shortfalls could increase. Shortfalls are already hitting the AJ tranche.

CMBS

CMBS 3.0 loans enter special servicing

After The Cove at Southern became the first CMBS 2.0 loan to take a loss this month (SCI 19 June), a pair of CMBS 3.0 loans have also entered special servicing. The US$18m Landmark Building office in COMM 2012-CR3 and the US$16m Oakridge Office Park in MSBAM 2013-C7 moved into special servicing this month.

Barclays Capital CMBS analysts note that the Landmark Building appears to have gone into special servicing due to the guarantor's bankruptcy, rather than issues directly related to the property. The Oakridge transfer appears to be due to tenants opting out of lease clauses.

NPLs

Italian servicers adapting to NPL increase

S&P suggests that the recent rise in Italian non-performing loan volumes could create new growth opportunities for Italian loan servicers. The agency reports that the Italian servicers it ranks have positioned themselves well to be able to manage some of the NPLs that banks and financial institutions could either sell to investors or outsource the servicing.

The volume of NPLs has continued to increase due to ongoing national economic challenges since the start of the financial crisis. According to Bank of Italy statistics, the volume of NPLs peaked at more than €150bn at end-2013, almost doubling since early 2011, when this figure was about €78bn.

Industry observers expect this figure to increase further, potentially exceeding €200bn within the next 12 months. The stock of sub-performing loans and restructured loans has risen too, and data indicate that a proportion of these are likely to become NPLs.

"Our observations of the Italian servicers that we rank support our view that they have prepared themselves well to deal with the increasing volume of NPLs," S&P notes. "Italian special servicers have strengthened their organisation and external provider networks, as well as their IT systems. Similarly, they have expanded their set of services."

Risk Management

Derivatives exposure remains concentrated

Insured US commercial banks and savings associations reported trading revenue of US$6.1bn in 1Q14, up by US$3.2bn or 108% from US$2.9bn in 4Q13, according to the OCC's 'Quarterly Report on Bank Trading and Derivatives Activities'. At the same time, credit exposures from derivatives fell for the seventh consecutive quarter.

Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, decreased by US$19bn or 6% to US$279bn during the first quarter. Banks hold collateral to cover 84% of their NCCE, 77% of which is cash.

The decline in credit exposure was driven by trade compression, with swap contracts falling by US$11trn during the quarter, as dealer banks continued to eliminate trades that offset each other. The report shows that the notional amount of derivatives held by insured US commercial banks declined by US$6.4trn, or 3%, from the fourth quarter to US$231trn.

The largest four banks hold 92% of the total notional amount of derivatives, while the largest 25 banks hold nearly 100%. Derivative contracts remain concentrated in interest rate products, which represent 80.6% of total derivative notional values, down from 82.1% in Q4.

Credit default swaps are the dominant product in the credit derivatives market, representing 96.3% of total credit derivatives.

Risk Management

Collateral management efficiency eyed

Sapient Global Markets has published a white paper on bringing efficiency to collateral management. The paper identifies six key areas for improvement to transform collateral processes.

Sapient surveyed global market participants earlier in the year (SCI 29 May). It has now identified inventory management, risk management, data management, reporting and analysis, dispute management and communication standards as key areas for improvement.

While regulations continue to drive firms' investments in new technology and infrastructure, a number of other trends are influencing firms' desire to increase efficiency, including shortfalls, cross asset netting, collateral optimisation and transformation. As the costs of central clearing, collateral reporting and margining continue to rise, firms will need to bring efficiency to several areas of their collateral management process in order to remain competitive and protect revenues, Sapient says.

"From the current environment of batch processes and reactive collateral management decisions, firms are now looking holistically at collateral management projects," says Thomas Schiebe, senior associate at Sapient Global Markets. "They realise that automation is needed to manage higher collateral volumes, increased margin calls, and interaction with more counterparties. As collateral management continues to evolve, driven by regulatory reform, firms are taking positive steps to remain competitive and protect revenues."

Risk Management

Cross-border swaps rules adopted

The US SEC has adopted the first of a series of rules and guidance on cross-border security-based swap activities for market participants. The new rules will be key to finalising the remaining proposals.

The rules and guidance explain when a cross-border transaction must be counted toward the requirement to register as a security-based swap dealer or major security-based swap participant. The rules also address the scope of the SEC's cross-border anti-fraud authority.

Procedures for foreign regulators or market participants to apply for substituted compliance, which would permit market participants to comply with US requirements by complying with foreign requirements, are also covered. The rules will become effective 60 days after their publication in the federal register.

Risk Management

OTC clearing guidelines released

AIMA has launched OTC derivatives clearing guidelines for asset managers. The guide to sound practices provides guidance on the new regulatory framework in the US and EU, which affects most OTC derivatives transactions cleared globally. The guidelines are supplemented by a due diligence questionnaire which is intended to help asset managers to evaluate different clearing members and clearing houses.

RMBS

Treasury looks to boost PLS market

US Treasury Secretary Jacob Lew last week outlined plans to expand access to credit by boosting the private-label securities market. A new financing partnership between the Treasury and HUD will also support the FHA's multifamily mortgage risk-sharing programme.

The Treasury-led effort to catalyse the PLS market is part of encouraging securitisation as a way of shifting risk to investors in those cases where loan borrowers do no meet GSE and FHA eligibility requirements. The Treasury notes that despite work "to put in place reforms that address the flaws in the securitisation and lending practices that played a role in the financial crisis" many of the largest investors have not returned.

That has shrunk the market, resulting in very limited issuance and thus few mortgage financing options for borrowers aside from government-supported channels. To help determine what more can be done to encourage a functioning PLS market, the Treasury has published an RFC and plans to host a series of meetings with investors and securitisers to further explore ways to increase private lending.

The partnership between the Treasury and HUD will see the Federal Financing Bank (FFB) use its authority to finance FHA-insured mortgages which support the construction and preservation of rental housing. Additionally, MHA has been extended until at least the end of 2016.

RMBS

Banks look to restructured assets

Banks and other market participants are increasingly looking to securitise residential mortgage and SME loan portfolios materially exposed to refinanced or restructured assets in Europe, says Fitch. The variety of loan restructurings complicates the rating process and necessitates extra detail.

The enquiries Fitch has received on potential deals mainly concern collateral in countries which have had sharp economic or housing market corrections since the credit crisis. Restructured or refinanced loan portfolios in Spain are estimated at €211.3bn at end-2013, equivalent to 15.3% of total lending to the private sector.

Fitch expects the number of debt restructuring agreements in these countries to rise over the coming months, reflecting deleveraging by the banking sector and recent legislative initiatives. Spain's insolvency law has been modified, making pre-insolvency debt restructuring agreements easier, while legal and regulatory changes in Ireland have created incentives for mortgage lenders and borrowers to agree long-term alternative repayment arrangements.

Credit analysis for securitisation transactions must be supported by a detailed, loan-by-loan dataset that describes the nature of restructuring terms, borrower circumstances before and after each restructuring and the payment track record since origination date, says Fitch. The rating agency would also take into account redefault rates experienced by the lender following similar restructurings.

RMBS

GSE risk-sharing delinquencies 'immaterial'

One year after GSE risk-sharing RMBS deals were introduced to the market, delinquencies and defaults remain immaterial, according to Fitch. Loan repurchases due to issues identified through GSE quality control reviews have outnumbered non-performing credit events by more than two-to-one. All but one of the loans repurchased were performing at the time of the repurchase.

"Though repurchases are outpacing credit event defaults, both figures are still extremely low as a percentage of the total amount of the loans in GSE risk-sharing transactions securitised so far," says Fitch md Grant Bailey.

The early repurchase activity reflects the upfront quality control reviews that both Fannie Mae and Freddie Mac perform on a sample of loans post-acquisition. "The GSEs typically initiate the upfront reviews within six months of acquisition, so repurchase activity of performing loans will be primarily concentrated early in the transaction's life," Bailey adds.

To date, only one of the 41 non-performing loans that experienced a credit event has been repurchased, although it is possible reviews are still pending for some of the loans. Transaction documents do not oblige the GSEs to review 100% of loans with credit events for underwriting defects. However, Fitch expects the GSEs to target a high percentage of those loans for review, particularly for credit events within three years of acquisition.