News Analysis
CLOs
Accelerated evolution
Rapid pace of change as CLO market grows
US CLO issuance has reached record pace this year, as innovations driven by both regulatory demands and investor behaviour ensure that the product continues to develop. Deal sizes have grown, structures have evolved and new managers have tapped the market.
"When we came out of the financial crisis, the deals that jump-started the market and this continuous upward trend were much more straightforward. They were 90% senior secured loans and maybe a 10% bond bucket. They had no synthetics and there were no delayed draws on the liability side," says Craig Stein, partner, Schulte Roth & Zabel.
He continues: "Many lessons were learned from the aftermath of the financial crisis; so the CLO market got back to basics and created a simpler product. Some examples include more subordination, and more clarity and protection around amends and extends, which triple-A investors were very concerned with."
May marked the first time when three consecutive months had surpassed US$10bn in issuance. Last month's ALM XIV - which, at US$1.5bn, is the largest CLO for seven years - ensured that supply has remained elevated.
"There was US$14bn issuance in June, including the US$1.5bn ALM XIV. That is a large deal, but not necessarily a sign of things to come, as the transaction was reportedly fully ramped at pricing," says Oliver Wriedt, co-president, CIFC Asset Management.
He adds: "I think the ALM deal is an outlier, but it does show that if you have the collateral, you can get some extraordinary things done. The largest deal before that came from Onex and required a long ramp."
While US$1.5bn transactions may not become par for the course, deal sizes have grown. Wells Fargo figures show an average deal size of US$422m in 2Q12, growing to US$468m in 2Q13 and US$545m in 2Q14.
As deals have grown larger, the equity piece has become proportionally smaller. This has gone hand-in-hand with the rise of single-B tranches, which have been present in the majority of CLOs this year and has been driven by investor demand for yield.
"Investors are willing to look further down the capital structure now than they did in early 2.0 deals. The single-B tranche has become an attractive option for investors hungry for yield," Stein confirms.
He continues: "Equity pieces have become smaller, with the single-B being sliced off from the equity. There is still the same credit support for the senior and mezzanine notes."
The single-B tranche appears to be a sweet spot after double-Bs proved vulnerable to price, selling off from a premium to par to a discount to par. "We are reasonably far along into the current credit cycle," says Wriedt. "Single-B tranches make a lot of sense here. The slow, sub-par recovery keeps extending the credit cycle and yield buyers continue to push the envelope."
Another significant change has been the increased prevalence of fixed-rate triple-A tranches. Stein notes that step-up coupons also seem to have become more popular at the triple-A level.
Additionally, collateral composition has changed as loan spreads have tightened and leverage has crept up. Wreidt says covenants have been whittled away at and notes that there is an ebb and flow around new issue quality.
"Sometimes the lending community has more influence and sometimes it has none. For example, around July or August last year investors had considerable influence over how deals were structured and priced. But later that year investors lost that influence, only to find we could get better terms again around April and May of this year," says Wriedt.
Much of the evolution in the market is being driven by investors and it is also the case that the investor base has changed. Wriedt suggests that the bar to enter the market has been lowered, which is reflected in the number of new platforms that have been created in the last 18 months.
"Rating agency requirements have necessitated the use of a back-up manager, but this has not stopped new entrants from running as hard as they can until risk retention takes hold of our market. Since the risk retention rules are unlikely to be implemented for a couple of years, an ambitious new manager has the opportunity to get some AUM under their belt," says Wriedt.
Regulatory pressures - such as risk retention - provide the second driver of change in the market. This has been reflected in new transactions, as well as in changes to CLO 1.0 deals.
"If CLO 2.0 was about adapting in the immediate aftermath of the financial crisis, CLO 3.0 is about adapting to the regulations that have followed. The Volcker Rule is imposing several changes on the CLO market, such as ending the practice of deals purchasing securities, as bond buckets are being scrapped to comply with the loan securitisation exemption in the Rule," says Stein.
For all the changes that have happened in CLO 1.0 deals, what has been surprising is how little fuss equity holders have made. "We are aware of many transactions where the equity was given no concessions, so it feels like we are in a rare period where everyone is pulling in the same direction and trying to put money to work," says Wriedt.
JL
back to top
Market Reports
ABS
Secondary ABS supply picks up
US ABS bid-list volume was up yesterday to more than US$230m, with SCI's PriceABS data revealing several student loan tranches out for the bid. Dealer offering levels were mostly unchanged, while auto paper was also available.
In the student loan space a US$10m piece of the ACCSS 2005-1 A3 tranche was talked at around 99 and at around 99.5. It was covered at 99.375.
A US$7.821m piece of the CIT Education Loan Trust CITEL 2005-1 A3 tranche was talked at around 99 and at around 99.69. It was covered at 99.5.
A US$35.037m piece of the GCOE 2005-2 A6L tranche was talked at 99.5 and at around 99.66 and was covered at 99.58. Meanwhile, NEF 2005-1 A3 was talked at around 98 and covered at 97.61.
A US$20m piece of the NSLT 2005-1 A5 tranche was talked at around 97.16 and at 97 handle and was covered at 99.296. There was also a US$45m piece of the SLMA 2005-7 A4 tranche on yesterday's BWICs and that was talked at around 97 and at around 97.06 and was covered at 97.66.
There was also auto loan paper circulating. PriceABS picked up the VWALT 2013-A A3 tranche, which was talked at plus 15 and covered at 100.34.
The VWALT tranche had previously appeared in PriceABS on 22 May, when it was talked at both plus 16 and at plus 18. Before that it appeared on 18 March, when it was covered at plus 24.
JL
Market Reports
ABS
Euro ABS activity encouraging
The seasonal summer slowdown has not yet set in for the European ABS market. While the secondary market might be softening a little, activity in the primary market continues at good levels.
"We are still seeing new deals being announced in the market so we have got a few weeks more to go before things get quiet. It is an active primary market and it is keeping investors engaged," says one trader.
He continues: "It is good to see so many primary deals getting done at such good subscription levels. These deals are generally pricing at the tight end of talk."
While there are opportunities across European ABS at the moment, the trader suggests that MODA 2014, Goldman Sachs' Italian CMBS, is one which they are currently paying particular attention to. The deal is currently sized at €198.222m.
"It is a slightly different picture on the secondary side of things where it feels like the market is getting a little softer. There are dealers keen to shift inventory and we are seeing a few more DNTs cropping up than we have been used to," says the trader.
Despite this, SCI's PriceABS data shows activity continuing. Among the names out for the bid during yesterday's session was the senior tranche of Investec's £270m lease ABS, Temese Funding 1, which was issued towards the end of last year.
A £18.695m piece of the TMSE 1 A tranche was talked at 100.15, 100.3 and 100.45 and was covered at 100.25. The tranche had previously appeared in PriceABS on 12 February, when it was covered at 100.8.
JL
Market Reports
ABS
SLABS bring secondary market boost
US ABS BWIC volume reached around US$200m yesterday, with student loan and credit card bonds driving issuance higher than it had been to start the week. Much of the supply came from a US$108m list of FFELP bonds.
SCI's PriceABS data captured a wealth of student loan tranches circulating on yesterday's bid-lists. Among them was the ACCSS 2005-2 B tranche, which was talked in the low-90s and was covered at 91.78.
The EDUFP 2006-1A A3 tranche was talked in the very high-40s to 50 region, which is also where price talk had been in the prior session. The tranche was covered at around 50 on 29 January.
The HEF 2005-1 A3 tranche was talked at mid-99 handle and covered at 99.609375. The tranche only made its first appearance in the PriceABS archive on Monday, when it was also talked at mid-99 handle.
There were a few NCSLT tranches out for the bid, including NCSLT 2006-3 A5. That tranche was talked in the very low-70s, marking a departure from June of last year when the tranche was talked in the mid-40s.
The NCSLT 2006-3 A5 and NCSLT 2006-4 A4 tranches were also talked in the very low-70s. The latter tranche had also been talked at around 70 last month.
The NCSLT 2007-2 A3 tranche, meanwhile, was talked at around 90. It was last covered on 6 June at 89.625.
NSLT 2005-2 A5 was talked at low-97 handle and covered at 97.57, while SCSLC 2005 A2 was talked at mid-99 handle and covered at 99.2. Lastly among the student loan names, SLMA 2005-6 A6 was talked at mid-97 handle and covered at 97.2.
In the credit card space, the CCCIT 2005-A2 A2 tranche was covered at 102.91 and the CCCIT 2013-A12 A12 tranche was covered at 100.13. The CCCIT 2013-A6 A6 tranche was covered at 100.89, having been covered last month at 19, while the CCCIT 2014-A1 A1 tranche was talked at plus 43 and in the very low-40s, having been covered last month at 44.
From the CHAIT shelf, the CHAIT 2012-A4 A4 tranche was talked at both 34 and in the very low-30s. The CHAIT 2012-A7 A7 tranche was talked in the mid/high-40s.
Supply was not purely from student loan and credit card paper, with HAROT 2013-4 A2 providing an example of an auto ABS name out for the bid. That tranche was covered at 100.04, the same level at which it was covered back on 17 December 2013.
JL
News
Structured Finance
SCI Start the Week - 14 July
A look at the major activity in structured finance over the past seven days
Pipeline
Several deals were added to the pipeline last week, including a large number of CLOs. As well as four ABS, three RMBS and two CMBS there were nine new CLOs sitting in the pipeline at the week's end.
The ABS were US$385m Consumers 2014 Securitization Funding, US$722m Dell Equipment Finance Trust 2014-1, €259.7m German Mittelstand Equipment Finance No.2 and ¥12bn KAL Japan ABS 13 Cayman. €4bn BBVA RMBS 13, US$306m Sequoia Mortgage Trust 2014-2 and A$350m Triton Trust No.2 Bond Series 2014-1 accounted for the RMBS, while the CMBS were US$345m HILT 2014-ORL and US$269m JPMCC 2014-BXH.
The CLOs were: Avoca CLO XII; US$612.625m Carlyle Global Market Strategies CLO 2014-3; Cordatus Loan Fund IV; US$500m Covenant Credit Partners CLO I; US$410.5m Golub Capital Partners CLO 19(B); US$252.24m Resource Capital Corp 2014-CRE2; US$351.4m Saranac CLO III; US$350m Silver Creek CLO; and €360m Toro European CLO 1.
Pricings
There were even more deals exiting the pipeline. As well as seven ABS prints there were three RMBS, two CMBS and a further nine CLOs.
The ABS were: US$975m Ally Master Owner Trust Series 2014-4; €1.039bn Bavarian Sky German Auto Loan 2; US$340m Cabela's Credit Card Master Note Trust 2014-II; €355m E-Carat Compartment 7; US$350m Sierra Timeshare 2014-2; US$251m SoFi Professional Loan Program 2014-A; and US$29.92m Vermont Student Assistance Corp series 2014A.
€3.45bn FTA RMBS Santander 2, £350m Paragon Mortgages 20 and £242m Precise Mortgage Funding 2014-1 accounted for the RMBS. The CMBS were US$188m BAMLL 2014-ICTS and US$235m RSO 2014-CRE2.
Lastly, the CLOs were: €400m Carismi Finance 2014; US$415.4m Cutwater 2014-1; US$466m Galaxy XVIII; the refinanced US$257m Golub Capital Partners CLO 10; €196.5m Guerriero SPV 2014; US$1.036bn Madison Park Funding XIV; US$770m Octagon Investment Partners XX; US$463m Tralee CLO III; and US$518m Voya CLO 2014-3.
Markets
The European ABS market remains active as the seasonal summer slowdown is yet to take hold, as SCI reported last week (SCI 11 July). There is some softening in the secondary market, but primary activity continues at good levels.
"It is good to see so many primary deals getting done at such good subscription levels. These deals are generally pricing at the tight end of talk," reports one trader.
The US ABS market is also fairly active (SCI 10 July). Wednesday's session saw US$230m of paper out for the bid on BWICs, with SCI's PriceABS data listing several student loan tranches from that session.
A couple of sizable US non-agency RMBS bid-lists helped bring secondary market activity up sharply on Tuesday after a slow start to the week (SCI 9 July). BWIC volume on Tuesday reached around US$600m, with subprime paper leading the charge.
There was also resilience in the US CMBS market, according to Barclays Capital analysts. Despite a steady sell-off in credit and equity markets, they report new issue spreads were unchanged, with CMBS 3.0 last cash flow dupers remaining at swaps plus 75bp, while legacy dupers were flat at swaps plus 82bp.
Meanwhile activity in the US CLO market was light, with BWIC volumes totalling about US$160m. "Both senior and mezzanine 1.0 tranches traded well with good demand. Mezzanine trading in the 2.0 space was more choppy. Overall, CLO 1.0 spreads remained unchanged over the week while 2.0 triple-B to single-B widened out," report Bank of America Merrill Lynch CLO analysts.
Deal news
• Further details have emerged about the delay in Hertz's 1Q14 Form 10-Q filing (SCI 4 July). Due to a number of accounting errors, the firm is to restate its 2011 financial statements and review the corporate financial statements for 2012 and 2013.
• The rating of Goldman Sachs' latest secured funding product - dubbed Fixed Income Global Structured Covered Obligation (FIGSCO) - would most likely be equalised with that of the total return swap provider, says Fitch. The transaction is secured by a wide range of fixed income assets, including securitised debt, with overcollateralisation (OC) levels that are marked to market daily.
• BNP Paribas Asset Management has replaced BNP Paribas as collateral manager on six CLOs. The affected deals are Leveraged Finance Europe Capital I, Leveraged Finance Europe Capital II, Leveraged Finance Europe Capital III, Leveraged Finance Europe Capital IV, Neptuno CLO I and Versailles CLO M.E. I.
• The US$62.4m 2000 Corporate Ridge Road loan securitised in BACM 2006-4 has been moved into special servicing, according to the July remittance report. It will be specially serviced by C-III Asset Management.
• Details have emerged on the BAMLL 2014-ICTS single-sponsor CMBS. The US$188m transaction is backed by a non-recourse mortgage loan secured primarily by a first mortgage on the borrower's fee simple interest in a luxury hotel in New York City.
Regulatory update
• The EBA has published a final set of guidelines designed to support both originator institutions and competent authorities in the assessment of significant risk transfer (SRT) for securitisations. The guidelines aim to ensure a more consist approach in the assessment of significant risk transfer across the EU and to achieve a level playing field in this area.
• The EBA has published its final draft regulatory technical standards (RTS) specifying the minimum margin periods of risk (MPOR) that institutions acting as clearing members may use for the calculation of their capital requirements for exposures to clients. To incentivise the use of CCPs, the Capital Requirements Regulation (CRR) introduces special treatment for centrally cleared derivatives.
• ESMA has launched a round of consultations to prepare for central clearing of OTC derivatives in the EU. A consultation paper on draft regulatory technical standards for clearing CDS has been released to stakeholders.
• ISDA has announced the timeline of the protocol to upgrade 2003 credit derivative trades to the new 2014 Definitions. The protocol adherence period is expected to begin on 18 August and close on 12 September, with clearing and confirmation in the trade warehouse available from the index roll on 22 September.
• The trustees for the RMBS that fall under Citibank's US$1.125bn rep and warranty settlement have exercised their right to extended by 45 days the deadline to respond to the offer. The new deadline is 14 August.
News
CDS
Definitions' economic impact projected
The 2014 ISDA Credit Derivatives Definitions contain a number of changes that are likely to impact the economic value of new financial CDS contracts, potentially bringing them more in line with the economics of the underlying cash bonds. JPMorgan credit derivative strategists consequently argue that any projections of where the new CDS contracts will trade should take cash bond pricing into account.
Among the changes introduced in the new definitions, the JPMorgan strategists expect the introduction of a governmental intervention (GI) credit event to have a limited impact on CDS spreads at the current time, as previous bail-ins have been classified as restructuring events. However, in the future more bail-ins will likely take place either through bail-in language included with bonds or through EU/domestic laws, which may not necessarily constitute restructuring events for current contracts. As a result, the change could have a widening impact on sub and senior CDS spreads in the future.
Sub contracts are also expected to trade much wider than current contracts with the introduction of asset package delivery, given that protection buyers can deliver the proceeds of any bail-in rather than outstanding bonds, of which seniors may only be available. This change is not anticipated to have as large an impact on senior CDS as senior bail-in is unlikely to be as severe in terms of the size of the write-down.
Similarly, for new CDS contracts, subordinated CDS will follow subordinated debt and senior CDS will follow senior debt during succession scenarios. This could cause new sub contracts to trade wider than current contracts, given the increased likelihood of there being subordinated deliverables at the CDS reference entity.
Finally, the strategists expect the removal of the cross-default trigger to have a tightening impact on new senior CDS, due to the lower likelihood of a credit event for senior CDS in the new contracts.
Overall the strategists expect new sub contracts to trade at wider spreads than current contracts. "We note that most current subordinated CDS contracts trade with a negative bond-CDS basis; if we expect the new sub contracts to trade more in line with cash bonds, then this would also suggest that new sub contracts should trade wider than existing contracts," they explain.
The impact of the changes is less clear cut for senior CDS, however. Given that current senior CDS contracts trade with a bond-CDS basis that is both positive and more positive than comparable corporate CDS, the strategists suggest that the net effect will be for new senior contracts to trade modestly tighter than existing contracts.
"We expect new senior CDS contracts to trade 7% tighter for most investment grade names and new sub CDS to trade 48% wider on average, compared to current contracts," they conclude.
CS
News
RMBS
ESAIL picks highlighted
2007-vintage Eurosail RMBS continue to attract headlines due to their unhedged FX exposure and associated restructuring activity (SCI passim). Nevertheless, European asset-backed analysts at JPMorgan suggest that ESAIL bonds offer interesting entry points for a range of investors, given the varied mix of currencies, ratings, WALs and risk profiles on offer.
Although only established in 2006, the ESAIL programme is one of the largest in the UK non-conforming RMBS asset class, representing eleven transactions and €4.3bn-equivalent of distributed bonds currently outstanding. The collateral was originated by Lehman's various non-conforming lenders, as well as by portfolios acquired from other lenders. As a result, the quality of the underlying mortgages ranges from subprime to near prime to BTL or even prime.
Performance also varies significantly across deals, with 90d+ arrears ranging from 2.5% (2007-PR1) to 45% (2006-3 and 2007-1). The JPMorgan analysts note that overall ESAIL deals show significantly above-average arrears at 28.4%, versus 15.3% for the UK non-conforming sector as a whole. Nevertheless, Moody's average CDR for the ESAIL programme is marginally lower than the market average, at 1.06% versus 1.15% as of February.
Based on a JPMorgan scenario analysis, two broad trends emerge: DMs improve across the board, both in the stressed and optimistic scenarios, compared to the base case. This is due to quicker redemptions, either through higher defaults (in the stressed scenario) or higher CPRs (optimistic scenario), and there are no meaningful losses on any of the bonds for which pricing information is available.
The analysts indicate that one of the more compelling ESAIL bonds is ESAIL 2007-5 A1C, which pays 160bp - a pick-up of about 60bp compared to other senior bonds from the shelf - albeit for an eight-year WAL and a double-B plus rating. "Investors looking for high running coupons should find value in some of the more deeply subordinated tranches - which should, however, be treated as IO notes, given their extremely long WALs," they add.
ESAIL 2007-4 is the latest transaction from the shelf for which a restructuring is being proposed. A noteholder meeting has been convened for 7 August to consider an extraordinary resolution to approve the sale of the remaining Lehman claims by way of an auction and an associated restructuring.
Fitch recently upgraded one tranche and affirmed 17 tranches of Eurosail-UK 07-3 BL and Eurosail-UK 07-4 BL. The agency notes that over the past year the pound has appreciated against both the euro and US dollar, resulting in a slower pace of under-collateralisation in both transactions, compared with previous years. At present, it estimates the level of under-collateralisation to be 25% in Eurosail 07-3 and 14% in Eurosail 07-4, compared with 31% and 20% a year ago.
CS
Job Swaps
Structured Finance
Asset manager names SF head
AXA Investment Managers has appointed Deborah Shire as head of structured finance, effective from September. She will be based in Paris and report to John Porter, global head of fixed income and structured finance at AXA IM.
Shire replaces Laurent Gueunier and is currently global head of business development for AXA Real Estate. She has been with AXA since 1996 and helped found the structured finance team in 2000.
Job Swaps
Structured Finance
Structured pro becomes partner
Hollis Park Partners has appointed Taranjit Sabharwal as a portfolio manager and partner. He brings broad experience across structured products.
Sabharwal was previously an md at Deutsche Bank, where he ran the credit business within CMBS trading. He also has experience in CLOs, CDOs and RMBS. He has also worked at HSBC and Bear Stearns.
Job Swaps
Structured Finance
Irish restructuring team acquired
Duff & Phelps has acquired the restructuring and insolvency division of RSM Farrell Grant Sparks (RSM FGS). The unit provides advisory services to local, regional and global businesses throughout Ireland and internationally.
RSM FGS restructuring and insolvency partners Declan Taite, Pearse Farrell and Anne O'Dwyer will lead Duff & Phelps' restructuring practice in Ireland and support client access to the firm's broader services platform. The addition formalises Duff & Phelps' presence in the Republic of Ireland and adds over 50 professionals to the group.
Job Swaps
Structured Finance
Partnership expands analytics access
Linedata and InvestSoft Technology have formed a strategic partnership through which Linedata will provide comprehensive fixed income and credit derivative analytics to the asset management community. The partnership means that Linedata's Longview and compliance clients can now access InvestSoft's BondPro soluition.
Linedata offers a multi-asset integrated global approach to portfolio management, trading and compliance for institutional and alternative asset managers. The InvestSoft Technology BondPro analytics library solution provides fixed income and credit derivative analytics covering an array of security types.
Job Swaps
Structured Finance
Restructuring firm expands into Asia
Zolfo Cooper has opened an office in Hong Kong, to be led be Bruno Arboit. The office will provide restructuring, insolvency, forensic accounting and litigation support services and is the advisory firm's first Zolfo Cooper-branded office in the Asia Pacific region, complementing an affiliation with Ferrier Hodgson.
Arboit has 16 years of experience in the local market, most recently as head of his own advisory and restructuring practice. He will be joined by Gwynn Hopkins, who is a partner in Zolfo Cooper Caribbean, and Lillian Zhang, who is currently based in Shanghai.
Job Swaps
Structured Finance
Asset manager adds senior advisor
Assenagon has appointed Christian Maria Kreuser as a senior advisor for fund management and structured investment management. He will focus on expanding business for the asset management firm and on advising investors on real estate assets.
Kreuser has more than 20 years of experience in the asset management and banking industry. He was most recently a member of the management board at Quirin Bank and has also worked at Merck Finck Vermögensbetreuungs as ceo and in various roles at HypoVereinsbank.
Job Swaps
CDO
Rating agency liability confirmed
The Full Federal Court of Australia last month dismissed an appeal by S&P, ABN Amro and Local Government Financial Services (LGFS) against a decision in favour of a group of New South Wales councils regarding the marketing and sale of Rembrandt CPDO notes (SCI 6 November 2012). The court also extended Justice Jane Jagot's original decision to rule that each of the three defendants were 100%, rather than proportionately, liable for the losses incurred.
A recent Herbert Smith Freehills memo notes that the ruling confirms that, as a matter of Australian common law, a rating agency owes a duty of care to investors in a rated financial product. As such, the rating agency must exercise reasonable care and skill in the issue of the credit rating.
"The essential basis on which the Full Federal Court reached that conclusion was that the rating agency knew that potential investors in a structured credit product would rely on its opinion as to the creditworthiness of the notes in making their decisions to invest," the memo states. "This Australian litigation is significant more broadly because it remains the only common law example of a rating agency being found liable to investors as a result of ratings which were found to have under-estimated the default risk of products, which performed poorly during the financial crisis. What is of particular interest is whether other common law courts would follow the reasoning of the Full Federal Court."
The judgement means that there is now potentially no blame apportionment or contributory negligence arguments to minimise damages in cases of deceptive and misleading conduct, according to Amicus Advisory. In practice, since only a minority of cases reach the courts, this means that financial settlements in legal disputes between investors and those who sold them financial products that soured are likely to be much larger.
"As a result, it is now easier to obtain litigation funding for smaller cases of mis-selling in Australia. However, the statute of limitations of six years from when the first losses occurred is now rapidly approaching - being September 2014 for most CDO cases," Amicus observes.
Job Swaps
CLOs
Japanese bank appoints CLO pro
Steve Kahn has joined the CLO team at Mizuho Securities as an executive director in New York. He was most recently president and executive officer at Invicta Financial.
Kahn was formerly at Babson Capital Management and served as group head for CDOs and CDS at Financial Security Assurance. He has also worked at Paine Webber and Ernst & Young.
Job Swaps
CLOs
Credit vet moves on
Peter McLaughlin has joined mid-market specialist Medley Capital in New York. He joins from CIFC, where he was a capital markets md.
McLaughlin has more than two decades of loan origination, structuring, underwriting and investing experience in debt and equity markets. Before CIFC he was head of originations for Longroad Asset Management and also led loan origination at Gottex Fund Management. Before these roles he worked at Contrarian Capital Management, GoldenTree Asset Management, Wells Fargo Foothill and JPMorgan.
Job Swaps
Insurance-linked securities
ILS leader takes top job
HSZ Group has named Stefan Kräuchi as ceo and partner. He joined the company two years ago and has been leading its dedicated ILS business, ILS Advisers.
Kräuchi is based in Hong Kong. Among his previous roles he has been a member of the executive board at Clariden Leu and ceo at AIG Fund Management in Zurich and held several positions in Europe, the US and Asia while at UBS.
Job Swaps
RMBS
Citi settles RMBS, CDO claims
Citigroup has agreed to settle an ongoing investigation by the RMBS Working Group. The agreement resolves actual and potential civil claims by the US DOJ, several state attorneys general and the FDIC relating to RMBS and CDOs issued, structured or underwritten by Citi between 2003 and 2008.
Citi will pay US$4.5bn in cash - including a US$4bn civil monetary payment to the DOJ - and provide US$2.5bn in consumer relief. The consumer relief will be in the form of financing provided for the construction and preservation of affordable multifamily rental housing, principal reduction and forbearance for residential loans as well as other consumer benefits from various relief programmes.
Job Swaps
RMBS
Cantor boosts RMBS team
Cantor Fitzgerald has expanded its MBS sales and trading team with the appointments of Cass Tokarski and James Murray, who each join from RBS. Tokarski becomes senior md and head of mortgages and ABS, while Murray joins as md, focussing on agency ARM trading.
Tokarski ran the CMO business at RBS and has also worked at UBS and Goldman Sachs. Murray was a director at RBS and worked on agency ARMs, HECM and 10-year trading.
News Round-up
ABS
FFELP portfolio sales anticipated
Wells Fargo last week announced that it transferred its US$9.7bn FFELP student loan portfolio to held-for-sale during Q2. Fitch suggests that the move - when considered alongside CIT Group's sale of its US$3.6bn FFELP portfolio to Nelnet in April - may signal that the market has finally reached an inflection point.
The agency believes that to date banks have been reluctant to sell their federal student loan portfolios due to a shortage of attractive opportunities to redeploy sale proceeds. However, new regulatory requirements, combined with improved prospects in core businesses and greater interest from potential buyers appear to be compelling more banks to explore potential sale opportunities.
"Importantly, we believe these transactions will provide a framework (e.g. structure, valuation), which may set a precedent for more banks and not-for-profit companies to sell their FFELP assets. We believe logical buyers include Navient Corp and Nelnet Inc, since each already holds sizable FFELP portfolios and service federal student loans for the Department of Education," Fitch observes.
The agency says that portfolio acquisitions would be positive for Navient's credit profile as they would create additional earnings capacity and potentially extend the duration of the company's existing portfolio. However, the pricing and financing of any potential acquisitions would also be considered.
Wells Fargo and CIT represented two of the top-15 largest holders of FFELP loans, as of September 2013, according to Department of Education data. Other large banks and not-for-profit companies with sizable FFELP portfolios include the Brazos Group, JPMorgan, PNC, Access Group, SunTrust, Bank of America, Northstar Guarantee and US Bank.
News Round-up
CDO
FDIC auction due
The first in a series of private FDIC bank Trups CDO auctions has been scheduled for 17 July (SCI 24 June). The sale comprises US$48.25m original face of mezzanine bonds from the PRETSL 9 (B1, B2 and B3 tranches), 10 (B1 and B3), and 12 (B1, B2 and B3), as well as USCAP 1 (B1) and USCAP 2 (B1) transactions. Black Swan Consultants and Keefe, Bruyette & Woods are said to have advised the FDIC on the auctions.
News Round-up
CDO
RFC issued on muni CDOs
Moody's is seeking comments from market participants on its proposed rating approach for CDOs backed by diversified pools of US municipal and international sub-sovereign debt. If adopted, the proposal will have a minimal impact of no more than one notch up or down on the ratings of two outstanding US muni CDOs.
The proposed approach includes assumptions about recovery rates on defaulted securities, default probabilities and the asset correlation characteristics of both municipal and sub-sovereign credits. The proposed recovery rates differ from Moody's previous assumptions and reflect the recent history of loss-given defaults in the US municipal market.
Feedback on the proposal is requested by 15 August.
News Round-up
CDO
ABS CDO on the block
An auction has been scheduled for Birch Real Estate CDO I on 23 July. The collateral shall only be sold if the sale proceeds are greater than or equal to the auction call redemption amount.
News Round-up
CDS
Monolines widen on Puerto Rico exposure
Puerto Rico's debt woes are driving credit default swap spreads wider for two of the largest monoline insurers, according to the latest CDS case study from Fitch Solutions. Five-year CDS on Assured Guaranty Municipal Corporation (66%) and MBIA Inc (73%) have widened notably in recent weeks.
CDS liquidity for both Assured and MBIA remains high, currently in the third and fifth global percentile respectively. "Souring market sentiment for Assured and MBIA is likely attributed to concerns over Puerto Rico's debt, to which both insurers have considerable exposure,' comments Fitch Solutions director Diana Allmendinger. "A new law enacted by the Puerto Rican government essentially removes government support for the commonwealth's public corporations and allows them to restructure debt, which may at least partially explain the CDS widening for both monolines."
News Round-up
CLOs
CLO origination vehicle planned
Blackstone/GSO is set to list a CLO origination vehicle - dubbed Blackstone/GSO Loan Financing (BGLF) - on the London Stock Exchange's Specialist Fund Market. The company will invest in a portfolio of assets comprising predominantly of European senior secured loans and CLO income notes issued by CLOs that are managed by Blackstone/GSO Debt Funds Management Europe.
Specifically, the new fund will initially purchase floating rate senior secured loans and subsequently establish new CLOs. Each time a new CLO is established, the fund will transfer to the transaction some or all of the senior secured loans it owns, while retaining at least 51% of the respective income notes.
The company is seeking to raise in excess of €200m through a share placement on 17 July by Dexion Capital and Nplus1 Singer Advisory. Admission is expected to become effective on 23 July.
The company is targeting annual dividends of 8%, with the expectation for progressive growth and mid-teen total returns over the medium term. Launch costs, estimated at around 2%, will be funded by GSO.
GSO will also rebate to the fund 20% of the annual management fee it receives for acting as CLO manager, pro rata to the fund's investment in CLO income notes. Annual ongoing expenses are expected to be substantially met by the CLO management fee rebate.
News Round-up
CLOs
Total return CLO index introduced
JPMorgan has launched the first rules-based daily observable pricing and total return index for US dollar-denominated broadly-syndicated arbitrage CLO debt. The Collateralized Loan Obligation Index (CLOIE) is intended to enhance transparency and act as a potential returns benchmark for the CLO sector.
The aggregate index contains 3,310 cusips from 679 CLOs, as of 30 June, representing US$236.1bn in par value (or an estimated two-thirds of the outstanding US CLO market). CLOIE is divided by origination (pre- versus post-crisis) and is further broken out into five original rating classes (triple-A, double-A, single-A, triple-B and double-B).
Only tranches with at least one original rating from Moody's, S&P or Fitch are eligible. If the agencies assign different ratings to a bond, it is classified by its lowest rating.
The final eligibility requirement is that a tranche must have available prices from PricingDirect. Portfolio yield and DM are calculated using a market value-weighted methodology, which accounts for duration differences among the portfolio constituents. The index is designed to count paid-in-kind (PIK) interest as an increase in the notional amount of the bond.
CLOIE will be produced every business day and rebalanced on the last business day of the month.
News Round-up
CMBS
Cash-out refinancings supported
Profiting from the strong post-crisis price recovery, investors who bought commercial properties from mid-2009 to early 2011 can typically pull out all of their cash equity via refinancing, according to the latest Moody's/RCA CPPI Index report. Investors who acquired properties through 2004 can also do so.
"Assuming a 70% loan-to-value (LTV) ratio on the both the original loan and the new one, major market CBD office acquisitions from mid-2009 to mid-2010 generally allow the investors to pull out more than twice their original equity, given the strong rise in values," says Moody's director of commercial real estate research Tad Philipp.
However, the agency notes that new loans could have an incrementally higher risk of default, solely as a result of the cash-out. Some investors are more likely to protect a fresh cash investment than the market-value-implied equity, following a cash-out refinancing.
The national all-property composite index increased by 1% in May, as did its apartment and core commercial components. The CPPI now stands at 61.2% above its January 2010 trough and 4.2% below its November 2007 peak.
News Round-up
CMBS
WPG taps CMBS financing
Simon Property Group formally completed its spin-off of 54 strip centres and 44 malls to Washington Prime Group (WPG) at the end of May. CMBS strategists at Morgan Stanley report that the new entity financed seven of these properties with US$410m of debt securitised in 2014-vintage CMBS 2.0 deals, meaning that 26 properties are now encumbered by a total of US$1.2bn of CMBS debt.
The properties refinanced so far this year include Brunswick Square (securitised in WFRBS 2014-C19 and 2014-C20), Cottonwood Mall (COMM 2014-CR17), Lincolnwood Town Center (JPMCC 2014-C20), Muncie Mall (JPMBB 2014-C19), West Ridge Mall and West Ridge Plaza (both securitised in COMM 2014-CR16). WPG's 10Q filing shows that that both Charlottesville Fashion Square and Town Center at Aurora have also been refinanced, but are yet to be securitised.
Overall the Morgan Stanley strategists calculate that 15 properties are encumbered by US$589m of CMBS 2.0 debt, while 11 properties are encumbered by US$625m of legacy CMBS debt. Of these latter properties, 10 are encumbered by US$520m of CMBS debt maturing over the next 30 months, which may require net recapitalisation of over US$95m assuming a 70% LTV.
"It's possible that WPG may 'return the keys to the lender' on some of these properties if they don't meet their target profile, similar to the strategy GGP has employed with Rouse. Chesapeake Square (JPMCC 2004-LN2) and Indian River Commons (BACM 2005-1), both of which mature in 2014, may prove to be case studies for WPG's approach to the other eight properties," the strategists observe.
News Round-up
CMBS
Sharp fall for industrial late-pays
US CMBS delinquencies fell by 10bp in June to 4.87% from 4.97% a month earlier, marking the fifteenth straight month of declines, according to Fitch's latest index results for the sector. In particular, the agency notes that the industrial late-pay rate fell sharply (by 65bp), which brings the rates for all major property types to below 6% for the first time in nearly five years.
Resolutions in June were led by the note sale of the US$112m Senior Living Properties Portfolio loan securitised in GMACC 1998-C1 (see SCI's CMBS loan events database). The next largest was the US$42.5m Glen Town Center loan (BACM 2006-2), which became REO in June of last year and was sold in late May for a 50% loss.
The largest new delinquency last month was the US$55m RiverCenter I & II loan (BSCMSI 2007-TOP28), which was reported to have defaulted at its 8 June maturity.
In total, resolutions of US$827m last month outpaced new additions to the index of US$449m. Fitch-rated new issuance volume of US$5.1bn outpaced US$4.8bn in portfolio run-off, causing a slight increase in the index denominator.
By property type, the industrial sector saw the largest decline, thanks to resolutions outpacing new delinquencies by over 2:1 by volume and an increase in the denominator from the US$655m CSMC 2014-ICE transaction. Multifamily experienced a 27bp decline, also due to an over 2:1 resolution-to-new-delinquency ratio.
Retail and office saw modest improvements of 16bp and 9bp respectively. Conversely, the hotel rate worsened by 18bp due largely to the US$54.4m Radisson Ambassador Plaza Hotel & Casino loan (CGCMT 2006-FL2) falling behind on payments. This was accompanied by no hotel resolutions in June.
Current and previous delinquency rates are: 5.78% for industrial (from 6.43% in May); 5.65% for multifamily (from 5.92%); 5.30% for hotel (from 5.12%); 5.13% for office (from 5.22%); and 4.82% for retail (from 4.98%).
News Round-up
CMBS
German CRE sentiment change 'too slow'
Recovering sentiment towards German commercial property in the secondary retail market will not be enough to avoid significant losses on many legacy loans in affected CMBS transactions, says Fitch. The rating agency expects rental yields in secondary markets to continue their decline from the peak in 2012.
Prices are not expected to approach pre-crisis levels in time for CMBS maturities. Servicers which have avoided selling into a falling market are now having to speed up workouts and so will come under pressure to accept discounts, Fitch notes.
€7.1bn of CMBS bonds partially secured on German collateral are due in 2015-2018, with two-thirds of loans dating back to 2005-2007 already resolved. Of the remaining German loans, most have been adversely selected - 97% are past their original maturity date.
Forbearance is becoming less viable as bond maturities approach. Where restructuring has not led to successful deleveraging, an enforced resolution may take considerable time. Most distressed loans are secured on secondary collateral so even a consensual process can be slow, particularly in cases of missing or poor documentation.
However, the return of some investors to secondary German property in the last 12 months following years is a positive development. Investor appetite is pushing up prices, particularly in retail, although some segments of this market, such as secondary retail warehouses and small shopping centres, are lagging.
Fitch notes that one way for sellers to entice buyers to accept these risks and move down the quality spectrum is to pool properties together. As this can be time consuming, however, potential buyers are likely to ask for discounts unless competition for assets intensifies.
The time constraints for CMBS exposed to secondary property in Germany mean that a gradual thawing in market conditions is unlikely to lead to substantial upgrades. An example of this is Talisman 6, where the A, B and C classes were recently downgraded.
"The pressure on the Talisman 6 servicer to dispose of assets well before October 2016 favours block sales, but no matter how well executed, we think buyers are still in the ascendancy. As a result, it is possible that the class A bonds will default. Fitch's 80% recovery estimate does not mean we view class A default as inevitable; rather we view a plausible driver of default being heavy discounting undertaken to ensure recovery in time for bond maturity," says Fitch.
News Round-up
CMBS
Euro CMBS loan maturities will slow
Fewer loans securitised in European CMBS are due to mature in the second half of 2014, when only 12 loans will have their originally scheduled maturity dates, says Moody's. The slowdown follows the surge of loan maturities in 2013 - when 133 loans totalling €16.11bn matured - and in the first half of 2014, when another 43 loans totalling €4.44bn matured.
Moody's expects only a third of the loans with an original scheduled maturity date 2H14 will repay. The quarterly CMBS loan repayment rate has ranged from 22% to 53% since 1Q12, depending on the quality of the maturing loans and the real-estate lending conditions.
The repayment rate in 2Q14 was 53%, up from the average repayment rate of 36% recorded since 1Q12. This increase was due to the high ratio of loan prepayments in 2Q14, which stood at 26% compared with the four-quarter rolling average of 5%, says Moody's.
News Round-up
CMBS
Losses threaten CMBS C class
The US$62.4m 2000 Corporate Ridge Road loan securitised in BACM 2006-4 has been moved into special servicing, according to the July remittance report. It will be specially serviced by C-III Asset Management.
Barclays Capital CMBS analysts note that the McLean, Virginia-based office building's lead tenant is set to leave in January 2015, leaving the building almost empty and DSCR likely to drop below 0.25x. A 50% appraisal reduction would push shortfalls from the G tranche, as they are currently seen, up as high as the C tranche.
News Round-up
CMBS
FVPO expenses clarified
C-III Asset Management has issued a clarification pertaining to the US$60.8m Rock Point Corporate Center loan securitised in CD 2006-CD2. The move is in response to a recent note published by Morgan Stanley's CMBS research team highlighting that an affiliate of the special servicer exercised a fair value purchase option (FVPO) on the asset for US$52.1m in May.
The Morgan Stanley analysts suggested in their note that this price appears to be a reasonable discount from the US$54.2m appraisal, taking fees and expenses associated with the sale of the property into account. "However, the additional US$2.6m of 'other selling expenses' seems high when considered in combination with the FVPO discount. We also question why the loan wasn't included in the historical loan liquidated detail during the May or June remittance reports, despite the May remittance report indicating that principal proceeds were received and the loan balance was reduced to US$0," they stated.
C-III notes that the US$2.6m of other selling expenses were not expenses associated with the sale, but rather tenant improvement costs associated with lease renewals or extensions that were already in place when the FVPO was exercised. These costs are reflected in the FVPO price, it says.
The special servicer adds that it reported the liquidation of the loan in an accurate and timely manner to the master servicer in both the Commercial Real Estate Finance Council's realised loss report for the May remittance period and the May special servicer data file. Further, it is working with the trustee to ensure that this information is properly disseminated to market participants and will continue to provide further updates as more information becomes available.
In addition to the US$2.6m of selling expenses, nearly US$12.8m of liquidation expenses were recorded for the loan, including US$4.4m of P&I advances. The analysts report that net proceeds totalled US$38.6m, resulting in a realised loss to the trust of US$22.3m or approximately a 37% loss severity.
News Round-up
Insurance-linked securities
UCITS cat bond fund prepped
Entropics Asset Management has been licensed by the Swedish Financial Supervisory Authority to undertake discretionary portfolio management, becoming the first asset manager specialising in catastrophe bonds to be authorised in the country. The firm is also one of the first ten managers worldwide to offer UCITS-compliant cat bond funds.
Entropics can now assume discretionary management assignments. It also plans to launch the SEF Entropics Cat Bond Fund in the autumn, in cooperation with Swedbank.
Under the partnership, Entropics will focus on investment decisions, while Swedbank will focus on fund administration and infrastructure. As well as making the fund widely available on the Swedish market, the cooperation enables the possibility of passporting it to other EU markets.
Entropics was founded last autumn by Robert Lindblom (ceo) and Gunnar Roos (chief underwriter), who previously worked at Brummer & Partners and Skandia International respectively. The team now comprises eight members of staff, with over 100 years of collective experience in reinsurance and risk management.
News Round-up
Insurance-linked securities
More records for ILS market
Last quarter was the busiest ever for the ILS market as 12 catastrophe bonds closed with a total value of US$4.5bn (SCI 8 July). Issuance in the first quarter was US$1.4bn, contributing to first-half issuance of US$5.9bn, which is almost 50% more than during the same period last year, according to a report by Aon Benfield Securities.
Total cat bonds outstanding as at 30 June remained at a record high, with US$22.4bn of bonds on-risk. Investor demand has kept pace with increased supply, allowing sponsors to expand coverage at competitive rates.
Each of Aon Benfield's ILS indices posted an increase during 2Q14. The all bond and double-B rated bond indices gained 0.8% and 0.32%, respectively, while the US hurricane bond and US earthquake bond indices gained 0.86% and 0.87%, respectively.
The indices also posted gains for the trailing 12 months, with the all bond and double-B rated bond indices gaining 7.74% and 4.99%, respectively, while the US hurricane bond and US earthquake bond indices gained 8.94% and 4.33% respectively. Strong continuing growth is expected to result in a record year for the market.
News Round-up
Insurance-linked securities
ILS diversification eyed
In sharp contrast to December when seven catastrophe bonds priced with a spread of 625bp or greater and a weighted average expected loss above 300bp, 1H14 saw approximately two-thirds of 26 classes issued with an EL of less than 130bp and a new issue spread of 400bp or lower, Swiss Re reports in its latest market update. US wind remained the dominant peril, accounting for approximately 75% of issuance, with an increased focus on single-state issuance in Florida and Texas.
The East Lane VI 2014-1 transaction was the first US wind transaction to price under the 300bp spread level. However, a broad spectrum of risk layers remained on offer, with five cat bond classes pricing above 500bp and as high as 1500bp. First-half non-peak coverage included European windstorm, Australian cyclone, Japanese earthquake and typhoon, Central US earthquake, Florida earthquake, US wildfire, volcanic eruption and - for the first time - meteor strike (in Residential Re 2014-1).
Indemnity-based triggers increased their market share to 75% of new issuance, from 55% in 2013. Aggregate coverage has also gained popularity in the ILS market and, as investor sophistication and expertise has deepened, there has been an acceptance of more unmodelled risks.
Meanwhile, trading volume for the Swiss Re Capital Markets desk exceeded US$490m through the end of June, marking the largest volume for the first half of a year since 2010. "The increased volume is a reflection of more issuance and of a change in portfolio management dynamics, with more investors willing to trade around their positions rather than just adopt a buy-and-hold strategy. Some investors view trading as a way to boost returns and to shape their portfolios more dynamically in response to changes in market, seasonal risk, etc," the firm notes.
Spread tightening continued during the first four months of 2014, with drops exceeding 10% for new issued bonds in some instances. However, starting in May-June, a trend reversal was observed as investor allocations to low yielding bonds slowed and they began to reach full deployment of their US wind limits, accelerated by the large Everglades Re 2014 and Sanders Re 2014 issuances.
Indeed, many investors appear to be content with their Florida wind exposure and have been offering out some of the Florida-focused bonds in favour of bonds with different regional exposure. Consequently, more sellers of bonds have been seen, as well as less aggressive bids in the market. This widening is expected to slow or slightly reverse in the coming weeks.
News Round-up
Risk Management
FpML updated ahead of new definitions
ISDA has published its recommendation for FpML version 5.7. Among the latest enhancements made to the FpML standard is coverage of package transactions. Version 5.7 also electronically represents the Standardised Credit Support Annex (SCSA) document and supports the ISDA 2014 Credit Derivatives Definitions.
The upcoming version 5.8 will focus further on product standardisation in FX derivatives, together with the coverage of commercial loan messages and repo representation. Regulatory reporting, clearing and electronic execution continue to be the focus areas for the FpML Standards Committee.
News Round-up
Risk Management
MAR consultation underway
ESMA has launched a consultation on the new Market Abuse Regulation (MAR), which entered into force on 2 July. The authority is issuing two consultation papers seeking stakeholders' views on the draft regulatory and implementing technical standards (RTS/ITS) and Technical Advice (TA) that it has to develop for the new MAR framework that is applicable in July 2016.
The draft RTS/ITS and TA specify the application of MAR to new products, venues and trading techniques and addresses transparency and governance issues. ESMA's technical provisions address the potential for a financial instrument to be manipulated not only by executing transactions on a trading venue, but also via placing orders that are not executed. A financial instrument may also be manipulated through behaviour occurring outside a trading venue or within an automated trading environment. To this end ESMA's technical work updates and strengthens the existing framework by defining how to address these new markets and trading strategies.
Both consultation papers are open for feedback until 15 October.
News Round-up
Risk Management
CDS clearing consultation launched
ESMA has launched a round of consultations to prepare for central clearing of OTC derivatives in the EU. A consultation paper on draft regulatory technical standards for clearing CDS has been released to stakeholders.
A separate consultation paper for interest rate swaps has also been released. For CDS, ESMA proposes European untranched index CDS for two indices should be subject to central clearing. The consultation paper is open for feedback until 18 September.
News Round-up
RMBS
Oz prime, subprime arrears diverge
Housing loans in arrears decreased in May for Australian prime RMBS but increased for subprime RMBS, says S&P. Both sectors continued to report lower levels than in the same period last year.
Loans in arrears greater than 30 days underlying Australian prime RMBS decreased by 3bp to 1.23% in May. At the same time, the total prime RMBS outstanding fell to approximately A$114.4bn.
Subprime RMBS arrears increased 33bp to 4.49%. There was A$3.1bn in subprime RMBS outstanding 30 May.
S&P credit analyst Narelle Coneybeare notes that the increase in arrears as a percentage is small and in dollar terms has actually fallen in the month to May. She adds: "Historically, we have seen the arrears trend decline in the second half of the year and we expect that there may be some further declines in coming months, albeit small movements."
News Round-up
RMBS
German RMBS performance 'stable'
The performance of the German RMBS market was stable up to to the end of April, according to Moody's. The rating agency's outlook for German RMBS collateral performance is stable.
The 90-plus day delinquency rate decreased from 3.13% in April 2013 to 2.87% in April 2014. Over that period the index for low- and medium-LTV transactions increased from 0.31% to 0.36%, while transactions comprising mortgage loans with high LTV ratios recorded decreased in their 90-plus day delinquency rate from 12.49% to 11.18%.
The cumulative loss rate for German RMBS rose from 0.81% in April 2013 to 1.06%. Transactions comprising mortgage loans with high LTV ratios mainly contributed to this development, with their cumulative loss rate increasing from 3.04% to 4.30%.
News Round-up
RMBS
Greek sovereign ceiling lifted
Fitch has upgraded 15 tranches of seven Greek RMBS transactions, removing them from rating watch positive. Following the upgrade of the sovereign issuer default rating to single-B outlook stable and subsequent upgrade of the country ceiling to double-B in May, the agency increased the maximum achievable rating for Greek structured finance transactions to double-B to reflect the improvement in the country's economic outlook.
Credit enhancement across transactions has substantially increased since their closing, Fitch reports. This increase has been driven by the steady repayment of the collateral, in some instances leaving portfolios at less than 10% of their original issuance amount, and by limited reserve fund draws in the majority of the transactions. In some transactions, high payment rates are driven by originators repurchasing loans out of the portfolio.
The agency says it recognises that challenges remain in Greece's mortgage market, given the continued ban on residential property enforcement, and has factored them into its criteria assumptions for rating Greek structured finance transactions and covered bond programmes.
News Round-up
RMBS
Servicing guidance slated
The FHFA is set to issue guidance by 1 December aimed at ensuring that non-bank servicers meet current servicing requirements. The move follows the release of an Office of Inspector General (OIG) report identifying broad problems in the mortgage servicing industry.
SFIG notes that some of these problems include: non-bank mortgage servicers taking on more loans than they can handle; payment delays to Fannie Mae and Freddie Mac; and limited credit availability, threatening servicers' ability to fund operations. "The Inspector General's report points to a lack of infrastructure to properly service all loans that non-bank servicers acquire. Fannie and Freddie became aware of these operational problems after sending special teams to servicers and finding weak infrastructure and careless handling of borrower complaints," the association observes.
The report further found that the rise in non-bank special servicers has been accompanied by "consumer complaints, lawsuits and other regulatory actions as the servicers' workload outstrips their processing capacity".
FHFA agreed with the majority of the OIG's recommendations and the forthcoming guidance is expected to establish a better strategy to manage counterparty risks associated with troubled loans, including those serviced by non-banks.
News Round-up
RMBS
Russian LMI rules defined
The Russian State Duma last month approved a number of amendments to several articles of the Federal Law On Mortgages, including defining lender's mortgage insurance (LMI) in the event of borrower default and clarification of creditors' rights. Moody's notes that such changes are credit positive for future Russian RMBS issuance as they limit losses for investors, while also potentially improving mortgage affordability for Russian borrowers.
"Based both on historical experience and our forecasts, the amendments are credit positive for Russian RMBS issuance as they will reduce interest rates on - and therefore increase the affordability of - mortgage loans, as targeted by a number of Russian government programmes," the agency explains. "Because the proposed amendments will motivate market participants to use mortgage insurance products more frequently, it is very likely that we will see a greater number of future RMBS transactions with embedded LMI. Since LMI provides the first layer of credit protection, RMBS transactions will benefit from the inclusion of LMI into deal structures."
The changes focus on reducing credit risks borne by creditors via the reallocation of risk to insurance companies. To achieve this aim, the law calls for the provision of two LMI schemes: lender's financial risk insurance and borrower's liability insurance.
By law, both mortgage insurance schemes cover the principal as well as interest due under a mortgage loan. The insurance beneficiary will be the lender or, if the mortgage is sold, the new owner (in the case of securitised portfolios, the issuer).
The law also sets limits for the minimum and maximum of the insured amount allowed under the mortgage insurance: the borrower or the lender needs to insure a minimum of 10% under both insurance schemes and up to a maximum of 50% of the mortgage principal amount under the borrower's liability insurance. In the event of a borrower's default, the lender will foreclose on the property. However, if the proceeds from the realisation of the property result in losses to the lender, such losses would constitute a claim under the insurance policy.
Moody's notes that the LMI benefit for an RMBS transaction will depend on the insurer's credit quality and the loss adjustments resulting from the fact that LMI does not cover all losses on a portfolio.
The wording in the revised law reinforces the lender's position in terms of recourse to a borrower's assets. In the absence of mortgage insurance, the lender can go after a borrower's personal assets for any remaining amount in case of a shortfall of the foreclosed amount.
News Round-up
RMBS
Canadian home prices 'overvalued'
Canadian home prices remain overvalued relative to historical macroeconomic fundamental drivers, according to Fitch. Home prices rose by 7.1% in May year-over-year, with both property sales and building permits for residential construction picking up in recent months.
Home prices also continue to be supported by historically low interest rates and a lack of supply in the major metropolitan areas - factors that have propped up affordability and drive demand. According to Fitch's sustainable home price model, Canadian home prices remain approximately 20% overvalued in real terms.
"We believe high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment or interest rate increases," the agency notes. "The ratio reached a high of 164.1% in 3Q13, before declining slightly in the following two quarters."
Fitch projects that unemployment will likely remain in its current 7% range, but low interest rates are unlikely to fall further. Rising interest rates could pressure the market more than others, given high borrower leverage and the short-term structure of Canadian mortgages.
The agency recognises that the Canadian government has taken several proactive steps in recent years to mitigate some of the risks to the housing market, such as tightening underwriting guidelines for loans insured by the Canadian Mortgage and Housing Corporation (CMHC), but notes that policymakers may be required to take additional steps over the short term to engineer a soft landing.
News Round-up
RMBS
SIV bid-list trades
US non-agency RMBS supply has been scarce so far this week, with the focus dominated entirely by the US$3.7bn pre-announced BWIC that traded yesterday. Credit Suisse is understood to have successfully bid for the list, which comprised 179 legacy predominantly subprime and home equity bonds.
The seller is said to be a SIV controlled by UBS. BlackRock Solutions was hired to run the all-or-nothing auction.
News Round-up
RMBS
WaMu case progressing?
JPMorgan and FDIC have filed their motions for summary judgement in the Washington Mutual rep and warranty lawsuit. The replies to the motions are due by 5 September, after which the judge's order is due.
JPMorgan is reportedly arguing that it assumed only repurchase obligations that were recorded in WaMu's books at the time of acquisition, but the FDIC argues that the language and primary purpose of the P&A agreement as well as extrinsic evidence make it clear that JPMorgan agreed to assume all WaMu mortgage repurchase liabilities. "While this is a step forward in the case, it could still be some time before a final decision is reached," Barclays Capital RMBS analysts observe.
First, there is no certainty that the court will grant either motion and not insist on a trial. Even if one party's motion is granted, the other party may appeal against it.
Second, even after a decision is made with regard to the party responsible for the reps and warranties, the court would still need to decide the scope of any damages owed to RMBS investors. The case is further complicated by a suit filed by JPMorgan against the FDIC in December 2013, alleging that the FDIC breached its indemnity obligations under the Washington Mutual PSA and that the FDIC should indemnify JPMorgan for all WaMu-related liabilities, except those expressly assumed by JPMorgan (SCI 7 January).
The Barcap analysts suggest that a couple of outcomes are possible, albeit it will be some time before a resolution is reached. If the FDIC/WaMu estate is held liable for R&W claims, for example, recoveries could vary significantly based on whether JPMorgan is granted indemnification.
If the bank is not granted indemnification, the circa US$2.7bn cash in the WaMu estate would primarily be distributed among RMBS holders and WaMu bank bonds. Assuming the US$7bn-US$10bn in RMBS claim is allowed, the potential recoveries for RMBS holders would be 50%-60% of the WAMU estate value, which the analysts calculate to be US$1.4bn-US$1.7bn or 8%-10% of total losses.
If JPMorgan is held liable for R&W claims, recoveries could be at least 7.2% of total losses, in line with the payout the bank has offered in its Gibbs & Bruns settlement. However, given the extensive discovery on actual breaches in this case, it is possible that recoveries will be higher.
structuredcreditinvestor.com
Copying prohibited without the permission of the publisher
