Contents

ABS

US ABS activity picks up

After a slow start to the week, yesterday's session brought an increase in US ABS secondary market activity. BWIC volume climbed to US$184m as SCI's PriceABS data captured 28 unique US ABS tranches, including a number of auto and student names.

A striking number of auto ABS tranches were making their first appearance in the PriceABS archive. These included the CARMX 2014-2 A2, NALT 2014-A A2B and FITAT 2014-2 A2B tranches, which were covered at 99.94, 99.98 and 100.03, respectively.

Both the CPS 2013-A D and UACST 2013-1 E tranches were covered at 101 handle, while EART 2014-1A D was covered at 102 handle. Fellow PriceABS debutant FCAT 2012-1 D was covered at 106 handle.

Among the other new auto names of interest, the AESOP 2014-2A A tranche was covered at plus 67, while the AFIN 2013-3 B was talked in the plus 60s and covered at plus 64. CCART 2013-AA C, meanwhile, was talked at around plus 90 and was covered at plus 85.

Those new tranches were joined by ALLYA 2013-2 A3, which was covered at 100.03, having first appeared in PriceABS in February. There was also AMCAR 2013-4 C, which was talked at around plus 70 and covered at plus 75, having been covered on 10 July at 102.88.

The CCART 2013-AA D was talked at around plus 110 and covered at plus 120 while the CFCAT 2013-1A D tranche was traded. There was a cover at 100.1 for MBALT 2013-B A3, which had been covered on 8 July at plus 15.5 and covered on 10 June at 19.

Several student loan ABS tranches were also picked up by PriceABS, such as the NCSLT 2006-4 A3 tranche, which was talked in the low-90s and at 92.25 and was successfully traded during the session. The tranche had been covered at 92.25 on 6 June and first appeared in PriceABS in October 2013, when it was covered in the mid/high-70s.

The EFSV3 2012-1 A3 tranche was talked at mid/high-101 handle, while NSLT 2006-3 B was covered at 91.94. The SLMA 2005-4 A3 tranche was talked in the low-40s and both the SLMA 2012-1 A3 and SLMA 2012-6 A3 tranches were talked in the low/mid-50s and high-50s.

There was credit card paper in the shape of CHAIT 2014-A4 A4 - which was covered at 100 - and container ABS paper such as SEACO 2014-1A A1, which was covered at plus 138. That CHAIT tranche had previously been covered at 100.02 on 29 May.

Lastly, OMFIT 2014-2A A, a tranche from OneMain Financial's US$1.2bn consumer loan ABS which priced this month, was also out for the bid. It was covered at plus 151.

JL

RMBS

Euro RMBS activity up sharply

It was a busy session for the European RMBS market yesterday as SCI's PriceABS data captured more than 60 unique European RMBS bonds out for the bid. Covers were recorded for tranches across the length of the capital structure.

Among the names circulating on yesterday's bid-lists was FEMO 1 A1, which was talked at low-98, the 98 area and 98 handle. The tranche was covered at 98.03, having been talked at low-98 on its three previous appearances in the PriceABS archive.

Another Italian RMBS tranche, CORDR 1 A2, was talked at low-99 and 99 handle and was covered at 99.035. The bond was previously covered on 4 April at 99.155 and before that was covered on 18 September 2013 at 98.37.

MECEN 2 A was talked at 97 handle and low-98 and was covered at 97.55. That tranche had also appeared on 18 September 2013, when it was covered at 96.13.

Lower down the capital structure, the MECEN 2 B tranche was talked in the low-90s and at 93 handle and was covered at 92.45. The bond was talked twice before in the month in the low-90s.

PELIC 2 B was covered at 92, while TDAC 4 B was covered at 80.08 during the session. Meanwhile, the SESTA 3 B tranche was talked in the low-70s and covered at 63, having been covered at 19.9 on its only previous appearance in PriceABS on 22 May 2012.

The BCJAF 9 C tranche was covered at 67.51, while the BERCR 6 C and PROVD 2005-2 C bonds were both covered at 86.25. E-MAC DE05-I C, meanwhile, was talked in the mid-60s and covered at 62.06.

There were also covers for the HERME 11 D and ALBA 2005-1 D tranches. The ALBA 2007-1 E tranche - which was covered at high-81 on 21 January - was yesterday covered at high-85, having been talked between the low-80s and 89.5.

In addition, several DNTs were recorded yesterday. These included the ALBA 2006-2 E, BCJAF 10 A2, ESAIL 2007-2X C1A, MONAS 2006-I A2 and RMACS 2007-NS1X M2C tranches.

JL

ABS

Punch B upside expected

With the ABI special committee now supporting the latest Punch restructuring proposal (SCI 22 July), it now appears likely that the restructuring could be completed within the next six months. European asset-backed analysts at Barclays Capital see most upside in the Punch B securitisation under this scenario, given that the Punch A class B notes have more value as currently structured.

The Punch B securitisation has potential for valuation improvement versus current prices of around 12% for the class A notes and around 30% for the Punch B class Bs, according to the Barcap analysts. Catalysts for this upside in value include: deleveraging from 11x to 8x EBITDA; certainty regarding capital structure; expected prepayment of class A bonds at modified spens from excess cashflows; and the expectation that the core estate will continue to show modest growth for the next few years.

Target values for Punch B would still imply a discount versus the Unique securitisations: class M bonds for the class As in Punch B of around 50bp-100bp and a discount of 100bp for the new class B Punch B bonds versus the Unique class Ns. "Although we see potential for further upside in Punch B on a relative value basis, valuation improvements at the class A level may be constrained by the size of the premium relative to par. We have made a simplifying assumption that the value of the equity that the bondholders would receive is equivalent to the new issue price of 7.75 pence per share, which compares with the current equity market value of nine pence," the analysts observe.

For Punch A, they believe that there is the potential for the value of the class A bonds to improve by around 6%, whereas the class Bs and Cs in Punch A would stand to lose versus current prices. Punch A class Bs as currently structured are geared to the recovery in Punch's core estate, can already defer interest and a default would likely result in prepayment at par for the seniors, the analysts suggest.

Enterprise Inns currently trades on an EV EBITDA multiple of 10x, which is similar to Punch A class B's current net debt to EBITDA, including swap break costs.

CS

Structured Finance

SCI Start the Week - 4 August

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

Pipeline
It was another busy week for deals joining the pipeline. Seven ABS, four RMBS, six CMBS and three CLOs remained by Friday.

The newly-announced ABS comprised: US$1bn CarMax Auto Owner Trust 2014-3; US$800.2m Enterprise Fleet Financing Series 2014-2; US$95m NYCTL 2014-A; US$148.76m Orange Lake Timeshare Trust 2014-A; NZ$283.25m Q Card Trust; US$382m SMB Private Education Loan Trust 2014-A; and US$253.55m Susquehanna Auto Receivables Trust 2014-1. The RMBS consisted of US$259.637m Agate Bay Mortgage Trust 2014-1, US$720m Invitation Homes 2014-SFR², US$672m STACR 2014-DN3 and US$460m STACR 2014-HQ1.

CMBS that entered the pipeline consisted of: US$367.8m ACRE Commercial Mortgage 2014-FL2; US$675m BAMLL 2014-520M; US$441m COMM 2014-FL4; US$542.8m GSMS 2014-GSFL; US$799m JPMBB 2014-C22; and £750m STRAT 2014. The CLOs were US$411.75m Black Diamond CLO 2014-1, US$626.5m CIFC Funding 2014-IV and US$618.2m Venture XVIII.

Pricings
Several deals also priced last week. The prints included five ABS, four RMBS, two CMBS and four CLOs.

The ABS new issues comprised: US$200m ACAR 2014-3; US$230.5m CarFinance Capital Auto Trust 2014-2; US$1.2bn Discover Card Execution Note Trust 2014-4; US$243.85m Louisiana LCDA System Restoration Bonds Series 2014-ELL; and US$573.3m Nelnet Student Loan Trust 2014-6.

The RMBS pricings were: US$353m CSMC Trust 2014-IVR3; €525m Fanes 2014-1-A; US$312.7m Silver Bay Realty 2014-1; and £307m Thrones 2014 No.1. As for the CMBS prints, those were US$1.037bn MSBAM 2014-C17 and US$386.342m VFC Series 2014-2.

Lastly, US$563m ALM XI, US$1.25bn Ares XXXI, US$615.55m Birchwood Park CLO and US$816m Carlyle Global Market Strategies CLO 2014-3 were issued.

Markets
After a slow start to the week, US ABS activity picked up on Wednesday, as SCI reported on 31 July. BWIC volume for the session was US$184m, with a number of auto and student loan names as well as credit card, container and consumer loan ABS paper out for the bid.

The tone in the US non-agency RMBS market was a little weaker last week, according to RMBS analysts at Bank of America Merrill Lynch, "as the sell-off in the broader markets bled into non-agencies". US$611m of investment grade bonds and US$6.9bn of non-investment grade bonds traded through Thursday, with the Street net longer by about US$840m.

Spread widening was observed in the US CMBS market, with Barclays Capital analysts noting that this was particularly noticeable on Thursday. 2014 LCF bonds widened by 3bp to swaps plus 77bp, while 2014 triple-B minus tranches widened by 8bp to swaps plus 298bp.

"Vintage spreads also leaked wider, with 2007 dupers up 1bp, to swaps plus 81bp, and 2007 AJs gapping out 23bp, to swaps plus 427bp," they add.

There was a busy session on Tuesday for the US CLO market, as 62 unique US CLO tranches appeared in SCI's PriceABS data. This comprised names from the length of the capital stack, with examples including INGIM 2014-1A A1 and BLACK 2005-1A D1.

Deal news
• Fannie Mae printed its US$2.05bn CAS Series 2014-C03 deal earlier this month, with structural innovations that may increase risk. While the market perception is that GSE credit risk transfer RMBS are very safe, concern is emerging regarding transparency around losses.
• Senior Lusitano RMBS bonds have cheapened by 0.5-2.5 points since Espirito Santo International failed to pay on its commercial paper liabilities last month. The dip has created a buying opportunity, with the caveat that the absence of back-up servicers in LUSI transactions could lead to servicing disruptions in the event of a BES bankruptcy.
• The US$3.7m Green Meadows Apartment loan - securitised in FREMF 2010-K6 - has been liquidated at a realised loss to the trust of US$374,943, representing a loss severity of approximately 10% (see SCI's CMBS loan events database). This is believed to be the first loan securitised across any FREMF CMBS to realise a loss.
• Freddie Mac priced what is believed to be a first-of-a-kind CMBS last month. The US$393m FREMF 2014-KX01 comprised 20 loans that were removed from previous securitisation pools by Freddie Mac or at the request of a B-piece buyer.
• Postal Savings Bank of China has launched a CNY6.8bn RMBS, the first Chinese RMBS since 2007. The move is designed to facilitate central government support for the faltering housing market, which saw sales drop by 9.2% during 1H14 and prices fall in 70 cities in June for the second straight month.
• Seaco's latest container deal - the US$500m Global SC Finance II series 2014-1 - is noteworthy not only for its size, but also for its structure. The transaction was upsized from US$400m before pricing, becoming the largest issuance seen in the sector since 2011.
• A pending court case could see the super senior certificate holders in MASTR Adjustable Rate Mortgages Trust 2007-3 receive larger payments than a strict reading of the payment waterfall would allow. The court case was filed last year to resolve a dispute between the super senior holders and Assured Guaranty Municipal Corp, which serves as the insurer of the senior support classes.
• Comenity Bank has corrected an error in the calculation and distribution of interest to WFNMT 2014-A class A noteholders for the June and July 2014 distribution dates. The calculation of interest should have been based on the actual number of days in the related interest period, but was incorrectly calculated on a 30/360 basis.
• Lighthouse Trade Finance Issuer I is to be redeemed on 18 August at the request of the originator BNP Paribas. The move comes almost a year after the transaction was completed (SCI 22 August 2013).
• With the ABI special committee now supporting the latest Punch restructuring proposal (SCI 22 July), it now appears likely that the restructuring could be completed within the next six months. The Punch B securitisation is said to offer the most upside under this scenario, given that the Punch A class B notes have more value as currently structured.
• S&P has affirmed its single-B rating on the series 2013-I class A notes issued by Everglades Re. The move follows the lowering of the catastrophe bond's attachment level to US$4.896bn and the resetting of the probability of attachment to 2.75%.
• Dock Street Capital Management has replaced Fortis Investment Management as collateral manager to Orient Point CDO II. Moody's confirms that move will not impact any ratings on the deal.
• An auction has been scheduled for Margate Funding I on 19 August. The securities shall only be sold if the proceeds are greater than or equal to the auction call redemption amount.

Regulatory update
• A group of twelve US Senators has sent a letter to SEC Chair Mary Jo White, pushing for the agency to finish four overdue reforms. The letter expresses concern about the slow pace of progress in putting "critical investor and systemic risk protections" related to securitisation in place, as set out in the Dodd-Frank Act.
• ASIC is seeking feedback on proposed revisions to the rules that require the mandatory trade reporting of OTC derivatives. The proposals aim to ensure a smooth transition to the reporting regime and follow a recent revision by ASIC of the timetable for Phase 3 reporting entities (financial entities holding less than US$50bn in OTC derivatives outstanding) to start reporting OTC derivative transactions to trade repositories.

Deals added to the SCI New Issuance database last week:
A10 Term Asset Financing 2014-1; American Credit Acceptance Receivables Trust 2014-3; CarFinance Capital Auto Trust 2014-2; Citibank Credit Card Issuance Trust 2014-A6; COMM 2014-UBS4; CVS Series 2014 Trust; Drug Royalty II LP 1 series 2014-1; Ford Credit Auto Lease 2014-B; Ford Credit Floorplan Master Owner Trust A 2014-3; German Mittelstand Equipment Finance Compartment 2; HLTN 2014-ORL; Hollis Receivables Term Trust II series 2014-1; Institutional Mortgage Securities Canada Inc Series 2014-5; MTF Valiant Trust 2014; OneMain Financial Issuance Trust 2014-2; Resource Capital Corp 2014-CRE2; SMHL Series Securitisation Fund 2014-1; SolarCity Series III 2014-2; Think Tank series 2014-1 Trust; WFRBS 2014-C21.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-2; BACM 2005-6; CANWA II; CD 2007-CD4 & GECMC 2007-C1; CMLT 2008-LS1; CWCI 2007-C3; DECO 2005-E1; DECO 2006-C3; DECO 2007-E6; DECO 7-E2; DECO 9-E3; ECLIP 2007-1; EMC VI; EPIC DRUM; EURO 28; FREMF 2010-K6; GSMS 2011-GC5; JPMCC 2006-CB15; LBUBS 2007-C1; MESDG CHAR; OPERA GER²; TITN 2005-CT2; TITN 2006-2; TITN 2007-1; TMAN 7; WBCMT 2007-C31; WFCM 2013-LC12; WINDM XIV.

Structured Finance

Accounting to drive tender activity

European securitisation analysts at Citi suggest that only securitisations that are consolidated on bank balance sheets are likely to be tendered going forward because the originator will not recognise any accounting gain from the buyback of bonds issued by deconsolidated entities. The implementation of IFRS 10 could prompt more originators to reassess their control over SPVs and may lead to consolidation of more deals.

New accounting rules for consolidating financial statements - IFRS 10 - came into effect on 1 January, with retrospective application for annual periods beginning on 1 January 2013. The standard replaces the previous control-based consolidation model under IAS 27 and the risk-and-rewards overlay for structured entities under SIC 12. IFRS 10 largely reinforces existing guidelines, but explicitly states that an entity may be controlled even when less than 50% of the voting rights are held by the parent company.

Generally, most banks consolidate their securitisations, with a few exceptions - including BBVA and Bankinter, which deconsolidated some transactions issued before 1 January 2004. A Citi analysis of historical tenders confirms that no deconsolidated securitisations have been tendered in the past. The analysis also finds that many originators have undertaken multiple repeat tender offers, despite rising bonds prices.

"We think that such originators are more likely to tender for their bonds again in the future than a new originator, who has never tendered in the past. The general complexity of carrying out a tender process, along with diminishing incentives due to high prices and decreasing investor take-up will likely dissuade new originators from ABS-related asset-liability management exercises," the analysts observe.

Issuers in peripheral countries have dominated tender activity so far, accounting for almost three-quarters of the total amount of bonds repurchased in the past three years. The analysts expect most tenders in the future to also be from peripheral countries because bond prices in core countries offer much lower discounts for originators to recognise sufficient gain.

"The consolidated securitisations of those originators who have tendered in the past are most likely to be tendered again, in our view," they note.

The analysis reveals that all Irish securitisations are consolidated on parent bank's balance sheet and have been tendered at least once in the past. Given that these banks have access to other more attractive sources of funding, such as covered and unsecured bonds, a desire to decrease their reliance on securitised funding could further increase the chances of tenders on Irish securitisations.

So far, not many Italian banks have participated in ABS tenders, other than Unicredit. The analysts believe that growing pressure from the Bank of Italy to increase provisions may increase tender activity somewhat, but high cash prices for relatively short-dated Italian bonds lowers the tender incentive. Further, Meliorbanca's SESTA, Intesa Sanpaolo's FIREN and BPV's BERCR 1 are deconsolidated and hence are unlikely to be tendered.

Spanish banks have dominated tender activity in the past 2-3 years and plenty of consolidated securitisations from the jurisdiction remain outstanding, suggesting that there is no reason why these banks cannot tender in the future. Union de Creditos, for instance, recently tendered for its UCI RMBS shelf for the eighth time (SCI 18 July).

Finally, Portuguese banks BES and Banif have never tendered for their securitisations, while Santander, BCP and BPI have tendered in the past. BES' LUSI 1-5 deals are deconsolidated and so are BCP's MAGEL 1 and 4.

CS

CMBS

Smaller agencies gain market share

The use of smaller rating agencies has become more common for US CMBS 3.0 deals, particularly as Moody's, S&P and Fitch have tightened their criteria in response to perceived weakening in credit quality. The move could potentially limit liquidity on these bonds if some investment mandates still require investment grade ratings from one of the top three agencies, according to CMBS analysts at Barclays Capital.

"We are now seeing an increasing number of tranches being structured without ratings from any of the big three agencies," they observe. "Instead, agencies such as Kroll, DBRS and Morningstar are being used. The main reason for this is likely to avoid raising the credit enhancement levels on certain tranches in the deal, which makes issuing CMBS deals less profitable."

Overall issuers maintained at least one of the big three agencies on investment grade rated tranches until 2014. Since the beginning of the year, triple-B minus rated tranches in 10 deals have been issued without a 'big three' rating, out of 28 in total. However, this does not appear to have affected pricing for the bonds.

MSBAM 2014-C17 is the first CMBS 3.0 deal not to have a big three rating on the single-A rated C tranche, in addition to the triple-B minus D tranche. It is unclear whether this is the only reason why, but the C tranche priced at swaps plus 190bp, notably wider than the previous deal at plus 178bp - despite other tranches in the deal pricing similarly.

Unsurprisingly, triple-B minus tranches without ratings from Fitch, Moody's or S&P generally have had lower credit enhancement. The Barcap analysts suggest that the difference is relatively small at about 50bp on average, but note that there is a clear trend towards higher credit support for bonds rated by Moody's and Fitch, versus those without. Credit enhancement has risen for both groups in Q2-Q3 versus Q1.

The analysts expect the trend for issues without a big three rating to become more common, with S&P appearing to have been "locked out of the market" and Moody's raising its criteria to a point where it has rated only three triple-B bonds this year, despite having rated the triple-A tranches on 24 deals. "This leaves Fitch as the only big three ratings company for the triple-B minus class," they add.

Investors may simply value having a big three agency rating more on the single-A rated tranche, which is publicly issued, than in the privately issued triple-B minus space.

CS

Structured Finance

Derivatives group to buy GFI

CME Group and GFI Group have entered into definitive agreements through which CME will purchase all outstanding shares of GFI Group and acquire subsidiaries Trayport and FENICS. A consortium of GFI Group management will then buy back GFI Group's wholesale brokerage and clearing businesses.

CME will acquire the GFI Group shares in exchange for US$4.55 per share in CME Group class A common stock. The GFI Group consortium will be led by executive chairman Michael Gooch, ceo Colin Heffron and md Nick Brown and will buy the brokerage and clearing businesses for US$165m in cash and the assumption of US$63m of unvested deferred compensation and other liabilities.

The wholesale brokerage business, including Kyte Group, will continue as a private company. The continuing GFI Group brokerage business will maintain its commitment to Trayport and FENICS by entering into long-term commercial agreements.

The transaction is expected to close in early 2015. It has already been approved by the boards of both CME and GFI Group.

Structured Finance

Working capital specialist firm acquired

JRJ Group, TomsCapital and 76 West Holdings have partnered to acquire Demica from the J.M. Huber Corporation. No staff changes are anticipated, with ceo Phillip Kerle remaining in his post in London.

Demica provides working capital solutions to a wide range of clients. It will now be able to combine its existing position in the working capital sector with the knowledge and resources of its new consortium of investors and will look to expand its product and service offering to existing and prospective clients.

Insurance-linked securities

Steadfast buys into reinsurance broker

Steadfast Group has agreed to take a 50% equity interest in Steadfast Re, formerly known as Beach & Associates Sydney. The firm will be the only Australian-owned reinsurance broker supporting Australian and New Zealand insurers and will be supported by Steadfast Group and Beach & Associates.

Steadfast Re will now benefit from Steadfast Group's network of broker businesses. It will continue to be led by ceo Simon Cloney and will retain its ILS focus.

Insurance-linked securities

New broker-dealer targets ILS

Minova Insurance Holdings has launched a new broker-dealer, BMS Capital Advisory. The firm will advise on and facilitate ILS offerings as well as mergers and acquisitions.

BMS Capital Advisory is an affiliate of BMS Intermediaries. Rom Braga will serve as ceo.

Risk Management

Valuation solution to ease EMIR burden

Confisio Managed Services is launching a collateral valuation solution along with Dion Global Solutions and Traiana. The solution will be available across all asset classes for exchange traded and OTC derivatives.

The new service is timed to precede the EMIR deadline on 11 August, when financial and non-financial counterparties will be required to provide daily reports on mark-to-market valuations of their positions and collateral value. Confisio's solution will help clients reporting to trade repositories and reduce EMIR compliance costs.

RMBS

Bank fined for mortgages 'hustle'

A US federal judge last week ordered Bank of America to pay US$1.27bn for Countrywide's role in the sale of risky mortgages to the GSEs during the financial crisis. The loans were sold through a programme known as 'the hustle' from August 2007 to May 2008, for which the bank was found liable for fraud last year (SCI 28 October 2013).

The focus for the hustle was alleged to be on generating a high quantity of loans rather than high quality. The government had sought a US$2.1bn penalty and Bank of America may yet appeal.

It is the first time a bank or its executives have been found liable under federal law for mortgage fraud leading up to the financial crisis. Rebecca Mairone, a former Countrywide executive, has also been fined US$1m for her role in the programme.

RMBS

Most trustees accept JPM settlement

Trustees for most of the deals covered by JPMorgan's recent settlement offer (SCI 29 July) have accepted the modified proposed settlement agreement. Trustees for 27 trusts and loan groups negotiated to extend their acceptance deadline, while six rejected the settlement.

The modified proposal allows for RMBS trustees to accept or reject the settlement based on an individual loan group level for deals structured with multiple loan groups. Those which have extended their deadline to accept or reject the settlement will now have until 1 October to make that decision.

Many of the deals which for which trustees rejected the settlement or extended the acceptance dates had earlier been flagged as potential rejection candidates in recently filed experts' reports, say Bank of America Merrill Lynch analysts. However, claims for two of the rejected deals - SACO 2005-10 and 2006-2 - were thought to be time-barred.

ABS

Conduits benefitting from full support

Moody's expects EMEA ABCP conduits to no longer be exposed to asset performance risk, as transactions financed by these conduits will almost exclusively be fully supported by liquidity support. The agency notes that the trend to fully supported transactions financed by EMEA ABCP has recently accelerated, with the conversion so far this year of two partially supported conduits - Scaldis Capital and Antalis - to full support.

Since the beginning of the year, the conduits classified as partially supported conduits have only added fully supported transactions and have converted most of their existing partially supported transactions to full support. Over the past four years, the drivers for converting a conduit to full support have varied from sponsor to sponsor.

Some converted their conduits to full support because of regulatory reasons, such as the resecuritisation treatment of conduits in Germany, or more recently because of the implementation of the Volcker Rule.

ABS

Trade finance ABS to prepay

Lighthouse Trade Finance Issuer I is to be redeemed on 18 August at the request of the originator BNP Paribas. The move comes almost a year after the transaction was completed (SCI 22 August 2013).

Fitch, which rated the deal, notes that the originator has exercised an optional redemption and prepayment provision of the documentation. It is understood that the deal is being called because of the shortage of commodity transactions originated by the Geneva booking centre, which focuses on energy commodities sourced from Eastern Europe, including Russia. According to the portfolio manager, recent geo-political developments in the area weighed significantly on the decision.

The transaction has performed in line with Fitch's expectations to date, with only one US$11m asset becoming delinquent, which was eventually repaid before being marked as defaulted. The agency says that the portfolio is becoming increasingly concentrated, with only nine assets, as of 9 July.

The total asset portfolio balance was US$62.8m on a transaction balance of US$131.6m, with the difference held in cash and authorised highly-rated investments. Prolonged exposure to these asset types would create negative carry and be likely to constitute excessive counterparty exposure, according to Fitch's counterparty criteria. However, an early amortisation event would have occurred, had the asset balance been less than 90% of the transaction size for 12 consecutive weeks.

The issuer will pay the loan and bondholders the principal outstanding, as well as a prepayment break fee. The prepayment break fee will be based on the interest due until the original expected maturity date in August 2015, but the applicable margins will be halved. The senior A loan pays a margin of 0.85% over one-month Libor.

ABS

Duration benefits seen in Seaco deal

Seaco's latest container deal - the US$500m Global SC Finance II series 2014-1 - is noteworthy not only for its size, but also for its structure. The transaction was last week upsized from US$400m before pricing, becoming the largest issuance seen in the sector since 2011.

The structure features two pari passu tranches, each with a 10-year expected final maturity and a five-year average life. However, the A1 tranche is non-callable for two years, while the A2 tranche is non-callable through final maturity - with the exception of a clean-up call when the outstanding is reduced to 10% of original balance

The A1 and A2 notes priced at swaps plus 145 and 135 respectively, representing a yield of 3.216% and 3.116% in absolute terms - the lowest yields to date for a container issuer, according to Deutsche Bank ABS analysts. "We believe the effectively non-call A2 tranche provides benefits to both investor and issuer. For the investor, the tranche provides duration in a sector that has had its share of bond calls; for the issuer, the 'give' of option value is likely not viewed as particularly costly relative to the low absolute yield and basis point savings versus the A1," they add.

ABS

Auto losses maintain lower levels

Annualised US prime auto losses were flat month-over-month through June this year at 0.24%, but remain far lower than the rates seen in 2005-2006, according to Fitch's latest index results for the sector. Annualised net losses (ANL) ranged from 0.52%-1.32% back in 2005-2006, while ANL were just 0.17%-0.49% in 2013-2014.

Fitch's prime auto loan ABS 60+ days delinquency index stood at 0.29% in June, down 1bp from May, improving by 3.3% versus a year earlier. The agency says that auto ABS loss rates are likely to creep up further through the end of the year as used vehicle values moderate with rising supply.

In the subprime sector, 60+ days delinquencies rose by 8% to 2.89% in June and have averaged 3.09% in 2014 versus 3.26% 2013. Subprime ANL crept up by 7% on a monthly basis to 3.71% in June, 2.4% lower than the previous June.

Overall, loss severity on defaulted and repossessed vehicles is low in 2014 as demand for used vehicles is strong and transaction prices are above 2013 levels.

ABS

Subprime auto investigation underway

The US Department of Justice has issued a subpoena to General Motors Financial Company, directing the firm to produce certain documents relating to its origination and securitisation of subprime auto loans since 2007. The move is in connection with a DOJ investigation in contemplation of a civil proceeding for potential violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).

GM Financial - through AmeriCredit Financial Services Inc - has sponsored over US$28bn of US auto loan ABS during the years 2007 through 2014, according to Bank of America Merrill Lynch figures. Total outstandings stand at US$9.3bn, with all of the 2007-2009 having been repaid. With respect to the 2007-2014 deals, the firm has repurchased only US$21m.

The subpoena requests information relating to the underwriting criteria used to originate the auto loan contracts, as well as the representations and warranties included in the firm's securitisation underwriting criteria. BAML ABS analysts expect similar actions from the DOJ and regulators to become more common for the non-prime auto loan market. They suggest that such attention could place pressure on spreads for the non-prime auto loan ABS sector, not just for individual issuers.

"At this point in the cycle, we are less concerned about the larger lenders than some of the smaller lenders. The smaller lenders tend to have fewer and less diverse funding sources than the larger lenders. Also, the smaller lenders need to compete with larger lenders, who likely have deeper relations with auto dealers," the analysts observe.

ABS

Timeshare delinquencies hit post-crisis lows

Total US timeshare ABS delinquencies for 2Q14 stood at 2.92%, down from 3.19% in 1Q14 and 3.05% in 2Q13, according to Fitch's latest index results for the sector. This marks two years of consistent year-over-year improvement and is the lowest level of delinquencies reported by the Fitch index since 2007.

The agency notes that defaults are consistent with last quarter, but are also showing year-over-year improvement. Defaults for 2Q14 were 0.66%, a slight increase from 1Q14 at 0.65%, but down from the 0.72% observed a year ago. However, default levels remain somewhat elevated compared to pre-recessionary levels.

On an annualised basis, defaults were 7.45% for 2Q14, down from 7.73% for 1Q14. This represents the eighth consecutive quarter of improvement, as well as the lowest level of defaults for timeshare ABS in over four years.

ABS

Russian DPR deal downgraded

Fitch has downgraded Roof Russia DPR Finance Company to triple-B plus from single-A minus, outlook negative. The rating action comes after the downgrade of originator ZAO Raiffeisenbank (RBRU), following the revision of Russia's country ceiling to triple-B from triple-B plus.

The rating of Roof Russia DPR's notes remains one notch above RBRU's long-term local currency IDR. Negative outlooks on the bank and the Russian sovereign primarily reflect the country risk related to sanctions on Russia and their possible impact on the economy and business environment, Fitch explains.

The majority of the DPRs settled by RBRU derive from energy exports from a small number of large oil and gas exporters and are mostly US dollar-denominated. The agency notes that the transaction's quarterly DSCR ratio has been consistently high since inception and stood at 103x in June 2014.

Fitch observes a 67% decrease in non-Russian flows from designated depository bank in 2Q14, compared with the average quarterly collections for 2013. The agency believes that sanctions on Russia will increase investor risk aversion towards Russia and lead to a decrease in capital inflows. Moreover, the deteriorating operating environment increases the risk that foreign currency flows that are mostly connected to cross-border trade activities will be reduced.

Structured Finance

APAC downgrade rate trends higher

Moody's reports that in 2013 the 12-month downgrade rate for its Asia-Pacific (ex-Japan) structured finance portfolio trended higher on a year-on-year basis, rising from 4.2% to17.5%. Over the same period, the 12-month upgrade rate increased slightly from 0.7% to 1.7%.

The average notches per downgraded issuer rose to 6.2 notches, more than double the 2.5 notches observed in 2012. The average notches per upgraded issuer decreased to 1.8 notches, down one notch from the previous year.

The Asia-Pacific structured finance market experienced 12 upgrades across seven deals and 125 downgrades across 88 deals during 2013. Australian RMBS accounted for 124 of the 125 downgrades and those rating actions were mainly the result of downgrade actions against mortgage insurers and methodology changes that affected the sector.

The Asia-Pacific region 12-month downgrade rate began the year below its global counterpart (4.2% versus 10.9%), but ended the year above the global SF downgrade rate (17.5% versus 9.1%). The increasing downgrade rate in the Asia-Pacific region was driven by the Australian RMBS sector.

With the exception of the RMBS sector, Moody's-rated Asia-Pacific structure finance portfolio had a lower downgrade rate than its rated global structured finance portfolio in 2013.

Structured Finance

Greek sovereign ceiling raised

Moody's has raised the maximum achievable rating for Greek structured finance transactions to Ba3 from B3, after it upgraded Greece's government bond rating to Caa1 from Caa3 and the local and foreign currency bond and deposit ceilings to Ba3 from B3. The agency says the move reflects the country's reduced economic, legal and political risks.

Specifically, Moody's notes that the improvement in Greece's economic outlook, the significant improvement in Greece's fiscal position over the past year and the government's reduced interest burden and lengthened maturities of the debt triggered the positive rating action. The agency is assessing the impact of Greece's government bond rating action and the corresponding increase in the local-currency country ceiling on all outstanding Greek structured finance rated transactions. It will publish the outcome of its deliberations for affected transactions in the coming weeks.

Structured Finance

Methodology guidelines finalised

Scope Ratings has finalised its methodology guidelines for rating and monitoring structured finance instruments, taking into account market comments and other feedback following the publication of a draft proposal. These guidelines provide the general framework for the development of in-depth methodologies. Scope plans to issue subsequent addenda to these guidelines in order to define its specific assumptions for rating structured finance asset classes, such as ABS, CLOs, CMBS and RMBS.

The finalised methodology reinforces Scope's objective of rating transactions in a European context (see also SCI 29 July). As a European rating agency, it focuses on European transactions, applying its knowledge of the local market and specific criteria. This is reflected in the way that the agency approaches input assumptions, as well as the way it stresses key assumptions.

Scope's approach takes into account the stressed scenarios various asset classes have experienced in the past and benchmarks them against the historical performance of European structured finance transactions. Its analysis evaluates the expected loss associated with the payments contractually promised by the rated instrument. In order to derive a rating, the agency benchmarks the expected loss outcome associated with a given time horizon with its idealised expected loss table.

Scope considers the results of its quantitative analysis as an anchor point for determining the rating and supplements its analysis by a qualitative judgment on unquantifiable risks. Its rating approach relies on three analytical building blocks: collateral risk analysis (the credit quality of the underlying assets); counterparty risk analysis (the risks and risk-mitigating factors associated with the key parties in the transaction); and structure-specific analysis (the characteristics of the issuance vehicle).

Structured Finance

SEC urged to complete ABS reforms

A group of twelve US Senators this week sent a letter to SEC Chair Mary Jo White, pushing for the agency to finish four overdue reforms. The letter expresses concern about the slow pace of progress in putting "critical investor and systemic risk protections" related to securitisation in place, as set out in the Dodd-Frank Act.

According to a recent SFIG memo, the Senators are concerned with credit rating reforms, prohibitions on financial firms betting against the securities they package, improved disclosure and oversight of the ABS market and a joint rulemaking with other agencies to limit bank compensation structures that incentivise risk. All of these reforms were mandated by the Dodd-Frank Act, but have yet to be completed by the SEC.

The Senators urge the Commission to "prioritise its time and resources to addressing its mandatory obligations and key issues arising out of the financial crisis". The letter notes that ABS markets are an important channel for attracting private capital for the benefit of the American economy, but for that channel to function effectively, investors must have confidence that "the rules of the road are strong enough" both to protect them and address systemic risk.

CDO

ABS CDO on the block

An auction has been scheduled for Margate Funding I on 19 August. The securities shall only be sold if the proceeds are greater than or equal to the auction call redemption amount. The collateral manager, although it may not have been the highest bidder, has the option to purchase the collateral (or any subpool) for a purchase price equal to the highest bid therefor.

CDS

Dixons CDS tighten on merger

Five-year CDS on Dixons Retail Inc have tightened by 35% over the past month, according to Fitch Solutions. The entity has outperformed the broader European retail sector, which widened by 5% over the same period.

"The boost in CDS market sentiment for Dixons Retail is likely attributed to shareholders approving the merger with Carphone Warehouse Group to create the UK's largest retailer of mobile phones and electronics," comments Diana Allmendinger, director at Fitch Solutions.

Although Dixon's CDS implied rating stands at double-B plus, based on present spreads, the CDS market is pricing the firm's default risk in line with triple-B levels or as a low investment grade credit. "CDS liquidity for the retailer has decreased in recent weeks, down 10 rankings to trade in the 47th regional percentile, signalling less market uncertainty over future pricing levels," Allmendinger adds.

CDS

ESFG credit event determined

ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in respect of Espírito Santo Financial Group, after the company requested the Luxembourg Courts for controlled management (Gestion Contrôlée) because it is unable to meet its obligations under its CP programme and standalone debt instruments. The Committee resolved that no auction would be held in relation to this event.

CDS

ABB credit event called

ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in respect of ABB International Finance, after the firm was dissolved last month. Since there are no deliverable obligations for the entity, the Committee is unable to publish any auction settlement terms for this event and, as such, no auction will be held in respect of outstanding CDS transactions.

CDS

Argentine credit event confirmed

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a failure to pay credit event occurred in respect of the Argentine Republic (SCI 1 August). An auction will be held in due course in respect of outstanding CDS transactions on the entity.

Separately, ISDA's EMEA Determinations Committee is deliberating over whether a succession event has occurred in respect of Banco Espirito Santo. The move follows the bank's bail-out by the Portuguese central bank, which entails BES's assets being transferred to Novo Banco, which will be underwritten by the country's resolution fund.

CDS

Argentine credit event mooted

ISDA's Americas Determinations Committee is due to meet today to discuss whether a failure to pay credit event has occurred in connection with Argentine Republic CDS. The move comes after S&P lowered the country's foreign currency sovereign credit ratings to selective default, citing failure to make a US$539m interest payment on its discount bonds maturing in December 2033. Argentina had a 30-day grace period following the 30 June scheduled IPD to make payment (SCI 24 June).

Interactive Data suggests that the market does not appear to be factoring in a significant increase in the probability of a pay-out to protection buyers. While benchmark five-year CDS spreads moved nearly 350bp higher yesterday from the prior close to 2966bp, the year-to-date high-water mark remains 3200bp, reached in mid-June. However, shorter tenors are exhibiting signs of stress, with Argentina's CDS curve inverting further.

Argentina is refusing to pay US$1.5bn to hold-out creditors from its restructurings in 2005 and 2010, with the government arguing that such payments would trigger an additional US$10bn-US$15bn of payments to other bondholders. Argentina's President has reportedly said that she is open to further negotiations with the hold-out creditors, although she would continue to defend her country's interests.

CLOs

Loan recoveries to support ratings

S&P is incorporating additional information on loan recoveries into its analysis of CLO transactions. The new information aims to provide additional insight into the agency's view of potential recovery outcomes within the bands associated with certain of its recovery rating categories.

The initial report providing additional guidance on recoveries for approximately 80 loans was published on 18 July, but the additional information will also be included in the comprehensive list of loans rated by S&P that it publishes monthly. "The additional information being added to these lists is already usually provided within the recovery reports we publish for individual rated loans, but we believe that investors would appreciate having this information compiled in one place," the agency explains.

For recovery rating categories 2 through 5, the published reports highlight whether S&P's view of a given loan's recovery prospects falls within the top or lower half of its recovery rating band. For example, a loan with a recovery rating of 2 indicates the expectation of 70% to 90% recovery of principal for creditors in the event of a payment default. The published reports will now highlight whether the agency expects a particular loan with a 2 recovery rating to have recovery prospects in the lower half of the range (70% to 80%) or in the top half of the range (80% to 90%).

To facilitate the incorporation of this additional information into its CLO analysis, S&P has updated the recovery assumptions contained in its corporate CDO criteria. The agency anticipates no rating changes as a result.

The impact on a given CLO transaction may generally be categorised based on where it is in its lifecycle. For instance, existing CLO transactions still within their reinvestment period may see moderately increased cushion for their current investment grade ratings, but no upgrades. Equally, new issue CLO transactions may see a modest reduction in credit enhancement required for senior tranche ratings, but only if they manage to higher weighted average recovery rates in accordance with their transaction documents.

S&P believes that the changes may incentivise CLOs to purchase better quality assets from a recovery perspective within a given recovery category.

CMBS

First loss for FREMF programme

The US$3.7m Green Meadows Apartment loan - securitised in FREMF 2010-K6 - has been liquidated at a realised loss to the trust of US$374,943, representing a loss severity of approximately 10%. CMBS strategists at Morgan Stanley believe that this is the first loan securitised across any FREMF CMBS to realise a loss.

According to special servicer commentary, the property was foreclosed on 4 February and listed for sale for US$4.1m, before being liquidated for US$3.89m. After payment of nearly US$600,000 of liquidation expenses, net proceeds available to the trust were US$3.3m. The loss resulted in a write-down to the class C2 notes, while the class A1 notes received an unscheduled default-induced principal prepayment of US$3.3m.

The loan transferred to special servicing in November 2013, due to monetary default. At that time, the borrower stated that it had "no interesting in retaining possession".

The Morgan Stanley strategists note that occupancy decreased from 91%, as of December 2011, to 80% as of June 2013. The property was originally appraised at US$5m in February 2008, but had declined to US$4.25m in November 2013.

CMBS

Loss severity ticks up

The US$82.9m Babcock & Brown FX 2 loan last month liquidated with a 95% loss, after being delinquent for more than two years (see SCI's loan events database). Coupled with low volume, Trepp notes that this large loss contributed to an up-tick in aggregate loss severity, which jumped from 45.32% in June to 60.80% in July.

Liquidated loan volume stood at US$605.47m in July, down from US$932.03m the previous month. Of the loans that were liquidated, 90% by balance fell into the greater than 2% loss severity category.

July loss severity was 1547bp higher month-over-month and registered its highest level since Trepp began tracking the number in January 2010. The number of loans liquidated during the month was 63, resulting in US$368.10m in losses. The average disposed balance was US$9.61m - well below the 12-month average of US$14.27m.

Since January 2010, servicers have been liquidating at an average rate of US$1.20bn per month.

CMBS

CMBS credit metrics slide again

Leverage and other key metrics for US CMBS slipped again in Q2, driving credit enhancement levels for new deals higher still, according to Fitch's latest quarterly index report on the sector. Average triple-A CE for Fitch-rated transactions rose to 24% during the quarter, up by 1.125 percentage points from the prior quarter and 2.375 percentage points from one year ago. Average triple-B minus CE increased by 25bp quarter-over-quarter and now is 100bp higher than in 2Q13.

"Fitch has quoted credit enhancement above 25% on several deals it ended up not rating, which begs the question of whether super senior credit enhancement will soon be poised for a move above 30% if the trend continues," says Fitch md Huxley Somerville.

The higher CE comes as the percentage of loans with Fitch-stressed DSCRs below 1x rose to 16.4%, up from just 1.9% for the same quarter one year ago. In addition, the percentage of loans with Fitch-stressed loan-to-value ratios (LTVs) above 100% rose by over five percentage points in 2Q14 from the prior quarter to 71%. The percentage of full term interest-only loans also rose by almost five percentage points last quarter to 20.5%.

Several other new issuance measures remained in check in 2Q14, including the exposure to retail properties at 31%, which is the same as the previous quarter and last year. Also, exposure to the southeast region declined, while exposure to the Mid-East increased.

"The average percentage of CMBS loans having or allowing subordinate debt fell by seven percentage points quarter-over-quarter for the first time in two years," adds Fitch md Mary MacNeill.

Further, weighted average mortgage rates in 2Q14 fell by another 10bp - the same drop as between 4Q13 and 1Q14.

CMBS

Specially serviced loans decrease

The accelerating US economic recovery led to a further decline in CMBS delinquency rates and a decrease in the share of loans in special servicing, according to Moody's 2Q14 surveillance review. The agency's base expected loss for conduit/fusion transactions fell to 8.2% during the quarter from 8.6% in Q1.

"The improving economy contributed to the decline in Moody's base expected loss," says Keith Banhazl, svp and co-head of Moody's US CMBS conduit surveillance team. "The continued decline in delinquency rates and the share of loans in special servicing also reflects the economic recovery that is underway."

Moody's Commercial Mortgage Metrics (CMM) weighted average base expected loss also fell to 5.7% in 2Q14 from 6.1% in the previous quarter. "The decline in Moody's CMM base expected loss since peaking at 8.5% in 2012 reflects that commercial real estate fundamentals are improving," explains Banhazl.

Performance improved in all core property sectors. Within the multifamily sector, annual demand is growing at a strong pace of 1.9%, higher than the recent historical average. Growth rates in the hotel sector are expected to be slower than their recent robust rates, due to additional supply - although they will continue to demonstrate improvement.

Office markets will continue to improve at a slow and steady pace. "The improving job market and low levels of construction have helped improve occupancy rates," says Banhazl.

Meanwhile, falling vacancy rates and muted sales growth will contribute to the slow pace of growth in the retail market. Retail sales are growing at a rate that is slightly below their historical average, but as the unemployment rate falls further and wages increase, retail sales growth should strengthen.

The overall share of specially serviced conduit loans fell to 7.6% in 2Q14 from 7.9% in 1Q14, representing the seventh consecutive quarterly decline. The share of specially serviced loans has contracted by 514bp from the April 2011 peak of 12.7%.

Lenders modified 29 loans in 2Q14, for an average monthly volume of 10 loans and US$134.4m per month. Loan extensions and the change in interest rates were the most widely used modification strategies, according to Banhazl.

CMBS

CMBS 2.0 defeasance emerging

Fitch says it has provided rating confirmations for 26 defeased loans in US CMBS thus far in 2014, three of which were from CMBS 2.0 transactions that occurred in July. Two others were in 2011 transactions and another in a 2010 transaction. Each of the loans has five-year terms.

The appearance of 2.0 requests marks the beginning of an expected increase in defeasance activity, as borrowers take advantage of increased property cashflows and reduced coupons that have occurred since the loans were originated early in the CMBS 2.0 cycle, according to the agency. Of the remaining defeased loans reviewed in 2014, 12 were from 2005 vintages, ten from 2006 and one from 2003.

In comparison, in 2013 25 were from 2004, 24 from 2005, seven from 2006 and five from 2007. The remaining requests were from 1997-2002 vintages and one from the BALL 2009-FDG single-borrower transaction that fully defeased in November 2013.

At the end of June 2013, Fitch had reviewed the same number of defeasance as of June this year. However, the total increased to 70 by year-end 2013.

The US$80.1m 1412 Broadway loan in WFRBS 2011-C2 recently defeased with T-Notes, FMAC and FNMA obligations (see SCI's CMBS loan events database). The loan had a 24-month interest-only period, matures in January 2016 and has 15 months remaining on the lock-out period. The property was reportedly purchased by Isaac Chetrit from Harbor Group International for US$250m, along with the neighbouring three-story retail property at 1420 Broadway.

Another recently defeased loan is the US$53m Murdock Plaza in MSC 2011-C1, which had been on servicer watchlist due to low DSCR and occupancy. It had a 12-month interest-only period, matures in January 2016 and has 14 months remaining on the lock-out period. The loan was defeased with T-Bills, T-Notes, FMAC and FNMA obligations, having reportedly been purchased by Tishman Speyer for US$121m.

CMBS

Auctions exposed to LNR assets

US$589m of allocated balance from US$775m in US CMBS loans is set to be sold via Auction.com in late August and early September. Three deals have a high concentration of loans out for bid and the properties appear to be exclusively specially serviced by LNR, according to Barclays Capital data.

The COMM 2006-C8 deal has the largest exposure to the auctions, with US$162m in allocated balance across 10 loans out for bid - the largest of which is the US$56m Morgan Resort Portfolio. Of the nine remaining properties, seven are being auctioned, with the other two yet to be moved into REO.

Also up for bid is the US$36m Longford Medical Center in Las Vegas, which was last appraised at US$11.1m and had -0.07x DSCR NCF in 2013. If the loan sells near the current appraisal, it would result in an 85% loss severity, Barcap CMBS analysts suggest.

Another CMBS with large exposure to the auctions is JPMCC 2007-CB19, with US$113m in allocated balance across 12 loans. The largest loan is only US$14.8m, but the combined sales are expected to have the impact of a large loan liquidation.

MLCFC 2007-9 also has US$113m in allocated balance out for auction from three portfolio loans, the largest of which is the US$79.3m DLJ West Coast Hotel Portfolio, with the Hilton Garden Inn Lake Oswego - the final remaining asset - up for bid. The sale of the hotel is likely to result in large losses to the trust, as the most recent value of the property was US$20m in January 2013. But the other two smaller portfolio loan sales are unlikely to immediately result in realised losses, since not all of the properties in the portfolios are being auctioned.

In addition, a few other large loans are set to be included in the auctions. For example, the US$39m Ashtabula mall in MSC 2007-IQ16 - which has been labelled non-recoverable and was last appraised at US$5.2m in December 2013 - is likely to take a near-total loss.

The US$32m Marriott Baton Rouge, securitised in CD 2005-CD1, may also be sold via the auction and is currently appraised at US$21m. Finally, two of the seven remaining properties in the US$104m Trinity Hotel Portfolio in BACM 2006-5 may be sold.

Of the largest loans from the late-July auctions, the final bid price for the Simon - Desoto Square Mall in MLMT 2005-MKB2 was US$33.75m, but it does not seem to have met the reserve and it is unclear if the seller will release the property (see SCI's loan events database). Similarly, bids for the US$38m Marriott-Memphis in JPMCC 2007-CB19 only appeared to reach US$6m, below the reserve price.

The US$38.5m Baldwin Complex appears to have sold for US$16.2m, above the appraisal of US$9.6m in November 2013, while the US$22.6m Prince Georges Metro Center IV in JPMCC 2003-C1 appears to have sold for US$8m - which is below the latest appraisal of US$12.3m from March 2014.

CMBS

Loan resolutions slow

The US CMBS delinquency rate dropped by just 1bp to 6.04% in July, according to Trepp. Loan resolutions totalled only US$600m during the month: with fewer distressed loans removed from the delinquent loan pool, newly delinquent loans pushed the monthly total back up. Trepp currently counts US$32.1bn in delinquent CMBS loans, which is down from June's total.

"After so many months of steady declines in the delinquency rate, the slow-down in distressed loan liquidations and an up-tick in newly delinquent loans put the brakes on the improvement in July," comments Joe McBride, research analyst at Trepp. "Whether the monthly decrease in loan liquidations is an outlier or a true shift to slower workout activity from special servicers remains to be seen, but we expect the rate to continue downward."

Seriously delinquent loans - which are counted as 60+ days delinquent, in foreclosure, REO or non-performing balloons - have also been on a steady decline. Again, this improvement stalled in July, as the rate decreased by only 4bp on this basis.

When broken out by major property type, lodging loans surpassed retail as the best performer. The delinquency rate for lodging loans fell to 5.19% in July, while retail increased to 5.53%. While all five property types have fallen into the single-digits for their respective delinquency rates, multifamily loans remain the worst performing property type, with a rate of 9.24%.

Insurance-linked securities

Queen Street III defaults

S&P has lowered to D (default) from double-C its rating on the US$150m Queen Street III Capital catastrophe bond, sponsored by Munich Re. The transaction covered losses due to major European windstorms between July 2011 and July 2014.

The downgrade reflects the fact that noteholders did not receive at least 99.99% of the outstanding principal back on the notes' redemption date of 28 July. Instead, there was a shortfall of 2bp - or US$28,374.65 on the proceeds - compared to a maximum allowed shortfall of 1bp lower than the total amount of notes.

Proceeds from the sale of the notes were invested in a US Treasury money market fund, which was in turn invested in treasury bills set up specifically for the transaction in the MEAG Queen Street III fund. A subsidiary of the asset management arm of Munich Re, MEAG MUNICH ERGO Kapitalanlagegesellschaft, managed the fund.

An investment eligibility event related to a drop in the per unit value of the MEAG Queen Street III fund below US$100 occurred, following uncertainties surrounding the US debt ceiling in October 2013 (SCI 25 November 2013). Pursuant to the transaction documents, the indenture trustee redeemed the MEAG Queen Street III fund and reinvested the proceeds into Federated US Treasury cash reserves.

S&P expects to withdraw its rating on the notes issued by Queen Street III Capital within the next thirty days.

Insurance-linked securities

RFC issued on transformer criteria

AM Best is requesting feedback on a new draft criteria report on rating reinsurance/insurance transformer vehicles. The report describes the rating agency's approach and highlights rating considerations unique to the evaluation of ILS transformer vehicles and the process by which the transformer vehicles act as an intermediary to transfer insurance risks to various counterparties.

The new criteria generally apply to the rating of various types of insurers/reinsurers that are licensed or designated as special purpose insurers/vehicles in various regulatory jurisdictions that primarily assume and cede insurance exposures funded by various capital market instruments. Because insurance transformer vehicles are corporate legal entities that have characteristics and features similar to insurance companies, Best's Credit Rating Methodology (BCRM) remains the governing document that provides a comprehensive explanation of AM Best's general rating process.

The new criteria report is not expected to affect existing ratings. Comments should be submitted by 1 September.

Risk Management

Clearing repository formed

IOSCO has established an information repository for OTC derivatives central clearing requirements. The aim is to provide regulators and market participants with consolidated information on the clearing requirements of different jurisdictions.

By providing this information, IOSCO seeks to assist authorities in their rule-making and help participants comply with the relevant regulations in the OTC derivatives market. The repository sets out central clearing requirements on a product-by-product level, as well as any exemptions from them. The information in the repository will be updated quarterly.

Formed in February 2014, the repository has been available until now only to IOSCO members. IOSCO says it has since gained sufficient experience and gathered enough information on central clearing requirements to open the repository to the public.

Suggestions are welcomed from the public on how to improve the information repository and on other areas that should be covered.

Risk Management

Basel 3 jurisdictional differences emerging

Moody's reports that while Basel 3 implementation is proceeding globally, notable differences are evident between jurisdictions in a number of areas, including pace, the degrees of strictness relative to Basel Committee guidance and the resulting challenges that banks face. The agency suggests that some of the weaknesses associated with Basel 2 have not been sufficiently addressed and that it is too soon to say whether the industry has so far achieved fundamentally stronger creditworthiness as a result of Basel 3.

For those systems where banks already hold high levels of capital and liquidity - such as in Asia Pacific, the Middle East and Latin America - authorities are imposing higher 'super-equivalent' requirements, as well as maintaining the liquidity and capital in their systems. In this case, a key challenge for banks will be the replacement of non-qualifying instruments through organic capital generation or issuance of new Tier 1 and Tier 2 instruments, according to Moody's.

The agency notes that in some countries - including the UK and Canada - implementation is stricter than the Basel Committee's guidance, so as to avoid regulatory 'back-stepping' (capital or liquidity requirements were already stricter than the requirements of previous regimes). Many jurisdictions are also implementing stricter requirements for their larger banks, including higher minimum capital levels, or accelerated phase-in of capital and liquidity requirements. For example, US systemically important banks are subject to a Tier 1 capital leverage buffer of at least 2% of total leverage exposure above the 3% minimum.

Moody's observes that the Basel 3 framework does not address some Basel 2 weaknesses, including comparability of risk-weighted assets and inconsistent use of and disclosure of Pillar 2 assessments. "Given the differences in implementation requirements and schedules, users of banks' financial disclosures should be aware that transitional capital and leverage ratios are not directly comparable without taking account of accelerated or 'super-equivalent' local rules," it adds.

The agency says that banks have made substantial improvements in their fundamentals, including reductions in leverage, the implementation of firm-wide stress testing and the formation of more robust liquidity and funding profiles. Yet, many banks remain challenged in meeting full Basel 3 requirements while, at the same time, sustaining profitable business models under these more stringent regulatory constraints.

RMBS

PSBC breaks Chinese RMBS drought

Postal Savings Bank of China last week launched a CNY6.8bn RMBS, the first Chinese RMBS since 2007. SFIG notes that the move is designed to facilitate central government support for the faltering housing market, which saw sales drop by 9.2% during 1H14 and prices fall in 70 cities in June for the second straight month.

The transaction comprised three tranches: CNY5.996bn A notes, CNY477m B notes and CNY341m subordinated notes. The offering is backed by 23,680 loans made to borrowers in 12 cities and 10 provinces, buyers who will live in the homes and benefit from the stable cashflow for the underlying assets.

Chengxin and China Credit are understood to have rated the A notes triple-A, with the former rating the B notes single-A minus and the latter rating them single-A. Lead manager on the transaction is said to be Citic Securities.

RMBS

UK NC RMBS performance supported

Moody's expects improving macroeconomic drivers and credit conditions in the UK, combined with low domestic interest rates, to boost UK non-conforming RMBS performance. However, the rating agency acknowledges that high household indebtedness could pose some risks to continued positive performance.

"Inflationary pressures on living costs will likely ease because of stronger forecast GDP growth. These costs typically affect more vulnerable groups, such as first-time buyers, homeowners on lower incomes and single-income households. The performance of UK NC RMBS is already showing positive signs, with 90+ arrears levels having dropped by 6.2% between May 2013 and May 2014, due to the robust economic recovery and continued low interest rates," comments Emily Rombeau, structured finance analyst at Moody's.

Low interest rates continue to support the resilient performance of UK NC RMBS because lower base rates mean that debt-servicing costs remain affordable relative to increased living costs. Moody's says that a cumulative interest rate increase of 1% would only lead to a 0.9% increase (for borrowers not already in arrears) in the number of borrowers experiencing negative cashflows. Even with a 3% rate increase, only 4% more borrowers would face such payment problems.

NC lending is re-emerging with improved underwriting criteria and the current buoyant housing market will help NC borrowers in difficulty to either sell their property or refinance onto a better rate, due to the lower indexed loan-to-values. Finally, NC borrower creditworthiness is improving, with the total number of individual insolvencies now standing at 30% below the peak of 1Q10 and CCJs having dropped by 32% between 2009 and 2013.

Nevertheless, UK household debt is high by historical and international standards, at around 140% in 1Q14. Moody's believes that this could exacerbate the sensitivity of NC borrowers to sudden economic shocks, due to their generally weaker credit profiles.

RMBS

RMBS buyouts eyed

Ocwen Financial disclosed in its Q2 EPS reporting that it plans to invest in RMBS buyouts for loans that it services beginning in 3Q14, which is expected to generate returns that meet the servicer's 25% hurdle rate. The firm is also set to exercise servicer clean-up calls, as it owns the call rights to deals totalling an estimated US$150bn-US$200bn.

Excluding MSR losses and other non-core expenses, normalised EPS was US$0.72 for the quarter, according to Bank of America Merrill Lynch figures. Total revenue was flat on Q1, as the average servicing fee rebounded but remained below expectations.

With respect to the ResCap integration, Ocwen reported that over 300,000 loans have been moved from the legacy ResCap system for REO servicing. An additional 340,000 loans still need to be transferred, 250,000 of which are Ginnie Mae related.

The ResCap portfolio is expected to be fully boarded before year-end, allowing the firm's integration and restructuring efforts to be completed.

RMBS

Fed launches mortgage pilot

The New York Fed has launched a Mortgage Operations Counterparty (MOC) Pilot Program for counterparties in agency MBS operations. The objective of the programme is to explore ways to broaden access to open market operations and gain further experience in dealing with a wider range of firms.

The move follows the conclusion of the Fed's Treasury Operations Counterparty (TOC) Pilot Program on 31 July, which was designed to broaden access to open market operations and to determine the extent to which firms beyond the primary dealer community can augment the Fed's operational capacity and resiliency in its monetary policy operations. Four firms were selected for the TOC pilot programme and began transacting with the Fed's open market trading desk in secondary market outright purchases of US Treasury securities.