Contents

CMBS

Mixed CMBS supply seen

At around US$72m, US CMBS BWIC volume remained light yesterday ahead of the Labor Day holiday, although up from the previous session. A mixed bag of bonds across a variety of vintages was out for the bid.

The vintage appearing most often in SCI's PriceABS data for the session was 2006. For example, CD 2006-CD3 AM was talked and covered at 85bp and 75bp respectively, having previously been covered at 95bp on 17 March.

The JPMCC 2006-LDP8 AM tranche was covered at 67bp, having been talked at 70bp. It was previously covered at 65bp on 23 July.

Additionally, LBUBS 2006-C6 AM was talked and covered at 75bp and 73.4bp respectively, having previously been covered at plus 79bp on 8 August.

From the 2005 vintage, the JPMCC 2005-CB13 A4 bond traded yesterday, having been talked at 80bp area on 25 March. The CSFB 2005-C2 A4 tranche did not trade, however. It was last talked at 85bp area on 12 February, according to PriceABS.

BSCMS 2005-PWR9 A4B traded after being talked at 75bp. The bond was previously covered at 80bp on 4 February.

GSMS 2014-GC18 C represented the most recent vintage captured by PriceABS yesterday. The tranche was covered at 198bp, having previously been covered at 220bp on 15 August.

Meanwhile, another recently-issued bond - JPMBB 2013-C15 A1 - was covered at 46bp on its PriceABS debut. Also from the 2013 vintage, MSBAM 2013-C12 A1 was covered at 49bp.

CS

Secondary markets

Patchy activity in Euro MBS

The summer lull in European MBS secondary markets looks set to continue this week. However, pockets of activity remain.

Notwithstanding a month-end flurry that saw three RMBS BWIC lists circulating last Friday, European RMBS and CMBS bonds are expected to carry on trading sporadically for now. "Investors will largely stay sitting on the sidelines because there's not enough juice in the market," says one MBS trader.

However, there is activity in some sub-sectors of the market. Trades in peripheral mezz and Dutch RMBS have been seen in the last few days and more are expected.

Concerns over Russia are also having an effect on the market, but expectations for the ECB's QE programme are serving as a counterbalance and keeping European ABS prices resilient overall.

Secondary markets

CLO sell-off coming?

After today's US public holiday, CLO traders expect an upswing in activity amid a potential sell-off.

Last week saw above-average CLO BWIC volume for a summer week, reports one trader. "That was driven by volatility, which is in an upward trend, so the market could be ready for a further sell-off this week. We therefore expect a lot more bid-lists to be added to the pipeline," he says.

So far this week, that pipeline only shows three CLO lists, all scheduled for Wednesday. It consists of one three-line euro list, one two-line US list and a four-line list comprising one dollar and three euro bonds.

Despite last week's flurry of BWICs, CLO 1.0 levels remain fairly firm across the capital structure, with senior mezz to junior mezz seeing most interest from asset managers off-BWIC. CLO risk out to five years remains broadly in line with the swap curve.

Secondary markets

Peripherals scheduled

Two peripheral European BWIC lists, consisting primarily of RMBS are now circulating for trade tomorrow. A 12 line list scheduled for 14:30 London time and a single line for 15:00.

Of the deals that have appeared on SCI's PriceABS service in the last three months, their last trades covered as follows: HIPOT 4 A at 91.5 on 24 July; LUSI 5 A at H92H on 26 June; MAGEL 4 A at 92H on 9 July; RHIPG I A at 95.91 on 5 August; RHIPO 8 A2A at 95.09 on 18 June; and TDA 23 A at 95.5 on 18 June.

The bond on the single line list, Greek RMBS AEOLO 1 A, did not trade last time out in May 2014.

Secondary markets

Euro markets hit re-set

The European ABS market appears to have hit the re-set button this morning to signal the true end of summer with the return of the US today and in anticipation of the ECB meeting on Thursday - most ABS sectors are better bid but peripherals are once more leading the way.

Meanwhile, a €5m slice of Dutch CMBS MESDG DELT A has been added to the BWIC calendar for 16:00 London time today. The bond last traded with a cover of 93.92 on 26 August, according to SCI's PriceABS service.

In addition, a two line list containing €1.9m of RMBS HMI 2010-1X A4 and £1.2m of ABS TURBF 4 A has just begun circulating for trade at 13:00. Those bonds last covered at 101.583 on 22 May and 100.23 on 30 July, respectively.

Secondary markets

Mixed day so far

The US structured finance markets are taking a while to find their feet today while off-BWIC Europe appears to be building up a head of steam - strong trading is continuing in European RMBS now including non-peripheral bonds.

On the BWIC front, both sides of the Atlantic aren't seeing many new lists circulating. The CLO market has not so far added to the lists seen yesterday that are scheduled for tomorrow and there are only a few fairly small ABS, non-Agency RMBS and CMBS lists doing the rounds in the US, though numbers are expected to pick up later in the day. No lists in any sector in Europe have been added for today.

Secondary markets

Rare outing for synthetic CRE CDOs

A BWIC list has begun circulating containing four tranches of Halcyon's synthetic CRE CDOs: 25m of HLCN 2005-1 A, 10m of HLCN 2005-1 B, 12.5m of HLCN 2005-2X A and 5.8m of HLCN 2005-2X B. The auction is scheduled for 10 September, but all the bonds can trade ahead.

The former two deals were seen once before, according to SCI's PriceABS service, when neither traded in May 2013. The latter two have not appeared since PriceABS began in April 2012.

Secondary markets

CLOs/CDOs ease back in

The CLO/CDO BWIC market eased back into its stride through the course of yesterday's US afternoon with the first two trades of the month and the addition of further lists.

A small two line CLO list traded at 14:30 New York time yesterday. $300,000 of BABSN 2013-IA A covered at 98.5 and $315,000 of TPCLO 2013-1A A1 covered at 98.375, according to SCI's PriceABS service.

A further two CLO lists have been added to the BWIC schedule for today, bringing the total to five so far. Of the two new lists, the first up is a single line €3m JUBIL V-X C auction due at 15:30 London, which last covered at MH80s in April 2014. The second new list is due at 11:00 New York time and consists of $1m CARL 2007-10A E, $6m KATO 2007-10A E and $2m MDPK 2007-4X E, none of which have traded on BWIC this year.

Meanwhile, the first ABS CDO list of the month is out for bid. The $1.74m ten line BWIC consists of: DUNHL 2004-1A B, ETRD 2005-1A A2, FORTS 2006-1A B, NWALL 2005-1A A2, NWALL 2005-1A B, LONGP 2005-2A A1J, SCF 7A A2, SCF 7A B, SCF 8A A2 and TABS 2005-4A B.

Secondary markets

Ceasefire increase

News of a ceasefire in the Ukraine has pulled credit indices tighter this morning and is expected to move European ABS spreads in the same direction on the back of increased trading activity.

Peripherals remain the main focus of the market as real and fast money accounts seek to grow positions ahead of tomorrow's ECB meeting. Peripheral RMBS in particular were already heading toward recent highs, but with Ukraine risk factored out for now there's even less of a brake on the rally.

Secondary markets

US BWIC activity picks up

As the US BWIC markets got back up and running yesterday most activity was concentrated in ABS, but supply was also seen in the CMBS and non-agency RMBS segments.

Bid-list volume for US ABS reached over $250m yesterday, with credit card bonds providing the majority of the paper. In addition, some auto paper was circulating during the session.

Meanwhile, generic US CMBS spreads were mostly unchanged, with bid-list supply only reaching around $30m. US non-agency RMBS activity was also subdued yesterday, with BWIC volume totalling a little under $50m. A few smaller-sized round-lot line items were circulating across a mixed bag of collateral types.

A large $1.5bn legacy RMBS BWIC has been pre-announced for tomorrow, the majority of which is backed by 2006- and 2007-vintage subprime collateral.

A longer, more detailed version of this article is available to SCI subscribers.

Secondary markets

European ABS expands

The talk surrounding a potential European asset purchase plan is expanding investor interest in ABS.

"We're finding a few accounts that have been out of the European ABS market for a couple of years are coming back in," confirms one trader. "There's a lot of new interest round the ECB."

Heightened activity is yet to filter through to European CLOs, however. "The market is slowly beginning to come back and we're beginning to see a few more BWICs, but the US is definitely outpacing Europe in that respect," the trader says.

Secondary markets

CLO BWIC volume spikes for a day

In the end, yesterday saw seven CLO BWICs trade in total either side of the Atlantic. However, no new lists are yet scheduled for today or tomorrow.

Yesterday's lists contained seven euro deals and 12 dollar-denominated bonds. Only two did not trade, ALME 2013-1X A-2 and WOODS 2006-7X D, with vast majority of the rest trading broadly in line with expectations - at or around talk levels.

Secondary markets

Peripherals pause as UK tightens

Since late yesterday and into this morning, peripheral European ABS secondary trading volume has eased and prices have stayed flat as the market awaits the outcome of the ECB meeting at 13:30 London time today. However, UK RMBS is seeing some action with a number of big names trading off-BWIC and the market as a whole edging tighter.

Feeding off that interest, a four line UK RMBS BWIC has been scheduled to trade at 11:00 London today. It comprises: £4.45m AUBN 4 A2, £1.5m GHM 2007-2X AA, £2m GRANM 2007-1 6A1 and £40m SPF 2005-B A.

Structured Finance

Reg AB, NRSRO rules finalised

The US SEC yesterday unanimously adopted final rules under Regulation AB 2 that substantially revise the offering process, disclosure and reporting requirements for registered offerings of ABS. The rules implement several key areas of reform - while deferring action on other significant aspects of the original proposals - and aren't expected to be too onerous for auto ABS or CLO issuers.

One of the key reforms adopted under Reg AB 2 concerns asset-level information. Issuers will be required to provide standardised loan-level information for ABS backed by residential mortgages, commercial mortgages, auto loans, auto leases, debt securities and resecuritisations in the prospectus and in ongoing reports.

Investor review periods are also being reformed. Issuers using a shelf registration statement will be required to file a preliminary prospectus containing transaction-specific information at least three business days in advance of the first sale of securities in the offering.

With respect to shelf-eligibility, the prior investment grade requirement is being replaced with new transaction requirements - including a requirement that the ceo of the depositor provides a certification at the time of each take-down regarding disclosure contained in the prospectus and the structure of the securitisation, as well as provisions for a review of the assets for compliance with the representations and warranties upon the occurrence of certain trigger events. The date by which transaction agreements must be filed in connection with shelf take-downs has also been accelerated: final transaction agreements must be filed no later than the date that the final prospectus is required to be filed.

Depending on the timeline for implementation and the magnitude of the asset-level details required, JPMorgan ABS analysts suggest that auto ABS issuers may need to turn to the 144a market as a transitional solution until the new Reg AB requirements can be met. Given that CLOs and non-agency RMBS are typically issued in the 144a market, the new rules aren't expected to impact those sectors.

So far this year, 144a issuance has accounted for 23% of auto ABS issuance, according to JPMorgan figures. Within the auto sub-sectors, 144a deals make up 16%, 39% and 22% of prime auto loan, non-prime auto loan and auto lease ABS 2014 supply respectively.

Chapman and Cutler notes in a client memo that the SEC deferred action on several significant aspects of its earlier Regulation AB 2 rule proposals, including: imposing public-style disclosure requirements on private placements and re-sales of structured finance products; requiring issuers to disclose general asset-level information for all asset classes and asset class-specific information for equipment loans and leases, student loans and floorplan financings; requiring grouped-account disclosure for credit and charge card ABS; and further accelerating the date by which transaction agreements, in substantially final form, must be filed.

"We note that a couple of the commissioners expressed the desire for more stringent disclosure requirements across other consumer ABS sectors and the 144a market. We expect that the SEC will likely seek to expand Reg AB to other ABS asset classes and revisit 144a and cashflow modelling requirements in the future," the analysts observe.

The final rules will become effective 60 days after publication in the Federal Register. Issuers must comply with the new rules (other than asset-level disclosure requirements) no later than one year after the final rules are published in the Federal Register. Offerings of ABS backed by residential and commercial mortgages, auto loans and leases, debt securities and resecuritisations must comply with the asset-level disclosure requirements no later than two years after the final rules are published in the Federal Register.

The SEC also yesterday adopted new requirements for nationally recognised statistical rating organisations (NRSROs) to enhance governance, protect against conflicts of interest and increase transparency around credit ratings. The new rules implement 14 rulemaking requirements under the Dodd-Frank Act.

The new requirements for NRSROs address internal controls, conflicts of interest, disclosure of credit rating performance statistics, procedures to protect the integrity and transparency of rating methodologies, disclosures to promote the transparency of credit ratings, and standards for training, experience and competence of credit analysts. The requirements provide for an annual certification by the ceo as to the effectiveness of internal controls and additional certifications to accompany credit ratings, attesting that the rating was not influenced by other business activities.

The Commission also adopted requirements for issuers, underwriters and third-party due diligence services to promote the transparency of the findings and conclusions of third-party due diligence regarding ABS.

Certain amendments will become effective 60 days after publication in the Federal Register. The amendments with respect to the annual report on internal controls and the production and disclosure of performance statistics will be effective on 1 January 2015 and the first annual certification on Form NRSRO relating to performance statistics is required for the annual certifications filed after the end of the 2015 calendar year.

CS

Structured Finance

SCI Start the Week - 1 September

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

Pipeline
August ended with a quiet week, as just three new deals joined the pipeline. These consisted of two ABS and one CLO.

The ABS were US$275m California Republic Auto Receivables Trust 2014-3 and €800m Silver Arrow Compartment 5. The CLO was the US$349m Symphony CLO VIII refinancing.

Pricings
There were a few more deals leaving the pipeline, with two ABS, an RMBS, a CMBS and four CLOs pricing.

The ABS comprised US$675.57m Capital Auto Receivables Asset Trust 2014-3 and US$1.01bn John Deere Owner Trust 2014-B. The RMBS was A$4bn Medallion Trust Series 2014-2.

€237mn Pangea Funding 1 was the sole CMBS print. Finally, the US$612.05m BlueMountain 2014-3, US$626.5m CIFC Funding 2014-4, US$879.1m ECP CLO 2014-6 and US$413m Octagon Loan Funding CLOs rounded the new issuance out.

Markets
US CMBS BWIC volume was generally light last week ahead of the Labor Day holiday, as SCI reported on Friday. Thursday's bid-list volume came to around US$72m as a mixed bag of bonds were out for the bid, with SCI's PriceABS data capturing several 2006-vintage names in particular.

The US non-agency RMBS market was steady last week, despite lighter market activity, according to Wells Fargo MBS analysts. The FHFA's settlement with Goldman Sachs (SCI 26 August) is expected to have only a limited impact on the market, as the analysts predict most of the securities purchased by Goldman Sachs will not be traded in the secondary market.

US ABS spreads widened again last week, continuing to reverse the tightening that has occurred for most of the year. "Across traditional ABS sectors, spreads are now in line with where they started the year. Nevertheless, year-to-date ABS returns are still respectable, with excess returns versus Treasuries through August 27 at 46bp and 152bp for the Barclays fixed- and floating-rate ABS indices," note Barclays Capital ABS analysts.

The European CMBS market was also fairly subdued, Bank of America Merrill Lynch securitisation analysts observe, as a result of many market participants leaving for holiday and others holding inventory in expectation of greater demand in September. "Even though volumes are light, we think bidders are closing the gap towards offer prices and we expect pricing to rally on stronger demand in September, barring new macro concerns," they add.

Deal news
• ECB president Mario Draghi's Jackson Hole address has reinvigorated the QE debate. Confirmation that preparations for outright ABS purchases are progressing quickly is being seen as a clear positive for senior peripheral European RMBS bonds, for which the summer correction has provided attractive levels for investors to re-enter the trade.
• The Countrywide shelf could face the brunt of increased principal modification rates, if Bank of America pursues a strategy of aggressively modifying loans in RMBS deals to fulfil the requirements of its Department of Justice settlement (SCI 27 August). This is because the bank has sold the servicing rights for most of the BOAMS, BAFC, FFML, FFMER and MLMI shelves.
• A recent Wells Fargo analysis suggests that cash-out loans with lower FICO scores show the highest delinquencies across GSE risk-sharing securitisations. By taking the cash-out delinquency trend into consideration and applying a pre-defined historical credit event rate to the remaining collateral, RMBS strategists at the bank estimate that cumulative credit events for risk-sharing deals will range from about 3.4% to 6%.
• Five firms have so far completed eight transactions for US$4.4bn in the single-family rental (SFR) securitisation market's first year. Growth in the sector is slowing, however, as the stock of distressed properties lessens and foreclosure timelines in judicial states lengthen.
• The liquidation last month of the US$19.5m Acropolis Gardens Realty Corp loan, securitised in WFRBS 2013-C15, is being seen as an unwelcome precedent for the CMBS market. The loan was resolved with a 1.3% loss, while repaying US$1.5m of prepayment penalties to the XA tranche - about half of the US$3.2m yield maintenance penalty due (see SCI's CMBS loan events database).
• The EMF-UK 2008-1 non-conforming RMBS has been restructured. Up until July 2014, the issuer had received distributions in respect of stipulated claims totalling US$35m and the remaining claims were monetised in an auction on 24 July, culminating in sales proceeds worth US$15.3m.
• Amortisation across US CLO 1.0 deals is positively impacting overcollateralisation cushions, according to a recent JPMorgan study. The US 2005-2006 vintage average senior/subordination level stands at 33.4%/6.8% versus US 2007 vintage at 16.5%/4.7%.
• Staples confirmed in its 2Q14 earnings results that it expects to close approximately 140 stores in North America this year, 80 of which have already been closed during the second quarter. Around 13 of the properties identified are believed to collateralise CMBS conduit loans.

Regulatory update
• The US SEC last week unanimously adopted final rules under Regulation AB 2 that substantially revise the offering process, disclosure and reporting requirements for registered offerings of ABS. It also adopted new requirements for nationally recognised statistical rating organisations to enhance governance, protect against conflicts of interest and increase transparency around credit ratings.
• The US SEC has approved amendments to TRACE dissemination rules, stipulating that CUSIP-level prices and trade sizes be publicly disclosed on ABS trades starting on 27 April 2015. CMBS, RMBS, CLOs, CDOs and SBA deals are excluded from the rules.
• The US Fed is to hold an open meeting on 3 September to vote on final regulations implementing the liquidity coverage ratio (LCR) requirement in the US. Proposed rulemaking regarding margin requirements for non-cleared swaps will also be discussed during the meeting. The FDIC is to also discuss changes to the supplementary leverage ratio (SLR).
• The FHFA has reached a settlement with Goldman Sachs, related companies and certain named individuals. The settlement addresses claims alleging violations of federal and state securities laws in connection with private-label MBS purchased by Fannie Mae and Freddie Mac between 2005 and 2007.
• Ocwen disclosed in its 2Q14 10-Q that it had received an SEC subpoena related to its dealings with and interests in Altisource, HLSS and AAMC. The filing also stated that the SEC plans to issue the servicer with another subpoena related to the recent amendments to its financial filings (SCI 19 August).

Deals added to the SCI New Issuance database last week:
American Residential Properties 2014-SFR1 Trust; AmeriCredit Automobile Receivables Trust 2014-3; Arena NHG 2014-1; Arrowpoint CLO 2014-3; Babson CLO 2014-II; BAMLL 2014-520M; BBCMS 2014-BXO; BHMS 2014-ATLS; Black Diamond CLO 2014-1; Catamaran CLO 2014-2; Cavalry CLO IV; COMM 2014-FL4; Ford Credit Floorplan Master Owner Trust A Series 2014-4; KVK CLO 2014-3; Macquarie Equipment Funding Trust 2014-A; Medallion Trust Series 2014-2; Monroe Capital CLO 2014-1; Taurus 2014-FR1.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-4; BACM 2006-5; BSCMS 2006-PW13; BSCMS 2007-PW15; CD 2006-CD3; CD 2007-CD4; CD 2007-CD5; CGCMT 2007-C6; CSFB 2001-CP4; CSMC 2006-C4; EPC 3; GCCFC 2005-GG3; GECMC 2005-C1; GSMS 2007-GG10; GSMS 2010-C1; GSMS 2012-GCJ7; JPMCC 2006-LDP9; JPMCC 2007-LDPX; LBUBS 2005-C5; LBUBS 2005-C7; LEMES 2006-1; MLCFC 2006-3; MSC 2007-T25; MSC 2011-C2; PNCMA 2000-C2; TITN 2007-CT1; WBCMT 2005-C17; WBCMT 2005-C18; WBCMT 2006-C26; WBCMT 2006-C28; WINDM X.

Structured Finance

TRACE update to impact esoteric liquidity?

The US SEC has approved amendments to TRACE dissemination rules, stipulating that CUSIP-level execution prices and original face values be publicly disclosed on ABS trades starting on 27 April 2015. The new rules are expected to have a limited impact on traditional ABS sectors, but could affect liquidity in non-traditional asset classes.

SEC-registered and 144a ABS - defined as securitised products that are collateralised by any type of financial asset - will have their execution prices disclosed under the amended rules. Barclays Capital ABS analysts expect that these securitisations will include all traditional ABS (such as credit card, student loan, auto and equipment deals) and most non-traditional ABS (such as timeshare loan, aircraft lease, whole business, railcar and container deals). CMBS, RMBS, CLOs, CDOs and SBA deals are excluded from the rules.

During the first 180 days after 27 April 2015, ABS data must be reported to FINRA within 45 minutes of when the trade was executed. After the 180-day transition period, trades must be reported within 15 minutes. Trades that occur after 6:30pm on any day must be reported within 15-45 minutes after the TRACE system opens the next morning.

However, to maintain some level of confidentiality regarding trading strategies, FINRA will not disclose whether trades are bought from or sold to a customer or whether the trade is executed between two dealers. In addition, precise trade sizes will not be disclosed when the original face value of the trade is greater than US$10m. Instead, they will be denoted as 'US$10m+'.

The Barcap analysts suggest that the new rules may reduce ABS inventories among some dealers, potentially decreasing liquidity for large investors that need to buy and sell sizeable amounts of paper in a short period. However, smaller investors could benefit from the new rules, as liquidity may not be as much of a concern and the increased price transparency may provide them with some comfort that prices are not significantly off-market.

"Overall, we believe that the effect of the new rules will likely be limited for traditional ABS sectors, where price transparency is already widely available and where many investors stand ready to buy and sell large blocks of ABS on a regular basis," the analysts observe. "Liquidity in non-traditional asset classes, on the other hand, may be more heavily affected, as some dealers may decide to stop making markets in these sectors. This could make it more difficult for investors to sell a significant amount of non-traditional ABS quickly, since dealers may prefer to find another investor to take the other side of the trade, rather than purchase the security for their own accounts."

CS

CMBS

LEMES 2006-1 refinancing underway

IEF Capital, the sponsor of the €1.05bn Dutch CMBS transaction Leo-Mesdag, has completed the first refinancing under the restructuring terms agreed with noteholders in June (see SCI's CMBS loan events database). The amount refinanced is €218.6m, which exceeds the €200m target amount.

Berlin Hyp and Helaba reportedly provided €197.8m for a term of eight years to finance 18 of the properties in the portfolio. Based on the €305.9m property valuation reported in the March 2014 restructuring proposal, Bank of America Merrill Lynch European asset-backed analysts estimate that the lenders advanced the new debt at a 64.7% LTV ratio.

IEF Capital is understood to have contributed the remaining €20.8m. The BAML analysts expect that further capital injections will be required from IEF Capital, as new lenders may be unlikely to match the current 72% LTV of the pool. For prime property in the Netherlands, they believe that senior debt may be limited to LTVs of around 65% or lower.

The sponsor is also responsible for the cost of unwinding the affected hedging, which is estimated to have been roughly €15m. "This suggests to us that IEF Capital has a strong commitment to the properties, which we view as a positive with respect to refinancing the remaining debt," the analysts observe.

Principal proceeds from the refinancing were allocated to the notes on a modified pro-rata basis: the first €150m was allocated on a pro-rata basis and the remaining €69m was paid sequentially to the class A notes. All future refinancing proceeds will be allocated sequentially between the notes.

The analysts suggest that the composition of the remaining pool is comparable to that prior to the refinancing. In terms of tenant distribution, the exposure to Hema remains unchanged at roughly 42% of the pool, while exposure to V&D has decreased from 21% to 18% and exposure to Bijenkorf has increased by about 1% to just under 36%. Similarly, the amount of A1 quality property remains unchanged at 50% of the pool, the amount of A2 quality property decreased slightly from roughly 37% to 34% and the amount of B1 property increased from roughly 12% to 15%.

In terms of rental income, the average rental yield of the property portfolio remains unchanged at 5.5% and the average lease maturity remains unchanged at 12 years. The allocated loan amount of the remaining properties represents 72.4% of their market value, compared to 72.2% before the refinancing, according to the analysts.

The next €200m refinancing is due by February 2015. The analysts anticipate that IEF Capital will achieve the refinancing targets of €200m each six months and repay the loan in full by the August 2016 maturity date.

As such, they calculate that the remaining WAL of the loan is 1.2 years. Based on the sequential allocation going forward, the class A WAL is estimated to be 0.84 years, the class B and C WAL is 1.5 years, the class D WAL is 1.84 years and the class E WAL is 2 years.

The loan and note margins are scheduled to step up from the August IPD. The analysts estimate that roughly 32bp of the 35bp loan margin step-up will be paid to the notes from this date, when the margin on each class of notes is scheduled to double from its current level.

CS

RMBS

ECB purchases to support periphery

ECB president Mario Draghi's Jackson Hole address enlivened the QE debate again last week. Confirmation that preparations for outright ABS purchases are progressing quickly is being seen as a clear positive for senior peripheral RMBS bonds, for which the summer correction has provided attractive levels for investors to re-enter the trade.

Morgan Stanley's year-end target for Spanish senior RMBS is 75bp-80bp, with Italian and Portuguese paper settling at 5bp-10bp around the Spanish levels. This represents 2-3 price point upside potential from current levels, according to European asset-backed analysts at the bank.

They explain that their constructive view is informed by two key considerations: attractive valuations (that aren't currently pricing in aggressive ECB purchases); and low fundamental and technical risks. With indicative spreads at 105bp-140bp, most peripheral RMBS bonds continue to trade 15bp-20bp wider than the June tights, even though a number of other asset classes are back to pre-summer tights. Similarly, the pick-up offered by peripheral RMBS over corresponding government bonds, covered bonds and core RMBS are all at recent highs.

"Given that the ABS market is not pricing in any concrete announcements on purchases in the ECB's September meeting, we see good upside optionality at current valuations," the Morgan Stanley analysts observe.

Peripheral economies (arguably except Italy) remain in recovery mode and collateral risks remain correspondingly well-contained, they add. "In fact, rating actions have been positive due to a combination of higher sovereign ceilings and better-than-expected performance. As more bonds transition back into investment grade and into the single-A minus bucket, we expect demand from real money investors and banks to improve. Against this backdrop, even a limited purchase of securitised assets by the ECB is likely to be a significant technical positive for spreads, given the current dearth of supply."

The easiest QE option for the ECB is seen as purchasing assets that are already eligible as repo collateral. Of the aggregate €1.5trn ABS outstanding, continental European assets account for around €1.1trn and €761bn satisfy ECB eligibility requirements. Assuming that the central bank is willing to buy 5%-10% of the eligible pool, the analysts suggest that the potential size of an ABS purchase plan could be circa €40bn-€80bn.

Although the focus is likely to be on SME securitisations, they expect any potential purchase programme to include a broader subset of assets benefitting the real economy, including RMBS and consumer ABS. The purchases are also likely to be across primary and secondary markets, as was the case with the ECB's covered bond purchase programme in the past.

The analysts conclude that the involvement of an external consultant - recently confirmed as BlackRock Solutions - should help expedite the operational aspects of secondary purchases, such as collateral quality and pricing scenarios.

CS

RMBS

Countrywide valuations eyed

The Countrywide shelf could face the brunt of increased principal modification rates, if Bank of America pursues a strategy of aggressively modifying loans in RMBS deals to fulfil the requirements of its Department of Justice settlement (SCI 27 August). This is because the bank has sold the servicing rights for most of the BOAMS, BAFC, FFML, FFMER and MLMI shelves.

Barclays Capital RMBS analysts estimate that modification rates for Countrywide deals could potentially increase by a factor of two to three. To earn consumer relief credit on principal forgiveness, the post-modification LTV must be reduced below 100% or the principal must be reduced to achieve a post-modification debt-to-income ratio of 25%. Loans that have already undergone a HAMP modification could still be modified through this programme for credit, providing the DTI is below 25% or the LTV is below 100%.

The total balance of delinquent loans across the Countrywide shelf is about US$25bn, with another US$7.5bn in previously modified current loans. To earn US$2bn in credit from the Countrywide securitisations, US$4bn in principal forgiveness would be required, according to the Barcap analysts.

This amounts to about a 16% reduction in balance on all delinquent loans or a 12% average reduction, if Bank of America also reduces balances on previously modified current loans. To achieve this over a three- to four-year period, a US$1bn-US$1.5bn reduction in principal per year would be required.

The pace of principal forgiven on these shelves over the past six months was about US$275m. A US$1bn-US$1.5bn per year rate would consequently require a doubling or tripling of principal modification rates on Countrywide pools.

Given the bonuses on offer if the modifications are completed before August 2015, the bank is incentivised to ramp up modification rates in Countrywide deals over the next 9-12 months. "Such a programme of indiscriminate principal modifications could dramatically affect valuations, especially on mezzanine bonds, which could get written off much sooner if principal mod rates pick up dramatically," the analysts observe. "These bonds are already pricing in somewhat higher valuations relative to fundamentals because of expectation from a settlement pay-out and a pick-up in mods would make that pay-out even less likely. Any indiscriminate increase in principal mods would also increase loss expectations and increase average life projections for the senior bonds that are in sequential or pass-through form, adversely affecting prices on those as well."

The analysts indicate that one push-back to such a ramp-up may be the fact that on most of the deals delinquent loans are serviced by approved sub-servicers. As a result, Bank of America may have limited control on directing aggressive principal modifications on these loans. 100,000-120,000 loans are sub-serviced by third-party servicers, which is close to the number of total delinquent/previously modified current loans.

CS

Structured Finance

Corporate trust service beefs up

Stuart Draper has joined Global Loan Agency Services as director, business development. He was previously a senior sales manager, client development at BNP Paribas Securities Services. His specialities include distressed debt funds, project finance and CDOs.

Structured Finance

Rating agency names new ceo

Scope Ratings has appointed Torsten Hinrichs as ceo, effective immediately. He replaces the European rating agency's founding ceo Florian Schoeller, who will become chairman of the supervisory board.

Hinrichs has almost 30 years of industry experience and has worked for a number of firms across the US, Europe and Hong Kong. Before joining Scope he was md at S&P, where he spent 15 years and served as regional head for German-speaking Europe, Scandinavia and Eastern Europe, with responsibility for market relationships, business growth and profitability as well as media and regulatory outreach.

Structured Finance

Investment management unit adds two

Tikehau Group has added two new members to its Tikehau IM private debt team. Nathalie Bleunven joins from Indigo Capital France, while Luca Bucelli was most recently at AlixPartners.

Bleunven was a managing partner at Indigo and before that spent 26 years at Société Générale. She will use her knowledge of French midcaps and her experience in structured finance and credit analysis to accelerate the development of the Tikehau's corporate direct lending activity.

At AlixPartners, Bucelli was involved in financial and operational restructurings with French and Italian clients. He has also worked at Lehman Brothers and will focus on developing Tikehau's Italian activities.

Insurance-linked securities

Cat bond pro takes reinsurance role

Mt Logan Re has recruited Mark Booth to serve as its head property reinsurance underwriter. He will be based in Bermuda.

Booth was most recently head of cat risk management at Aspen Insurance. Before that he was a senior modelling analyst at Axis Specialty, where his role included cat bond pricing.

ABS

Pub performance to prompt upgrades

Spirit's latest quarterly trading statement confirms strong performance for both the managed and tenanted businesses over the last fiscal year. With profit exceeding market expectations of £57.3m, Barclays Capital analysts expect Sprit's bonds to be upgraded back to investment grade.

The analysts note that the current leverage ratios are already consistent with an investment grade rating. Greene King's class B bonds rated triple-B and triple-B minus are levered around 6.5x debt to EBITDA, while Spirit is 5x levered and lower rated.

Furthermore, Spirit's free cashflow debt service coverage ratios are now 1.5x, meeting Fitch's criteria for a triple-B rating. Fitch and the other two main rating agencies are due to review Spirit by the end of the year, with a one notch improvement to double-B plus expected.

The class A5 and A7 bonds continue to look attractive, say the analysts. They see around 10 points of upside potential over the next year for the A5s as spreads move below 200bp.

Structured Finance

SFR maturity risk underestimated?

Elevated cashflow leverage, refinance risk and dependence on property liquidation for debt repayment remain key reasons for a single-A rating cap on single-borrower single-family rental securitisations, according to Fitch. The agency believes that the justification in presale reports for recent SFR transactions of elevated leverage with current property values and the likelihood of repayment through the foreclosure and sale of the properties may lead participants to materially underestimate maturity default risk and an issuer's ability to refinance.

SFR transactions do not fully amortise, exposing issuers to term as well as maturity risk. Term default risk is mitigated by the currently low interest rates and interest rate caps.

However, loans with balloon payments will default at maturity if they're not refinanced. To refinance, secured lenders expect property cashflow to cover expected principal and interest payments.

A common measure of leverage and refinance capacity for income producing real estate is debt yield. For three recent SFR transactions - Silver Bay Realty 2014-1, American Residential Properties 2014-SFR1 and Invitation Homes 2014-SFR² - other rating agencies calculate debt yields in the 5% range. In contrast, debt yields for Freddie Mac K Series CMBS are approximately 9%.

Debt yield represents a loan's maximum interest rate based on a property's cashflow. Using the Invitation Homes transaction as an example, Fitch notes that the break-even interest rate on the loan is 4%.

If a take-out lender required a minimum debt service coverage ratio of 1.2x, the break-even rate refinance rate drops to 3.34%. If the take-out lender also required the loan to amortise on a 30-year schedule, the break-even interest rate drops to approximately 2bp.

Given the leverage on SFR transactions, Fitch suggests that it is unlikely a secured lender would refinance the current debt, absent significant improvement in property cashflow. The agency also believes that debt repayment predicated on foreclosure and liquidation is contrary to sponsor plans to build SFR portfolios and is inconsistent with high investment grade ratings.

CDO

CDOs on the block

Auctions will be conducted for Kleros Preferred Funding and Trainer Wortham First Republic CBO V on 22 September. The securities will only be sold if the proceeds are at least equal to auction call redemption amounts. Although it may not have been the highest bidder, the collateral manager of the former transaction will have the option to purchase the collateral for a purchase price equal to the highest bid therefor.

CDS

Crossover tranche levels projected

Markit is set to begin supporting trading in iTraxx Crossover tranches next month. The new tranches will be based on the Crossover Series 22 index, split across 0%-5%, 5%-10%, 10%-20% and 20%-100%.

Credit derivative strategists at JPMorgan project a broad indication of the trading levels of the new tranches using the iTraxx Crossover Series 21 portfolio and a representative correlation surface - the CDX.HY Series 21 portfolio. Based on the belief that in practice investors may choose to trade the 0%-5% and 5%-10% tranche together as a 0%-10% tranche to concentrate liquidity, they roughly estimate that the three-year 0%-10% tranche will trade at 18.5% plus 500bp and the five-year 0%-10% tranche at 44% plus 500bp.

The iTraxx Crossover is due to be expanded to up to 75 constituents at the next roll, likely resulting in a large number of wide credits entering the index. "As a result, we expect Crossover Series 22 to trade notably wider than Series 21; if this is the case, then we would expect the actual tranche levels to trade wider [as well]," the JPMorgan strategists observe.

Assuming 75 constituents are included in Series 22, one default in the index with a 40% recovery would cause a 0.8% loss to the index, according to the strategists. This means that the 0%-10% tranche could absorb 12 defaults before being wiped out.

CLOs

CLO overcollateralisation examined

Amortisation across US CLO 1.0 deals is positively impacting overcollateralisation cushions, according to a recent JPMorgan study. The bank analysed OC trends in a universe of 508 US CLOs (representing US$227bn) and 154 European CLOs (€52bn) issued between 2005 and 2013. CLOs with less than 40% of their original capital structure remaining were excluded to minimise distortion from outliers.

Among the key findings from the study is that the US 2005-2006 vintage (representing an average deal factor of 65%) average senior/subordination level is 33.4%/6.8% versus US 2007 vintage (average deal factor of 84%) at 16.5%/4.7%. No US 1.0 or 2.0 transactions are failing their subordinated OC test, which is positive for equity cashflows.

US CLO 2.0 OC cushions have crept higher: senior, mezzanine and subordinated OC in this segment rose by an average 0.23%, 0.20% and 0.16% since January 2014. JPMorgan CDO strategists suggest that this is less due to amortisation, as in the case of 1.0s, and more from par building.

Meanwhile, European CLO 1.0 mezz and sub cushions continue to underperform US CLOs, given prior credit loss and less reinvestment - albeit the average sub OC test is still passing by some margin. However, the strategists note that European 2.0 performance (2013 vintage) is comparable to the 2013 US vintage.

They point out that managers can add value by trading assets as loan prices appreciate, which can result in the building of extra par and OC since inception. "In that sense, factors including launch time, warehouse strategy and manager size can also complicate the analysis."

CMBS

Weakening credit metrics eyed

Competition among originators in the US conduit CMBS market has continued to weaken loan credit metrics in the past few months, S&P says. The most recently priced deals have seen a higher percentage of loans with an interest-only (IO) component and a growing share of lodging collateral, both signs of increased future credit risk, according to the agency.

S&P has also observed certain underwriting trends that don't necessarily show up in the headline metrics, but that it believes could still contribute to higher expected defaults and loss severities for recently securitised loans. These include the increased use of straight-line rental growth assumptions, combined with expenses that underwriters assume remain flat for the loan's life, cash-out refinancings where a snapshot of very strong recent performance is used for a property valuation versus a longer-term history, and aggressive assumptions that future expenses will be below historical figures.

Other trends that the agency is monitoring include a potential financing shortfall in 2017 and subsequent surplus in 2018, issuer debt service coverage ratios rising and deal sizes increasing.

CMBS

Sunrise II/Treveria II disposals progressing

CR Investment Management has sold three properties backing the Sunrise II/Treveria II loan, securitised in the EMC 6 and DECO 2006-E4 CMBS. All retail assets, the properties are located across Germany in Duderstadt, Kempten and Ranstadt.

The Duderstadt property comprises four freehold retail units with an occupancy rate of 95%, while the Kempten property is a department store with a 100% occupancy rate. The Ranstadt building, currently a local supermarket, is a mixed-use property suitable for redevelopment.

CR was appointed asset manager for Treveria D Silo in February 2013 (see SCI's CMBS loan events database), at which time the portfolio consisted of 48 retail assets, across 250,000 square-metres and 43 German cities. Today, the portfolio consists of 43 properties with a market value of approximately €150m.

The firm is in negotiations with a broad range of both local and institutional investors for a further 22 properties from the portfolio, which are in the due diligence process. It is "very optimistic" that there will be further progress in Q3 and Q4.

CMBS

Japanese, US CMBS enforcement weighed

Japanese CMBS enforcement mechanisms (EMs) are weaker when compared with US CMBS in instances where representations and warranties (R&Ws) are breached, Moody's says in its latest Structured Thinking: Asia Pacific publication. While R&W conditions in Japanese and US CMBS transactions are similar, there is greater variation between deals in Japan, partly because the US CMBS industry has adopted standardised R&Ws.

For example, Japanese CMBS do not provide creditors with put-back rights. Nonetheless, creditors may claim any damages caused by any breach of R&W and the breach of some R&W can constitute a default event for an underlying loan.

Further, in Japan, SPE borrowers - all of which are unrated - provide R&Ws on the properties to lenders in the loan agreement. Third-party reports or due diligence on the properties provide some level of comfort to the lenders, according to Moody's.

In addition, Japanese loan sellers - typically investment grade financial institutions - provide R&Ws to trustees in the trust agreement when the loan sellers entrust the loans to the trustees. However, overall, R&W conditions at the trust level are general and do not include specific R&Ws on the properties.

Japanese and US CMBS exhibit similar R&W conditions, including in key areas such as the legal right to properties, licenses, and permits and insurance. Such conditions provide investors in Japan and the US with the assurance that R&W providers would take responsibility if any R&W conditions are breached.

But some R&W items that are specific to Japan do not occur in the US. For example, many Japanese CMBS deals have R&Ws specifying that transaction parties and tenants should not include members of crime syndicates.

Moody's says that US CMBS are easier to compare than Japanese CMBS because the former involve greater disclosures and use model R&Ws adopted by the Commercial Real Estate Finance Council. Detailed information on R&Ws in Japanese CMBS is usually not publicly disclosed and is provided only to prospective investors.

CMBS

Acropolis Gardens liquidation scrutinised

The liquidation last month of the US$19.5m Acropolis Gardens Realty Corp loan, securitised in WFRBS 2013-C15, is being seen as an unwelcome precedent for the CMBS market. The loan was resolved with a 1.3% loss, while repaying US$1.5m of prepayment penalties to the XA tranche - about half of the US$3.2m yield maintenance penalty due, according to Barclays Capital CMBS analysts.

Acropolis Gardens is a cooperative housing complex in the New York City borough of Queens and the loan was originated by National Cooperative Bank (NCB), a specialty lender to Co-ops. NCB also appears to have been the master and special servicer for the loan.

The Acropolis Gardens loan was originated in June 2013 and soon went delinquent after missing its January 2014 payment (see SCI's CMBS loan events database), though it is unclear from special servicer commentary why the delinquency occurred. Nevertheless, the liquidation report indicates that undisclosed litigation on the property was discovered during the delinquency process.

The Barcap analysts suggest that if this litigation existed before the loan was originated, it could indicate a possible breach of representations and warranties and result in the trust recouping the loss taken through a rep and warranty buyback. It does not appear that yield maintenance penalties are required to be paid on rep and warranty claims, however.

The liquidation report also indicates that the value of the Co-op had risen to US$138m from US$128m at securitisation and that no construction was active at the property - implying that the US$4m capital improvement escrow which the loan funded may remain outstanding. Even taking into account other potential litigation mentioned in the liquidation report, the LTV was still likely below 25%, the analysts note.

"Based on the data provided, it appears the borrower had enough equity to repay the loan with prepayment penalties," they observe. "The Co-op likely repaid the loan with a refinance, since the Co-op likely did not have enough cash to repay the loan, based on reserves detailed at underwriting. With the low LTV, it seems that a new lender could have provided enough financing to repay prepayment penalties in full, as well as the loan balance to a point that losses would not be taken."

Yet the liquidation report justifies the acceptance of the partial payment because of substantial foreclosure and potential bankruptcy costs. "The decision suggests that in similar situations, a borrower could use the threat of bankruptcy to avoid paying prepayment penalties, even when the loan has ample equity backing it. In all, this loan sets an unwelcome precedent and we recommend being especially watchful when investing in XA IOs," the analysts conclude.

CMBS

Loss severities drop

Aggregate loss severity for US CMBS loans dropped significantly in August from July's record high, according to Trepp. The move is despite large losses on the US$116m Bethany Roll-up Portfolio and US$68.7m SilverCreek Portfolio Phase I loans (see SCI's CMBS loan events database).

The average loss severity came in at 37.56% in August, down from July's 60.80%. Liquidated loan volume stood at US$993.97m in August, up from July's US$605.47m. Of the loans that were liquidated, 71% by balance fell into the greater than 2% loss severity category.

The August loss severity was more than 10 percentage points lower than the 12-month moving average of 47.64% and well below the 43.96% average since January 2010.

The number of loans liquidated in August was 87, resulting in US$373.30m in losses. The average disposed balance was US$11.42m, also below the 12-month average of US$14.22m.

Since January 2010, servicers have been liquidating at an average rate of US$1.19bn per month. However, volume has remained below the US$1bn mark for three months in a row now.

Risk Management

LCR vote scheduled

The US Fed is to hold an open meeting on 3 September to vote on final regulations implementing the liquidity coverage ratio (LCR) requirement in the US. Proposed rulemaking regarding margin requirements for non-cleared swaps will also be discussed during the meeting.

Together with the FDIC and the OCC, the Fed had initially proposed LCR regulations that would assign a 100% outflow amount to any unfunded commitment provided by a US bank to an SPE, while excluding ABS and private-label MBS from the high-quality liquid asset category (SCI 25 October 2013).

Risk Management

SLR vote scheduled

Similar to the US Fed, the FDIC is to hold an open meeting on 3 September to vote on final regulations implementing the liquidity coverage ratio (LCR) and to discuss margin requirements for covered swaps (SCI 28 August). But it also plans to discuss changes to the supplementary leverage ratio (SLR). Proposed changes to the SLR would assign a 20% or 50% credit conversion factor to all unused credit and liquidity commitments of less than or equal to one year and greater than one year respectively in determining the amount of those commitments required to be included in the SLR denominator, according to Chapman and Cutler.

Risk Management

Risk management seen as core competency

A global survey undertaken by the Professional Risk Managers' International Association (PRMIA) and SunGard reveals an attitudinal shift among risk managers, who are now increasingly viewing risk management as a strategic core competency rather than simply a regulatory obligation. The survey captured the views of over 200 risk managers about their collateral and exposure management priorities.

Of the key findings from the survey, stress-testing capabilities ranked as a lower-than-expected priority, behind collateral consolidation and asset and exposure valuation. This is particularly surprising in light of the impending ECB comprehensive assessment, due to be published in November, which will disclose those under the baseline and adverse scenarios of stress tests. This suggests that while regulatory requirements remain important, banks are beginning to focus more on longer-term risk management capabilities.

The calculation of regulatory limits exposures also ranked as a lower-than-expected priority. However, over 96% of respondents confirmed that combined credit risk and collateral management capabilities were important - further highlighting how firms are increasingly taking a longer-term view of risk management rather than a short-term tick-box exercise.

Other priorities for risk managers revealed by the survey include centralisation of customer information to drive increased accuracy, improved monitoring of counterparty risk, enhanced reliability of risk data and better single-borrower exposure and monitoring internal limits.

Risk Management

Initial margin impact surveyed

New regulations governing the margining of non-centrally cleared OTC derivatives are rapidly being developed by regulators. In order to assess expected market impact and how the road to compliance is being navigated, InteDelta has undertaken a global survey of derivatives market participants.

Over 80 institutions responded to the survey (59% of which were banks and the remainder were asset managers), which was conducted during April to June. Among the key findings is that the bilateral OTC derivative market is not expected to disappear any time soon.

The survey group overwhelmingly believes that material portfolios of bilateral OTC derivatives will still exist over the medium term. As such, strategic systems and processes are being put in place to meet the new regulations.

Industry views on initial margin models appear to be converging, although banks and asset managers have different preferences and drivers. Most banks and asset managers believe that they will ultimately be required to calculate and exchange IM on non-cleared OTC trades, even taking into account the fact that current regulations only mandate this for firms with outstanding OTC derivative notional amounts greater than €3trn (for 2015), phasing down to €8bn (for 2019).

Banks and asset managers are divided on how they would like to see IM modelled, however. Of the asset managers surveyed, 62% would currently prefer to use the standard regulatory IM schedule. Conversely, 63% of the banks surveyed prefer an industry-wide internal model. Both banks and asset managers agree that they would like to see any such IM model implemented, the preferred method being to use an industry standard margin calculation utility.

Regarding haircut calculations, asset managers favour using the regulatory standardised schedule, together with an industry-wide shared vendor service for the implementation of this model. Banks favour an industry internal model. However, for its implementation, the results were split - with an in-house built model narrowly preferred over an industry-wide shared vendor service.

Banks favour re-hypothecation wherever regulation permits it, with 57% of bank respondents believing that all available opportunities for re-hypothecation are critical. Asset managers appear to have a more pragmatic approach to re-hypothecation: if the final rules are operationally difficult, 63% of participants would choose not to re-hypothecate.

The InteDelta survey suggests that preparations are being made in most areas, although work towards certain issues is on hold pending further clarity: 74% of banks have some sort of change in progress, compared to 63% of asset managers. Only a quarter of banks are waiting for rules to become final before electing to undertake any change, as opposed to 37% of asset managers.

Over 90% of survey respondents believe that there will be a significant increase in complexity as a result of the new rules. Nearly 80% of respondents indicated that documenting and implementing agreements, policies and procedures to comply with the new rules will require a high work load. No participant feels that it will be easy to comply in this area.

Finally, the survey results indicate that front office interest and ownership of collateral and margin is gaining further impetus, with almost half of bank responses coming from front office participants. 90% of survey participants feel that they cannot keep their current organisational set-up and comply with the regulations. 81% of bank respondents indicated that margining in the future will require greater input/ownership from the front office.

RMBS

Continuous pricing offered

Interactive Data Corporation has launched a continuous fixed income evaluated pricing service. The offering aims to provide clients with greater pre-trade transparency support and price discovery capabilities on a continuous basis throughout the trading day.

The firm says that coverage across multiple fixed income asset classes, in addition to its extensive global team of 200 evaluators responding to pricing inputs in real time means that the service can support a variety of uses and applications within the industry. It offers streaming evaluated pricing via three delivery options: through a FIX market data feed; via the Vantage application; and through its Apex reference data product.

TBA MBS and MBS Pass-throughs are among the asset classes covered by the new pricing service, which will be extended across other products in the coming months.

RMBS

Scottish redenomination a 'remote risk'

This month's referendum on Scottish independence would only create a remote risk for some UK RMBS transactions if a 'yes' vote resulted in currency redenomination, Fitch suggests. The agency notes that deals affected by such a move benefit from significant credit enhancement, while lenders and policymakers would have time to develop contingency plans. Nevertheless, no mechanisms are in place in transactions to address the risks of possible redenomination.

Whether an independent Scotland would keep the UK pound has been a key point of contention between the pro- and anti-independence campaigns ahead of the referendum. If Scotland did adopt a different currency, mortgage loans made under Scottish law for properties in Scotland would likely be re-denominated in the new currency, but RMBS notes issued under English law would still need to pay noteholders or currency swap providers in sterling (SCI 18 June).

This would happen in more than two-thirds of the 150 Fitch-rated UK RMBS deals that have a portion of Scottish loans in their portfolio. The average proportion of Scottish loans in these portfolios is around 8%, but for around 15 issuers it is more than 10%. The highest exposure is 23%.

The agency notes that the value of any new Scottish currency relative to sterling would be uncertain. However, an orderly redenomination would not be comparable to what Greek RMBS deals might have faced, had Greece suddenly left the eurozone. An initial analysis of UK deals suggests that many have built up significant subordination since they closed, to the point where even if the Scottish loans were devalued, there is unlikely to be any impact on the majority of triple-A rated notes.

However, in this scenario, junior notes that have lower credit enhancement could suffer large rating migrations if redenomination led to portfolio losses that were not addressed by issuers as the value of the assets fell relative to the value of the liabilities. While this may not cause losses to noteholders, inter-creditor disputes might become more likely, according to Fitch.

"We think that lenders would use the 18-month lag between a 'yes' vote and independence, proposed for 24 March 2016, to address redenomination risk to maintain relations with investors," the agency observes. "Potential actions might include buying back Scottish loans, adding additional subordination commensurate with the risk or introducing FX swaps into transactions, for example. While it is unclear whether in a small number of transactions redenomination would create a termination event for FX swaps that reference the notional amount of the performing balance of the loans, we would anticipate an industry-wide solution to be developed and applied in these cases."

RMBS

Operational risk limited for Spanish RMBS

Moody's reports that operational risk in Spanish RMBS has been limited, following the placement of some financially stressed Spanish banks under the Bank of Spain's administration between March 2009 and May 2014. The agency does not expect any payment disruption relating to non-performance of a servicer, cash manager and trustee because all Spanish RMBS transactions benefit from third-party independent cash managers and back-up servicer facilitators.

"The risk of servicer disruption has been low - despite the servicers undergoing severe financial distress - due to the efficacy of the Spanish management companies acting as independent cash managers/trustees, as well as the support provided by the Bank of Spain," says Alberto Barbachano, a Moody's vp-senior analyst.

Institutions that came under public administration perform administration and collection duties for more than 40 Spanish RMBS deals. Moody's says that the credit quality of these deals greatly depends on the efficacy of transaction parties, including the servicer, cash manager and trustee.

Nevertheless, the overall performance of Spanish RMBS deals has deteriorated after the placement of servicers under administration. Banco CAM and Catalunya Banc SA deals, for instance, have experienced a material increase in arrears above Moody's Spanish 90+ RMBS index. The deals lacked effective back-up servicing arrangements, resulting in higher delinquencies and a lower recovery rate.

"Although the administration of servicers has mitigated the risk of payment disruption on notes in the short term, the risk could remain in the long term if the servicing has not been transferred," says Barbachano. "A disruption in servicing can lead to a decline in servicing quality and, ultimately, the credit quality of portfolios."

RMBS

Risk-sharing losses projected

A recent Wells Fargo analysis suggests that cash-out loans with lower FICO scores show the highest delinquencies across GSE risk-sharing securitisations, based on current performance trends. By taking the cash-out delinquency trend into consideration and applying a pre-defined historical credit event rate to the remaining collateral, RMBS strategists at the bank estimate that cumulative credit events for risk-sharing deals will range from about 3.4% to 6%.

"Our credit event estimates suggest that the non-rated classes may realise a fair amount of losses, while the triple-B rated securities would likely avoid write-downs," they observe.

On average, about 1.9% (in unpaid principal balance) of the loans in risk-sharing deals are cash-out loans with FICO scores of less than 700. With each subsequent risk-sharing transaction, the percentage of such loans has increased, according to the Wells Fargo analysis.

In reviewing Fannie Mae's historical data release information, 2000-2004 loans with original LTVs of 60%-80% had a weighted average credit event rate of 2.85%, while loans with original LTVs greater than 80% had a 1.5-2 times higher default rate than the 80% or less LTV loans. Using this as a proxy for the performance of risk-sharing deals, the strategists assume a 2.85% credit event rate for the purchase and refi loan purpose cohorts for all of the deals with loans with original LTVs of 60%-80% and a 5.7% credit event rate for the purchase and refi loan purpose cohorts for the higher LTV collateral groups/deals. In applying the applicable severity schedule to each transaction's projected cumulative credit event ranges, they find that losses will likely range between 0.9% and 1.8%.

Thus far total delinquencies across risk-sharing transactions average only about 20bp, while cumulative credit events are marginal. "The purpose of the loans continues be a driver of delinquency, with cash-out loans underperforming compared to purchase and refi loans. In addition, the data continue to show delinquency trends for cash-out loans is highly correlated to the credit quality of the borrower but not specifically tied to CLTVs," the strategists conclude.

RMBS

Servicer scrutiny intensifies

Ocwen disclosed in its 2Q14 10-Q that it had received an SEC subpoena related to its dealings with and interests in Altisource, HLSS and AAMC. The filing also stated that the SEC plans to issue the servicer with another subpoena related to the recent amendments to its financial filings (SCI 19 August).

Barclays Capital RMBS analysts note that it appears as though the agency has similar concerns as New York Department of Financial Services Superintendant Ben Lawsky. Namely, the SEC seems to be concerned about the potential for conflicts of interest between Ocwen and its affiliated entities - especially given that the companies all share the same chairman, William Erbey.

"The SEC's subpoena follows investigations by the NYDFS, the CFPB and the FHFA into Ocwen's and other non-bank servicers' business and servicing practices. Given the number of agencies involved and the convoluted nature of Ocwen's business relationships, we would not be surprised if the investigations take some time to be resolved," the Barcap analysts observe.

Meanwhile, the CFPB last week issued a bulletin outlining its expectations for servicers when mortgage loans that are in the process of being modified are transferred to a successor servicer. The CFPB stated that it would "carefully scrutinise transfers of loans with pending loss mitigation applications or approved trial and permanent modification plans" to ensure that the transfer of relevant documents to the new servicer occurs in a timely and comprehensive manner. Servicers that do not comply with the CFPB's servicing rules regarding transfers may be subject to corrective measures by the agency.

Although the CFPB's bulletin may slow the transfer of MSRs to non-bank servicers and add additional expenses to future servicing transfers, Ocwen's and Nationstar's MSR purchases have already declined significantly this year as a result of the NYDFS' regulatory investigations, the analysts note.

RMBS

Lehman RMBS restructured

Fitch has withdrawn its single-C rating on EMF-UK 2008-1's existing class A3 tranche and assigned triple-A, double-A and single-A minus ratings to the new replacement class A1a, A2a and A3a notes, following a restructuring of the non-conforming RMBS transaction. Up until July 2014, the issuer had received distributions in respect of stipulated claims totalling US$35m and the remaining claims were monetised in an auction on 24 July, culminating in sales proceeds worth US$15.3m.

As part of the restructure, these recoveries were converted into a sterling equivalent amount of £29.8m, which were combined with the existing fully funded cash reserve. The class A3 notes were then redenominated to sterling from euro and the class B notes written down by 4.86% (£2m).

Various extraordinary payments were also made using cash recoveries from the terminated hedging agreement, supplemented by a reserve fund of £1.5m. On the September 2014 IPD, £31m will be applied towards restructuring costs, a payment to residual certificateholders, establishment of a reduced £1.1m reserve fund and partial redemptions on the class A and B notes. Following the partial redemptions, the level of credit support available to the class A1a, A2a and A3a notes totalled 32.5%, 25% and 15.8% respectively.

The weighted average margin on the class A1a, A2a and A3a notes is 110bp, lower than the pre-restructured class A3 note margin of 150bp. The economic loss from the note margin reduction was, however, compensated by the transaction's variation payments totalling £8.1m.