Contents

ABS

ABS secondary supply up

US ABS bid-list volume was up from the prior session to reach around US$270m yesterday. Much of the supply came from student loan and credit card bonds, but a significant amount of aircraft ABS paper was also circulating.

SCI's PriceABS data picked up a number of names from the session, including the student loan ABS EDUFP 2006-1A A2 tranche, which was talked in the low/mid-90s and traded successfully. The bond had also been talked in the low/mid-90s in the prior session and was covered at that level last month.

In the credit card space, the CCCIT 2013-A5 A5 tranche was talked at 5, having never before appeared in the PriceABS archive. The CCCIT 2013-A8 A8 tranche, meanwhile, was talked in the high single-digits, having been talked at plus 6 on Monday.

Many of the names picked up by PriceABS yesterday come from the aircraft sector, such as the ACST 2007-1A G1 tranche, which was talked in the mid/high-90s and covered at 98. The bond had also been talked in the mid/high-90s at the start of the week and its last recorded cover, from August 2013, was at 90.69.

AIRSP 2007-1X G1 was talked in the mid/high-80s and was covered at 84.3. The tranche first appeared in PriceABS in March 2013, when price talk was in the low-80s.

Another G1 tranche, this time BBAIR 2007-1A G1, was talked in the mid/high-80s and high-80s and was covered at 85.1. Price talk for the bond on Monday was also in the mid/high-80s to high-80s.

PALS 1999-1A A1 was talked in the mid-single digits. Before this week, the tranche appeared in PriceABS twice in September two years ago, with price talk in the mid-20s, and was also talked at that level on its first appearance in the archive on 31 August 2012.

Beyond those sectors, the BLX 2005-1A A business loan tranche made a rare appearance and traded successfully. The tranche had not been seen in the PriceABS archive in very nearly a year, since it was last traded on 17 September 2013.

Finally, the franchise loan ABS FFCA 1999-2 WA1C tranche was talked in the mid-100s. That was the same level at which it had been talked on Monday.

JL

CMBS

CMBS secondary activity climbs

US CMBS secondary market activity picked up yesterday, with BWIC volume more than doubling to over US$80m. CMBS 2.0 and 3.0 junior triple-As tightened a little, but otherwise spreads were generally unchanged.

SCI's PriceABS data recorded several covers from the session, such as the COMM 2006-C8 AM tranche which was talked in the 80 area and covered at 69. The tranche was talked at swaps plus 85 last month and was also last covered at 85, back on 24 March.

Another AM tranche to be successfully covered was LBUBS 2006-C6 AM, which was talked at around 70 and covered at 71.5. That tranche was covered last Thursday at 75 and before that was covered on 8 August at plus 79.

The LBUBS 2007-C7 A3 tranche was covered at 75 yesterday. The previous recorded cover price for the tranche was 72.5 on 13 March, while the tranche was also covered at 72 on 12 March.

There were also covers for the CSMC 2007-C2 A3 and CSMC 2007-C5 A4 tranches, at 100 and 110, respectively. The A3 tranche first appeared in PriceABS in May 2012, when price talk was at 335, while the A4 tranche made its PriceABS debut in July of that year, when it was covered at 270.

Covers were also recorded for a pair of GSMS tranches. GSMS 2007-GG10 A4 was covered at 79, having been covered at 82.4 in June, while GCCFC 2007-GG11 A4 was covered at 87, having last been traded on 29 July.

Of the other names of note, the MSC 2007-IQ14 A4 tranche was covered at 90. That tranche too was traded on 29 July and before that was covered at 99 on 20 March. There was also price talk in the low/mid-400s and at plus 415 for the MSC 2006-HQ8 C tranche.

Lower down the capital structure, price talk for the WBCMT 2006-C23 D tranche was in the low-200s and at plus 265. That tranche's only recorded cover was at 99.55 in October 2013, although it was since talked in the high-200s on 15 May.

JL

CMBS

Weaker bounce for CMBS

The European CMBS market remains fairly quiet, despite the better than expected announcement from the ECB yesterday (SCI 5 September). However, prices have been creeping up since last week and further moves are expected.

"CMBS has not been very active over August but we started to see a little more last week. Prices have moved up but there has not been the same post-ECB rally in CMBS as there has been for example in the RMBS market," reports one trader.

The trader notes that Italian paper such as Gallerie 2013 has been tighter, while Infinity Soprano has gone from trading in the high-94 area at the start of the week to the 96 area now. He says TMAN 6 has also rallied by around a point.

SCI's PriceABS data shows slight movement for the MESDG DELT A tranche, which was covered yesterday at 94.875. That tranche had also been out for the bid on Tuesday, when it was talked at high-93 and covered at 94.08.

The MESDG tranche was covered at 93.92 on 26 August. It started that month with a cover at 93.5.

"For names like Gallerie, yesterday was about the offer but now it is all about the bid side. The market has been pleasantly surprised by how much the ECB is pledging to do," says the trader.

He continues: "Right now dealers are also a bit cagey about offering out too much. Clients want to see where things settle and the dealers are with them on that, so once there is a little more clarity I think we will see an increase in activity."

JL

Secondary markets

CLO BWIC circulating

The first CLO BWIC of the day, scheduled to trade at 15:00 New York time, has begun circulating.

The four line list consists of $500,000 of BACUS 2006-1A A, $2m of CORNR 2007-1A A1S, $3m of RACEP 2006-3 A and $3m of STNY 2007-1A A1. STNY 2007-1A A1 is the only bond to previously trade on BWIC in the last three months, according to PriceABS, and covered at 99h on 13 August.

Secondary markets

Subprime list disappoints

The US$1.5bn RMBS BWIC the market had been waiting for came out yesterday but met with weak execution. The list consisted mainly of subprime collateral and accounted for almost the entirety of the session's supply.

Two of the 18 line items on the list did not trade, while another five covered at or below minimum dealer price talk. The only bond to be covered at the upper end of guidance was MANA 2007-A2 A1.

Secondary markets

ECB sparks RMBS rally

European RMBS has rallied on the back of the ECB's confirmation that it will commence ABS purchases. The rally has been particularly pronounced in the periphery and in non-conforming RMBS.

"Spanish RMBS has been very active since the announcement and even Portugal, which was starting to look tight, has traded up quite a bit. Non-conforming mezz was trading well even before the announcement but has traded up since," says one trader.

Even prime Dutch and UK RMBS have moved tighter. "This announcement looks even better than expected and the market is reflecting that," says the trader.

Secondary markets

European ABS/RMBS edge tighter

Trading activity seen so far this morning in European ABS and RMBS indicates a further move tighter following on from the post-ECB rally seen at the end of last week.

Traders expect the market to remain solid overall until the next ECB announcement on the ABSPP scheduled for October. However, some profit taking from fast money accounts is expected this week, particularly in peripheral paper, which could buck the trend temporarily.

Profit-taking could boost BWIC volumes, but so far only two short Euro lists are scheduled for today. €10m of BBVAL 2007-1 B is slated for 15:00 London time and a further €3.5m of BBVAL 2007-1 B combined with €3.5m of EMERM 4 B at 16:00.

Secondary markets

Euro CLOs reap ECB benefit

European CLO secondary spreads across the capital structure either held firm or narrowed last week on the back of healthy flows. The moves are credited, in part at least, to the market being buoyed by the ECB's ABSPP announcement despite CLOs not being included in the programme. The positive impact for CLOs, driven by increased interest and activity in European structured finance markets more broadly, is expected to continue.

There are already two euro CLO lists circulating in the BWIC market for this week. Tuesday at 15:00 London sees a €22.5m three line list consisting of AVOCA VIII-X A1, ORX 1X C and QNST 2006-1X A1. On Thursday at 15:00 there is a five-line all equity list: €14.05m AXIUS 2007-1X SUB, €3m CELF 2006-1X F, €5m CGMSE 2014-1X SUB, €20m CRNCL 2007-2X SUB and €5m HARVT 8X SUB.

The only two bonds on those lists to trade in the last three months, according to PriceABS, are CGMSE 2014-1X SUB and CRNCL 2007-2X SUB. They covered at 93.75 on 14 August and 62h on 17 June respectively.

Secondary markets

Aussie dollar deals up for grabs

A 12 line BWIC containing primarily Australian dollar-denominated RMBS tranches is circulating for trade at 08:30 London time tomorrow.

There are ten Australian RMBS on the list: A$14m CRGT 2007-1 A3, A$81m LT 1 A, A$284m MEDL 2006-1G A2, US$27m PROGS 2007-1GA 1A, A$14m PROGS 2007-1GX 2A, A$158m PUMA P11 BA, A$50m SMHL 2009-2 A, A$12m SMHLG 2007-1 A3, A$41m TORR 2005-1 A2 and A$29m TORR 2007-1 A. In addition there is one A$50m slice of UK RMBS FOSSM 2012-1X 2A1 and an A$34m piece of Australian auto ABS NABS 2012-1M A2.

None of the deals listed has appeared in PriceABS in the last three months.

Secondary markets

US CLO BWIC pipeline builds around equity

Nine US CLO BWIC lists are now circulating for trade this week and a significant proportion are focused on equity tranches.

The current schedule sees a total of $710m out for auction made up of 50 line items, of which 22 are slices of equity. Today currently has three lists scheduled, two at 10:00 New York time and one at 13:30.

First up is a seven line $26m double-B list, consisting of CGMS 2013-4A E, CIFC 2013-4A E, DRSLF 2014-31A E, OZLM 2014-6A D, SNDPT 2013-2A E, WINDR 2014-1A E and WITEH 2014-1A E. None of these bonds has traded on PriceABS in the last 3 months.

The second 10:00 list is a $21.5m two line equity list with NEUB 2012-12A Sub and NEUB 2012-12X Sub. Again neither bond has covered on PriceABS in the last three months, but they do both also appear on the third list of the day.

That third list is a five line equity and single-A list totalling $24.15m. The additional names on the list are ATRM 7X PREF, DRSLF 2014-31X Sub and TRNTS 2014-1X C and, again, haven't been seen as traded on PriceABS in the last three months.

Secondary markets

Euro ABS eases

Activity in the European ABS market has eased today, following another active day yesterday where spreads tightened still further by the close.

"We saw good two-way flows again yesterday with trading late into the day, but it's a bit quieter today," says one trader. "Yesterday's flows were a continuation of the flurry of activity post-ECB and were mostly hedge fund driven playing the momentum, but we saw some real money and bad bank involvement as well."

With reduced secondary volume, attention will switch to the BWIC market where only one list is currently scheduled for today - a Spanish and Irish mezz two line list now due at 16:00 (originally reported as being due yesterday). It consists of €3.5m of BBVAL 2007-1 B combined with €3.5m of EMERM 4 B. According to SCI's PriceABS the two deals were being talked yesterday at M70s and M50s respectively.

Secondary markets

Floating interest

A collection of senior FFELP auction rate bonds being offered on BWIC today at 12:00 New York time is generating some interest in the US ABS market thanks to the relative rarity of the line items involved.

The BWIC consists of floating rate student loan ABS from three trusts. From the Education Loan Asset-Backed Trust there is a total of $50.4m original face from five bonds: ELAB 2003-1 A7, ELAB 2003-1 A8, ELAB 2003-2 2A2, ELAB 2003-2 and ELAB 2003-2 2A13. From NorthStar Education Finance there are also five bonds but totalling $69.75m: NEF 2007-1 A4, NEF 2007-1 A5, NEF 2007-1 A6, NEF 2007-1 A7 and NEF 2007-1 A8. From the College Loan Corporation there are two bonds totalling $18.2m: COLLE 2003-1 A6 and COLLE 2002-1 A5.

Bids are required on each trust on an all or none basis.

Secondary markets

Euro CLOs go higher

Heavy trading volumes have continued in the European CLO secondary market throughout today pushing prices higher, particularly in 1.0 deals.

At the same time, the €22.5m three line BWIC list due at 15:00 London time has traded strongly with covers around or higher than talk. AVOCA VIII-X A1 was covered at MH98, ORX 1X C at MH99 and QNST 2006-1X A1 at MH99.

Secondary markets

FDIC offers triple-As

The FDIC's Trups CDO auction process will reach its seventh iteration with an auction scheduled for 11:00 New York time this Thursday, 11 September. This time the auction consists of tranches all originally rated triple-A.

The $94m ten line list consists of: $18m ALESC 1A A1, $11m ALESC 2A A1, $3m ALESC 3A A1, $24m REGDIV 2004-1 A1, $2m TRAP 2003-4A A1B, $8.5m TRPE 2005-1A A2, $5m TRAP 2003-5A A1B, $8m TRAP 2004-6A A1B, $4.5m USCAP 3 A1 and $10m USCAP 3 A2. Only one deal is shown as trading on SCI's PriceABS in the last three months - TRAP 2003-5A A1B, which covered at 79h on 20 August.

Secondary markets

CDO/CLO BWIC pipeline builds

On the back of rising prices in Europe and increasingly strong bids in many sectors in the US yesterday, the CDO/CLO BWIC pipeline for the next two days has filled up considerably. There are now seven lists due today and already 11 slated for tomorrow.

From today's schedule the most notable lists are the HLCN synthetic CRE CDO quartet (see SCIWire 2 September) due at 11:00 New York time and a pair of pre-crisis CDOs due at 15:00 London. Those CDOs are €8.5m of ABS CDO FAXT 2004-1X A-3 and $7m of emerging markets CDO GEML 2006-3A C.

The two deals are both being talked in the low 90s according to PriceABS. Their last trades seen on the service had covers of 81 on 6 December 2013 and M80s on 23 May 2013, respectively.

Secondary markets

Euro ABS/MBS softer

European ABS and RMBS markets opened softer this morning following the direction seen into the close last night and, in turn, broader credit trends. CMBS spreads are still unchanged, but the tights seen over the past week look set to be tested in all three deal sectors over the next two days as BWIC supply is on the increase and profit-taking opportunities are taken.

The first of that supply is a 10 line RMBS list due at 13:00 London time. It consists of €300,000 BERAB 2011-1 A1, €100,000 DMPL VIII A1, €200,000, £300,000 GFUND 2011-1 A2, GRANM 2005-1 A5, €100,000 GRANM 2005-2 A5, €100,000 HERME 18 A1, €300,000 STORM 2012-4 A1, €300,000 STORM 2013-1 A2, €100,000 STORM 2013-2 A2 and €200,000 STORM 2012-4 A2.

Of those bonds, six have covered on PriceABS in the last three months: GFUND 2011-1 A2 at 101.061 on 17 July, GRANM 2005-1 A5 at 99.496 on 19 June, GRANM 2005-2 A5 at 99.56 on 11 July, HERME 18 A1 at 100.27 on 17 July, STORM 2012-4 A2at 102.773 on 2 July and STORM 2013-2 A2 at 101.57 on 30 July.

Structured Finance

LCR, SLR requirements finalised

The US Fed, the FDIC and the OCC have released a notice of final rulemaking that implements minimum liquidity coverage ratio (LCR) requirements for banks and depository institutions. They have also issued a final rule modifying the definition of the denominator of the supplementary leverage ratio (SLR).

In response to industry comment, the final LCR rule has been amended to apply a 'look through' approach to determining outflow amounts for commitments to SPEs that do not issue securities or CP and that are consolidated subsidiaries of certain customers or counterparties of a bank, according to a Chapman and Cutler memo. However, ABS, covered bonds and private-label MBS remain excluded from the definition of high quality liquid assets (HQLA) used to calculate the numerator of the ratio.

Citi securitised products strategists believe that agency CMOs that have simple and standardised structures will be considered as HQLA, while ruling out more exotic structures like supports and derivatives. "We think this interpretation is in line with market expectations, since banks have been adding simple GN CMO structures to meet their LCR requirement since last October," they explain.

Other adjustments to the rule include a revised approach to address maturity mismatch during a 30-day period to focus more explicitly on outflows and inflows with contractual maturity days, as well as overnight funding from financial institutions. The stress period for bank holding companies and savings and loan companies subject to the modified LCR has also been lengthened to 30 days, while the LCR requirement has been reduced to 70% from 100%.

The LCR will apply to all banking organisations with US$250bn or more in total consolidated assets or US$10bn or more in on-balance sheet foreign exposure and to their subsidiary depository institutions that have assets of US$10bn or more. The rule also will apply a less stringent, modified LCR to bank holding companies and savings and loan holding companies that do not meet these thresholds, but have US$50bn or more in total assets. Bank holding companies and savings and loan holding companies with substantial insurance or commercial operations are not covered by the final rule.

The effective date of the final rule is 1 January 2015, with covered companies required to maintain a minimum LCR of 80% beginning on that date. But implementation of the daily calculation has been delayed to 1 July 2015.

Modified LCR holding companies will be required to calculate and maintain their LCRs monthly starting on 1 January 2016.

The Fed estimates that if the draft final rule were currently in effect and fully phased in, all covered depository institution holding companies and modified LCR companies would be required to hold an aggregate of approximately US$2.5trn of HQLA, with a shortfall for firms that currently do not meet the standard of approximately US$100bn. The Citi strategists note that demand for HQLA is likely to be driven by: the current shortfall to meet the LCR; the amount of buffer banks would like to have in the LCR ratio; and the change in liabilities going forward. They estimate that banks will likely add US$300bn of HQLA over the next two years.

This figure is based on the assumption that bank assets grow by US$500bn over the next two years, which would increase their HQLA requirements by US$100bn. Some of the large banks already have excess HQLA, but if smaller banks target a 10%-15% buffer, they would need to add approximately US$100bn of HQLA. However, as well as adding HQLA, banks can try to extend their borrowing terms - which should reduce their HQLA requirement from an LCR perspective.

Meanwhile, the final SLR rule has been modified in a manner consistent with recent changes agreed to by the Basel Committee. The revisions apply to all banking organisations subject to the advanced approaches risk-based capital rule and are expected to increase the aggregate measure of exposure across firms.

Chapman and Cutler notes that the final rules apply graduated credit conversion factors (CCFs) to off-balance sheet commitments that would reduce the portion of total leverage exposure associated with these commitments. More specifically, off-balance sheet exposures would be multiplied by the appropriate CCF under the standardised approach for risk-weighted assets under the US Basel 3 rule.

Commitments with an original maturity of one year or less that are not unconditionally cancellable by the bank are assigned a 20% CCF, while commitments with an original maturity of more than one year are assigned a 50% CCF. The final rules do not distinguish between unfunded securitisation credit and liquidity commitments and other types of commitments in applying these CCFs.

Certain public disclosures required by the final rule must be made starting in 1Q15 and the minimum SLR requirement using the final rule's denominator calculations is effective from 1 January 2018.

CS

Structured Finance

SCI Start the Week - 8 September

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

Pipeline
The first week of September saw the pace of deals joining the pipeline quicken. The week's additions consisted of eight ABS, one ILS, one RMBS, four CMBS and two CLOs.

The ABS comprised: US$273m CPS Auto Receivables Trust 2014-C; £100m E-CARAT 4; US$112.672m Foursight Capital Automobile Receivables Trust 2014-1; US$196.545m Grain Spectrum Funding II Series 2014-1; US$300m OSCAR US 2014-1; US$1.06bn Santander Drive Auto Receivables Trust 2014-4; A$500m Series 2014-1 REDS EHP Trust; and US$734m World Omni Automobile Lease Securitization Trust 2014-A.

The ILS entrant was US$150m Golden State Re II, while the RMBS was US$329.95m Sequoia Mortgage Trust 2014-3. US$513m American Homes 4 Rent 2014-SFR², US$1.4bn COMM 2014-UBS5, US$1.33bn FREMF 2014-K39 and US$1.5bn WFRBS 2014-C22 accounted for the newly-announced CMBS, while the CLOs were €413m Harvest X and €400m Sorrento Park CLO.

Pricings
ABS accounted for the majority of last week's pricings. A couple of RMBS and three CLOs also printed.

The ABS new issues consisted of: €770m Bilkreditt 6; US$550m Capital One 2014-A4; US$275m California Republic Auto Receivables Trust 2014-3; £1bn Driver UK Two; and €1.075bn Silver Arrow Compartment 5. £150m Boston Mayflower Finance 2014 and £1.39bn Gosforth Funding 2014-1 accounted for the RMBS pricings, while the CLO prints were a €202m Dryden XXVII CLO tap, US$370.5m JMP Credit Advisors CLO III and US$518.5m Mountain View CLO 2014-1.

Markets
The US ABS market got back on track quickly after the Labor Day holiday, as SCI reported on 3 September. Bid-list volume on Tuesday was over US$250m, with SCI's PriceABS data showing credit card paper dominating supply. Among the names out for the bid was CCCIT 2014-A6 A6, which was talked in the low-20s.

US non-agency RMBS prices have been largely immune to macro volatility, but there could be weakness if broader markets fall again, note Barclays Capital ABS analysts. "Non-agencies stayed firm this week, even as broader markets fluctuated, and as per TRACE trading volumes remained low in the short post-Labor Day week. STACR/CAS LCF M2/M3s rallied and tightened another 5bp-15bp and are now trading 40bp-50bp below their month-ago levels, though still 50bp-70bp above their June tights," they observe.

The US CMBS secondary market was not as fast out of the traps as ABS, but did pick up on Wednesday (SCI 4 September). BWIC volume more than doubled to reach US$80m during the session.

European CMBS was also fairly quiet, even after the ECB's purchase programme announcement (SCI 5 September). "CMBS has not been very active over August, but we started to see a little more last week. Prices have moved up, but there has not been the same post-ECB rally in CMBS as there has been for example in the RMBS market," reports one trader.

Finally, while European CLOs will not benefit directly from the ECB's planned asset purchases, the market is expected to benefit indirectly. Volumes were up last week as spreads tightened across the capital structure, both before and after the ECB meeting, report Bank of America Merrill Lynch European securitisation analysts.

They add: "The spread tightening was most evident at the bottom of the capital structure for longer-duration bonds, with 2.0 double-Bs tightening around 30bp over the week, and with trades taking place at around 580-590bp DM."

Deal news
• Five UK non-conforming RMBS have cured their pro-rata triggers since May, taking the total number of deals in the segment paying on a pro-rata basis to 23, according to Morgan Stanley figures. Given continued improvement in arrears performance, the sustainability of these cures is believed to be high.
• 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.
• Blackstone has reportedly purchased Solana Business Park - which secured a US$360m loan securitised in JPMCC 2007-LDPX and BACM 2007-1 - for US$180m. The liquidation is expected to result in interest shortfall reimbursements and a write-down reimbursement for the former transaction.
• 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.
• Chimera Investment Corp has acquired the rights to approximately US$4.8bn of seasoned residential mortgage loans through the purchase of subordinate notes and trust certificates in Springleaf Mortgage Loan Trusts 2011-1, 2012-1, 2012-2, 2012-3, 2013-1, 2013-2 and 2013-3. By purchasing these securities, the REIT may over time terminate the securitisation trusts by redeeming all outstanding bonds at par and obtain the underlying mortgage collateral in accordance with each respective trust indenture.
• 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, Sprit's bonds are expected to be upgraded back to investment grade.
• More managers are expected to tap CLO 2.0 deals after Dryden XXVII Euro CLO 2013 (SCI 19 August) became the first European post-crisis transaction to tap its ability to issue additional notes. The Dryden tap yielded net proceeds of €194m, with the note terms remaining the same.
• 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.

Regulatory update
• The US Fed, the FDIC and the OCC have released a notice of final rulemaking that implements minimum liquidity coverage ratio requirements for banks and depository institutions. They have also issued a final rule modifying the definition of the denominator of the supplementary leverage ratio.
• The US Fed, the Farm Credit Administration, the FDIC, the FHA and the OCC are seeking comment on a proposed rule to establish margin requirements for swap dealers, major swap participants, security-based swap dealers and major security-based swap participants. The proposed rule would establish minimum requirements for the exchange of initial and variation margin between covered swap entities and their counterparties to non-cleared swaps and non-cleared security-based swaps.
• 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.
• The ECB is to modify the loan-level reporting requirements for ABS backed by auto loans, leasing receivables, consumer finance loans and credit card receivables that are used as collateral in Eurosystem monetary policy operations and are unable to satisfy the timeline announced on 27 November 2012. As of 1 October, bonds for which the mandatory level of compliance with reporting requirements has not been attained and for which the data provider has neither given an explanation for that non-compliance nor provided an action plan for achieving full compliance will become ineligible for use as Eurosystem collateral.

CMBS

Hope note recoveries examined

As the use of hope note CMBS modification wanes in the US, more information is becoming available on their performance in a liquidation. Although many hope notes have posted 100% loss severities, some have seen meaningful recoveries.

Based on a recent Barclays Capital study, B-notes on smaller balance loans and multifamily-backed loans, as well as thinner B-notes and those with lower A-note LTVs tend to have higher recoveries. CMBS analysts at the bank suggest that this could be due to respectively weaker bargaining power of small loan sponsors, higher recovery of valuations in the multifamily sector, the leverage of thinner B-notes to small changes in property valuations and lower A-note LTVs having more value that can flow to the B-note.

Several B-notes have managed to pay off with 100% recovery so far. However, many of these were special cases - such as bankruptcy modifications or extreme property recoveries - and the Barcap analysts do not expect this to become the norm.

"In assessing B-notes' potential for non-zero recoveries, we would look for strong sector/area and property appreciation, loans with stronger strategic refinance or prepayment protections, and loans with thinner preferred equity and a thinner B-note relative to the overall size of the loan," they observe. "Overall, potential recoveries for hope notes are still at risk from strategic pay-offs and large recoveries remain very unlikely. However, we would feel comfortable pricing in 10%-20% recoveries on hope notes where properties have shown significant recoveries."

The analysts note that protections mitigating strategic refinance risk vary from loan to loan, with some providing only minimal protections and others ensuring that the B-note receives its share of the equity at resolution. "Borrowers still have an incentive to refinance once their preferred equity is in-the-money with a preferred return. Since additional gains will have to be split with the B-note, borrowers may wish to refinance to ensure that future gains are not shared with the B-note. However, this is counterbalanced by the reduced below-market coupon rates on rate-modified A-notes, which lessen the incentive to refinance unless NOIs have risen enough to provide a significant cash-out return on the preferred equity."

Close to US$4bn in CMBS loans were modified annually using the A/B-note structure in 2011-2013. But its usage has declined in 2014, due to the combination of fewer delinquent loans, an improving CRE market and increasing credit availability and demand for distressed assets.

The analysts estimate that of all the circa 475 hope note modifications undertaken, about 75 have paid off so far (representing about US$2.7bn in balance), while another US$12bn remains outstanding. Most of the pay-offs have come from modifications carried out between 2009 and 2011.

The distribution of B-note recoveries for all hope note modifications that have paid off so far shows that although the most common outcome is a 100% loss to the B-note, this has occurred on only about 40% of the loan pay-offs (55% by balance). A sizeable portion of loans have seen losses of more than 60% but less than a full loss, while 20% of modifications (5% by balance) have seen full recoveries to the B-note.

Only about 4% of hope note modifications have re-defaulted, according to Trepp data. "In our view, hope note re-defaults have generally been successful in preventing higher losses to these properties, particularly if these properties were sold in distressed markets in 2011 and 2012 or held to accrue interest at rates of more than 5%. However, we expect the overwhelming majority of modifications to at least be able to repay their A-note balance, barring a credit shock to the CMBS universe," the analysts conclude.

CS

RMBS

Non-conforming optionality supported

Five UK non-conforming RMBS have cured their pro-rata triggers since May, taking the total number of deals in the segment paying on a pro-rata basis to 23, according to Morgan Stanley figures. Given continued improvement in arrears performance, the sustainability of these cures is believed to be high.

Four of the recently-cured deals are from Kensington programmes - MPS 2, MPS 3, RMS 21 and RMS 22 - while the other is MPLC 6. Morgan Stanley European asset-backed analysts note that exits via voluntary sales of properties in non-performing loans are helping to improve the arrears performance of Kensington deals at an accelerated pace.

Five deals from the originator have switched to pro rata since December 2013, while MPS 1 and 4, as well as RMS 20 are among the deals the analysts view as top pro-rata trigger candidates. Other candidates include ALBA 2007-1, LMS 1, MANSD 2006-1, MPLC 7 and NGATE 2006-2 and 2007-1.

The analysts note that a majority of the candidates are tripping their 90+ tests by 1-3 percentage points and are likely to cure by end-2014 or early next year. MANSD 2006-1 cured its reserve fund trigger in July and is expected to start paying pro rata from the October IPD.

The other source of upside optionality in the sector - prepayments - is also improving: the average three-month CPR rose from 5.3% in 2Q13 to 6.3% in 2Q14. The increase was driven by a broader subset of transactions, with Kensington deals reporting a slight decline in average CPRs.

However, the analysts suggest that softening mortgage market indicators, the new MMR rules and an impending rate hike may all limit the upside in house prices and hence temper the momentum in voluntary prepayments. "While we continue to be constructive on the asset class from a fundamental perspective and expect performance improvement to slowly spread to the weaker programmes, we think the nascent moderation in housing markets warrants some caution while pricing in prepayment upside. The pro-rata optionality has played out in line with our expectations, but investors can still look for value using this screening tool."

UK non-conforming senior spreads tightened by around 25bp-30bp through end-June, while mezz prices rose by 7-10 points. However, as one of the best-performing sectors in 1H14, the segment was more exposed to the summer volatility. Senior spreads widened by about 5bp-10bp from their tights and prices lower down the capital structure, where the nature of investors is more tactical, dipped by 2-3 points.

Supply may improve due to new issuance and the restructuring of Lehman deals, but the analysts believe that technicals in the sector are well-supported and spreads should maintain a tightening bias into year-end.

CS

Structured Finance

SF vet nets top role

The Investment Industry Regulatory Organization of Canada (IIROC) has appointed Andrew Kriegler as incoming president and ceo. He will also become a member of the IIROC Board of Directors.

Kriegler currently serves as Deputy Superintendent of the Office of the Superintendent of Financial Institutions (OSFI), an executive position he has held since August 2013, with responsibility for the supervision of more than 400 federally regulated financial institutions. He has over 25 years of experience in the financial services industry, including in areas such as debt capital markets, securitisation and fixed income trading.

Structured Finance

Incapital makes securitisation hire

Incapital has hired Lawrence Schechter as capital markets md. He will lead the firm's securitisation efforts.

Schechter was previously at London-based Schechter & Co, where he oversaw all aspects of debt finance, equity-linked finance, lease finance and financial and strategic advice. He has also served as head of debt capital markets at Bear Stearns and worked in equity derivatives at Lehman Brothers.

Structured Finance

Capital markets pair appointed

TMF Group has recruited David Bell and Mary Mackintosh, who will join the firm's capital markets and SPV services business. Bell joins as structured finance and loan services director, while Mackintosh becomes UK head of capital markets and SPV services.

Bell will be primarily responsible for TMF Group's loan agent and loan administration services. He joins from BNY Mellon's corporate trust division and was previously at Goldman Sachs and JPMorgan.

Mackintosh's principal focus will be on intermediary client relationships and business development. She joins from Freeth Cartwright Solicitors.

Structured Finance

Distressed debt exec recruited

Victory Park Capital (VPC) has named Gordon Watson principal, charged with opening the firm's New York office. He will primarily oversee the sourcing, execution and management of direct private debt and equity investments in specialty finance, with a focus on acquiring whole loan portfolios.

Watson was previously a portfolio manager focused on distressed debt at GLG Partners. He joined GLG after it purchased Ore Hill Partners (SCI 30 March 2011), where Watson served as a partner.

Structured Finance

Investment adviser names co-president

Todd Owens is joining Fifth Street Management as co-president and a member of the management committee, effective from 29 September. He will be responsible for driving growth in Fifth Street's business by evaluating and executing strategic initiatives, as well as managing institutional capital raising efforts, investor relations and distribution channels.

A 24-year Goldman Sachs veteran, Owens' experience spans a broad range of financial service sectors, including commercial finance, asset management, alternative asset management, commercial banking and business development companies. He held various positions as md and partner at Goldman Sachs, including head of the West Coast financial institutions group, head of the specialty finance group and a senior member of the bank group.

Structured Finance

Finacity beefs up with SF hire

Finacity Corporation has expanded its global client coverage with the engagement of David Viney. A former md at RBS, Barclays, Bank of America and Mizuho, he has extensive experience in the securitisation of both consumer and trade receivable assets and has held senior management positions in Europe, the US and the Middle East. His appointment will augment Finacity's global capabilities in trade receivables financing and its continued expansion into the securitisation and funding of consumer receivables.

Structured Finance

KBRA bolsters ratings analysis

KBRA Analytics has invested in Weiss Residential Research (WRR), with the aim of providing end-users with abundant, creditworthy information. WRR's proprietary technology optimises housing market decisions, having calculated property-specific price indexes for over 45 million homes. The increased resolution of the WRR indexes is designed to provide earlier indications of market changes.

"Kroll Bond Ratings' partnership with Weiss Residential Research continues our effort to provide the marketplace with the most in-depth and useful data," comments Jim Nadler, president and coo of Kroll Bond Rating Agency and a board member of WRR. "We look forward to collaborating with Weiss Residential Research and using their data to further enhance our ratings analysis, as well as jointly developing future analytical products."

Structured Finance

Rival GFI bid prepped

BGC Partners intends to commence a tender offer to acquire all of the outstanding shares of GFI Group. CME and GFI recently announced a deal for CME to purchase GFI's shares and subsidiaries (SCI 1 August).

BGC's offer of US$5.25 per share represents more than a 15% premium to the US$4.55 per share transaction announced by CME. It also represents more than a 68% premium to the price of GFI shares as of 29 July, the last day prior to the CME announcement.

BGC currently owns around 13.5% of GFI's common stock and says the pending transaction with CME deprives GFI shareholders of the appropriate value of their investment, allowing as it does for GFI management to purchase the brokerage business from CME at a discount. BGC says it is willing to engage with the GFI board to negotiate a transaction but has made this offer directly to shareholders as a result of previous refusals by GFI to engage in such discussions.

Structured Finance

SF legal vet brought in

Jones Day has appointed Neil Hamilton to the firm's London office as a capital markets partner. He was previously at Paul Hastings, where his securitisation and structured finance practice had a particular focus on CLOs.

Hamilton has also worked at Clifford Chance, where he was a partner for 12 years. He advises on new issue securitisations in a number of asset classes as well as on repackagings, repo transactions and total return swaps.

CLOs

Credit manager adds trader

Highland Capital Management has hired Chris Hayes as a loan and high yield bond trader. He will be based in Dallas and report to head of structured products and trading Josh Terry.

Hayes will be Highland's primary bank loan, high yield bond and CDS trader for the firm's CLOs, hedge funds, mutual funds and separate accounts trading in the primary and secondary markets. He will be responsible for trade execution and identifying new opportunities.

Hayes joins from Neuberger Berman, where he was a fixed income trader. He has also worked at Federated Investors, HSBC and JPMorgan.

CMBS

Real estate group adds multifamily pro

Greystone Bassuk Group has added Jeffrey Levien in New York. He becomes an md and will assist in the development of creative structured finance products for owners and developers of multifamily assets, reporting to Richard Bassuk.

Levien has more than 20 years of real estate experience. He was previously a partner at Street-Works Development and co-founded Scott-Lawrence Realty & Development. He has also worked as an attorney at Camhy Karlinsky & Stein.

Insurance-linked securities

Industry vets form ILS firm

A new firm has launched to change how catastrophe risk is syndicated in the reinsurance and capital markets. Rewire Holdings intends to form a highly specialised team of capital markets and insurance professionals to originate, structure and distribute reinsurance risk.

Rewire will focus on increasing the transparency, efficiency and execution of capital markets based transactions by developing a web-based closed-end marketplace for insurance companies and investors to transact directly. It is co-founded by Stefano Sola and Richard Pennay, who are joined by founding team members Vincent Myers and Sangyeop Lee.

Sola has 20 years of capital markets experience. He was most recently cio at JGWPT Holdings, where he built the financing and securitisation platform. Pennay has worked as a cat bond structurer since 2006.

Insurance-linked securities

Insurance firm adds ILS vet

Horseshoe Group has appointed Brenton Slade as coo. He will be based in Bermuda and lead the firm's global business operations, focusing on strategy, day-to-day operations, business development and client service delivery.

Slade was previously chief marketing officer at Flagstone Reinsurance. He has also worked at West End Capital Management.

Insurance-linked securities

ILS lawyer joins team in NY

Edwards Wildman Palmer has recruited Robert Underhill as an insurance and reinsurance partner in New York. He will focus on advising hedge and private equity funds, investment banks and insurance and reinsurance companies on a diverse range of subjects, including ILS.

Underhill was previously at Fortress Investment Group, where he was responsible for legal, regulatory and compliance matters for the life insurance investments of various Fortress-affiliated funds. He has also worked at Credit Suisse, Citigroup and AIG.

Risk Management

ICE to buy SuperDerivatives

ICE has entered into a definitive agreement to acquire risk management analytics, market data and valuation services provider SuperDerivatives. Completion of the transaction for around US$350m is expected before the end of the year.

SuperDerivatives provides risk management analytics and systems across all asset classes, including interest rates, FX, credit, equities, energy and commodities. It also provides independent valuation, market data for mark-to-market, multi-asset derivatives front office and risk systems and a multi-asset OTC execution platform.

RMBS

REIT adds mortgage vet

Two Harbors Investment Corp has appointed Beth Mlynarczyk as policy and strategy vp. She has previously worked as an assistant trader at Soros Fund Management and as an associate at Lehman Brothers on the non-agency trading desk.

Mlynarczyk was most recently at the US Treasury, where she served as a senior advisor to the counselor on housing finance policy. Before that she was in the capital markets group at the Treasury, in both roles aiding housing finance policy formulation, including implementation of Dodd-Frank and discussions about reviving the private label securitisation market.

RMBS

UK speciality lender acquisition agreed

Speciality UK residential mortgage lender Kensington will be sold by Investec to Blackstone Tactical Opportunities and TPG Special Situations Partners. The buyers intend to develop Kensington's mortgage lending business and broader speciality finance capabilities.

Ian Henderson has been named as group ceo to lead Kensington's new strategy. He was previously ceo at Shawbrook. Meanwhile, Keith Street will continue to lead the Kensington mortgage business.

ABS

Floorplan ABS set for strong performance

Profitable auto dealer networks supported by healthy demand for and sales of new and used vehicles are helping to position US dealer floorplan ABS for strong performance headed into next year, according to Fitch's annual portfolio review. The agency projects solid asset trust metrics for the sector, including stable monthly payment rates and agings, together with virtually zero trust losses.

"US automobile dealership networks are benefitting from higher auto sales, which are expected to top 16 million new units this year," comments Fitch senior director Hylton Heard. "In-demand new vehicle models, the availability of cheap financing and continued economic recovery are also boosting dealership revenues and profit margins."

The agency's outlook for both asset and ratings performance is stable for the rest of 2014 into next year. This follows one of the most profitable years on record for US auto dealers in 2013, with 2014 on track to exhibit similar dealership profit levels.

However, a number of factors could impact dealers negatively and dent their profits over the next six to 12 months. "Any slow-down in the US economy and a dip in auto sales could crimp dealer floorplan ABS performance," says Heard.

Other potentially adverse developments include: over-production resulting in bloated inventory levels; rising dealership costs, driven by higher floorplanning interest and operational expenses; and fierce competition and/or overexpansion.

Fitch expects intense competition among dealerships over the next year, albeit this is nothing new for the sector. Specifically, dealership acquisitions by larger dealership groups are elevated as they look to expand and buy out existing dealers when opportunities arise. Acquisition activity has already risen this year to above 2013 levels.

Over US$10bn of dealer floorplan ABS issuance is expected this year, with volumes set to rise further in 2015.

ABS

Reporting deadline extended

The ECB is to modify the loan-level reporting requirements for ABS backed by auto loans, leasing receivables, consumer finance loans and credit card receivables that are used as collateral in Eurosystem monetary policy operations and are unable to satisfy the timeline announced on 27 November 2012. As of 1 October, bonds for which the mandatory level of compliance with reporting requirements has not been attained and for which the data provider has neither given an explanation for that non-compliance nor provided an action plan for achieving full compliance will become ineligible for use as Eurosystem collateral.

As of 1 October, the Eurosystem may also temporarily accept non-compliant auto loan, leasing, consumer finance and credit card ABS bonds as eligible collateral on a case-by-case basis and subject to the provision of adequate explanations for the failure to achieve the mandatory score required. For each adequate explanation, the Eurosystem will specify its tolerance stance.

The ECB says that these decisions will help secure a smooth transition to full compliance, while ensuring a level playing field between different classes of ABS at different stages of the compliance process.

ABS

Japanese cross-border ABS prepped

Orico is in the market with a cross-border Japanese prime retail instalment auto loan ABS. OSCAR US 2014-1 will issue US dollar-denominated notes, but is secured by Yen-denominated receivables.

Arranged by Mizuho, the transaction is expected to be sized at US$300m and securitise a ¥39.95bn portfolio of assets. Moody's has assigned provisional ratings to the four classes of notes: P-1 to the A1 class and Aaa to classes A2 to A4.

The two-tier structure involves the issuance of a Yen-denominated bond by Oscar Japan LLC that is purchased by the Oscar US SPV, which then issues US-dollar denominated notes. The latter vehicle will enter into a currency swap agreement to hedge its foreign currency risk.

ABS

SLABS volume continues to shrink

The size of the US student loan ABS subsector continues to shrink as the broader universe expands to record highs, says Fitch. As of 2Q14, outstanding student loans totalled US$1.1trn, of which less than 25% was securitised and funded through the ABS market.

Student loan ABS issuance has fallen significantly in recent years, to US$14bn in 2011 from US$67bn in 2006. "The termination of the FFELP programme four years ago figures to dampen student loan ABS issuance further going forward," says Fitch senior director Tracy Wan.

Government-backed student debt still makes up the vast majority of student loans. However, private loan issuance is showing signs of bouncing back after languishing for the last four years. And the compositional make-up of these loans has improved, according to Wan.

"Private student loan ABS transactions issued after the financial crisis are benefiting from significantly higher credit enhancement and more stringent underwriting standards on the underlying loans," she observes. "As the economy recovers, performance for both federal and private programmes stands to improve."

Structured Finance

ABS strategies outperform

Hedge funds returned an average of 1.4% in August, with average gross market exposure across the industry lower in the month than any point in the last two years, according to eVestment. Credit strategies posted their second consecutive negative month in August, declining by 0.03%, for the first time since the height of the European sovereign debt crisis in 2011.

The majority of losses appear to have come from funds with high yield, Europe and/or MBS-related market exposures. Nevertheless, securitised credit strategies focused on broader ABS markets continue to be one of the industry's best performing market segments.

Structured Finance

ABSPP effect to take time

Moody's says that while measures announced by the ECB last week are broadly credit positive for the euro area, the immediate impact on the economy is likely to be limited. In particular, the rating agency notes that it will take considerable time for purchases of ABS to engender significant alternative credit flows.

The planned purchase programmes represent a clear commitment by the ECB to employ a range of policy tools in an effort to mitigate deflationary risks and boost growth, according to Moody's. In particular, the purchase programmes could provide significant support to euro-area businesses over the longer term.

"Banks could originate and securitise new loans, and then sell the securities on to the ECB or other buyers, boosting credit provision," notes Colin Ellis, chief credit officer for EMEA at the agency.

However, Moody's also notes that the extent to which these measures boost growth will depend on the details. The ECB will buy 'simple and transparent' ABS, but it is unclear exactly what that implies.

Similarly, the purchase programmes may involve a degree of co-purchasing, whereby the ECB does not buy securities on its own. In this instance, there would be a need to find private buyers prepared to engage alongside the central bank.

Furthermore, the ECB has given no formal indication of the potential size of the purchase programmes. Without knowing the scale of purchase programmes, it is difficult to gauge their potential impact.

"Even with large-scale primary purchases, it would still take many months - if not years - before the euro-area securitisation market became a significant alternative funding channel for businesses, given the dominant role of bank lending," says Ellis.

Structured Finance

BWIC information offered

JPMorgan plans to provide BWIC trading volume information to clients via its DataQuery application, with the aim of providing more transparency on ABS secondary activity. The data will be available on aggregate and multiple asset class levels, capturing all of the bid-lists seen by the bank's ABS trading desk.

The data is grouped across the major consumer ABS sectors, with volumes displayed by original face, current face and number of bonds. Each week's trading activity will initially be uploaded on Thursdays, with the objective of eventually uploading the data at the end of each trading day.

JPMorgan's BWIC data suggests that trading volumes in ABS are up by 9% relative to 2013 levels. So far this year, there has been US$45bn (current face) in BWIC activity versus US$41bn at the same time last year.

Auto ABS has seen the most BWIC activity, accounting for 37% of 2014 year-to-date volume. Credit card and student loan bonds account for 25% and 22% of BWIC activity respectively. These trends appear relatively unchanged from those of 2013.

Structured Finance

ECB plan exceeds expectations

Following yesterday's meeting of the Governing Council, ECB president Mario Draghi confirmed that the Eurosystem will purchase a broad portfolio of simple and transparent ABS with underlying assets consisting of claims against the euro-area non-financial private sector under an ABS purchase programme (ABSPP). The announcement has exceeded market expectations.

In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by financial institutions domiciled in the euro area under a new covered bond purchase programme (CBPP3). Purchases under the two programmes will start next month, with formal details announced after the Governing Council meeting of 2 October.

Both existing and new securitisations will be considered under the ABSPP, including residential mortgages and other assets benefiting the real economy. Mezzanine bonds would also be considered, if they are guaranteed.

In terms of the scale of purchases, the number circulating the market is in the order of €500bn. Certainly, Draghi observed that the purchase programmes will have a "sizable impact" on the ECB's balance sheet.

Structured Finance

Strong growth expected for sovereign sukuk

Moody's expects the strong growth momentum in the sovereign sukuk market to be sustained, as both Islamic and non-Islamic governments aim to tap increased demand for Shariah-compliant financial assets and further support their policy goals for Islamic finance. The agency says that demand and liquidity in the market should improve as the sector attracts more global investors.

"The year 2014 has become a landmark year for sovereign sukuk, with the UK issuing its inaugural sukuk, and with Hong Kong and South Africa expecting to conclude sales in September. All three are major non-Islamic countries and the transactions indicate a significant change in the potential size, depth and liquidity of this market," comments Khalid Howladar, Moody's global head for Islamic finance.

Moody's estimates that total sovereign sukuk outstanding now accounts for over 36% of the US$296bn of outstanding sukuk, as of July 2014. The agency expects sovereign sukuk issuance to exceed 2013 levels to reach around US$30bn by end-2014, with the overall outstanding amount to reach US$115bn. Continued expansion of the number of sukuk-issuing governments into 2015 is also anticipated.

"Malaysia and more recently Indonesia have been driving the growth in sovereign sukuk with sales in their domestic markets," notes Christian De Guzman, a Moody's vp and senior analyst. "Together, the two countries account for around two-thirds of total sovereign issuance, as of July 2014, and the remainder of cross-border/international sukuk were offered by a wide array of sovereigns."

Investors' growing comfort with relatively complex Islamic instruments, the increasing financing needs and leverage appetites of some Muslim countries, as well as a desire for stronger investment links with the faster growing economies in the Gulf and Asia are driving this growth, according to Moody's. Further, the dollar-pegged economies in the Gulf could drive an increasing proportion of cross-border, hard currency sukuk issuance and attract more global investors.

Since 2001, 16 governments have issued sukuk instruments. Most recently Sharjah, Luxembourg, Morocco, Tunisia, Egypt, Jordan, Oman, Bangladesh and Kenya have expressed firm intentions to issue sukuk in the short to medium term. Countries including Australia, the Philippines, Russia, Azerbaijan and South Korea have shown moderate interest in the sector, but are unlikely to issue in the near term.

Structured Finance

Reg AB 2 to increase data integrity

Moody's says that the US SEC's adoption of Regulation AB 2 will enhance transparency in publicly offered ABS, which is credit positive for RMBS and auto ABS but credit neutral for CMBS. Overall the agency expects the requirement for loan-level data to result in more scrutiny by sponsors, thereby increasing data integrity.

Third-party diligence firms currently review key loan-level data for a substantial majority of loans in private-label RMBS pools, but controls over data should be stronger once the regulations begin requiring issuers to provide such detail. For RMBS, the level of data disclosure under the new rules is mainly consistent with what rating agencies and investors currently receive for new transactions. But for auto ABS, sponsors do not historically provide loan-level data even to rating agencies.

For both RMBS and auto ABS, Moody's suggests that the requirement to provide for a review of the compliance of representations and warranties (R&W) upon trigger events will also increase data integrity by reducing the chances of defective loans slipping through the cracks and escaping discovery. Similarly, requirements to resolve questions of buying back defective loans will increase the chances that sponsors will remove defective loans from the deal. Post-crisis RMBS generally already include some form of these provisions.

The requirement that ceos certify the accuracy of a transaction's disclosures and design puts personal responsibility on an officer of the depositor, also enhancing data integrity. Finally, the requirement that issuers and/or servicers disclose investors' requests to communicate with other investors makes issuers and servicers more accountable to investors.

Meanwhile, new loan-level disclosure requirements are likely to only marginally increase the information already available to investors for CMBS. CMBS issuers have historically provided investors with granular asset-level information, owing to the nature of commercial real estate and investor demands. The industry's investor reporting package (IRP) currently has the vast majority of required data fields for public offerings under Reg AB 2, Moody's notes.

"Because R&W disputes in CMBS historically have been minimal, even through the financial crisis, the new R&W compliance review requirements and put-back dispute resolution procedures should have little credit impact. Nonetheless, Reg AB 2's requirement to have binding arbitration as a required dispute resolution may reduce the time- and cost-barriers to filing put-back claims, possibly encouraging a larger volume of claims," the agency adds.

Structured Finance

Basel 3 'impediment' highlighted

Capital charges for securitisation exposures under the latest Basel 3 proposals represent an impediment to the development of a confident investor base underlying a healthy European securitisation market, Fitch says. The agency notes that while the proposed Basel securitisation framework involves lower capital charges than under the first exposure draft, the proposals for the external ratings-based approach would still significantly increase risk-weights compared with the existing treatment under Basel 2, for all but the worst-performing asset classes.

"The current capital charges already represent multiples of Fitch's expected losses across all European securitisation sectors. The new framework is particularly punitive for higher-rated tranches, with around six times the current capital required for single-A category senior tranches under the proposal," says Andrew Currie, md in Fitch's structured finance team.

The securitisation framework proposal reflects Basel's stated aim of reducing the differentiation between levels of risk that is present under the current framework. To achieve this, capital charges will increase more for highly-rated tranches, with the largest increase proposed for tranches in the single-A category.

"The proposed framework produces some counterintuitive results. Securitisations that have demonstrated the greatest credit resilience in times of stress are expected to require among the largest increases in capital holdings between the current and proposed frameworks," adds Currie.

For example, capital charges for the Spanish RMBS sector will decline from their current levels based on the proposed framework, reflecting the lower average ratings on these transactions due to the deterioration in underlying asset performance. By contrast, stronger RMBS sub-sectors - including the largest markets of UK and Dutch RMBS - show capital charges that would be 3x-4x higher than their current levels.

CDO

ABS CDO on the block

An auction will be conducted for the Bluegrass ABS CDO II on 27 September. The collateral shall only be sold if the proceeds are at least equal to the redemption amount.

CDO

Trapeza judgement 'positive' for Trups CDOs

A court decision last week in favour of Trapeza Capital Management is positive for holders of Trups CDOs, Fitch says. The court ruled against dismissing the Chapter 7 involuntary bankruptcy Trapeza filed against FMB Bancshares in June, as requested by the bank.

The judge stated that the terms of the indenture and amended trust agreement give Trapeza the right, as the sole creditor, to force liquidation of the subsidiary bank as an option to remedy a default on the note. Although FMB is legally prohibited from making any distributions of interest or principal on Trups without prior approval of the US Fed, it still has the legal duty to satisfy the contractual obligations to Trapeza. The fact that FMB cannot make any payment on its debt to Trapeza does not waive its legal duty to pay, Fitch notes.

While there has been a significant increase in cures over the past two years across the Fitch-rated Trups CDO universe, a large balance of issuers still continue to defer. The agency estimates that 51 bank issuers in 41 Trups CDOs (totalling approximately US$400m) will reach their five-year deferral limit by end-2014.

Of those, 41 banks have written agreements with banking regulators that prohibit them from making distributions on Trups. There have been few cases of deferring banks resuming interest payments while under written agreement with the Fed.

Trapeza Capital Management, on behalf of Trapeza CDO XII, filed a Chapter 7 involuntary bankruptcy petition against FMB Bancshares after the expiration of the deferral period in June. FMB filed a motion to dismiss the involuntary Chapter 7 bankruptcy, claiming it cannot make any payment to its Trups due to the written agreement with the Fed.

"Now that the motion has been denied, FMB has the option to appeal, consent with the Chapter 7 bankruptcy petition or convert to a Chapter 11 bankruptcy petition. A Chapter 11 bankruptcy would give FMB more control over the process, as opposed to a Chapter 7, which is driven by the trustee," Fitch concludes.

CDS

Uncertain direction for Sharp spreads

Tighter credit default swap (CDS) spreads indicate improving market sentiment for Sharp Corporation, according to Fitch Solutions' latest CDS case study snapshot. Where those spreads will head over time remains to be seen, however.

Five-year CDS on Sharp have tightened by 30% over the past month and by 25% just last week. "Credit protection against a default on Sharp's debt is now pricing at the lowest levels in over two years," says Fitch Solutions director Diana Allmendinger. "The boost in Sharp's CDS market sentiment is likely due to its recent deal with Sprint to launch its Aquos Crystal smartphone in the US."

Meanwhile, CDS liquidity for Sharp has climbed and is now trading in the fifth global percentile. "The higher CDS liquidity is pointing to increased uncertainty over the future direction of spreads for Sharp," Allmendinger adds.

CDS

Tightening seen for European financials

Five-year credit default swaps on the European banking sector have tightened significantly over the past month, following a bout of widening earlier this summer, according to Fitch Solutions' latest case study. Banks domiciled in Spain, Portugal and Italy were at the forefront of the tightening, with their spreads firming by 26%, 25% and 22% respectively during the period.

"On average, CDS on European banks have come in 12% over the past month, outpacing the broader region, for which spreads moved 6% tighter over the same time period," comments Diana Allmendinger, director, Fitch Solutions. "Based on our CDS indices, the market is no longer singling out the European financials industry as it had in recent years - with the spread differential between the financials and corporates indices less than 10bp, compared to 60bp a year ago."

CDS

Argentine CDS settled

The final price of Argentine Republic CDS has been determined to be 39.5, following yesterday's auction (SCI 27 August). Eleven dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the Argentine Republic.

CLOs

More CLO taps mooted

Fitch expects more managers to tap CLO 2.0 deals after Dryden XXVII Euro CLO 2013 (SCI 19 August) became the first European post-crisis transaction to tap its ability to issue additional notes. The Dryden tap has now priced, yielding net proceeds of €194m with the note terms remaining the same.

The additional issuance is not only more economical for the manager than issuing a new transaction, but also underlines investor demand for shorter WAL issuance, says the rating agency. More managers are subsequently expected to tap their deals, particularly those managers which are issuing fewer deals each year but still see the opportunity to deploy additional capital.

CLOs

European CLO 2.0 performance surveyed

With all 2013-vintage European CLOs having seen one or two payment dates since issuance, Morgan Stanley CLO strategists surveyed performance so far, focusing on equity. The median annualised distribution to 2013-vintage European CLOs stands at 16%, albeit with significant variation across transactions.

Compared to the median annualised cash distribution one year after closing for legacy European CLOs, 2013-vintage CLOs appear to have outperformed. The Morgan Stanley strategists also expect 2014-vintage European CLO equity tranches to outperform 2013 vintages, due to their higher structural leverage (9.6x leverage versus 7.7x) and higher payment frequency.

However, a comparison of European versus US 2.0 deals is less favourable for the former. The strategists suggest that the main reasons for the outperformance of US CLO equity are that: they have much higher leverage (above 10.5x for the 2013 vintage, compared to 7.7x for European CLOs); and collateral sourcing remains a challenge for European CLO managers, while the larger, deeper leveraged loan market in the US provides managers with more opportunities for active trading.

Of 2013-vintage European CLO 2.0 transactions, 71% pay liabilities semi-annually, while most European loans pay quarterly. The mismatch of payment frequency between quarterly paying CLO assets and semi-annually paying CLO liabilities effectively raises CLO equity investors' borrowing cost by about 10bp, according to the strategists.

"In our view, quarterly paying European CLOs could be more desirable for equity investors. We note that such structures have become more common recently, with 67% of 2014-vintage European CLOs structured to deliver quarterly payments," they observe.

Between European and US CLO 2.0 deals, the strategists believe that credit fundamentals are healthier in the US compared to Europe and that US CLOs contain fewer distressed names. However, ample supply of new paper in the US market contrasts with the more measured European supply, thereby creating a technical positive for European CLO 2.0 equity.

CMBS

CMBS pay-off rate drops

The percentage of US CMBS loans paying off on their balloon date sank sharply in August to 59.3%, the lowest reading since June 2013, according to Trepp. The 12-month moving pay-off average is 70.2%.

Trepp suggests that the lower August reading - and the lower trend over the last few months - may reflect the fact that many borrowers have been racing to refinance in advance of potential rate hikes later this year. As a result, borrowers are paying off loans as soon as they reach their open period, rather than waiting until the loan's maturity date.

By loan count as opposed to balance, 73.6% of loans paid off in August - a slight increase from July's level of 72.8%. The 12-month rolling average by loan count is now 71.4%.

CMBS

Reimbursements due on Solana liquidation

Blackstone has reportedly purchased Solana Business Park - which secured a US$360m loan securitised in JPMCC 2007-LDPX (US$140m) and BACM 2007-1 (US$220m) - for US$180m. The liquidation is expected to result in interest shortfall reimbursements and a write-down reimbursement for the former transaction.

Morgan Stanley CMBS strategists anticipate a 66% loss severity on the loan, resulting in significant losses to both trusts. However, US$23m of ASERs remain outstanding, which could see the full repayment of interest shortfalls across JPMCC 2007-LDPX and interest shortfall reimbursement through the class G notes of BACM 2007-1.

"We project nearly US$5m of excess ASER reimbursement to be available on JPMCC 2007-LDPX after repayment of interest shortfalls. This amount may be applied to class D/D-S in the form of a US$2.7m write-down reimbursement, while the class E and E-S bonds will receive the remaining US$2.3," the Morgan Stanley strategists add.

For BACM 2007-1, they anticipate losses to result in a full write-off of the G through K classes, while the F class will realise a partial write-down. For JPMCC 2007-LDPX, losses are expected to result in a full write-off of Class D/D-S and a partial write-down of the Class C/C-S notes.

Blackstone acquired the property for approximately US$5m below its March 2014 appraisal value and is expected to invest roughly US$110m in terms of improvements and leasing costs. The loan was transferred to special servicing in March 2009 and the property became REO in February 2014, following a foreclosure auction (see SCI's CMBS loan events database).

CMBS

CMBS delinquencies inch up

The US CMBS delinquency rate stands at 6.10%, 6bp above July's reading, according to Trepp. August's rate is 228bp lower than the year-ago level, however. Year-to-date, delinquencies have fallen by 133bp from 7.43%, as of 31 December 2013.

The largest newly delinquent loan is the US$240m Westfield Centro Portfolio, securitised in JPMCC 2006-LDP7. This note alone put almost 5bp of upward pressure on the delinquency rate.

The percentage of loans 30+ days delinquent or in foreclosure was 6.04% in July and 6.05% in June. The percentage of seriously delinquent loans is now 5.88%, unchanged for the month.

If defeased loans were taken out of the equation, the overall 30-day delinquency rate would be 6.43% - up by 11bp from July. Trepp notes that there are currently US$32.5bn in delinquent loans, up from US$32.1bn last month.

Risk Management

CCP systemic importance explored

The new regulatory environment mandating clearing of OTC derivatives is creating a structural shift in the global exchange and clearinghouse industry, Moody's reports. By ensuring that an increased share of the OTC derivatives market activity falls under the umbrella of central counterparties (CCPs), mandatory clearing elevates the systemic importance of these entities.

"Mandatory central clearing of OTC derivatives is also likely to increase clearing volumes and the types of products cleared at the clearinghouses," says Moody's vp and senior analyst Katie Kolchin. "This growth in centrally cleared trades, in turn, could increase the risks facing CCPs. Risks would increase if a CCP were to move too quickly into new product offerings, taking on operational risks and inadequately managing its exposures."

Global regulators are moving towards mandatory central clearing of OTC derivatives. However, rules for mandatory central clearing have not been implemented uniformly across regions, according to Moody's.

"The intention is to standardise this market along the lines of the more heavily regulated exchange-traded derivatives (ETD) market," says Kolchin. "Unlike most exchange-traded derivatives, however, OTC derivatives are often custom products designed to meet the specific financial goals of the counterparties."

Given high demand for customisation, OTC volumes have grown to be much larger than ETD volumes. As of December 2013, the OTC market stood at US$710trn gross notional outstanding versus US$65trn for ETDs. Interest rate products lead the pack at US$584trn gross notional outstanding, followed by FX products at US$71trn and credit default swaps at US$21trn.

Risk Management

RFC issued on margin requirements

The US Fed, the Farm Credit Administration, the FDIC, the FHA and the OCC are seeking comment on a proposed rule to establish margin requirements for swap dealers, major swap participants, security-based swap dealers and major security-based swap participants as required by the Dodd-Frank Act. The proposed rule would establish minimum requirements for the exchange of initial and variation margin between covered swap entities and their counterparties to non-cleared swaps and non-cleared security-based swaps.

The proposal builds on one originally released by the agencies in 2011 (SCI 13 April 2011) and includes some modifications that were made in light of comments, such as an expansion of the types of collateral eligible to be posted as initial margin. It also seeks to promote global consistency by generally following the final framework for margin requirements on non-cleared derivatives that the Basel Committee and IOSCO adopted last year (SCI 2 September 2013).

The amount of margin that would be required under the proposed rule would vary based on the relative risk of the counterparty and of the non-cleared swap or non-cleared security-based swap. In particular, the proposed rule does not require a covered swap entity to collect specific or minimum amounts of initial margin or variation margin from non-financial end-users, but rather leaves that decision to the covered swap entity, consistent with its overall credit risk management.

Comments on the proposed rule are requested no later than 60 days after the date of its publication in the Federal Register.

Risk Management

OTC support remains strong

OTC derivatives continue to be an integral part of end-user risk management strategies, according to a new ISDA survey. An overwhelming majority of end-users intend to keep their use of derivatives at similar or higher to current levels over the last three months of the year. However, the survey shows that end-users are concerned about the impact of a lack of regulatory coordination, market fragmentation and increased costs of hedging.

The survey results indicate that support for OTC derivatives by end-users remains very strong. Almost 86% of respondents believe that OTC derivatives are very important or important to their risk management strategies, while 81% expect to increase or maintain their current levels of derivatives activity during 4Q14. Only a small fraction said they expect their use of OTC derivatives to decrease.

According to the survey, 65% of respondents believe that derivatives are important for managing exposures so their firms can maintain and improve pricing, operating expenses and returns. Reducing financing costs and managing the cost of capital (47%) and hedging exposures in international markets to maintain and enhance competitiveness (45%) are also rated highly.

However, more than half (54%) of the end-user respondents agree that market fragmentation is occurring along geographic lines as a result of new regulatory requirements, with most believing it is increasing the costs of OTC derivatives. More than half of survey respondents prefer to trade with dealers from their own jurisdiction.

The survey also highlights that the top-three concerns for end-users regarding their ability to use derivatives include: increased costs of hedging (60%), the scope of cross-border derivatives regulations (44%) and uncertainty about regulations in their firm's principal business regions (38%). In addition, the majority of respondents (58%) believe that new electronic trade execution requirements for OTC derivatives will have a positive impact on transparency, but end-users are less optimistic about the impact on liquidity (22%) and pricing (25%).

Of the 125 firms responding to the survey, 28% were non-financial corporates and 55% were financial institutions. Of the participants, 43% were headquartered in Europe and 49% were headquartered in the US.

RMBS

Short-amortising loan criteria reviewed

S&P is updating the roll rate and loss severity assumptions it uses to analyse and monitor ratings on US RMBS backed by certain vintages of prime and Alt-A fixed-rate fully amortising mortgage loans with an original maturity of 20 years or less. The agency says that the objective of the criteria review is to promote transparency and comparability across all its ratings globally.

Once finalised, S&P expects that its roll rate and loss severity assumptions for short-amortising loans will better reflect the difference between the expected performance of these loans and traditional 30-year loans. For short-amortising loans originated prior to 2009, the agency is considering the establishment of distinct roll rate assumptions based on the empirical roll rate data relating solely to those loans. For short-amortising loans originated between 2005 and 2008, it is reviewing the loss severity assumptions to determine whether to further differentiate expected loss severity based on certain loan characteristics that could be conducive to lower loss severities.

The agency expects to publish the updated criteria before year-end.

RMBS

Springleaf subs acquired

Chimera Investment Corp has acquired the rights to approximately US$4.8bn of seasoned residential mortgage loans through the purchase of subordinate notes and trust certificates in Springleaf Mortgage Loan Trusts 2011-1, 2012-1, 2012-2, 2012-3, 2013-1, 2013-2 and 2013-3. By purchasing these securities, the REIT may over time terminate the securitisation trusts by redeeming all outstanding bonds at par and obtain the underlying mortgage collateral in accordance with each respective trust indenture.

"In an environment with limited loan originations, this transaction gives Chimera access to a large amount of seasoned residential mortgage loans, which may be securitised into new investments. The deals will be callable over the next two years and will provide us a robust securitisation pipeline, subject to market conditions," comments Chimera cio Mohit Marria.