Contents

CLOs

Euro CLOs enjoy ECB boost

The 'ECB effect' is pulling European CLO spreads tighter, with BWICs last week trading very well. Further bid-lists are scheduled to trade today and tomorrow, with good execution expected again.

"Last week really exceeded expectations because bid-lists were trading at very good levels. Significant tightening was seen on the back of the ECB's recent purchase programme announcement," says one European CLO trader.

He continues: "There have been some instances of spreads widening out slightly at the start of this week. I would suggest that is a bit of profit-taking and spreads can continue to tighten."

Some paper last week moved in much tighter than many market participants had expected. For example, BACCH 2006-2 D was trading at 400 DM before the ECB's announcement, but broke through into the mid-300s range afterwards.

SCI's PriceABS data shows the tranche out for the bid on Thursday, with price talk between the high-80s and mid-90s. It was covered at 94 handle.

The trader also points to the VALLA 2X C bond, which has moved to around 300 DM. PriceABS recorded a cover price last week of 96 handle for the name.

"It is surprising how far the market has moved. Now I think some accounts will want to wait and see where spreads go next and what the new levels will be before they commit themselves," says the trader.

He adds: "At the same time, I have heard that some dealers were being lifted of inventory and wanted more. They were bidding up and front-running the ECB, so there are still a lot of people trying to make trading gains, because there is not much out there with a real yield."

While senior and mezzanine tranches have tightened, the trader notes that CLO 1.0 equity prices have been unaffected. This is perhaps unsurprising considering the rate at which they are paying down.

"Price talk has been moving all over the place - far more than before," says the trader. "We are working on a junior triple-A list right now that is coming out tomorrow and there is another list today as well, so the market is busy right now."

JL

RMBS

Large lists lift non-agencies

US non-agency RMBS secondary activity was up sharply yesterday, as BWIC volume comfortably exceeded US$1bn. Much of the supply came from a pre-announced US$727m legacy list.

SCI's PriceABS data captured a range of price talk and cover prices on tranches from deals issued between 2003 and 2013. Many of the bonds out for the bid came from subprime transactions.

BSABS 2007-HE4 1A4 was one name of interest. It was covered yesterday at 54 handle, having last been captured by PriceABS a year ago today, when it was talked in the low/mid-30s, mid/high-30s and low-40s.

Fellow subprime tranche FHLT 2003-B M2 was also covered, this time at 97 handle. That bond had never appeared in the PriceABS archive before.

Another early-vintage tranche, ABSHE 2004-HE6 M2, also made its PriceABS debut during the session. The name was covered in the low/mid-80s.

Additionally, the JPMAC 2006-NC1 M1 tranche was covered in the mid-60s, while the MABS 2004-WMC1 M4 tranche was covered at 97 handle. Another MABS tranche - MABS 2005-WF1 M7- did not trade. The PPSI 2005-WHQ1 M6 tranche was also a DNT.

Among the post-crisis names out for the bid yesterday, the SMI 2010-1A A3 tranche was covered at 101.28. That tranche was covered last week at 101.441, when price talk had been at 101.385 and around 101.46.

Several dollar-denominated tranches of European deals were also circulating on BWICs yesterday. ARRMF 2010-1A A2C was covered at 100.92, although ARRMF 2011-1A A2C was a DNT. Both LAN 2012-2A 1A and LAN 2013-1A 1A1 were also DNTs.

Covers were also recorded for AIREM 2006-1A 1A, AIREM 2007-1A 2A1, BRNL 2007-1A A4C, GRAN 2004-1 2A1, GRAN 2004-3 2A1 and a further nine GRANM tranches. KDRE 2007-1A A2 was covered at 99.55 and PARGN 13A A2C was covered at 93.58.

Finally, the Canadian dollar-denominated GRANM 2006-4 A5 and GRANM 2007-2 2A2 bonds were covered at 99.34 and 99.388 respectively.

JL

Secondary markets

Mixed result for synthetic CRE CDOs

Two of the HLCN synthetic CRE CDOs on BWIC today traded and two did not. Nevertheless, another synthetic CRE CDO has been added to the BWIC pipeline for tomorrow.

HLCN 2005-1 A and HLCN 2005-1 B traded, while HLCN 2005-2X A and HLCN 2005-2X B DNT'd. In all cases no cover was divulged by the seller.

However, $10m of PEGSU 2007-1A A1 is now due to trade at 10:00 New York time tomorrow. The bond last covered at 88-9 on 18 June 2014, according to PriceABS.

Secondary markets

Differing days for European CDOs and CLOs

European CDOs and CLOs saw differing results yesterday and the latter looks set for another good day today.

On BWIC the two CDOs scheduled for 15:00 London yesterday did not trade. Euro-denominated ABS CDO FAXT 2004-1X A-3 had a best bid in the 95 area and dollar-denominated emerging markets CDO GEML 2006-3A C had a best bid in the 90 area.

Conversely, off-BWIC the European CLO market saw continued trading throughout the day albeit not with the ferocity of Tuesday but still at above average levels that drove prices upwards. With three euro CLO BWICs due today to distract the market bilateral trading may take a back seat this afternoon, though BWIC execution levels will at least give a clearer indication of how far the market has moved this week. All three lists are expected to trade well as dealers seek to replenish inventory.

The first BWIC due is a single line auction at 14:00 London time consisting of €10m of AVOCA VII-X A3. That is followed at 15:00 by two more lists - a €37.05m five line equity list and a €42m six line list containing two single-A tranches and four triple-Bs.

Secondary markets

European CMBS picks up

Activity has picked up in the European CMBS secondary market over the past few days with decent two-way flows at the top end and now a few BWICs are beginning to appear.

"First pays are trading fairly well," confirms one trader. "But it's more challenging with the distressed stuff - sellers want higher prices in this market environment, but with most distressed European CMBS that's hard to do as it's still not clear which way a deal is going to go."

At the same time, there is fresh paper coming into the market, the trader says. "We're seeing a lot of private deals that people have been working on for some time now appearing and we expect to see many more coming out."

Meanwhile, there are three European CMBS BWICs now circulating for today and more expected tomorrow. First up today, at 14:00 London time, is a four line list containing: FIPF 1 A2, WINDM VII-X A2, WINDM X-X A and WINDM X-X B. At 14:45 is a three line list: €10m EMC 6 A, £10m TITN 2007-1X A and €10m TMAN 6 A. Finally at 15:00 is a single line £1.5m of BUMF 4 M.

Secondary markets

Testing time for US CLOs

The US CLO BWIC machine grinds on today with five lists scheduled so far. However, with almost a third of the bonds that covered on PriceABS yesterday not trading, today will be a test of market appetite or at the very least seller expectations.

The five lists cover tranches from across the capital structure totalling just over $128m in 13 lines. Perhaps the most notable item on today's lists is the $23.5m controlling equity piece ATCLO 2013-2X SUB. The bond has so far been talked at H70s and LM80s according to PriceABS.

Secondary markets

Strong trading in European CLOs

As expected, the three European CLO BWICs due today all traded strongly. However, bilateral trading doesn't appear to have been completely overshadowed by the BWIC activity.

All bar one item on the three BWIC lists, JUBIL IV-X D1, traded. The single line AVOCA VII-X A3 list and the majority of the other bonds traded at or above talk levels.

At the same time, inventory buying has continued throughout today with supply meeting demand. "Dealer CLO offers are on the increase with more bonds being added to their sheets, perhaps a sign of some hoarding in the run up to the ECB announcement," says one trader. "Also a lot of off-the-run deals are now being offered. Not that there's anything wrong with that - just people looking to sell positions they've had for years at an opportune time."

Secondary markets

US CMBS returns

After an extended summer lull the US CMBS market at last appears to be on its way back to full functionality.

BWIC volume exceeded $300m yesterday and Wednesday for the first time since summer began. However, generic spreads remain primarily unchanged, excepting some legacy AMs and double-As, albeit inside the wides of mid-summer.

Over the next few weeks secondary supply and activity is expected to continue to grow with technical driving spreads tighter across the board.

Secondary markets

European CLO demand continues

European CLOs continued to attract strong bids today as the demand for paper seen all week carried over into this morning.

That appetite was evident with the market's sole BWIC today at 10:00 London. The six line €9.75m list covered at or above talk except for CELL 2006-1X C, which was only shown as 'traded' with no price colour.

There are only two two-line euro CLO BWICs scheduled for next week so far, but more lists are expected to be added.

Secondary markets

Euro mezz takes centre stage

ECB president Draghi's comment on Friday that the ABSPP would be more effective if it were to include mezzanine paper has drawn market focus to that section of the capital structure.

On Friday and into this morning investor demand has centred on mezz paper in European ABS, CMBS and RMBS, notably Dutch prime. Consequently, spreads have moved tighter across all three deal types.

Secondary markets

Increasing US CMBS supply

Spreads held steady in US CMBS into the end of last week, but with ever increasing bid list supply expectations are they will have to budge sooner rather than later.

There are now six bid lists scheduled for today and a further two already on the slate for tomorrow. Among today's lists the most eye-catching is the 12:30 New York time LCF list.

The list comprises 14 lines totalling $243.7m in original face. Among the deals on offer five have covered in the last three months on PriceABS: CSMC 2008-C1 A3 at 85 on 5 September, MSC 2007-IQ15 A4 at 77 on 21 August, COMM 2007-C9 A4 at 62 on 4 August, LBUBS 2007-C1 A4 at 77on 23 July and MSC 2007-IQ15 A4 at 72 on 14 July.

Secondary markets

Peripheral mezz list circulating

With European peripheral and mezzanine paper in demand it was only a matter of time before a BWIC capitalising on both aspects would appear. There is now a nine line peripheral mezzanine list doing the rounds for trade tomorrow at 15:00 London.

The €25.2m list contains two CLOs and seven RMBS most of which are rarely seen bonds - only three of the bonds on offer have traded on PriceABS this year. BCJAF 11 B covered at 57.36 on 20 June, GRIF 1 B at 53.48 on 6 May and SESTA 3 B at 63 on 5 August.

Secondary markets

Euro RMBS stays BWIC focused

European RMBS trading looks set to be focused around BWICs for the second day running today.

Yesterday saw quieter trading off-BWIC in European RMBS where spreads held firm. However, on-BWIC yesterday prices were at or higher than talk.

Today, there are already three lists scheduled. As mentioned yesterday there is a peripheral mezz list at 15:00 London time, which is followed at 15:15 by a four line €44m Dutch list consisting of DUTCH 2013-18 A2, HERME 18 A2, LUNET 2013-1 A2 and STORM 2014-2 A2.

First up though is an 18 line dollar-denominated list of European senior deals at 14:00 London. There are two Canadian dollar tranches on the list C$73.946m of GRANM 2006-4 A5 and C$84.51m of GRANM 2007-2 2A2.

The rest total $51.902m, which is made up of: AIREM 2007-1A 2A1, AIREM 2006-1A 1A, BRNL 2007-1A A4C, GRAN 2004-3 2A1, GRAN 2004-1 2A1, GRANM 2005-2 A6, GRANM 2006-1A A5, GRANM 2006-2 A4, GRANM 2006-3 A3, GRANM 2006-4 A4, GRANM 2006-4 A6, GRANM 2007-1 2A1, GRANM 2007-2 2A1, GRANM 2007-2 3A1, KDRE 2007-1A A2 and PARGN 13A A2C.

Secondary markets

Eclectic euro list circulating

The market's continuing appetite for all things European seemingly irrespective of deal type could meet its match tomorrow with a large eclectic BWIC list currently circulating. The 40 line €185m list due for trade at 14:00 London time includes ABS, CDOs (including ABS CDOs, CBOs and Trups CDOs), CFOs, SME CLOs, CMBS and RMBS.

Talk appears to be thin on the ground for the list so far today, which is possibly because most of the deals on offer are rarely seen on BWIC. Indeed, only 12 have covered with a price (as opposed to TRD or DNT) on PriceABS in the last two years, as follows:

BBVAR 2007-2 A2, H80s, 29 May 2013; BCJA 5 C, M50, 12 March 2014; CHAPE 2007 F, 9.5, 17 January 2014; EMERM 4 B, LM70S, 9 September 2014; FAB 2003-1 A1E, 93.51, 23 October 2013; HEATM I-07 B, 1, 14 November 2013; IVORY 2007-1 B, 26.11, 10 June 2013; PREPS 2005-2 B1, 8, 14 November 2013; PREPS 2006-1 B1, 31.1, 14 November 2013; SCCFO 2006-1X A, 80, 29 June 2012; SMARS 2006-1 E, 55.51, 07 February 2013; and STAB 2007-1 E, 28.08, 27 June 2014.

Secondary markets

Triple-A days

The past week has seen healthy demand in triple-A CLOs in Europe, particularly as a result of the ABSPP announcement, but high grade paper has also been trading strongly in the US. To feed that demand there is one triple-A CLO list out for bid later today and four scheduled for tomorrow.

At 13:00 New York time today, as part of a larger list, there are four triple-A lines: $10m of CTRPK 2011-1A A, $10m of FCBSL 2013-1A A, $10m of GOLD6 2012-6A A and $15m of RMPRT 2007-1A A. All four bonds are currently being talked in the very high 90s.

Tomorrow initially sees two four line euro lists of €15.5m and €33.9m due at 09:30 and 14:00 London time, respectively. Only one line item from each list has traded on BWIC in the last three months according to PriceABS - NWEST II-X A covered at VH99h on 17 July and HSAME 2007-IX A2 at MH96 on 10 July.

Next up tomorrow are a mixed euro and dollar list at 15:00 London and a single-line dollar list at 11:00 New York. The former consists of €3m ADAGI II-X A1, €8m GROSV I-X A4 and $1.5m INGIM 2006-2A A2; while the latter is $10m of ARES 2013-2A A1. Of those deals only ADAGI II-X A1 has covered this year on PriceABS - at 98.75 on 7 February.

Secondary markets

Strong trading in European RMBS

Yesterday saw strong execution on European RMBS bid lists and continued bilateral buying. More of the same is expected over the rest of the week.

Yesterday's dollar-denominated list went well with all bonds trading, but there was even stronger execution on the peripheral mezz and Dutch RMBS BWICs later in the afternoon. However, investor demand continued on the follow and further trading was seen at higher levels across the market.

Bid list supply looks set to continue with an increasing number of large BWICs containing euro and UK RMBS being scheduled for the rest of the week, including the previously mentioned eclectic list due at 14:00 London today. Another highlight is a Spanish seniors list due at 13:00 London time tomorrow.

Secondary markets

Latest FDIC auction on the block

Results of the seventh FDIC auction of Trups CDOs were released late yesterday and the eighth has already been scheduled.

The seventh FDIC auction completed in line with expectations - all bonds traded around talk levels. The next auction is scheduled for tomorrow at 11:00 New York time.

The eighth FDIC list consists of 11 lines totalling $55.5m. It is made up of: I-PRETSL 1 B1, I-PRETSL 1 B2, I-PRETSL 1 B3, I-PRETSL 2 B1, I-PRETSL 2 B2, I-PRETSL 2 B3, ICONS C1, INCAPS 1 B1, INCAPS 1 B2, INCAPS 2 B1 and INCAPS 2 B2.

Structured Finance

ABSPP challenges outlined

The ECB will likely allocate national targets for ABS purchases based on its capital key percentages, Citi European securitisation analysts suggest. They anticipate that the central bank may have to buy bonds at off-market prices to ensure the success of its purchase programme.

Basing national targets on capital key percentages is in line with the approach the ECB used in the first covered bond purchase programme. Germany and France are the top two contributors to the ECB's capital, but the size of their ABS markets is relatively small, with the mismatch posing a potential challenge in the distribution of ABS purchases across member countries. The Citi analysts indicate that the inclusion of covered bonds in the latest purchase programme - despite no prior indication by the ECB - may be driven by a desire to buy at least something in countries where ABS is scarce.

Another challenge will be sourcing paper to buy. The analysts estimate that about €745bn of senior ABS bonds are outstanding in the euro-area across consumer ABS, SME ABS, RMBS (which accounts for over three-quarters of outstandings), CMBS, CLOs and other ABS. About €240bn of these tranches are placed, while the remainder is retained.

However, many legacy holders of placed ABS and originators of retained deals may be unwilling to sell bonds to the ECB at current market prices - or even at a slight premium - in case it results in mark-to-market and accounting losses. Some holders may also tactically decide not to sell in the hope that ECB purchases will drive prices higher - which may, in turn, force the ECB to offer even higher purchase prices. Further, European ABS secondary market trading volumes are only in the order of a few billion euros per month, which is small relative to the scale that the ECB seems to be hoping to achieve.

While the prospect of the ECB paying up to buy bonds in both secondary and primary markets is positive for spreads and new issuance, the analysts suggest that the purchases may not be enough to revive new lending. "Offloading senior tranches will not provide significant capital relief to lenders because they will still be left with the junior portion, which requires significant capital because of the risks involved. Moreover, most banks are required to consolidate securitisations on their balance sheet for leverage ratio purposes, unless they can show that the transferred risk is 'significant'. As a result, senior purchases alone are unlikely to free much capacity for new lending," they explain.

In order to transfer significant risk from the banking system, the ECB will need to purchase mezzanine tranches too - by convincing national governments to guarantee them - or incentivise private investors to buy them. The analysts believe that the latter could be achieved by structuring a new issue programme where the ECB buys senior tranches at off-market prices, which would enhance yields for the junior portion and could incentivise some private investors to buy the mezzanine portion.

While lenders would still need to satisfy the skin-in-the-game requirement, doing so by retaining a random selection of loans would enable them to achieve true deconsolidation, according to the analysts. They note that ING and Credit Foncier de France have used such a risk-retention method in their RMBS deals (SCI 5 June).

CS

Structured Finance

SCI Start the Week - 15 September

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

Pipeline
A raft of US CMBS deals joined the pipeline last week, accounting for over half of all newly-announced transactions. Four ABS and two CLOs also began marketing.

The newly-announced ABS consisted of US$1.028bn Chrysler Capital Auto Receivables Trust 2014-B, US$850m PILOT 2014-1, US$2.62bn SpringCastle Funding 2014-A and US$215m Westgate Resorts 2014-1. The CLOs, meanwhile, were €927.4m Atlantes SME No. 4 and US$400m LCM XVII.

Finally, the CMBS joining the pipeline comprised: US$1.1bn GSMS 2014-GC24; US$1.162bn JPMBB 2014-C23; US$516.7m JPMCC 2014-FL5; US$1bn MSBAM 2014-C18; US$525m MSC 2014-150E; US$473m Progress Residential 2014-SFR1; and US$191.8m Velocity Commercial Capital 2014-1.

Pricings
It was a busy week in terms of pricings. As well as 12 ABS, one ILS, four RMBS, four CMBS and three CLOs printed.

The ABS new issues were: US$1.1bn BA Credit Card Trust 2014-3; US$650m CCCIT 2014-A7; US$273m CPS Auto Receivables Trust 2014-C; US$750m Dryrock Issuance Trust Series 2014-3; £480m E-CARAT 4; US$589.1m GE Equipment Midticket Series 2014-1; US$709m GMALT 2014-2; €1.3bn UCL Locat SV - 2014 Series; US$646.7m PHEAA Student Loan Trust 2014-3; US$1.35bn Santander Drive Auto Receivables Trust 2014-4; A$950m Series 2014-1 REDS EHP Trust; and US$734m World Omni Automobile Lease Securitization Trust 2014-A.

US$150m Golden State Re II was the only ILS to print during the week and was joined by the £150m Cambridgeshire Housing Capital 2014, A$700m Firstmac Mortgage Funding Trust No.4 Series 2-2014, US$329.95m Sequoia Mortgage Trust 2014-3 and US$770m STACR 2014-HQ2 RMBS. 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 CMBS pricings. Finally, US$461.1m Battalion CLO VI, US$625m Halcyon Loan Advisors Funding 2014-3 and US$334m ZAIS CLO 2 were issued.

Markets
The US non-agency RMBS market has experienced a busy couple of weeks in both primary and secondary. "The Street was busy with multiple BWICs, including a US$1.5bn BWIC from Freddie Mac. Prices remained firm on the week," Wells Fargo RMBS analysts note.

In US ABS Tuesday's session included a number of aircraft ABS bonds, alongside the more common student loan and credit card names, as SCI reported on 10 September. Included among those tranches was ACST 2007-1A G1, which SCI's PriceABS data shows was talked in the mid/high-90s and covered at 98.

In the US CLO space, BWIC volumes exceeded US$1bn, according to Bank of America Merrill Lynch CLO analysts. Over US$800m came from 2.0 and 3.0 senior triple-As.

"US CLO 1.0 continued to trade well. Overall, 2.0 US spreads widened out modestly by 10bp at the double-B level," they add.

Meanwhile, the BAML analysts note that European CLO spreads tightened meaningfully across the capital structure. Shorter-duration triple-A 1.0 paper tightened by around 15bp. Mezzanine bonds also tightened, with single-A and triple-B bond spreads moving in by around 20bp-25bp.

European ABS spreads also tightened during the week, report JPMorgan ABS analysts. This is attributed to the positive impetus from the ECB's purchase programme announcement.

"Generic Spanish senior spreads end the week at 110bp, a level last seen in August 2008, while the equivalent level of Italian senior bonds requires investors to cast their minds back even earlier to February that year," they observe.

Deal news
• US CMBS credit metrics continue to slip, but are seemingly yet to give investors pause. Nevertheless, while the positive reception for WFRBS 2014-C22 last week marked a departure from recent pricing weakness in the sector, caution remains regarding the intermediate direction of new issue spreads.
• A court decision last week in favour of Trapeza Capital Management is positive for holders of Trups CDOs. The court ruled against dismissing the Chapter 7 involuntary bankruptcy Trapeza filed against FMB Bancshares in June, as requested by the bank.
• The US$425m Four Seasons Resort Maui loan, securitised in GECMC 2007-C1 and CD 2007-CD4, has paid off in full. The loan was modified with a US$350m/US$75m A/B note split in 2011 (see SCI's CMBS loan events database).
• Orico is in the market with a cross-border Japanese prime retail installment auto loan ABS. OSCAR US 2014-1 will issue US dollar-denominated notes, but is secured by Yen-denominated receivables.
• CR Investment Management has sold a further ten properties located across Germany from the Sanchez Portfolio, resulting in approximately €55m of sales proceeds. Many of the properties are located in non-prime locations and had a number of technical complexities associated with them, such as fire protection issues, 100% vacancy and part-ownership structures.
• S&P has maintained its double-B minus (with negative implications) ratings on the Punch Taverns Finance A class A1(R) and A2(R) notes, while lowering the ratings on the class M1, M2(N), B1, B2, B3, C(R) and D1 notes (credit watch negative). The agency has also lowered to triple-C (credit watch negative) from single-B plus its ratings on the Punch Taverns Finance B class A3 and A6 notes, while the class A7 and A8 notes have been lowered to single-B.
• 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.

Regulatory update
• The ECB is expected to allocate national targets for ABS purchases based on its capital key percentages. The central bank may have to buy bonds at off-market prices to ensure the success of its purchase programme, however.

Deals added to the SCI New Issuance database last week:
Atlas Senior Loan Fund VI; AYR Issuer; Bilkreditt 6; BlueMountain CLO 2014-3; California Republic Auto Receivables Trust 2014-3; Capital Auto Receivables Asset Trust 2014-3; Capital One Multi-asset Execution Trust 2014-4; CSMC Trust 2014-WIN1; Driver UK Two; Dryden XXVII Euro CLO 2013 (tap); ECP CLO 2014-6; Gosforth Funding 2014-1; JMP Credit Advisors CLO III; John Deere Owner Trust 2014-B; Mountain View CLO 2014-1; Octagon Loan Funding; Pangaea Funding I; PUMA Series 2014-4P; Silver Arrow Compartment 5; Venture XVIII CLO; WFRBS 2014-C22.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2004-6; BACM 2005-1; BACM 2007-1 & JPMCC 2007-LDPX; BACM 2008-1; BSCMS 2005-PW10; CGCMT 2007-C6; COMM 2006-C8; COMM 2013-CCRE11; CSFB 2005-C3; DBUBS 2011-LC1; DECO 2007-C4; DECO 2007-E5; DECO 2007-E6; ECLIP 2006-3; ECLIP 2007-1; EURO 28; FLORE 2012-1; GECMC 2007-C1 & CD 2007-CD4; GSMS 2005-GG4; GSMS 2006-GG8; JPMCC 2003-CB6; JPMCC 2005-CB13; JPMCC 2010-C1; JPMCC 2010-C2; JPMCC 2012-C6; MODA 2014-1; MSBAM 2012-C5; MSC 2007-HQ13; OPERA GER²; TIASS 2007-C4; TITN 2006-3; TITN 2007-1; TITN 2007-CT1; WBCMT 2005-C17; WFRBS 2012-C8; WFRBS 2013-C15; WINDM XIV.

Structured Finance

Negative correlation offers diversification

US consumer ABS spreads are wider and more volatile in the post-crisis period. However, a recent Wells Fargo study of the distribution of correlation coefficients indicates a less correlated and more diversified market than in the past.

ABS strategists at the bank calculated correlation coefficients for a variety of ABS sector pairs. For the 2004-2007 period, 90% of the correlation coefficients indicated strong positive linear relationships, with coefficients of +0.70 or higher. The remaining 10% had a moderate positive linear relationship of +0.50 to +0.70.

"Consumer ABS spreads tended to trade in unison, regardless of sector," the Wells Fargo strategists observe. "Spread differentials between sectors might have changed (wider or tighter), but the direction was normally the same, as traders moved in and out of ABS. Although there were a variety of sectors and collateral types represented in ABS, it appears that investors and traders treated all ABS in a uniform fashion."

But conditions have changed significantly since 2010, with only 46% of the sector pairs showing correlation coefficients of +0.70 or higher. Further, 11% of the pairs had no linear relationship (0.0 to +0.30) and another 15% had a negative correlation coefficient, denoting spreads moving in opposite directions.

Credit card and rate reduction ABS accounted for the majority of negatively correlated pairs. This outcome suggests that these lower-risk sectors may provide some diversification for ABS portfolios, according to the strategists.

"This shift in the behaviour of spreads indicates that, in our opinion, the fundamentals of the ABS market have changed in a meaningful way. It seems that investors and traders are making significant distinctions between market segments," they add.

To calibrate the analysis, the strategists reviewed the relationship between three-year and five-year triple-A rated credit card bonds, revealing a high positive correlation coefficient of +0.97. However, beyond the credit card ABS sector, the spread relationships become less strong.

For example, the correlation coefficient between three-year triple-A card and two-year triple-A prime auto bonds is +0.78. The five-year card/two-year prime auto correlation coefficient has a similar reading of +0.73, suggesting that the fundamental demand for liquidity offered by two-year prime auto ABS is closely aligned with that of credit card bonds.

Meanwhile, the correlation coefficient of three-year triple-A card and three-year triple-A prime auto bonds is +0.53, indicating that the supply and demand factors contributing to the determination of last cashflow prime auto spreads are somewhat different to those of two-year triple-A auto bonds. Similarly, the correlation coefficient of three-year triple-A card and two-year triple-A subprime auto bonds is +0.10, implying that senior credit card paper may provide some diversification for investors that are already buying subprime auto ABS.

Beyond ABS, the correlation coefficient for three-year triple-A credit card paper and three-year triple-A CMBS is relatively low at +0.23. But a -0.31 correlation coefficient was calculated for three-year triple-A credit card ABS and two-year triple-A CLOs.

"The negative correlation points to a stronger potential for diversification benefits, in our opinion, from combining different structured products sectors in a portfolio," the strategists conclude.

CS

RMBS

Whole loan securitisation on the rise?

Gross agency MBS issuance increased from US$85bn to US$89bn and net issuance increased from US$7bn to US$14bn from July to August, according to Citi figures. The increase was partly driven by a jump in seasoned loan securitisation by Bank of America and SunTrust.

Agency MBS issuance backed by seasoned loans has picked up since July, with September issuance surpassing the unusually high August issuance in the first 10 days of the month. But unlike August - when most of the seasoned loan issuance was securitised through Freddie Mac - September seasoned loan issuance has almost exclusively been securitised through Fannie Mae.

BofA securitised US$3bn seasoned loans through Freddie in August and has securitised another US$3.1bn through Fannie month-to-date in September. SunTrust has securitised US$2bn seasoned loans through Fannie so far in September.

Considering the average monthly issuance of these two originators, the amount securitised in August and September is unusually large, according to Citi RMBS strategists. They add that securitisation of retained whole loans is also somewhat unusual, given that whole loan holdings of banks have been trending higher this year.

In August, BofA predominantly issued 30-year Gold 3.5s, while securitisations were concentrated in 30-year FN 4.0s in September. For SunTrust, 38% of the issuance was in FN 15-years, while its FN 30-year issuance was spread out across different coupons.

BofA issuance in August was concentrated in the 2012 and 2013 vintages, while the September issuance shifted to 2010 and 2011 vintages. SunTrust issuance was more focused on the 2011 vintage, although more than half of the FN 15-year issuance was from 2010-vintage loans.

The Citi strategists note that the loan sizes are fairly small, compared to the average loan that would be retained in a bank portfolio. "Although it is difficult to ascertain the exact motivation for securitising whole loans, we think it could be driven by the desire to increase capital and liquid assets, either by converting these loans to MBS or by selling the securitised MBS to replace them with GNs. It is well publicised that some large banks retained conforming whole loans in their portfolio in 2012 and, if these banks decide to securitise these loans as well, we could see a surge in gross and net issuance in the months to come."

They add that the overall impact on supply/demand will depend on whether these loans are securitised into MBS and held in portfolios or if they are sold. "If they are sold, the supply would need to be absorbed by other market participants. At the very least, if this becomes a broad trend, it suggests that the securitisation rates for conforming whole loans will be elevated going forward - which, in turn, could increase issuance."

CS

Structured Finance

Value add

Rajat Rohailla, executive director at Molton Street Capital, answers SCI's questions

Q: How and when did Molton Street become involved in the structured finance markets?
A: We are a young firm, but all of our backgrounds are in trading, securitisation and risk management. We have been focused on structured finance since our inception and the firm brings together deep structured credit experience.

Personally, I qualified as a chartered accountant and moved into the market in 2004. From there, I moved into investment banking and had a number of roles before joining Molton Street Capital in 2012.

Q: What are your key areas of focus today?
A: Our business largely breaks down into a trading side and an advisory side. When we started in the market, we wanted to set up a securities boutique and our success has been built on that trading side of the business.

2014 has been a bit challenging as compared to previous years, due to yield compression. Our client base has not been very active in the CUSIP space, due to lower yield profiles, and clients have concentrated their efforts in being active in other areas of the credit spectrum.

We have seen a lot of interest this year in non-CUSIP business, such as non-performing loan portfolios and esoteric credit. Anticipating this shift in late 2013, we concentrated our efforts in building our advisory business, which focuses on structuring, debt capital markets and direct lending businesses.

Q: Which market constituent is your main client base?
A: Our business has always been very client-driven. Hedge funds have been our main clients, but that is changing a little as they step away from structured finance.

We also do a lot of work with asset managers and dealers. At the moment, the hedge funds are not buying as much as they used to, but we are still seeing opportunities across Europe where good returns are available.

Q: How do you differentiate yourself from your competitors?
A: The advisory angle offers another string to our bow, but our principal strength is the fact that - unlike other broker dealers active in Europe - we are one of the few who are strictly structured credit-focused. We do not jump from one credit segment to another; we are specialists in this field, who add value for our clients.

Our offering is based on being the best at what we do. Structured credit is a market where we have a specialised level of expertise that other firms cannot offer, so we can identify the opportunities and add value for our clients. Everything we do is about adding value.

We also do not limit ourselves to the more vanilla ABS and MBS segments. We are able to look at the slightly more funky esoterics and recently, for example, we have been looking quite closely at aircraft ABS.

We are happy to provide funding or to structure in the £50m-£200m area. That is smaller than the larger banks will get involved in, but provides us with enough room to be creative.

Q: Which challenges and opportunities does the current environment bring to your business and how do you intend to manage them?
A: It is a very interesting time in the market and at the moment there is a lot of liquidity. There is activity in secondary markets, but our main challenge at the minute is finding yield for our clients.

In many ways we are not competing with other broker dealers, but with the macro environment. Spread tightening and improvements in fundamentals create opportunities for the institutional funds, but not necessarily for hedge funds, as yield profiles are completely different.

As for opportunities, we like to look at the things which the banks are not looking at. The recent ECB announcement helps a lot because it provides players with an exit. ECB buying could create a whole list of opportunities.

Q: What major developments do you expect in the market in the near future?
A: The ECB's announcement certainly made things interesting. I think it surprised a lot of people, but in a way it has been priced in already. We know there is only one way for the yields to go if there is stimulus in the market, so I think tightening is inevitable.

Having said that, geo-political risks continue to exist in the macro environment, which would have an impact. Also, the eurozone still has deep structural issues that could always creep up and create problems.

We should also see more volatility. The VIX volatility index has been active already and, of course, an increase in volatility would be good news for us.

JL

Structured Finance

European structured leader named

PIMCO has selected md and portfolio manager Joshua Anderson to lead its European structured products group in London. The firm has also made a number of additions to its real estate team.

Anderson has been at PIMCO since 2003, working in Newport Beach. He will continue to oversee the firm's global structured credit investments.

The real estate hires include Shrey Shah, who was previously responsible for credit and ABS structuring at RBS. The others are Adam Doran, Steffen Kluners, Rudiger Holfeld and Véronique Ménard. Doran, Kluners and Shah are portfolio managers, while Holfeld and Ménard are structuring and finance experts. They are all based in London.

Structured Finance

Law firm merger mooted

Locke Lord and Edwards Wildman Palmer intend to merge and create a new firm, which would be named Locke Lord Edwards. The management teams of the two firms have signed a letter of intent but the proposal is still subject to negotiation and partner approval.

If approved, the merger would take place in early 2015. Locke Lord chairman Jerry Clements would be chairman of the new firm, while Edwards Wildman Palmer's managing partner Alan Levin would become a vice chairman.

Edwards Wildman Palmer recently beefed up its ILS capabilities with the appointment of Robert Underhill (SCI 10 September).

Structured Finance

Emerging/frontier markets fund launched

Global Evolution and Universal-Investment have launched an absolute return fund, called CGS FMS Global Evolution EM Debt and FX, which invests in bonds and currencies of established emerging markets as well as frontier markets. The objective of the UCITS fund is to generate positive returns through a combination of a high-yielding emerging and frontier market bond portfolio with the active management of key risk components to enhance and protect fund performance. In addition, the fund uses derivatives - including credit derivatives, although usage of them is not planned yet - to take targeted long and/or short positions.

"The combination of a bond portfolio with a derivative overlay enables us to systematically optimise the fund's risk-return profile and reduce the risk of a severe draw-down, particularly in volatile phases," explains Global Evolution cio Morten Bugge. "This makes the CGS FMS Global Evolution EM Debt and FX Fund a suitable option for investors looking for access to emerging and frontier market bonds, as well as an active management of currency and interest rate risks."

The fund aims to generate a return of 10% per annum at lower volatility compared with standard emerging market indices.

Structured Finance

Limited payout for former Gleacher execs

An independent arbitration panel has awarded Gleacher & Company's former ceo Thomas Hughes and former coo John Griff US$987,667 plus interest and US$295,833 plus interest, respectively. The pair had sought around US$9.2m.

Hughes and Griff were removed from their roles in May last year after the firm's largest shareholder, MatlinPatterson Global Advisors, took control of the board and elected its own directors. MatlinPatterson objected to Hughes' strategy for the firm and continued disappointing financial results.

Hughes and Griff had sought compensatory damages of US$7.9m, vesting of unvested equity awards, reimbursement of legal fees and interest on these amounts, totalling around US$9.2m. The arbitration panel denied the former officers' request for reimbursement by the company of their legal expenses.

Structured Finance

Securitisation valuation director joins

Grant Thornton has appointed Adam Bareham as a forensic and valuation services director. He is based in New York and takes responsibility for valuing RMBS, CMBS, CDOs, CLOs, loan portfolios, CDS and derivatives, amongst other products.

Bareham was previously at the DTCC. Before that he spent 17 years at Deloitte & Touche where he became a senior manager in the firm's financial accounting, valuation and securitisation practice. He began his career as an MBS analyst at Bank of New York.

Structured Finance

Corporate trust vet recruited

Global Loan Agency Services has added another staffer to its roster, following the recruitment of Stuart Draper last month (SCI 29 August). Louise Moore joins the firm as a relationship manager, with over twenty years' debt capital market and corporate trust experience. She has held senior posts with Law Debenture, Deutsche Bank and Bank of New York Mellon in the corporate trust space, and was more recently head of investor relations at Kensington Group and head of RMBS portfolio management at Morgan Stanley.

Structured Finance

RBS restructures DCM, client teams

RBS has restructured its UK and EMEA debt capital markets and client coverage teams. The restructure includes combining structured finance and corporate finance, with Andrew Blincoe leading the new unit as head of infrastructures and structured corporates.

Blincoe was previously head of secured debt, which included securitisation. His new role is part of the client coverage team for UK and EMEA.

Structured Finance

CLO pro rejoins law firm

Cadwalader, Wickersham & Taft has added David Quirolo to its global capital markets practice group in London as a partner. His practice covers securitisation and structured finance, with a particular focus on CLOs. Quirolo was previously an associate at the firm but left in 2004 to join Ashurst, where he was a partner.

CDO

Taberna settlement agreed

RAIT Financial Trust has agreed in principle to resolve a US SEC investigation concerning its subsidiary Taberna Capital Management (TCM). The investigation concerned exchange transactions conducted by TCM between March 2009 and November 2012 and on restructuring fees from issuers of securities held by Taberna securitisations relating to these transactions.

Under the terms of the agreement, TCM will not admit or deny the SEC's allegations and will resolve all violations alleged by the SEC. This will include paying US$21.5m. RAIT says it also expects to exit the Taberna business, including TCM's management of the Taberna securitisations.

CMBS

CMBS origination platform prepped

Principal Real Estate Investors and Macquarie Group are forming Principal Commercial Capital, a lending platform focused on originating and securitising commercial mortgages. Principal Real Estate Investors will source, underwrite, close and service loans while Macquarie will provide funding and capital markets expertise.

Principal Real Estate Investors has a long track record as a CMBS loan originator and seller. Macquarie has been stepping up its efforts and hired a team earlier this year - which is led by Tim Gallagher, who was formerly at Morgan Stanley - to expand its US CRE presence.

Insurance-linked securities

Markel hires bring ILS experience

Markel Global Reinsurance has hired Erik Manning, Jamie Welsby and John Duda. All three will be based in Bermuda and bolster the managed catastrophe and retrocessional insurance team.

Manning joins as md and was previously md at Guy Carpenter. He has also worked at Deutsche Bank, ABN Amro and RK Carvill.

Welsby also joins as md and was most recently a principal at Logic Reinsurance Underwriting Management, which he co-founded. He has also worked at RBC Reinsurance, GE Insurance and Frankona.

Duda joins as avp and was most recently a portfolio manager at Logic. He has also worked for Aon Benfield, Guy Carpenter and Zurich Financial Services.

RMBS

Further FHFA suit settled

The US FHFA has agreed a settlement of US$550m with HSBC North America Holdings, related companies and specifically named individuals. The settlement resolves claims in the lawsuit 'FHFA v. HSBC North America Holdings Inc., et al.', alleging violations of federal, Virginia and District of Columbia securities laws in connection with private-label MBS purchased by Fannie Mae and Freddie Mac during 2005-2007. Pursuant to the agreement, HSBC will pay US$374m to Freddie Mac and US$176m to Fannie Mae.

Only two of the 18 lawsuits the FHFA filed in 2011 are yet to be resolved. The agency says it continues to pursue a satisfactory resolution of these actions.

RMBS

Agency trader added

Randy Turso has swapped RBS for RBC, joining the Canadian bank as a director. He will trade agency RMBS bonds and report to co-head of securitised products Chris Bellhumeur.

RMBS

Manufactured housing REIT to unwind

Origen Financial is to sell substantially all of its assets - in addition to the assumption of its securitisation financing - to an affiliate of GoldenTree Asset Management for a purchase price of US$47m, subject to certain adjustments. Upon closing of the sale, Origen - a REIT that manages residual interests in securitised manufactured housing loan portfolios - intends to dissolve and liquidate.

Completion of the sale and subsequent dissolution is conditioned upon approval by Origen's stockholders, receipt of certain third-party consents and other closing conditions. The firm plans to seek stockholder approval at a special meeting to be held in October.

If the sale is completed, Origen will distribute to its stockholders the proceeds of the sale, estimated liquidation expenses and estimated reserves for liabilities and contingencies. The firm currently estimates that the amount of the distribution will be approximately US$1.77 per common share. To the extent that there is cash available after winding up the business, Origen would make an additional distribution to stockholders.

Origen ceo Ronald Klein explains that there are many risks inherent in continuing to hold the residual interests in the firm's seven securitised loan portfolios. "The value of our residuals may decrease if interest rates rise or delinquencies and defaults in the securitised pools increase. In addition, the loans in the securitised pools are subject to certain redemption rights beginning in late 2015 and the value of the residuals may be diminished or wiped out if the servicer of the loans or Origen do not or cannot exercise the redemption rights."

He also states that the firm's general and administrative expenses as a percentage of revenues will continue to grow as the securitised loans are paid down. The board consequently determined that the GoldenTree transaction - which is expected to result in distributions to stockholders that represent a premium over the recent trading price of the common stock - is the best way to deliver value to stockholders.

Hentschel & Company is acting as Origen's financial advisor and has issued a fairness opinion in connection with the transaction.

RMBS

Large RMBS settlement agreed

A group of underwriters for IndyMac Bank RMBS have agreed to settle class-action claims concerning underwriting misrepresentations for US$340m. The underwriters in the case are Credit Suisse, Deutsche Bank, JPMorgan, RBS, Morgan Stanley and UBS.

The claims allege that offering materials for 50 RMBS offerings issued in 2006 and 2007 contained untrue statements which mischaracterised the underwriting practices used to originate and acquire the underlying loans. The lead plaintiffs are the Wyoming State Treasurer's Office and the Wyoming Retirement System and if the settlement is approved it would result in one of the largest federal class-action recoveries for RMBS investors.

ABS

Punch hit by restructuring uncertainty

S&P has maintained its double-B minus (with negative implications) ratings on the Punch Taverns Finance A class A1(R) and A2(R) notes, while lowering the ratings on the class M1, M2(N), B1, B2, B3, C(R) and D1 notes (credit watch negative). The agency has also lowered to triple-C (credit watch negative) from single-B plus its ratings on the Punch Taverns Finance B class A3 and A6 notes, while the class A7 and A8 notes have been lowered to single-B. Additionally, the ratings on Punch B's class B1, B2 and C1 notes were lowered to triple-C minus (credit watch negative) from triple-C.

While Punch Taverns has announced increased support for its restructuring proposals, the final terms will remain uncertain until noteholders formally agree them. They are due to vote on 17 September.

Because the noteholders can take control of the secured business by appointing an administrative receiver and the liquidity facility remains available, until the stakeholders agree a restructuring plan, S&P says its analysis of the transactions continues to centre on a scenario in which a borrower EOD is triggered. The agency's rating actions therefore reflect its view of the underlying business' ability to meet debt service payments on the notes on a timely basis.

At its last review, S&P notes that it was unable to include cash in the disposal proceeds account in the amounts it considered available for debt service because the transaction documentation allowed it to be used for other purposes. However, the terms of the latest covenant waiver have imposed restrictions on the use of this cash. As a result, the agency is now giving credit to the cash balance in the disposal proceeds account and assumes it will be available for the pro-rata repayment of the most senior notes upon a breach of a borrower EOD and the assumed enforcement and acceleration.

ABS

Punch exchange notes provisionally rated

Moody's has assigned provisional ratings to four classes of notes to be issued by Punch Taverns Finance in line with the proposed restructuring of the securitisation. The issuance comprises £111.01m super senior hedge notes (rated Baa1), £67.5m A1(V) notes (Baa3), £45.79m A2(V) notes (Baa3) and £300m M3 notes (B2).

The issuance of the class A1(V) and A2(V) notes will follow the extinguishment in full exchange of 25% of the currently outstanding class A1(R) and A2(R) notes under the proposed restructuring. If the restructuring is implemented and assuming that there are no material changes to the proposals, Moody's currently expects that the ratings of the remaining 75% of the class A1(R) and A2(R) notes - which will be re-designated as class A1(F) and A2(F) notes respectively - would be upgraded to Baa2.

At the same time, the agency currently expects that the ratings of the Punch B class A3 and A6 notes would be upgraded to Ba3 and the class A7 notes would be downgraded to Ba3, following the release of the financial guarantee currently provided by MBIA. It has not assigned a rating to the proposed issuance of class B4 notes by Punch A or the class B3 notes issued by Punch B.

The provisional ratings will be withdrawn if the proposed restructuring is not approved by the relevant parties.

ABS

Stable performance predicted for ARS

US student loan auction rate securities (ARS) appear to be entering a period of relative calm, following a volatile few years. Fitch expects this to translate into more stable performance across the segment.

Many student loan ARS credit ratings were negatively affected by increased interest expenses, due to the failure of the auction market in early-2008. In some cases, downgrades exacerbated already high funding costs in the face of a rising interest environment, prompting action by student loan ARS issuers (SCI passim).

"Issuers either redeemed or restructured SLARS securitisations in an effort to reduce numerous risks and stem rating downgrades," notes Fitch director Autumn Mascio.

The end result is a dramatically reduced amount of ARS outstanding. At the beginning of 2014, ARS accounted for US$51bn of the market, with student loan ARS accounting for less than half of that total. This is in stark contrast to the US$330bn in total ARS (25% of which was student loan ARS) seen in 2008.

However, rising interest rates could lead to further deterioration on trust performance for some student loan auction rate securities, according to Mascio. Nevertheless, Fitch has taken into account various interest rate environment and transaction structures in its analysis, which should translate into more stable rating and collateral performance over time.

ABS

Credit card criteria updated

Moody's has updated its global methodology for rating credit card and revolving consumer loan ABS, following an earlier RFC on the proposal (SCI 29 April). The new approach more explicitly incorporates the credit quality of the sponsor into the agency's rating analysis and also reflects other modifications to assumptions about credit card portfolio performance under stress.

"Credit cards and revolving consumer loans are different from many other traditional ABS assets, for which performance does not typically depend on the sponsor's ability to continue to fund new receivables," says Moody's md William Black. "We have refined our approach to more explicitly incorporate the effects of a sponsor failure."

While the changes apply in all jurisdictions, Moody's will continue to tailor its approach to the characteristics of local markets. The methodology changes will result in rating changes to a limited number of credit card and revolving consumer loan ABS.

The approach incorporates an analysis of the data that the agency has accumulated on key metrics in credit card securitisations, in which the sponsor closed the accounts that it had securitised. Despite having very different portfolios in terms of card type and cardholder performance, in the six cases of early amortisation and portfolio closures, cardholder behaviour was generally consistent once the accounts were closed.

Moody's also makes an explicit adjustment, based on the rating of the sponsor, on the level of credit enhancement consistent with a given bond rating. "Overall, the approach allows for more differentiation among trusts based on the quality of the collateral pool, the economics of the trust and the structure of the programme - particularly in the event of account closures," says Black.

ABS

Subprime auto 'domino risk' outlined

Fitch notes that rising US subprime auto lender competition and an increase in start-ups means problems at one lender could quickly spread to others. The agency examines in a new report why 'domino risk' is higher in subprime auto lending than in other ABS sectors.

In Fitch's view, the risks to the sector mean that most subprime auto transactions would not earn higher investment grade ratings and should be capped at single-A or lower. The agency rates deals from just three of the nearly 20 active subprime auto lenders: GM Financial (with the AMCAR programme), Santander Consumer USA (SDART) and Ally Financial (CARAT).

"The intensification of lender competition is particularly important now, as many auto finance companies depend on securitisations for their funding needs. Those lenders that have become overly reliant on securitisation face excessive exposure to market volatility, which could ultimately affect investors and customers," Fitch observes.

Headline risk or increased regulatory pressure could result in the withdrawal of credit lines and, in some cases, private equity support from one or several subprime auto lenders simultaneously. The report points out that a similar event occurred in the late-1990s in the subprime auto, equipment leasing and franchise lending markets.

Fitch says it is not confident that, in this scenario, larger lenders would step in. The agency believes that some smaller lenders could be left stranded and their borrowers could be under serviced.

ABS

Amortisation waiver anticipated

Natixis Factor expects the senior funding base for its FCT Factoring Asset Securitisation Transaction (FAST) to fall below the outstanding class A1 note balance this month, due to a combination of seasonality and temporary effects. A waiver of the class A1 note amortisation is therefore being contemplated.

Should such a waiver be accepted by the noteholders and the management company (Eurotitrisation), no amortisation of the class A1 notes would take place on the 13 October payment date. Nevertheless, the protection available to the class A1 and class A2 notes is anticipated to remain adequate, due to additional collateralisation. If needed, this can be provided in the form of cash funded through the issuance of further subordinated units.

Consequently, Fitch does not regard the potential waiver of the class A1 notes amortisation as having any rating impact on the class A1 and class A2 notes.

FAST is a securitisation of French trade receivables purchased by the issuer from Natixis Factor. The transaction closed in December 2012, with a three-year revolving period.

The class A1 notes are allowed to amortise in part during the revolving period, if such amortisation is required under the senior funding base calculation.

CDS

PDVSA underperforms on uncertainty

Five-year credit default swaps on Petroleos de Venezuela (PDVSA) have widened by 31% during the past month and 16% over the past week, according to Fitch Solutions. The name has significantly underperformed Fitch's Global Oil & Gas CDS Index, which firmed by 5% during the same period.

The one- and five-year CDS referencing PDVSA have inverted, indicating that the market is pricing in higher credit risk at the shorter end of the curve. Mounting market concern over PDVSA's credit prospects reflected in the CDS change can likely be attributed in part to the company's decision to sell its American CITGO unit, which could indicate the company's immediate need for cashflow, Fitch suggests.

Further, comments from former Venezuelan planning minister Ricardo Hausmann that the government should default on its obligations due to the country's dire financial position also likely contributed to volatility. PDVSA has US$3bn in maturities due October 2013.

Earlier this month, President Nicolas Maduro removed the main and latest economic policymaker Rafael Ramirez from office, causing additional macroeconomic uncertainty.

CDS liquidity for PDVSA has increased to trade in Fitch's 16th regional percentile, up 10 rankings compared to a month ago.

CDS

KRIS adds CDS data

Credit default swap trading volumes have been added to the Kamakura Risk Information Services (KRIS) default probability service, comprising the weekly number of contracts traded and the notional principal traded on 1,214 reference names. Provided by the DTCC, the data begins with the week ended 16 July 2010 and complements Kamakura's implied CDS spread history and corresponding confidence levels. The addition of this information is designed to enhance the process of transparency to the CDS market.

CDS

Protocol adherence period extended

ISDA has extended the adherence period for the 2014 Credit Derivatives Definitions Protocol until 17 September (SCI 22 August). The association says that the protocol has seen a high level of adherence globally, but - following member feedback - its Credit Steering Committee (CSC) recommended that the adherence period be extended to provide additional time for market participants to adhere and to evaluate the addition of Caesars (which is a complex and evolving credit situation) to the Protocol's excluded reference entity list.

Credit default swap contracts referring to reference entities on that list are excluded from the scope of the Protocol and so remain on their existing terms. Nearly 200 reference entities were on the excluded list when the list was first published on 21 August.

The adherence extension does not affect the intended 22 September launch date, on which trading using the new 2014 ISDA Credit Derivatives Definitions is expected to begin. However, to allow time for operational processing and to avoid the quarter-end, the CSC also recommended that the effective date for changes to existing trades under the Protocol be delayed until 6 October.

CDS

Sears sentiment continues to sour

Market sentiment continues to sour for Sears Roebuck Acceptance Corporation, with its five-year CDS having widened by 68% over the past six months, according to Fitch Solutions' latest CDS case study snapshot. Credit protection against a default on Sears' debt is now pricing at the highest levels seen since January 2012.

CDS liquidity for Sears has rebounded over the past month and is now trading in the ninth regional percentile, following a sharp decline earlier this summer. "Souring market sentiment for Sears is likely attributed to the company's significant cash burn and funding concerns through 2016," comments Fitch Solutions director Diana Allmendinger.

CLOs

CLO equity distributions to increase?

On average, 2011-2013 vintage US CLOs have paid dividends of 5.1%-5.6% since inception, according to Wells Fargo figures. Equity distributions have generally trended downwards since 2011, as loan spreads tightened in 2012 and 2013, but are expected to stabilise or possibly increase over the next few quarters due to the recent loan market sell-off.

The Wells Fargo data shows that average CLO equity distributions in 2Q14 were at least 6% for most quarterly issuance cohorts in the 2013 vintage and were in the 4.5%-5.2% range for most cohorts in the 2011 and 2012 vintages. CLOs issued in 2H13 appear to have higher average current equity payments than those issued in 1H13 with lower funding costs.

Median equity NAVs are down by approximately six points since February 2014. "While NAVs have dropped, it is likely that equity investors will benefit in the future from lower loan prices, as savvy managers have likely been able to purchase lower priced assets," Wells Fargo CLO strategists suggest.

CLOs

Increase in WARR 'fairly consistent'

A recent Morgan Stanley study suggests that investment grade CLO tranches could benefit from an average uplift in weighted average recovery rate (WARR) of over 3.3%, following S&P's incorporation of additional information on loan recoveries into its analysis of CLOs (SCI 4 August). The average uplift for double-B rated bonds is 2.7%, but remains unchanged for the single-B and triple-C rated bonds.

Morgan Stanley CLO strategists mapped S&P's new recovery rate table to the universe of CLO 2.0/3.0 deals, as of their most recent trustee report. Only deals where 75% or greater of the assets (by count) could be mapped were included in the analysis, which captured 358 transactions or approximately 77% of the universe.

The study found that the increase in WARR was fairly consistent across deals. For instance, only 10% of the transactions sampled had a WARR increase for triple-A rated CLOs of less than 3.1%, while 100% of the deals had a WARR increase of less than 4.2%.

S&P is now providing additional granularity for recovery rating categories 2 through 5, highlighting whether loans fall within the top or the lower half of its recovery rating band. The agency estimates that the following percentage of loans were in the higher half of the recovery rate band: 48.5% of loans with a recovery rating of 2; 53.6% of loans with a recovery rating of 3; 68% of loans with a recovery rating of 4; and 25.6% of loans with a recovery rating of 5.

CMBS

Largest B-note recovery recorded

The US$425m Four Seasons Resort Maui loan, securitised in GECMC 2007-C1 (US$175m) and CD 2007-CD4 (US$250m), has paid off in full. The loan was modified with a US$350m/US$75m A/B note split in 2011 (see SCI's CMBS loan events database).

The pay-off repaid the A-note and the B-note in full and represents the largest B-note recovery to date, according to Barclays Capital CMBS analysts. The pay-off also repaid the deferred interest on the B-note in GECMC 2007-C1, off-setting the standard 1% special servicing work-out fee.

A refinance of the loan had been expected and the latest updated modification template from July detailed that the loan could be paid off before June 2015 only if both the A- and B-notes are paid in full. The loan is anticipated to be placed in a new single-asset CMBS this month.

The CD 2007-CD4 remittance has not been released yet, but the Barcap analysts expect work-out fees for the deal also to be offset by B-note deferred interest recoveries.

CMBS

B-piece liquidity increasing

Secondary market liquidity for US CMBS B-pieces is increasing, with 162 bonds totalling US$1.2bn appearing on BWICs year-to-date, according to Morgan Stanley figures. CMBS strategists at the bank note that the majority of the B-pieces traded in the secondary market are primarily double-B and single-B rated bonds from deals issued in 2012 and prior. However, some unrated bonds are also beginning to trade, as well as a few 2014-vintage names.

B-pieces offer a return in the mid-teens, with the yield profile highly dependent upon the timing and magnitude of losses over time. As well as opportunistically selling bonds in the secondary market, the B-piece yield can be enhanced up to 30% through the creation of an XA IO that shifts interest senior in the waterfall and/or negotiating a portion of special servicing fees.

Given the specialisation required for investing in CMBS B-pieces, the Morgan Stanley strategists note that the bonds are distributed to a relatively small group comprising 19 different investors. Although the B-piece investor base is growing, with at least two new entrants in 2014 - Seer Capital Management (accounting for 3.5 deals) and Doubleline (two) - it remains dominated by a handful of accounts. The top-three investors - Rialto (accounting for eight deals), Ellington (five) and LNR (3.5) - have purchased nearly 60% by count of the B-pieces on the 30 deals priced year-to-date.

CMBS

Cash-out impact examined

Kroll Bond Rating Agency has published a research report delving into borrower equity cash-outs in the US CMBS market. Given increased competition among lenders, the agency sought to quantify the impact that equity cash-outs have had in driving its main stressed metrics into riskier territory.

Slightly less than half of the loans in KBRA's top-20 rated universe have returned equity to the borrower, but the agency also individually reviewed characteristics of the loans to gauge the story behind the numbers. "After further review, it is evident that a majority of the cash-outs have occurred in loans where the borrowers have had long operating histories of at least five years and where equity has built up in the property, either through equity investments and/or asset appreciation. That said, the credit metrics of these loans weakened faster than the broader universe," it notes.

Unsurprisingly, stressed leverage for cash-out loans deteriorated faster than the broader top-20 universe, ending 2Q14 at 104.3% compared to 101.4% for the top-20 loans.

CMBS

Further Sanchez sales inked

CR Investment Management has sold a further ten properties located across Germany from the Sanchez Portfolio, resulting in approximately €55m of sales proceeds. Many of the properties are located in non-prime locations and had a number of technical complexities associated with them, such as fire protection issues, 100% vacancy and part-ownership structures.

The Sanchez Portfolio originally consisted of 107 properties and was originally owned by a MSREF vehicle. The portfolio was financed through loans totalling approximately €1.1bn, including the €472m Mozart loan securitised in the Talisman 7 CMBS. CR has subsequently reduced the portfolio to less than 20 properties, achieving sales proceeds with an average of 10% above market value.

CMBS

Healthcare tops severity rankings

Healthcare edged out all other property types as the worst-performer in 2Q14, according to Moody's latest quarterly US CMBS loss severities update. The 57.4% weighted average loss severity for loans backed by healthcare properties included the 105% loss severity on the Senior Living Properties Portfolio, which liquidated with a US$117.7m loss to the GMACC 1998-C1 transaction (see SCI's CMBS loan events database).

"The Senior Living Properties Portfolio loss is the seventh highest dollar loss to date," says Keith Banhazl, a Moody's svp.

Meanwhile, two other deals are expected to incur losses exceeding 20% of their original balance - JPMCC 2008-C2 at 26.7% and GSMS 2007-GG10 at 20.7%. In addition, the top two loans with the highest dollar losses to date are from these two transactions.

Two California Plaza, securitised in GSMS 2007-GG10, liquidated with a US$203.5m loss (for a severity of 43.5%) at the time of final disposition and is the largest loan loss to date. The Promenade Shops at Dos Lagos, securitised in JPMCC 2008-C2, liquidated with a US$135.4m loss (for a severity of 109.2%) and is the second-largest loan loss to date.

The 2006 and 2008 vintages continue to have the highest cumulative realised loss rates at 5.9% and 5.1% respectively, Moody's notes.

The weighted average loss severity for loans liquidated at a loss rose to 42.1% in the second quarter from 41.9% in the first quarter. From 1 July 2013 to 30 June 2014, US$14.7bn of CMBS loans liquidated, compared with approximately US$16m in the prior 12-month period.

CMBS

Property appreciation rates compared

Many investors who acquired US property after 2000 and sold during the pre-crisis price run-up or who acquired property post-crisis and sold into the recovery realised double-digit annualised appreciation, according to the latest Moody's/RCA CPPI report. The finds are based on a study of annualised appreciation rates for 91 post-2000 purchase/sale holding periods.

In the apartment sector, of the 26 post-2000 purchase/sale holding periods with double-digit annualised appreciation, 16 were pre-crisis and 10 were post-crisis. In the commercial sector, of the 21 post-2000 purchase/sale holding periods that saw double-digit appreciation, 16 were pre-crisis and five post-crisis.

The Moody's/RCA Commercial Property Price Indices national all-property composite index increased by 0.1% in July. The apartment component increased by 0.8%, while the larger core commercial component decreased by 0.2%. The CPPI now stands at 64.9% above its January 2010 trough and 2% below its November 2007 peak.

CMBS

Delinquencies off-set resolution gains

US CMBS delinquencies fell by 2bp in August to 4.85% from 4.87% a month earlier, according to Fitch's latest index results for the sector, despite the highest volume of changes to the index since March. While resolutions rebounded strongly last month to US$1.075bn, delinquencies hit US$1.082bn, representing the largest volume of new delinquencies since February 2013.

The surge in resolutions was led by the sale of the US$360m Solana loan, securitised in BACM 2007-1 (US$220m) and JPMCC 2007-LDP10 (US$140m). The property was reportedly acquired by Blackstone for US$180m (see SCI's CMBS loan events database).

Meanwhile, two large new delinquencies last month off-set the resolution gains, the largest of which was the US$240m Westfield Centro Portfolio (securitised in JPMCC 2006-LDP7) - which remains due for its 1 July payment. The special servicer is dual-tracking foreclosure alongside negotiations with the borrower regarding a potential modification.

The second largest new delinquency in August was the US$190.8m Gulf Coast Town Center Phases I & II (CSMC 2007-C5). The loan has been in special servicing since July 2013 and, despite payments being kept current via a lockbox, was added to Fitch's index last month since a consensual foreclosure now seems likely.

Although new delinquencies slightly exceeded resolutions in August, the overall rate moved modestly lower due to an increase in the index denominator. Fitch-rated new issuance volume of US$4.3bn outpaced US$3.5bn in portfolio run-off. The new issuance also helped off-set significant jumps in late-pays for two property types.

Delinquencies on retail CMBS soared by 49bp: the US$722m in new retail delinquencies far surpassed last month's US$272m in resolutions. The two largest new additions to the index last month - Westfield Centro Portfolio and Gulf Coast Town Center - contributed nearly 60% of the new retail delinquency volume.

Hotel also saw a significant jump in its rate, moving 41bp higher, due to US$123m in new delinquencies outpacing just US$22m in resolutions. However, the largest hotel new delinquency was only US$42.5m - the Radisson Alexandria loan, securitised in MLMT 2007-C1.

Conversely, industrial, office and multifamily saw their rates move lower in August by 12bp, 5bp and 4bp respectively. The largest loans with status changes for those three property types were attributable to the office sector: the US$55.2m Wharf at Rivertown (GSMSC 2007-GG10) became 60 days delinquent last month, while the US$50m Forum Building (CD 2007-CD4) was disposed of for a loss.

Current and previous delinquency rates are: 5.88% for hotel (from 5.47% in July); 5.52% for multifamily (from 5.56%); 5.34% for retail (from 4.85%); 5.17% for office (from 5.22%); and 5.15% for industrial (from 5.27%).

CMBS

Acropolis calculation error corrected

The US$19.5m Acropolis Gardens Realty Corp loan, securitised in WFRBS 2013-C15, has had its recently reported US$246,887 realised loss reversed (see SCI's CMBS loan events database). The loan was secured by a 612-unit cooperative residential building located in Astoria, New York.

The loan was transferred to special servicing in March 2014 due to monetary default. The borrower had also failed to provide audited financial statements for its fiscal year ending 30 April 2013, as required under the mortgage note. In addition, there had been on-going litigation in federal court claiming fraud and breach of fiduciary duty on the part of the board of directors of the cooperative, which was not disclosed at issuance.

Fitch reports that NCB, as special servicer, recommended acceptance of a full pay-off of the loan balance. The prepayment penalty that would have been due under the note was approximately US$3.2m, but the servicer accepted a US$1.5m discounted prepayment penalty to avoid potential costly litigation - including a contested foreclosure - a high probability of bankruptcy filing and the likelihood of various claims and defences being asserted against the trust.

The loan was repaid in full on 17 July and was originally reported as taking a small loss due to special servicing fees. However, after further discussion with NCB, Fitch confirms that the loss was due to a calculation error. Per the August remittance report, the liquidation of the Acropolis Gardens Realty Corp loan resulted in zero realised loss.

CMBS

Special servicer transfers surveyed

Although US CMBS loan delinquencies have been trending steadily lower, the past spike in defaults, coupled with declines in collateral values has led to more frequent erosion of first-loss outstanding principal and consequently changes in controlling-class bondholders and ultimately named special servicers. This has sparked concern that the volatility caused by these changes in the special servicer negatively impacts both borrowers and CMBS trusts.

For example, a panel at the Commercial Real Estate Finance Council's March conference outlined the propensity for special-servicer change-overs to disrupt the asset-resolution process, as well as the handling of unapplied loan payments and communication among the parties involved. In light of these concerns, Morningstar Credit Ratings examined the extent of special-servicer transfers triggered by controlling bondholder class changes by analysing data collected from a representative sample of CMBS special servicers.

There are generally two chief mechanisms that trigger a change in the controlling class of a transaction: when actual realised losses upon liquidation of an asset are applied to the outstanding principal balance of the lowest existing tranche in the securitisation; and the application of an ARA to the outstanding principal balance of the lowest existing tranche. Morningstar's data shows that from the transferor side (or outgoing special servicer), an ARA led to a change of bondholder control and subsequent special-servicer transfer in only 10% of the reported transfers, while realised losses triggered the change in 72% of the reported transfers. From the transferee side (or receiving special servicer), an ARA caused a control change and transfer in 2% of the reported transactions, while realised losses caused the transfer in 71% of the reported cases.

The study shows that the vast majority of reported transfers involved CMBS transactions issued during 2004 to 2007. Morningstar's data comprised 65 CMBS transactions in which the special servicer was the transferor, with the transfers occurring between 2011 and March 2014.

These transferred pools involved 7,907 loan or REO assets totalling approximately US$107.1bn in unpaid principal balance. The pools had 631 active specially serviced assets, with a total UPB of approximately US$12.3bn at the time they transferred.

The data also identifies 86 transactions in which the special servicer was the transferee during the same time period. These pools contained 10,031 assets totalling approximately US$129.2bn in UPB, with 780 active specially serviced assets having a total UPB of approximately US$15.6bn. Some CMBS transactions were common to both the transferor and transferee data submitted to Morningstar.

Within the transferor-reported transactions, 549 (or approximately 87%) of the active assets moved to the successor special servicer - that is, the incumbent special servicer retained resolution responsibility for 82 (or approximately 13%) of the active assets. Consistent with the transferor data, transferees reported receiving 663 (or approximately 85%) of the active assets, with the remaining 117 (or 15%) retained by the incumbent special servicers.

The data suggests that transferors were the originally named special servicer on 41 (or approximately 63%) of the CMBS transactions they transferred to a successor. As such, this indicates that nearly 40% of these transferred CMBS pools incurred a change in the special servicer at least twice since their issuance.

Unsurprisingly, affiliations between the new controlling-class holder and a special servicer seem to have played a large role in those entities being named as successors in these transfers. Of the reported transfers submitted by Morningstar's respondents, 59% stated that they were affiliated with the controlling-class holder appointing them as the new named special servicer. However, the percentage of unaffiliated special-servicer appointments may increase as more subordinate bond investors - not having their own special-servicing capability - continue to hire third-party special servicers.

For both transferors and transferees, it appears that 2013 was by far the most active year - although 2014 may be on pace to match or even exceed that volume.

With respect to transfer volatility, special servicers have noted that not only have some CMBS transactions incurred multiple special-servicer transfers, but that the duration period for successor special servicers has been as short as a few months. In two reported situations, the special servicers each held their transferred special-servicing rights only for three months. In one other case, the special servicer held the transferred special-servicing rights for two months before having to relinquish that position.

Morningstar indicates that in some cases this volatility may be attributable to special servicers' regaining their special-servicing rights as a result of CMBS bond purchases in the secondary market.

As the volume of delinquencies in seasoned CMBS generally has declined and newer pooling and servicing agreements now impose limits on special servicing fees, the agency believes that special servicers may become more recalcitrant to surrender potential fee income. Another related challenge for these firms is the need to retain the requisite infrastructure and experienced asset managers to ensure full readiness for any upswings in loan default activity.

Accordingly, fee-sharing arrangements in transferred CMBS portfolios also can help special servicers manage their businesses and revenue projections. Fee-sharing arrangements were in place on 17 (or approximately 53%) of the transfers in which transferors provided data about fee-sharing; they were in place on 36 (or approximately 57%) of the transfers in which transferees provided data about fee-sharing.

While Morningstar believes the volatility caused by repeat transfers can be disruptive to ongoing asset management and may aggravate losses to the trust in some cases, the agency views them as unintended consequences of the pre-CMBS 2.0 structure of governing PSAs, exacerbated by the financial crisis and the preceding loan underwriting environment. "No doubt there likely will continue to be additional special-servicer transfers in the near term, resulting from events triggering changes in the controlling bondholder class. However, we expect this phenomenon to diminish as these legacy transactions pay down and as loss severities decrease, due to improving fundamentals in the commercial real estate market," it concludes.

Insurance-linked securities

Rationalisation for cat bond market?

Continued demand from hedge funds and institutional investors has pushed outstanding catastrophe bond volumes approximately 12% higher so far in 2014 than as at end-2013, to reach a total of US$22.9bn, according to Moody's latest Reinsurance Monitor. Peril coverage continues to widen across a range of risk types and geographies, while there are signs that a more rational marketplace is emerging in terms of pricing.

Moody's currently anticipates 2014 market issuance to reach approximately US$9bn, a record for the sector, and approximately 10% higher than the 2007 peak. At the same time, the year-to-date decline in price multiples has slowed to an average of 2.88x the expected loss - down from 5.14x in 2009, 4.44x in 2012 and 3.17x in 2013.

In the first two months of 2014 the average discount for new cat bond issuances was around 20%, but investor sentiment has hardened since February and cat bonds issued since the spring have averaged less than a 5% discount versus initial guidance.

Furthermore, the majority of May's cat bond issuances were priced above initial expectations. Unsurprisingly, this apparent bottoming-out of cat bond prices coincides with an uptick in risk-free rates.

"We see this tougher stance at the point of pricing as a key first step towards investors demanding higher returns on cat bonds as an asset class," Moody's observes.

Together with the increasing coverage of European and Asian/Oceanic natural catastrophe perils, non-natural catastrophe bonds are beginning to emerge. One recent example is Hoplon II Insurance, which is designed to protect MyLotto24 against exceptional lottery jackpot winnings in Germany.

RMBS

Servicing continuity risk highlighted

The rapid growth of several US mortgage servicers means that a small group of entities control the vast majority of legacy loans in need of a work-out. Fitch suggests that this could present risks for some private label RMBS.

The top-five non-agency mortgage servicers - Ocwen, Nationstar, Bank of America, JPM Chase and Select Portfolio Servicing - together service approximately 75% of all non-agency RMBS. Future problems may rest with lower-rated or non-rated non-bank servicers, according to Fitch md Roelof Slump.

"Non-bank servicers have grown significantly through the sale and transfer of difficult-to-service loans from large banking institutions," he says. "However, while non-bank servicers typically offer specialisation which is important for this critical function, they are generally not as well-capitalised as the banks and this could increase servicer disruption/continuity risk among lower-rated companies with unique business strategies."

Fitch says it has taken negative rating actions on a number of RMBS transactions over the past 24 months, due to a higher risk of servicer disruption among some of these companies. The biggest risk to a mortgage investor from a servicer default is a disruption in servicing continuity.

"Until a new servicer is put in place to manage the loan, investors are at risk that pool delinquencies increase and trust cashflows are disrupted," adds Slump. This becomes more of a problem with large higher risk portfolios that require more extensive servicing processes.

RMBS

RFC issued on updated SHP model

Fitch has released an updated methodology for its Sustainable US Home Price (SHP) model as an exposure draft. The agency is soliciting market comments before incorporating the model into its rating methodology.

While the foundation of the SHP model has not fundamentally changed, Fitch has expanded the dataset and introduced statistical techniques designed to enable the model to self-identify home price bubbles without external user input. These new enhancements aim to increase the model's long-term effectiveness in capturing home price dynamics, especially in respect of the behaviour of the boom/bust cycles of the late 1980s and the 2000s.

Home price growth throughout the US is largely sustainable, although Fitch suggests that some regions remain overvalued - namely markets in coastal California and Texas. Indeed, the agency identifies several cities - including San Francisco, Los Angeles, Riverside and Houston - as being more than 10% overvalued.

"While home price momentum continues to be strong in these regions, growth will need to moderate as the economies continue to grow for prices to regain long-term equilibrium," comments Fitch director Stefan Hilts.

Fitch will be accepting and considering comments until 1 October, when the exposure draft period ends.