Contents

Structured Finance

Regulatory requirement

Call for scrutiny under risk retention originator route

European CLO and RMBS issuers are increasingly adopting the originator route under the Capital Requirements Regulation to satisfy risk retention rules. While the flexibility provided by this approach appears to be attracting external capital to the market, scrutiny of both the owner and substance of risk retention is recommended to ensure sufficient alignment of interest between sponsors and investors.

The CRR aims to avoid the originate-to-distribute model and has been welcomed by market participants for the flexibility of its eligibility rules, especially with respect to the originator route, which puts the onus on a third party to take the role of risk-retention holder. A Cadwalader CLO client memo from January states that the originator route can be achieved in two ways: by acquiring some of the underlying loans and then, after holding them for a period, selling them to the issuer; or via an originator entity that has established the securitisation and through which the issuer acquired the loans. Over half of the loans need to have been originated by the originator entity.

Funds established by Fair Oaks Capital and Blackstone/GSO Loan Financing have positioned themselves as such originator entities (SCI passim). Third-party funds holding the retention requirement has also been seen in a handful of RMBS so far this year. Kilimanjaro AM, for instance, is the retaining entity in Moorgate Funding 2014-1.

European securitised products strategists at Citi suggest that to the extent retaining entities and retention amounts are meant to represent skin-in-the-game, investors should consider the substance of the true retention. They believe that fees paid to CLO managers show significant skin-in-the-game, as junior fees make up the majority of the total fees that a manager would earn if the CLO performs well. Equally, owning shares in an originator fund represents a manager's own capital in the CLO.

"We would get far more comfort if we knew that the manager would commit to buy shares in any IPO that went towards funding any originator entity that is buying the CLO equity. That is because, in our opinion, it takes a significant default rate to have any meaningful impact on management fees," the Citi strategists observe.

Miguel Ramos Fuentenebro, co-founder of Fair Oaks Capital, says that his firm's alignment of interest with investors is clear: the firm invests in its own fund and the fee structure is back-loaded. "We're free to invest in any manager and can therefore negotiate terms without any conflict of interest to achieve the best possible economics for investors," he adds. "Managers are under no obligation to accommodate the requests of the control investor. But, if they do, it's a constructive relationship."

Like CLO equity, UK non-conforming RMBS residual tranches are junior in risk, but also generate attractive front-ended cashflows. As such, they are appealing candidates for retention.

But the Citi strategists note that in some cases the first loss tranche may be re-tranched, with the sponsor retaining only back-ended cashflows. In Moorgate Funding 2014-1, for example, the residual piece is split into principal and revenue residual certificates.

The retention entity has undertaken to keep only the principal certificate, which is entitled to a minority of the total cashflows and has a back-ended return profile. The strategists estimate that even a slight up-tick in annual default rates to 1% would reduce the cashflows to nearly zero, suggesting that the present value of such a retention amount is negligible. They consequently recommend that once investors get comfortable with the degree of subordination below the debt tranches, they should consider the cashflows of the retained tranche.

Fitch also points to the greater risk present in legacy loan portfolios purchased by RMBS sponsors at a discount, having analysed several recent securitisations of legacy portfolios purchased by the deal sponsor from the original lender (SCI 5 June). The agency is concerned that if the RMBS are sold to investors, total proceeds may exceed the sponsor's initial investment. It suggests that other potential issues to be aware of include insufficient data in cases where the portfolio has been transferred across servicers.

"Originator [entities] need to comply with the letter, as well as the spirit of the regulation because its objective is to rebuild a viable market for the long term," Ramos Fuentenebro observes. As such, third-party origination with a bank partner that has a network of SMEs could also be suitable for the originator route, providing the third party is actively involved in the selection of assets.

At least three other managers are believed to be exploring the CLO originator fund route, in a format that's closer to the GSO model. Nevertheless, Ramos Fuentenebro is sceptical about how many vehicles will ultimately be successful.

"Complex models and structured credit expertise aren't sufficient: a fund needs enough analysts to review loans - the main driver of returns - as well as long-term capital for originations. Any third party who's committed should be able to achieve this, but it could prove to be too much hassle to raise a fund, especially a listed fund," he notes.

He concludes: "The originator fund model is a useful addition to the tool box, but only if it works economically. While it's positive to have alternative risk retention routes, if the originator fund option is removed, the CLO market will survive."

CS

ABS

Bid-lists bring ABS variety

It was a busy session in US ABS yesterday, with SCI's PriceABS data capturing a range of aircraft, auto, credit card and student loan names out for the bid. Vintages ranged from 2000 to 2013 and there was even a timeshare ABS name in the mix.

Among the aircraft names was one of the earliest-vintage tranches out for the bid. The ACAP 2000-1A A1 tranche was talked in the mid-40s, having been talked at the same level on Tuesday.

AERCO 2A A3 was talked in the low-50s both yesterday and the day before. The last recorded cover price for the tranche was in the mid-50s on 20 May.

LIFT 1 A2 was talked in the low/mid-60s to mid-60s area. The tranche has previously been recorded as a DNT twice this year, with its last recorded successful trade coming in June 2013, when price talk had been in the mid/high-60s.

In the auto space, the ALLYA 2012-4 A4 tranche was talked at plus 22 on its first appearance in the PriceABS archive. SDART 2012-1 C was talked at plus 40 and covered at 48.

The FORDL 2013-A A4 tranche was talked at 24 and covered at 27, while PILOT 2013-1 A3 was talked at 22 and covered at 25. Price talk last month on that latter tranche was at plus 25 and it was covered in April at 24.

AMXCA 2012-2 A was one of the credit card names on the day's bid-lists and was talked and covered at plus 13. The tranche also circulated on one of Monday's bid-lists, when price talk was at plus 10 and plus 14.

CABMT 2012-1A A1 was talked at plus 35 and covered at 30, while CCCIT 2012-A1 A1 was talked at plus 12 and in the low/mid-teens. On its first appearance in PriceABS on 3 April that CCCIT tranche was covered at 100.02.

CCCIT 2013-A6 A6 was talked at 17 and covered at 19. The tranche was covered at plus 20 on Monday and have been talked in the low-20s on 2 September.

Lastly for the credit card names, CHAIT 2012-A3 A3 was talked at plus 11. The tranche was covered at 14 on 3 September.

A variety of student loan names was also out for the bid, including the NCSLT 2006-1 A5 tranche which was talked at 78. The tranche was covered in the high-60s in January.

NSLT 2006-3 B was talked at 92. It had only appeared in PriceABS once before, when it was covered at 91.94 on 30 July.

NSLT 2012-4A B was talked at 89, while NSLT 2012-5A B was talked at 84.5 and NSLT 2013-3A B was talked at 93.81. The NSLT 2013-4A B tranche, meanwhile, was talked at 91.88.

SOFI 2014-A A1 was traded, as were SLMA 2004-B A3 and SLMA 2012-3 B, while SLMA 2004-B A4 was a DNT. The SLMA 2012-6 B tranche was talked at 93.94.

Rounding out the supply, the SRFC 2012-2A A timeshare ABS tranche was also out for the bid. It was talked at plus 85 and covered at 83, having last been covered on 11 March at plus 89.

JL

ABS

Euro 'chips off the table'

Both the primary and secondary European markets have been busy recently as the market continues to benefit from the ECB bounce. However, there has also been an increase in the number of DNTs on BWICs as an element of caution creeps into the market.

"Since the ECB's announcement the European market has really picked up. What we have seen over the last couple of days though is an increase in the number of DNTs," says one trader.

SCI's PriceABS data captured a couple of these DNTs yesterday. Both DUCHS IV-X F and EUROC V-X SUB were CLO equity tranches. However, while a €1m piece of the DUCHS tranche failed to trade, a smaller €150,000 piece was covered in the very high-20s.

The trader suggests that after a surge of activity, investors may now take a step back. He says: "It seems like a lot of people are taking chips off the table as quarter-end approaches."

He adds: "Although the announcement was positive, nothing is official just yet. I think people are looking to avoid disappointment when the next ABSPP announcement is made on 2 October."

The trader reports that the outlook for the end of this week and start of next week is fairly quiet. While BWIC activity is not expected to be out of the ordinary, there are a couple of new issue deals in the pipeline.

"There are a couple of CLOs in the market that are being talked about and there is some interest around those. In CMBS, Deutsche Bank has a deal backed by a couple of Dutch loans [DECO 2014-TULIP] which looks more like an old-school conduit issuance, so that will also be an interesting one to watch," says the trader.

JL

Secondary markets

No demand for eclectic list

The 40 line €185m eclectic BWIC list of ABS, CDOs, CFOs, SME CLOs, CMBS and RMBS failed to find investor demand this afternoon with 32 of the bonds on offer not trading.

A further six bonds were only revealed to have traded - BBVAR 2007-2 A2, BCJA 5,CSTNA 2007-1 A, DEKAE II-X E, EMERM 4 B and SANFI 2006-1 E. However, two tranches did have covers announced - STNTM I C at MH70s and WINDM VII-X D at 61.25.

Secondary markets

Mixed CLO BWICs

Yesterday's triple-A CLO BWIC lists traded well either side of the Atlantic, but elsewhere results were more mixed with plenty of DNTs, notably none of the dollar equity tranches on offer traded. Nevertheless there is heavy supply again today with ten euro and US CLO lists scheduled.

Those lists cover a broad mix of CLOS from all parts of the capital structure and include the four line €33.9m triple-A list postponed from yesterday. In total there are 22 euro line items totalling €68.579m and 31 US dollar tranches totalling $96.112m.

Most eye-catching are two slices of euro CLO equity due at 15:30 London - €1m of DUCHS IV-X F and €950,000 of EUROC V-X SUB. The former hasn't traded on PriceABS but the latter last covered at LM20s on 26 February 2014.

Secondary markets

BWICs still dominating Euro ABS

Today sees another large slew of European ABS and MBS BWICs, which is dampening other secondary market activity.

"It's a question of getting through a lot of line items again today. It's been the same story for the past few days, throughout which we've seen reasonably good execution," says one trader.

The volume of lists has meant that the rest of the secondary market has been quieter than in recent weeks and the trader expects that to continue into tomorrow at least. "Italian CMBS has been trading up in the Street but there hasn't been much else going on this morning. Most people seem now to be waiting on the Scottish result," he says.

Further, there appears to be growing buy-side caution off-BWIC as the next ECB meeting gets nearer, though there is still enough dealer activity to keep prices firm.

Secondary markets

Spanish seniors trade well

The 13:00 London time Spanish seniors BWIC has traded at or above talk and sparked some activity in similar deals in the bilateral market.

The seven line list covered as follows: AYTH III A at 98.57, AYTH M1 A at 98.71, AYT 2 A2 at 99.65, BBVAL 2007-1 A1 at 99.17, BCJAM 4 A2 at 94.913, RHIPO 7 A1 at 96.183 and TDA 22 A2A at 99.865.

Secondary markets

Uncommon deal type trades

Yesterday's US ABS session saw a rarely-witnessed tax lien deal included on BWIC. The TAX 2014-1A NOTE tranche was covered in the session at mid/high-99.

SCI's PriceABS also recorded price talk for the tranche in the 100 area. The deal is the first tax lien ABS to appear in the PriceABS archive.

Secondary markets

Back to work after Scots decision

After monitoring the build up very closely, the European ABS market has reacted calmly to the result of the Scottish independence referendum. While the impact of a 'Yes' vote was expected to be limited, the 'No' result has ensured business can continue as usual.

"We were watching this with interest but it was always going to be a minimal impact. There were a couple of isolated RMBS master trusts that had exposure to Scottish properties but most people were not anticipating any currency changes in the near future," says one trader.

He adds: "Now that we have certainty on this issue the market will be looking to move on. I have not seen any price moves on the back of the referendum and I do not think there will be much of an impact."

Secondary markets

Equity tranches do not trade

Yesterday there were two euro CLO equity tranches catching traders' attention (SCIWire 18 September). The first was a €1m piece of DUCHS IV-X F and the second was a €950,000 piece of EUROC V-X SUB.

While the €1m piece of the DUCHS tranche came back as a DNT, a smaller €150,000 piece was successfully covered in the very high-20s. Price talk had been in the high-20s.

The €950,000 EUROC tranche was also a DNT. In that case there was no smaller piece successfully covered.

Secondary markets

Quiet start to the week for BWICs

After last week's high levels of list-based activity this week's BWIC schedule looks very light. However, auction volume is expected to rise after the close the ABS East conference on Wednesday.

There are no BWICs currently scheduled for today and just two European MBS lists for tomorrow. CLOs on either side of the Atlantic are not slated to return until Wednesday.

Secondary markets

European RMBS sporadic

Traders report only sporadic trading in the European RMBS secondary market today with most players content to sit on the sidelines and take a breather after last week's hectic activity.

What trading interest there has been today has revolved around the most liquid names in both core and peripheral markets, which is perhaps responsible for the first BWIC of the week - a two-line Dutch Prime RMBS list that traded at 15:00 London today.

€20m of CITAD 2010-2 A covered at H100 this afternoon and €15m of DMPL VI A covered in the low 101s. Both deals last covered on PriceABS on 25 June 2014 at 100.993 and 101.261 respectively.

Secondary markets

European CMBS take centre stage

As the European MBS BWIC market eases itself back to life today, two CMBS lists take centre stage.

First up at 10:00 London is a six line 26.55m list, which consists of: FORES 1 A, INFIN SOPR A, MESDG CHAR A, MESDG CHAR B, VEST 2 A4 and WINDM X-X A. Two of those deals have traded with a price in the last three months on PriceABS - MESDG CHAR A covered on 19 September at 99.05 and and WINDM X-X A covered at 98.4 on 11 September.

Due at 15:00 is a 22.15m five line list containing: ECLIP 2006-4 B, INFIN SOPR A, MESDG DELT A, SANDW 2 A and TAURS 2007-1 A1. The only bond to trade with prices on PriceABS in the last three months is the highly active MESDG DELT A, which has covered in a range from 94.32 on 24 July to 95.16 on 19 September.

Secondary markets

US CMBS ticks over

Despite ABS East and a strong new issue pipeline the US CMBS secondary market is holding on to last week's gains and activity is ticking over.

Spreads held firm yesterday amid light secondary trading that saw $130m+ in BWIC volume with lists dominated by senior paper. Today is expected to be much the same with $86m across 20 line items already circulating on BWIC so far.

However, today's lists do offer a broader variety across the capital structure including $22m of JPMCC 2012-CBX G due at 14:00 New York time.

Secondary markets

Early start for European CLOs

As all structured finance asset classes look to get back into full stride today, European CLOs are taking the lead with four BWIC lists already scheduled.

The first is a small list of four lines of senior paper totalling €1.92m due at 9:00 London today. It comprises: CELF 2005-1X B, CELF 2005-2X B1, DALRA 1-X B and DALRA 3-X A2.

14:00 London sees a nine line €120.5m list of triple-A bonds - AQUIL 2006-1X A, AVOCA VII-X A2, AVOCA VIII-X A2, GSCP 2006-3X A1, HARBM 9X A1T, JUBIL V-X A2, LEOP V-X A1, SKELL 2006-1X A1 and WODST V-X A2.

Then at 15:00 there are two lists - €3m each of triple-B BOYNE 1X D and double-B CCOC I-X V, as well as €7.538m of triple-A CADOG 2X A2 and €1m of double-A CADOG 2X B.

The only bond on any of these lists to trade on PriceABS in the last three months is CCOC I-X V, which covered at 98.11 on 9 July.

Structured Finance

SCI Start the Week - 22 September

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

Pipeline
Two ABS, two RMBS, two CMBS and six CLOs entered the pipeline last week. The ABS comprised FCT Ginkgo Compartment Sales Finance 2014-1 and Glacier Credit Card Trust Series 2014-1, while the RMBS were US$374m Agate Bay Mortgage Trust 2014-2 and STORM 2014-III.

The newly-announced CMBS were US$1.4bn CSMC 2014-USA and €250m DECO 2014-TULIP. The CLOs consisted of: US$510.5m ACIS CLO 2014-5; €308.25m Contego CLO II; US$500m Cent CLO 22; US$411.56m Flagship VIII; US$600m Octagon XXI; and US$450m Sound Harbor 2014-1.

Pricings
It was a very busy week for pricings. Together with 10 ABS and 10 CMBS, six CLOs printed.

The ABS pricings were: US$1.52bn Ally Auto Receivables Trust Series 2014-2; US$154.87m CarNow Auto Receivables Trust 2014-1; US$1.028bn Chrysler Capital Auto Receivables Trust 2014-B; US$1.1bn Citibank 2014-A8; US$349m Credit Acceptance Auto Loan Trust 2014-2; US$300m OSCAR US 2014-1; US$850m Porsche Innovative Lease Trust 2014-1; US$2.62bn SpringCastle Funding Asset-Backed Notes 2014-A; Turbo Finance 5; and US$215m Westgate Resorts 2014-1.

The CMBS prints comprised: US$1.236bn COMM 2014-LC17; US$425m COMM 2014-PAT; US$1.173bn FREMF 2014-K716; US$1.1bn GSMS 2014-GC24; US$1.162bn JPMBB 2014-C23; US$516.7m JPMCC 2014-FL5; US$911m MSBAM 2014-C18; US$525m MSC 2014-150E; US$473m Progress Residential 2014-SFR1; and US$871m WFRBS 2014-C23.

Finally, the €927.4m Atlantes SME No.4, US$461m Cedar Funding IV, US$400m LCM XVII, €361m Newhaven CLO, the refinanced US$349m Symphony CLO VIII and US$515m Thacher Park CLO transactions were issued.

Markets
The European ABS, MBS and CLO markets have been busy recently as they continue to benefit from the ECB bounce, although caution has begun to creep in (SCI 19 September). Bid-lists are including more DNTs and investors appear to be waiting to see whether there will be any surprises when the ECB clarifies its ABSPP plans in early October.

Meanwhile, US ABS BWICs included a variety of names last week, with Wednesday's session seeing aircraft, auto, credit card, student loan and timeshare ABS bonds out for the bid (SCI 18 September). SCI's PriceABS data captured paper from a range of vintages, including the ACAP 2000-1A A1 tranche and SOFI 2014-A A1 tranche.

US CMBS spreads tightened as there was strong new issue demand: a post-crisis record of five conduit transactions priced during the week. Barclays Capital CMBS analysts note that 2014 LCF tranches tightened by 2bp to swaps plus 84bp. In the vintage space, 2007 LCF duper tranches were flat at swaps plus 82bp and credit-levered AJ bonds tightened by 7bp to swaps plus 464bp.

US CLO secondary market activity was moderate, with BWIC volumes totalling about US$630m, report Bank of America Merrill Lynch analysts. Supply was split evenly between pre- and post-crisis deals, with bids for 2.0 bonds moving slightly weaker. Demand for 1.0 bonds and shorter-WAL notes remained strong as both real and fast money continued to search for shorter cashflows.

Deal news
• DSB Bank's Chapel and Monastery securitisations remain attractive following an update on their performance. CHAPE seniors have factored down more than 25% since late 2012, while MONAS has factored down 15%, with the bonds now trading three or four points higher.
• 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.
• 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.
• Punch bondholders have voted in favour of restructuring its capital structure. Most bonds are expected to rally strongly as a result.

Regulatory update
• FHFA director Mel Watt has reaffirmed the agency's intention to create a single TBA market for GSE securities. Although the industry has voiced concerns over the proposal, it could be a step towards rebuilding the private-label RMBS market.
• Trading under the new 2014 ISDA Credit Derivatives Definitions is now expected to begin for most standard credit default swap (CDS) contracts on 6 October. The new date was recommended by ISDA's Credit Steering Committee (CSC) to match the day on which the changes to existing trades under the ISDA 2014 Credit Derivatives Definitions Protocol take effect (SCI 15 September).
• IOSCO has published a consultation report, entitled 'Risk Mitigation Standards for Non-centrally Cleared OTC Derivatives', which proposes nine standards aimed at mitigating the risks in the non-centrally cleared OTC derivatives markets. The proposed risk mitigation standards would contribute to the G20 effort to strengthen the OTC derivatives market in the wake of the financial crisis.
• 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.
• 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 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.
• The US House of Representatives has passed a bill which includes the Barr Bill and three others. The Barr Bill was originally passed in April (SCI 30 April), yet while its reintroduction demonstrates continued support for it, the Senate is still not expected to agree to pass the bill.

CMBS

Sears closures affect CMBS

Barclays Capital analysts have identified seven CMBS loans with exposure to the recent closure of various Sears and Kmart stores. The affected properties include two anchor stores in CMBS 2.0/3.0 malls.

The US$49m Towne West Square Mall in MSC 2011-C2 may be most affected by the closing, say the analysts. Sears accounts for 27% of the rentable area for the securitised portion of the mall and the closing should set off a trigger event on the mall, which requires all cash flows to fill a US$1.2m reserve until Sears is filled.

DSCR NOI should fall from 1.53x to 1.39x after the lease expiration in April 2015. There are co-tenancy clauses, but those are unlikely to be triggered.

The US$28m Holiday Village Mall in COMM 2012-CR5 is also affected by a Sears closure, which will also trigger larger reserve cashflow sweeps for the loan. DSCR NOI will fall from 2.19x to 2.0x. Both Towne West and Holiday Village are expected to continue performing, but are now more vulnerable if another anchor tenant moves out.

The US$150m Westfield Countryside in MSBAM 2013-C11 and MSBAM 2013-C12 is losing a Sears Automotive. However, the space is already being filled and the loss should not affect the property.

There are three malls backed by CMBS loans which may struggle to stay current after the closings. These are the US$28.5m Hickory Point Mall in BSCMS 2006-PW11, the US$25m Towne Square Mall in MSC 2007-T27 and US$19m Mercer mall, which partially backs the US$33.6m Ershig Mall Portfolio in MSC 2007-IQ14.

While Hickory Point is losing its Sears, JC Penney has also announced its own closure. Sears was paying minimal rent and the DSCR NOI is not expected to change much from 1.14x, but the closure of both anchors is likely to trigger co-tenancy clauses that allow smaller retailers to move out or pay a smaller percentage of sales rents, say the analysts.

Towne Square Mall has reported declining performance, with 2Q14 DSCR NCF at 0.95x. The Sears lease at the property runs until 2028 and it is not clear if early termination options exist or co-tenancy clauses will be triggered.

For the Mercer mall in the Ershig Mall Portfolio, DSCR NOI was already just 0.95x on the entire loan. The analysts believe the loss of Sears may be enough to move the loan into default.

JL

CMBS

More to CMBS losses than LTV

Out of 220 loans securitised in European CMBS with an initial LTV below 62%, only one loan experienced a loss, according to a Bank of America Merrill Lynch analysis. The study covered 184 transactions totalling €147bn in issuance.

Losses on the €147bn have so far totalled €2.9bn, or 1.9%. By number of loans, 127 have suffered a loss, representing 11.9% of the total number securitised.

All of the 127 loans suffering a loss were in transactions issued in 2005, 2006 or 2007. The frequency of losses increased with time, from 8.8% for 2005 vintage loans to 11.7% for 2006 and 16.2% for 2007.

Loss rates are expected to increase further, particularly for the 2006 and 2007 vintages, as more outstanding loans are worked out and losses are realised. Less than 10% of 2005 vintage loans remain outstanding, but 26% of 2006 vintage loans and 37% of 2007 vintage loans are currently outstanding.

The study shows that the perception of LTVs getting out of hand pre-crisis appears to be incorrect. Throughout the data period from 2000-2007, there was consistently a portion of borrowers with low LTVs of around 40%, while LTVs in excess of 80% can also be seen all the way back to the earliest data from 2000.

Most loans originated after 2002 were with LTVs between 60% and 85%, with the average LTV of new CRE loans in the UK between 75% and 80% for both prime and secondary quality property from 1999 to 2006. However, leverage increased in the form of increasing debt quanta; as property values increased, so did the amount of debt borrowed at a constant LTV.

Arguably this is why the dramatic decline in property values after 2007 left a number of loans exposed. "Sizing debt quanta using a sustainable LTV concept during the 2005-2007 period could have helped to lessen the build-up of debt and reduce the scale of losses subsequently, in our view," BAML European asset-backed analysts note.

The UK represents 41% of the loans securitised from 2005 to 2007, while Germany accounts for 35%. Losses for the €54bn of securitised UK loans have totalled €1.2bn to date (or 2.3%), while losses for the €46bn of securitised German loans have totalled €679m (1.5%). French losses on €7.2bn securitised are €422m (5.8%) and Dutch losses on €9.9bn securitised are €335m (3.4%), according to the study.

The frequency and magnitude of losses in the UK increase by vintage until the property market peak in 2007. By number, 10.7% of 2005 vintage loans have suffered a loss, as have 11.8% of 2006 vintage loans and 31.6% of 2007 vintage loans.

Loss severities were 11.3% for the 2005 vintage, 19.1% for the 2006 vintage and 34.3% for the 2007 vintage loans. "It is tempting to summarise by saying that among 2007 vintage UK loans, the probability of default was 31.6% and the loss given default was 34.3%," the BAML analysts observe. "However this is not strictly correct because we are not able to identify defaults, only losses."

Germany shows the same pattern for frequency and magnitude of losses by vintage, albeit with a lag, likely reflecting the longer enforcement period compared to the UK. So far, 10% of 2005 vintage loans, 15.3% of 2006 vintage loans and 13% of 2007 vintage loans have suffered a loss, with the more recent vintage in particular expected to see an increase in future.

German loss severities are expected to be similar to those of UK loans, as more loan defaults are expected and existing ones are yet to be resolved. So far, the loss severity for 2005 is 1.7%, while it is 18.9% for 2006 and 18.2% for 2007.

In terms of losses by LTV, the lowest initial LTV loan to experience a loss had an LTV of 57.4% and the next lowest had an initial LTV of 62.6%. Not a single loan with an initial LTV of less than 57% has experienced a loss.

Losses add up more quickly at higher LTVs and, among loans with an initial LTV between 60% and 70%, 9.4% went on to experience a loss. That increases to 15.8% for loans with an LTV of 70%-80% and 23.5% for loans with an LTV of 80%-90%. Interestingly, the only two loans securitised with an initial LTV above 90% both repaid in full.

Equally, none of the 66 loans with an initial ICR of 2.5 or greater experienced a loss, while 38% of the loans with an initial ICR of between 1.0 and 1.1 experienced a loss.

JL

RMBS

Dutch bonds remain attractive

DSB Bank's Chapel and Monastery securitisations remain attractive following an update on their performance, say Morgan Stanley European securitisation analysts. CHAPE seniors have factored down more than 25% since late 2012, while MONAS has factored down 15%, with the bonds now trading three or four points higher.

The trustee has published its latest update on the transactions, noting that a response has been filed to May's court ruling (SCI 27 May). That response included an offer to amend the WCAM agreement and is likely to lead to additional losses of €20m, with a court ruling expected next month.

DSB Bank is receiving an average of 50-60 new claim applications each week, which is down from 100 per week over the last two years. Assuming a conservative run-rate of 100 new filings per week through to the end of next year, the Morgan Stanley analysts estimate the total pipeline of unresolved claims to be 8,500.

Realised losses for CHAPE 2003-1, MONAS 2004-1, MONAS 2006-1 and CHAPE 2007 are currently €82.9m. Factoring in the €20m compensation and additional claims, the analysts calculate potential additional net losses of €55.4m for the four transactions.

Principal impairment would therefore reach CHAPE 2003-1's C or D tranche, although losses would not go higher than the E tranche for MONAS 2004-1. MONAS 2006-1 would be affected up to the D tranche, while CHAPE 2007 losses could reach around the D or E tranche.

The analysts say: "The decline in rate of new claims, lower losses per claim and greater certainty of timelimes are all positive, in our view. While the court's observations earlier in the year have increased our loss expectations, we expect the impact on the securitisations to be limited."

CHAPE seniors are now trading at around 200 DM. Relative value looks compelling, with a 150bp pickup versus prime Dutch transactions and good fundamental value in the senior mezz, the analysts add.

The CHAPE 2003-I A tranche was out for the bid on yesterday's BWICs. It was picked up by SCI's PriceABS data with price talk between 93 and low-95 handle and was covered at 94.4.

JL

CLOs

BlackRock adds PM

Aly Hirji has joined BlackRock in London as a portfolio manager, working on leveraged loans. He was previously a partner at New Amsterdam Capital and has also worked at JPMorgan.

CMBS

Industry vet to lead CMBS push

Robert Kline has joined Cushman & Wakefield's capital markets division as a senior md for the equity, debt and structured finance group. He is based in Phoenix, Arizona.

As a key part of his role, Kline will help to develop the firm's national CMBS advisory practice. He is the founder of RW Kline Capital and has more than 30 years of experience in CRE debt and equity, diversified investments, portfolio management and structured finance.

Risk Management

Valuation risk specialist adds partner

Voltaire Advisors has appointed Peter Jones as a senior partner in its London office. He will be responsible for growing the firm's valuation risk network.

Jones has over 18 years of industry experience and specialises in debt, equity, structured case and derivative valuation, pricing and risk. He was most recently fixed income global head at S&P Capital IQ and has also worked in evaluation services at Interactive Data.

ABS

Agreement to boost Punch bonds

Punch bondholders yesterday voted in favour of restructuring its capital structure. Most bonds are expected to rally strongly as a result.

Barclays Capital analysts expect Punch bonds could rally strongly enough to reach comparable pricing levels to Enterprise Inns. The latter has historically had a superior portfolio, but has not sold down its estate as aggressively as Punch and the two now have largely similar profit per pub and geographic concentration.

The strongest benefit of the restructuring is expected to be seen in Punch B. However, even in Punch A the M1s should see a price upside of around 25%.

"The juniors in Punch B are expected to gain the most and to the extent that Punch's equity trades in line with Enterprise on EV EBITDA basis, then we see most upside in the Punch B class Cs with implicit value of c90 versus c30 current bond price," add the analysts.

Completion of the restructuring still remains subject to consent from RBS and Lloyds Bank, with an expected closing date of 8 October. The new structure prevents dividend distributions and for that reason the Barcap analysts suggest a refinancing option should start to be priced into the bonds within the next 12 to 24 months.

ABS

Declining shipments hurt tobacco ABS

Around 80% of the aggregate outstanding balance of all tobacco settlement ABS bonds rated by Moody's may not pay down in full by maturity according to current projections, says the rating agency. Tobacco settlement ABS payments are tied to cigarette shipment volumes and shipment declines are projected to be between 3% and 4% per year.

The average decline in shipments since 2000 has been 3.3%, which has reduced the ability of the ABS bonds to fully amortise before their maturity dates. However, the credit quality of bonds with higher payment priorities has generally strengthened and the higher-priority bonds in 17 transactions Moody's rates improved because they paid down significantly with funds from 2013 settlement (SCI 18 March 2013). Higher-priority bonds in 11 other transactions benefited from a large payment in April 2014 to the sponsoring states following an arbitration panel's decisions on the diligent enforcement of tobacco laws in 2003.

ABS

ABS ratings approach released

Morningstar Credit Ratings has published its methodology for US ABS ratings, outlining the principles the agency's analysts apply when rating and monitoring ABS transactions. The methodology serves as Morningstar's framework for evaluating financial, operating and corporate asset transactions. The move progresses the agency's plans to expand into ABS ratings services (SCI 8 April).

Morningstar's ABS ratings methodology addresses seven areas of analysis: legal structure, asset quality, transaction structure, credit support, cashflow analysis, originator and servicer quality, and counterparty credit risk. The methodology also includes monitoring, which is an essential part of Morningstar's ratings process.

ABS

Tax lien methodology published

Kroll Bond Rating Agency has released its methodology for rating property tax lien ABS transactions. KBRA's rating of a tax lien ABS transaction represents a blended analysis of the key qualitative and quantitative credit risk determinants.

The agency notes that the credit analysis of tax lien ABS can vary by transaction, not only due to collateral characteristics and transaction structure, but also to local legal provisions. KBRA believes that due to the variability of property tax lien ABS collateral, a qualitative and quantitative assessment that incorporates the originator's collection history and overall strategy is critical in determining a transaction's ratings. The agency also reviews the key features associated with tax lien ABS collateral, including: the lien-to-value ratio, penalty and interest rate accruals, property type, lien age and subsequent liens.

ABS

Aircraft ABS issuance set to rise

Fitch expects stable asset and rating performance for recent-vintage aircraft ABS in the near term, thanks to improved global commercial air travel industry fundamentals, strong asset quality and adequate credit enhancements to weather future volatility. Combined with the increased need for capital markets financing for lessors, these conditions will likely lead to increased issuance in the sector.

"2014 has seen three aircraft lease securitisations and many market participants expect multiple more in the coming year," confirms Fitch senior director Brad Sohl. "Meanwhile, EETC issuance remains a viable source of funding, with lessors and airlines both seeking capital markets solutions to fund record upcoming deliveries."

Competition in the aircraft leasing market is also an evolving issue. New entrants to aircraft leasing are stoking a more competitive environment, particularly in the Asia-Pacific region. The low cost of funds and aggressiveness of certain new entrants could have an influence on market lease rates, according to Fitch.

The prospect of rising interest rates could also have a positive impact on performance for certain aircraft ABS. "Aircraft ABS transactions with fixed rated liabilities or capped liabilities in particular could benefit from rising interest rates," says Sohl.

Structured Finance

Dim Sum ABS mooted

Moody's notes in its China Securitisation Compendium that, with the majority of recent Chinese issuance being CLOs and auto ABS, market participants are considering other asset types for securitisation. These include credit card and equipment receivables - both big ticket items (such as leases backed by aircraft and large machinery) and small ticket items (such as small equipment and auto leases).

Credit cards have become increasingly popular in China and most cardholders tend to pay off the entire balance on their invoice. In order to use such very short-term receivables as collateral in a securitisation, market participants have indicated that a revolving structure would be required.

"Without a revolving structure, transactions can be repaid in full within a very short period, as the payment rate for credit card receivables in China is very high. However, it is not clear to market participants as to how a revolving structure can be employed under the Credit Asset Securitization scheme - China's core securitisation framework," Moody's observes.

Market participants anticipate that the securitisation of Chinese-related assets will also occur overseas as the market continues to expand. Dim Sum ABS would probably be the interim product offered prior to the issuance of true offshore foreign currency-denominated securitisation products, Moody's suggests.

The motives for cross-border transactions are twofold. First, the interest rate differential between issuing overseas and in the domestic market is 2-3 percentage points. If originators issue overseas and still manage to enjoy a healthy rate differential, then cross-border issuance becomes a very viable choice for them.

Second, the current investor base is mostly banks. As such, in order to redistribute risk outside the banking system, diversification of the investor base is necessary.

"Based on China's gradual opening up to foreign investors, such as through the Qualified Foreign Institutional Investor programme, market participants believe that allowing foreign investors to invest in domestic transactions or allowing transactions to go cross-border are both possible in the future," Moody's concludes.

Structured Finance

NAIC proposals to boost insurer demand?

The US NAIC recently published the proposed macroeconomic assumptions and scenarios for its year-end 2014 analysis of insurer-owned RMBS and CMBS. The proposed scenarios are expected to result in higher assumptions for the Home Price Index and National Property Index, potentially leading to lower capital requirements for some RMBS and CMBS bonds.

Indeed, taken together with another proposal under NAIC's consideration for changing asset risk factors by end-2015, Morgan Stanley ABS strategists believe that the proposed scenarios may increase insurer demand for securitised products. With respect to CMBS, they note that in both the optimistic and baseline scenarios, the assumed three-year and five-year NPI growth is more bullish than the prior year.

The assumed prices for the conservative and most conservative scenarios are also higher at every point over the next 10 years, despite more severe current-to-trough assumptions, given the realised price appreciation in 2013. The Morgan Stanley strategists suggest that this may result in lower modelled losses for some legacy CMBS bonds, especially AMs and AJs, while the vast majority of CMBS 2.0 bonds will likely continue to carry a 100.86 price.

With respect to RMBS, home price appreciation (HPA) growth forecasts over the three- and five-year time horizons are lower across the optimistic, baseline, conservative and most conservative scenarios. However, given the realised price appreciation in 2013, the absolute level of home prices is only lower at the tail end of the optimistic scenario. The strategists believe that this is positive for the non-agency RMBS space, as higher home prices should result in lower realised loss severities for these legacy bonds.

The NAIC is also considering altering the asset risk factors in capital ratio calculations, with implementation potentially by end-2015. The most significant increase is expected on single-A rated bonds, while the triple-A factor is expected to decline.

"This may be bullish for demand for securitised products, particularly CMBS and CLOs, given the availability of triple-A rated and NAIC-1 bonds," the strategists observe.

Structured Finance

Rating methodologies released

ARC Ratings has published its global consumer ABS rating criteria, which apply to transactions that benefit from a diversified portfolio with a large number of underlying obligors. The criteria cover analyses of expected defaults, delinquencies, recoveries, prepayments and asset yield, which are supplemented by a cashflow analysis. Although applied globally, each individual country and specific transaction may give cause to additional observations or deviations to the criteria, which will be disclosed in transaction-specific reports.

At the same time, ARC has updated its global structured finance rating criteria, which were initially published in June 2013. There are no significant amendments to the criteria and they are not expected to have an impact on any existing transactions that have been rated under them.

The agency has also published its global summary criteria for rating structured finance servicers. ARC's SQ rating approach separates a servicer's performance from the credit quality of the loans being serviced, as well as other factors beyond the servicer's control.

The approach involves an intensive review of the originator's business processes and procedures to evaluate how effective a servicer is at preventing defaults and maximising recoveries when defaults do occur. Nevertheless, the quality, stability and experience of servicers have a direct impact on the asset quality and therefore the performance of the transaction.

The SQ rating considers the operational and financial stability of a servicer, as well as its ability to respond to changing market conditions. This assessment is based on a servicer's organisational structure and management strength, its financial profile, information technology and reporting capabilities, as well as its strategic goals.

ARC's SQ ratings are typically divided into three servicing types: primary servicer, special servicer and standby/back-up servicers.

Structured Finance

Analytics portal strengthened

Moody's Analytics is expanding the coverage of its Structured Finance Portal to include auto, credit card and student loan ABS. The service offers innovative content and analytics, delivered in real-time in an easy-to-use web-based format.

Initially focused on CLOs, the portal includes loan-level data to show which deals and managers are most exposed to a loan and who has been trading it recently. Users can compare managers and their trade behaviour, loss mitigation, market perception and concentration choices in addition to NAV analysis. It also provides access to up-to-date estimated simplified supervisory formula approach (SSFA) capital charge calculations for each tranche, along with the underlying factors.

CDO

Trups defaults, deferrals decline

The number of combined defaults and deferrals for US bank Trups CDOs decreased slightly from 22.7% at the end of July to 22.6% at the end of August, according to Fitch. In August there was one deferring bank - representing US$22m of collateral in three CDOs - which cured, with no new defaults or deferrals.

Last month also saw a discount sale of a previously defaulted issuer representing US$5m of notional from one CDO with no recovery, which resulted in reduction of the cumulative defaulted notional of the banks. Across 78 Fitch-rated TruPS CDOs, 231 bank defaulted issuers remain in the portfolio and 196 issuers are currently deferring interest payments.

CDS

Definitions implementation delayed

Trading under the new 2014 ISDA Credit Derivatives Definitions is now expected to begin for most standard credit default swap (CDS) contracts on 6 October. The new date was recommended by ISDA's Credit Steering Committee (CSC) to match the day on which the changes to existing trades under the ISDA 2014 Credit Derivatives Definitions Protocol take effect (SCI 15 September). The association says that alignment of the launch with the 6 October Protocol date reduces risk by minimising differences between new trades and legacy transactions under the Protocol.

CLOs

Barr Bill back in contention?

The US House of Representatives has passed a bill which includes the Barr Bill and three others. The Barr Bill was originally passed in April (SCI 30 April), yet while its reintroduction demonstrates continued support for it, the Senate is still not expected to agree to pass the bill.

The Barr Bill would provide some Volcker Rule relief for CLOs. It was passed yesterday along with the Insurance Capital Standards Clarification Act of 2014 - which the Senate has already approved - and two others, which focus on mortgages and swaps.

The three bills other than the insurance capital bill have been passed in the House with bi-partisan support but have not made headway in the Senate, note Deutsche Bank analysts. They do not expect the Senate to pass this larger bill, although the situation could change if the Republicans take control of both houses in the November elections.

CLOs

CLO principal losses to stay low

The cumulative number of CLO tranches which have incurred principal losses has remained low since 2012 and should continue to remain low, says Moody's in its latest CLO Interest publication. In 2012 Moody's found 59 tranches in 31 CLOs which had incurred or were likely to incur principal losses. In the time since then there have been a further four tranches identified.

The total number of Moody's-rated CLO tranches which have actually incurred principal losses has risen to 42, which is just 0.8% of all CLO tranches rated since 1996. Since May 2012 there have been no CLOs which have cancelled any notes, one CLO which has declared an event of default because of an interest payment failure and one CLO tranche which has been downgraded to Ca because of the likelihood that it will incur principal losses.

No CLO tranches with initial ratings higher than A2 have incurred losses. Moody's continues to expect few principal losses for CLOs in the future given ample credit enhancement for CLO notes and the effectiveness of over-collateralisation diversion features.

CLOs

US CLO, loan outlook stable

US CLOs and the leveraged loans in them will remain on a stable footing heading into next year, according to Fitch's newest quarterly index. Meanwhile the maturity wall has moved out from 2017-2020 to 2019-2021.

Leveraged loan credit quality has been stable over the last year and this will continue, while the benign credit environment has helped to improve senior and junior OC cushions to 10.9% and 5%, respectively, over the past year. However, there is still some differentiation across deals due to trading, credit losses and transaction specific structural features.

Portfolio composition has also been stable across the sector, with top five sectors comprising almost 40% of Fitch-rated CLO 2.0 portfolios. WAL has barely changed as collateral seasoning has been offset by the addition of more recent vintage CLOs and reinvestment activity.

CMBS

WPG to 'prune' CMBS exposure?

Washington Prime Group (WPG) is to acquire Glimcher Realty Trust (GRT) for US$4.3bn in cash and stock, including the assumption of debt. The combined company will be renamed WP Glimcher and own a portfolio of 119 retail properties, with a combined 58 million square-feet of gross rentable area.

CMBS strategists at Morgan Stanley have identified 47 of these properties as being encumbered by a total of US$2.5bn of CMBS debt across the combined portfolio. They suggest that the acquisition may increase the chance that WP Glimcher "returns the keys to the lender" to prune the combined portfolio of properties that don't meet its target profile.

GRT accounts for nearly US$1bn of these CMBS exposures across 11 properties (not including the US$22.6m Glimcher Retail Portfolio loan securitised in DBUBS 2011-LC2, which is sponsored by Robert Glimcher). The weighted average debt yield for these loans is 12.2%, with seven of the properties securitised in CMBS 2.0 deals, according to the Morgan Stanley strategists. This may indicate that the properties are higher quality and have lower refinancing risk compared to the WPG portfolio.

With respect to WPG's exposure, 18 properties are encumbered by US$792m of CMBS 2.0 debt, while 11 are encumbered by nearly US$600m of legacy CMBS debt. A total of 10 properties accounting for US$520m of CMBS matures by end-2017. The strategists suggest that these properties will require net recapitalisation of over US$95m, assuming a 70% LTV.

CMBS

Mixed bag of properties up for bid

Auction.com and Real Capital Markets are listing US$700m in US CMBS loan sales from late September through early November. A Barclays Capital analysis finds that the auctions consist primarily of smaller properties, securing 100 loans across 73 transactions.

The deal with the most exposure is JPMCC 2005-CB13, accounting for US$92m in allocated balance up for bid, across nine properties and eight loans. However, Barcap CMBS analysts note that some of the properties are securitised in larger portfolios and losses are unlikely to be realised until the last properties in these portfolios are sold.

The loan with the largest allocated balance in the auctions is the US$43.3m Investcorp Portfolio (securitised in JPMCC 2005-CB13), with the final two properties listed for sale. The properties are valued at US$23.8m, indicating that losses could approach 50%.

The next largest loan is the US$21.08m Shops at Grand Avenue, the final asset remaining in BALL 2005-MIB1. The most recent appraisal of US$8.5m in November 2013 should result in a pay-off of the K tranche and a write-off of most of the L tranche, according to the analysts.

They suggest that the US$21m Stockdale Tower, securitised in LBUBS 2004-C6, could also take losses of up to 35% in the auctions.

Insurance-linked securities

Cat bond event report awaited

S&P has placed its single-B minus rating on MultiCat Mexico series 2012-I class C notes on credit watch with negative implications, reflecting the fact that a trigger event may have occurred with respect to the catastrophe bond. The class C notes cover losses in Cabo San Lucas in Mexico, near which Hurricane Odile made landfall on 15 September.

Swiss Re subsequently submitted an event notice to the calculation agent AIR Worldwide on 16 September. Based on the event definition in the transaction documents, the central pressure requirement for an event to be considered a triggering event is equal or lower than 932 millibars.

S&P reviewed an update from the National Hurricane Center that indicated a reading of 930 millibars at one station falling within the covered area. In this case, the transaction documents state that noteholders would lose 50% of their principal amount.

The agency will resolve its credit watch placement once the calculation agent completes its event report, which should be within 15 business days from the hurricane event parameters date. This date is either the date the first tropical cyclone report containing all information necessary to determine if Odile is a covered event is released, or 120 days after Odile made landfall.

If a trigger event occurred, S&P will lower its rating to D; if one did not occur, the agency will affirm its rating at single-B minus.

Insurance-linked securities

Climate change cat bonds prepped

African Risk Capacity (ARC) has unveiled the Extreme Climate Facility (XCF), a multi-year funding mechanism that will issue climate change catastrophe bonds. The bonds - which are expected to be issued in 2016 - will provide additional financing to participating countries to enhance their climate adaptation investments, in the event that weather shocks increase in occurrence and intensity across the African continent.

Experts estimate that the continent needs to invest between US$10bn-US$20bn annually through 2050 to prepare for a 2°c warmer world. "Africa needs solutions. The XCF will offer African nations a new financing mechanism to manage climate risks by providing direct access to new private capital and by leveraging development partner contributions," comments Ngozi Okonjo-Iweala, Nigeria's Minister of Finance and chair of ARC's governing board.

ARC will work with African states and their partners towards having an effective and fair XCF design in place when nations convene in Paris next year for the UN Climate Change Conference. Once established, the XCF will be entirely objective and data-driven, using Africa's 30-year climatology as a baseline. Meteorological information will be used to calculate a multi-hazard extreme climate index for each region in the continent.

The index will track increases in the frequency and magnitude of extreme weather events over and above an established baseline in each climate region of the continent. Should the index exceed a pre-defined threshold, bond maturity payments will be automatically made to countries in the affected regions and used to boost adaptation efforts or scale up existing disaster risk management mechanisms.

Designed to access private capital and diversify the available funding sources, the XCF will be structured as a catastrophe bond programme, whereby its financial obligations to countries over a three- to five-year financing window will be securitised and financed by capital provided from private investors. Initial cat bonds will total several hundreds of million dollars in value, but issuance of over US$1bn of African climate change bonds is anticipated over a period of 30 years.

Participating countries will be chosen based on criteria that include their current involvement with ARC in managing weather risks through its disaster insurance company, ARC Ltd, and having robust and investment-ready climate change adaptation plans in place.

ARC was established as a specialised agency of the African Union to help AU member states improve their capacities to better plan, prepare and respond to extreme weather events and natural disasters. The creation of XCF was mandated by African finance ministers in March at the seventh AU-ECA Joint Annual Meetings in Abuja, Nigeria.

Insurance-linked securities

Transformer approach detailed

AM Best has released a new criteria report regarding rating reinsurance/insurance transformer vehicles. The report highlights rating considerations unique to the evaluation of transformer vehicles and the process by which they act as an intermediary to transfer insurance risks to counterparties.

The new criteria generally applies to the rating of various types of insurers/reinsurers that are licensed or designated as special purpose insurers/vehicles in various regulatory jurisdictions that primarily assume and cede insurance exposures funded by various capital market instruments. Because insurance transformer vehicles are corporate legal entities that have characteristics and features similar to insurance companies, Best's credit rating methodology remains the governing document for the sector.

A 30-day public consultation for the criteria report was opened on 1 August and no comments were received. Consequently, no changes have been made to the final version of the report.

NPLs

NPL/RPL demand rising

Of the circa US$658bn in US non-performing loans - including US$60bn in REO properties - banks, the GSEs and the HUD own about US$400bn, according to Barclays Capital figures. CMBS analysts at the bank estimate that a further US$500bn-US$600bn in re-performing loans is outstanding, with about US$200bn held by the GSEs, US$200bn-US$250bn in non-agency RMBS and the remainder on bank balance sheets.

The liquidation exit for NPLs has received a boost from the growth of the single-family rental securitisation market, with issuers including NPLs in their acquisition strategies. Similarly, RPL securitisations provide an attractive exit for modified pools, with the VOLT (accounting for US$2.68bn in issuance year-to-date) and BOMFT (US$728m) shelves dominating recent issuance.

As the investor base for NPL and RPL assets grows, pricing has improved across the sector. Demand has mostly come from specialty servicers and hedge funds.

Primary sellers in the market have been banks and the HUD, which is expected to auction another US$2.3bn of NPLs later this month. Freddie Mac has sold sporadically and may continue doing so, while Fannie Mae is said to be considering entering the market.

About US$32.9bn in NPL/RPL bonds were outstanding, as of June, with US$12.4bn issued year-to-date. RMBS strategists at Bank of America Merrill Lynch predict that volumes will reach US$18bn by year-end, compared to US$14.7bn for 2013.

Risk Management

Data aggregation options outlined

The Financial Stability Board has published a study of the feasibility of various options for a mechanism to produce and share global aggregated OTC data. To date, a total of 25 trade repositories in 11 jurisdictions are either operational or have announced that they will be. Aggregation of the data being reported across these trade repositories is necessary to ensure that authorities are able to obtain a comprehensive global view of the OTC derivatives market and activity, according to the FSB.

The report compares three basic options for aggregating OTC derivatives trade repository data: a physically centralised model (Option 1); a logically centralised model (Option 2); and the collection and aggregation by authorities themselves of raw data from trade repositories (Option 3). The options are compared according to their suitability for meeting authorities' needs as data users, and the legal, data and technology considerations that they give rise to.

The report finds that Options 1 and 2 are highly preferable to Option 3, in order to ensure that authorities have access to the aggregated data that they need in order to perform their mandates and meet the G20 objectives. While Option 3 is the only option currently available for use, it has practical limitations that allow it to meet only part of authorities' data needs, beyond protecting against market abuse.

The report recommends a number of key steps that should be undertaken either as part of the preparatory work before any formal project is launched to implement a global aggregation mechanism, or that will need to be undertaken irrespective of the particular aggregation model chosen, in order to enable effective aggregation. In particular, it is critical for any aggregation option that the work on standardisation and harmonisation of important data elements be completed, including through the global introduction Legal Entity Identifiers (LEIs) and the creation of a Unique Transaction Identifier (UTI) and Unique Product Identifier (UPI).

The FSB has asked the Committee on Payments and Market Infrastructures (CPMI) and IOSCO to develop global guidance on harmonisation of data elements that are reported to trade repositories and are important to aggregation by authorities. It will work with CPMI and IOSCO to provide official sector impetus and coordination for the further development and implementation of uniform global UTIs and UPIs, as well as address the legal and regulatory changes that would be needed to implement a global aggregation mechanism that would meet the range of authorities' data access needs, and the appropriate governance structure for such a mechanism.

The FSB will also initiate or coordinate additional work to address other recommendations in the report that would support a future FSB decision on the potential development of a global aggregation mechanism. That work would comprise: further study of the technological requirements for such an aggregation mechanism, so as to better support a more detailed project specification; and a more detailed assessment of potential costs, beyond the initial discussion of cost drivers provided in the latest report. Work in these other areas will require progress first on the harmonisation and standardisation of data elements, as well as on legal and regulatory changes, and will therefore be initiated at a later date.

Risk Management

RFC issued on non-cleared OTC standards

IOSCO has published a consultation report, entitled 'Risk Mitigation Standards for Non-centrally Cleared OTC Derivatives', which proposes nine standards aimed at mitigating the risks in the non-centrally cleared OTC derivatives markets. The proposed risk mitigation standards would contribute to the G20 effort to strengthen the OTC derivatives market in the wake of the financial crisis.

The proposed risk mitigation standards are expected to bring about three main benefits: promoting legal certainty and facilitating timely dispute resolution; facilitating the management of counterparty credit and other risks; and increasing overall financial stability. Developed in consultation with the Basel Committee and the Committee on Payments and Market Infrastructures (CPMI), the standards complement the margin requirements developed by the Basel Committee and IOSCO in September 2013 in strengthening the non-centrally cleared OTC derivatives market.

The proposed risk mitigation standards cover nine areas: scope of coverage; trading relationship documentation; trade confirmation; valuation with counterparties; reconciliation; portfolio compression; dispute resolution; implementation; and cross-border transactions. Comments on the proposals should be submitted by 17 October.

RMBS

'Market consensus' emerging in Spain

Price declines in the Spanish residential property market are coming to an end after nearly seven years, Fitch reports. The agency notes that while the return of mortgage credit is driving the stabilisation, high unemployment and a large property overhang will prevent a rapid rebound in prices.

Fitch's latest Spanish repossession analysis suggests that property value depreciation on repossessed and sold houses has peaked at 70% relative to their initial valuations, and that the price range at which mortgage servicers are selling repossessed properties has also narrowed considerably. These findings are reflective of a new market consensus, helped by improved price transparency and drastic economic adjustments that have affected both supply and demand.

The effect of the large property overhang - with the Spanish Statistical Office (INE) reporting that 768,000 houses built between 2002 and 2011 remain empty - can be seen within the regression analysis Fitch performed to better understand the drivers of the property sale discount on repossessions. Based on over 8,000 foreclosed loans originated by more than 20 banks across Spain, the analysis suggests that forced sale discounts are higher in coastal regions such as Andalucia and Catalunya, and that repossessed properties linked to mortgages originated before the credit crisis required greater discounts to find a buyer.

The stabilisation of prices on repossessed properties is occurring simultaneously with a bottoming-out of the broader property market. Last week, the INE reported that prices rose by 0.8% in 2Q14, the first quarter-on-quarter rise since 3Q07.

Stabilisation at current prices is in line with Fitch's forecast of a nominal peak-to-trough house price decline of 40% and a ratio of the average house price to the annual net household income of approximately five times, which is close to the historic mean.

RMBS

RMBS analytics enhanced

BlackBox Logic has enhanced its core suite of products with a new dataset. Dubbed BBx Premium Non-Agency RMBS, the offering is designed to help capital market participants more accurately evaluate security performance and the ways in which it is impacted by servicer behaviour. The dataset includes information on forbearance, modifications and servicer advances, and can track the historical progression of this data.

RMBS

Aire Valley restructuring proposed

Bradford & Bingley is proposing to restructure its Aire Valley RMBS master trust. By removing loans with adverse characteristics, the current pool would be reduced by approximately 50% under the restructuring.

The proposed restructuring of the programme includes: repayment of all the notes issued under the retained series 2007-2 and 2008-1; removal of all loans that are three or more months in arrears; removal of all loans with a current LTV of 95% or greater; removal of all buy-to-let loans with a current LTV of 90% or greater; the removal of all interest-only loans maturing beyond 2030; the removal of approximately £1.2bn of random mortgage loans from the pool; and the reduction of the reserve fund to £280m, to be replaced with a subordinated loan tranche that is expected to provide credit enhancement for the rated classes of notes.

Further, the documents would be amended so that the servicer would have the ability in the future to delegate certain aspects of the servicing. If the servicing is delegated, Bradford & Bingley would still remain responsible for the performance of the servicing.

Following the restructuring, the available credit enhancement for the class A, B and C notes in the 2004-1, 2005-1, 2006-1 and 2007-1 transactions (as of the cut-off date of 31 May) will increase to 28.4%, 19.9% and 10.7% respectively. These amounts were 23.6%, 17.9% and 8.9% respectively before the proposed restructuring. Furthermore, the available credit enhancement for the class D notes in the 2004-1 transaction will increase to 9.9% from 5.4%.

Fitch says it has conducted a preliminary analysis of the proposed changes and does not expect their implementation to have a negative rating impact on the existing notes issued by Aire Valley Mortgages 2007-1, 2006-1, 2005-1 and 2004-1. Meanwhile, Moody's has placed on review for upgrade ten notes issued under the same four transactions, following the announcement of the proposal. The agency considers that the amendments would be credit positive for these deals.

Finally, S&P notes that its credit ratings are unchanged on all series of notes issued by the master trust. "Based on our review of the portfolio in light of the master trust's proposed restructuring and the proposed amendments made to the transaction documents, we consider that the execution of the amendments will not - in and of itself - result in a change to, withdrawal of or qualification of our respective ratings in each transaction," it observes.

Bradford & Bingley is in the process of obtaining investor consent to the proposed changes.

RMBS

Irish RMBS criteria updated

Fitch has updated its Irish residential mortgage loss and cashflow assumptions. The structured finance rating cap on Irish RMBS has also been lifted to triple-A, in line with the sovereign country ceiling, following the upgrade of Ireland to single-A minus from triple-B plus on 15 August.

Fitch's revised criteria assumptions: reduce the foreclosure frequency (FF) by around 20% at the single-B level and by a lesser extent for higher rating scenarios; adjust upwards the FF of between 10% and 70% to loans that are not in arrears but have been restructured in the past; increase differentiation between pools; include less severe house price decline assumptions; and increase the quick sale adjustment to close to 35%. The agency has reviewed the ratings on existing Irish RMBS transactions that were capped at double-A plus. In particular, it analysed the ability of the structures of Fastnet Securities 9 and Kildare Securities to withstand triple-A stresses.

Fitch will shortly update ResiEMEA to reflect the changes to the Irish criteria assumptions.

RMBS

Aire Valley proposal 'broadly positive'

Assuming noteholder approval is granted, the proposed restructuring of the Aire Valley RMBS master trust (SCI 23 September) should be broadly positive for bondholders. JPMorgan European securitisation analysts suggest that investors will benefit from a cleaner pool of collateral, higher levels of subordination and potentially higher ratings. With longer-dated IO collateral targeted for repurchase, alongside exposures to higher LTV borrowers, a degree of WAL contraction could also emerge.

The JPMorgan analysts anticipate that the adoption of the restructuring proposals will result in improved credit quality of the pool and the trust size falling to £5.5bn, of which the distributed funding share will constitute £3.8bn, together with a new seller's share of £1.4bn. The seller's share will therefore decrease from 29% currently to 26%, while the credit enhancement available to the notes will improve across the capital stack.

Subordinated bondholders are likely to gain more on adoption of the proposals, with the potential impact on senior bonds being relatively limited. "We do have some reservations about the redemption of retained bonds ahead of distributed peers, instead of being repaid pro-rata as current practice. But, against the improvement in collateral quality and credit enhancement levels, we come down on the side of these proposals being in the investor interest," the analysts observe.

A noteholder vote is scheduled for 17 October, with the proposals scheduled to be implemented by the January 2015 IPD.