Contents

CLOs

Only loans

Loan-only CLOs defy convention

This summer's €525m Harvest CLO IX and €415m Avoca CLO XII were each backed by loan-only portfolios. The European CLO market's traditional reliance on bond buckets now appears to be subject to re-evaluation.

The Volcker Rule has spurred the rise of CLO 3.0 structures, with loan-only deals following one path to regulatory compliance in the US. The fact that European deals have achieved compliance by forgoing bond buckets is unexpected, but others could follow suit.

"The real test for these deals will be in the next month or so. A lot of deals are coming to market at the same time and there is competition to access collateral for ramping up, which could prove more difficult in loan-only CLOs," says one investor.

Harvest CLO IX and Avoca CLO XII are only two CLOs from a period of steady issuance, with SCI's CLO database listing eight European CLOs that have priced since the Avoca deal. The pair currently still appear to be exceptions to the norm, with neither subsequent deals nor those currently in the pipeline following the loan-only route.

"We are still seeing oversized bond buckets in prospective deals. There is one deal on our plate at the moment with a large bond bucket. Ultimately deals are going to be constrained by how they can ramp up their portfolios," says the investor.

Leveraged loan issuance has increased and the volume for the first eight months of 2014 totalled €36.9bn, close to the 2013 full-year total of €39bn. Bank of America Merrill Lynch European securitisation analysts note that this figure is also higher than any other full-year total since 2007.

"With growing loan issuance, we believe loan-only issuance is less difficult than in the past and we do not envisage difficulties in ramping up portfolios without bond buckets. However, we do not expect all managers to choose this option," the BAML analysts note.

There are two difficulties with loan issuance. One is that volumes remain a long way short of pre-crisis levels; the other is the lack of diversity in the loan market.

"Loan diversity has long been an issue in Europe because you do not have sufficient depth in the market. Loan issuance has grown by a multiple over the last two years, but there has also been a significant increase in the number of CLOs coming to market and managed accounts also continue to compete for loans," notes the investor.

He continues: "There is loan concentration in the market and diversity scores in Europe are much lower than in the US. Even where deals have different managers, we do see crossover between portfolios."

Furthermore, while loan issuance has increased, so has high yield bond issuance, which is at record levels. Therefore managers are expected to be particularly reluctant to give up the ability to invest in bonds at present.

For those managers that do pursue the loan-only route, the good news is that the structure does not seem to have a particularly adverse effect on pricing. SCI's deal database shows the class A notes for St Paul's CLO V and Avoca CLO XII, which printed on 1 August and 4 August, priced at spreads of six-month Euribor plus 134bp and three-month Euribor plus 133bp respectively.

The class Bs for both deals priced at plus 200bp. Avoca's class C, D, E and F notes priced at plus 260bp, 350bp, 550bp and 600bp, while the St Paul's class C, D, E and F notes priced at plus 245bp, 335bp, 480bp and 580bp.

"The loan-only deals have priced in line with other CLOs, both for the debt and the equity. The key, however, is what assumptions you make as to whether those deals will move out of the loans and into bonds," says the investor.

He continues: "You do not know what paper they will ultimately be able to pick up. You have to assume the starting portfolio is your base case."

It is also possible for deals to be initially structured with bonds permissible and then to alter the CLO documentation further down the line to achieve Volcker Rule compliance. That would allow the deal to benefit from the bond bucket in the ramp-up and early years, although the investor notes that document amendments can be difficult to execute.

While loan-only issuance might not take off dramatically, this year's deals have demonstrated that it is workable. It does therefore broaden managers' options when looking at routes to regulatory compliance, although that might not be top of their list of concerns presently.

"The market is slightly unusual at the moment in that European triple-As are tighter than US triple-As. If, in a couple of years, US triple-As are tighter than European triple-As, then loan-only deals that are Volcker-compliant should be able to refinance at a cheaper rate by having access to US triple-A buyers," says the investor.

He concludes: "The flexibility managers have at the moment is important. What will be interesting is to see whether the loan-only guys will bring bond buckets in; my suspicion is that they will not because that starts to look like flip-flopping on their strategy and they cannot be seen to be doing that. But, of course, it remains a possibility."

JL

RMBS

RMBS seniors up after ECB update

The market has reacted cautiously to yesterday's ABSPP update from the ECB. Peripheral RMBS has been most active, although the CMBS market is quiet.

"Most of the activity over the last 24 hours or so has been in Spanish and Italian RMBS. Really people are looking to get whatever Spanish and Italian paper they can, but mainly that has been RMBS," says one trader.

SCI's PriceABS data captured a number of Italian and Spanish RMBS names out for the bid on yesterday's bid-lists. These included the Italian BERAB 2011-1 A1 tranche, which was talked at 99.6 and covered at 99.58.

Another Italian tranche - CLARF 2011-1 A2 - was talked at 101 and covered at 101.05. Price talk of around 92 was recorded for the HIPO HIPO-11 A2 tranche, while price talk was also recorded on half a dozen other Spanish RMBS tranches.

The trader adds: "Before the speech there had been a rally across the board as anticipation was high. Hedge funds were buying up senior paper with a bit of spread, particularly the more broken up seniors with lower ratings."

However, those hedge funds may have bitten off more than they can chew, the trader suggests. He notes that the main negative point in what was otherwise a positive update from the ECB is that it will focus on buying paper which has a second rating of at least triple-B minus.

"At lot of these bonds that have been trading up lately do not have a high enough second rating to meet the ECB's requirements. That means it is pretty uncertain now what will happen for those bonds," says the trader.

He continues: "From a relative value standpoint they might look like good bonds, but I do not know who the natural buyer will be. The paper is not yieldy enough for the hedge funds, while the ratings could put other buyers off, so I do not know what the exit there will be."

Otherwise the trader feels the announcement was largely as expected. Trading in the wake of the announcement has held up well, but it now remains to be seen whether some weakening will creep in.

"Many market participants will be sitting on the sidelines now and seeing which way the market goes. Some people got pretty long before the announcement and while the higher-yielding seniors have picked up a bit, it has otherwise been pretty quiet," says the trader.

JL

RMBS

Peripheral RMBS push resumes

Heightened activity in the European secondary RMBS market continued as the week began. Italian and Spanish names continue to be in demand, while Portuguese paper and more commonly-seen bonds from the core were also out for the bid.

Italian and Spanish paper has seen an up-tick in investor interest after the ECB's ABSPP update (SCI 3 October) and the Italian CLAAB 2011-1 A tranche was covered yesterday at 99.26. The tranche first appeared in SCI's PriceABS archive on 28 July, when it was talked at 97.75.

Meanwhile, fellow Italian tranche SESTA 2 A made its first appearance in PriceABS during the session. It was talked at around 95.

As for Iberian paper, the Spanish BCJAF 10 A2 tranche was talked at 98.5. That tranche was covered last month at 97.275, when price talk was between mid-96 and mid/high-97.

TDAC 5 A was talked at around 97.5. The bond had not appeared in PriceABS since last November, when it was covered at 87.22.

Joining these Spanish names was the Portuguese ATLAM 2 A tranche. It was talked at 95.11 and 96.7, having never before appeared in the PriceABS archive.

Elsewhere, the EUMF 2008-1X A1A tranche was talked at 100.8, EUMF 2008-1X A2A tranche was talked at 100.375 and EUMF 2008-1X A3A tranche was talked at 101.3. Meanwhile, ESAIL 2007-1X D1C was talked at around 80, 84.8 and in the mid-80s.

Three RMACS tranches were also out for the bid, including RMACS 2006-NS4X B1A, which was talked at 88.75, around 89.25 and around 90. The tranche was last successfully covered on 25 November 2013 at 76 handle.

RMACS 2006-NS3X B1C was talked at 88, 88.5 and around 90. The last recorded cover on the bond was in the mid-80s on 20 August.

RMACS 2006-NS4X B1C was talked at 88.25, around 88.5 and at around 90. The tranche was covered last month at 87.02 and was covered on 5 August in the mid-80s.

Finally, a £2.986m piece of the £3.5m ALBA 2006-2 E tranche was talked at 88.45 and at around 90 during the session. The bond was covered early last month at 89.18 and before that was covered in July at 88.76.

JL

RMBS

RMBS activity ratchets up

US non-agency RMBS BWIC volume approached US$600m yesterday, with another large bid-list of around US$1bn due to trade today. While secondary supply is high, yesterday's session suggests execution is weakening, with bonds covering below price talk and SCI's PriceABS data listing a number of DNTs.

PriceABS shows many tranches which were successfully traded, such as the ACE 2005-HE2 M6 and ACE 2006-ASP2 M1 tranches. They were joined by NHELI 2006-HE1 M2 and SAST 2004-1 B1, with the latter three each making their first appearance in the PriceABS archive.

Another new arrival was the ARSI 2003-W9 M4B tranche, which was covered in the mid-90s. CSMC 2014-USA F, meanwhile, was talked in the 330s and at swaps plus 330bp.

The BSABS 2006-EC2 M4 tranche was covered in the mid-50s, having last appeared in PriceABS on 8 July 2013, when price talk was in the low/mid-single digits. BSABS 2006-HE10 1M2 was covered in the very low-40s, having previously traded in November 2013, when price talk was in the mid-20s.

CMLTI 2006-WFH2 M2 was traded on its second PriceABS appearance of the year. It was a DNT in January and before that was talked last August in the mid-single digits.

CWL 2006-14 M1 was covered in the high-20s, while CWL 2006-22 M1 was covered in the low-20s. Price talk on the second tranche was in the low-single digits in August 2013, November 2012 and August 2012.

FFML 2005-FF1 M3 was covered in the mid-50s, having previously been talked in the mid-20s. HEAT 2004-2 M2 was covered in the high-80s on its first appearance in the PriceABS archive.

INABS 2005-D M2 was traded. The tranche was talked in the low-single digits on its only previous appearance in PriceABS, which came on 7 June 2012.

JPMAC 2006-FRE2 M2 was covered in the mid-40s. The tranche was talked in the mid-single digits on its two prior PriceABS appearances.

JPMAC 2007-CH4 M2 was covered in the low-50s, having previously traded last month. Before that it had not appeared in PriceABS for almost two years, with its first appearance being a cover at around 10 on 12 September 2012.

The session also saw a number of DNTs. Among these were the ARSI 2003-W9 M5, JPMAC 2006-CW2 MV1, PPSI 2005-WLL1 M5, RAMP 2006-NC2 M1, RAMP 2006-RS2 M1 and RASC 2005-AHL2 M3 tranches.

JL

Secondary markets

Sizeable triple-A supply for US CLOs

As in Europe, triple-A paper is central to the US CLO market today with three sizeable BWICs currently circulating on the back of persistent spread tightening in top-rated paper over the past few days.

At 10:00 New York a $200m nine line list is due, which contains: BABSN 2013-IA A, BALLY 2013-1A A, BSMC 2013-1A A1, CAVY 2A A, OZLMF 2013-4A A1, TPCLO 2013-1A A1, INGIM 2013-3A A1, BHILL 2013-1A A and CGMS 2013-1A A1. Only two of the bonds have covered on PriceABS in the last three months, both on 2 September - BABSN 2013-IA A at 98.5 and TPCLO 2013-1A A1at 98.375.

Another list, due at 11:00, contains 14 triple-A bonds totalling $182.895m - APID 2014-18A A1, ARES 2014-30A A2, AVOCE 2014-1A A1B, CGMS 2012-2AR A1R, CGMS 2014-3A A1B, GOLD8 2014-8A A, OCT19 2014-1A A, SPARK 2014-1A A, SYMP 2014-14A A2, INGIM 2007-5A A1A, MAPS 2007-2A A1, MVEW 2007-3A A1, MVEW 2007-3A A2 and SYMP 2007-5A A1. Six of those tranches have covered on PriceABS in the last three months, as follows: MVEW 2007-3A A1 at 99.62 on 3 September; GOLD8-8A A at 99.876 on26 August; OCT19-1A A at 100 on 26 August; SPARK-1A A at L100H on 13 August; SYMP-14A A2 at L100H on 13 August; and MAPS 2007-2A A1 at 98.5 on 23 July.

Last, at 14:00 New York is a four line list totalling $5.45m with: ATRM 10A A, BANDM 2014-1A A1, HLA 2014-2A A1B and TRNTS 2014-1A A1. ATRM 10A A is the only deal to have covered on PriceABS in the last three months, last doing so at M98.5 on 12 August.

Secondary markets

Triple-As mixed

Yesterday's triple-A CLO BWICs either side of the Atlantic had mixed fortunes with 1.0 deals faring best, which reflects secondary appetite more broadly. Nevertheless, there are more triple-A bonds of a range of vintages out for bid today.

The three line 15:00 euro list traded strongly with covers as follows: CORDA 2006-1X A1 99a, CORDA 2007-1X A1F h98 and CADOG 4X A L99. Prior to that a single line of €200,000 WODST I A was due but no colour whatsoever was released.

However, all bar one of the deals on the 10:00 US list did not trade - BABSN 2013-IA A covered at 98.515. The 11:00 US list saw five of its nine 3.0 triple-A deals DNT, the others covered as follows: ARES 2014-30A A2 at 99.37, AVOCE 2014-1A A1B at 99.61, OCT19 2014-1A A at 99.95 and SPARK 2014-1A A at 99.86. Two of the 1.0 triple-As on the list did not trade but INGIM 2007-5A A1A covered at 99.45, MAPS 2007-2A A1 at 98.95 and MVEW 2007-3A A2 at 97.5.

The 14:00 US list containing ATRM 10A A, BANDM 2014-1A A1, HLA 2014-2A A1B and TRNTS 2014-1A A1 was only announced as traded with no further colour given. Nevertheless, there are already three triple-A lists scheduled for today.

First up at 10:00 New York is a single line list containing $75m of ZOHAR 2005-1A A1. The now non-rated bond has never traded on PriceABS.

At 10:30 New York there is a seven line $160.5m list, consisting of: FCBSL 2013-2A A1F, FLAT 2013-1X A1, GALL 2013-2A A1, RACEP 2013-8A A, SRANC 2013-1A A1A, SUDSM 2013-1X A1 and WINDR 2013-2A A1. Only one of those bonds has traded on PriceABS in the last three months - SRANC 2013-1A A1A, which covered at 99.63 on 17 July.

Then, at 11:00 there is a four line $420.5m BWIC for: GOLDK 2007-2A A, AIMCO 2006-AA A1, DUANE 2007-4A A1T and ARES 2007-11A A1B. Only one item on the list has traded on PriceABS in the last three months - DUANE 2007-4A A1T, which covered at L99 on 19 September.

Secondary markets

FDIC brings some life to Trups CDOs

A quiet week in US Trups CDOs is set to be enlivened by the ninth FDIC auction today at 11:00 New York.

"It's been fairly quiet this week, though we did have a two line BWIC from an original holder's legacy book on Monday, which traded well, so there's certainly people who want to buy Trups CDOs when they are available and that means there will be plenty of action round the FDIC list," says one trader. Last Monday's list saw a slice of REGDIV 2000 SNR trade ahead and TPREF 2 B cover at 46h, which was higher than talk.

While today's FDIC list is, as ever, causing interest it doesn't seem as likely to involve new players as some of its predecessors. "The sizes are small so that makes it less exciting for investors outside the market," says the trader. "In the past plenty of mezz came out and boosted the on the follow market, though that's a bit choppy now, and brought in some cross-over players, but now while there is still a lot of value in these lists, there is a lot of work involved too, so existing funds in the space have an advantage."

He adds: "Equally, if this is the volume involved after eight auctions, you've got to wonder where the FDIC process is going next."

The 13 line $55m FDIC list consists of: ALESC 13A A2, ALESC 15A A2, PRETSL 28 A1, PRETSL 28 A2, PRETSL 25 A1, PRETSL 25 A2, PRETSL 21 A1, PRETSL 21 A2, PRETSL 22 A2, PRETSL 26 A1, PRETSL 27 A1, PRETSL 24 A1 and PRETSL 24 A2. Six of the bonds have covered on PriceABS this year as follows: PRETSL 21 A1 at M70S on 21 May; PRETSL 21 A2 at 60a on 6 May; PRETSL 24 A1 at MH70s on 8 April; PRETSL 25 A1 at M70s on 8 April; PRETSL 26 A1 at M70s on 19 March and PRETSL 28 A1 at 78H on 16 September.

Secondary markets

US RMBS picks up

The start of a new quarter has boosted activity in the US non-Agency secondary market with sellers, for now, just having the edge.

"Things have definitely picked up since 1 October and BWIC volumes have shot up since the quiet quarter-end," reports one trader. The non-agency market saw RMBS BWIC volumes in excess of $700m yesterday and by late this morning $4-500m was already scheduled for today.

Market drivers and direction are not yet clear. However, the trader notes: "Geopolitical events have had people selling and there's also some end of year positioning on the sell-side. That said, there's no real direction in spreads yet, though they are maybe a little weaker right now."

Secondary markets

Post-ECB peripheral test

Yesterday saw spread volatility across peripheral secondary markets surrounding the ECB meeting, but two BWICs circulating today will provide a clearer test of investor demand after the ABSPP announcement.

Peripheral ABS spreads compressed across the board in the run up to the ECB meeting, but afterwards there were diverse intra-market, -country and even -deal moves leaving Spanish seniors the winners and Greek paper the hardest hit. Today, the two peripheral BWICs currently circulating contain notable peripheral names across ABS, CMBS and RMBS and will attract significant market attention.

At 13:30 London there is a six line €40m list consisting of: AEOLO 1 A, CHAPE 2007 A2, CORDR 2 C, GRF 2013-1 D, GRIF 1 A, and TDAC 1 B. Four of the bonds have covered on PriceABS in the last three months: AEOLO 1 A at 94.05 on 2 September; CORDR 2 C at 92.56 on 10 July; GRF 2013-1 D at 104.95 on 5 August; and GRIF 1 A at 87.25 on 8 July.

At 15:00 is an eight line €143.7m peripheral seniors list - EHME 2007-1 A, GRIF 1 A, GCPAS 5 A2, HIPO HIPO-11 A2, IMPAS 3 A, TDA 25 A, TDA 28 A and TDAC 9 A2. In addition, to the above mentioned GRIF 1 A, one of those tranches has covered on PriceABS in the last three months - IMPAS 3 A at 91.29 on 5 September.

Secondary markets

Triple-A tiering trend continues

Yesterday's triple-A US CLO BWICs saw the same result as the day before - 2.0 deals did not trade and 1.0 deals traded strongly, in some cases twice. Today sees only one triple-A CLO out for bid so far and it's a 1.0 deal.

All the bonds on yesterday's seven line $160.5m 2.0 list failed to trade. Conversely, the four line 1.0 list traded strongly with covers as follows: AIMCO 2006-AA A1, 99.43; ARES 2007-11A A1B, 98.5; DUANE 2007-4A A1T, L99; and GOLDK 2007-2A A, 99.56.

As soon as that auction finished another 1.0 triple-A BWIC began circulating for trade at 15:30 New York incorporating two of the same names as the previous list. The four line $67.24m list again traded strongly with the following covers: AIMCO 2006-AA A1,99.46; CARL 2007-10A A2A, 98.5; DUANE 2007-4A A1T, 99.13; and OCTR 2006-1A A1, 99.31.

There is currently only one triple-A US CLO circulating today as part of a large mixed list due at 9:00 New York - $3.225m of FORE 2007-1X A2, which was being talked on PriceABS yesterday at between 98 and 98.5.

Secondary markets

Peripherals trade strongly

The majority of both peripheral BWIC lists today traded at or above talk and covers were high on two bonds that DNT.

Three of the bonds traded with prices on the 13:30 €40m list, covering as follows: AEOLO 1 A at 94.46, GRIF 1 A at 90.02 and TDAC 1 B at 94.55. CORDR 2 C was just reported to have traded with no further colour given, while CHAPE 2007 A2 and GRF 2013-1 D did not trade, though highest bids for both were reported with handles of 95 and 105 respectively.

All eight bonds on the 15:00 seniors list traded, covering as follows: EHME 2007-1 A 82.01, GRIF 1 A 90.02, GCPAS 5 A2 91.75, HIPO HIPO-11 A2 92.04, IMPAS 3 A 91.22, TDA 25 A 61.5, TDA 28 A 67.25 and TDAC 9 A2 94.88.

Secondary markets

Euro ABS settles down

European ABS and MBS secondary markets have started to settle down this morning after the heightened activity seen last week.

"It's been quiet this morning - we've only done a few trades," says one trader. "It looks like following on from the price movements around the ECB last week the market is settling down and looking through every detail of the ABSPP to confirm what is eligible and what is not."

Once that's done there is likely to be something of a two tiered market. "The non-eligible bonds will, of course, still trade it's just a question of at what level," the trader says.

For now at least, this afternoon looks likely to be similarly quiet with only one single-line BWIC scheduled for today in the sector. €11.3m of GLDR 2014-A A is due at 13:30 London time, which last covered on PriceABS at 100.035 on 17 September.

Secondary markets

Portuguese RMBS flash BWIC circulating

A BWIC of €12.5m of Portuguese RMBS ATLAM 2 A has begun circulating for trade at 17:00 London today. The bond hasn't traded on PriceABS before and price talk is yet to be seen for this auction.

Elsewhere, aside from some patchy bilateral trading the European markets have stayed quiet today, as is the case with US ABS, CMBS and RMBS aside from a small volume of BWICs. No CLO BWICs are scheduled either side of the Atlantic today.

Secondary markets

Euro ABS pipeline builds

After a quiet start to the week the European ABS and MBS market has started to build up a healthy pipeline of BWICs over this week. For today, that pipeline already includes a combination of peripheral and core names, as well as a stand-alone UK non-conforming RMBS list.

First up at 10:30 London time is a nine line 6.6m mixed sterling and euro list consisting of: BERAB 2011-1 A1, ECAR 2012-1 A, GFUND 2014-1 A1, GFUND 2011-1 A2, GMG 2012-1 A1, GLDR 2011-AX A, HERME 18 A1, SILVMA 5.063 10/21/16 and TENDE 2012-1 A. Four of those bonds have traded on PriceABS in the last three months, their last covers as follows: BERAB 2011-1 A1 at 99.58 on 2 October; GFUND 2011-1 A2 at 101.12 on 15 September; GMG 2012-1 A1 at 102.65 on 3 September; and SILVMA 5.063 10/21/16 at 77 on 31 July.

Then at 13:30 there are two lines of Spanish and Italian mezz paper - €7.8m of HIPO HIPO-7 B and €5.5m of CORDR 4 D - which is followed at 14:00 by €12m of Italian lease ABS LEASI 2 A. None of those bonds has covered on PriceABS in the last three months.

The UK RMBS list follows at 15:00 totalling £25.25m and consisting of: ALBA 2006-2 E, ESAIL 2007-1X D1C, RMACS 2006-NS3X B1C, RMACS 2006-NS4X B1A and RMACS 2006-NS4X B1C. Three of the bonds have traded on PriceABS in the last three months and their last covers were as follows: : ALBA 2006-2 89.18 on 4 September, RMACS 2006-NS3X B1C M80s on 20 August and RMACS 2006-NS4X B1C 87.02 on 4 September.

Last, a €71.55m three line list of Spanish and Italian seniors is due at 16:00 - BCJAF 10 A2, SESTA 2 A and TDAC 5 A. Only BCJAF 10 A2 has traded on PriceABS in the last three months covering at 97.275 on 15 September.

Secondary markets

Trups CDOs stay sparse

It looks to be a quiet week again on-BWIC in the US Trups CDO space this week with only one list currently scheduled and that is another auction on behalf of FDIC. The tenth list from the agency also looks likely to meet with the same complaints as last week - it's all senior paper in small size.

Due at 11:00 New York Thursday the 14 line list has a total original face of $51.5m. It consists of: ALESC 9A A2A, ALESC 10A A2A, MMCAP 17A A2, PRETSL 1 MEZZ, PRETSL 2 SNR, PRETSL 10 A2, PRETSL 12 A3, PRETSL 13 A3, PRETSL 14 A2, PRETSL 15 A2, PRETSL 16 A1, REGDIV 2000 SNR and REGDIV 9.25 17A.

Only one of those bonds has covered on PriceABS in the last three months - PRETSL 16 A1 at 77h on 20 August.

Secondary markets

Technicals drive US RMBS

Spreads are staying firm in the US RMBS market thanks to its strong technicals and the resultant two-way trading.

"Secondary spreads have held in well unlike other markets such as high yield," says one trader. "That's primarily thanks to our market's current technical strength - you've got a trillion dollar market with only US$8bn of new issuance in total this year, so buying in the secondary market has to happen."

However, he concedes: "Flows are pretty light at the moment and BWIC volume is not that high. Every now and then you get a huge BWIC from a legacy seller, bad bank or government entitity but we haven't seen one of those in while."

Nevertheless two-way flows are regularly being seen. Asset managers with large number of redemptions in their portfolios are regularly coming to market, while hedge funds are now sub-prime mezz sellers as they look to take profit on highly successful positions. At the same time, relative value players have proceeds to put to work and are seeking out opportunities through structural and collateral nuances.

Secondary markets

Spanish mezz focus

The European ABS and MBS BWIC pipeline is ramping up once more for today with a Spanish mezz list due at 14:00 London time attracting most investor attention.

The nine line €41.972m list consists of: BVA 3 B, CAJAM 2006-1 C, HIPO HIPO-7 D, HIPO HIPO-8 C, LUSI 4 B, LUSI 4 C, RHIPO 8 C, TDAC 5 B and UCI 16 B. According to PriceABS, most of the bonds are being talked in the mid-high- to high-70s. The outliers are LUSI 4 C in the LM70s, while BVA 3 B and CAJAM 2006-1 C are expected to trade in the low-mid- and low-80s respectively.

Only one of the bonds traded on PriceABS in the last three months - RHIPO 8 C, which covered at 73.75 on 10 July.

Secondary markets

European ABS tiering continues

Tiering between eligible and non-eligible ABSPP ABS/MBS assets has become increasingly evident this week and in to this morning's session.

For non-eligible assets spreads have been driven wider on end-accounts selling to take as much profit as possible as prices move seemingly ever lower. Those profits are being utilised in eligible asset positions in the hope of further tightening and thereby increasing the tiering effect.

There has also been some profit-taking in eligible bonds, but sellers are finding dealers eager buyers, so spreads have remained firm. Here, profits are being swapped into other European assets currently generating more return such as CLOs and core ABS.

Structured Finance

SCI Start the Week - 6 October

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

Pipeline
A large number of deals joined the pipeline last week. At the last count there were seven ABS, four RMBS, seven CMBS and four CLOs announced.

The ABS were: £581m Dignity Finance; US$500m EART 2014-3; US$330m Flagship Credit Auto Trust 2014-2; US$1.081bn Ford Credit Auto Owner Trust 2014-REV2; €142.6m Master Credit Cards PASS Compartment France Series 2014-1; US$173m NEQ 2014-1; and US$400m WLAKE 2014-2. Meanwhile, RUB6.588bn CJSC Mortgage Agent KHMB-2, US$355m JPMMT 2014-OAK4, €1.567bn Saecure 15 and US$276.9m WIN 2014-2 accounted for the RMBS.

The CMBS were: US$1.3bn JPMBB 2014-C24; US$260m JPMCC 2014-PHH; US$182m ReadyCap 2014-1; C$280.615m REAL-T 2014-1; US$1bn SBA Tower Trust Series 2014-1C; US$540m SBA Tower Trust Series 2014-2C; and £750m Westfield Stratford City Finance. As for the CLOs, those were US$700m Babson CLO 2014-III, US$191m CAN Capital Funding Series 2014-1, US$650m GoldenTree Loan Opportunities IX and US$322.5m Regatta V.

Pricings
A fair number of deals also printed, with CLO prints leading the way. The week's issuance consisted of three ABS, four RMBS, two CMBS and eight CLOs.

The ABS were US$196.545m Grain Spectrum Funding II Series 2014-1, €287.8m Madeline and US$240m MVW Owner Trust 2014-1. The RMBS were €1.7bn Dolphin Master Issuer 2014-2, US$483.562m JPMMT 2014-IVR3, US$463m NRMLT 2014-2 and A$347m Pepper Residential Securities Trust No.13.

US$570m BLCP Hotel Trust 2014-CLRN and €250.04m DECO 2014-TULIP accounted for the CMBS. Finally, the CLOs were: US$361m BNPP IP CLO 2014-II; €877m BPM Securitisation 3; €359m Contego II; US$451m Flagship CLO VIII; US$713m Fortress Credit Opportunities V; €466.5m Harvest X; US$335m Ivy Hill Middle Market Credit Fund 2014-9; and US$511m Oaktree CLO 2014-2A.

Markets
Thursday's ABSPP update from the ECB was the big story of the week for European RMBS and activity following the bank's announcement was largely focused on Italian and Spanish bonds as buyers sought peripheral paper (SCI 3 October). One trader reports that there was also concern that some hedge funds may be holding paper with insufficient secondary ratings to meet the bank's buying requirements.

Across the Atlantic, the US non-agency RMBS market was fairly active, with BWIC volume of close to US$3bn and a number of primary issuances. "Trend trajectories for 2.0 transactions show greater gross WAC dispersions in the 2014 deals compared to the 2013 deals," comment Wells Fargo analysts.

US CMBS new issue spreads widened moderately last week in the face of a broad-based macro selloff, but with little sign of distressed selling, according to Barclays Capital analysts. They note that bid-list volume was also higher, with US$2bn in bonds listed, compared with US$1.4bn over the past four weeks. "However, the volume was concentrated in agency CMBS and legacy dupers, which represented 65% of trades this week," they note.

Lastly, the US CLO market saw a surge of activity as BWIC volume passed US$1.5bn, with a bias towards 2.0 triple-As. "US 2.0 triple-A transactions encountered a fair amount of headwind this week. A lot of line items did not end up trading and for those that did, the recent tightening we saw in this part of the capital stack was completely reversed with 2.0/3.0 triple-A DMs pushing out to about 152bp," say Bank of America Merrill Lynch analysts.

Deal news
• Fitch reports that the modified US$56.8m Colony IV A-note (securitised in JPMCC 2006-LDP9) has been transferred to special servicing, but Barclays Capital CMBS analysts believe the entire US$144m Colony IV portfolio has been moved into special servicing, based on cross-default and modification terms. Together with the A-note, the portfolio comprises a US$37.5m B-note and US$49.8m C-note, which modified in 2012 to be pari passu with the same December 2014 maturity date, two optional one-year extensions, target loan size deadlines and an interest rate reduction to 2% until January 2014.
• Freddie Mac is proposing to amend the intercreditor agreements for six of its CMBS to enable it to sell its interests in the trusts' junior loans to a depositor, which in turn will securitise the assets and issue CMBS notes. The affected transactions are FREMF 2010-K7, 2011-K702, 2011-K703, 2011-K704, 2012-K706 and 2012-K707.
• The attorneys for the Triaxx entities have withdrawn as intervenor-respondents in the US$8.5bn Countrywide settlement covering 530 RMBS trusts. The objection by Triaxx - consisting of Triaxx Prime CDO 2006-1, Triaxx Prime CDO 2006-2 and Triaxx Prime CDO 2007-1 - had been seen as the largest barrier to final court approval of the proceedings since the settlement agreement between AIG and Bank of America (SCI 17 July).
• KBC says it has collapsed the two remaining CDOs in its portfolio, freeing up €300m in capital and increasing the bank's solvency by 0.4%. The move also releases KBC from the portfolio protection agreement it entered into with the Belgian Federal Government and completely eliminates the group's exposure to MBIA.
• The September remittance report for the US$14.1m Grand Mart Chicago Portfolio loan - securitised in MSCI 2007-TOP27 - shows a revised loss severity of 100% for the asset. The CMBS loan was resolved last month, but the August remittance reported a 140% loss severity, with a realised loss of US$19.8m - including US$5.7m in interest shortfalls.
• S&P has affirmed its double-B plus rating on Nakama Re Series 2013-1, after the probability of attachment was reset to a percentage consistent with the transaction documents and the current rating. The agency also reviewed the creditworthiness of the ceding company - National Mutual Insurance Federation of Agricultural Cooperatives (Zenkyoren) - and the rating on the collateral that, barring the occurrence of a covered event, will be used to redeem the principal on the redemption date.
• Talk of a possible leveraged buyout has sent Computer Sciences Corp credit default swap spreads to their widest level in nearly two years, according to Fitch Solutions' latest CDS Case Study Snapshot. The firm reports that five-year CDS on Computer Sciences widened by 81% on Monday alone.

Regulatory update
• The High Court in London has issued a judgment against Colliers International (UK) over its negligent valuation of a property in a test case that is expected to have major implications for the CMBS market. The case was brought by Titan Europe 2006-3, after the building in question lost nearly 90% of its stated value when the occupants - German mail order company Quelle - became insolvent and vacated the property.
• US District judge Royce Lamberth has dismissed four lawsuits against Fannie Mae and Freddie Mac, two of which were brought by Perry Capital and Fairholme Funds. The lawsuits asserted that the US Treasury's full-sweep of the GSEs' profits amounted to an illegal seizure of private property without due compensation.
• The European Commission has adopted three regulatory technical standards (RTS) needed to implement key provisions of the Regulation on Credit Rating Agencies (CRAs). These RTS set out: the disclosure requirements for issuers, originators and sponsors on structured finance instruments; reporting requirements to CRAs for the European Rating Platform; and reporting requirements for CRAs on fees for the purpose of ongoing supervision by ESMA.
• Fitch says that the application of Italy's factoring law to portfolio transfers can increase transparency in Italian revolving securitisations, bringing Italian practice into line with all other European jurisdictions. The agency's comments come after it assigned its first ratings on an Italian securitisation that uses the factoring law to complete the sale of loans to the SPV, as provided for under amendments to Italy's securitisation law made earlier this year.

Upcoming SCI events
• 29 October, New York - SCI's 7th Annual Securitisation Pricing, Trading & Risk Seminar
Click here for more details

Deals added to the SCI New Issuance database last week:
Atrium XI; Carlyle Global Market Strategies CLO 2014-4; Carlyle Global Market Strategies Euro CLO 2014-3; Cent CLO 22; COMM 2014-PAT; FREMF 2014-K716; JPMBB 2014-C23; JPMCC 2014-FL5; Jubilee CLO 2014-XIV; MSC 2014-150E; Octagon Investment Partners XXI; Oscar US 2014-1; Progress Residential 2014-SFR1; Resimac UK RMBS No. 1 ; Sorrento Park CLO ; Sound Harbor Loan Fund 2014-1; STORM 2014-III; VCL 20; WFRBS 2014-C23

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-4; BACM 2006-4; BACM 2008-1; BSCMS 2005-PWR9; BSCMS 2007-T26; CMAT 1999-C1; COMM 2006-C7; CSMC 2006-C2; CSMC 2006-C5; CSMC 2007-C4; ECLIP 2007-2; EURO 28; FLORE 2012-1; GECMC 2006-C1; JPMCC 2004-C3; JPMCC 2004-LN2; JPMCC 2005-CB12; JPMCC 2006-LDP6; JPMCC 2006-LDP9; JPMCC 2007-CB18; JPMCC 2014-C20; LBUBS 2005-C1; LBUBS 2007-C6; MESDG CHAR; MLMT 2004-BPC1; MSC 2005-T17; MSC 2007-IQ15; MSC 2007-T27; TITN 2006-3; TITN 2007-1; UTREF 1

Structured Finance

IOSCO chairman continues in role

Greg Medcraft, chairman of the Australian Securities & Investment Commission (ASIC), has been re-elected as chairman of IOSCO's board. He was first elected last year (SCI 2 April 2013) when the board was formed through a three-way merger of the IOSCO technical committee, executive committee and emerging markets committee advisory board.

Structured Finance

Board changes at Markit

Edwin Cass has joined Markit's board of directors. He was nominated by the Canada Pension Plan Investment Board, where he is the senior md and chief investment strategist, leading the global capital markets, corporate securities and tactical asset allocation groups within the public market investments department.

Cass joins the Markit board as a Class III director and has been appointed to the board's audit and risk committee. Zar Amrolia has resigned from the board and Timothy Ryan has become a Class II director.

Structured Finance

Fund manager adds two

SCIO Capital has added Barry Lucassen to its portfolio management team and Eriko Aron to its risk management team. Lucassen was previously at Aeris Capital and will now report to head of analytics Eric Eastlund, while Aron will report to Jason Harris, executive director of risk.

Aron was previously at Deutsche Bank, where she covered securitisation and distressed portfolio transactions. She has also worked on cash and synthetic securitisations at Ambac Assurance UK and began her career in derivatives marketing at Bank of Tokyo-Mitsubishi.

CLOs

CLO strategy head leaves bank

Kenneth Kroszner has joined Bayview Asset Management as a CLO analyst and trader. He was previously head of CLO strategy at RBS, having joined the bank in July 2011.

CLOs

Investment manager purchase prepped

Neuberger Berman has agreed to purchase Ramius' interest in Orchard Square Partners. Terms of the deal have not been disclosed but the transacion is expected to close on 31 December.

Orchard Square is led by Norman Milner, Rick Dowdle, Darren Carter and Itai Baron, who have worked together for over eight years. The team is supported by seven professionals who will also be joining Neuberger Berman.

CLOs

Madison Capital pair to lead new team

Angelo Gordon has recruited Chris Williams and Trevor Clark to establish a new middle market direct lending business. The new team expects to launch the business in 1Q15 and collaborate extensively with the corporate credit team.

The pair co-founded and built the direct lending business at Madison Capital. Clark has held a number of loan underwriting and origination roles, including stints at Antares Capital, GE Capital and Bank of America, while Williams has worked at Cochran, Caronia & Co, GE Capital and Bank of America.

CLOs

Cantor adds CLO trader

Cantor Fitzgerald has appointed Ervin Pilku as an md. He will be based in New York and focus on trading CLOs, CDOs and Trups.

Pilku was previously head of fixed income trading at White, Weld & Co. Before that he traded CLOs, CDOs and ABS at Tejas Securities Group and he has held a range of structured products posts at Advisors Asset Management, NewOak Capital, Verum Capital, Circle Point Asset Management and Ambac.

Insurance-linked securities

ILS manager makes UK move

Twelve Capital has opened an office in London, with the firm's chairman and cio Urs Ramseier relocating from Switzerland to the UK to lead the team. The firm has also engaged in a push to strengthen its analytics capabilities in Zurich.

Twelve Capital believes its presence in London will provide enhanced access to insurance and capital markets talents as well as enabling full integration in the London market, which will further facilitate interaction with major insurance brokerage houses, investment banks and insurance companies themselves.

Ramseier is joined in London by Laura Santori, Mark Wauton, Dinesh Pawar and Richard Guerin. Santori is a partner, senior credit analyst and insurance debt portfolio manager, while the other three all joined the firm this year and serve as senior portfolio manager, head of trading and consultant relations director, respectively.

The firm has also added to its team in Zurich with the appointment of Jan Kleinn, who joined as head of ILS analytics in the summer. He was previously head of research and development at Aspen Re and will now build up a team of analysts.

RMBS

GSE lawsuits dismissed

US District judge Royce Lamberth has dismissed four lawsuits against Fannie Mae and Freddie Mac, two of which were brought by Perry Capital and Fairholme Funds. The lawsuits asserted that the US Treasury's full-sweep of the GSEs' profits amounted to an illegal seizure of private property without due compensation. However, Judge Royce ruled that Congress - via HERA - had in effect given the conservator immense discretionary power and prohibited the courts from interfering with the exercise of this power, according to a Citi research note.

RMBS

Springleaf nears mortgage wind-down

Springleaf Holdings has completed the sale of US$1bn performing and non-performing mortgage loans to Credit Suisse under its mortgage liquidation plan. The company's real estate portfolio totaled approximately US$9bn on a historical accounting basis, as at 31 December 2013. By 30 June, the company had closed on the sale of approximately US$1.5bn of real estate loans backed by securitisation interests.

The latest asset sale was completed pursuant to an agreement to sell to Credit Suisse whole loans of approximately US$1.7bn. The bank continues to perform diligence on the remaining whole loans and additional sales may be completed during 4Q14.

Springleaf closed on the sale of an additional US$6bn in real estate loans and securitisation interests in Q3, leaving less than US$1.5bn of real estate loans in its portfolio. Through a strategy of further sales to Credit Suisse or other parties and natural portfolio run-off, the company's goal is to achieve the target of holding approximately US$1bn or less in real estate loans by year-end.

The company has also substantially completed the wind-down of its real estate servicing operation, which follows the sale of its mortgage servicing rights for certain securitised loans to a subsidiary of Nationstar Mortgage Holdings on 29 August. As of 1 October, substantially all of Sprinleaf's remaining first-lien real estate portfolio is being serviced by Nationstar and a third-party servicer, pursuant to separate sub-servicing agreements with the company.

RMBS

JPMorgan settlement hearing scheduled

Trustees involved in the JPMorgan rep and warranty settlement released their decision for the 28 RMBS deal groups for which they had sought a deadline extension. The trustees accepted the US$4.5bn offer on 18 deal groups and rejected it for the remainder.

Barclays Capital RMBS analysts note that the trustees have now reached their decision on all 330 trusts and are awaiting the judicial instruction for which they have already filed a petition. Investors who oppose the settlement for previously-accepted deals have until 3 November to file their objections and trustees have a month after that to file their response. The hearing is scheduled for 16 December.

Based on the progress in the Countrywide case and the work undertaken by the trustees so far in the JPMorgan case, the Barcap analysts believe that the settlement may be approved for the majority of the 330 deals and cash will flow to those trusts in 2015.

RMBS

Agency vet joins originator

American Financial Resources has hired Timothy Yanoti as president and appointed him as a board member. He will assist with the mortgage originator's overall strategy, strategic partnerships and regulatory oversight.

Yanoti was previously at Fannie Mae, where he was head of securitisation and worked on the common securitisation platform. He has also served as head of global securitisation for GE Capital and head of capital markets for National City Corporation.

ABS

FFELP default improvements welcomed

The improvement in the FFELP default rate is positive for FFELP student loan ABS, Fitch says. The decline was anticipated, given the moderate macroeconomic improvement since the peak of the crisis, but the agency believes that part of the improvement is also attributable to a more aggressive push by the government to enroll borrowers in various income-based repayment plans. Both of these factors is expected to continue to push the default rate lower in the near term.

The three-year cohort default rate, which includes both FFELP and the Federal Direct Loan Program, declined from 14.7% last year to 13.7% this year - the first drop in defaults since the financial crisis. The 90+ day delinquency rate for student loan delinquencies published by the New York Fed has dropped since 3Q13.

However, these results are higher than those for FFELP ABS trusts, according to Fitch. The default rates for FFELP loans that were securitised were typically much lower.

Fitch believes that improvement in the job market is a major driver for the decline in defaults. In addition, servicers have increasingly responded to the administration's push for various income-based repayment plans.

ABS

Aircraft engine sale affirmed

Blade Engine Securitization intends to sell a CFM56-3C1 aircraft engine out of the trust to a third party. Fitch notes that the move is unlikely to impact its ratings on the ABS transaction.

The agency says that the engine in question is currently grounded. Therefore, its sale would provide cashflow to the trust from an asset that is currently not generating revenue.

The proposed sale price of the engine is below the note target price, as defined by the transaction documents, but Fitch does not anticipate that this would adversely impact the ratings on the trust. However, the agency says that all notes currently have a negative rating outlook, indicating that downward rating movements are likely over a one- to two-year period. The negative outlook reflects Fitch's concerns regarding the engines' ability to generate sufficient collections and repay the notes under certain stress rating scenarios.

Structured Finance

Bank performance under consideration

Given the proposed changes to its bank rating methodology, Moody's is considering adjusting how it reflects risk of bank performance in rating securitisations globally. These risks coincide with various roles banks play in structured transactions.

The proposed changes to Moody's bank rating methodology aim to improve insight into how different regulatory approaches to bank resolutions may impact a bank's ability to fund obligations and perform essential functions in structured finance transactions. The proposals follow a change in public policy in recent years favouring 'resolution regimes', under which bank regulators can bail-in debt instruments of undercapitalised banks without invoking bankruptcy, thereby allowing other banking operations to continue uninterrupted.

Depending on the resolution regime and the role of a bank in a securitisation, there are four reference points the agency is considering to reflect bank performance risk. These are, from highest to lowest risk: the risk that a bank will default or require extraordinary support to avoid a default on one or more of its debt obligations, as indicated by the bank's adjusted baseline credit assessment; the risk of a bank's senior unsecured obligations, as indicated by its senior unsecured debt rating; the risk of bank deposits, as indicated by the bank's deposit rating; and the risk that a bail-in or other actions taken by regulators in resolving a failed bank will prove insufficient to recapitalise a bank.

Structured Finance

Downgrades expected on sovereign update

S&P has updated its methodology for rating single-jurisdiction securitisation tranches above the underlying sovereign rating, following a year-long consultation process (SCI 15 October 2013). The main change from the previous criteria is the reduction of the maximum rating differential between securitisations and sovereign to four notches from six notches, unless the tranches meet certain conditions based on structural features and collateral quality.

These conditions are: the class is the senior-most tranche and the deal pays sequentially (or has conservative pro-rata triggers and switches back to sequential if performance deteriorates); underlying assets have moderate sensitivity to country risk and have stable payment characteristics; there is no refinancing or direct market value risk; liquidity support to cover one debt-service payment is available; the pool is seasoned or the assets are short term and the securitisation is supported by a dynamic reserve; and sufficient credit support is available to cover losses expected in S&P's stress scenarios. All of these conditions should be satisfied for a six-notch rating uplift over the sovereign; if all other than the seasoning condition are met, the tranche can be rated up to five notches higher than sovereign.

The agency also eliminated the distinction between investment and non-investment grade sovereigns in deciding the maximum achievable ratings on securitisations. As such, ratings on some RMBS and ABS notes from non-investment grade countries such as Portugal will be upgraded.

However, many more ratings are expected to be downgraded due to the implementation of the criteria. Citi European securitised products analysts suggest that Italy is likely to be the worst affected among peripheral countries, while Ireland is likely to be the least affected, with only 6% of RMBS expected to be downgraded. The impact on Spain and Portugal will be balanced, as the new criteria will lead to both downgrades and upgrades of structured finance tranches from the two countries.

With respect to Italian transactions, S&P anticipates downgrades of 1-2 notches in about 35% of RMBS and 15% of ABS. Almost half of CMBS and SME CLO tranches will be downgraded by 1-3 notches.

In Spain, the agency expects about 25%-40% of RMBS and ABS to be downgraded by 2-3 notches and about 25%-30% of SME CLOs to be downgraded by 1-3 notches. Separately, about 20% of RMBS ratings will be upgraded due to changes in the Spanish RMBS criteria.

Portugal will benefit from more upgrades than downgrades. S&P expects to upgrade about 36% of RMBS, 72% of ABS and about 17%-20% of SME CLOs by one notch. Downgrades are anticipated to impact about 24% of RMBS, 18% of ABS and 8%-10% of SME CLOs.

The Citi analysts note that the new rating of a tranche will depend upon S&P's projected losses for the deal under severe levels of macroeconomic stress and the available credit support for the tranche. "We think all those bonds that are rated more than four notches higher than the sovereign will be vetted very conservatively by S&P. As such, we think the failure to satisfy any of the [uplift conditions] will lead to downgrade to the new maximum rating level; that is, four notches above the corresponding sovereign," they observe.

Structured Finance

Bankruptcy-remote approach explained

Moody's has published its methodology for assessing the bankruptcy remoteness of SPEs in global structured finance transactions. Under the methodology, the agency notes that if an SPE is bankruptcy-remote, the risk of bankruptcy is so low that it has no rating impact. If it determines that an SPE is not bankruptcy-remote, it evaluates whether the risk of bankruptcy has a rating impact, according to the likelihood of bankruptcy and the potential negative consequences for noteholders.

Moody's approach divides bankruptcy remoteness criteria by the type of bankruptcy filing (involuntary or voluntary) and the risk of substantive consolidation. The agency says it assumes that an SPE will not be subject to an involuntary bankruptcy filing by external creditors if the SPE meets all of these criteria: its activities are suitably restricted; it is independently owned and managed; it cannot incur secondary liabilities; its activities will not lead to any tax liabilities; it has no liabilities from previous activities; and it has all necessary licences and authorisations. Furthermore, Moody's assumes that an SPE will not be subject to an involuntary bankruptcy filing by transaction creditors if they agree to contractual terms that legally prevent them from filing, or are otherwise highly unlikely to file against the SPE.

Moody's assumes that an SPE will not be subject to a voluntary bankruptcy filing if it meets at least one of these criteria: it is independently owned and managed; a voluntary bankruptcy filing requires the affirmative vote of at least one independent director; the shareholders and/or management are very unlikely to have an incentive to cause the SPE to file for bankruptcy; and it is unlikely to ever be in sufficient financial distress to file for voluntary bankruptcy. Finally, the rating agency assumes that an SPE's assets and liabilities will not be pooled with those of a bankrupt affiliate if it is located in a jurisdiction that does not apply substantive consolidation, or is established and operated in a way that mitigates consolidation risk.

Structured Finance

EMEA UMPPR launched

Moody's has launched unpublished monitored private placement ratings (UMPPR) across EMEA, focused on the developing private placement markets in the region. The agency first launched its UMPPR service for the US private placement market in November 2012.

The UMPPR service provides definitive, unpublished and monitored credit ratings on privately placed debt instruments. "Moody's new UMPPR service will provide an independent view of the creditworthiness of issuers seeking funding through the EMEA private placement markets," says Matt Donohue, vp, global product management at Moody's. "Our private placement rating offers issuers the flexibility to get a rating for disclosure just to its private placement investors, but it can swiftly transition into a published rating when needed."

The UMPPR provides customers with an independent view of their credit quality through a definitive rating assigned at the corporate or institutional level. UMPPRs are subject to the same information, rating committee and internal documentation procedures that apply to Moody's published credit ratings and to the same level of monitoring as Moody's published monitored credit ratings.

Further, UMPPR customers have access to research and analysts directly through a private and secure dataroom. Ratings and research will be disclosed through the secure dataroom to a private group of existing and prospective investors.

Structured Finance

SF impairments hit post-crisis low

The global structured finance 2013 new impairment count declined to 1,138 from 2,189 in 2012, according to Moody's. This marks the lowest number of new impairments observed since 2007.

Moody's findings are based on ratings, impairment and loss information for over 72,000 global structured finance tranches from roughly 11,500 deals. "The performance of structured finance securities, as measured by impairment counts and rates, has steadily been improving," confirms Debjani Dutta Roy, an analyst in the agency's credit policy default research team.

Meanwhile, newer structured finance securities rated by Moody's since 2009 continue to display robust performance, with a cumulative impairment rate of just 0.1%. None of these impaired tranches were ever rated investment grade.

The investment grade impairment rate for 2013 was close to 0% and no new impairments were observed among Aaa- and Aa- rated structured securities during the year. Even speculative-grade rated structured securities are performing well - the impairment rate dropped to 5.3% in 2013, the lowest in the past five years.

The US RMBS and CMBS sectors posted significantly lower impairment rates in 2013 from previous years, with 12-month impairment rates declining to 4% and 2.5% respectively. US ABS and global CLOs posted low impairment rates of 0.7% and 0.1% respectively. EMEA and international securitisations excluding CDOs and CLOs also performed well, with their impairment rates standing at 1.1% and 1.6% respectively.

Moody's considers a security to be impaired if it is considered defaulted or if the security has been downgraded to a Ca or C rating.

CDS

Mining spreads widen on commodity slump

Sputtering commodity prices are leading to wider credit default swap spreads for mining companies globally, according to Fitch Solutions' latest CDS Case Study Snapshot. Five-year CDS on the mining sector have widened by 23% over the past month and by 12% just last week.

Companies domiciled in North America and Europe led the widening with spreads moving out by 31% and 25% respectively over the month. "At the forefront is Newmont Mining Corporation, Barrick Gold Corporation and Anglo American, where spreads have moved out 71%, 68% and 46% respectively over the past month," comments Fitch Solutions director Diana Allmendinger.

CDS liquidity for mining companies also rose by six global percentile rankings, on average, over the last month. "Souring market sentiment for mining companies can likely be attributed, at least in part, to falling commodity prices - particularly gold, iron ore and coal," adds Allmendinger.

CDS

CDX rolls to higher quality

The CDX indices are set to roll to Series 23 today (6 October) in line with the delayed implementation of the 2014 ISDA Credit Derivatives Definitions. Morgan Stanley credit derivatives strategists note that the names removed in the CDX IG index are slightly lower quality, with one name removed following a downgrade, so on average IG23 is higher quality than IG22. With respect to the CDX HY roll, the two new names are both rated double-B, while the removals had either defaulted or are rated single-B - making HY23 higher quality than its predecessor.

At the sector level for CDX IG23, a consumer name (The Hillshire Brands Company) is replaced by a financial name (Prudential Financial), with the other change within the materials sector (Alcoa replaced by Teck Resources). Even after this change, the CDX IG index has a much lower percentage of financials and a much higher percentage of consumer discretionary names than before. The Morgan Stanley strategists estimate that the difference in constituents is worth less than 1bp, given the credit quality and spreads of the replacement names.

The additions to the CDX HY23 index are in the consumer staples (Constellation Brands) and financials (Navient) sectors, while the removals are in the consumer discretionary (Kate Spade & Company) and utilities (Texas Competitive Electric Holdings) sectors. The sector composition is now more financials-heavy than it was before. The strategists estimate that the difference in constituents contributes around 2bp of tightening to the roll.

Given the small difference in spread levels from credit changes in both the CDX IG and HY indices and the current steep curves, the strategists point out that the vast majority of the spread differential in both rolls is from the six-month extension in maturity (worth around 9bp for CDX IG and 24bp for CDX HY). They calculate that the fair value for CDX IG23 is just under 10bp wider than for CDX IG22, while the fair value differential for the CDX HY roll is 22bp.

Gross and net notional amounts outstanding of the on- and off-the-run indices have increased from Series 21 to Series 22 in both CDX IG and CDX HY. At the same time, a slight decrease in average daily volumes has been observed over the last six months.

CDS

Forest Oil hits wides ahead of vote

Forest Oil Corporation's five-year credit default swaps have widened by 34% over the past month and 109% since the start of the year, according to Fitch Solutions in its latest case study. The contracts are now trading at their all-time wide levels.

"Souring market sentiment for Forest Oil can be partly attributed to ongoing merger discussions with Sabine Oil & Gas, which is subject to a shareholder vote next month," comments Diana Allmendinger, director, Fitch Solutions.

Equity markets have echoed the negative sentiment, resulting in a notable increase in Fitch Solutions' one-year and five-year probability of default for the company, which are both 166% higher compared to a month ago. "Forest Oil's CDS curve has become inverted, with the one-year tenor now pricing nearly 500bp wider than the five-year," adds Allmendinger.

An inverted CDS curve indicates that the market perceives more likelihood of a credit event in the shorter timeframe than long-term and typically occurs as issuers become distressed.

CLOs

CLO diversity surveyed

CDO strategists at JPMorgan have examined single name exposures within and between pre- and post-crisis US CLOs to gain a sense of diversification across the sector. They surveyed 357 1.0 and 325 2.0 broadly-syndicated CLOs issued from 2001 to 2014, representing over US$220bn in loan collateral.

When comparing the top 50 names between 1.0 and 2.0 CLOs, there are 22 matches. In addition, there are three matches in the top 10 names (First Data, Community Health Systems and Chrysler), 10 in the top 25 and 47 in the top 100.

As expected, 1.0 CLOs are significantly less diverse than 2.0 CLOs, due to the former exiting reinvestment and high loan prepayments that coincided over the past two years. In JPMorgan's sample, the average total number of names in 1.0 (90) is just over half of the 2.0 number (174), with the top 50 accounting for nearly 40% of CLO 1.0s versus 20% in CLO 2.0s.

To address the diversity across CLOs issued around the same time, the strategists focused on CLOs issued in 4Q13 because of the high volume (44 deals for US$20bn) and good visibility of the collateral pools. The average number of single name exposures in the average CLO issued during this period is about seven in the top 10, 14 in the top 25, 25 in the top 50 and 42 in the top 100. But dispersion is apparent, indicating different manager styles and other factors.

Meanwhile, the average exposure to the top names of deals issued in 4Q12 to 4Q13 has only marginally decreased and on a percent basis has stayed relatively flat, despite the loan market's expansion over the past year in both size and number of issuers. To the extent that there is organic growth in loan supply as the economy improves with more buyout and M&A financing, the strategists indicate there is room for more single name choice in the future.

CMBS

Sears exposure tallied

Morningstar estimates that about US$373.3m in loans across nine US CMBS could potentially be affected by Sears' most recently announced store closures. The effect on more recent CMBS deals is expected to be minimal, but three malls backing pre-2010 loans will face increased default risk, as these loans are already on the Morningstar watchlist for performance issues.

Sears is closing stores backing four pre-2010 CMBS deals, three of which could lead to near-term defaults as these properties already are struggling. The stores include the Mercer Mall in Bluefield, West Virginia, which secures a US$19m portion of a US$33.5m loan in the Ershig Mall Portfolio securitised in MSC 2007-IQ14 (see SCI's CMBS loan events database). The US$28.5m Hickory Point Mall loan in BSCMS 2006-PW11 and the US$24.6m Towne Square Mall loan in MSC 2007-T27 are also expected to be affected.

While Sears occupies just 7.9% of the Ershig Mall Portfolio's total leasable space, it occupies 14.3% of the leasable space at the Mercer Mall and - with the loan already struggling - default risk is elevated. As of 30 June, its debt service coverage ratio had dipped to 0.79x.

Meanwhile, the Hickory Point Mall near Decatur, Illinois, is reportedly losing two of its anchor stores. The pending closing of the Sears store and automotive centre follows the closing of JCPenney's store earlier this year.

JCPenney's lease expires in October 2015. Sears is obliged to pay rent until its lease expires in September 2028, but it is unclear whether losing both anchors will trigger co-tenancy clauses that allow smaller tenants to pay reduced rent.

The loan has a DSCR of 0.97x, as of 30 June, and Morningstar considers the loan at low to moderate risk of default. However, the agency's analysis suggests that the value of the asset is more than the exposure of the loan.

The Towne Square Mall in Kentucky generated a 0.90x DSCR as of year-end 2013, which improved to 1.12x as of 31 March, according to Morningstar. Sears is the largest tenant with 122,136 square-feet and its lease runs through February 2028.

It is not known whether Sears has an early termination option or if co-tenancy clauses will be triggered. JCPenney recently renewed its lease until 2018, but Macy's Home - a shadow anchor - reportedly has not renewed. Morningstar forecasts a value deficiency of US$6.3m and an expected loss of US$1.6m for the loan.

One additional pre-2010 loan has exposure to a Sears closure: the Manhattan Town Center (CSFB 2005-C2) in Manhattan, Kansas, is the largest collateral tenant and its departure will lower occupancy to less than 75%. With a balance of US$27.9m, the loan is among the top 10 loans in the deal, representing 3.1%. As of 30 June, it had a healthy DSCR of 1.53x.

Morningstar expects the effect of the latest Sears closings on CMBS deals originated after 2010 to be minimal. The agency cites as an example the closure of a Sears auto centre at the Westfield Countryside mall in Clearwater, Florida, which backs a US$100m loan in MSBAM 2013-C11 and a US$55m loan in MSBAM 2013-C12 (see also SCI 23 September). The space Sears occupied is owned by the tenant and is not included as collateral for the loan.

Two additional CMBS 3.0 deals have exposure to Sears closures: the retailer occupies 27% of the space in the US$48.8m Towne West Square Mall loan, securitised in MSC 2011-C2 (its lease expires in April); and is the third-largest tenant at the Holiday Village Mall, securitised in COMM 2012-CR5 (its lease expires in June). Morningstar notes that both loans have strong DSCRs and neither is likely to default at lease expiration, as Sears pays a low proportion of total rent. It is unknown, however, if co-tenancy clauses would be triggered upon Sears' departure.

"The potential for greater defaults arises where JCPenney and Sears stores are both part of collateral backing CMBS deals, as JCPenney closed more than 30 stores this year and could close more stores next year," the agency observes. "For example, the Gallery at Military Circle (GMACC 2004-C2) in Norfolk, Virginia, lost its Sears store two years ago and JCPenney closed in May. The loan matured in August and Morningstar projects a US$15m loss."

With respect to Sears' affiliate Kmart, just US$25.8m of CMBS have exposure to Kmart's most recent store closures. But the potential for near-term defaults exist as Kmart leases between 48.2% and 98.7% at the collateral properties.

CMBS

Servicer workloads increasing

The workload of European CMBS servicers has increased significantly so far in 2014, with around half of the loans maturing in 2013 and 2014 still awaiting resolution, according to Fitch's latest EMEA commercial mortgage market index report. Although the number of loans being watchlisted has begun to slow down, the agency expects that most loans will require special servicer intervention due to borrower leverage being too high for refinancing. With bond maturities peaking in 2017, pressure on servicers is mounting.

"The peak of loan maturities is now behind us and only eight loans are falling due over the remainder of the year. However, what this does not show is the surge of loans in workout or otherwise awaiting resolution and the associated pipeline of properties to be disposed of in the next three years," says Mario Schmidt, associate director in Fitch's structured finance team.

In some cases, loans can be worked out with the cooperation of the borrower - although for a loan to be refinanced, it would require property sale proceeds to exceed allocated loan amounts. Offering a discounted payoff is not permitted in CMBS documentation.

Given the large number of loans in or awaiting workout, the impending maturities of the eight loans therefore understate demand for debt financing. Fitch suggests that little will be drawn by borrowers to refinance the eight CMBS loans.

"Debt financing is increasingly available for the kind of secondary collateral that dominates legacy deals, particularly in Germany. However, as loans are now offered with much reduced leverage, most will be used by new investors funding property purchases. This will help special servicers manage disposals on time," Schmidt observes.

The eight loans maturing in 4Q14 face similar challenges. Four have previously been extended, of which only two have improved sufficiently to envisage full repayment. Fitch says that another two also stand a chance of full repayment, provided resolution is not complicated by looming bond maturities.

Overall, Fitch's maturity repayment index improved to 62.5% for 3Q14 from 59.8% in the previous quarter.

CMBS

Areas for improvement remain

There are many favourable aspects to the general health of the US CMBS sector, but some areas could still be improved, Fitch says. This is according to its US CMBS progress report, the first in a series that the agency plans to publish globally, discussing significant changes a sector has undergone since the financial crisis.

Underwriting declines have been in the spotlight in recent years, but prudence is generally being exercised by CMBS originators, according to Fitch md Huxley Somerville. "CMBS originators on the whole are using more sensible assumptions when underwriting a property's cashflow, which is a positive development compared to what took place between 2006 and 2008," he says.

Another notable contrast to the overheated markets of 2006-2008 is that credit enhancement for CMBS has increased to counteract the underwriting slippage. In fact, credit enhancement levels for triple-A CMBS are nearly double those seen in 2006 and 2007. Ratings on new CMBS transactions since 2010 remain stable and are expected to continue to do so, with only nine loans defaulting thus far in deals originated in the last four years.

However, improvements could be made, particularly around potential conflicts of interest among special servicers and the excessive amount of debt evident in some large loan deals. "Increased transparency is still needed on the motivations of some CMBS special servicers in relation to the actions that they take on a loan in need of a workout," notes Somerville. "As for large loans, some of them are just too highly leveraged and may have considerable refinance risk, particularly if interest rates are significantly higher at maturity."

CMBS

Call to revisit PACE provisions

US CMBS loan documents currently do not have explicit prohibitions barring borrowers from taking out property-assessed clean energy (PACE) loans without the lender's prior consent. Moody's suggests that this could negatively affect the credit profile of the property, given the risks posed by PACE loans.

"PACE loans can materially increase a loan's leverage and risk profile," says Moody's svp Daniel Rubock. "Property improvement loans are typically junior to first mortgages on the property, but PACE loans - which are a type of property improvement loan - are senior and may significantly increase expenses, making the first mortgage loan riskier."

CMBS loan documents need to specify that a borrower cannot take out a PACE loan without prior written consent of the lender, according to Moody's. Requiring consent would allow the lender to weigh the risk of increased debt obligations against the energy savings resulting from making the property more energy efficient.

"Mortgage lenders could be in favour of incurring additional PACE leverage if energy savings are clearly and convincingly substantial enough to outweigh the risk and thus benefit CMBS investors," explains Rubock. "While we recognise the virtues of clean energy initiatives, in all cases the lender should be in the position to make that credit determination. Loan documents have to be specific about this because borrowers could argue that a PACE loan is a tax lien and thus is not an unpermitted encumbrance on the property, which standard loan documents normally prohibit."

There is also uncertainty about whether a PACE loan would always trigger a 'bad-boy' guarantee, where the loan becomes full recourse to the borrower's owner for cases of serious, intentional covenant breaches. Taking out unapproved subordinate debt would typically trigger this liability, but PACE loans usually are senior, not subordinate.

Although federal agencies and non-profit organisations have taken some steps to address these risks, state laws on PACE financing vary widely. About half of the states with operating PACE programmes have enacted some sort of consent or notice-to-mortgage lender procedure. Conversely, Florida does not require lender consent if total energy savings are greater than or equal to the annual repayment amount of the PACE loan and even appears to ban lenders accelerating the loan if a borrower takes out a PACE loan.

CMBS

Colony IV returns to special servicing

Fitch reports that the modified US$56.8m Colony IV A-note (securitised in JPMCC 2006-LDP9) has been transferred to special servicing, but Barclays Capital CMBS analysts believe the entire US$144m Colony IV portfolio has been moved into special servicing, based on cross-default and modification terms. Together with the A-note, the portfolio comprises a US$37.5m B-note and US$49.8m C-note, which modified in 2012 to be pari passu with the same December 2014 maturity date, two optional one-year extensions, target loan size deadlines and an interest rate reduction to 2% until January 2014.

Based on trustee remittances, five of the properties backing the portfolio appear to have been sold and the balance reduced by US$27m from pay-downs in February. Each note was reported as having US$6.2m in NOI and US$2.8m in NCF, but the Barcap analysts suggest that this seems to be the total NOI/NCF for the entire portfolio, leading to inflated DSCRs being reported.

Indeed, watchlist commentary reports that DSCR NCF for 2013 was 0.87x, not the 2.22x reported. Using 2013 NOI/NCF and taking into account the end of the modified 2% note rate, the analysts believe that 2014 DSCR has likely fallen to just 0.78x and may be even lower, considering that properties were sold in early 2014.

It is unclear whether the borrower will attempt to negotiate another modification or allow the loan to go delinquent. If the loan becomes delinquent, a 25% auto-ARA would increase AJ to S tranche shortfalls by around US$170,000, according to the analysts. A new modification would likely have to reduce interest payments to help stabilise the properties.

The remaining properties in the portfolio were valued at US$125m, as of December 2011, and there appears to have been little leasing-up progress since the original modification.

CMBS

Liquidations drive losses higher

Average US CMBS loss severity measured 55.69% in September, up from 37.56% in August, according to Trepp. Loss severity was almost seven percentage points higher than the 48.83% 12-month moving average and 11 points above the 44.27% average since January 2010.

Liquidated loan volume was almost double August's US$994m and triple July's lull of US$605.47m. Of the loans that were liquidated, 89% by balance fell into the greater than 2% loss severity category.

Over the course of the month, ten loans above US$50m helped push the disposed loan balance to US$1.8bn in September. The liquidation of the World Market Center in Las Vegas caused much of the damage: the US$225m loan in BSCMS 2005-PW10 took a total 48% loss, with a loss of more than 100% on the B note; and the US$345m World Market Center II loan in BSCMS 2007-PW15 was resolved with an aggregated 59% loss on the A- and B-notes, with a 101% loss on the B-note (see also SCI's CMBS loan events database). In addition, the US$220m Solana loan was disposed of with a 59% loss.

Overall the number of loans liquidated in September was 105, resulting in US$1.03bn in losses. The average disposed balance was US$17.56m in September, well above the 12-month average of US$14.98m.

Since January 2010, servicers have been liquidating at an average rate of US$1.2bn per month.

CMBS

CMBS delinquency rate slides

The Trepp US CMBS delinquency rate fell by 7bp in September to 6.03% and is now 211bp lower than the year-ago level. Year-to-date delinquencies have fallen by 140bp from 7.43%, as of 31 December 2013.

Loans that became delinquent totalled almost US$1.4bn in September, putting 26bp of upward pressure on the delinquency rate. The largest loan that became delinquent during the month was the US$116m Dallas Market Center loan, securitised in BACM 2004-4 and MLMT 2004-BPC1.

Loans that cured totalled over US$600m in September, which helped push the delinquency rate down by an additional 13bp.

Meanwhile, CMBS loans that were liquidated with losses totalled about US$1.8bn last month. Of these loans, US$1.2bn were delinquent as of the month prior to resolution. The removal of these previously distressed assets from the numerator of the delinquency calculation helped push delinquencies lower by 22bp.

The largest loss resolutions by loan balance came from the Solana loan (securitised in BACM 2007-1 and JPMCC 2007-LDPX), the World Market Center loans (BSCMS 2007-PWR15 and BSCMS 2005-PWR10), the Westin Casuarina loan (WBCMT 2007-C32) and the CVI Multifamily Apartment Portfolio loan (CSMC 2007-C1).

Trepp notes that over US$1.9bn in newly defeased loans appeared in the database in September, the largest of which was the US$345m Mall of America loan securitised in COMM 2006-C8, CD 2007-CD4 and GECMC 2007-C1 (see SCI's CMBS loan events database).

CMBS

Repeat loan trends examined

DBRS has identified a sample of approximately 3,700 US CMBS properties that were collateral for loans that have been securitised in multiple transactions over the past 20 years. Based on the data available from these repeat loans, the agency compared leverage trends and other financial metrics for CMBS loans through time.

Broadly the results show that since the near collapse of the CMBS industry in the late-2000s, repeat loans have signalled some relative stability in the market. However, the industry has yet to achieve a long‐term stable footing, according to DBRS.

The agency found that loans representing an original balance of US$42bn have been re‐issued into new CMBS transactions. Through refinancing or other methods, repeat loans have found their way back into the CMBS universe with a combined balance of US$57bn, representing a 35% increase in leverage. This increased leverage is illustrated by the measure of whether a repeated loan is cash‐in versus cash‐out.

During the bubble years, observances of cash‐in loans declined substantially, underscoring the increased risk in legacy CMBS transactions. This trend has been reversing since late-2007, with instances of loans that are cash‐in accounting for less than half of all repeat loans.

DBRS recognises that cash‐outs can be normal and healthy when accompanied by proportional cashflow growth. But when either loan balance growth is greater than value growth (LTV increase) or value growth is greater than cashflow growth (cap rate compression), the agency suggests that there is a high likelihood that - all else equal - the repeat loan's ability to perform and refinance in good standing is reduced relative to its prior term.

The observed 35% increased leverage of repeat loans is partially justified by an offsetting 15% cashflow growth, but the balance was created by changes in underwriting standards and cap rate compression. Just 18% of repeat loans in CMBS history involved a cash‐in, a trend that changes through time, approaching just 5% for the vintages that were marked by the highest leverage increases.

Post‐crisis CMBS repeat loans have trended towards having more instances of cash‐in, but these instances remains below 50% of all repeat loans and have begun to trend downwards again more recently.

DBRS concludes that the final assessment of CMBS new issuance lending as seen through the lens of repeat loans "remains in murky territory". In order for it to be seen by the agency as unequivocally credit positive on CMBS bond performance, the cashflow growth of properties would need to exceed leverage increases - but it still does not.

"What is positive is that value increases in post‐crisis CMBS tend to exceed leverage increases for the first time in sustainable form in CMBS history. This is, however, not in small part due to interest rate declines and compressing cap rates," it observes.

Insurance-linked securities

ILS trade trends examined

FINRA began making transaction prices available on TRACE for 144a and structured products trades on 30 June, including ILS transactions by US registered broker dealers. The TRACE record shows that 100 trades took place in catastrophe bonds in Q3, according to Lane Financial's latest quarterly market performance report.

The record further shows that the dealer mark-up averages about 10bp, but reaches as high as 25bp and as low as zero, depending on difficulty, size and the desires of transaction participants. Given that trade sizes greater than US$1m are not disclosed by TRACE and assuming the average transaction size was US$2m during the quarter, Lane Financial estimates that approximately US$500m of face value was traded in Q3 (counting both sides as one trade).

If the average round lot is US$5m, then the face value traded is US$1.25bn. Given the outstanding size of the ILS market, this equates to a turnover rate of about 5%.

The data shows that 27 different issues were traded, 45% of which were in a lot size greater than US$1m. Further, while wind-exposed bonds had been expected to trade during the hurricane season, the record shows that earthquake ILS and mortality ILS also traded during the quarter.

Based on trading activity for four different ILS, the trend from July onwards was for higher trade prices - implying lower yields. This was true of seasoned deals - such as Mythen, which was already trading at a premium - and of new deals starting off at par. The most traded bond was Everglades 2014 (also the biggest bond outstanding), accounting for over a quarter of the volume.

The Lane Financial report concludes that the preliminary data from quote sheets - whether in seasonal price patterns or in yields in the firm's synthetic rate-on-line index - present the same general story. Transactions appear to follow the direction of quotes.

RMBS

RMBS comparison tool launched

Moody's has released a proprietary tool designed to facilitate comprehensive comparisons of the key characteristics of 13 different RMBS markets, including the UK, Spain, Italy, Netherlands, Japan, Australia and the US. They can be compared by several different topics, covering collateral, modelling assumptions, typical structural features and counterparties.

The collateral characteristics comprise details on loan amortisation profiles, maturities and underwriting metrics. The modelling assumptions for prime RMBS provide the average expected loss and MILAN credit enhancement for each market. Under lenders' mortgage insurance, the tool indicates the relevance and credit implications of mortgage insurance or guarantors for each market.

This information is complemented by RMBS structural features, comprising typical structures, portfolios, tranching and structuring trends. With regard to counterparty risk, markets can be differentiated based on the degree of reliance on the originator, servicing and cash management arrangements and set-off risk.

Additionally, the RMBS performance section allows comparison of 90+ arrears, worst performing vintages, sector outlook and market-specific rating change drivers.

According to information obtained using the tool, in aggregate RMBS structures continue to be simpler and have higher subordination levels than before the crisis - although the rating agency notes a number of key differences between markets, such as the Netherlands, the UK and Australia being the only markets with a significant proportion of interest only loans.

RMBS

EPD losses made whole

US$42m of subsequent recoveries was paid to the MLMI 2007-MLN1 RMBS in September's remittance, most of which comprised make-whole loss payments on loans that were liquidated prior to 2009. The recoveries were paid on Group 2 loans and represent about 8% of the lifetime losses expected for the deal, according to Barclays Capital figures. As a result, the A2A tranche paid down by from US$82m to US$38m.

The mortgage loans were originated by Mortgage Lenders Network, which had filed for bankruptcy before the deal closed. Bank of America is liable for the rep and warranties claims, while Deutsche Bank is the trustee for the transaction.

About 475 loans were outstanding for repurchase, of which 459 with a balance of around US$120m were repurchased in 2Q14. Barcap RMBS analysts suggest that since there has not been any other subsequent recovery cashflow to the deal in the past six months, the US$42m paid out last month is likely related to this repurchase.

However, they note that make-whole payments in the September remittance were made on around 200 loans with an original balance of circa US$63m. Consequently, it is possible that some additional cash may flow through to the deal in the coming months for the remaining loans.

Over 80% of the make-whole payments in September were on loans that defaulted on their mortgage payments within 12 months of loan origination and, as a result, a substantial loss related to early-pay defaults (EPDs) was reversed. Although rep and warranty recoveries depend on a number of factors, this might be an indication that claims against EPDs might be easier to prove and be reimbursed, the Barcap analysts suggest.

Indeed, to the extent that the likelihood of rep and warranty recoveries might be higher for early-pay defaults, deals with a relatively higher proportion of them may be more likely to have a higher put-back recovery. Other MLMI deals that have substantial losses linked to early-pay defaults include MLMI 2006-HE6, 2006-RM2, 2006-RM4, 2006-RM5, 2007-HE1 and 2007-HE2. For all these deals, Merrill Lynch made the rep and warranties, either directly or as a backstop for a third-party originator.

RMBS

Arrears calculation revised

Van Lanschot has revised its mortgage arrears calculation method. Fitch says that the ratings of the RMBS transactions backed by loans originated and serviced by the bank will not be affected by the move.

At Van Lanschot, when a borrower misses their mortgage payment, the due instalment is debited from their current account held with the bank. Prior to May 2014, borrowers were classified as being in arrears only if the funds available on the current account were insufficient to cover the full mortgage payment due. As of May 2014, the bank has revised its classification of borrowers in arrears to include borrowers whose current accounts cover partial payments of the due instalments.

In addition, loans with quarterly payment frequency are treated as loans with monthly payment frequency, which means that until the payment is collected the loan is recorded as being in arrears. Combined with regular movements in outstanding arrears, these factors have led to an increase in the outstanding balance of loans in arrears by more than three months.

Three-months plus arrears rose to 2.10% from 0.6% for Citadel 2010-I and to 1.4% from 0.6% for Citadel 2010-II in August from May, and to 1% from 0.3% for Citadel 2011-I, to 1.2% from 0.5% for Courtine 2013-I and to 0.3% from 0.1% for Lunet 2013-I in July from April. Although this is a notable increase in arrears, the levels remain within Fitch's assumptions at the time of the transactions' last review. For this reason, the agency does not believe that any rating action is warranted, as sufficient credit enhancement is in place.

RMBS

Triaxx withdraws Countrywide objection

The attorneys for the Triaxx entities have withdrawn as intervenor-respondents in the US$8.5bn Countrywide settlement covering 530 RMBS trusts. The objection by Triaxx - consisting of Triaxx Prime CDO 2006-1, Triaxx Prime CDO 2006-2 and Triaxx Prime CDO 2007-1 - had been seen as the largest barrier to final court approval of the proceedings since the settlement agreement between AIG and Bank of America (SCI 17 July). Triaxx had argued that the trustee approved the settlement without consulting it on repurchasing US$31bn in modified loans required by the deal governing documents.

Details of Triaxx's withdrawal were not disclosed. But, in the case of a settlement agreement between Triaxx entities and Bank of America, RMBS analysts at Deutsche Bank don't expect other investors in the covered trusts to benefit from a payout.

They estimate that remaining objectors to the Countrywide settlement deal include: Scott + Scott, American Fidelity Assurance, The Westmoreland County Employee Retirement System, Mortgage Bond Portfolio, US Debt Recovery Entities, Liberty View, First Reliance Standard Life, Platinum Underwriters Bermuda, Sun Life Insurance of Canada, CA Core Fixed Income Fund, CA High Yield Fund, Strategic Equity Fund, Knights of Columbus, Cedar Hill, Declaration Management, Doubleline, First National Bank, Lincoln Life & Annuity, Lincoln National Reinsurance, Radian Asset Assurance, Valley National Bank, Federal Home Bank of Pittsburgh, Pine River, Silver Sands Fund and Two Harbors. However, the Deutsche Bank analysts suggest that a settlement deal between Scott + Scott and Bank of America could be reached within 30 days, with more settlements expected ahead of final court approval.

"With Triaxx's withdrawal and the anticipated settlement agreement between Scott + Scott and BoA, Bank of America still needs to settle with the remaining objectors. We expect that it is more likely that Bank of America will choose to settle with the remaining objectors out of the trusts than to upsize the settlement amounts. We expect that the settlement payout timeline is between six to nine months," they observe.

The hearing on the motion to re-argue Judge Kapnick's decision in the Countrywide settlement has been adjourned for the second time and is rescheduled for 26 February 2015.

RMBS

RFC on concentration adjustments

Moody's has issued a request for comment on a proposed update to its approach to rating RMBS. The proposed changes, if adopted, will affect both the way the agency applies portfolio concentration adjustments contained within its MILAN model and the scale of these adjustments. On balance, the combined effect of the changes is expected to be neutral for the vast majority of RMBS transactions the agency rates.

Under the MILAN model, Moody's analyses the overall diversification of a portfolio by making two adjustments - one to reflect the borrower concentration and another to reflect the regional concentration. The methodology update proposes changes in these two adjustments.

Based on the agency's preliminary analysis, very limited positive rating actions - if any - are anticipated in the EMEA region, if the proposed amendments are adopted. For other regions, no changes to outstanding ratings are expected.

Comments are invited on the RFC by the end of this month.

RMBS

Silverstone restructuring proposed

Nationwide Building Society is proposing to restructure its Silverstone Master Trust UK RMBS programme. The move is not expected to have a negative rating impact on the rated notes of the programme.

The proposed restructuring includes the removal of £8.09bn of mortgages from the pool - through the removal of £5.5bn of fixed rate loans and £2.6bn of random selected loans - reducing the portfolio size to £16.03bn from £24.11bn. It also provides for the cancellation of £9.5bn retained senior class A notes (series 2011-1 classes 3A1, 3A2 and 3A3) and £803.1m of retained subordinate class Z notes (series 2011-1 classes 3Z1, 3Z2 and 3Z3).

The restructuring is conditional on the redemption of the series 2009-1 class A1 and A2, and series 2011-1 class 1A notes, together with the relevant class Z notes as scheduled on 21 October. Following these scheduled redemptions, the restructuring will reduce the outstanding class A note balance to £3.81bn from £15.9bn and increase credit enhancement to 45.39% from 18.74%.

In addition to structural changes, Nationwide is proposing to make a number of amendments to the programme documentation to reflect the current counterparty criteria of rating agencies. It is also seeking to: cancel the basis swap that hedges against the change in the spread between bank base rate-linked mortgages and three-month Libor-linked note payments; remove the replacement triggers in the swaps linked to BMR and SMR (Nationwide SVR rates) loans and the collateral posting requirement upon downgrade, while adding a post-perfection margin covenant in their place; implement a collateralised GIC account structure in the event of a Nationwide downgrade below A/F1; have an option of a panel bank arrangement for some time-critical funds; provide flexibility to the cash manager to invest funds in the GIC account in triple-A rated money market funds; remove a trigger that prevents Nationwide from selling further loans into the portfolio in the event of a rating downgrade below F2; remove a requirement to appoint a master servicer upon downgrade of the seller below triple-B minus, but instead undertake to appoint a back-up servicer upon downgrade below triple-B minus; and amend the calculation of the minimum seller share to account for set-off risks only for deposits in excess of those covered by the Financial Services Compensation Scheme.

Nationwide is in the process of obtaining investor consent to the proposed changes.