Contents

Secondary markets

Dutch RMBS in for the bid

After a Dutch RMBS flash BWIC yesterday, the market sees two prime lists today.

Yesterday afternoon's three line flash auction came on the back of healthy off-BWIC trading in Dutch RMBS. The list covered as follows: €3m of DUTCH 2012-17 A2 at 102.91, €400,000 of SAEC 10 A2 at 101.50 and €21.4m of SAEC 12 A2 at 102.64.

Today sees two four line lists of Dutch prime scheduled for 14:00 and 16:00 London time. The €49m 14:00 list consists of: DMPL IX A2, SAEC 12 A2, STORM 2012-1 A2 and STORM 2012-4 A2. Three of the bonds have covered on PriceABS in the last three months - SAEC 12 A2 as above yesterday; STORM 2012-1 A2 at 103.01 on 17 July; and STORM 2012-4 A2 at 102.93 on 29 September.

The €63.664m 16:00 list consists of: CATSN 1 A, SAEC 11 A1A, STORM 2013-1 A2 and STORM 2013-4 A2. One of these bonds has traded on PriceABS in the last three months - STORM 2013-1 A2, which covered most recently at 101.93 on 29 September.

Secondary markets

CLO secondary supply surges

After a relatively quiet few days on-BWIC the European and US CLO markets have a hefty volume of lists to contend with today, though indications from activity so far this week suggest demand will be there.

As one trader notes: "The CLO market has continued to trade very, very well this week, particularly in the senior space." Further he is unfazed by the sudden glut of lists: "It just looks like real money trying to crystallise positions they've had on for the last 18 months and reinvest in the junior stack."

Scheduled so far today are two euro-denominated lists and nine dollar-denominated. The euro lists both come at 15:00 London - one a €2m single line of CELF 2005-2X C as part of a euro and dollar list and then there is a 22 line mixed CDO and CLO list totalling €80.22m of original face, consisting of tranches from all parts of the capital structure.

Today's US lists similarly span all points of the ratings curve with the lists totalling $393.923m over 75 line items, including a $170.418m dealer BWIC at 14:00 New York. Perhaps most interesting is the last auction of the day also due at 14:00.

It's a $20.15m five line equity list consisting of: CIFC 2014-2X INC, REGT3 2014-1X SUB, SYMP 2012-8A PREF, WOODS 2014-11X SUBA and WOODS 2014-11X SUBB. Only CIFC 2014-2X INC has traded in the last three months on PriceABS, covering at 100A on 12 September.

Secondary markets

CMBS opportunities sought

US CMBS investors are seeking out fresh secondary market opportunities as the sector's BWIC machine rumbles on.

US CMBS BWICs are continuing to trade strongly albeit at a slightly lower volume than earlier in the week - the $400m out for bid seen on Tuesday, for example. By late this morning around $264m was scheduled for auction throughout the day.

While this offers healthy supply and there is a fresh round of primary issuance being prepped as well, some investors are looking for higher yield in more obscure parts of the market. "Hedge funds are seeking arbitrage opportunities in the esoteric CMBS space," reports one trader. "There's still plenty of potentially good paper pricing at, say, 50 cents on the dollar, but if you are convinced on the underlying there are great deals to be had."

Secondary markets

European CMBS picks up

Activity in the European CMBS secondary market is picking up albeit from relatively low levels.

With little primary issuance and low BWIC volumes in recent days European secondary market trading has been focused on bilateral trading. There, there has been healthy activity, with interest chiefly focused round Italian and UK paper, which has held spreads tight.

Such activity combined with the knock-on effects of ABSPP-based optimism does appear to be shaking out some lists too. Yesterday saw a two line auction of DECO 2014-GNDL D and TAURS 2014-UK1 B trade above talk and today already has a six line BWIC and single line OWIC scheduled.

The BWIC, part of a mixed list, is due at 15:00 London today and consists of: £5m BUMF 4 M, €4m DECO 2014-GNDL E, €12m INFIN SOPR A, €20m FIPF 1 A1, €10m FIPF 1 A2 and €3.5m MODA 2014-1 E. Three of the bonds have traded on PriceABS in the last three months and their most recent covers were: BUMF 4 M 94.26 on 11 September; FIPF 1 A2 98.32 on 18 September; and INFIN SOPR A 96.58 on 29 September.

The OWIC falls due at 14:30 and is for €25m of TITN 2006-5A A1. The tranche has not traded on PriceABS.

Secondary markets

1.0 CLOs hold sway

Despite the swathe of DNTs on yesterday's BWICs, the US CLO market is up for more today. Four lists are scheduled so far and with a majority of 1.0 deals the auctions are likely to trade strongly.

Yesterday's high proportion of DNTs revolved around 2.0 and 3.0 deals while 1.0 deals fared far better. It is, however, not entirely clear whether this reflects lack of investor demand or lack of real intent to sell. Equally, it could be an indication of overly optimistic price expectations on behalf of the sellers of the more recent notes.

In any event, today's US CLO lists are primarily 1.0 deal based and in lower overall volume than yesterday's BWICs. The lists total $34.4m over 22 line items.

The first scheduled is due at 9:30 New York and consists of ARES 2013-1A A and EMNPK 2013-1A B1. Neither bond has traded on PriceABS in the last three months.

At 10:00 there are five names due: BRDG 2007-2A C, GOLD4 2007-4A B, RACEP 2007-4A D, STAMC 2007-1A B1L and WESTW 2006-1A C1. Only GOLD4 2007-4A B has covered with a price on PriceABS in the last three months, doing so at 95.55 on 17 July.

11:00 sees 12 bonds in for the bid: ARES 2007-22A B, BAKR 2005-1A D, BLUEM 2005-1A C, BRDG 2007-2A D, BSIS 2007-5A B, CNOVA 2006-2A C, DUANE 2006-2A C, EATON 2006-8A D, LATI 2005-1A B1, SHINN 2006-1A C, STRN 2007-1A D and VENTR 2006-7A E. Three of these tranches have covered on PriceABS in the last three months as follows: BSIS 2007-5A B at 95.8 on 16 July; EATON 2006-8A D at 95.25 on 15 July; and STRN 2007-1A D at 92.02 on 5 August.

Finally, there are three deals due at 11:30: DRSLF 2013-30A C, GOLD7 2013-7A A and NOMAD 2013-1A A1. Only DRSLF 2013-30A C has covered with a price on PriceABS in the last three months, doing so at 97.91 on 17 September.

Secondary markets

US RMBS moves to a holding pattern

Non-agency RMBS has moved into a holding pattern after a busy week as the long US weekend approaches and geopolitical concerns continue to impact other markets.

This week sprang into life with the introduction of a $900m legacy BWIC on Wednesday, which was followed by strong auction volume yesterday. By late this morning around $150m was circulating for bid today - a fairly typical amount for a Friday.

"The big list on Wednesday that came out from a GSE traded well. When that happens we usually see a bit of a sustained rally, however the market already feels a little softer today," one trader says.

The reason for that softness, he suggests, comes from outside the RMBS market. "As fixed income widens and equities fall RMBS traders' attention is being dragged elsewhere. After all, Q4 isn't a time to be taking on more risk if you've had a good year."

Consequently, the trader says: "Market participants have moved into a holding pattern for now and are trying to figure out what to do next - how far will equities fall and how much with that change risk profiles?"

Secondary markets

FDIC returns to mezz

The 11th FDIC Trups CDO BWIC sees the agency return to mezz paper following two less enthusiastically received auctions offering only senior bonds. Overall size is up a little too, to $61.5m, which could also help produce a return to the strong execution levels and on the follow auctions seen in the sector alongside FDIC mezz lists earlier in the year.

This 15 line list is due to trade at 11:00 New York on Thursday, 16 October. It consists of: ALESC 2A B1, ALESC 4A B2, MMCF 1 B, MMCF 3 B, PRETSL 8 B1, PRETSL 8 B2, PRETSL 8 B3, PRETSL 11 B1, PRETSL 25 B1, PRETSL 28 B, REGDIV 2004-1 B1, REGDIV 2005-1 B1 and TRAP 2005-9A B2.

Only two of those bonds have covered with a price on PriceABS in the last three months - MMCF 1 B at MHsingles on 16 September and PRETSL 11 B1 at 64.52 on 6 August.

Secondary markets

European BWICs get back underway

After a quiet start to the week on-BWIC thanks to the US holiday, the European ABS/MBS auction calendar starts strongly today with four lists already scheduled.

Those lists cover in excess of 85m of original face across four auctions totalling 32 line items. There is a wide range of bonds on offer throughout the day and that is typified by the first list currently scheduled.

Due at 13:30 London is a 20 line mixed list of sterling and euro MBS, consisting of: AUBN 5 B, GHM 2007-1 A2B, LEEK 17X BC, LMS 2 AA, LORDS II A, NEMUS 2006-2 C, NGATE 2006-1 MA, PARGN 13 CB, PARGN 14 BB, PSF 1A, PARGN 19 A, PARGN 19 B, PARGN 19 C, PRS 06-1 C1A, RIVOL 2006-1 A, RMAC 2004-NS3 M1, RMAC 2006 NS1 M2C, RMAC 2006 NS3 MIC, RMACS 2006-NS2X M1C and SMPER 2006-1 C.

Five of those bonds have traded on PriceABS in the last three months. They covered as follows: LEEK 17X BC at 98.53 on 25 July; PARGN 19 A at 100.24 on 29 August; PARGN 19 C at 100.18 on 8 August; RIVOL 2006-1 A at 98.81 on 15 September; and SMPER 2006-1 C at 99.38 on 18 September.

Secondary markets

European ABS/MBS edges wider

This morning has seen European ABS and MBS spreads edge wider on the back of both fundamentals and technicals.

Macroeconomic and global geopolitical concerns are entering into the hitherto relatively unaffected European securitised secondary markets giving them more of a selling bias. Auction supply has been added to for today with two further BWICs introduced mid-to-late morning, which potentially could add to widening pressure.

Meanwhile, bilateral flows are also adding to that pressure. Dealers' offers have been loosened at some key market points and while there is two-way trading from real money investors, fast money managers have become net sellers as basis trading opportunities between eligible and non- eligible ABSPP bonds diminish.

Secondary markets

Euro mezz CLOs fail to trade

A five line list of euro mezz CLOs due at 15:00 London failed to trade despite involving bonds in the recent sweet spot for the market - 1.0 double-Bs.

No covers were given for the €17.6m list, which consisted of DRYD 2006-15X E, HEC 2006-2CX E, HEC 2007-3X E, QNST 2006-1X E and REGP 1X E. Thanks to the type of bonds involved the list had been widely talked over the last few days with the majority of anticipated trading levels between L90s and MH90s across the BWIC.

Secondary markets

Euro CLOs shift up

The European CLO BWIC pipeline shifts up a gear today with four lists already scheduled. There is a high percentage of 1.0 deals on offer, nevertheless buyer appetite will be tested amid increased broad market volatility.

First up is a three line €4m equity list due at 14:00 London. DUCHS V-X F, CADOG 1 M and CADOG 2X M have not traded on PriceABS in the last three months.

At 14:30 is a €15m single-line of triple-A SPAUL 4X A1. The bond last covered on PriceABS at 100.23 on 19 September.

At 15:00 is an eight line €35.85m list including one CDO and consisting of: GARDC 2006-1X E, GARDC 2006-1X F, GSCP 2007-4X E, HOLPK 1A SUB, JUBIL I-RX E, MUNDA 1X E, PANTH III-X C1 and TCLO 1X E. None of the bonds has traded on PriceABS in the last three months.

Also due at 15:00 is a €4m single-line of triple-A CADOG 5X A1, which hasn't traded on PriceABS in the last three months.

Secondary markets

Choppy trading in Euro ABS/MBS

The European ABS/MBS markets are currently seeing mixed trading and a slowing of momentum.

"Execution has been choppy over the past few days," says one trader. "On the lists yesterday some names covered well below talk while others traded aggressively."

That choppiness is likely to continue as the market loses some momentum. "We're seeing continued volatility in broader markets - credit indices have lightened again this morning, for example - and that tends to cause our market to slow down," the trader explains.

Further, volumes have reduced following the ECB announcement and many participants are now sitting on the side-lines until the purchasing programme actually begins. "We're still seeing a few BWICs but buying activity has reduced and it feels like dealers are pretty full at the moment," the trader says.

Secondary markets

US CLOs get going

After a quiet start to the shortened week on-BWIC yesterday, the US CLO auction market gets going today.

There are already five lists scheduled for today totalling 25 lines and $245.93m in original face, albeit that figure is skewed by a $156m single line of APID 2007-CA A2A. Bonds across the capital structure in mixed vintages are on offer. However, there is a small list due at 10:00 New York that is the most eye-catching.

Two lines of emerging market CLO equity are in for the bid - $3m of ICEC 2012-1X INC and $2.5m of GEML 2006-3X PPU. Neither bond has traded on PriceABS before.

SCI Start the Week - 13 October

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

Pipeline
Several deals joined the pipeline last week. These included seven ABS, two RMBS, three CMBS and six CLOs.

The ABS were: €500m A-BEST 10, US$1.107bn Ally Auto Receivables Trust 2014-SN2; US$999m CNH Equipment Trust 2014-C; US$552.63m GE Dealer Floorplan Master Note Trust Series 2014-2; US$376m PFS Financing Corp Series 2014-B; SCFI Rahoituspalvelut; and US$150.82m Silverleaf Finance XVIII Series 2014-A.

Brass No.4 and €500m Dolphin Master Issuer Series 2014-3 accounted for the RMBS. The CMBS were US$475m CARS Series 2014-1, US$842m CGCMT 2014-GC25 and US$290m Colony Multifamily Mortgage Trust 2014-1.

As for the CLOs, those consisted of: €360m ALME Funding III; US$512.25m Apidos CLO XIX; Kingsland VIII; US$512.5m Limerock CLO III; €412m St Paul's VI; and US$512.15m Voya CLO 2014-4.

Pricings
Even more deals printed. The week's issuance consisted of 14 ABS, three RMBS, four CMBS and three CLOs.

The ABS were: US$1bn BMWOT 2014-A; US$1.3bn Capital One Multi-asset Execution Trust 2014-5; €678m Cars Alliance Auto Loans France V 2014-1; US$300m CLI Funding V Series 2014-2; US$500m Discover Series 2014-5; US$500m EART 2014-3; €469m FCT Ginkgo Compartment Sales Finance 2014-1; 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 2014-1; US$946m Nissan Auto Lease Trust 2014-B; £1.22bn Penarth Master Issuer 2014-2; US$1bn Toyota Auto Receivables 2014-C; and US$400m WLAKE 2014-2.

The RMBS were US$355m JPMMT 2014-OAK4, €1.567bn Saecure 15 and US$277m WIN 2014-2, while the CMBS were US$1.3bn JPMBB 2014-C24, US$1bn SBA Tower Trust Series 2014-1C, US$524m SBA Tower Trust Series 2014-2C and £750m Westfield Stratford City Finance. Lastly, the CLOs were US$724m Babson CLO 2014-III, US$650m GoldenTree Loan Opportunities IX and US$322.5m Regatta V.

Markets
The European RMBS market was busy to start the week, as SCI reported on Tuesday (SCI 7 October). Italian, Spanish and Portuguese names were all out for the bid during Monday's session as peripheral paper remained in the spotlight.

There were some busy sessions for US RMBS as well, with non-agency BWIC supply on Tuesday coming close to US$600m and a US$1bn list trading on Wednesday (SCI 8 October). During Tuesday's session there were early signs of weakening execution, with bonds covering below price talk and several bonds coming back as DNTs.

US CMBS activity was steady without hitting the same heights as RMBS. BWIC volume on Wednesday was over US$320m and SCI's PriceABS data revealed a degree of spread widening for 2.0 and 3.0 double-As, as SCI reported (SCI 9 October).

As for the US ABS market, spreads were stable to modestly wider over the week, according to Barclays Capital analysts. Trading volumes were slightly lower than they had been in the previous week, while prime auto and equipment ABS widened out by about 1bp.

Deal news
• 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.
• All conditions to Punch's restructuring proposals have been satisfied (SCI passim). Following the termination of the interest rate swaps provided to the Punch A and Punch B securitisations, the issuer under the former securitisation has issued £123.4m in principal amount of super senior hedge notes to RBS and the issuer under the latter securitisation has entered into a £49m super senior swap loan with Citi.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.

Regulatory update
• Additional amendments to the Italian securitisation and covered bond law - introduced by Law 116 of 11 August - still do not fully mitigate account bank exposure, Fitch says. However, the agency concedes that they help clarify treatment of SPV accounts.
• Limits on high LTV and loan-to-income (LTI) lending proposed by the Central Bank of Ireland would in the long term reduce credit risk in the Irish residential mortgage market through more prudent lending, Fitch suggests. The central bank's consultation paper proposes limiting how much banks can lend to individuals with LTVs above 80% and LTIs above 3.5 to 15% and 20% of new lending respectively, and limiting buy-to-let lending with LTVs greater than 70% to 10% of new lending.
• 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.

Upcoming SCI events
• 16 October - Live Webinar: Implementing Regulation AB 2
Complimentary registration here
• 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:
Agate Bay Mortgage Trust 2014-2; Auto ABS Italian Loans Master ; BLCP 2014-CLRN; BNPP IP CLO 2014-II; BPM Securitisation 3; COMM 2014-LC17; Contego CLO II; CSMC 2014-USA; DECO 2014-Tulip; Dolphin Master Issuer series 2014-2; Flagship CLO VIII; Fortress Credit Opportunities V CLO; Harvest CLO X; Ivy Hill Middle Market Credit Fund IX; JP Morgan Mortgage Trust Series 2014-IVR3; MSBAM 2014-C18; MVW Owner Trust 2014-1; Oaktree CLO 2014-2; RESIMAC Versailles Trust Series 2014-1; RIAL Series 2014-LT6; STACR 2014-HQ2; Velocity Commercial Capital 2014-1

Deals added to the SCI CMBS Loan Events database last week:
CD 2007-CD4; CGCMT 2005-C3; COMM 2006-C8; COMM 2007-C9; CSFB 2005-C2; CWCI 2007-C2; DECO 7-E2; GMACC 2004-C2; JPMCC 2006-CB17; JPMCC 2006-LDP7; LBUBS 2005-C2; LBUBS 2006-C3; MSC 2005-HQ6; MSC 2005-IQ10; MSC 2005-IQ9; MSC 2006-IQ11; MSC 2007-HQ11; TITN 2006-3; TITN 2007-1; WBCMT 2006-C27

ABS

LCR changes still penalise ABS

As well as the release of the delegated acts under the Solvency 2 directive, the European Commission (EC) has updated its required liquidity coverage ratio (LCR) and its definition of high quality liquid assets (HQLA). All told, the treatment of securitisation has improved considerably, but remains less favourable than covered bonds.

The LCR is intended to ensure banks hold sufficiently liquid assets to cover expected liquidity outflows during a period of stress, with the EC amending the proposals which were initially put forth by the Basel Committee. Under the EC's regime, both securitisation and covered bonds have been given an expanded role from the original proposals.

Highly rated, European benchmark covered bond deals will rank alongside government debt as Level 1 assets. Lower rated European deals or highly rated non-European deals will constitute Level 2A assets, while smaller European deals which do not meet the required rating threshold for Level 2A can be included as a Level 2B asset.

ABS can now be included as Level 2B assets, having originally been excluded from HQLA. Previous European proposals would only have included RMBS, but now SME, auto and consumer exposures can also be included alongside senior RMBS, up to a maximum of 15% of liquid assets, note JPMorgan analysts.

Both covered bonds and ABS have improved their liquidity treatment from the original international and European drafts. However, the treatment of covered bonds remains more favourable than the treatment of securitisation.

"It is not just the absolute regulatory treatment that drives investor behaviour, but also an instrument's relative treatment. With Friday's LCR text pushing the liquidity treatment of covered bonds and ABS further apart in our view, we view covered bonds as the clear winner from this exercise," note the analysts.

Furthermore, AFME notes that the charges for triple-A rated Type 1 securitisations under the Solvency 2 delegated act remain too high and that the classification of all non-senior tranches as Type 2 securitisations creates severe cliff effects between the capital charge treatment of senior and non-senior securitisations. As an example, the senior tranche of a 5-year triple-A RMBS would receive a capital charge of 10.5% while the non-senior would receive a charge of 67%.

What is more, direct investment in pools of mortgage loans will continue to receive much lower capital charge treatment, which the association notes will create adverse investment incentives. Compared to that 5-year triple-A tranche's capital charge of 10.5%, direct investment in a whole loan pool comprised of the same mortgages would receive a capital charge of just 0%-3%.

The LCR ratio will be progressively implemented in line with the Capital Requirement Regulation up until 100% implementation from 1 January 2018. This is one year earlier than required by the Basel standard.

JL

ABS

Punch ratings disappoint

Fitch, Moody's and S&P last week published their new ratings for the restructured Punch A and Punch B whole business securitisations. Barclays Capital European ABS analysts believe that Fitch and S&P's ratings will have disappointed bondholders, given how low they are relative to Moody's ratings.

The Punch A A1F, A2F and A1V notes are rated Baa2/B+/BB (Moody's/S&P/Fitch), while the M3 notes are rated B2/B-/B-. The Punch B A3, A6 and A7 notes are rated Ba3/B+/B+.

The Barcap analysts suggest that the classes most negatively affected by the move are the Punch A class AF bonds because their pricing could have been driven by attracting an investment grade investor base. "Instead, the potential technicals for the AF bonds have swung into reverse, with holders potentially facing pressure to sell now that the composite rating on these bonds is firmly high yield," they observe.

They add: "At current levels, the AF bonds still have circa five points of upside potential to our target of 117 (spread of 260bp), but reaching this level is likely to take longer. Had the AF bonds been rated investment grade, we think the upside in price could have been to circa 122, where the bonds would have had a spread of circa 200bp relative to gilts and still offer value relative to investment grade bonds."

For both Punch A and B, the restructuring is expected to have a limited impact on pricing and potential returns, since the investment grade technical has been eliminated. With respect to the AV bond, pricing is likely to be driven by the expected speed and total value of disposals.

The analysts anticipate that Punch will sell its non-core property faster than the projected five years, as it's in the interest of the equity to de-lever and refinance sooner.

S&P's ratings reflect the potential for an interruption in liquidity draw-down and the need to rely on disposals to meet debt service from 2016. Fitch acknowledged that the metrics are compatible with an investment grade rating, but the historical track record of the company and the nature of the tenanted pub sector capped the ratings at the high yield level.

Moody's ratings are based on the reduction of the issuer debt obligation through note exchanges and write-downs of existing notes, as well as the agency's analysis of the long-term sustainability of the borrowers' assets and the cashflows generated by the underlying pub portfolios.

CS

Structured Finance

Manager to spin off advisory groups

Blackstone's board of directors has approved a plan to spin off its financial and strategic advisory services and its restructuring and reorganisation advisory services, as well as its Park Hill fund placement businesses. These businesses would then be combined with PJT Partners.

The new entity would be an independent company led by PJT Partners' founder Paul Taubman. Before founding PJT Partners, Taubman was co-president of the institutional securities group at Morgan Stanley, where he spent 30 years.

Structured Finance

Appen swaps Barclays for Lloyds

Allen Appen has joined Lloyds to lead its financial institutions capital and asset-backed solutions business, which was created earlier this year after the departure of former ABS head Robert Plehn (SCI 20 May). In his new role, Appen will report to head of capital markets James Garvey. Appen was previously at Barclays, most recently as head of financial institutions capital markets for EMEA.

Structured Finance

Retail restructurings targeted

A new joint venture focused on financing opportunities arising across performing, stressed and distressed retail sector situations in Europe has been formed. Dubbed Alteri Investors, the entity is structured as a partnership between funds managed under Apollo's credit business and a team led by former GA Europe ceo Gavin George.

Alteri will initially focus on the UK and Germany and expects to invest in retailers through both debt and equity transactions, typically in the £10m to £50m range, with additional capacity for larger transactions. The firm will also seek to lend to retailers directly, providing flexible asset-based financing, either in a senior or second-lien capacity.

Ancillary to its core objective of providing investment solutions to retailers, Alteri also expects to provide a consulting service to retailers and their key stakeholders in stressed or distressed situations, by providing a range of operational services, such as assisting with store closure programmes across Europe, stock sales or managing the real estate component of a restructuring.

CDS

Derivatives lawyer brought in

Chapman and Cutler has appointed Joel Laub as a partner in its New York City office. He will focus his practice on OTC and exchange traded derivatives.

Laub joins from Jones Day. He brings broad experience in drafting and negotiating credit default, equity and commodity derivatives, synthetic investments, repurchase and securities lending agreements, guaranteed investment contracts and custody, clearing and prime brokerage agreements.

CLOs

CLO manager expands to Europe

Onex Credit Partners has added Stephen Baker as it establishes a London office and expands the platform to Europe. Initially, the platform will focus on placement of European CLOs.

Prior to joining Onex, Baker was as a senior portfolio manager with CQS, where he grew the firm's leveraged credit business to US$2bn in less than two years. He has also held senior leadership roles in leveraged credit, syndications and corporate finance with Scotia Capital, Bank of America, Barclays and CIBC.

CLOs

CLO partnership agreed

Credit Value Partners and Macquarie Group have agreed to work together to create a series of CLO funds. Macquarie will provide equity capital, warehouse financing facilities and structured credit expertise toward the creation of the CLOs, which are expected to be comprised mainly of institutional leveraged loans and will be managed by CVP.

CVP is led by managing partner Don Pollard. The firm's CLO platform is headed by Joe Matteo, who previously led the CLO efforts at Par-Four Investment Management and at Merrill Lynch Investment Managers.

CMBS

Conduit relationship formed

Trez Capital Group has formed a strategic relationship with Natixis, whereby the New York branch of Natixis will provide warehouse financing, hedging services and other advisory services to Trez's newly established term lending platform operated by its CMBS conduit Trez Commercial Finance (TCF). The firms say that the combination of Trez's long-standing Canadian real estate expertise and Natixis' expertise in the mortgage securitisation space will provide the basis for a market-leading term financing platform for commercial real estate owners and developers across Canada.

Trez has provided innovative financing for commercial properties in major centres throughout Canada and selected US markets since 1997, managing over C$1.8bn in mortgage assets. The ability to provide term financing is an expansion of the firm's traditional lending platform and will complement its core business.

Risk Management

ICE completes SuperDerivatives purchase

ICE has completed its acquisition of SuperDerivatives for approximately US$350m. The acquisition will enhance the data and technology services which ICE can offer, while also growing its clearing offering through the addition of SuperDerivatives' market data.

SuperDerivatives provides risk management analytics and systems across all asset classes, including credit, interest rates, FX, equities, energy and commodities, as well as independent valuation, market data for mark-to-market, multi-asset derivatives front office and risk systems and a multi-asset OTC execution platform. The deal was agreed last month (SCI 8 September).

ABS

Punch restructuring launched

All conditions to Punch's restructuring proposals have been satisfied (SCI passim). Following the termination of the interest rate swaps provided to the Punch A and Punch B securitisations, the issuer under the former securitisation has issued £123.4m in principal amount of super senior hedge notes to RBS and the issuer under the latter securitisation has entered into a £49m super senior swap loan with Citi.

The board of Punch believes that the completion of the restructuring creates a robust and sustainable long-term debt structure for the group, with a £600m reduction in total net debt, including the mark-to-market on interest rate swaps. Gross securitisation debt of £1.604bn at completion has an initial effective interest rate of circa 7.7%, including PIK interest.

The consolidated net debt to EBITDA ratio falls to circa 7.7x, based on net debt at completion of £1.508bn.

In connection with the restructuring, the pubco has issued 3,771,151,200 new ordinary shares on the London Stock Exchange, boosting the total of ordinary shares of Punch in issue to 4,437,003,420. The proposed consolidation of Punch's ordinary shares, on the basis of one consolidated ordinary share for every 20 existing ordinary shares and new ordinary shares is expected to become effective on 13 October.

ABS

Weakening seen in prime auto collateral

US prime auto ABS credit quality has been declining since the latter half of 2012, following its strongest-ever levels between 2009-2011, Fitch notes in a special report. The agency says that increased risk appetite is driving a shift in credit quality.

"Prime auto lenders are showing a higher propensity to lend to non-prime borrowers, which is leading to marginally lower weighted average FICO scores and higher subprime concentrations," comments Fitch senior director Bradley Sohl. "Finance companies are also catering to consumer demand for low monthly payments by extending loan terms; namely, loans with terms greater than 60 months."

Subprime loans accounted for nearly 9% of prime pools in 2013, an 81% increase from the lows seen in 2011. Subprime collateral levels declined marginally during 2Q14 as a result of a number of 'super prime' ABS transactions being issued.

However, healthy ABS issuance from captives in the second half of this year could lead to subprime concentrations rising back to, or slightly above, the levels seen in 2013.

ABS

German auto credit quality eyed

Signs of increasing risk appetite among German auto loan and lease originators have emerged gradually in recent months, Fitch reports. The agency says that they are relatively minor so far and have not reached the point where they would weaken the credit quality of German auto ABS deals.

Two notable trends in the last 12-24 months are an increase in original loan terms to maturity and a fall in the size of down-payments in some originators' loan books. Discussions with captive originators indicate that marketing campaigns by vehicle manufacturers are an important driver of these developments, since they improve affordability for borrowers and can therefore support the continuing revival in car sales. However, for German originators whose ABS transactions Fitch rates regularly, typical loan terms have only been extended by 2-3 months, while down-payments have only fallen by 2-3 percentage points and remain typically in the mid- to high-teens.

In addition, the terms in transaction pools have remained fairly stable, partly reflecting the blend of recently originated and more seasoned loans in portfolios. Fitch believes that an increase in terms will become more visible in transaction pools in the coming months, although selection criteria should limit the extent to which this happens.

Other evidence of higher risk appetite is limited. For example, originators' forecasts for future vehicle values - which serve as the basis for balloon payments - have not become significantly more aggressive on average relative to those of independent third-party agencies. Similarly, average borrower credit scores have not seen major changes - suggesting that while originators are amending the terms under which they will lend, they are not targeting riskier borrowers.

Structured Finance

Structural concerns remain for Brazilian ABS

New regulations in the local Brazilian ABS market address some of the structural issues exposed by recent bank failures, Fitch says. However, the agency suggests that the new regulations fail to comprehensively address certain structural concerns that it has outlined over the past several years.

"The Brazilian ABS market is undergoing a paradigm shift. Progress has certainly been made. But some structural issues remain, which need to be addressed to restore market confidence and shore up credit quality," comments Jayme Bartling, senior director at Fitch.

The agency highlights the inherently riskier nature of revolving periods that often last the life of a transaction, which are common in Brazilian ABS. More recent transactions have, however, defined revolving periods after which the portfolio becomes static or are backed by an initial static pool with no revolving period.

Historically, many originators would sell loan pools at a premium to the principal balance of the loans to justify upfront loan origination costs, but most purchase rates go beyond these cost items. Typically, structures account for the assets at their purchase price as opposed to principal value. This overestimates collateral value and, in turn, credit enhancement levels.

Counterparty risks related to servicing and commingling recently materialised in non-Fitch rated ABS transactions, whose highly-rated structures failed to shield investors from insolvency or reorganisation of the seller/servicer. This year CVM Instruction 531 took effect to establish minimum standards to address certain commingling concerns and conflicts of interest among transaction parties.

Structured Finance

APAC ratings stable in 3Q14

Fitch affirmed the ratings on 160 Asia-Pacific structured finance tranches in 3Q14, as well as upgrading a further five tranches and downgrading one. Most long-term ratings in the Asia-Pacific region have stable outlooks.

Strong economic performance in both Australia and New Zealand supported rating actions in those jurisdictions. All ratings reviewed during the quarter - 87 tranches from 37 transactions - were affirmed, contributing to 54% of all affirmations in the region. This was largely reflective of the rebounding housing market, as Australian prime RMBS ratings (across 72 tranches) accounted for most of the affirmations.

Korea and Singapore also benefited from affirmations based on steady economic performances. Ten international long-term ratings were affirmed: five Singaporean credit card tranches, four Korean prime RMBS tranches and one Korean auto loan tranche.

Most ratings in Japan were also affirmed for the quarter, including three credit-linked transactions. Five tranches from three CMBS transactions were upgraded and one CMBS tranche was downgraded to single-C from double-C.

Negative outlooks on four Indian auto loan tranches and two credit-linked structured credit tranches were the exceptions to the general Asia-Pacific picture.

Structured Finance

RFC issued on 'standard' securitisations

The EBA has launched a public consultation on its discussion paper on simple, standard and transparent securitisations. The move is in response to the European Commission's call for advice on identifying a prudentially sound securitisation market and its regulatory treatment.

The discussion paper lays down preliminary views on defining the three pillars of simplicity, standardisation and transparency. Together with criteria on the credit quality of the securitised assets, these three pillars should shape a new class of securitisation products that are prudentially sound and may therefore become subject to specific regulatory recognition.

The EBA also acknowledges in the paper the wide spectrum of risks that can be embedded in securitisation processes, as well as the different historical performance of securitisation determined by these risks. Through this public consultation, the authority is inviting stakeholders to provide their input and views, so as to inform its final technical advice to the European Commission, which is expected for 2Q15.

Comments should be submitted by 14 January 2015. A public hearing will take place at the EBA premises on 2 December.

Structured Finance

Investor expectations rise

European credit investors expect the ECB's purchase programme to influence both supply and spreads in the structured finance market, according to Fitch's latest investor survey. Nearly 60% of respondents expect structured finance issuance to increase over the next 12 months, compared with 33% in the agency's previous survey. The 3Q14 reading is the highest in the history of the survey and is higher than for any other asset class.

More than a third (37%) of respondents expect spreads to tighten somewhat and 10% expect them to tighten significantly. Nobody expected spreads to tighten significantly in Fitch's previous survey, which closed in May shortly before the ECB announced that it was accelerating preparations to buy ABS. Less than a quarter of respondents expected spreads to tighten somewhat.

In Fitch's view, spread tightening will improve the economics of structured finance for issuers, but it will not necessarily broaden participation in the market. Existing active structured finance investors have expressed concerns that ECB purchases could drive spreads tighter to the point where they do not receive sufficient returns for their funding and capital costs; they also have alternative investment opportunities.

In the operational details of its purchase programme, the ECB said that it would buy a maximum of 70% of any issue, suggesting that buying by private sector investors is still key to increasing overall issuance. The effectiveness of the programme will depend on whether additional investment funds are allocated to the market due to the presence of the ECB backstopping the sector. Responses to Fitch's survey suggest that fixed income investors became more confident about the future of the structured finance market even before the details of the programme were announced on 2 October, with the ECB first mooting its interest in using the ABS market for this purpose in May.

Fitch's 3Q14 survey closed on 3 October and represents the views of managers of an estimated €7.1trn of fixed income assets.

Structured Finance

Risk variations 'not reflected'

The European Commission's decision to implement only two Solvency 2 capital charges on securitisations across the investment grade rating spectrum does not reflect the variation in risk in these assets, Fitch says. The agency suggests that this is likely to push insurers that invest in securitisations using the standard model to favour assets in the triple-A and triple-B categories.

The Commission said on Friday that charges under the standard formula for double-A, single-A and triple-B rated tranches of securitisations classified as 'Type 1 high quality positions' will be 3% multiplied by duration. It had previously said the charges would be duration times 3%, 4% and 5% respectively. Charges for triple-A rated notes remain 2.1% multiplied by duration.

Fitch notes that the charges remain high compared to other investment options and may discourage insurers using the standard formula to invest significant sums in securitisations. The undiversified charge for a double-A rated 10-year securitisation is still 30%, compared to 20% for a 10-year triple-B rated loan and is 15% higher than the charge for investing in an unrated five-year uncollateralised direct loan. The comparison with covered bond holdings is even starker: five-year double-A rated securitisation holdings will require 15% capital compared to 4.5% for covered bonds with the same rating and duration.

Charges for lower-rated tranches have not been reduced. Fitch suggests that finding buyers for these tranches may therefore be difficult, making it harder to structure deals.

The agency also notes that there may be greater benefit for insurers using their own internal models because they are able to use assumptions tailored to the risks of the specific transaction. But supervisors have often not been willing to approve models with large deviations from standard industry assumptions, so Fitch does not expect insurers to be able to reduce capital requirements as low as might be indicated by empirical data.

Another change in the delegated acts is that investments in infrastructure project bonds are treated as corporate bonds, even when credit risk is tranched. This should make it more attractive for insurers to invest in the sector.

Fitch views the Commission's adoption of the delegated acts as an indication that the timeline is on track for the planned 1 January 2016 implementation. There will now be a six-month window during which the European Parliament and European Council can challenge the details of the text or accept it.

Structured Finance

SCI conference line-up revealed

Panellists have been announced for SCI's 7th Annual Securitisation Pricing, Investment & Risk Seminar, which is taking place on 29 October in New York. The event is being held at Bank of America's offices at 250 Vesey Street (formerly Four World Financial Center).

The conference programme consists of a series of roundtables and panel debates focusing on issues affecting the investment in and trading of securitised bonds, including the impact of recent regulatory actions on primary market issuance and secondary market valuations. In addition, a workshop will provide an in-depth review of non-agency RMBS pricing methods.

Speakers include representatives from: Christofferson Robb, CIFC, Crescent Capital, Ernst & Young, the FHFA, Gapstow Partners, Invesco, Kanerai, Lloyds, Milbank, RJM Consulting, Sidley Austin and TIG Funds. The event is sponsored by Bank of America Merrill Lynch, Bloomberg, Duff & Phelps, Fitch Solutions, Lewtan, PriceServe and Thomson Reuters.

A limited number of spaces are available on a complimentary basis. To attend, email SCI for a registration code or click here to register.

Structured Finance

Further clarification needed

Additional amendments to the Italian securitisation and covered bond law - introduced by Law 116 of 11 August - still do not fully mitigate account bank exposure, Fitch says. However, the agency concedes that they help clarify treatment of SPV accounts.

Full clarification is unlikely until the Bank Recovery and Resolution Directive (BRRD) is incorporated into Italian law. As long as there is a risk that money in SPV accounts could be bailed-in, Fitch notes that Italian structured finance transactions and covered bond programmes will continue to be analysed in line with its counterparty criteria.

The latest amendments clarify the legal protection that SPV accounts would have in the event of account bank insolvency. The Law states that monies in an SPV's account are due 'in full' and 'immediately' and are not subject to payment suspension. According to the Law, payments must be made outside the account bank's bankruptcy estate distribution (this includes all SPVs' accounts, not just collection accounts).

However, pursuant to the Italian legislation, the SPV remains an unsecured creditor of the account bank. In addition, the cash due to the SPV may not be immediately available when the account bank defaults because account banks are allowed to freely use funds standing to the credit of the SPV's accounts.

Further, the interrelationship between the Italian securitisation and covered bond law and the BRRD remains uncertain. Fitch continues to highlight that under the BRRD, in the event of an account bank default, there is the risk that money held in the SPV's accounts would be liable to be bailed-in at the same level as senior unsecured liabilities. This may not be clarified until the directive is incorporated into national legislation, which is expected to occur by end-2014.

Structured Finance

Reg AB 2 webinar scheduled

SCI, in association with Lewtan, is hosting a webinar on the implementation of Regulation AB 2 at 3pm UK time/10am Eastern on 16 October. Click here to sign up for this complimentary event.

Panellists include SNR Denton partner Steve Kudenholdt and Lewtan svp Ned Myers. The panel will discuss the nuances of the new shelf registration and asset-level disclosure requirements, as well as data provision practices that may need to be reconsidered as a result of the new regulations. The panellists will also provide an overview of the Reg AB 2 pilot programme, an implementation timeline and checklist, and an outlook for the Rule 144a ABS market.

CDS

AMD widens on ceo replacement

A change at the top has sent CDS spreads for Advance Micro Devices (AMD) to their widest level since early in the year, according to the Fitch Solutions' latest CDS case study snapshot. Five-year CDS on AMD widened by 15% in the last two trading days of last week to the widest levels observed since February.

"Last week's announcement that AMD's president and ceo was stepping down and being replaced by the current coo is the likely catalyst behind the CDS spread widening," comments Fitch director Diana Allmendinger.

Spreads have been widening since late August, signalling market concern over the company's forecasted Q3 earnings and falling PC market share. The change in leadership came one week ahead of the company's Q3 earnings announcement. This may be a sign that weak consumer PC demand is more than offsetting growth in non-legacy PC markets.

This negative sentiment is being echoed in the equity market, where Fitch Solutions' one-year and five-year probability for default for the company is up by 63% and 67% respectively since last week's announcement.

CDS

Crossover tranche trades touted

Markit iTraxx Crossover tranches are set to begin trading on 20 October. Markit will support four tranches - 0%-5%, 5%-10%, 10%-20% and 20%-100% - but dealers are anticipated to quote the 0%-5% and 5%-10% tranches together as a joint 0%-10% equity tranche (SCI 28 August). Liquidity will likely be focused at the five-year point, given that there is little trading in the underlying Crossover index at other maturities.

Based on the underlying composition of the iTraxx Crossover Series 22 index, JPMorgan credit derivatives strategists project an initial trading level of approximately 53.2 points plus 500bp running for the 0%-10% equity tranche and a spread of 162bp for the 20%-100% senior tranche. "These projected pricing levels are very dependent on the implied correlation inputs that are used," they observe. "We believe that the best starting point for the correlation of Crossover tranches is to use CDX HY S21 tranche pricing, given that this index has the most similar rating and dispersion to the new Crossover S22 index. This would give a 10% base correlation of 43.2%."

But the JPMorgan strategists also note that for recent iTraxx Main tranche rolls, the prevailing interest has been to sell equity protection, given the continuing search for yield in Europe. "We believe that dealers will anticipate this and will mark correlation higher compared to CDX.HY as a result, which will have the effect of lower equity tranche upfronts and making it less attractive for investors to sell protection. We also note that iTraxx Crossover still has a large number of ex-investment grade peripheral credits (OTE, Telecom Italia, EDP), which should lead this index to have a higher implied correlation than the more idiosyncratic US index. Given this, we apply a plus 5% shift to the current CDX HY correlation surface to obtain the Crossover tranche prices."

The projected upfront for the 0%-10% tranche would increase to 56.5 points based on the CDX HY surface and fall to 40.6 points if the iTraxx Main surface is used. For the 20%-100% tranche, the projection of a 162bp full running spread would fall to 151bp if the CDX HY correlation surface is used

For investors who are interested in taking on 0%-10% risk, the strategists believe that the best value lies in selling equity tranche protection and buying protection on wide single names. Meanwhile, the senior tranche could be attractive as an outright long, given the large number of ex-investment grade credits in the portfolio experiencing some improvement in credit quality.

CLOs

CLO investment fund listed

Eagle Point Credit Company has launched an IPO on the NYSE of over 5.15 million shares at a price of US$20 per share. The company is a closed-end fund whose objective is to generate high current income and capital appreciation primarily through investment in equity and junior debt tranches of CLOs. The company is externally managed and advised by Eagle Point Credit Management, whose principals are Thomas Majewski, Daniel Ko and Daniel Spinner.

Gross proceeds from the IPO equate to about US$103.1m. The company has granted the underwriters a 45-day option to purchase up to an additional 773,295 shares of common stock to cover overallotments.

Deutsche Bank and Keefe, Bruyette & Woods acted as joint book-running managers for the offering.

CMBS

Apartments driving CRE price rises

Moody's/RCA Commercial Property Price Indices (CPPI) national all-property composite index increased by 1.2% in August and has recovered 99.5% of its post-crisis loss. The CPPI is now just 0.2% short of its November 2007 peak.

Apartment prices have driven the recovery, increasing by 17.4% over the past year, compared with 13.8% for core commercial. Apartment prices now exceed their pre-financial crisis peak by 18%, while core commercial property prices are 6.5% below peak.

The apartment component increased by 1.6% in August and the larger core commercial component by 1%. Retail properties in non-major markets is the only sector that has not recovered at least half of its peak-to-trough loss. In addition, central business district office prices are slowing, having only increased by about 1% in the last three months.

CMBS

Small multifamily loan programme launched

Freddie Mac Multifamily has unveiled a new initiative to purchase and securitise small multifamily loans of US$1m-US$5m and with at least five apartment units. The initiative is the company's newest effort to support affordable rental housing and provide the underserved small rental property borrower with access to long-term debt capital.

"We believe our initiative will increase liquidity in the small multifamily loan space and provide stability and facilitate private capital investment in this somewhat fragmented and underserved market segment," comments David Brickman, Freddie Mac Multifamily evp. "Historically, local lenders have financed small multifamily properties and debt capital is not widely available across the country from national lenders with standard products."

About 29% of the multifamily loan market is comprised of smaller loans with an average size of US$1.2m, based on 2012 data from Trepp.

The initiative provides approved lenders with a dedicated platform to originate and sell loans on smaller rental properties. Freddie Mac has a designated small balance loan team for the production, pricing, underwriting, closing, purchasing and funding of these loans.

The securitisation will be similar to the K-deal securitisation structure, in which Freddie Mac sells the first-loss risk to private capital. For a small balance loan securitisation, the collateral will be comprised of small balance loans with LTVs of up to 80% and the originating sellers must purchase the subordinate bonds on their loans, which they can then sell in whole or in part to third-party investors.

To date, Arbor Commercial Mortgage, Greystone Servicing Corporation and Hunt Mortgage Group are approved to sell these loans to Freddie Mac. Additional lenders will be added as they are approved.

CMBS

RFC issued on CMBS enhancements

Moody's is requesting feedback on proposed enhancements to its approach to rating North American conduit/fusion CMBS. The enhancements are based in part on an analysis of historic CMBS loan and transaction performance and aim to help Moody's further differentiate credit quality among transactions.

If implemented, the changes are expected to have an impact on less than 1% of the ratings on the outstanding bonds covered by the proposal. "This is largely a refinement of our current approach, which remains substantially unchanged," says Nick Levidy, a Moody's md responsible for new US CMBS ratings. "We are codifying some elements that have been incorporated into our analyses of CMBS transactions and we have enhanced our analytics for differentiating among deals backed by concentrated pools of uneven quality."

The three adjustments detailed in the RFC are: a more robust fusion approach to better account for investment grade and large below-investment grade loans; a refined approach for scaling the enhancement for all rated classes from A3 through B1; and a formal broadening of the range of the property quality scale to 0-5 from 1-5. "We anticipate some one-notch downgrades to a small number of subordinate tranches of outstanding US deals in instances where large loans experienced meaningful credit drift or in which the loan pool became significantly more concentrated since our last review," notes Michael Gerdes, a Moody's md responsible for monitoring outstanding US CMBS transactions.

Feedback should be submitted by 10 November.

CMBS

Resolutions drive late-pays lower

US CMBS late-pays fell by 8bp in September to 4.77% from 4.85% a month earlier, according to Fitch's latest index results for the sector. Delinquency rates for all major property types also improved in September, with the exception of hotel.

Resolutions of US$571m outpaced new additions to Fitch's index of US$410m during the month. Both resolutions and new delinquencies slowed from August at US$1.075bn and US$1.082bn respectively. Resolutions and new delinquencies last month generally consisted of smaller loans.

In addition to resolutions exceeding new delinquencies, the overall rate moved lower due to an increase in the index denominator. Fitch-rated new issuance volume of US$6.9bn outpaced US$3.7bn in portfolio run-off.

The largest resolution last month was the US$33.1m Blackwell I loan, securitised in GCCFC 2007-GG9, which was disposed of for a 70% loss (see SCI's CMBS loan events database). The largest new delinquencies last month were two hotel loans: the US$61.7m Westin - Falls Church (WBCMT 2006-C28) and the US$40.8m Westin - Fort Lauderdale (CWCI 2007-C2).

New hotel delinquencies outpaced resolutions by nearly a 3:1 ratio by volume. Office improved by 12bp due to US$184m in resolutions outpacing US$126m in new office delinquencies.

Industrial saw the largest decline by 31bp, largely due to resolutions outpacing new delinquencies by over a 10:1 ratio by volume. Multifamily and retail delinquencies also moved lower by 20bp and 15bp respectively.

Current and previous delinquency rates are: 5.91% for hotel (from 5.88% in August); 5.32% for multifamily (from 5.52%); 5.19% for retail (from 5.34%); 5.05% for office (from 5.17%); and 4.84% for industrial (from 5.15%).

CMBS

CMBS pay-offs dip

The percentage of US CMBS loans paying off on their balloon date dipped sharply in September to 53.3%, according to Trepp, six points lower than the August rate of 59.3%. The rate came in below the 12-month moving average of 68.5%.

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

By loan count as opposed to balance, 62.6% of loans paid off in September - a sizable decrease from August's level, when 73.6% paid off on that basis. The 12-month rolling average by loan count is now 70.8%.

Risk Management

Credit exposure increased in Q2

Insured US commercial banks and savings associations reported trading revenue of US$6.4bn in 2Q14, up by US$200m (or 4%) in the first quarter, according to the latest OCC quarterly report on bank trading and derivatives activities. Trading revenue in Q2 was US$700m (or 10%) lower than the US$7.1bn recorded in 2Q13.

The OCC report also shows that net current credit exposure (NCCE) increased by US$10bn (or 3%) to US$365bn during Q2, having fallen by a total of US$132bn (27%) over the prior seven quarters. The increase in credit exposure was driven by a US$138bn increase in receivables from interest rate contracts to US$2.6trn: the decline in rates during Q2 appears not only to have caused an increase in credit exposure, but also caught some market participants by surprise and therefore created demand for risk management products.

The notional amount of derivatives held by insured US commercial banks increased by US$6.1trn (or 3%) from Q1 to US$237trn. New contracts more than offset trade compression activity during the quarter, with a 5% increase in swap contracts to US$136trn particularly noticeable.

Banks hold collateral to cover 82% of their NCCE, 78% of which is in cash (US dollar and non-dollar). The largest four banks hold 92% of the total notional amount of derivatives, while the largest 25 banks hold nearly 100%.

Derivative contracts remain concentrated in interest rate products, which represent 81% of total derivative notional values. On a product basis, swap products represent 62% of total derivatives notionals.

Credit default swaps are the dominant product in the credit derivatives market, representing 96% of total credit derivatives.

Risk Management

Collaboration seen in collateral management

Collateral management activities are entering a new stage beyond merely firm-level infrastructure and data enablement, according to a new report from Celent. Entitled 'Fortress to Federated Models in Collateral Management: Embracing Innovative Operating Models and Technologies', the report suggests that market participants are increasingly looking to connect pools and movement of collateral at an industry level.

Celent views prospective developments from innovative solutions and business models around shared services, utilities and joint ventures as a potential 'collective solution' to mitigate the problems of situational shortages of collateral, as well as to address the cost-complexity issues that plague collateral management infrastructures and operations. New capabilities for managing collateral are required, but prohibitive costs and complexities still prevail, especially for market participants outside of the realm of tier one banks and larger broker-dealers.

"As the shake-out in capital markets continues to intensify, there are emerging ways of operating that are starting to appear on the horizon," says Cubillas Ding, research director of Celent's securities and investments practice. "For firms watching along the sidelines, doing nothing or holding on to simplistic approaches are no longer viable options."

Collaborations are taking place in a number of ways, ranging from commercial relationships to joint ventures, acquisitions and market-led utilities. Financial institutions are also increasingly collaborating with data and technology providers. In addition, start-ups are emerging, some of which are new but most are from what Celent describes as industry stalwarts.

The report also considers: options for change across five different commercial models for collateral management; strategic building blocks that characterise the quest for enhanced collateral management capabilities at firm and industry levels; and the movers and shakers jostling for a place in the collateral value chain. In addition, it provides recommendations on implementing best practices.

Risk Management

ISDA stay protocol inked

Eighteen major global banks have agreed to sign a new ISDA Resolution Stay Protocol, which has been developed in coordination with the Financial Stability Board to support cross-border resolution and reduce systemic risk. The move represents a major step in strengthening systemic stability and reducing the risk that banks are considered 'too big to fail', the association says.

The Protocol will impose a stay on cross-default and early termination rights within standard ISDA derivatives contracts between participating firms in the event that one of them is subject to resolution action in its jurisdiction. The stay is intended to give regulators time to facilitate an orderly resolution of a troubled bank.

The Protocol essentially enables adhering counterparties to opt into certain overseas resolution regimes via a change to their derivatives contracts. While many existing national resolution frameworks impose stays on early termination rights following the start of resolution proceedings, these stays might only apply to domestic counterparties trading under domestic law agreements and so might not capture cross-border trades.

Regulators have committed to develop new regulations in 2015 that will promote broader adoption of the stay provisions beyond the initial 18 banks. Banks have also committed through the Protocol to expand coverage once such regulations are enacted to include a stay that could be used when a US financial holding company becomes subject to proceedings under the US Bankruptcy Code. Those regulations will be made under the rule-making process in each jurisdiction.

The contractual approach is meant to support current statutory regimes and ensure wider, more consistent application. By adhering to the Protocol, banks will extend the coverage of stays to more than 90% of their outstanding derivatives notional and that proportion will increase as other firms sign the Protocol.

The terms of the Protocol have been agreed in principle and it is scheduled for implementation in early November. The Protocol will take effect from 1 January 2015 and will govern both new and existing trades between adhering parties.

The first wave of adhering firms consists of: Bank of America Merrill Lynch, Bank of Tokyo-Mitsubishi UFJ, Barclays, BNP Paribas, Citi, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Mizuho, Morgan Stanley, Nomura, RBS, SG, Sumitomo Mitsui Financial Group and UBS.

Risk Management

SEF landscape evolving

Market participants are still evaluating trading on swap execution facilities (SEFs) and how they may adapt their derivatives trading operations to comply with new regulations. A new report by Greenwich Associates provides a review of the changes in the US swaps market since the start of mandatory trading on SEFs, as well as an assessment for the future.

The new rules are changing trading practices dramatically: the share of US investors reporting that they trade a portion of their overall swaps trading volume electronically has jumped from 23% in 2013 to 41% in 2014. A further 20% said they plan to start trading electronically in the next 12 months.

Greenwich Associates research shows that the top two platforms for investors trading interest rate swaps electronically - Tradeweb and Bloomberg - remain the same today as they were before SEF rules came into effect. Data also suggests that the majority of investors continue to prefer trading via name give-up request for quote (RFQ), which is most similar to the old way of phone trading as is possible under the US CFTC's rules.

"For now, the complexity of the rules is what has kept many on the sidelines, despite the growing benefits of trading on SEFs," says Kevin McPartland, head of research for market structure and technology at Greenwich Associates. "Even so, the new market structure has only just started to take shape, with many opportunities still on the table for incumbent interdealer broker and new entrant SEFs."

Greenwich Associates believes that there are five factors that will determine the success of SEFs as liquidity consolidates over time: liquidity (a unique set of liquidity providers can make a SEF stand out); distribution (incumbents typically have an advantage over new entrants); unique functionality (the ability to handle package trades or innovative order types may prove enough for nascent SEFs to attract liquidity); pricing (high costs can be a barrier to success); and service (the ability to speak with someone who is knowledgeable about both the system and the market is critical).

RMBS

HUD auction 'less competitive'

The US Department of Housing and Urban Development last week released the results for its latest single family loan sale. Ten different pools - totalling US$2.1bn aggregate UPB and US$2bn aggregate BPO - were offered in the auction and each had geographically diverse non-performing FHA loans.

The weighted average bid for the ten pools was 70.4% of BPO (65.5% of UPB), according to Barclays Capital figures. This is six percentage points below the weighted average bid of HUD's previous auction, held in June, and 1pp lower than that of its December auction.

Barcap RMBS analysts note that the auction was also less competitive than previous ones, attracting bids from 15 investors, compared with 27 in the previous one. Lonestar - which won every pool in the previous auction - was replaced by Bayview, GCAT Depositor, DLJ and SW Sponsor as the winning bidders.

RMBS

Call for clarity on single GSE MBS

SIFMA has sent a comment letter to the FHFA, following the agency's request for input on its proposed structure for a single security that would be issued and guaranteed by Fannie Mae or Freddie Mac (SCI 13 August). The association's response explores both the risks and rewards of the proposed structure, and discusses a number of issues where more clarity is required.

SIFMA president and ceo Kenneth Bentsen has both welcomed the FHFA's proposal for input and emphasised caution. He praised the goal of improving liquidity in the TBA market while stressing "prudence and deliberation" in the movement towards a more uniform market.

SIFMA also laid out five key recommendations to the FHFA, notably the need to address industry feedback with regard to the proposals by forming an industry working group to work jointly with the FHFA in their development. The association also suggests that the FHFA should: be highly confident that any changes to market pricing and liquidity will be net-positive before implementing any proposals; examine and clarify issues related to the identity of the guarantor to be faced by investors and other issues that promote legal certainty; be prepared to take an active and ongoing role to ensure the improved and continued alignment of the performance of GSE MBS; and reduce frictions in any transition to a new MBS issuance framework.

RMBS

UKAR assets back new RMBS

JPMorgan is in the market with Slate No.1, a UK RMBS backed by a £2.38bn multi-originator purchased portfolio of prime residential mortgages. The assets were purchased from UK Asset Resolution by the deal's sponsor Consilium Airton (CAL), a wholly owned subsidiary incorporated for this transaction by Commercial First Group.

Fitch has assigned expected ratings of triple-A to the £1.93bn class A notes. The capital structure also comprises £202.67m class B, £101.33m class C, £41.73m class D, £47.69m class E and £59.61m class F unrated notes.

The portfolio consists of seasoned loans that have been less than one month in arrears during the previous two years and no loan has an indexed current LTV of over 90%. Of the loans, 70.3% are standard variable rate, 18.4% are bank base rate tracker and 8% are fixed-rate loans that revert to a floating rate. There are no swaps to hedge potential exposures to mismatches between the multi-basis asset cashflows and the payments to noteholders, which are linked to three-month Libor.

Just before closing, the original sellers - NRAM, Mortgage Express and Bradford & Bingley - will enter into a mortgage sale agreement with CAL, under which they will assign to CAL by way of equitable assignment all their rights, title and interest in and to the loans in the portfolio. The structure is designed to ensure that insolvency of any of the original sellers or CAL will not interrupt the timely payments of principal and interest on the notes to investors.

The loans will be initially serviced by UKAR and then transferred to Pepper (UK). At the point the servicing is transferred, legal title will also transfer from UKAR to the legal title holders.

RMBS

'Intuitive' analytics tool offered

TransUnion has partnered with Digilant Analytics to provide INTEXcalc subscribers with their Mortgage Risk Metrics (MRM) non-agency solution, which combines the power of borrower-level credit data, loan-level mortgage data and predictive analytics. The offering integrates TransUnion's anonymised consumer credit data with loan-level mortgage data and Digilant's predictive analytics to provide a familiar and intuitive analytics framework for non-agency RMBS traders, analysts and portfolio managers. Key benefits include running daily offerings and BWICs using MRM as the common yardstick to easily evaluate relative value, running portfolios using MRM to discover bonds with latent performance issues exposed by borrower-level credit data and evaluating low loan-count bonds with greater confidence using borrower-level credit data.

RMBS

Settlement threshold eyed

A letter from JPMorgan made public last week revealed that the number of accepted trusts/loan groups as of 1 October fails to exceed the 'confidential percentage' agreed between the bank and institutional investors under its rep and warranty settlement. Based on Section 2.03(e) of the modified settlement agreement, this gives the bank the right to terminate the settlement. JPMorgan has not yet exercised this right, but has stated that it reserves this right if any of the accepting trusts are excluded from the settlement.

Although the 'confidential percentage' has not been made public, Barclays Capital RMBS analysts suggest that it is likely to be greater than 93%, as the losses of the final accepted deal/loan-groups constitute around 93% of all trusts' losses. "With the letter, JPMorgan seems to be suggesting an intent to terminate the settlement unless it covers a substantial number of [the] 330 trusts. That would depend primarily on the objections made in the Article 77 proceeding filed by the trustees and the number of trusts in which those objectors would hold interest," they observe.

How many objectors come forward against the JPMorgan settlement should be clear after the 3 November deadline to file objections expires. "If the opposition to the settlement does instigate JPMorgan to terminate the settlement, it would create much uncertainty about rep and warranty recoveries, since these deals would most likely have to file individual claims against JPMorgan. For now, we do not think that substantial objections would be raised and continue to believe that the settlement may be approved for the majority of the 330 deals, with cash flowing to those trusts in 2015," the Barcap analysts note.

RMBS

Lehman reserves revisited

A group of trustees comprising US Bank, Wilmington, Law Debenture and Deutsche Bank are said to be trying to persuade the bankruptcy court to increase the placeholder reserves allocated to Lehman RMBS holders from US$5bn to US$12.1bn and allow sampling to be used to determine the eventual size of the liability. Barclays Capital RMBS analysts report that an initial analysis undertaken by the trustees on a sample of about 5,000 loans that were liquidated/modified or are delinquent, stratified across various asset types and vintages, shows that about 57% of these loans had a rep and warranty breach.

On the 255 deals for which they are the trustees, the group claims that the total lifetime expected losses are about US$21.2bn (US$15.7bn realised and US$5.5bn projected). Based on the 57% estimated breach rate, this results in estimated claims of US$12.1bn.

"Given that other large rep and warranty settlements have had a loss pay-out ratio much less than 57%, the trustees' claim for US$12.1bn is likely to be met with some opposition," the Barcap analysts note. They point to the ResCap settlement, in which the total allowed claims on the bankruptcy estate represented only about 20% of losses.

The trustee group has asked for a scheduling order and estimated pre-trial conference in April 2015, contingent upon the scheduling order being entered by October. Given that a hearing date for this matter has not been set yet, the timing and outcome of the trustees' motion remains uncertain.

RMBS

GSE risk transfer gathering pace

The amount of credit risk on US residential mortgages that Fannie Mae and Freddie Mac sell via their risk transfer securitisations is set to see a sizeable increase year-over-year, Fitch says in its latest GSE risk-sharing trends report. Transactions completed through the first three quarters of 2014 reference mortgage pools of close to US$300bn, after totalling just over US$80bn for all of 2013. With additional deals likely before year-end, the amount of mortgage pools referenced is on pace to approach US$400bn.

Since the advent of the risk-sharing deals in 2013, the GSEs have sold US$10bn in securities exposed to the credit risk of the reference mortgage pools. Credit quality of the reference mortgage pools remains strong, with better credit attributes than historical averages.

Even compared with strong-performing vintages, such as those prior to 2005, the reference pools have significantly higher average FICO scores (760 versus 716). The clean payment behaviour to date reflects the high credit quality of the borrowers, according to Fitch. Of the mortgage loans included in the transactions issued to date, only 20bp are currently delinquent.

RMBS

Traditional prime borrowers targeted

Slightly weaker performance is emerging for US prime RMBS transactions completed this year than for those issued in 2010-2013, Fitch notes in its latest monthly prime jumbo trends report. The agency suggests that the modest increase in risk reflects a move towards a more traditional prime borrower credit profile after several years of pristine credit attributes.

Weighted average original combined LTV ratios have increased from 67% to 70%, while credit scores have fallen from 771 to 766 on average. Credit scores remain well above average scores prior to 2005 (732).

Fitch says that while the credit quality of recent transactions remains excellent and notably stronger than any pre-crisis vintage, the modest change in 2014 credit attributes is apparent in the early performance. "Despite less seasoning, more borrowers from 2014 transactions have already missed a payment at any point than in transactions issued the two years prior," comments Fitch md Grant Bailey.

The percentage of loans currently delinquent in 2014 transactions (26bp) is higher than that in the 2013 vintage (18bp) and 2012 vintage (11bp).

RMBS

Lending limit proposal welcomed

Limits on high LTV and loan-to-income (LTI) lending proposed by the Central Bank of Ireland would in the long term reduce credit risk in the Irish residential mortgage market through more prudent lending, Fitch suggests. The central bank's consultation paper proposes limiting how much banks can lend to individuals with LTVs above 80% and LTIs above 3.5 to 15% and 20% of new lending respectively, and limiting buy-to-let lending with LTVs greater than 70% to 10% of new lending.

"The central bank's study showing significantly higher default rates for loans with high LTV and LTI is in line with our findings. Both ratios are major factors in our analysis of Irish RMBS and covered bonds," Fitch notes.

The agency believes that LTV at origination is a key driver of a borrower's willingness to repay mortgages and is positively correlated with foreclosure frequency. LTI affects borrowers' ability to pay, another key driver of foreclosure frequency. Restraining high LTV and LTI lending should therefore reduce mortgage foreclosure frequencies over time.

A regression analysis on about 54,000 loans with a mix of vintages shows that for LTVs above 80%, the foreclosure frequency increase associated with higher LTVs becomes greater when DTIs are higher too. An LTI cap could therefore be important for the Irish market, where there has been a sharp decline in the proportion of new mortgage loans with LTVs of over 90% since 2010, but an increase in 80%-90% lending.

The central bank says that 44% of new lending by volume for primary dwelling purchase in 2013 was at LTVs above 80% and 23% at LTIs greater than 3.5x. Lending volumes are at around 10% of pre-crisis volumes, but mortgage approvals have increased in 2014 on 2013 and the rise in prices in Dublin may be a factor in the higher proportion of lending at 80%-90% LTVs. Fitch indicates that lending volumes could fall in the short term while borrowers adjust to the limits.

The introduction of a credit register in 2016 will also provide lenders with a comprehensive assessment of a borrower's ability to pay.