Contents

CMBS

CMBS A4s dominate

CMBS was the only sector to see much secondary supply yesterday stateside, with many participants focused on the US$4.6bn legacy non-agency RMBS bid-list scheduled to trade today (28 October). BWIC volume reached around US$183m, up from the prior session, and was dominated by A4 securities.

Among the legacy A4 bonds out for the bid during the session was COMM 2006-C8 A4, which was talked at 90 area before being covered at plus 85. The tranche was previously covered at 74 on 21 August, according to SCI's PriceABS data.

The CSFB 2005-C5 A4 tranche was talked at mid/high-180s and covered at plus 185 yesterday. It was last covered at plus 130 on 12 May.

Other legacy A4 tranches circulating during the session included GSMS 2006-GG8 A4 (which covered at plus 84), JPMCC 2006-CB15 A4 (covered at plus 120) and MLMT 2006-C1 A4 (covered at plus 112).

In addition, a few recent-vintage A4 bonds were out for the bid. CGCMT 2014-GC21 A4 and COMM 2014-UBS4 A4 were respectively talked at plus 80 and plus 91, the latter on its debut in PriceABS. WFCM 2014-LC16 A4 was talked at plus 80, having been recorded as a DNT on 15 October.

Also debuting in PriceABS were the CGCMT 2014-GC23 and COMM 2014-UBS3 A3 tranches, which were talked at plus 79 and plus 85 respectively.

Meanwhile, a sprinkling of legacy non-A4 senior bonds was seen during the session. These included MLMT 2005-CKI1 A6 and WBCMT 2006-C23 A5, which were respectively covered at plus 152 and plus 102. The former was previously talked at 90 area on 25 March, while the latter had been talked at 70 area on 16 October.

With non-agency RMBS trading grinding to a halt yesterday, ABS secondary activity also slowed, as supply dropped to around US$91m. In that sector, a US$115m mixed legacy list had been pre-announced for this morning.

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Secondary markets

Non-agency RMBS settles down

The US non-agency RMBS market has increasingly settled down over the last few days following last week's volatility and there is still plenty of liquidity to be had for now.

"Broader markets have stabilised a bit this week," says one trader. "We've settled back into a normal trading pattern in non-agency and pricing levels have started to move back up."

He continues: "The excitement has gone, but liquidity is still good. For example, there is $500m currently out for bid today, which is mostly hedge fund selling, but there are one or two money managers involved too."

Though how long the 'excitement' will stay away is unclear. "All is quiet now, but with QE ending soon we may be in for another storm before too long," the trader concludes.

Secondary markets

Illiquid action

The CDO and CLO markets are attracting plenty of sellers at the moment, particularly in illiquid bonds.

"We're seeing a lot of selling in illiquid off-the-run assets - primarily ABS CDOs, Trups CDOs and distressed CMBS," says one trader. "It's the time of year where legacy portfolios are looking to square away their books and decide whether to lighten them or not."

The sellers come from a range of investor types, but are led by fast money looking to take profits. "At the same time, we're seeing opportunistic buyers willing to look at these illiquid assets," the trader says.

Meanwhile the CLO market is still softening with participants remaining cautious. However, the large swathe of European CLO BWICs due on Monday and Tuesday appears not to be driven by anything unusual.

"It's near month-end and a continuation of that squaring away activity, particularly by bad banks," the trader suggests. "That said, there aren't many bad bank legacy portfolios still around - many have now been folded into the trading desk."

Secondary markets

Trups CDOs stabilise

The US Trups CDO market has stabilised after last week's volatility and bid lists have been well-received.

"The market has stabilised and in only a week we've seen the range of bids move back and forth 2-4 points," says one trader. "People were trying to buy in the dips, but they now realise as things move back to previous levels and supply is limited they need to pay."

Trading revolves primarily around BWICs. "Off-BWIC there is activity, but it's still a little by appointment only in this asset class," notes the trader.

Indeed, the two major BWICs of yesterday and today look to have been well-received. "Yesterday's hedge fund seller list was well participated and today's FDIC list, even though it was longer dated, will see participation albeit not as high," the trader adds.

Secondary markets

Euro ABS/MBS stay steady

European ABS/MBS spreads held steady yesterday albeit in relatively quiet markets. More of the same is expected today, but all eyes are on a large liquidation BWIC on Tuesday.

Currently buyers just edge it over sellers in both core and peripheral ABS/MBS bonds across secondary, with UK RMBS and Italian names seeing the most interest. However, there has been less BWIC supply in recent days, due in part to the Monaco conference.

Today, the BWIC schedule is again light. The day kicks off at 10:30 London with a six line mixed list consisting of: €3.4m BERAB 2011-1 A1, €3m of DRVON 12 A, £1m DRVUK 2 A, $800,000 of GRANM 2007-1 2A1, €2m of GRANM 2007-2 3B2 and €2.2m of STORM 2014-2 A1. Four of the bonds have covered on PriceABS in the last three months - BERAB 2011-1 A1 at 99.58 on 2 October; DRVON 12 A at 100.087 on 11 September; GRANM 2007-1 2A1 at 99.55 on 30 September; and STORM 2014-2 A1 at 100.11 on 24 September.

Meanwhile, market attention is being increasingly drawn to a large European portfolio liquidation of US and European assets due at 14:00 London on Tuesday. It contains 147 lines of European ABS, CMBS and RMBS with a total original face of 4.3bn.

Secondary markets

US CLO BWICs stay relatively quiet

Yesterday's relatively quiet day in US CLO BWICs, albeit with fewer DNTs than of late, currently looks likely to continue today. There are four fairly small lists due totalling 15 lines and $60.95m of original face.

Selling activity is currently being led by one chief investor type, according to one trader. "We're seeing managed accounts lightening a little due to redemptions, but hoping prices will continue to fall so that they can add risk," he says.

Today's schedule starts at 9:00 New York with a $3.25m five line equity list consisting of: BLACK 2006-1X INC, PRSP 2006-1I SUB, SHAST 2007-1A PREF, STAND 2007-1X C1 and VERI 2006-2A SUB. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Large list to dominate

Tuesday's large liquidation BWIC is set to dominate traders' attention across asset classes either side of the Atlantic in the short-term. Longer term the picture is less clear.

The previously mentioned list, possibly from a Scandinavian bad bank, amounts to 647 lines and just under 7.5bn of current face when US assets and CDOs/CLOs are included. "This type of legacy asset sale at this time of year is of course not unusual, but at 7.5bn the effect on the market will certainly be profound - Monday and Tuesday will be incredibly busy days," says one trader.

Overall, there is less certainty. The trader says: "We've recovered from last week's volatility blip, but the future picture is still a little confused."

That is not to say the markets are entirely negative. "In US sub-prime RMBS we've traded a lot of bonds this week with good execution," the trader reports.

"At the same time, we're seeing good demand for European and US triple-B CLOs. In CMBS there is less clarity, but the overriding sentiment is people want to go long."

In Europe more broadly with triple-dip recession fears there is perhaps less positivity. "Your view on the future in Europe is entirely strategy-, book- and duration-dependant," the trader notes.

Secondary markets

Strong CLO schedule

Notwithstanding the big list due tomorrow the CLO BWIC market already has a strong schedule in place either side of the Atlantic this week. Today already has three lists in the pipeline and nine more are scheduled over the following two days.

Today currently begins with a $32.35m five line list at 9:00 New York time. It consists of: AVERY 2014-1A C, CENT6 1A PREF, LCM 15A C, RACEP 2012-6RA CR and VENTR 2012-10A C. None of the bonds has traded with a price on PriceABS in the last three months.

Second at 10:00 New York, is a three-line dollar and euro list consisting of: $2m HARV6 6X SUB, €1.43m OHECP 2006-1X E and $2m WGH 2006-1X SUB. Again, none of the bonds has traded with a price on PriceABS in the last three months.

Last, at 15:30 London is a €48.978m 12 line list that has already seen three bonds trade ahead. The list currently consists of: CELF 2007-1X D, ELEXA 2006-1X D, HARBM 9X D, HARBM PR3X B2, HEC 2006-2NX D, JUBIL I-RX D, JUBIL I-RX E, JUBIL VIII-X E, MSIMC 2007-1X D, WODST III-A D, WODST II-X D and WODST V-A D. only one of the bonds has covered with a price on PriceABS in the last three months - JUBIL I-RX E at L80s on 15 October.

Secondary markets

More Trups today

Another Trups CDO BWIC is circulating for trade today at 14:00 New York time.

The $12.5m 13 line list is understood to emanate from a hedge fund. It consists of: PRETSL 16 C, PRETSL 18 C, PRETSL 19 C, PRETSL 21 C1, PRETSL 22 C1, PRETSL 23 D1, PRETSL 23 DFP, PRETSL 24 C1, PRETSL 27 C1 and PRETSL 28 C1.

Seven of the bonds have covered on PriceABS in the last three months, as follows: PRETSL 16 C at L50S on 12 August; PRETSL 18 C at M50S on 19 August; PRETSL 19 C at H40S on 12 August; PRETSL 22 C1 at H50S on 19 August; PRETSL 23 D1 at H30S on 19 August; PRETSL 24 C1 at M40S on 20 August; and PRETSL 27 C1 at H49H on 22 October.

Secondary markets

Trups trade well

Yesterday's Trups CDO BWIC traded well and at the same time the latest FDIC list was announced.

The 14:00 hedge fund list saw every line trade at or above talk with good participation. Consequently the 13th and latest FDIC Trups CDO auction, which again features mezz paper, is expected to go well at 11:00 New York on Thursday.

The 15 line $77.1m list consists of: ALESC 13A D2, ALESC 14A D1, ALESC 11A D, ALESC 15A D, MMCAP 1 MEZ, PRETSL 4 MEZZ, PRETSL 7 MEZ, PRETSL 21 C1, PRETSL 21 D, PRETSL 21 C2, TRAP 2003-2A C-1 and TRAP 2003-2A D.

Three of the bonds have covered on PriceABS in the last three months - PRETSL 4 MEZZ at 81.25 on 6 August; PRETSL 7 MEZ at M40s on 16 October; and TRAP 2003-2A C-1 at M60s on 22 October.

Secondary markets

CLO supply spike

The US CLO market has added significant supply around today's 7.5bn BWIC, which appears to be transfixing all other sectors. There are now 12 US CLO BWICs scheduled between now and the end of Wednesday.

The flurry of US CLO lists appears to be a reaction to the big list. Traders suggest that the additional sellers are seeking either to get in front of or take advantage of the market disruption that such a large volume list always causes.

CLO spreads have held steady over the last week, but the next 24 hours will test levels significantly. Equally, there is a strong likelihood that a very high percentage of the CLO auction line items will DNT.

Secondary markets

Euro rejuvenation

Yesterday's big list has rejuvenated activity and interest across European securitisation asset classes.

"We're still waiting on official colour on the big BWIC, but while the market was quiet leading up to the list we've seen trading on the back of it since," says one trader. "Overall, the list has given a much-needed boost to trading and customer interest."

The list contained a large proportion of ABSPP-eligible assets and that is where the trader expects activity to be sustained. "Everyone is still watching the ECB in terms of CBPP3 and trying to get an indication of when the ABS programme will start. At the same time, the big list has heightened account interest in eligible paper and we've seen a big pick-up in customer and Street activity in names that were on the list and similar bonds," he says.

The European BWIC schedule is also beginning to ramp up again today with a broad mix of assets on offer. Perhaps the most notable is a £170m block of CMBS DIVFN 2007-1 A due at 13:30 London. The bond hasn't covered on PriceABS in the last three months but is being talked in the 97-98 area.

Secondary markets

Rarely seen US ABS circulating

A portfolio liquidation BWIC of rarely seen US ABS is circulating for trade today at 10:00 New York.

The ten line list of aircraft, structured settlement, insurance and private student loan ABS totals $194.376m of original face. It consists of: AIRSP 2007-1A G1, AIRSP 2007-1A G2, HENDR 2005-1A A1, HENDR 2006-1A A1, HENDR 2006-2A A1, HENDR 2006-3A A1, HENDR 2006-4A A1, HENDR 2007-1A A1, INCT 2005-1R1A NOTE and KSLT 2006-A 2A4.

Only AIRSP 2007-1A G1 and HENDR 2007-1A A1 have covered on PriceABS this year, doing so at 83-08 on 11 March and 96.13 on 4 April, respectively.

Structured Finance

SCI Start the Week - 27 October

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

Pipeline
A mix of transactions remained in the pipeline at the end of last week. The US$250m Navistar Financial Dealer Note Master Owner Trust II Series 2014-1 and US$325m Sierra Timeshare 2014-3 deals made up the newly-announced ABS, while the US$207.56m Citigroup Mortgage Loan Trust 2014-J2 and US$263m JPMMT 2014-5 accounted for the RMBS.

Three CMBS also began marketing last week: US$415m JPMCC 2014-CBM, US$550m NYCHDC 2014-8SPR and US$1.1bn WFRBS 2014-C24. The US$425m Marathon CLO VII was the sole CLO entering the pipeline.

Pricings
Almost twice as many deals priced during the week. ABS accounted for the majority of prints, but a number of CMBS, CLOs and RMBS were issued as well.

Auto ABS had a good showing, with US$1bn Fifth Third Auto Trust 2014-3, €516.3m Globaldrive Auto Receivables 2014-B, €517.7m Kimi 3, US$216.47m NCF Dealer Floorplan Master Trust Series 2014-1 and World Omni Auto Receivables Trust 2014-B pricing. There were three esoteric ABS prints too: US$120.18m Elara HGV Timeshare Issuer 2014-A, US$301.4m Textainer Marine Containers III Series 2014-1 and US$300m Trafigura Securitisation Finance 2014-1.

The US$1.2bn COMM 2014-CCRE20, US$182m ReadyCap 2014-1 and US$335m TMSQ 2014-1500 made up the CMBS issuance, while the US$432m Ares CLO XXIII (a refinancing), US$409.18m Ballyrock CLO 2014-1, US$411.5m Battalion CLO VII and US$191m CAN Capital Funding Series 2014-1 accounted for the CLOs. Finally, a pair of risk-transfer RMBS - US$611m STACR 2014-DN4 and US$429m STACR 2014-HQ3 - rounded out the prints.

Deal news
• Recent rating agency criteria changes have re-focused attention on the European peripheral ABS markets. While all investors - including the ECB - will be affected, the importance attached to ratings varies.
• The New York Department of Financial Services has alleged that Ocwen backdated thousands of letters to borrowers relating to modifications and foreclosures. A large-scale disruption in servicing at the firm as a result of the move is unlikely, but the likelihood of a scenario that could have a significant effect on non-agency RMBS has increased.
• The US$25m Creekside Mixed Use Development loan, securitised in COMM 2014-UBS2, has become 60-days delinquent and entered foreclosure status. The loan was transferred to special servicing due to a legal dispute between the owner, Strathmore Development Co, and the loan trustee over unpaid reserve account funds.
• Lehman Brothers Holdings Inc has filed objections to both counts of a trustees' motion that had asked the bankruptcy court to increase the reserve to US$12.1bn and allow for estimation of the claims (SCI 14 October). LBHI argues that the trustees had expressly agreed to set a US$5bn reserve in February 2012 and that the reserve order should preclude attempts to adjust the reserve. Further, it suggests that the one-year time limit under rule 60(b) of the Federal Rule of Bankruptcy Procedure is applicable and so the trustees' motion should be disallowed on this basis.
• Pursuant to an order of the US District Court for the Southern District of New York, settlement funds resolving all claims for US$6m in the 'In re IndyMac Mortgage-Backed Securities Litigation' action against Blair Abernathy, John Olinski, Samir Grover, Simon Heyrick and Victor Woodworth are finally to be distributed. The court granted final approval to the individual defendant settlement on 18 December 2012, but distribution of the funds was delayed pending resolution of claims against remaining defendants, in an effort to avoid duplicative expenses.
• Moody's has realigned its definition of impairment for structured finance securities in Japan with that which it applies in all other geographical locations. The agency is also requesting feedback on a proposed update to its approach to rating Japanese RMBS to align its approach with its global RMBS rating methodology, while taking into account the unique characteristics of the Japanese market.

Regulatory update
• The FDIC, OCC, Fed, SEC and HUD have adopted final rules for credit risk retention under section 941 of the Dodd-Frank Act. The rule contains a number of exemptions, notably qualified residential mortgages (QRM), but concerns have been raised about the impact it will have on CLOs.
• In prepared remarks delivered at the annual MBA convention, FHFA director Mel Watt announced several key changes aimed at improving US mortgage credit conditions. Borrowers refinanced through the HARP process are expected to benefit the most from the proposals.
• The Office of Inspector General (OIG) for the US Fed and the CFPB has released its summary report of the supervisory activities related to the US$2.3bn credit derivatives losses of JPMorgan's chief investment office (CIO) in 2012. The report describes four findings and 10 recommendations that encourage the Fed to enhance its supervisory processes and approach to consolidated supervision for large complex banking organisations.
• The US SEC has published analyses of data on the reporting and dissemination of security-based swap transaction information. The analyses examine: the effect of the CFTC's mandated post-trade transparency in the CDS index market on total credit exposure, trading volume and trade size; and recent single-name CDS transactions, especially in terms of how dealers may hedge any large notional exposures that result from executing trades with their customers.

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:
A-Best 10; ACIS CLO 2014-5; Ally Auto Receivables Trust 2014-SN2; Apidos CLO XIX; Babson CLO 2014-III; BBVA Consumo 6; Benefit Street Partners CLO V; BMW Vehicle Owner Trust 2014-A; Brass No. 4; Capital One Multi-asset Execution Trust 2014-5; CLI Funding V series 2014-2; CNH Equipment Trust 2014-C; Discover Card Execution Note Trust 2014-5; Dolphin Master Issuer 2014-3; Exeter Automobile Receivables Trust 2014-3; Flagship Credit Auto Trust 2014-2; Ford Credit Auto Owner Trust 2014-REV2; GE Dealer Floorplan Master Note Trust Series 2014-2; GoldenTree Loan Opportunities IX; HarbourView CLO VII; HERO Funding Trust 2014-2; Limerock CLO III; MCF CLO IV; Navient Private Education Loan Trust 2014-A; Nissan Auto Lease Trust 2014-B; PFS Financing Corp series 2014-B; Regatta V Funding; SBA Tower Trust 2014-1; SBA Tower Trust 2014-2; Silverleaf Finance XVIII series 2014-A; Slate No. 1; Slate No. 2; Toyota Auto Receivables 2014-C Owner Trust; Volkswagen Auto Loan Enhanced Trust 2014-2; Westlake Automobile Receivables Trust 2014-2.

Deals added to the SCI CMBS Loan Events database last week:
BSCMS 2007-PW16; BSCMS 2007-T26; CD 2005-CD1; COMM 2012-CCRE1, 2012-CCRE2 & 2012-CCRE3; COMM 2014-UBS2; CSMC 2006-C3; CSMC 2006-C4; CSMC 2007-C5; DECO 2006-E4; DECO 2007-E7; DECO 8-C2; ECLIP 2007-1; EMC VI; EURO 28; FLTST 3; GECMC 2007-C1; GSMS 2012-ALOHA; JPMCC 2005-LDP1; JPMCC 2006-CB17; JPMCC 2007-CB18; LBUBS 2005-C2; LBUBS 2007-C1; MLCFC 2007-7; MLMT 2005-CKI1; MSBAM 2013-C7; MSC 2006-HQ8; MSC 2011-C1; SMPER 2007-1; TAURS 2007-1; TITN 2006-1; TITN 2006-3; TITN 2007-1; TITN 2007-CT1; TMAN 6; TMAN 7; WBCMT 2005-17; WBCMT 2006-C25; WINDM XIV.

RMBS

Backdating impact eyed

The New York Department of Financial Services (NY DFS) has alleged that Ocwen backdated thousands of letters to borrowers relating to modifications and foreclosures. A large-scale disruption in servicing at the firm as a result of the move is unlikely, but the likelihood of a scenario that could have a significant effect on non-agency RMBS has increased, according to Barclays Capital RMBS analysts.

NY DFS superintendent Benjamin Lawsky alleges in a letter sent to the servicer on Tuesday (21 October) that many borrowers received modification denial letters dated more than 30 days prior to the day that Ocwen actually mailed them. These borrowers were given 30 days from the date of denial letter to appeal, but those 30 days had already elapsed before they received the letters. The NY DFS also alleges that Ocwen mailed backdated letters to borrowers facing foreclosure; these had a date by which borrowers could cure their default to avoid foreclosure, but that date had also already elapsed.

When Ocwen was notified of the backdating issue by a NY DFS monitor, the servicer allegedly conducted its own investigation and represented that the problem was limited to letters of a specific type and affected 6,100 of them. The firm also represented that the issue was discovered in April-May and that it had immediately implemented changes to its systems in May that resolved the problems.

However, the NY DFS claims that the monitor found each of these representations to be false, that many more than 6,100 letters were backdated and that the issue remains unresolved. The regulator also claims that Ocwen was first made aware of the issue by an employee in November 2013.

In response to the NY DFS letter, Ocwen released a statement blaming software errors in its correspondence systems for inadvertently sending "improperly dated" letters to some borrowers. The firm stresses that its goal is to avoid foreclosure and, in the case of the 283 borrowers in New York who received letters with incorrect dates, 281 are currently borrowers with it.

The servicer says it continues to review the rest of the cases. "We believe that we have resolved the letter dating issues that have been identified to date and we continue our investigation as to whether there are additional letter dating issues that need to be resolved. We are working with and fully cooperating with DFS and the monitor to address their concerns," the statement notes.

Ocwen services non-agency loans with a UPB of about US$184bn, representing about 25% of the outstanding legacy non-agency universe. The Barcap analysts note that although it may be too early to determine the true extent of these practices, if widespread, they could lead to additional costs imposed on non-agency RMBS investors.

They indicate that the best case for RMBS investors would be that this issue is fairly contained, it leads to only a small fine on Ocwen and the practices are resolved fairly quickly. However, if other state or federal regulatory agencies become involved, a much larger fine could be imposed on Ocwen or the FHFA could face pressure to move GSE servicing away from Ocwen, which may affect the servicer's ability to service the rest of its loans. A settlement is also possible, which can impose forgiveness-related costs directly onto non-agency investors.

Nevertheless, the analysts believe that the implications of the allegations on HLSS' servicer advance ABS are limited at this point. But given Ocwen's role in servicing the loans and recouping the servicing advances, its insolvency or a determination by Fannie Mae or Freddie Mac that it is no longer an approved servicer would constitute both a facility early amortisation event and an EOD under the indenture.

Additionally, if a significant number of servicing rights are pulled from Ocwen because of regulatory concerns, the associated advance receivables would become ineligible receivables - potentially leaving the notes undercollateralised. A majority of noteholders or the administrative agent could then accelerate all of the ABS notes and lock HLSS out from any residual cashflows.

"Even in an acceleration event, we would not expect the servicer advance ABS notes to incur significant, if any, write-downs," the analysts observe. "The HSART master trust is well collateralised at this time, with US$6.4bn of advance receivables supporting US$4.7bn of advance ABS notes. In addition, as far as we are aware, all of the receivables in the collateral pool have a general collections backstop that gives the servicer the right to recover on the advance receivables through the general collections account of the related private-label securitisations."

Absent an EOD, they believe that HLSS will continue to support its HSART securitisations through the regular addition of advance receivables collateral and by paying off transactions as they reach their expected maturity dates, since the company heavily relies on the HSART trust for its financing needs.

CS

Structured Finance

Investment platform broadens

ClearVest has expanded the number of managers approved by its investment committee. The additions include funds managed by Arden Asset Management, Coherence Capital Partners, DUNN Capital Management and Wasserstein Debt Opportunities. Through the ClearVest platform, institutional investors, qualified purchasers and wealth managers will now be able to access over 27 carefully selected alternative investment managers.

Investments are available through direct feeders or a commingled managed vehicle. The platform provides for daily position reconciliation, daily risk monitoring, performance analytics, NAV calculation and complete investor reporting. ClearVest offerings are diversified across investment strategies, including credit, fixed income and event-driven/distressed.

Structured Finance

Vendor acquired

Moody's has acquired Lewtan Technologies. The firm will become part of Moody's Analytics' structured analytics and valuations business, which provides an extensive data and analytics library for securitised assets.

Lewtan's products cover more than 200,000 bonds and 20,000 securitised deals, serving over 300 financial institutions worldwide. For its fiscal year ending 30 September, the firm generated annual revenue of approximately US$25m.

The acquisition is expected to have a minimal impact on Moody's earnings per share in 2014 and 2015, and will be funded primarily from US cash on hand.

Structured Finance

Primus seeks voluntary liquidation

Primus Guaranty is convening a special general meeting of shareholders on 20 November, for the purpose of seeking shareholder approval to wind up the company by way of a members' voluntary liquidation. If approved, the voluntary liquidation will see Primus' stock transfer books frozen and the company's transfer agent will not record or recognise any subsequent assignments or transfers of the company's common shares.

Primus says it has adopted a plan of liquidation for US federal income tax purposes and has to date made three partial liquidating distributions pursuant to such a plan, aggregating to US$10.70 per common share. The company may pay one or more additional distributions during the voluntary liquidation, as well as a final distribution to shareholders at its completion.

Structured Finance

FIG reshuffled

Barclays' financial institutions group (FIG) has undergone a revamp, following the departure of former md Allen Appen to Lloyds earlier this month (SCI 15 October). Ben Davey will now solely head FIG in EMEA, having previously been co-head with Richard Boath. Boath has been appointed chairman for FIG in the same region, in an attempt to utilise his experience in building senior client relationships.

Appen's former responsibilities as head of EMEA FIG capital markets have been split into two roles, which will result in two promotions. Peter Mason will head FIG debt capital markets for the EMEA region, while Peter Jurdevic will now lead financing solutions for the bank, covering capital, balance sheet advisory and liability management for all FIG, corporate and public sector businesses. Most notably, he will also oversee the bank's securitisation business.

Finally, Daniel Fairclough has been appointed as head of UK banking coverage.

Structured Finance

BGC bid commences

BGC Partners has gone ahead with its attempt to acquire all of the outstanding common shares of GFI Group, following an impasse in negotiations between the two companies. BGC currently owns 13.5% of GFI's shares and has now commenced an unsolicited tender offer of US$5.25 per share for the 86.5% it does not currently own.

The terms remain unchanged from BGC's offer on 9 September and represent more than a 15% premium to the US$4.55 per share transaction announced by CME (SCI 10 September). The offer will expire on 19 November unless extended.

BGC notified the GFI board by letter regarding the launch of its tender offer, stressing its belief that the CME transaction would deprive GFI shareholders of the value of their investment because it provides for GFI management to purchase GFI's brokerage business from CME at a discount. In addition, it accused GFI of providing unreasonable demands and delay tactics during their attempt for a negotiated transaction.

"We remain open to seeking a negotiated transaction with GFI and the CME, and we are also open to conversations with GFI management regarding matters related to such agreement," the BGC letter states. The firm says it has secured committed financing from Morgan Stanley Senior Funding and its offer has no financing condition.

Consistent with its fiduciary duties and in consultation with its financial and legal advisors, GFI says its special committee will thoroughly review the offer to determine a course of action that it believes is in the best interests of GFI stockholders. The firm intends to advise its stockholders of the board's formal position by 4 November.

Until that time, the board advises GFI stockholders not to take any action with respect to BGC's tender offer. The firm says it has not changed its recommendation with respect to, and continues to support, the pending transaction with CME Group.

Structured Finance

Channel beefs up in trade finance

Channel Capital Advisors is branching out into trade finance, having recently recruited two professionals to assist in the development of its Trade Finance Lending Fund. Investment is focused on pre-export, post-export and syndicated import/export facilities.

Ken Owen has joined the firm as portfolio manager, responsible for investment origination, structuring, evaluation and portfolio monitoring. He was previously head of trade finance origination at Eiger Trading Advisors.

In addition, Dan Luther has been hired in an operations and transaction management role. He formerly worked at Trafigura, most recently in securitisation IT project management.

CLOs

CLO partnership established

Crestline Investors has partnered with Denali Capital to further expand a CLO platform under the broader Crestline suite of investment products. The business will operate under the name Crestline Denali Capital.

Under the new agreement, Crestline will sponsor a series of new CLO issuances - the first of which is underway - to be managed by Crestline Denali Capital. In addition to CLOs, the business will be positioned to pursue investment strategies that meet growing investor interest in the US$800bn syndicated commercial loan class.

Denali Capital has had a relationship with the principals of Crestline since it began operating in 2001.

CMBS

CMBS offering strengthened

Hunt Mortgage Group has opened a commercial mortgage financing office in Cleveland, Ohio. Daniel Eibler has been hired as a director to lead the effort and to expand the firm's product offering locally and throughout the US Midwest.

In addition to Fannie Mae DUS, Freddie Mac, FHA and bridge loans, Eibler will concentrate on CMBS and other loan vehicles beyond Hunt's traditional multifamily reach to include other property types like retail, office and hotels. He will report to William Hyman, senior md and head of the mortgage banking group at Hunt.

Eibler was previously a director at Red Mortgage Capital and before that worked at KeyBank Real Estate Capital and Column Financial.

Insurance-linked securities

LCP acquisition confirmed

Amlin has signed definitive legal agreements to increase its existing interest in Leadenhall Capital Partners (LCP) to 75%. The move follows a non-binding agreement that was reached back in July (SCI 7 July).

Under the terms of the agreement, Amlin will increase its interest in the business via a partial acquisition of each individual partner's stake. The final consideration amount will be determined by the future profitability of the business and will be payable in three installments over the period to May 2016.

The remaining 25% that Amlin has not acquired will continue to be held by the individual partners of LCP on an ongoing basis, with the current management team of John Wells (chairman) and Luca Albertini (ceo and cio) remaining in their existing roles following completion of the transaction. The agreement also sets out safeguards to preserve appropriate operational independence of the business and alignment of interest between Leadenhall's management and their third-party investors through the continuation of separate entity and remuneration structures and strengthened governance.

Risk Management

Board shuffle for vendor

OpenGamma has appointed Mark Beeston as chairman, with Cristobal Conde also being appointed to the board. This follows the decision by former chairman and co-founder Kirk Wylie to take on the role of chief innovation officer (while remaining on the board).

An OpenGamma board member since 2012, Beeston has over 20 years of experience working at leading financial institutions. He established Illuminate Financial Management in February 2014 after four years serving as ceo for ICAP's post-trade risk business.

Conde joins the board after holding a number of executive management roles at SunGard, including 12 years at its helm as ceo.

ABS

Chinese auto ABS issuance to double

Fitch expects Chinese auto loan ABS issuance to more than double to over CNY35bn in the next 12 months, due to funding needs driven by a rapidly expanding car sales market and the increasing penetration of captive auto finance companies. In particular, the agency believes that auto ABS will become entrenched in the funding profile of China-based foreign-owned auto finance companies.

China is now said to be the largest auto market in the world, with expected sales of over 20 million cars in 2014, representing a compound average growth rate of 7.8% over the past five years. Sales are expected to reach 30 million passenger cars by 2020.

So far, six auto ABS transactions totalling CNY17bn have been issued in China this year. All the originators that have come to the market were auto finance companies (AFC) licensed by the China Banking Regulatory Commission, except China Merchants Bank, which securitised its single-use credit card instalment loans for vehicle purchases. Three originators were wholly foreign-owned companies (Volkswagen, Ford and Toyota) and two were Sino-foreign joint ventures (Dongfeng Nissan and BMW).

Fitch's positive issuance forecast for the sector aligns with its belief that there will be no deterioration of the credit quality of the underlying loans or the ABS transactions they support. The agency anticipates that the auto ABS market in China will be characterised by two groups of originators - AFCs and commercial banks.

The expectation is that foreign-owned or Sino-foreign joint venture AFCs will lead the market with new and repeat issuances in the near term. Repeat transactions are likely to come from those who already have global securitisation platforms, such as Volkswagen, Toyota, Nissan, BMW, Ford and GMAC.

ABS transactions may also be originated by commercial banks, but comparative funding costs for commercial banks will make securitisation a less attractive proposition than existing funding avenues such as deposits.

ABS

ABCP outflow to be offset?

The impact of money fund reform on ABCP programmes will vary, depending on the composition of each programme's investor base, according to Fitch. Institutional prime money fund investments account for only about one-third of total outstanding ABCP, and ABCP only accounts for approximately 6% of total institutional prime money fund assets.

Investments in ABCP by institutional prime money funds are expected to decrease further, following the SEC's recent amendments to Rule 2a7. However, Fitch expects outflows from money funds to take place gradually over the implementation period - which will end in October 2016 - and to be offset by inflows into new products that invest in ABCP.

Estimates for potential outflows vary greatly, with the high end of the range at about 50% of institutional prime money fund assets, or approximately US$476bn. Based on these funds' investments in ABCP, this could amount to about 13% of total ABCP outstandings as of July 2015, or US$32bn.

However, different ABCP programmes rely on money funds - specifically institutional prime money funds - to varying degrees. ABCP programmes whose investor base is comprised heavily of institutional prime money funds will face the greatest impact, ranging from 3%-51%, Fitch suggests.

At the same time, some of the money leaving institutional prime money funds is expected to migrate to products with similar investment mandates, reducing the likely impact of the outflows from money funds. For example, the cash leaving money funds could move to less regulated short-term bond funds, separately managed accounts or direct investments. This could increase aggregate demand for ABCP.

Structured Finance

RFC issued on repack revision

Moody's is requesting comments on proposed updates to its global approach to rating repackaged securities. The agency is seeking to refine how it assesses the risk of interest rate and cross-currency swaps in relation to swap counterparties in structured finance cashflow transactions.

If the proposed methodology is adopted, Moody's expects the impact to be limited to some upgrades or downgrades by one notch on a small number of repacks. Feedback on the request for comment is invited by 1 December.

Structured Finance

Further growth forecast for China

New originators and asset types continue to emerge in China's securitisation sector, attracting growing investor interest, Moody's reports. Issuance is expected to grow further in 2015, despite a number of lingering concerns about market infrastructure.

"In addition to the policy banks and big commercial banks, which are currently the main players in China's securitisation market, some city commercial banks and auto captive finance companies have started issuing new securitisation transactions [SCI 23 October]," says Moody's svp Jerome Cheng. "China's growing securitisation market serves the needs of originators because securitisation can be a cheaper funding source or a better balance sheet management tool than traditional bank loans."

The agency suggests that international investors are more comfortable investing in originators with whom they have previous relationships in other markets, particularly those originators applying global operational procedures and policies to their securitisations in China. In addition, international investors prefer diversified asset pools in order to avoid concentration risks and challenges inherent in analysing the underlying assets on an asset-by-asset basis. The performance of short-term assets - such as consumer loans and auto loans - are also attractive due to China's strong macroeconomic conditions, as well as fewer regulatory and industry uncertainties, making it easier for investors to evaluate asset performance.

Nevertheless, Moody's highlights three key concerns that remain about the burgeoning market. First, as China's relatively young legal system lacks court precedent, the applicable laws are less comprehensive than in other developed countries.

As such, there is a lack of clarity in China over fundamental concepts, such as true sale, asset transfer, interest perfection and bankruptcy-remoteness. This uncertainty is compounded by complex regulatory frameworks and requirements.

The second key concern is operational risk. The relatively new securitisation market in China means that originators have limited experience in managing transactions. As a result, transactions are subject to the operational risk of the originator, which is usually the servicer.

Back-up servicing risk is also present because the back-up servicer system is not yet established in the country. Transactions may be subject to operational delays if back-up servicers cannot be successfully found and put in place in the event of a servicer failure.

The third concern is the lack of historical performance data, particularly during periods of economic distress.

Structured Finance

'Minimal' risk for ECB

The ECB is taking only minimal credit risk with the ABSPP, according to Fitch. This assessment is based on the programme's conservative eligibility criteria, especially the focus on senior bonds.

As a hypothetical example, Fitch applied the same eligibility criteria to all Fitch-rated bonds that were outstanding at the onset of the credit crisis, based on a cut-off date of 1 July 2007. The agency estimates that the ECB would have been able to purchase approximately a quarter of the 2007 universe based on the ABSPP criteria. Of the Fitch-rated balance outstanding in 2007, 1.6% has either been written down or is expected to make a loss; the corresponding figure for the ECB-eligible portion is less than 0.001%, resulting from just two RMBS bonds.

"Fitch's analysis indicates that the ECB's eligibility criteria would have cherry-picked some of the least risky bonds available at the onset of the credit crisis. We estimate that the eligible bonds will incur less than one-tenth of a basis point of loss," says Andrew Currie, Fitch head of surveillance for EMEA structured finance.

He adds: "The pre-crisis bonds included in this exercise represent a 'worst case' scenario. Securitisations issued post-crisis account for over three-quarters of currently eligible bonds and these deals generally benefit from increased credit enhancement, more robust origination practices and greater structural protection."

The agency also believes that the ABSPP structure minimises moral hazard, despite certain commentators stating that the ECB's commitment to significantly increase its balance sheet will encourage a return to the 'originate-to-distribute' model and a loosening of origination practices. Issuers will need to secure third-party investors alongside the ECB for senior tranches and will need either investors for more junior bonds or to retain the risk on their own balance sheets (while guarantees for mezzanine tranches are unavailable), both of which will act as deterrents to moral hazard.

Fitch estimates that less than 30% of the outstanding Fitch-rated securitisation balance is eligible for the ABSPP (approximately €225bn), the majority of which is already placed with the ECB. "For the ABSPP to achieve a large-scale increase in the availability of credit to the real economy, it will need to trigger a significant increase in primary issuance," says Currie. "Ultimately, the ability of the ECB to revitalise the securitisation market and transform it into a reliable source of funding for the real economy will depend on whether the ABSPP can facilitate a broadening and deepening of the investor base that will remain when the ECB exits the market."

Structured Finance

Short-biased credit fund launched

Cohanzick Management has launched the Nexus Fund, a long/short corporate credit strategy with a short bias. The fund will focus primarily on deteriorating or overvalued credits, as well as capital structure mispricing.

The firm says that the most obvious opportunities at present are event-driven situations, in which corporate management seeks to benefit shareholders by taking advantage of the gap between equity yields and debt funding costs. In this scenario, incentives for shareholders and bondholders are at odds: shareholder-friendly actions are likely to increase credit risk to the detriment of bondholders.

The Nexus strategy aims to take advantage of such circumstances by shorting bonds of companies that pursue shareholder-friendly activities. The fund may also incorporate long equity positions of the same issuers in order to benefit from stock appreciation resulting from these catalysts.

In addition, it can short corporate credits that are expected to experience deterioration due to declining secular trends, failing business models or economic weakness. Preference is given to shorting in the cash market, but CDS may be used in certain circumstances.

Examples of portfolio investments that fit Cohanzick's Nexus criteria include Walgreens, Rio Tinto, Pepsi, Gap, and Oracle. The firm notes that investment grade bonds are especially susceptible to credit-negative events due to covenant packages that generally allow issuers to increase leverage with little limitation. It adds that shorting credit is currently particularly attractive because activity among activist investors is rising and companies often respond by increasing leverage, which is typically detrimental to investment grade bonds.

Structured Finance

'London whale' assessment released

The Office of Inspector General (OIG) for the US Fed and the CFPB has released its summary report of the supervisory activities related to the US$2.3bn credit derivatives losses of JPMorgan's chief investment office (CIO) in 2012. The purpose of the evaluation is to assess the effectiveness of supervisory activities and identify lessons learned for enhancing future supervisory activities.

By focusing on consolidated supervision, the OIG says its evaluation addresses an aspect of the 'London whale' story that has not been a focus of prior reviews released to the public. In particular, the summary report describes four findings and 10 recommendations that encourage the Fed to enhance its supervisory processes and approach to consolidated supervision for large complex banking organisations.

The first finding relates to a "missed opportunity" for the consolidated supervisor and the primary supervisor to discuss risks related to the CIO and to consider how to deploy the agencies' collective resources most effectively. Second, the report finds that Fed and OCC staff lacked a common understanding of the Fed's approach for examining Edge Act corporations - a disconnect that could result in gaps in supervisory coverage or duplication of efforts.

Third, New York Fed staff was not clear about the expected deliverables resulting from continuous monitoring activities. Enhanced clarity concerning the expected deliverables could improve the effectiveness of this supervisory activity, according to the OIG.

Finally, the New York Fed's JPMorgan supervisory teams appeared to exhibit key-person dependencies, which the OIG suggests heightened the agency's vulnerability to the loss of institutional knowledge.

Among the 10 recommendations outlined in the report is that the Fed's Division of Banking Supervision and Regulation (BS&R) enhance its supervisory processes and approach to consolidated supervision for large, complex banking organisations. Other recommendations include: developing best practices for transitioning supervisory staff or teams; clarifying the Fed's intentions and expectations regarding Edge Act entity supervision with the appropriate counterparts at the OCC; issue guidance detailing expectations for documenting and approving the deliverables of continuous monitoring activities, tracking identified issues and performing follow-up activities; issue guidance outlining the Fed's preferred approaches for mitigating key-person dependency risk on supervisory teams; and an assessment of whether the New York Fed needs to hire additional supervisory personnel with market risk and modelling expertise.

Both the Fed and the New York Fed have indicated that they have taken action or have planned activities to address the recommendations. The OIG will conduct follow-up activities to determine whether these actions fully address the recommendations.

Structured Finance

CLOs face risk retention questions

The recently-finalised risk retention rules (SCI 22 October) will remove a level of uncertainty that has hung over the US structured finance market since 2011, but raise new questions as to the market's direction going forward, Fitch suggests. The CLO and leveraged loan markets are expected to be profoundly affected by the move, while the new rules could help reduce uncertainty and support credit availability in the RMBS market.

In the short term, CLO fund managers are expected to accelerate issuance before the rules become effective. Over the long term, smaller CLO managers could struggle with the economics of risk retention requirements, which will bring into question their current business models. Larger managers will likely be able to cope with the changes, due to the greater diversity in their business models and more economic access to capital, but may expand their loan product offerings after the rules are implemented.

The 5% risk retention requirement translates to US$50m for every US$1bn of CLO assets under management issued after the effective date of the rule. Loan portfolio managers may elect to transition a portion of their loan management activity away from the securitisation markets towards separate managed accounts, comingled funds and retail funds that do not have these capital-intensive requirements and may offer more attractive economics. Fitch expects new innovative ownership structures to be proposed, which are designed solely to minimise the amount of capital required to manage CLOs in the future.

There is also an expectation that investors will have to re-assess their CLO investment thesis. Investors that currently invest in CLOs from smaller managers will likely no longer have that option after the rule goes into effect, while other investors will subsequently be limited to a smaller range of larger CLO managers.

If the US CLO market shrinks due to the increases in capital requirements and reduced demand from CLO investors, funding costs could rise for corporate issuers. Currently, US CLOs represent approximately two-thirds of the buyer base for new term loans and 40% of the institutional loan market's US$860bn of financing.

In contrast, Fitch believes that the rule reduces uncertainty for US RMBS market participants by effectively aligning the QRM definition with the QM rules released by the CFPB in January and removing the down payment requirement or other overlays. The final rule also does not distinguish between 'high-priced QM' and 'safe harbor QM', with both treated as QRM without any distinction.

An analysis by Fitch finds that the majority of post-crisis securitised mortgage production would meet QM rules and thus be treated as QRM and not subject to risk retention. Securitisations backed by non-QM mortgages will be subject to risk retention requirements, however.

The rules will go into effect for residential loans one year after their finalisation and two years after finalisation for all other asset types.

Structured Finance

Spanish mixed pool purchased

Sankaty Advisors and Starwood Capital Group have acquired, through a controlled affiliate, a €800m portfolio of secured and unsecured loans from BFA-Bankia Group. The portfolio is made up of two distinct types of loans: one part is secured against hotel collateral in Spain, with a concentration in resort locations; the other is a pool of syndicated and bilateral loans secured against Spanish EMEs, with a mix of collateral including real estate. The sale is believed to be the largest comprising such loans to be sold in Spain and the first to comprise both hotel and corporate loans.

The firms view the pool as one of the most attractive loan portfolios on Bankia's book and believe that their hospitality expertise and talented asset management team will allow them to maximise the value of the assets for the joint venture, while also capitalising upon strong local markets in Spain that have exhibited high growth and consistently robust tourism.

Copernicus assisted Sankaty and Starwood Capital Group in transaction due diligence. Copernicus will also act as the Spanish servicer for the portfolio post-acquisition, with Hatfield Philips International providing servicer interaction support.

Structured Finance

QRM provides 'meaningful incentives'

The final QRM standards provide meaningful incentives for banks to maintain quality underwriting and avoid certain riskier mortgage products, Fitch says. The agency believes that the rule should curb many practices that led to severe bank pressures during and after the financial crisis.

Nevertheless, the final QRM avoids minimum down payment standards originally proposed by regulators in 2011, thus providing mortgage originators considerable flexibility to lend to high loan-to-value (LTV) borrowers. Fitch suggests that this could modestly boost mortgage lending, with limited negative implications for banks' balance sheet exposure, as these loans could still be sold to RMBS trusts with zero percent risk retention. Any mortgage loans that are eligible for sale to Fannie Mae and Freddie Mac are automatically included under QRM, as long as the credit risk is ultimately borne by the US Treasury.

"The QRM rule aligns with each of the seven main features of qualified mortgage (QM) rules, which focus on a borrower's ability to repay and create a safe harbour for originators when loans fail," the agency observes. "Most notably, to qualify as both a QM and QRM, total debt-to-income for borrowers is capped at 43% and negative amortisation, interest-only and balloon loans are restricted."

Meanwhile, for banks originating CMBS, Fitch says the bar to be exempt from risk retention is relatively high compared to legacy regulatory underwriting guidelines. The risk retention rule limits commercial real estate loan LTVs at 65% and 70% for cumulative LTV. The current regulatory guidelines for commercial real estate loans are 85%.

Auto loans also have higher bars to be exempt from risk retention, such as meeting rules that include no 60-plus day delinquencies on any debt within the last 24 months and putting down or trading in at least 10% of the purchase price of the vehicle.

Fitch notes that regulators continue to favour loans with lower leverage and amortisation principal within a reasonable timeframe. For example, the leveraged lending guidance states that commercial loans should generally amortise 50% of principal within five to seven years. The risk retention rule is more proscriptive in that 50% of principal should be amortised in five years or less.

The agency also observes that the final rule provides no flexibility for securitisation sponsors to transfer retained risks. Additionally, the rule prohibits direct hedging of retained risk. However, indirect hedging is possible through macro hedges of similar asset classes or securities.

Fitch believes that indirect hedging is an important tool to reduce credit exposure in the case of systemic credit deterioration, but will not act as a perfect hedge against the risk. It adds that the ability to retain the 5% interest either in the form of a horizontal or a vertical tranche allows for some flexibility in structuring the economics and risk profile for various transactions.

Structured Finance

Second workshop added to SCI agenda

Only a few tickets remain for SCI's 7th Annual Securitisation Pricing, Investment & Risk Seminar. Over 200 attendees have registered for the event, which is being held tomorrow (29 October) at Bank of America's offices at 250 Vesey Street (formerly Four World Financial Center).

A further workshop has been added to the agenda, focusing on CLO valuations. The conference programme also 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. The other workshop will provide an in-depth review of non-agency RMBS pricing methods.

To attend the event, click here to register.

Structured Finance

Big list trades well

Yesterday's US$7bn legacy auction saw bonds generically trading at a couple of points higher than talk. Citi, Credit Suisse and Goldman Sachs are understood to each have bought about a third of the paper out for bid.

The liquidation, the largest observed year-to-date, comprised 507 US dollar-denominated bonds (totalling US$5bn current face) and 152 European securities (US$2bn) from a European bad-bank. The bid-list spanned ABS, CDOs, CLOs and non-agency RMBS, with RMBS accounting for US$4.6bn and 465 line items. The RMBS predominantly consisted of subprime and Alt-A collateral, with a sprinkling of prime FRM and ARM paper, as well as second liens and HELOCs.

Price talk on the largest subprime blocks was in the low-60s context on average, according to Interactive Data, although one Countrywide bond (CWL 2007-BC1 2A3) had guidance as high as the low/mid-80s area. The largest Alt-A ARM blocks had price talk ranging from 54 to 59, with IMSA2006-3 A7 talked the low/mid-40s area.

Greater diversity was observed for the largest Alt-A FRM blocks, with price talk for some Countrywide bonds (such as CWALT 2007-8CB A2) pushing as high as 90, while TBW 2007-1 A2 saw guidance as low as the mid-40s area. But the distribution was much tighter for prime ARM and prime FRM collateral. Price talk for the largest ARM blocks averaged 92 to 99, while it was concentrated at between 93 and 95 for the largest FRM blocks.

IDC notes that distribution appears to have been highly selective, with only four large dealers circulating price talk. The winning dealers are anticipated to sell the majority of the bonds on to investors, with re-offers said to emerge soon after the auction ended.

Structured Finance

Listed alternatives gaining traction

US$73bn of alternative assets is listed on the London and Amsterdam stock exchanges, according to Tom Skinner, head of research at Dexion. The sector has added a total of US$18bn in the last 12 months alone, comprising US$12.6bn through 22 IPOs and a further US$5.4bn from follow-on fundraises.

Half the IPOs have been credit and property funds, raising US$1.38bn and US$2.6bn respectively. The focus within credit has been on alternative sources of financing, while the focus within property has been on alternative property sectors, such as student accommodation and care homes.

Skinner notes that the highly regulated environment post-crisis and the consequent constraints on banks has led to a number of investment companies opportunistically launching to provide alternative sources of finance to borrowers or to work alongside banks to maintain their lending activities. "We believe that there is further scope for the listed credit investment fund universe to grow, especially for illiquid strategies, where there are premium returns available and gaining exposure to these strategies can be a challenge," he adds.

Technology and changing demographics have directly impacted alternative financing and property funds respectively, which have evolved their investment cases to take advantage of the opportunities they provide, according to Dexion Capital executive group md Ana Haurie. "All are about finding solutions to supply shortages and lack of adequate provision at a clearing price: SME loans, property loans, consumer loans, GP surgeries, student housing and residential. SMEs are the backbone of the UK economy and one of today's credit opportunities is about funding the companies, by either getting the banks to lend or disintermediating them through new lending channels," she observes.

Peter Denton, partner and head of European debt at Starwood European Real Estate Finance, concludes: "Alternative property lending is not about disintermediation of the banks; the banks have always been here. What is new is the entry of pension funds and other newcomers to the space."

CDS

Dynamic HY fund offered

AXA Investment Managers has launched a new fund that aims to take advantage of recent market volatility by investing in US high yield bonds, with a credit derivatives overlay. The AXA WF US Dynamic High Yield Bonds Fund will invest in companies with solid business models and improving credit fundamentals.

Fund manager Carl Whitebeck comments: "The fund's flexible approach will allow us to optimise our high yield exposure in order to reflect our top-down view. This new strategy builds upon our existing US core high yield strategy, but targets higher return potential in both neutral and bull markets via the CDS overlay, but with volatility closer to that of the broad high yield market."

In contrast to its traditional US core high yield strategy, the fund will take a lower number of positions, thereby investing in it credit analysts' highest conviction credit opinions. At the same time, this should allow the fund to better react to market moves in real time.

In addition, the fund has the ability to write single name CDS protection in order to add leverage while expressing positive views on individual issuers.

CDS

Sovereign CDS added to clearing roster

ICE Clear Credit has introduced clearing for Hungary and South Africa credit default swap instruments for dealer-to-dealer and client clearing, becoming the first CCP to clear Hungary and South Africa sovereign CDS. It now clears seven sovereign CDS names, while ICE Clear Europe clears four.

The CCP says it has cleared over US$680bn in gross notional amount in sovereign CDS instruments since it launched clearing for sovereign CDS in 2011. Buy-side clearing for sovereign CDS has seen strong growth totalling US$3.6bn so far in 2014 - up from US$47m for full-year 2013.

CMBS

Large loss forecast for Mango

The €51.75m Mango loan, securitised in the Talisman 6 Finance CMBS, looks set to suffer a loss of over 89% of its outstanding balance. This comes after a sale and purchase agreement was notarised last month to dispose of the last remaining property (Magdeburg) for €5.5m.

The Mango loan was transferred to special servicing on 28 April 2011 due to an LTV covenant breach and a failure by the borrower to provide an acceptable plan to rectify the breach (see SCI's CMBS loan events database). The borrower then failed to repay the loan in full at its maturity date in October 2013.

The Magdeburg property was re-marketed in July after the initial buyer failed to pay the purchase price of €5.5m, but a new SPA has been notarised with a new buyer for the same purchase price. The property was valued at €5.64m, as of 1 February 2013.

Net disposal proceeds from the sale are expected to be applied on the January 2015 interest payment date. Trepp estimates that the disposal will result in at least a principal loss of €46.25m, which would write down the class E and F notes completely and the class D notes by about €22.21m.

All outstanding loans in TMAN 6 are currently in default and have failed to repay in full at their maturity. The Pineapple loan paid off on the October 2014 IPD with a loss of €3.93m on the class F notes, while the €40.46m Cherry loan has no properties remaining and is awaiting a final loss to be applied to the notes.

CMBS

Valuation reporting examined

In an analysis of US CMBS loans greater than US$2m that became delinquent prior to 2014, Fitch has found that approximately 12% of its sample had stale appraisal values reported by the special servicer, compared to 10% this time last year. As of June, there were 2,541 loans in special servicing with an outstanding balance of US$42.3bn, according to the agency - a decline from 3,372 loans with an outstanding balance of US$57.7bn, as of June 2013.

Across special servicer portfolios, Fitch's analysis shows that 180 properties were in monetary default without valuations received within 15 months, as of end-2Q14. Only LNR Partners, Midland Loan Services and NCB demonstrated improved valuation reporting from the prior year.

LNR had 23 properties (4%) missing valuations in 2013, reduced to 18 properties (3%) in 2014. Midland had nine properties (26%) missing in 2013, with only four properties (22%) in 2014. NCB had one property missing a valuation both in 2013 and 2014, but the percentage of its portfolio that this represents dropped from 17% to 13%.

In contrast, Orix Capital Markets showed the highest percentage increase, with one property (18%) missing valuations in 2013 to three properties (50%) in 2014. Meanwhile, C-III Asset Management showed the highest increase in properties missing valuations, with 28 properties (7%) in 2013 rising to 49 (17%) in 2014. CWCapital Asset Management's figures rose from 28 properties (7%) to 44 properties (11%) respectively.

KeyBank Real Estate Capital's figures also increased substantially from six properties (26%) in 2013 to 18 properties (47%) missing valuations in 2014. Situs Holdings had 14 properties (19%) missing valuations in 2013, compared to 10 properties (24%) in 2014. Finally, Torchlight Loan Services had 22 properties (18%) missing valuations in 2013, increasing to 33 (26%) in 2014.

Fitch says it may take actions on servicer ratings in instances where a servicer is not obtaining valuations required by pooling and servicing agreements.

CMBS

Legal dispute hits Creekside loan

The US$25m Creekside Mixed Use Development loan, securitised in COMM 2014-UBS2, has become 60-days delinquent and entered foreclosure status. The loan was transferred to special servicing due to a legal dispute between the owner, Strathmore Development Co, and the loan trustee over unpaid reserve account funds.

CMBS strategists at Deutsche Bank note that the property is performing solidly: it remains well leased, with a current DSCR of 1.5x and an LTV of 74%. "While such legal issues can be drawn out, it is likely that the loan will eventually return to current status, given its strong current performance," they observe.

Fourteen other US CMBS loans securitised this year have incurred late payments over the last few months - including the US$100m Jordan Creek Town Center (securitised in JPMBB 2014-C18) and US$83m One Kendall Square (COMM 2014-LC15) loans, but none besides Creekside have entered special servicing yet. Indeed, the Deutsche Bank strategists note that 2014 vintage deals are generally performing well.

Insurance-linked securities

ILS capacity platform unveiled

Willis Capital Markets & Advisory has established Resilience Re, a new platform designed to simplify client access to catastrophe bond capacity. Clients are expected to benefit from cost efficiencies and expedited timelines to secure capacity.

Resilience aims to achieve these benefits in part from simplified processes and documentation for qualifying risks. The platform will provide access to dedicated reinsurance transformers with standardised reinsurance and securitisation processes, by either integrating with standard reinsurance placements or operating on a standalone basis.

Resilience will offer investors access to additional opportunities through a syndicated process. Investors may also benefit from meaningful secondary liquidity.

Risk Management

CVA service unveiled

Quaternion Risk Management and UBS Delta have teamed up to provide counterparty exposure, CVA/DVA analytics and reporting services to the financial and corporate community. Quaternion's risk engine and analytics have been integrated into UBS Delta to provide the CVA service. The two firms note that CVA and DVA pricing has become a mainstream valuation challenge and is no longer confined to large and sophisticated financial institutions.

RMBS

Japanese RMBS approach updated

Moody's is requesting feedback on a proposed update to its approach to rating Japanese RMBS. The proposed methodology follows an analysis of Japanese mortgage loan defaults over the past 30 years and aims to align the agency's approach with its global RMBS rating methodology, while taking into account the unique characteristics of the Japanese market.

Moody's expects the proposed changes to bring greater transparency, allowing market participants to more easily compare Japanese RMBS with RMBS issued in other jurisdictions. The portfolio analysis will, however, continue to focus on the same features of residential mortgages in Japan as the current methodology. Debt-to-income (DTI) and LTV ratios will continue to be used as key elements, with greater emphasis on DTI in the assessment of default frequency.

No triple-A rated notes are expected to be impacted by the potential change and only a very limited impact is anticipated for non-triple-A mezzanine notes. Any impact will be limited to one or two notches, with the majority of bonds moving in a positive rating direction.

Feedback on the proposal is invited by 25 November.

RMBS

SFR performance 'within expectations'

Moody's notes in its latest ResiLandscape publication that the performance of the five single-family rental (SFR) transactions that it rated from November 2013 to June 2014 remains within original expectations. The agency reports that the percentage of vacant properties since issuance has been low, at less than 10% in each transaction. The number of delinquent tenants in the underlying properties has also been low.

"As a result, the monthly rent revenue collected on the occupied properties has been stable. The transactions are also benefiting from housing price appreciation, which has increased the value of the homes underlying the transactions," Moody's observes.

The vacancy rates are generally lower than the 5%-10% range for the rental vacancy rates of the top-10 MSAs. A relatively high rate of 8.4% in Colony American Homes 2014-1 reflects the higher rate of lease expirations from May 2014 to July 2014 on the underlying properties compared to those of the other four SFR transactions.

Properties with delinquent tenants constitute less than 2% of the occupied properties underlying the transactions. The rate of tenant delinquencies served as a proxy for the strength of the manager's screening process, according to Moody's.

The monthly contractual in-place rent revenue collected, as of August 2014, is steady at 93%-102% of the cut-off monthly rent revenue. The agency expects the average rent revenue in the rated transactions to remain stable because of the high demand for rental properties and the low home ownership rate compared with historical levels.

At the current level, monthly revenue amounts to about four times the monthly distribution and is sufficient to service the debt in each of the transactions. Moody's says that although operating expenses are within its expectations, expenses will need to be contained so that the transactions can maintain their DSCRs.

The properties in the transactions are concentrated in a few MSAs: the current distribution of the top MSAs represent at least 10% of the underlying properties in the five transactions combined. Housing prices in most of these MSAs have risen by double-digits since 2009.

The five rated transactions are backed by SFR properties whose aggregate value, as measured by the broker price opinion (BPO), is greater than the trust balance. By adjusting the properties' valuation for home price appreciation and rehabilitation costs, Moody's suggests that the transactions have a trust balance-to-BPO value range of 70%-75% and a trust balance-to-Moody's Value range of 88%-92%.

The transactions have an underwritten net debt cashflow yield in the range of 5.72%-7.86%. For each transaction, a low debt yield period is triggered if the debt yield falls below 85% of the starting debt yield.

Finally, the class A senior certificates have an advance rate range of 44%-53%, while the class D junior tranches' is 71.4%-74.8%.

RMBS

New CRT breed debuts

JPMorgan is in the market with its inaugural risk-transfer RMBS, dubbed JP Morgan Madison Avenue Securities Trust Series 2014-1. The US$989.13m deal will simulate the behaviour of a US$989m pool of JPMorgan-originated mortgage loans, with the objective of private investors sharing credit risk with Fannie Mae.

"The notes and certificates will be subject to the performance of the mortgage loans originated by JPMorgan and sold to Fannie Mae and, as such, are intended to simulate the repayment behaviour and credit risk of private-label US RMBS bonds," Fitch explains.

However, the agency notes that there are several key differences between this transaction and Fannie Mae's CAS programme. Most notably, the bonds will be issued by a special purpose trust, whose security interest consists of the cash collateral account (CCA), an interest account, a retained interest-only strip and a reserve account - all of which will be used to pay principal and interest on the notes.

Fitch has assigned a preliminary triple-B minus rating to the US$19.78m 10-year class M1 notes. The capital structure also includes an unrated US$942.15m class AH reference tranche, US$27.2m class M2 notes and US$989.13m class XIO certificates.

The pool represents 3,792 mortgage loans originated by JPMorgan in June-August and sold to Fannie Mae during 3Q14 that meet the GSE's eligibility criteria. The collateral consists of prime-quality, 30-year fully amortising and fully documented fixed-rate mortgages to borrowers with strong credit profiles and low leverage. Fitch says that the pool is also geographically diverse.

The issuer will acquire the underlying mortgage loans from JPMorgan and simultaneously sell them to Fannie Mae, to be held in a newly-issued Fannie Mae guaranteed MBS. The issuer will retain an IO strip of 26.88bp off the mortgage pool and will issue the class M1, M2 and XIO notes. Payments to the class M2 and XIO notes are subordinated to the class M1 tranche.

Proceeds from the sale of the class M notes will in turn be deposited in the CCA. Amounts received from the retained IO strip will be deposited in the interest account.

Payments will also be made to Fannie Mae from the CCA with respect to mortgage loans that become 180 days or more delinquent, or as to which certain other recourse events occur. The issuer will make payments to Fannie Mae for recourse events, based on the loan balance at the time multiplied by the fixed loss severity. The total recourse obligation to Fannie Mae payable by the issuer will initially equal 4.75% of the mortgage pool balance.