Contents

CLOs

Quiet CLO market looks ahead

The European CLO market has remained quiet over the last week. A sizable list due to trade on Wednesday could liven it up.

"It has been really quiet again," says one trader. "We have been looking increasingly at US paper because the supply in Europe has been weak."

A lot of the reduced activity in Europe's markets has been attributed to the ECB - which is expected to meet this week to finally sign off on its ABSPP (SCI passim) - but Wednesday's list will consist on non-eligible paper, the trader suggests. He describes the paper as "a mixed bag from a legacy seller" and suggests that it will be interesting to see how it trades.

"Otherwise volume has been muted. BWIC activity has been down a bit and with the end of the year approaching, it might remain like this for the next few weeks," says the trader.

SCI's PriceABS data captured a number of European CLO tranches out for the bid in the final session of last week. There were DNTs for tranches such as ADAGI III-X A3, EUROC VII-X SUB and JUBIL I-RX F.

Other tranches were covered successfully, however. Among them was the CRNCL 2007-2X SUB tranche, which was talked between the high-40s and 59 and was covered at 49. The tranche was covered in September in the low-60s.

Another sub tranche - H1776 2006-1X SUB - was covered in the low/mid-80s. That is the same level it had been covered at on Wedensday.

One more cover price recorded by PriceABS was at 97 for HSAME 2006-IX E. That tranche was talked at 96, in the mid/high-90s and in the high-90s. It has appeared in PriceABS several times, but its previous recorded cover was on 27 September 2013 at 90.

JL

CMBS

Large lists lift Euro CMBS

European CMBS secondary supply is being boosted by sizeable bid-lists, with paper trading today and set to trade tomorrow as well. A degree of weakness seems to have set in, with enhanced supply likely to exacerbate that.

"There is hardly any client activity and right now it feels pretty weak, but the BWICs keep coming in decent size. Some of the names out today are pretty interesting but mainly this is all very tight paper," says one trader.

"There is some very tight Irish stuff out. Mainly what we are seeing is paper that trades at a very tight bid-offer, so the hedge funds will not be falling over themselves."

The trader notes that the ECB's ABSPP announcement, expected on Thursday, continues to dominate investors' attention. However, he is sceptical that much will change.

"Clients have been using this announcement as an excuse not to buy paper but I do not think the announcement will drop any bombshells. It is likely to be quite low-key and just confirm what we already know, so I think clients will need another excuse," says the trader.

He continues: "There is nothing to say that people will not keep holding fire for the next announcement after this one, or the one after that. With that said, however, it is often just when you think spreads will keep tightening that instead they widen and perhaps it is just when client activity seems to be done that they will suddenly become active again."

SCI's PriceABS data shows some activity already this week. Among the tranches out for the bid in Monday's session was TAURS 2013-GMF1, which was covered at 102.65.

Yesterday's session also included Italian paper such as the DECO 2014-GNDL A tranche, which was talked at 100 and 100.35, and German paper such as the STAB 2007-1 E tranche, which was talked at 30 and in the low-30s. The Infinity Soprano A tranche was talked at 95.9, 96, low-96 and 96.25.

JL

CMBS

CMBS supply up, spreads wider

US CMBS spreads widened out a little yesterday as BWIC supply picked up from the quiet start to the week. SCI's PriceABS data captured a couple of pre-crisis names as well as a list of post-crisis ones.

BWIC volume for the session was over US$270m. Among the CMBS 1.0 tranches contributing to that total was BACM 2006-4 A1A, which was talked at around 80 and in the 80s.

The JPMCC 2005-CB11 A4 tranche was talked at 100.27 and in the low/mid-300s. It had been talked last month at 100.41 and its last recorded cover was at plus 140 on 12 May.

The bulk of the supply picked up by PriceABS came from post-crisis names. The only one of those which was not covered was the GSMS 2011-GC5 D.

MSBAM 2013-C10 A3 and MSBAM 2013-C12 A3 were each covered at 78. Price talk on each tranche had been in the mid/high-70s and the latter tranche had previously been covered on 20 December 2013 at 87.

The WFRBS 2013-C17 A3 tranche made its first appearance in PriceABS. It was talked in the high-70s and covered at 78.5.

COMM 2013-CR11 A3 was talked in the high-70s and covered at 79. Its only previously recorded cover was at 92.9 on 20 December 2013.

WFRBS 2013-C18 A4 was another tranche to be talked in the high-70s and covered at 79. Like the previous WFRBS tranche, it had not previously appeared in PriceABS.

A price of 80 was recorded for the COMM 2013-LC13 A4 tranche. It was also talked at around 80 and had been covered at 88 on its previous PriceABS appearance, which was on 20 December 2013.

MSC 2011-C3 E was covered yesterday at 224. It had previously been covered at 323 on 12 December 2013 and before that was covered at 485 on 18 September 2012 and 596 on 15 August 2012.

Also covered at 224 was the WFRBS 2011-C5 E tranche. Price talk on that tranche was in the mid/high-200s and in the low-300s at the start of the year and it was covered on its PriceABS debut at 480 on 18 September 2012.

JL

RMBS

AON lists boost NA

US non-agency RMBS secondary supply climbed yesterday as BWIC volume approached US$800m. Several lists were presented all-or-none and SCI's PriceABS data reveals a significant number of covers.

Supply captured by PriceABS was overwhelmingly from 2004-2007 vintage deals. Among these was the CWALT 2004-J11 M tranche, which traded.

A US$17.87m piece of the CWHL 2004-R² 1AS tranche was also out for the bid yesterday. Although it was one of the session's few DNTs, price talk had been in the mid-12s.

ABFC 2005-HE2 M3 was one of many 2005-vintage deals out for the bid. It was covered yesterday at 90.

Both AMSI 2005-R7 M2 and AMSI 2005-R8 M2 were covered at 88, as were the ECR 2005-3 M3, NHEL 2005-2 M2 and INABS 2005-C M1 tranches. The INABS 2005-C M2 tranche, meanwhile, was covered at 78 handle.

There was a cover in the low-90s for a US$14.332m piece of the CWALT 2005-57CB 4A3 tranche, while CWL 2005-8 M2 was covered at around 98. A piece of the CWALT tranche had been covered at 89 in June.

MABS 2005-HE2 M2 was covered at 87, while NCHET 2005-3 M3 and RASC 2005-KS10 M2 were each covered at 86. The GSAMP 2005-HE4 M3 tranche was covered at 81 and the PPSI 2005-WHQ4 M2 and SGMS 2005-OPT1 M2 tranches were both covered at 80, while NCHET 2005-4 M3 was covered at 78.

Away from the 2005-vintage names, a US$7.954m piece of the RALI 2006-QA8 A1 tranche was talked at 78 handle and in the mid/high-70s and was also traded. The tranche was being talked in the mid-70s on 17 June.

There was also a US$6.59m piece of the WAMU 2006-AR17 1A tranche out for the bid. That was talked in the low-80s and successfully traded, having also been talked in the low-80s in July.

SAMI 2006-AR² A2 was another interesting 2006-vintage name from yesterday's session. It was covered in the low-40s.

Of the other names of interest, a US$7.175m piece of the GSAA 2007-4 A1 tranche was covered in the low/mid-50s, while there was a cover in the low/mid-70s for the LXS 2007-3 1BA1 tranche. WAMU 2007-OA3 2A, meanwhile, was talked in the low/mid-80s and was traded, with price talk in August having been slightly higher, in the mid-80s.

As for post-crisis names, BCAP 2012-RR5 4A8 was covered in the 90 area. The CMLTI 2012-A B tranche meanwhile was covered in the low/mid-90s, having previously been talked in the low/mid-80s on 24 October 2013.

JL

Structured Finance

ECB wait continues

While most of the market is waiting for the ECB, a European CLO list of non-eligible paper has been announced for the middle of the week. "That is a mixed bag from a legacy seller; it is not the kind of paper we normally look at, but it could be interesting," says one trader.

Beyond that, the trader suggests BWIC volume will remain muted for a while as the market continues to wait-and-see. "All eyes seem to be on the ECB now, so it will be interesting to see what happens at the end of the week," says the trader.

"I think there is a meeting scheduled for Wednesday or Thursday, so we have a little longer to wait yet. I should think that will be when we get the final sign-off."

CMBS

CMBS supply keeps coming

Sizeable European CMBS BWICs today and tomorrow are keeping the market active in the run-up to the much-anticipated announcement from the ECB. For all the activity, the central bank's update on Thursday remains the market's primary focus.

"There is hardly any client activity and right now it feels pretty weak, but the BWICs keep coming in decent size. Some of the names out today are pretty interesting but mainly this is all very tight paper," says one trader.

"There is some very tight Irish stuff out. Mainly what we are seeing is paper that trades at a very tight bid-offer, so the hedge funds will not be falling over themselves."

Secondary markets

Euro ABS/MBS BWIC focused ahead of the ECB

A healthy supply of BWICs is focusing the European markets' attention today, but the expected ABSPP announcement will inevitably cause some distraction.

"The tone is generally positive this morning across secondary markets, but it's going to be mainly a BWIC day today," says one trader. "There are quite a few auctions attracting everyone's attention, but this afternoon's big eclectic list is perhaps the main focus right now."

At the same time, the trader adds: "Everyone is obviously keeping one eye on the ECB and expecting confirmation today of the ratification of its rules to enable ABSPP. Then, we anticipate buying to start tomorrow."

Secondary markets

US CLO equity robust

It's been a strong morning for the US CLO market with equity pieces in particular trading robustly.

Traders report that equity slices offered on BWIC today so have primarily traded well. "The generic optionality trade for 1.0 equity in particular is there," says one trader. "Such pieces are actively being sought after and people are bidding aggressively."

Consequently, the equity list at 14:30 today, mentioned earlier, is expected to also go well. "We will certainly be looking at it closely," the trader adds.

Secondary markets

More of the same for European ABS/MBS

The European secondary markets remain fixated with the ABSPP and so expectations are for the same trading patterns to continue until the buying starts.

Yesterday saw a more active day than of late in European ABS/MBS but the end result was once again spread tightening in ECB-eligible paper. Today looks to be slightly busier still, but little else is expected to change.

"There are a few more lists today, but it's more of the same in terms of content - peripheral and UK non-conforming RMBS, some CMBS and CLOs," says one trader. "Most trading remains focused around the ABSPP and while we don't know the exact timing all the indications are it's imminent, so that focus isn't going to change any time soon."

Secondary markets

European eclectic list circulating again

A 37 line €276.502m BWIC is circulating for trade next Wednesday at14:00 London time. The list incorporates a wide range of assets - ABS, CDOs (including Trups and CFO deals), CLOs, CMBS and RMBS - many of which appeared on an eclectic list where most items failed to trade on 17 September.

There are two ABS deals on the list - CHAPE 2007 F and ITALF 2005-1 A. CHAPE 2007 F did not trade on 17 September list, whereas ITALF 2005-1 A wasn't on that list, but has most recently covered on PriceABS at 99.16 on 24 September.

The CDOs on the list are: DEKAE III-X D, DEKAE III-X F, DEKAE II-X A2A, DEKAE II-X D1, DEKAE I-X A2, DEKAE I-X E, DSFIN 2006-1 A2, FAB 2003-1 A1E, FAB 2003-1 C2, SCCFO 2006-1X A, SCCFO 2006-1X B and SCCFO 2006-1X C. None of which have traded with a price on PriceABS in the last three months, though they did all DNT on 17 September.

The SME CLOs are: CBMEZ 2006-1 E, CBMEZ 2006-1 F, GATE 2006-1 F, HEATM I-05 B1, HEATM I-07 B, PREPS 2005-2 B1, PREPS 2005-2 JR, PREPS 2006-1 B1 and SMARS 2006-1 E. None of which have traded with a price on PriceABS in the last three months, but again they did all DNT on 17 September.

The CMBS on the list are: EPICP BROD C, INFIN SOPR A, MESDG CHAR B, STAB 2007-1 E, TITN 2006-3X C and TMAN 5 A. STAB 2007-1 E and TITN 2006-3X C DNT's on 17 September. However, INFIN SOPR A and MESDG CHAR B have subsequently traded on PriceABS covering most recently at 96.66 on 10 October and 97.08 on 23 September respectively.

The RMBS deals on the list are: APULM 4 A, CRSM 12 B, HIPO HIPO-10 A2, MONAS 2006-I A2, PRS 2006-1A A2C, TDA 27 E, TDAC 5 A and UCI 9 A. CRSM 12 B and TDA 27 E did not trade on 17 September. However, four of the other bonds have subsequently traded on PriceABS with a price, covering most recently as follows APULM 4 A at 98.71 on 23 September; HIPO HIPO-10 A2 at 90.75 on 27 October; MONAS 2006-I A2 at 93A on 17 October; and TDAC 5 A at 97.11 on 7 October.

Secondary markets

Strong day for US RMBS

The US non-agency RMBS market is seeing heavy BWIC volume and strong trading today after a disjointed and relatively quiet week following the public holiday on Tuesday.

There is over $1bn of paper scheduled for trade today across all non-agency RMBS deal types. Sellers are coming from across the board too with lists being seen from liquidations, money managers and hedge funds. So far today the market has traded strongly with prices staying firm and less than 30% of DNTs, which is a usual level on good days.

One particular type of auction is gaining traction at the moment. "We're seeing an increasing number of AON lists from US money managers," says one trader. They are smaller than the large AON lists we've been seeing from Europe but they are proving popular, with more and more sellers mimicking them, because it offers easier execution. At the same time, they typically involve higher dollar price bonds, which are easier to analyse and attract a wider range of buyers."

Secondary markets

Europe stays patchy

European core and peripheral bonds across deal types continue to trade well where they do trade, but activity remains patchy and looks set to carry on that way.

"It's very quiet and I think it's more than just people waiting on the ECB," says one trader. "A lot of trading desks have essentially closed for the year and are not looking to do very much. I can only see it getting quieter into Thanksgiving week barring any kind of major increase in global risk."

There does, however, continue to be some patchy activity around legacy desks tidying up their books. The re-issue of the eclectic BWIC from a bad bank, mentioned yesterday and due to trade on Wednesday, is a case in point. "They didn't hit their reserves in September and are trying again, but they really need to decide whether they want to hold on to the bonds for the option value or sell at the market price to clean up their positions," the trader says.

ABS

Unique exchange odds increase

Enterprise Inns' latest results show income growth across the portfolio. With portfolio performance stabilised, the likelihood that the firm will look to reduce the amortisation profile on its Unique securitisation through a tender or exchange programme has increased, say Barclays Capital analysts.

Enterprise Inns is now having to buy back debt above par in the securitisation. It will also want to have greater discretion on use of free cash flow.

However, despite solid results and the increased likelihood of a Unique restructuring, the analysts continue to see better value in Punch. After Punch's restructuring, the pricing and revaluation of its securitisation should proceed in two phases.

"First, that pricing on the bonds would catch up with the comparable Unique bonds given similar if not better quality of pubs after disposal of non core. A key catalyst we think for this re-rating of the bonds will be the recruitment of a credible ceo," say the analysts.

"Secondly, that the Punch bonds should start to price in the probability of a further refinancing / restructuring in two years time in the senior bonds since the current structure does not allow Punch to pay dividends out of its securitisations (SCI 12 November). Although in the Punch B class As the values are already in phase two (pricing having surpassed Unique comps), we still think the Punch A class As offer catch up potential before starting to price in refinancing."

Punch A class A1Fs have lower leverage, for very similar returns as the Unique class A3s. The analysts identify 4 points upside from the current level of 115 if it were to price consistently with the Unique A3s leverage.

The Punch A class AVs have yield pick-up relative to the Unique A3s but price in line with the Unique A4s on a yield basis. However, the analysts note that the AV bonds should have a significantly shorter WAL, since they prepay out of excess cash. That would suggest they should price in line with the AFs, which implies at least 10 points of upside to current levels.

The expectation is that Punch will refinance in two years, limiting price appreciation potential for the mezzanine and junior bonds, which all have the option to be called at par. Punch A M3s would return a 620 DM or 565 DM to scheduled maturity if they are called in two years, which is attractive relative to the junior Unique class Ns, the analysts note.

JL

Structured Finance

SCI Start the Week - 17 November

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

Pipeline
A lot of deals joined the pipeline last week, with a strong line-up of ABS leading the way. There were 11 ABS, as well as one ILS, three RMBS, three CMBS and four CLOs.

The ABS were: US$530m American Homes 4 Rent 2014-SFR3; US$750m CIT Equipment Collateral 2014-VT1; US$1.61bn Ford Credit Auto Owner Trust 2014-C; US$145m Gold Key Resorts 2014-A; US$151m Golden Credit Card Trust series enhancement notes; US$152.5m Indiana Secondary Market For Education Loan Series 2014; US$350m KAL ABS 15; US$758m Navient Student Loan Trust 2014-8; US$204m Oxford Finance Funding 2014-1; €1.5bn Sunrise Series 2014-2; and £275m Temese Funding 2.

The ILS was US$100m Residential Re 2014-2 and the RMBS were €787m Arena NHG 2014-II, Auburn Securities 8 and A$400m Liberty Series 2014-2 Trust, while US$1.44bn CDGJ Commercial Mortgage Trust 2014-BXCH, US$504m JPMCC 2014-FL6 and US$875m WFRBS 2014-C25 accounted for the CMBS. The CLOs consisted of €375m Arbour CLO II, US$465.4m Catamaran CLO 2014-3, US$500m Northwoods Capital XIV and US$861.75m OHA Loan Funding 2014-1.

Pricings
A considerable number of deals also printed. The week's issuance consisted of seven ABS, two ILS, three RMBS, three CMBS and four CLOs.

The ABS were: US$1bn AmeriCredit Automobile Receivables Trust 2014-4; US$1bn American Express Credit Account Master Trust Series 2014-4; US$516m American Express Credit Account Master Trust Series 2014-5; US$260m Diamond Resorts Owner Trust 2014-1; £1.6bn Gracechurch Card Programme Funding Series 2014-2; C$454m MBARC 2014-A; and US$826m Synchrony Credit Card Master Note Trust Series 2014-1.

The ILS were US$350m Kilimanjaro Re Series 2014-2 and US$350m Ursa Re 2014-1. As for the RMBS, those consisted of A$500m Avoca Series 2014-1, £200m Precise Mortgage Funding 2014-2 and US$341.71m Sequoia Mortgage Trust 2014-4.

US$463.9m MSCI 2014-MP, US$550m NYCHDC 2014-8SPR and US$725m Starwood Retail Property Trust 2014-STAR accounted for the CMBS. Lastly, the CLOs were US$609m Dryden 36 Senior Loan Fund, US$411m Jamestown CLO V, US$411m Ocean Trails V and US$722m Octagon XXII.

Markets
US non-agency RMBS secondary supply was fairly strong last week, including nearly US$800m in BWIC volume on Thursday, as SCI reported (SCI 14 November). Many of the bid-lists from that session were presented all-or-none, with SCI's PriceABS data revealing a significant number of covers.

In the US CMBS market, secondary spreads widened out in mid-week as BWIC supply began to pick up (SCI 13 November). BWIC volume for Wednesday's session was over US$270m, with a bias toward post-crisis paper.

Deal news
• In light of Punch's latest results, Punch A bonds continue to offer better value than Punch B across the capital structure, say Barclays Capital analysts. While both Punch A and Punch B may be refinanced in a couple of years, Punch B seniors are pricing in some probability of refinance already.
• November remittances so far suggest that BSCMS 2005-PW10's delinquent pipeline has been cleaned out, while JPMCC 2007-CB19 appears to have been hit by unusually large interest shortfalls.
• The sale of the final four properties of the £25.86m Workspace Portfolio loan, securitised in Eclipse 2007-1, has been completed for a purchase price of £8.6m. Trepp notes that expected net recovery proceeds will likely result in a principal loss of at least £17.26m, resulting in the full write-down of the class D notes and a partial write-down of the class Cs.
• BNP Paribas has assigned its investment manager obligations for the Kintyre CLO I and Gillespie CLO transactions to BNP Paribas Asset Management. The novation deeds received the consent of 100% of the noteholders. Moody's has confirmed that the move will not affect the current ratings of the notes.
• Five-year CDS on Caesars Entertainment Operating Company spiked 50% yesterday to an all-time wide, says Fitch Solutions. The change follows news that the company has reached an agreement with creditors that would include bankruptcy.
• Five-year CDS on Genworth Financial are pricing 143% wider compared to a week ago, according to Fitch Solutions. This comes after the company reported a reserve charge of over US$500m relating to its struggling long-term care business and the potential for further charges in 4Q14.

Regulatory update
• The US CFTC has further implemented the trade execution requirement for certain interest rate and credit default swaps. The Commission previously provided no-action relief for certain swaps required to be traded on a swap execution facility (SEF) or designated contract market (DCM) to the extent that those swaps were part of a package transaction.
• ISDA has opened the ISDA 2014 Resolution Stay Protocol for adherence. Eighteen major banks have signed it at launch, as they pledged to do last month (SCI 13 October).
• SFIG has established a new working group: the High Quality Securitization (HQS) Task Force. The HQS Task Force will serve as the forum through which SFIG will respond to recent initiatives that seek to define 'qualifying securitisations', such as the EBA's recent discussion paper on simple standard and transparent securitisation (SCI passim).

Deals added to the SCI New Issuance database last week:
Ally Master Owner Trust Series 2014-5; AMMC CLO XV; Bank of the West Auto Trust 2014-1; Bumper 6 (NL) Finance; Carlyle Global Market Strategies CLO 2014-5; CarMax Auto Owner Trust 2014-4; Chase Issuance Trust 2014-7; Colony Multifamily Mortgage Trust 2014-1; Covenant Credit Partners CLO II; Cronos Containers Program I Series 2014-2; CSMC 2014-TIKI; FCT Opera 2014; First Investors Auto Owner Trust 2014-3; FREMF 2014-K40; FREMF 2014-K503; Hawaii Green Energy Market Series 2014-A; Intu (SGS) Finance series 3; Invitation Homes 2014-SFR3 Trust; NextGear Floorplan Master Owner Trust series 2014-1; OCP CLO 2014-7; Paragon Mortgages 21; Securitised Australian Mortgage Trust 2014-1; SMART ABS Series 2014-4 Trust; SoFi Professional Loan Program 2014-B; TMSQ 2014-1500; World Financial Network Credit Card Master Note Trust Series 2014-C; Ziggurat CLO

Deals added to the SCI CMBS Loan Events database last week:
BACM 2001-1; BACM 2004-5; BACM 2004-6; BACM 2005-2; BACM 2006-2; BACM 2007-1; BACM 2007-2; BSCMS 2005-PW10; CD 2006-CD3; CGCMT 2004-C2; CGCMT 2007-C6; COMM 2005-C6; COMM 2006-C7; COMM 2006-C8; COMM 2013-LC13; CSFB 2003-CPN1; CSFB 2004-C1; CSFB 2005-C1; CSFB 2005-C6; CSMC 2006-C4; CSMC 2007-C1; CSMC 2007-C4; CSMC 2007-C5; CWCI 2007-C3; DECO 2006-E4; ECLIP 2006-2; ECLIP 2007-1; EURO 28; FUBOA 2001-C1; GCCFC 2005-GG3; GCCFC 2005-GG3 & MSC 2005-HQ5; GCCFC 2007-GG11; GECMC 2003-C1; GMACC 2004-C1; GMACC 2004-C2; GSMS 2005-GG4; GSMS 2006-GG8; JPMBB 2014-C22; JPMCC 2005-LDP1; JPMCC 2006-CB16; JPMCC 2006-LDP7; JPMCC 2006-LDP9; JPMCC 2007-CB19; JPMCC 2007-LDPX; LBUBS 2005-C1; LBUBS 2005-C7; LBUBS 2006-C1; LBUBS 2006-C6; LBUBS 2007-C7; MLCFC 2006-2; MLCFC 2007-5; MLCFC 2007-8; MLMT 2007-C1; MSBAM 2013-C12; MSC 2005-HQ5; MSC 2005-IQ10; MSC 2005-IQ9; MSC 2006-HQ9; MSC 2007-HQ13; MSC 2007-IQ14; TITN 2007-1; TITN 2007-CT1; WBCMT 2005-C17; WBCMT 2005-C17 & WBCMT 2005-C18; WBCMT 2005-C20; WBCMT 2005-C21; WBCMT 2006-C26; WBCMT 2006-C27; WBCMT 2007-C32; WFCMT 2013-BTC; WFRBS 2012-C7

Structured Finance

Two added to head fund

Nomura Asset Management has added Richard Hodges and Ben Bugg to its global fixed income team. They will head the Global Dynamic Bond Fund, which Nomura plans to launch in early 2015.

Hodges joins NAM from Legal & General Investment Management (LGIM), where he held the role of head of high alpha fixed income. During his tenure, Hodges launched and managed the company's Dynamic Bond Trust.

He arrives with more than 25 years' experience, having begun his career at Chase Manhattan Bank and Natwest Investments. Hodges also served as head of pan-European portfolio construction at Gartmore Investment Management, managing a range of fixed income strategies.

Bugg was an assistant fund manager at LGIM in its high alpha fixed income team, working across a range of strategies, including the Dynamic Bond Trust.

The fund will invest across a full range of fixed income securities. The investment remit includes MBS and ABS from a total of about 10 asset types that the fund could hold.

Structured Finance

Structured head appointed

Munish Varma has rejoined Deutsche Bank in London to lead structured solutions in its loans and deposits group. He was previously at Nomura, where he was global head of structured credit.

CDS

Bank bags new team

Toronto-Dominion Bank has hired a structured products team from Scotiabank to lead a new US-based sales group for its derivatives business. The team is headed by Tim Andrews, md and head of Scotiabank notes desk.

Andrews will join in January as a securities md. He will report to Todd Hargarten, md at TD Securities, in Toronto.

Chris Obalde and Mark Quaglia have joined as directors. Obalde was a director and head structurer at Scotiabank, as well as a desk lawyer for the US notes desk. Quaglia was a director and OTC equity derivatives specialist for the company.

In addition, Alexandra Nino arrives as vp and Joe Hemmes as an associate. All five worked for Scotiabank's structured products and equity derivative sales business in the US, which was headed by Andrews.

CLOs

CLOs transferred in-house

BNP Paribas has assigned its investment manager obligations for the Kintyre CLO I and Gillespie CLO transactions to BNP Paribas Asset Management. The novation deeds received the consent of 100% of the noteholders. Moody's has confirmed that the move will not affect the current ratings of the notes.

For information on other recent CDO manager transfers, see SCI's database.

CMBS

Blackrock add CMBS researcher

Blackrock has added Deniz Yegenaga to focus on CMBS in its London-based research team. Yegenaga arrives after eight years at Moody's, where she rated CMBS transactions as an analyst in the agency's structured finance group.

CMBS

Greystone adds in CMBS

Gregory Krafcik has joined Greystone as md, based in Atlanta and reporting to Robert Russell, head of production for the firm's CMBS Group. Krafcik will focus on originating new loans and establishing a stronger CMBS presence for Greystone in the Southeastern US.

He arrives from Prudential Mortgage Capital Company, where he led the Southeast commercial mortgage originations team across the CMBS, life insurance and agency loan platforms. Prior to his tenure at Prudential, Krafcik worked as a business strategy consultant for the financial services sector at Accenture.

Insurance-linked securities

ILS experts join firm

Todd Winchel and Robert Quinn have joined Wilmington Trust's global capital markets division to lead the insurance collateral solutions business. Winchel will lead the unit's product management while Quinn will head client development.

Winchel arrives from Wells Fargo, where he was svp in corporate, municipal and escrow services. Previously, he was vp of corporate and insurance trust services at the BNY Mellon.

Quinn also joins Wilmington from Wells Fargo, where he was svp of business development for corporate, municipal and escrow services. Before that, he was vp of business development for corporate trust at BNY Mellon.

RMBS

Hogg joins B2R

B2R Finance has named Jason Hogg as ceo. He will provide strategic direction to support B2R's expansion, building a platform of products and services to accommodate the demands of residential investors.

Hogg has held a number of senior positions, including president of American Express Serve Enterprise, coo of Medsite and chief business development officer for MBNA Canada. He is also the founder of alternative payment company Revolution Money.

B2R is owned by Blackstone Tactical Opportunities. It was established last year to provide residential buy-to-rent mortgages for property investors, focusing exclusively on single-family home investors (SCI 18 November 2013).

ABS

GE regs 'mildly negative' for SLABS

The recent US gainful employment (GE) regulations focusing on for-profit colleges and schools are mildly negative for US student loan ABS, according to Fitch. Affected loans comprise less than 10% of current Fitch-rated federal and private student loan ABS trusts. The agency says that, as GE is unlikely to affect funding until 2017 at the earliest, new ABS deals will avoid these types of loans.

Announced by the US Department of Education (DOE), GE's objective is to lower student loan burdens and help ensure that recent graduates secure salaries that are sufficient to service their loans. The regulations could cause some schools or programmes to close due to lack of funding, while having marginal ramifications for existing borrowers.

Under the new rules, schools will qualify for federal aid if their graduates' loan payments are less than 8% of graduates' annual income or 20% of their discretionary income, with no more than a 30% default rate on the loans overall. Programmes with high debt-to-earnings ratios and high programme-level cohort default rates would lose eligibility for three years.

As the rules will not go into effect until 1 July 2015, they are unlikely to begin affecting college funding until late 2017 or early 2018, says Fitch. The agency believes that career training programmes have the highest risk of losing funding as the DOE estimates that a quarter of these 5,500 programmes would fail to meet the standards if the rules were implemented today. These rules also apply to some non-profit institutions.

ABS

Beneficial merger mooted

Perella Weinberg Partners plans to merge its Flagship Credit Acceptance and CarFinance Capital auto lending units into one company. Moody's says in its latest Credit Outlook that the merger would be credit positive for the subprime auto loan ABS that the companies sponsor because the larger combined entity would likely be more creditworthy than two separate entities.

Future loan pools that the combined company securitises would have additional geographic diversification, reducing regional concentration risk in the ABS deals, according to the agency. CarFinance's direct lending channel also gives the combined company a presence in the direct lending market.

Perella would continue to manage the combined company, although details about the planned capital structure for the new company remain unclear. Perella has shown a continued commitment to the subprime auto sector, such as with past equity investments in Flagship and CarFinance totalling about US$230m.

Moody's believes that the new company would have a combined loan portfolio of around US$1.8bn - funded primarily through securitisation - which would increase its long-term sustainability through operational efficiencies in servicing and possibly better funding costs. It adds that although merging two servicing platforms typically introduces short-term servicing disruptions, the long-term benefit of having one servicing platform outweighs the short-term negative effect.

Flagship and CarFinance currently target subprime borrowers with similar credit profiles. These borrowers tend to have stronger credit characteristics than the customers of other subprime auto lenders. The weighted average credit scores of the underlying borrowers in CarFinance securitisations range between 599 and 607, while scores in Flagship securitisations range between 593 and 595.

Moody's adds that the similar origination platforms of Flagship and CarFinance would also allow the combined company to scale up servicing and origination, without sacrificing underwriting standards.

ABS

Seasoning to stabilise credit cards

The quality of assets underlying US credit card ABS is expected to begin normalising in 2015. This is in spite of delinquencies and charge-offs increasing from current levels, says Fitch.

Despite the likely deterioration in asset quality, ratings assigned to US credit card lenders remain stable reflecting adequate liquidity, strong balance sheets and limited sensitivity to a rise in US interest rates. Credit card asset quality metrics again hit record lows in 3Q14.

However, Fitch believes that late stage delinquency metrics may be signalling a possible inflection point in credit loss performance. Credit loss metrics will begin to weaken throughout 2015 as more recent vintages begin to season.

Over the longer term, credit metrics may stabilise at a rate lower than the historical average. Fitch attributes this to changes in underwriting criteria and declines in subprime exposure, resulting from the implementation of the 2009 CARD Act, and a broader industry-wide focus on credit card transactors over revolvers.

ABS

FFELP portfolio acquired

Navient has closed a new US$10bn student loan ABCP financing facility. The conduit matures in November 2017 and is supported by Wells Fargo, JPMorgan and RBC.

Arranged by Wells Fargo, the facility will finance the acquisition of federally guaranteed student loan portfolios and provide additional liquidity to the company. The first acquisition made under the facility is the purchase from Wells Fargo of a US$8.5bn (principal balance) portfolio.

"We're delighted to offer our deep expertise to benefit more than half a million new customers," comments Jack Remondi, president and ceo, Navient. "We're also pleased to deliver on a key business objective to leverage our servicing scale and grow our portfolio. As the new name in student loan servicing, Navient is committed to working in close partnership with Wells Fargo to implement best practices that ensure an easy transition and support customer success."

With this transaction, Navient will service more than US$310bn in student loans. The firm anticipates converting a majority of the purchased loans to its servicing platform in 2015. Rates, terms and benefits will remain unchanged.

The purchase consists of whole loans originated under the FFELP before it ended in 2010. The acquisition is expected to close in a series of transactions, substantially all of which will be completed in 4Q14, subject to customary closing conditions.

Structured Finance

Reg cap clarifications mooted

The US Fed, the FDIC and the OCC have proposed clarifications to the revised regulatory capital rules adopted by the agencies in July 2013. The proposal applies only to large internationally active banking organisations that currently determine their regulatory capital ratios under the advanced approaches rule or that may use the advanced approaches rule in the future - generally those with at least US$250bn in total consolidated assets or at least US$10bn in total on-balance sheet foreign exposures.

Specifically, the proposed rule would make technical corrections and clarify certain aspects of the advanced approaches rule, including the qualification criteria and calculation requirements for risk-weighted assets. The authorities note that many of the proposed changes would better align the advanced approaches rule with the Basel framework and thereby enhance consistency with international capital standards.

Comments on the clarifications must be submitted within 60 days of publication in the Federal Register.

Structured Finance

Strong forecast for Asia

Credit quality across the Asian securitisation and covered bond markets will remain strong overall in 2015, says Moody's. This is due to relatively healthy economic growth levels and falling corporate default rates in the region.

Chinese auto loan ABS default and delinquency rates are expected to rise from 7.3% in 2014 to 7% in 2015, due to projected slower GDP growth and an increase in the debt burden of consumers. However, issuance levels could continue to increase to satisfy the growing funding needs of auto loan lenders in China's fast-growing car market.

Eight auto ABS transactions have closed in China so far this year. In addition, car sales in the country are growing by around 8% a year and are expected to exceed 20 million units in 2014 (SCI 23 October). Moody's expects new transactions to have larger securitised portfolio sizes in 2015, with greater numbers of loans than existing transactions.

In the CLO market, credit quality of new deals is expected to be worse than for existing transactions, continuing a downward trend from this year. Non-performing loans are increasing in China at a faster pace than the total amount of loans, due to overexpansion in certain sectors in the last several years, overall decelerating economic growth and tightening credit conditions.

Moody's says that the increase in NPLs is credit negative for the collateral in CLO transactions and that the credit quality of new Chinese CLO portfolios will be weaker than for existing transactions. It also expects to see in 2015 increasing involvement in the CLO market by smaller originators, such as city and rural commercial banks.

The agency believes that more asset classes will emerge in China, such as consumer loan ABS and equipment lease securitisations, sponsored by both existing and first-time issuers. These will include commercial banks that have yet to participate, the local branches of international banks, financial leasing companies and asset management companies.

In its forecast for Korea, Moody's says that government policies to boost the economy will be positive for the performance of credit card ABS, on top of low interest rates and strict underwriting criteria. However, market risk in covered bond transactions may increase as the proportion of fixed-rate loans in cover pools rises. The quality of mortgage loans in new covered bond pools will be worse than those in existing deals because of - as part of government policies - a loosening of lending standards.

In Singapore, Moody's believes that CMBS will benefit from higher economic growth, with increasing GDP, LTV ratios, high debt-service coverage ratios and strong support from their sponsors (as is the case with existing transactions). The agency also expects to see covered bonds issued by Singapore banks for the first time in 2015, after the introduction of legislation to allow them to do so.

Finally, the credit quality of Asia CLOs is expected to improve slightly in 2015 from already good levels, in line with a decline in the corporate default rate in the region. The CLO market will be supported mostly by originators' need to refinance maturing deals, rather than for funding purposes.

Structured Finance

Green bond index unveiled

Barclays and MSCI have launched a new green bond index family measuring the global market of fixed income securities issued to fund projects and initiatives with direct environmental benefits. This complements the existing Barclays MSCI environmental, social and governance (ESG) fixed income index family.

Eligibility for the index family is based on an independent and objective assessment of securities by MSCI ESG Research along four dimensions: use of proceeds, project evaluation, management of proceeds and reporting. Additional fixed income index criteria are then applied to this screened universe to identify index membership on a monthly basis.

The indices are intended to provide benchmarks for both dedicated green investors as well as traditional fixed income investors seeking informational measures of green bond risks and return as part of their broader portfolio allocations. In addition to the multi-currency index, sub-indices by currency, maturity, sector and use of proceeds are also available as part of the family.

The green bond index family will be available for institutional clients to license for their index-linked investment products, such as ETFs, separately managed accounts and structured products.

Structured Finance

HQS task force formed

SFIG has established a new working group: the High Quality Securitization (HQS) Task Force. The HQS Task Force will serve as the forum through which SFIG will respond to recent initiatives that seek to define 'qualifying securitisations', such as the EBA's recent discussion paper on simple standard and transparent securitisation (SCI passim). The HQS Task Force will meet in the upcoming weeks to develop SFIG's comments on the EBA discussion paper, which must be submitted by 14 January 2015.

CDO

Trups defaults down again

The number of combined defaults and deferrals for US bank Trups CDOs has slightly decreased to 22% at the end of October, according to Fitch's latest index results. This compares with 22.1% at the end of September.

Two deferring banks representing US$29.5m of collateral in three CDOs cured their Trups last month. Both banks have reached the end of their maximum allowed deferral period.

Another two banks with total notional of US$23m in three CDOs were closed by the FDIC in October. There has not been any FDIC closure in the banks Trups universe since June. National Republic Bank of Chicago with total notional of US$15m jumped to default without prior deferral, while Rising Sun Bancorp that had been deferring on its Trups since December 2009.

Across 78 Fitch-rated Trups CDOs, 236 bank defaulted issuers remaining in the portfolio represent approximately US$6.2bn of collateral. Additionally, 184 issuers are currently deferring interest payments on US$2.1bn of collateral.

CDS

IOSCO consults on CDS transparency

IOSCO has published a consultation report which seeks to analyse the potential impact of mandatory post-trade transparency in the CDS market. The report reaches a preliminary conclusion that the introduction of mandatory post-trade transparency has not had a substantial effect on market risk exposure or activity for CDS products.

The report also says that greater post-trade transparency in the CDS market would be valuable to market participants and other market observers. It encourages members to take steps to enhance post-trade transparency in the CDS market in their respective jurisdictions.

The BIS estimates that gross notional amounts of outstanding CDS at end-2013 were approximately US$21trn. The report adds that improving transparency in this market will increase the efficacy of the G20 commitments to reform the OTC derivatives markets.

IOSCO is seeking public comment on the consultation report, in order to inform its final report on post-trade transparency in the market. Comments should be submitted by 15 February 2015.

CDS

CDS widens on alleged scandal

Five-year CDS on Petroleo Brasileiro SA (Petrobras) widened out 21% last week to price at the widest levels observed since early 2009, according to Fitch Solutions. This follows a number of alleged improprieties among some of Petrobras' senior management.

After pricing consistently in-line with double-B minus levels, credit protection on Petrobras' debt is now pricing deeper in speculative-grade space, in line with single-B minus. After seeing a drop-off throughout late summer, CDS liquidity for Petrobras has rebounded since October, up to the 16th regional percentile from the 36th.

Growing market concern likely stems from an alleged corruption scandal involving money laundering and a bribery scheme, resulting in the arrests of two senior executives. The company has delayed its third quarter earnings announcement, potentially further worrying investors.

CDS

Abengoa CDS spikes

Abengoa's five-year CDS spiked 128% last week, according to Fitch Solutions. This follows a results call in which the company's management said debt raised by its Abengoa Greenfield subsidiary would be considered non-recourse and would not be included in its corporate leverage metrics.

"Investors were also likely unnerved by the company's lowered revision of consolidated revenue guidance, contributing to the rapid spread widening," said Diana Allmendinger, director at Fitch. "The CDS curve for Abengoa has inverted, with the one-year contracts pricing 332bp wider than the five-year, indicating markets are pricing in more risk over the shorter horizon."

CDS

Possible bankruptcy hits Caesars' CDS

Five-year CDS on Caesars Entertainment Operating Company spiked 50% yesterday to an all-time wide, says Fitch Solutions. The change follows news that the company has reached an agreement with creditors that would include bankruptcy.

"The CDS curve remains inverted for Caesars, with the market pricing in the highest credit risk at the shortest maturities," says Fitch director Diana Allmendinger. "The market's growing concern with Caesars is likely being driven by its anticipated debt restructuring and potential bankruptcy of the operating company."

CDS

Deutsche Bank trims CDS trading

Deutsche Bank is set to reduce its activity in CDS trading referencing individual companies, citing regulation as a key factor in the move. The bank says it will continue to trade CDS referencing corporate and sovereign debt indices, as well as distressed and emerging markets debt.

CLOs

Euro CLO overlap examined

Morgan Stanley structured credit strategists have analysed European CLO 2.0 collateral, focusing on issuer overlap and tail risks across portfolios. They find that although European managers are more constrained than their US counterparts in sourcing collateral, the overall quality of CLO portfolios is stronger than the broader loan market.

The analysis suggests that the average overlap for European deals is 38%, compared to 23% for US CLO 2.0 transactions. "In our view, the difference is largely a reflection of the greater collateral sourcing constraints faced by European managers. However, intra-manager collateral overlap is comparable across both jurisdictions," the Morgan Stanley strategists observe.

In line with its weighting in the S&P ELLI, media and telecom is the most referenced sector in CLO portfolios, at 17%. However, compared to the ELLI, CLO managers are slightly underweight healthcare and slightly overweight construction and banking/finance.

The maximum aggregated exposure to any single issuer is 2%, according to the analysis, but certain obligors are more popular across transactions. Numericable, TDF and Ziggo are the top-three issuers that CLO investors are exposed to. With the top-20 issuers accounting for a quarter of all 2.0 collateral, the analysts note that CLO investors need to be cognisant of concentration risks in these names.

Overall, they find that relative to pre-set limits and compared to the broader market, CLO portfolios have a lower exposure to weaker collateral categories like mezzanine/second-lien debt, covenant-lite loans and the triple-C ratings bucket.

CMBS

Resolutions continue apace

November remittances so far suggest that BSCMS 2005-PW10's delinquent pipeline has been cleaned out, while JPMCC 2007-CB19 appears to have been hit by unusually large interest shortfalls.

Four properties with US$162.7m in balance were liquidated from BSCMS 2005-PW10 for US$59.8m in gross proceeds. Barclays Capital CMBS analysts note that total losses realised accumulated to US$114.6m at a 70% severity, after taking into account advance and ASER-shortfall reimbursements.

The largest loan to be resolved was the US$95.6m Oasis Net Leased Portfolio, which generated US$13.9m in proceeds compared with a November 2013 appraisal of US$11m. The loan appears to have been partially liquidated this summer, when the loan was paid down by US$12.6m, and the final property was sold this month. The proceeds from the sale repaid advances and US$801,000 of ASER-shortfalls outstanding before realising an US$86m loss at 90% severity.

The second-largest loan liquidated was the US$32m College Square Mall, which was sold via a note sale for US$13.4m, resulting in a severity of 65% and realised loss of US$21.2m. Additionally, the US$31m Embassy Crossing retail centre was sold for US$29.9m (versus its US$25.6m January appraisal) and realised a slight loss of US$5.75m.

Overall the CMBS trust incurred US$114.6m in realised losses and, as a result, classes D to H were written off and the C class was written down by a loss of US$6.8m (23%). This reduced the A to J tranche enhancement from 8.8% to 2.7%.

At the top of the capital structure, the A4 tranche was paid off by 7%. The liquidations also repaid US$1m in ASER and US$1.24m in special servicer fees to interest, which repaid shortfalls to the H tranche.

Following the liquidations, there are no remaining loans in special servicing for the deal.

Meanwhile, nine properties with US$129.8m in balance were liquidated with heavy losses from JPMCC 2007-CB19 this month, all of which appear to have been listed in Auction.com sales in August and September. The Barcap analysts note that the loans were liquidated for US$59m in gross proceeds (versus a combined appraisal value of US$59.3m), with three of the properties resolved at 100% severity. Total losses came to US$99.8m, but bond losses totalled US$89.4m due to the way the loss was applied.

The largest property sold was the US$38m Marriott-Memphis, which was disposed of at just US$4.9m (versus its August 2013 appraisal of US$14.9m). The property was only able to repay fees, advances and US$1m of the US$6mn of ASER outstanding, with the principal balance written off in full.

Two of the loans - the US$16m Value City and the US$9.4m Beaver Brook Village - were both non-recoverable and had sizeable property advances while the loans were in REO. These property advances were taken from principal and led to losses being applied before the loans were liquidated: US$5m for Value City and US$5.4m for Beaver Brook Village.

"When these loans were liquidated, after repaying expenses, proceeds were first used to repay advances and expenses, then repay ASER/non-recoverable interest, then proceeds were used to repay these previously taken principal losses and finally principal," the analysts observe. "However, for these two loans, the proceeds were insufficient to repay these previously-taken losses to the trust. As a result, these previously-taken principal losses were recouped from interest, leading to large interest shortfalls."

Value City only took US$83,500 in proceeds, which was insufficient to repay US$553,000 advances still outstanding. Consequently, a US$5.45m charge to interest was applied to the loan to repay the advances and losses previously taken from principal. US$256,000 in ASER and US$4.6m in non-recoverable interest were also not repaid.

Beaver Brook Village was sold for US$5m and, after selling costs, repaying advances of US$2.3m and US$844,000 in ASER, it was only able to partially recoup about US$1.6m in previously-applied losses. To recoup the remainder, the analysts estimate that US$3.8m will be taken from interest, of which US$3.46m was taken this month.

The combined interest charges of US$8.9m absorbed all the US$6.3m in ASER recoveries and led to shortfalls through the AM class. Another US$350,000 of charges is expected next month, which should slow the recovery of interest shortfalls.

"The previously-taken losses were in effect repaid to principal from interest, leading to a loss recovery of US$10.3m. While it may take a few months, we do expect the AM shortfalls to be repaid in the near term, which might allow the bond to avoid taking ratings downgrades," the analysts explain.

The trust took US$89m in realised bond losses, writing off the G and F tranches and 57% of the E tranche. This reduced AJ credit enhancement to 4.6%.

CMBS

Westfield AJ losses threatened

The US$240m Westfield Centro Portfolio, securitised in JPMCC 2006-LDP7, has received an updated appraisal at US$139m in November remittance after transferring to special servicing in May 2014. The appraisal represents a steep fall from the appraisal at origination in 2006 and threatens AJ shortfalls and heavy losses or a large hope note modification for the trust, according to Barclays Capital analysts.

The combined DSCR NOI reported full year-end in 2013 was 0.93x, with combined occupancy of 84%. The Barclays Capital analysts believe the performance of the properties has been dragged down by the largest loan in the portfolio, the Midway Mall in Elyria, Ohio, which is at 65% occupancy according to special servicer commentary.

The West Park mall in Cape Girardeau, Missouri, is also struggling, with just 70% occupancy. The malls have significant Sears and JC Penney exposure, although the only near-term lease expiration from those anchors is the Sears in the Westfield Enfield, Connecticut in 2018.

The analysts say that the loan does not currently have an appraisal reduction, so a new appraisal could lead to an appraisal reduction amount of US$114m, which could, in turn, increase the monthly ASER interest shortfall by US$550,000 on the loan. This would push interest shortfalls in JPMCC 06-LDP7 to the AJ tranche, one notch above the B tranche it is at currently.

The special servicer commentary indicates that the borrower is seeking a modification, which could likely be met only through the creation of a large hope note, probably with a significant capital infusion. The analysts add that if the property is instead liquidated at the US$139m appraisal value after another year in delinquency, the losses to bond holders could be as high as US$124m, or 52%, after taking into account selling cost and interest expenses. This would be enough to write off the J-H tranches and lead to partial losses on the G tranche.

CMBS

CMBS maturities present challenges

Over the next three years, more than US$300bn in conduit CMBS loan balance will mature, which is more than two and half times the amount that matured from 2012 to 2014. Office and retail loans make up 63% of the loan balance maturing in the next three years with multifamily accounting for 14%.

Trepp believes that with 2014 issuance set to reach just below US$100bn and 2015 forecasts calling for a marginal increase, the CMBS origination engine will have to pick up the pace to digest the wall of maturities, especially in the heavy 2016 and 2017 years. Headwinds include the threat of rising rates, the end of quantitative easing and the implementation of new risk retention regulations coming in January of 2017.

Currently, multifamily and industrial have the highest rate of maturing delinquent or specially serviced loans at 12.4% and 12% respectively. Multifamily delinquency in 2016 maturities comes mainly from the US$3bn StuyTown loan which actually suffers more from risk of extension and litigation than of low valuation. The US$208.5m Schron Industrial Portfolio and US$292.5m Bush Terminal loans contribute to the high rates in 2015 and 2017 in the industrial category.

So far in 2014, new loan interest rates average 4.94% for all property types with a high of 5.08% in lodging and a low of 4.89% in office. Trepp adds that, assuming lenders require at least a 1.50x DSCR on new loans, 82% of loans maturing between 2015 and 2017 would be eligible for refinance at current debt and income levels. Loans maturing in 2015 have the highest percentage of loans at or above the threshold while 2017 maturities are the lowest.

Looking ahead, Trepp says the wall of maturities presents an opportunity for originators and a worry for legacy CMBS bondholders. In 2012, a mini-wave of maturities resulting from five-year loans issued in 2007 sent the Trepp delinquency rate to its highest level of all time. Maturing volume that year was 40% of what it will be in both 2016 and 2017.

With nearly 60% of the entire CMBS public conduit universe maturing in the next three years, property transaction and origination volumes will have to continue and accelerate their upward trends, Trepp adds. In addition, almost 20% of those maturities will also require additional capital either from current borrowers or new buyers when the loan is refinanced or the property is sold.

Trepp concludes that all of this will have to happen in an environment of uncertainty in terms of interest rates and property values and a shifting landscape in office and retail property usage. However, continuing low interest rates, continued property value appreciation and fundamental performance growth would make these obstacles easier much easier to scale.

CMBS

Losses to rise on A/B mods?

Overall loss severities on US CMBS A/B loan modifications liquidated to date have been low. However, this trend may change for many highly leveraged loans utilising this strategy, according to Fitch.

Special servicers have argued that A/B note modifications allow for improved performance and value, which can help reduce losses to the trust. However, some investors suggest the hope note aspect of the strategy delays the realisation of losses and proceeds to the senior notes, while building up unnecessary expenses and fees to the trust.

"Adverse selection remains a concern, as there are still some outstanding loans currently performing under the terms of the modification that have yet to stabilise," says Fitch md Mary MacNeill. "Some of these loans still have extended maturity options and may transfer back to the special servicer a second time, thus increasing the possibility for higher loss severities."

163 loans totalling over US$10bn within the US Fitch-rated CMBS conduit universe have been modified into A/B notes. Of these, only 51 have been disposed of thus far.
The 2007 vintage saw the most A/B loan modifications with 72 loans at US$6.3bn, followed by the 2006 vintage with 43 loans at US$1.9bn. In terms of property type, A/B modifications were concentrated in the office sector, with 58 loans at US$4.4bn.

Risk Management

ISDA stay protocol launched

ISDA has opened the ISDA 2014 Resolution Stay Protocol for adherence. Eighteen major banks have signed it at launch, as they pledged to do last month (SCI 13 October).

The protocol has been developed in close coordination with the Financial Stability Board by an ISDA working group that included both buy- and sell-side participation. It will come into effect on 1 January 2015.

Adherence is voluntary, but regulators have committed to develop new regulations in their jurisdictions throughout 2015 that will encourage further adoption of stay provisions. A US bankruptcy component will come into effect once relevant rules have been issued by US regulators.

Parties adhering to the protocol will be opted in to special resolution regimes, with the aim being to ensure cross-border derivatives trades are captured by statutory stays on cross-default and early termination rights if a bank counterparty enters into resolution. The stays are intended to give regulators enough time to ensure an orderly resolution for a troubled bank.

The protocol also incorporates certain restrictions on creditor contractual rights that would apply when a US financial holding company becomes subject to US bankruptcy proceedings, including a stay on cross-default rights that would restrict the counterparty of a non-bankrupt affiliate of an insolvent US financial holding company from immediately terminating its derivatives contracts with that affiliate. A non-defaulting party's right to terminate derivatives trades with a direct counterparty that is under insolvency proceedings is unaffected by the protocol.

Risk Management

IRB consultation launched

The EBA has launched a consultation on its draft regulatory technical standards (RTS) on an assessment methodology for the internal ratings-based (IRB) approach. The EBA says that these draft RTS are a key component of its work to ensure consistency in model outputs and comparability of risk-weighted exposures and will contribute to harmonise the supervisory assessment methodology across all EU Member States.

The RTS set out standards for the competent authorities to help the EBA assess an institution's compliance with minimum IRB requirements when it initially applies to use the IRB approach, applies to use the IRB approach for certain types of exposures in accordance with the sequential implementation plan, applies for implementation of material changes to the IRB approach or applies to resume less sophisticated approaches.

Competent authorities will also use the RTS to assess whether such institutions meet minimum IRB requirements on an ongoing basis following their regular review of the IRB approach, as well as of the changes that require notifications from the institution. Consequently, the RTS will need to be embedded in day-to-day practices of supervisory authorities.

To ensure uniform interpretation and application by all relevant competent authorities across the EU of all minimum IRB requirements, the RTS provide a mapping of the assessment criteria in fourteen chapters. Furthermore, they take account of the proportionality principle and put forward relevant methods which have to be used by competent authorities, depending on the nature, size and degree of complexity of the institution's business and organisational structure.

The consultation runs until 12 March 2015.

Risk Management

Capital floor introduced

The Basel Committee has published two documents in preparation for the G20 Leaders' Summit in Brisbane on 15-16 November. One report outlines measures to reduce excessive variability in bank regulatory capital ratios and the other provides an update on the implementation of Basel 3 standards since the 2013 progress report to G20 Leaders.

The Committee's studies confirm that there are material variances in banks' regulatory capital ratios that arise from factors other than differences in the riskiness of their portfolios. These variances undermine confidence in capital ratios, it says. In response, the Committee has initiated a number of policy and supervisory actions to address excessive variability in risk-weighted assets that are based on a bank's internal models.

One such measure is to revise the Basel capital framework's standardised measurement approaches. Once finalised, the revised standardised approaches will form the basis for a capital floor, designed to ensure that internal model-based capital requirements do not fall below prudent levels.

The Committee last month proposed revisions to the standardised approach for measuring operational risk capital and it expects to publish by year-end proposed revisions to the standardised approach for credit risk, as well as a proposed capital floor.

Drawing from its risk-weighted asset studies, the Committee is also developing specific policy proposals to reduce excessive variability arising from banks' risk modelling practices. The modifications under consideration will narrow the modelling choices available to banks, particularly in areas which by their nature are not amenable to modelling, and will serve to increase consistency and reduce complexity.

In addition, the Committee is assessing whether a considerable simplification of the advanced measurement approach to operational risk is needed. It intends to finalise this work programme by end-2015.

Meanwhile, the progress report on Basel 3 notes that the work on implementation is fostering harmonisation of capital regulations across member jurisdictions. The report also notes that all Committee members have implemented risk-based capital regulations and that efforts are now under way to adopt Basel 3 regulations for liquidity and leverage ratios, as well as for global systemically important banks and domestic systemically important banks.

The Committee has also published a report on the use of national discretions in implementing Basel standards, which is aimed at fostering transparency on the differences in implementation across member jurisdictions.

RMBS

Master trust changes proposed

A number of changes have been proposed to the Arkle and Permanent master trust programmes. The moves are not expected to have a negative rating impact on the rated notes of the programmes.

Changes proposed by the issuers include the introduction of a guaranteed investment contract (GIC) account collateralised by sterling debt obligations of the UK government and an option for Lloyds - as seller - to repurchase loans that are greater than three months in arrears. There are also amendments to replacement triggers defined in the issuer swap documentation and amendments of triggers in bank account agreements.

In addition, there is the suggested amendment of the triggers on the mortgages trustee GIC account requiring replacement of the counterparty on downgrade and the removal of a trigger that required the replacement of Lloyds as direct debit account provider in the event of a downgrade, as well a trigger that required a pool audit to be conducted in the event of a downgrade of Lloyds.

Further amendments would allow the Arkle programme to sell loans originated by Halifax and the Permanent programme to sell loans originated by Lloyds. The issuers are in the process of obtaining investor consent to the proposed changes.

RMBS

Bank settlements affecting US RMBS

Recent settlements between big banks and the US Department of Justice (DOJ) have allocated billions of dollars for consumer relief. Although the settlements aim to help troubled homeowners, S&P says they may also directly affect the performance of and ratings on US RMBS.

Performance under these settlements can affect the related US RMBS ratings, as US RMBS investors - rather than the settling institution - could bear some of the losses. Two more major institutions have agreed to similar provisions this year; S&P cites Citigroup entering into a settlement with the DOJ in the amount of US$7bn, with US$2.5bn being provided for consumer relief and Bank of America's settlement with the DOJ in the amount of US$16.65bn, with US$7bn being provided for consumer relief.

Both settlements follow another large settlement from JPMorgan in November 2013.

S&P says that an increase in loan modifications - such as principal forgiveness, principal forbearance and interest rate reductions for loans backing any particular securitisation - can result in realised losses, a reduction in excess spread, an increase in the potential for interest shortfalls or any combination of these. The banks must still abide by the terms specified in the respective transaction documents and may, in certain instances, need to obtain investor consent prior to providing certain loan modifications.

Contacting and identifying investors have proven difficult for trustees and transaction parties. S&P believes this could be a formidable obstacle to modifying loans when investor consent is required.

In addition, an increase in loan modifications on delinquent loans and a corresponding increase in reperforming loans may result in a lower default frequency. However, modified loans that were current at the time of modification are also considered reperforming in S&P's analysis, resulting in a higher default frequency than that assumed prior to modification. The movements in and out of these performance buckets may have an effect on projected losses for transactions evaluated under S&P's criteria for most pre-2009 RMBS transactions.

Most significantly, securitisation investors - rather than the settling institution - would bear the losses that result from modifications to loans in securitisations. The eventual negative or positive impact of loan modifications on any particular transaction will depend on the timing and extent of the modifications and the resulting loan performance, according to the agency.

Since the financial crisis, servicers have been identifying potential candidates for loss mitigation and providing loan modifications to qualified borrowers. To the extent these settling institutions have been selling loans, particularly distressed collateral, as well as transferring servicing and mortgage servicing rights, S&P expects a larger impact to loans still serviced by the three banks. To comply with these settlements, the agency believes the servicers of loans covered by the consumer relief provisions in the settlements will review their entire servicing portfolios again to identify additional borrowers who may qualify for relief.

As certain 2009 HAMP loans begin to increase their interest rates, the servicers may modify these borrowers to maintain their current interest rates, which could also help satisfy the terms of the settlements. Otherwise, S&P believes there could be an adverse effect on some US RMBS performance if the coupons increase and the borrowers are unable to make the monthly payments.