Contents

RMBS

Cautious optimism

Fed's presence to remain after MBS purchase halt

With the end of QE3, the US Fed has ceded the spotlight in agency MBS purchases, while staying committed to the sector through reinvestments. The timing of its taper is now seen as a significant driver of the outlook for MBS going into 2015.

The US Fed's decision last month to halt its agency RMBS purchases followed improving US unemployment figures, which have risen to 5.9%, versus the 8.1% at the beginning of QE3 over two years ago. "We only have to go back to the reasons the Fed chose to purchase MBS in the first place to see why it is now ending it," says Anurag Bhardwaj of Citi's securitised products research team. "The policy was motivated by the attempt to avoid the 'fiscal cliff.' This was also in accordance with attempts to ease unemployment."

He adds: "Since the unemployment rate is dropping and there is a general belief that the fiscal cliff has been avoided, the decision was made that investing in securities can stop."

However, Bhardwaj believes that it is difficult to predict the economic ramifications of the Fed's halt in purchases. "I think this is best left for the economists to say; however, it is largely seen as a sensible choice. It is certainly a move that marks a healthier economic environment and the Fed has put itself in a position that, if intervention does become necessary, it can step back in."

The strategy for the near future is somewhat less cloudy, however. The Fed's monetary policy going forward, particularly the timing of its approach, is seen as a significant factor in shaping the outlook for MBS going into 2015.

"The Fed portfolio has flatlined," says Bhardwaj. "So the next job for the Fed is to encourage some tightening and hike rates. Its policy will likely be to wait and see what the reaction is following a lag, but it will slowly wind down its portfolio once this has been done."

The Fed will also continue to maintain a presence in reinvestments, in the interest of maintaining and sustaining current economic stability. It is projected that the market can expect Fed reinvestments to represent 28% of gross supply.

Bhardwaj anticipates the reinvestment strategy to follow a similar pattern to that of QE3. The timeline and pacing of phasing out reinvestments will reflect the broader economic and housing outlook. The Fed will also be sensitive to market reaction towards its decision to wind down the balance sheet and, if mortgage spreads widen, reinvestments are likely to be reduced more gradually.

Bhardwaj elaborates on the strategy: "If the Fed stopped reinvestments in one go, then this could have a negative impact on both the Fed and the economy. The size of the Fed's balance sheet would be contingent on pay-downs and, in turn, rate levels. Therefore, the portfolio would decline faster if rates rally and slower if rates sell off."

Such a situation is likely the opposite of what the Fed is aiming for - reducing the portfolio faster when rates sell off, indicating greater inflation and a growth outlook, and slowing the pace of portfolio reduction on a rally that represents a dim economic outlook. Bhardwaj adds: "As a result, we expect phasing-out of reinvestments to begin 3-6 months after the first rate hike. I think we should expect a gradual taper to begin in the first quarter of 2016 earliest."

Come that time, the private sector may have to absorb as much as US$225bn in net supply, including the reduction in the Fed's portfolio. However, a more likely scenario may involve the Fed reducing its portfolio in quarterly totals.

Citi's hypothetical example is a deduction of US$5bn a month in Q1, US$10bn a month in Q2 and finally US$15bn a month in H2. Under such a scenario, total supply for private investors from the Fed's portfolio in 2016 will be US$35bn-US$45bn in H1 and US$90bn in H2. This will be on top of organic net supply, taking the total for private sector absorption to above US$200bn.

It is understood that the Fed now holds around US$1.8trn in agency MBS, or 32% of the market. Bhardwaj believes that there will be two positive effects from this.

"The Fed is basically impacting the MBS market in two ways: by account of its large holdings of MBS and through its purchases every day. The former is called the 'stock effect' and the latter the 'flow effect'," he explains.

The stock effect benefits the market twofold. "First, it effectively reduces the outstanding MBS for the private sector, creating a scramble for private hands to find securities for their portfolios. Second, in many cohorts, the Fed owns bonds that have worse convexity characteristics than the rest of universe. This improves the cheapest-to-deliver for the TBA market, thus supporting valuations," Bhardwaj suggests.

He adds that the flow effect benefits the market too, as it can count on a steady buyer that takes out 20%-30% of supply every day, leaving less for the rest of market. "In addition, as the Fed keeps taking delivery of new bonds each month through its purchases, it implies potential for the cheapest-to-deliver to keep improving for sectors that the Fed is active in," Bhardwaj concludes.

JA

ABS

Paper trades ahead of Thanksgiving

The US secondary markets have not shut down just yet, with SCI's PriceABS data picking up price talk and cover prices for US ABS, CLOs, CMBS and RMBS yesterday. In ABS there was more than US$100m out for the bid on BWICs, with supply divided between autos, credit card, equipment and student loan ABS.

Each of the auto names was making its first appearance in PriceABS and all of them were from deals issued this year. First was AMCAR 2014-4 D, which was talked at around 160 and which also traded.

CPS 2014-C C was talked in the mid-200s and was another tranche which traded. Meanwhile the FORDF 2014-1 A2 tranche was talked at 100.09.

The credit card space also had a couple of newcomers to the PriceABS archive. The CABMT 2014-2 A tranche was talked at 100, while the CCCIT 2014-A8 A8 tranche was talked at plus 33.

In the equipment space, CNH 2013-A A3 was talked at plus 30. That tranche had appeared in PriceABS before and its last recorded cover price was at 100.19 on 19 May.

The student loan space provided the only pre-crisis ABS paper picked up from yesterday's session, such as the NCSLT 2006-1 A4 tranche, which was talked in the low/mid-90s. The tranche was talked in both the low-90s and mid-90s in August and its last recorded cover price, from 5 May, was at 93.83.

SLMA 2006-A A5 was talked at around 90 but came back as a DNT. The tranche did trade successfully in August, when price talk was at 91 and 91.09.

JL

RMBS

RMBS supply stays high

US non-agency RMBS BWIC supply remained elevated on Wednesday at more than US$1bn. Yesterday's session came hot on the heels of around US$2.3bn in bid-list supply on Tuesday.

Tuesday's supply was strongly boosted by a large US$1.3bn list in the morning consisting mainly of subprime paper and a US$753m list in the afternoon consisting mainly of ARM paper. FINRA reported data shows the Street was left holding around US$680m yesterday.

SCI's PriceABS data captured a number of trades from yesterday's session, with certain lists offered on an all-or-none basis. There were also a limited number of DNTs.

The tranches picked up by PriceABS largely came from the peak issuance vintages of 2004-2007. Among them was the AABST 2004-2 M3 tranche, which traded on its first appearance in the data archive.

From the 2004 vintage, there were also covers for AABST 2004-3 B2, CWL 2004-6 M6, SURF 2004-BC4 M1 and SURF 2004-BC4 M2 tranches. The SURF 2004-BC4 M1 tranche was also traded on 5 November and first appeared in PriceABS on 23 August 2012, when it was talked in the low-20s, before being covered in the low/mid-60s on 9 October of that year.

As for tranches from 2005-vintage issuances, the MSAC 2005-WMC6 M5 tranche was traded. Previously recorded price talk from 18 September 2013 was in the low-30s.

SAST 2005-4 M4 and SVHE 2005-4 M4 were also traded. The latter tranche had previously been talked in the mid-20s.

The ACE 2006-OP1 M1 tranche, which previously traded in January, also traded yesterday. Recorded price talk since its first appearance in PriceABS in July 2012 has been in the high-single digits, low-double digits and mid-20s.

Also from 2006, the AMSI 2006-R² M3 tranche traded. AMSI 2006-R² M4, however, was a DNT.

Other DNTs from the 2006 vintage included BSMF 2006-SL3 A and BSMF 2006-SL4 A. The BSMF 2006-SL6 1A tranche, however, did trade with a cover price of around 150. The BSMF 2006-SL2 A1 tranche was covered at around 170.

Another BSMF tranche was among the 2007-vintage covers. The BSMF 2007-AR1 2A3 tranche was covered at 73 handle, having been covered earlier this year in the mid/high-60s. Meanwhile the JPMAC 2007-CH5 M2 tranche also traded, but BSAAT 2007-1 1A1 came back as a DNT.

JL

Secondary markets

US CLOs get ahead

US CLO market participants are looking to capitalise on this week's healthy BWIC volumes in advance of the usual Thanksgiving lull.

"Everyone is looking to get ahead of the likely holiday slowdown next week," says one trader. "Volumes are strong if not at recent highs, but there is activity and interest across the board."

In particular, the trader cites investor interest in double- and triple-B paper in both 1.0 and 2.0 vintages. Meanwhile, banks are looking higher in the capital structure in 3.0 paper. "With all the new issuance coming we have plenty of product to work with," he notes.

Meanwhile, manager tiering continues with appetite for lower rated tranches focused around top tier managers. However, investors are keen on lower tier managers for higher rated paper for the excess spread.

Secondary markets

Eclectic list fails to trade again

A large proportion of the re-issued large eclectic BWIC of European assets from a bad bank (SCIWire passim) has failed to trade.

The 37 line €276.502m auction was due at 14:00 London time today. However, 29 lines did not trade, including all of the SME CLOs on the list and all bar one of the CDOs.

The bonds that did trade covered as follows: APULM 4 A at 98.84; DEKAE II-X A2A at VH70s; EPICP BROD C at 96.51; HIPO HIPO-10 A2 at 90.75; ITALF 2005-1 A at 99; TDAC 5 A at 97.13; TMAN 5 A at 98.29; and UCI 9 A at 97.28.

Secondary markets

Euro ABS/MBS holds steady

Despite the lack of news about ABSPP, the European ABS/MBS markets have held steady.

"Spreads are holding firm this morning," says one trader. "We're seeing the Street trading some eligible paper, a few asset managers are starting to show bonds and there are a number of BWICs today, but it's really just a waiting game for the ECB."

He continues: "It's increasingly frustrating as the whole market is consumed by the ABSPP and distracted from everything else. However, it is still not clear how it's going to work yet - will it be OWICs, will it be price-led lists or some other method?"

Consequently, the trader suggests ECB buying might be a while away yet. "Some are still hoping for today, but tomorrow is more likely or it could even be Monday."

Secondary markets

US CMBS resurgent

The US non-agency CMBS market is seeing a resurgence in activity this week.

"Last week was very quiet, but this week we're seeing plenty of activity in both the primary and secondary market," says one trader. "BWIC volume is strong, so there's definitely an element of people taking money off the table. We've $300m out for bid already scheduled for today, so significant size again."

The trader says there are no obvious unusual drivers behind the activity. "We're seeing continued activity from real money, with less from hedge funds as there's not so much quick profit to be made in the current market environment."

Next week will inevitably be quieter given the US Thanksgiving holiday. However, further retrenchment is expected beyond that as participants seek to lock in gains for year-end and trading will become patchier.

Secondary markets

Busy week continues in US RMBS

Today sees another day of heavy volumes in the US non-agency RMBS secondary market, but bonds continue to trade well.

"This week has been one of the busiest weeks of the year with very high BWIC volumes," says one trader. Yesterday saw US$1.4bn in auction paper, while today sees even more with in excess of $1.8bn in for the bid.

"Large lists continue to be the norm with $700m BWICs trading today and yesterday from single sellers. However, overall we're seeing high numbers of lists from the full range of sellers," the trader adds.

There are a full range of RMBS deal types on offer too including more esoteric structures. For example, today's schedule includes second lien bonds as well as some derivatives.

The trader suggests that sellers are taking advantage of the liquidity on offer this week pre-Thanksgiving. At the same time, there is still a strong new issue pipeline for this year so some are selling to put their money to work on new deals.

From the buyer's perspective, the trader says: "Broader markets are up keeping the tone positive and keeping RMBS prices in an upward direction. As a result, despite the high volume we're experiencing the majority of bonds continue to trade well."

Secondary markets

Spanish seniors catch the eye

As European ABS/MBS traders continue to wait for ABSPP buying to start, the focus remains on BWICs today - in particular a list of Spanish senior RMBS names is attracting market interest.

The 19 line list is due at 13:00 London time and totals €733.7m of original face and €183+m of current. 12 of the line items are ECB eligible.

The BWIC consists of: AYTCH I A, AYTH M4 A, BCJAF 3 A, BCJAF 8 A, BFTH 11 A2, BVA 2 A, HIPO HIPO-5 A, IMCAJ 1 A, RHIPO 5 A1, TDA 19 A, TDA 23 A, TDAC 4 A, TDAC 5 A, TDAI 1 A, TDAI 2 A, TDCAJ 2 A2, UCI 12 A, UCI 7 A and UCI 8 A.

11 of the bonds have covered with a price on PRICEABS in the last three months - as follows: BFTH 11 A2 at 96.4 on 3 November; HIPO HIPO-5 A at 98A on 21 October; RHIPO 5 A1 at 97.17 on 5 November; TDA 19 A at 97.7 on 3 November; TDA 23 A at 94.5 on 2 September; TDAC 5 A at 97.13 on 19 November; TDAI 2 A at 94.55 on 2 September; TDCAJ 2 A2 at 99.2 on 3 November; UCI 12 A at 93.65 on 5 November; UCI 7 A at 97.41 on 5 November; and UCI 8 A at 95.91 on 5 November.

Secondary markets

US CLOs closing out

Year-end is at the forefront of US CLO traders' thoughts, but that's not to say the market is quiet.

"We saw robust volume yesterday and it's very busy for a Friday today, especially in 1.0 deals, with a high proportion of lists overall from non-bank entities," says one trader. "We're also seeing sales of quite a few tranches that are in the post re-investment phase that have or are about to delever."

The lists are continuing to be met with buying interest but it has changed character. "There's a lot of bidding, but the bid isn't as strong as it has been - a lot of banks have closed for the year so are not as keen to be risk takers," the trader says.

"Sure they'll buy stuff if it's cheap, but are reluctant to get involved if the price is tight," he adds. "Equally, the major dealers all appear to be very heavy on inventory right now."

The trader expects profit-taking to remain the driving theme for the remainder of the year. "Everyone has to be thinking about closing out for the year now - time is running out with a half week next week and a short December this year that amounts to only eight or nine genuine full trading sessions."

Secondary markets

Euro ABS/MBS wants more

The ECB began ABSPP buying on Friday, but the European ABS/MBS market is still waiting for more action.

"The ECB bought some Dutch RMBS on Friday, but thus far there's been no follow up trading," says one trader. "No volume has yet been reported on the Dutch RMBS purchases, but our sense is they weren't huge, so the market is still waiting for the real action to start."

Meanwhile, spreads are staying firm. A combination of expected continued ECB buying and Dovish comments by Draghi on Friday sending broader markets higher means European ABS/MBS remain well-supported at current levels.

Secondary markets

European CMBS sees selective trading

After the flurry of BWICs in the first half of last week the European CMBS market has quietened down. However, there is still selective activity off-BWIC.

"It's very quiet overall, particularly today," says one trader. "But we're seeing renewed interest from end-accounts in putting on trades in the CMBS space that are attractive from a yield perspective versus what can be generated in other markets."

He continues: "Investors definitely haven't shut up shop for the year yet - there's still cash to be placed, but they are being very selective. The story and the bond itself have to be just right."

Focus is revolving around the lower mezzanine tranches where for the right bonds yields can be in the high singles or even the very low teens.

Secondary markets

Trups flurry expected to trade well

The appearance of three Trups CDO BWICs due today has re-focused traders' attention on the asset class. All bonds are expected to trade well.

The first list was due at 10:00 New York time and contained €60m of original face of DEKAE III-X A1 and $10m of TPREF 2 B. "It'll be interesting to see who is in a position to take down the big piece of DEKAE, but both are likely to trade well," says one trader. Covers have not yet been released, but the trader expects the former to trade in the mid-to-high-80s and the latter in a mid-40s context.

Next up at 11:00 is $500,000 of PRETSL 20 A2 and $172,780 of PRETSL 23 INC. Given the very small sizes both are expected to be snapped up.

Last, at 14:00 is five line $110.4m list from a regional bank. It consists of: ALESC 5A C2, PRETSL 4 MEZZ, TPREF 2 A2, TPREF 2 B (for the second time today) and TRAP 2004-6A B2. Three of the bonds have covered on PriceABS in the last three months, last doing so as follows: ALESC 5A C2 MH50s on 22 October; PRETSL 4 MEZZ at MH73s on 6 November; and TPREF 2 B at 46h on 29 September.

There doesn't appear to be anything significant in the coincidental timing of the lists. "They're all legacy holder auctions so month-end wouldn't be a factor, it's more likely they are just trying to get them done before the holiday," the trader says.

Secondary markets

Still no big ABSPP trades

European ABS/MBS spreads are holding firm as the market continues to wait on significant ECB buying.

"Spreads are staying stable as the market continues to expect the ECB to start buying in size, but every day seems to bring with it another day's delay," says one trader. "They bought some Arena in the primary market yesterday, but we haven't seen anything of significance in secondary and the lack of price action reflects that."

Consequently, the European ABS/MBS secondary market is relatively quiet, with fairly low volumes of BWICs going through. "Eligible bonds have essentially stalled for now and that's having a similar effect on the rest," the trader reports.

Secondary markets

Whole tranche auction due

A BWIC consisting of the whole of MECEN 3 A due to trade at 14:00 London time today is attracting the attention of plenty of market participants.

The previously retained €401.3m Italian RMBS tranche now has a current size of €94.755m. The former triple-A and now double-A bond is being talked at round about 99.

Secondary markets

US RMBS quietens down for now

In contrast to last week's bumper levels of activity the US non-agency RMBS market is fairly quiet this week, but higher volumes are expected to return next.

BWICs only totalled $300m yesterday and look set to be about the same today. The rest of the week is expected to continue that trend thanks to both Thursday's holiday and predictions of bad weather in the North-eastern US.

"Today, it's mainly money managers selling a random assortment of bonds - it looks like they are just tidying up ahead of the holiday," says one trader. "However, other markets such as equities and high yield are trading well, so we expect to see continued selling when we come back from the Thanksgiving break."

Then, the trader says: "We're likely to see a return to much higher volumes, particularly in plain vanilla product, continuing until the end of the year as people take advantage of positive broad investor sentiment."

Structured Finance

SCI Start the Week - 24 November

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

Pipeline
A lot of deals joined the pipeline in the last full week before Thanksgiving. Unlike previous weeks it was not ABS leading the way - there were two new ABS deals added, along with two ILS, six RMBS, seven CMBS and six CLOs.

US$159m DFCF 2014-1 and €800m FTA Santander Consumer Spain Auto 2014-1 were the two ABS. They were joined by the US$300m Tradewynd Re Series 2014-1 and US$150m Tramline Re II Series 2014-1 ILS deals.

The RMBS were: A$276m Barton Series 2014-1; €700m BBVA RMBS 14 FTA; US$285.9m FirstKey Mortgage Trust 2014-1; US$344m Nationstar HECM Series 2014-1; A$460m Progress 2014-2 Trust; and RPMLT 2014-1.

The CMBS were: US$512m CGCCRE 2014-FL2; C$283.7m CMLS Issuer Corp Series 2014-1; US$557.1m COMM 2014-FL5; US$1.3bn COMM 2014-UBS6; US$136.61m FREMF 2014-K717; US$1.25bn GSMS 2014-GC26; and US$510m Spirit Master Funding Securitization 2014-4.

As for the CLOs, those consisted of: US$500m Ares XXXII CLO; Carlyle Global Market Strategies Euro CLO 2014-4; Halcyon Loan Advisors European Funding 2014; US$400m KKR CLO 10; US$510.215m OZLM IX; and US$410.5m West CLO 2014-2.

Pricings
Even more deals priced during the week. In this regard ABS did lead the way with 11 prints, while there was also an ILS as well as four RMBS, three RMBS and six CLOs.

The ABS were: US$178m American Credit Acceptance Receivables Trust 2014-3; US$1bn CHAIT 2014-A8; US$750m CIT Equipment Collateral 2014-VT1; US$250m Dryrock Issuance Trust Series 2014-4; US$250m Dryrock Issuance Trust Series 2014-5; US$1.57bn Ford Credit Auto Owner Trust 2014-C; US$1.025bn Honda Auto Receivables 2014-4; US$207.5m JGWPT XXXIII Series 2014-3; US$1.016bn Navient Student Loan Trust 2014-8; US$1bn SDART 2014-5; and US$266m TAL Advantage 2014-3.

US$100m Residential Re 2014-2 was the ILS. The RMBS, meanwhile, were US$1.449bn CAS 2014-C04, €897.6m FCT ELIDE Compartiment 2014-01, €7.5bn FTA RMBS Santander 3 and A$400m Liberty Series 2014-2 Trust.

The CMBS were US$530m American Homes 4 Rent 2014-SFR3, US$450m LCCM 2014-LKMD and US$900m WFRBS 2014-C25. Lastly, the CLOs were: US$368.5m Calvary CLO 2014-5; US$406m Cerberus Onshore II CLO 2014-2; €400m Cordatus Loan Fund IV; US$413m Figueroa 2014-1; US$361.2m Hildene CLO III; and US$507.3m Northwoods Capital XIV.

Markets
The US ABS market started to shift into year-end mode last week, according to JPMorgan analysts, with a final push to clear out the pipeline in the primary market and investors losing focus in secondary. "The last batch of 2014 vintage ABS was absorbed at decent spread levels, which were still back of the tights seen this year and in from the recent wides. In secondary, investor demand and focus were scattered and mixed with pockets of demand (very specific buy axes) as well as general disinterest (year-end malaise settling in)," they say.

As for US non-agency RMBS, several busy secondary market sessions saw significant BWIC supply, as SCI reported on Thursday (SCI 20 November). Tuesday's supply was boosted by a US$1.3bn list in the morning and a US$753m list in the afternoon, while there was also over US$1bn out for the bid on Wednesday.

US CMBS spreads widened as multiple deals came to market, with Barclays Capital analysts noting that the CMBS market was largely in line with the credit market, where spreads also leaked wider. "New issue dupers were flat at swaps 86bp and, lower in the capital stack, 2014 dupers were 2bp wider at swaps plus 329bp. In the legacy space, spreads were unchanged; 07 dupers are at swaps plus 86bp and 07 AJs are at swaps plus 488bp," they report.

European CMBS secondary supply was also elevated, as SCI reported (SCI 18 November). A degree of weakness appeared to be setting in, with one trader noting that clients were largely waiting for the ECB's Thursday update (SCI 20 November).

Lastly, the European CLO market was similarly focused on the ECB, but did have a large list due on Wednesday to look forward to, as SCI reported at the start of the week (SCI 17 November). "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."

Deal news
• 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.
• 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.
• Cutwater Asset Management Corp will continue to manage its seven CDOs, despite a change in control being triggered by the purchase of ownership interests in Cutwater Holdings by Bank of New York Mellon. Fitch confirms that Cutwater will operate as part of BNY Mellon Investment Management and will be administered by Insight Investment Management. Cutwater is the collateral manager for Acacia CDO 6, Coronado CDO, Fulton Street CDO, Mulberry Street CDO, Mulberry Street CDO II, Oceanview CBO I and Reservoir Funding.
• 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.
• 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.
• 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.

Regulatory update
• The implementation of the ABSPP has entered into force, following yesterday's (19 November) publication of the ECB's decision regarding the programme. The decision outlines the scope and eligibility criteria of the central bank's outright purchases.
• Questions remain over whether Chinese securitised assets under the Asset Backed Specific Plan (ABSP) can be ring-fenced for the ABSP's creditors in a bankruptcy ruling, Moody's reports. This is despite proposed changes by the China Securities Regulatory Commission (CSRC) in September.
• 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.
• A new ruling by the Nevada Supreme Court is forcing participants in the single-family residential market to examine their exposure to delinquent Homeowners Association (HOA) fees to ensure that fees, fines and assessments are paid on time. The ruling - SFR Investments Pool 1, LLC v. U.S. Bank - could be troubling for the single-family residential lending market, potentially affecting both agency and private-label securitisations, says Morningstar.

Upcoming SCI events
• 12 December, London - SCI's 8th Annual Securitisation Pricing, Investment & Risk Seminar
Click here for more details

Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-2; BSCM 2006-PWR11; BSCMS 2006-PW14; BSCMS 2006-T22; BSCMS 2007-T28; COMM 2012-CR5; CSMC 2006-C5; CWCI 2006-C1; ECLIP 2006-4; ECLIP 2007-2; EURO 23; EURO 25; EURO 28; GSMS 2006-GG6; JPMCC 2001-CIB2; JPMCC 2006-CIBC15; JPMCC 2006-LDP7; JPMCC 2007-LD11; JPMCC 2007-LD12; LBUBS 2006-C1; MESDG CHAR; MLMT 2007-C1; MSC 2005-HQ7; MSC 2007-HQ11; MSC 2007-IQ16; TITN 2007-1; TMAN 6; TMAN 7; WBCMT 2006-C25

RMBS

GSE update on life-of-loan exclusions

Fannie Mae and Freddie Mac have released an official update to the representations and warranties framework outlined last month (SCI 21 October), providing details and clarity on life-of-loan exclusions. The framework details what remedial actions the GSEs will take and explicitly favours the re-pricing of risk over repurchase.

Life-of-loan exclusions have been characterised under six categories: misrepresentations, misstatements and omissions; data inaccuracies; charter compliance issues; first-lien priority and title matters; legal compliance violations; and unacceptable mortgage products. The update concerns misrepresentations, misstatements and omissions, data inaccuracies and legal compliance violations.

The framework provides greater clarity and less downside to originators for minor violations and Barclays Capital analysts believe it should therefore have an incrementally positive effect on credit availability. The update gives an explicit definition of the loan count threshold for triggering a significance test, a clear metric to determine significant violations of reps and warranties and also a framework to address and remedy breaches.

The loan count threshold for triggering a significance test has been set at three or more loans for misrepresentations, misstatements or omissions and at five loans or more for data inaccuracies. The Barcap analysts note that these are low thresholds which sellers with a reasonable volume will cross easily.

Misrepresentations, misstatements and omissions or data inaccuracies would only be considered to be significant if the inaccurate information caused the GSEs' automated underwriting systems to give too high a risk profile recommendation to a loan pooled or purchased on or after 1 January 2013. If the automated underwriting system determines the loan is still eligible to purchase with the accurate information then the GSEs will re-price it to the correct risk profile, while if the loan is deemed ineligible for purchase it would lead to a repurchase request.

The new framework displays a strong preference for re-pricing over repurchase wherever possible, with repurchase serving as a last resort. "This is positive on the margins for credit availability as originators would not be required to repurchase loans just because the risk profile on the loan was mis-categorised," the analysts comment.

Fraud, however, remains one instance where a repurchase would be mandatory. There is still a grey area as to the point at which a pattern of misrepresentation constitutes fraud, with the GSEs saying that they will look to find clear and convincing evidence that the lender knowingly participated in such actions, which the analysts note leaves room for interpretation.

JL

RMBS

Can't test our way to trust

Mike Manning, co-founder and ceo of DealVector, argues that alignment of interest is the key to RMBS reform

We may be working on the wrong issues. And when you're in a hole, stop digging.

Those were two thoughts I took from SFIG's very well-designed conference on reforming private label RMBS last week. Three moments stood out in particular:
• Treasury's Michael Stegman announcing that the government has decided it is not appropriate to create an "unambiguous fiduciary standard" for trustees.
• Citi noting that it had recently printed a deal with "40 reps and warranties and 85 triggers."
• A participant bemoaning Reg AB II's required disclosure of "only 275 data fields" in new deals and asking: "How do we know that those are the right 275 data fields?"

These are signs of a fundamental breakdown in trust: insisting that someone be labeled as having actual fiduciary obligations; incorporating nearly 100 triggers in a deal; demanding more than 275 data fields. They are more symptom than cure; proof of how thoroughly things have gone off the rails.

Until trust is re-established, no amount of tests or triggers or disclosure will bring the market back. 'Trust, but verify' is viable. 'Distrust and triple-check everything and everyone' is not.

What can rebuild trust?
"Alignment" was the answer that came from several participants. The work that is being done by SFIG and others to develop a better RMBS 3.0 structure is important, but several investors noted that it is impossible to anticipate every possible future problem.

At core, they are asking: "How can I invest if I don't trust you? And how can I trust you if your interests are not aligned with my own?"

Looked at through this lens, current efforts to re-start the market may even be counterproductive. Yes, that 100th trigger or that 276th data field may be the key to alerting investors to problems.

But they may also just add hay to the stack, further obscuring the needle. At the very least, the increased complexity serves as a further barrier to new capital getting comfortable with the asset class.

Consider this: RMBS was ground zero for the 'no skin in the game' problem that was at the heart of the misaligned interests leading to the financial crisis. Yet it has completely escaped the risk retention requirements that have been imposed on other structured asset classes.

Moreover, policymakers have been busy weakening the ultimate 'skin in the game' backstop by lowering the down payment required for qualifying mortgages. No wonder investors are worried.

An interesting exchange developed on the servicer oversight and enforcement roundtable. The servicers described what they were doing to improve servicing and expressed what seemed to be a genuine willingness to disclose more information and to work with investors to assure them that modifications and other decisions were being made in the best interest of bondholders.

However, one noted gently, there does have to be some level of trust. Sometimes oversight degenerates into micromanagement. Any of us who has ever worked for an overbearing boss can sympathise.

"Hold on," responded an investor. "You are asking for a level of trust after we've just been through a period when that trust has been horribly violated." Any of us who has managed an underperforming employee can sympathise with this sentiment as well.

It may be that instead of focusing on governance structures, we should be focusing on incentive structures. This calls into question the whole 'originate to distribute' supply chain that has emerged in RMBS. With each of the functions in a deal - origination, servicing, issuing - dispersed among separate entities, each with its own incentives, RMBS faces unique challenges in assuring investors that their interests will be looked after.

Is this 'distributed' supply chain model viable any longer? Does this explain why RMBS has been so much slower to rebound than other structured categories? Can we maintain the current model, but design different payment schemes to ensure that everyone's interests are actually aligned?

These questions - questions of incentives and rewards, rather than indentures and rules - seem to be the key to bringing back the market. That is because investors, as they made clear at the conference, won't invest their capital again until they are confident that interests are aligned.

CMBS

New broom

Mount Street managing partner and ceo Ravi Joseph and director Jonathan Banks answer SCI's questions

Q: How and when did Mount Street become involved in the securitisation market?
RJ: Mount Street is an amalgam of a couple of different businesses. We began taking on servicing assignments about two years ago and this business has grown quickly around the emergence of non-bank lenders, most of whom choose to outsource their servicing requirements.

We then acquired the Frankfurt CRE loan servicing operations of Crown Credit Services in 4Q13, which included staff and a portfolio of contracts, which we continue to service. This was followed by the acquisition of the Morgan Stanley Mortgage Servicing (MSMS) platform in 1Q14 (SCI 30 January), which completes a loop, as I set up the original CMBS business at Morgan Stanley.

MSMS was the first European CRE servicer (being established in 1998), the first rated CRE servicer (with S&P and Fitch ratings of 'above average' and CPS1- respectively) and always had a strong reputation for integrity and professionalism. Many of our current investor and borrower relationships were carried over from Morgan Stanley.

JB: We understand how CMBS deals work after many years of managing the Morgan Stanley deals, which is one differentiating factor. Our aim is to look after the entire structure, thereby providing more comfort to bondholders.

RJ: Paul Lloyd, one of the three Mount Street partners, ran MSMS and went on to run Deutsche Bank's and CBRE's servicing platform. Our third partner - Bill Sexton - has deep bricks-and-mortar experience and, in fact, was a CMBS borrower while at Halverton, which brings an interesting perspective to the firm.

We currently service circa £12bn of loans and bonds, a quarter of which is specially serviced and the remainder is performing. About £5bn-£6bn is non-securitised and represents new assets from non-bank lenders.

Q: What are your key areas of focus today?
RJ: The third-party servicing community has worked its way through the business of busted real estate loans over the period 2008 to present. While there was little restructuring experience in the sector prior to the financial crisis, now there is significant experience with workouts.

We're trying to deploy that experience with potential purchasers of loan portfolios. The skill-set is an extension of a special servicer's, but the task is easier in some ways because the restrictions of a bond are removed.

We understand what the costs are for different restructuring strategies and have expertise across different jurisdictions. Investors can leverage their position by having us help them underwrite loans and manage the asset.

JB: There is significant bank deleveraging underway and a slew of NPL sales are expected over the next 12 to 24 months, following a record year in 2014, driven by the ECB's asset quality review and the implementation of IFRS 9 and Basel 3.

French banks are notably absent in terms of non-core asset disposals, while UniCredit and Intesa in Italy have only recently started to set up bad banks in earnest. Spain has the highest volume of NPLs at around €200bn and is expected to remain active, together with the UK and Ireland. And a modest volume of sales is anticipated in Germany.

Q: How do you differentiate yourself from your competitors?
RJ: My background is bond-facing and so I'm very sympathetic to the needs of investors. Investors have three major complaints about the CMBS servicing industry, the first of which is in relation to professionalism and quality of service.

Many doubt whether the right level of skills are being deployed or simply can't tell what is happening behind the scenes. But we're hoping to maintain the strong reputation built by MSMS as a quality servicer. We're staffed by high quality professionals, with extensive CRE experience.

The second complaint is around transparency and the third is around fees. There appears to be a culture of maximising fees by taking fees on the side for mundane tasks like standstills. But we believe that the standard servicing fees are appropriate.

We won't take extra fees that are unnecessary for mundane tasks. If we decide that something needs a fee, we will disclose it so that bondholders can judge for themselves whether we're being paid fairly.

We even back-end the fee sometimes when we have a strong conviction, thereby providing alignment of interest with bondholders.

With respect to the second complaint, we invested in a complete revamp of our reporting platform to make it user-responsive. The CMBS business survives on bond communications and bondholders need to be the ones that set the agenda. What they typically find frustrating is that reporting is so shoddy - it's been done in the same format for 10 years, which is astonishing.

Many investors say that servicer reporting is hard to understand and that special servicers are reluctant to be transparent, but we want to provide the maximum information that we can. It's a very different approach: if we have to keep making more information public, so be it.

JB: Mount Street understands the importance of transparency in the CRE market, particularly following the credit crisis, and we are committed to providing a clear and concise reporting solution. We have created a new suite of investor reports for the Morgan Stanley CMBS deals, incorporating feedback provided by investors over the years. All reports are easily accessible via the Mount Street website, which was recently re-launched to reflect our growing business.

While the E-IRP template is one element of our reporting, we also try to include more explanatory details because often the facts and figures don't provide the full picture around a loan's history, especially if a bond has been acquired in the secondary market. In addition, we try to provide our expectations on exit strategy and so on.

We supplement the information by providing colour on asset sales and leases, as well as working closely with borrowers and cash managers to gather loan level detail and financial data.

Some other special servicers are starting to provide more comprehensive information. Although the typical reporting hasn't changed, there may be more ancillary reports, for example.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
RJ: We often hear that all the value in legacy European CMBS has been extracted and any potential opportunities are now fully priced in. But situations remain where a completely fresh look at a workout or resolution strategy can lead to a different expected value and make a significant difference to where value breaks. For example, if the recovery on a transaction increases from £270m to £300m, the lower tranches exponentially move up in value.

One such instance we've been involved with this year is the Bridge loan, securitised in Windermere X. The class E noteholders were in a position in April to have Mount Street create value with a new workout strategy, but they have since been wiped out by losses.

It has been an incredibly inefficient process that has taken nearly a year and now the controlling class is the class D noteholders. They are still debating whether their position could be worth more if servicing is transferred to a different firm with a different strategy. The bonds do appear to have been undervalued: they have traded up by around 40% since negotiations began.

We feel strongly that there is an opportunity here: we've come up with a path to recover par on the Bridge loan. Because of our conviction, if special servicing is transferred to us, we have committed not to take a resolution fee until the senior loan is repaid at par.

Many deals remain that could potentially be transferred to a different special servicer, but it depends on the controlling noteholders and whether there is a control valuation mechanism. Noteholders need incentives to go through the process: it requires someone to benefit and acquire the tranche and instigate change.

JB: Perhaps investors aren't familiar with the servicing transfer mechanics or are put off by the long-winded processes involved. Although selecting a new servicer is straightforward, all the other bells and whistles take time.

RJ: Investors can also ask themselves whether the current servicer is doing the best job. The answer is almost never yes because a high level of dissatisfaction remains prevalent in the investor community.

We'd like to encourage investors to talk to us about anything. We're happy to do a lot of work to see if we can squeeze more value out of a situation.

Q: What major developments do you need/expect from the market in the future?
RJ: Looking ahead, the big question is whether the CMBS market is coming back and, if so, how to position ourselves as the servicer of choice for new issues. If the market comes back in size, we hope that issuers will follow the lead laid out by investors and the CMBS 2.0 principles. The industry is much more sophisticated post-crisis - both in terms of servicers and investors - so the 2.0 market should reflect this.

CS

Structured Finance

Cutwater integration underway

Cutwater Asset Management Corp will continue to manage its eight CDOs, despite a change in control being triggered by the purchase of ownership interests in Cutwater Holdings by Bank of New York Mellon. Fitch confirms that Cutwater will operate as part of BNY Mellon Investment Management and will be administered by Insight Investment Management.

Cutwater is the collateral manager for Acacia CDO 6, Coronado CDO, Fulton Street CDO, Mulberry Street CDO, Mulberry Street CDO II, Oceanview CBO I, Reservoir Funding and Summer Street 2004-1. The most senior classes are currently rated below investment grade and are no longer in their reinvestment periods. Fitch consequently does not expect the acquisition to have any impact on its assigned ratings.

BNY Mellon announced last month that it had reached an agreement to acquire Cutwater. The addition of Cutwater's capabilities is expected to enhance BNY Mellon's and Insight's US platform and abilities to offer specialised fixed income solutions. The transaction is subject to standard regulatory approvals and is expected to close by the beginning of 1Q15.

As of 30 June, Insight Investments had over US$495bn in assets under management, with offices in London, New York, Sydney and Tokyo. As of 30 September, Cutwater had US$21.9bn in assets under management.

Structured Finance

First Names branches out

First Names Group has formed a global structured finance services unit in the US. Orlando Figueroa and Mark Ferraris have been appointed as mds to drive the business.

Ferraris and Figueroa will be responsible for global strategy in delivering services through both First Names' existing network - including the UK, Luxembourg, Ireland, the Netherlands and Switzerland - and new jurisdictions. They will focus on the global capital markets industry, specifically those services associated with the formation, management, governance, accounting and administration of SPEs for securitisations and other types of complex financing structures.

Prior to joining First Names, Figueroa spent 13 years at Lord Securities Corporation. Ferraris has led his specialist consulting practice, Orchard Street Partners, for the past seven years. Previously, he held roles as global head of corporate trust services for BNY Mellon, president and ceo of Wall Street Analytics and president of global fixed income services for Computershare.

The pair will report to First Names md Armin Kirchner.

Structured Finance

Voluntary liquidation approved

Primus Guaranty's shareholders have approved a proposal to wind up the company by way of a members' voluntary liquidation, after it held a special general meeting of shareholders (SCI 28 October). Mark Smith, of Deloitte, has been appointed by the shareholders as the company's liquidator.

With the commencement of the voluntary liquidation, the powers and authorities of the company's directors and management have ceased and been assumed by the liquidator. In addition, the company's stock transfer books are now frozen and its transfer agent will not record or recognise any subsequent assignments or transfers of the company's common shares.

Primus confirms that 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.

Structured Finance

TMF expands in SA

TMF Group has acquired 100% of the share capital of South Africa-based GMG Trust Company, a provider of trustee services to the banking and structured finance industries. All senior GMG management and client relationships will remain with the business post completion of the acquisition, which is expected by end-November.

The acquisition positions TMF Group as one of the largest providers of fiduciary services within South Africa, complementing its existing services within the country, as well as providing significant cross-selling opportunities of other services to the GMG client base. In addition, the deal provides the firm with a sizable platform from which to accelerate its growth strategy across Africa.

TMF Group funded the acquisition from existing resources. The financial terms of the transaction have not been disclosed.

Structured Finance

Demica names new ceo

Demica has appointed Matt Wreford to the role of ceo. Wreford arrives from Vernier Partners, a business he founded in early 2014. Along with further developing Demica's trade receivables securitisation franchise, he will look to broaden Demica's current supply chain finance offering.

Prior to founding Vernier Partners, Wreford spent seven years at IPGL. He was appointed ceo of Exotix Partners in 2011 and became ceo of IPGL in 2012. In addition to these roles, he has served as non-executive director of a number of other financial services companies including City Index and Origin Asset Management.

CLOs

CLO team formed

Lupus Alpha has expanded its team with the addition of four members from Main First Asset Management. Norbert Adam, Klaus Ripper, Michael Hombach and Stamatia Hagenstein will form a specialised fund management team in January, focused on CLOs. Lupus Alpha intends to issue several CLO strategies for institutional investors, as well as policy-compliant mutual funds.

CMBS

CRE initiative established

Pine River Capital Management has hired Jack Taylor to serve as global head of CRE. The company has also added Stephen Alpart and Steven Plust to each serve as mds.

Taylor was previously md and head of the global real estate finance business for Prudential Real Estate Investors. He was also a member of the global management committee and chaired the global investment committee for debt and equity.

Alpart and Plust were also mds at Prudential. Both were portfolio managers and members of the debt investment committee, responsible for investment activities.

In light of these moves, Two Harbors Investment Corporation - a company managed by a subsidiary of Pine River - is planning an initial allocation of approximately US$500m of equity capital to a new CRE initiative.

Insurance-linked securities

Broker expands into ILS

Alwen Hough Johnson has established AHJ Capital Markets, which has been authorised by the UK Financial Conduct Authority. The new company will provide clients with access to risk transfer and capital products available in the financial markets.

Initially, the company will help insurers to manage risk through reinsurance backed by ILS and to finance risk through debt and equity capital. It will also develop risk solutions specific to the sectors in which Alwen Hough Johnson operates.

Based in London, AHJ Capital Markets is led by Martin Davies. It will be fully integrated within AHJ's broking teams and will have full access to the group's broking, analytical and accounting services.

Insurance-linked securities

Reinsurance merger agreed

Platinum Underwriters and RenaissanceRe have entered a merger agreement under which RenaissanceRe will acquire Platinum. Under the terms of the transaction, the common shareholders of Platinum will receive US$1.16bn of cash and 7.5 million RenaissanceRe common shares with an approximate value of US$76 per share, or approximately US$1.9bn in aggregate, representing a 24% premium to Platinum's closing price.

At closing, Platinum shareholders will receive a US$10 per share special pre-closing dividend, with the remainder of the consideration being in the form of US$66 per Platinum share in cash, 0.6504 RenaissanceRe common shares per Platinum share or a combination of US$35.96 in cash and 0.2960 RenaissanceRe common shares per Platinum share, subject to proration. The agreement has been unanimously approved by both companies' boards of directors. The transaction is expected to close in 1H15 and is subject to customary regulatory approvals, as well as the approval of Platinum's shareholders.

Goldman Sachs is acting as financial advisor to Platinum, with Sullivan & Cromwell acting as legal counsel.

Risk Management

Consulting director recruited

4sight Financial Software has hired Edward Cockram as North American product consulting director. Based in New York, he will provide client consultation and business analysis services to North American clients.

Prior to 4sight, Cockram was vp of securities finance at ABN AMRO, where he established and ran the collateral finance trading desk. Cockram has also worked in collateral finance at Fortis Bank.

Risk Management

BGC breach resolved

BGC Partners has resolved matters with the UK FCA regarding exceeding a 10% stake in GFI Group without first informing and seeking the approval of the authority. This is a breach of UK regulatory law.

BGC acknowledges the breach and says it is working with the FCA to ensure that changes are made to its systems and controls to ensure that such a breach does not occur again. In light of this, and the particular circumstances involved, the FCA has taken the view that it is not appropriate in this specific case for it to take any formal action. However, the FCA has expressed its disappointment at the breach and has reiterated the seriousness with which it views such breaches and its willingness to take action in appropriate circumstances.

BGC also says that it has received approval from the FCA to acquire control of GFI and thereby take control of the UK regulated firms within GFI Group.

Risk Management

Collateral management collaboration inked

Genpact has integrated its collateral agreement and reference data services (CARDS) with Lombard Risk's collateral, clearing, inventory management and optimisation solution COLLINE. The firms say that the collaboration will enable both buy- and sell-side firms to automatically digitise and capture the terms and conditions of various collateral agreements across asset classes, counterparties and business silos, resulting in a margin and collateral rulebook by counterparty.

Specifically, the digitised data loads COLLINE's agreement management database with the counterparty margin and collateral rules needed to efficiently manage and optimise margin and collateral, sharply reducing the time required to manually capture the information from existing and new agreements and amendments. Genpact's service includes the data entry of custom agreement terms that are incapable of being extracted and digitised by CARDS, as well as management of the data.

In addition, the two firms are launching a joint business processing outsourcing service for the collateral management function to include processes such as set-up and management of agreements, integrating and verifying positions and inventory, and monitoring of margin calls extending from issuance to settlement.

Risk Management

BGC bid extended

BGC Partners has extended the expiration date of its tender offer to acquire all of the outstanding shares of GFI Group that it does not currently own. The offer is now scheduled to expire on 9 December, having previously been scheduled to expire on 19 November.

As of 19 November, approximately 23.2 million shares were tendered pursuant to the offer. Together with the 17.1 million shares of GFI common stock already owned by BGC, this represents approximately 31.7% of GFI's outstanding shares.

BGC remains actively engaged with the GFI Special Committee. While these discussions are not yet complete, BGC believes that the Special Committee would be willing, under certain conditions, to recommend that GFI's stockholders accept BGC's tender offer, resign and take actions necessary so that BGC will have control of two-thirds of GFI's board.

ABS

Global variations in card ABS

Credit card ABS in different jurisdictions incorporate a variety of structural features to address the credit risks inherent in such securitisations, says Moody's. In addition, the types of issuers and loans backing credit card ABS are different across countries.

"General purpose and co-branded cards in the US, UK and Canada are typically issued by regulated banking entities," says Matias Langer, a Moody's vp and team leader of the US credit card ABS team. "General purpose cards in Japan and Korea are issued by non-bank entities, although some Korean issuers are affiliated with regulated banks. And in contrast with other jurisdictions, cash advances account for a significant portion of the loans in Japanese and Korean transactions."

Asset quality across trusts in the UK, Japan and Korea, for example, is usually more difficult to compare than in the US or Canada because originators use proprietary credit scores. Performance through and after the credit crisis also varied by jurisdiction.

Moody's adds that credit card losses from charged-off loans rose less dramatically in Canada, where they have been historically lower as a result of a higher average credit quality cardholder base and a more conservative consumer credit culture than in the US and the UK. "Since the crisis, though, US and UK losses declined rapidly because many weaker cardholders' accounts exited the securitisations when sponsors charged them off during the crisis," says Langer.

Typical credit enhancement levels and early amortisation triggers also vary across jurisdictions. "For example, Japanese transactions - in contrast to other jurisdictions - use both loan principal repayments and excess spread, which consists of net finance charges and fees, to build additional credit enhancement," says Moody's vp Peter McNally. "Also, Japanese and Korean transactions typically have additional performance triggers based on other metrics, including delinquency rates, default rates, principal payment rates and yield."

For a card transaction to achieve a credit rating that is higher than that of the related sponsor, its assets must be clearly isolated from any creditor claims, should the sponsor become insolvent. "Because US card trusts are typically sponsored by federally-insured banking entities, most trusts isolate their assets from the claims of a sponsor's creditors by qualifying for the FDIC's safe harbour rule," says McNally. "Trusts in other jurisdictions are able to isolate the assets of the trust from the claims of the related sponsor's creditors by meeting the standards for a legal true sale of the trust's assets under those countries' own laws."

ABS

Cell tower auctions 'credit positive'

The US Federal Communications Commission (FCC) last week completed 27 rounds of Auction 97, its ongoing wireless spectrum license auction, having received bids from 70 participants totalling US$33bn. The bids received are well beyond the FCC's aggregate reserve price of US$10.6bn and industry estimates of US$15bn.

Moody's says in its latest Credit Outlook publication that the auction results thus far are credit positive for wireless cell tower operators American Tower Corporation, Crown Castle International and SBA Communications Corporation and their asset-backed bonds. It expects the auction to stimulate the major mobile carriers to spend more to upgrade or install new equipment at the tower operators' sites, thus increasing revenue and cashflow available to their bonds.

The agency also estimates that total bids could surpass US$40bn when the auction closes in a few weeks, given that spectrum prices have risen by an average of 15%-20% in each round. Moody's believes that the high valuations gives the tower operators increased pricing leverage with the carriers and increases the likelihood that the carriers will build out the spectrum sooner to justify the high purchase prices and improve their returns on the investment.

This could benefit the tower firms because the average incremental increase in revenue per tower driven by amendment activity from carriers' deployment of spectrum acquired at the auction can vary from US$500 a month to as high as US$800 a month. This equals a monthly revenue increase of 9%-18% for each augmented tower, given that operators currently generate monthly revenue per tower of US$4,500-US$5,300.

Because it will take at least two years for the carriers to begin building out the spectrum, Moody's does not expect the auction to trigger an increase in the cell tower operators' organic revenue growth in 2015. However, it does expect revenues in 2016 and beyond to benefit as the winning carriers begin deploying the spectrum and complying with the FCC's mandate to offer service to at least 40% of the US population in each of its license areas within six years after receiving a license.

Moreover, Moody's research finds that cashflows in cell tower ABS are highly concentrated among the four largest US wireless carriers - AT&T, Sprint Communications, Verizon Communications and T-Mobile USA - with cell tower ABS having the largest exposure to AT&T. All but Sprint are participating in the auction.

The agency says that AT&T and Verizon have been the most aggressive bidders, although it is unlikely that they will meaningfully accelerate their deployment, given that both already own licenses to a large amount of spectrum and are actively deploying it. On the other hand, a smaller carrier such as T-Mobile could more quickly deploy the new spectrum to accelerate its nationwide 4G/long-term evolution coverage to catch up with AT&T and Verizon.

Another major auction bidder is DISH Network, the second-largest satellite TV provider in the US and a possible candidate to merge with T-Mobile, given that DISH already holds a sizable block of unused spectrum. If DISH acquires some of the new spectrum, a tie-up with T-Mobile would give the combined entity a sizable spectrum portfolio. Deployment by a combined DISH/T-Mobile entity would likely accelerate, benefitting tower securitisations, according to Moody's.

ABS

CBRC actions 'positive' for card ABS

The China Banking Regulatory Commission's (CBRC) decision to fine seven banks for violations in their credit card businesses signals its intent to tighten underwriting and risk management standards among commercial banks, according to Fitch. This is positive for the performance of credit card portfolios and future credit card ABS in China, as it indicates that the regulator is moving pre-emptively to ensure portfolios supporting future ABS transactions will be kept pristine.

CBRC has issued a total of CNY2.4m in fines to seven commercial banks for violations that include not verifying borrower information, granting excessive credit and failing to monitor abnormal transaction activities. The fines follow an increase in delinquent credit card debt for five straight quarters to CNY32.1bn in 2Q14.

These delinquencies of six months or more represent 1.57% of total outstanding credit card debt in China. By way of comparison, Fitch's US credit card charge-off index stood at a record low of 2.7% in 3Q14.

Fitch explains that credit card portfolios are revolving as cardholders will continue to use the credit cards to make purchases. Therefore, a credit card issuer's continuous monitoring of its portfolio and readjustment of credit limits when warranted are vital to the stable performance of the portfolio.

The agency believes that CBRC's actions are in line with the regulators' desire to ensure credit quality is maintained and the securitisation market grows at a measured pace. It adds that originator success in utilising ABS as a mainstream funding tool will depend on how they manage their underwriting and servicing quality to keep delinquencies manageable, while continuing to grow their auto financing businesses.

The key concern of these originators is that the ABS funding channel is not taken away at the first sign of credit deterioration. In Fitch's view, the securitisation market is developing into an important funding source and regulators are probably unwilling to see the momentum built so far in 2014 taken away by credit deterioration.

Only one credit card ABS has been issued in China thus far: issued by the China Merchants Bank in March, it is backed by credit card instalment loans to finance the purchase of vehicles by the obligors (SCI 29 April).

Structured Finance

ABSPP 'hinges' on mezz purchases

The ability of the ECB's ABSPP to provide capital relief to eurozone banks could hinge on its plans to buy mezzanine tranches, says Fitch. The capital impact of the ABSPP purchases at different parts of the capital structure will vary with jurisdiction, underlying assets and the originating banks' approach to calculating credit risk.

Fitch looked at three hypothetical structured finance portfolios - a Dutch RMBS portfolio, a Spanish SME portfolio and a Greek RMBS portfolio - and compared capital charges on the underlying portfolio and securitised debt in order to assess the possible capital impact of ECB purchases at different points in the capital structure. The capital benefits of securitising the hypothetical Dutch portfolio - 33% of which comprises NHG loans with a 0% risk weighting - could depend on loss assumptions. Holding the underlying mortgages attracts a capital charge of 6.8% under the advanced internal ratings based approach (AIRB), according to Fitch's probability of default and loss-given default assumptions.

When securitised, with a capital structure similar to that seen in recent Storm transactions, holding both the junior and mezzanine tranches would result in a capital charge under the current supervisory formula approach of 4.9%. An originating bank that securitised this hypothetical portfolio would therefore get a 1.9 percentage point capital benefit by selling the senior tranche only.

However, the default and loss assumptions used in Fitch's analysis - which are those used in its single-B scenario for Dutch RMBS - may be more conservative than those used by Dutch originators. Reducing assumed probability of defaults by around one-third lowers the capital charge on the underlying mortgages to 3.7%, while the cumulative charge on the junior and mezzanine RMBS drops to 4%, removing the capital benefit of selling the senior tranche without also selling mezzanine bonds.

For its hypothetical Spanish SME portfolio, Fitch says that capital relief might be harder to achieve. The underlying SME loans attract a capital charge of 16.1% under the AIRB, again under Fitch's assumptions for the assets.

An originating bank which securitised the loans and sold the senior tranche (double-A plus rated, with an attachment point of 30%) but retained the mezzanine (10%-30%) and junior (0%-10%) tranches would have to hold 17.1% capital against its securitised exposure. Thus it would have to sell mezzanine notes to achieve the same capital treatment it would receive for holding the underlying assets.

Obtaining capital relief is most challenging for the hypothetical Greek mortgage portfolio. Fitch used assumptions in line with the single-B scenario in its Greek RMBS criteria and based original loan-to-value ratios and mortgage performance on a Greek transaction that has seen relatively little support.

Under the standardised approach, used by some Greek banks, the underlying loans attract a relatively low capital charge - at 3.4% - making it hard to achieve capital relief via securitisation. Using the AIRB, the capital charge when the originator holds the underlying assets is considerably higher at 14.1%. However, the ECB's requirement that Greek securities it buys have a minimum current credit enhancement of 25% still makes it very unlikely that capital relief would be achieved by selling the senior tranche in a securitisation.

Structured Finance

Direct lending fund closed

Alcentra has raised €850m at the close of the Alcentra European Direct Lending Fund. With the closing of the fund, the firm's committed capital for the strategy now exceeds €1.5bn.

The focus of the fund is to provide debt financing to middle market companies in Europe. Alcentra has been sourcing and arranging financings to middle market businesses in Europe since its launch in 2003. To date, the firm has invested over €2bn in middle market companies across senior debt, unitranche, second-lien, mezzanine and equity investments.

Structured Finance

Economy supports Aussie outlook

Moody's expects Australian RMBS, ABS and covered bonds to continue performing well in 2015. This is in spite of deteriorating collateral quality in new transactions in an environment of rising house prices.

The agency says that steady performance will be supported by Australia's GDP growth - expected to be in the range of 2.5% to 3.5% in 2015 - similar to 2014. Unemployment is anticipated to remain steady at around 6% through 2015.

It is also expected that the official interest rate will rise from the current record-low level of 2.5%, with a possible 25bp increase forecast for 3Q15, followed by another 25bp rise in Q4. Moody's notes that, even at 3%, interest rates would remain at historically low levels.

Against this backdrop, RMBS is expected to continue to perform well in 2015. But the credit quality of new mortgages underwritten in the historically low interest rate environment may be weaker than for older mortgages.

Furthermore, the quality of collateral in new ABS could deteriorate slightly, due to the continued diversification of the underlying assets away from stronger-performing auto loans. However, delinquencies and defaults should remain at current low levels, reflecting stable economic growth and unemployment levels.

Finally, Moody's believes that the high credit quality of all Australian and New Zealand covered bond programmes will continue, reflecting the strong financial standing of issuers and the quality of the mortgage collateral.

Structured Finance

Call for ring-fencing clarity

Questions remain over whether Chinese securitised assets under the Asset Backed Specific Plan (ABSP) can be ring-fenced for the ABSP's creditors in a bankruptcy ruling, Moody's reports. This is despite proposed changes by the China Securities Regulatory Commission (CSRC) in September.

"Although the proposed changes have provisions suggesting that securitised assets should be ring-fenced from the bankruptcy estate of the originator and project manager, uncertainties remain on how the courts will enforce the relevant provisions, which do not constitute laws enacted by the National People's Congress," says Jerome Cheng, a Moody's svp. "While the CSRC's proposed administrative measures may provide some guidance for future court rulings, questions continue over whether investors in securitisations under the ABSP framework will be immune from claims made on the securitised assets by creditors of the bankrupted originator and/or project manager."

Specifically, the CSRC's revisions would apply to the ABSP securitisation framework, which was formerly known as the Specific Asset Management Plan (SAMP). Under the ABSP framework, securities firms and subsidiaries of asset management companies assume the role of project manager for the SPVs used in securitisations.

The CSRC securitisation framework is based on an assignment concept, whereby the contractual relationship between the securities firm/asset manager and investors is that of a principal and an agent. This relationship is different from the trust structure adopted by securitisations under the Credit Asset Securitization (CAS) programme regulated by the People's Bank of China (PBOC) and China Banking Regulatory Commission (CBRC), wherein a special purpose trust structure is set up for CAS issuance.

"The ABSP framework does not have this trust structure used for CAS issuance and therefore some ambiguity exists over how the assets can be ring-fenced," says Cheng. "In the event that the project manager goes bankrupt, creditors of the bankrupted project manager may have a same priority claim as the ABSP investors over the ABSP assets."

As one of the main goals of securitisation is to ensure the assets transferred to a SPV will be unaffected by any claims related to the originator or other transaction parties, the bankruptcy remoteness of an SPV can significantly influence rating decisions.

Structured Finance

ABSPP decision published

The implementation of the ABSPP has entered into force, following yesterday's publication of the ECB's decision regarding the programme. The decision outlines the scope and eligibility criteria of the central bank's outright purchases.

The decision confirms that, under the ABSPP, the ECB may instruct its agents to purchase eligible ABS on its behalf in the primary and secondary markets from eligible counterparties. Eligible counterparties, both for outright transactions and for securities lending transactions involving ABS held in ABSPP portfolios, are defined as: counterparties participating in Eurosystem monetary policy operations; counterparties that are used by Eurosystem central banks for the investment of their euro-denominated investment portfolios; and entities deemed to be eligible counterparties for outright transactions under the ABSPP by the ECB Governing Council on the basis of a Eurosystem counterparty risk assessment.

No more than 70% of the outstanding amount of a tranche of ABS may be purchased and held pursuant to the ABSPP at any time. For collateral from Greece and Cyprus, no more than 30% of the outstanding amount of a tranche may be purchased.

Prior to the purchase of any ABS, the decision stipulates that the ECB shall conduct a credit risk assessment and due diligence in relation to the bonds. Additionally, after the initial phase of the ABSPP, it is intended that the programme should be implemented in a uniform and decentralised manner by the Eurosystem central banks in accordance with a subsequent decision to that effect by the Governing Council.

CDS

Revenue, subscriber uptick tightens CDS

Unitymedia KabelBW's five-year CDS tightened 25% over the past month to price at all-time tight levels, according to Fitch Solutions. It says that improved investor confidence for Unitymedia likely stems from revenue growth and an uptick in subscribers reported for the third quarter, as well as parent Liberty Global's plans to expand content offered through its cable networks.

"After pricing consistently in-line with single-B levels, credit protection on Unitymedia's debt is now pricing in double-B minus space, or two notches higher," says Diana Allmendinger, director at Fitch.

CDS

CDS widens on oil price decline

Five-year CDS on Parker Drilling widened 40% over the past month to price at the widest levels observed in over three years, according to Fitch Solutions. The widening significantly outpaced the 4% widening seen for the broader North American oil and gas sector over the same time period.

After pricing consistently in line with single-B levels, credit protection on Parker Drilling debt is now pricing in the triple-C space. Fitch says that waning market sentiment is likely attributed to concerns over the impact of declining oil prices on the company's credit prospects.

CLOs

CLO retention relief sought

The LSTA has filed suit against the US Fed and SEC, seeking relief for CLOs from the final risk retention rule and "to protect an important source of financing for American companies". The association says that it and the industry strongly believe that the agencies did not fulfil their legal responsibilities when finalising the rule.

It adds that the move is a "last resort", since after four years, more than a dozen letters, studies and presentations, three hearings on Capitol Hill and countless meetings with rulemakers and lawmakers, the rule continues to require CLO managers to purchase and retain 5% of the amount of CLOs. "We believe this rule disproportionately punishes CLOs, an industry that was not involved in the financial crisis, suffered virtually no losses and currently provides critical financing to over 1,000 non-investment grade companies," the association observes.

CMBS

Transferred loan sizes increasing

While the dollar volume of US CMBS loans transferring into special servicing has remained stable year-over-year, loan sizes are increasing, according to Fitch. Approximately US$6.8bn transferred into special servicing in the Fitch-rated universe through October 2014, consistent with year-to-date October 2013. However, by count 2014 had less transfers at 441 loans compared to 573 in 2013.

The average loan size for transfers through year-to-date October 2014 was US$15.4m, compared to YTD October 2013 at US$11.8m. The majority of the transfers continue to be in the US$10m and below range (309 loans totalling US$1.2bn), a similar trend to YTD October 2013 (410 loans totalling US$1.7bn). As of YTD October 2014, 18 loans over US$75m (ranging in size from US$77m to US$387m) transferred into special servicing - six of which transferred in October.

So far in November, one loan sized at US$170m has transferred. Additional overleveraged large loans from peak vintage deals are expected to transfer to the special servicer over the next year as these loans approach their maturity dates.

By property type, office and retail continue to dominate transfers into special servicing, as has been the case for the past several years. Transfers for the office sector account for approximately 50% of the overall balance transferred, with 14 of the 18 loans greater than US$75m secured by office properties or having an office component.

For the major property types, transfers for YTD October 2014 are: 122 loans totalling US$3.4bn for office; 174 loans totalling US$1.9bn for retail; 29 loans totalling US$493m for hotel; and 49 loans for US$304m for multifamily.

CMBS

Sears closures hit loss severity

Sears Holdings is set to close over 100 underperforming Sears and Kmart stores in the US - on top of more than 100 that were shut during 1H14 - after a net loss attributable to shareholders of US$573m for 2Q14. Of the 107 store closure announcements since late August, Trepp has identified loans in CMBS deals on about a fourth of the affected properties. The heaviest concentration of store closures is in the Northeast and Midwest.

When looking at the larger retail market, Trepp says that loss severity on loans in CMBS has been slightly higher than for other major property types, which is attributable to events such as the Sears closings. Over the last year, loss severity on retail loans in CMBS was 63.1%, which is well above the 53.9% total loss severity for all property types. Year-to-date retail loss severity is 57.2%, compared to 49.3% across all property types.

Going forward, Trepp believes that CRE and CMBS investors should "keep an eye on" Sears and other struggling big-box retail tenant exposure.

CMBS

IO loans underperforming

Partial interest-only loans represented 41% of US CMBS 2.0 conduit loans through 3Q14, up from 20.1% at end-2012, according to Fitch. Full interest-only loans represented 18.6% of conduit loans, up from 13% at end-2012.

The agency notes that interest-only loans demonstrated noticeably higher default, severity and loss rates than amortising loans. This relationship held true even when controlled for vintages: if the 2006-2008 vintages are removed, interest-only loans still underperformed amortising loans.

Partial interest-only loans from pre-2006 vintages performed better than more recent vintage partial interest-only loans. On the other hand, full interest-only loans from pre-2006 vintages performed worse than interest-only loans from more recent vintages with noticeably higher default and loss rates. However, many full interest-only loans from the 2006-2008 vintages have not yet reached their maturity dates.

While average severities were higher for interest-only loans than amortising loans, LTVs were not strongly related to average loss severities. Across all amortisation cohorts, average loss severities were only 1% lower for low LTV cohorts than higher LTV cohorts. Fitch says that this is consistent with its regression testing that demonstrated that issuer LTVs are only marginally predictive of loss severities.

With respect to default timing, fully amortising loans and amortising loans had the longest average time to default from origination at 85 months and 84 months respectively. Full interest-only loans were next, at 64 months on average.

Interestingly, partial interest-only loans were the quickest to default at 56 months after origination on average, suggesting that the change in payment terms may cause some borrowers to default earlier in the term of the loan. Approximately 27% of partial interest-only loans defaulted before the end of their initial interest-only period, while the remaining 73% defaulted 28 months after switching from interest-only to amortising on average.

Fitch's dataset included 47,443 conduit loans originated from 1994-2008 totalling US$414.5bn in original securitised principal balance, with performance through year-end 2013.

Risk Management

CCP adequacy principles released

ISDA has published a set of key principles on the adequacy and structure of central counterparty (CCP) loss-absorbing resources, and on CCP recovery and resolution. The paper identifies the key issues that need to be addressed and makes several recommendations on how to proceed.

ISDA suggests that the practices, standards and methodologies used by CCPs to size their loss-absorbing resources - which include initial margin, default-fund contributions and CCP 'skin in the game' (SITG) - need to be transparent to market participants. It stresses that without transparency on CCP risk methodologies, the ability of market participants to accurately assess the adequacy of CCP resources is severely hampered.

In addition, the paper recommends that CCP risk management methodologies and frameworks should be regularly tested and assessed using regulatory-driven standardised and transparent stress-test criteria to assure market participants they are adequate. On top of this, it says that CCPs' contributions to the loss-absorbing resources pool should incentivise robust risk management, align CCP management incentives with those of the clearing members (CMs) and be fully funded, material and substantial.

The paper also adds that ensuring the continuing operation and restoring the viability of a failed CCP is less disruptive and costly to its liquidation or full contract tear-up. Therefore, it says that CCP recovery mechanisms should be clearly defined and transparent and should be pursued as long as the CCP default management process (DMP) is effective.

Where CCP rules provide for cash calls to CMs, they should be limited, capped and fully transparent. Loss-allocation tools should only be considered if they are rules-based, clearly agreed upon and in place, and are economically viable for all categories of clearing participants

Finally, the paper suggests that recovery efforts should only be undertaken as long as the DMP is effective and the clearing service is viable. If the DMP has failed and/or further recovery efforts to re-establish a matched book are either ineffective, unfeasible or create systemic instability, then the CCP is faced with the prospect of considering the closure of the clearing service. ISDA says it is likely that, at this point, the resolution authorities will be evaluating which course of action is most effective.

Risk Management

Basel leverage ratio challenged

FIA Global has sent a letter to the Basel Committee urging the committee to consider how segregated margin is treated in the leverage calculations that determine bank capital requirements. FIA was joined on the letter by two other global trade associations - the World Federation of Exchanges and CCP12 - as well as four global central clearing counterparties: ICE, CME Group, LCH Clearnet Group and Eurex Group.

The letter addresses the Basel 3 leverage ratio framework, which was designed to capture the total exposure a banking organisation has to its customers and counterparties. It explains that if the exposure-reducing effect of segregated margin isn't included in leverage ratio calculations, the amount of capital required for central clearing will substantially increase.

"Such a significant increase in required capital will also significantly increase costs for end users, including pension funds and businesses across a wide variety of industries that rely on derivatives for risk management purposes, including agricultural businesses and manufacturers. Further, banks may be less likely to take on new clients for derivatives clearing. As a result, market participants may be less likely to use cleared derivatives for hedging and other risk management purposes," says Walt Lukken, president and ceo of FIA.

He continues: "In addition, the liquidity and portability of cleared derivatives markets could be significantly impaired, which would substantially increase systemic risk."

The letter identifies three potential avenues for revising the leverage ratio: an interpretive FAQ, amending the text of the leverage ratio standard and adopting a modified calculation methodology that recognises the benefit of collateral. "If the leverage ratio calculation stands as-is, we will likely see fewer banks offering central clearing services and fewer opportunities for end-users to hedge risks," Lukken says. "That result is not only undesirable, but it is also completely contrary to the G20's intentions to promote central clearing."

RMBS

Ruling exposes SFR investors

A new ruling by the Nevada Supreme Court is forcing participants in the single-family residential market to examine their exposure to delinquent Homeowners Association (HOA) fees to ensure that fees, fines and assessments are paid on time. The ruling - SFR Investments Pool 1, LLC v. U.S. Bank - could be troubling for the single-family residential lending market, potentially affecting both agency and private-label securitisations, says Morningstar.

In the case, the HOA was owed US$6,000 and US Bank - as trustee for the securitisation collateralised by the property - had an US$885,000 first-lien mortgage securing its loan. But the HOA foreclosed on the property, sold the house to an investor - SFR Investments Pool 1 - in a trustee sale for the amount of the overdue HOA fees.

The ruling thereby provided the holder of the HOA lien with super-lien status, allowing them to extinguish all other liens on the property. The foreclosure on the HOA lien took priority over the first-lien mortgage and extinguished the senior lien, leaving the securitisation investors with no recourse.

While 22 jurisdictions allow super-lien status for HOAs, only Nevada and Washington, DC, have allowed HOAs to extinguish the first-lien mortgage loan on the property.

Morningstar says that servicers don't routinely check for HOA membership. In Nevada, the HOA must notify the owner of the property several times over nine months during the foreclosure process, but only if the lender requests notification. However, if the lender is not aware of the HOA, it will not be able to request notification and avoid foreclosure on the HOA lien.

The agency adds that owner-occupied borrowers who are underwater or cash-strapped may stop making all payments on the property. Typically, servicers will advance whatever cash is needed to maintain the properties. However, if the servicers do not know about an HOA, the investors in RMBS may take the hit.

Some third-party vendors are consequently expected to start collecting data on HOA membership, as more membership data will facilitate servicers' notification requests allowing them to avoid HOA delinquencies. Until then, the ruling could cause a wave of interest in buying HOA liens and initiating foreclosures. This may leave investors in securitisations exposed to complete collateral loss that is not due to any credit risk that they signed on to take, Morningstar adds.

However, it notes that the issuer in SFR securitisations is also the property owner and therefore will be notified of any HOA delinquency. The agency says that large property managers have the appropriate processes in place to handle HOA-related notifications. Generally, the property manager will pay the HOA expenses directly to the HOA and then decide whether to bill the expense back to the renter.

Moreover, Morningstar believes that multi-borrower SFR securitisation investors may be more exposed than single-borrower SFR securitisation investors - but not as exposed as owner-occupied RMBS investors - as property managers in multi-borrower securitisations have an incentive to maintain a property even if it is vacant.

RMBS

Actual loss credit offering prepped

Freddie Mac has added loan-level actual loss data to its single family loan-level historical dataset. The aim is to provide an expanded view of credit risk, paving the way for continued growth and evolution of the GSE's credit risk offerings.

"Having data openly available in the marketplace allows us to expand the amount of risk transferred to private investors," says Kevin Palmer, vp of single-family strategic credit costing and structuring for Freddie Mac. "We are releasing this data now to give potential credit investors sufficient time to get familiar with Freddie Mac's actual loss performance."

The GSE expects to introduce an actual loss credit offering in its ACIS reinsurance and STACR programmes next year.

In addition to such loan-level loss information as expenses and recoveries, the dataset contains loan-level credit performance data on 30-year fixed-rate single-family mortgages. The dataset covers approximately 17 million mortgages originated between 1 January 1999 and 30 June 2013. Actual loss and monthly loan performance data - including credit performance information up to and including property disposition - is being disclosed through 31 December 2013.

RMBS

RMBS loss criteria updated

Fitch has updated its criteria for estimating losses on US mortgage pools for RMBS transactions. It expects the updates to have no impact on recently issued pools, modestly negative rating pressure for some pre-2005 legacy prime RMBS and generally positive rating momentum for legacy subprime RMBS.

The core principle of the framework remains the interaction between borrower equity and market value declines in determining expected loss for each loan. In addition, the methodology accounts for both loan level attributes and macroeconomic factors in deriving loss expectations.

Fitch's update includes several enhancements from the previous version. While the model's core methodology has not materially changed, several key enhancements have been made to incorporate the agency's updated sustainable home price (SHP) model and better reflect recent probability of default (PD) and loss severity (LS) trends.

For newly issued RMBS pools, the enhancements will likely result in modestly higher projected losses at high investment grade rating categories and modestly lower projected losses at non-investment grade categories. Losses for seasoned legacy RMBS pools will generally decrease. Fitch says that it expects to review all legacy RMBS with the updated criteria within the next six months.

In addition, Fitch has recalibrated the regression-based PD model to reflect recent enhancements to its proprietary SHP model. This update has resulted in a stronger relationship between PD and Fitch's sustainable LTV (sLTV) metric - which measures the borrower's equity in the home - and is expected to result in modestly higher PD levels in high investment grade rating categories, or for pools with high sLTVs. The agency also expects a modest reduction in projected loss severities at all rating categories as a result of updated market value decline assumptions.

Finally, it has made several enhancements that primarily affect its analysis of seasoned legacy RMBS. Among these changes are the use of sLTV in non-prime regression analysis, revisions to PD adjustments for delinquent loans, enhancements to the quick-sale adjustment assumption and a modification to the economic risk factor variable used in application.

RMBS

RPL approach finalised

Fitch has finalised its approach for rating RMBS backed by re-performing (RPL) and seasoned mortgage loan collateral. The criteria have not materially changed from those proposed by the agency in August (SCI 12 August).

Under the criteria, the agency analyses the key risk drivers of the RPL asset class using its mortgage loan loss model, as well as existing rep and warranty and due diligence review criteria. However, since the existing methodologies were developed with a focus on newly originated and seasoned performing collateral, Fitch says that RPL pools and some seasoned performing pools purchased in the secondary market are likely to have factors that require additional consideration or an alternative approach.

The key features distinguishing RPL RMBS analysis from that of new issue RMBS are the limited rep and warranty frameworks or weak rep providers and the potential for incomplete collateral files or missing documentation. Because the servicer's ability to foreclose and liquidate the property takes on heightened relevance in the agency's RPL analysis, Fitch reviewed each of the 35 reps comprising its existing criteria to determine if the risks they are intended to address could be mitigated by a third-party due diligence review of the collateral file or additional credit enhancement.

The agency found that most risks can be addressed by the presence and review of certain loan file documents or additional credit enhancement. Therefore, for transactions that do not have all 35 reps listed in existing criteria or that have a below-investment grade rep provider, the due diligence and document file reviews will be critical for Fitch to gain comfort with lien enforceability and the servicers' ability to foreclose.

Other risk factors identified by the agency include limited servicing and borrower pay history and missing modification type or payment reduction amounts. When estimating losses on RPLs and seasoned performing mortgage loans, Fitch generally uses the same probability of default, loss severity and rating stress framework as used for analysing newly originated loans. However, it considers additional risk attributes that will drive expected losses for RPL and seasoned mortgage loan pools, which include updated valuation types, borrower pay history and modified payment amounts.

Fitch believes that RPL RMBS transactions backed by highly seasoned performing collateral having sufficiently clean performance history could achieve a high investment grade rating if the reps and warranties, document file and due diligence review and transaction structure are also supportive of the rating. Transactions that lack these attributes could present risks that may not be quantifiable and therefore may limit the maximum achievable rating from Fitch, or Fitch may decline to rate the transaction.

RMBS

Data platform re-launched

Ocwen Financial Corp has re-launched a free database of loan-level data for mortgages serviced by Ocwen in private label RMBS. Powered by the REALPortal platform, the database provides mortgage investors with access to accurate data, as well as analytical tools and details on processes, procedures and loan performance.

The re-launch addresses a variety of requests from investors to enhance functionality, access to data and bandwidth. Ocwen says that additional functionality is being planned for near-term implementation.

REALPortal is fully searchable by MBS deal name and includes loan-level data for over 3,000 active Ocwen-serviced transactions from the date the company began servicing the deal. The database has been compiled over the last ten years and the enhancements were recently beta tested.

RMBS

RMBS portfolio tool released

BlackBox Logic has released a new portfolio manager that is available within their web-based RMBS analytics solution, Crystal Logic. Dubbed the Crystal Logic Portfolio Manager, non-agency RMBS investors and researchers can use it for in-depth analysis and more.

The Crystal Logic Portfolio Manager allows users to: compare bonds across various performance metrics including prepay speeds, defaults, losses, modifications, delinquencies, servicer advances, liquidation timelines and forbearance; compare an individual bond to its sector-vintage and shelf-vintage benchmarks; set up bond-level and portfolio-level alerts based on monthly changes of any performance metric; communicate thoughts and ideas on a bond with other members of their firm through easy-to-add notes; and look into loan-level data for any bond for a more granular analysis.