Contents

ABS

Month begins with solid session

US ABS BWIC volume was around US$120m in the first session of the week, with auto paper well represented. There was also a higher than normal number of utility bonds out for the bid.

SCI's PriceABS data captured half a dozen unique auto ABS line items from Monday's session. Among them was the AESOP 2011-5A A tranche, which was covered at plus 72, having been covered at the start of the year on 6 January at plus 58.

The HERTZ 2010-1A A2 tranche was covered at plus 73, having been talked at 40 when it was out for the bid in August. Both the SDART 2012-4 C and SDART 2012-6 C tranches were talked at plus 85; the former had previously been covered at 54 on 9 June, while the latter had been covered at 69 on that same date.

Also out for the bid in the auto space were the FORDO 2011-B B, TAOT 2013-B A3 and CPF 2010-1A 1 tranches. The Ford tranche was talked at plus 38, while the Toyota one was talked at plus 23 and the Centre Point Funding tranche came back as a DNT.

A noteworthy number of utility bond ABS tranches also circulated during the session. Among those was the AEPTC 2006-A A4 tranche.

That AEPTC tranche was covered at plus 39. It was covered last month at 107.31 and first appeared in PriceABS in September 2013, when it was talked at plus 41 and covered plus 42.

CNP 2009-1 A2 was covered at plus 39. The tranche had not been seen in PriceABS for over a year and had previously been covered at plus 40.

A US$6.63m piece of the EAI 2010-A A1 tranche was also traded, after the tranche was separately covered last month at 101.69. Meanwhile a US$6.406m piece of the ETI 2009-A A2 tranche was covered at plus 51.

There was also a  US$2.369m piece of the A tranche of the SRFC 2012-3A timeshare ABS which traded yesterday. That tranche was talked at plus 70 and plus 80 on 1 October and its last recorded cover was at 100.25.

JL

RMBS

US RMBS back to BWICs

The US non-agency RMBS secondary market returned to life on Tuesday after a stretch of inactivity which had begun before Thanksgiving. Total BWIC volume yesterday was more than US$630m as supply increased sharply, with SCI's PriceABS data capturing a variety of names out for the bid.

Supply was skewed towards paper from the 2004-2007 vintages, with several subprime tranches available. There was also a noteworthy amount of single-family rental paper included on the day's bid-lists.

For the earlier vintages, the GT 1997-7 A7 tranche was talked at 103, while ORGN 2002-A A3 was talked at 99. Neither tranche had appeared in PriceABS before.

Several 2004-vintage tranches were also out for the bid, including AHM 2004-3 5A, which was talked at 95. The CWL 2004-S1 A3, CXHE 2004-D AF4 and RASC 2004-KS2 AI4 tranches were each talked at 100.

BAYV 2005-D AF3 was talked at 99, having previously been talked at around 100, while NCHET 2005-C M2 was traded yesterday, as it had been in October and July. There were a number of CWALT tranches talked between the low-90s and mid-90s, including CWALT 2005-21CB A3, CWALT 2005-26CB A6, CWALT 2005-54CB 1A7 and CWALT 2005-64CB 1A7.

The BSABS 2006-SD1 M3 tranche was covered in the low/mid-70s, while FFML 2006-FF5 2A3 was covered in the low/mid-80s. There were covers in the low-50s for FHLT 2006-E 2A3 and MLMI 2006-MLN1 A2C, while WMALT 2006-8 A1 was covered in the high-50s and MLMI 2006-RM2 A1B was covered in the mid/high-teens.

Among the other pre-crisis names, BSABS 2007-HE1 2M2 was covered in the low-30s. It had only previously appeared in PriceABS in June last year, when price talk was recorded in the low-single digits.

PriceABS captured five different tranches from 2014-vintage deals out for the bid yesterday. Just one of those - AH4R 2014-SFR1 C - came back as a DNT, while the others all traded.

The traded tranches were Colony American Homes' CAH 2014-1A C and CAH 2014-2A C tranches and Invitation Homes' IHSFR 2014-SFR1 F and IHSFR 2014-SFR3 F tranches. Most of those were new to PriceABS, although IHSFR 2014-SFR1 F was seen back in August, when it was a DNT.

JL

CLOs

Mezz focus for European CLOs

Today sees two substantial primarily mezzanine tranche BWICS in the European CLO market reflecting most active part of the capital stack so far this week off-BWIC. Both auctions are due at 15:00 London time and will be watched closely given recent spread widening in the sector.

One list totals €36.8m of original face across ten line items. It consists of: BOYNE 1X C1, GSHAM 2006-1 C, GSHAM 2006-3X C, HARBM 9X C, JUBIL V-X B, JUBIL V-X C, LFE IV 3, MERCT II-X A3, NASHP 2006-X E and RMFE IV-X IV-A. Four of the bonds have covered with a price on PriceABS in the last three months, as follows: GSHAM 2006-3X C at 98.43 on 15 September; JUBIL V-X B at 98H on 3 October; JUBIL V-X C at VH80S on 21 November; and RMFE IV-X IV-A at 95H on 21 October.

The other list has 13 lines totalling €63.07m. It consists of: ADAGI III-X D, AVOCA VI-X E, DALRA 4-X C, DUCHS VII-X B, GSHAM 2006-3X C, HARBM 9X B, HARBM PR²X A2, HARBM PR²X B2, HARVT IV B1, HEC 2007-3X B, HSAME 2007-IX D, QNST 2007-1X D and VALLA 2A C. Again, four of the bonds have covered with a price on PriceABS in the last three months, as follows: DALRA 4-X C at 98.63 on 2 October; GSHAM 2006-3X C at 98.43 on 15 September; HARBM PR²X A2 at 96.25 on 18 September; and QNST 2007-1X D at 93.61 on 5 November.

Secondary markets

European ABS/MBS ramps back up

The European ABS/MBS markets are ramping back up after a relatively quiet end to last week.

The secondary market saw patchy trading continue through Friday with spreads ending the week broadly softer. Meanwhile, the BWIC schedule slowed with the US being out, but is already building up again.

Currently the first auction scheduled for today is an 11.9m original face 13 line mixed list due at 12:00 London time. It consists of: ARRMF 2010-1A A2B, ECLIP 2007-1X A, EURO 25A A, EURO 25X A, GHM 2007-2X AA, GRAN 2003-3 2A, GRAN 2004-3 3A1, GRAN 2004-3 3A2, GRANM 2005-2 A5, GRANM 2006-1X A6, GRANM 2006-3 A5, LOCAT 2006-4 A2, MANSD 2007-2X A1 and STORM 2012-4 A1.

Nine of the bonds have covered on PriceABS in the last three months, as follows: ECLIP 2007-1X A at 98.27 on 18 November 2014; GHM 2007-2X AA at 95.55 on 4 September 2014; GRAN 2003-3 2A at 99.717 on 13 November 2014; GRAN 2004-3 3A1 at 99.85 on 1 October 2014; GRANM 2005-2 A5 at 99.79 on 10 September 2014; GRANM 2006-1X A6 at 99.351 on 21 November 2014; GRANM 2006-3 A5 at LM99 on 17 November 2014; MANSD 2007-2X A1 at 98.5 on 15 September 2014; and STORM 2012-4 A1 at 100.635 on 10 September 2014.

Secondary markets

Portuguese RMBS drops back

A €13m single line BWIC of LUSI 5 A traded at 16:00 London time today with a cover of 90.46, some way back from previous levels.

The bond has been picked up by PriceABS out for bid nine times previously this year hitting its highest cover level last time out on 5 September at 94.21, having traded three times before that above 91 since June. The last time the tranche traded below today's price was on 8 May when it covered at 89.86.

Secondary markets

Mixed reactions in European ABS/MBS

European ABS/MBS markets appear sanguine about yesterday's announcement that the first week's ABSPP volume was only €368m. Meanwhile, the news that Deutsche Annington is to buy Gagfah for €3.9bn has given a boost to the CMBS market.

"The market is still a bit quiet this morning with no real reaction to yesterday's ECB number," says one trader. "People were disappointed it was so low, but seem happy to sit on what they've got in the expectation that ABSPP activity will pick up in the weeks and months ahead."

ABS/MBS market tone remains strong in eligible bonds, but non-eligible paper is lagging. "We're seeing non-eligible European and UK non-conforming spreads going wider," the trader says.

Meanwhile, the Gagfah news has had a far greater impact - sparking a rally in the German multifamily space. "Mezz tranches from GRF and TAURS GMF bonds have benefitted particularly," says the trader. Who reports seeing triple-Bs print at around 260.

Secondary markets

US RMBS swings back into life

The US non-agency RMBS secondary market is swinging back into to life today as traders search for alpha in an uncertain rate environment.

The market saw only one BWIC yesterday, but eight are already scheduled for today with a total notional of around $600m, making it an average day in volume terms. "Bonds are trading well and prices are flat from the end of November," says one trader. "So, people working their way through the lists looking for incremental yield through either collateral or structural nuance."

The trader reports interest in the short-end of the curve. "I think that's because rates are all over the place at the moment and no one knows where they're going to go."

At the same time, the trader says: "We've also seen some hedge funds buying longer-dated spread duration type assets, but most enquiry is coming in short-dated paper."

Secondary markets

US CLOs stay light

Trading volumes are still light in the US CLO market post-Thanksgiving and are expected to stay that way.

"It's still pretty quiet and there isn't much of major interest going out on the BWICs that there are," says one trader. He cites a list of BLUEM single-Bs that traded yesterday and a double-B OWIC due this morning as exceptions in terms of interest.

However, the trader adds: "Everything seems to be trading a bit wider, which reflects reduced demand. There aren't many, especially among the major dealers, keen to take on more risk for now, so the market is likely to stay quiet."

Structured Finance

SCI Start the Week - 1 December

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

Pipeline
The number of deals joining the pipeline last week was down on the week before as Thanksgiving arrived. The only newly announced ABS were NewDay Partnership Receivables Trust 2014-1 and NewDay Partnership Receivables Trust 2014-2.

There were also two ILS - US$200m Chesterfield Financial Holdings 2014-1 and US$200m Nakama Re Series 2014-2 - and five RMBS. The RMBS were: RUB2.5bn CJSC Mortgage Agent AkBars; Lanark Master Issuer 2014-2; RUB3.45bn Mortgage Agent ITB 2014; A$1bn Series 2014-2 WST Trust; and US$505m SWAY 2014-1.

€690m DECO 2014-BONN and C$224m MCAP CMBS 2014-1 accounted for the CMBS. Meanwhile, the new CLOs were US$497.295m ELM CLO 2014-1, US$400m ICG US CLO 2014-3 and US$510m Magnetite XI.

Pricings
While a reduced number of deals may have joined the pipeline, a remarkably high number priced. There were seven ABS, seven RMBS, five CMBS and seven CLO prints.

The ABS were: US$556.3m Apollo Aviation Securitization Equity Trust 2014-1; US$650m Citibank Credit Card Issuance Trust 2014-A9; US$350m KAL ABS 15; A$200m FP Turbo Series 2014-1 Trust; €798m FTA Santander Consumer Spain Auto 2014-1; US$152.5m Indiana Secondary Market Ford Education Loans Series 2014; and €1.5bn Sunrise Series 2014-2.

The RMBS were: €787m Arena NHG 2014-II; €700m BBVA RMBS 14 FTA; €2.072bn Fastnet Securities 10; US$285.9m FirstKey Mortgage Trust 2014-1; US$282.8m GSMBS 2014-EB1; A$460m Progress 2014-2 Trust; and US$644m RPMLT 2014-1.

The CMBS were: US$307.6m Colony 2014-FL2; 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.

Lastly, the CLOs were: US$410.79m ACAS CLO 2014-2; US$511m Ares XXXII CLO; €414m Avoca CLO XIII; €4.56bn FTA PYMES Santander 10; €310m Halcyon Loan Advisors European Funding 2014; US$415.6m KKR CLO 10; and US$405m Lockwood Grove 2014-1.

Markets
Last week marked the first week of the ECB's ABSPP, with the central bank understood to have made a modest start. The US Thanksgiving holiday impacted European activity, with BWIC volume at around half the level of the week before. Bank of America Merrill Lynch analysts note supply was high for European CMBS and UK RMBS.

In European RMBS, the successful placement of Arena NHG 2014-II was a significant boost for the Dutch market. Citibank analysts say it shows both that RMBS continues to be an attractive funding source with value to investors compared to Dutch covered bonds and that the ECB's purchase programme is likely to bring early benefits to core RMBS.

The US ABS market was active early in the week before shutting down for Thanksgiving, as SCI reported last week (SCI 26 November). There was more than US$100m out for the bid on ABS BWICs on Tuesday, with SCI's PriceABS data picking up a number of auto, credit card, equipment and student loan names in what proved a varied session.

Regulatory update
• 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.
• FIA Global has sent a letter to the Basel Committee urging it 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 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. 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.
• The Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission (SFC) have published the conclusions of a joint public consultation on the mandatory reporting and related record keeping obligations under the new OTC derivatives regime. The paper includes revised proposals following feedback from respondents.
• ISDA has published a set of key principles on the adequacy and structure of central counterparty 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.
• The ability of the ECB's ABSPP to provide capital relief to eurozone banks could hinge on its plans to buy mezzanine tranches. The capital impact of the ABSPP purchases at different parts of the capital structure is expected to vary with jurisdiction, underlying assets and the originating banks' approach to calculating credit risk.

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 New Issuance database last week:
Barclays Dryrock Issuance Trust Series 2014-4; American Credit Acceptance Receivables Trust 2014-3; American Express Credit Account Master Trust Series 2014-4; American Express Credit Account Master Trust Series 2014-5; AmeriCredit Automobile Receivables Trust 2014-4; Avoca Series 2014-1 RMBS; Barclays Dryrock Issuance Trust Series 2014-5; Cavalry CLO V; Cerberus Onshore II CLO-2; Chase Issuance Trust 2014-8; CIT Equipment Collateral 2014-VT1; CVC Cordatus Loan Fund IV; Diamond Resorts Owner Trust 2014-1; Dryden 36 Senior Loan Fund; Figueroa CLO 2014-1; Ford Credit Auto Owner Trust 2014-C; Golub CLO 21(M); Gracechurch Card Programme Funding Series 2014-2; Greywolf CLO IV; Hildene CLO III; Honda Auto Receivables 2014-4 Owner Trust; Jamestown CLO V; JGWPT XXXIII Series 2014-3; Navient Student Loan Trust 2014-8; Neuberger Berman CLO XVIII; Northwoods Capital XIV; Ocean Trails CLO V; Octagon Investment Partners XXII; OHA Loan Funding 2014-1; Precise Mortgage Funding 2014-2; Santander Drive Auto Receivables Trust 2014-5; Synchrony Credit Card Master Note Trust series 2014-1; TAL Advantage V Series 2014-3; Voya CLO 2014-4.

RMBS

At the edge

Peripheral RMBS prospects examined

Representatives from Bloomberg, Prytania Group and DBRS discussed peripheral European RMBS in a live webinar hosted by SCI last month (view the webinar here). Topics included the development of the peripheral RMBS market versus core RMBS, a detailed look at the Irish and Spanish markets, pricing challenges and the impact that the ECB's ABSPP will have.

Q: How has European peripheral RMBS evolved since the crisis?
A: Cynthia Sachs, global head, Bloomberg Valuation Service: There has been incredible evolution around the market and it has been a long, hard road. To understand what has happened in Europe, it helps to make a contrast with what happened in the US.

In the States, the Fed had a much easier time intervening by implementing asset purchase programmes, quantitative easing and all the rest of it and that intervention helped to avert a major depression. The US economy, like the UK, is now in a fairly healthy state.

It is a different story in Europe, where the EU has turned into a highly fragmented state, both politically and economically. Strict rules and the common currency make it difficult to be flexible and what works for Germany might not work for Greece, so when you reflect on which levers can be pulled, it is much more difficult in Europe and it has been extremely hard for the ECB to take the kind of actions that have been taken in other countries.

Now the European market is weakening and Europe seems to be lagging the rest of the world, so clearly the pressure is on the ECB. The central bank has now taken extreme measures, both with a massive rate cut in June - where certain rates are now at negative levels - and with the announcement of its ABS and covered bond purchase programmes.

The ABSPP is going to impact the periphery in a positive way, with even countries like Greece and Cyprus - where credit quality is not what you would typically find in the ECB's wheelhouse - benefiting. This action from the ECB is going to be healthy for the periphery.

Mark Hale, cio, Prytania Group: The European ABS markets still do not have the breadth or depth that there has been in the US for many years now. However, there has been a strong recovery since the crisis and you can see a wide variety of bonds traded now across nearly all sectors, in all jurisdictions, and up and down the capital stack.

That pattern is generally observable whether the markets are rising strongly, falling or flat. The relatively consistent activity levels are a clear sign of the market normalising.

Looking at the prices which we take in every day, we are typically receiving between 3,000-4,000 prices daily. There is a degree of seasonality and we certainly saw activity dip around events such as the summer's ABS conference in Barcelona, but the ECB's announcement in September brought with it a strong pick up in activity.

Q: How has collateral changed?
A: Keith Gorman, head of European RMBS, DBRS: The drop-off in European RMBS issuance since the crisis has declined year-over-year and we have already this year surpassed total issuance for 2013. That said, we remain a long way off the 2008 peak.

The drop-off was particularly hard in some of the peripheral countries, with only one or two transactions out of Portugal over the last four years and a similar number from Ireland. There have been a few more transactions from Italy but a common feature you are seeing with the issuance is that these are structured and securitised for balance sheet retention.

ECB president Mario Draghi has mentioned the option for the central bank of purchasing peripheral bonds that are balance sheet retained and currently on repo with the ECB. Current estimates are of around €170bn-€190bn of these type of bonds out there, largely from Ireland, Italy, Portugal and Spain.

The success of the ECB's covered bond programmes has meant that issuers have been able to access liquidity from that market for the last couple of years. The larger banks have often relied on covered bonds and then securitised the ineligible products, which are typically higher LTV loans.

In Italy, a lot of issuance has come from the smaller regional banks, with LTV restrictions typically keeping LTVs somewhere between 55% and 65%. The differentiation in those pools will come from geographical distributions, because a lot of the banks there will be focused on their local region, so you will see some high geographical concentration in the pools.

In terms of structures, something we have seen in Spain, Portugal and Italy is transactions being issued unhedged, with no swap. Previous structures would have relied on the issuer acting as swap provider, but bank downgrades mean they are now ineligible to be swap counterparties.

Q: How does the ECB plan to change things?
A: Sachs: We have known for a while now that the ECB's ABSPP will include RMBS and covered bonds. That will hopefully encourage banks to increase their lending in the consumer finance market, compressing spreads and leading to cheaper financing, with the goal of stimulating the economy.

The bank has also said it wants to bring its balance sheet back to 2012 levels, which is about €3trn. The ECB was a big buyer of sovereign debt then and its balance sheet has come down since, so it has shown that it is capable of ramping up its balance sheet.

The ECB's balance sheet is currently around the €2trn level, which essentially implies €1trn of purchases. Purchases are likely to be in the primary market in order to get sufficient size and are likely to be €150bn-€175bn for covered bonds and around €250bn for ABS.

Draghi has mentioned buying triple-B minus paper in the periphery, but the thinking generally is that he will stick with the highest-rated senior tranches as they are within the standard credit criteria. There has been a lot of talk about whether the ECB will buy mezz tranches, but it now looks like a non-starter for anyone to guarantee those tranches.

Banks retain a fair amount of mezz debt, so as senior spreads tighten the mezz debt should trade up naturally on a relative value basis. If that prompts banks to start selling then it will free up capital and should increase lending, so there are many knock-on effects.

Q: How will the ECB's involvement affect pricing?
A: Hale: There has been a sharp, sustained rise across relevant ABS and covered bond sectors and the announcements which the ECB has made appear to justify such rises. There has already been a spill-over impact into segments of the market that are not going to be directly targeted by the ECB.

The market is anticipating some of the capital will be recycled from bonds sold to the ECB back into other structured credit products. The main challenge is that the quantum of eligible bonds relative to the desired balance sheet expansion of the ECB is very small in Europe, therefore it contrasts quite significantly with what the Fed was able to do with for example US agency mortgages.

There is perhaps €160bn-€190bn of eligible publicly issued collateral out of a European structured credit market of €1.5trn, so only a small portion of the secondary market is eligible. We expect a steady and gradual pace of buying with a focus on primary market purchases.

RMBS prices have already closed on - or, in some cases, gone through - the equivalent government bonds asset swaps to give a Libor spread equivalent. There might be room for another 10bp-20bp of tightening at the senior end of the market, but to get very much tighter than that, such as to the levels that we see some US ABS trading, would seem somewhat constrained by the relative value against sovereign bonds.

In terms of the relative value against other asset classes within the ABS universe, there may be an opportunity to book profits where European bonds run strongly up towards par and find better relative value outside the eurozone and within the very strong economies of the UK and US. Asset classes which will be excluded from the ABSPP already have quite a wide spread differential.

Q: How do similarities and differences between the Irish and Spanish markets illustrate these themes?
A: Gorman: Ireland and Spain both experienced the real estate bubble with the sharp decline. Prices in Ireland dropped off by 51% peak-to-trough and Spanish prices dipped 37%, although in Ireland we have seen gains of about 15% over the last year.

Ireland is really split between Dublin-centric and non-Dublin. The economy has been recovering and there is job growth in Ireland, while there is also the potential for a housing shortage in Dublin, so that is pushing up prices. By contrast, in Spain unemployment is picking up and home prices are flattening out, so there is not the same boost that you are getting in the Dublin area.

Saying that, there are probably bigger opportunities to look at Spain compared to Ireland as there is a bigger geographic region and you can look at different pools for different concentrations in different areas of Spain. Madrid and Barcelona can account for as much as 30%-40% in some transactions and depending on the originator you could have some other areas of Spain with higher concentrations.

There have also been increased defaults and arrears, but the structures in Spain and Ireland differ. In the Spanish transactions you typically have a default protection mechanism where after the loans reach 12 or 18 months in arrears, excess spread is automatically diverted to cover the defaulted balance of the loan on the principal side to keep your assets and liabilities matched up. By contrast in Ireland the losses are not crystallised until there is actually a foreclosure process or some kind of judicial conclusion on the borrower.

In effect the Irish government has prevented banks from foreclosing on borrowers, so there have been many modifications to underlying loans in Ireland, with a combination of extended loan maturities and lowered interest rates. Loans have not been written down but senior note durations are being extended because there is no cash being diverted to pay down on defaulted balances in the way that that is happening in Spanish transactions.

We have definitely seen some of the performance flow through in the Spanish transactions. 90-plus delinquencies have levelled off there because the loans which had been 90-plus delinquent are flowing through into default. By contrast in Ireland there is a build-up of 90-plus because borrowers are not being pushed through to default and loss just yet.

Sachs: We are seeing a lot of activity, particularly in the Spanish ABS market. There has been massive spread tightening since the ECB's September announcement, with 40% double-A spread compression in the first two weeks to 40bp-50bp. We also saw tightening down the stack, although that was to a lesser degree.

The biggest moves down the stack that we did see was down below double-B in the Spanish consumer space and also in Spanish SMEs, where spreads tightened significantly. We saw huge moves of 60%-70%. Although spreads can still be as wide as 600bp-700bp down the stack, they used to be considerably wider than that.

In certain pockets we have also seen some widening as different market participants are selling into the rally. There is some selling pressure, so we see some spreads widening back out a bit. That is healthy and the market seems to be functioning pretty well.

Hale: Ireland and Spain rather exemplify the story of the tortoise and the hare; Ireland famously took the harsh necessary action, both in terms of fiscal policy and in addressing the issues in the real estate and bank markets relatively quickly, whereas other parts of Europe, including Spain, infamously did not really grasp the problems until more recently. We have now seen a dramatic shift in the data from Spain in the last year, with material progress in addressing the problems both in the real estate and in the financial sector.

That progress has been given a strong endorsement by the market, as shown by Spanish CDS, government bond prices or RMBS prices. To a large degree the gap between peripheral countries like Spain, Portugal or Greece has converged on the core markets.

Clearly some of that is to do with nationally-specific progress made but most of it is to do with the broad global rally and search for yield, and specifically the enthusiasm generated by the prospect of almost unlimited ECB support. Since the last eurozone shakeout in the summer of 2013, the spread convergence that we have seen in the major markets of Italy, Spain and Portugal has been striking.

As for Ireland, Irish and UK RMBS used to trade relatively closely until surprisingly late in the crisis. There was then a massive underperformance from Ireland that lasted a very long time and it took a while before RMBS prices started to respond to the better data coming out of the country.

That response has been particularly strong in recent times, to the point where spread differential between Ireland and the UK is almost back to where it was pre-crisis. However, while the UK has a strong, pervasive, long-standing house price boom with almost no delinquencies observable in prime RMBS, the improved picture in Ireland still includes a lot of pain which is yet to be felt through the structures.

Q: Where is the market headed next?
A: Gorman: The growth of the RMBS market in peripheral jurisdictions has been marginal over the last few years and over the short- to medium-term that trend will continue. We are, however, expecting to see a few transactions.

A lot of the smaller Italian banks which have been issuing recently have been starting to run dry and look for new product, so they may not quite be ready to securitise again. As for Spain and Ireland, new eligibility criteria might lead to loans being repurchased out of old transactions and used in new ones.

The trend for covered bonds to cannibalise the RMBS market has been well observed. We expect the attractive funding for covered bonds versus RMBS for a lot of banks to continue to drive that trend.

In the longer term, the return of RMBS relies on these peripheral economies starting to turn the corner a little more. Ireland has made progress but it will still be some time before banks lend again there, while in Spain they still have to work out some of their issues and get the economy rolling again before you really start to see the mortgage market grow year over year.

Q: What can be expected for pricing?
A: Hale: We can expect to see further spread tightening. Fundamentals perhaps justify that and the relative spreads on structured credit assets against other comparables in the investment universe also justifies it.

Without a paradigm shift in terms of where European peripheral government paper trades or CDS trades, there may be a limit to how much more the senior paper can rally in. In our view that could be 15bp-20bp.

Beyond that it depends on the extent to which the ECB's ABSPP, perhaps supplemented by other regulatory measures, can drive a much greater renaissance in the European market. If you could push up issuance from below the €100bn level up to more like €400bn-€500bn per annum as we saw pre-crisis, that would materially transform the outlook for investors.

Potentially also the ECB could open up new asset classes by being the buyer for senior bonds in the very first instance, which could increasing the size and frequency of issuance and so generate greater liquidity and encourage a wider diversity of originators to come to the market. That is something the ABSPP can help to stimulate, but cannot do alone; for a broader based renaissance we are looking at national governments or parastatals to respond to Draghi's invitation for government guarantees so the ECB can buy mezzanine bonds.

Q: What other developments are expected?
A: Sachs: In the US we have seen agency RMBS come back but non-agency has been more limited. With that in mind, the ECB's efforts are welcome, but it remains to be seen whether they can jumpstart the market.

It might be the covered bond market that leads the way and then we will see where the securitised part of the market goes. I think it will be interesting to see how it plays out and what other steps Europe may take to jumpstart the economy, whether it is continued sovereign bond purchases or other asset classes to just keep on moving forward. We are at an inflection point.

Hale: Clearly the ECB has failed with words alone and with its repo operations to address the issues that have continued to bedevil the European economy, where deflationary forces remain extremely strong. To some degree the ECB's credibility is at stake, so over time we need to see definitive action.

Whether or not the ECB is right is almost less important than whether it maintains credibility. If it does then I think Draghi has done a great job once again in managing expectations such that he can pull off the trick of having this extraordinary monetary policy shift without getting to the very difficult political question of outright quantitative easing - buying government bonds - which obviously we have seen in other countries. That balance is a very difficult one and if the monetary data and economic data can continue to show an improvement into 2015 then he will not be challenged, but otherwise we may need to see the ECB taking even more strenuous efforts in order to meet their policy objectives.

Gorman: Besides the ECB programme there are some other things going on in the market that can help to generate some positive momentum and clean up some of these problems we are still seeing on bank balance sheets. For example we are seeing a lot more special servicers being built up in Ireland, Spain and Italy.

Prior to the crisis there simply were not large numbers of borrowers going into default so these jurisdictions did not have much of a strategy in place for dealing with large scale defaults. Having these special servicers now helps to get the loans off bank balance sheets.

Also, with NAMA in Ireland winding up its programme two years earlier than intended, there could be good news from other bad banks. In Spain they are also being aggressive in selling off collateral.

Structured Finance

BTG adds trader

Stephane Delacote has joined BTG Pactual as a trader. He joins the bank having held previous roles at BNP Paribas as head of structured credit trading and head of Asia credit trading.

Structured Finance

Investment teams realigned

AXA Investment Managers has reorganised its fixed income and structured finance teams with the creation of a new department. Reporting to John Porter, global head of fixed income and structured finance, the new arrangement will facilitate the integration of structured finance assets into traditional fixed income so that AXA IM can address changing client needs across the credit spectrum.

The fixed income and structured finance division is now organised into five broad investment streams: active fixed income, which encompasses all actively managed strategies, including traditional benchmarked, total return and strategic; buy and maintain fixed income, encompassing all long-term low-turnover solutions for third-party pension scheme and insurance clients, including smartbeta credit and accounting constrained; solutions, a new team under the leadership of Jean-Louis Laforge that brings portfolio engineering and credit research together with a solutions strategy team responsible for designing solutions across the credit continuum; AXA Group, led by Gilles Dauphine; and structured finance, organised around two platforms - loans and private debt and securitised and structured assets - which will be led by Deborah Shire.

Chris Iggo, AXA IM cio and head of fixed income Europe and Asia, leads the European, Asian and global teams within buy and maintain fixed income and active fixed income. The US teams will report to Carl Whitbeck, head of fixed income US.

Each of the two structured finance platforms is split between a traded assets segment and an illiquid assets segment. Alexandre Martin Min and Christophe Fristch will co-head securitised and structured assets. Min will be responsible for traded assets, whereas Fritsch will be in charge of illiquid assets and the business development of this platform.

Jean Philippe Levilain and Renaud Tourmente will co-head the loans and private debt platform for traded assets, with Laurent Cezard heading the business development team.

Structured Finance

SF team boosted

Clifford Chance has recruited a team of five lawyers from Bingham McCutchen, led by partners Robert Gross and William Cejudo, to its office in Washington, DC. The move brings additional expertise to the firm's US structured finance and real estate finance practices, with Gross contributing to the corporate practice and Cejudo expanding the tax, pensions and employment team.

Gross advises investment banks, hedge funds, issuers, sellers and investors on structured and asset-based financings, including publicly registered and privately placed securitisations and resecuritisations. He is also experienced in cross-border securitisations and emerging markets and in securitising UK and Australian mortgage loans.

Cejudo focuses primarily on the tax aspects of structured finance transactions, including distressed asset funds, RMBS and CMBS, ABS, debt repackaging, catastrophe bonds and CDS. He previously worked in the financial institutions and products division of the IRS Office of Chief Counsel, where he focused on tax-exempt and taxable financings and other financial products.

Gross and Cejudo are also joined by Robert Hagan, Leah Willmore and John Lust.

CLOs

Originator fee rebates tallied

Blackstone/GSO Corporate Funding has priced the €415m Castle Park CLO, its third originator CLO. The fund has negotiated a rebate of Castle arrangement fees of €3.95m, which will be paid at closing.

Blackstone/GSO Corporate Funding will sell approximately €240m par amount of loans to Castle at closing, representing approximately 60% of the CLO's portfolio. The fund will then acquire all of Castle's €46m income notes, bringing its cumulative investment in CLO income notes to €103.75m.

At closing, cumulative fee rebates will total approximately €6.95m.Fee rebates have covered all of the initial costs of the IPO, including costs associated with the over-allotment option, with the excess of €750,000 being available to shareholders.

CLOs

CLO specialist moves

Ross Heller has joined RBC Capital Markets as a director, structured credit sales. He will work in CLO marketing and distribution.

Heller arrives after five years at Nomura Securities, where he was an executive director for leveraged credit sales. He has also held roles as md at NewOak Capital and executive director at JPMorgan.

Risk Management

Tech initiative launched

NewOak has launched a new technology innovation programme (TIP). The firm believes the initiative will help address the growing technology skills gap by offering an intensive training course tuition-free that will elevate participants' job skills and marketability.

Students accepted to the programme will participate in a 16-week immersion course where they will study and apply modern computing languages, tools and concepts. Upon successful completion of the course, students will move on to an eight-week mentoring programme where they will work side-by-side with NewOak technology experts applying the skills they have learned on real-world business projects.

Following the mentoring session, students will be eligible for full-time employment at NewOak in its financial technology solutions group. Those joining the firm also will have the opportunity to earn stipends towards future studies at area colleges and universities as they achieve various levels and lengths of service with the firm.

The first class of recruits is scheduled to kick-off the inaugural programme in January 2015. Applications are being accepted immediately.

The firm plans to run three recruiting classes per annum and will assess the programme and curriculum after each one.

Risk Management

Services centre announced

Calypso Technology is to establish a managed services centre in Dublin, with plans to create up to 150 skilled roles. The investment is supported by the Department of Jobs, Enterprise and Innovation through IDA Ireland.

The managed services centre will be the basis of a new professional service model that Calypso will offer for its customers globally. It is expected to enhance the firm's ability to offer comprehensive end-to-end implementation services while meeting its customers' budget constraints.

Calypso is currently recruiting professionals for a range of areas, such as business and technical analysis, quality assurance and application support. Through the managed services centre, the firm will significantly augment its implementation services and offer pre-implementation, testing, post-implementation and support. In addition, the centre will be focused on developing tools that automate its solution delivery services, thus reducing associated costs and project risks.

Risk Management

REIT promotes risk md

Robert Rush has taken the role of chief risk officer at Two Harbors Investment Corp. Paul Richardson, who has served in that role over the past several years, will remain in his role as partner and chief risk officer for Pine River Capital Management, the parent of the company's external manager.

Rush has served as Two Harbors' md for risk management since September 2013. Prior to joining the company he held various roles at UBS, most recently as md and director of risk strategy for the non-core and legacy group.

Rush has also served as head of risk analytics for the StabFund Investment Management Group, focusing on analysis of RMBS, CMBS and ABS. Before that he was head CDO and esoteric asset trader for the UBS workout group and co-managed the ABS and CMBS derivatives structuring team in the global CDO group.

Risk Management

ISDA elects new chairman

ISDA has elected Eric Litvack as its new chairman, effective from January 2015. Litvack is md and head of regulatory strategy for SG's global banking and investor solutions business.

He has worked at SG for nearly 29 years in a variety of roles and has served on the ISDA board since 2006 and was appointed vice-chair in 2012. Litvack succeeds Stephen O'Connor, who has been chairman since April 2011 and a board member since 2008.

ABS

Agency issues CE RFC

Moody's is seeking comment on proposed changes to the minimum portfolio credit enhancement levels in EMEA ABS and RMBS. The credit enhancement consistent with the highest rating achievable in a given market is currently the greater of: the model implied credit enhancement; the minimum portfolio credit enhancement; and expected loss multiple. The agency is proposing that the second of these is no longer necessary for most EMEA markets.

Moody's says that information and data observed from the global financial crisis prompted it to revisit the relevance of its minimum portfolio credit enhancement. It introduced minimum portfolio credit enhancement in EMEA markets when it was difficult to analyse, with a high degree of certainty, the effect that a potential extremely negative series of events in the local economies would have on collateral performance. At the time, it only had limited asset-class specific historical data.

Furthermore, for RMBS the agency is proposing to change the scale of certain adjustments contained within its loan analysis model. The agency proposes to make these changes as it revisits the relevance of minimum portfolio credit enhancement to help ensure its standard analytical approach captures the performance observed in certain markets.

If adopted, Moody's expects Spanish RMBS to experience the most rating changes. The rating agency would upgrade approximately 20% of notes in this sector, with the proposal limiting most upgrades to one notch for senior and mezzanine note ratings. Spanish ABS and other EMEA ABS and RMBS markets, such as Italy and Portugal, will see more limited positive rating actions, if any.

ABS

Different roads for auto ABS

Prime auto loan delinquencies and annualised net losses (ANLs) declined in October compared to September, according to Fitch. In contrast, subprime auto ANLs increased by 13% month-over-month.

Prime auto loan ABS ANLs dropped by 13% to 0.4%. This was in line with August's rate and represents a 2.4% improvement over October 2013. 60-plus day delinquencies moved down to 0.36%, 10% lower month-over-month and in line with the rate seen a year earlier.

Fitch says that improving macroeconomic conditions are supporting asset performance in late 2014 as unemployment continues to decline and the job market grows steadily. Further, declining gas prices and low interest rates are helping consumer households keep a lid on rising costs moving into next year.

Meanwhile, subprime 60-plus day delinquencies were at 4.02% last month, down 7% month-over-month but 11% higher than a year earlier. Subprime ANLs followed typical seasonal patterns increasing to 7.61%, a 7.5% rise versus September and 21% higher than a year prior.

Ratings performance remains on track to record one of the best years ever, with 63 upgrades through September, up from 37 in 2013. Therefore, Fitch believes the ratings outlook is positive entering 2015.

ABS

Law change to affect pub deals

Plans to give tenants of tied UK pubs the option of simply paying a market-rate rent are likely to hit pubcos' net income in the medium term, says Fitch. Higher letting and beer supply costs, combined with potentially shrinking revenues could damage earnings, with a number of whole business securitisation transactions being affected.

Following last week's vote in the House of Commons, a mandatory market-rate only (MRO) option is now likely to be included in the statutory code, breaking the 400-year old tied model that requires tenants to buy beer from the pubco. Fitch expects that the new code would improve profit sharing between pubcos and tenants, benefiting tenants to the detriment of pubcos, despite likely increases in rent for MRO contracts in compensation for the loss in beer sales.

If the MRO option were to be chosen by a majority of tenants at rent review or lease renewal, the reduced number of tied tenants could lower the bargaining power of the pubcos for the negotiation of beer supply contracts. The pubcos would also have to pay for most of the additional fees associated with the code adjudicator and related mandatory independent assessors.

Punch Taverns, which sponsors Punch A and Punch B, and Enterprise Inns, which sponsors the Unique securitisation, would both be affected. The hybrid managed and tenanted operators such as Marston's, Greene King and Spirit, which each also have securitisations, would also be affected.

ABS

Canadian auto losses examined

DBRS has undertaken a study of Canadian retail auto loan securitisations through the financial crisis to observe loss timing patterns and transaction performance. The agency's observations confirm that losses are more front-loaded during times of stress.

Leading up to the liquidity crisis, DBRS notes that losses were still front-loaded but more evenly distributed. Importantly, regardless of the state of the economy, over 50% of losses were realised within the first two years following note issuance.

The highest losses were also associated with the front-loaded loss observations, while back-end and belly loss observations experienced lower losses. This loss timing is becoming increasingly important as yet another year of record-breaking car sales is underpinned by more aggressive underwriting, according to DBRS.

Unsurprisingly, the data on loss timing confirms DBRS's expectation that loss frequency increases as unemployment and bankruptcies increase. Unemployment and consumer bankruptcies peaked in 2009, with the frequency of default rising as unemployment and bankruptcy rates increased, resulting in an overall increase in losses on auto loan transactions. Similarly, as the economy recovered and the economic indicators stabilised, losses on transactions also stabilised from historical highs.

As expected, the cohorts that were most affected were earlier in their lifecycle, specifically 2008 (representing the overall largest loss), followed by 2007. While 2009 and 2006 also exhibited higher losses than historical trends, a closer look reveals changes in loss timing.

The 2005 and 2006 cohorts were in the mid to later stages of their lifecycle when the recession hit, resulting in the highest degree of back-loaded losses in 2005 and more belly-like losses in 2006 and 2007. The 2008 and 2009 statistics show the continuation of the trend towards front-loaded losses as the recession levels were in the beginning stages of their lifecycle and consequently exhibit a transition from front-loaded loss characteristics in 2008 and 2009.

In addition, DBRS suggests that a greater percentage of the total losses in each cohort were realised as the recession hit its worst levels. Thus, by 2009, virtually all consumers (99.4%) that were likely to default did so in the first four years compared to only 92.5% in 2005.

ABS

China auto ABS performance reviewed

Moody's has released its first-ever performance review of the burgeoning Chinese auto loan ABS market, published in its latest Structured Thinking: Asia Pacific newsletter. The report finds that delinquency and default rates were low in 2014, alongside record issuance.

The agency says that China's auto loan ABS market has scaled new heights in 2014, with record levels of issuance achieved. For the six auto ABS deals issued in the first three quarters of 2014, the cumulative default rate was just 5bp seven months after close, while the 30 day-plus delinquency ratio was also low at 20bp as of September.

In comparison to the 2014 vintage, loans from deals closed in 2012 - the last time auto ABS were issued in China prior to 2014 - incurred 13bp of cumulative default and 44bp of 30 day-plus delinquency seven months after close. Just two auto ABS deals were issued in 2012.

Moody's accredits China's stable employment market, prudent underwriting standards and full recourse to borrowers as factors in the good performance of the 2012 and 2014 vintages. Loans in both vintages were originated in a benign economic environment, it says.

In addition, the LTV for individual loans is low at no more than 80%, and the weighted average LTV for each of the transactions is around 60% to 70%. All originators, except one, have security over the vehicles purchased by all the borrowers. They also have full recourse to the borrowers in addition to the vehicles.

Moody's analysis also shows that the one ABS transaction originated by a Chinese bank in 2014 performed better than other deals originated by the finance arms of auto manufacturers. Transactions featuring loans used to purchase more expensive vehicles performed worse.

In its forecast for 2015, the agency expects delinquency and default rates for auto loans to increase slightly, owing to slowing economic growth and rising household debt levels.

Moody's newsletter also looks at the various cashflow allocation structures employed in Chinese auto ABS issued in 2014, finding that each structure has a different impact on the repayment of different classes of notes and therefore their risk profiles. Among the eight Chinese auto loan ABS transactions issued in 2014, two adopted a full turbo cashflow allocation mechanism; one a mix of sequential and senior/mezzanine cashflow allocation mechanism; and the remaining five a 'use it or lose it' mechanism, where excess spread can be used to cover the defaulted receivables.

The agency says that a full turbo cashflow allocation mechanism provides the most protection to senior notes because all available interest and principal collections are applied by issuers to repay the most senior and outstanding class of notes sequentially. This cashflow allocation mechanism typically does not leak out collections to unrated subordinated notes. The interest payment on subordinated notes will also typically be paid after the rated and more senior class of notes are repaid in full.

In contrast, under a mix of senior or sequential and senior/mezzanine cashflow allocations, the issuer will not apply all the available interest and principal collection to repay the most senior and outstanding classes of notes - thus providing less protection to rated notes.

Finally, 'use it or lose' issuers adopt a separate cashflow allocation for principal and interest collections. Principal collections are used to repay the notes in a sequential manner, while interest collections are used to repay the senior or mezzanine notes if loan defaults have occurred. Moody's says that senior notes and mezzanine notes can benefit more from this type of cashflow allocation mechanism if the portfolio has a front-loaded default timing, where defaults occur earlier in the transaction period.

Structured Finance

Consultation response welcomed

CREFC Europe has welcomed the Bank of England's response to its consultation on improving credit information with regard to the UK CRE debt market. It says it strongly supports better information and transparency in CRE debt markets, having previously expressed support both for the central bank's proposal for a CRE loan database and for a broader package of recommendations put forward in a previous report by the Real Estate Finance Group (REFG).

The BOE paper confirms that the majority of respondents supported, subject to costs, the recommendation of the REFG to establish a loan-level database for CRE loans. In addition, the central bank agrees that the initiatives to improve the availability of information in the SME and CRE lending markets would best be pursued separately. It also recognises the broad consensus that "the main information problem in the CRE market was that lenders and regulators need more data to understand the market and assess lending risks better."

The BOE acknowledges the challenges, as well as the benefits, of a CRE loan database and confirms its intention to "engage closely with participants from the CRE industry, to ensure that the benefits of developing a CRE loan-level database outweigh the costs."

Peter Cosmetatos, chief executive of CREFC Europe, says: "For UK banks, a comprehensive national CRE loan database is the route to better models and capital rules that reflect economic risk better than 'slotting' does. Any investment in information management systems that might be required should also improve banks' ability to use and manipulate their own data."

With regard to SMEs, the BOE says it is working with the industry and relevant parts of government to pursue improvements on information availability. It notes that the most material gap in the availability of information on SMEs was identified at the smaller end of the firm size spectrum, with unincorporated businesses viewed as the cohort most disadvantaged.

The central bank listed the following priorities going forward: to work with credit rating agencies to assess the impact and benefits of incorporating further information into borrower credit scores and limits; working with British Business Bank, market participants and CRAs to explore improvements to the availability of information that would help investors to enhance their understanding of the SME asset class and benchmark investment opportunities; working with challenger banks and the CRAs to identify what information is needed to support pooled credit data for credit risk modelling; working with Her Majesty's Treasury to improve access to publicly owned information; and improving policymaker access to credit data by working with lenders and CRAs.

The BOE says it will look to deliver these objectives through the UK's existing credit reporting infrastructure, in line with the favoured approach from market respondents. Should the industry be unable to deliver these benefits, the BOE will work with the government to explore the case for further legislation to realise the benefits of improved information sharing.

CREFC Europe adds that it hopes more of the recommendations of the REFG will be implemented over time in the UK and that European regulators may follow the UK's lead and extend the transparency, liquidity and stability benefits of better information beyond the UK.

Structured Finance

Core RMBS supported

The ECB has disclosed that it purchased €368m of paper via its ABSPP last week, at least some of which is believed to have been Arena NHG 2014-II bonds bought in the primary market. In the secondary market, eligible Spanish RMBS tightened in excess of 10bp on the move.

While the amount purchased last week is viewed by some as disappointingly small, European securitisation analysts at Citi suggest that the successful placement of Delta Lloyd's Arena NHG 2014-II (the 5.4-year A2 tranche priced at 40bp) has two implications. First, RMBS can be an attractive funding source while also providing value to investors when compared to benchmark Dutch covered bonds.

Second, the ECB's plan to support the ABS market but not destroy investor participation implies that the central bank's bid will likely benefit core RMBS earlier than anticipated. "The sector looks cheap relative to peripheral RMBS for banks and insurance companies based on return-on-capital considerations. We saw similar relative value investing happen with covered bonds, where core country bonds rallied strongly but peripherals remained stable, despite the ECB purchasing both sectors," the Citi analysts note.

Structured Finance

Updated registration to 'simplify issuance'

The China Banking Regulatory Commission (CBRC) last month unveiled a new registration system for credit asset securitisation. Moody's notes in its latest Structured Thinking: Asia Pacific publication that the move is positive for the development of China's securitisation market because it will simplify issuance.

Under the new registration system, qualified issuers are only required to register transactions before they are issued. This is different from the previous approval system, where issuers could not issue transactions until they were approved by regulators on a deal-by-deal basis.

First-time issuers need to apply for qualification based on the existing requirements, but banks and other financial institutions that have previously issued credit asset securitisations automatically qualify under the new system. Qualified issuers must register the securitised products prior to issuance and complete issuance process within three months of registration. If the issuance is not completed within three months, the issuer will need to re-register.

During the process of registration, regulators should investigate the compliance status of the originators, and not that of the underlying asset pool. However, the originators must select the underlying assets according to related regulations and structure the transaction transparently.

Both originators and investors are expected to benefit from the new system. For originators, it will allow deals to be issued in a more timely manner, which in turn improves the economics of a transaction. Under the previous system, a material portion of the underlying portfolio was often paid off by the time of issuance, due to the relatively long approval process.

In addition, the new registration system will remove most uncertainties surrounding the approval process, particularly for deals where an issuer has already obtained the status of a qualified issuer.

The new system also shifts control from the regulator to the issuer, which could give rise to larger issuance amounts. The removal of the requirement to approve the transaction - including the issuance amount - effectively increases flexibility for the issuer to issue transactions of a larger size, Moody's says.

"We believe the above benefits will encourage more originators to enter the Chinese securitisation market, resulting in more diversified asset types and a broader market participant base," the agency adds.

For investors, the new system will make China's securitisation market more attractive because it will be more efficient and offer a higher number of transactions and asset types.

However, Moody's notes that some uncertainties remain, as there is no precedent for what happens if regulators reject a registration. Regulators also retain overall control over the types of assets that are securitised.

As at end-October, a total of CNY193.5bn of credit asset securitisations had been issued in 2014, compared to CNY16bn in 2013.

Structured Finance

FLS extended further

The Bank of England and HM Treasury have extended the Funding for Lending Scheme (FLS) by one year. The extension is designed to provide lenders with continued certainty over the availability of cheap funding to support lending to SMEs during 2015, even in the event of stress in bank funding markets.

The FLS extension complements other longer-term initiatives to improve the availability of credit to SMEs, including: the joint Bank of England-ECB initiative to improve the functioning of the securitisation markets; the British Business Bank's programmes to make markets work better for SMEs; the government's proposals in the Small Business, Enterprise and Employment Bill to mandate greater sharing of SME credit information and to require banks to share details of SMEs that have been declined finance; the Bank of England's consideration of widening access to credit data to support the provision of credit to SMEs through non-financial intermediary channels; and a reduction in capital requirements for SME lending under EU legislation.

The drawdown window for the FLS extension will remain open until 29 January 2016. Current participants in the FLS will remain part of the scheme unless they choose to opt out and they will retain borrowing allowances earned by lending from 2Q13 to 4Q14.

Participants will be able to earn further allowances by lending to SMEs in 2015, with such lending incentivised by allowing participants to draw £5 in the scheme for every £1 of net lending to SMEs. Net lending to financial leasing corporations and factoring corporations will continue to count towards allowances generated in 2015.

All other terms of the FLS extension remain unchanged, with drawings continuing to be for a term of four years and attracting a fee of 25bp.

Structured Finance

Japanese market outlook 'positive'

Strong credit quality and good collateral performance will remain features of Japanese securitisation markets in 2015, despite the contraction in the country's GDP, says Moody's. Performance will be underpinned by ongoing strict underwriting standards and supportive labour market conditions.

Default rates for consumer ABS are expected to be stable at low levels, owing to already low unemployment and government policies to further boost the labour market. This should make up for the negative impact of any declines in real incomes caused by rises in consumer prices.

RMBS will also remain strong in 2015 because of tight underwriting standards, while default and delinquency rates will remain stable at low levels. Rising house prices will be negative for loans in new RMBS deals, but the negative impact will be mitigated by the DTI ratio and LTV ratio limits set by lenders. These limits will remain unchanged and will prevent buyers from borrowing too much.

Furthermore, Moody's adds that rising real estate prices will accelerate the resolution of defaulted CMBS loans and the prepayment of performing CMBS loans in 2015. However, new issuance will be limited because banks are more willing to lend to property buyers while real estate prices are rising, negating the need for buyers to raise funds through CMBS.

Japan's economy contracted by an annualised 1.6% in 3Q14, the second consecutive quarter of contraction. This follows the consumption tax hike in April, which has weighed on consumer spending and growth. Yet, in spite of this, Moody's notes signs that Japan's economy has already started to recover and its forecast is for GDP to grow mildly by 0.5%-1.5% in 2015.

As such, the rating agency expects that Japan's unemployment rate will remain stable at low levels in the range of 3%-4%, supporting the performance of the securitisation market throughout 2015. However, real wages may erode to a certain degree, despite a stable labour market, owing to consumer price increases stemming from the Abe government's polices to foster growth and end deflation.

In the real estate sector, property prices are expected to rise in 2015 as a result of the quantitative easing measures pursued by the Bank of Japan under the Abe administration. While this development may be positive in terms of the resolution of defaulted real estate loans in securitisation transactions, it could also be the trigger for a decline in the credit quality of newly originated mortgages, adds Moody's.

CDS

Higher guidance boosts Lowe's

Five-year CDS on Lowe's Companies tightened by 28% over the past month to price at the tightest levels observed since 2007, according to Fitch Solutions. After pricing at double-A levels for much of the past year, credit protection on Lowe's debt is now pricing in the triple-A space.

CDS liquidity for Lowe's has decreased in recent months, dropping by 10 rankings to trade in the 37th regional percentile over the past month, signalling less market uncertainty over future spread levels. "Improved investor confidence for Lowe's can likely be attributed to strong fiscal third-quarter results and slightly higher full-year guidance, thanks to more home improvement spending overall," says Fitch director Diana Allmendinger.

CLOs

CLO returns rebound

JPMorgan's latest Collateralized Loan Obligation Index (CLOIE) monitor report shows that the total amount of CLOs paid down in the index since the October rebalance was US$2.15bn in par outstanding, split between US$2.12bn and US$30m of pre-crisis and post-crisis CLOs respectively. The post-crisis CLOIE added US$7.65bn from 78 tranches across 16 deals at the November rebalance.

Post-crisis CLOIE returns last month rebounded from a negative October, seeing positive returns across the capital structure, with double-B tranches returning 1.28%. Pre-crisis CLOIE returns were positive across the capital structure in November, extending a consecutive 17-month streak of positive returns since June 2013.

CLOs

CLO constraints scrutinised

Constraints in the second generation of European CLOs that restrict managers' flexibility to agree to amend and extend leveraged loans will lead to significantly higher leveraged loan default rates during the next downturn, says Fitch. The agency adds that if these covenants had been in place during the last downturn there would have been more forced restructurings, which could have reduced confidence, increased the default rate further and slowed investors' re-entry into the market. During 2009-2012, when the primary market for refinancing was all but shut, Fitch estimates that up to 60% of European leveraged loans underwent a voluntary maturity extension.

Post-crisis structures typically include significant restrictions on the reinvestment of unscheduled proceeds after the end of the four-year reinvestment period, including restrictions on agreeing to amend and extend. The restrictions are included at the behest of triple-A investors, who want more certainty about when their debt instruments will mature.

Pre-crisis CLO senior notes typically pay about Libor plus 25bp and investors missed out on the opportunity to reinvest that money at much higher returns, says Fitch. The extensions meant that €60bn-€70bn of leveraged loan collateral in pre-crisis European CLO transactions remains outstanding.

The spread increase the transactions received by agreeing to the loan amendments and extensions was largely paid to equity investors. About 60% of pre-crisis CLOs made equity distributions even during 2009 and 2010, increasing to close to 80% in 2011.

Senior investors appear to be confident that the higher defaults these transactions may experience will not affect their notes. The new generation of CLOs typically has around 40% credit enhancement for the senior notes. In the last downturn, the losses on Fitch-rated European structured credit transactions, including European CLOs, was just 1% across all rated notes.

The declining role of European bank investors in leveraged loans also reduces the chances of widespread amend-and-extend agreements in the next downturn. Banks were encouraged to agree to loan extensions to prevent further write-downs on their portfolios. Fitch expects the proportion of primary issuance held by European bank investors to continue to decline as banks delever capital-intensive sectors.

The potential for a higher default rate if there are no amend-and-extend agreements in the next downturn is already incorporated into Fitch's criteria. Its historical default matrix is largely calibrated to the bond market, which does not allow maturity extensions. The agency believes the amendments and extensions during the recent downturn produced an artificially low loan default rate compared with the stress the market experienced.

CLOs

No cov-lite switch for mid-market

A sampling of middle-market loans by Moody's suggests that a substantial majority still have financial maintenance covenants. This is credit positive because these covenants provide lenders a mechanism to manage their exposure in a deteriorating credit situation, but the average number of covenants per loan has declined over the past four years.

Moody's sampled 30 middle-market loans for which it provided credit estimates in each year from 2011 through 2014. Of those, covenant-lite loans accounted for a small share: 3% in 2014, 10% in 2013 and 3% in both 2012 and 2011.

As well as the declining number of covenants per loan, the average leverage ratio covenant has increased. These are both credit negatives and indicate that the sector has not been totally immune to the erosion of covenants in the broadly syndicated loan universe (BSL).

Although rising investor demand for higher-yielding loans has caused cov-lite BSL issuance to increase markedly in recent years, 90% of the middle-market loans Moody's sampled in each of the past four years have covenants, with fixed-charge coverage and leverage covenants the most common.

In Moody's sample, the average number of covenants per loan has declined from 3.03 in 2012 to 2.50 now, while the average leverage ratio per covenant has increased three years in a row and now stands at 5.69, compared with 4.78 in 2011. Only six middle-market loans in Moody's 120-loan sample do not contain any covenants.

Risk Management

CVA hearing scheduled

The EBA is holding a public hearing in London on Friday (5 December) on a draft credit valuation adjustment (CVA) report to be submitted to the EU Commission. The report covers all aspects of the CVA framework, as well as the review on the application of CVA charges to non-financial counterparties established in a third country.

The objective of the hearing is to gather views from stakeholders on the conclusions and policy recommendations drawn in the report, which will be presented during the public meeting. Interested parties are invited to register for the event by 3 December.

Risk Management

HK regulators provide OTC update

The Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission (SFC) have published the conclusions of a joint public consultation on the mandatory reporting and related record keeping obligations under the new OTC derivatives regime. The paper includes revised proposals following feedback from respondents.

Among the revised proposals is that mandatory reporting and related record keeping obligations will commence first for authorised institutions, approved money brokers, licensed corporations and central counterparties. As a result of market feedback, the implementation of the same obligations will be deferred for other persons that are based in or operating from Hong Kong.

The HKMA and SFC say they will also defer the proposal to require authorised institutions and licensed corporations to report transactions that they have entered into in their capacity as a person either registered or licensed to carry out Type 9 regulated activity. They add that this will allow the market more time to sort out some of the reporting difficulties that arise in view of practices in the fund industry.

The regulators also seek further views on three ancillary matters: the reporting of valuation transaction information (including the details of this requirement and the proposed implementation timetable); the designation of a list of jurisdictions for the purpose of the masking relief; and the list of stock markets, futures markets and clearing houses to be prescribed for the purposes of defining the scope of the OTC derivatives regime.

Parties are invited to submit their comments on any of the three ancillary matters to the HKMA or SFC by 23 December.

RMBS

Italian mortgage market 'resilient'

The Italian mortgage market has been resilient, despite the country's prolonged recession, according to Fitch. This has been aided by low interest rates and conservative lending policies.

Fitch says that over the last 12 months late-stage arrears and the annual default rate have been little changed at 1.6% and 1.3% respectively. In contrast, income flows from loan recovery have suffered in the economic downturn.

A prolonged recovery process and a steady stream of defaults have caused the volume of outstanding defaulted loans to reach 4.8% of the current aggregate portfolio, up from 4% at end-2013. Fitch expects recovery proceeds to remain subdued.

Italian house prices declined by 1.2% in the year to September and are down by 15.8% from the peak in December 2008. The decline has been more pronounced in southern regions, with prices down by over 20% from peak at end-2013.

"The overall contraction reflects tighter credit conditions, high unemployment and an uncertain economic outlook," says Andrew Currie, head of EMEA structured finance surveillance at Fitch. "Nevertheless, we believe the pace of decline is decelerating and expect prices to bottom out in 2016, at around 20% below the peak."

The balance of loans in payment holidays has steadily decreased to 1.9% over the last 12 months as the main schemes came to an end. The agency expects payment holidays to further decline, leaving tenor extensions and loan repurchases as the main tools to support weak borrowers.

RMBS

Improving economy boosts UK RMBS

The continued revival of the UK economy underpinned strong UK RMBS collateral performance in 3Q14, according to S&P. Delinquencies of more than 90 days in non-conforming transactions fell to their lowest level since March 2008, weighted-average delinquencies declined and the outlook for UK collateral performance into 2015 remains strong.

In the three months to October, house price growth slowed to 0.8%, the lowest in two years, according to Halifax. In line with S&P's expectations, the Mortgage Market Review (MMR) (SCI 27 March) and the restrictions on high risk lending introduced over the course of 2014 have led to a softening of house price growth.

In addition, 90-plus day delinquencies fell by 0.57% in non-conforming transactions to 13.49%. In prime and buy-to-let transactions, 90-plus day delinquencies also fell by 9bp and 12bp to 1.79% and 2.71%, respectively.

S&P's prime index benefited from the strength of the Granite UK RMBS master trust, as 90-plus day delinquencies fell by 0.28%. 90-plus delinquencies also decreased in Permanent Master Issuer by 0.21% and Arkle Master Issuer by 0.10%. Holmes Master Issuer is reverting back to its pre-restructuring arrears levels, with another 0.22% increase in 90-plus day delinquencies. As of 3Q14, the Holmes Master Issuer and Silverstone master trusts have the lowest arrears among the rated master trusts.

On average, total delinquencies remained stable. S&P's indices only experienced decreases of a few basis points, as the lower delinquency buckets offset some of the decreases in 90-plus day delinquencies. Moreover, the performance of rated non-conforming transactions has generally improved further, apart from Bluestone and some of the ex-Lehman transactions, where 90-plus day delinquencies increased.

The constant prepayment rate continued to increase across S&P's index, despite the MMR and slowed house price appreciation. Even in the non-conforming market, where refinancing options are more limited, 3Q14's reading of 6.67% constitutes a four-year high.

RMBS

Mortgage payment hikes loom

Half of all performing US RMBS mortgage borrowers will see payment increases over the next five years, according to Fitch. The agency says that payment increases have historically led to higher default rates among US mortgage borrowers, with a positive relationship between the amount of payment increase and the default rate.

Loans particularly vulnerable include those with adjustable interest rates (ARMs), interest-only (IO) payments and certain modified loans. "IO loans are in store for the largest payment increases," says Fitch director Sean Nelson. "As a wave of peak vintage 10-year IOs approaches recast, many mortgage borrowers could see their monthly payments more than double."

ARMs and modified loans are also expected to see future payment increases, though the magnitude of the increases will be smaller. Payment increases for ARMs will be driven by future movements of short-term interest rates, while modified loans typically have scheduled, limited interest rate increases.

Fitch adds that the prime jumbo sector has the most exposure to future payment increases due to a larger composition of ARM and IO loans. Nearly two-thirds of performing prime jumbo loans are at risk, whereas less than half of subprime loans are exposed to future payment hikes.

The impact of future payment increases on existing ratings is expected to be modest. Fitch's US RMBS loan loss model projects payment increases and adjusts the probability of default accordingly.

"While default rates are expected to increase for loans with an upcoming payment hike, the elevated default risk is already baked into our RMBS ratings," says Nelson.

RMBS

RFC issued on Portuguese RMBS

S&P is requesting comments on proposed changes to its methodology and assumptions for rating Portuguese RMBS, which would align the criteria for Portuguese RMBS closely with the agency's global RMBS criteria. The proposals discuss two fundamental principles of structured finance ratings and criteria: the credit quality of the securitised assets; and the payment structure and cashflow mechanics.

Compared with S&P's existing criteria, the proposed criteria for analysing Portuguese RMBS transactions would include the agency's definition of an archetypical Portuguese mortgage loan pool, along with adjustment factors that would apply when a loan pool differs from the archetypical pool. If adopted, S&P says the proposed criteria would lower the foreclosure frequency assumptions for the single-A, triple-B and double-B rating categories and make more transparent its foreclosure frequency assumption for the single-B rating category.

In addition, the criteria would increase the agency's loss severity assumptions to incorporate its views of longer foreclosure timelines and more significant market value declines. The proposed changes would also result in higher projected losses.

As with the global RMBS criteria, S&P says it would start by setting an anchor point of triple-A projected losses for a pool, which it defines as archetypical. The archetypical Portuguese mortgage loan pool provides a benchmark against which all pools are compared and measured, both in terms of credit support provided and each portfolio's particular risk characteristics.

Its proposed characteristics relate to the borrowers, loans, security arrangements and properties. These features match those of archetypical pools defined in S&P's global RMBS criteria and variations from the proposed archetype attributes would result in projected loss adjustments.

S&P says that, taking into account its rating above the sovereign methodology, the application of these proposed criteria would negatively affect 23% of ratings outstanding on Portuguese RMBS, with downgrades of up to two notches in 33% of the cases. These downgrades would reflect the increase in projected loss assumptions, as well as the proposed modelling assumptions. The actual impact on individual Portuguese RMBS transactions would vary, depending on a transaction's asset pool and the characteristics and features of the transaction's structure, S&P adds.

Comments on the proposed criteria should be submitted by 30 January 2015.