Contents

Structured Finance

Hiring logjam?

Waiting game leaves recruitment on hold

Recruitment in the structured finance space remains somewhat stagnant. While market players await regulatory clarity in the US, positive sentiment in Europe is yet to translate into increased hiring activity.

The European securitisation market has provided a mixture of both disappointment and rational caution in terms of hiring trends, according to one London-based headhunter. "The market may not have picked up, but there is certainly more optimism now," he notes. "The ECB programme has started slowly and there are still a lot of nagging questions around regulation. However, there are some positive vibes coming out of the core European regulatory institutions that suggests the market is returning."

The headhunter stresses that for the market to pick up, regulators, banks and other financial institutions must go beyond acknowledging the upside to a securitisation resurgence. "The key is translating optimism into something concrete. In turn, this will translate into hirings."

But he warns: "Even then, do not expect an explosion in recruitment."

For now, the headhunter says the market is best described as "ticking over". He elaborates: "At least 85% of hiring is currently happening in the US, but I do not expect much in Europe until at least mid-2015. There is no homogeneity; no set of banks or institutions are choosing to lead the way forward."

Chadrin Dean, managing partner at Integrated Management Resources, believes the US market is not much further ahead. "There have been no significant movements. If there is any growth, it is in the same areas as before."

He continues: "The current reality is that some institutions are overstaffing their structured finance teams with employees they can perhaps afford to take on. However, these roles are not especially significant."

Dean cites the CLO sector as a prime example of where the market currently lies, identifying the paradoxical nature between production levels and recruitment activity in this asset class. "CLOs had a good year with regard to volumes, but little in the way of hiring. I think this can be pinpointed to market players anticipating regulatory announcements. Delays with these announcements have bred a sense of caution and institutions won't move with hiring until those announcements have been finalised."

On top of that, Deans says that a number of problems among CLO issues this year have acted as impediments. For example, he points to Covenant Capital Partners' pricing of its US$525m CLO issue on 29 October, only a day after hedge fund operator Prophet Capital sold most of its US$36m equity piece in the offering. Dean believes this type of uncertainty and indecision could have easily facilitated further caution in the decision-making of CLO recruitment managers.

Meanwhile, the London headhunter suggests that a variety of asset classes could pick up in Europe. "Currently, the active sectors are RMBS, some ABS and covered bonds. Even with covered bonds though, once they are up and running, firms don't usually take on a huge amount in terms of team requirement."

The headhunter attributes this to companies not needing the weight of a large team, while looking to avoid unnecessary adjustments to their current structure. He adds: "There are some companies who are active in covered bonds, such as Santander. However, major banks like Morgan Stanley and UBS are completely anonymous. This is certainly factoring into the low volumes in hiring."

Dean sees a similar story with the approach by banks in the US. "There is movement in the banks, but it's better to call it musical chairs rather than building capacity."

With regard to recruitment activity across asset classes, Dean believes RMBS and CMBS are fairly stagnant. "However, auto ABS is doing somewhat well - but again, there isn't much room for increasing capacity."

He continues: "In fact, lenders have pulled back with regard to lower subprime auto loans due to an increase in default rates. This has provoked a reduction in ratings and issuance too. Those signs don't bode well for the immediate future."

Dean says that smaller platforms in the US are also showing little recruitment activity. "There is simply no reason to get involved right now. The market is not competitive enough for them to be taking on the baggage."

The London headhunter's message is somewhat similar on the auto ABS front: "There has been some movement in the established ABS markets, such as auto and credit card loans, but it's nothing of great significance. With CMBS, however, explosion of issuance in the US has nowhere near been replicated here in Europe. Therefore, the recruitment market has not had enough activity to respond to."

If any high quality securitisation is to happen, the headhunter expects the established jurisdictions to be the potential hot spots for issuance, as well as being the likely catalysts for any recruitment activity. "Don't expect much in Southern Europe. Look to the UK, Germany and the Netherlands - the typical northern jurisdictions."

Although he has seen some activity in Europe, the headhunter notes that it remains a similar story of rotating names rather than building teams. "Hedge funds are doing reasonably well, but most movement involves existing players who are being used to beef up teams."

He concludes: "One or two banks are taking on new recruits on six-month contracts. Perhaps this best symbolises the caution right now in the market."

JA

CLOs

US CLOs stay busy

Unlike most other securitised markets, year-end is driving business in US CLOs rather than hindering it.

"We're busy and still seeing people looking to liquidate stuff," says one trader. "Our sense is that that's not a result of macro vol, but just people squaring up portfolios."

That sense is confirmed by the high proportion of DNTs being seen rather than forced sales. "Not everything is trading, but that's driven by investors taking a defensive stance for now," the trader says.

That said, some buyers are being proactive, according to the trader. "We've had an insurance company and a few banks putting trades on in the last day or so to build positions before the end of the year, so there's still life in the market."

Secondary markets

Euro ABS/MBS close to shut down for the year

The European ABS/MBS secondary market has all but shut down for year-end as from today.

"This look like it's pretty much it for the year," says one trader. "Spreads haven't moved this morning, but that's theoretical anyway as there has been no visible trading."

A few very small clips in recently popular names are understood to have changed hands, but that aside activity looks set to revolve around the only European BWIC scheduled so far for today - a single line of UK RMBS LEEK 18A A2D and even that is from a dollar-denominated tranche. The $5.3m slice is due at 15:30 London time.

Meanwhile, the ECB has posted the following statement on its website: "The Eurosystem will temporarily pause ABSPP and CBPP3 purchases between 22 December 2014 and 2 January 2015, inclusive, in anticipation of lower market liquidity during this period and in order to reduce possible market distortions. Purchases will resume on 5 January 2015."

Secondary markets

US CLOs cleaning up

Today sees another strong BWIC schedule in the US CLO market with five lists already circulating.

"My sense is today is a lot of cleaning up rather than managed accounts having to sell," says one trader. "I suspect it will be the last full trading day of the year and yes there are number of lists, but total size is only up around $120m and it's mainly 1.0 and 2.0 mezz."

Price action has been elsewhere in the capital structure this week so far. "Broader markets have whipsawed pretty hard over the last couple of days, which CLOs tend to lag slightly, plus there is a supply technical in both primary and secondary and that all puts pressure on spreads," says the trader. "Double-Bs are all over the map and we've seen wider than expected prints in triple-Bs."

For the most part investors are staying out of it for now, according to the trader. "End accounts seem happy to see how it goes - they'll step in if anything crazy happens, but if not they'll just let the year close out."

Secondary markets

US RMBS eases off

The US non-agency RMBS market remains busy by December standards, but even here there is sense of a market easing off for the year.

There is $600m scheduled on BWIC for today, matching the volumes seen over the last few days, but expectations are volumes will now begin to drop. "Like some other markets our BWICs are currently driven by real money cleaning up positions and like other markets I think we will begin to quieten down from tomorrow," says one trader.

Selling volumes have not been impacted by the broader market volatility of recent days. "While we watch related markets and the broader picture, RMBS is less sensitive to short-term volatility - there's finite supply and secondary levels are typically attractive in comparison to primary, so there's always a bid," the trader says. "Consequently, there's not been much weakness in legacy RMBS throughout this week - there's good liquidity and bonds are continuing to trade well."

That said, the reduction in volatility seen over the past 24 hours has come at a good time, the trader suggests. "Everyone can now focus on their strategy for next year and hope 2014 ends quietly."

Secondary markets

Solitary CLO list circulating

Only one US CLO BWIC is currently scheduled for today and reflects the most active sectors of the market last week amid some spread softening - triple-Bs and equity.

The 13 line list due at 11:00 New York time also falls into line with last week's pattern in that it is small with only $12.575m of original face on offer. The list consists of: EATON 2006-8I SUB, GALXY 2006-6A D, HLMK 2006-1A C, INGIM 2007-5A C, LCM 6A D, MDPK 2007-4A SUB, MPORT 2006-1A B1L, OCT10 2006-10A D, OCT11 2007-1A C, OCT11 2007-1A INC, SYMP 2006-2A C, SYMP 2007-3A D and SYMP 2007-4A D.

Only one of the bonds has covered with a price on PriceABS in the last three months - LCM 6A D at 98.55 on 19 November.

Secondary markets

US CLO trend emerging

US CLOs are seeing an even quieter day today than yesterday, but there are already signs of a potential trend for next year.

"Yesterday's list got really good participation," says one trader. "But we're down to a one line list today, so the holidays have finally arrived."

Today's list is an $8.5m slice of SYMP 2007-3A C due at 11:30 New York time. The bond hasn't traded with a price on PriceABS in the last three months, but is being talked in the 95 area.

The trader again expects strong participation on the list and that such strong interest will carry on into next year. "Seasoned mezz is looking increasingly attractive to investors at the moment given where primary is going - the double-Bs on the Allegro deal last week priced pretty wide, for example. Most believe that primary is going to continue to price wide and that will drive more people into secondary and impact prices accordingly."

Secondary markets

US RMBS looks for a spark

The US non-agency RMBS market is quiet today, but could still spark back into life despite year-end looming.

"We've been pretty quiet yesterday and today, even with today's economic news," says one trader. "The revision upwards of Q3 GDP has driven activity in broader markets and pulled high yield tighter, but RMBS is not seeing a major impact."

A small number of BWICs totalling only $1m in current face reinforce the impression of the market winding down for the year. However, the trader adds: "Remits are due in the next few days and a good performance there could spark some decent buying activity, which combined with people positioning for 2015 might bring heavier volumes over the next couple of weeks."

RMBS

Ocwen settles NY charges

Ocwen Financial has reached a settlement with the NYDFS to address its violations of a consent order issued by the regulator in 2012, as well as various violations of its agreement with the regulator in connection with its purchase of Litton Loan Servicing in 2011. There should be no direct impact on non-agency RMBS but certain ABS payments could be accelerated.

Ocwen will pay the NYDFS US$100m by the end of this year as well as US$50m as restitution to New York homeowners who were foreclosed upon by Ocwen between January 2009 and 19 December 2014. Ocwen reported US$300m of cash on its balance sheet as of the end of 3Q14, so Barclays Capital analysts note it should meet the monetary fine easily. However, if other stats pursue similar penalties then the aggregate fine could prove much more onerous.

From early 2015 and lasting for two years, Ocwen will also provide a complete loan file to New York homeowners serviced by the company, provide a free credit report each year to homeowners for whom Ocwen made a negative report to any credit agency since January 2010 and will also provide every homeowner who is denied a loan modification, short sale or deed-in-lieu of foreclosure request a detailed explanation of why that request was denied.

The NYDFS will appoint an independent monitor to review Ocwen's business operations over the next two years. Ocwen cannot purchase any additional MSRs until it has met benchmarks set by this monitor.

The settlement should not affect non-agency RMBS as it stands, but that could change if other regulators follow the NYDFS' lead. Only around 8% of the borrowers foreclosed by Ocwen were in New York, so the analysts estimate total fines could reach US$700m, which would cast serious doubt on the continuity of Ocwen's operations.

"In addition, if other regulators/states also had to be paid something on the lines of the US$100m fine, Ocwen's ability to service could come under question and could open up the doors for further rating agency downgrades or for the FHFA to move servicing away from Ocwen," the analysts say. "Nonetheless, it remains to be seen whether and what action other states/regulators may take on Ocwen. While it is tough to assign likelihood of such actions at present, risks to Ocwen servicing hinge on any possible add-on actions by other regulators/states."

The settlement could be construed as a change in control of the servicer for the HLSS servicer advance ABS. Ocwen is currently the servicer and a change in control is considered an early facility amortisation event under HSART indentures, which could lead to an acceleration of the notes.

The change in control comes from the replacement of William Erbey as chairman of Ocwen and HLSS. However, the senior management team at both entities remains intact and the day-to-day operations of both businesses should not be significantly affected, so the Barclays Capital analysts do not believe this clause will be triggered.

JL

Structured Finance

Call for clarity

Transparency at the forefront of CRA debate

Panellists at SCI's recent London conference discussed the implications of credit rating agency (CRA) regulation in Europe. While they welcomed the increased competition and transparency brought by CRA 3, some issues remain outstanding.

Andrew Currie, md of structured finance at Fitch, believes that CRA regulation has not been the biggest driver of the way rating agencies are managed. "The financial world has changed dramatically since the crisis and where changes or improvements have needed to be made, we made them quickly and decisively. But rating agency regulation has not been the main driver of those changes."

He continues: "We regularly review our ratings and methodology to ensure they are robust and reflect market dynamics as a natural course of our business, so I do see the regulation as the framework for monitoring the changes that had already been made."

Currie adds that the most effective barometer for rating agencies is their reputation in the investor community. "There is more interest in Fitch's opinion and research now than at any point in the past. Agencies should be judged by the quality of their credit output and not just regulations."

Richard Hopkin, head of fixed Income at AFME, notes that several important issues remained outstanding in the CRA 3 discussions, with one being the controversy surrounding the application of disclosure requirements to private transactions. "If private contracting parties want to make deals between themselves, then there is no reason why they should not, and set their own terms for disclosure," he says. "It is reasonable that commercially sensitive, confidential information - which is often used in private transactions - should not be required by law to be publicly disclosed."

In the public markets, however, he stresses that disclosure and transparency are key. "Standards of disclosure are already very good in securitisation; much better than in many other forms of finance. Despite this, transparency is one of those issues that politicians, in particular, tend to grab onto whenever the subject of securitisation comes up. So it is important for the industry to stay ahead of the game on this."

One approach espoused by the authorities is a platform for new rating agencies to enter the market, thus providing an avenue for shadow ratings to be placed on deals. The European Commission adopted a report in May assessing the feasibility of a network of smaller credit rating agencies in the EU (SCI 6 May).

Currie believes there are both positive and negative implications to this. "Incumbents should welcome attempts to create competition, because a wider set of views adds value to the market. However, shadow ratings can create confusion and problems for investors where there is a lack of consistency in the ratings provided."

Rob Ford, a founding partner at Twenty Four Asset Management, agrees that a wider choice is healthy for the market, but stresses caution against a continuous outpouring of regulatory solutions to CRA issues. He explains: "Continuing to create regulation for regulation's sake is unnecessary. We had simple structures before and that is something we should vie for again."

Ford elaborates: "It's great that newer agencies are coming to the market, particularly given new rules about rating rotation, but actually some of the other new stringent criteria is effectively working against them - such as how some assets are treated within a rated fund. I have a triple-A rated fund and so I should be able to buy bonds rated triple-A by any agency. However, the agency that rates that fund is forced to ignore the ratings of any other agencies on bonds it doesn't rate and initially must assign it a double-C rating."

As a result, Ford admits he would have no choice but to leave the bond out of his portfolio, as it would adversely affect the rating of his fund. "No rated fund investors would touch any bonds not rated by their fund-rater when the shadow ratings place them on such a lower scale," he adds.

In terms of of alternative approaches to tackling CRAs, Ford says that it is market players themselves who continue to keep the current system alive and well, and does not expect this to change soon. He says: "Investors are so tied to CRA restrictions. Their investment criteria is so heavily motivated by and ingrained into them."

Currie concludes: "It seems to me that the current system and its conflicts of interest are manageable. On the other hand, the alternative options would have more conflicts of interest and would be less manageable. Therefore, I wouldn't expect any dramatic change soon."

JA

Structured Finance

Loan trading team bolstered

Cantor Fitzgerald has expanded its whole loan sales and trading team with the appointments of Gary Wang and Karl Partch as mds. Wang and Partch will focus on portfolio disposition, evaluation and structuring advisory. They will be based in Los Angeles and report to Cass Tokarski, senior md and head of mortgage and ABS sales and trading.

Wang previously served as svp of loan trading at Wunderlich, where he managed the whole loan trading desk. Prior to this, he held senior roles at WaMu Capital and Countrywide Securities.

Partch also served as svp of loan trading at Wunderlich. In addition, he has held a number of senior trading positions at Countrywide Capital Markets and Bank of America Merrill Lynch.

Structured Finance

CRE underwriting vet moves on

Morgan Stanley has added George Kok as an md in its commercial real estate (CRE) lending group. He will work on securitised and portfolio mortgages and will report to Jim Flaum, md and global head of CRE lending.

Kok arrives from Ladder Capital, where he was chief of underwriting. He will officially join Morgan Stanley in 1Q15.

Structured Finance

DBRS buyout agreed

The Carlyle Group and Warburg Pincus, in partnership with a consortium of Canadian-based investors - including DBRS founder Walter Schroeder and DBRS management - have agreed to acquire DBRS. Terms of the transaction, which is expected to close in 1Q15, were not disclosed.

Schroeder will remain an important investor in DBRS. He comments: "While our Canadian franchise and culture will continue to be at the core of DBRS' operations, the breadth and depth of both Warburg Pincus and Carlyle's international presence will be invaluable to DBRS at it seeks to capitalise upon its growing platforms in the US and Europe."

The agency currently rates over 1,000 different companies and SPVs that issue CP, term debt and preferred shares in the global capital markets. Corporate headquarters will remain in Toronto, with offices in New York, Chicago and London.

Carlyle's portion of the equity for the investment will come from Carlyle Global Financial Services Partners II. Warburg Pincus' portion will come from Warburg Pincus Private Equity XI.

DBRS was advised by Perella Weinberg Partners as financial advisor and Torys as legal counsel. CIBC World Markets served as financial advisor and Wachtell, Lipton, Rosen & Katz and Stikeman Elliott served as legal counsel to The Carlyle Group and Warburg Pincus.

Structured Finance

Agency shareholder base broadens

Scope Corporation has raised its number of shareholders from 10 to 29, with a share capital increase of €2.5m fully subscribed by German investors. Scope intends to accelerate the "Europeanisation" of its rating business and has opened a second tranche of capital raising to European investors.

Senior management participated in the first tranche and founder Florian Schoeller retains a majority stake. Scope aims to be the European rating agency of choice and the second tranche, for a further €2.5m, is due to be completed in spring 2015.

Completion of the second tranche will increase Scope's capital to a total of €6m from 2013. The additional capital will be used mainly to accelerate the "Europeanisation" of the rating business and recruit further high-profile analysts.

CDO

Taberna manager replaced

TP Management has replaced Taberna Capital Management as collateral manager for both Taberna Preferred Funding VIII and IX. Moody's (which rates both of the deals) and Fitch (which rates the latter) say there will be no impact on the rating of either Trups CDO.

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

CDS

Derivatives vet switches regulator

Gary Barnett, director of the division of swap dealer and intermediary oversight at the US CFTC, will leave the regulator in January to become a deputy director in the US SEC's division of trading and markets. He will be responsible for the office of broker-dealer finances and the office of derivatives policy and trading practices.

Before joining the CFTC, Barnett was a partner and headed the US derivatives and structured finance practice group at Linklaters in New York. Prior to that, he was a partner and co-head of the securitisation and derivatives practice at Shearman & Sterling.

Tom Smith - current deputy director for DSIO's capital, margin and segregation branch - will become interim director for DSIO upon Barnett's departure.

Insurance-linked securities

ILS merger discussions begin

XL Group is in discussions with Catlin Group regarding a potential transaction to acquire the company and form a combined entity. The transaction would require approval by the boards of directors of each company and would be subject to various shareholder and regulatory approvals.

The combined entity would be a leader in the global speciality and property cat markets. However, XL says at this stage there can be no assurance that a transaction will result from the discussions, nor can there be any certainty as to the terms on which any such transaction might proceed.

Insurance-linked securities

ILS manager moves

Wilmington Trust has hired Robert Bilodeau as a senior relationship manager in its insurance collateral solutions group. His appointment follows those of Robert Quinn and Todd Winchel last month (SCI 17 November) and he will play a key role in trust agreement negotiations, due diligence acquisition and transaction administration.

Before joining Wilmington Trust, Bilodeau was relationship and product manager in the corporate trust division at Wells Fargo. He has also held roles at BNY Mellon and Citi.

Insurance-linked securities

ILS expert joins board

Clive O'Connell has joined Twelve Capital's board of directors as vice-chairman and a non-executive independent member of the board. He will serve alongside board chairman Urs Ramseier, who relocated to London earlier this year (SCI 7 October).

O'Connell is the lead partner of Goldberg Segalla's London office. He is also currently general counsel and board member of the International Insurance Society and UK chair for Defense Research Institute International.

Insurance-linked securities

AQR adds underwriter

Chris Conway has joined AQR as an underwriter for the firm. He will focus on underwriting international retrocession and catastrophe reinsurance business.

Conway has held positions at Axis Specialty and, more recently, Third Point, where he was an underwriter and head of risk analytics. He will report to AQR's chief underwriting officer, Martin Vezina.

Risk Management

GFI bid increased

BGC Partners has increased its fully financed, all-cash tender offer to acquire all of the outstanding shares of GFI Group (SCI passim) to US$5.45 per share. The tender offer is scheduled to expire on 6 January 2015.

The company has also reduced the minimum tender condition to 45% of the outstanding shares of GFI common stock, inclusive of the approximately 13.4% of GFI shares that BGC currently owns. BGC's offer had previously required that at least 50% of GFI's outstanding shares on a fully diluted basis be tendered.

BGC's revised offer represents a premium of US$0.20, or approximately 4%, to the US$5.25 per share stock and cash transaction announced by CME and GFI on 2 December and a premium of more than 75% to the price of GFI shares on 29 July, the last day prior to the announcement of the original CME transaction.

RMBS

NCUA files Wells Fargo suit

The NCUA has filed suit in federal court against Wells Fargo, alleging the bank violated state and federal laws by failing to fulfil its duties as trustee for 27 RMBS trusts. The agency is suing in its capacity as liquidating agent for five failed corporate credit unions and has previously filed suit against several other trustees (SCI passim).

The five corporate credit unions - US Central, WesCorp, Members United, Southwest and Constitution - purchased approximately US$2.4bn in RMBS issued between 2004 and 2007. Those securities lost value, contributing to the failure of each of the institutions.

The complaint says that Wells Fargo failed to provide required notices to certificate holders and other parties, despite knowing about defects in the mortgage loans. The NCUA also accuses the bank of failing to take timely action to force the repurchase, substitution or cure of defective mortgage loans or otherwise preserve trust remedies.

RMBS

GSE vet joins Redwood

Redwood Trust has added Karen Pallotta to its board of directors. She was at Fannie Mae for more than 20 years until her retirement in 2011.

Pallotta served in various roles at the GSE, most recently as evp of its single family credit guaranty business. She was directly responsible for Fannie Mae's single family mortgage business, comprising more than US$2.5trn in guaranteed mortgages and RMBS.

ABS

RFC issued on life insurance ABS

Moody's is seeking comments on its proposed approach to monitoring life insurance ABS. The agency says that the approach, if adopted, will not have any impact on the outstanding ratings of life insurance ABS.

The proposed methodology entails a quantitative and qualitative approach to analyse life insurance ABS transactions with or without the support of supplemental policies, while accounting for the risk of lapse of the underlying life insurance policies and other key factors. Comments on the proposals are requested by 12 January 2015.

ABS

Auto losses up but historically low

Losses were up for both US prime and subprime auto loan ABS last month. Subprime losses were higher than they have been since early 2010, according to the latest monthly index results from Fitch.

Subprime auto loan ABS losses moved 4.6% higher to 7.96% in November. Annualised net losses (ANL) for prime auto ABS also moved higher, but are still low on a historical basis.

Losses on subprime loans from the 2013 vintage are tracking slightly above those from 2012. However, both vintages should finish with lower losses than 2006-2008 issuances.

Prime ANL rose from 0.4% to 0.47% from October to November. The highest rate of the year was 0.49% in February, so performance is stable going into 2015.

Prime auto loan ABS 60-plus day delinquencies were down 6% to 0.34%, just 3% higher than the record a year earlier. Subprime 60-plus day delinquencies declined 1% to 3.98%.

Prime ratings performance remains on track to record one of the best years ever, with 65 upgrades this year, up from 44 last year. The outlook for prime auto ABS is positive entering 2015.

ABS

Venture debt ABS approach updated

Moody's has republished its global methodology for rating SME balance sheet securitisations primarily to incorporate its approach to rating venture debt transactions. The agency says that the publication of the formal methodology will not result in any changes to ratings of any outstanding securities backed by venture debt.

Moody's originally published a request for comment on its approach to rating securities backed by venture debt in August (SCI 26 August). Changes since the RFC include clarifying that stressed correlation assumes a stressed liquidity environment that reflects venture capital cycles and explaining that substantial credit enhancements, such as high over-collateralisation, significant excess spread or low LTV, are necessary for such concentrated pools.

ABS

SLABS defaults, delinquencies drop

US private student loan (PSL) defaults dropped below 2.5% for the first time since 2006 and will remain at pre-recession levels, according to Moody's. The default index fell to 2.4% in 3Q14 - continuing a two and a half year decline - while the 90-plus delinquency rate index remained at its historic low of 1.9%.

"The loans backing 2010-14 securitisations are to borrowers with considerably higher credit quality than those in prior deals," says Moody's avp and analyst, Stephanie Fustar. In addition, loans from the 2001-07 securitisations, which made up 64% of the securitisations in Moody's indices in 3Q14, will continue to season past their peak default periods.

Structured Finance

Canadian ABS, RMBS to stay strong

The credit quality and performance of Canadian ABS and RMBS will continue to be strong in 2015, according to Moody's. The agency largely attributes this to an improving domestic economy.

"For credit card ABS, rising GDP growth and declining unemployment will bolster collateral performance," says Moody's vp and senior analyst Richard Hunt. "These factors will also reduce delinquency levels and credit card charge-offs, supporting our positive outlook for the asset class."

Following a decline in credit card ABS issuance in 2014, owing partly to the impact of Moody's new methodology for rating credit card receivables-backed securities, the agency expects an increase in issuance next year. This is in light of relatively low issuance in 2014 and rising maturities in 2015.

Canadian auto ABS credit quality should remain robust in 2015, thanks to positive economic trends and strong borrower credit profiles, which could offset the industry trend toward longer loan terms. While auto ABS issuance fell sharply from 2010 to 2012, mostly because of a rise in alternative financing options, it is expected to pick up again in 2015.

Moody's also expects another year of strong credit quality and performance for equipment ABS. This is a reflection of continued growth in the economy.

Furthermore, the Canadian RMBS market should continue to perform well in 2015, with Genesis Trust II remaining the primary issuer. Moody's believes collateral performance for this transaction will stay strong due to prime obligor quality and high levels of borrower equity.

Structured Finance

CLO, CLN, ABCP RFCs released

ARC Ratings has released RFCs on its CLO, CLN and ABCP methodologies. The rating agency encourages market participants to provide comments or feedback no later than 18 January 2015.

The CLO, CLN and ABCP methodologies under review each apply globally. There is currently no rating impact from ARC's proposed changes.

Structured Finance

ESMA publishes MiFID update

ESMA has published its final technical advice and launched a consultation on its draft regulatory technical standards and implementing standards for the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR). The new regulatory framework aims at ensuring that secondary markets are fair, transparent and safe and that investors' interests are safeguarded when being sold investment products.

Key proposals stemming from ESMA's technical advice and draft standards cover: increased trade transparency for non-equity instruments, in particular bonds, derivatives, structured finance products and emission allowances; trading obligation for shares and a double volume cap mechanism for shares and equity-like instruments; an obligation to trade derivatives on MiFID venues only, in line with G20 requirements; and newly introduced position limits and reporting requirements for commodity derivatives.

ESMA's technical advice proposes that the European Commission adopts a number of measures that will further the protection of investors across the EU, including clarifications about the circumstances in which portfolio managers can receive research from third parties and clarifications of the circumstances under which inducements meet the quality enhancement requirement for the provision of advice. The advice also seeks information on the requirements for investment firms manufacturing or distributing financial instruments and believes structured deposits should have product governance arrangements in place in order to assess the robustness of their manufacture and distribution.

The technical advice will now be sent to the European Commission. ESMA's draft standards are open for public comment until 2 March 2015. In addition, an open hearing will be held in Paris on 19 February 2015. MiFID II/ MiFIR and its implementing measures will be applicable from 3 January 2017.

Structured Finance

Mixed expectations for LatAm SF

The credit quality of Mexican structured finance transactions will strengthen in 2015, according to Moody's. However, Argentine and Brazilian deals are expected to deteriorate.

In Mexico, the credit quality of new and existing RMBS transactions should remain strong, helped by improving macroeconomics and a more dynamic lending environment. Additionally, higher job and price stability could positively affect RMBS by increasing consumers' disposable income.

Nonetheless, Moody's expects weaker issuance in the Mexican RMBS market compared with 2014. In 2015, Infonavit will likely issue between MXN3bn and MXN5bn - about 33% of its 2014 amount - while Fovissste will issue about MXN16bn, about the same as it did in 2014.

In Brazil, the credit quality of the underlying assets in new Brazilian ABS and RMBS transactions will weaken in 2015 because of the weakening economy, Moody's suggests. Furthermore, rising inflation and unemployment may negatively affect borrowers' creditworthiness.

The performance of existing Brazilian deals could also decline, given the expected monetary and fiscal tightening in the country. Regulatory changes in Fundo de Investimento em Direitos Creditórios in 2014, which have raised the cost of issuing these deals and thus deterred certain users from coming to market, will continue to challenge issuance levels next year.

"In Argentina, despite the challenging economic environment, the collateral quality of new ABS will improve in 2015 as originators have tightened their underwriting standards," says Martin Fernandez-Romero, a Moody's senior credit officer. "Nevertheless, the country's macroeconomic challenges will constrain the performance of existing deals in 2015, particularly ABS backed by unsecured consumer loans originated by financial companies."

Moody's expects that Argentine ABS issuance volume will be weaker next year than in 2014, owing to low economic activity and a decline in consumer and auto loan portfolios from banks and financial companies.

CLOs

Volcker extension for covered funds

The US Fed has acted under the Volcker Rule to give banking entities until 21 July 2016 to conform investments in, and relationships with, covered funds and foreign funds that were in place prior to 3 December 2013. The board also intends to act next year to grant banking entities an additional one-year extension of the conformation period until 21 July 2017, to conform ownership interests in, and relationships with, legacy covered funds.

The Fed previously issued a statement indicating its intention to grant two one-year extensions of the conformance period for legacy CLOs backed in part by non-loan assets (SCI 8 April). This latest action is consistent with that and extends the conformance period for other types of legacy covered funds.

CMBS

CMBS origination metrics deteriorate

Differences among US CMBS originators are continuing to emerge in recent months as IO loans proliferate and leverage metrics deteriorate, according to Fitch. In addition, collateral mix and loan quality continue to show declines.

The agency's latest sample analysis of CMBS conduit loans shows a 42.4% increase in partial IO loans, while originators are also increasing leverage. Fitch says the most notable changes over the last several months are: an increase in the average Fitch net cashflow haircut from 7.1% to 8.1%; a decrease in Fitch DSCR to 1.17x from 1.24x; and an increase in LTV from 100.7% to 106.7%.

"While many CMBS originators are continuing to push the envelope, it is important to note that other originators are showing a higher level of discipline," says Fitch md Stephanie Petosa. The report shows significant differences among the 25 originators sampled on a range of variables.

Offsetting the decline in underwriting metrics is an increase in credit enhancement, which is averaging 23.25% on triple-A rated CMBS tranches. That compares to 21.875% at the end of 2013.

CMBS

Lack of TRIPRA sparks CMBS worry

The failure of the US Congress to renew government-sponsored terrorism reinsurance could have repercussions for commercial real estate (CRE) in 2015, according to Fitch. The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is slated to expire at the end of this year.

TRIPRA is an important component of the CMBS market and has become common in many transactions. If it is not renewed, Fitch identifies approximately 20 transactions which it would put on rating watch negative.

As loan documents require terrorism insurance over the life of the loan, CMBS servicers may increasingly force-place coverage from their own carriers. This would likely be at a very high cost - if coverage can be found at all.

The impact on individual CMBS transactions would vary widely. If TRIPRA is not renewed it would have a negative impact on ratings of office properties with loans in CMBS single-asset transactions, for example.

The lack of TRIPRA could also affect some multiborrower transactions if the number and size of the loans lack sufficient coverage, or if the risk of terrorism-related losses could not be mitigated by the rest of the pool. However, at this stage, no multiborrower transaction is included in the 20 deals at risk.

Fitch believes that withdrawal of TRIPRA reinsurance protection without readily available substitute coverage will likely prompt insurers to exclude terrorism from property coverage. By statute, workers' compensation writers are forbidden from excluding terrorism coverage in their policies, so the expiration of TRIPRA may lead underwriters to withdraw from writing workers' compensation in large cities that are thought to be targets for terrorism.

Speciality or monoline workers' compensation or commercial property writers that focus on large urban markets have the greatest credit sensitivity to reductions in available terrorism reinsurance protection. Underwriters have typically made preparations to adapt to an insurance market without TRIPRA, but it will take time for some insurers to execute plans to reduce exposures and risk aggregations through revised coverage terms and policy cancellations, if there is not a swift renewal vote in early 2015.

The US Senate adjourned on 16 December without voting on TRIPRA, which passed the US House of Representatives on 10 December. The bill would have extended the programme for six years and set insurers' co-payments to 20% of losses, up from 15% in 2014. While there is a chance for legislative action in early 2015, Fitch says insurers must prepare for managing risk exposures without the terrorism coverage that has been in place in various forms since 2002.

CMBS

Economy spurs CMBS on

The macro economy and low interest rates contributed to continued growth in the commercial real estate (CRE) and securitisation markets this year, according to Kroll Bond Rating Agency. Property fundamentals for most CRE segments improved, fuelling the appetite for CMBS investment.

The agency notes that credit standards continued to ease as demand increased, with competition between loan originators progressing throughout the year. Credit metrics have weakened as leverage climbed to new post-crisis highs and debt service trended downward despite lower interest rates and the prevalent use of interest-only loan structures.

As the economy continues to expand, Kroll expects real estate fundamentals will remain stable across all of the property type segments, many of which will experience flat to modest growth. However, it says that the multifamily and lodging sectors are standouts, with the performance of these two sectors in many markets at or above that experienced during the height of the last real estate cycle.

CMBS

Treveria portfolio acquired

Sunrise Properties has acquired the Treveria Silo E Portfolio, also known as Project Sunrise. The portfolio includes 127 mainly commercial real-estate (CRE) assets across prime locations in Germany.

The portfolio was underpinned by the Orange Loan within the Talisman 6 CMBS, which had an unpaid whole loan balance of approximately €380m. BNP Paribas Real Estate valued the portfolio at €394.9m in May 2012.

CMBS

CMBS maturity spike expected

US CMBS loan maturities will spike in 2Q15 following a measured start to the year, says Fitch. The agency notes US$3.7bn of US CMBS loans in Fitch-rated transactions are scheduled to mature in 1Q15, jumping to US$9.7bn in 2Q15 and to US$12bn in each of 3Q15 and 4Q15.

In addition, US$64.6bn worth of loans in 2016 is expected to mature, with US$73.4bn in 2017. Fitch's analysis included all US CMBS loans it rates that were not defeased or in default as of 30 November. Defaulted loans still outstanding totalled US$18.5bn, with US$1.7bn of that consisting of loans with original maturities in 2015.

Another US$344m of outstanding, performing loans with 2015 original maturities were previously modified and extended. By vintage, approximately 70% of the US$37.4bn in 2015 maturities are from 2005-vintage transactions, with another 15% representing loans securitised in 2006.

The largest exposures listed by Fitch for 1Q15 are: US$142.6m Grand Plaza (JPMCC 2005-LDP5); US$100m Park 80 West - A and B notes (LBUBS 2005-C2); US$88.9m Century Centre Office (GSMS 2005-GG4); US$59m SLS Beverly Hills (JPMCC 2013-FL3); US$56.2m 401 Fifth Avenue (GECMC 2005-C2); US$50.9m Park Place (BSCMS 2005-PWR8); and the US$50.4m One Riverway Office (GMACC 2005-C1).

The Grand Plaza loan was paid off in December ahead of its January 2015 maturity, while Century Centre Office was also paid off this month but took an approximately 1% loss due to special servicing fees. Of the remaining largest 1Q15 exposures, Fitch expects losses on the Park 80 West loan, which was previously modified and split into an A and B note. The loan is scheduled to mature in February.

CMBS

CMBS delinquencies down

The delinquent unpaid balance for US CMBS fell to US$30.92bn in November, says Morningstar. This is down 3.5% from the prior month and 25.79% from a year ago.

Meanwhile, liquidations, at US$775.6m across only 70 loans, experienced an average loss severity of 40.58%. This is significantly lower than the US$1.3bn in liquidations by balance across 83 loans in October, which averaged a loss severity of 48.87%.

Morningstar notes that the November data marked the 12th consecutive month that overall delinquent unpaid balance was reported below US$40bn, a low point not seen since October 2009. In addition, the agency says it is the tenth consecutive month that the delinquency rate remained below 5%.

The delinquency percentage amounted to 4.03%, down 13bp from the previous month and down from 5.64% one year ago. As delinquency has fallen for 29 of the past 34 remittance cycles dating back to January 2012, Morningstar believes the declining trend will continue into 2015.

The agency estimates US$67.2bn in performing CMBS will mature throughout 2015 within its active surveillance of loans - which is down from US$70.24bn a month prior, as loans continue to refinance. Most recent figures show that of the US$68.6bn of CMBS loans scheduled to mature over the next 12 months, US$3.54bn (5.15%) is already delinquent, US$4.92bn (7.17%) is specially serviced and US$16.49bn (24.04%) is on Morningstar's watchlist.

RMBS

Agency updates Japan RMBS methodology

S&P has updated its methodology and assumptions for rating Japanese RMBS transactions. The agency's new criteria aims to increase the comparability of RMBS ratings globally and across sectors.

The criteria will become effective as of 5 January 2015 for all new and existing ratings on Japanese RMBS, including securitisations of condominium investment loans and apartment loans. Outstanding, rated Japanese RMBS transactions number about 320, with a total of about 710 rated tranches.

S&P says that application of the criteria will likely constrain its ratings on fewer than 10 transactions. In addition, fewer than 20 transactions are likely to be upgraded, with the agency expecting to resolve any rating changes within six months of the effective date of the criteria.

RMBS

Borrower attributes drive loss variability

Freddie Mac's recently disclosed loan-level loss data reveal that loss severities on liquidated Freddie Mac mortgages are higher than those on prime jumbo and lower than those on Alt-A non-agency loans, according to Fitch. The differences can be attributed to specific borrower attributes, such as property values, and the presence of mortgage insurance.

Freddie Mac last month enhanced its single family residential loan-level historical dataset by adding loan-level loss data (SCI 25 November). In doing so, the GSE increased transparency to the market in anticipation of an actual loss credit offering in 2015. To date, all risk-sharing transactions have passed losses on defaulted loans to investors using a pre-determined loan loss severity schedule.

Fitch conducted an analysis of Freddie Mac's loss data and contrasted it with non-agency RMBS loss data provided by CoreLogic. The comparison focused on non-agency loans with similar characteristics to the Freddie Mac sample: fully-amortising, 30-year, fixed rate, first lien and full documentation. Fitch found that on average loss severities on liquidated Freddie Mac loans are generally 5%-10% higher than severities on prime jumbo non-agency liquidations and roughly 15%-20% lower than severities on Alt-A non-agency liquidations.

The main drivers of differences in loss severity include property values, mortgage insurance and interest rates. Loss severity is generally negatively correlated with property value, with higher-value properties exhibiting lower severities.

Average property values of liquidated loans in the Freddie Mac dataset range from US$100,000 to US$300,000 since their loan balances cannot exceed the conforming limits. While the Alt-A loans analysed have comparable property values to Freddie Mac's, average values among the prime jumbo dataset are considerably higher, ranging from US$300,000 to US$700,000. As such, average prime jumbo loss severities are lower than Freddie Mac and Alt-A loans.

Private mortgage insurance (PMI) also contributes to differences in loss severity. Freddie Mac generally requires PMI for any loan with a loan-to-value (LTV) ratio over 80%. As such, there is a higher percentage of loans in the Freddie Mac loss dataset with PMI coverage than for prime jumbo or Alt-A. Higher PMI recoveries at liquidation result in lower loss severities among Freddie Mac loans compared to Alt-A, even though the two segments have comparable property values.

Higher loss severities among Alt-A loans are also driven by interest rates. On average, interest rates on Alt-A non-agency loans are 50bp-100bp higher than rates on Freddie Mac and prime jumbo loans. Higher interest rates lead to higher delinquent interest carry costs and ultimately translate to lower net proceeds at liquidation.

Nevertheless, loss severities are comparable when the dataset is controlled for PMI, original LTV, property type and occupancy status. This indicates that the differences in historical severities can be attributed to differences in borrower attributes rather than differences in operational risk or procedure.

RMBS

Trustees targeted in NCUA suit

The NCUA has filed suit in federal court against US Bank and Bank of America, alleging the banks violated state and federal laws by failing to fulfill their duties as trustees for 99 RMBS trusts. The agency's suit seeks damages to be determined at trial.

Five corporate credit unions - US Central, WesCorp, Members United, Southwest and Constitution - purchased approximately US$5.8bn in RMBS issued from the trusts between 2004 and 2007. Those securities lost value, contributing to the failure of all five firms.

NCUA's complaint states that the value of the securities depended on the quality of the pooled mortgage loans the trusts contained and that the banks, as trustees, had contractual and statutory duties to protect the interests of certificateholders. The complaint alleges that, despite knowing about defects in the mortgage loans, US Bank and Bank of America failed to provide required notices to certificateholders and other parties and failed to take timely action to force the repurchase, substitution or cure of defective mortgage loans or otherwise preserve trust remedies.

RMBS

Further STACR risk transferred

Freddie Mac has obtained a number of insurance policies under its Agency Credit Insurance Structure (ACIS), which has attracted commitments of private capital from non-mortgage guaranty insurers and reinsurers. The policies, underwritten by a panel of insurers and reinsurers, cover up to a combined maximum of approximately US$155m of losses for a portion of the credit risk associated with a pool of single-family loans acquired in 3Q13.

"This transaction is backed by a mix of new and returning participants," says Kevin Palmer, vp of Freddie Mac's single-family strategic credit costing and structuring. "These policies further demonstrate Freddie Mac's business strategy to expand risk sharing with private firms to reduce taxpayers' exposure to mortgage losses."

He adds: "ACIS transfers a portion of the remaining credit risk associated with STACR reference pools to a diversified set of insurance and reinsurance companies around the globe, some of which are among the largest and best-capitalised in the industry."

Freddie Mac has introduced new risk-sharing initiatives with nine STACR debt note offerings and now four ACIS transactions since mid-2013. Through STACR and ACIS, Freddie Mac has laid off a substantial portion of credit risk on more than US$205bn of UPB in single-family mortgages.

RMBS

Texas house prices surge

Texas has surpassed California and now has the most overvalued housing market in the US, says Fitch. However, falling energy prices are likely to put pressure on house prices.

After largely avoiding the excesses and downsides of the last housing boom, significant recent growth has made Fitch cautious on the Texan housing market. The agency says that fundamentals do not appear supportive of current prices and the economy is vulnerable to the energy sector. Overall, it views Texas prices as approximately 11% overvalued, with prices in Houston, Austin and Dallas each growing by over 20% since 2011.

One concern is the recent drop in oil prices, which has long been a primary economic driver of the local economy and propelled its recent economic strength. However, a five-year rebound in oil prices has collapsed of late with prices falling by more than 40%, placing them in the mid-50s, although the agency does note that Texas has an economic resiliency beyond energy, which should help to offset downward movement in home prices.

Fitch notes that California remains near the top of the list of most overvalued housing markets in the country as home prices continue to be the most volatile in the nation. Additionally, growth of over 25% since 2012 has left many of the major markets amongst the most overvalued in the US. Like national values, California growth has significantly slowed during the year, although Fitch does not see a significant correction as likely.

RMBS

RMBS lowered on sovereign downgrade

S&P has lowered its credit ratings on 84 tranches in 47 Italian RMBS transactions. This follows the rating agency lowering its unsolicited long- and short-term sovereign credit ratings on the country.

Following the sovereign downgrade, S&P has based its subsequent rating actions in these Italian RMBS transactions on the application of its updated criteria for rating single-jurisdiction securitisations above the sovereign foreign currency rating. Under its criteria for ratings above the sovereign, the highest rating that it can assign to the senior-most tranche in a structured finance transaction is six notches above the sovereign rating on the country in which the securitised assets are located.

For all the other tranches, the highest rating S&P can assign is four notches above the sovereign rating, as it views the country risk sensitivity as 'moderate' under its criteria. As a result, the criteria now caps its ratings in transactions with underlying assets in Italy at double-A minus.

RMBS

Portfolio repurchase 'credit positive'

Moody's believes that Catalunya Banc's repurchase of problematic Spanish mortgage loan portfolios from seven securitisations it originated and retained is credit positive for the transactions because it has improved the credit quality of the underlying collateral pools and increased available credit enhancement to some notes. The bank repurchased 6,208 mortgages in the amount of €762.83m in June ahead of a subsequent sale of a €6.4bn portfolio to Blackstone Group, in the context of the entity's resolution plan for its privatisation.

Moody's says that the repurchase of the problematic loans helped improve the credit profile of the remaining collateral pools. Delinquency levels are expected to increase in the future, but to a lower level than prior to the repurchase, considering improved quality of the pools as well as its stable outlook for Spanish RMBS market. Historically, one of the drivers for the weak performance of Catalunya Banc's Spanish RMBS transactions has been the exposure to non-Spanish borrowers affected by difficult economic conditions, such as increasing unemployment and declining house prices. The exposure of the portfolios to non-Spanish borrowers and the loan characteristics associated with high unemployment rates and weak housing market could continue to weigh on the performance.

In addition, Catalunya Banc repurchased current, defaulted and delinquent loans at par value. The repurchase price covered outstanding principal, and unpaid interest and expenses. The principal balance for the repurchased loans represented from 3.84% to 20.60% of pool balance at closing of the transactions. Defaulted and delinquent mortgages represented 33.43% to 85.97% of the repurchase in each transaction.

Moody's notes, however, that the distribution of the loan-to-value (LTV) remains mostly unchanged. It did not observe significant changes in the weighted average interest or in the geographic concentration either.

The agency adds that, as the repurchase proceeds covered all the outstanding principal balance and the unpaid interest and fees, the repurchase helped boost the recoveries on defaulted mortgages in the affected transactions. Recovery rates on the seven RMBS now average between 75% and 90% of total cumulative defaults post-repurchase.

Historically, the recovery process on the defaulted mortgages has been slow and achieved a low recovery rate. Moody's analysed the recovery data of 3,505 loans with properties went into repossession from 14 Catalunya Banc-originated RMBS transactions. The achieved average sales price of those repossessed properties was 68.77% of the property value at their mortgage origination. When those intragroup sales were excluded, however, the average property sales price was down to 44.01% of the original property value (or 57.33% of the outstanding loan balance at repossession).

One additional positive factor for all Catalunya Banc-originated transactions is the anticipated acquisition of the bank by BBVA in 1Q15. Moody's says the acquisition will be credit positive for Catalunya Banc's transactions from an operational risk perspective: none of Catalunya Banc's deals had adequate back-up servicer arrangements, either at transaction closing or upon a trigger breach.