Contents

ABS

Secondary ABS starts year strongly

The US ABS secondary market is back up and running this week as BWIC volume yesterday reached more than US$150m. Supply was only a little lower than that on Monday and was even higher on Tuesday.

Wednesday's supply was dominated by auto and credit card names. There was also a single student loan tranche - PHEAA 2013-3A A - picked up by SCI's PriceABS data, which was talked at around 100. That is also where it was talked on 21 October 2014.

In the auto space, the AMCAR 2014-2 A2B tranche was talked in the mid/high-40s and was covered at Libor plus 40. The tranche appeared in the PriceABS archive once previously, when it was talked in the low-30s on 26 September 2014.

All of the auto tranches were issued last year, with AMCAR 2014-4 A2A talked in the high-40s and covered at plus 40. The tranche had not appeared in PriceABS before.

FORDR 2014-2 A was talked at plus 50. The tranche was covered on 3 November 2014 at plus 49.

SDART 2014-5 A2A was talked in the high-40s and covered at plus 39. The WLAKE 2014-2A A2 tranche, meanwhile, was talked at plus 75.

Tranches out for the bid from credit card ABS deals were generally post-crisis issuances, although only one was from a deal issued last year. Among the available paper was AMXCA 2012-4 C, which was talked in the low-50s and at 57 and was covered yesterday at 100.64.

CHAIT 2007-B1 B1 was the sole pre-crisis tranche and was talked in the low/mid-50s, having been covered the day before at 99.31. Price talk on 6 January, when the tranche was covered, had been at around plus 70.

CHAIT 2013-A2 A2 was talked yesterday in the mid-teens and at 21.7 and was covered at 99.99. The tranche was previously covered in September 2014 at 12 and in January of that year at plus 13.

CHAIT 2014-A3 A3 was talked in the low/mid-20s and at 25.8 and was covered at 99.92. The first recorded cover price for the tranche was 100.03 on 10 September 2014.

COMET 2013-A3 A3 was talked in the mid-20s and at plus 31 and was covered at 99.74. The tranche's three previous covers were at 21, 23 and 29.

JL

RMBS

Non-agency supply rises

US non-agency RMBS BWIC activity was up to over US$150m yesterday. SCI's PriceABS data captured more than 70 unique line items, all of which come from 2003-2009 vintages.

The increased supply appears to have traded in line with dealer price talk. A US$466m liquidation has also been announced for today.

The earliest-vintage tranche picked up by PriceABS from Monday's session was TMST 2003-4 M2, which was talked from low-90 to low/mid-90 and in the mid/high-90s. The tranche's only previous appearance in the PriceABS archive was on 21 November 2013, when price talk was in the low/mid-80s and the tranche was covered at 85.

A US$1.54m piece of the CWL 2004-6 2A5 tranche was talked at mid/high-90 and in the mid/high-90s and was covered at 96. A US$1.426m piece of the tranche was previously covered on 29 October 2013 at 95.

Another 2004-vintage tranche accounted for the only DNT recorded by PriceABS. That tranche was GSAMP 2004-NC2 A1A, which had been talked at low/mid-90 and in the mid-90s.

There was also a cover for the 2005-vintage ABSHE 2005-HE7 M3 tranche. The tranche was talked at mid/high-80 and in the mid-80s and was covered yesterday at 87. A US$2m piece of the same tranche was covered last Thursday at 86.

A US$3.7m piece of the US$26.3m BALTA 2005-10 11A1 tranche was talked in the high-70s, while price talk on the BSABS 2005-2 M3 tranche was recorded in the low-90s. The FMIC 2005-2 M4 tranche, meanwhile, was talked in the low-single digits, as it has been on its three previous appearances in PriceABS.

Much of the paper out for the bid was issued in 2005. The NCHET 2005-2 M4, PPSI 2005-WHQ2 M4 and RASC 2005-KS7 M7 tranches were three more to be talked in the low-70s. A US$4.6m piece of the US$6.9m WFMBS 2005-AR10 B1 tranche, meanwhile, was talked in the mid/high-90s.

The CARR 2006-FRE1 M1 tranche was talked in the mid/high-20s yesterday. It was previously covered on 19 November 2013, when price talk had been in the high-single digits.

SAST 2006-3 A4 was talked in the low/mid-40s on its first appearance in the PriceABS archive, while ABFC 2006-OPT3 A3B, BSABS 2006-4 M1 and JPMAC 2006-WMC3 A4 were each talked in the low/mid-50s. A US$7m piece of the US$30m ARSI 2006-W3 A1 tranche and a US$3.6m piece of the US$4.3m OWNIT 2006-6 A2C tranche were each talked in the high-50s.

A US$7.9m piece of the US$23.6m CWALT 2006-41CB 2A12 tranche was talked yesterday in the low-90s. On 15 January 2014 a US$43m piece of that tranche was talked in the mid/high-80s.

In the 2007 vintage, the BSABS 2007-SD3 M1 tranche was talked in the low-single digits, while BSABS 2007-2 M2 was talked in the low/mid-20s and BSABS 2007-HE7 M2 was talked in the high-30s. The BSABS 2007-1 M1 tranche, by contrast, was talked in the mid-60s.

There were no 2008-vintage tranches captured by PriceABS and only one from 2009. That was a US$7.61m piece of the US$7.92m DMSI 2009-RS2 1A2 tranche, which was talked between mid-80 and mid/high-80 and also in the mid-80s.

JL

Secondary markets

Slow start for US CLOs

US CLOs are starting the year slowly with relatively low levels of activity, but thus far are only slightly impacted by broader market volatility.

"It's been slow since New Year, but CLOs seem to be holding in despite the volatility elsewhere over the last few days," says one trader. "In primary deals are currently being talked at tighter levels than CDS is implying and secondary hasn't gone as wide as might have been expected."

He continues: "Secondary was marginally wider yesterday, but when we tried back bids on some bonds, we were told we were way out - by half a point on single-As, for example." On the two BWICs circulating yesterday all the bonds that traded did so inside of talk, albeit talk that was calibrated slightly wider than year-end levels.

Today looks potentially to be a stronger day, the trader suggests. "There seems to be even better sentiment today, but we'll have to wait and see where the equity list due today actually trades to be sure - declining energy prices are weighing heavily on portfolios, but my sense is that even so sellers are not distressed enough to let go at any level just yet."

The list the trader refers to is a $16m four line BWIC due at 14:00 New York consisting of: BRCHW 2014-1X INC, CIFC 2014-3X INC, SYMP 2013-11A LP and VENTR 2014-17X SUB. None of the bonds has traded with a price on PriceABS in the last three months.

Secondary markets

Euro ABS/MBS activity continues to rise

Trading activity in the European ABS/MBS secondary market is slowly but surely increasing as the week continues.

"Today looks to be a bit better again," says one trader. "We're seeing more prices and more enquiries, but the market is slow to come back."

Yesterday's positive tone has continued into this morning on the back of improved macro sentiment. RMBS remains at the centre of market activity particularly around UK non-conforming senior and mezzanine paper, while prime RMBS across jurisdictions continues to see good two-way interest.

Again today the BWIC schedule is limited and revolves around the main areas of focus with only two lists currently due this afternoon - one Dutch prime and one mixed.

Secondary markets

'Wait and see' for US CLOs

The US CLO market is continuing to adopt a wait-and-see approach to 2015.

"There have been a few lists as people test the waters, but not that many," says one trader. "We're not seeing any major moves, the market is still in wait-and-see mode - digesting year-end marks and trying to figure out where to deploy capital or where the selling opportunities are."

Yesterday's BWICs did however provide some food for thought. "The equity list was closely watched as anticipated and traded in line with most people's expectations," the trader says. "But the 1.0 double- and triple-B list DNT'd, which was a bit surprising given 1.0s will grind tighter over time as they move closer to a an economic call or generically de-lever."

As was the case yesterday, there are only a couple of BWICs scheduled for today, but less is likely to be learned. "They're small lists by CLO standards with nothing really significant on them," says the trader.

Secondary markets

US RMBS looks ahead

Secondary activity in US non-agency RMBS has gradually picked up this week, but next week is expected to see a full return to normality.

"The market has been particular quiet up until now," says one trader. "BWIC volume has picked up to just under $500m for today - that is light for a Thursday, but it is the first full week of the year and a lot of people are still out."

The trader suggests the start to a new year has been made more difficult by global factors. "People are concentrating on external markets and events and trying to work out what it all means for RMBS - there are a lot of what-ifs to consider."

Nevertheless, next week looks likely to signal a return to normality. "Everyone will be back to their desks and focused by then and there's already a $400m liquidation scheduled for Tuesday consisting primarily home equity mezz," says the trader.

Secondary markets

Looking for levels

European ABS/MBS secondary market activity continues to increase slowly but participants are still trying to determine clearing levels, particularly around Greek bonds.

"Activity continued to pick up a bit yesterday and into today," says one trader. "However, competing factors are at work - expectations over QE and the Greek elections. There is less conviction about direction in the broader space, which is bringing about price choppiness, albeit to a lesser extent in ABS."

The trader reports increased trading around Greek paper, particularly in GRIF 1 A the most traded Greek name. "There has been no clarity on market clearing levels for some time after the bond saw tremendous moves last year," the trader explains. "So we're now seeing plenty of 3x1 and 1x1 offers to try to get nibbles to assess where the market should be - current opinion seems to be somewhere between High-60s and Low-70s."

Meanwhile, the European BWIC market remains relatively quiet with only one list currently scheduled for this afternoon. "It's a mixed list of only odd lots, but it includes some interesting names including some Greek mezz," says the trader.

The 17 line list is due at 14:30 London time and consists of: ALBA 2005-1 E, BLST 2007-1 CA, DECO 7-E2X G, ESAIL 2007-1X D1A, ESTIA 1 C, GHM 2007-1 EA, KION 2006-1 A, LGATE 2007-1 BB, LGATE 2007-1 CB, LMS 1 D, LUSI 3 A, LUSI 5 A, RMAC 2005-NS2X B1A, RMAC 2005-NS2X M2A, THEME 1 A, THEME 1 C and THEME 2 A. Only two of the bonds have covered on PriceABS in the last three months - LUSI 3 A at 96.03 on 20 November and LUSI 5 A at 90.46 on 1 December.

Secondary markets

Euro CLO pipeline builds

Amid healthy activity across the capital structure off-BWIC, the European CLO auction pipeline is building up after a very quiet week this week.

There are already three lists scheduled with the first due at 14:00 London time on Tuesday 13 January. The €8.4m seven line list consists of: CELF 2006-1X C, CORDA 2007-1X C, EUROC VII-X B, HARBM 10X A4, HARBM PR3X A3, HARVT II-X C1 and SKELL 2006-1X B. Only HARVT II-X C1 has covered with a price on PriceABS in the last three months - doing so most recently at M90s on 21 November.

Then, at 15:00 on Wednesday is a €33.04m eight line BWIC consisting of: EUROC V-X C, GROSV II-X C, HARVT IV B1, HLCYN 2008-2A E, JUBIL VIII-X C, MSIMM 2007-1X C, QNST 2007-1X D and RMFE V-X IV. Two of those bonds have covered with a price on PriceABS in the last three months - QNST 2007-1X D at 93.61 on 5 November; and RMFE V-X IV at 93h on 21 October.

Last, and perhaps the highlight, is a €366m single line of HEC 2007-3X A due at 15:00 on Thursday. The triple-A tranche has not traded on PriceABS before.

Secondary markets

European ABS/MBS stays firm

Despite a volatile end to the week in broader markets, European ABS/MBS is staying firm into this morning.

Activity levels across secondary are continuing to edge higher albeit with a little to see on the BWIC schedule for now. The main focus remains on UK and Dutch prime, where spreads have tightened over the last week, as well as UK non-conforming RMBS, which is seeing growing buying activity. Peripherals are less well bid, but are seeing little movement on the back of limited activity.

With no auction lists currently scheduled for today, market attention will be skewed towards the latest ECB ABSPP number due for release this afternoon.

Secondary markets

US Trups list due today

Today sees the first widely circulated Trups CDO BWIC of 2015.

The six line $46.963m list is due at 11:30 New York time. It consists of: ALESC 9A A1, ALESC 15A A1, PRETSL 21 A1, PRETSL 24 A1, PRETSL 27 A2 and PRETSL 28 A2. Only PRETSL 21 A1 has covered on PriceABS in the last three months, doing so at LM70s on 24 November.

The bonds, all originally triple-A, but now mostly in the double-B area, are expected to trade well given the recent lack of auctions in the sector.

Secondary markets

ABSPP underwhelms again

The ECB's latest ABSPP number is likely to underwhelm the market once again.

The ECB has confirmed that the total outstanding amount under ABSPP at 9 January was €1,792m. Meaning that last week saw a net settled volume of €48m, which is likely to further shift traders' focus away from ABSPP and build further anticipation around broader QE and hoped for announcements on government bond buying at the next ECB meeting on 22 January.

However, the market is yet to see forced selling of ECB eligible assets despite many participants being heavily long the sector and consistently lower than originally anticipated ABSPP weekly figures.

Secondary markets

European ABS/MBS better supported

As activity levels slowly increase in European ABS/MBS investor appetite appears to be holding up.

"Activity levels are again a bit better today," says one trader. "There are a few BWICs scheduled for this afternoon and the pipeline is building, but secondary is active this morning and the market is a little bit better supported."

Even previously dormant sectors are seeing some interest, the trader notes. "Things are improving in the peripheral space with a few trades going on this morning."

Overall, participants are currently ignoring the lack of ECB activity and instead it is the lack of primary issuance that is driving the market. "With no new deals, people are focusing on secondary axes and some assets are leaking out of dealer inventory and into customer hands," says the trader.

Secondary markets

Tiers for US CLOs

The US CLO market is picking up speed, but energy exposure continues to create price tiering.

"It was quiet again yesterday, but we're seeing a lot more activity today," says one trader. "However, there's no real direction as a lot of people are still sitting on the sidelines waiting to see where spreads clear."

Levels of energy exposure within CLOs remains an issue for investors and is causing price tiering. "Equity is 10-15 points weaker on bonds with more than 5% energy," reports the trader. "That said, we've incorporated some allowance for tiering in our bids today and the trades haven't gone through, so sellers are not yet pressed to take a hit."

Among the growing BWIC pipeline the trader highlights today's 11:00 New York list of 2.0 BBs from one of a large asset manager's managed accounts as the most potentially interesting. "Again there are relatively high percentages of energy exposure in there, so we're keen to see where it traded. However, initial feedback suggests there may be a few DNTs."

Secondary markets

Euro BWICs build but flow patchy

The European ABS, MBS and CLO BWIC schedule is building up a head of steam this week, but flow trading is still intermittent.

"We saw a few more BWICs yesterday and there was strong execution across deal types - not just prime RMBS, but also in UK non-conforming, CLOs and CMBS," says one trader. "There are more BWICs scheduled today, tomorrow and into next week, which will hopefully open up the market still further."

However, the trader adds: "Flow business is still very quiet and turning trades is a bit difficult. We had the excuse at the start of the year of broader market weakness, but that's no longer the case."

Instead, the trader suggests it's participants' reticence that is holding the market back. "Some real money players are sitting on the sidelines and there is no boost from the ECB. We do see interest here and there but it remains patchy."

Structured Finance

SCI Start the Week - 12 January

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

Pipeline
A number of US ABS deals have been announced for the start of the year. An ILS and an RMBS have also joined the pipeline.

The ABS are: US$1.1bn AmeriCredit Automobile Receivables Trust 2015-1; US$2.4bn DB Master Finance Series 2015-1; US$1.351bn Ford Credit Auto Owner Trust Series 2015-REV1; US$100m Global SC Funding One Series 2015-1; US$130m Global SC Funding Two Series 2015-1; US$1.25bn Hyundai Auto Receivables Trust 2015-A; and US$689m Navient Private Education Loan Trust 2015-A.

US$200m Vitality Re VI Series 2015-1 is the newly announced ILS. The RMBS, meanwhile, is US$210m Towd Point Mortgage Trust 2015-1.

Pricings
There have also been two prints already. These were US$1bn BMW Vehicle Lease Trust 2015-1 and upsized US$2bn MBALT 2015-A.

Markets
The US ABS secondary market got back up and running last week, as SCI reported on Thursday (SCI 8 January). BWIC supply was particularly high during Tuesday's session, while SCI's PriceABS data shows auto and credit card names dominated Wednesday's proceedings.

US non-agency RMBS started picking up last week, with Wells Fargo analysts reporting trade volume of US$4.4bn and BWIC volume of US$1.2bn. "December 2014 remittance data continue to show stable credit performance trends. In reviewing the modification data, we note a notable decrease in modification activity year over year. We view the decrease in modifications as a positive and reinforcing sign of stable credit performance for the sector," they add.

US CMBS remains quiet, as the holidays were followed by the CREFC conference. "The low volume has helped CMBS spreads hold up somewhat, despite the volatility in rates," note Barclays Capital analysts. "This resilience will be tested as supply returns, with indications of a fairly robust new issue pipeline in the coming weeks."

Around US$150m of US CLO paper circulated on BWICs last week, split evenly between 1.0 and 2.0 as spreads remained unchanged. "European CLO secondary market activity, on the other hand, picked up as market participants returned to their desks, though much of this happened away from BWICs, of which there were very few," say Bank of America Merrill Lynch Analysts.

Deal news
• ISDA's Americas Determinations Committee has voted to send a credit event request in connection with Caesars Entertainment Operating Company Inc to an external review panel. The DC will reconvene tomorrow (8 January) to review progress and continue discussions.
• GC Securities has closed what is believed to be the first-ever Swiss franc-denominated catastrophe bond. Dubbed Gurten and sponsored by Gebäudeversicherung Bern (GVB), the Sfr70m private deal was structured using the Kaith Re vehicle.
• Lane Financial's 4Q14 statistical review of the ILS market highlights the price fluctuations of two catastrophe bonds during the quarter. First, the firm notes that price indications for the MultiCat Mexico series 2012-I class C notes were marked down to around 52 in Q4. Another transaction that saw price fluctuations during the quarter was Gator Re.
• S&P has corrected by reinstating its triple-A rating on the Harbourmaster CLO 8 class A1 notes. The agency last month withdrew its rating on the notes due to what it describes as an error.

Regulatory update
• The EBA last month published an opinion on how to improve the functioning of the securitisation market, based on its assessment of compliance by competent authorities with securitisation risk retention, due diligence and disclosure requirements. While expressing support for the provisions laid down in the Capital Requirements Regulation (CRR), the opinion puts forward recommendations to ensure increased transparency, legal certainty of compliance with the retention rules and the prevention of any potential regulatory arbitrage.
• The final US credit risk retention rule was published in the Federal Register on 24 December. Compliance with respect to ABS collateralised by residential mortgages is therefore required beginning on 24 December 2015, while compliance with regard to all other classes of ABS is required beginning on 24 December 2016.

CMBS

Store closures prompt performance concerns

JC Penney and Macy's have disclosed that they will respectively close 39 and 14 stores this year, including 15 properties backing US$479m of CMBS loans. Certain property closures could accelerate the performance divergence between dominant class A malls and inferior malls.

Barclays Capital CMBS analysts note that four malls losing JCP as an anchor tenant are represented in 2011 and 2012 deals, which tend to have a higher retail mall concentration than more recent CMBS 3.0 transactions. They identify Providence Place Mall in Rhode Island as the largest mall with a closing JCP: it has a US$51m pooled loan securitised in DBUBS 2011-LC3, a pari passu US$131m senior rake bond and US$109m in subordinate debt. Nevertheless, the mall also has both Macy's and Nordstrom as anchors and should remain in a strong financial position, unless it loses another anchor.

However, the US$50m Hudson Valley Mall loan in CFCRE 2011-C1 faces a significant risk of medium-term default with the loss of its JCP, which has a lease that runs until 2017. The mall's DSCR has already fallen to 1.18x (versus 1.59x at securitisation) and it faces significant tenant rollover risk from its other anchors - Macy's, Regal Cinemas, Dick's and Sears - in 2016-2019, according to the Barcap analysts.

The US$49m Cumberland Mall in MSBAM 2012-C6 could also be at a greater risk of medium-term default after losing its JCP. The mall's anchors outside of JCP, whose lease expires in 2018, have leases expiring in 2019.

The final CMBS 3.0 mall with a JCP closing is the US$27m Susquehanna Valley Mall securitised in COMM 2012-LC4, which remains anchored by Boscov's, Bon-Ton and Weis Markets.

Of the legacy properties that are losing a JCP or Macy's store, three of the properties have been previously modified via hope notes, while several others are already in delinquency or REO. The hardest hit mall is the Simon - Upper Valley Mall in Springfield, Ohio, which is losing both its Macy's and its JCP.

The mall is already in REO after re-defaulting on its US$22m/US$20m hope note modification in BACM 2004-6 (see SCI's CMBS loan events database). With the loss of two anchors, co-tenancy clauses are likely to be triggered, which could cause additional store and rent losses.

The largest legacy mall losing an anchor is the US$79mn Hanover Mall in JPMCC 2005-LDP5. The mall is already in REO and was last appraised at US$60m in October 2013.

Fitch suggests that the impact of the store closures on the CMBS market will be muted by the previous affects of the recession and diversification. Fitch-rated deals have exposure to nine of the JCP closures (four of which are already REO) and two of the Macy's closures. Most of the other loans including closing JCP stores account for less than 3% of their underlying transactions.

"In our view, closures in certain properties will accelerate the performance divergence between dominant class A malls and inferior malls," the agency observes. "In 2015 we believe second- and third-tier malls will continue to be at greater risk as the economic recovery for low-income consumers will remain slow, online competition continues and store traffic declines remain. Second- and third-tier malls will be subject to relatively rapid and substantial performance declines that may lead to outsized losses if these closures continue."

CS

RMBS

FHA MIPs moved down

The FHA's mortgage insurance premiums (MIPs) are being lowered by 50bp. This brings policy risk back into the picture for RMBS investors, say Bank of America Merrill Lynch analysts, as the FHA looks to maintain market share in the face of the GSEs' high-LTV programmes (SCI 9 December 2014).

The MIP decreases will apply across the board and lower annual MIP for purchase loans from 135bp to 85bp - a level they were last at in April 2011. The lowered MIPs bring with them increased refinancing incentive for existing borrowers.

Once the effective date for lower MIPs kicks in, the analysts believe that prepayment speed changes will be fairly uniform across the stack. The peak response is expected to range from 5% to 7% CPR for 3.5s and higher coupons, with marginal offsets for pools with high VA share in recent cohorts and fewer FHA-to-conventional refinancings.

The BAML analysts note that the immediate impact on GN/FN swaps will be reflected through faster speeds and lower rolls. The impact of the roll will be subject to the deliverable, which has been new issue in 3.5s and 4s in recent months, although production is now shifting into 3s at current rates.

The impact of the speed increases on 3.5s and 4s is expected to be about a tick. The impact on 4.5 is expected to be about a tick and a half. Swaps have already been weighed down by about 11-15 ticks, implying this carry differential prevails for about nine months.

"The increases in speeds will also have a significant impact on the benchmark 3xMIP IIOs. We expect anywhere from a 2 to 3 point impact on 3xMIP 4s and 4.5s and 1 to 1.5 point impact on IIOs off 5s '10 such as GNR 10-20 SE," the analysts add.

JL

Structured Finance

GCM backs new investment manager

A new global structured products investment management firm, Hollis Park Partners, has launched with significant investment capital from GCM Grosvenor and other institutional investors. Hollis Park was founded by cio and managing partner Troy Dixon.

"We believe today's environment presents attractive and rapidly changing opportunities across a wide spectrum of structured products, including agency and non-agency mortgage-backed securities, CLOs, CMBS and asset-backed securities, and we will seek to dynamically allocate capital across a number of strategies," he comments.

Dixon was previously md and head of the RMBS trading group and co-head of securitised products at Deutsche Bank, where he led a group of 70 investment professionals. While at Deutsche Bank, he served on the corporate banking and securities Americas executive committee, as well as the rates and credit trading executive committee. Dixon has also served as head of pass-through trading at both UBS and Credit Suisse.

Hollis Park's investment team also includes partners Joseph Valentine and Taranjit Sabharwal, as well as senior analyst Douglas Adelman. Most recently, Valentine was co-head of securitised products at CRT Capital. Sabharwal was previously an md at Deutsche Bank, where he ran the credit business within CMBS trading and traded other non-agency products, including CLOs.

There are six other professionals supporting the Hollis Park business.

Structured Finance

Credit co-heads appointed

Mehdi Kashani and Matthew Davies have been appointed interim co-heads of European credit at RBC, replacing Ian Pearce, who is believed to be leaving the bank. Kashani was previously European head of ABS and structured credit trading at RBC, while Davies was head of Europe credit sales.

Structured Finance

Promotion for risk manager

Marathon Asset Management has promoted Jamie Raboy to partner. He has been with the firm since its inception in March 1998 and has led several business areas before becoming global head of risk management in January 2009. He also serves on Marathon's executive committee.

Raboy joins Marathon's existing partners Bruce Richards, Louis Hanover, Andrew Rabinowitz, Richard Ronzetti, Jake Hyde, Stuart Goldberg, Andy Springer and Gabriel Szpigiel.

Structured Finance

Securitisation pros promoted

Weil, Gotshal & Manges has announced a number of promotions in the securitisation, derivatives, restructuring and litigation areas.

Brian Maher and Ariel Kronman have been named partners in the firm's structured finance and derivatives practice in London and New York respectively. Maher has advised on a wide range of securitisations, covered bonds, restructurings/refinancings and portfolio acquisitions, while Kronman has worked at a number of law firms, investment banks and hedge funds on Wall Street and in Asia, including as head of legal coverage of the CDO/CLO desk at Bank of America.

Weil has also promoted two lawyers in its securities litigation practice in New York: Caroline Hickey Zalka becomes a partner, while Stefania Di Trolio Venezia becomes counsel. The pair focuses on litigation of securities and derivatives matters in state and federal court.

Additionally, Kelly DiBlasi has been named counsel in the firm's business finance and restructuring department in New York. DiBlasi's practice focuses on debtors, creditors and equity interest holders in all areas of domestic and international restructurings and crisis management, both in and out of court. She recently worked on behalf of the Superintendent of Financial Services of the State of New York, as rehabilitator of FGIC.

Structured Finance

Boost for Indian real estate

KKR has established a non-banking financial company (NBFC) that will provide structured credit solutions to the real estate sector in India, with an investment from Singapore's sovereign wealth fund GIC. The firm has so far structured and participated in three transactions, with an aggregate amount of approximately US$190m.

KKR says that while many lenders provide debt to the real estate sector in India, the need for solution-oriented non-dilutive capital for property developers remains. It intends to fill that gap and "contribute to the continued development of India's residential and commercial real estate sectors."

The move marks the establishment of KKR's second NBFC in India. Through its first, the firm expanded its capabilities to provide solutions across the capital structure.

The firm says that India's growing business community welcomes non-traditional entities that allow companies to tap into a more sophisticated capital markets system and provide them with greater choice beyond traditional equity or bank loans. Since 2009, KKR has extended more than US$2bn of structured financing to 21 business groups in India through its credit and capital markets business.

Structured Finance

Mid-market capabilities strengthened

The York Street Capital Partners team, including co-heads and co-founders Robert Golding and Christopher Layden, have joined Star Mountain Capital. The move is expected to further Star Mountain's capabilities as a value-added investor in SBIC funds, as well as other small- and medium-sized business-focused fund managers.

Golding and Layden have sourced and underwritten over US$750m of investments over the past decade and have participated in over US$4bn in credit investments during their careers. Prior to York Street, Golding was md and group head of corporate finance at CIT Group, having been md and group head of structured finance at AT&T Capital Corporation. He has also worked at Salomon Brothers, Merrill Lynch and Irving Trust Company.

Layden was formerly senior director of corporate finance at CIT Group, having been director in the structured finance group at AT&T Capital. He has also worked in the credit and collection groups of RH Donnelley and Xerox Credit.

Structured Finance

TwentyFour beefs up

Dawn Kendall is set to join TwentyFour Asset Management as a partner on 1 July 2015, with a dual role covering both portfolio management and serving on the firm's management committee. She was previously senior bond strategist at Investec Wealth Investment and has also worked at Architas Multi Manager, IAM, Newton Investment Management, Codelouf Trust and SG Warburg.

TwentyFour also recently recruited Gordon Shannon from Ignis - who joins as a portfolio manager, working with Chris Bowie - and Sujan Nadarajah from Sarasin as compliance officer. Additionally, Ben Hayward - one of TwentyFour's founding partners - is joining the firm's management committee with immediate effect.

Structured Finance

Structured products co-head named

Mitsubishi UFJ Securities has appointed Alex Pierre as international co-head of structured products in London. He was previously at UBS since June 2006, most recently as global product head, credit and financing structuring. He has also been head of structured credit, secured funding, repackaging and EM structuring and co-head of credit derivatives structuring at the bank. Before joining UBS, Pierre held structured credit roles at Citi and BNP Paribas.

Structured Finance

Executive shuffle for trust company

First Names Group has appointed Cengiz Somay as group ceo, replacing Morgan Jubb, who will assume the role of group executive chair. Current executive chair Declan Kenny will assume the role of group executive director, with a primary focus on the firm's expansion into Asia and its leisure division.

Somay originally joined the firm in June 2014 as group md of operations, responsible for the Group's finance, HR, IT, change and treasury teams. Since arriving in Jersey in 2005, he has held leadership roles in EMEA and Asia at Mourant, State Street and Standard Bank.

The firm says the changes reflect the evolving needs of its business, having concluded an intensive period of acquisitions and structural change. The group is now focusing on consolidating its position and continuing to drive its organic growth strategy.

Structured Finance

Coherence strengthens risk function

Coherence Capital Partners has appointed John Lovisolo as member, coo and chief risk officer. He previously spent 10 years at Barclays, most recently as md and co-head of prime brokerage origination, but he also ran investment grade debt and structured credit products sales for the first half of his tenor. Prior to Barclays, Lovisolo was at Deutsche Bank and Bear Stearns, where he worked for fellow Coherence partners Sal Naro and Vincent Mistretta.

CLOs

Loan trading vet added

Golub Capital has hired Kenneth Selle as head of loan trading in its broadly syndicated loans group. He will be based in the firm's Chicago office and is responsible for sourcing and trading all broadly syndicated loan transactions.

Selle has over 28 years of credit investment experience, most recently as md and head trader in Deerfield Capital Management's corporate credit group. At Deerfield, he was responsible for sourcing and trading all leveraged loan and fixed income investments for CLOs, which totaled US$5.4bn in assets under management.

Prior to Deerfield, Selle was with Banc One Capital Markets, where he oversaw a loan sales desk responsible for the syndication of leveraged loan transactions.

CLOs

Debut for new CLO team

Mariner Investment Group has closed the first CLO - a US$502m transaction - to be managed by its newly-created CLO business. The firm hired in November the 13-member corporate credit team of its strategic partner, ORIX USA, to lead the effort.

The business is co-led by David Martin and Erik Gunnerson, who were co-heads of the leveraged loan and high yield bond business at ORIX USA since 2009. ORIX USA acquired a majority interest in Mariner in 2010.

Basil Williams, Mariner's co-cio, comments: "We believe that CLOs represent a compelling investment opportunity in a market where senior lending opportunities will continue to offer superior risk-adjusted returns and the floating-rate nature of these products acts as an effective hedge if interest rates rise."

The new Mariner CLO investment team brings more than 100 years of combined investment expertise. Prior to joining ORIX in 2009, Martin was an svp at Imperial Capital, a portfolio manager at Highland Capital Management and a vp at Newcastle Partners. Gunnerson also joined ORIX in 2009, before which he was a portfolio manager at Highland Capital Management, an associate in Citi's global capital markets division and worked in Deutsche Bank's investment banking group covering the chemicals industry.

Insurance-linked securities

Catlin acquisition agreed

XL Group has agreed to acquire all of the capital stock of Catlin Group to form a combined business that is expected to have a leading presence in the global specialty insurance and reinsurance markets (SCI 19 December 2014). Under the terms of the transaction, XL will acquire all of Catlin's common shares for a consideration of 388 pence in cash and 0.130 share of XL for each Catlin common share.

On the basis of the closing price of an XL share on 8 January of US$35.42, the offer values Catlin at 693 pence per share. This represents a transaction equity value of approximately US$4.1bn and a premium of 23.5% to Catlin's closing share price as of 16 December. In addition, Catlin shareholders will receive a 22p final dividend to be paid in 1Q15.

The transaction is structured as a scheme of arrangement and is expected to close mid-2015, subject to approval of Catlin shareholders and customary closing conditions. Following completion, the newly combined company will be marketed as XL Catlin, reflecting the strong reputation of both brands.

XL ceo Mike McGavick comments: "We believe the transaction will accelerate each company's strategy and address the meaningful structural changes we see shaping the P&C sector. Specifically, the combination will add immediate scale in specialty insurance, it will create a more efficient and more capable global network by bringing our two infrastructures together, and it creates a top 10 reinsurer with expanded alternative capital capabilities."

The combined company has US$17bn of total capital and approximately US$10bn of net premium, based on the 31 December 2013 audited financials of each insurer.

McGavick will continue as ceo of the combined company and Catlin ceo Stephen Catlin is expected to be named executive deputy chairman upon closing of the transaction. It is also expected that Catlin will serve on the board of directors.

Peter Porrino will continue as cfo, while an additional Catlin director who meets applicable independence and other qualifications is also expected to join the XL board of directors. XL's chief executive of insurance operations Greg Hendrick will have the role of chief executive of reinsurance, assuming responsibility for the combined reinsurance business and leading all alternative capital strategies.

Catlin chief underwriting officer Paul Brand will chair the insurance leadership team and assume the role of chief underwriting officer of insurance, responsible for capital allocation and purchasing of outward reinsurance for the group. Additionally, XL's head of professional insurance Kelly Lyles will become deputy chair of the insurance leadership team and chief regional officer of insurance. The pair will report to McGavick and lead all aspects of insurance for the combined company.

The integration planning team will be led by Myron Hendry, XL's chief platform officer, with support from the extended leadership teams of XL and Catlin. It is expected that additional roles will be identified for many of Catlin's senior management team post-integration, with the organisation drawing upon the talent of both XL and Catlin's functional teams.

The combined entity expects to be able to achieve annual cost synergies of at least US$200m, with the full level of these recurring synergies being achieved by end-2017.

Insurance-linked securities

ILS exec recruited

StormHarbour Securities has named Jonathan Spry md and head of insurance solutions and advisory in London. Originating and executing ILS and securitisations are among his responsibilities in the new role.

Spry was previously head of UK insurance coverage at RBS and before that was svp at Guy Carpenter and director, ILS at S&P. He began his career as an analyst at Morgan Stanley, before a stint in structured finance at Bank of Tokyo-Mitsubishi UFJ.

Risk Management

Regulatory and compliance practice formed

Duff & Phelps has acquired Kinetic Partners, a move which will see it create a dedicated financial regulatory and compliance practice. The firm aims to leverage Kinetic Partners' recognised leadership in providing regulatory consulting and compliance counsel to the financial services industry.

Kinetic Partners founder Julian Korek will lead the new financial regulatory and compliance practice. Kinetic Partners' corporate recovery, forensic and tax practices will also join Duff & Phelps.

The Kinetic Partners audit practice is not included in the transaction and remains separate from Duff & Phelps. However, the firms will work closely to provide seamless service to joint audit, tax and/or regulatory compliance clients.

Risk Management

BGC to use proxy card

BGC Partners has extended the deadline for its fully financed, all-cash tender offer to acquire all of the outstanding shares of GFI Group to 27 January. The firm also intends to file a proxy statement with a GOLD proxy card with the US SEC in order to solicit votes at a GFI special meeting on 27 January, against the 20 cents per share lower and inferior proposed merger with CME Group.

Howard Lutnick, chairman and ceo of BGC, comments: "We are taking the further step of soliciting proxies against the inferior CME transaction because we believe the failure of GFI's board to take immediate action in recommending our offer represents a blatant disregard for the interests of all GFI shareholders and is a breach of their fiduciary duties. We also understand that GFI's management team has been participating in GFI board meetings regarding our offer, despite their opposing bid. In order to eliminate this obvious and egregious conflict of interest, BGC believes that Messrs Gooch and Heffron must be excluded from any deliberations related to our tender offer in order to protect the rights of all GFI shareholders."

As of 6 January, approximately 21.7 million shares were tendered pursuant to the offer. The 21.7 million tendered shares, together with the 17.1 million shares of GFI common stock already owned by BGC, represent approximately 30.5% of GFI's outstanding shares.

Lutnick's comments follow CME and GFI's recent announcement that they have received all of the material regulatory approvals necessary to close the acquisition of GFI by CME. The acquisition remains subject to the approval of GFI Group's stockholders, with a vote on the transaction due at the 27 January special meeting.

"With these regulatory approvals and the significant shareholder support through commitments from Jersey Partners, GFI Group's largest stockholder, we believe the planned merger of CME Group and GFI Group can deliver value with speed and certainty for all GFI Group shareholders," comments GFI Group executive chairman Michael Gooch.

The revised transaction has been approved by the GFI board upon the unanimous recommendation of a special committee comprised solely of independent and disinterested directors. The transaction is expected to close shortly following the stockholders' meeting.

RMBS

Acenden sale agreed

Blackstone Tactical Opportunities and TPG Special Situations Partners (TSSP) are set to acquire Acenden Mortgage Servicing Solutions from the administrators of Lehman Brothers. Acenden provides primary servicing, special servicing, analytics and securitisation services.

The firm has over 64,000 loans under management, with a value of about £5.4bn. It employs almost 400 staff located in central London, High Wycombe and Dublin.

The transaction is expected to close early this year, subject to customary regulatory and antitrust approvals.

RMBS

MBS vet recruited

Gregory Finck has joined Morgan Stanley Investment Management as md, portfolio manager and head of the securitised team for global fixed income. As well as undertaking portfolio management of the Morgan Stanley Mortgage Securities Trust, he will focus on securitised asset research and portfolio management for the firm's Global Mortgage Strategy.

Finck has 22 years of experience managing credit and interest-rate sensitive mortgage portfolios, most recently at Fortress Investment Group, where he was md and portfolio manager of MBS portfolios for various Fortress funds. Prior to that, he was md at Goldman Sachs, where he ran the residential mortgage trading business.

Finck reports to Michael Kushma, Morgan Stanley Investment Management's cio for global fixed income.

RMBS

Citi settlement progresses

RMBS trustees have accepted Citigroup's US$1.125bn settlement for all but seven deal-groups (across four deals) of the 68 trusts involved and have filed for judicial instruction. Given the high degree of similarity between the Citi and JPMorgan settlements, as well as the fact that the same judge is presiding over both cases, Barclays Capital RMBS strategists indicate that the procedure and outcome of both settlements will likely be similar.

Going by the JPM settlement, they suggest that at least a few objectors might intervene. The deadline by which such objections need to be filed has not yet been decided by the court, however.

"It is worth noting that, like JPMorgan, Citigroup has the option to exclude certain deals from the settlement; hence, the settlement approval can be expedited for trusts with no objectors. Overall, we continue to believe that settlement will be approved and that pay-outs might be made to most of the trusts by the end of this year, soon after payments are made in the JPMorgan settlement," the Barcap analysts observe.

RMBS

Ocwen faces California allegations

Ocwen says that it is fully cooperating with the California Department of Business Oversight (DBO) to resolve an administrative action dated 3 October 2014 and has dedicated substantial resources towards satisfying the DBO's requests. The servicer believes it has effective controls in place to ensure compliance with the California Homeowners Bill of Rights and all single point of contact requirements under federal and state laws.

Ron Faris, Ocwen president and ceo, comments: "We believe we have provided the requested information in the format requested. We expect that we will receive follow-up requests or clarifications and that further document and information exchanges may take place. We expect our ongoing cooperation will result in a satisfactory outcome for all parties."

The DBO alleges that Ocwen provided insufficient documentation for the agency to determine whether the servicer had fully complied with the provisions under the California Homeowner Bill of Rights. Among other requirements, the statute mandates that the servicer provide notice of foreclosure alternatives to seriously delinquent borrowers and requires that servicers give homeowners at least 30 days to appeal a denial of a loan modification request.

As such, the DBO has filed a formal notice of intent to suspend Ocwen's license for a year. However, an administrative judge in Los Angeles will hold settlement conferences between the department and Ocwen in an attempt to reach a resolution of the complaint. If a settlement is unable to be reached, a hearing will be held in mid-2015 to decide whether Ocwen's mortgage license should be suspended.

Ocwen may ultimately agree to compensate homeowners for violations of the California Homeowner Bill of Rights and have a monitor installed to review its business operations in the state. The servicer may also be required to pay a civil monetary fine.

Given that Ocwen has already paid US$150m to the NYDFS under a settlement last month (SCI 23 December 2014), Barclays Capital RMBS analysts suggest that the servicer may run into liquidity concerns if it is also required to pay a substantial fine to regulatory bodies in California and especially if additional states levy their own fines. "Moreover, penalties on Ocwen could quickly escalate if Ocwen is found to be in breach of the National Mortgage Settlement and could cast serious doubt on the continuity of Ocwen's operations," they add.

The Barcap analysts anticipate Ocwen buy-outs to slow substantially as the servicer reserves for potential settlements.

Structured Finance

Counterparty risk rating mulled

Moody's is proposing to change its global approach to rating structured finance (SF) securities in light of proposed changes to its global bank rating methodology, including the introduction of a new bank counterparty risk (CR) rating. If adopted, the CR rating would represent the agency's opinion on the probability of default on certain senior bank obligations and other contractual commitments.

Moody's proposes to match each type of credit exposure that structured finance transactions face to bank entities with one of three reference points: senior unsecured debt rating or equivalent, bank deposit rating or CR rating. Currently in its structured finance rating methodologies, the agency generally uses a single reference point - the senior unsecured debt rating or equivalent.

In proposing three reference points, Moody's says its rating analysis will better account for discriminatory effects of bank resolution on the diverse range of exposures. More specifically, the proposal would replace the senior unsecured debt rating with the new CR rating as a reference point for contractual performance obligations (servicing), derivatives (swaps) and liquidity facilities.

The ongoing evolution of banking resolution tools that increasingly include debt bail-in underscores the need to differentiate counterparty risk relative to the debt ratings, according to Moody's. The agency believes that although debt obligations and other capital instruments may be subject to loss in a resolution, counterparty obligations may be shielded from loss in order to preserve the entity's operations. A CR rating will therefore provide an opinion on how counterparty obligations are likely to be treated if a bank fails.

The introduction of the CR rating is driven by the assumption that when a bank is failing, it will maintain and honour certain operations and funding obligations, even as losses are being imposed on other creditors. Thus, in many cases, the CR rating could be higher than the bank's senior unsecured debt or deposit rating.

The proposed structured finance rating methodology updates would apply globally in some instances and regionally in others. Specific reference points may vary depending on a bank's home country and host country regulatory considerations, as well as the type of underlying structured finance transaction.

Moody's is seeking market feedback on these changes by 9 February.

Structured Finance

Euro retention activity approved

The EBA last month published an opinion on how to improve the functioning of the securitisation market, based on its assessment of compliance by competent authorities with securitisation risk retention, due diligence and disclosure requirements. While expressing support for the provisions laid down in the Capital Requirements Regulation (CRR), the opinion puts forward recommendations to ensure increased transparency, legal certainty of compliance with the retention rules and the prevention of any potential regulatory arbitrage. The report also assesses the application and effectiveness of such requirements in light of international developments.

The EBA has reviewed the supervisory measures taken by competent authorities to ensure compliance with securitisation risk retention, disclosure and due diligence requirements and notes that in most jurisdictions - at least in those countries with an active securitisation market - actions have been taken. Only a limited number of breaches were reported.

The EBA says it is of the opinion that the retention requirements and their multiple components - namely, the type of retainer (originator, original lender or sponsor), the forms of retention used, the level of net economic interest retained and the assessment of the consolidated situation of the retainer - are appropriate. However, the authority recommends the introduction of certain additional safeguards and provisions to support the current framework. In particular, it recommends the implementation of a complementary 'direct' approach (where the onus is on the originator, sponsor or original lender) together with the existing 'indirect' approach (where the onus on the investors), aimed at creating more certainty and transparency for investors.

In addition, the report highlights that as a result of the wide scope of the definition of 'originator' in the CRR, securitisation transactions may be structured so as to meet the legal requirements of the regulation without following the 'spirit' of the regulation. The EBA believes that the scope of the originator definition should be narrowed to ensure that industry participants do not abuse the rules.

Furthermore, the authority notes that the disclosure requirements are appropriate and fit for purpose to ensure investor protection as well as financial stability, and that the due diligence requirements are sufficient and proper.

Finally, when comparing and reviewing the regulations at international level, the EBA observes several differences. It believes that if the EU regime and international legislation are not harmonised, a "wedge" will be driven between the global securitisation markets and may further prevent EU issuers from benefitting from the global investor base and reduce EU investors' ability to benefit from global securitisation investments.

"This would reduce the competitiveness of the EU financial industry and its ability to be engaged in the global securitisation market," the authority says.

Structured Finance

Retention compliance dates set

The final US credit risk retention rule was published in the Federal Register on 24 December. Compliance with respect to ABS collateralised by residential mortgages is therefore required beginning on 24 December 2015, while compliance with regard to all other classes of ABS is required beginning on 24 December 2016.

The final rule was adopted by the FDIC, Fed, FHFA, HUD, OCC and SEC in October to implement the credit risk retention requirements of Section 15G of the Securities Act of 1934, which were added to that statute pursuant to Section 941 of the Dodd-Frank Act (SCI 22 October 2014). Section 15G and the final rule generally require securitisers to retain not less than 5% of the credit risk of the assets collateralising an ABS and restrict the transfer, hedging, or pledge of that credit risk.

Structured Finance

Slow stabilisation for SME credit

Credit availability for European SMEs is slowly stabilising, according to a Fitch report that compares SME funding conditions across the region. The agency notes that funding conditions slightly improved over the past year in Germany and France, while credit contraction is slowing in Italy and Spain.

German and French SMEs are benefiting from robust returns on assets (RoA) and record low interest rates on loans for the last 10 years. Loan volumes have increased slightly since 2H14, reflecting improved funding conditions.

In the Netherlands and the UK, the outstanding volume of credit continues to decrease, due to a combination of deleveraging and restricted access to credit. In the Netherlands, more than one-third of loan applications from SMEs were rejected in 2014.

In the UK, the banking system also appears to be suffering from a bottleneck in transferring credit to the real economy. While UK SMEs enjoy healthy returns on capital and historically low interest rates, they still suffer fairly high rejection rates, although these improved significantly in 2014.

In Spain and Italy, loan interest rates were among the highest in the eurozone, but have improved gradually. In particular, interest rates on new Spanish loans with maturities between one and five years are now close to those of German loans.

However, the RoA for Spanish SMEs remains below the cost of debt and demand for financing will thus likely remain low. In Italy, the RoA is also low and bank loan rejections rose above 18% in 2014 from 16.1% in 2013.

Structured Finance

SFR methodology clarified

Moody's has finalised its methodology for rating single-family rental (SFR) securitisations in the US, following a request for comment on its approach to single-borrower and multi-borrower transactions in the sector (SCI 7 March 2014). The report clarifies certain aspects of the RFC.

"In the RFC, we mentioned that there could be variations if the SFR transaction included more than one loan," says Moody's md Navneet Agarwal. "In the final methodology, we further clarify the main differences between the two and what factors we would look to address in a multi-borrower SFR transaction."

The published methodology updates the information used to monitor SFR transactions and clarifies which information can be provided monthly, quarterly and annually. It also outlines that the adjustments applied to take into account the degree of geographic concentration in the portfolio of an SFR transaction are linked to a concentration index (Herfindahl-Hirschman). In addition, adjustments could be made to advance rates and other assumptions for the presence or absence of amortisation features in a loan, for loans with longer terms, to account for the fixed or floating nature of the loan and for considerations pertaining to smaller operators.

CDS

Enbridge CDS outpace sector

Freefalling oil prices may have contributed to wider credit default swap (CDS) spreads on Enbridge Inc, according to Fitch Solutions latest CDS case study snapshot. Five-year CDS on the Canadian energy company have widened by 53% over the past month to levels not seen in over five years.

Spreads on North American Oil and Gas companies on the whole have taken a hit due to falling oil prices (CDS for the sector are 25% wider in the last month), though CDS movement on Enbridge has significantly outpaced the broader sector over the same time period. "After pricing consistently in the triple-B space, plunging oil prices and weak global economic growth have now driven the cost of credit protection on Enbridge's debt in line with double-B minus levels," comments Fitch director Diana Allmendinger. "In addition to falling oil prices, Enbridge's recently-announced restructuring plans may also be contributing to the wider spreads."

CDS

Sovereigns added to clearing roster

ICE Clear Credit and ICE Clear Europe have introduced CDS clearing for additional sovereign single names. ICE Clear Credit has added Portugal, Ireland, Italy and Spain to its suite of sovereign single names (bringing the total to 11), while ICE Clear Europe has added Austria and Belgium (six). ICE's CDS clearinghouses clear over 500 single name and index CDS instruments referencing corporate and sovereign debt.

CLOs

Record CLO issuance tallied

Last year saw record CLO issuance, with 237 transactions worth US$123.8bn pricing, according to Appleby's latest CLO Insider report. The second half of 2014 saw 121 CLOs price for a total of US$61.8bn, keeping pace with a strong first six months in which 116 CLOs accounted for US$62bn of issuance.

The average deal size for CLOs priced in 2014 was US$523m, up by 10% from the average of US$437m the previous year. A core set of arrangers continued to dominate the market, with the leader Citi closing 34 deals totalling US$18bn.

The average triple-A spread for deals closed between July and December 2014 was 151bp, compared to 149bp for the first half. The average for the full year was 150bp compared to 133bp for 2013.

Looking ahead, Appleby expects a robust 1H15, albeit new risk retention rules may drive smaller CLO managers to leave the market, financing costs to rise and continue a wave of consolidation that has already commenced. "We anticipate that the combination of a steady credit environment and stable interest rates will maintain investor demand for CLO debt and equity tranches in the first half of 2015," comments George Bashforth, head of directorship services, Appleby Trust (Cayman). "By the second half of the year, however, we expect issuance growth to dampen with analysts predicting that by the end of the year we will see new issuance retreat to 2013 levels."

CLOs

CLO index returns forecast

The total amount of CLOs paid down in JPMorgan's Collateralized Loan Obligation Index (CLOIE) since the last rebalance through 31 December was US$1.9bn in par outstanding, split between US$1.26bn and US$640m of pre-crisis and post-crisis deals respectively. The post-crisis CLOIE saw the addition of US$10.2bn at the December rebalance, comprising 129 tranches from 25 deals.

Monthly pre-crisis CLOIE returns were negative at the double- and single-A levels, bringing an end to a 17-month consecutive streak of positive returns. Post-crisis CLOIE returns were flat to negative throughout December. The laggards were double-B, single-A and triple-A tranches, which returned -0.56%, -0.15% and -0.56% respectively.

JPMorgan anticipates modest spread compression in new issue triple-A bonds to 135bp-140bp over Libor by end-2015. Factoring in this spread compression and forward Libor forecasts, the bank also forecasts a 2.25% total return in its post-crisis triple-A CLOIE index during the year.

CMBS

CMBS resolutions outpace delinquencies

US CMBS delinquencies finished 2014 at US$18.4bn, down US$5.4bn from US$23.8bn at year-end 2013, according to Fitch's latest index results for the sector. The overall delinquency rate finished the year at 4.62%, only 2bp lower than the previous month, but a 136bp drop from 5.98% one year ago.

Overall, resolutions in 2014 outpaced new delinquencies by nearly 2:1. Resolutions ended the year at US$11.5bn, compared with new delinquencies of US$6.5bn. Fitch-rated new issuance volume of US$53bn in 2014 edged out US$51bn in portfolio run-off, causing an increase in the index denominator. Multifamily saw the strongest issuance, fuelled by over US$8bn in Fitch-rated Freddie Mac transactions.

The industrial, office and multifamily sectors saw the largest improvements during the year, while retail and hotels saw only modest gains. Current and previous delinquency rates are: 6.20% for hotel (from 6.03% in November and 6.50% at year-end 2013); 5.37% for retail (5.36% and 5.63%); 5.25% for industrial (4.94% and 8.45%); 5.22% for multifamily (5.44% and 6.48%); and 5.01% for office (4.98% and 6.89%).

The industrial late-pay rate recorded the biggest improvement in 2014, falling by 320bp on the year. Industrial resolutions of US$1bn outpaced new industrial delinquencies of US$452m.

The largest industrial resolution in 2014 was the US$186m StratReal Industrial Portfolio II (securitised in JPMCC 2007-LDP10), which was disposed of in March (see SCI's CMBS loan events database). The largest new industrial delinquency last year was the US$171.4m Colony IV Portfolio cross-collateralised loans (JPMCC 2006-LDP9), which fell behind in payments in November.

Office saw the next largest improvement in 2014, with its late-pay rate falling by 188bp. Resolutions of US$4.3bn far surpassed new office delinquencies of US$1.8bn.

The largest office resolution last year was the US$470m Two California Plaza loan (GSMSC 2007-GG10), which was disposed of in February. Meanwhile, the largest new office delinquency was the US$90m Gateway I loan (MSCI 2007-IQ13), which fell delinquent in early 2014 but was brought current in May.

Multifamily experienced a 126bp decline in its delinquency rate in 2014, driven by resolutions outpacing new delinquencies by a 2:1 margin (US$1.2bn versus US$578m). The multifamily late-pay rate benefitted from strong multifamily issuance in 2014, resulting in a US$5.6bn net increase in its denominator.

Hotels saw only a 30bp improvement in delinquencies in 2014. Resolutions of US$896m outpaced new delinquencies of US$650m.

Resolutions were led by the disposition of several large assets, including the US$175m Four Seasons Resort and Club - Dallas (WBCMT 2006-C28), US$103.5m Long Island Marriott and Conference Center (JPMCC 2007-LDP10) and US$100m senior trust portion of the Westin Aruba Resort & Spa (WBCMT 2006-WHALE 7). In addition, the US$209m (senior debt) Westin Portfolio loan (JPMCC 2007-C1 and JPMCC 2008-C2) was brought current in February 2014. However, the hotel universe shrank by 7% in 2014, which put upward pressure on the rate.

Finally, retail saw the slowest improvement in 2014 among the major property types, with its delinquency rate falling by only 26bp. Resolutions of US$3.2bn edged out new delinquencies of US$2.8bn.

The US$190m Montclair Plaza (WBCMT 2006-C28) was resolved via disposition. However, 2014 saw several large new retail delinquencies: the US$240m Westfield Centro Portfolio (JPMCC 2006-LDP7); US$190.8m Gulf Coast Town Center Phases I & II (CSMC 2007-C5); and US$110m Westfield Shoppingtown Independence (JPMCC 2006-CIBC17).

CMBS

CMBS pay-offs plunge

The percentage of US CMBS loans paying off on their balloon date plunged in December to 49.6%, according to Trepp. The latest reading is 26 points lower than the November rate of 75.6% and is the lowest reading since July 2012.

"A downward trend in the rate in 2015 would not be all that surprising," the firm notes. "Most of the loans maturing in 2014 were 10-year loans issued in 2004, which was a very good year for loan underwriting. Now the notes that are beginning to mature will be from the 2005 vintage, one in which underwriting standards began to slide."

A second reason the rate may trend lower in 2015 is that so many high quality properties had their loans defeased or paid off early in 2014. That means many higher quality loans will not be reaching their maturity dates in 2015 and a higher percentage of lower quality assets will linger.

The December rate came in well below the 12-month moving average of 66.1%. The highest rate in the last five years was in November 2013, when pay-offs totalled 81.3%.

By loan count as opposed to balance, 63.7% of loans paid off in December. On this basis, the pay-off rate was down just six points from November's 70.2% level. The 12-month rolling average by loan count is now 69.9%.

CMBS

CRE prices, employment correlated

The recent increase in US commercial property prices closely corresponds to the national increase in employment, with the strength of the price-employment relationship lasting for over a decade, according to the latest Moody's/RCA Commercial Property Price Indices (CPPI) national all-property composite index. This correlation is also strong in the six metro areas that Moody's designates 'major', although the closeness of the relationship varies by market.

"The correlation is looser in Boston and Washington, DC than it is in Los Angeles, Chicago, New York City or San Francisco because of industry concentration," says Tad Philipp, director of commercial real estate research at Moody's. "Boston has above-average employment in the education sector and Washington, DC in the government sector."

Overall, major-market prices exceed the November 2007 pre-crisis peak level by approximately 16%, while non-major market prices are approximately 9% below the pre-crisis peak. The national all-property composite index increased by 0.6% in November, with prices now standing at 2.4% above their 2007 pre-crisis peak.

Commercial property prices increased by 0.7%, while the smaller apartment component increased by 0.4%. Prices of central business district office properties in major markets rose the most, by 8.6% over the last three months, largely as a result of global investor activity.

CMBS

Tesco CMBS hit

Moody's has downgraded from Baa3 to Ba1 the ratings of seven classes of notes issued by Tesco-linked CMBS. Approximately £3.89bn of debt (initial outstanding) is impacted by the move.

The affected transactions are Delamare Finance and Tesco Property Finance 1-6. The move reflects Moody's downgrade from Baa3 to Ba1 of the long-term senior unsecured rating of Tesco. The CMBS are credit-tenant-linked and, as a result, the ratings of the notes are closely linked to the rating of Tesco as guarantor of the occupational leases.

CMBS

Lower loss severities continue

The amount of US CMBS loans disposed with a loss in December stayed consistent month-over-month in that it remained lower than average, Trepp reports. The total disposed loan balance registered US$670m last month, down slightly from November's US$676.4m, with loss severities standing at 50.26% (versus November's 56.84%).

The loss list was headlined by the US$80.5m Pier at Caesars loan securitised in MSC 2007-HQ13, which took a US$103.1m loss (128% severity). Two other loans took losses greater than 100% in December: the US$6m Gold Coast Business Center in COMM 2006-C8 and the US$5.3m Bel Air Park II in GMAC 2001-C1.

The Pier at Caesars loan accounted for 30.61% of the total dollar losses in the month. Excluding the Atlantic City loan, loss severity in December would have been 39.64%.

Losses for the month came in at US$336.8m across 63 loans. Of the loans that were liquidated, 78.68% by balance fell into the greater than 2% loss severity category after November's spike up to 94.52%.

Loss severity in December hovered just above the 12-month moving average of 49.67% and the 44.47% average going back to January 2010. The average disposed loan balance was US$10.6m in December, below the 12-month average of US$14.99m.

December's volume of liquidations is the second lowest for 2014 after July's US$605m.

CMBS

CMBS indices unveiled

Trepp and Markit have launched of a number of CMBS indices that aim to provide independent and transparent performance coverage to CMBS market participants. The offering is designed to leverage the combination of Trepp's CMBS Deal Library and Markit's global index coverage.

The Markit iBoxx Trepp CMBS index family includes two benchmark indices and a liquid index. The CMBS Benchmark Index reflects the performance of investment grade CMBS securities at issuance.

Capturing approximately 75% of the total current balance of overall CMBS conduit non-IOs and half of all the bonds in the overall universe, the Benchmark Index delivers broad coverage for highly specified performance analytics. Sub-indices capture specific market segments across various criteria and are available based on rating, seniority, vintage, sector, WAL and delinquency rates.

The Liquid Index reflects the liquid CMBS market and is suitable for the creation of tradable products, such as ETFs. The index uses large deal and bond size criteria for both original and ongoing notional values and is cap weighted for any given vintage or shelf.

CMBS

Relief at TRIA renewal

The US Senate voted yesterday to re-authorise the Terrorism Risk Insurance Act (TRIA) for an additional six years, bringing an end to uncertainty in the CMBS market over whether the programme would be renewed. The bill now moves to the White House for final signature before becoming formal law.

CREFC president and ceo Stephen Renna comments: "This quick action from the new Congress on the heels of the December fumble is a positive for the commercial real estate finance market, which was dealing with tremendous uncertainty following the programme's expiration on 31 December."

The package increases the event trigger from US$100m to US$200m over several years and increases the mandatory recoupment surcharge to policyholders from US$27.5bn to US$37.5bn. Somewhat controversially, it also contains relief for users of derivatives to hedge against business risk by exempting them from margin and capital requirements under the Dodd-Frank Act.

Insurance-linked securities

Swiss cat bond debuts

GC Securities has closed what is believed to be the first-ever Swiss franc-denominated catastrophe bond. Dubbed Gurten and sponsored by Gebäudeversicherung Bern (GVB), the Sfr70m private deal was structured using the Kaith Re vehicle.

The protection provided via the cat bond is positioned alongside traditional reinsurance on each layer of GVB's traditional reinsurance programme. It provides one year of annual aggregate protection on identical coverage terms to its traditional reinsurance programme.

GC says that the active involvement of the key participating investment managers - LGT ILS Partners and Schroders Investment Management (Switzerland) - early in the process streamlined the catastrophe bond implementation to efficiently provide GVB with a capital markets-based solution covering Swiss natural peril catastrophe risk that is highly competitive to the traditional reinsurance placement.

RMBS

RFC issued on reverse mortgages

Moody's is seeking comments from market participants on its proposed approach to assessing structured financed transactions backed by reverse mortgages. If adopted, the changes will result in upgrades ranging from one to three notches for some UK deals due to changes in the outlook for future mortality improvements and long-term house price appreciation.

The request for comment details Moody's assumptions for assessing whether the value of the homes at their maturities will be sufficient to pay off the original loans and any accrued interest. The agency proposes to analyse: the future price of the home; the timing of mortality and mobility events; interest rate risk; liquidity risk; legal and operational risk; and the structure of the transaction.

Market participants are invited to comment on the RFC by 8 February.

RMBS

Ocwen to unload agency MSRs

Ocwen last month disclosed in a shareholder conference call that it will sell its entire agency MSR portfolio as part of a plan to raise capital and focus on the non-agency business. Citi agency RMBS analysts note that the impact on prepayment speeds from these MSR transfers will depend on which servicer acquires the assets. Buyouts on Ginnie loans serviced by Ocwen could also remain elevated, due to efforts to reduce 90+ delinquencies in the portfolio.

The current outstanding UPB of Ocwen's agency servicing portfolio is around US$117bn, with US$91bn in conventionals and US$26bn in Ginnies. Cohorts with the highest share of Ocwen-serviced loans are FN 3.5s 2010, 4s of 2010 and 2011, GD pre-HARP 5.5s and 6s, and GNII 4.5s and 5.0s of 2009 and 2010, according to the Citi analysts.

Ocwen speeds are comparable to banks and other non-bank servicers, except Quicken, whose speeds are faster. "We believe that Ocwen is likely to sell its MSRs to non-bank servicers. Large banks in general have been shedding MSRs in recent years for capital/regulatory reasons and are unlikely to be willing buyers. The risk of speed increase from a sale to Quicken and/or Freedom therefore remains a possibility and poses potential upside risks to speeds," the analysts observe.

Among the large Ginnie servicers, Ocwen is the only servicer with a 90+ delinquency ratio of over 5% for the last several months. The firm's buyout activity has been erratic, with buyouts spiking in November 2014 but trending lower for a few months before that.

RMBS

Further Freddie credit risk transferred

Freddie Mac has closed its first three Agency Credit Insurance Structure (ACIS) transactions of 2015, through which it obtained a number of insurance policies as part of the GSE's continued efforts to transfer credit risk to private capital market investors and global reinsurers. The three transactions transfer much of the remaining credit risk associated with three STACR deals executed in 2014: up to a combined maximum limit of approximately US$707m of losses on pools of single-family loans acquired in 2013 and 1Q14.

Combined with the GSE's ACIS transaction last month (SCI 18 December 2014), Freddie Mac has now acquired more than US$860m in additional insurance coverage since its last STACR transactions in October. Similar to previous deals, the latest transactions also include new participants as part of the GSE's efforts to mature and further expand its panel of counterparties.

Through the STACR and ACIS programmes, Freddie Mac has laid off a substantial portion of credit risk on more than US$205bn of UPB in single-family mortgages.

RMBS

Servicer transfer activity to 'pick up'

Portfolios of the largest US RMBS servicers saw little movement over the last quarter, according to Fitch's latest index report for the sector. The agency notes that this trend could change in 2015, however.

Fitch observed little movement among the five largest bank and non-bank servicers across their portfolios of agency, non-agency, owned portfolio and third-party servicing in Q4. This was primarily driven by the reduced level of servicing transfer, MSR sale and subservicing transactions from banks to non-banks in 2014.

However, servicing transfer activity is expected to pick up in 2015, according to Fitch md Roelof Slump. "We may see more portfolios change hands among RMBS servicers, particularly once Ocwen Loan Servicing begins its announced withdrawal from agency servicing [SCI 12 January]," he explains.

Ocwen's ability to maintain licensing agreements in key states like California - which accounts for US$98bn of its servicing book - could also become a factor. The California Department of Business Oversight reportedly alleges that the servicer withheld information regarding its compliance with the state's Homeowner Bill of Rights (see separate story), a development that could eventually lead to a suspension of Ocwen's mortgage license in the state.

An exit by Ocwen from such important servicing segments could be prolonged due to the size of its portfolio and regulatory requirements. "The Ocwen portfolio change is probably the most significant one on the horizon, though larger trades and portfolio shifts could be more commonplace if and when industry regulatory concerns recede," adds Slump.

Fitch's US RMBS servicer index report also notes that lower levels of transfer activity, combined with portfolio run-off resulted in moderate portfolio declines at the largest non-bank servicers - Ocwen and Nationstar Mortgage. Modification volumes continue to decline, while elinquencies continue to improve across bank portfolios.

RMBS

Risk-sharing activity spikes

Fannie Mae and Freddie Mac have more than quadrupled their US risk-sharing presence year-over-year, according to Fitch's latest GSErisk-sharing trends report. The agency notes that performance of the transactions remains "exceptionally clean".

Fannie and Freddie sold portions of credit risk on US residential mortgages of over US$369.7bn last year, a more than four-fold increase compared to the US$84.7bn seen in 2013. This brings the total dollar amount of the GSE loans included in risk-sharing transactions to US$454.4bn.

Agency mortgages included in recent reference pools are continuing to show better credit attributes than historical averages, according to Fitch md Grant Bailey. "Even compared with strong-performing vintages originated prior to 2005, the GSE reference pools have significantly higher average FICO scores," he says.

Prepayment speeds are averaging over 15% for mortgage loans originated within the last year and after the increase in mortgage rates in 2H13. "Prepayment speeds are still below 10% for older mortgage loans with lower initial coupons," adds Bailey.

RMBS

Home ownership 'faces challenges'

Home ownership levels continue to drop in many countries, despite stable or positive outlooks for most mortgage markets, Fitch reports. As a result of market dislocations post-crisis, home ownership levels face challenges as large foreclosure pipelines are expected to displace owners in some countries such as the US, Spain and Ireland, while new lending remains well below pre-crisis levels - particularly in the eurozone periphery. Stretched affordability - especially in Australia and parts of the UK - and a growing preference for renting are also having an impact.

The percentage of homeowners in the US has fallen to 65% from 69% in 2006. The steady decline has been mainly driven by foreclosures, mortgage scarcity and unemployment.

In the UK, home ownership has dropped even more sharply, falling to below 65% from 73% in just six years. Ongoing affordability pressures in Australia are likely to continue to make renting attractive relative to buying, with the ratio of homeowners falling to 67.5% in 2012 from 70.7% in 2000.

"Tight credit availability and stretched affordability should continue to lead to falling home ownership levels in many countries around the globe, with a generation of first-time buyers largely priced out of the market," Fitch observes.

The main emerging threats are the prospect of rising interest rates for some markets and deflationary pressures in the eurozone. Gradual rate rises are expected in the US and the UK, but the eurozone's mostly high sensitivity to rate changes will not be tested anytime soon. Australia, Hong Kong and Singapore exhibit relatively high rate sensitivity, but balancing factors such as economic performance mitigate this.

Fitch expects moderate house price growth of around 2% in the Netherlands, the US, the UK and Canada - albeit with some concerns regarding sustainability in the latter country. The agency anticipates Australian house prices to continue to rise, albeit at a lower rate than the past 12 months.

Meanwhile, UK regional growth trends may actually reverse as the South East slows and the North picks up, due to stretched affordability in the South East. Eurozone corrections should continue next year in Greece, France, Italy and Belgium. Policy actions in Hong Kong and Singapore are targeting a soft landing, but Hong Kong risks a sharp price correction, given its significant affordability stretch.

Gross new mortgage lending should rise in all but seven countries (the US, France, Greece, Portugal, Hong Kong, New Zealand and Belgium) covered by the report, as consumer confidence generally returns. But policy measures, borrower caution, tight credit and low savings in some markets may be a constraint.

The UK and the Netherlands could see annual increases of up to 10% due to improving housing market liquidity. US volumes will fall again as refinancing activity drops on rising rates. Lending in the eurozone periphery is likely to remain weak.

Fitch notes that policy supports for housing and mortgage markets put in place post-crisis are starting to be removed and prudential measures now target overheating markets in the Asia Pacific region, Canada, the UK and perhaps Ireland in the near future. While such measures reduce long-term risks, they put pressure on home prices and lending.

Supporting factors for the expected improvement in the mortgage market include better macro-economic conditions, low interest rates and, for some markets, improvements in affordability.