Contents

NPLs

Follow by example

Italy in the NPL spotlight

Italian NPL disposals have been disappointing so far, despite significant growth of the assets within the country's banking system. Panellists at SCI's annual London conference last month discussed the challenges that face emerging NPL markets, as well as ways to support their evolution.

Vittorio Savarese, head of credit risk transfer at Banca IMI, describes Italy as a "hot spot" for NPLs and distressed assets. "Growth of NPL stocks in the Italian banking system has been extraordinarily high," he says. "During the last five years, it has been around 200%. Provision has also grown, albeit at a slower rate of 125%, making NPLs probably the primary issue for the Italian banking system."

Savarese notes that out of the €180bn of NPLs on Italian bank balance sheets, the level of actual disposals has been very poor, in part due to the pricing gap between provisioning and market evaluation on NPLs. "So, we have to start asking, what has gone wrong in Italy so far?" says Savarese. "Some transactions have already been postponed: if we can adjust what has gone wrong, we could expect that shortly the volumes of NPLs trades could rise."

Peter Denton, head of European credit investment at Starwood Capital, believes that Italy need only look to the Spanish model as a basis to observe and learn from. "A lot of politics was involved in the enforcement process of NPLs in Spain. Local banks, judges and so on had their agendas. The level of information was also very poor," says Denton. "And yet, Spain has recently been motoring through NPL transactions."

Through the assistance of the European rescue plan, Spanish banks used around €38.9bn for bank recapitalisation, under restructuring and resolution plans - all approved by the European Commission. Denton continues: "In addition, the Spanish government changed the insolvency law twice in 2014 to make it easier for banks to avoid liquidation during the recovery. What we have, as a result, is greater transparency and a changing legal framework."

Denton believes this underlines the reality that foreign investment is an attractive and viable option to consider. "In many regards, you can describe Spain's scenario as that of a virtuous circle. There were a number of factors that led to the country needing an injection of investment and this has paved way for GDP to recover and grow," he says.

Denton adds: "Italy needs to look at the Spanish model closely, if it wants to boost NPL activity. The game can only be played if there is positive growth."

Tamara Box, head of structured finance at Reed Smith, suggests a number of key issues that could be impeding the emergence of new markets. "Regulation and information are two big issues," she says. "Regulatory issues are well known; however, information is vital in the proper functioning of this market, as bidders need to be able to grasp the realities of what they are getting into."

She continues: "You're entirely dependent on the information you get and there is currently a tremendous lack of uniformity in the way vendors present their portfolios of distressed assets to buyers. What can subsequently happen too is that vendors can take actions resulting in clearly but not quantifiably stale information, making it more problematic to handle pricing properly."

One way to produce a more accommodative environment for NPL transactions more broadly would be to establish an initiative whereby sellers take a more uniform and standardised approach to delivering information to bidders, according to Box. "On top of that, some NPL activity will be growth-dependant on the country itself. As Spain showed, growth should lead to greater disposals."

Denton believes that simplifying and standardising the whole approach to NPLs could make an essential difference. "Despite the good things that have happened in Spain, there are still some frustrating factors, such as the inability to enforce from breach of financial covenants; they are meaningless in court and the frictional costs of time delays are still horrific," he says. "If you look at the UK in comparison, there is clearly a reason why it has no NPLs left. The jurisdiction doesn't suffer from these complicating issues."

Denton points to the insight that the AQR test has provided: the foundation of information it has provided could be essential in analysing the optimum approach going forward. "We know that nine Italian banks failed the AQR test. It is an eye-opener as to what problems need remedying and will make matters somewhat easier," he explains.

In its latest European CRE Debt ViewPoint report, CBRE says that despite the level of legacy NPLs in Europe identified by the AQR (SCI 19 November 2014), it does not expect to see a rapid change in loan sales volume. This coincides with the expectation that the bank deleveraging cycle will remain protracted.

Nevertheless, CBRE expects European banks to create more structured and innovative deleveraging solutions beyond simple loan sales. The firm speculates that this could involve joint venture solutions, sales of servicing platforms or repackaging of existing NPL debt.

"Such solutions will offer those banks an exit strategy without crystallising significant balance sheet losses," it concludes.

JA

ABS

ABS BWICs bounce back

US ABS bid-list activity was up yesterday as traders returned to their desks, with student loan and auto ABS paper driving supply. Total BWIC volume was around US$125m, with SCI's PriceABS data capturing 24 unique line items.

In the student loan space, the COELT 2005-A B tranche was covered at high-82. It had only one previously recorded cover price, which was at 84.03125 on 9 October 2013.

The NSLT 2004-4 B tranche was covered at high-86. Meanwhile NCSLT 2004-2 C was covered at low-22, NCSLT 2005-1 C was covered at low-4 and NCSLT 2007-2 C was also traded.

SLCLT 2006-A C was covered at mid-87. The tranche was also covered in January last year, at 83.56, and was more recently out for the bid in November, when price talk was in the high-80s and low-90s.

There were also several Sallie Mae student loan tranches covered in yesterday's session. These consisted of: SLMA 2012-C A1, which was covered at low-49; SLMA 2003-12 B and SLMA 2004-2 B, which were each covered at low-89; SLMA 2004-1 B and SLMA 2004-6 B which were each covered at low-90; SLMA 2004-B B which was covered at mid-92; SLMA 2005-B C which was covered at low-93; and SLMA 2005-1 B which was covered at low-94.

In the auto space, the ACAR 2014-4 B tranche was talked in the high-100s and very high-100s, while ACAR 2014-4 C was talked in the low/mid-300s. DTAOT 2014-3A D was also talked the low/mid-300s, as well as in the low/mid-100s.

EART 2014-3A C was another auto tranche to be talked in the low/mid-300s. It was joined by AMCAR 2014-4 D, which was talked at around 165, having been talked at around 160 on 25 November 2014, when it was also traded.

A couple of container ABS names were also out for the bid. Both CLIF 2014-2A A and CRNN 2014-2A A were talked at around 175, while TAL 2013-1A A was covered at 155 and the TAL 2014-1A A tranche was talked at around 180.

Beyond those names there was also a single whole business tranche whetting appetites during the session. The DPABS 2012-1A A2 tranche was talked in the high-220s, in the 230s and at around 240, having been covered last September at plus 211.

JL

CMBS

CMBS supply rises, spreads widen

US CMBS BWIC volume hit US$400m yesterday in a busy session as spreads widened out. SCI's PriceABS data picked up more than 60 unique US CMBS tranches out for the bid from a variety of vintages.

A very high proportion of the available paper was covered yesterday. This included the 2004-vintage JPMCC 2004-CB8 J tranche, which was talked in the high-80s, 90 area and mid-90s and was covered at 96, having previously appeared in the PriceABS archive on 24 April 2014, when it was talked in the mid-80s.

The JPMCC 2005-LDP2 A4 tranche was covered in the low-100s, which was in line with price talk. The tranche's first recorded cover in PriceABS was at swaps plus 66 on 2 August 2012.

Also in the 2005-vintage, the WBCMT 2005-C22 B tranche was talked in the mid/high-90s, high-90s and at around 100 and was covered at 99.06. Price talk in January 2014 had been in the low-90s.

As for 2006-vintage paper, the GSMS 2006-GG6 A4 tranche was talked and covered at around plus 200. The tranche had been covered on 5 January at 190 and before that was covered on 31 October 2014 at 135.

The WBCMT 2006-C29 A4 tranche, meanwhile, was talked in the low-100s and covered at 118. The tranche was also talked in the low-100s when it was out for the bid on Monday.

2007-vintage paper was represented by tranches such as GCCFC 2007-GG11 A4, which was yesterday covered at 125. That tranche had been covered at 110 on 11 December 2014 and at plus 102 on 13 November 2014.

Also out for the bid was the MSC 2007-HQ11 F tranche, which was talked in the 60s, high-60s, 70 area and mid-70s and was covered in the mid/high-70s. The tranche had not appeared in PriceABS since February 2014, when it was traded in the mid-70s.

The CMLT 2008-LS1 AM tranche was covered at 413, with price talk in the low-400s and low/mid-400s. While the tranche was covered at 300 in June 2014, it had been covered at 550 in July 2012.

The CSMC 2008-C1 A3 tranche was covered at 92. It had already been out for the bid earlier in the week, when it was talked at around 100.

The 2010-vintage GSMS 2010-C1 X tranche was covered at 140 on only its second PriceABS appearance. JPMCC 2010-C2 XB, meanwhile, was covered at 350.

CFCRE 2011-C1 XB and WFRBS 2011-C3 A2 both traded, while UBSBB 2012-C4 A5 was covered at 84. The UBSBB 2013-C6 A4 tranche was likewise covered at 84.

A number of covered tranches were only issued last year. Among these was the COMM 2014-LC15 XA tranche, which was talked in the high-150s and 170 area and was covered at plus 170.

JPMBB 2014-C25 XA was also covered at plus 170, having been talked at around 170 and in the mid/high-180s. JPMCC 2014-FBLU D was covered at 100.19, while MSBAM 2014-C14 D was talked at around 340 and covered at 320.

There were also a few DNTs worth noting. These included: CSMC 2006-5 3A4, JPMCC 2006-CB16 D, JPMCC 2006-CB16 E, LBUBS 2007-C6 AJ, WFRBS 2013-C15 D, CSMC 2014-7R 8A2 and DBCCR 2014-ARCP E.

JL

RMBS

Unusual list dominates RMBS session

Friday's US non-agency RMBS session was dominated by a large pre-announced US$891m legacy BWIC which was being presented in a highly unconventional way. The list came with an uncertain notional amount, as five of the 14 line items out for bid carried the option to upsize.

For those five securities, the seller owned the entire tranche size and would sell all or just a portion, with the choice first granted to the buyer and then, if not exercised, passing to the cover bid. Thus, the US$891m list could grow to as large as US$1.334bn.

Subprime accounted for around half of the list, with the remainder divided fairly evenly among Alt-A hybrid ARM and pay option ARM paper. Interactive Data notes that price talk for the list was particularly tightly clustered, with guidance across the Street centred between 70 and 80.

There were just a couple of outliers, with SCI's PriceABS data showing GPMF 2005-AR5 2A1, a pay option ARM tranche, talked in the low-50s, as it had been on Thursday. At the other end of the spectrum, the Alt-A hybrid ARM CWHL 2006-HYB1 1A1 tranche was talked in the high-80s, which was again in line with price talk in the prior session and also with its last recorded cover, on 5 November 2014.

The earliest-vintage tranches from the list, along with GPMF 2005-AR5 2A1, were BALTA 2005-10 23A1, MARM 2005-8 3A1 and CMLTI 2005-10 1A3A, which were talked in the mid/high-70s, in the high-70s and in the high-80s, respectively. Most of the paper was from 2006-vintage deals, although the 2007-vintage BSABS 2007-HE3 3A and CMLTI 2007-AHL2 A2 were talked in the mid-70s and high-60s, respectively.

SGMS 2006-FRE2 A1 was talked in the low-60s, while GPMF 2006-AR3 2A1 was talked in the 70 area. CWL 2006-25 1A was talked in the mid-70s and BSABS 2006-HE10 22A was talked in the mid/high-70s, while BALTA 2006-4 31A1 was talked in the high-70s and both CWALT 2006-OA14 1A1 and FHLT 2006-C 1A1 were talked in the low-80s.

There were also some interesting names out for the bid beyond that large list. The INDX 2004-AR1 2A1 tranche was talked in the high-80s, while MLCC 2004-B A1 was talked in the mid-90s and WAMU 2004-AR11 A was talked in the high-90s.

There were also a couple of tranches from deals issued last year. BCAP 2014-RR3 4A1 was recorded as a DNT on its first appearance in the PriceABS archive, while CSMC 2014-USA F was talked in the low-400s. That CSMC tranche was covered on 23 October 2014 at 365 and had been talked earlier that month at swaps plus 330.

JL

Secondary markets

US CMBS secondary suffers

The US non-agency CMBS market has returned from its annual conference focused on the primary market and away from secondary trading.

"The conference mood overall was very positive and loan originators are very bullish," says one trader. "It really feels like we're back to 2005/6 in terms of new issuance."

The trader continues: "The first new issue deals of the year are circulating and a lot of focus is on those, as it should be. Secondary is a bit more of a concern - with so much broad market volatility investors would rather take their shots on those new issues, consequently activity is spotty away from the primary market."

Nevertheless, headline BWIC volume has already pushed past $350m current face for today. However, over half of that is taken up by one triple-A legacy list at 16:00 New York time.

The eight line list consists of: BSCMS 2005-PWR9 A4A, GECMC 2006-C1 A4, GSMS 2006-GG6 A4, JPMCC 2005-LDP2 A4, JPMCC 2006-LDP6 A4, LBUBS 2006-C1 A4, MSC 2006-HQ8 A4 and MSC 2006-HQ9 A4. Two of the bonds have covered on PriceABS in the last three months, both on 5 January - GECMC 2006-C1 A4 at 140 and GSMS 2006-GG6 A4 at 190.

Secondary markets

Back to business in European secondary

The European ABS, CLO and MBS secondary markets have finally fully returned to normality on- and off-BWIC.

"It's back to business as usual," confirms one trader. "Focus is away from any potential QE announcement next week and there is an acceptance that ABSPP is underwhelming and it's very difficult to trade with the ECB on that - so it's just normal trading."

The BWIC schedule continues to build. "There's a ton of odd lots to bid on today across deal types and jurisdictions," says the trader.

In particular he highlights the previously mentioned €366m HEC 2007-3X A auction due at 15:00 London time. The CLO tranche is being talked at 98h.

Off-BWIC the trader reports a big pick-up in activity, again across the board, including peripherals. In particular, he notes that interest and prices have picked up in GRIF paper on the back of the rally in Greek government bonds.

Secondary markets

US CLOs step off

US CLO sellers could dominate today as buyers may be harder to find.

"Yesterday the market pretty much stood its ground, with most US CLOs trading in line with talk," says one trader. "But more broadly, particularly in 2.0 deals, were in a widening environment and today's tone is very much risk off."

The trader notes that there is relatively little supply on BWIC today with only 20 lines of 2.0 bonds scheduled for auction so far. Much of the supply is odd lots and while some are undoubtedly looking to exit as the market moves wider, the trader reports that the double-A list due at 10:00 New York is from an asset manager that has been selling steadily throughout January as is its New Year habit.

Overall, the trader says: "It will be interesting to see if there is a support bid from the dealer community. Certainly the investors we speak to aren't looking to add today."

Secondary markets

US RMBS sees more supply

The secondary US non-agency RMBS market looks to have started its year in earnest this week with another day of hefty supply today and a big list due tomorrow.

"It was very busy yesterday and is today as well with over $1bn in BWICs scheduled," says one trader. "Those lists are from multiple sellers and cover all deal and cashflow types."

The trader continues: "Bonds are trading, but there is an element of price discovery as people reassess levels amid increased positivity in broader markets. My sense is that overall RMBS prices are a little weaker."

However, that could change tomorrow with a large list from a GSE due at 10:00 New York. "It's about $890m in current face across a range of deal types and is simply them shedding assets," says the trader. "That kind of 'new' supply often means an uptick in RMBS prices, albeit with a drift down afterwards."

Secondary markets

Euro ABS/MBS stays positive

The European ABS/MBS secondary markets are staying positive in terms of both tone and price levels as the week draws to a close.

Strong execution across yesterday's BWICs combined with increased buy-side participation off-BWIC has kept market sentiment positive and spreads have continued to tighten. The greatest beneficiaries continue to be autos, Dutch Prime RMBS and UK non-conforming RMBS.

CMBS also got a real boost from tighter than expected trading levels in the sector yesterday. Whereas peripherals remain slightly out of favour, though some Irish RMBS tranches saw some activity.

Today's BWIC schedule is considerably quieter so far, though UKNC demand continues to be fed with a six line £39.52m list due at 14:00 London time. It consists of: BRNL 2007-1X A4B, NGATE 2006-2 A3A, NGATE 2006-3X A3A, PRS 2006-1X E1C, RMAC 2004-NS2X A3 and UROPA 2007-1 A3A. None of the bonds has traded with a price on PriceABS in the last three months.

Secondary markets

Europe awaits ECB again

European secondary spreads ground tighter into the end of last week amid positive sentiment and lighter volumes than of late. This week looks set to continue that direction and pattern of activity, especially given the US holiday today and anticipation of a QE announcement from the ECB on Thursday.

The European BWIC schedule for today currently stands at two mixed lists - a long list of odd lots due at 12:00 London and a more substantial list in terms of size at 13:30. The latter list consists of: $0.6m FOSSM 2012-1X 3A1, £5.7m GRAN 2003-3 3B, €3.8m GRAN 2004-3 2B, €10m GRAN 2003-2 2B, €1.6m HARBM 9X A1T,€2.8m HARBM 5X A2E,€08m HARBM 8X A2 and €5.8m SGOLD 2011-1 A2. None of the bonds has traded with a price on PriceABS in the last three months.

Secondary markets

Europe stays quiet

Ahead of the ECB meeting and Greek general election European secondary markets have, as expected, remained for the most part quiet through yesterday and into today.

Yesterday's BWICs all traded with reasonable participation, but again today the schedule is limited, with only a three line Granite mezz list and a 100,000 piece of Arkle in the ABS/MBS space currently doing the rounds. Euro CLOs are similarly quiet with just a single line due today - €3m of DALRA 1-X D, which last covered on PriceABS at LM90s on 16 January.

In broader secondary, spreads remain unchanged though core European paper remains in demand, particularly Dutch RMBS, plus a few major CMBS names have also seen some trading in the past 24 hours. Peripherals are quieter still with many investors taking a step back until after the Greek election.

Secondary markets

US RMBS keeps tight

First day back from a long weekend the US non-agency RMBS market is seeing a continuation of last week's themes.

"It's pretty sluggish today," says one trader. "There are BWICs, but volume is light." So far, around $200m of current face is circulating for auction today.

Last week's themes are already in evidence today, says the trader. "Spreads are staying tight thanks to technicals in the market - net new issuance in particular. Meanwhile, everyone is focusing on what underlying yields are doing and trying to get a handle on where rates are going."

Secondary markets

US CLOs steady

The US CLO secondary market is making a steady start to the week.

"It's fairly quiet so far as it's a holiday week," says one trader. "Away from the oil and gas heavy deals things seem to be trading reasonably well."

However, the BWIC schedule is beginning to build for the next few days. As was the case last week - especially with the energy exposure-driven lists - a significant proportion of auctions now scheduled for the remainder of today and tomorrow focus on the lower end of the capital structure.

Of those lists, the largest in terms of current face is a $112.68m six line equity list due at 11:00 New York tomorrow. It consists of: ATCLO 2012-1A SUB1, CGMS 2012-3A SUB, CGMS 2012-4A INC, MAGNE 2012-7I SUB, MRNPK 2012-1X SUB and VENTR 2012-10A SUB. Only MAGNE 2012-7I SUB has covered with a price on PriceABS in the last three months, doing so at 87h on 19 November. The last appearance of all the other bonds resulted in a DNT.

Secondary markets

Europe's waiting game continues

It's still an ECB waiting game in European secondary markets but sentiment remains positive.

"It's still mainly about waiting on some ECB action tomorrow," says one trader. "But sentiment is good, albeit on quite thin flows, so we're seeing a continuation of the tightening trend especially in UK and Dutch prime."

UK non-conforming RMBS is also continuing to attract interest, but now across a broader spectrum. "UK NC is better bid even in names that had previously been left aside including longer-dated paper, such as Paragon," says the trader.

Overall, the trader says: "Clients are getting strong results on BWICs, but bid-offers are fairly wide in the Street." Nevertheless today's BWIC calendar is, again, a short one so far with only two lists scheduled.

At 14:00 London time, as part of a larger mixed dollar-euro list, there are four lines of triple-B and equity euro-denominated CLOs. The deals totalling €10.67m are: AVOCA VIII-X M, HARBM 5X CS, LFE III D and WODST III-X SUB. None of the bonds has traded on PriceABS in the last three months.

Then there is a single £3.769m line of ESAIL 2007-4X A5 due at 15:00. The double-A RMBS hasn't traded on PriceABS before but is being talked in the mid-90s.

Structured Finance

Socially secured

An innovative real asset transaction backed by German care homes is currently in the private placement phase. Dubbed German Care Homes Fund, the vehicle aims to provide attractive returns at low risk, given that it is indirectly secured by the German social security system.

Three structural variations are currently under consideration: a SICAV-SIF vehicle, a JV holding or a securitisation under Luxembourg law. The target volume is €330m, with a maturity of 10 years. The anticipated capital structure - comprising 60%-70% of senior debt (financed by loans from German banks and a German Schuldschein), 22%-30% of mezzanine debt and 8%-10% of equity - has respective yields/IRRs of low single-digits in anticipation of the low swap rate in Germany, 8%-10% and 13%-15%.

Under the securitisation format, the mezz and equity tranches would be combined to form a 30%-40% mezz piece, with an embedded kicker provided by the equity pushing returns up to potentially double-digits. Private ratings of both debt layers are available if required by investors.

The vehicle is designed to appeal to pension funds, insurance companies and private debt and equity, with investor commitments expected this quarter. A choice of legal structures is being offered in order to maximise flexibility during the placement phase.

"The process allows us to discover where we can raise the most money. Ultimately, we will choose the most appropriate structure, depending on investor demand," explains Oliver Fochler, managing partner of Stone Mountain Capital on behalf of Cepheus Capital Partners, which has structured the transaction.

The fund will be managed by Health Care Germany Invest, the directors of which have over 40 years of combined experience in investing in commercial real estate and managed over €920m of assets. The manager has already sourced a €360m pipeline of property for the fund.

The portfolio is expected to comprise 31 care homes, managed by 18 different operators under 20- or 25-year double net lease contracts indexed for inflation. On average 30% of the care home residents are subsidised by the German social security system; the remaining 'self-payers' would be covered by German social security if they were no longer able to afford the care.

"The lease cashflow of the transaction is therefore indirectly secured by the German government," Fochler notes. "The potential returns on offer are attractive, given the low risk."

The deal also features a maintenance deposit of 5% of the operators' yearly lease cashflows for the roof and façade of the underlying buildings. If the maintenance deposit isn't used during the life of the investment, it is available to be paid out at maturity as additional yield. Fochler says that historically only a low percentage of such maintenance deposits have been used.

He concludes: "Funding on the senior side is getting cheaper by the day as German bund yields decline, enhancing the attractiveness of the deal further, based on additional yield/IRR for mezzanine and equity."

CS

Structured Finance

SCI Start the Week - 19 January

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

Pipeline
Last week saw a greater variety of deals join the pipeline than had done in the week before. There were nine ABS announced along with three RMBS, four CMBS and a CLO.

The ABS were: US$117.813m BXG Receivables Note Trust 2015-A; US$1.25bn CARAT 2015-1; US$300.6m Credit Acceptance Auto Loan Trust 2015-1; €717m Driver Thirteen; US$434m Global Container Assets 2014 Series 2015-1; US$700m HDMOT 2015-1; US$625m Longtrain Leasing 2015-1; US$500m Kubota Credit Owner Trust 2015-1; and Motor 2015-1.

US$279.49m Agate Bay Mortgage Trust 2015-1, US$380m CSMC Trust 2015-WIN1 and US$514m Invitation Homes 2015-SFR1 accounted for the RMBS, while the CMBS were: US$200m CGCMT 2015-101A; US$340m Hyatt Hotel Portfolio Trust 2015-HYT; US$1.147bn MSBAM 2015-C20; and US$1.25bn SFAVE 2015-5AVE. The CLO was US$279.4m LMREC 2015-CRE1.

Pricings
A further six ABS priced last week, as did an RMBS, a CMBS and a CLO. The RMBS was US$210m Towd Point Mortgage Trust 2015-1 and the CMBS was US$1.13bn FREMF 2015-K42, while the first CLO of the year was US$509.3m Apidos CLO XX.

The ABS were: US$1.1bn AmeriCredit Automobile Receivables Trust 2015-1; US$1.5bn 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.

Markets
The US CMBS market was active last week, with BWIC volume on Wednesday hitting US$400m, as SCI reported on Thursday (SCI 15 January). Spreads widened out in that session as SCI's PriceABS data picked up more than 60 unique US CMBS tranches out for the bid from a variety of vintages.

For US agency RMBS, "underperformance intensified this week as the sharp rally in rates and the spike in volatility continued relentlessly", say Citi analysts. "FN 4s and 4.5s led the underperformance initially as rolls collapsed but 3s and 3.5s have also come under pressure since Thursday. Global macro risks to the rate/vol outlook remain high and policy risks to MBS have also increased since the FHA announcement."

US non-agency RMBS activity picked up over the course of last week, starting with US$150m circulating on bid-lists on Monday (SCI 13 January). That was set to be dwarfed by a US$466m liquidation due on Tuesday.

US ABS spread performance was mixed last week, with credit card and senior prime auto ABS spreads generally tighter and equipment and auto ABS subordinates mostly wider. Barclays Capital analysts add: "ABS trading was more active this week, as an average of US$1.4bn was traded during the first four days of the week, compared with a daily average of US$1.25bn over the same time frame last week."

Spreads in the European ABS and RMBS secondary markets were mostly stable last week, with JPMorgan analysts noting a couple of sectors of outperformance. "UK risk continues to catch notable attention from investors as pricing disparities between ABSPP-eligible and non-eligible assets become more stark. In particular, UK buy-to-let and non-conforming backed RMBS deals, along with positions in Granite throughout the stacks, continue to offer value," they say.

Activity was fairly muted in the European CLO secondary market, say Bank of America Merrill Lynch analysts, although total BWIC volumes were over €400m. "Accounts appear to be cautiously waiting for next week's ECB announcement, particularly towards the top of the capital structure, though demand appears strong for higher yielding assets," they say.

Deal news
• An innovative real asset transaction backed by German care homes is currently in the private placement phase. Dubbed German Care Homes Fund, the vehicle aims to provide attractive returns at low risk, given that it is indirectly secured by the German social security system.
• 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. Barclays Capital CMBS analysts 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.
• 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 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).
• 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.
• Portugal Telecom International Finance's five-year CDS widened 44% over the past month to price at its widest levels since October 2013, according to Fitch Solutions. This significantly outpaced the 6% widening observed for the overall European telecom sector over the same time period.
• 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.

Regulatory update
• Bill H.R. 37- Promoting Job Creation and Reducing Small Business Burdens Act yesterday passed the House by a vote of 271-154. The bill, which aims to make technical corrections to the Dodd-Frank Act, has the potential - though somewhat low - of eventually becoming legislation and stabilising the US CLO market.
• The US SEC has adopted two new sets of rules that will require security-based swap data repositories (SDRs) to register with the SEC and prescribe reporting and public dissemination requirements for security-based swap transaction data. The new rules are designed to increase transparency in the security-based swap market and to ensure that SDRs maintain complete records of security-based swap transactions that can be accessed by regulators.
• 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.

Deals added to the SCI New Issuance database last week:
BAMLL 2014-INLD; BMW Vehicle Lease Trust 2015-1; DCP Rights series 2014-1; ELM CLO 2014-1; LEAF Capital Funding SPE A Series 2014-A; Mercedes-Benz Auto Lease Trust 2015-A; New Residential Mortgage Loan Trust 2014-3; Voba Finance 5 (re-offered)

Deals added to the SCI CMBS Loan Events database last week:
ASC 1997-D4; BACM 2004-6; BACM 2005-1; BL Superstores; BSCMS 2007-PW15; CANWA II; CD 2005-CD1; CFCRE 2011-C1; CGCMT 2008-C7; COMM 2007-C9, CD 2007-CD5 & JPMCC 2007-CIBC20; COMM 2012-CR3; COMM 2012-LC4; COMM 2014-CR16; CSFB 2005-C1; CSFB 2005-C5; CSMC 2006-C2; CSMC 2006-C3; CSMC 2006-C4; CSMC 2006-C4 & CSMC 2006-C5; DBUBS 2011-LC1; DBUBS 2011-LC2; DBUBS 2011-LC3; DECO 2006-C3; DECO 2007-E7; ECLIP 2007-1; EPC 3; EURO 28; GCCFC 2005-GG5; GCCFC 2006-GG7; GCCFC 2007-GG9; GMACC 2004-C1; GMACC 2006-C1 & GECMC 2006-C1; GSMS 2006-GG8; GSMS 2007-GG10; GSMS 2011-GC3; GSMS 2012-GCJ7; JPMCC 2005-LDP; JPMCC 2005-LDP1; JPMCC 2006-CB17; JPMCC 2007-CB18 & JPMCC 2006-LDP9; JPMCC 2007-CB20; JPMCC 2007-LD11; JPMCC 2011-C4; LBUBS 2007-C1; MSBAM 2012-C6; MSC 2006-HQ8; MSC 2007-HQ12; MSC 2007-HQ13; TAURS 2; TAURS 2006-2; TAURS 2007-1; THEAT 2007-1 & THEAT 2007-2; TITN 2006-1; TITN 2006-2; TITN 2006-3; TITN 2006-5; TITN 2007-2; TMAN 5; TMAN 6; TMAN 7; UBSBB 2013-C5; WBCMT 2005-C17; WBCMT 2006-C26; WBCMT 2007-C30; WFRBS 2012-C10; WFRBS 2013-C18; WFRBS 2013-C18, WFRBS 2013-UBS1 & WFRBS 2014-LC14; WINDM X

CLOs

New Volcker fix progresses

Bill H.R. 37- Promoting Job Creation and Reducing Small Business Burdens Act yesterday passed the House by a vote of 271-154. The bill, which aims to make technical corrections to the Dodd-Frank Act, has the potential - though somewhat low - of eventually becoming legislation and stabilising the US CLO market.

The passage comes one week after the House first considered the bill on 7 January, when the vote was 276-146, just shy of a required two-thirds majority for passage. "It is unclear how far this bill will go with President Obama's veto threat. At this point, the chance of eventual legislation seems slim, but the odds of reaching the Senate do improve with a new Republican-led Senate," observe Citi CLO analysts.

If enacted, H.R. 37 would allow more time for banks to divest their CLO holdings and provide more flexibility on both investment and trading activities over the next few years, according to the Citi analysts. The bill seeks to extend the Volcker conformance period to apply to activities related to, or investments in, a debt security of a CLO issued before 31 January 2014.

It also calls for the conformance period of non-compliant CLO debt to be extended by another two years to 21 July 2019. Equity positions in non-compliant CLOs would still have to conform by 21 July 2015.

"We estimate up to US$386bn of US CLOs are still outstanding today - including US$262bn CLOs issued before 31 January 2014 (US$115bn CLO 1.0s and US$147bn CLO 2.0s) - which were usually issued with bond buckets, thus would be deemed as 'covered funds' under Volcker. About 72% of such CLO 2.0s would exit their reinvestment periods by the end of 1H17 and the entirety would exit by the end of 1H19, if the conformance period is pushed back by another two years," the analysts note.

H.R. 37 is a further regulatory initiative to fix the Volcker issues after the Barr bill (as part of H.R. 5461) passed the House last April with significant bipartisan support, but never made it to the Senate (SCI passim).

CS

Structured Finance

Business services expert added

Calypso Technology has hired Venkatesh Ramasamy as svp for business services and utilities. As a member of the company's operating committee, he will use the newly created role to develop and execute a strategy for offering customers cost-efficient managed services.

Prior to joining the firm, Ramasamy was global co-head of prime services at RBS, where he established a cross-asset service for hedge funds and leveraged players. In this role, he led initiatives providing exchange-traded derivative and OTC clearing, intermediation on rates and FX during the crisis and financing cross-asset margin post-crisis. He has also held a number of management roles on the business and IT side at RBS and Dresdner Kleinwort.

Ramasamy joins the firm with first-hand experience of the Calypso platform, having spear-headed its implementation at RBS to consolidate multiple systems.

Structured Finance

Pamplona beefs up in credit trading

Pamplona Capital Management has hired Yacine Amara and Florian Chapel as credit traders. They will trade bonds and derivatives in the Pamplona Credit Opportunities Fund, which invests in European corporate and structured credit.

Amara and Chapel both arrive from Chenavari Capital Partners. Amara was part of the firm's trading and risk quantitative team, whereas Chapel worked as a senior credit analyst.

Structured Finance

Portfolio manager moves

Capitala Investment Advisors has hired Stephen Riddell as a portfolio manager. He is tasked with expanding liquid credit activity for the firm's business development company, Capitala Finance, as well as to build and run Capitala Group's liquid credit platform.

Riddell most recently was a portfolio manager in Apollo Global Management's US performing credit group. He also has previous experience as a partner and portfolio manager at Gulf Stream Asset Management, as well as various sell-side leveraged finance and loan syndication groups.

Structured Finance

Credit team strengthened

Spire Partners has recruited Saqib Deen and Henrik Holcke as senior credit analysts. Their appointments follow last year's addition of Rob Reynolds as cio and partner at the company.

Deen was most recently with CarVal Investors, having previously worked at JPMorgan as both a credit analyst on the secondary trading desk and a high yield research analyst. He also held an analyst role at Lazard.

Holcke joins from Lyxor Asset Management, where he was a credit analyst. He has experience in leveraged finance and CLOs, having previously been a director with SG's European leveraged finance teams in London and Frankfurt.

Structured Finance

ISDA reshuffles senior roles

ISDA has made several organisational changes in its public policy and regulatory and legal teams to reflect the next phase of regulatory reform and to support cross-border harmonisation efforts. Among the changes, Steven Kennedy has been appointed global head of public policy.

Kennedy is tasked with coordinating and managing ISDA's regional policy and advocacy efforts, as well as developing a global public policy strategy on key cross-border issues. He is replaced as head of strategy, research and communications by Nick Sawyer, who was formerly head of communications for Europe.

ISDA has also established a new regulatory and legal practice group within the office of the general counsel. The new group will be led by Bella Rozenberg, who has joined from the CFTC.

Rozenberg will drive policy coordination from a legal perspective and provide advice to ISDA's policy teams globally. She reports to general counsel David Geen.

ISDA has also appointed Mary Johannes to lead its non-cleared margin implementation initiative. She replaces senior advisor to the ISDA board Athanassios Diplas, who has left the association. Christopher Young has been promoted to fill the role vacated by Johannes and is now acting head of US public policy.

Structured Finance

Investment vet added

Permira Debt Managers has appointed Dan Hatcher as investment director to lead the UK origination of opportunities for its direct lending fund. The hire brings the total team size to 17.

Hatcher arrives after seven years in mid-market private equity with Gresham Private Equity and Palatine Private Equity, as well as seven years in EY's transaction advisory services team. He has worked on a number of high profile deals, including ICR Integrity, IESA, 7City Training and James Grant Group.

The first close of Permira's direct lending fund was held in October 2014 at approximately €400m. The fund seeks to address the gap in the market providing medium-sized businesses with the investment that they cannot obtain from traditional banks or the bond market.

Structured Finance

Raters gain consulting roles

LCM Partners has hired two new directors to the firm. Ilaria Vignozzi and Nadya Aleshina arrive from S&P to join LCM's consulting team.

Vignozzi is a senior analyst, who covered securitisation and structured finance (SF) markets at S&P. Prior to that, she worked for three years in the Financial Institutions Group.

Aleshina was a director within the SF team at S&P, where she focused on European RMBS transactions. Prior to this, she was a business analyst with Barclays Global Investors in London and has held several research roles within the research centre of Unicef in Milan, the European Bank for Reconstruction and Development and the World Bank in Moscow.

CDO

CDO claims set for distribution

Cambridge Place Investment Management (CPIM) has disclosed that all claims relating to its allegation that certain financial institutions mis-sold approximately 140 US RMBS bonds to the Camber 3 ABS CDO have now been settled. In respect of these settlements, a distribution amount of US$13.09m is currently held for the account of the transaction. A reconciliation amount of approximately US$420,106 may also become payable in connection with the claims, following the conclusion - which is expected in March - of certain procedures currently being performed by KPMG to determine the firm's entitlement to these amounts.

The CDO sold its interest in these claims to CPIM in July 2010. The transaction documents do not prescribe how the amounts relating to the claims should be distributed, so the firm and the trustee have obtained advice from counsel on this point.

The advice states that amounts should be paid into the transaction's collection account and then into its payment account for distribution in accordance with the priority of payments. These amounts will be distributed on the 9 February payment date. Any reconciliation amounts will be distributed on the following payment date.

CDO

CDO manager transferred

Cairn Capital has replaced Cambridge Place Investment Management as collateral manager for the Camber 4 ABS CDO. Moody's has determined that the substitution will not cause the current ratings of the notes to be reduced or withdrawn.

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

CDS

CME matches offer

CME has increased the consideration payable to GFI stockholders under the proposed merger to US$5.60 per share from US$5.25 per share, payable in a mix of shares of CME class A common stock and cash. The new offer represents more than an 80% premium above the closing price of US$3.11 per share of GFI common stock on 29 July 2014, the last day of trading prior to the announcement of the CME transaction, and is equal to BGC's most recent offer (SCI 15 January).

As part of the revised CME offer, the purchase price to be paid by a private consortium of GFI executives - led by current executive chairman Michael Gooch, ceo Colin Heffron and md Nick Brown - for GFI's wholesale brokerage business was increased to approximately US$282m, up from US$254m in cash. This is along with the assumption, at closing, of approximately US$77m of unvested deferred compensation and other liabilities. CME Group is also contributing US$9.5m in additional stock consideration to GFI shareholders.

Together, these new contributions deliver an approximately US$37m increase in purchase price to all GFI stockholders, excluding the shares held by the GFI Group Management Consortium through Jersey Partners. The consortium will only receive US$5.25 per share.

The updated terms of the CME transaction have been approved by the board of directors of GFI upon the unanimous recommendation of a special committee comprised solely of independent and disinterested directors, and by the GFI board. GFI's board, acting upon the unanimous recommendation of the special committee, continues to recommend that GFI stockholders vote to approve the CME merger agreement.

CDS

BGC ups GFI offer

BGC Partners has delivered an executed agreement to GFI Group that, if countersigned by GFI, provides an increase to its tender offer to acquire all of the outstanding shares of GFI to US$5.60 per share. The proposed revision represents a premium of US$0.35, or approximately 7%, to the US$5.25 per share stock and cash transaction announced by CME Group and GFI on 2 December 2014.

It also represents a premium of more than 80% to the price of GFI shares on 29 July 2014, the last day prior to the announcement of the original CME transaction. Prior to its proposed revision, BGC's tender offer price was US$5.45 per share.

Howard Lutnick, chairman and ceo of BGC, says: "We continue to remind GFI shareholders to vote against the proposed US$5.25 CME-GFI transaction at the 27 January special meeting of shareholders and also urge them to tender their shares into our clearly superior offer. We are prepared to move quickly to complete our fully-financed tender offer and deliver the value to which GFI shareholders are entitled."

He continues: "We want to reiterate that, following the close of our tender offer on the proposed terms, GFI employees with unvested restricted stock units (RSUs) can choose to receive the same offer price available to all other shareholders in cash per RSU without any change to their pre-existing vesting schedules."

A copy of the tender offer agreement has been filed with the US SEC. As previously announced, BGC has also filed a preliminary proxy statement with a GOLD proxy card with the SEC in order to solicit votes against the CME transaction at the 27 January special meeting (SCI 8 January). GFI shareholders can vote against this transaction by returning the GOLD proxy card from BGC or voting 'no' using the materials provided by GFI.

The expiration date for the offer is 27 January, unless extended.

Insurance-linked securities

BMS president promoted

BMS Capital Advisory has named Andrew Bustillo, president and ceo of BMS Intermediaries, as a principal of the firm effective immediately. Currently serving as chair of BMS Capital Advisory, in his new leadership role Bustillo will leverage his extensive network among insurance underwriters, risk distributors and capital providers to originate and execute opportunities in the market.

Together, BMS Capital Advisory and BMS Intermediaries offer clients access to the resources needed to achieve their strategic goals through reinsurance transactions or access to the capital markets. Operationally, the firm says it will continue to promote a disciplined and integrated strategy by breaking down internal silos, facilitating the flow of proprietary intellectual capital and ultimately delivering the associated benefits and customised solutions to our customers.

ABS

Fuel prices to lift aircraft ABS

Performance of outstanding aircraft securitisations may be buoyed if fuel prices remain at their current levels over the long term, according to Fitch. LTV ratios for existing enhanced equipment trust certificates (EETCs) that feature current-generation narrow-body aircraft could also see marginal improvement.

Fitch says that lower jet fuel prices may allow the current generation of narrow-body aircraft, such as the A320ceo and the B737NG, to remain economically competitive with next-generation aircraft, such as the A320neo and the 737 MAX. If the current models maintain higher values, they could provide securitisations with higher-than-expected cashflow.

Low fuel costs may also support airline profitability, lowering potential default risks in the near term. If the operating cost differential between current- and next-generation technology decreases, demand for the B737NG and A320ceo families could prove more resilient than forecasted.

Next-generation narrow-body aircraft are expected to enjoy operating advantages over their existing counterparts, due to lower maintenance, lower emissions and customer preference. However, the main benefit of these models is their lower fuel consumption, which is key to airlines whose largest operating expense is fuel. The new models are expected to deliver 13%-15% incremental fuel-burn savings over their predecessors.

As a result, Boeing and Airbus are said to have attempted to capture a portion of the lifetime savings benefit in the prices for the new equipment. If that benefit erodes as a result of lower fuel prices, the economics of in-place technology with lower price points begin to improve. Fitch says that while valuations and demand for older aircraft may benefit, new aircraft will still be needed to meet continued traffic growth.

According to the International Air Transport Association, as of 2 January the average price for jet fuel was US$1.71 per gallon, which is 18.1% lower than the prior month and down by 43.2% year-over-year. Fitch believes a sustained drop in the long term could potentially have an impact in the estimated operating cost reduction of the A320neo and B737 MAX. The current jet fuel price is 51.1% lower than Boeing has assumed in calculating the estimated US$112m in cost savings for a fleet of 100 B737 MAX 8s.

ABS

Equipment ABS exceed expectations

Moody's has lowered its original cumulative net loss expectations for recent vintages of US equipment ABS. The move follows the performance of the related underlying collateral now meeting or exceeding the agency's initial expectations.

Losses for the 2011-2012 equipment ABS vintages - which Moody's anticipated reaching similarly high levels as those during the recession - outperformed its expectations by 0.5% to 1.5% on average. Actual and expected losses for post-recession vintages, including the 2013-2014 vintages, were also lower than the agency's expectations.

"Tight underwriting standards and the improving economy boosted the performance of the 2011-2012 pools," explains Moody's analyst Keith Van Doren.

Moody's says that the credit strength of agricultural and construction equipment transactions post-recession has improved, as there are more lease contracts with slightly longer original terms and underlying obligors with higher FICO scores. However, it notes that there are no clear trends in underwriting metrics that would indicate improved credit quality of mid- and small-ticket obligors.

The agency adds that overall industry fundamentals provide support for the improved credit strength of obligors, with the earlier strength of the agriculture sector in particular raising the credit profile of farmers. In addition, weaker mid- and small-ticket obligors that ceased business during the recession are not included in post-recession securitisations.

Moody's has lowered its loss expectations for most equipment securitisations, although future cumulative net loss performance of agricultural and construction equipment securitisations could weaken as a result of declining agriculture fundamentals. "We don't expect declining agriculture fundamentals to affect performance very much though because strong farm balance sheets will offset any drop in performance," says Van Doren.

Moody's upgraded its ratings on 47 tranches of equipment ABS in 2014, compared with 35 tranches in 2013.

ABS

Headwinds for LatAm ABS

Despite potential for growth in some of the smaller Latin American structured finance markets, issuance volumes and collateral performance across the region will face headwinds in 2015, according to S&P. Brazil once again led issuance volume in 2014, followed by Mexico and Argentina.

Issuance in most of the region's structured finance markets decreased last year, except for Brazil and Colombia. These countries should both be boosted further by their domestic expansion, while Argentina's markets will grapple with the uncertain climate surrounding the upcoming presidential elections.

"Last year, new issuance levels in Brazil, Mexico and Argentina - the area's largest structured finance markets - suffered from weak economic conditions, regulatory changes and ample liquidity throughout the market, which gave unsecured financing an edge over securitisation," says S&P credit analyst Mauricio Tello. "But we believe the economics underlying securitisation will slowly become more favourable, which could help foster growth toward the second half of the year."

S&P says that infrastructure projects in the region will likely have spillover effects into recently dormant cross-border structured finance markets, such as Peru, which tend to issue in international rather than domestic markets. Though Peru and Chile had no cross-border placements last year, S&P believes a few infrastructure-related deals are likely this year.

In addition and against the market's expectations, interest rates in Mexico remained low throughout 2014, which drove issuers toward cheaper and less-complex funding options. While S&P foresees more favourable economic conditions this year for issuers to tap regional structured finance markets, it also expects growth to be sporadic, which could result in another tepid year for new issuance.

ABS

Third tariff defecit ABS closed

StormHarbour has acted as sole placement agent, arranger and lead manager on a €229m sale of electricity receivables owned by EDP Distribuição - Energia to the TAGUS vehicle. The purchase of the receivables was financed through a private placement of pass-through notes in December.

The deal is the third tariff deficit transaction for which StormHarbour has acted as arranger and lead manager in Portugal since 2012. The previous transactions are the €450m Volta Electricity receivables securitisation placed in May 2013 and the €750m Volta II deal in March 2014, which was upsized from the initial minimum of €500m due to investor demand.

ABS

Airline sector taking flight

Kroll Bond Rating Agency reports that the airline sector is enjoying the benefits of lower fuel prices, but is also experiencing stress due to rising concerns about sovereign risk and the strength of the dollar. It adds that the overall credit quality of aircraft lessors will continue to strengthen in the year ahead, supported by improving credit profiles of airlines and rising demand for technological advancements.

KBRA believes the credit profile of the airlines, as key customers of lessors, is benefiting from a number of positive dynamics. This includes strategic mergers, cost rationalisation, deleveraging and robust passenger travel globally backed by positive demographic trends - especially in Asia and Latin America. However, the agency notes that persistently lower fuel prices below a certain level, especially if coupled with higher interest rates, could change industry dynamics. The result could be credit negative for aircraft lessors if it is judged that aircraft leasing may not be so beneficial for airlines.

In addition, KBRA says rising demand for modern and more technologically advanced aircraft globally is not driven solely by fuel-efficiency considerations and should stay robust, given rising demand for passenger travel and the need for replacement of older aircraft. Overall, sustained lower fuel prices could also help lead to extension of leases for older aircraft, which is deemed a credit positive for aircraft lessors operating in the mid-life market.

A further catalyst underpinning the credit strength of lessors is the continuing need for replacement of older fleets, which is a priority for many airlines around the world. This need is helping to boost demand for modern aircraft and lessors with such orders.

Last year saw the beginning of some equity owners of aircraft lessors considering their exit strategy, which has created a number of opportunities for sale and purchase of portfolios of aircraft. A related trend gaining momentum is the emergence of discreet aircraft portfolio funds serviced by existing lessors that allow for more fee income and scale efficiencies for the lessors, while creating more tailor-made investment opportunities for aircraft and for equity and debt investors in specific aircraft assets. To this end, KBRA also notes a robust market between buyers and sellers of mid-life aircraft, which is a positive for lessors who want to maintain a young fleet.

However, sovereign risk due to falling oil prices and a stronger dollar is a consideration in terms of risks facing investors in the aircraft leasing sector. Carriers in some oil producing nations, such as Russia, Nigeria and Venezuela, are already under pressure, which is credit negative for lessors with exposure to those countries.

Structured Finance

Sukuk set for solid year

S&P believes that the global sukuk market is primed for another solid year in 2015, even though some emerging headwinds could slow its progress compared to 2014. Sukuk issuance reached US$116.4bn last year, compared with US$111.3bn in 2013, and the agency expects volumes to cross the US$100bn mark again this year.

Supporting sukuk issuance is the still-positive economic performance of core markets (nations in the Gulf Cooperation Council and Malaysia), the implementation of new regulatory requirements (such as the Basel 3 liquidity coverage ratio) and increasing sovereign interest in sukuk. S&P forecasts growth in the GCC to average around 3.7% in 2015, compared with 4.2% in 2014, thanks to a good flow of public investments. The agency also expects Malaysian growth to remain strong in 2015, at 5.5% compared with 6% in 2014.

New sovereign issuers are expected to tap the sukuk market in 2015, continuing a trend that started few years ago. Among those that came to the market in 2014 were the UK, Luxembourg, South Africa, Hong Kong and Senegal.

"The rationale for sovereign sukuk issuance can vary for different governments, but we think creating benchmarks and diversifying the investor base have been among the most important reasons for new sovereign sukuk issuance in 2014," S&P says.

The implementation of new regulatory requirements and the lack of high-quality liquid assets in the Islamic finance industry also might increase sovereign and central banks' issuances and provide the Islamic finance industry with much-needed instruments to manage liquidity. Central banks are looking at the experience of Bank Negara, the central bank of Malaysia, which is the established leader in sukuk issuance.

Total sukuk issuance from central banks reached US$50.2bn in 2014 (or 43.1% of all issuance), with Malaysia alone accounting for 92.1% of that at year-end 2014, followed by the Central Bank of Bahrain at 3.7%.

Nevertheless, S&P foresees some turbulence ahead that could cause overall issuance volumes to be lower in 2015. "The US Federal Reserve appears on track to start increasing its benchmark interest rate in the second quarter of 2015, which may reduce liquidity in global capital markets, including emerging markets," the agency explains. "Another obstacle for sukuk could come from the continued drop in oil prices, which could reduce economic growth and ultimately infrastructure-related borrowing in core sukuk markets, especially if prices decrease further."

Structured Finance

Data partnership agreed

A new partnership between Misys and Intex Solutions will see the former's FusionInvest tool connecting with the latter's ABS, RMBS, CMBS and CLO global cashflow models to expand its fixed income coverage. The agreement will allow access to prepayment research, cashflow and deal data, providing asset managers with a wide range of functionality. This includes deal pricing and portfolio management, risk and stress testing, as well as account settlement through a single integrated system.

Structured Finance

Positive implications for EMEA ratings

Moody's has updated a number of its ABS and RMBS rating methodologies, as well as its approach to local currency country risk ceilings. The move is expected to have positive implications for ABS and RMBS ratings in a number of euro area countries, including Spain, Portugal, Italy and Ireland.

The updated ABS and RMBS methodologies reflect changes to the minimum portfolio credit enhancement levels in EMEA ABS and RMBS. The CE consistent with the highest rating achievable in a given market is the greater of the model-implied credit enhancement, the minimum portfolio CE and the expected loss multiple.

Moody's says that the minimum portfolio CE is no longer applicable for most EMEA markets following the update. However, the agency is maintaining its existing RMBS minimum portfolio CEs for more nascent securitisation markets - Russia, Turkey and South Africa.

Meanwhile, the revised approach to country ceilings explains that, in Moody's view, the main component of ceiling risk in euro area countries is the risk that the country exits the euro area and re-denominates all local debts into a new, weaker currency. The ceilings applied to different euro area countries will therefore be determined predominantly by that country's risk of exit and, in turn, currency re-denomination.

The revised methodology has led to an upward adjustment of 11 euro area countries' country risk ceilings. Where exit risk is viewed as very small, country ceilings in the euro area will now be placed six notches above the government's bond rating. Only in circumstances where the country's commitment to the currency union is perceived to be materially weaker will its ceiling be closer to its government bond rating.

Accordingly, all euro area country ceilings have been raised to six notches above the relevant government bond rating or - if the government bond rating is A3 or higher - to Aaa, with two exceptions: Greece and Cyprus.

For RMBS specifically, the update also results in changes to the portfolio concentration adjustments contained within the MILAN model and the scale of these adjustments (for all markets), and the scale of certain other adjustments contained within the MILAN model (for specific EMEA markets).

Structured Finance

APAC ratings remain 'stable'

Fitch affirmed 222 APAC structured finance (SF) tranches in 4Q14, one of which was affirmed twice. Two Australian tranches were upgraded, while no downgrades occurred during the quarter.

Continued strong economic performance supported rating actions in Australia. Most ratings reviewed during the quarter were affirmed, contributing 84% of the total affirmations in the region.

In addition, Fitch says that steady economic performance in India, Korea and Singapore contributed to affirmations in these countries too. A total of 14 international long-term ratings were affirmed by the agency: nine Indian ABS pass-through certificates, four Korean credit card ABS tranches and one Singaporean single-borrower CMBS tranche.

In Japan, 23 ratings were affirmed in the quarter, with 17 tranches from three CMBS transactions, five tranches from the RMBS transaction L-STaRS One Funding and one structured credit (SC) transaction.

Moreover, most long-term ratings in APAC have stable outlooks. The exceptions are negative outlooks on four Indian auto loan tranches and two credit-linked SC tranches, and seven positive outlooks in Australia (five) and Japan (two).

Fitch placed Japan's single-A plus long-term and F1+ short-term issuer default ratings on rating watch negative in December 2014. However, it notes that this had no immediate impact on the public ratings of Fitch-rated SF transactions in Japan.

CDS

Swap transparency rules adopted

The US SEC has adopted two new sets of rules that will require security-based swap data repositories (SDRs) to register with the SEC and prescribe reporting and public dissemination requirements for security-based swap transaction data. The new rules are designed to increase transparency in the security-based swap market and to ensure that SDRs maintain complete records of security-based swap transactions that can be accessed by regulators.

The rules implement mandates under Title VII of the Dodd-Frank Act. Known as Regulation SBSR, they outline the information that must be reported and publicly disseminated for each security-based swap transaction.

In addition, the rules assign reporting duties for many security-based swap transactions and require SDRs registered with the SEC to establish and maintain policies and procedures for carrying out their duties under Regulation SBSR. They also provide an exemption from registration for certain non-US SDRs when specific conditions are met.

Under the rules, the SEC recognises the global legal entity identifier system as the system from which security-based swap counterparties must obtain codes to identify themselves when reporting security-based swap data. The rules also address the application of Regulation SBSR to cross-border security-based swap activity and include provisions to permit market participants to satisfy their obligations under the regulation through compliance with the comparable regulation of a foreign jurisdiction. Furthermore, the proposed rule amendments would assign reporting duties for certain security-based swaps not addressed by the adopted rules, prohibit registered SDRs from charging fees to or imposing usage restrictions on the users of publicly disseminated security-based swap transaction data and provide a compliance schedule for certain provisions of Regulation SBSR.

The new rules will become effective 60 days after they are published in the Federal Register. Persons subject to the new rules governing the registration of SDRs must comply with them by 365 days after they are published in the register.

CDS

Sale spurs CDS widening

Portugal Telecom International Finance's five-year CDS widened 44% over the past month to price at its widest levels since October 2013, according to Fitch Solutions. This significantly outpaced the 6% widening observed for the overall European telecom sector over the same time period.

"Growing market concern for Portugal Telecom, which merged with Brazil's Oi last year, is likely stemming from uncertainty surrounding a potential US$8.7bn sale of the company's assets to Altice," says Diana Allmendinger, director at Fitch. A shareholder vote on the sale was postponed until later this month amid discussions relating to the company's defaulted loans to Espirito Santo and questions pertaining to the validity of the Oi merger.

CDS liquidity for Portugal Telecom increased sharply late last month after dropping in the months prior. Currently, CDS on Portugal Telecom are trading in the third regional percentile - or with more liquidity than 97% of Fitch's European CDS pricing universe.

CDS

CDS spike on oil price decline

Globally, CDS spreads widened by 16% in 4Q14, according to S&P Capital IQ's latest Global Sovereign Debt Report. The report highlights the dramatic fall in oil prices during the quarter, which affected the credit default swaps and bond spreads of major oil producing sovereigns.

In particular, Venezuela, Russia, Ukraine, Kazakhstan and Nigeria sovereign CDS spreads widened as the price of oil plummeted by over 40%. Separately, Greece saw a major deterioration in its CDS levels (widening to 1281bp) as the country faces a possible early election.

Venezuela remains at the top of the table of the most risky sovereign credits following Argentina's default in 3Q14, resulting in its removal from the report, with spreads widening by 169% and the five-year CDS implied cumulative default probability (CPD) moving from 66% to 89%. The CDS market now implies an 11% probability (down from 34% in 3Q14) that Venezuela will meet all its debt obligations over the next five years

Russia entered S&P Capital IQ's top 10 most risky table last quarter as CDS spreads widened by around 90%, following the fall in oil price, which is adding more pressure to an economy already subject to continued economic sanctions. The Russia CDS curve inverted during Q4, with the one-year CDS level higher than the five-year.

Ukraine CDS spreads also widened by 90%. Meanwhile, CDS quoting for Nigeria remained extremely low throughout the last quarter, with Z-spreads widening by 150bp for the bonds maturing in January 2021 and July 2023.

CDS levels among the top 10 least risky sovereigns remained broadly unchanged, however. Bond yields in Germany reached record low levels in a flight to quality due to concerns over Greek debt.

Switzerland ended the quarter 5bp tighter. CDS quoting remains low, with the spread between bid and ask standing at around 10bp.

At 182bp (23bp tighter than in 3Q14), Turkey ended the quarter as one of the best performers. CDS quoting in Pakistan - another top performer - remained extremely low, with the April 2019 bonds tightening by around 40bp.

CDS

Caesars auctions on the cards

Creditex and Markit have confirmed that credit event auctions will be held to settle the credit derivative trades for Caesars Entertainment Operating Company CDS and LCDS. Dates for the auctions will be announced in due course.

CLOs

Spanish SME CLOs to re-emerge

Scope believes that favourable conditions for a revival of placed Spanish SME CLOs are re-emerging. The significant decrease in spreads demanded for investment grade tranches allows for economically viable transactions again, the agency suggests.

"Scope expects that the return of investors interested in the real economy may reactivate the public issuance of Spanish SME securitisations intended for placement rather than retention purposes," it explains. "The Spanish economy can become a source of high quality SME securitisations, even when higher leveraged structures are used. This is particularly true if originators select granular portfolios without adverse selection of credits."

Based on an analysis of 48 Spanish SME CLOs issued between 2003 and 2014, the agency notes that spreads demanded for senior and investment grade mezzanine tranches have fallen to levels that now allow for viable securitisation structures in a context of SME portfolio yields slightly above 4%. Scope believes that at present Spanish SME portfolio yields adequately reflect the credit risk of SME portfolios, demonstrated by the fact that in recent securitisations the excess spread covers default losses.

Yet, capital structures reflect inflated credit views that often indicate high default expectations by credit rating agencies since 2010. This fact was offset by note margins well below market references, particularly for the mezzanine tranches.

In Scope's view, the current base-case performance of Spanish deals allows for an increase in leverage. This is because the yield on the first loss piece would still be positive, even after coverage of base-case losses from single-B quality portfolios.

Quoted credit spreads on Spanish SME securitisation notes also reflect the perception of lower risk by investors, according to Scope. The agency says that this more positive perception is supported by: the correction in real estate prices; the restructuring of the Spanish banking system; and the resolution of the Spanish sovereign credit crisis.

CMBS

Tesco CMBS lowered

S&P has lowered to double-B plus from triple-B minus all seven of the UK CMBS transactions that are credit-linked to Tesco. The ratings have all also been removed from creditwatch negative.

The agency's ratings on these notes are credit-linked to its long-term double-B plus corporate credit rating on Tesco. Therefore, any change to S&P's rating on Tesco affects its ratings on the notes in these transactions, all else being equal.

As tenant and financial guarantor, Tesco is the primary source of funds for repayment of the notes in these CMBS transactions, which closed between April 2004 and February 2013.

CMBS

CMBS defeasance proliferates

Defeasances in Fitch-rated US CMBS reached US$5.3bn in 4Q14, as borrowers took advantage of low interest rates. The 4Q14 defeasance volume brings the total in Fitch-rated deals to US$18.7bn, or nearly 5% of Fitch's total outstanding rated CMBS universe. Of this number, US$9.6bn (51%) will mature or have an expected final defeasance payment in 2015, US$5.4bn (29%) in 2016, US$2.3bn (12%) in 2017 and US$1.4bn (8%) in 2018 and beyond.

The largest share of the 4Q14 defeasances (44%) were 2006-vintage loans, at US$2.3bn. This is followed by 2005 (US$1.5bn, 29%), 2007 (US$638m, 12%) and 2011 (US$533m, 10%).

By property type, office led the way with US$2.6bn, or 49% of the new defeasance total. That was followed by retail with US$1bn (19%), then multifamily (US$751m, 14%) and hotels (US$491m, 9%).

By MSA, New York led 4Q14 defeasances with US$1.5bn, followed by Chicago with US$613m. Loans backed by New York offices accounted for nearly US$1bn of the 4Q14 total.

Fitch expects 1Q15 defeasance volume to remain strong, as there are already several large loans in the pipeline with defeasances expected to close in January, including two sized at greater than US$100m. However, a rise in interest rates or drop in values could cause a fairly abrupt slowdown to the defeasance activity.

Fitch says an increased percentage of defeased loans in a transaction may warrant rating upgrades to triple-A due to increased certainty of paydown. However, in more concentrated pools, upgrades may be limited to single-A, as the potential for interest shortfalls may also increase.

CMBS

CMBS defaults, delinquencies differ

The 12-month-rolling loan maturity default rate for European CMBS increased to 30.5% from 29.5% at the close of December 2014, according to S&P. This is due to the decrease in loans that were not in default in the 12-month-rolling period versus the previous month.

In addition, the delinquency rate for continental European senior loans decreased slightly to 63.2% from 63.9%, with the rate for UK loans also decreasing to 23.8% from 25%. Overall, the senior loan delinquency rate decreased to 50.8% from 51.7%. S&P adds that the total number of delinquent loans was 129; no additional loans defaulted on their payment and there were no cures.

Loans in S&P's special servicing index stood at 152, with none cured either. The WPC loan securitised in Taurus CMBS (Pan-Europe) 2007-1 entered special servicing due to a loan-to-value EOD.

Only one loan - the Twin Squares (Prater) loan in Titan Europe 2006-3 - was scheduled to mature in December 2014. However, S&P says it is still awaiting information on the loan.

Out of the €50.3bn outstanding loan balance, €3bn is scheduled to mature in the coming year.

CMBS

'CMBS-like' deal debuts

Gatehouse Bank has launched what it describes as a CMBS-like structure, which will be known as a commercial rental-backed security (CRBS). In this transaction, Gatehouse will act as sole structuring agent, arranger and lead manager to an acquisition facility relating to a commercial office property in the Paris region, worth over €100m.

The two-tranche fixed rate certificates will be backed by the direct legal ownership of the property, providing additional credit enhancement and making the issuance compliant with Shariah finance principles. The CRBS structure has the added advantage for investors of avoiding potential foreclosure procedures, given that the security underlying the certificates will include ownership of the property itself and is not limited to a mortgage.

The listed issuance has a five-year term and will benefit from a five-year tail period between the original facility maturity and the final legal maturity date. The European roadshow is expected to start in the next few weeks and will include site visits to the property.

Natale Giostra, head of real estate finance at Gatehouse, says: "This issuance offers institutional investors access to the European securitisation market, with the added benefit of an ownership structure which gives investors greater security than would normally be available under a traditional collateralised facility."

Mount Street Mortgage Servicing has been mandated as servicer and special servicer for the transaction.

Insurance-linked securities

CPO relief for ILS

The US CFTC last month issued two letters - No. 14-145 and No. 14-152 - affecting ILS vehicles. The former letter affords relief to ILS issuers from certain disclosure and periodic reporting requirements, while the latter provides them with no-action relief from commodity pool operator (CPO) registration, subject to specific conditions.

In addition to meeting the operational and substantive conditions of relief, an operator of an ILS issuer must file a notice of exemption with the National Futures Association to claim the relief under Letter 14-152. A recent Sutherland Asbill & Brennan client memo suggests that the letter generally will not affect the majority of the widely-distributed catastrophe bond transactions that are currently being executed, however.

"The type of risk transfer agreement that catastrophe bond issuers have entered into in connection with Rule 144A/Regulation S offerings has, in recent years, usually been an indemnity reinsurance agreement. This type of ILS transaction is structured to mitigate any material concern that the ILS issuer could be a 'commodity pool', subjecting its operator(s) to regulation under the US Commodity Exchange Act (CEA)," the memo explains.

But CFTC Letter 14-152 will affect ILS transactions involving risk transfer agreements that could be swaps under the CEA, where the ILS are offered or sold to US investors. The letter is expected to reduce the compliance obligations of derivatives-based ILS issuers.

Conditions for relief include: the issuer may only hold eligible collateral; and notification of the CFTC if the value of the collateral held by the ILS issuer is less than the notional amount of the relevant risk transfer contract. The vehicle may not issue any additional bonds or enter into any commodity interest transactions while such a deficiency exists.

The basis for affording relief from certain disclosure and reporting requirements under Letter 14-145 is the unique structure of ILS transactions, according to Sutherland. "Although the letter cannot be relied on by all market participants because it is tailored to the CPO in question's particular facts and circumstances, it nevertheless provides insight into the CFTC staff's view of ILS transactions within the context of the CPO regulatory regime," the memo observes.

Insurance-linked securities

ILS to maintain momentum

Following a record-breaking year for ILS issuance in 2014, 2015 is set to reach new heights, according to Willis Capital Markets & Advisory (WCMA). These positive projections are attributed to the growth of investor interest in insurance catastrophe risk.

Non-life catastrophe bond issuance in 4Q14 totalled US$2.1bn, capping a record year that saw over US$8bn of non-life catastrophe bonds issued. The previous record-breaking high was US$7.2bn in 2007.

Tony Ursano, ceo of WCMA, says: "As investors become more sophisticated, any coverage gaps between reinsurance provided by traditional rated reinsurers and that provided by investors is shrinking - 72% of catastrophe bonds used indemnity triggers in 2014, only 30% used such triggers in 2007."

He adds that in the current climate there are no signs of growth abating. "We could very easily see two consecutive record-breaking years. We would not be surprised to see US$9bn of issuance in 2015."

However, the WCMA report notes that although issuance is set to rise, market dynamics in 2015 are less predictable.

The report also highlights three trends to look for in 2015, including catastrophe bonds continuing to mirror 2014 collateralised reinsurance. Further extensions of terms and conditions are expected in 2015, including for indemnity-trigger retrocession deals.

In addition, spreads are expected to decline as assets under management grow. However, the report also outlines that the rates of both decline and growth are likely to flatten.

"As a reaction, some investors will reach for yield and accept more risk, while others may lean towards more transparent risk transfer with modest expected returns," says William Dubinsky, md and head of ILS at WCMA.

Finally, large reinsurance buyers are expected to challenge the status quo. "Large ceding companies are now active users of the capital markets via catastrophe bonds, collateralised reinsurance and sidecars, but some have seemingly reached a plateau in their ILS strategies under current conditions," Dubinsky explains.

The report notes that companies could move significantly more of their reinsurance to both aggregate coverage and over a much longer term; for example, of up to between seven and ten years. "The capital markets can support both these features," says Dubinsky. "With longer-term reinsurance capital in place, these companies would have the advantage of being able to rely on stable reinsurance capacity in their underwriting."

RMBS

STACR programme enhanced

Freddie Mac has made a number of enhancements to its STACR programme, coinciding with the announcement of its first STACR offering for 2015. The enhancements aim to reduce credit risk, as well as promote programme liquidity and provide diverse investment options for investors.

Programme enhancements as showcased by STACR 2015-DN1 include transferring 100bp of the first loss credit risk tranche to the private capital markets and rating the class M3 bonds for the first time. Freddie plans to issue six to eight STACR transactions this year, depending on market conditions.

With the settlement of the US$775m STACR 2015-DN1, the GSE says it will have reduced a portion of credit risk on one million single-family loans since the programme's inception. "Freddie Mac is shifting its credit risk business strategy from a buy-and-hold company to a buy-and-sell company, so it is natural that we would further reduce our credit risk exposure by selling the first loss piece," comments Mike Reynolds, Freddie Mac vp of credit risk transfer. "We have heard from numerous investors who have an appetite for more risk and higher yields like those found in the first loss piece."

JPMorgan and Citi are co-lead managers and joint bookrunners for the latest deal, which has a reference pool of recently-originated single-family mortgages with an unpaid principal balance of over US$27.6bn.

RMBS

Loss model updated

Kroll Bond Rating Agency has updated its residential mortgage default and loss model. The revisions include reduced default expectations for purchase loans, revised timeline and expenses for liquidated loans and penalties for higher debt-to-income (DTI) loans.

KBRA says that purchase loans generally have a lower default risk than refinancings because they represent an actual arms-length transaction, which yields a more accurate view of a home's value than an equivalent refinancing transaction. However, it notes that pre-crisis mortgage vintages showed high levels of default associated with purchase mortgages, largely due to the practice of extending credit to first-time homebuyers on very favourable terms - despite these borrowers having either little or poor credit history.

"Based on analysis focused on both jumbo and conforming prime mortgages, KBRA has found that, for these loans, the traditional benefits of purchase loans remain well established and we have adjusted the model's treatment of purchase loans to reflect lower default expectations relative to equivalent refinancing mortgages," the agency says.

In addition, the amount of time a loan is assumed to be REO has been reduced to better reflect the historical data. KBRA says that while this results in a reduction in carrying expenses, it has the effect of better aligning peak liquidation periods with the peak home price stress. As a result, the net effect is to increase loss severity. The foreclosure/obsolescence cost component of liquidation expenses has also risen, which increases loss severity.

Finally, the agency believes that DTI loans can bear significant incremental risk. When it began to encounter newly originated loans with back-end DTIs in excess of 45%, it assigned an additional default penalty to such loans. This has been documented in presale reports for those rated RMBS backed by loans with high DTIs.

RMBS

Risk transfer targets upped

The FHFA last week released its 2015 Scorecard for Fannie Mae, Freddie Mac and Common Securitization Solutions (CSS). Of note, the GSEs' risk transfer targets have been increased to US$150bn for Fannie and US$120bn for Freddie, using at least two types of structures.

Last year the GSEs exceeded their goals of US$90bn each, with Fannie transferring US$222.2bn and Freddie US$147.5bn via the CAS and STACR programmes respectively. Wells Fargo RMBS analysts point out that they also transferred smaller amounts of credit risk via reinsurance and other transactions, such as JPPMA 2014-1, and via Redwood Trust.

The GSEs are also required to enhance servicer eligibility standards for counterparties and assess the feasibility of alternative credit score models and credit history in loan decision models.

Meanwhile, the goal of CSS under the 2015 Scorecard is to "implement approved plans for the enterprises' integration to the CSP". Specifically, a single security structure must be finalised, including security features, disclosure standards and related requirements. Additionally, a plan must be developed to implement the single security in the market.

RMBS

Record issuance for prime RMBS

US prime jumbo RMBS new issuance hit a post-crisis milestone in 4Q14, with 11 transactions pricing. At the same time, post-crisis RMBS performance remains exceptional, according to Fitch.

"Another development worth noting is that different names are tapping the RMBS market with increasing frequency, with six issuers coming to market with new deals," says Fitch md Grant Bailey. "More new names are likely to test the private label RMBS market this year."

Delinquencies remain extremely low, with only five borrowers falling behind more than three months on their mortgage out of 20,000 outstanding loans. Bailey adds: "Mortgage rates are continuing to fall, so we saw prepayment speeds pick up last quarter to reflect more homeowners refinancing their monthly payments."

RMBS

Mortgage tightening stumps Dutch RMBS

Despite an expected further strengthening of the macro economy in the Netherlands, stricter maximum loan-to-income (LTI) ratios will likely decrease the speed at which there is a more wide-spread bottom-up recovery of larger residential properties and regional markets, says Moody's. The agency believes this is credit negative for existing Dutch RMBS and covered bonds.

"Over the past 12 months, the Dutch housing market showed clear signs of recovery, spurred on by the market for smaller houses and apartments in key urban areas that performed better as a result of increased transaction volume," says Jeroen Heijdeman, a Moody's avp - analyst.

However, Moody's expect the recovery of the housing market to dampen because of tighter mortgage loan underwriting criteria in the Netherlands in 2015, following a relaxation of LTIs until 2008. "This will be credit negative for existing Dutch RMBS and covered bond transactions because the approximate 20% house price decline in recent years will mean that many Dutch homeowners will have a loan-to-value above 100% for a longer period of time," adds Heijdeman.

RMBS

Housing initiatives to drive Indian RMBS

Housing policies initiated by the new Indian government are expected to encourage growth in the country's mortgage finance sector and provide a catalyst for the development of its emerging RMBS market. However, Moody's warns that the tax environment may hamper some investor participation in the sector.

In 2014, RMBS issuance in India increased by 75% to INR53bn, but this growth was from a low base and the sector remains relatively small. It is estimated that India's housing shortage is about 18.78 million dwelling units in urban areas alone, without taking into account rural housing requirements.

As the funding needs of India's mortgage lenders grow in step with the government's 'housing for all' vision, Moody's believes the RMBS market has scope to develop into a larger funding source, particularly for niche lenders focused on affordable housing. The agency expects securitisation to play a bigger role in funding these mortgages, particularly as specialist housing finance companies - which account for 37% of India's mortgage lending - have limited access to cheap deposits. Housing finance companies are anticipated to grow their loan books by 20%-22% in 2015 and will need as much as INR²trn in incremental funding.

A number of key obstacles remain for the sector's development, however. New tax rules have led to lower post-tax returns for bank investors in RMBS, while tax-related legal uncertainty has prevented mutual fund investors from participating in the Indian market. In addition, Moody's suggests that the long tenor of RMBS, combined with the lack of a liquid secondary market for the securities could dampen investor appetite.

RMBS

Japan RMBS approach updated

Moody's has updated its approach to rating Japanese RMBS, following an analysis of Japanese mortgage loan defaults over the past 30 years. The approach aligns with its global RMBS rating methodology, but takes into account the unique characteristics of the Japanese market. The changes are also expected to bring greater transparency, as market participants will be able to more easily compare Japanese RMBS with RMBS issued in other jurisdictions.

Although the updated methodology is more aligned with its global framework, Moody's portfolio analysis will continue to focus on the same features of residential mortgages in Japan. It will also continue to use debt-to-income (DTI) ratios and loan-to-value (LTV) ratios as key elements, with greater emphasis on DTI in the assessment of default frequency.

No existing triple-A rated notes are expected to be impacted by the updated methodology. The updates will result in positive rating changes to a limited number of non triple-A mezzanine notes.