Contents

ABS

Euro ABS up and running

The European ABS market has begun to pick up steam over the last week and will be further boosted by yesterday's highly anticipated QE announcement from the ECB. However, the immediate ABS spread reaction to the QE announcement has been limited, as the market started pricing it in well in advance.

"It was a pretty slow start to the year in both the primary and secondary markets, which was really reflected in the ECB's limited buying. It was the end of last week and then over the course of this week that things have started to firm up," says one trader.

He continues: "The last week has seen more secondary market trading activity and spread compression. The number of bid-lists has picked up and primary issuance has restarted, too."

A few BWICs are due today as the trader notes that the session is "looking pretty good" and "things are getting done". He suggests that the slow start to the year can partly be attributed to a typically sleepy holiday season and partly to investors holding their breath in the run up to yesterday's announcement.

"The QE announcement was largely as the market expected, so there should not be any dramatic change. What the announcement does do is provide a bit more certainty and underline the central bank's support for the product, which in turn will help to support spreads," says the trader.

He adds: "The ECB did a good job of leaking information on the major points of its QE programme beforehand, so the announcement did not have as much wow-factor as it might have, but it has been well received nonetheless. Absent those leaks there would have been a lot more volatility in the market, so it has been well handled."

JL

CLOs

CLO space stays active

The storm battering the north-eastern US put a freeze on most secondary market activity yesterday, although a number of US CLO bid-lists did circulate. SCI's PriceABS data captured price talk on 39 unique US CLO tranches during Tuesday's session.

Most of the paper out for the bid came from post-crisis issuances, with tranches such as MCAP 2006-5A B2L proving a rare exception. That MCAP tranche was talked at 99.3, having been talked between the mid-90s and mid/high-90s two weeks ago.

RACEP 2012-7A INC was one of the 2012-vintage names included on the day's bid-lists. It was talked at around 60, having not appeared in PriceABS since 14 May 2013, when it was covered at 88 handle.

GOLD6 2012-6A E was talked at 96 handle. It, too, had experienced a lengthy absence from PriceABS, with its last recorded cover coming from 31 January 2014, when it was talked between the high-90s and 100 and was covered at 99 handle.

Price talk on 2013's SHSQR 2013-1A F tranche was between 82.9 and 86, while GWOLF 2013-1A D was talked at around 87. The GOLD7 2013-7A E tranche was talked at 90, while the BSMC 2013-1A B1 tranche was talked at 95, low-95, 95.35 and 96.

The ALM 2013-7RA A2 and ALM 2013-7R²A A2 tranches were each talked at 98 handle. That is that same level they had each been talked at in the prior session.

As for tranches from CLOs issued last year, the GOLD8 2014-8A E tranche was talked at around 87. The tranche has one recorded cover from last year, at 90.57 on 3 June 2014.

BABSN 2014-IA A2 was talked at 97 handle. The tranche was talked at the same level on Monday and back on 13 August 2014, when it was also covered at low/mid-98.

One more name of interest from the session was LROCK 2014-2A A. Price talk on the tranche yesterday was between 99.2 and mid/high-99. It had been talked at low-99 on Monday and PriceABS records covers from both August and September last year.

JL

Secondary markets

Energy concerns weigh on US CLOs

Energy price concerns among others could hinder US CLO secondary trading today.

As noted yesterday, a highlight of today's US CLO BWIC schedule is the $112.68m six line equity list due at 11:00. However, one trader says: "Investors seem to be happy to sit on the sidelines for this one. They are good bonds with very good managers and on average across the list don't have that much energy exposure for 2.0 deals."

Nevertheless, the trader argues it is the energy exposure that is key. "Our talk is 70s to low-80s, but we've seen customer bids seven or eight bonds back of that simply because no one is willing to stick their neck out in relation to a volatile and currently dropping market. At the same time, investors know there is less price support from the major dealers because they've got their hands full in the primary market."

Consequently, the trader is pessimistic for the list. "I hope I'm wrong but I expect a high percentage of DNTs."

Secondary markets

Euro ABS/MBS settles down

The European ABS/MBS secondary market saw a brief hiccup yesterday before settling down to wait on the ECB this afternoon.

Prices softened yesterday morning before reports appeared speculating that today's announcement would see higher than expected QE buying volumes. Bids immediately strengthened and core paper ended the day unchanged.

Since then, trading has been has been even quieter, albeit across asset classes and with some sellers appearing. Meanwhile, the BWIC schedule remains light and is dominated by UK RMBS today.

Secondary markets

Euro ABS/MBS unmoved

The ECB's QE announcement earlier has found favour elsewhere, but the European ABS/MBS market is unmoved.

"There has been no ABS market reaction to the news, literally nothing," says one trader. QE was to an extent already priced into the market but there could even be an eventual adverse reaction, the trader suggests. "Obviously the fear is now that the ECB will buy a trillion euros of assets elsewhere and not bother with the ABSPP."

Secondary markets

Large list dominates US RMBS

The US non-agency RMBS secondary market has again been in the thrall of a large GSE BWIC similar to the one seen on Friday last week.

Today's list had a hard cut off time of 10:30 New York and consisted of around $1bn of current face, though with the option to upsize, over 17 mainly subprime line items. "The rest of the day is fairly quiet and we only have one BWIC currently scheduled for tomorrow, but that could change depending on where the big list clears, so that's what everyone will be watching out for over the next couple of hours," says one trader.

The main thing the market is looking for is no surprises. "The only real surprise would be a very high proportion of DNTs, if not then the probability is the status quo will be maintained," the trader says.

"For the most part we are trading in a tight range, but these big lists shake things up a little and get the market's full attention pre- and post-auction," the trader adds. "At the same time, they create new supply as people are doing re-remics off these large blocks."

Secondary markets

Euro ABS/MBS slips into gear

After a brief pause to digest the ECB's QE announcement yesterday, the European ABS/MBS has slipped back into gear.

The wholesale buying activity seen in broader markets has not been seen in ABS/MBS, but two-way flows were evident across asset classes from mid- to late-afternoon yesterday and the tone remains positive this morning. Peripherals in particular benefitted from increased activity and spreads there have tightened by up to 5bp since yesterday's open.

The BWIC schedule is also expected to increase and a four line auto/RMBS flash BWIC has already been put out for trade at 10:00. That aside, there are currently only two ABS/MBS auctions scheduled for today.

The first, at 13:30 London, is two lines - €13.1m of AIREM 2004-1X 3A2 and €35m of AIREM 2006-1X 2A1 - then at 14:30 is €48m of CHAPE 2003-I A. The two AIREM deals have both covered on PriceABS in the last three months, last doing so at 97.64 on 3 December and 97.2 on 9 January respectively.

Secondary markets

Euro CLO schedule surge

European CLOs are seeing an uptick in secondary activity thanks to broader securitisation market positivity on the back of QE and consequently there is a surge in the BWIC schedule for today.

There are already four lists circulating covering 23 line items. First up, and attracting most market interest, is a 17 line €45.23m predominantly equity list of 1.0 bonds due at 14:30 London.

It consists of: ADAGI III-X SUB, AVOCA III-X F, CGMSE 2013-2X SUB, CGMSE 2014-2X SUB, ELEXA 2006-1X SUB, EUROC IV-X D, EUROC VIII-X SUB, EUROC VII-X SUB, GSCP II-X E1, GSHAM 2006-3X S, HARVT II-X F, HUDCL 2007-1X B2, HYDEP 1X SUB, NPTNO 2007-2X F, NWEST II-X SUB, SPAUL 5X F and WIMIL 2007-1X SUB. Only CGMSE 2013-2X SUB has traded with a price on PriceABS in the last three months, covering at LM80s on 29 October.

Then, at 15:00 there is €16m of single-As - ACAEC 2007-1X C, CRNCL 2007-2X C and DUCHS VI-X C. None of the bonds has traded on PriceABS in the last three months.

Also, at 15:00 are two lines of double-Bs - €2.5m of CGMSE 2014-2X D and €1.5m of SPAUL 4X D. Neither has traded with a price on PriceABS in the last three months.

Last, at 15:30 is a €3m slice of triple-B CGMSE 2014-3X C. The bond has never appeared on PriceABS.

Secondary markets

Greek RMBS soften

Broader market pessimism over the Greek election result and subsequent coalition formation is reflected in the European RMBS market this morning.

Although no significant trade flow has yet been seen today dealers' offers have been reduced on Greek RMBS. For example GRIF 1A finished last week at 75 and is currently being quoted around two points lower.

Other peripheral ABS/MBS markets are retaining the positive tone seen into Friday's close.

Secondary markets

Euro CLO BWICs quiet for now

After the swathe of BWICs on Friday, the European CLO auction schedule currently looks considerably quieter. However, given the strong levels of execution seen on Friday's lists, albeit believed to be primarily driven by dealer inventory building, more BWICs are likely to be added soon.

For now, there is only one list scheduled for today - a €9.628m six line mezz list due at 14:00 London time. It consists of: ALME 2X D, CGMSE 2014-1X C, CGMSE 2014-1X D, CORDA 3X C1, CORDA 3X D and RPARK 1X C.

None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Euro CLOs on the rise

After a slow few weeks, European CLO secondary market volumes are on the rise.

"We've seen very little flow across the board as players have held back waiting on macro issues, the ECB, Greece and the Fed," says one trader. "What trading there has been is mostly in 1.0 mezz and 2.0 upper mezz."

However, the US Federal Reserve meeting this week should remove the last hurdle to activity. "Once the Fed speaks activity is expected to pick up," the trader says. "In any event, it's got to happen at some point as accounts have mandates in place and need to put money to work."

Secondary markets

Euro CMBS BWICs to the fore

Today and tomorrow sees a flurry of European CMBS BWICs amid increasing interest off-BWIC in both core and peripheral bonds.

This morning saw a €3m single line of DECO 2014-GNDL D in for the bid. The bond traded strongly covering at 100.663.

Next up at 14:00 London time is a mixed list containing £2.13m current face across three tranches - FHSL 2006-1 A, LORDS 2 B and THEAT 2007-2 C. Only FHSL 2006-1 A has covered on PriceABS in the last three months, doing so at 59h on 2 December.

Then at 15:30 today is €4.75m of GALRE 2013-1 C. The Italian deal last covered on PriceABS at 102.06 on 9 December.

Tomorrow already has two European CMBS lists scheduled - both mix sterling and euro bonds. One at 14:00 London involves 28.1m over ten line items, while the other, due at 14:30, involves four bonds with a total original face of 238.55m, over half of which is accounted for by €125.212m of TAURS 3 A.

Secondary markets

Euro secondary activity up

The European secondary markets are seeing increased activity across jurisdictions and securitisation asset classes.

"There have been good two-way flows over the past two days," confirms one trader. "Most price levels are up in ABS, CLOs and MBS."

Dutch prime paper continues lead the way hitting record lows again yesterday. For example, a five-year DOLPH senior covered at around 25 and the two-year was seen trading in the 20 area.

However, the trader notes: "Greek paper is still weak though on very patchy volume. Nevertheless other peripherals continue to rise, especially Portugal."

Italian prices are also on the increase, particularly in CMBS. Though that could either be driven by the broader peripheral rise or yesterday's release of strong price talk on the latest Taurus new issue.

"Overall, the tone is positive," says the trader. "That is a result of QE expectations filtering through the system, which in turn is bringing back real money investors to ABS who are buying what is available and in the absence of primary that's good news for secondary. Sadly, ABSPP continues to have no effect on spreads - it is just too small."

Structured Finance

SCI Start the Week - 26 January

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

Pipeline
A number of the deals which joined the pipeline last week then went on to price before the weekend. At the final count there remained one newly announced ABS, two ILS, two RMBS, four CMBS and one CLO.

The ABS was US$737.5m OneMain Financial Issuance Trust 2015-1 and the ILS were US$150m Atlas IX Capital Series 2015-1 and US$200m Galileo Re Series 2015-1. The RMBS were US$338.8m Sequoia Mortgage Trust 2015-1 and US$775m STACR 2015-DN1.

US$360m AOA 2015-1177, US$1.2bn CGCMT 2015-GC27, US$1.423bn COMM 2015-LC19 and €286m Taurus 2015-1 IT accounted for the CMBS. The CLO, meanwhile, was US$404.75m Golub Capital Partners CLO 22(B).

Pricings
The pace of issuance picked up last week. There were 12 ABS prints, along with one ILS, two RMBS, three CMBS and one CLO.

The ABS were: US$650m Avis Budget Rental Car Funding 2015-1; 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; US$2.5bn DB Master Finance Series 2015-1; €717m Driver Thirteen; US$434m Global Container Assets 2014 Series 2015-1; US$700m HDMOT 2015-1; US$1.25bn Honda Auto Receivables 2015-1 Owner Trust; US$500m Kubota Credit Owner Trust 2015-1; US$625.49m Longtrain Leasing 2015-1; and US$313.8m SoFi Professional Loan Program 2015-A.

US$200m Vitality Re VI Series 2015-1 was the ILS, while the RMBS were US$514m Invitation Homes 2015-SFR1 and US$563m Progress Residential 2015-SFR1. The CMBS were US$200m CGCMT 2015-101A, US$340m Hyatt Hotel Portfolio Trust 2015-HYT and US$1.147bn MSBAM 2015-C20, while the CLO was US$409m CVP Cascade 3.

Markets
The European ABS market began to pick up steam last week, with the ECB's QE announcement providing a further boost, as SCI reported last week (SCI 23 January). "The last week has seen more secondary market trading activity and spread compression. The number of bid-lists has picked up and primary issuance has restarted, too," says one trader.

The QE effect was felt in European CMBS, where secondary spreads tightened across the stack by around 5bp for senior tranches and 15bp for junior tranches. "Broadly speaking, discount margins are around 105bp for original triple-A rated notes, 140bp for original double-A rated notes, 175bp for original single-A tranches and 215bp for original triple-B tranches," note Bank of America Merrill Lynch analysts.

The US ABS market also picked up as trading resumed after Martin Luther King Day. Total BWIC volume on Tuesday was around US$125m, with SCI's PriceABS data capturing 24 unique line items (SCI 21 January).

Barclays Capital analysts note that a heavy pipeline of deals weighed on US CMBS spreads. "In secondary trading, 2014 vintage dupers were 2bp wider, at swaps plus 93bp, while further down the capital stack, spreads held up better and 2014 BBBs were unchanged at swaps plus 353bp. In the legacy space, 07 LCF bonds were flat at swaps plus 104bp, and 07 AJs were flat at swaps plus 518bp," they note.

The US non-agency RMBS market was robust last week, with Wells Fargo analysts reporting weekly trade and BWIC volumes of US$8.4bn and US$4.1bn, respectively. "A good portion of the supply this week (about 25%) came from a $1.0 billion GSE bid list. Week-over-week prices remained firm across all sectors," they add.

Deal news
• 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.
• Freddie Mac has made a number of enhancements to its STACR programme, coinciding with the announcement of its first STACR offering for 2015 - STACR 2015-DN1. The enhancements aim to reduce credit risk, as well as promote programme liquidity and provide diverse investment options for investors.
• Moody's reports in its latest ABS Spotlight that the College Loan Corporation Trust I Series 2007-2 class A1 Libor-based notes are behind their amortisation schedule and are at risk of failing to fully amortise by their final maturity date in 2024. The notes should have paid off in 2010, but the transaction administrator has not made any principal payments to date because it believes - contrary to Moody's opinion - that principal payments should not commence as long as another Trust I series (the Series 2006-1 reset-rate notes (RRNs)) remain outstanding.
• 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.
• Moody's reports that the number of EMEA CMBS loans in special servicing decreased by three in December, following the removal of the loans, and there were no new transfers. Among the highlights for the month was the Libra loan, the sole loan securing Titan Europe 2007-1 (NHP), which was worked out following the completion of a sale of the underlying security (see SCI's CMBS loan events database).
• 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.
• 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.
• 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.

Regulatory update
• The FDIC has proposed a rule that would revise certain provisions of its securitisation safe harbour rule, in order to clarify requirements as to the retention of an economic interest in the credit risk of securitised financial assets upon and following the effective date of the credit risk retention regulations adopted under Section 15G of the Securities Exchange Act. A recent Chapman and Cutler memo notes that there has been confusion among market participants on several aspects pertaining to the relationship between the FDIC's securitisation safe harbour rule and the new Section 15G Regulations.
• 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.
• The US SEC, in conjunction with the New York and Massachusetts Attorneys General, has fined S&P US$77m and banned it from rating new issue conduit CMBS for one year. The move is expected to have a minimal effect on the CMBS market, however.

Deals added to the SCI New Issuance database last week:
AmeriCredit Automobile Receivables Trust 2015-1; Apidos CLO XX; CIFC Funding 2011-1 (refinancing); Ford Credit Auto Owner Trust 2015-REV1; Global SC Funding One Series 2015-1; Global SC Funding Two Series 2015-1; Goal Structured Solutions Trust 2015-1; Hyundai Auto Receivables Trust 2015-A; Navient Private Education Loan Trust 2015-A; Towd Point Mortgage Trust 2015-1

Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-3; BSCMS 2007-PW16; CANWA II; CGCMT 2004-C1; CGCMT 2006-C5; CSFB 2005-C2; CSFB 2006-C4; DECO 2005-C1; DECO 2007-C4; DECO 2007-E7; ECLIP 2006-4; EURO 28; GSMS 2012-GCJ7; JPMCC 2006-LDP8 & MLCFC 2006-4; JPMCC 2007-CB18; JPMCC 2007-LDPX; JPMCC 2014-C20 & JPMBB 2014-C21; LBCMT 2007-C3; MSC 2011-C3; TITN 2007-1; TITN 2007-CT1; TMAN 5; WBCMT 2005-C20 & WBCMT 2005-C21; WINDM VIII; WINDM X; WINDM XIV

CMBS

Ratings probe settled

The US SEC, in conjunction with the New York and Massachusetts Attorneys General, has fined S&P US$77m and banned it from rating new issue conduit CMBS for one year. The move is expected to have a minimal effect on the CMBS market, however.

The settlement resolves an investigation into six US conduit CMBS that S&P rated in 2011 and two additional conduit CMBS from that period, which were the subject of a Wells Notice received and disclosed by S&P in July 2014 (SCI passim). In addition, the rating agency has reached settlements with the SEC regarding descriptions in its 2012 CMBS criteria of credit enhancement levels and analyses contained in a related article published in 2012 regarding Depression Era data, as well as the application of loss severity assumptions in its surveillance of certain US RMBS transactions.

Under the terms of the settlements with the SEC, S&P will pay a total of US$58m and not issue ratings on new US conduit transactions until 21 January 2016, including engaging in any marketing activity related thereto. The agency will continue to rate all other types of CMBS transactions and provide surveillance of outstanding CMBS ratings, including US conduit ratings. Under the terms of the settlements with New York and Massachusetts, S&P will pay US$12m and US$7m respectively to these states.

CMBS analysts at Barclays Capital note that the settlement highlights three specific issues with regard to S&P's ratings post-crisis, which go beyond its previously known issues rating CMBS bonds in 2011. The first order by the SEC details the issues in 2011, when S&P did not follow its own published guidelines when issuing ratings for six conduit transactions (three non-agency and three Freddie Mac K-series deals). The rating agency used more relaxed calculations for debt service than disclosed, resulting in higher DSCRs and ultimately lower enhancements for the same ratings than would have occurred if it had used its disclosed methodology, according to the SEC.

The second SEC order highlights the weakening in underwriting standards made in 2012 when S&P re-entered the market with a new model and misrepresentations made by S&P with respect to that model, specifically the ability of bonds to withstand the Great Depression based on their ratings. The third order relates to the surveillance of RMBS from 2012 to 2014, where S&P failed to disclose an assumption change and ad hoc workarounds that were used to rate bonds.

Given that S&P only rated 5.6% of the US conduit market in 2014, the Barcap analysts anticipate that the new issue conduit market will be relatively unaffected by the loss of S&P in 2015. Similarly, for Freddie Mac K-series bonds, S&P's market share represents only 9% of deals rated over each of the past two years and arrangers will likely use other ratings agencies for new deals.

The SEC's enforcement action - which alleges fraudulent misconduct in connection with a series of federal securities law violations - is its first against a major ratings firm. Without admitting or denying the findings in the SEC's orders, S&P has agreed to publicly retract the Great Depression-related study, correct the inaccurate descriptions in the publication about its criteria and enhance and improve its internal controls environment. The rating agency self-reported the misconduct pertaining to the third order and cooperated with the investigation, resulting in a reduced penalty for the firm.

Meanwhile, in a separate order instituting a litigated administrative proceeding, the SEC alleges that the former head of S&P's CMBS Group fraudulently misrepresented the manner in which the firm calculated a critical aspect of certain CMBS ratings in 2011. Barbara Duka allegedly instituted the shift to more issuer-friendly ratings criteria and the firm failed to properly disclose the less rigorous methodology. The matter against Duka will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the allegations and determine what, if any, remedial actions are appropriate.

CS

RMBS

HSART EODs eyed

BlueMountain Capital Management has notified the trustee of HLSS Servicer Advance Receivables Trust that three EODs have been triggered under the trust indenture. If a sufficient number of other noteholders agree with the firm's assessment, the RMBS notes could be accelerated.

BlueMountain claims that: Ocwen has materially breached covenants to comply with applicable laws and its requisite servicing obligations; Ocwen has breached a warranty in the senior secured term loan facility agreement; and the HSART trust is in violation of the collateral test under the indenture. The firm believes that Ocwen's admissions of wrongdoing under the recent settlement with the NYDFS and the current proceedings by the California DBO (SCI passim) demonstrate that the servicer has breached its servicing obligations under the indenture.

RMBS analysts at Barclays Capital note that the alleged breach of the senior secured term loan facility appears to be related to a representation Ocwen made when issuing the loan. Specifically, Ocwen represented that it was not in violation of any applicable laws that would reasonably be expected to have a material adverse effect on the servicer, which BlueMountain believes to be false.

BlueMountain claims that the collateral test under the HSART trust has been breached because the receivables that collateralise the trust should no longer be considered facility eligible receivables, thus making them ineligible for inclusion in the calculation of the collateral value of the trust. It believes that Ocwen's servicing breaches have led to unmatured defaults with respect to the underlying RMBS that Ocwen services and that Ocwen's breaches under the master subservicing agreement between HLSS and Ocwen make the RMBS servicing agreements ineligible to be included in the HSART trust.

BlueMountain holds notes in HSART series 2012-T2 and 2013-T3, as well as some RMBS bonds with Ocwen as the servicer and short positions in the common stock of both HLSS and Ocwen.

If the trustee ultimately determines that the breaches are EODs, the Barcap analysts suggest that the HSART ABS notes could be accelerated under certain conditions. They note that under the HSART indenture, the only EOD triggers that would automatically give rise to an acceleration are: a failure of the collateral test; an involuntary case or other proceeding under US federal bankruptcy laws commenced against the issuer; the commencement by the issuer of a voluntary case under US federal bankruptcy laws; and the occurrence of an insolvency event as to the administrator, the receivables seller, the servicer, a subservicer or the depositor. As such, with the exception of the violation of the collateral value test, the other breaches that BlueMountain refers to would likely require noteholder consent.

The indenture further indicates that over 50% of the holders of each series of notes or the administrative agents would need to direct the trustee to accelerate the notes, if the trustee determines that Ocwen materially breached its covenants, reps and warranties under the HSART indenture and the term loan facility agreement. "Given that BlueMountain only holds some of the notes in the HSART 2012-T2 and HSART 2013-T3 trusts, we do not believe that it has enough voting rights to accelerate the notes unilaterally at this point," the analysts observe.

The administrative agents could direct the trustee to accelerate the notes, but they recently agreed to a temporary expansion of the VFN facility and so are expected not to be inclined to remove Ocwen's and HLSS' ability to finance their servicing operations at this time. But if the advance receivables collateralising the HSART trust are determined to be ineligible facility receivables, then a breach of the HSART collateral value test could occur and the notes would be automatically accelerated.

Even if an EOD is determined to have occurred and the notes are accelerated, a waiver of the default is still possible, according to the analysts. A majority of all of the HSART notes outstanding can rescind the acceleration, providing the issuer has paid all overdue installments of principal and interest on the notes and all EODs have been cured. Similarly, holders of more than two-thirds of the outstanding notes of each series may waive any past default, except for uncured defaults related to the payment of principal or interest on the notes or with respect to covenants that have been breached that require all outstanding noteholders to amend or modify.

If Deutsche Bank, as trustee, does determine that an EOD has occurred, it will likely send a notice to all HSART noteholders asking for a vote on whether to accelerate the notes. If it determines that a collateral value trigger has been breached, the HSART notes will be automatically accelerated.

CS

ABS

CPS in subprime auto probe

Consumer Portfolio Services has disclosed in a regulatory filing that it has received a civil investigative subpoena from the US Department of Justice, pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The subpoena directs the firm to produce documents relating to its subprime auto finance and related securitisation activities. Santander and GM were issued with similar subpoenas last year (SCI passim).

Structured Finance

Capital markets reshuffle

Cadwalader, Wickersham & Taft has appointed Patrick Quinn as managing partner. He specialises in securitisation and structured products, and was previously co-head of the firm's capital markets practice.

The appointment completes a year-long transition period leading up to the retirement of chairman Chris White at the end of 2014. Quinn managed the operations of the firm during that time, sharing leadership responsibilities with Jim Woolery, who is departing for a new investment management venture for which Cadwalader is acting as counsel.

The firm has also appointed Chris Cox, co-head of Cadwalader's corporate practice, as sole head of its capital markets practice - a responsibility he had previously shared with Woolery. Cox will oversee the operations and business development efforts of the practice.

Structured Finance

Manager adds credit vets

TCW Group has added Melinda Newman and Drew Sweeney to its fixed income team as svps. Both hires are based in the company's Los Angeles headquarters and have extensive experience of working in the US credit markets.

Newman serves as a senior analyst, responsible for evaluating and making investment recommendations regarding high yield and investment grade credits. She reports to Jamie Farnham, director of credit research. Prior to TCW, Newman was the head of corporate credit research for fixed income at First Pacific Advisors and had also served as md and senior portfolio manager at Post Advisory Group.

Sweeney is a senior bank loan trader and reports to Jerry Cudzil, head of US credit trading. Sweeney was previously the bank loan portfolio manager for Bradford & Marzec, where he served on the investment committee and managed loan strategies for both total return and CLO accounts. He has also worked for Macquarie Group, overseeing both bank loan and high yield bond investments.

Structured Finance

Board movements made

Fifth Street Finance (FSC) has promoted Todd Owens to ceo after Leonard Tannenbaum resigned from the position. Owens moves from his role as president of the firm and a member of the board.

Ivelin Dimitrov will replace Owens as president. Dimitrov was previously cio of FSC and a member of the board, as well as being chairman of Healthcare Finance Group, a portfolio company of FSC.

Structured Finance

Lender adds origination expert

Andrew Shook has joined A10 Capital as senior evp, where he will have national responsibility for new loan originations. He has a record of originating, managing, structuring and trading in real estate whole loans, CMBS and other securitisations.

Shook's prior roles include being on the founding management team of Resource Capital and serving as president and cio of Ischus Capital Management. He has also ran a multi-billion dollar real estate portfolio for HSBC, and held senior roles at BAML in the US and Europe.

Structured Finance

Mustier tapped for international expansion

Jean-Pierre Mustier has joined Tikehau Capital as a partner. Based in London, his primary focus will be on the firm's international expansion, while also contributing to its various existing businesses.

Mustier was previously deputy general manager in charge of UniCredit's corporate and investment banking division and a member of the bank's executive management committee. He remains a member of its international advisory board.

Before that, Mustier held numerous senior positions at SG across various markets and financing activities in Europe, Asia and the US. A member of the bank's executive committee since 2003, he headed its corporate and investment banking division from 2002 to 2008 and then took over the responsibility for asset management, private banking and securities services until 2009.

Structured Finance

Analytics partnership agreed

SCI's PriceABS secondary market price service is now available on the Thetica Systems platform. Common licensees can view SCI's daily trade colour and prices via the Thetica Trader Tools analytics. The Thetica platform offers a high-speed analytics module capable of running multiple bonds simultaneously under various scenarios, to allow for precise forecasting and analysis.

Structured Finance

AIF team expanded

Scope has bolstered its research in alternative investment funds (AIF) with the addition of three new analysts, including Harald Berlinicke, who has been appointed executive director for the agency's AIF team. Berlinicke previously worked for a number of financial institutions, including Dresdner Bank, Landesbank Berlin and Toronto-Dominion Bank. His career has focused on analysis and management of structured products, hedge funds and alternative investments.

Frank Netscher also joins the AIF team as a transport analyst. He has analysed and valued closed-end funds in previous roles, beginning as an analyst at Fondsbörse Deutschland before later working as head of valuations at MCE Schiffskapital.

Finally, Aaron Konrad joins the team as an infrastructure and energy project analyst. He previously worked at Kommunalkredit Austria as a financial analyst and risk manager. In that capacity, he established ratings and risk analyses mainly for infrastructure and conventional and renewable energy project financing.

CDS

Credit index group formed

JPMorgan has formed a new global credit index business. The group will be headed by Samik Chandarana and combine the market making of index CDS, credit options and bond indices.

Chandarana will report to Guy America and Matt Cherwin, co-heads of credit and securitised products. The group aims to provide clients with improved liquidity in a broader array of products, as well as embark on a new partnership with global equities to enhance the firm's offering in credit exchange-traded funds to clients.

Chandarana will also lead the firm's e-trading agenda across global credit, working closely with the other business heads within credit, as well as Frank Troise (global head of JPMorgan execution services) and Scott Wacker (global head of e-commerce sales and marketing).

Sanjay Jhamna will replace Chandarana as head of EMEA credit trading. Jhamna has led the company's global credit exotics and hybrids business for the last four years.

Aymeric Paillat will subsequently lead exotics trading and report to Jhamna. The repack and solutions group led by Alistair Bloch will move under the company's global syndicate function, with Boch reporting to Ryan O'Grady and Bob LoBue. Finally, the credit correlation business will continue to be managed by Fajr Bouguettaya, who will report to America and Cherwin.

CDS

BGC ups stakes again

BGC Partners has increased its fully financed all-cash tender offer to acquire all of the outstanding shares of GFI Group to US$6.10 per share. The firm has extended the expiration date for its tender offer to 3 February, after the previous offer was scheduled to expire on 29 January.

The revision represents a premium of US$0.25, or approximately 4%, to the US$5.85 per share stock and cash consideration offered by the CME and GFI management.

BGC has also delivered an executed agreement to the board of GFI that, if countersigned by GFI, provides that BGC would increase its offer to acquire all of the outstanding shares of GFI by an additional US$0.10 per share. This proposed revision to US$6.20 per share would represent a premium of US$0.35, or approximately 6%, to the US$5.85 per share stock and cash consideration offered by CME and GFI management. In order for GFI shareholders to receive the additional US$0.10 per share, BGC set a 20 January deadline for the GFI special committee and board to commence the 'match period' under GFI's merger agreement.

BGC reiterates that GFI shareholders can vote against the CME transaction by returning the GOLD proxy card from BGC or by voting 'against' using the materials provided by GFI at the 27 January special meeting (SCI 8 January). The firm adds that Institutional Shareholder Services recommends that shareholders of GFI vote against the merger agreement with CME at the special meeting.

As of 16 January, approximately 13.9 million shares were tendered pursuant to BGC's offer. Together with the 17.1 million shares of GFI common stock already owned by the firm, this represents approximately 24.4% of GFI's outstanding shares.

Insurance-linked securities

Reinsurance merger agreed

AXIS Capital and PartnerRe are set to merge, following unanimous approval by both companies' boards of directors. The agreement will combine gross premiums written in excess of US$10bn, total capital of more than US$14bn, and cash and invested assets of over US$33bn.

Under the terms of the transaction, PartnerRe shareholders will receive 2.18 shares of the combined company's common shares for each share of PartnerRe common shares they own and AXIS Capital shareholders will receive one share of the combined company's common shares for each share of AXIS Capital common shares they own. Upon completion of the transaction, shareholders of PartnerRe and AXIS Capital will own approximately 51.6% and 48.4% of the combined company respectively.

PartnerRe chairman Jean-Paul Montupet will be non-executive chairman of the merged company, while AXIS Capital ceo Albert Benchimol will serve as ceo. The new company will have a 14-person board of directors, consisting of seven directors from each firm, including Montupet and Benchimol. Current AXIS Capital chairman Michael Butt will continue to serve on the board as chairman emeritus.

In connection with the transaction, Costas Miranthis has stepped down as ceo of PartnerRe and as a member of the PartnerRe board. Current PartnerRe director David Zwiener will assume the position as interim ceo of PartnerRe until the completion of the transaction.

A number of further senior positions have also been identified: Emmanuel Clarke will be ceo of reinsurance; Peter Wilson will be ceo of insurance; Chris DiSipio will be ceo of life, accident and health; and John Nichols will be responsible for strategic business development and capital solutions. In addition, Joseph Henry will be cfo and Bill Babcock will be deputy cfo and lead integration officer. Babcock will assume the role of cfo upon Henry's retirement in July 2016.

The company headquarters will be located in Bermuda and will have a presence on five continents in 39 distinct geographic locations worldwide. The transaction is expected to close in 2H15, subject to approval by the shareholders of both companies, regulatory clearance and customary closing conditions.

Risk Management

Calypso president named

Calypso Technology has appointed Pascal Xatart as president, responsible for all day-to-day operations at the firm. Xartart will head the company's executive leadership committee and report to Calypso founders and co-ceos Charles Marston and Kishore Bopardikar.

Prior to Calypso, Xartart was the ceo and co-founder of Giift.com. He was also previously ceo of Sophis and held senior roles for Linedata and Le Public System.

ABS

Solar ABS ready to shine

The US rooftop solar industry has achieved the scale and maturity to tap the securitisation markets as a distinct asset class, says Moody's. The agency believes the declining cost of solar technology, along with regulatory and policy support for solar power has made securitisation viable and attracted institutional investors.

Solar ABS are backed by pools of rooftop solar photovoltaic systems with long-term contractual payments. Moody's believes that solar developer companies - which typically have used tax equity, leases, bank revolvers and equity to fund their installations - are increasingly interested in tapping securitisation to fund growth.

"Solar developer companies have started to enter the ABS market to secure financing, especially as federal investment tax credits for the solar industry are set to decline in January 2017," says Moody's vp and senior analyst Benjamin Shih.

In addition, institutional investment has increased as investors have become more knowledgeable about the asset class. SolarCity, the only current sponsor in the solar ABS sector, has brought three transactions to market thus far.

However, several key risks exist for solar as an asset class new to the securitisation market (SCI 23 December 2013). Among them, operational and servicing risks arise from the short operating history of solar developer companies that sponsor the securitisations, along with uncertainty over their long-term viability. These companies typically have non-investment grade ratings or are unrated.

Default risks could arise from credit events (such as obligor bankruptcy) or non-credit related events (such as when solar customers sell their properties). In addition, political and regulatory risks stem from uncertainty over the federal investment tax credit and net energy metering programmes. There is also the risk that over the long term solar technology could become obsolete or not meet performance expectations.

However, Moody's notes that current solar ABS transactions contain structural features to mitigate these risks, such as a high level of credit enhancement and reserve accounts.

ABS

Hertz waiver 'credit positive'

Holders of rental car term ABS notes issued by Hertz Vehicle Financing (HVF) have extended through 31 August their waiver of a lease EOD related to Hertz's failure to timely furnish its financial statements (SCI passim). Moody's notes in its latest ABS Spotlight publication that the move is credit positive for the notes because it lifts the immediate threat of a potential amortisation event.

The waiver will terminate after 30 June if Hertz's failure to furnish its financial statements results in HVF II being prohibited from drawing funds under its variable funding notes or Hertz being prohibited from drawing funds under its senior secured asset-based revolving credit facility. A potential amortisation event would give the requisite investors in each series the option to declare an amortisation event and thus cause their notes to amortise. For each series where an amortisation event is declared, HVF would be required to use a pro rata portion of all vehicle disposition proceeds to pay down the notes.

Moody's says that Hertz has sufficient liquidity to finance its rental car fleet through 2015 following a US$2.25bn increase in borrowing capacity in October under VFNs issued by HVF II. This increase will allow Hertz to make approximately US$600m of scheduled amortisation payments through March on ABS term notes issued by HVF.

The increase also provides ample capacity for the firm to execute its fleet purchase strategy for 2015. Hertz has total commitments of US$8.6bn under US rental car VFNs and corporate asset-based loan (ABL) facilities, of which approximately US$3.6bn of borrowings was outstanding, as of 31 October.

Hertz will likely have to seek additional waiver extensions in 2015 from its lenders under the VFN and ABL facilities to avoid termination of these funding sources, according to Moody's. While the firm received waiver extensions from the lenders under these facilities through 30 June, it has stated that it does not expect to file updated financial statements before mid-2015.

"Lenders will likely grant such extensions, but the need to seek additional extensions could increase costs and uncertainty for Hertz," Moody's observes. "Hertz will have largely completed the seasonal build-up in its fleet purchases by the end of 2Q15, reaching near-peak borrowings under its lending facilities. The willingness of the VFN and ABL lenders to significantly increase their facilities in anticipation that Hertz will reach peak borrowing levels reflects a recognition of the healthy fundamentals in the car rental industry and the company's sound long-term position in the market."

Hertz might also be required to seek an additional waiver extension from term ABS noteholders if it does not file its financial statements prior to 31 August.

ABS

SLABS amortisation highlighted

Moody's reports in its latest ABS Spotlight that the College Loan Corporation Trust I Series 2007-2 class A1 Libor-based notes are behind their amortisation schedule and are at risk of failing to fully amortise by their final maturity date in 2024. The notes should have paid off in 2010, but the transaction administrator has not made any principal payments to date because it believes - contrary to Moody's opinion - that principal payments should not commence as long as another Trust I series (the Series 2006-1 reset-rate notes (RRNs)) remain outstanding.

"The risk of default at maturity will increase if the pool's amortisation rate declines as a result of either lower prepayments or higher deferment and/or forbearance levels than the administrator projects. Conversely, the risk of default at maturity will decline if the pool's amortisation rate increases or if the 2007-2 A1 notes become senior to the RRNs owing to a mechanism in the transaction structure," Moody's explains.

A mechanism in the transaction structure made the RRNs senior to the 2007-2 A1 notes when the remarketing agent failed to resell the RRNs to new investors in April 2009 and on a quarterly basis thereafter, as a result of the financial crisis. The Trust I administrator interprets the transaction documents to imply that it does not have to make principal payments on the 2007-2 A1 notes until the RRNs amortise down to zero. But Moody's believes that the Trust I administrator should have amortised the 2007-2 A1 notes according to the amortisation schedule with any available cash because the Trust I documents do not explicitly say that the administrator should halt all 2007-2 A1 principal payments until the RRNs are paid in full.

Repayment of the RRNs is left to the administrator's discretion when the Trust I's overcollateralisation exceeds the minimum level of 0.5%; Trust I's OC was 5%, as of October, and has exceeded the minimum since October 2010. As a result, the administrator has used available cash to either repurchase outstanding auction-rate securities or make distributions to itself instead of repaying the RRNs.

If market conditions improve and the remarketing agent successfully remarkets the RRNs, the 2007-2 A1notes will become senior to the RRNs and will receive a sufficient amount of cash to fully amortise in less than two years, based on the US$100m per quarter the student loan pool currently generates. The amount of monthly cash that Trust I's underlying student loan pool generates will decline if the pool's voluntary prepayment rate declines from the current rate of approximately 4%, deferments or forbearances increase from the current levels of 8% and 5% respectively or the principal payment rate declines as a result of increased use of the federal income-based repayment or graduated repayment programmes.

ABS

Lebanese auto deal debuts

Bemo Securitisation has launched and co-placed with Fransa Invest Bank an auto loan ABS issuance for Century Motor Company (CMC). CMC Automotive SIF is the first securitisation transaction for CMC and the first securitisation for a Korean brand automobile dealer in the Lebanese market.

The transaction consists of a portfolio of auto loans valued at US$8.6m granted by CMC to its clients, including car rental companies, as well as corporate and individual clients. It is established as a securitisation investment fund with two classes of notes: senior class A notes with an expected weighted average life of 3.75 years and a subordinated class B note.

The structure provides protection to class A noteholders under several credit enhancements. In addition, it has the flexibility to issue subsequent notes under the same platform, credit features and issuance terms.

Structured Finance

Canada derivatives reporting rules proposed

The securities regulatory authorities in Alberta, British Columbia, New Brunswick, Nova Scotia and Saskatchewan have published for comment proposals on derivatives product determination and trade repository data reporting. Together, these proposed instruments would form a derivatives reporting regime that is largely harmonised with regimes previously implemented in Manitoba, Ontario and Québec.

"Collection of this OTC derivatives data is intended to assist in the regulatory oversight of the OTC derivatives market, including the ability to identify and address systemic risk and the risk of market abuse," says Bill Rice, chair of the Canadian Securities Administration (CSA) and chair and ceo of the Alberta Securities Commission.

The proposed instruments are also informed by comments received on CSA Staff Consultation Paper 91-301 and CSA Staff Consultation Paper 91-302. The comment period closes on 23 March.

Structured Finance

Japanese rated issuance declines

S&P has assigned ratings to Japanese securitisation transactions worth about ¥1.66trn 2014, down 19.9% from 2013. Rated new issuance of RMBS - the asset class with the largest share of Japan's securitisation market - declined 16.2% year on year, pushing down total new issuance rated by the agency.

In particular, total rated new issuance of regular monthly notes that Japan Housing Finance Agency issued declined. In the course of its surveillance, S&P made 44 upgrades in 2014 to RMBS and synthetic CDOs. Meanwhile, it made 24 downgrades, primarily to CMBS and cashflow CDOs.

Structured Finance

Sovereign ceilings lifted

Moody's has taken rating actions on a number of Spanish, Irish, Portuguese and Italian ABS and RMBS transactions. The actions were prompted by the agency's upgrades of the local-currency country risk ceilings to Aa1 from Aa3 in Ireland, to Aa2 from A2 in Italy, to A1 from A3 in Portugal and to Aa2 from A1 in Spain (SCI 21 January), together with the reduction of the minimum portfolio credit enhancement.

Specifically, Moody's has upgraded the ratings of 591 notes and placed 332 notes on review for upgrade across 14 Irish, 98 Italian, 25 Portuguese and 163 Spanish RMBS deals, and 47 Italian, five Portuguese and 72 Spanish ABS deals. The agency says the main drivers behind the upgrades are: the reduced country risk as reflected by the increase in the maximum achievable rating in Spain, Italy, Ireland and Portugal; a reduction in portfolio credit enhancement following the removal of minimum country requirements; and a reduction in expected loss assumptions.

Structured Finance

Trading partnership reaches Europe

MarketAxess and BlackRock are expanding their Open Trading alliance into the European credit markets. The partnership seeks to improve liquidity and reduce transaction costs for European fixed income market participants, building upon the firms' existing alliance in US credit.

The partnership will look to offer increased choice in execution options and counterparties, while providing data and market insights to better inform trading decisions in European markets. The firms will also continue their efforts to develop innovative trading protocols that address liquidity challenges in the global credit markets.

BlackRock's broad Aladdin investor client community will combine with MarketAxess' network of more than 1000 investor and dealer firms in an attempt to improve the range of trading connections available to European credit market participants. The BlackRock community will have the benefit of streamlined access to MarketAxess' expanded liquidity options and data products through its Aladdin platform.

The alliance coincides with the launch of MarketAxess' all-to-all Open Trading in European credit products. Open Trading enables all buyers and sellers to source liquidity from all other MarketAxess system participants in a single, independent marketplace for credit trading.

Clients in Europe will also benefit from access to unique market data from Trax, with volume and pricing data from 40,000 daily regulatory reported transactions, and quoted and traded prices on over 50,000 unique bonds.

Structured Finance

Safe harbour clarifications proposed

The FDIC has proposed a rule that would revise certain provisions of its securitisation safe harbour rule, in order to clarify requirements as to the retention of an economic interest in the credit risk of securitised financial assets upon and following the effective date of the credit risk retention regulations adopted under Section 15G of the Securities Exchange Act. A recent Chapman and Cutler memo notes that there has been confusion among market participants on several aspects pertaining to the relationship between the FDIC's securitisation safe harbour rule and the new Section 15G Regulations.

Adopted in 2010, the FDIC's securitisation safe harbour rule sets forth criteria under which the FDIC will not recover or reclaim financial assets transferred in connection with a securitisation, which include a credit risk retention requirement. The rule states that, prior to the effective date of the Section 15G Regulations, the documents governing a securitisation must require the sponsor to retain an economic interest either in the form of 5% of each of the credit tranches sold or transferred to investors or in a representative sample of the securitised financial assets equal to not less than 5% of the principal amount of the financial assets at transfer. However, upon the effective date of the Section 15G Regulations, the Section 15G Regulations will exclusively govern the credit risk retention requirement under the securitisation safe harbour rule.

The proposed revisions to the securitisation safe harbour rule clarify that to qualify for the benefits of the safe harbour, the documents governing the issuance of ABS must require retention of an economic interest in the credit risk of the financial assets relating to the securitisation transaction in compliance with the Section 15G Regulations, if such issuance occurs upon or following the date on which compliance with Section 15G is required. Further clarifications include the safe harbour rule not requiring inquiry as to whether the sponsor or other applicable party in fact complies with risk retention requirements of the documentation, nor requiring changes to the securitisation documents governing ABS issuances that are closed prior to the date on which compliance with Section 15G is required.

Comments on the proposed rule are due 60 days following their date of publication in the Federal Register.

CDS

Caesars decision due

ISDA's Americas Determinations Committee anticipates that a decision in connection with the external review process in respect of the Caesars credit event will be known during the week of 9 February, following the selection of three external reviewers. Any ISDA member can submit written materials in connection with the external review process by 2 February. The DC next week intends to begin considering obligations for inclusion on the list of deliverable obligations in connection with the auction.

CDS

Non-cleared OTC standards released

IOSCO has published its final report on risk mitigation standards for non-centrally cleared OTC derivatives (SCI 18 September 2014). The report sets out nine standards that cover key areas in trading relationship documentation and trade confirmation, process and/or methodology for determining valuation, portfolio reconciliation, portfolio compression and dispute resolution.

The report notes how the inter-connectedness across financial institutions engaged in trading OTC derivatives led to contagion and heightened systemic risk. IOSCO says the standards encourage the adoption of sound risk mitigation techniques to promote legal certainty over the terms of the non-centrally cleared OTC derivatives transactions, to foster effective management of counterparty credit risk and to facilitate timely resolution of disputes.

CLOs

CLO performance stays strong

CLO performance was positive in 2014 says S&P, with 75% of its ratings remaining stable and upgrades exceeding downgrades by nearly five times. The agency adds that the momentum of issuance in CLOs in 2014 looks set to continue into 1H15.

Overall assets rated in the triple-C category have decreased since 3Q14. There has been an increase in the 2013 vintage, although this vintage continues to have the lowest percentage of assets in the triple-C category. Except for the 2004 vintage, the percentage of defaulted assets decreased in 4Q14.

Senior overcollateralisation (OC) cushions have increased for most vintages included in our index. However, subordinated OC cushions have shown mixed performance for various vintages included in S&P's index.

CLOs

Euro spread series introduced

JPMorgan has introduced a new issue spread series for European CLO 2.0 deals that is designed to be an additional gauge of relative value for investors on both sides of the Atlantic. In addition, the bank has commenced issuing formal European CLO 2.0 recommendations.

These recommendations begin with being overweight triple-A to single-A tranches, given the relative value to European RMBS and ABS. Further down the stack, JPMorgan is tactically neutral triple- and double-Bs, citing credit/deflationary risk in Europe, poor relative value on a spread basis to US CLO debt and the differential to European high yield/leveraged loans. However, CLO analysts at the bank note that the search for yield and technicals could drive mezz spreads tighter.

The JPMorgan European CLO spread series reflects spreads for on-the-run new issue European CLOs. The bank expects to update the data on a weekly basis.

The CLO analysts expect the number of US deals that cater to both European and US investors to increase in 2015. "We believe the extent of the proliferation of 122a-compliant US CLOs will be dependent on the basis between US and European CLO spreads," they explain. "To the extent this basis widens, we believe more US CLOs will be incentivised to offer CRD IV-compliant deals, thereby limiting spread compression in the European CLO market. US CLO investors can use our new Euro CLO 2.0 spread series as a gauge for this emerging valuation trend."

CLOs

CLO expansion creates challenges

The CLO market has experienced a 65% growth in issuers, with 47 new managers entering during 2013 and 2014 through October, according to Fitch. As a result, new entrants to the market are taking advantage of favourable conditions to enter a space historically dominated by large institutional firms.

The profile of newer entrants is different than the standard CLO 2.0 issuers of 2010 and 2011, Fitch adds. Investors are typically focused on operational and reputational risk.

Therefore, the agency says there should be emphasis on governance, risk management, investment processes and discipline, operational risk and sustainability. It also believes investors should be demanding in terms of reporting and client servicing, which could be a challenge for less experienced managers with fewer resources.

Fitch's CLO rating process includes an operational risk assessment and a review of the CLO manager's investment processes. Due to differences among CLO asset management organisations in terms of size, operating strategy and assets under management, among other organisational characteristics, Fitch concludes that a review of a manager requires careful consideration of the context in which it operates.

CLOs

Manager league tables released

Although the top 10 CLO managers in the US, Europe and globally is relatively unchanged from December 2013, the top 10 US managers' share of the market - by assets under management - slipped to 30% from 34%, according to Moody's latest CLO Interest publication. For 2014, US and European CLO issuance reached all-time and post-crisis records respectively.

In the US, there are now 58% more CLO 2.0 deals outstanding than CLO 1.0 deals, including 21 deals from first-time managers. Moody's attributes this to the record new issuance of CLO 2.0 deals and continued redemption of CLO 1.0s. In Europe, there are now 37 CLO 2.0 deals outstanding, alongside 152 CLO 1.0 deals.

CIFC Asset Management remains the leader by number of deals in the US, managing 32 CLOs, followed by Carlyle Group. Credit Suisse Asset Management tops the league table by total amount of AUM, managing US$13.1bn CLO assets. CIFC and Apollo rank second and third by AUM, managing US$12.4bn and US$11.4bn of assets respectively. Octagon Credit Investors last year joined the top 10 managers in the US by AUM.

GSO/Blackstone manages the most European CLOs by both volume and deal count at 15, totalling €4.5bn. On the other hand, Carlyle leads the global league tables by both deal count and AUM, managing 37 CLOs that total US$15.8bn. GSO/Blackstone follows Carlyle with 36 deals totalling US$15.4bn.

CSAM leads CLO 2.0 managers in AUM and is tied with Carlyle for number of deals, after issuing five new transactions in 2014, including two sized at US$1bn. Octagon entered the top 10 by issuing five CLOs with total par of US$3.2bn in 2014.

CLO new issuance reached an all-time record in 2014, as Moody's rated 217 US CLOs with total par of US$110bn, doubling the amount it rated in 2013. Net of redemption, aggregate outstanding par of US CLOs increased by 22% to US$339bn from US$278bn in 2013. In Europe, Moody's rated 30 deals with total par of €12.4bn in 2014.

Moody's notes that the US risk-retention rule will likely reshape the manager landscape in 2015, spurring more manager consolidation. The latest example was Man Group's acquisition of Silvermine Asset Management at end-2014 (SCI 17 December 2014).

Furthermore, medium-sized managers (those with five to nine deals under management) were more active in 2014 than in 2013, accounting for 36% of the new issuance in 2014, compared with 18% in 2013. The share of new issuance from the top 10 managers by deal count declined to 18% in 2014 from 25% in 2013.

Large managers' US market share by AUM has also declined, with top 10 CLO managers by AUM in the US accounting for 30% of the CLO market in 2014, down 4% from a year ago. Managers (excluding top 10) with five or more CLOs outstanding accounted for 53% of outstanding CLOs, up 8% from a year ago.

In Europe, the 10 largest managers control about half of the market, roughly the same as in 2013. Large managers also dominated issuance in Europe, issuing a combined 20 deals with €8.8bn in total par. GSO/Blackstone issued five new deals in 2014, the most among European managers in 2014.

Moody's also reports that more managers accessed the primary market and managers launched the deals in higher frequencies. In 2014, 98 managers issued new deals in 2014 and about 68% of those managers issued two or more. In comparison, 81 managers issued CLOs in 2013, only half of which issued two or more. All of the top 10 US managers issued at least two CLOs in 2014.

The number of CLO managers increased to 143 from 133 in 2013 in the US. The number of medium-sized managers grew to 26, up from 10 in 2013.

The 29 managers that have entered the CLO 2.0 market since 2012 now manage 86 CLOs with total par of US$39bn, representing 11% of the market. Finally, 11 first-time managers closed 21 deals totalling US$8.5bn in 2014.

CMBS

Special servicing activity examined

Moody's reports that the number of EMEA CMBS loans in special servicing decreased by three in December, following the removal of the loans, and there were no new transfers. At the end of the month, 142 loans were in special servicing, representing approximately 26% of the total balance of loans in Moody's sample.

Among the highlights for the month was the Libra loan, the sole loan securing Titan Europe 2007-1 (NHP), which was worked out following the completion of a sale of the underlying security (see SCI's CMBS loan events database). The special servicer issued a final recovery determination of €459.4m in relation to the loan, resulting in a 24% principal loss at the loan level, albeit the notes remain outstanding. Ultimate recovery on the notes will depend on the ranking and the ultimate amount of swap arrears in the transaction.

Two further loans previously in special servicing were worked out with realised principal losses. The €16m Monheim loan in Juno (Eclipse 2007-2) was worked out via a sale of the underlying security, while the €7m Hof loan in Talisman - 7 Finance was worked out via a DPO by the borrower. The principal loss severities ranged from 1% to 6%.

As of January 2015, Moody's tracks 74 loans worth €8.3bn - 58% of which are in special servicing - as undergoing liquidation either through consensual property sales or enforcement. For an additional 13 loans worth €2.7bn, the respective special servicers have already sold the underlying properties and are working towards finalising recoveries.

The weighted average Moody's expected principal loss for loans in special servicing is stable at 44%.

CMBS

Interactive CMBS tool introduced

Fitch has launched a new offering that seeks to improve transparency on new US CMBS transactions. The Interactive Deal Tool (IDT) allows investors to view Fitch's loan-level analysis and assumptions across all properties in new CMBS deals while affording them several new features and benefits, including a sensitivity analysis tool.

The IDT is launched via a button located at the top of each new CMBS presale report. The tool allows users to save output directly to their desktop.

Although the product will initially focus on Fitch-rated conduit CMBS transactions, the agency says this may be expanded over time.

Risk Management

Prudent valuation draft tweaked

The EBA has amended its final draft regulatory technical standards on prudent valuation (SCI 1 April 2014) by replacing all occurrences of 'volatility' in Articles 9 and 10 with 'variance' for the purposes of computing market price uncertainty and close-out cost additional valuation adjustments (AVAs). Affecting only institutions using the core approach, the authority says the amendment will result in a slight relaxation of the calibration of the volatility test performed under these two articles, thus avoiding unwanted side-effects in the already challenging first year implementation of the core approach. However, while allowing for this flexibility in the context of the first implementation of the prudent valuation framework, it also suggests reassessing the calibration of the volatility test within the first two years of implementation of the RTS.

Risk Management

CCP recovery proposals announced

ISDA has published a new position paper on a proposed recovery and continuity framework for central counterparties. The paper sets out tools that can be used to re-establish a matched book following the default of one or more clearing members, but it does not cover non-default losses and those relating to liquidity shortfalls.

ISDA suggest that clearinghouses have become vital to derivatives market infrastructure, following the implementation of new regulations that require standardised OTC derivatives to be cleared. As a result, CCPs should develop recovery plans to avert a threat to their viability and ensure they can maintain the continuity of critical services without requiring the intervention of resolution authorities or resorting to public money.

The paper explains that the proposed recovery measures are consistent with the recommendations made by the Committee on Payments and Market Infrastructures and IOSCO in October 2014. The measures include a portfolio auction of the defaulted clearing member's portfolio, limited cash calls to solvent clearing members, loss-allocation mechanisms in the form of a pro-rata reduction of unpaid obligations of the CCP and consideration of a partial tear-up of contracts to re-establish a matched book.

ISDA adds that the recovery of a CCP is preferable to its closure. As a result, recovery efforts should continue so long as the CCP's default management process is effective, even if pre-funded resources have been exhausted. In the event the default management process hasn't been effective in re-establishing a matched book - signaled by a failed auction - the CCP may have to consider the closure of the clearing service. At this point, it is likely that resolution authorities will be considering whether this should trigger resolution.

The paper also says that recovery measures should be clearly defined in clearing service rule books to provide transparency and predictability over the maximum timeframe for the default management process before recovery tools are deemed to have failed. ISDA also recommends that clearing services should be segregated and structured to be of limited recourse to the clearing provider to mitigate the potential for contagion across other clearing services of the CCP.

The proposed framework follows ISDA's publication of a set of high-level principles for CCP recovery last year (SCI 25 November 2014), which called for greater CCP transparency, use of standardised stress tests and significant CCP 'skin in the game'.

Risk Management

NewOak branches out

NewOak has opened new offices in Atlanta, Boston and Irvine, California, as it expands its mortgage and consumer credit services team to meet the growing demand for forensic underwriting, quality assurance and compliance reviews. The teams in each office are connected and integrated through NewOak's cloud-based OpenRisk work-flow process management infrastructure to deliver consistent work products and services across a wide variety of assignments.

RMBS

Home price concern amid rate cut

The economic uncertainty implied by the Bank of Canada's surprise interest rate cut could be detrimental for home prices, says Fitch. It believes this could be especially true in energy-dependent provinces, such as Alberta.

Fitch views Canadian house prices as 20% overvalued compared to long-term economic fundamentals, with prices growing over the last several years, despite low levels of affordability and high household debt-to-income ratios. The agency forecasts prices to rise by 2.5% in 2015 based on continuing market momentum.

However, the potential economic weakness resulting from lower energy prices raises the risk of some local price downturns. Nationally, 6% of Canadian GDP is from oil and gas extraction, while it represents more than 25% of total economic production in Alberta.

The Bank of Canada lowered its national GDP forecast for 2015 to 2.1% from 2.4%, based on the expectation that oil prices will stabilise at US$60/bbl. Fitch anticipates that near-term West Texas Intermediate crude prices, currently below US$50/bbl, will remain below the long-term price assumption of US$75/bbl.

The impact could be acutely felt in energy-producing regions, such as Calgary and Edmonton, Alberta, where home sales fell by 25% from November to December in 2014. While some of this decline is attributable to seasonality, this is the largest decline in sales since the financial crisis and does not yet reflect the full economic impact of lower energy prices, Fitch suggests.

Historically, Alberta's 90-plus day mortgage delinquencies have correlated closely with oil prices and have been significantly more volatile than for the country as a whole. Delinquencies rose from 0.32% to 0.65% as oil prices fell from February 1993 to February 1996.

When West Texas Intermediate crude oil prices fell from US$140/bbl to US$40/bbl during the 2008 credit crisis, delinquencies rose by nearly five times, up to 0.83%. Nonetheless, current delinquency levels are low, at 0.27% of outstanding mortgages secured by properties in the province at the end of 3Q14.

Overall, Fitch believes the rate cut is not expected to have a significant impact on borrowers, since early indications are that most lenders do not expect to pass through lower mortgage rates as a result. The cut will keep mortgage rates near historical lows and forestall any payment stress. Fitch had previously projected an increase in mortgage rates of 40bp in 2015, but now forecasts rates to be stable with modest pressure near the end of the year.

RMBS

Servicer issues robust response

Ocwen has responded to a claim by a group of investors represented by Gibbs & Bruns that certain contractual breaches have occurred in connection with 119 RMBS trusts that it services. The servicer says the complaints are "essentially the same baseless allegations" as were previously asserted by the same investors in their failed attempt to block the transfer of servicing from OneWest to Ocwen. The servicer calls the allegations "groundless" and notes that an independent review agreed with that assessment at the time of the servicing transfer.

While Ocwen will address the concerns of the investor group in due course, it notes that its obligations as servicer for the trusts are to the trusts as a whole, rather than to any specific group of investors or to their special interests based on their particular tranche positions. Furthermore, Ocwen claims the ultimate objective of the investors - who claim contractual breaches have occurred - is to prevent Ocwen from modifying loans and thereby force the servicer to foreclose on and evict homeowners, which would benefit select investors but not the trusts as a whole, as part of an "ongoing industry-wide pro-foreclosure campaign".

Ocwen also defends its approach as making sound economic sense - against the allegations of the investors - and says the most egregious objection is to the principal reduction modification targets in the government's national mortgage settlements with RMBS issuers and servicers. The servicer notes the settlement provides that such modifications shall be done subject to, and within the confines of, the servicing agreements.

Separately, Ocwen has responded to a letter from lawyers representing BlueMountain Capital Management by addressing the allegations in the letter directly with the indenture trustee Deutsche Bank (SCI 26 January). The servicer says it intends to vigorously defend itself against the allegations in the letter.

Meanwhile, Moody's notes that Ocwen's consent order with the California Department of Business Oversight (DBO), under which the DBO agreed to withdraw its request to suspend Ocwen's mortgage license, is credit neutral for RMBS transactions holding Ocwen-serviced loans.

In addition, the consent order precludes Ocwen from acquiring any new mortgage-servicing rights (MSRs) for California loans until the DBO is satisfied that Ocwen can respond to their requests for information and documentation, which Moody's says is credit positive. The agency believes the provision, which will improve Ocwen's servicing activity by forcing it to focus on its existing servicing portfolio, mirrors a similar requirement from a monitor the New York Department of Financial Services appointed to develop benchmarks for Ocwen before it can acquire additional MSRs (SCI 7 February 2014).

Foreclosure timelines will likely remain elevated for California loans Ocwen services while the DBO continues to assess Ocwen's compliance with California's Homeowners Bill of Rights (HBOR) and other state and federal regulations, and Ocwen's general loan-servicing quality; Moody's says this settlement will have some credit negative effects on California loans Ocwen services. Extended foreclosure timelines reduce recoveries on liquidated loans through additional costs that accrue during the foreclosure process, including principal and interest advances, legal fees, property insurance, taxes and maintenance.

Moody's believes that consent order reduces likelihood of cash-flow disruptions from servicing transfers. The state's agreement to withdraw its suspension request minimises the probability that the DBO will force Ocwen to transfer to other servicers the US$94bn of loans in California that it services. A forced servicing transfer would likely result in increased trust losses and large-scale cash flow disruptions for RMBS holding Ocwen-serviced California loans, both of which are credit negative.

Finally, Moody's suggests that Ocwen's servicing costs will increase as a result of the consent order, owing largely to the cost of an independent, third-party auditor the state will impose on Ocwen and a US$2.5m penalty. Furthermore, Ocwen will have to adopt corrective plans to address any shortcoming in servicing practices the auditor identifies while paying the DBO's expenses associated with the DBO's filing to suspend Ocwen's license along with any other expenses associated with the consent order.

RMBS

Oil prices 'low risk' for SFR

Moody's says that most US single-family rental (SFR) securitisations have low risk of material declines in overall cashflows and property values if low oil prices persist and weigh on oil-dependent regional economies. SFR transactions generally have low, or no, concentrations of properties in oil price-sensitive markets.

However, unemployment that results from the loss of oil-related jobs will harm SFR securitisations with material concentrations of properties in those markets because more renters will be unable to make the monthly payment that secure the portfolios of single-family homes that back the securitsations. If regional economic weakness results in a decline in home prices in some areas, the decline will weaken SFR securitisations with exposure to those markets as the properties will have less value in the event that the transaction sponsor needs to sell them, adds Moody's.

Of the 10 metropolitan areas with the highest percentages of oil-related employment, only Houston is represented in SFR securitisations. Oil-dependent industries account for about 3% of the Houston metropolitan area's employment, a higher share than in all but four other metropolitan areas. No other metropolitan area with securitised SFR properties owes more than 1% of its employment to oil-dependent industries.

Houston's relatively large share of employment in oil-dependent industries means that its economy will weaken if oil prices remain low. Under a scenario in which oil prices remain at US$60 per barrel through 2017, Moody's estimates that the growth rate in Houston's gross metropolitan product would fall to 3.04% in 2015-16, relative to a baseline scenario in which the region's growth is 5.59%.

Currently three securitisations have concentrations of properties in the Houston area that are material enough to affect the securitisations' cashflows under a prolonged weakness in oil prices. Those securitisations are American Residential Properties 2014-SFR1 Trust (14.2% of its properties' original value in the Houston metropolitan area), American Homes 4 Rent 2014-SFR1 Trust (8.4%), and Progress Residential 2014-SFR1 Trust (8.4%). All other securitisations have Houston property concentrations less than 5%.

RMBS

Rate dip buoys borrowers

US mortgage rates have declined to near-historic lows, according to Fitch's latest quarterly index report for the sector. Coupled with recent actions by the FHA, this backdrop could create more incentive for borrowers to purchase a home or refinance their mortgage.

The average interest rate for 30-year fixed-rate mortgages has fallen 92bp since mid-2013 and is currently at a 20-month low of 3.66%. In addition, further conditions in the market could benefit those looking to purchase a home, particularly first-time purchasers.

"Mortgage rates are falling, FHA insurance premiums are coming down, home prices are cooling and employment is steady," says Fitch director Sean Nelson.

Many first-time homebuyers finance their home with a FHA insured mortgage due to the low down payment requirements. The FHA recently announced a reduction in its mortgage insurance premiums, which could save new borrowers an average of US$900 per year (SCI 8 January).

Fitch believes that borrowers looking to refinance their existing mortgage should benefit as well. Historically, sharp declines in mortgage rates have resulted in spikes in refinance rates. However, mortgage rates were lower than today's levels as recently as 2012-2013, so the recent declines may not have as large an impact on refinance rates as in the past.

Fewer remaining borrowers may be eligible to refinance, however. "Those borrowers that did not already take advantage of the historically low interest rates of 2012-2013 may be restricted by credit issues or insufficient home equity," adds Nelson.

Nonetheless, falling rates may still provide refinance incentive for some. Borrowers who were unable to refinance in 2012-2013 because they were underwater on their mortgage may have built up enough home equity to refinance, after several years of strong home price growth. In addition, Fitch says that those who took out a mortgage in the last 18 months when rates were higher could benefit from refinancing with the current rates.

RMBS

Interventions aiding Greek RMBS

Fitch reports that lender intervention has improved Greek RMBS performance, with a significant portion of defaulted loans having reverted back to either less critical delinquency or performing status. The agency expects originator intervention to persist in 2015 as borrower affordability slowly improves.

The pipeline of non-performing Greek mortgage loans remains stable at below 11%. In addition, the constant default rate dropped to 0.4% per annum, as of 4Q14, down from its 2Q12 peak of 2.8%.

In December 2014, period recoveries increased slightly to 3.7% from 3.2% the previous quarter, while recovery income remains low at only 29% of the cumulative gross defaults. Fitch says this unsurprising as the partial moratorium on property foreclosure continues and is likely to be extended into 2015. In its opinion, the ability to enforce some distressed loans would provide lenders with an improved negotiating position with borrowers and potentially increase the number of out-of-court settlements.

In the three-quarters to end-September 2014, Greek home prices declined by 2.4%, bringing the total decline from the January 2009 peak to 39.3%. Fitch expects home prices to fall between 4% and 6% further in 2015. Given high unemployment and limited personal savings in the country, any economic recovery is unlikely to immediately support home prices, the agency adds.

RMBS

Non-QM support service launched

NewOak has launched a new Non-Qualified Mortgage Support Services platform. The programme provides a range of solutions to address the demands on originators and investors in non-qualified mortgage products to manage increasing regulatory and enforceability risks.

Solutions include due diligence and quality assurance consulting services, customisable underwriting applications that ensure accurate and defendable data and work flows, and NewOak's mortgage defence package - a proprietary electronic repository of all key documentation and decision-support data needed to defend loan approval.

The platform is designed to be tailored specifically to each client's unique needs. "Our platform allows for integration across points of origination, compliance and risk management workflows. Depending on where a particular client's needs are, we can integrate a solution to satisfy them," says Chad Burhance, head of NewOak credit services.