News Analysis
Structured Finance
Different strokes
HQS consultations reflect divergent approach
The HQS consultations being undertaken by the EBA and the Basel Committee/IOSCO joint taskforce appear to reflect the different motivations of European and US policymakers. Indeed, the former consultation could potentially be instrumental in shaping a 'Basel-lite' approach for the European securitisation market.
Peter Nowell, head of ABS trading at BNP Paribas, notes that the ECB has long been trying to rejuvenate the European securitisation market through a combination of activities. "The central bank supports securitisation as a tool for economic growth and is behind the development of the European DataWarehouse and ABS repo operations. It is advocating better capital treatment for plain vanilla ABS and appears to be getting a favourable response from the EU."
In contrast, the Basel Committee seems to be lagging behind in its appreciation of securitisation. The latest Basel 3 iteration increased risk weights even on senior ABS tranches, at a time when EU regulators are seeking to reduce them.
"The Basel Committee appears to be under a lot of pressure from US regulators not to be too easy on the RMBS market. But it's a different situation in the US, where much of the mortgage market is financed via government agencies," Nowell observes.
Further, except for the private label RMBS sector, the US securitisation market has largely recovered from the financial crisis and remains deep and liquid. The notion of HQS is therefore attractive from a risk-based capital and LCR perspective, but its implementation isn't crucial for the market as a whole to recover.
"The best value of HQS for US participants would be to achieve capital relief and/or help with the liquidity ratios," observes Jason Kravitt, partner at Mayer Brown. "Because the securitisation markets are already deep and well-functioning, it would be counterproductive to introduce a new hoop for participants to jump through, which may even damage the market and at the very least create uncertainty. In this light, it would be natural for issuers and investors to not be incentivised by the proposals, except with regard to capital ratio relief."
However, the European securitisation market is generally illiquid and has yet to recover from the financial crisis. Consequently, the HQS concept is not only positive from a capital/coverage perspective, but it is also important from a market substance standpoint.
"In the European context, HQS has a deeper significance - the aim is to rejuvenate the securitisation market and by extension the European economy," Kravitt notes. "The two consultations create a delicate situation globally because of different motivations between the US and the European markets, as well as different inclinations in terms of implementing standards. I'm cautiously optimistic that the industry can work these issues out, but they are a particularly knotty set of problems."
Nowell suggests that a two-speed approach to securitisation could emerge, with the EU independently moving ahead with a more favourable treatment. "There is a chance that the EU could argue that the Basel Accord is not binding and is inappropriate for European jurisdictions. It may ultimately introduce a Basel-lite framework, under which Basel 3 is implemented in a modified form. We've already seen Denmark, for example, successfully lobby and win different treatment for mortgage bonds in respect of the LCR rules."
The two consultations on criteria to identify qualifying securitisations that would deserve more favourable regulatory treatment are: the EBA's 'simple, standard and transparent' (SST) securitisation initiative (SCI 15 October 2014); and the Basel Committee/IOSCO taskforce's 'simple, standard and comparable' securitisation concept (SCI 11 December 2014). The ECB and Bank of England have also published principles advocating a modular approach to qualifying securitisations, to be supplemented with special criteria (SCI 30 May 2014).
"The European concept has been in development for some years and the European Commission has adopted regulations that give qualifying securitisations favourable treatment under Solvency 2 and as HQLA for the Basel 3 LCR. These rules drew on ECB eligibility criteria and PCS label criteria," explains Kevin Hawken, partner at Mayer Brown.
The EBA's SST consultation proposes 22 criteria, plus three additional credit quality criteria. But many criteria have sub-parts, so all together there are around 40 items to consider.
Hawken notes that the SST initiative seeks to mitigate certain non-credit risks, such as structural complexity, and ensure alignment of interest. "The initiative is designed to be prescriptive to increase certainty of application. However, the concern is that where the criteria are unclear or reach beyond existing market practise, the effect could be to exclude many market standard deals and require adherence to a gold standard."
In contrast, the Basel/IOSCO joint taskforce's criteria are being put forward as proposals for the consideration of the financial industry and aren't designed to change existing regulation - although the Basel Committee stated that it would consider reflecting the taskforce's work in future iterations of the capital framework (SCI 12 December 2014). The criteria are short and high-level, comprising 14 principles, albeit many have sub-parts. Hawken says they are more principles-based, while including some prescriptive items.
Carol Hitselberger, partner at Mayer Brown, points to the difficulty in balancing principles-based and rules-based criteria. "Principles-based criteria would be more flexible, but less certain in terms of implementation; rules-based criteria would be clear and specific, but inflexible in their scope. The hope is that ultimately the correct balance between the two is achieved."
Another issue is who would decide whether a deal qualifies as a HQS - the issuer, the regulator or a third party? Kravitt suggests that for the US, the most efficient model would be for issuers to determine whether a deal is compliant and for investors to then decide on their own if the issuers are correct.
"An issuer would have to disclose whether it deems a deal as qualifying and face securities law implications if the deal fell foul of the requirements. Investors could then decide how to treat the investment for capital purposes," he says.
He continues: "The third-party option would not likely be popular with issuers in the US. Qualification would need to be determined prior to placement because compliance would affect pricing. But if qualification is determined by a regulator or a third party, the process would add another layer of compliance before issuance, thereby dramatically slowing down execution."
Kravitt says that HQS is likely to be more popular in Europe from an implementation perspective if a third-party or regulatory opinion is required, especially from an investor standpoint. He suggests that the PCS could potentially be expanded to incorporate the third-party review function from an EU point of view.
The EBA recently indicated that if the EU regime and international legislation are not harmonised, a "wedge" could be driven between the global securitisation markets that may prevent EU issuers from benefitting from the global investor base and reduce EU investors' ability to benefit from global securitisation investments (SCI 9 January). However, Nowell points out that investments are increasingly being seen in local hands.
"European securitisations are typically bought by European investors, so I'm not overly concerned that regulatory fragmentation will reduce the competitiveness of the market per se. What will reduce the competitiveness of the European securitisation market is if insurers are driven away under Solvency 2; the situation will become even more dire if pension funds become regulated too," he concludes.
CS
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Structural concerns
The EBA and Basel Committee/IOSCO HQS consultations are aimed at distributed term commoditised asset classes and in their current form would exclude most private or off-the-run deals, as well as synthetics. Both papers set aside ABCP for later discussion, while noting that the sector may need its own specific set of criteria.
Carol Hitselberger, partner at Mayer Brown, indicates that the consultations represent a shift towards prescribing the structure and terms of securitisations. "In many cases, the substantive changes as proposed are counterintuitive," she adds. "Certainly more thought needs to be put into what these criteria mean for term securitisations in order for them to be workable. We also need to know what the scope of application will be, so that we can gauge what the impact is likely to be."
For example, the Basel/IOSCO criteria require underlying assets to be homogeneous in terms of type, jurisdiction and currency. "This requirement could result in smaller transaction sizes and therefore it may become too expensive to execute deals limited to smaller jurisdictions or currencies. We need to determine what exactly 'asset type' and 'jurisdiction' mean? Should we instead be looking at legal regime?" Hitselberger asks.
Similarly, exceptions to loan-level data requirements are proposed to the extent that there is a granular pool, yet it isn't clear what 'granularity' entails. Hitselberger also notes that the requirement for deals to switch to strict sequential pay after a performance trigger is hit isn't practical in many transactions, as triggers typically result in other remedies, such as an increase in credit enhancement or the trapping of cashflow.
In its response to the EBA consultation, the European Banking Federation (EBF) suggests that granularity should not be an overriding factor in determining the credit risk of the underlying assets. Equally, the association disagrees that synthetic securitisations and ABCP should be excluded from the framework of qualifying securitisations.
"The qualifying securitisation framework should aim at excluding only the asset classes which performed very badly during the crisis, as the EBA discussion paper has noted a big difference in performance among asset classes and countries," the EBF response states. "The framework should also avoid threshold effects where, for example, there would be a huge difference in capital requirements between a securitisation of a pool with a certain borrower concentration and a securitisation of an asset pool with a marginally higher borrower concentration. The ambition should be to include a wide range of securitisations under the qualifying securitisation framework lest the excluded ones would face a competitive disadvantage."
The response also puts forward the arbitrage-free approach (SCI 30 September 2013) and its conservative calibrated version, the conservative monotone approach, as a "plausible proposal to promote the EU qualifying securitisation market with no further delay". In addition, it advises European policymakers to play a "crucial role" in the international debate to ensure that the European case is taken into account by the Basel Committee in the design of a prudential framework for securitisations.
"The identification of simple, standard and transparent securitisations in Europe is a necessary step, but not sufficient to revive the European securitisation market. It needs to be coupled with slight changes to the capital requirements framework that would permit the revival to happen," the EBF observes. |
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News Analysis
CMBS
Floodgates open
Quelle case sparks further negligent valuation claims
The recent landmark Titan Europe 2006-3 ruling affirmed that an issuer can have a legal basis for a negligence claim against a property valuer. The decision may prompt further cases to come forward and encourage a fresh set of standards for CMBS 2.0 deals.
In the Titan case, the UK High Court found that Colliers International negligently overvalued the Quelle Headquarters in Nuremberg, Germany, by €32m (SCI 1 October 2014). It also ruled that the agency's duty of care extends beyond the lender to the issuer, with the CMBS having suffered a loss.
The concept of an SPV issuer taking action had, until the ruling, largely been a foreign concept in the market. However, it is now expected to pave the way for other similar cases to follow.
"There will certainly be an increase in these types of cases," says James Walton, partner at Rosling King. "You only need to look at the level of damages awarded by the Court in the Titan case to see there is sufficient incentive for other issuers and market participants to pursue cases."
The case is unique in that it is the first in which the loan is securitised to come before a UK court. Future cases, however, may not be confined to issues surrounding CMBS.
"In the Titan case the claimant was the issuer of CMBS exercising the rights it had to pursue the negligent valuer, but the decision raises the prospect of more cases involving non-CMBS distressed real estate loans coming forward at some point or another," Walton explains. "Loans that were originated in the period between 2005 and 2007 but have only recently been traded will be examined by their purchasers to see if there is a potential means for litigation. There are a lot of potential cases on the cards here."
A more recent example of a CMBS issuer successfully pursuing a claim is the Windermere X versus Warwick Street case (see SCI's CMBS loan events database). In June 2006, Warwick Street - which was then called King Sturge - valued a distribution centre in Germany at €69.64m, slightly higher than the €67m purchase price.
The €62.3m Woolworth Boenen loan was secured against the property. However, following the insolvency of sole tenant Woolworth, the property was eventually sold for €5.85m in August 2012. Despite no admission of liability, a €9.25 settlement was last month agreed over the loan between the issuer and Warwick Street.
Another case that is expected to be resolved imminently is Gemini (Eclipse 2006-3) versus CBRE Limited and Warwick Street, which was initially filed in 2013. In this instance, Propinvest alleges that CBRE and Warwick Street overvalued 26 of the 36 properties in the Gemini portfolio by over £100m. The portfolio was valued at £1.23bn during the first half of 2006, in which Barclays extended a £850.36m senior loan and a £105.24m junior loan on the properties.
Walton says that there are further examples waiting in the pipeline. However, they are struggling to gain the same publicity, due mainly to the popular arrangement of pre-court settlements.
He notes: "On the question of volume, no-one really knows how many cases will come forward. But expect to see purchasers who have done business in the last 12-18 months to start looking into whether they have a case here. These cases aren't restricted because they are time-barred; depending upon the circumstances of the case, there is time to bring these claims."
Furthermore, he explains that cases have not been brought forward until now due to a combination of hesitation and insufficient resources. "Claims have been pursued on the residential property side for years, but commercial property cases have been a lot less common. People in this area have been slow off the mark and this may have been due to scepticism surrounding the legitimacy of any potential claims. Not many people were aware of the grounds on which issuers and distressed loan purchasers could bring cases."
He continues: "In addition, banks did not have the resources to pursue such claims. There were bigger issues on hand at the time, but this has now changed following the financial crisis and following the loans ending up in the hands of those with perhaps more appetite to pursue claims."
Nevertheless, uncertainty remains as to where proceeds will end up in successful cases. For example, in the Windermere case, the €9.25m in settlement proceeds is currently stuck in limbo. The issuer will likely seek legal advice on the matter.
New CMBS are, however, expected to cater to the issues that are being brought up in the ongoing cases. "One of the issues on these cases involving historic CMBS issuance is that the documentation did not envisage what is now happening. It didn't really clarify what servicers can and cannot do when it comes to these claims, and it didn't cater for the type of claims we are now witnessing," Walton observes.
He already senses a shift in mentality. "In any profession, mistakes are made at times of intense transactional volume. It is therefore not a surprise to see these claims emerging; the only surprise is that it has taken so long."
Walton concludes: "However, if there is an upside, it is that we will see a higher degree of caution and improved checks and procedures to ensure that mistakes are eradicated."
JA
Market Reports
ABS
Auto ABS names abound
SCI's PriceABS data captured 26 unique US ABS tranches yesterday as bid-list supply surged, after weather concerns had curtailed Tuesday's activity. Total BWIC volume was comfortably above US$360m.
A considerable number of tranches on Wednesday's BWICs came from auto ABS. Among these was Ally's AFIN 2013-2 A3, which was covered at 44.
A US$5m piece of the ALLYA 2012-1 B tranche was talked at around 50 and at around 55. Last January there was a US$10m piece talked at plus 40 and covered at plus 41.
AMCAR 2011-1 E was talked at around 90 and at around 100. When it first appeared in the PriceABS archive in January 2013, the tranche was talked at 150.
From more recent issuances, HART 2013-C A4 was talked in the very high-20s, while both BMWLT 2014-1 A4 and HDMOT 2014-1 A3 were talked in the mid-30s. VWALT 2013-A A4 was talked in the low-30s.
There were also several FORDF tranches out for the bid, including FORDF 2014-2 B, which was covered at plus 82. Two SDART tranches were covered in the session - SDART 2012-5 D at 125 and SDART 2012-4 D at 112 - while price talk was recorded on another three.
A couple of credit card names were also available during the session. Among these was CCCIT 2006-A3 A3, which was covered at 105.11, having been covered on 15 January at plus 29.
COMET 2014-A2 A2 was covered at 100.4. It had been covered on both 5 January this year and 14 November last year at plus 28.
In the student loan space there were several NCSLT tranches out. NCSLT 2005-1 B was talked in the mid-60s and covered in the high-40s.
NCSLT 2004-1 A3 was talked in the low-80s and at 92 and traded during the session. Its last recorded cover was in the low/mid-80s on 12 August 2014.
NCSLT 2004-2 B was talked at around 70 and covered in the high-60s. The tranche was previously traded on 13 January, when price talk was in the mid-60s and mid/high-60s.
Of the other tranches of interest from the session, the JDOT 2014-B A3 equipment tranche was covered at 99.95. The business loan BLX 2005-1A M tranche was also covered in the mid-80s.
JL
Market Reports
CMBS
Mixed signals in CMBS
The unexpectedly wide pricing of Taurus 2015-1 IT has raised some concerns in the European CMBS market. However, secondary market activity has been fairly strong this week.
"The last fortnight has been more positive in the market, with activity picking up. However, the Greek situation has made clients a bit wary of doing too much, so we are seeing trading slowing down again," says one trader.
He continues: "Bid-list activity early this week was quite strong. There was some DECO 2014-Gondola paper out early in the week which was trading strongly and appeared on a couple of BWICs, trading up as the week went on."
Taurus paper has also been trading in the secondary market, with SCI's PriceABS data recording price talk in the high-90s and a cover at 98.1 for the TAURS 3 A tranche yesterday. The same tranche was covered at 98.12 on Wednesday.
That tranche is interesting in light of the fact that the Taurus 2015-1 IT CMBS printed yesterday. The trader notes that the deal printed unexpectedly wide.
"It is quite a small deal, so we expected that it would get away within secondary price levels. In fact it was about 10 points wider on the As and Bs," says the trader.
He continues: "The market is now so small that if a group of investors decide not to buy, then a seller's options become limited very quickly. It is worrying, because for all that we hear about a strong pipeline and high hopes for primary issuance, seeing this kind of execution so early in the year could scare people off bringing out other deals."
The trader suggests the market faces a catch-22 problem of low issuance failing to attract new investors and a limited pool of investors making issuance less likely. "The key may be to keep deals clean and simple," he says.
The trader adds: "Maybe this deal had too many different borrowers. However, others have been structured the same way without difficulty, so that may not be the problem."
Despite the fact that the market has become smaller, there was still secondary market activity yesterday. Along with the Taurus 3 A tranche which was covered, there were a couple of other tranches which also changed hands.
PriceABS shows that ECLIP 2007-1X C was talked yesterday in the high-70s and covered at 82.71. It had been covered on 14 January at 78.51.
GRF 2013-1 B was talked at 102 and covered at 102.41. The last cover recorded by PriceABS was at 101.645 on 27 November 2014.
The LORDS 2 C tranche, meanwhile, was talked at 101 and covered at 101.17. It was covered at 101.1 on 15 January and first appeared in PriceABS in June 2013, when it was covered at 81.
JL
SCIWire
Secondary markets
US CLOs/CDOs in discovery mode
After a disrupted week the US CLO/CDO market is busy today, especially with many BWICs carried over from yesterday. However, as one trader says: "It feels a little like we're still in price discovery mode."
The recent heavy focus on 2.0 lists hasn't helped, but even then the bottom part of the capital structure isn't featuring significantly either. "There's not a lot of equity out there at the moment, we're mainly only going down to double-Bs," says the trader.
Further up it's a slightly different story, the trader concedes. "There is certainly a bifurcation at the top of the capital structure between Volcker and non-Volcker deals - as much as 10-15bp of DM."
Oil and gas exposure continues to be potential price tiering issue too, but, again, there are few indications as to how much. "There still aren't willing sellers of the energy-heavy bonds so not many trades are going through," the trader says.
It is a similar story in the Trups CDO space the trader adds. "There's still investor demand, but again with no motivated sellers there is not much trading or indeed supply."
Such a lack of price transparency means the lone Trups CDO BWIC scheduled for the remainder of this week will be followed closely. The 11 line list from a hedge fund features a mix of triple-As and single-As with one slice of equity with a total original face of $41.15m and is due at 10:00 New York time tomorrow.
It consists of: ALESC 6A A3, ALESC 9A A1, I-Pretsl 4 B1, I-Pretsl 4 B2, MMCAP 18 A2, MMCAP 18 C2, PRETSL 10 B3, PRETSL 12 B3, PRETSL 18 A2, SLOSO 2007-1A SUB and TROPC 2004-1A A1L. None of the bonds has traded with a price on PriceABS in the last three months.
SCIWire
Secondary markets
Euro ABS/MBS scope broadens
ECB-eligible ABS/MBS are mostly continuing their rise but non-eligible bonds are also finding buyers.
Yesterday and this morning has seen further strengthening across most European ABS/MBS with the exceptions of Greek RMBS, which continues to drift wider, and Portuguese paper that retraced some of the gains made over previous sessions. Dutch bonds continue to lead the way grinding ever tighter, but there are also some new areas of interest.
"We've seen a little bit of a revival in non-ECB eligible assets over the last day or so, notably UK non-conforming and buy-to-let deals," says one trader. "It doesn't seem to be more than a play on QE and broader market tightening."
Market focus was very much on a heavy BWIC schedule yesterday, where all lists traded at or better than expectations, including a list of non-eligible Spanish bonds. Today sees even more lists circulating covering all deal types.
However, there is nothing out of the ordinary behind the increased selling activity, according to the trader. "There's no major trend - just a few people profit-taking and some lists from legacy funds that simply sell-off of a vertical slice of their portfolios from time to time."
SCIWire
Secondary markets
US CLOs/CDOs stuck on repeat
The US CLO/CDO secondary market appears stuck on repeat this week.
"There's not a great deal of volume on BWIC today and, again, a fair proportion is lists postponed from earlier in the week," says one trader. "That's partly why we're seeing the same themes over again - dominance of 2.0 deals in the triple-A to double-B range. It's also, of course, a result of energy prices continuing to stress the lower part of the capital stack, particularly in 1.0 deals."
Whatever the reason the end result is more of the same, the trader says. "For example, there's an 11 line list due at 10:00 today nearly all double-Bs in good 2.0 deals, with good managers - sure it'll trade tighter, but it's something we've been seeing week in week out for a while now."
Slightly more out of the ordinary is the Trups CDO list also due at 10:00 today, but here too the trader is sceptical, particulalrly at its value for price discovery. "It looks like a mix of stuff they picked up a couple of years ago cheap and some other pieces with high reserves that they're trying to work out where they should trade."
SCIWire
Secondary markets
US RMBS back in full flow
Secondary liquidity in US non-agency RMBS was hit hard earlier in the week, but is now back to full flow.
"Due to the snow warnings liquidity dried up as lists were pulled Monday and Tuesday, but we're back to normal today with over $1bn of BWICs," says one trader. Those lists cover a broad range of sellers, primarily money managers and hedge funds, across the full range of deal types.
The trader cites a $114.73m 32 line list due at 14:00 New York time as the most interesting today. It consist of prime, second lien, HELOC, Alt-A, subprime, re-REMIC and POA deals, all of which are wrapped by Ambac. "It's the first substantial Ambac list since it made large deferred payments in December, so the list will be very closely watched to see where it clears," the trader says.
Subprime is currently the most price sensitive sector of the RMBS market. "Subprime is trading a little softer, which could be the result of extraneous factors such as interest rate volatility, but I think it's mainly because of the Ocwen case," the trader suggests. "When any larger servicer gets into the headlines people tend to step off a little and being longer term securities subprime is going to feel any servicing impact the hardest."
SCIWire
Secondary markets
Euro secondary stays firm
Despite broader market volatility European secondary spreads held firm throughout yesterday and into today.
The large volume of BWICs dominated the market yesterday, but all traded at or above talk. Off the back of the lists and in secondary more broadly there was healthy activity notably again in UK non-conforming and buy-to-let RMBS as well as increased, but patchy, trading around CLOs and some major peripheral MBS.
The wider positive tone has continued into this morning although today is expected to remain reasonably quiet because of month-end.
SCIWire
Secondary markets
US CLOs edge in
Secondary US CLO spreads are edging in on the back of increased investor demand.
"Secondary market technicals are definitely getting better," says one trader. "Customers seem willing to pay up a little more, so spreads are tightening."
The trader continues: "That's mainly driven by the feeling that there won't be as much new issuance this year as there was last. So, investors that mainly relied on the primary market in the past are now already utilising secondary."
That is not to say the CLO primary market is moribund - there are some unusual deals going through. "A GSO US deal with European risk retention got pretty good execution this week and we're hearing about some interesting structures coming out of Apollo," the trader says.
Meanwhile, the US CLO BWIC schedule is light today with only 11 line items due totalling $35.593m. Again, 2.0 deals make up the majority of the auction calendar.
SCIWire
Secondary markets
Positive tone continues in European ABS/MBS
The European ABS/MBS secondary markets held onto their positive tone into the end of last week and the start of this.
As expected, European secondary volumes were low on Friday due to a combination of month-end and continued broader market concerns over Greece and oil prices keeping many investors on the sidelines. However, ABS/MBS spreads were either unchanged or slightly tighter as QE-based optimism holds sway.
That optimism has kept spreads steady into the start of today's session, albeit on very light flows.
SCIWire
Secondary markets
CDO/CLO BWICs burst into life
Today and tomorrow see a significant burst of CDO/CLO BWIC supply either side of the Atlantic that is notable in terms of both volume and variety of bonds on offer.
There are ten auctions already scheduled for today and tomorrow covering 81 line items and 311.7m in original face. Tomorrow's lists look likely to provide the most interest as they in part veer away from the steady flow of similar fodder seen in for the bid in recent weeks.
Most eye-catching among the European lists is a five line €20.117m ABS CDO BWIC due at 15:00 London tomorrow. It consists of: CAVSQ 2 C, CAVSQ 1 SUB, CAVSQ 2 SUB, FAB 2002-1 C and FAXT 2003-1 C-1. Only CAVSQ 2 SUB has covered on PriceABS in the last three months doing so at 225 on 12 November.
Highlight of the current US schedule is an 18 line item $109.637m list offering a mix of CLOs, SF CDOs and Trups CDOs from across the capital structure. Due at 10:00 New York tomorrow it consists of: ACABS 2007-2A PREF, ATTN 2007-3X A2, COAST 2002-1X D, CODA 2007-1A PREF, CVSC 2006-3A NOTE, CVSC 2006-3X NOTE, EASTL 2007-1A PREF, KDIAK 2006-1X A2, PRETSL 26 B1, ROCKW 2006-1A PREF, TBRNA 2007-8A A2, TBRNA 2007-8X A2, TRAP 2006-11A A2, TRAP 2006-11X A2, TROPC 2004-1A A4B, TROPC 2004-4A A2L, USCAP 2006-5X A2 and USCAP 2006-5X A3.
None of the bonds has traded on PriceABS in the last three months.
SCIWire
Secondary markets
UK BTL stays strong
Three slices of UK buy-to-let seniors traded strongly on BWIC this afternoon.
The results of the auction at 16:00 London time today reflect the continued demand for UK buy-to-let RMBS seen off-BWIC over the past week. The list consisted of three slices of Aire Valley bonds totalling £23.12+m of current face - AIREM 2004-1X 3A1, AIREM 2005-1X 2A1 and AIREM 2007-1X 2A3.
The bonds covered at 98.28, 98.03 and 97.76 respectively. Talk circulating this afternoon on the list hovered around low-to-mid-98, low-98 and mid-to-high-97.
SCIWire
Secondary markets
Euro ABS/MBS keeps steady
The European ABS/MBS secondary markets maintained their steady head of steam through yesterday and into today.
While spreads continue to hold in across the board, two areas were involved in notable price action - UK non-conforming RMBS, which saw a further increase in activity and traded strongly off- and on-BWIC yesterday, and CMBS deal INFIN SOPR.
"There was a drop in valuation for the German properties within INFIN SOPR, which means more losses in the senior tranches," explains one trader. "It's difficult to see how such a drop in values could happen in just a year, but we are stuck with an opaque process and the market has re-priced accordingly."
He continues: "The As were at 96.75-97.00 yesterday and should now be in the 92/94 area while the Bs and Cs should be close to zero. But we've not seen any trading yet today to confirm those levels."
The ABS/MBS market is yet to see any major impact from the new Greek debt plan that is buoying broader markets this morning. Instead, the trader says: "We are seeing a continuation of the same themes with Italian RMBS up a little and Dutch paper very well bid."
SCIWire
Secondary markets
US CLOs continue double-B focus
US CLO secondary activity continues to lean toward double-B paper in both 2.0 and 1.0 form.
"We're seeing a continued flurry of 2.0 double-Bs on BWIC today and tomorrow," says one trader. "And we've got the same theme going on around them of sector tiering particularly with regard to energy exposure, but there's also now some healthcare impact."
The trader reports strong trading in 2012 bonds with shorter reinvestment dates and good managers, which are printing in the 625-640 DM area. However, overall 2.0 double-B spreads are widening.
Nevertheless, such deals are still likely to trade, the trader suggests. "We're seeing specialist investors stepping in and creating support levels at relevant points depending on structure, manager and sector exposures, so most trades are going through."
With 1.0 double-Bs the position is much more straightforward. "1.0s are a clear trade, in particular deals with a high coupon and short duration to call. With six or seven guys looking at every bond on offer it's a safe buy."
SCIWire
Secondary markets
INFIN SOPR trades up
A flash BWIC on INFIN SOPR A traded up this morning.
The 10:00 London time auction saw €8m of INFIN SOPR A circulated for a quick sale as market prices had started to reverse on the CMBS deal previously hit by valuation concerns. The piece covered at VL93 versus market levels that had moved from 92a at yesterday's open to 93a earlier this morning.
Dealer offers had strengthened on the bond following the release of a report from the special servicer yesterday. The report addresses some of the concerns over the latest valuation, suggesting there is potential for the asset managers to increase those values and promises further investigation into the process.
News
Structured Finance
SCI Start the Week - 2 February
A look at the major activity in structured finance over the past seven days
Pipeline
A mixed bag of transactions entered the pipeline last week, with all asset classes represented. ABS accounted for the largest number of deals, as US$667m AIM Aviation Finance Series 2015, US$327m Consumer Credit Origination Loan Trust 2015-1 and a pair each of Ford Credit Floorplan Master Owner Trust A (Series 2015-1 and 2015-2) and Ally Master Owner Trust ($300m 2015-1 and US$200m 2015-2) transactions were announced.
US$421.3m BWAY 2015-1740, US$635.3m JPMBB 2015-C27 and US$1bn WFCM 2015-C26 made up the CMBS, while €415m CGMSE 2015-1 and US$512m OZLM XI represented the CLOs. The RMBS comprised US$940m JP Morgan Mortgage Trust 2015-1 and A$500m PUMA series 2015-1.
Pricings
A similar mix of deals priced during the week, although the highest number of prints were seen in CLOs. US$786.2m ALM XII, US$509.5m Dorchester Park CLO, US$509.05m Dryden 37 Senior Loan Fund, US$309.45m Fifth Street Senior Loan Fund I, US$509.9m Galaxy XIX, US$759.9m Jamestown CLO VI and US$279.4m LMREC 2015-CRE1 were issued.
The ABS prints consisted of US$900m Nissan Master Owner Trust Receivables Series 2015-A, US$475m GE Dealer Floorplan Master Note Trust Series 2015-1, US$300m GE Dealer Floorplan Master Note Trust Series 2015-2 and US$1.23bn OneMain Financial Issuance Trust 2015-1. US$360m AOA 2015-1177, US$1.423bn COMM 2015-LC19 and €286m Taurus 2015-1 IT accounted for the CMBS pricings, while US$775m STACR 2015-DN1 was the lone RMBS issue.
Deal news
• The inaugural rated securitisation of consumer instalment loans originated on the Prosper Funding P2P platform has hit the market. The US$345.85m Consumer Credit Origination Loan Trust 2015-1 (CCOLT 2015-1) is an SPE created by BlackRock Financial Management on behalf of funds and accounts under management.
• 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.
• 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.
Regulatory update
• The HQS consultations being undertaken by the EBA and the Basel Committee/IOSCO joint taskforce appear to reflect the different motivations of European and US policymakers. Indeed, the former consultation could potentially be instrumental in shaping a 'Basel-lite' approach for the European securitisation market.
• CFTC commissioner Christopher Giancarlo has published a White Paper analysing what he views as flaws in the Commission's implementation of its swaps trading regulatory framework under Title VII of the Dodd-Frank Act. The paper proposes a more effective alternative.
• The Basel Committee has issued its final standard for the revised Pillar 3 disclosure requirements, which aim to enable market participants to compare banks' disclosures of risk-weighted assets. The revisions focus on improving the transparency of the internal model-based approaches that banks use to calculate minimum regulatory capital requirements.
• 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 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.
Deals added to the SCI New Issuance database last week:
Avis Budget Rental Car Funding series 2015-1; BXG Receivables Note Trust 2015-A; Capital Auto Receivables Asset Trust 2015-1; COMM 2015-LC19; Credit Acceptance Auto Loan Trust 2015-1; CVP Cascade CLO-3; DB Master Finance Series 2015-1; Driver 13; FREMF 2015-K42; Global Container Assets 2014 Series 2015-1; Harley-Davidson Motorcycle Trust 2015-1; HHPT 2015-HYT; Honda Auto Receivables 2015-1 Owner Trust; Kubota Credit Owner Trust 2015-1; Longtrain Leasing III series 2015-1; MSBAM 2015-C20; SoFi Professional Loan Program 2015-A; Tibet CMBS; Vitality Re VI series 2015.
Deals added to the SCI CMBS Loan Events database last week:
BACM 2002-PB2; BACM 2005-4; BACM 2005-6; BACM 2007-2; BACM 2008-1, MLMT 2008-C1 & MSC 2008-T29; BSCMS 2003-PWR2; BSCMS 2004-T16; BSCMS 2006-PW11; BSCMS 2007-PW18; CD 2007-CD5; CGCMT 2008-C27; COMM 2006-C8; CSFB 2004-C5; CSFB 2005-C1; CSFB 2005-C5; CSFB 2005-C6; CSMC 2006-C4; CSMC 2007-C5; DBUBS 2011-LC1; DECO 2006-E4; DECO 2007-E5; DECO 8-C2; EMC VI; EURO 25; EURO 27; GCCFC 2005-GG3; GCCFC 2007-GG9; GECMC 2006-C1; GSMS 2005-GG4; GSMS 2007-GG10; GSMS 2011-GC5; JPMCC 2001-CIB2; JPMCC 2004-CBX; JPMCC 2005-CB11; JPMCC 2005-LDP2; JPMCC 2005-LDP5; JPMCC 2006-CB16; JPMCC 2007-CB19; JPMCC 2007-LD11; JPMCC 2013-C10; LBUBS 2005-C3; LBUBS 2006-C4; MLCFC 2006-3; MLCFC 2006-4; MLMT 2005-MCP1; MLMT 2007-C1; MSBAM 2013-C7; MSC 2007-HQ11; MSC 2007-IQ14; TIASS 2007-C4; TITN 2006-3; TITN 2006-5; TITN 2007-1; TITN 2007-2; TMAN 5; TMAN 7; WBCMT 2002-C2; WBCMT 2005-C18; WBCMT 2005-C21; WBCMT 2006-C23; WBCMT 2007-C30; WBCMT 2007-C31; WFRBS 2012-C7; WINDM XIV.
Job Swaps
ABS
Origen ABS acquired
HAS Capital has acquired interests in select ABS structured financings and manufactured housing-related assets from affiliates of Origen Financial. The assets primarily consist of equity trust certificates issued in conjunction with seven rated securitisation trusts with a current underlying asset value of US$412m.
HAS says it co-invested in the deal with a credit-oriented investment manager that holds a majority stake in the ownership entity. The acquisition represents substantially all of Origen's current manufactured housing assets.
Job Swaps
Structured Finance
Moves made at Alcentra
Alcentra has made several executive leadership appointments, including Paul Hatfield returning to the firm's global headquarters in London as global cio. He will lead the firm's initiatives related to multi-strategy credit portfolio management and customised investment solutions.
Hatfield has been head of the Americas for Alcentra for the last two years, which included sub-advising on the launch of the Dreyfus Floating Rate Income Fund, issuing Alcentra's Shackleton family of US 2.0 CLOs and establishing the global high yield bond and loan strategy.
Jack Yang succeeds Hatfield as head of the Americas, with both reporting to David Forbes-Nixon, chairman and ceo of Alcentra. In his new role, Yang is responsible for the firm's business operations in the Americas, along with product development, marketing, fundraising and investor relations globally. He will maintain his role as md and global head of business development for the firm.
Prior to joining Alcentra, Yang was at Onex Credit Partners, where he was the company's managing partner. He has also held roles at a number of other organisations, including Highland Capital Management, Chemical Securities and Merrill Lynch, where he founded the loan syndications group and was subsequently global head of leveraged finance.
Job Swaps
Structured Finance
Securitisation head recruited
Opus Capital Markets Consultants has named William Shuey as director of securitisation. He will be responsible for operational oversight of securitisation processes, with a focus on ensuring the delivery of high quality, compliant solutions to the RMBS market.
Prior to joining Opus, Shuey was the due diligence manager at Accenture assigned to Morgan Stanley, where he was responsible for analysing new rules and regulations and ensuring compliance. He also held management positions at Goldman Sachs and was vp at Hudson Advisors.
Job Swaps
Structured Finance
Hires spark multi-asset initiative
Assenagon has made two appointments in an initiative to start offering multi-asset portfolio management and risk expertise. The effort will be led by Thomas Romig, who will join the firm as md in March, and Thomas Handte, who will follow in April as senior portfolio manager.
Romig was most recently head of multi-asset management at Union Investment, with re¬sponsibility for €12bn in assets under management. He was also previously head of multi-manage¬ment at cominvest Asset Management, after he began his career in fund management at ADIG Investment.
Handte worked with Romig as senior portfolio manager at Union. He also previously managed multi-asset portfolios at cominvest after starting his career as portfolio manager for Deutscher Investment Trust.
Job Swaps
Structured Finance
Director swaps vendors
Paul Whitmore has joined Fitch Solutions as regional business manager for EMEA and a senior director. He will report to md and global product head Brian Filanowski.
Whitmore arrives from S&P Capital IQ, where he worked in a variety of commercial and product management roles, most recently in the business development area. Prior to this, he worked as a data quality manager within the ratings practice of S&P.
Job Swaps
Structured Finance
MBO for trading platform
The Guggenheim Global Trading (GGT) multi-strategy trading platform has been acquired by an investor group led by GGT management. The new business will operate under the name of Deimos Asset Management.
Deimos will retain the current GGT senior management team led by Loren Katzovitz and Patrick Hughes. Former co-ceo of RBC Capital Markets Mark Standish will also join Deimos as a managing partner.
Deimos will be supported by an equity investment from Ares Management.
Job Swaps
Structured Finance
Valuation firm acquired
Duff & Phelps is set to acquire valuation and fixed asset management advisor American Appraisal Associates. The transaction includes the company's Real Estate Advisory Group, a real estate advisor with principal operations in Europe. The agreement will add professionals in more than 50 offices globally for Duff & Phelps and significantly expand its geographic footprint in Europe and Asia.
The transaction - financial terms of which were not disclosed - is expected to close during 1Q15. Kirkland & Ellis acted as legal advisor to Duff & Phelps and Foley & Lardner acted as legal advisor to American Appraisal.
Job Swaps
Structured Finance
Structured finance group poached
Alston & Bird has expanded its finance practice with the hiring of four new partners and four additional attorneys in Dallas. The group brings with it considerable real estate and structured finance experience.
The new partners are Mark Harris, Charles Marshall, Peter McKee and Patrick Sargent. Also joining the firm are three counsel - Michael Jewesson, Jonathan Rini and Karen Wade - and one associate, Bradford Patterson. All join from Andrews Kurth.
Harris focuses on representing issuers, underwriters, sellers, servicers and other participants in connection with domestic and cross-border public and private securitisation transactions. Marshall specialises in real estate finance, including CMBS financing and problem loan workouts.
McKee focuses on CMBS, loan servicing, secondary market transactions, legal risk evaluation methodology, securitised lending and structured finance transactions. Finally, Sargent concentrates on structured finance, corporate securities and business transactions.
Job Swaps
Structured Finance
Sales team beefed up
Bryan Bushnell has joined TwentyFour Asset Management to help develop its sales capabilities with discretionary wealth managers and multi-managers. He arrives from Jupiter, where he was business development manager for wealth management. Kimberley Cuthbertson is also set to join TwentyFour in a sales support role later this month.
Job Swaps
Structured Finance
Record ratings settlement agreed
The US Department of Justice and 19 states and the District of Columbia have entered into a US$1.375bn settlement agreement with S&P along with its parent McGraw Hill Financial. The agreement resolves allegations that S&P had engaged in a scheme to defraud investors in RMBS and CDOs.
Each of the lawsuits allege that investors incurred substantial losses on RMBS and CDOs, for which S&P issued inflated ratings that misrepresented the securities' true credit risks. Other allegations assert that S&P falsely represented that its ratings were objective, independent and uninfluenced by the agency's business relationships with the investment banks that issued the securities.
In addition to the payment of US$1.375bn, S&P has acknowledged conduct associated with its ratings of RMBS and CDOs during 2004 to 2007 in an agreed statement of facts. It has further agreed to formally retract an allegation that the US' lawsuit was filed in retaliation for the defendant's decisions with regard to the credit rating of the US. Finally, S&P has agreed to comply with the consumer protection statutes of each of the settling states and the District of Columbia, and to respond to any of their requests for information or material concerning any possible violation of those laws.
Half of the US$1.375bn payment - or US$687.5m - constitutes a penalty to be paid to the federal government and is the largest penalty of its type ever paid by a rating agency. The remaining US$687.5m will be divided among the 19 states and the District of Columbia.
Job Swaps
CDS
Market structure pros added
Tradition has hired three market structure professionals to bolster its hybrid and electronic businesses, including John Wilson as md for the firm's strategy and business development unit. He will be involved in all aspects of Tradition's strategic, hybrid and electronic initiatives globally.
Prior to joining the firm, Wilson was global head of OTC clearing at Newedge and RBS. He has also represented the industry in EU discussions in relation to cross-border regulatory proposals, such as EMIR, and is a former member of numerous industry and market infrastructure steering committees and working groups around the globe.
Additionally, Rob Mountain has been hired to lead the North American business development division of Trad-X, Tradition's interest rate swaps trading platform. Mountain has previously held senior client service positions at BGC Partners and State Street, and will oversee client services and interaction on Trad-X to ensure the platform continues to deliver in line with market requirements.
Finally, Dan Torrey joins Tradition's strategic development team, where he will assist with the development of the company's electronic trading initiatives, including its spot FX trading platform ParFX. As previous head of sales for Americas at EBS, Torrey oversaw a range of client segments and products across the Americas regions and was also responsible for new business and relationship management across the sell- and buy-side.
Job Swaps
CDS
CME bid rejected
CME Group and GFI Group have each determined to terminate their merger agreement following a special meeting of GFI shareholders. Preliminary results from the meeting indicate that the shareholders did not approve the proposed merger.
As a result, the parties each determined that terminating the merger agreement and related transactions was in the best interest of the respective companies and shareholders at this time. The related merger agreement by and among CME and Jersey Partners and their affiliates and purchase agreement by and among GFI Brokers Holdco, CME, Jersey Partners and their affiliates were also terminated.
Michael Gooch, GFI's executive chairman, says: "While we are disappointed that the CME merger was not approved by our shareholders, we appreciate their view and will work tirelessly to find a strategic alternative that offers the company's shareholders the chance to maximise the value of their investment."
In response, Howard Lutnick, chairman and ceo of BGC, comments: "We remain fully committed to completing our all-cash tender offer of US$6.10 per share, which remains open to GFI shareholders. Since a rejection by GFI shareholders would end any possibility of the CME-GFI management merger being completed, our tender offer is the only viable option for GFI stockholders seeking to maximise the value for their shares."
BGC's offer is scheduled to expire tomorrow (3 February).
Job Swaps
CMBS
CMBS franchise eyed
Sandler O'Neill and Partners has appointed David Cook and Andrew Flick as mds, focusing on building a CMBS franchise at the firm. They will report to Alan Roth, a principal in Sandler O'Neill's fixed income sales and trading group.
The pair joins the firm from Brean Capital, where they established a CMBS business. Before Brean, Cook was head of CMBS trading at Barclays, while Flick was md and head of CMBS trading and syndicate at Jefferies & Co.
Job Swaps
CMBS
Mass migration for new CMBS team
SG has launched a US CMBS business after hiring a team of seasoned CMBS professionals from RBS. The team will engage in the full range of CMBS activities from origination to distribution and includes new head of CMBS Wayne Potters.
Potters was most recently head of RBS's CRE Group. He has also worked at Fortress, Merrill Lynch and Credit Suisse First Boston in various senior CMBS roles.
Adam Ansaldi also joins to head CMBS securitisation for SG. He previously oversaw RBS's CMBS distribution and securitisation platform, as well as leading the CRE securitisation group at JPMorgan/Bear Stearns.
Additional key team members include: Gary Swon, Joey Petras, Chris Kramer and Peter Lewicki driving origination; Stewart Whitman managing REITs origination; David Goodwin managing CMBS credit; Jim Barnard and Justin Cappuccino in CMBS securitisation; and Marty Black as CMBS underwriter.
This CMBS development is part of a global SG initiative headed in the US by Hatem Mustapha. It looks to develop asset-backed product capabilities that will take advantage of a trend towards increased securitisation to finance the economy.
Job Swaps
CMBS
CRE origination bolstered
CCRE has expanded its loan origination team with the appointment of Christof Laputka as director. He will head operations for the San Francisco office, focusing on loan origination and expanding the firm's ability to serve clients on the West Coast.
Laputka previously served as director at UBS, where he focused on CMBS origination, fixed and floating rate interim financing, equity structuring and portfolio lending. He also served as vp at Credit Suisse.
Laputka will report to Michael May, coo of CCRE.
Job Swaps
CMBS
Ratings group bolstered
Peter Simon has joined Fitch as a director in its CMBS ratings group in New York, with a focus on new conduit deals. He had previously been with Moody's since October 2010, most recently as a CMBS analyst.
Job Swaps
Insurance-linked securities
'Banner year' for BSX
Bermuda has been the domicile of choice for 57% of ILS issued during 2014, according to the Bermuda Stock Exchange (BSX), with a record nearly US$16bn listed in the jurisdiction. However, the exchange notes that it is facing strong competition in the catastrophe bond sector from newcomers - such as Malta, Gibraltar and Puerto Rico - as well as the more established players, including the Cayman Islands, Guernsey and Dublin.
In a banner year, the BSX saw a 53% increase in its ILS listings from 77 in 2013 to 118 in 2014. Meanwhile, the value of these securities grew to US$15.91bn from US$9.71bn over the same period.
Included in the new listings last year were several additional variable rate notes and programmes from Alamo Re, Azora Re, Citrus Re, Gator Re, Golden State Re II, Kilimanjaro Re, Kizuna Re II and URSA Re.
"Bermuda has proven time and again to be an innovative environment that encourages the growth of all forms of ILS - from catastrophe bonds to sidecars and collateralised reinsurance vehicles," comments BSX president and ceo Greg Wojciechowski. "Bermuda has nimbly responded to changes in the industry to offer its global clientele modern and efficient solutions for their commercial needs."
In October 2009, the Bermuda Monetary Authority amended existing insurance legislation and brought in new standards for insurers, making the set-up of SPVs a more straightforward process. In addition, the island has developed ancillary businesses and specialised service providers that further support the growth of the ILS asset class.
Aon Benfield Securities reports that US$8.03bn of property catastrophe bonds were issued in 2014 - the highest-ever figure in the history of the sector. In addition, a record amount of collateralised reinsurance capacity has been put to work - reaching US$36.2bn at 30 June 2014, up by approximately 23% from the US$29.4bn seen a year earlier.
News Round-up
ABS
Savings provide 'buffer' for Chinese ABS
Moody's says that China's high household savings rate is credit positive for the country's fledging CNY249bn securitisation market because it provides a buffer against potential defaults for loans backing securitised transactions. The underlying assets of these transactions include retail loans and credit extended by banks and non-bank financial companies for the purchase of vehicles, houses and other consumer loans.
However, Moody's expects differences to emerge in China's securitisation market regionally. For example, as household credit grows on the mainland, a larger disconnect will become apparent between the growth in consumer loans and salary levels in the less-urbanised regions of the country.
"As a result, borrowers from these less-urbanised regions are potentially more susceptible to loan repayment challenges," says Jerome Cheng, a Moody's svp. "Such borrowers have less ability to increase their salaries and consequently increase their savings in order to provide a buffer against financial difficulties. And, as private consumption and consumer credit grow in regions that are becoming urbanised, future Chinese securitisation deals will increasingly include loans originated from these areas."
In this context, Moody's notes that China's policymakers have focused on increasing the pace of urbanisation over the past decade so as to lift the level of disposable household income and therefore stimulate private consumption as a way to counterbalance slowing export- and investment-led growth. This urbanisation drive has been given a fresh impetus under a new pilot programme launched by Premier Li Keqiang, which focuses on 62 counties and cities, concentrated in the central and western parts of China and the two provinces of Anhui and Jiangsu.
"In fact, households in the central region are already using more of their disposable incomes for consumer spending - hence, less for savings - than their counterparts on the east coast," says Georgina Lee, a Moody's avp.
If urbanisation cannot increase disposable income to keep pace with the growth in consumer spending, households in central China will start to exhibit a lower savings propensity when compared to those in the more affluent east, suggests Moody's. Such a trend could reduce the financial backstop for borrowers from these regions should they face repayment challenges and is particularly important, given the rise in non-performing loans in central China.
News Round-up
ABS
Marketplace lending deal debuts
The inaugural rated securitisation of consumer instalment loans originated on the Prosper Funding P2P platform has hit the market. The US$345.85m Consumer Credit Origination Loan Trust 2015-1 (CCOLT 2015-1) is an SPE created by BlackRock Financial Management on behalf of funds and accounts under management.
Prosper Funding has partnered with WebBank, a Utah state-chartered industrial bank, to originate consumer instalment loans. BlackRock SPEs have, in turn, been purchasing a nearly pro-rata portion of the loans originated via the Prosper platform since November 2013 and will continue purchasing them on an ongoing basis.
A US$50m pre-funding account will be used in the first two months after closing to purchase additional Prosper loans to be added to the pool. BlackRock independently evaluates the credit quality of loans on the platform and has no ongoing obligation to purchase the loans.
Provisionally rated by Moody's, the transaction comprises three tranches: US$281.32m of Baa3 rated class A notes, US$45.38m of Ba3 class Bs and US$18.15m of unrated class Cs. The CCOLT 2015-1 SPE will retain the class C notes and the residual certificate at closing.
Overcollateralisation will be 5% at the time of closing and increase to a target of 15% of the outstanding pool balance, subject to a floor of 2% of initial pool balance. A non-declining reserve fund is sized at 1% of the initial pool balance. In addition, a cumulative default trigger will be tested on a monthly basis.
The weighted average FICO of the CCOLT 2015-1 eligible loans as of the 31 December statistical cut-off date is 706. The underlying borrowers in the pool have a weighted-average annual income of approximately US$90,000 and a weighted average debt-to-income ratio of approximately 26%. The loans are fully amortising, with initial repayment terms of three or five years, and the pool has a weighted-average remaining term of 42 months.
Moody's cumulative net loss expectation for the CCOLT 2015-1 pool is 8%, which is considerably higher than the net losses typically expected for pools of other consumer assets with similar credit characteristics.
News Round-up
ABS
Auto performance to slow?
The shift away from smaller, more fuel-efficient vehicles could result in lower wholesale vehicle prices and marginally slow the asset performance of US auto ABS in 2015, Fitch suggests. Sales of trucks and SUVs reached the highest level in over three years through end-2014, while sales of cars have been declining since 2012.
Fitch expects used vehicle supply to rise in 2015 and place pressure on wholesale vehicle values. Additionally, low gas prices may raise consumer demand and purchases of larger vehicles.
Auto manufacturers may increase small car incentives if inventories rise beyond optimal levels. If these trends continue in 2015, the agency notes that securitised auto ABS pools with high concentrations of cars may be impacted, particularly pools with cars totalling over 50%.
Trucks and SUVs captured approximately 52% of the market in 2014, up from 48% through YE12. Conversely, sales of cars declined to 48%.
The state of the wholesale vehicle market is a key indicator of loss severity in auto ABS. Fitch forecasts that returns of leased vehicles will rise over 10% in 2015 versus 2014, with a large number comprising cars, given sales of these smaller, cheaper vehicles in 2012-2013 will come off lease in 2015.
"Combined with higher vehicle trade-in volumes expected in 2015, this trend may pressure used values throughout the year and drive losses marginally higher in auto loan ABS. It could also push up auto lease residual value losses in auto lease ABS transactions," the agency observes.
It expects US prime auto loan annualised losses to rise to 0.50%-1.10% in 2015, based on current expectations of softer used vehicle values this year. But such a range is well within historical levels in prior years and in line with the strong 2005-2007 period.
News Round-up
ABS
Record lows for auto arrears
Fitch reports that European auto ABS performance continued to improve in 2014 as arrears reached record lows. The agency's 30-plus and 60-plus delinquency indices fell to 0.9% and 0.4% respectively, from 1.4% and 0.6% at the end of 2013, while its annualised loss index decreased slightly to 0.3% from 0.4% in the same period.
Macroeconomic factors also showed signs of improvement across the EU, with new car registrations increasing across all the five major EU economies in 2014. Additionally, used car prices in the region increased on an aggregate basis during the year.
Total new auto ABS issuance volumes in 2014, including retained transactions, were the highest since the onset of the financial crisis. Levels were up by 43% in 2014 relative to 2013, including tap issuances from French and German master trusts.
News Round-up
ABS
BPF undertakings transferred
The partnership between Banque PSA Finance (BPF) and Santander Consumer Finance (SCF) is expected to have no impact on the ratings of the five French BPF transactions rated by Fitch. France and the UK are the first countries to implement the global cooperation between BPF and SCF, with all the administrative and regulatory tasks and consents finalised yesterday (2 February). Germany, Italy and Spain will be the subsequent countries to complete the partnership by the beginning of 2016.
BPF and SCF are establishing large-scale collaboration agreements across 11 European countries in total. The agreement contemplates forming local partnerships, which will support the sales of PSA Group cars by providing financing to end-customers and dealers.
The five French transactions are: Auto ABS FCT Compartiment 2011-1, FCT Auto ABS Compartiment 2012-1, Auto ABS French Loans Master, Auto ABS FCT Compartiment 2013-2 and Auto ABS3 FCT Compartiment 2014-1. These securitisations are backed by French assets originated by Credipar, BPF's French arm.
The partnership resulted in a change of control of Credipar, with Credipar becoming indirectly owned by Santander and BPF on a 50/50 basis, and likely to become consolidated at the level of Santander. This resulted in the partial withdrawal of BPF from all its roles in the French BPF transactions.
Fitch believes that the move will not entail any change to the financial conditions of the transactions, as BPF has transferred all its roles to Credipar, except the role of custodian for each of the securitisation vehicles. BPF's representations and undertakings have been taken up and reissued in an identical form by Credipar.
The agency also expects the underwriting, servicing and recovery procedures to remain unchanged as Credipar's current IT systems and staffing will remain in place. Fitch therefore considers that the change of control of Credipar and the series of modifications contemplated in the French BPF transactions will not impact the rated notes.
News Round-up
Structured Finance
HQS boost for Europe
The European Commission last week began a project to create a capital markets union (CMU) for all 28 EU Member States with a first orientation debate at the College of Commissioners. The CMU is one of the Commission's flagship projects and ties in with efforts to boost jobs and growth in the EU.
"It is designed to help businesses to tap into diverse sources of capital from anywhere in the EU and offer investors and savers additional opportunities to put their money to work. It aims to create a single market for capital for all 28 Member States by removing barriers to cross-border investment and lower costs of funding within the EU," the EC explains.
The orientation debate focused on the key challenges and priorities for the integration of capital markets. The College concluded that a Green Paper should be adopted next month to consult all interested parties on concrete areas for potential action. The paper is expected to build on the short-term priorities set out in the EU's 'Investment Plan for Europe', including reviving the markets for high quality securitisation.
A key objective of the CMU will be to diversify and extend sources of funding, so that businesses have easier access to credit through capital markets as well as banks, and to boost cross-border access to funding. The consultation phase will call for input from the European Parliament, national parliaments, Member States, citizens, SMEs, the non-governmental sector and the financial sector. An action plan on the CMU will be unveiled during 3Q15.
News Round-up
Structured Finance
'Diversified' fund launched
Nomura Asset Management has launched its Global Dynamic Bond Fund, designed to provide investors with a more diversified approach to fixed income investing. It seeks to generate attractive total returns by investing across a full range of fixed income securities.
The fund utilises top-down analysis of macroeconomic and market themes to construct a strategic core portfolio of cash bonds, accounting for at least 80% of the assets within the strategy. Allocations will benefit from expected changes in markets, with the fund's diversification allowing greater flexibility to invest across all fixed income assets.
Risk control plays a pivotal role in the strategy. The portfolio manager will use derivatives to provide cost-effective hedging strategies to protect and position the fund to benefit from short-term market movements and shocks.
The fund will be managed by Richard Hodges, who joined NAM last year from Legal & General Investment Management (SCI 13 November 2014).
News Round-up
Structured Finance
Securitisation to boost Indian economy?
Moody's says that India's securitisation market can provide funds needed to finance housing, infrastructure and urbanisation projects as the country's economy grows. Since coming to power last year, the new Indian government of prime minister Narendra Modi has set a goal of lifting economic growth through polices to stimulate the construction of housing, infrastructure and other urbanisation initiatives.
"Securitisation can provide funds for real estate developers, project sponsors and retail loan providers, alleviating pressure on public finances and the banking system," says Georgina Lee, a Moody's avp.
Moody's points out that while securitisation volumes in India increased by 29% year-on-year to INR490bn in the fiscal year ended 31 March 2014, issuance levels have been volatile in recent years. The agency attributes the volatility to regulatory and taxation considerations, which in turn have shaped the extent to which originators and investors have been motivated to tap into the securitisation market.
It is also suggested that the emergence of a broader set of investors in India will be important for the development of the country's securitisation market and its ability to help fund the economy, because the existence of a diverse range of investor types is key to a deeper, more liquid market and better price discovery.
Moody's explains that the Indian securitisation market is currently dominated by three main asset classes: auto loan ABS, RMBS and micro loan ABS. India's CMBS securities market is also emerging, with three deals concluded in 2014.
In terms of the performance, delinquencies for commercial vehicle loan ABS - the key auto loan ABS segment in India - are relatively higher for more recent vintages, owing to a stressed operating environment for transport operators. On the other hand, RMBS pools have performed strongly, displaying high collection efficiency ratios and low delinquencies. However, RMBS loans from certain regions exhibit higher delinquency rates than others.
Finally, micro-loan ABS performance has been robust, with the majority of transactions exhibiting a zero delinquency rate.
News Round-up
Structured Finance
CRA technical advice prepped
ESMA has released a call for evidence as part of the development of technical advice for the European Commission on the functioning of the credit rating industry and the evolution of the markets for structured finance instruments, as required by the regulation on credit rating agencies (CRAs). The authority is seeking evidence about how the regulation is achieving the objectives of stimulating competition between CRAs, improving the choice of CRAs available and minimising conflicts of interests in the industry.
The call for evidence is particularly targeted at: corporate and sovereign issuers of financial instruments requesting credit ratings; credit rating agencies issuing credit ratings; and institutional investors and other users of credit ratings. Responses should be submitted by 31 March.
News Round-up
Structured Finance
South Africa expectations 'stable'
Fitch believes the performance of assets backing South African structured finance (SF) deals will remain stable across most asset classes in 2015, despite the country's economic challenges. The agency consequently expects the transactions it rates in the jurisdiction to continue to perform within expectations.
Despite slow economic growth, Fitch anticipates unemployment to remain broadly stable in the near term, which should preserve the steady performance of residential mortgage loans and consumer secured loans. In addition, the current inflationary recess has reduced the risk of a sharp rise in interest rates. However, unsecured loans continue to exhibit high arrears and Fitch does not expect their performance to significantly recover in the near term.
Additionally, prospects for new household credit are mixed. While unsecured lending is contracting, the mortgage market has become unexpectedly dynamic in the sluggish economic environment of 2014.
In Fitch's view, mortgage lending may have benefited from the large clearance of defaulted loan books over recent years. The agency believes it will keep growing moderately in 2015.
The committed liquidity facility - promoted by the South African Reserve Bank to help banks meet regulatory requirements - became effective on 1 January and may restrain securitisation activity, adds Fitch. This will depend in particular on the terms of repayment of the facility and whether this can be used as a long-term funding tool by banks. Greater clarity on these issues should emerge during 1H15.
Finally, Fitch's performance outlook for assets in ABCP conduits remains stable, as do the rating outlooks for sponsor banks on the national South African scale (zaf). However, the extent of recovery in ABCP issuance from the sharp decline in 2014 - caused by regulatory uncertainties and the failure of African Bank Investments - remains to be seen.
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Structured Finance
Appetite for restaurant securitisation
Highly franchised US restaurants are increasingly using securitisations to extract value for shareholders, Fitch notes. The agency expects this trend to continue as more companies move towards nearly 100% franchised operating models and the market for these types of deals remains open, especially for non-investment grade franchisers that are comfortable maintaining high levels of leverage.
Most recently, Dunkin' Brands Group completed a US$2.6bn securitisation of its revenue-generating assets - consisting principally of franchise and licensing agreements, real estate and intellectual property - to refinance its existing US$1.9bn senior secured credit facility. The move follows similar transactions in the US restaurant space, including that of DineEquity, which issued US$1.3bn in a private securitisation offering in September 2014.
Fitch adds that the capital structures of Domino's Pizza and Sonic, which are also more than 90% franchised, already consist mainly of securitised debt. The annual fixed rate weighted average interest rate on the debt for all of these companies is in the 5% range or less, with that of Dunkin' at 3.765% and DineEquity's at 4.277%.
Net proceeds from issuing securitised debt have also historically been used to return cash to shareholders and to make acquisitions. Dunkin' plans to use approximately US$615m of net proceeds from its recent securitisation to help fund a US$700m share repurchase programme, while DineEquity announced a new capital allocation strategy inclusive of a significant dividend increase and a US$100m of share authorisation in conjunction with its 2014 securitisation transaction. Both Dunkin's takeover in 2006 and DineEquity's acquisition of Applebee's in 2007 were financed by securitising franchise royalties, fees and related assets.
DineEquity has historically expressed a comfort level with total debt-to-EBITDA in the 5x range, while Dunkin's leverage pro forma for its securitisation transaction is approximately 6x. Dunkin's financial strategy following the refinancing will entail increased shareholder return and modest deleveraging.
The company publically stated an intention to return to total debt/adjusted EBITDA in the 4.5x-5.5x range, delevering half a turn per year by only paying the minimum 1% amortisation on the new debt annually, but is willing to periodically re-lever the balance sheet in order to support increased shareholder return as it benefits from its new capital structure. The majority of Dunkin's remaining cashflow is likely to be applied to growing the firm's dividend and share repurchases.
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Structured Finance
High demand for loan portfolios
European loan portfolios with a face value of €91bn were sold in 2014, up from €64bn the previous year, says PwC. The European secondary market for loan portfolios is set to grow to €100bn in 2015, with around €40bn of that figure already in progress.
In 2014 CRE lending accounted for over half the deals done, with €49bn in face value, up from €18bn the previous year. In second place was consumer mortgage lending, accounting for just under €20bn, which is double the previous year's total. The UK, Irish and Spanish markets saw the most transaction activity, with banks based in these countries accounting for more than 75% of all transaction volumes.
"Increased certainty over asset prices sustained high demand from a number of leading financial investors and greater availability of debt-to-leverage deals contributed to high transaction volumes," says Richard Thompson, partner at PwC. "Real estate-backed assets continue to be a major focus for the largest investors and we expect this asset class to dominate deals in 2015."
Thompson explains that the AQR brought to light €136bn of troubled bank loans that may require reclassification on balance sheets. "While some of the 2014 deals were in part AQR-driven, I expect this to play a bigger role in deals in 2015 and beyond," he adds.
Furthermore, banks continue to hold more than €2trn of unwanted lending. While much of this lending is expected to be refinanced in the ordinary course of business, a sizeable pool of loans remains that will eventually be sold. Even at current transaction volumes, PwC suggests the market for loan portfolios is expected to remain buoyant for many years to come.
"We're looking at the geographical spread of deals and predicting the next portfolio transaction boom. Ireland, Spain and the UK will continue to be strong this year, but there's likely to be significant growth in the Italian, Dutch and Central and Eastern European markets," says Thompson. "These markets accounted for less than 10% of transaction volumes in 2014 (€9bn) and we expect them to more than double in size in 2015, to around €20bn."
He adds that the market continues to be dominated by the major financial investors, all of which have significant committed funding. "Many are looking at emerging European economies to escape the high levels of competition in UK, Irish and Spanish markets."
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CDO
Marginal decrease in Trups defaults
The number of combined US bank Trups CDO defaults and deferrals marginally decreased to 21.1% at end-December from 22% at end-November, according to Fitch's latest index results for the sector. Approximately 0.5% of this drop is attributed to the removal of the defaulted and deferring collateral from two Trups CDOs that are no longer rated by the agency, with the remainder of the difference due to new cures and redemptions.
In December, six banks representing US$52.9m of notional in nine CDOs began deferring on their Trups. All six cases are re-deferrals that had previously been cured. Fifteen banks representing US$155.2m notional in 19 CDOs cured their Trups, while four banks representing US$42.2m of notional in five CDOs redeemed them.
Moreover, there were no new defaults in the month of December. However, recovery of US$8m was received on US$66m of notional from three banks in eight Trups CDOs.
Across 78 Fitch-rated Trups CDOs, 235 defaulted bank issuers remain in the portfolio, representing approximately US$6bn of collateral. Finally, 171 issuers are currently deferring interest payments on US$1.9bn of collateral.
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CDS
Non-cleared OTC tool introduced
Calypso Technology has released a tool for calculating initial margin on non-centrally cleared derivatives trades, which meets Basel Committee and IOSCO requirements. The new margin calculation module provides three models: a BCBS/IOSCO model using a cross-product VaR-based margin calculator; a BCBS/IOSCO schedule (which does not require regulatory approval); and an ISDA SIMM methodology.
It will be available to existing Calypso customers as an additional module, while firms that are not Calypso customers will be able to access it via a cloud-based utility service. Users of the utility tool can send trades through a secure web service and receive back the initial margin calculation results.
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CLOs
CLO FX risk examined
Fitch says liability currency hedges in European CLOs are less effective than perfect asset swaps (PAS), by exposing the transaction to FX risk. The agency believes this could be due to asset defaults or due to different repayment profiles between euro-denominated assets and non-euro assets.
Such structures avoid costly PAS and hedge foreign currency exposure by issuing liability tranches also denominated in the same foreign currency. However, Fitch says this cheaper hedging strategy does not fully mitigate FX risk and has therefore not been used in any new-generation European CLO in 2014.
Gresham Capital CLO IV is an example of a transaction where the impact of differing prepayment speeds has materialised. The structure is a CLO issued in 2007, which uses a multicurrency variable funding note (VFN) to hedge UK sterling exposure and which exited its reinvestment period in July 2013.
Fitch downgraded the class C, D, and E notes of this transaction in December 2014 due to their exposure to FX risk. Since November 2013, receipts of euro-denominated funds have significantly exceeded sterling-denominated proceeds.
In keeping with the like-for-like repayment strategy, the transaction first applied euro proceeds towards the redemption of euro-denominated senior liabilities. However, once these were redeemed, the transaction started to use euro proceeds to redeem senior liabilities denominated in sterling, creating a currency mismatch. Fitch says that euro proceeds will only be used to redeem non-senior euro liabilities once the sterling liability is repaid, since all remaining euro-denominated notes rank junior to it.
As of January 2015, sterling-denominated assets totalled £20.8m (20.9% of performing assets at the current exchange rate). The corresponding sterling liabilities were repaid in January, completely removing the currency hedge. If sterling depreciates versus the euro, then the value of sterling-denominated assets will fall in euro terms. The transaction is exposed to currency losses in this scenario as the fall in the asset value in euro terms is no longer offset by a decline in the euro amount of liabilities.
Fitch currently rates eight European CLOs which use a portfolio currency swap or a senior multicurrency VFN to hedge foreign currency exposure in the portfolio. The agency believes that the future performance of these transactions could be more volatile compared with their single-currency counterparts, as some remedial actions for currency mismatches are no longer available following the end of the reinvestment period.
PAS hedge currency risk in case of prepayment as well as default, but come at a cost in terms of spread. Managers also have to pay the net present value as unwind cost, should they sell the asset prior to maturity, while the counterparty would typically not pay unwind costs if out of the money. Therefore, Fitch says that adverse currency moves may lock the manager into an unfavourable position.
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CLOs
Covenants strengthened on liquidity concerns
The introduction of minimum obligor debt issuance covenants in recent European CLOs is likely to be driven by market liquidity concerns, Fitch suggests. Based on the exposure in CLOs to date, there are only small differences in the default likelihood and recovery prospects between borrowers of different sizes, the agency says. The exposure to obligors with less than €200m of total debt outstanding represents about 20% of the approximately 350 European debtors on which it has credit opinions.
Across the last 16 Fitch-rated transactions, nine have included covenants restricting the assets purchased by the manager according to the quantum of outstanding debt attributable to an obligor. Of the remaining six, two restrict lending according to EBIDTA levels, while another restricts purchases according to how broadly syndicated an asset is.
Fitch says that Harvest X is typical of the type of covenant that attempts to restrict manager's exposure to obligors on the lower end of the spectrum with respect to total debt outstanding. The manager is not permitted to purchase any debt issued by obligors with total current indebtedness of less than €50m, increasing to 5% for debt issued by obligors with between €50m and €100m of total indebtedness, and rising to a 12.5% maximum for debtors between €100m and €200m. Similar restrictions across recently rated deals typically restrict purchases for debtors of up to €100m at between 5% and 7.5%, and debtors of between €150m and €200m at a maximum of 12.5%.
Fitch suggests that such covenants were introduced due to the perceived lack of liquidity in the loan market for such obligor debt. Syndicated loans of the size indicated by the covenants may only trade infrequently and at large spreads between asking and bid prices. This may restrict the manager's ability to sell loans in the event of credit impairment.
Furthermore, actively managed CLOs rely, to some extent, on market pricing. Discounted and excess triple-C assets, for example, are typically treated at their market value in overcollateralisation test calculations. Fitch believes these illiquid credits could therefore negatively affect the performance of CLOs.
Related to this is a concern among investors that asset managers that recently expanded their direct lending platforms may use CLO vehicles to fund such lending, increasing the exposure to smaller obligors with less liquid debt. Market liquidity aside, credit and recovery characteristics according to debt quantum outstanding do not fluctuate significantly across Fitch-rated European debtor universe. Within the Fitch-rated European CLO universe, 6.4% of total debt is attributable to entities with an issuer default rating of triple-C or below for obligors with less than €200m debt outstanding, while the equivalent figure is 6% for debtors with more than €200m outstanding.
Fitch's data also shows that there is only a negligible difference in the expected recovery prospects of senior secured debt between small and large obligors. While 77% of debt outstanding to obligors encumbered with less than €200m has Fitch recovery estimates of 60% or higher, this compares with 79% for debt attributable to obligors with more than €200m outstanding.
Delving further into CLO credit characteristics, in terms of diversity of income, the industries attributable to the different types of debtor tend to be reasonably similarly cyclical. While 62.1% of debt attributable to debtors of more than €200m can be classified as allocated to a cyclical or somewhat cyclical industry, the equivalent figure for outstanding debt of less than €200m is 70.4%. When exclusively considering cyclical industry exposure for debtors below and above €200m, the comparable figures, however, are more in line at 47% and 44.5% respectively.
There is a greater exposure to Europe's periphery in the shape of Italy and Spain for debt issued by obligors with less than €200m outstanding in the Fitch-rated European debtor universe. These two countries account for 12.7% of debt issuance for obligors with less than €200m outstanding, but only 6.1% for debtors with more than €200m outstanding.
With respect to the ability to service debt from free cashflow, however, 58% of debt attributable to obligors with debt outstanding of less than €200m have a debt service coverage ratio of below 1x, compared with 72.9% of obligors with debt of more than €200m. Fitch says this would suggest that less indebted obligors are no worse placed to make their repayment obligations than their more encumbered counterparts.
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CLOs
CLO administration tool unveiled
Deutsche Bank has launched a new collateral administration tool designed exclusively for CLO managers to access their transactions via the bank's Autobahn App Market. Dubbed Deal Hub, the offering streamlines the way clients access and manage their portfolios by providing a direct online portal to CLO information, including current positions and characteristics on loans, cash balances and periodic reports, as well as the ability to save time through enhanced data reconciliation. It additionally provides clients with an online activity stream that highlights important updates to portfolio information, such as rating changes, spread changes, principal payments and test breaches.
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CLOs
Post-crisis CLO index outperforms
JPMorgan's latest CLO index (CLOIE) monitor report shows that US$2.8bn in par outstanding of CLOs paid down in the index since the last rebalance through 30 January, split between US$2.4bn and US$400m of pre-crisis and post-crisis CLOs respectively. The post-crisis CLOIE added US$8.8bn across 114 tranches from 22 deals at the January rebalance.
The post-crisis CLOIE last month outperformed the pre-crisis CLOIE across the capital structure for the first time since November. Post-crisis CLOIE returns were positive in January, led by a 0.64% return in double-A tranches.
The pre-crisis CLOIE experienced weakness in double-B tranches, in particular, which returned -0.32%. This -0.32% return represented the first negative monthly return for the pre-crisis double-B index since June 2013.
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CLOs
CLO par building examined
A Wells Fargo analysis of US and European post-crisis CLOs indicates that the 2012 vintage has posted the highest average quarterly increase in equity par NAV and minimum OC cushion. The data also shows that 2013 broadly-syndicated loan CLOs have built less par per period than 2014 CLOs.
"We believe that a combination of loan market technicals and CLO issuance patterns is why the 2012 vintage has the best par building record," Wells Fargo CLO strategists observe.
In 2013, retail inflows drove loan prices higher: average primary loan prices were under 99 for most of 2012, while the average primary loan price was closer to 99.5 in 2013. Consequently, many 2013 CLOs may have had fewer opportunities to build par.
Data for middle market CLOs show consistent average quarterly par building across all vintages, however. For 2012 to 2014, each vintage has posted a median quarterly equity par NAV increase of 70bp.
European CLOs issued in 2H13 posted equity par NAV increases of almost five points in 4Q14, according to the analysis. The median periodic increase in equity par NAV for 2013 vintage European CLOs is 60bp.
Both primary and secondary loan prices declined significantly in 4Q14, with the strategists expecting future data to show that CLOs built significant par during the quarter and 1Q15.
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CMBS
GG9 auction relisted
Auction.com and RealCapitalMarkets.com data indicates that 45 properties backing US$417m distressed US CMBS loans are up for auction in February and March. Barclays Capital CMBS analysts note that some of the loans, primarily securitised in GCCFC 2007-GG9, were previously out for bid in the US$250m year-end auctions and appear to be relisted.
The largest exposure in the latest auctions is MLCFC 2007-7, with US$88m in allocated loan balance across eight properties and seven loans, according to the Barcap analysts. The largest of these loans is the US$21m Carlsbad Corporate Plaza, which was appraised at US$17m in June 2014. The MLCFC 2007-7 properties out for bid are all in REO.
GCCFC 2007-GG9 has the second-largest exposure to the auctions, with US$75m in allocated loan balance. The largest GG9 loan is US$31m Blackwell II, which was previously in the 2014 year-end auction and has an appraised value of US$12m. Five loans are in REO with LNR, while two others - US$10.2m Princess Road Medical Arts Building and US$3.1m Eastern Hills Center - Phase L - are both 90+ delinquent and are being marketed as note sales.
The largest loan up for auction outside of these deals is the US$41m Lakeside Loudoun Tech in GECMC 2005-C4. The property was last appraised at US$22.5m in June 2014.
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CMBS
RFC issued on global CMBS
S&P has requested comments on its proposed methodology and assumptions for rating CMBS transactions outside of jurisdictions with specific CMBS criteria (the US, Canada, Europe and Japan). The agency expects the proposals to have no effect on any outstanding ratings.
The criteria of the proposal would apply to all new and existing CMBS transactions. In jurisdictions where S&P has published specific CMBS criteria, the relevant jurisdiction-specific criteria will be applicable. The proposals may also be used as a starting point to analyse other types of transactions in markets that do not have jurisdiction-specific CMBS criteria where cashflow for the securities is derived primarily from CRE.
Market participants are encouraged to submit their comments on the proposed criteria by 28 February.
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CMBS
CMBS delinquencies down again
The Trepp delinquency rate for US CMBS loans is now 5.66%, down by 9bp in January and 159bp from the level a year ago. This drop marks the eighteenth time the rate has decreased in the last 20 months.
In January, US$1.2bn in previously delinquent CMBS loans paid off either at par or with a loss and over US$500m in loans were cured. This combination helped push delinquencies lower by 32bp. Conversely, almost US$1.5bn loans became newly delinquent in January, which put significant upward pressure on the rate.
Across property types, lodging continues to be the best performing asset class with a delinquency rate of 4.40%, down by 37bp in January. The industrial delinquency rate saw the second largest decrease last month with a 35bp drop to 7.20%, while the office delinquency rate was the only major property type to weaken in January with a 10bp increase to 6.18%.
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CMBS
Defeasance, prepays up for CMBS 2.0
CMBS 2.0 borrowers continue to take advantage of low interest rates and improving property performance as the pace of defeasance and prepayments increase, Fitch notes. The agency expects this trend to continue as interest rates remain low and the CRE market remains stable.
By securitised balance, US$9.3bn CMBS 2.0 loans have refinanced since issuance, consisting of US$7.2bn in prepayments, US$2bn in defeasance and US$42m in pay-offs at maturity. This represents 5% of the original US$192bn Fitch-rated CMBS 2.0 universe, excluding non-performing loan pools and restructured or re-REMIC deals. Overall, loan performance continues to improve or remain stable and therefore the costs of defeasance or prepayment are often offset by value growth.
Fitch says that total CMBS defeasance is rising, with US$5.3bn defeased during 4Q14 alone. Of this, US$791.4m was from 2.0 transactions. In total, 85 loans in 2.0 issuances have defeased, comprising 1% of the 2.0 universe.
In 2014, defeasance by quarter for 2.0 deals was: US$115.9m in 1Q14; US$70.1m in 2Q14; US$905.5m in 3Q14; and US$791.4m in 4Q14. By vintage, the majority - US$1.1bn - was from 2011, followed by 2012 (US$259.7m) and 2010 (US$200.8m). Defeasance from the 2009 vintage was from one transaction, Bank of America Large Loan Trust 2009-FDG (US$460m).
CMBS prepayments have also increased, as 160 loans totalling US$7.2bn have prepaid in 2.0 CMBS transactions, representing 3.7% of the Fitch CMBS 2.0 universe. Of these, 84 loans or US$3.9bn prepaid during the open period, 44 loans totalling US$3.1bn prepaid with yield maintenance and 28 loans totalling US$131.2m with a prepayment premium.
In addition to the prepayments, 14 loans totalling US$75.6m paid after a default or modification. Seven loans totalling US$42.1m paid off at maturity, US$26m of which was one large floating rate loan.
Fitch adds that large loan and single-borrower transactions had much higher rates of prepays and pay-offs, as these loans are often shorter term, floating rate and/or on higher-profile properties with sophisticated borrowers who refinance more often. Prepays and pay-offs for large loan transactions totalled US$2.2bn, or 53.1% of the large loan floating rate universe. In addition, single-borrower totalled US$3.9bn (21%) and multi-borrower totalled US$1.1bn (27.4%).
The highest amount of loan prepayments occurred in the second and third quarters of 2013 and 2014: US$2.1bn in 3Q14; US$1.5bn in 3Q13; US$1.2bn in 2Q14; and US$772.5m in 2Q13. The 2011 vintage had the highest amount of pay-offs or prepayments with US$3.3bn, followed by 2012 with US$2.1bn and 2013 with US$1.2bn.
Fitch notes that although defeasance and pay-downs increase credit enhancement, potential upgrades in 2.0 CMBS may be limited as many of these transactions have become more concentrated.
News Round-up
CMBS
Conduit credit quality eyed
The credit quality of US CMBS conduit loans continued to decline, while conduit loan leverage expanded to a new high for second-generation loans in 4Q14, says Moody's. The agency anticipates that the decline will continue in 1Q15.
As more conduit loans in 2015 approach 2007 leverage levels that exceed the pre-crisis peak of about 120% Moody's loan-to-value (LTV) ratio, Moody's average Baa3 credit enhancement for transactions has increased by almost a full percentage point, to an average of 11.5% in 4Q14 from 10.6% in 3Q14 transactions.
"The increase in conduit leverage is following the same trajectory as first-generation CMBS, though for now at slightly lower levels," says Tad Philipp, director of CRE research at Moody's. "But it continues to trend toward pre-crisis levels."
Although Moody's only rated the top tranches of many 4Q14 conduit transactions, the agency calculated credit enhancement levels for all tranches top to bottom. Tranches designated D, intended to merit a low investment grade rating, are particularly sensitive to the possible volatility created by rising conduit loan leverage.
According to the reports of other agencies that rated these tranches, they assigned levels of credit enhancement averaging 7.6% to class Ds, almost four percentage points lower than Moody's. These matched Moody's enhancement levels from a year earlier, before the significant credit deterioration had occurred.
The agency suggests the trend reflects loosening underwriting standards as mortgage brokers compete for the highest loan proceeds. As a result, the underwritten LTV ratio in second-generation transactions has risen to the upper 60% range. Meanwhile, Moody's LTV rose to 113.6% in 4Q14, a second-generation high, from 112.2% in 3Q14.
The agency also examined the credit implications of falling oil prices. "The impact will be mixed, with some positive effects from consumer savings helping support CRE, but varying negative effects in markets where employment depends on the energy sector," adds Philipp.
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Risk Management
Pillar 3 standard finalised
The Basel Committee has issued its final standard for the revised Pillar 3 disclosure requirements, which aim to enable market participants to compare banks' disclosures of risk-weighted assets. The revisions focus on improving the transparency of the internal model-based approaches that banks use to calculate minimum regulatory capital requirements.
The revised requirements will take effect from end-2016 and supersede the existing Pillar 3 disclosure requirements issued as part of the Basel 2 and 2.5 frameworks. The standard retains the structure of the Committee's June 2014 consultative paper, with key changes involving: rebalancing the disclosures required quarterly, semi-annually and annually; streamlining the requirements related to disclosure of credit risk exposures and credit risk mitigation techniques; and clarifying and streamlining the disclosure requirements for securitisation exposures.
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Risk Management
'Pro-reform' swap framework proposed
CFTC commissioner Christopher Giancarlo has published a White Paper analysing what he views as flaws in the Commission's implementation of its swaps trading regulatory framework under Title VII of the Dodd-Frank Act. The paper proposes a more effective alternative.
Giancarlo asserts that there is a fundamental mismatch between the CFTC's swaps trading regulatory framework and the distinct liquidity and trading dynamics of the global swaps market. The paper states that the Commission's framework is highly over -engineered, disproportionately modelled on the US futures market and biased against both human discretion and technological innovation. As such, the CFTC's framework does not accord with the letter or spirit of the Dodd-Frank Act, it suggests.
The paper identifies a number of adverse consequences of the swaps trading rules, including: driving global market participants away from transacting with entities subject to CFTC swaps regulation; fragmenting swaps trading into numerous artificial market segments; making it expensive and burdensome to operate SEFs; hindering swaps market technological innovation; and increasing market fragility and the systemic risk that regulatory reform was predicated on reducing. In contrast, the proposed alternative swaps trading framework is described as "pro-reform".
The proposed alternative framework is built upon five clear tenets: comprehensiveness, cohesiveness, flexibility, professionalism and transparency. The paper asserts that such a pro-reform agenda would yield a broad range of benefits, including the promotion of vibrant swaps markets by regulating swaps trading in a manner well matched to underlying market dynamics.
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Risk Management
RFC issued on ECL framework
The Basel Committee has issued, for consultation, guidance on accounting for expected credit losses. Comprising 11 fundamental principles, the guidance sets out supervisory expectations for banks relating to sound credit risk practices associated with implementing and applying an expected credit loss (ECL) accounting framework. It also covers supervisory expectations of how an ECL accounting framework should interact with a bank's overall credit risk practices and the regulatory framework.
An ECL accounting framework reflects the fact that credit quality deteriorates far earlier than when loss events are incurred. A further important feature of an ECL accounting framework is that the assessment and measurement of ECL must take into account forward-looking information and macroeconomic factors and cannot therefore rely exclusively on current conditions and historical data.
Comments on the guidance are requested by 30 April.
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Risk Management
Exemption extension recommended
The European Commission has published a report that recommends granting pension funds a two-year exemption from central clearing requirements for their OTC derivative transactions. The report explains that central counterparties need this time to find solutions for pension funds and encourages CCPs to continue working on finding technical solutions on the matter.
The Commission says the objective is that pension scheme arrangements (PSAs) should use central clearing for their derivatives transactions, as is the case for other financial institutions. Under current arrangements, PSAs - which encompass all categories of pension funds - would have to source cash for central clearing. Given that PSAs hold neither significant amounts of cash nor highly liquid assets, imposing such a requirement on them would require far-reaching and costly changes to their business model which could ultimately affect pensioners' income.
Recent estimates show that the costs for obliging pension funds to clear their OTC derivative portfolios would range from €2.3bn to €2.9bn annually and the expected impact could be up to 3.66% over 20-40 years on retirement incomes across the EU.
Current EU law provides for a temporary exemption from the clearing obligation for certain contracts, with the current exemption set to expire in August. The Commission's report recommends extending it for another two years.
Furthermore, in line with the Commission's legal mandate under the EMIR, the report also assesses possible alternative solutions for the posting of non-cash assets by PSAs.
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Risk Management
Clearing obligation opinion published
ESMA has published an opinion on the draft regulatory technical standards (RTS) on the clearing obligation on interest rate swaps. The move is in response to the European Commission's notification on 18 December of its intention to endorse, with amendments, the draft RTS submitted by ESMA on 1 October.
In accordance with the ESMA regulation, within a period of six weeks from this notification, ESMA may amend the draft RTS and re-submit it in the form of a formal opinion to the Commission. The opinion addresses a number of changes introduced by the Commission.
In particular, the opinion explains ESMA's support of the Commission's intention to extend the initial approach with the objective of postponing the start date of the frontloading obligation, as this should provide counterparties with sufficient time to determine whether their contracts are subject to the frontloading obligation.
However, the opinion also raises some concerns on the process envisaged to exempt non-EU intragroup transactions from the clearing obligation. ESMA is ready to provide technical advice on this particular issue in order to find an alternative solution, both in the interest of an efficient implementation and to avoid any delays in the roll-out of the clearing obligation.
News Round-up
RMBS
Master trusts to remain 'strong'
The performance of UK RMBS master trusts will remain strong in 2015, according to Moody's. This trend is supported by the country's robust economic recovery and improving affordability.
"Rising house prices will support the collateral performance of UK RMBS master trusts by leading to lower severities and enhancing borrowers' refinancing abilities," says Emily Rombeau, a Moody's analyst.
Home price appreciation in the UK will likely continue in 2015, although at a slower pace, with prices increasing by up to 5%. Furthermore, the government's stamp duty reform could improve house purchase affordability as it lowers the overall cost of home buying, albeit with significant regional variations.
Moody's expects that the combination of favourable economic conditions and the recovering labour market will contribute to a steady rise in household income this year too. Low interest rates may also reduce pressure on more vulnerable households, including highly leveraged borrowers and homeowners on lower incomes.
Although Moody's expects sustained income growth in 2015, it believes that house prices will continue to appreciate at a faster pace than earnings as the growth in housing supply keeps falling behind that of demand. The agency says that new measures by the Bank of England will have a limited impact on credit availability as lenders generally already operate within the new rules.
Nevertheless, Moody's expects a gradual rise in interest rates of around 2%-3% over the next few years, with the first hike by mid-2015. However, debt servicing costs will likely remain affordable. Master trusts mostly contain seasoned collateral (on average, 8.2 years), which were usually originated at significantly higher rates, while newer loans benefit from tighter underwriting standards, including a regulatory interest rate stress test at origination.
Cross-currency swap counterparty risk remains high and a key driver of rating actions for some UK RMBS master trusts, however. Moody's expects that this risk will continue to be a major rating driver for Aire Valley and Granite in 2015, given their continued exposure to RBS, but will be limited in other trusts because of highly rated providers and documentation generally consistent with the agency's swap framework.
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RMBS
Aussie postcode performance analysed
Fitch says that Kingston (4114), in the Logan City region of Queensland, was the worst performing postcode in terms of Australian mortgage repayment delinquencies as at end-September 2014, replacing Budgewoi (NSW). Kingston's 30-plus days delinquency rate was 3.2%, approximately 3.5x the national average of 0.9%. Moreover, its delinquency rate rose by 20bp between March and September 2014, in contrast to the average improvement rate of 45bp across the country.
Given the diminishing effect of Christmas spending and the continuing strong property market, all Australian states and territories showed a marked improvement in delinquency rates from end-March 2014, of between 28bp and 51bp. Stable interest rates and booming housing markets had an impact during the twelve months to September 2014, as arrears were 34bp lower than a year earlier. Local unemployment and economic trends have been the major drivers in regional mortgage performance, particularly in the current low interest rate environment.
Queensland remained the worst performing state at end-September 2014, showing the lowest level of improvement at 38bp. There was little divergence among the delinquency rates across all six states, as the gap between the best- and worst-performing states was only 20bp, compared to an average of 74bp over the past eight years. Northern QLD was the only region in Queensland to worsen in the six months to September 2014, up by 6bp, with delinquencies in Mackay improving the least.
Five of the worst-performing postcodes were located around Brisbane, three of which were in the Gold Coast area. Surfers Paradise and Mudgeeraba have previously been among the worst-performing postcodes, while Oxenford appeared in the list for the first time in September 2014.
Hume (VIC) remained the worst-performing region in Australia by both dollar volume and number of mortgages, with a delinquency rate of 1.67%. Fitch suggests that mortgage performance in Victoria has shown strong sensitivity to mortgage rates due to socio-economic factors. However, delinquencies in this region have improved significantly, down 126bp from the peak in March 2014.
Hume (VIC), Melton-Wyndham (VIC) and Northern Outer Melbourne (QLD) improved less than other regions in terms of mortgage performance. Fitch expects these regions to continue to perform poorly, given their performance is mainly driven by socio-economic variables and local economies. Unemployment in these areas has increased to the highest level in three years at approximately 9%, while house prices have also shown little appreciation in the last three years, with Hume and Melton recording growth of 1% and 10% respectively.
News Round-up
RMBS
Servicer ratings exposure examined
The number of US RMBS transactions likely to experience servicer EODs due to servicer rating changes is marginal, according to Fitch. The agency's comment comes in light of increased negative pressure on Ocwen Loan Servicing, the largest servicer of non-agency US RMBS loans.
Fitch conducted a review of transaction documents for approximately 450 US RMBS transactions. In addition to standard servicer EOD conditions related to financial condition and contractual obligations, the agency found that less than 10% of transactions reviewed included a servicer EOD tied to a specific servicer rating by a rating agency. More commonly, servicer EODs were tied to collateral performance triggers (25%) and GSE approval (17%).
Typically in an EOD, the trustee may - or at the direction of bondholders representing a certain percentage of voting rights - terminate the servicer and appoint a replacement. Historically, servicer EODs have not resulted in significant numbers of servicing transfers due to obstacles in obtaining the appropriate voting rights and potential cashflow disruptions risks related to servicing transfers.
Following recent developments with Ocwen, Fitch has placed 297 US RMBS classes from 135 transactions on rating watch negative. All of the classes are rated above single-A and are collateralised with mortgage loans serviced in part by Ocwen. The agency says the rating action reflects the increased risk of a temporary servicer disruption.
The rating watch status is expected to be resolved within 30 days upon completion of an ongoing assessment of Ocwen's servicing operations. Fitch currently expects most of the classes placed on watch to be downgraded to single-A. The classes affected represent approximately 2% of all US RMBS classes currently rated above single-A.
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