Contents

RMBS

Poor vintage?

Caution urged on recent Australian mortgages

Australian RMBS issuance has increased, but so too have concerns regarding the underlying loans. House prices continue to rise unchecked, while underwriting standards are also coming into question, suggesting that investors should focus on more proven vintages.

Two Australian RMBS have already been issued this year - the A$344m PUMA Trust 2015-1 and A$750m Series 2015-1 Harvey Trust - while SCI's deal database lists 36 transactions issued last year. However, there are reasons to be cautious about 2014-vintage residential mortgages loans.

"By various international measures for property overvaluation, Australia is up there with Canada and Hong Kong in the top three. Being overvalued, even over decades, is not a problem by itself, but it becomes a problem when a correction finally comes," says Jonathan Rochford, portfolio manager at Narrow Road Capital.

That correction could come in the form of a serious recession, but it is not the only threat to house prices. Rochford notes that a substantial federal budget deficit needs to be addressed, with Australia's generous property taxes providing a likely starting point.

"Property ownership is heavily incentivised by the tax system in Australia, with low land taxes and no capital gains tax when you sell the primary residence. House prices continue to rise and property has been seen as a 'no lose' investment for many years," he says.

Rochford adds: "The government is unlikely to make major changes to the tax system this year, so it is a medium-term issue rather than a short-term one. However, with unemployment rates slowly rising, it becomes more likely."

Of more pressing concern to investors is the fact that underwriting standards appear to be slipping. The risk posed by non-conforming loans - which is substantially lower now than it was seven years ago - is considerably less than the risk posed by prime mortgages.

"While the non-conforming originators are writing fairly low risk loans, the prime lenders are pushing LTVs increasingly higher. Standards have not slipped all the way to pre-crisis levels, but there are 2% deposits being accepted and instances of deposits being given to borrowers by their parents, as well as an increasing number of anecdotal stories of borrowers maxing out their credit cards to 'create' deposits," says Rochford.

He notes that a lot of risk is concentrated around the 90%-95% LTV area in prime residential mortgages, so any RMBS investor looking at deals backed by 2014-vintage loans should prioritise low LTVs. In addition, the fact that property prices continue to rise means that the most recent vintage also has the greatest potential for losses if prices fall.

Rochford notes: "Slightly older vintages, where borrowers have proven they can pay, are preferable to 2014-vintage loans. However, for the prime deals, I would also recommend staying clear of the lower tranches from more recent vintages - especially where there are high LTVs. Of course, there is not much secondary trading going on, so it is easy to say an investor should target older loans, but harder to actually do so."

Rochford also sounds one more note of caution. S&P has made changes to its treatment of LMI in its RMBS ratings, with those changes coming into effect this month (SCI 9 December 2014). Whereas the other major rating agencies used to be seen as taking a stricter approach to LMI, now that S&P is no longer "the softest touch", investors should be watchful of arrangers simply going to the other agencies instead.

"The Australian market has not learnt the LMI lessons from the US or UK. When the next crisis comes, if LMI does not hold up in the way that lenders and investors hope, then the rating agencies will slash their ratings for the lower tranches of RMBS. That is another reason to prefer non-conforming paper, because while some are blended, others are not insured, so there is a lot more stability in the ratings," Rochford concludes.

JL

Secondary markets

US CMBS ticking over

While most US secondary structured finance markets have been all but non-existent during the Vegas conference, the non-agency CMBS market has been ticking over.

Spreads have remained broadly unchanged throughout the week, but volumes have been reasonably healthy. Today's BWIC schedule looks set to reach around the $200m mark as it did yesterday after seeing just over half that Monday.

Today's BWIC volume is skewed by one large list, however. A ten line $130.08m mix of dupers and AMs is due at 14:00 New York time. It consists of: BACM 2006-1 A4, CSMC 2006-C2 A3, GSMS 2006-GG6 A4, LBUBS 2006-C6 A4, LBUBS 2007-C1 AM, MSC 2006-IQ11 A4, MSC 2006-T23 A4, MSC 2006-T23 AM, WBCMT 2006-C24 A3 and WBCMT 2006-C26 A3.

Three of the bonds have covered on PriceABS in the last three months - GSMS 2006-GG6 A4 at 190 on 5 January; MSC 2006-T23 A4 at 125 on 12 December; and MSC 2006-T23 AM at 84.9 on 5 January.

Secondary markets

Euro ABS/MBS dampens down

Secondary European ABS/MBS activity has dampened down once more as participants step away amid broader market volatility.

"Flows are again relatively light," says one trader. "There's some concern over Greece and to a lesser extent Ukraine, which is keeping things pretty static in ABS."

Core bonds remain the main focus of the ABS/MBS market with spreads grinding ever tighter led by Dutch and UK prime. In peripherals Italian paper is still attracting interest, while Greek bonds continue to fluctuate - GRIF 1 A is currently being quoted in the 66h-67h region having touched 65 and 68 in the past couple of days.

Headline numbers suggest the BWIC schedule is a little busier today, but it is dominated by an 18 line list of Granite senior and mezzanine paper in mixed currencies due at 15:00 London time.

Secondary markets

US RMBS looks to tomorrow

The US non-agency RMBS secondary market is still fairly quiet post-Vegas, but tomorrow should see renewed focus with the large AON list due at 10:00 New York time (SCIWire 9 February 2015).

"It looks like another quiet day today with people still trickling back from Vegas," says one trader. BWIC volume today is low for a Thursday at $200m-$300m, aside from a total proceeds AON list. The bulk of the sellers are money managers with hedge funds largely absent.

However, that will change, the trader suggests. "The big AON list tomorrow will ensure everyone is back in - it's certainly rare to see something like this on a Friday, especially before a long weekend, and even more unusual in that I believe it isn't from a GSE."

The wide array of deal types on offer is a further attraction for the list, the trader says. "There are bonds from across the board so everyone will be looking closely to see how it trades and to who - because of its size it'll have to go to a large real money account or multiple fast money players."

Secondary markets

Euro ABS/MBS returns to form

After an up and down week in terms of activity the European ABS/MBS secondary markets have returned to form.

Flows across the secondary market increased yesterday in both bilateral trades and BWICs as lists were added throughout the day. Most names saw strong trading levels and that positive tone has extended into this morning.

The recent favourite sectors continued to lead the way with Dutch RMBS prints hitting record tights. At the same time, senior Spanish and Portuguese paper saw plenty of interest and Greek RMBS quotes have turned around over the past 24 hours and are on the rise once more.

Today's BWIC schedule already looks far more robust than of late, albeit with only three lists scheduled so far. First up is a 13 line 20.517m mixed currency CMBS list at 14:00 London time.

The CMBS list consists of: DECO 2006-E4X A2, DECO 2006-E4X C, DECO 2014-GNDL D, ECLIP 2006-3 A, ECLIP 2006-4 B, ECLIP 2007-1X B, EURO 25X B, EURO 27X A, EURO 27X C, EURO 28X B, EURO 28X D, TITN 2007-2X B and WINDM X-X D. Four of the bonds have covered with a price on PriceABS in the last three months, as follows: DECO 2014-GNDL D at 100.663 on 27 January; EURO 25X B at 95.06 on 2 December; EURO 27X A at LM97H on 19 November; and EURO 27X C at 95.68 on 15 January.

Also due at 14:00 is a seven line €7.6m mixed list consisting of: AYTGH II B, BBVAR 2007-2 B, EUMAX VI A, GSHAM 2006-1 D, RHIPO 8 B, RMAC 2005-NS2X M2C and TDA 17 B1. Only BBVAR 2007-2 B has covered with a price on PriceABS in the last three months, doing so at 64.15 on 10 December.

Then at 14:30 there are three lines of Portuguese RMBS seniors: €31m of ATLAM 2 A, €38m of ATLAM 4 A and €112.39m of MAGEL 4 A. Two of the bonds have covered with a price on PriceABS in the last three months - ATLAM 2 A at 96.263 on 3 February and MAGEL 4 A at 89.25 on 12 December.

Secondary markets

Peripherals take attention

Peripheral paper is receiving increased attention in the European ABS/MBS secondary market.

On the back of strong prints on Friday and positive market tone at today's open, prices in major name peripheral bonds edged upwards first thing this morning. Focus revolved around Greek, Italian and Portuguese paper, though the former is likely to remain highly volatile.

At the same time, core bonds continue to attract investor interest particularly in Dutch and UK RMBS. Equally, the strong execution on Friday's large European CMBS list is likely to feed through into activity today.

Nevertheless, the ABS/MBS BWIC calendar is empty so far for today, with the US public holiday likely to discourage the addition of any large auctions this session.

Secondary markets

Euro CLO BWICs building

The auction calendar for European CDOs/CLOs is building strongly for this week.

Increasing secondary CDO/CLO activity in most sectors and parts of the capital structure was seen last week and is now being reflected in the BWIC schedule. There are currently six lists containing 37 European bonds due for trade this week.

The only auction scheduled so far for today is a mix of 1.0 senior and mezz CLOs due at 15:00 London time. The €163.9m original face six line list consists of: ACAEC 2007-1X A1R, DALRA 1-X B, DALRA 2-X B, GROSV III-X A3, QNST 2007-1X A2 and WODST IV-X B. Only GROSV III-X A3 has covered on PriceABS in the last three months, doing so at H96 on 9 December.

Secondary markets

Euro ABS/MBS keeps calm

As anticipated with the US holiday the European/ABS secondary market was reasonably calm yesterday and that has extended into this morning despite the news around Greece.

"We've not seen much action since the Greek discussions collapsed," says one trader. "Overall spreads have remained pretty stable."

The trader continues: "For the moment the market is quiet, though we're hopeful it'll take off later in the week once everyone is back. What activity we are seeing is mainly in prime - we've been active in Dutch and UK as well as some Italian names."

BWIC activity did pick up a little after a slow start yesterday with some strong execution seen, especially in Dutch RMBS. Today's calendar again looks limited at the open but more is likely to be added intraday.

Secondary markets

US CLOs strengthen

The US CLO secondary market has returned from the Vegas conference and yesterday's public holiday with a strengthening tone.

"New issue spreads are tightening thanks to the demand for risk retention structures and with that people are scrambling for paper in secondary, particularly at the top end of the stack," says one trader. "Bonds are now scarce as it seems a lot of dealer inventory has been cleared out, so people are paying tighter and tighter prices for what is available."

At the same time, CLO investors are becoming more comfortable with oil credits, according to the trader. "They're willing to look beyond just the oil exposure to see what it actually involves and where the specific piece is trading. Certainly with mid-stream companies, such as refiners, investors are much happier than they were."

Meanwhile, the US CLO BWIC market remains very quiet today, but the auction schedule is growing rapidly for the rest of the week.

Secondary markets

Euro secondary remains robust

European secondary securitisation markets are staying robust despite continuing broader volatility around Greece.

"The ABS/MBS market is strong," confirms one trader. "The core space continues to grind tighter and it's almost impossible to buy paper - the UK and euro is extremely well bid. At the same time, peripherals are unchanged to slightly better."

Overall, ABS/MBS flows are increasing, albeit from a low level last week, but the BWIC calendar remains quiet with only one list scheduled so far for today. As noted on Monday it's a different story in European CLOs with a heavy schedule running throughout the week.

Yesterday's euro CLO auctions saw good participation and some strong prints. Today already sees another three lists circulating.

The highlight is perhaps two €10m slices of triple-A ABS CDOs at 16:00 London time. The two bonds, PANTH V-A A1 and PANTH IV-A A, have not traded on PriceABS before.

ABS

Renewal risk highlighted

American Express is set to end its US co-brand relationship with Costco Wholesale Corporation on 31 March 2016. AMXCA charge-offs and delinquencies could rise as a result, although the move is expected to have a negligible impact on the ratings of American Express Credit Account Master Trust and American Express Issuance Trust II credit card ABS.

Costco cards account for one in 10 American Express cards in circulation, but over 70% of the spending on Costco Amex cards takes place outside of Costco stores. American Express has stated that it will approach these customers with alternative products. Costco - which replaced American Express in Canada last year - is expected to seek new bids for both an issuer and a payments network for its US cards.

American Express has not disclosed whether it will sell its Costco portfolio, although its cfo Jeffrey Campbell mentioned the possibility of a sale in a conference call last week. Barclays Capital ABS analysts point out that the prospectus for AMXCA 2014-5 states that "some of the co-branding arrangements provide that, upon expiration or termination, the co-brand partner may purchase or designate a third party to purchase the receivables", suggesting that the decision of whether to sell the portfolio may be up to Costco.

The Barcap analysts expect AMXCA net charge-offs and delinquencies to rise following the end of the Costco US co-brand relationship, especially if the portfolio is sold to Costco's new card partner. In addition, principal payment rates in the trust are likely to decline.

The AMXCA 2014-5 prospectus states that the "co-branded receivables in the trust have, as a whole, had higher payment rates and lower losses as compared to the general population of Centurion and FSB's portfolio of credit card receivables". The absence of some of these high-income, high credit quality borrowers will likely weigh on AMXCA performance in the future.

"While it is possible that American Express will be able to retain some of the spending from these card holders (the company estimates that 70% of the spending on its Costco co-brand cards occurs outside of the retailer), it is also possible that at least some of these card members will switch their general-purpose spending to whichever card issuer Costco has chosen to co-brand with. That said, while a potential sale of the Costco receivables and the reduction in spending among American Express Costco card holders is likely to be detrimental to the AMXCA trust collateral performance, we do not expect credit performance to deteriorate significantly, given the strong credit profile of American Express cardholders in general," the analysts observe.

The credit profile of the card company's customer base has consistently improved since 2009 and subprime account holders now represent a historically low share of its card member base. The analysts note that as a result, AMXCA charge-offs and delinquencies have also reached historically low levels, with AMXCA net charge-offs the lowest among the large bank and retail card issuers today.

Fitch suggests that contract renewal risk has the potential to cause deterioration in trust performance. In this case, a non-renewal could slow overall annual spending on its cards and, in turn, cause a disruption to the generation of new receivables to support outstanding bonds for the trusts. This can result in early amortisation.

However, the agency believes this risk will be adequately mitigated in AECAMT and AEITII by the levels of available credit enhancement and structural protections. It says that the notes issued by these trusts maintain ample cushion to absorb any performance deterioration of the securitised credit card receivables.

CS

Structured Finance

SCI Start the Week - 16 February

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

Pipeline
It was an understandably quiet week for the pipeline as market participants attended the annual industry conference, ABS Vegas 2015. There were five new ABS announced, as well as three RMBS, two CMBS and two CLOs.

The ABS were: US$265.94m CarFinance Capital Auto Trust 2015-1; US$1bn CarMax Auto Owner Trust 2015-1; US$265.1m DT Auto Owner Trust 2015-1; US$750m Navient Student Loan Trust 2015-1; and US$1.06bn Santander Drive Auto Receivables Trust 2015-1.

US$1.5bn CAS 2015-C01, A$1bn Medallion Trust Series 2015-1 and Precise 2015-1 accounted for the RMBS, while the CMBS were C$325.4m IMSCI Series 2015-6 and US$871.25m MSBAM 2015-C21. Meanwhile, the CLOs were €308m Aurium CLO I and US$563.125m CIFC Funding 2015-I.

Pricings
Completed issuance was even more limited. Eventually one ABS, two RMBS, one CMBS and one CLO printed.

CNY2.99bn Fuyuan 2015-1 was the ABS, while €1.09bn-equivalent Guildford No.1 and A$750m Series 2015-1 Harvey Trust were the RMBS. The CMBS was US$913.5m GSMS 2015-GC28 and the CLO was €443m Dryden 35 Euro CLO.

Markets
The Vegas effect was felt throughout the markets, not least in US ABS. "Spreads were stable w/w amid below-average trading volumes, with an average of US$580m in ABS traded each day during the first four days of the week, significantly less than the US$1.7bn of average daily trading volume during the week-earlier period. ABS primary issuance was non-existent," comment Barclays Capital analysts.

US non-agency RMBS activity was slow last week. Wells Fargo analysts note: "Weekly trade and BWIC volumes were about US$2.5bn and US$1.3bn, respectively. On the heels of the conference, Fannie Mae announced its first CRT transaction of 2015, CAS 2015-C01, expected to close on Feb 26."

US CMBS spreads tightened for the second consecutive week, with triple-A LCFs about 5bp tighter from the beginning of the month, while double-A and triple-B minus spreads are how around plus 150bp and plus 360bp, respectively. "One potential headwind continues to be the heavy anticipated supply. The pipeline through March shows nearly US$25bn of new deals, including US$13bn of conduits," say Citi analysts.

The European CLO market largely resisted the wider trend of spread tightening, as levels held firm. "UK paper seems to have moved in more than the EZ paper, and senior tranche core more than the junior core," say Bank of America Merrill Lynch analysts.

Deal news
• The first static CLO 2.0 deal has been placed on the European market. The €233.4m Bosphorous CLO I is a transaction managed by Commerzbank Debt Fund Management and co-arranged by Sterne Agee & Leach and Sterne Agee UK.
• Jefferies Finance is set to transfer its responsibilities as portfolio manager for JFIN CLO 2013 and JFIN CLO 2012 to Apex Credit Partners. The transfers aren't expected to cause the downgrade or withdrawal of the current Moody's rating assigned to the class A notes issued.
• The US CMBS market was last week hit by a double-whammy of negative news, as RadioShack filed for bankruptcy and Staples announced plans to acquire Office Depot. The loan likely to be most affected by the merger is the US$49m OfficeMax Headquarters, securitised in MLMT 2007-C1.
• Around €4.4bn of EMEA CMBS loans are scheduled to mature in 2015, with about half of them expected to repay at maturity. Citi analysts put forward the class A and B bonds of ECLIP 2007-1 and RIVOL 2006-1 as high conviction trades.
• The auction to settle the credit derivative trades for Caesars Entertainment Operating Company Inc CDS and LCDS has been scheduled for 19 February. ISDA's Americas Determinations Committee anticipates holding the auction for RadioShack CDS during the week of 2 March.

Regulatory update
• The Monetary Authority of Singapore (MAS) has proposed legislative amendments to the Securities and Futures Act (SFA) to effect reforms to the regulation of OTC derivatives trading and the securities market. The consultation follows the feedback it received on these reforms.
• The US NAIC has released RFPs from vendors to produce valuations for state insurance regulators to set risk-based capital requirements for CMBS and RMBS owned by US-domiciled insurance companies. Responses to the RFPs are due on 10 March.
• The OCC, US Federal Reserve and FDIC have developed an automated tool to help national banks and federal savings associations calculate risk-based capital requirements for securitisation exposures. The agencies are making the tool available for all banks that use the simplified supervisory formula approach to help calculate associated capital requirements.

Deals added to the SCI New Issuance database last week:
Agate Bay Mortgage Trust 2015-1; Ally Master Owner Trust Series 2015-1; Ally Master Owner Trust Series 2015-2; Atlas IX Series 2015-1; BA Credit Card Trust 2015-1; Carlyle Global Market Strategies Euro CLO 2015-1; Chesapeake Funding Series 2015-1; Clear Creek CLO; Consumer Credit Origination Loan Trust 2015-1; Ford Credit Floorplan Master Owner Trust A Series 2015-1; Ford Credit Floorplan Master Owner Trust A Series 2015-2; JPMBB 2015-C27; MidOcean Credit CLO IV; NZCG Funding 2015-1; PUMA series 2015-1; Resource Capital Corp 2015-CRE3; SFAVE 2015-5AVE; Vibrant CLO III; WFCM 2015-C26

Deals added to the SCI CMBS Loan Events database last week:
BACM 2002-PB2; BACM 2006-3; BSCMS 2003-T12; CD 2005-CD1; COMM 2014-UBS5; CSMC 2006-C3; DECO 2007-E5; ECLIP 2006-1; ECLIP 2007-1; ECLIP 2007-2; EURO 23; EURO 28; GCCFC 2007-GG9; GECMC 2007-C1; JPMCC 2006-CB14 & JPMCC 2005-LDP5; JPMCC 2012-C6; LBCMT 2007-C3; LBUBS 2005-C1; MESDG CHAR; MLCFC 2006-1; MSC 2007-HQ11; TITN 2006-3; TITN 2007-CT1; UBSC 2011-C1

CLOs

CLO demand capacity gauged

Amid slower origination levels and a fading legacy CLO bid, CDO strategists at JPMorgan have updated their CLO reinvestment model to project global CLO liquidity over the next few years. They forecast US$524bn in demand capacity from both US and European CLOs in 2015-2016 combined.

The JPMorgan reinvestment model brackets the universe into four groups by reinvestment period and calculates effective reinvestment rates based on assumed asset turnover rates - such as discretionary trading and credit improvement/impairment trades - prepayment rates and reinvestment ratios of available proceeds. A 30% prepayment rate is assumed for US deals based on 2014's prepayment rate of around 28%. Asset turnover rates are assumed to be higher in the US than Europe, partly reflecting the larger market and diversity of collateral.

Though European loan prepayments have tended to be lower relative to the US, the JPMorgan strategists anticipate prepayment rates to remain at around current ranges, given recent large prepayments, diverging monetary policy with the US, a recovering European CLO market and the amount of European loans yet to be refinanced. Consequently, a 30% prepayment rate is also assumed for European deals.

The strategists calculate US$105bn in US CLO 1.0s outstanding, with 98% out of their reinvestment periods. In the US$272bn post-crisis CLO universe, only US$6bn is out of reinvestment period, including US$4bn from the 2011 vintage.

Assuming flat issuance growth of US$75bn, the strategists project the total reinvestment capacity from existing US CLOs for 2015 and 2016 to be US$219bn and US$211bn respectively. CLO 1.0 deals will contribute less and less to loan purchasing capacity, with 2015 likely only seeing US$8bn. However, post-crisis/new issue CLOs should account for 97% of reinvestment capacity in 2015.

Meanwhile, an estimated €69bn of European CLOs is outstanding, with one-third of the universe comprised of deals issued post-crisis. One-third of the market remains within reinvestment period.

For European CLOs, reinvestment capacity is estimated to be €40bn and €42bn in 2015 and 2016 respectively, assuming new supply of €20bn.

The strategists note that from 2017 to 2018, US$201bn - or 54% of the entire existing US CLO universe - will exit reinvestment. In the absence of elevated CLO issuance, large-scale rising-star upgrades, higher bond-for-loan take-outs or increased demand from alternative funding sources, 2017 and beyond could therefore be problematic for the combined US$396bn of loans that mature between 2017 and 2019.

CS

CMBS

Short-duration trades touted

Around €4.4bn of EMEA CMBS loans are scheduled to mature in 2015, with about half of them expected to repay at maturity. Many of these loans are large and could result in significant principal payments for senior noteholders.

About €2.3bn of the loans maturing this year have already prepaid, but a few good quality candidates remain that are very likely to repay, according to European securitised products analysts at Citi. While the likelihood of timely loan repayment is to a large extent incorporated in the high-90s market prices of senior bonds, they believe that such bonds are still attractive, given their very short WALs.

In particular, the Citi analysts put forward the class A and B bonds of ECLIP 2007-1 and RIVOL 2006-1 as high conviction trades. These tranches are all rated single-A or above by at least two agencies, with discount margins ranging from 125bp-350bp for 0.5- to 0.7-year WALs.

With respect to ECLIP 2007-1, the analysts note that the £121m Criterion loan is scheduled to mature in July, with successful repayment at maturity resulting in the complete pay-down of the class A notes and about 40% of the class B notes. "We think that the loan is highly likely to repay at maturity because of the trophy location of the underlying property, low LTV and 100% occupancy, and a long remaining lease term," they explain.

The loan is secured by a mixed-use property at Piccadilly Circus in the West End of London and was valued at £260m in 4Q14, an increase of £80m over the previous July 2012 valuation. The new valuation reduced the whole loan and securitised loan LTVs to 64% and 55% respectively.

Nevertheless, risks that could prevent the timely refinancing of the Criterion loan include the fact that about 60% of the space is let to McKinsey and Company, which has just over three years of lease term remaining. Moreover, some of the retail space is currently let on a 'tenancy at will' basis and may result in income volatility if the tenancy is terminated.

The remaining balance of class B notes is likely to be repaid by January 2017, when another large loan - the £56m NOS 2 & NOS 3 - matures. Further upside is possible if earlier recoveries materialise for the remaining two smaller loans: Amsterdam Place and Sol Central.

For RIVOL 2006-1, the analysts highlight the €56m Blue Yonder loan, which matures in August and is secured by a portfolio of seven office, industrial and retail assets located at Schiphol airport in Amsterdam. The loan has a low LTV of about 38% and high interest coverage of over 8.6x.

The properties are occupied by the sole tenant KLM until August 2018, although the airline is likely to renew the lease due to the strategic location of the properties at its hub airport. As such, the analysts believe the loan is highly likely to refinance on its maturity date, resulting in full pay-down of the class A notes and some residual payments to class B notes. The main risks that could prevent Blue Yonder's refinancing are a default before loan maturity or KLM's unwillingness to renew the lease.

The class B notes will have to rely for repayment on another €67m loan - Rive Defense - whose borrower entered safeguard in July 2013 and the court approved a three-year extension until July 2016 (see SCI's CMBS loan events database). However, whether the loan will repay by the new maturity date is uncertain, as the borrower is currently seeking permission to redevelop the site into a business park.

CS

Structured Finance

Business development head hired

Spencer Potts has joined CIFC as head of business development. He arrives from Silver Creek Capital, where he was md and head of business development for the firm.

In his role at Silver Creek Capital, Potts was responsible for marketing institutional investment portfolios centred around alternative assets, including hedge funds, private equity and real estate. Prior to this, he was a director in Merrill Lynch's hedge fund origination group, sourcing and marketing institutional hedge fund portfolios. Potts was also previously a portfolio manager for Pinnacle Asset Management.

Structured Finance

Law firm adds renewables expert

Crowell & Moring has added Elliot Hinds as a partner in the firm's energy and corporate groups. He joins the firm from Akin Gump Strauss Hauer & Feld, where he was a member of its global project finance group.

Hinds has previous experience in renewable energy securitisations and will continue to cover this area for Crowell & Moring. He also has experience in project development and finance, mergers and acquisitions, joint ventures and debt financing work in the energy space.

Structured Finance

Islamic finance head hired

Fitch has appointed Bashar Al Natoor as global head of Islamic finance, based in Dubai. In this new role, he will coordinate all Islamic finance activities and expertise across Fitch's sovereign, financial institutions, corporate, structured finance, infrastructure and insurance teams.

Since joining the agency, Al Natoor has overseen Fitch's sukuk criteria and Islamic finance practices, undertaken research and written numerous published articles on Islamic finance. Prior to this, he was at the Islamic Development Bank in roles including investment officer in the treasury department, senior credit analyst in risk management and senior technical assistant to the vp of finance and administration.

As well as being involved in the rating process of Islamic finance instruments, the Islamic finance group will continue to closely monitor and report on the sector, producing specialised research and commentary as well as criteria development.

Fitch reports that sukuk issuance volumes globally continued their upward trend in 2014, with issuance reaching approximately US$116bn across 16 different currencies. Around 14 different sukuk structures were used during 2014, with murabaha accounting for the largest proportion, and the instrument continues to evolve in degrees of complexity.

Fitch expects Islamic banking and finance assets to continue their double-digit growth in coming years due to a combination of growth plans within the GCC and Asia, and rapidly improving investor confidence.

Structured Finance

Infrastructure team beefs up

Standard Life Investments has hired Alex Campbell and Marianne Froude to its infrastructure debt team. The pair will report to Jeremy Allcock, head of infrastructure debt, with the team reporting to head of credit Craig MacDonald.

Campbell joins the firm as investment director for infrastructure debt and will be responsible for the sourcing, negotiation, preparation and review of infrastructure debt funding proposals. He is experienced in originating and underwriting long-dated capital market debt, with expertise across a range of infrastructure assets and in related asset classes, such as utilities and real estate financings.

Froude has been hired as investment analyst for the infrastructure team. She will assist in preparation of debt submissions, with particular responsibility for the analysis of detailed cashflow models and financial analysis of counterparties. Froude will also carry out ongoing management and monitoring of client infrastructure debt portfolios.

Campbell was previously director, infrastructure at Assured Guaranty, and has also worked at FGIC, CIBC and ING Barings in its corporate finance and securitisation department. Froude comes to Standard Life from ANZ, which she joined in 2008.

CLOs

Share issuance completed

Fair Oaks Income Fund has raised approximately US$39.7m - before costs and expenses - through the issue of 40 million new ordinary shares (SCI 10 February). Admission of the new shares to the London Stock Exchange's Specialist Fund Market is scheduled for 19 February. As a result of the issue, the company's issued share capital will consist of 161,898,362 ordinary shares.

CMBS

CMBS production strengthened

Ted Nasca has joined Greystone as md, focusing on establishing a stronger CMBS presence for the firm in the central states through Texas. He will report to Robert Russell, head of production for Greystone's CMBS group.

Nasca joins Greystone from Guggenheim CRE, where he was responsible for originating life company, CMBS and agency loans in the central region of the US. Prior to Guggenheim, he held roles at Cantor Fitzgerald and Credit Suisse, the latter of which was as a producer of CMBS loans.

Insurance-linked securities

ILS valuations firm founded

Former AIG Americas chief risk officer Kevin Huang has founded a firm specialising in risk analysis to facilitate the rapid growth of the insurance-linked securities market. Huang & Associates Analytics (HAA) aims to facilitate the convergence between reinsurance and capital markets through sophisticated analytics, advanced data visualisation, easy-to-use reporting tools and fair market valuation.

Using a patent-pending mark-to-market approach, HAA provides fair market valuations of any security, reinsurance contract or portfolio to both buyers and sellers. The service can be purchased annually (for an unlimited number of transactions) or on an ad-hoc basis (per transaction).

The firm plans to develop an ILS index reflecting the daily movement of underlying securities based on the mark-to-market approach. Working with a large asset manager, the index can be leveraged to build an exchange-traded fund (ETF) for catastrophe risk, which would expand the investor base for ILS and increase market liquidity.

As ceo of HAA, Huang brings over 15 years' industry experience in reinsurance, with a particular focus on risk management.

Insurance-linked securities

Entropics fund operational

SEF Entropics Cat Bond Fund is now open to subscriptions, becoming the first fund specialised in catastrophe bond investments managed by a Scandinavian asset manager and the ninth cat bond fund globally to comply with UCITS regulations (SCI 10 December 2014). The first institutional investor in the fund is Movestic, part of the Chesnara Group. The fund will invest in a globally diversified portfolio of cat bonds, with a target return of 4%-6% after fees.

RMBS

RMBS origination platform unveiled

Venn Partners is to establish a new residential mortgage origination platform in the Netherlands and plans to boost its Dutch mortgage lending to €1bn by the end of 2015. Marc De Moor has been recruited to lead the new platform.

De Moor was previously an executive director of Argenta and ceo of Argenta Nederland. With De Moor leading the new platform, Venn Partners is targeting €500m of Dutch mortgage origination per annum and at least one RMBS issuance per year through its Cartesian programme.

The decision to establish the platform is a key part of the firm's wider strategy to expand its direct lending activities in Europe beyond banks and traditional lenders.

Structured Finance

Capital calculation tool introduced

The OCC, US Federal Reserve and FDIC have developed an automated tool to help national banks and federal savings associations calculate risk-based capital requirements for securitisation exposures. The agencies are making the tool available for all banks that use the simplified supervisory formula approach to help calculate associated capital requirements.

The tool is designed to help reduce the potential burden on banks. It requires five manual inputs consistent with the requirements of the revised capital rule.

Banks may opt to use the simplified supervisory formula approach under the standardised approach, which is part of the revised capital rule that became effective on 1 January.

Structured Finance

Valuation RFPs issued

The US NAIC has released RFPs from vendors to produce valuations for state insurance regulators to set risk-based capital requirements for CMBS and RMBS owned by US-domiciled insurance companies. Responses to the RFPs are due on 10 March.

Consistent with NAIC policy, the association periodically submits third-party contracts to competitive rebidding. Blackrock Solutions and PIMCO have been providing the valuations for CMBS and RMBS respectively, which involve producing probability weighted NPVs using defined analytical inputs approved by the NAIC Valuation of Securities Task Force.

In order to be considered for these projects vendors must: be a nationally recognised entity with a minimum of five years' experience in performing valuations of complex structured securities; have the capability to immediately assign sufficient qualified staff to the projects and devote them to the endeavour until it is completed; have a methodology that can be quickly modified and implemented to evaluate approximately 6000 CMBS and 24,500 RMBS; and have access to loan-level details for the universe of CMBS and RMBS. Valuations must be produced by mid-December each year.

Structured Finance

New challenges, heights for China

S&P suggests that securitisation in China could reach new heights in 2015, with market-driven initiatives and more flexibility in the issuance review process likely to facilitate the growth. At the same time, the agency expects that as the country shifts towards a less regulated market, the importance of self-governance and responsibility will grow.

"2015 could build on the momentum generated in 2014, with growth stemming from increased flexibility of issuance eligibility and approval processes, the participation of new issuers and new investors, more asset classes to be securitised and trials in new deal structures," says S&P credit analyst Vera Chaplin. "Furthermore, market-driven developments could go beyond the regulatory approval process for new issuances and expand to market self-management to the investment and servicing side."

Issuance volume increased and there was a larger variety of assets, issuers and investors in the Chinese market in 2014, thanks to oversight by regulators, the recognition of securitisation's use for funding and capital management and deregulation that allowed a more efficient issuance process. S&P says that such developments should result in deeper knowledge of securitisation and asset performance in the context of China's macro environment and in the enhancement of market players' experience and capabilities.

"The market will strengthen its governance and assume heightened responsibility of self-management, following the recent regulatory effort in bringing more market-review initiatives," adds Chaplin. "Continuous efforts are required for greater transparency for the benefits of investors as well."

Structured Finance

Call for comments on TRACE expansion

The comment period on FINRA's proposal to expand TRACE trade reporting to include CMBS securities, as well as CMOs and CDOs, began last week. The proposal calls for trades to be reported 15 minutes after execution on a CUSIP basis with price information, similar to reporting for consumer ABS.

However, only trades sized at below US$1m would be reported in this manner, which Barclays Capital CMBS analysts suggest essentially reduces TRACE reporting to odd lots. Trades above US$1m in original balance would be reported in an aggregated format on a weekly and monthly basis.

"The rules would have the largest impact in the less liquid distressed mezzanine and deep credit space in CMBS, where some pricing transparency would increase. However, with same-day CUSIP level reporting limited to odd lots below US$1m, we would expect the effect to be minimal on larger tranches - such as legacy AJs - and thus unlikely to hurt liquidity," the Barcap analysts note.

The comment period ends on 10 April and the rule will be finalised sometime after that. TRACE will begin tracking consumer ABS trades on 27 April.

Structured Finance

Loss trends continue to improve

Loss trends on pre-crisis global securitisations continue to improve, Fitch reports. The agency says this is due in large part to the recovery of the US housing market.

Total losses on securitised bonds issued between 2000 and 2008 have dropped to 4.9% from 5% in last year's study. Total losses include both realised and expected future losses.

"Loss performance on 2000-2008 US RMBS deals has continued its positive trend, falling further to 8.1% from 8.7% last year," comments Fitch senior director Gioia Dominedo. "This is consistent with our revisions to home price and loan projections, which reflect the continued improvement in the US housing and mortgage markets."

The analysis also demonstrates the continued robust performance of post-crisis vintages. "Transactions issued after 2008 are benefiting from higher-quality collateral and increased credit protection," adds Dominedo.

The end result continues to be miniscule losses, with post-crisis vintages ranging from 0% to 0.05%. By contrast, pre-crisis losses peaked at 11% on 2006 vintage transactions.

Fitch-rated structured finance bonds issued between 2000 and 2014 had an original balance of US$10.5trn, of which 1.9% had been written off, as of 31 December 2014. The agency expects total losses on these bonds to grow to 4%.

Structured Finance

APAC loss rate falling

Fitch says that losses on rated Asia Pacific structured finance (SF) transactions issued between 2000 and 2014 are falling. The agency assigned ratings to nearly US$520bn of APAC SF bonds during the period and estimates that realised losses plus future expected losses will total 0.6% of the original note balance. This is marginally lower than the 0.7% total losses estimated in last year's analysis.

Transactions in APAC continue to be supported by strong economic performance, which means that assets have generally performed within the agency's expectations. However, transactions issued in 2006 and 2007 accounted for most of the losses, two-thirds of which come from structured credit (SC) transactions where realised losses now total 15.2% of the original note balance - up from the 14.6% estimated last year.

Defaults and losses on SF CDO and investment grade corporate CDO transactions resulted mainly from US and, to a lesser extent, European exposures, including US subprime RMBS bonds, Icelandic banks, Lehman Brothers and various US corporates. SC transactions in which the collateral pool consisted entirely of APAC assets are not expected to experience any losses.

Structured Finance

EMEA losses better US rate

The estimated total losses from European securitisation bonds are small relative to those of the US, according to Fitch. Total losses on Fitch-rated EMEA securitisations issued from 2000 to 2014 are expected to be 0.7%, compared to 4% globally.

Fitch says that a breakdown of the overall figures provides further evidence that securitisations have not performed as a homogenous investment category, with losses varying considerably by asset type, issuance date, seniority and country. Negligible losses are expected on EMEA securitisation bonds issued from 2008 onwards, while transactions issued more recently have higher quality collateral and increased credit protection.

Losses on EMEA ABS transactions remain exceptionally low at less than 0.1% of total initial issuance balance and no losses are expected on tranches originally rated triple-A. RMBS losses are also expected to be low at 21bp, although losses in Spanish transactions from around the peak in mortgage originations and UK non-conforming transactions with exposure to Lehman hedging have generated some loss exposures. The largest currently active European securitisation markets of UK prime and buy-to-let RMBS, Dutch RMBS and auto loan ABS are not expected to make any losses.

The losses realised on European bonds issued before the financial crisis have increased in the last year. This follows the expected pattern as more defaulted assets underlying the securitisations have completed a workout and recovered as much as the transactions are going to receive.

In European CMBS in particular, realised losses increased to 1.6% by end-2014 - up from 1.2% a year earlier - as more property sales were completed. Total losses from all pre-2008 CMBS issuance are now expected to reach 4.5%, up marginally on previous estimates.

Two-thirds of the losses generated in the structured credit sector are associated with structured finance CDOs. Losses from the currently active sectors of SME CLOs and leveraged loan CLOs are much lower at 0.8% and 0.3% of their original balances respectively.

Structured Finance

CMU consultation underway

The European Commission has launched its landmark Capital Markets Union (CMU) project, which aims to unlock funding for Europe's businesses and to boost growth in the EU's 28 Member States with the creation of a single market for capital (SCI 2 February). A complementary consultation on high-quality securitisation has also been launched as part of the initiative.

The first stage of the project involves a three-month consultation round, based on a Green Paper, the outcome of which will shape an action plan for the coming years. The EC says that the CMU is a long-term initiative that will require sustained effort over many years, although early progress can also be made in some areas in the coming months.

The purpose of the Green Paper on the CMU is to kick-start a debate across the EU over the possible measures needed to create a true single market for capital. It identifies the following key principles that should underpin a CMU: maximising the benefits of capital markets for the economy, growth and jobs; creating a single market for capital for all 28 Member States by removing barriers to cross-border investment within the EU and fostering stronger connections with global capital markets; building on firm foundations of financial stability, with a single rulebook for financial services that is effectively and consistently enforced; ensuring an effective level of investor protection; and helping to attract global investment and increase EU competitiveness. The Commission hopes to identify the actions that are necessary to achieve the following objectives: improve access to finance for all businesses and infrastructure projects across Europe; help SMEs raise finance as easily as large companies; create a single market for capital by removing barriers to cross-border investments; and diversify the funding of the economy and reduce the cost of raising capital.

The Commission's Investment Plan for Europe has already highlighted some measures that can be taken in the short term, including the identification of HQS. This is one of the areas where the EC says the "need for progress is widely recognised, with potential to bring early benefits".

The EC adds that an EU-wide initiative on HQS would need to ensure high standards of process, legal certainty and comparability across securitisation instruments through a higher degree of standardisation of products. This would notably increase the transparency, consistency and availability of key information for investors, including in the area of SME loans, and promote increased liquidity. This should facilitate issuance of securitised products and allow institutional investors to perform due diligence on products that match their asset diversification, return and duration needs.

One area covered by the consultation is the establishment of an optional securitisation regime at the EU level, including the creation of a harmonised 'EU securitisation structure'. The EC says that provisions for a standardised securitisation structure may address: the legal form of the SPV used for securitisation transactions; the modalities of transferring assets; and the rights and subordination rules among noteholders.

"Such a framework would increase the simplicity and legal certainty of EU structures for the benefit of investors, originators and issuers. It may contribute to the greater standardisation of securitisation practices, help create economies of scale and provide access to securitisation for smaller lenders in Member States where securitisation markets are underdeveloped," it adds.

For investors, the hope is that such an EU securitisation structure could reduce unnecessary burdens in the due diligence process and save time spent analysing country-specific securitisation practices.

A recent BlackRock Viewpoint paper highlights a number of principles that could serve as a useful tool for EU policymakers to promote a sound, consistent and streamlined securitisation regulatory framework. The paper advocates: setting out high-quality, prudent underwriting standards that are evaluated and administered properly; establishing quality servicing standards; ensuring transparent and accessible asset and transaction information; ensuring conflicts of interest are identified and managed properly; ensuring structures are clear, complete and presented in an understandable manner; and appropriately aligning originator, sponsor or original lender and investor interests.

BlackRock notes that reviving the securitisation market will not only require such an investor-centric regulatory framework to be adopted, but also the recalibration of Solvency 2 capital provisions and the liquidity coverage ratio (LCR), as well as an upwards adjustment of bank lending margins.

The Commission is seeking feedback on its Green Paper by 13 May. Following the public consultation, it will adopt an action plan this summer, setting out its roadmap and timeline for putting in place the building blocks of a CMU by 2019.

CDO

Trups default drop minimal

US bank Trups CDO combined defaults and deferrals marginally decreased to 21% at end-January, according to Fitch's latest index results for the sector. This compares with 21.1% at end-December.

In January, four banks representing US$35m of notional in six CDOs cured. Additionally, three previously cured banks representing US$18m of notional in three CDOs redeemed their Trups.

There were no new deferrals of defaults in January. A previously defaulted bank, Beverly Hills Bancorp, received a recovery of 8% on its Trups par value and has been removed from the portfolio.

Across 78 Fitch-rated Trups CDOs, 234 defaulted bank issuers remain in the portfolio, representing approximately US$6bn of collateral. Finally, 167 issuers are currently deferring interest payments on US$1.9bn of collateral.

CDS

OTC amendments proposed

The Monetary Authority of Singapore (MAS) has proposed legislative amendments to the Securities and Futures Act (SFA) to effect reforms to the regulation of OTC derivatives trading and the securities market. The consultation follows the feedback it received on these reforms.

The proposed amendments cater for the mandatory reporting and central clearing of OTC derivatives trades, as well as the regulation of OTC derivatives trade repositories and clearing facilities. The aim is to complete OTC derivatives reforms in Singapore - with MAS extending its regulatory regime to OTC derivatives trading platforms and intermediaries - and introduce simplified, principles-based definitions of securities and derivatives.

While the MAS has assessed that it is not necessary to mandate a trading regime for OTC derivatives for now, it will assume powers to implement a trading regime if such a regime was deemed necessary in the future. Further, it says it will continue to monitor developments, consult the industry closely and conduct detailed analysis to determine the conditions that might make a trading mandate necessary.

The amendments will also strengthen Singapore's securities market in two other areas. First, the proposed requirement of reporting short selling of securities trading and the publication of aggregate short positions will improve transparency in the short selling of securities. Second, enforcement-related proposals will enhance the authorities' powers to take action against market misconduct and increase the quantum of civil penalties that may be applied so as to increase their deterrent effect.

CDS

CDS auctions due

The auction to settle the credit derivative trades for Caesars Entertainment Operating Company Inc CDS and LCDS has been scheduled for 19 February. ISDA's Americas Determinations Committee anticipates holding the auction for RadioShack CDS during the week of 2 March.

CDS

RFC issued on CCP rule

The Canadian Securities Administrators (CSA) have published for comment proposals on the rule for national mandatory central counterparty clearing of derivatives. The rule describes requirements for CCP clearing of OTC derivatives transactions and is intended to improve transparency in the derivatives market while enhancing systemic risk mitigation.

The proposal is divided into two rule-making areas. First, the determination of derivatives - each a mandatory clearable derivative - that will be subject to the requirement to submit for CCP clearing. Second, the requirement to submit a transaction in a mandatory clearable derivative to a recognised or exempted CCP for clearing, including proposed end-user and intragroup exemptions.

Following consultation, the CSA will review all comments received and make appropriate amendments to the rule. The comment period is open until 13 May.

CMBS

Marginal decrease in maturity defaults

The 12-month rolling European CMBS loan maturity default rate for S&P's rated universe decreased slightly to 29.9% from 30.5%, as of end-January. However, the overall senior loan delinquency rate increased to 51.4% from 50.8%.

The delinquency rate for continental European senior loans increased to 64.9% from 63.2% in January. The rate for UK loans decreased to 22.8% from 23.8%.

The total number of delinquent loans was 127 during the month. The Cottbus Shopping Centre loan securitised in DECO 14 - Pan Europe 5 defaulted on its maturity payment. But the Heathvale Estates loan in DECO Series 2005-UK Conduit 1 and the Century Center loan in FORNAX (ECLIPSE 2006-2) both repaid (see SCI's CMBS loan events database).

Loans in S&P's special servicing index remained at 151. Two loans in DECO 14 - Pan Europe 5 entered special servicing in January: the Cottbus Shopping Centre loan and the Sofia Business Park loan, for which the borrower failed to comply with the funds transfer obligation.

During the same period, two specially serviced loans were cured due to repayment. There was therefore no net change in the total number of loans in special servicing.

CMBS

CMBS default decline analysed

Fitch says that the marginal decline of loans in default/special servicing in 4Q14 as a percentage of its rated EMEA CMBS portfolio does not signal a change in maturity trends for legacy transactions. The number of loans maturing in 2015 is small compared with those that matured in 2013 and 2014; however, the majority of loans continue to default at maturity.

Recent new issuances/refinancings and workout completions in light of looming bond maturities in legacy transactions are the main drivers of the ongoing marginal reduction in the default/special servicing percentage. The agency expects this trend to be reversed once loan maturities peak again in 2016.

The upcoming bulk of bond maturities in 2016 to 2017 puts pressure on special servicers to finalise the workout of all defaulted loans in the affected transactions. In cases of strong income profiles, loans were held to maximise amortisation via cash sweep prior to an exit.

Other loans benefited from major capital expenditure to enhance collateral quality, raise occupancy, rent and ultimately recoveries. Some loans were granted short extensions to allow the borrowers more time to negotiate terms for refinancing.

Fitch adds that loans that have already passed their maturities - approximately €8bn - better represent the challenges for lenders, special servicers and property investors than the 13 loans maturing in 2015, at €1.3bn.

Overall, the agency's maturity repayment index improved to 63.8% for 4Q14 from 62.5% in the previous quarter.

CMBS

CMBS credit enhancement rising

Declining US CMBS deal metrics in 4Q14 have set the stage for higher credit enhancement levels in 2015, according to Fitch. Last quarter saw a sizeable jump in Fitch-quoted credit enhancement for triple-A (up by 103bp) and triple-B minus (32bp) rated CMBS tranches.

Driving Fitch's increase in CMBS credit enhancement were deals that had poorer debt service coverage ratios and contained more IO loans. In fact, IO loan exposure in 4Q14 was 40% higher than in 2013 and now stands at 71.5%. Offsetting these negative factors were Fitch's loan to value remaining stable from the previous quarter and fewer loans with additional debt.

With the focus on triple-B minus rated tranches, it should be noted that in the majority of the eight deals Fitch rated in 4Q14, its levels were the constraining factor or the agency was not asked to rate the triple-B minus tranche at all. In the three deals with higher than expected triple-B minus credit enhancement levels, this was because the issuer increased it to ensure minimum tranche thicknesses.

Further, while the percentage of the pool using subordinate debt dropped by year-end, the dollar amount of debt on loans that had subordinate debt increased.

CMBS

Delinquencies at post-recession low

New US CMBS delinquencies began 2015 at a post-recession low, according to Fitch's latest index results for the sector. CMBS late-pays finished January at just US$274m, down from US$554m in December and a peak of US$6.6bn in January 2010.

Total outstanding delinquencies finished last month at US$17.9bn, down by US$517m from US$18.4bn at year-end 2014. Resolutions in January outpaced new delinquencies by nearly three to one, totalling US$790m compared to US$274m. This marks the lowest level of new delinquencies since September 2008.

The overall delinquency rate stood at 4.72%, 10bp higher than the previous month. This was due to an update to Fitch's methodology used in calculating its late-pay rate. Under Fitch's previous methodology, the delinquency rate would have fallen by 7bp to 4.55%.

Improvements in the overall delinquency rate remain tempered by the inventory of REO assets awaiting disposition. At the end of January, REO assets (by stated balance) comprised 3% of Fitch's rated US CMBS universe, or nearly two-thirds of total outstanding delinquencies.

Fitch-rated new issuance in January included one single-borrower transaction totalling US$200m, which will be included in Fitch's universe in February. The month saw over US$5bn in portfolio run-off, causing a decrease in the index denominator.

The January run-off was led by several large defeased 2005-vintage loans paying off. Among them were the US$340m Lincoln Square Retail loan (securitised in MSC 2005-HQ6), the US$287m 1500 Broadway (MSC 2005-HQ6) and the US$200m Mall at Wellington Green (GSMS 2005-GG4). Other large loans paying off in January included the US$250m ALC Portfolio (JPMCC 2013-ALC), the US$200m (Fitch-rated portion) Wells Fargo Center loan (GSMS 2005-GG4) and the US$170m Parkoff Portfolio (MSC 2007-HQ12) (see SCI's CMBS loan events database).

Meanwhile, several new large defeasances were reported in January. These include the: US$313m Brookdale Office Portfolio (JPMCC 2005-LDP5); US$214m 353 North Clark Street (DBUBS 2011-LC1); US$193m 222 South Riverside Plaza (GSMS 2006-GG8); US$170m Michigan Plaza (MSC 2011-C1); and a US$163m portion of the NGP Rubicon GSA Pool (WBCMT 2005-C20 and WBCMT 2005-C21).

Current and previous delinquency rates by property type are led by hotel at 6.15% (from 6.20% in December based on Fitch's prior methodology). Retail is 5.39% (5.37%), multifamily is 5.21% (5.22%), industrial is 5.04% (5.25%), office stands at 5% (5.01%), mixed use at 2.86% (not calculated in December) and 'other' at 1.08% (1.15%).

By transaction type, delinquency rates as of January were: large loan floaters at 15.34% (12 loans at US$592m); small balance at 5.57% (24 loans at US$36m); conduit at 5.52% (1,039 loans at US$17.3bn); seasoned at 2.63% (seven loans at US$15m); and Freddie Mac at 0.02% (one loan at US$9m).

Insurance-linked securities

Innovative ILS programme launched

Kane SAC has listed its new ILS note programme on the Bermuda Stock Exchange. The programme has been set up with the addition of the EuroClear settlement system to facilitate secondary trading for catastrophe bonds by allowing investors to trade OTC using a recognisable system. The US$20.695m Dodeka I-2015 is the first issuance to use the new programme.

Insurance-linked securities

Longevity swap facility created

Artex Risk Solutions has partnered with PwC to create a new facility that provides pension funds with the opportunity to transfer their longevity risk cost-effectively and directly to the reinsurance market. Dubbed Iccaria, the facility is an incorporated cell company, which provides a structure enabling pension funds to select the service providers they wish to use to administer the arrangements. It is anticipated that pension schemes with liabilities as low as £250m will now be able to benefit by using the Iccaria facility.

Risk Management

OTC reporting rules amended

The Australian Securities & Investment Commission (ASIC) has amended its 2013 OTC derivative transaction reporting rules. The changes include the introduction of end-of-day reporting instead of intraday reporting as a permanent reporting option, as well as the introduction of a 'safe harbour' from liability for reporting entities using delegated reporting, if certain conditions are met.

ASIC is also expanding the ability for foreign firms to rely on foreign reporting requirements in order to comply with their obligations under the rules, known as alternative reporting. In addition, it is introducing a requirement for foreign entities who use alternative reporting to designate transactions as being reported under the rules to enable that information to be made available for financial regulators.

ASIC has decided not to proceed with the proposal to require larger foreign subsidiaries of Australian authorised deposit-taking institutions and Australian financial services license holders to report OTC derivative transactions. It concluded that the regulatory benefit would not outweigh the additional compliance cost; however, regulators will keep the issue of the materiality of OTC derivatives holdings in foreign subsidiaries under review.

As part of the amendment to allow the option for reporting entities to use end-of-day reporting on a permanent basis, ASIC has also introduced a determination power for it to require the reporting of intraday trades in a derivative or class of derivative. Although the Commission does not presently intend to exercise the power, for market integrity purposes it will continue to keep under review the need to require certain intraday OTC derivative transactions to be reported, such as for contracts for difference or margin FX derivatives.

RMBS

MSR portfolios hit the market

MountainView Servicing Group is advising Freddie Mac and Fannie Mae on the sale of a MSR portfolio with approximately US$3bn of unpaid principal balance. Bids for the portfolio are due by 19 February.

The portfolio comprises 100% fixed-rate first lien assets, with a weighted average original FICO score of 755, a weighted average original loan-to-value ratio of 80%, a weighted average interest rate of 3.9% and low delinquencies. Top state exposures are Texas (at 21% of the portfolio), New Jersey (8.1%), Illinois (7.4%) and Georgia (7.0%). Average loan size is US$203,106.

MountainView separately brought a US$341m Ginnie Mae MSR portfolio to market on 11 February. Bids for this offering are requested by 18 February.

RMBS

UK servicer acquisitions eyed

Changes in ownership of UK residential mortgage servicers can create uncertainties about post-acquisition strategy and operations, as well as the effect on servicers' stability and performance, according to Fitch. The agency adds that the financial and operational support and strategic direction provided by new owners are key to the ratings impact of unprecedented numbers of acquisitions in the sector.

The potential for servicer sales to create uncertainty is reflected in Fitch's most recent rating action in the sector. The agency placed Acenden's servicer ratings on rating watch evolving (RWE) on 13 February, following its sale to Blackstone and TPG (SCI 8 January). Kensington Mortgage Company's servicer ratings were placed on RWE last year, following acquisition by the same parties.

"There is potential synergy between KM and Acenden and we will monitor whether any operational changes result from them having a shared parent," Fitch observes.

The RWEs could result in upgrades, affirmations or downgrades. The agency's assessments will take into account the new owners' longer-term financial commitment and the impact of the change of ownership on business performance, technology infrastructure and loan performance. It is unclear whether private equity-owned servicers will continue to seek third-party mandates or focus on servicing portfolios originated or acquired by their new owners, as has typically been the case in the past.

Servicers may find increasing their third-party business challenging, Fitch suggests. The UK is Europe's most competitive market and Homeloan Management and Pepper (UK) have consolidated their dominant positions. Recent entrants to the lending market have kept servicing in-house and concerns about the operational risks of servicer transfer have led to few securitised portfolios changing hands.

If opportunities do not materialise, the financial and operational support new owners provide could decrease. This could be negative for servicer ratings.

Nevertheless, ownership changes can be positive where acquirers have the ability and the intention to help the business develop. Fitch cites Computershare's recent acquisition of HML and Pepper Group's purchase of Oakwood as examples. Similarly, Capita Asset Services' status as a major outsourcing provider suggests that it will try to address the failure of Crown Mortgage Management (now Capita Mortgages Services) to keep pace with industry-wide technology, following its acquisition last year.

RMBS

Derivatives skew for large list

A large non-agency RMBS BWIC hit the market on Friday with a significantly greater volume of derivatives than in other recent lists. The US$2.6bn current face list totalled 130 bonds, of which 62% were IOs, 22% were P&I and 16% were inverse IOs.

The P&I portion of the list mainly comprised POA bonds, although there was also Alt-A, prime and re-performing collateral. Interactive Data reports that price talk was skewed heavily toward to 10-50 range, while a small handful of names were talked above par.

As for the derivatives, price talk on the IO tranches ranged from zero to 40, with most bonds below 10. At the top end of Street guidance was the Alt-A fixed inverse IO CMLTI 2007-6 2A5 tranche, which SCI's PriceABS data shows was talked in the mid-30s. By contrast, PriceABS shows the prime hybrid IO WFMBS 2006-AR14 1A9 tranche was talked at 0.25.

On an aggregate basis, the FRM bonds within the P&I list garnered the highest price talk, with an overall simple average of 57 and a weighted average of 52. The inverse IOs attracted the highest price talk for the derivatives portion of the list, with a simple average of 25 and a weighted average of 26.