Contents

Structured Finance

Game changer

Resolution regulation to transform covered bond approach?

Scope Ratings has dubbed the implementation of the European Resolution and Recovery Directive and similar regimes in other European countries as a "game changer" for the covered bond market. The improved credit characteristics and lower probability of default for covered bonds have been reflected in the agency's proposed new rating methodology for the sector, as a result.

In its proposed covered bond criteria, Scope says it takes into account the fact that reliance on a bond's cover pool only arises after a long chain of adverse events, including failure of the resolution and recovery process resulting in actual insolvency of the issuer. Consequently, the agency suggests that while the level and quality of a cover pool still represents an important part of covered bond ratings, the scenario in which the cover pool becomes the main source of repayment to covered bond investors has become increasingly remote.

Therefore, Scope's rating of the bank is the starting point for its rating process of a covered bond. "The proposed methodology reflects our fundamental view that the new regulatory environment provides sufficient support for investment grade banks to issue covered bonds up to the highest rating levels," says Karlo Fuchs, head of covered bond ratings at Scope.

Fuchs stresses that the new approach addresses previous flaws in the analysis of covered bonds, which were ultimately weighing them down as a product. "When it came to rating criteria, covered bonds regularly made triple-A rating levels before the financial crisis. Yet, there has been a downward migration of their ratings since then," he says.

He adds: "This was usually linked to the mechanical treatment of sovereign and counterparty risk. Yet, the underlying credit fundamentals of the product itself have not materially changed."

With regard to counterparty risk, Fuchs explains that it has to be seen in the context of the individual covered bond transaction and the ongoing management by the issuer. "As long as the bank is not in default, there is an alignment of interest between the covered bond investor and the issuer, as both do not want the supporting party to cease providing its services."

Fuchs says that a deteriorating macroeconomic environment will clearly put stresses on the collateral and might eventually prompt rating changes. "Mechanically capping the ratings of all covered bonds at a given ceiling does not reflect that the sensitivity to sovereign risks and the way it can be mitigated varies between programmes," he adds

The introduction of resolution frameworks has singled out covered bonds as one of the few types of bank liabilities that are not subject to a bail-in if a bank were to pass the resolution trigger. Fuchs says it is a case in which covered bonds will continue to perform, as the bank issuer will be maintained as a going concern.

The need to rely on the second recourse - which is the cover pool - is dependent on three factors. These are: if the available regulatory capital is fully depleted; significant amounts of bail-inable debt converted into capital or written down are not sufficient to ensure the business continuation of the issuer; and the restructured or resolved bank becomes insolvent.

"A string of all these events is very unlikely to occur," says Fuchs. "The rating of a covered bond therefore must reflect this high degree of protection, which is unique within the liability structure of banks."

This has led Scope to believe that, even without the analysis of the cover pool, a covered bond issued under a supportive legislative framework and by a resolvable bank can equate to a credit enhancement of up to six notches above the issuer credit strength rating of the bank. Adding the comfort from the cover pool analysis can further elevate the covered bond rating up to an additional three notches, resulting in a maximum elevation of up to nine notches or three rating categories.

Scope's criteria therefore aim to allow covered bonds to be analysed separately and fairly, without wider factors mitigating the rating. Fuchs believes that this will provide a good litmus test for the reliability of covered bonds.

"We need to see if counterparty and sovereign factors are truly a constraint. This new approach should uncover whether risk is genuinely there, but more importantly allows covered bonds to truly become self-sustaining structures," he explains

Scope invites comments on its proposed covered bond rating methodology by 3 April.

JA

Secondary markets

US CLOs on the up

Activity is picking up in US CLO secondary today with a strong bid for the right deals.

"There are a lot of lists out today, primarily revolving around the triple-B to double-A sector," says one trader. "Bids are aggressive, especially for what most buyers are really looking for to achieve some price delta over the next few sessions - the better managers, lower energy exposures, higher coupons and shorter reinvestment periods."

The secondary market looks set to remain the main area of investor focus for a while. "We're seeing primary issuance continuing to accelerate, but spreads there just aren't moving," the trader says. "Whereas secondary, especially in 2.0 mezz with better managers, has tightened because deals are cleaner in sector terms and NAVs have recovered from mid-January making managers a bit more aggressive. Overall, secondary has had a real shot in the arm."

The double-B to double-A part of the cap stack has been the biggest beneficiary of that shot so far. "Triple-B and equity tranches are still suffering from energy exposures with some potential for downgrades," the trader explains. "However, even here good managers can help and some are taking advantage of the oil-related volatility to buy more discounted loans to build up par, though of course they still have MTM exposure."

Secondary markets

Euro CLOs keep coming

Today sees another healthy chunk of European CLOs in for the bid.

Yesterday again saw strong BWIC execution levels across the vast majority of bonds on offer. Today, the market is already scheduling another three lists including a mixed list at 15:00 that also includes two CRE CDO tranches.

The line 15:00 list consists of: €3m CADOG 4X E, €3m HARVT 9X SUB, €2m HARVT V D, €838,000 NPTNO 2007-1 D, €7.621m TABNA 2006-1X A2 and €7.621m TABNA 2006-1X B. None of the bonds has traded with a price on PriceABS in the last three months.

Secondary markets

US CLOs slow down

After a busy couple of days, activity in the US CLO secondary market has slowed today.

"There's still a bit of activity today, but things are on the slower side," says one trader. "Nevertheless, bonds are likely to continue to trade well and the tone remains positive."

There is no main reason for the quieter day today, the trader suggests. "It just feels like a lot of people are off the desks today and that could be because of the weather or school holidays or a combination of factors."

The BWIC schedule is down considerably today with only three US CLO lists currently due. Although there is also a 46 line OWIC of double-A and triple-A 2.0 tranches due at 10:00 New York time.

Secondary markets

Positive pattern for US RMBS

Activity in US non-agency RMBS is developing something of a pattern, which is positive for the market.

"As with previous weeks, the market is focused on a big list, which on this occasion looks like it's from a GSE," says one trader. "It's due today and is around $1bn but could be upsized to about $2bn as there is the option to buy some whole tranches."

The list is not discouraging broader RMBS auction activity, however. "Today's pretty busy even for a Thursday with $2bn in total on BWIC - these big lists encourage others to put similar bonds out to bid," the trader says.

Overall, the market has fallen in to a pattern of late, the trader suggests. "As with last week's big list, which traded well, if the same happens today we'll tighten and then drift out a bit into the next big list as we have recently. With these types of big lists coming up weekly as well as regular appearances from liquidators it's far from an illiquid market and we keep just chugging along in a positive manner."

Secondary markets

Euro secondary closes quietly

European secondary securitisation markets continue to remain insulated from broader market volatility and after a busy week look set to close it out quietly.

BWIC activity dominated across the board yesterday with bilateral trading taking a back seat. The majority of ABS, CLOs and MBS on lists saw strong execution once more.

Today's European auction schedule is considerably quieter with only two lists currently scheduled for this afternoon. First up at 14:30 London time is a four line €53.187m CMBS list.

It consists of GALRE 2013-1 A, GRF 2013-1 A, GRF 2013-2 A and TAURS 2013-GMF1 A. Only GALRE 2013-1 A has covered on PriceABS in the last three months, doing so at 100.863 on 9 December.

Then at 15:00 as part of a mixed euro and dollar list are two lines of European triple-A CLOs - €3m AVOCA VII-X A3 and €4m CELF 2006-1X A1. Only CELF 2006-1X A1 has covered on PriceABS in the past three months, last doing so at 99.06 on 30 January.

Secondary markets

US CLOs see direction

US CLO secondary activity picked up after a slow start yesterday and found some direction for oil-related assets.

"In the end, yesterday was pretty active in terms of lists as it has been over the previous few days," says one trader. "We're seeing a lot more double-Bs out there and getting a lot more prints on those with high energy exposure, so there's a better feel for market direction in that sector."

Meanwhile, results are yet to be released on yesterday's double-A and triple-A OWIC, but the trader suggests it's likely to have gone well. "We're seeing consistent demand at the top of the stack."

Today's BWIC schedule is considerably quieter with a Trups CDO list perhaps the most eye-catching. The 14 line $161+M original face list is due for trade at 11:00 New York time today contains bonds from across the capital stack - from triple-A down to double-B - but most of the bonds are low dollar pieces.

The list consists of: ATTN 2006-1A C2A, SLOSO 2005-1A A1LA, SLOSO 2007-1A A1LA, TBRNA 2005-1A C1, TBRNA 2005-2A B, TBRNA 2005-3A D, TBRNA 2006-5A B1, TBRNA 2006-6A C, TBRNA 2006-7A C1, TBRNA 2007-9A A2LB, TRAP 2006-10A D2, TRAP 2006-11A D2, TRAP 2006-11A F and TROPC 2004-1A A4L. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Euro secondary stays strong

European secondary securitisation markets continue to trade well despite the Greek rollercoaster impacting other markets.

A flurry of BWICs added to the calendar on Friday took market attention, but further strong prints were seen across deal types and jurisdictions. There has even been an upswing for some Greek RMBS names - for example, dealer quotes for GRIF 1 A have moved out of the 60s and back into the 70s.

The BWIC schedule is already building strongly for this week and there are four lists scheduled for today so far. Three of the lists revolve around UK non-conforming RMBS, but there is also an auction of double-A to double-B CLOs due at 15:00 London time.

The 16 line €41.93m list consists of: ALPST 2X B, AVOCA IV-X C1, BACCH 2006-1 C, CADOG 1 C, CADOG 2X E, DALRA 2-X D, DUCHS IV-X D, HARBM 6X B1, HARBM 7X A3, HARVT III-A E1, HARVT III-X E1, LEOP V-X C1, LFE IV 4, NPTNO 2007-2X C, PENTA 2007-1A E, RMFE V-X III. Three of the bonds have covered on PriceABS in the last three months - AVOCA IV-X C1 at 96.7 on 17 February; HARBM 6X B1 at VH80s on 21 November; and LEOP V-X C1 at 95h on 2 February.

Secondary markets

Belle Haven list circulating

It's a quiet start to the week for the US CDO/CLO BWIC market, but today does include a list consisting of four pieces of a Belle Haven CDO.

Due at 16:00 New York time today the list represents $349.17m of current face from the multi-sector ABS CDO. It is made up of two first pays and two second pays - BLHV 2004-1A A1ST, BLHV 2004-1A A1SB, BLHV 2004-1A A1J and BLHV 2004-1A A2.

None of the bonds has ever traded on PriceABS. However, the first pays are currently being talked in the 40s and the second pays in the teens.

Secondary markets

BWICs drive European secondary

BWICs held sway once more in European secondary markets yesterday as spreads ground ever tighter and today looks set to be similar.

"We saw seven lists yesterday afternoon and they all traded well," says one trader. "Greece continues to dominate the broader market, but ABS remains insulated from the volatility and the tone continues to be stable and strong on our side."

The majority of today's auction schedule so far is made up of triple-A RMBS from core and peripheral names. The list receiving the most attention is a 12 line Spanish BWIC accounting for €354.6m of original face, albeit heavily factored.

The list comprises: AYTGH II A, BCJAF 4 A, BCJAF 6 A2, BFTH 11 A2, BFTH 13 A2, BFTH 5 A, IMPAS 2 A, SABA 1 A2, TDA 19 A, TDAC 2 A, TDAC 3 A and UCI 9 A. Six of the bonds have covered on PriceABS in the last three months - BFTH 11 A2 at 97.28 on 28 November; BFTH 13 A2 at 96.63 on 3 February; IMPAS 2 A at 98.05 on 19 January; TDA 19 A at L98A on 5 December; TDAC 3 A at MH98 on 29 January; and UCI 9 A at LM97 on 29 January.

Secondary markets

Supply and demand for US CLOs

After a quiet day yesterday the US CLO secondary market has picked up today with a healthy number of BWICs circulating and quite a few already scheduled for tomorrow.

"The market is benefitting from a positive tone following on from last week and activity in primary," says one trader. "We're seeing 29 bonds on BWIC today with a good distribution of 1.0 and 2.0 mezz, as well as some nice pieces of equity."

However, the total current face on offer is a relatively small $113.15m. The trader explains: "There are obviously some strong axes in mezz so a range of managers, including some big ones, are putting out small pieces to test where the market is. At the same time, the equity is from fast money looking to sell into a rising market."

Overall, bonds are finding buyers. "There is not much paper out there and prices are coming in, although of course there's still tiering between managers and energy exposure levels," the trader says. "We're particularly seeing client demand across single-As to triple-Bs, which have broadly come in 10-15 and 25-30 bips, respectively."

Secondary markets

Euro ABS/MBS keeps active

The European ABS/MBS secondary markets continue to be active across an increasing range of sectors.

"Yesterday was busy again especially in prime, but we're seeing good two-way flows across a growing number of well-supported markets," says one trader. "That continues to involve Dutch and UK prime and Italian RMBS, but we're also seeing increased activity in UK non-conforming, where real money interest has returned after the sector experienced a bit of a lag recently."

The trader also reports an uptick in trading in Spanish SMEs and RMBS alongside Italian consumer ABS. However, CMBS secondary remains less active meaning prices are softening and bid offers are wider. "There's interest in 2.0s such as German multifamily deals, but away from that there's not much happening in the sector," the trader says.

The BWIC pipeline continues to build for the rest of this week although there are only three lists currently scheduled for today, which contain a broad mix of assets and jurisdictions. The chunkiest auction circulating so far is a six line CLO, CMBS and RMBS list due at 15:00 London time.

It consists of: £5m DECO 2006-C3X A1B, €4m GHM 2007-2X EB, £3m LMS 2 BA, €5.6m PAST 3 C, £3m SLT 1 Y and €5.025m SPS 2005-2X D1A. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

US CLOs firm further

Yesterday's positive moves in the US CLO secondary market have continued into today.

"There's definitely a firmer tone - things feel tighter across the board," says one trader. "Today's lists are trading well and we're now seeing sellers testing that strength."

Activity continues to revolve around the double-A to double-B section of the capital stack. "We're not really seeing any equity, the primary focus is the belly of the curve," the trader says.

Overall, the positive tone could extend beyond the secondary market, the trader suggests. "This tightening should be constructive for new issuance as it'll improve the arbitrage situation."

Secondary markets

European BWIC boom

After a quieter day on the BWIC front yesterday European securitisation markets are set for a boom in auction activity today.

While there were fewer BWICs yesterday than in previous days clearing levels remained strong and most recently popular sectors continue to be well-bid. However, UK non-conforming RMBS have softened a little on the back of increased primary activity.

Today sees a return to a hectic BWIC schedule across deal types and jurisdictions. There are already eight lists circulating for trade today so far.

The largest auctions in terms of line items come at 14:00 and 15:00 London time, with 28 and 47 lines respectively. Both feature a wide array of deals across ABS, CLOs, CMBS and RMBS, but the bonds are offered in relatively small sizes, bringing current face totals to €15.2m and €22.7m.

Perhaps more interesting though is a smaller and more esoteric list due at 15:30, which contains two lines of CMBS, a CLN and a pub deal. It comprises: £15m FHSL 2006-1 A, €15m TIBET 1 D, £12.8m RBS 0 12/21/33 (a CLN linked to Telereal bonds) and £6m ENTINN 5.659 06/30/27.

Only FHSL 2006-1 A has covered on PriceABS in the past three months, last doing so at M55 on 27 January.

Secondary markets

CLO secondary buying continues

Buyers are continuing to drive activity in the US CLO secondary market.

"General investor demand for CLOs is undiminished," says one trader. "We're being consistently lifted out of bonds and it's getting more and more difficult to replace them."

In the last couple of days prices have only been going one way. "We've seen CLOs trade over par and that's something we haven't seen for a while," the trader reports.

As a result, the flow of BWICs is continuing with a hefty calendar already building through today and into next week. Nevertheless, the trader says: "bid lists are very competitive and the positive tone looks likely to continue."

However, the trader warns: "I'm not sure that market isn't getting ahead of itself a little. If secondary keeps tightening at this rate new issue could increase dramatically and push us wider again, but that remains to be seen."

Secondary markets

Softening signs for US RMBS?

The US non-agency RMBS secondary market remains active and spreads are tight, but there are small signs of potential softening around the edges.

"In many ways it's more of the same - the market has been busy this week, especially Tuesday, as people looked to get ahead of two big lists that are due today and tomorrow," says one trader. "However, there are signs of a slight reduction in liquidity as we see more and more accounts making their own markets."

The trader continues: "This could be because dealers are getting full or just fatigued from all the big lists we've seen this year. In any case there appears to be a little trepidation about buying away from the big lists, which offer investors a one-stop shop. Consequently, we might go a little weaker in some of the smaller pieces, but hopefully that won't continue once we pass month end."

In the meantime, the first of this week's big lists was due at 11:00 today New York time. It amounted to $1.2bn of current face spread across a wide range of structures and looked likely to be from a GSE. Tomorrow sees a $1.4bn list of mezzanine and derivatives bonds potentially from a hedge fund that could trade AON or AON by group.

Overall, the trader says: "The market remains healthy and spreads are still tight. As always, everyone will be looking to see where the big lists clear and that's especially when they involve esoteric assets such as the derivatives on tomorrow's auction."

Secondary markets

Euro secondary absorbs BWICs

Yesterday's spike in European BWIC volume was absorbed comfortably, but today looks to be quieter.

"The lists yesterday traded well though many bonds were in reasonably small size so it's difficult to read too much into it," Says one trader. "It's quieter today as it's a Friday, but the overall tone remains positive."

There are only a few BWICs circulating for trade today so far, but the schedule does include some UK non-conforming, which will be watched closely for price direction given there is new issuance from the sector currently on the blocks. The BWIC is due at 15:30 London and consists of: £1.08m GHM 2007-2X EA, €2.9m LGATE 2007-1 CB, €1.24m RMACS 2007-NS1X B1C and £9.6+m SLT 2 Y. Only LGATE 2007-1 CB has covered on PriceABS in the past three months - last doing so at 80.5 on 20 February.

The trader notes that it's not only BWICs that have seen action in recent days. "General flows have been busy this week with real money being active and select hedge funds."

Structured Finance

SCI Start the Week - 23 February

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

Pipeline
Several new deals have been announced in the wake of the recent conference. Last week there were 10 ABS transactions added to the pipeline, as well as one ILS, one RMBS, two CMBS and two CLOs.

The ABS were: US$330m Ascentium Equipment Receivables 2015-1; C$250m CNH Capital Canada Receivables Trust Series 2015-1; US$800m CNH Equipment Trust 2015-A; A$500m Driver Australia Two Trust; C$405m Element Rail Leasing II Series 2015-1; US$750m Enterprise Fleet Financing Series 2015-1; C$602.4m Hollis Receivables Term Trust II Series 2015-1; NewDay Partnership Funding 2015-1; €740m Red & Black Auto Germany 3; and US$706m World Omni Auto Receivables Trust 2015-A.

US$225m East Lane Re VI Series 2015-1 was the ILS, while the RMBS was A$750m Apollo Series 2015-1 Trust. The CMBS were US$.14bn COMM 2015-DC1 and US$1.45bn FREMF 2015-K43, while the CLOs were US$515.5m Betony CLO and US$506.7m BlueMountain CLO 2015-1.

Pricings
A similar number of deals also priced. There were 10 ABS prints, along with two RMBS, one CMBS and four CLOs.

The ABS were: US$667m AIM Aviation Finance Series 2015; US$265.94m CarFinance Capital Auto Trust 2015-1; US$1bn CarMax Auto Owner Trust 2015-1; US$950m Discover Card Execution Note Trust 2015-1; US$265.1m DT Auto Owner Trust 2015-1; US$750m Motor 2015-1; US$1bn Navient Student Loan Trust 2015-1; US$566.3m Nelnet Student Loan Trust 2015-1; US$1.3bn Santander Drive Auto Receivables Trust 2015-1; and US$1.16bn Springleaf Funding Trust 2015-A.

The RMBS were US$1.5bn CAS 2015-C01 and A$1bn Medallion Trust Series 2015-1, while the CMBS was US$285m BAMLL 2015-ASHF. Lastly, the CLOs were €243m Dartry Park CLO, US$415m Flatiron 2015-1, US$637m LCM XVIII and US$511m OZLM XI.

Markets
The tone in US ABS has improved notably since the annual industry conference in Las Vegas, say JPMorgan analysts. "Primary market execution was strong this week as various transactions saw bonds pricing through guidance levels and were upsized. Despite headlines on rising delinquencies and subprime lending, the auto ABS new issues this week were well received by investors as reflected in the pricing spreads and subscription levels. The secondary market also gained traction as the buying picked up," they say.

US CMBS spreads continued to rally for a third week as spreads were helped by the continued selloff in US Treasury rates. "Additionally, spreads were helped by the relatively light issuance in the holiday shortened week, although this will change in the weeks ahead. Secondary trading of recent issue CMBS 10-year triple-A LCF bonds tightened 2bp to swaps plus 87bp," say Barclays Capital analysts.

The US CLO rally also continued, as BWIC volumes reached around US$640m. "Overall, US CLO 2.0 spreads tightened by 2 to 15bp from triple-A to double-B to 155, 230, 330, 440 and 685bp," say Bank of America Merrill Lynch analysts.

Deal news
• Final results of the Caesars Entertainment Operating Company Inc CDS and LCDS auctions have been published. The final price for CDS referencing the entity was determined to be 15.875, with 11 dealers submitting initial markets, physical settlement requests and limit orders to yesterday's auction. The final price for LCDS on the name was determined to be 96, with eight dealers submitting initial markets, physical settlement requests and limit orders.
• Five-year CDS on Renault have firmed by 22% over the past month to price at the tightest levels observed since 2008, according to Fitch Solutions. After consistently pricing in the triple-B minus space for much of the past year, credit protection on Renault's debt is now pricing one notch higher, in line with triple-B levels.

Regulatory update
• 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.
• 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 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 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.
• ESMA has published a consultation paper that complements the transparency section of the paper on MiFID II/MiFIR published in December (SCI 19 December 2014). The new consultation covers non-equity asset classes, including credit derivatives.
• The US SEC has charged VCAP Securities and its ceo Brett Graham with fraudulently deceiving other market participants while conducting auctions to liquidate CDOs. The agency's investigation found that VCAP and Graham improperly arranged for a third-party broker-dealer to secretly bid at these same auctions on behalf of their affiliated investment adviser in order to acquire certain bonds to benefit the funds it managed.

Deals added to the SCI New Issuance database last week:
ALM XII; Ares XXXIII CLO; BWAY 2015-1740; Carlyle Global Market Strategies CLO 2015-1; CAS 2015-C01; COMM 2015-3BP; Dryden 35 Euro CLO; Eurosail-UK 2007-4BL (re-offer); FREMF 2015-KLSF; Golub Capital Partners CLO 22(B); GSMS 2015-GC28; Heathrow Funding; Magnetite XII; Series 2015-1 Harvey Trust; Silverstone Master Issuer series 2015-1; WinWater Mortgage Loan Trust 2015-1

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; CANWA II; COMM 2014-UBS4; CSMC 2006-C4; CWCI 2007-C3; ECLIP 2006-4; EMC VI; EURO 25; GSMS 2007-GG10; JPMCC 2001-CIB2; JPMCC 2007-LD11; JPMCC 2013-LC11; LBUBS 2005-C2; LBUBS 2007-C6; LBUBS 2007-C7; LEMES 2006-1; MLMT 2005-CKI1; MSC 2005-IQ9; MSC 2007-HQ13; MSC 2011-C2; MSCI 2007-T27; TITN 2006-2; TMAN 7; UBSC 2011-C1 & UBSCM 2012-C1; WBCMT 2006-C24; WINDM XI

CMBS

CMBS sub debt proliferating

Subordinated commercial real estate loans have emerged as a compelling alternative for investors seeking higher yields while targeting specific credit opportunities. Coupled with looser underwriting standards, this has driven an increase in the volume of US CMBS 2.0 conduit loans with subordinated debt - a trend that is expected to continue.

Of the 49 CMBS 2.0 conduit deals issued in 2014, Morgan Stanley CMBS strategists identify 190 loans totalling nearly US$7.6bn that were structured with US$2bn of subordinated debt across 48 deals. This represents 14% of all the loans originated last year and is a steady increase over the 11.4% in 2013 and 9.2% in 2012.

The Morgan Stanley strategists calculate that 154 of the loans, totalling over US$6bn, are structured with US$1.3bn of mezz debt. The remaining sub debt is structured as B-notes, rake bonds and preferred equity.

Further, 25 lenders originated the CMBS 2.0 conduit subordinated debt last year. While larger originators dominated this volume, an analysis of loans originated with subordinated debt relative to the total balance of loans originated in 2014 suggests that four of the top originators were smaller players (Redwood, Walker & Dunlop, Jeffries LoanCore and Keybank).

Redwood is the only lender that appeared to originate significantly greater volumes of conduit loans with subordinated debt (ranking tenth overall), compared to its total volume of conduit loan originations last year (eighteenth overall). However, this may reflect a specific business strategy, as the lender previously issued a CRE CDO - RCMC 2012-CREL1 - that was primarily secured by mezzanine loans.

Deutsche Bank originated the greatest amount of subordinated debt at US$368.7m, driven primarily by the US$195m mezzanine loan on 625 Madison Avenue and the US$67.8m mezzanine loan on the Google and Amazon Office portfolios. Bank of America Merrill Lynch originated the highest average balance of subordinated debt at nearly US$70m, driven primarily by the US$244m B-note secured by 300 North LaSalle.

Finally, the Morgan Stanley analysis shows that the underwriter LTV of 2014 CMBS 2.0 conduit loans with subordinated debt is lower (at 64%) than the vintage as a whole (66%), but the total debt LTV (78%) is significantly higher. The total debt LTV is among the highest for multifamily properties and lowest for retail properties. Half of the loans with subordinated debt are secured by top 25 MSA properties, but the total debt LTV for the 46 loans secured by properties outside the top 50 MSAs is surprisingly high.

CS

CMBS

CMBS 2.0/3.0 watchlistings eyed

February US CMBS remittance data indicates a significant up-tick in the number of post-crisis loans that were watchlisted by master servicers for potential performance concerns. The rise in overall new watchlistings is a sign of deteriorating performance and is worth heeding if they lead to an increase in special servicing transfers, according to Barclays Capital CMBS analysts.

US$2.1bn of post-crisis CMBS loans were newly watchlisted this month, compared to US$1bn in January, representing the highest monthly total to date for 2.0/3.0 deals (previously US$1.6bn in August 2014). The Barcap analysts note that the transaction with the largest exposure to the new watchlistings is DBUBS 2011-LC3A.

For example, the US$51m Providence Place Mall loan was watchlisted after JC Penney announced it will close its location at the mall (see SCI's loan events database), triggering a US$2.5m reserve on the asset. Also watchlisted this month in the deal was the US$94m Columbia Sussex Hotel Portfolio - although this appears to be related to insurance claims from Hurricane Sandy.

Additionally, the US$27m Albany Mall loan was watchlisted after DSCR NCF fell to 1.01x as of September 2014, due to decreased rent. However, occupancy is up to 91% from 85% at year-end 2013 and servicer commentary indicates that a few stores plan to open at the location in the near term.

Meanwhile, seven loans in JPMCC 2010-C1 were watchlisted this month - all because they are approaching their five-year maturities, rather than facing credit issues. The concerning loan in this deal remains the US$95m Gateway Salt Lake, which is watchlisted due to low occupancy (78%) and DSCR NCF (0.68x).

The largest loan to be watchlisted this month was the Google and Amazon Office Portfolio, securitised in COMM 2014-C16 (US$67m) and COMM 2014-UBS2 (US$120m). The analysts point out that although the loan was watchlisted due to low DSCR of 1.1x through the first nine months of 2014, contractual rent step-ups and the high quality tenants make any near-term credit risk unlikely.

The largest loan with tenant performance issues appears to be the US$56m Condyne Industrial Portfolio in GSMS 2013-GC12. Occupancy has experienced a sharp drop to 68% from 90% at securitisation, which has lowered DSCR NCF to 1.17x.

The only loans to enter special servicing in the February remittance so far are those securing the US$16m Action Hotel Portfolio, securitised in UBSCM 2012-C1. The portfolio consists of three separate cross-defaulted loans: the US$7m Dewitt, the US$4.6m Van Buren and the US$4.4m Cicero Holiday Inn Express properties.

The Van Buren property turned 60-days delinquent this month, resulting in the transfer of all three properties to special servicer Rialto. Performance appears to have deteriorated last year, with 1H14 DSCR standing at 1.08x compared to 1.83x for year-end 2013.

CS

RMBS

UKNC opportunity eyed

The latest Eurosail restructuring and remarketing of debt tranches provides investors with an interesting route into UK non-conforming RMBS. ESAIL 2007-4BL's shorter-dated A2a tranche, in particular, appears to offer a rare opportunity in the asset class.

ESAIL 2007-4BL originally issued securitisation liabilities in euros, while the loans were all denominated in pounds. Cross-currency swaps were entered into with Lehman Brothers, with a recovery of around 66% as of November 2014, after the issuer entered into a settlement with the Lehman bankruptcy estate and sold certain claims at auction (SCI 17 December 2014).

Noteholders agreed to re-denominate the euro notes into pounds, removing some volatility, while the notes were also partially paid down. The B1a tranche was also written up by around £3.1m to restore the balance between assets and notes.

The restructuring has led to higher ratings and to higher coupons for the senior tranches. The original A3a and A3c notes were replaced with new A3, A4 and A5 notes, with a pro-rata switch only allowed after the A5 bonds have been paid down.

"Unsurprisingly, the removal of currency risk through note re-denomination, the partial paydown of the notes, the new £3.29m reserve fund and the more senior-friendly capital structure have led to upgrades of the notes. These upgrades should also enable better liquidity from dealers, given the new investment grade ratings," comment Citi securitised products analysts.

The analysts note that the deal compares favourably with recent securitisations of legacy mortgages as well as new non-conforming loan securitisations, with the short 1.2 year maturity of the first-pay bonds providing the biggest advantage. By contrast, the first-pays from ESAIL 2006-2 - which has not been restructured - have a 6.5 year WAL.

While ESAIL 2007-4BL's offered A-notes offer little sequential to pro-rata optionality, the B1a and lower notes can still benefit. However, other ESAIL shelves may offer better optionality opportunities, with ESAIL 2007-3A yet to benefit from a restructuring.

"However, upgrades are not guaranteed. ESAIL 2007-5 went through a restructuring which led to all notes being re-denominated [into pounds], but the low credit enhancement has led to the first-pay bonds still being non-investment grade by two of the three agencies. Moreover, the appeal of senior bonds may reduce further because the structure will most likely turn pro-rata after the cut-off date of December 2015 because current delinquencies (11.86%) are well below the trigger threshold of 20%," the analysts note.

An additional advantage to the ESAIL 2007-4BL bonds is that they should comply with risk retention regulations. Although the originators will not hold any economic interest in the deal, the transaction should be exempt from retention regulations as it was originated before 1 January 2014 and new loans will only be added where doing so complies with regulations.

JL

ABS

ABS trader switches banks

Marshall Insley has joined Credit Suisse to co-lead ABS trading for the bank with Ted Moran. Insley arrives from Bank of America Merrill Lynch and will begin working for the firm in May. Along with Moran, Insley will report to Bryan Chin, global head of securitised products for Credit Suisse.

Structured Finance

Structured product heads appointed

Bank of America Merrill Lynch has appointed Megan Messina and David Trepanier to co-head its global structured products and credit financing team. Messina was previously global head of CLO origination for BAML, while Trepanier ran CLO trading for the bank. The pair will report to Frank Kotsen, head of global credit and special situations at BAML.

Structured Finance

Altisource appoints ceo

Altisource Asset Management (AAMC) has hired George Ellison as ceo, succeeding current ceo Ashish Pandey. Effective upon Ellison's appointment, Pandey became AAMC's executive chairman and will remain in his position as ceo of Altisource Residential.

Prior to joining the firm, Ellison had been at Bank of America and its predecessor Nationsbank. He held several roles at the bank, most recently leading the team that managed the valuation and disposition of BAML's legacy mortgage loan portfolio, as well as being a leading member of the bank's special initiatives team that worked to resolve its representation and warranty litigation.

Before this, Ellison was global head of the structured products division within BAML's investment banking platform with responsibilities involving all structured products, including RMBS, ABS, ABCP conduit and CMBS securities.

Structured Finance

Asset finance firm acquired

Amicus Finance has acquired Norton Folgate Capital Group, including Norton Folgate Capital Consulting, for an undisclosed sum. Amicus has secured an initial stake of 75% in Norton Folgate Capital Consulting, with the remaining 25% being held by the incumbent partners.

Amicus says it has committed significant working capital and resources to build the Norton Folgate business over the next five years to become a strong and sustainable provider in the areas of SME asset finance and leasing, HNWI financing and SME business loans. Norton Folgate will continue to operate as a significant brokerage, as well as a principal provider of such products.

Structured Finance

ABS syndicate head named

Bank of America Merrill Lynch has hired Tristan Cheesman as head of ABS syndicate for EMEA. He will report to Greg Petrie, head of EMEA structured finance origination.

Cheesman arrives from JPMorgan, where he was vp for its securitised products group syndicate. He has also worked in ABS syndicate and trading for Commerzbank, as well as holding roles at Dresdner Kleinwort and KPMG.

Structured Finance

Chief economist named

Radian Group has appointed Clifford Rossi as svp and chief economist for the firm. In this position, Rossi is responsible for research, forecasts, quantitative analysis and financial modeling of Radian's mortgage insurance portfolio and the housing and mortgage markets.

Rossi is currently an executive in residence and professor at the Robert H Smith School of Business, University of Maryland, a position that he plans to continue while serving at Radian. He has previously held a number of senior executive roles in risk management, most recently as md and chief risk officer for Citigroup's consumer lending group. Rossi also held senior risk management positions at Freddie Mac and Fannie Mae.

Structured Finance

Board promotion at Blackstone

Blackstone has appointed Bennett Goodman to its board of directors. Goodman is a co-founder of GSO Capital Partners, which currently manages over US$70bn in various direct lending strategies, leveraged loan vehicles and distressed investment funds. He also currently sits on the firm's management committee.

CDS

GFI agreement mulled

BGC Partners says it is engaged in discussions with GFI Group and expects to reach a consensual agreement related to its tender offer to purchase the shares of GFI for US$6.10 per share. The proposed agreement would satisfy all of BGC's previously disclosed tender offer conditions.

The offer for stockholders to tender their shares expired on 19 February. BGC's financial advisor and dealer manager for the tender offer is Cantor Fitzgerald and its legal advisor is Wachtell, Lipton, Rosen & Katz.

Insurance-linked securities

ILS exec hired

CGSC North America has hired William Ludington as evp for carrier management and alternative markets. His role includes developing partnerships and new business opportunities by accessing alternative sources of insurance capital via structured products, such as catastrophe bonds and ILS.

Ludington will also provide carriers with a point of contact for strategic partnership opportunities related to the US$2.5bn in premium sourced by CGSC from retail brokers in North America. He joins the firm from Canaccord Genuity, where he was head of the US structured products sales team, and has also held positions at Marsh, JPMorgan, UBS and CapRok Capital.

Mason Power and Mark Smith have also joined CGSC as chief marketing officer and senior advisor respectively. All three recruits will report to Tom Ruggieri, ceo of CGSC North America.

Insurance-linked securities

Willis expands to Australia

John Philipsz, md at Willis Capital Markets & Advisory (WCMA), has relocated from London to establish operations for the firm in Sydney, Australia. The new office will complement WCMA's existing presence in Hong Kong, led by Michael Guo, head of WCMA Asia.

Prior to WCMA, Philipsz worked for Bank of America, where he was a director in the financial institutions group. He has also worked in the financial institutions groups for Noble & Company and Merrill Lynch.

Insurance-linked securities

ILS pro hired

Securis Investment Partners has hired Stephen Lister to work in its operations team in London. Lister joins the firm from Kane Group, where he was ILS manager, overseeing the management of clients and providing alternative reinsurance solutions in the US and Europe. He will report to Securis coo, Vegard Nilsen.

Risk Management

First investment for margin start-up

llluminate Financial Management has invested in CloudMargin, marking its first investment in a fintech firm since it was launched last year by Mark Beeston, who previously managed ICAP's post-trade risk and information division. Illuminate's investment is the only institutional funding completed by CloudMargin - a collateral and risk management technology platform - as it eyes the next phase of its growth.

The cloud-based solution, which launched in 2013, is a cross-product cloud-based collateral and margin management technology solution that costs a fraction of competing products. It was developed to cater specifically to buy-side and non-bank institutions.

CloudMargin also recently announced connectivity to AcadiaSoft, the collateral messaging platform, where Beeston was a former board member.

RMBS

California probe revealed

Goldman Sachs has disclosed in its 2014 Form 10-K that, as part of the RMBS Working Group investigation, it received a letter in December from the US Attorney for the Eastern District of California in connection with a potential civil action. The letter states that the AG had preliminarily concluded that the firm had violated federal law in connection with its underwriting, securitisation and sale of RMBS and offers the firm an opportunity to respond.

Goldman says it is cooperating with these regulators and other authorities, including in some cases agreeing to the tolling of the relevant statute of limitations. The firm adds that it continues to receive requests for information and/or subpoenas under inquiries or investigations by the US Department of Justice, other members of the RMBS Working Group and other federal, state and local regulators and law enforcement authorities. It expects to be the subject of additional putative shareholder derivative actions, purported class actions, rescission and put-back claims and other litigation, as well as additional regulatory and other investigations with respect to mortgage-related offerings, loan sales, CDOs, and servicing and foreclosure activities.

RMBS

HLSS sale welcomed

New Residential Investment Corp is set to acquire all outstanding HLSS shares for US$18.25 per share in cash, totalling approximately US$1.3bn. The sale is expected to boost HLSS's future liquidity and capital resources and, in turn, its ability to fund future servicer advances.

The purchase price represents a 9% premium to HLSS' closing price of US$16.76 on 20 February. John Van Vlack, HLSS ceo, comments: "Of the strategic proposals received, New Residential's was the most attractive for a variety of reasons, including valuation and certainty of execution. We believe that New Residential is well positioned to provide support and act as a strategic financing party to Ocwen over the long term."

Moody's says that the sale is credit positive for Ocwen in two ways: by reducing financing concerns at HLSS, Ocwen's own servicing operations become more stable; and strengthening Ocwen's ability to meets its servicer advance obligations reduces the likelihood of servicing disruptions for the RMBS it services. "With more secure funding in place, the likelihood of disruptions in servicing advance payments and recoupments decreases," the agency explains. "However, the new ownership marginally increases the likelihood of servicing transfers from Ocwen if it doesn't adequately fulfil its servicing obligations. Any such transfers would likely be more orderly, benefiting from increased oversight and planning, than if Ocwen had been forced to transfer servicing."

The acquisition is expected to close in 2Q15, subject to HLSS shareholder approval and other customary closing conditions.

RMBS

California settlement disclosed

Morgan Stanley disclosed in a recent Form 8-K filing that it has reached an agreement in principle with the US Department of Justice and the US Attorney's Office for the Northern District of California to pay US$2.6bn to resolve certain claims that they indicated they intended to bring against it. In connection with the resolution of this matter, the bank has increased legal reserves for this settlement and other legacy RMBS matters by approximately US$2.8bn. However, it notes that there can be no assurance that an agreement will be reached on the final documentation of the settlement.

ABS

Tourism boost for SME ABS

With the weakness of the euro and prevailing low oil prices, tourism in Spain should continue on an upward performance trajectory in 2015. Moody's suggests that this could provide positive credit effects for SMEs and SME ABS transactions.

"Any growth in tourism, which we do expect in 2015 following record numbers in 2014, will directly benefit SME and micro companies related to the tourist sector," says Luis Mozos, a Moody's vp and senior analyst. "The credit positive effect for Spanish SME ABS has been and will continue to be significant because 'hotel, gaming and leisure' and 'beverage, food and tobacco' industries represent around 25% of Spanish securitisation pools rated by Moody's."

The agency says that the growth in the total number of international tourists and in the total amount that they spend is credit positive for SMEs in the tourism industry and indirectly for all companies through its contribution to the economic rebound. In 2015, the agency expects Spanish tourism to continue growing from 2014 record figures. In 2014, Spain consolidated its third position - after the US and France - as the most visited country with 64.9 million visitors, a 7.1% increase relative to 2013.

"The potential for further robust growth is made all the more real by the fact that the euro has depreciated by around 6% in effective terms since its peak in mid-March 2014," adds Javier Hevia, a Moody's vp and senior analyst. "This depreciation benefits tourism coming from outside the euro area, around 40% of the total number of visitors, and offsets the negative effect of the economic slowdown affecting some of the Spain's key contributing countries within the euro area."

Moody's reports that SME securitisation pools have high exposure to tourism industries. 'Hotel, gaming and leisure' and 'beverage, food and tobacco' sectors are the top sectors in Spanish securitisation portfolios, only after 'construction and building.' Both sectors together represent around a 25% share of the current balance and account for 9.3% of cumulative defaults observed.

"Growth in tourism started in 2010 and accelerated thereafter; so, given our expectations for a positive trend and the gradual economic rebound in Spain, it will continue to support the performance of Spanish SME securitisation deals, particularly in terms of lower arrears," explain Mozos and Hevia.

ABS

DOJ to take proactive ABS approach

A speech this week by acting deputy US Attorney General Sally Yates has illuminated the approach the Department of Justice (DOJ) will take to US auto ABS. Yates stated that experience from mortgage lending and RMBS will form the template for the investigation into autos, as the DOJ seeks to both explore past incidents and actively head off potential threats.

The DOJ has asked various lenders for information on loan underwriting and securitisation programmes (SCI passim). Much of that requested information concerns subprime borrowers.

It is unclear whether the government is examining specific issues in the auto ABS market or whether it has been alerted by the increase in subprime lending. Yates' speech appears to reveal an assumption by the government of some level of systemic risk in the auto lending market and in auto loan securitisation.

"Subprime lending has increased in auto loans and credit cards to nearly the same levels that occurred prior to the financial crisis. While that alone does not signal that fraud is going on, we should not wait until there is a crisis to pay attention," Yates said.

Wells Fargo ABS analysts note that, while subprime auto lending and securitisation have returned to levels seen before the crisis, there is far more discipline this time around in underwriting, leverage and investing. They suggest it is unlikely that subprime auto ABS will generate significant systemic risk.

ABS

FTA 'credit negative' for auto ABS

Moody's says that the lower prices for new Japanese cars sold in Australia, as a result of the Australia-Japan free trade agreement (FTA), are credit negative for Australian auto loan ABS. As the prices of new cars fall, so does the demand for used cars, in turn reducing the amount that can be recovered when cars are sold to repay defaulted loans.

"Non-conforming auto loan ABS transactions - which have higher default rates - and auto operating lease ABS transactions, which incur higher net losses when the value of vehicles falls, will be most affected by the decline in car prices," says Noirit Zaman, a Moody's associate analyst. "But the impact on prime auto loan ABS transactions will be limited because these transactions typically have lower default rates."

Under the Australia-Japan FTA, the customs duty charged on new cars imported from Japan to Australia was cut to 3.3% from 5% in January. The duty will be further reduced to 1.7% in April 2016 and will be abolished by April 2017. As a result of the cut, prices for new Japanese cars sold in Australia have fallen by amounts ranging from A$250 to A$8,000.

However, the impact of the lower prices on loss rates in prime auto loan ABS transactions will be minor, given the typically low levels of defaults in these transactions. As of December 2014, the cumulative default rate of Australian prime auto loans ABS was 1.1% with a recovery rate of 48%, resulting in a cumulative net loss of only 0.56%. The cumulative default rate of Australian non-conforming auto ABS transactions, on the other hand, reached 4.3% with a recovery rate of 52%, resulting in a cumulative loss of 2.1%.

Australia is currently negotiating an FTA with India, while discussions about a possible FTA with the EU are also underway. If these agreements are reached and result in lower new car prices from manufacturers in these countries, Moody's says it will be a further credit negative factor for Australian auto loan ABS.

Australia has been using customs duties, tariffs and import restrictions on vehicles manufactured overseas to protect the local automobile manufacturing industry. However, the motivation to maintain these restrictions has waned because the local automobile manufacturing industry is petering out.

Of the three companies currently manufacturing cars in Australia, Ford Motor Company will cease production in Australia by 2016, while General Motors Company and Toyota Motor Corporation will follow suit by 2017.

Structured Finance

Total return ETF debuts

State Street Global Advisors (SSGA) and DoubleLine Capital have partnered to launch the SPDR DoubleLine Total Return Tactical ETF (TOTL), which has begun trading on the NYSE Arca. TOTL is the first actively managed ETF to offer investors access to DoubleLine's investment research process.

The core fixed income strategy seeks to maximise total return over a full market cycle by actively investing across global fixed income sectors. The ETF will be managed by Jeffrey Gundlach, ceo and cio of DoubleLine Capital, Philip Barach, DoubleLine president, and Jeffrey Sherman, portfolio manager and participant on the firm's fixed income asset allocation committee.

TOTL will look to combine traditional fixed income investment sectors of the Barclays US Aggregate Bond Index and fixed income asset classes outside the index with the goal of maximising total return over a full market cycle through active sector allocation and security selection. DoubleLine adds that it will strive to maintain TOTL's portfolio investments with a shorter duration than that of the Barclays US Aggregate Bond Index.

TOTL has a net expense ratio of 0.55% and a gross expense ratio of 0.65%. The structure offers transparency, intraday trading liquidity and no investment minimums.

Structured Finance

AH4R debuts structural twist

The latest single-family rental securitisation to hit the market provides new structural features in the form of an anticipated repayment date (ARD) and a longer term than previous SFR deals. Arranged by Goldman Sachs, the U$438.8m American Homes 4 Rent 2015-SFR1 transaction is backed by a single 30-year fixed rate loan with an ARD of 10 years.

The loan will amortise at a rate of 1% of the original loan amount per year for the first 10 years. At the ARD, all excess cashflow will be used to pay down the principal of the loan.

Moody's says the amortisation over the term of the loan is a positive feature if the issuer does not default prior to the end of the term, as it increases borrower equity and credit enhancement for investors. The ARD feature is also positive for the deal because it mitigates the risk that the issuer defaults at year 10 if it is unable to refinance. However, when compared to previously issued SFR securitisations - which have five-year terms - investors are more exposed to deterioration in both home prices and sponsor performance, as well as an increase in expenses that may arise over a longer time horizon.

The loan backing the transaction is secured by 4,769 SFR properties located in 14 states, with over 50% concentrated across Texas, North Carolina, Florida and Ohio. Rated by Moody's, the deal comprises six tranches: US$315.46m of triple-A rated class A notes, US$42.46m of double-A class Bs, US$46.51m of single-A class Cs, US$34.39m of Baa2 class Ds, US$97.46m of unrated class Es and US$29.93 of unrated class Fs.

Structured Finance

Unconstrained bond fund launched

T Rowe Price has launched a global unconstrained bond fund, which is designed to help long-term investors navigate fixed income markets. The fund will be managed by Arif Husain, head of international fixed income and co-manager for the firm's international bond fund and institutional international bond strategies.

The fund seeks to offer some protection against rising rates, with a low correlation to equity markets. Through a flexible, benchmark-agnostic approach, it aims to offer low volatility and consistent income, even in rising interest rate environments.

The fund will be used to achieve these objectives in a number of ways, including by investing in MBS and ABS. At least 40% of the assets will be foreign securities, including emerging market debt, which may be denominated in US dollars or non-US currencies.

Interest rate swaps, CDS and forward currency exchange contracts will be used to manage interest rate exposure and limit the fund's volatility. The net expense ratio is estimated to be 0.75% for the investor class shares and 0.9% for the advisor class shares.

T Rowe Price has also launched a global high income bond fund, which is co-managed by Mark Vaselkiv and Mike Vedova. This fund seeks to provide high income and capital appreciation by investing in high yield bonds issued by companies around the world.

The minimum initial investment for both funds is US$2,500, or US$1,000 for retirement accounts or gifts/transfers to minors accounts.

Structured Finance

Euro P2P securitisations awaited

Peer-to-peer (P2P) lending - also known as marketplace lending - could expand the universe of potential investors in the European securitisation market, Moody's suggests. As with any other receivables, P2P loans can be securitised through the sale of the loans to SPVs that issue corresponding securities sold to investors.

P2P lending is one of the few alternative funding mechanisms that is available for typical SMEs and households alike, and is growing quickly in Europe. Moody's says that P2P lending platforms can fund their loans in several ways, but essentially aim to match cashflows from borrowers with those from lenders through internet platforms. In practice, while a bank can be involved in the origination process, the P2P platform generally sets the lending underwriting criteria and pricing policy, so the bank's role is less prominent.

"P2P lending platforms are created with different purposes and rules, and many differences exist in the geographic or industry focus, type of lenders or borrowers targeted and policy in terms of loan sizes, as well as credit criteria and operational set up," says Moody's vp Ariel Weil.

Securitisation of P2P loans has already occurred in the US (SCI 30 January) and, as the P2P sector matures in EMEA, securitisation could drive more funds towards European P2P lending. "By tapping investors in the rated securitisation market, European P2P lenders could attract larger investment volumes or lower their funding costs and hence increase their scale and the amount of lending they provide," Weil explains.

Moody's md Thorsten Klotz adds: "We should note though that P2P lending is not without its own specific credit risks, although operational set-ups may mitigate some of these risks."

CDO

Synthetic CDO notes tendered

Mizuho Bank has launched a tender offer for the six outstanding tranches of notes issued by Proventus European ABS CDO. The firm says the offer is aimed at supporting its strategy to optimise its financial structure and strengthen its balance sheet by purchasing the notes at below their par value. At the same time, the offer enables noteholders to exit the transaction, taking into consideration current financial market conditions.

The purchase price will be determined pursuant to an unmodified Dutch auction. The Proventus class A, B, C, D, E and F notes respectively have €12m, €28m, €20m, €25m, €20m and €10m in aggregate principal amount outstanding.

CDO

Fraud charge for CDO liquidations

The US SEC has charged VCAP Securities and its ceo Brett Graham with fraudulently deceiving other market participants while conducting auctions to liquidate CDOs. The agency's investigation found that VCAP and Graham improperly arranged for a third-party broker-dealer to secretly bid at these same auctions on behalf of their affiliated investment adviser in order to acquire certain bonds to benefit the funds it managed.

Under engagement agreements with the CDO trustees, VCAP and its affiliates were prohibited from bidding while serving as liquidation agent for these auctions. The SEC says that VCAP had access to all of the confidential bidding information as the liquidation agent and Graham exploited it to ensure their third-party bidder won the coveted bonds at prices only slightly higher than other bidders. VCAP's investment adviser affiliate then immediately bought the bonds from its secret bidder, obtaining a total of 23 bonds during five auctions.

VCAP and Graham agreed to pay nearly US$1.5m combined to settle the SEC's charges, while Graham is barred from the securities industry for at least three years. In addition, Graham agreed to pay disgorgement and prejudgment interest of US$127,733, plus a penalty of US$200,000.

CDS

Caesars auction results in

Final results of the Caesars Entertainment Operating Company Inc CDS and LCDS auctions have been published. The final price for CDS referencing the entity was determined to be 15.875, with 11 dealers submitting initial markets, physical settlement requests and limit orders to yesterday's auction. The final price for LCDS on the name was determined to be 96, with eight dealers submitting initial markets, physical settlement requests and limit orders.

CDS

Positive sentiment drives Renault tighter

Five-year CDS on Renault have firmed by 22% over the past month to price at the tightest levels observed since 2008, according to Fitch Solutions. After consistently pricing in the triple-B minus space for much of the past year, credit protection on Renault's debt is now pricing one notch higher, in line with triple-B levels.

The equity market has echoed the positive sentiment, driving the company's five-year probability of default down by 45% over the past month. "Market sentiment for Renault has likely been buoyed by better-than-expected 2014 earnings amid lower labour costs and higher demand in Europe," comments Diana Allmendinger, director at Fitch Solutions.

CMBS

CRE performance positive

All US CRE sectors performed well in 4Q14, according to Moody's. The agency says performance was supported by the country's economic recovery and stable inflation.

Moody's base expected loss for conduit/fusion CMBS transactions fell to 7.6% in 4Q14 from 8.2% in 3Q14. The overall share of specially serviced conduit loans decreased by 5bp to 7.32% in 4Q14 from 7.37% in 3Q14, the ninth consecutive quarterly decline. In addition, the share of specially serviced loans has contracted by 540bp since peaking at 12.72% in April 2011.

"The decline in Moody's base expected loss reflects improving economic conditions in the US. Household debt is lower than pre-crisis levels and, with falling unemployment, points to increased wage growth," says Keith Banhazl, svp in Moody's CMBS and CRE CDO surveillance unit. "Furthermore, strong profits and low external financing costs at US companies will continue to drive investment growth."

Lenders modified 27 loans in 4Q14, for an average volume of nine loans and US$161.2m per month. In the last two years, interest rate changes, term extensions and interest-only period extensions have been the most prevalent modification strategies.

During 2014, Moody's took rating actions on 6,703 tranches in 780 CMBS and CRE CDO securitisations. The bulk (80.3%) of these rating actions were affirmations.

In 4Q14, the agency took rating actions on 1,706 tranches in 264 CMBS and CRE CDO securitisations. Approximately 78.2% of Moody's 4Q14 rating actions were affirmations.

Finally, Moody's MOST scores indicate stable ratings for most of the transactions it rates. The agency anticipates that affirmation rates will remain around 75%-80% throughout 2015.

CMBS

CMBS metrics diverging

New issue and legacy US CMBS metrics continue to diverge, says Fitch. New issue metrics continued to decline in 4Q14, while the metrics of legacy US CMBS improved.

The percentage of new issue full and partial interest-only loans in Fitch-rated transactions rose by 5% last quarter. The increase was driven by an approximately 4% increase in full IO loans. In addition, Fitch-stressed loan to values continued to edge up, while stressed DSCRs were lower.

Contrastingly, delinquencies in Fitch-rated legacy transactions fell in 4Q14, though the rate of declines slowed. This was largely due to a backlog of REO assets, which comprised nearly two-thirds of the index balance. Furthermore, the percentage of loans in special servicing declined again in 4Q14 to US$25.1bn.

The majority of 2015 loan maturities for Fitch-rated fixed-rate multi-borrower CMBS (US$21bn) are set to come due in 2H15, while roughly US$12bn are due in 1H15 (US$3.5bn in 1Q15). The majority of the higher-leveraged peak-vintage loans mature between 2016 and 2017, which totalled US$129bn at year-end 2014, excluding US$11bn that already defaulted and remain outstanding.

CMBS

CMBS best practices released

CREFC has published new best practices addressing a variety of issues in the CMBS market. Effective immediately, the standards have been developed in conjunction with industry participants in the interest of further enhancing data consistency, transparency and efficiency across the market.

The six new best practices include promoting the reporting of consistent and timely details by special servicers regarding loan and REO liquidations. In addition, they address the challenges that arise when dealing with the transfer of the named special servicer on a CMBS trust, including the flow of information and documents between servicers, rating agency confirmations, logistical and timing issues, appraisals and reporting/communication issues.

The best practices also include: addressing reporting issues on excess liquidation proceeds; providing guidance for writing off B-notes and realised loss reporting; establishing the best practices to improve the delivery and information flow of operating statements, rent rolls and OSARs; and creating a new 1099 'reference sheet', along with a list of frequently asked questions to assist servicers in completing 1099 tax forms.

CMBS

RadioShack exposure gauged

RadioShack has outlined a list of almost 1800 stores that it intends to close due to its bankruptcy (SCI 11 February), including 191 properties across 130 US CMBS backed by 185 loans with a balance of approximately US$2.4bn. However, Barclays Capital CMBS analysts note that the allocated loan balance of the properties is US$940m, with only US$33m of the properties having a larger than 20% exposure to the retailer.

Out of the 13 single-property loans, eight (with an aggregated loan balance of US$99.5m) are currently in special servicing and five (US$19.2m) are currently in REO/foreclosure, according to the Barcap analysts. The largest loan is the US$81m City View Center, securitised in MSC 2007-IQ, which is currently in special servicing with a DSCR of -0.02x.

Other loans in special servicing or REO/foreclosure that the analysts deem to exhibit higher distress risks due to low DSCRs include US$10.34m Orchard Plaza (securitised in BACM 2005-5), US$15.13m Pine Creek Center (BSCMS 2007-PW15) and US$13.8m Lakewood Shopping Center (MLCFC 2006-4), with DSCRs of 0.71x, 0.84x and 1.02x respectively.

Risk Management

Transparency consultation broadened

ESMA has published a consultation paper that complements the transparency section of the paper on MiFID II/MiFIR published in December (SCI 19 December 2014). The new consultation covers non-equity asset classes, including credit derivatives.

For each asset class, two sections are provided. The first section presents an analysis on the definition of a liquid market and the second includes calculations on the pre- and post-trade transparency large in scale and size specific to the instrument thresholds.

The last section of the paper completes draft regulatory technical standards (RTS) 9 (transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives) published in Annex B of the consultation paper on MiFID II/MiFIR in December. The consultation runs until 20 March.

ESMA will use the input received to finalise its draft RTS, which will be sent for endorsement to the European Commission in mid-2015. MiFID II/ MiFIR and its implementing measures will be applicable from 3 January 2017.

Risk Management

Transparency principles released

ISDA has published a paper that outlines a number of key principles and initiatives that aim to further improve regulatory transparency of derivatives activity. The paper notes that a lack of standardisation within and across jurisdictions in reporting requirements remains a major challenge.

Indeed, ISDA says that data requirements differ in different jurisdictions, while some data requirements are not clearly defined. Additionally, it believes that standardised reporting formats have not been adopted quickly or broadly enough.

The end result is that regulators may lack a true picture of risk in individual jurisdictions because of incomplete and inconsistent trade data, and cannot aggregate data or risk exposures on a global basis. At the same time, ISDA believes that market participants face costly, duplicative and conflicting trade reporting rules, while trade repositories must collect and standardise data from multiple sources for multiple jurisdictions.

As a result, ISDA's paper includes the suggestion that regulatory reporting requirements for derivatives transactions should be harmonised within and across borders. The paper says regulators around the world should identify and agree on the trade data they need to fulfill their supervisory responsibilities, and then issue consistent reporting requirements across jurisdictions.

Further, ISDA believes policymakers should embrace and adopt the use of standards - such as legal entity identifiers, unique trade identifiers, unique product identifiers and FpML - to drive improved quality and consistency in meeting reporting requirements. It says the governance of such standards should be transparent and allow for input and review by market participants, infrastructure providers and regulators.

Where global standards do not yet exist, market participants can establish a central source that defines and clarifies derivatives trade and reference data and workflow requirements for each reporting field that is required by each regulator. Regulators should be clear about their priorities and set timetables for reform, while also regularly reviewing this work and facilitating its adoption on a cross-border basis.

In addition, laws or regulations that prevent policymakers from appropriately accessing and sharing data across borders could be amended or repealed. ISDA says that regulators need to continue to work collaboratively to develop a framework that enables appropriate sharing of derivatives trade data across geographic boundaries.

Finally, the association says the quality and completeness of data provided to repositories should be tracked, measured and shared with market participants and regulators. This will allow progress in reporting to be benchmarked, monitored and incentivised.

Risk Management

CVA recommendations proposed

The EBA has addressed an opinion to the European Commission on several aspects related to the calculation of own funds requirements for credit valuation adjustment (CVA) risk. The 16 policy recommendations in the opinion build on an extensive technical analysis conducted by the EBA. Based on the findings of the report, the Commission may adopt a delegated act.

The CVA data collection exercise conducted by the EBA has highlighted the materiality of the CVA risks that are currently not covered by EU legislation due to some exemptions provided for in the Capital Requirements Regulation. Overall, the EBA is of the opinion that EU exemptions on the application of CVA charges should be reconsidered or removed, since they leave potential risks uncaptured. However, the EBA also thinks that any action should be taken in this regard only after a Basel review of the CVA framework, as part of the fundamental review of the trading book.

In the meantime, however, the EBA is proposing policy recommendations that can be implemented in the short term, which will provide clarification and convergence in the implementation of the current CVA framework in the EU. Additionally, in order to partially address the risks generated by the current EU exemptions, the EBA recommends monitoring the impact of the transactions exempted from the CVA risk charge and defining potential situations of excessive CVA risks. This could be taken into account as part of the bank supervisory review and evaluation process (SREP).

In this respect, the EBA will issue guidance specifying what may lead to a situation of excessive CVA risk, thus allowing competent authorities to decide whether supervisory measures should be taken, depending on the specific situation of each institution. As supervisory measures cannot materially reverse the effect of exemptions that are enshrined in EU regulation, additional own funds requirements should never be calibrated in such a way to request capital requirements that replicate in full or in substantive part the international standards that have not been implemented into EU legislation.

Over the course of 2015, the EBA will provide details in terms of process and timeline, as well as on the potential thresholds that could presumably lead to excessive CVA risks. This could be applied for the 2016 SREP process, at the earliest.

Finally, in light of the regulatory consistency assessment programme for the EU published by the Basel Committee (SCI 8 December 2014) and with a view to re-establishing international consistency in the implementation of the Basel CVA framework, the EBA is making policy recommendations aiming at addressing the inconsistencies of the current standards. In particular, the authority recommends that the CVA risk charge should be realigned with actual CVA risk so as to better reflect banks' internal practices and ensure that the prudent capture of CVA risks does not generate unintended market distortions or wrong incentives for banks.

Risk Management

Expanded CLO tool launched

Thetica Systems has launched an expanded portfolio analysis tool that is designed to enable users to analyse and price lists of CLO bonds using personal insights, preferences and scenarios. New module functions include: the power to price the entire CLO universe daily per scenarios and discount margin/yield levels as customers choose; the ability to run quick risk and exposure analysis on the entire portfolio; and the ability to screen bonds on over 70 different characteristics, including specialised cashflow metrics. The firm also provides similarly customised modules for RMBS, CMBS and ABS.

Risk Management

CCP disclosure standards published

The Committee on Payments and Market Infrastructures (CPMI) and IOSCO have published a paper on public quantitative disclosure standards for central counterparties. To help ensure that the risks of using CCPs are properly understood, the paper suggests that CCPs need to make relevant information publicly available.

The CPSS and IOSCO published a disclosure framework in December 2012 to improve the overall transparency of financial market infrastructures (SCI 14 December 2012). That framework primarily covers qualitative data that need relatively infrequent updating, for example, when there is a change to a CCP's risk management framework.

The new paper sets out the quantitative data that a CCP should disclose more frequently. The proposed disclosure are intended to help stakeholders, including authorities, participants and the public to: compare CCP risk controls, including financial resources to withstand potential losses; have a clear and accurate understanding of the risks associated with a CCP; understand and assess a CCP's systemic importance and its impact on systemic risk; and understand and assess the risks of participating in a CCP.

In addition, the CPMI and IOSCO have published three level two assessment reports on selected jurisdictions' progress towards the implementation of the principles for financial market infrastructures (PFMI). The reports focus on the implementation of the principles for CCPs and trade repositories in the EU, Japan and the US as at 18 April 2014.

Overall, the reports demonstrate that the three jurisdictions have made good progress in implementing the principles in their legal and regulatory or oversight frameworks. This is especially evident for CCPs, where the jurisdictions have generally developed frameworks that completely and consistently implement either all, or the majority, of the principles applicable to systemically important CCPs.

Jurisdictions' progress towards completely and consistently implementing the principles for trade repositories has been more varied. Where appropriate, the reports highlight gaps and make recommendations for addressing them.

RMBS

Specialist lending quality improving

Relative to pre-2008 lending standards, the credit quality of mortgage loans in the specialist lending sector in the UK has significantly improved, according to Moody's. This is due to lenders having to comply with Mortgage Market Review (MMR) standards on affordability and income verification.

"Aside from affordability assessments and more rigorous income checking, stronger borrower profiles have also played a part in consolidating loan credit quality, with high-street lenders' continued tightened criteria leading to customers who may have been accepted by a mainstream lender currently now limited to a specialist lender," says Jonathan Livingstone, a Moody's vp and senior analyst.

Moody's says that the current prevailing trend is one where specialist lenders are originating far fewer loans that have multiple layers of risk. For example, features that were common pre-2008 - loans with poor payment history in combination with loose underwriting practices - are now rare, thanks to the MMR.

The target market landscape has shifted towards prime away from non-conforming. Borrowers who have had significant prior payment problems would not now be able to receive home finance from specialist lenders.

The strengthening UK economy and continued low interest rate environment contribute to Moody's positive outlook on UK non-conforming RMBS and will lead to improving performance for pre-2008 loans and continued strong performance for newer vintages of specialist lending.

RMBS

Prime RMBS approach finalised

Moody's has outlined its approach to rating and monitoring US RMBS and GSE risk-transfer transactions backed by first-lien prime mortgage loans issued after 2009. This follows the agency's request for comment last year (SCI 14 August 2014).

Under the new approach, the MILAN model will be the main quantitative tool for collateral analysis. The methodology also incorporates Moody's approach to account for the ratings impact of ability-to-repay rules.

For seasoned transactions rated before January 2010, for which significant performance information is available and which have been exposed to severe declines in home prices and increases in unemployment, Moody's will continue to use its US RMBS surveillance methodology.

The agency notes that the methodology clarifies certain aspects of the RFC based on comments from the market and will not result in any rating changes. Market comments generally related to modelling and collateral analysis assumptions, data quality evaluation guidelines and Moody's approach to assessing the benefit the transaction pools will receive from mortgage insurance.

"We currently have a global framework for assessing the effect of mortgage insurance in RMBS transactions," says Moody's md Navneet Agarwal. "However, we will continue to solicit views from the market in order to refine our assumptions for this US-specific benefit."

RMBS

Surveillance errors under review

S&P says it is assessing the impact of potential error corrections relating to the use of lower default rate assumptions for certain current-paying pre-2009 US residential mortgage loans in its cashflow model than those prescribed by its RMBS surveillance criteria for pre-2009 originations. The agency's preliminary assessment suggests that between 300 and 400 ratings may be affected. It expects to place the affected ratings on credit watch within a few days.

The criteria provide base-case default rate assumptions for certain current-paying loans across a range of product types and vintages. Specifically, it clarifies that the base-case default frequency assumption for long- and short-amortisation current loans in a collateral pool is first bounded by upper and lower thresholds based on the relevant cohort.

The lower bound reflects S&P's estimation of the likelihood of default associated with a 60% LTV loan that has not been delinquent at any time over the preceding 24 months. Lower bounds were established for all cohorts and operate as a floor for the base-case default assumption for the current loans in the pool with a weighted average adjusted LTV of 60% or lower.

However, instead of establishing the lower bound at 60% LTV, the agency's analytical practice had previously incorrectly established the lower bound at 30% LTV. This resulted in the use of lower default assumptions for pools of current-paying loans with LTVs of lower than 60%.

RMBS

Ocwen-serviced RMBS downgraded

Fitch has resolved the negative rating watch on 280 US RMBS classes from 127 transactions. All of the classes were previously rated above single-A and are collateralised with mortgage loans serviced in part by Ocwen Loan Servicing.

In all, 273 classes have been downgraded to single-A and assigned a stable outlook by Fitch, while seven classes have been affirmed at triple-A and also assigned a stable outlook. The agency explains that the small number of affirmed classes are expected to pay off in full imminently, which mitigates potential servicer disruption risk.

Fitch says it has applied rating constraints to Ocwen-serviced US RMBS since 2012 due to the unique risks related to the rapid growth of the company's servicing portfolio. To date, the agency's rating constraints have focused primarily on subprime RMBS, where Ocwen's market share is largest. It says the size of the portfolio and the increased cost and heightened regulatory requirements of servicing subprime loans in particular limits the number of companies willing and able to quickly assume the servicing rights in the event a servicing transfer is required.

RMBS

Italian prepays to rise

Increased competition in the Italian mortgage market is likely to raise prepayment rates and make the renegotiation of mortgage terms more common, Fitch reports. Data from banking credit information company, CRIF, shows new residential mortgage originations in Italy increased 15% year-over-year in the first nine months of 2014.

Fitch says the rise in originations is largely due to a surge in refinancings as banks resume mortgage lending with low-risk-profile clientele. Italian lenders are willing to compete for new borrowers, including those who are remortgaging, despite the gradual erosion of spreads.

Most of the new originations will therefore contain more favourable terms for residential borrowers, while higher prepayment rates for existing mortgage pools will result if this trend persists. Fitch expects the constant prepayment rate in Italian RMBS transactions to converge toward its pre-2007 level, up from its historical lows since 2013.

Further, Fitch expects new deals to have more accommodating thresholds for renegotiations than the strict ones in the most recent transactions because originators would like to retain the flexibility to compete with other lenders. Margin reductions are likely to be the main focus of renegotiations in Fitch-rated Italian RMBS deals in the short to medium term.

The re-mortgaging trend could also increase tenor extensions, adds Fitch. It believes originators are likely to extend the term of a mortgage to relieve troubled borrowers as an alternative to the government-sponsored payment suspension schemes of the recent past.

Finally, the agency says it will analyse whether the credit quality of loans originated to refinance existing debt differs from that of loans originated on the same terms to purchase properties. But even if the trend for more refinancings continues, the overall consequences for new and existing Italian RMBS transaction ratings and performance are likely to be limited.

RMBS

Rate cut effects examined

Moody's says the Reserve Bank of Australia's (RBA) decision to cut the official cash rate by 0.25% to a record low of 2.25%, which mortgage lenders have passed on to borrowers, brings mixed benefits for the country's RMBS sector. The decrease is positive for existing RMBS as it means lower repayment amounts for home loan borrowers, but is negative for the underwriting of new loans and RMBS, given that greater risk borrowers - who borrow at historically low rates - may not be able to afford repayments when the interest rate cycle turns.

"Moreover, we expect the cash rate to be cut by a further 0.25% point to 2% in 2015 so that when it will eventually rise again, RMBS that have a greater proportion of loans originated during low interest rate periods will be more exposed to borrowers who may have a harder time servicing their loans at higher rates," says Karen Burkhardt, a Moody's associate analyst.

The agency believes the risks associated with underwriting mortgages in a low interest rate environment can be mitigated if lenders maintain adequate interest rate buffers and/or interest rate floors when assessing a borrower's ability to service their mortgage at higher rates. However, it believes these buffers tend to be less effective in a low rate environment and have to be set at suitable levels.

In December, the Australian Prudential Regulatory Authority (APRA) announced it expected lenders to test borrowers' capacity to repay their mortgage loans with an interest rate buffer that is at least 2% above the lenders' loan product rate and a minimum interest rate floor of 7%. Applying the 2% buffer to the average standard variable mortgage rate (SVR), which Moody's expects will fall to 5.7% from 5.95% as a result of the February cut, means a new borrower's serviceability will be assessed at 7.7%. However, at 7.7%, the average rate that a borrower's serviceability will be tested is just 0.51% above the 10-year average bank SVR of 7.19% - which has been exceeded during three periods over the last 15 years.

For each Moody's-rated RMBS transaction, the agency calculated the proportion of loans by current balance originated in 'high' versus 'low' SVR months. The result was that in 94 of 122 transactions, 50% or more of their mortgage loans were originated during high interest rate months, suggesting that their borrowers - because of their previous exposure to higher rates - are more likely to be able to afford repayments if rates increase. For the ten RMBS with the highest proportion of loans originated in high interest rate months, their borrowers have benefited from declining repayments and improving mortgage affordability, while property values have also risen.

Moody's further notes that although Australia's official cash rate is now at a record low, lenders' SVR has in fact been below the 10-year average of 7.19% since May 2012, due to the interest rate cycle.

RMBS

MSR sale agreed

Ocwen Loan Servicing has signed an agreement in principle to sell to Nationstar Mortgage residential mortgage servicing rights on a portfolio consisting of approximately 81,000 performing loans owned by Freddie Mac with a total principal balance of approximately US$9.8bn. Subject to a definitive agreement and approvals by Freddie Mac and the FHFA, the transaction is expected to close by 31 March and the loan servicing to transfer in April.

"This transaction represents the first step in the execution of our previously-announced strategy to transfer certain types of non-strategic servicing," comments Ronald Faris, ceo of Ocwen. "We look forward to exploring additional MSR transactions with Nationstar."