Contents

Secondary markets

Triple-Bs take the lead

Triple-B paper is currently at the forefront of US CLO secondary market activity.

Overall, triple-B tranches saw the strongest tightening in the CLO capital stack last week. Today sees the sector dominating a quiet BWIC calendar and also making up a significant proportion of the burgeoning auction schedule for the rest of this week.

There are currently only two CLO lists scheduled for trade this afternoon and both are, bar one line, comprised of 2.0 triple-Bs. 13:30 New York time sees a $12m four line list that also incorporates a single-A piece.

The list consists of: BABSN 2012-2A C, DRSLF 2011-22A CR, OCP 2012-1A B and OHALF 2013-1A D. None of the bonds has traded on PriceABS in the last three months.

Then at 14:00 there is a five line $15m list involving: MCLO 2014-7X C, OCTR 2014-5X D, REGT5 2014-1X C, SNDPT 2014-3X D and TELOS 2014-6X D. Again, none of the bonds has traded on PriceABS in the last three months.

Secondary markets

Euro ABS/MBS keeps support

Spreads remain well-supported in European ABS/MBS secondary markets, but activity has declined dramatically from last week.

"It's very, very quiet this week," says one trader. "The market is well-supported at these levels, but there's no real impetus to do anything."

The trader continues: "ABSPP is still slowly happening - ECB announced €470m for last week, which is one of their bigger weeks, and that's enough to keep the tone positive. Meanwhile, there are few bits happening in primary and that's taken focus away from secondary trading."

At the same time, last week's heavy BWIC activity has for now come to an end. "A lot of last week's selling was to do with profit-taking for US quarter-end," the trader notes.

Consequently, as was the case yesterday today's ABS/MBS BWIC schedule is quiet with three lists circulating so far covering a range of jurisdictions and deal types, but mainly in small size.

The largest clips currently on offer come from a €12.1m original face two line list due at 15:30 London time consisting of CHAPE 2007 A2 and EMERM 4 B. Only CHAPE 2007 A2 has covered on PriceABS in the past three months doing so at 95.25 on 29 January.

Secondary markets

Euro CLOs move target

The recent large broad-based volumes seen in the European CLO secondary market have been replaced this week by a more targeted approach.

"No one is focusing on generic runs, it's now about targeted offers," says one trader. "People want to see ideas and if you go out with them you will trade."

In particular, interest surrounds specific European mezzanine tranches. The trader explains: "1.0 triple-B and double-B paper has got much, much tighter over the past month or so on the back of significant volume. It now offers an attractive return on leverage versus new issue and for that matter single-As, which have hardly moved over the same period."

Meanwhile, the European CLO BWIC calendar is significantly quieter than last week, though there are two lists scheduled for trade today and a couple more in the calendar for later in the week so far. Today's lists offer 18 tranches, but nearly all in small size and of those only one line item is an original 1.0 triple- or double-B - €300,000 of ALPST 2X D due as part of a larger ABS/MBS mixed BWIC at 13:30 London time.

The bond hasn't traded on PriceABS in the last three months.

Secondary markets

US CLO rally continues

US CLO secondary spreads are continuing to tighten on the back of healthy activity.

"Everything in the cap stack from triple-B and above is tightening as it has over the past week or so and that's with decent February primary volume," says one trader. "Sellers are putting stuff out there confident it will go at decent levels and so far 98% of line items are trading."

The depth of the positive market sentiment will however be further tested later in the week. "A big money manager has just put out a $140m list for trade on Thursday, so that should be interesting," the trader says. The 47 line auction of 2.0 and 3.0 double-A to single-B bonds is due at 14:00 New York time on 5 March.

Aside from the big list the US CLO BWIC calendar is building strongly for the remainder of the week, with triple-Bs still making up a high proportion of line items. Nevertheless, they are likely to go well, according to the trader.

"Triple-Bs have now come in 50bp-60bp since the start of the year, but people believe they still have further to go and are having trouble getting enough of the right paper. There is still some tiering on these bonds, but on the energy exposures there is now the realisation that 2.0 attachment points are too high for it to make a big difference."

Secondary markets

Euro secondary sees pockets of activity

European secondary is still quiet overall, but there are pockets of activity

"It continues to be very quiet this week, but the few trades going through are trading quite high," says one trader. "We've seen Dutch RMBS print in the mid-teens, for example."

Strong trading is currently mainly macro driven, the trader says. "The positive tone was helped by the ECB, but it's primarily global sentiment that's keeping prices supported."

The trader cites Portuguese bonds as another pocket of activity. "The latest ATLAM deal was generously priced and that's pushed up the whole Portuguese secondary market, although on very low volume."

CMBS is even quieter, the trader adds. "There's almost nothing going on there, though INFIN SOPR is up a little."

The BWIC calendar for today so far is also quiet though up a little on previous days. There are a couple of single line CMBS lists, an ABS CDO slice and a larger UK non-conforming BWIC, albeit of small current sizes; but attracting most interest is a double-A CLO auction due at 14:00 London time.

The four line €57.5m list consists of: ARESE 2013-6X B, ALME 2013-1X A-2, JUBIL 2013-10X B and SPAUL 2X B. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

US CMBS tightens

US non-agency CMBS spreads are edging tighter this week.

"It's already been a pretty heavy primary and BWIC schedule this week," says one trader. "On the back of that and continuing positive market tone spreads are grinding a little bit tighter."

The trader continues: "BWICs this week have traded well, but nothing has really changed - the market focus is new issue, new issue, new issue. People try to make increased activity happen in the older stuff, but with only limited success unless primary is quiet."

The primary market is far from quiet today and is providing additional distraction thanks to the appearance of Credit Suisse's first conduit deal since 2008. Perhaps as a result, the BWIC calendar is significantly down today with only three small lists scheduled at the open.

Secondary markets

Euro secondary ticks over

European secondary markets are quiet, but activity is still ticking over.

"Secondary is reasonably quiet, but we are getting stuff done particularly around peripherals and non-conforming plus a little in CLOs," says one trader. "There's not much on BWICs again today, though there are some RMAC equity residuals later in the day, which might be quite interesting."

The drop-off in activity this week compared to last is mainly due to drivers beyond the ABS/MBS secondary market, according to the trader. "The market is waiting for direction and any news from the ECB on QE this afternoon while not directly impacting us could help as we're currently taking our cue from the broader credit markets."

At the same time, the trader adds: "New issue is also seeing continuing activity, a new STORM deal has just been announced for example, and a lot of client focus is currently on primary."

Secondary markets

Hurdle ahead for US CLOs

The broad-based US CLO secondary rally is continuing, but will face its biggest hurdle so far later today.

"We've seen continued tightening across the capital structure and that's brought out a lot of sellers trying to take advantage of the strength," says one trader. "As a result, it's been a busy week with a lot of BWICs, but that hasn't stemmed the rally."

The variety of BWICs seen this week has helped, the trader adds. "There's no real theme - lists are from all parts of the stack from equity to triple-A, though it's almost exclusively been 2.0 deals."

However, the market faces its biggest hurdle later today with the $140m 47 line CLO BWIC due at 14:00 New York time (SCIWire 3 March 2015). "It'll be very interesting to see how the list trades - it's a real bellwether for how much depth this rally actually has," says the trader.

Secondary markets

US RMBS disrupted but still strong

This morning's storm in the Northeastern US has disrupted activity in the non-agency RMBS secondary market, but it continues to trade strongly.

"It was a fairly light start to the month though activity was picking up a head of steam as the week went on, but that's changed today because of the weather," says one trader. "One larger list has been postponed until Monday and a few others have been shifted until tomorrow."

Consequently, volume is low for a Thursday at around $600m. The bonds on offer are scattered across a range of different sectors, while sellers are primarily money managers from outside the Northeast.

Nevertheless, the trader cites an $86m current face re-REMIC list as being of particular note. "The re-REMIC underlying is subprime and this is the first time I've seen such structures put out to bid. They'll be watched closely to see where they'll clear both because they're unusual and because they're highly time intensive to value."

Overall, the non-agency RMBS secondary market continues to trade strongly, the trader says. "The continuing move tighter is consistent with other similar markets such as CLOs and CMBS, but it's currently restricting RMBS buyers primarily to real money - fast money accounts appear to be waiting for a move wider before they dip back in."

Secondary markets

More of the same for European ABS/MBS

Yesterday saw another positive but quiet day in the European ABS/MBS secondary market as broader credit was boosted by the ECB's QE announcement.

Trading continued to be slow yesterday and into this morning, but remains strong in still patchy activity around the usual key areas of prime, UK non-conforming and selected peripheral paper. However, there was some softening in German CMBS on the back of refinancing concerns in the sector.

The BWIC schedule is light again today, but is at least offering an eclectic selection of assets across the four lists scheduled so far. First up at 11:00 London time are two lines of Russian RMBS - $20m of MSCOW 2007-1 A and $29.6m of RNBR 2007-1 A. Only MSCOW 2007-1 A has covered on PriceABS in the past three months last doing so at 96 on 26 February.

Then at 14:30 there is a five line BWIC of UK RMBS with all pieces denominated in dollars. The $71.014m list comprises AIREM 2006-1A 1A, AIREM 2007-1A 2A1, BRNL 2007-1A A4C, KDRE 2007-1A A2 and PARGN 13A A2C. Three of the bonds have covered on PriceABS in the past three months - AIREM 2006-1A 1A at 97.07 on 27 January; AIREM 2007-1A 2A1 at 96.5 on 9 January; and BRNL 2007-1A at 98.9 on 23 February.

At 15:00 there is a single £1.5m line of DECO 2007-C4X C. The CMBS last covered on PriceABS at 90.86 on 20 February.

Finally at 16:00 there is a £6.75m single line of pub ABS MABLN 0 06/15/36. It last covered on PriceABS at 88.5 on 6 February.

Secondary markets

US secondary stays bullish

US secondary securitisation markets, particularly CLOs, are ending a strong week in bullish mood.

"We're seeing better buying from all types of investor from banks to real money," says one trader. "As a result, spreads are tighter across the board and everything feels as if it will stay positive for now, whether that's CLOs, CMBS or RMBS."

The positive tone is evidenced by the covers just released from yesterday's $140m CLO BWIC. All the bonds that traded did so at or above talk. While more than half of the list did not trade the bid levels seen were also at or above talk.

There are currently only two CLO BWICs due today, but both are of healthy size. At 10:00 is a nine line $54.25m list comprising: AMMC 2014-14A B2L, AVERY 2013-3A E, CECLO 2013-19A D, DRSLF 2013-26A E, DRSLF 2013-28A B2L, FINNS 2012-1A D, JTWN 2014-4A D, OAKC 2014-10A E and OCT17 2013-1A E. Three of the bonds have covered with a price on PriceABS in the last three months - AVERY 2013-3A E at 90.01 on 26 February; CECLO 2013-19A D at 90.45 on 24 February; OAKC 2014-10A E at 85 on 3 February.

At 11:00 there are eight line items totalling $30.2m - CGMS 2013-3A D, CGMS 2014-2A E, GALXY 2014-18A E1, INGIM 2013-1A D, MDPK 2014-12A E, MVW 2013-1A D, SYMP 2014-14A E and VOYA 2014-2A D. Again, three of the bonds have covered with a price on PriceABS in the last three months - CGMS 2013-3A D at VH80S on 22 January; INGIM 2013-1A D at 91.13 on 26 February; and VOYA 2014-2A D at 87.72 on 23 January.

Structured Finance

SCI Start the Week - 2 March

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

Pipeline
Many of last week's pipeline additions priced briskly, leaving only a short list of new additions at the week's end. These consisted of five ABS, one RMBS and two CMBS.

The ABS were: US$350m California Republic Auto Receivables Trust 2015-1; US$280.725m Flagship Credit Auto Trust 2015-1; US$964.65m Hyundai Auto Lease Securitization Trust 2015-A; US$1.021bn John Deere Owner Trust 2015; and US$395.55m Westlake Automobile Receivables Trust 2015-1.

£351m RMS 28 was the sole RMBS. The CMBS were US$245m MSCI 2015-420 and US$1bn WFCM 2015-C27.

Pricings
It was the busiest week of the year so far for new issuance. There were 14 ABS prints, as well as six RMBS, three CMBS and four CLOs.

The ABS were: US$256m Ascentium Equipment Receivables 2015-1; C$325m 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$950m Enterprise Fleet Financing Series 2015-1; US$500m Exeter Automobile Receivables Trust 2015-1; US$555.65m GE Equipment Transportation 2015-1; C$525m Golden Credit Card Trust Series 2015-1; C$602.4m Hollis Receivables Term Trust II Series 2015-1; US$134.6m Kentucky Higher Education Student Loan Corp 2015-1; US$1.5bn Toyota Auto Receivables 2015-A Owner Trust; US$1.45bn Volkswagen Auto Lease Trust 2015-A; and US$706m World Omni Auto Receivables Trust 2015-A.

The RMBS were: US$566.21m American Homes 4 Rent 2015-SFR1; A$1.25bn Apollo Series 2015-1 Trust; US$405.27m CSMC Trust 2015-1; US$293m FirstKey Mortgage Trust 2015-1; £210m Precise 2015-1; and US$372.361m WinWater Mortgage Loan Trust 2015-2.

US$1.4bn COMM 2015-DC1, US$1.45bn FREMF 2015-K43 and US$1.8bn Motel 6 Trust 2015-MTL6 accounted for the CMBS. Lastly, the CLOs were US$618m Betony CLO, US$414m Denali Capital CLO XI, €414.7m Harvest CLO XI and US$614m Madison Park Funding XVI.

Markets
US ABS secondary market volume was steady at around US$1.25bn last week, according to Bank of America Merrill Lynch analysts, with credit card and FFELP ABS spreads grinding tighter. "The year started with spreads in most sectors trading at the wide-end of 12-month trading ranges. Currently, spreads in several sectors have moved to the middle of 12-month trading ranges, including timeshares plus senior FFELP and private student loans. We expect these and other sectors will move to tighter levels," they say.

The US non-agency RMBS market has also witnessed robust activity, both in primary and secondary. "Week-over-week prices for legacy paper and CRT NR notes were firm, while SFR MBS triple-B rated notes tightened about 25bp and NPL notes widened about 15-20bp," comment Wells Fargo analysts.

In the European RMBS secondary market, "activity picked up and sentiment improved, in line with the broader credit and equity markets" according to JPMorgan analysts. "Spreads on peripheral ABSPP-eligible paper closed the week marginally wider after a number of large BWICs, while UK RMBS paper was tighter," they add.

US CMBS spreads rallied for a fourth week as primary issuance failed to meet expectations. Spreads at the top of the stack in recent vintage CMBS tightened to plus 86bp. "Lower in the capital stack, single-A rated tranches tightened 2bp, to swaps plus 206bp, and triple-B minus rated tranches were 3bp tighter, to swaps plus 339bp," say Barclays Capital analysts.

Deal news
• 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 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.
• 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. Out of the 13 single-property loans, eight are currently in special servicing and five are currently in REO/foreclosure, according to Barclays Capital 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.
• 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.

Regulatory update
• 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.
• 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.
• 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.
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
AIM Aviation Finance series 2015; Auto ABS 2012-3 (re-offer); Bosphorus CLO I; CarFinance Capital Auto Trust 2015-1; CarMax Auto Owner Trust 2015-1; COMM 2015-DC1; Dartry Park CLO; Discover Card Execution Note Trust 2015-1; DT Auto Owner Trust 2015-1; Flatiron CLO 2015-1; FREMF 2015-K43; Fuyuan 2015-1 Retail Auto Mortgage Loan Securitization Trust; GAHR 2015-NRF; Guildford No.1; LCM XVIII; Medallion Trust series 2015-1; Motor 2015-1; MSBAM 2015-C21; Navient Student Loan Trust 2015-1; Nelnet Student Loan Trust 2015-1; OZLM XI; Race Point IX CLO; Santander Drive Auto Receivables Trust 2015-1; Springleaf Funding Trust 2015-A; Westgate Resorts 2015-1

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-5; BSCMS 2007-PW15; CD 2006-CD2; CSFB 2005-C5; DBUBS 2011-LC3A; DECO 2007-E5; DECO 2007-E6; ECLIP 2006-2; ECLIP 2007-1; EPICP BROD; EQTY 2014-INNS; GCCFC 2005-GG3; GCCFC 2006-GG7; GSMS 2013-GC12; GSMS 2014-GC22; JPMCC 2006-CB15; JPMCC 2006-LDP9; MLCFC 2006-4; MSC 2007-IQ; MSC 2011-C3; TITN 2006-3; TITN 2006-5; TITN 2007-CT1; TMAN 5; TMAN 6; UBSBB 2013-C5; UBSCM 2012-C1; WFRBS 2012-C8; WFRBS 2013-C14

Structured Finance

Repo eligibility tightening?

The ECB last month published new guidelines on the implementation of the Eurosystem monetary policy, effective from 1 May. Several changes have been made to ABS repo eligibility, which appear to reflect a bias towards tightening of the criteria.

The changes include the exclusion of ABS comprising receivables with residual value, with a four-month grandfathering period for bonds that will be on the list of eligible assets on 1 May. Additional criteria have also been introduced for the place of incorporation of mortgage or receivables trustees in ABS transactions (those outside EEA will be excluded), with a one-year grandfathering period for bonds that will be on the list of eligible assets on 1 May.

Further, the framework on ABS surveillance reports requirement has been enhanced and a more detailed specification introduced of the rules governing the provision of liquidity support in respect of ABS. These provisions shall apply from 1 November.

Finally, the requirements for counterparties to inform the Eurosystem of modifications to the ABS that took place in the preceding six months and of any planned modification to the ABS have been removed.

Regarding the exclusion of residual value leases, Citi European securitised products strategists note that many of the region's auto ABS issuers - such as Volkswagen and BMW - do not securitise residual values, so their ABS bonds should not be impacted by the move. However, transactions such as LeasePlan's Bumper 6 (NL) Finance securitise residual value from future vehicle sales and are therefore likely to become ineligible under the new criteria. The imposition of geographical restrictions may also make many UK prime master trust bonds ineligible because their mortgage trustees are incorporated in Jersey.

Meanwhile, the introduction of a requirement that ratings should be explained in a publicly available new issue report and that rating agencies should publish regular surveillance reports no later than four weeks after each IPD should increase transparency. "Although the surveillance requirement will increase the workload of agencies, we think they are very likely to comply. As such, this condition should not render many bonds ineligible and should rather facilitate availability of updated pool performance information for investors," the Citi strategists observe.

Under the counterparty-related changes, a counterparty may not be able to use ABS as collateral if it has close links with the issuer account bank or liquidity facility provider and a few conditions on the size of reserve fund and liquidity facility are met. If the current reserve fund is greater than 5% of the original balance of all tranches and is greater than 25% of the current balance of subordinated tranches and the counterparty has close links with the issuer account bank, the counterparty shall not be permitted to use such bonds as collateral. A similar condition exists if the liquidity facility of the transaction is greater than 20% of the original balance of all tranches and the counterparty has close links with the liquidity facility provider.

CS

Structured Finance

Stricter eligibility causes casualties

The ECB has removed 11 Spanish bonds from its repo-eligible ABS bond list due to non-compliant payment waterfalls following enforcement or accelerated amortisation. Such a stringent interpretation could have far-reaching implications, according to European securitisation analysts at Barclays Capital.

The Spanish bonds that have lost ECB repo-eligibility over the last month are: Bancaja 4, Bancaja 5, Bancaja 6, Bankinter 3, Foncaixa Leasing 2, UCI 9, TDA CAM 1, TDA CAM 2, TDA Ibercaja 1, TDA Ibercaja 4 and IM Pastor 2. Most of them have been repo-eligible since 2010, leading to the suggestion that this reassessment could have been triggered by a proposal to purchase the bonds under the ABSPP.

"The problem seems to affect seasoned Spanish transactions only," the Barcap analysts explain. "In other markets, separated pre- and post-enforcement waterfalls have always been common."

As a result, they recommend that investors examine closely post-enforcement/liquidation priority of payments before deciding whether to purchase a seasoned Spanish ABS senior bond under the assumption it is ECB repo-eligible.

In the analysts' view, the post-enforcement/liquidation waterfalls of the affected transactions initially appear compliant and in nearly all cases the transactions would pay interest and principal on the most senior tranches ahead of any payments due on other bonds. However, closer analysis shows that the transactions do not fulfil the ECB's criteria in a strict sense - for example, the seniority of the most senior tranches is not explicitly mentioned in the waterfall.

For 10 of the 11 bonds, principal payments to the most senior tranches are not prioritised over interest payments to subordinated tranches in all post-enforcement/liquidation scenarios. Neither do the bonds contain a specific trigger stating that, upon enforcement/liquidation, principal due on the senior notes would rank senior to interest due on more junior notes.

The analysts caution that such a strict view on post-enforcement/liquidation waterfalls could also be relevant in European ABS regulations. If investors or their regulators apply the same strict view as the ECB in their repo-eligibility criteria, senior bonds would also not be LCR or Solvency 2 type 1 eligible.

JA

CLOs

Duration changes weighed

US CLO structures that experiment with duration parameters are emerging ahead of the risk retention effective date. A recent JPMorgan research note looks at the pros and cons of shortening non-call periods and including delayed draw notes in transactions.

A number of early 2015-vintage US CLOs have been structured with non-call periods ending before the effective date to provide equity with a tranche-specific refinancing window. However, JPMorgan CDO strategists note that it's unclear how tranche-specific refinancing will be treated post-effective date. They add that the refinancing window is shrinking, bringing the risk of many CLOs attempting to refinance at around the same time.

The strategists suggest that inserting short non-calls into new issue CLOs may simply run its course. "CLO investors will have a minimum duration and may not be interested in the effort to buy very short paper. The market for short CLO paper is developing, but we note the limited refinancings for post-crisis vintages - i.e. 26 in total for US$9.3bn."

A few 2015-vintage CLOs have also issued delayed draw funding notes with separate CUSIPs. These notes aim to provide equity holders with some additional optionality by theoretically enabling non-compliant CLOs to refinance after the effective date without triggering risk retention compliance.

"Regulatory treatment is unclear, however," the strategists observe. "The tranches have no struck coupons and drawing down may be interpreted as an investment decision and therefore a new issuance of securities, which triggers the need for compliance. The mechanics of pricing delayed draw tranches may also be complicated from an operational and fee perspective."

Other early 2015-vintage CLOs have been issued with two-year non-calls ending after the effective date, with little or no additional structural changes. The strategists indicate that new issue CLOs may incrementally utilise this option as managers finalise risk retention strategies and begin issuing compliant structures over the course of this year.

Looking ahead, they believe that CLOs could also be structured with longer non-call and reinvestment periods, or longer non-calls but the standard four-year reinvestment period, with the manager/equity looking for debt to provide a pricing concession as it's locked in for longer. The economics of this strategy will vary, but a longer reinvestment period/longer WAL entails higher default probability and potentially higher debt subordinations and lower equity leverage.

"Debt investors may welcome extra duration, but to a point, depending on views on the credit cycle. Our recent client survey indicates that triple-A investors seem unwilling to give up more than 10bp on average for a four-year non-call, with limited appetite to give up more than that for longer duration," the strategists conclude.

CS

CMBS

CMBS workout pattern shifts

European CMBS loans worth more than €5bn have exited special servicing since January 2014, while new additions have totalled around €1.2bn. Last year was the first since the crisis in which resolutions outpaced transfers and they should outpace new defaults this year as well.

The maturity pipeline for 2015 is modest, with less than €3bn outstanding set to mature. Almost €500m of this figure is already in special servicing and Morgan Stanley CMBS analysts expect €1bn to repay at maturity, limiting new defaults to €500m-€700m. The five largest loans, worth €1.5bn, are expected to be resolved in full.

Despite many loans leaving the special servicing bucket, around 31% of outstanding European CMBS loans remain in it. While the absolute size of the NPL bucket has shrunk markedly, it has fallen more modestly in percentage terms as the wider outstanding market has also shrunk.

Half of last year's workouts were via forced sales of properties. However, the Coeur Defense loan skews this figure and forced sales accounted for only a third of workouts if that loan is excluded.

Last year there was a notable shift away from forced sales in favour of consensual workouts, compared to 2013. Borrower-led or consensual sales accounted for nearly 39% of last year's workouts (or more than half excluding Coeur Defense), while nearly 6% were loan sales and the remainder was split between discounted payoffs (DPOs) and refinancing.

There were 55 loans resolved last year, with 36 incurring losses. Those losses amounted to over €1bn in aggregate, which represents an average loss severity of 17% based on the original securitised loan balance of all 55 loans or an average of 25% based only on those 36 loans which suffered losses, according to Morgan Stanley figures.

Loss severities were highest for loans resolved via DPOs at over 30%, with forced sales resulting in average losses of over 20%. Consensual sales yielded loss severities below 15%.

Average loss severity over the last five years is 15%, or 27% if only counting loans that incurred a loss. This shows that last year's loss severities were largely in line with the five-year average.

French loans appear to have underperformed over the last five years, with an average loss severity of 20%. However, the large loss severities on the HUGO and SQY Quest loans does skew the data.

German collateral has outperformed that from the UK at the margin. That outperformance is largely attributable to the zero loss severity outcome on large loans such as Opera Germany 2, Corleone, Tishman German and Project Christie.

There are 144 European CMBS loans still in special servicing, with an aggregate balance of nearly €10.4bn. Of these, 53% are from Germany and 28% from the UK. Almost half are in special servicing because of a default at maturity, while nearly a third are in special servicing because of an LTV covenant breach and 10% are in special servicing because of payment defaults during the term of the loan. The remainder are in special servicing due to a mix of factors such as ICR/DSCR breaches, borrower insolvency or tenant default.

Loans in special servicing have currently spent an average of just over three years in the NPL bucket. Some are already past their legal finals and 5% have their legal finals this year, with another 46% reaching deal legal finals in 2016-2017.

Post-crisis loans and deals are very different to legacy issuance, with a significant emphasis on transaction simplicity. Loans are backed by fewer properties and deals are backed by fewer loans.

European CMBS 2.0 transactions are structured with longer tail periods to better account for delays in loan resolution and the uncertainties associated with trigger language in the event of loan modification are better addressed in 2.0 transactions, the Morgan Stanley analysts note. This should positively impact servicing outcomes for 2.0 loans.

Other positive developments are increased clarity around controlling classes and servicer discretion. Enhanced reporting requirements also bring greater transparency.

JL

CMBS

Ratings-driven tiering continues

The pricing of two US CMBS on the same day last month indicates continued investor sensitivity to which rating agencies are rating bonds across the CMBS 2.0 capital structure. Indeed, a recent Morgan Stanley analysis finds that CMBS 2.0 LCF triple-A bonds that are rated by both Moody's and Fitch are pricing nearly 3bp tighter on average than those that are rated by Moody's and at least one of DBRS, Kroll and Morningstar.

The analysis suggests that this relationship also holds true lower down the capital structure, even though Moody's hasn't rated a triple-B minus bond this year. Morgan Stanley CMBS strategists note that triple-B minus bonds from deals where both Moody's and Fitch rated the bonds anywhere in the capital structure are pricing an average of nearly 20bp tighter than deals that are rated by Moody's and at least one other rating agency anywhere in the capital structure.

"In our view, this may be driven by a perception (rightly or wrongly) that deals rated by Moody's and Fitch are of higher quality than those that are only rated by Moody's and another rating agency," they observe.

Spread tiering appears to be most pronounced in double-A minus and single-A minus bonds, where deals that are rated by both Moody's and Fitch are pricing an average of 10% and 13% tighter than ones that are rated by Moody's and another rating agency. "We believe this may reflect real money investors' willingness to move down the credit curve on deals where the double-A minus and single-A minus bonds have Fitch ratings, in addition to Moody's ratings. All that being said, we believe this may present a buying opportunity for investors who are not ratings constrained, to the extent that they believe deals not rated by both Moody's and Fitch - and hence trading more widely - are still of higher quality," the strategists add.

MSBAM 2015-C21 and GSMS 2015-GC28 both priced on 13 February, with the LCF triple-As pricing in a 6bp range (at 86 and 92 for the respective transactions) and the triple-B minus tranches pricing in a 40bp range (345 and 385). The former deal was rated by both Moody's (to the class B notes) and Fitch, while the latter was rated by Moody's (to the class Bs) and Kroll. By comparison, the strategists note that there were six instances in 2014 when at least two CMBS 2.0 conduit deals priced on the same day, with the maximum spread range for triple-A bonds was 3bp and 5bp for the triple-B minus bond.

CS

CMBS

Refinancing target missed

The second refinancing instalment of the restructured Dutch CMBS transaction Leo-Mesdag, due last month, was missed. While the CMBS classes are not expected to face principal losses, it does appear that the sponsor will struggle to meet its refinancing business plan.

The CMBS was restructured last year (see SCI's CMBS loan events database) and exceeded its first refinancing target (SCI 1 September 2014). A further €200m should be refinanced every six months, however the second scheduled refinancing has now been missed.

The failure to meet the scheduled refinancing last month does not constitute an event of default. Instead, the shortfall will be added to the next scheduled refinancing, meaning the target in August will be €400m.

If there is a further delay in refinancing, the CMBS class A noteholders will benefit from an additional coupon added to the restructuring proposal last year (SCI 22 May 2014). The maximum amount of the additional coupon is €15m, which will be paid if the class A notes have not been redeemed by more than 70% on the May 2016 IPD.

Barclays Capital CMBS analysts note that there are several possible explanations for the refinancing target being missed. It is possible, for example, that there has simply been a short-term delay in arranging the refinancing loan and therefore the target will be met a couple of months late at the May IPD.

"However, we think that recent newsflow related to one of the tenant of the portfolio suggests that the delays are more profound," they say. The analysts point to reports that one of the main tenants - V&D - is loss-making.

V&D has negotiated with its landlords - including CMBS sponsor IEF Capital - to temporarily reduce rent by €25m-€30m for the 63 stores it operates, five of which are part of the securitisation. It is not known how much rent for the five properties still in Leo-Mesdag will be cut by.

Discussions with V&D could partly explain why the sponsor did not negotiate refinancing loans in time. Other factors could lead to further delays.

Chief among these factors is the fact that, based on the reported value and allocated loan amount, the V&D properties have the lowest LTV and so should have been easier to refinance than those with different tenants. However, the rent reduction and tenant uncertainty are now likely to negatively affect the market value of the V&D properties.

As part of last year's restructuring, V&D exposures measured by allocated loan amount after refinancing cannot exceed 25%. Unless the next refinancing tranche includes V&D properties, this threshold would be very nearly reached.

The restructuring also saw an interest coverage ratio (ICR) threshold added to the structure, under which ICR must exceed 1.45x. Should the V&D rent reduction equate to 50%, ICR would fall from 1.62x currently to around the 1.45x threshold. Therefore, any refinancing would have to include V&D properties in order to maintain an appropriate ICR.

February's missed refinancing target and the negative news surrounding V&D will make it difficult for the sponsor to meet its refinancing business plan. Refinancing is likely to be more back-loaded than anticipated, which makes an additional class A margin payment more likely than before.

The Barcap analysts' new base case scenario is that the sponsor continues with partial refinancing in November 2015 and the loan is fully repaid at maturity in August 2016. They do not expect that the missed payment will be made up in May or that the sponsor will continue to refinance in accordance with its business plan.

JL

RMBS

Countrywide appeal approved

The Appellate Division of the New York Supreme Court yesterday approved the Countrywide trustee's proposed US$8.5bn rep and warranty settlement in its entirety. The court concluded that as a trustee, BNY Mellon properly exercised its discretion in settling all the claims, including repurchase claims against loan modifications that were previously excluded by Judge Kapnick's decision from early 2014 (SCI passim).

The court said that the issue for its determination was whether the trustee exercised its discretionary power reasonably and in good faith, and that it was not the task of the court to decide whether it agrees with the trustee's judgment. While agreeing with the bulk of Judge Kapnick's decision, it consequently ruled that in excluding the modification claims, the lower court had applied a "stricter and far less deferential" standard and overturned that part of the decision.

As a result, Barclays Capital RMBS analysts project that cashflow from the settlement could emerge in 6-9 months, unless further appeals or tax decisions stall progress. It is unclear whether the remaining objector-intervenors will pursue further appeals and whether the Court of Appeals would actually take them up. Equally, it is unclear how long IRS/state tax approvals may take or whether the trustee has pursued them simultaneously with court proceedings.

"Overall, the appellate court's verdict is a definite positive for the settlement and the likelihood of cash being paid out to the trusts in the next 6-9 months has increased meaningfully, which could help most on certain cashflows leveraged to the timing of the settlement," the Barcap analysts observe.

They suggest that the verdict might also be a positive for JPMorgan's and Citigroup's rep and warranty settlements. Although the objections against these settlements are of a somewhat different nature, the Countrywide verdict should clarify the standard against which trustees will be judged.

"As such, we believe that the likelihood of faster progress on the approval process in the JPMorgan and Citigroup settlements has risen," the analysts note.

The latest development in the Citi settlement is the scheduling of an Article 77 hearing on 19 May at the Supreme Court of the State of New York. In the Article 77 proceeding, the RMBS trustees are seeking a judgment that their acceptance of the settlement agreement was a reasonable and good faith exercise of their authority and to bar certificateholders from asserting claims against them with respect to the evaluation and acceptance of the agreement and its implementation.

CS

Structured Finance

Bank ceo named

Bill Winters has joined Standard Chartered as ceo and will officially begin in his role on 1 May. He replaces Peter Sands, who will step down from the board.

Winters was previously ceo at Renshaw Bay, an asset manager that specialises in real estate and structured finance. He was also formerly co-ceo of JPMorgan and served on the UK Independent Commission for Banking.

Structured Finance

Portfolio manager promoted

Third Avenue Management has promoted Ryan Dobratz to co-lead portfolio manager of the Third Avenue Real Estate Value Fund, which has over US$3bn in AUM. Dobratz previously served as a portfolio manager of the fund and will now share full responsibility for managing the fund with co-leads Michael Winer and Jason Wolf. Prior to joining Third Avenue, Dobratz was a research analyst at Morningstar, where he was the primary analyst on several North American REITs, real estate holding companies and homebuilders.

Structured Finance

Fund expertise bolstered

Lars Hunsche has joined AHP Capital Management as a partner. Hunsche arrives from Moody's Analytics, where he was a general manager and product specialist for CreditEdge, a tool used by the firm for credit risk assessment and default prediction. AHP says it will be shortly launching a long/short credit fund optimised for CreditEdge as a joint venture with a German asset manager.

Structured Finance

UCITS fund prepped

Advent Capital Management is set to launch in 2Q15 a new UCITS-regulated umbrella fund, which will include its Global Absolute Return Strategy. The fund marks the first alternatives product in Advent's UCITS offerings.

The new UCITS fund will be asset class agnostic and optimally positioned to implement Advent's fundamental views under various market conditions. It will be co-managed by portfolio managers Odell Lambroza and Matthew Dundon.

Lambroza managed the firm's global opportunity strategy and invests across the entire capital structure. Prior to Advent, he served as md of the convertible securities department at SG Cowen and as vp of structured equity derivative products, asset swaps and convertible trading at Merrill Lynch.

Dundon joined Advent from Pine River Capital, where he co-led a team of analysts focused on North American high yield, distressed debt, reorganised equities and mezzanine investing. He was also involved in distressed and special opportunities in Asia, Europe and the Middle East. Prior to Pine River, he was head of research at GMP Securities and has also practiced leveraged finance and securities law.

Structured Finance

Securitisation co-head promoted

AXA Investment Managers has appointed Christophe Fritsch as head of structuring. He will retain his other responsibilities as co-head of securitisation and structured assets and business development.

Fritsch will lead the structuring team in supporting the two investment streams within AXA IM's structured finance business: loans and private debt; and securitised and structured assets. The securitised and structured assets stream will be co-led with Alexandre Martin Min. This comes in light of AXA IM recently reorganising its fixed income and structured finance teams by creating one fixed income offering covering the entire credit continuum (SCI 2 December 2014).

Fritsch initially joined AXA IM as an actuary and financial engineer, working on global asset and liability management. He later joined the structured finance division as a structurer and established the AXA IM ILS team, which represents more than US$500m in AUM.

Structured Finance

Start-up taps asset manager

Sequant Re has added Lola Myshketa as evp to lead its capital raising and business development activities. Her appointment follows Sequant Re's launch in December (SCI 16 December 2014).

Prior to joining Sequant, Myshketa was head of asset management for Bermuda Commercial Bank. She also held senior positions in the Canadian private financial sector, where she specialised in alternative investments. Additionally, Myshketa held various roles within CIBC Group, managing the financial affairs of high net-worth individuals.

Structured Finance

Portfolio manager poached

The International Finance Corporation has named Jean-Sebastien Paley as senior portfolio officer in London. He will oversee portfolio management in international ABS.

Paley arrives from PIMCO, where he was an RMBS portfolio manager, covering Europe and Australia. He had previously been a structured product associate in the EMEA region for PIMCO, covering multiple asset classes. Paley has additionally held roles at Wharton Asset Management, Fortis Investment and Societe d'Audit.

Structured Finance

Business development director added

First Names Group has appointed Joanne McEnteggart as business development director, focusing on the corporate, trust and structured finance areas. She will be based in Dublin.

McEnteggart joins First Names following a number of senior roles for Capita, most recently as director of business development of debt solutions. She has also held roles at Michael Page, NCB Stockbrokers and Ernst & Young.

Structured Finance

Whole loan pool acquired

Distressed Capital Management (DCM) has purchased approximately US$207.57m of whole loans from RBS' RBSHD 2013-1 A, B1, B2, B3 and trust certificates. The portfolio consists of two sub-pools: seasoned fixed/adjustable-rate fully amortising and balloon reperforming and non-performing mortgage loans, secured by first liens on one- to four-family residential properties; and REO properties.

"This acquisition represents high investor value on multiple dimensions," says DCM md Rod Colombi. "It has scale and diversification with over US$200m in UPB and assets distributed across 43 states. At 5.3%, the blended cost of funds relative to leverage is very low cost, which contributes greatly to a range of equity returns that are high from the low to the high end."

Colombi explains that, from a cashflow perspective, the pool enjoys a ratio of REO to total assets in excess of 20%. "The average loan size is over US$200,000, keeping disposition costs down."

He adds: "We see continued value and opportunity in the distressed space and plan to acquire more quality assets."

DCM is a subsidiary of Pluto Sama and utilises its affiliate companies BP Law Group for loss mitigation of portfolios and Wilson Harvey Browndorf for legal work regarding securitisation and structured product solutions with major Wall Street banks and placement agents.

Structured Finance

Law firm beefs up in SF

Jeffrey Stern has joined Winston & Strawn as a partner in its structured finance practice in New York. Stern arrives from Pillsbury Winthrop Shaw Pittman, where he served as a partner and head of structured products. He has previously worked in developing and refining new and emerging forms of domestic and cross-border structured financings, credit derivative structures, structured funds, asset-based lending and structured credit facilities, crowdfunding platforms and alternate risk transfer transactions.

CLOs

CLO shop taps lawyer

Eagle Point Credit Management has hired Daniel Wohlberg as vp. He will assist the senior investment team in all facets of the investment process, focusing primarily on the analysis and negotiation of CLO trade documentation.

Previously, Wohlberg was an associate at Dechert, where he advised financial institutions, hedge funds, underwriters, issuers, institutional investors, asset managers and sponsors in structured finance transactions and other complex financings. Prior to this, he was an associate at Cadwalader, Wickersham & Taft.

CLOs

Failed bank's assets acquired

Triumph Capital Partners has acquired all the equity of Doral Money and certain related assets in connection with the FDIC auction process for Doral Bank. As a result, the firm has acquired the management contracts to two active CLOs consisting of approximately US$703m in AUM.

The move brings Triumph Capital Advisors' outstanding AUM to approximately US$1.7bn. In addition to the CLO management contracts being acquired, the primary assets of Doral Money consist of loans with a face value of approximately US$37m, which Triumph has assumed as part of the transaction. The assets also include certain securities of the CLOs, which were divested to a third party immediately following the closing as part of an agreement entered into by Triumph Capital Advisors.

Doral Bank was closed by regulators on 27 February, making it the largest bank failure since 2010, involving US$5.9bn in assets. The bank's market capitalisation had been shrinking and it received a January capital directive from the FDIC, as well as an adverse appeals court ruling last week related to a tax refund.

Wachtell, Lipton, Rosen & Katz acted as legal advisor to Triumph Bancorp in connection with the transaction. In addition, Dechert acted as legal advisor to Triumph Capital Advisors, with respect to the assignment of the CLO management contracts.

CLOs

CLO fund holding sold

A fund advised by Coller Capital has purchased for US$32.3m a 20% stake in Fair Oaks Income Fund that was previously held by GLI Finance, with the entire holding accumulating to 34,298,425 ordinary shares. As the fund's largest shareholder, Coller has entered into a lock-in agreement under which it has agreed not to directly or indirectly transfer the legal and/or beneficial ownership or any interest therein in any of the shares its owns until 16 August 2016, subject to certain agreed exceptions.

CMBS

CRE vet hired

John Scheurer has joined American Capital as md and cio for its CRE group, where he will be responsible for developing a CRE platform alongside md Doug Cooper and the existing CRE group. American Capital may fund its CRE investments by incubating a commercial mortgage REIT, which it would manage.

Prior to joining American Capital, Scheurer was president and ceo of Allied Capital, where he oversaw restructuring of its debt, sales of assets and reductions in expenses. He also held positions for the firm as md, management committee member, investment committee member and head of CRE investments. Previous to this, Scheurer served as president, portfolio manager and coo of Allied Capital Commercial, overseeing the purchase and origination of CRE loans and building a CRE platform that invested in, managed and worked out CMBS bonds, as well as other CRE debt.

Insurance-linked securities

ILS exec moves

Maria Rapin has joined Nephila Advisors as business development director. In the role, she will focus on investor relations and general business development for the firm.

Previously, Rapin worked as a portfolio manager for SCOR Global Investments, where she was responsible for portfolio construction and management in ILS. Prior to this, Rapin was vp for sales and distribution at Swiss Re Capital Markets.

Insurance-linked securities

Reinsurance merger finalised

RenaissanceRe has completed the acquisition of Platinum Underwriters, making the firm a wholly owned subsidiary of RenaissanceRe. The acquisition was originally announced late last year (SCI 25 November 2014). The completion of the acquisition follows the receipt of all necessary regulatory approvals and approval of the transaction by Platinum shareholders, which was obtained at a special general meeting of Platinum shareholders held on 27 February.

Risk Management

GFI takeover completed

BGC Partners has completed its tender offer for outstanding GFI shares. As of the expiration of the tender offer on 26 February, approximately 54.6 million shares were tendered pursuant to the offer.

The 54.6 million tendered shares, together with the 17.1 million shares of GFI common stock already owned by BGC, represent approximately 56.3% of GFI's outstanding shares. BGC has accepted the shares and expects to issue payment for the shares tendered on 3 March. In addition, GFI employees holding restricted sock units (RSUs) will receive US$6.10 per RSU in cash, based on their pre-existing vesting schedules.

GFI will be a controlled company and operate as a division of BGC, reporting to Shaun Lynn, president of BGC. Although its financial results will be consolidated as part of BGC, GFI is expected to remain a separately branded division of the firm.

"By the end of the first year, we expect to save at least US$50m annually on items, including network infrastructure, telephone lines, data centres, vendors, disaster recovery, regulatory capital and interest expense," says Lynn. "We expect further cost savings in the second year and beyond. We also expect to generate increased productivity per broker and to continue converting voice and hybrid broking to more profitable fully electronic trading, all of which should lead to increased revenues, profitability and cashflows."

GFI's current executive chairman Michael Gooch and ceo Colin Heffron will remain as executives and directors of GFI and shall continue in their related roles in the GFI division. Gooch will also hold the title of vice-chairman of BGC.
However, as part of the agreement, Marisa Cassoni, Frank Fanzilli and Richard Magee have resigned from the GFI board. BGC has designated six directors to the expanded eight-member GFI board, three of whom are independent directors nominated by BGC.

The new board members are: Howard Lutnick, chairman and ceo of BGC; Stephen Merkel, evp, general counsel and secretary of BGC; William Moran, former evp at JPMorgan; Peter Powers, president and ceo of Powers Global Strategies; Michael Snow, managing member and cio of Snow Fund One; and Lynn.

RMBS

AG actions disclosed

Morgan Stanley has disclosed in its latest Form 10-K that the New York Attorney General's Office last month indicated that it intends to file a lawsuit under the Martin Act related to approximately 30 subprime RMBS sponsored by the firm. The lawsuit is expected to allege that Morgan Stanley misrepresented or omitted material information related to the due diligence, underwriting and valuation of the loans in the securitisations and the properties securing them. The firm states that it does not agree with AG's allegations and has presented defences to them to the AG.

The filing discloses a number of other actions brought by state Attorney Generals, two of which Morgan Stanley says it does not agree with and has presented defences against. First is the California Attorney General's allegation from May that the firm made knowing and material misrepresentations regarding RMBS and that it knowingly caused material misrepresentations to be made regarding the Cheyne SIV, which issued securities marketed to the California Public Employees Retirement System. The AG indicated that it believes the firm's conduct violated California law and that it may seek treble damages, penalties and injunctive relief.

In the second action, the Illinois Attorney General alleged in October that Morgan Stanley knowingly made misrepresentations related to RMBS purchased by certain pension funds affiliated with the State of Illinois and demanding that the firm pay the AG approximately US$88m.

Additionally, the Virginia Attorney General last September filed a civil lawsuit - styled Commonwealth of Virginia ex rel. Integra REC LLC v. Barclays Capital Inc., et al - against Morgan Stanley and several other defendants in the Circuit Court of the City of Richmond related to RMBS. The lawsuit alleges that the defendants knowingly made misrepresentations and omissions related to the loans backing RMBS purchased by the Virginia Retirement System (VRS).

The complaint alleges that VRS suffered total losses of approximately US$384m on these securities, but does not specify the amount of alleged losses attributable to RMBS sponsored or underwritten by Morgan Stanley. The complaint asserts claims under the Virginia Fraud Against Taxpayers Act, as well as common law claims of actual and constructive fraud, and seeks treble damages and civil penalties.

The defendants last month filed a demurrer to the complaint and a plea in bar seeking dismissal of the complaint.

ABS

Euro auto ABS outperforming

Fitch says that European consumer ABS remains one of the most stable structured finance asset classes. This is largely due to the favourable payment profile of the underlying assets, which are mostly amortising quickly, as well as the absence of a subprime market and a limited pre-crisis 'originate-to-distribute' model.

As the European economy starts to recover, some of the most stringent lending criteria that lenders introduced during the crisis are being relaxed, the agency reports. However, more sophisticated underwriting procedures, improved reporting transparency, more automation and better use of available data could be lasting positive features of this market.

While no major structural innovation has taken hold over the past few years, revolving periods - which virtually disappeared during the crisis (except for retained transactions) - are making a comeback in the market. This reflects both originators' desire to lock in low funding spreads and investors' willingness to accept slightly more risk for additional yield.

Within consumer ABS, auto loan-backed transactions have displayed stronger performance than unsecured consumer loan deals. However, Fitch believes that harsh competition in the European car markets over recent years has contributed to a shift in asset features with additional risks.

For example, lenders increasingly resort to loans with residual value components, thereby improving affordability in the short term, but also introducing direct exposure to used car market values. Since ABS bonds comprising receivables with residual value will cease to be eligible collateral, as recently announced by the ECB, they will need to be increasingly financed in the public market.

Further, regulation of the ABS sector has changed markedly since the crisis. Within ABS, consumer-related senior bonds benefit from a more preferential regulatory approach, but they remain at a disadvantage compared to other financial instruments - which, in Fitch's view, does not reflect their good historical performance and stable outlook. The European Commission's recent discussions on high quality securitisations could result in better alignment, however.

ABS

ABCP appetite varied

US money fund investments in ABCP conduits have been declining in line with outstanding supply in the market, according to Fitch. During the 12 months ending in January, US ABCP outstandings fell by US$22.5bn to a total of US$234.6bn, while money fund investments in ABCP shrank by US$1.8bn to a total of US$91bn - representing a 1.9% drop versus the 8.8% decline in the ABCP market broadly.

Despite the overall reduction in money fund holdings of ABCP, there are clear differences in ABCP appetite among fund managers, Fitch reports. While two of the largest US prime money fund managers Fidelity and Vanguard held only negligible amounts of ABCP as of January, other large managers reached double-digit allocations to this asset type. Among the 10 largest US prime money fund managers, Wells Fargo had the greatest allocation to ABCP as a percentage of total assets at 21% and continued to increase its allocation over the past few months.

Individual fund allocations to ABCP reflect the respective managers' preferences, but across a wider spectrum, ranging from 0%-33% of assets for US prime funds. As of January, 56 individual prime money funds placed more than 10% of their assets in ABCP conduits, with 25 surpassing 20% of exposure and 30 holding no ABCP at all.

Fitch says that money funds continue to represent a large portion of ABCP investors - at 39% of total outstandings, as of January - and can have a significant impact on the market. Managers such as BlackRock and Wells Fargo have sizable money fund portfolios and large allocations to ABCP, each controlling more than 5% of the ABCP market.

Additionally, strategies for allocations to ABCP vary across fund managers and reflect varying degrees of risk appetite, sensitivity of key clients, available resources and other qualitative factors. Fitch believes that, despite the strong features and performance of ABCP conduits post-crisis, the sector retains a negative reputation with some money fund investors based on their pre-crisis experience.

ABS

Costco impact gauged

Costco has entered into a new co-brand credit card programme agreement with Citibank and an acceptance and co-brand incentive agreement with Visa (SCI 16 February). Bank of America Merrill Lynch ABS analysts expect any resultant widening in American Express credit card ABS to be temporary and an opportunity to add exposure to the trusts.

The implementation of the Costco agreements is subject to Citi purchasing the existing co-brand credit card portfolio. Costco US co-brand product represents about 8% of Amex's worldwide billed business, with over 70% of the spending on the product occurring outside of Costco warehouses.

Amex had previously stated that it intends to develop and offer other products to Costco co-branded cardholders to maintain its relationships with such cardholders. A purchase by Citibank of the existing portfolio could change this strategy. Specifically, any purchase agreement could include a non-solicitation clause, according to the BAML analysts.

The American Express Credit Account Master Trust likely has exposure to the co-branded cards with Costco. "By itself, the end of the company's partnership with Costco could have a negative impact on the trust's receivables balances, portfolio yields, payment rates and losses," the analysts observe. "However, the company will likely take offsetting actions to minimise any negative impacts, in our view. If the related portfolio is sold, any portion previously transferred to the trust could be replaced with the company's remaining portfolio."

About 47% of the company's US$63bn US managed loan portfolio has been transferred to the AMXCA trust so far. If necessary, based upon past actions, the analysts also believe the company would likely add incremental enhancement to support credit ratings. They note that in 2009 Amex increased subordination levels and began discounting receivables, with the rating agencies subsequently confirming their respective ratings.

ABS

Subprime auto ABS weakening

US subprime auto loan ABS performance continues to weaken, according to S&P. However, the agency expects ratings to remain stable due to credit enhancement keeping pace to offset additional risk and outstanding securitisations benefitting from robust structural features.

The 2014 yearly average net loss rate for the sector increased by 17.5% from the 2013 level, with delinquencies also continuing to increase. The yearly average of the percentage of account balances for which a monthly payment is more than 60 days past due increased by 17.8% last year.

"The increase in the yearly average is a continuing trend that we have observed across the subprime auto loan ABS market as competition and availability of lending to subprime borrowers have increased, which may have lowered the overall quality of the loan pools," says S&P credit analyst Peter Chang. "In addition, with increased regulatory scrutiny in the past year, some issuers have modified their servicing, collections and vehicle recovery practices, which may have had - and may continue to have - an incremental adverse effect on performance."

Structured Finance

Long/short mutual fund debuts

Collins Capital has launched the Collins Long/Short Credit Fund, a mutual fund that attempts to generate absolute returns over a complete market cycle by primarily investing in a portfolio of long and short investments in credit-related securities with active management of net exposure. Investors can use the fund as a substitute for long-only high yield, as a risk managed supplement to core fixed income or as a complement to their alternatives' allocation.

The fund's sub-advisor, Pinebank Asset Management, manages a portfolio of generally between 25 and 50 investments by combining an in-depth understanding of credit cycles and market liquidity, along with bottom-up and event-driven credit selection. Pinebank maintains the flexibility to adjust the portfolio's net long and short exposures in different market environments, with the goals of providing downside protection for investors and of generating positive returns independent of market direction.

Structured Finance

Bankruptcy rule 'credit negative'

The initiation of Spain's second chance rule is credit negative for covered bonds and securitisations backed by loans to individuals, suggests Moody's. RMBS and SME ABS are the most affected asset classes, as the rule allows for debt forgiveness of mortgage debt left outstanding after property repossession.

The rule aims to assist individuals struggling with bank debt, facilitating debt forgiveness through personal bankruptcy, among other measures aiming at alleviating individuals' debt burdens. Moody's says that such debt forgiveness is a clear weakening of the full recourse that existed previously for Spanish secured lending.

The agency adds that the rule increases the ease with which individuals can declare themselves bankrupt and start a bankruptcy procedure in court if they are unable to meet their total debts. Any individual may now ask for bankruptcy protection, with no other limit contemplated than acting in good faith.

If a debtor cannot feasibly pay his mortgage through debt restructuring, payment moratoriums or maturity extensions, a judge can determine the liquidation of assets. Unlike for companies, the most likely case for individuals is that the only asset owned by the borrower to pay his secured debt is the residential property backing a mortgage.

The new rule allows the borrower to achieve debt forgiveness once the property backing a mortgage has been repossessed by the creditor. The liquidation of the bankruptcy mechanism moots all debts from the individual, as happens for companies.

Moody's default assumptions for Spanish secured loans considered the full-recourse nature of Spain's mortgages, although it assigned limited value to recoveries from a borrower's future earnings and assets. The effect of this legal change will depend on how widely borrowers opt for this legal mechanism - which is not straightforward, given legal formalities, such as court-requested documentation and information and securing legal advice.

Moody's notes that the law does not completely mitigate moral hazard, as it gives creditors the right to ask for revocation of debt forgiveness in the cases of fraud or a significant improvement of the borrower's assets. However, lenders have little practical ability to monitor former borrowers.

Structured Finance

Non-monetary EOD criteria published

S&P has published its global methodology for analysing structured finance transactions that include provisions for changing the payment priority or sale of collateral, following a non-monetary EOD. A non-monetary EOD is caused by a reason other than a failure of the transaction's issuer to make timely interest and/or principal payments on the rated notes.

Certain transactions provide that the payment priority, whether within a class or among classes, may change or the collateral could be sold if a specific non-monetary EOD occurs. Some examples include the payment priority shifting from sequential to pro rata, or both principal and interest payments to a senior class being prioritised first and all payments to the subordinated classes being delayed until the senior class of notes is fully repaid.

S&P expects the ratings impact of the criteria to be minimal because the framework largely reflects existing practices that are being unified and made more transparent. However, as a result of the update, the agency has placed 262 student loan ABS ratings under observation.

Structured Finance

'Robust' outlook for Chinese ABS

Moody's outlook for China's securitisation market is robust, given the authorities' initiatives to develop the country's capital markets. This is exemplified in the recent raft of reforms, the market's expansion and associated regulatory developments.

Moody's sees broad recognition that securitisation is playing a key role in deepening the country's credit market and notes that issuance jumped to approximately CNY280bn in 2014 from CNY16bn in 2013, with a commensurate spike in sponsors. In this context, China's securitisation market is also growing fast by asset type, originator type, the number of investors and third-party service providers, and structural innovations.

"The strong issuance seen in 2014 has attracted both domestic and international investor interest, and we expect this trend to persist as the government continues its market-developing initiatives," says Jian Hu, md at Moody's.

Recent regulatory and policy changes will also promote future issuance, with the new regulations including a new registration system for credit asset securitisation that means qualified issuers will only be required to register transactions before issuance (SCI 16 December 2014). This is in contrast to the previous system, where regulators approved transactions on a deal-by-deal basis.

"We expect to see more barriers broken down, with a flurry of new asset classes and originators in 2015, such as equipment lease, real estate loans and consumer loan securitisations, sponsored by both existing and first-time issuers, such as commercial banks, local branches of international bank, financial leasing companies and asset management companies," Hu explains. "So far, market issuance has been dominated by securitisations backed by corporate loans and this is unlikely to change soon."

Jerome Cheng, svp at Moody's, adds: "In terms of key recent developments, we note that China's more-established auto loan ABS market developed significantly in 2014, with record levels of issuance." Looking ahead, the agency expects issuance levels to continue increasing to satisfy the growing funding needs of auto loan lenders in China's rapidly growing car and car loan market across the country.

In addition to government-initiated reform, Moody's says that China's high household savings rate is credit positive for its securitisation market, because it provides a buffer against potential defaults for loans backing securitised transactions. However, the agency notes that overly fast expansion of novel products for China, as an emerging market, carries risks. Accordingly, the prudent selection of assets, and clear and well understood structures and related documentation are essential for safeguarding these products against unknown risks.

CDO

Limited tender take-up

Mizuho has accepted for purchase €11m of Proventus European ABS CDO bonds via its tender offer (SCI 24 February). €2m of class D notes (with an accrued interest payment of €215.33 per €50,000), €4.5m of class Es (€614.08) and €4.5m of class Fs (€885.95) were validly tendered.

The expiration deadline for the offer was 4 March, with settlement expected on 12 March. Mizuho says it will exercise a redemption option, under which any holders that did not submit a valid tender of any notes are entitled to receive the amount due in respect of these notes.

CDS

RadioShack results in

The final price of the RadioShack Corp CDS auction has been determined at 11.5. At yesterday's auction, 11 dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the entity.

CLOs

Risk retention uncertainties remain

Fitch suggests that many small US CLO managers will find it difficult to comply with new risk retention rules. While several strategies are emerging to assist CLO managers with the rules, their effectiveness in satisfying regulatory requirements remains uncertain.

In one strategy, banks that arrange CLO collateral provide financing by taking vertical strips. In another, a majority owned affiliate with third-party capital is structured to invest in CLOs.

Fitch believes that these strategies may not be available to independent, smaller employee-owned partnerships. During 2013, the market grew by 65% in CLO issuers, with 47 new managers entering during 2013 and 2014 through October. Many are smaller than the 'frontier' CLO 2.0 issuers of 2010 and 2011.

However, Fitch expects the number of small CLO managers to decline in 2015, as the industry undergoes consolidation ahead of risk retention rules becoming effective in 2016.

In addition to risk retention implementation, there are several important considerations for investors in CLOs of smaller managers. Some smaller managers with fewer financial or operational resources may underutilise governance, risk management, investment processes and operational controls. They may also be vulnerable to business concentration and smaller asset bases and lack clear distribution networks and the benefit of affiliating with a larger firm.

In Fitch's view, new managers with adequate administration capabilities - thorough indenture review procedures, advanced portfolio set-up procedures and strong modelling tools - can limit these operational risks. The agency recommends that investors monitor managers' compliance with their investment guidelines.

Fitch notes that large, frequent CLO issuers have been named as back-up managers in CLO documents with less experienced issuers and are expected to step in as replacement managers, following specific breaches or for 'cause', as defined in the collateral management agreement. The agency adds that the effectiveness of this technique remains an open question, as regulators have not yet commented on whether the back-up manager would need to comply with the risk retention rules.

CLOs

CLO recovery bands introduced

S&P has introduced recovery bands - 'high' or 'low' - for recovery ratings on CLO loans in the '2' through '5' categories via its core ratings products to accommodate more granular recovery information. The move follows the agency's incorporation of additional recovery information into its analysis of CLO transactions (SCI 4 August 2014).

The previous update included delineating whether the agency's recovery expectation for a corporate loan with a recovery rating between '2' (indicating the expectation of 70%-90% recovery in the event of a payment default) and '5' (10%-30% recovery expectation) resides in the higher or lower end of a given recovery rating range. For example, an S&P corporate ratings report ascribing a recovery rating of '2' to a loan might also indicate that the specific recovery estimate falls within the lower portion of the 70%-90% range (70%-80%) or the higher portion (80%-90).

Under the new recovery bands, the identifiers '2H', '3H', '4H' and '5H' denote recovery expectations that fall in the upper portion of the respective recovery rating categories, while '2L', '3L', '4L' and '5L' designate recovery expectations that fall in the lower portion of the respective recovery rating categories. In cases where S&P's reports do not indicate whether the recovery expectations on a loan with a recovery rating between '2' and '5' fall into the higher or lower portion of the given recovery range, ratings products will display the recovery rating without the appended 'H' or 'L'. The agency's criteria state that in such instances, it will presume that the recovery expectations fall within the lower portion of the given recovery range.

CLOs

Post-crisis CLOs outperform

The total amount of CLOs paid down in JPMorgan's Collateralized Loan Obligation Index (CLOIE) since the January rebalance was US$1.55bn in par outstanding, split between US$1.514bn and US$340m of pre-crisis and post-crisis deals respectively. The post-crisis CLOIE added US$3.2bn of assets across 48 tranches from eight deals at the February rebalance.

The post-crisis CLOIE last month experienced strong outperformance, specifically in the belly of the credit curve, with double-A, single-A and triple-B tranches returning 1.23%, 1.62% and 2.07% respectively. These are the highest monthly returns posted since September/October 2012.

Pre-Crisis CLOs also performed strongly, with triple-B total returns standing at 1.07% in the month of February.

CMBS

Delinquency decline projected

S&P forecasts a 50bp-100bp decline in the US CMBS delinquency rate this year, after analysing historical and distressed loan data, vintage characteristics, maturity schedules and regression testing against the national unemployment rate. Based on the 6.69% delinquency rate in December 2014, which was down by 123bp year-over-year, the agency expects the rate to be in the 5.6%-6.1% range by end-2015.

According to the agency's analysis, roughly ten years after a loan pool's origination delinquency rates generally see a steep rise to a 30%-45% range, reflecting the remaining collateral's quality at that time. Higher quality loans typically refinance or pay off as they approach maturity, especially in times of high issuance or low long-term interest rates (or both), resulting in a type of adverse selection where only weaker loans remain. Recently, the heights of these peaks have declined because the economy and CRE performance have broadly rebounded, which S&P attributes, in part, to recent federal stimulus programmes.

Loans originated in 2005-2007 are the main drivers of current delinquency rates, making up close to 60% of the total loan balance outstanding. Considering that vintage year 2005 aggregates to 17% of the rated population, S&P says the larger loan base anticipated to pay down, refinance or liquidate will decrease the delinquency rate because a large portion of 2005 loans have distressed attributes. The agency believes that the 2005 vintage's delinquency rate will be close to the 30%-40% range at year-end 2015, but the outstanding loan balance will be significantly reduced.

Further, it found that 2004 vintage loans paid off or liquidated at a 90% rate and the remaining loans as of December 2014 had a little more than US$4bn remaining, with a 29% delinquency rate. Vintage years 2006 and 2007 make up a significant percentage of the outstanding loan base at around 26% and 33% respectively. Delinquency rates may continue to decline in 2015 for both the 2006 and 2007 vintages and flatten out around 6% and 10% respectively.

S&P projects delinquencies in 2015 to be around 6.1%. As a caveat, refinancing is a viable option for many borrowers while the Fed continues to keep rates low, but it may become more difficult as rates increase.

Short-term delinquencies may continue to decrease; however, the medium- to longer-term delinquency rates could rise from a lack of refinancing. There has been an up-tick in collateral defeasance over the past year and S&P expects that trend to continue in 2015 because of the large penalties and spread maintenance for loans that pay off before maturity, as well as the ability to refinance in a lower interest rate environment.

The agency also analysed the correlation between delinquencies by property type and the US national unemployment rate, as delinquency rates have steadily declined from their 2010-2011 peaks. Office and retail sectors are expected to show continued steady declines in delinquency throughout 2015; however, certain regions may be adversely affected by the oil and energy markets, while an up-tick in office delinquency rates could occur.

Finally, the average unemployment rate fell to around 6.3% from 7.4% in 2014, with similar delinquency declines to 6.69% from 7.92%. If the Fed's projected unemployment rate is in line with the assumptions utilised, S&P predicts an approximate 75bp decrease from 6.69% in 2015.

CMBS

Sears spin-off welcomed

Sears provided further details in its 4Q14 earnings release of its plan to create a REIT consisting of 200-300 stores, many of which are likely to be Sears-owned anchor pads in high quality malls. Barclays Capital CMBS analysts suggest that the spin-off could be a positive for any affected CMBS properties, as it would secure Sears as a long-term anchor or provide the opportunity to replace a non-collateral Sears store with a more desirable anchor tenant.

Sears stated that it believes many locations can be re-purposed "with or without Sears Holdings as an anchor", which would provide the REIT with "the potential for value creation, as well as downside protection if Sears Holdings were unable to continue to operate certain stores profitably". The company has already taken advantage of oversized anchor pads to include other stores, such as Whole Foods or Forever 21, on shared anchor pad sites and more could undergo a similar transformation.

With execution targeted for May or June, estimated proceeds for the REIT transaction could exceed US$2bn, which would significantly improve Sears's cash position. The proceeds are expected to be used to reduce the inventory lending that the company currently depends upon.

However, the Barcap analysts note that Sears will have more flexibility to reduce inventory if some of this debt is retired, making it easier to close underperforming stores not included in the REIT transaction. "This could lead to more strains on weaker CMBS properties with Sears as an anchor tenant, which are not included in the REIT transaction. As a result, we could see fewer store closings in the first half of 2015 and then an acceleration after the potential REIT transaction is completed," they observe.

CMBS

CMBS delinquency rate plummeting

The Trepp US CMBS delinquency rate has fallen for the fourth straight month and the twentieth time in the last two years. The delinquency rate now stands at 5.58%, down by 8bp for February and 120bp from a year ago.

CMBS loans that were previously delinquent but paid off either at par or with a loss totalled about US$550m in February. Removing these previously distressed assets from the numerator of the delinquency calculation helped move the rate down by 10bp. In addition, over US$700m in loans were cured last month, which helped push delinquencies lower by 14bp.

Almost US$1.5bn in loans became newly delinquent in January, which put 22bp of upward pressure on the rate. However, the Trepp CMBS universe grew by about US$4.5bn, as a result of adding newly seasoned CMBS 3.0 deals.

February also brought the third lowest CMBS liquidation volume since Trepp began tracking the number in January 2010. It marks the eighth month out of the last twelve with liquidation volume below US$1bn.

Liquidated loan volume came in at US$563.59m in February, 45% lower than the 12-month average of US$1.02bn. Loss severity was similarly low at 34.79%, well below the 47.7% 12-month average.

Including only losses greater than 2%, volume was US$317.98m with 61% loss severity. Two 100% losses on large B-notes and a 94% loss on the US$65.26m Regency Square loan contributed to the high severity in that category (see SCI's CMBS loan events database).

CMBS

CMBS loss severity up

Higher liquidations and losses from large 2007 vintage loans drove US CMBS loss severity to 49.1% in 2014 from 45.7% in 2013, says Moody's. Three loans in particular that are in the top-ten dollar losses to date pushed severities higher last year: World Market Center II, Solana and Hyatt Regency - Jacksonville (see SCI's CMBS loan events database). The Hyatt Regency - Jacksonville loan liquidated with a US$118.1m loss for a loss severity of 78.8%, the World Market Center II loan liquidated with a US$235.8m loss for a loss severity of 71.8% and the Solana loan liquidated with a US$212.4m loss for a loss severity of 59%.

Loss severities were significantly lower for loans liquidated after a maturity default than for loans that defaulted during their terms. For the 2002-2007 vintages, maturity defaults had a weighted average loss severity of 18.3%, compared with 52.2% for term defaults.

The weighted average loss severity for liquidated loans in 4Q14 (excluding those with losses of less than 2%) was 53.1%, up slightly from 52.9%, according to Moody's. Loans with losses of less than 2% account for 20% of the sample size by balance and 19.1% by number.

Loans backed by healthcare properties had the highest weighted average loss severity, at 56.7%, while loans backed by self-storage properties had the lowest, at 35.2%.

CMBS

Defeasance hits seven-year highs

US CMBS defeasance activity reached its highest level in 2014 since 2007, Moody's reports. The agency expects defeasances will continue to increase as borrowers take advantage of low interest rates and increased liquidity to trade in older loans for new loans.

CMBS defeasance activity rose to US$20.9bn at end-2014, increasing by 58% year-over-year, in line with the 2005 level of US$21.2bn. Moody's expects defeasance levels to increase by another 20% in 2015.

"The CMBS loan origination market is becoming increasingly competitive, with many new lenders entering the market," says Moody's vp and senior credit officer Sandra Ruffin. "This, combined with the large number of loans approaching their maturity and general improvement in CRE markets, is fuelling increased defeasance."

Surprisingly, defeasance activity for loans with five years or more before maturity also increased, rising by 5% in 2014 versus 1% in 2013. "The CRE property markets have recovered to such an extent that defeasance is still attractive, even if the loan's maturity is years away," adds Ruffin.

Unlike in 2013, last year the largest share of defeased loans was in the office sector at 34%, reflecting the significant rise in central business district office property prices as the CRE sector recovers. After the office sector, retail (23%), multifamily (22%), hotel (10%), other (8%) and industrial (2%) were the sectors with the largest share of defeased loans.

The top 10 largest loans that defeased in 2014 constituted slightly less of overall defeasance volume, at 20% in 2014 versus 23% in 2013, but featured much larger loans. Moody's also expects CMBS issuance to increase by 17% YOY to US$110bn in 2015.

CMBS

BWIC composition changes analysed

With the growth of US CMBS supply over the last five years, secondary activity has transitioned from being dominated by legacy conduit paper into a more even mix of post-crisis conduit, agency and single-asset/borrower bonds. So far this year, 40% of BWICs have been concentrated in legacy conduit paper, 22% in post-crisis conduit bonds and 38% in other deal types, according to Deutsche Bank figures.

CRE debt research analysts at the bank note that the most pronounced transition from legacy conduit to post-crisis conduit demand has been seen among money managers and insurance companies. So far this year, 31% of money manager BWIC volumes have been concentrated in post-crisis conduit paper and 34% in legacy (versus 5% and 82% respectively in 2011). Similarly, 25% of insurance company BWIC volumes have been concentrated in post-crisis conduit paper and 49% in legacy (versus 3% and 90% respectively in 2011).

The Deutsche Bank analysts add that banks/financial institutions have also made the transition away from legacy conduit paper, but their new activity has been focused on agency product, which accounts for 45% of their activity so far this year. The most significant transition into single-asset/borrower paper has been from hedge/opportunity funds and now makes up around 18% of their volumes.

Among legacy product, long-duration dupers have seen the largest declines in activity, down from 38% of all BWICs in 2011 to 19% this year. At the same time, mezzanine legacy debt has remained consistently active, down just one percentage point to 10% this year from 11% in 2011.

Risk Management

CCP location policy nullified

The EU General Court has ruled on the ECB's location policy for central counterparties. The court's judgement annuls the Eurosystem Oversight Policy Framework published by the ECB, in so far as it sets a requirement for CCPs involved in the clearing of securities to be located within the eurozone.

In its judgement, the court considered that the ECB location policy was of a binding nature and that the ECB had no autonomous regulatory competence in respect of all clearing systems under the Treaty on the Functioning of the EU. In response to the judgement, the ECB says it remains convinced of the importance of effective oversight of CCPs to safeguard financial stability. It adds that it also remains committed to enhancing cooperation among authorities for CCPs with significant cross-border systemic risk implications, in line with the CPMI-IOSCO Principles for Financial Market Infrastructures.

The Bank of England says that it is important for the safety and soundness of CCPs that they have access to liquidity arrangements in the currencies they clear. In addition, access to central bank liquidity can provide a backstop arrangement and the most efficient ultimate source of this backstop liquidity in the event of major market disruption is provided by the network of central bank swap-lines.

The BOE adds that it recognises the ECB has an interest in the safety and soundness of UK CCPs that clear significant amounts of euro-denominated contracts. As a result, both institutions stress that they will continue to seek a coordinated and shared approach for achieving their common objectives of financial stability and the smooth functioning of financial market infrastructures.

RMBS

Irish roll rates imply improvement

A recent DBRS analysis indicates that the Irish RMBS market is likely to continue stabilising, as underlying roll rates have improved significantly. However, the agency notes that at this stage it is difficult to project the extent to which that improvement will take place, as many of the delinquent loans in Irish portfolios are long-term delinquent borrowers for whom lenders have to find a long-term solution in order to considerably bring down overall levels.

Loan-level roll-rate analysis of Irish RMBS transactions suggests that a further slow-down in late-stage arrears can be expected in the coming months under current conditions. DBRS's analysis shows that 4Q14 projected default rates could be up to 50% lower than those based upon 1Q13 data. However, even when factoring in the improvement in performance as expressed by such various roll-rate metrics, overall projected default levels are still high in comparison with other countries.

Irish unemployment has declined from 15.1% at its peak in February 2012 to 10.5%, as of December 2014. GDP also grew by 2.5% in real terms in 2014, while house prices have improved by 27% from their recent low.

Improving economic conditions have impacted the performance of Irish mortgage loans. As of 3Q14, average residential 90+ delinquencies are 15.7%, down from a peak of 17.3% in 1Q13. Buy-to-let arrears are much higher at 30.8% for 3Q14, but only increased by 0.1% from 2Q14, according to DBRS.

"While improvements seen in Irish RMBS have been influenced by the improved macro-environment, it is worthwhile to point out that further analysis may reveal that observed roll rates are also a function of servicing practices," the agency observes. "These can have a meaningful impact on observed roll-rate behaviour, as forbearance measures - such as deferred interest and payment holidays - influence a borrower's movement from one stage of delinquency to the next. Additionally, loan repurchases from the transaction collateral pool will have an impact on the roll rates."

A further uncertainty is how the Central Bank of Ireland's loan-to-income/LTV caps proposal will affect the recovery of the housing market and influence a borrower's ability to refinance or re-negotiate their mortgage debt.

RMBS

Portuguese arrears slow

Fitch says the volume of defaulted Portuguese residential loans has reached a new high. However, the rate of increase has slowed and new arrears cases are at their lowest level for a decade.

The agency believes there are signs that the fragile economic recovery and low interest rate environment are reducing the stress on the Portuguese mortgage market. The proportion of loans in early-stage arrears fell to 0.5% in 2H14, the lowest level seen in the past 10 years and less than half of the peak figures of 2008-2009. Late-stage arrears are also down on peak levels and remained at around 1% during 2014.

The pace of new defaults has also slowed so that the constant default rate stood at 0.5% in 4Q14, down from 1.5% two years earlier, but this did not prevent the total stock of defaulted loans from reaching a record high. The slow pace of recoveries on defaulted loans means that the outstanding net defaults reached 3.9% of the overall portfolio balance.

Properties sold following lender enforcement have achieved average prices of 30% below their original valuations. There are signs that the market has become more liquid, with smaller distressed sales discounts now expected than in the trough of the economic downturn in 2012.

Moreover, Portuguese home prices have been broadly flat - although indices report quarter-on-quarter fluctuations, including a 2.3% decline in 4Q14. The Algarve region is experiencing the largest correction, with prices falling by a further 5.4% during 2014.

Finally, demand for housing is limited, but constrained supply of mortgages is also weighing on the market. New mortgage lending in Portugal remains depressed at around 10% of pre-crisis highs.

RMBS

Trustee drops Ocwen

Ocwen Financial says it has received notice from a trustee that a majority of certificate holders of two RMBS trusts - SABR 2006-FR1 and 2006-FR3 - have voted to terminate Ocwen as servicer. The move follows an EOD triggered when its servicer ratings were downgraded in October 2014.

The two pooling and servicing agreements (PSAs) represent US$260m of unpaid principal balance, or 0.07% of Ocwen's overall servicing portfolio, and US$800m in MSR value. The PSAs are among the 119 transactions involved in a claim brought by a group of investors represented by Gibbs & Bruns (SCI 27 January). Wells Fargo, as trustee on the deals, has expressed intent to move the servicing to SPS.

"We regret the decision made by this particular group of investors, who have been critical of Ocwen's superior loan modification results, but are pleased that in the majority of the affected securities investors are keeping Ocwen as their servicer," comments Ron Faris, president and ceo of Ocwen.

The servicer believes that the financial impact of these transfers will be immaterial to its overall financial condition.

RMBS

Brazilian RMBS criteria updated

Fitch has updated its rating criteria for assessing credit risk in Brazilian residential mortgage loan pools that are used as collateral for structured finance transactions. The revised assumptions include increased market value decline (MVD) assumptions for lower stress scenarios, longer foreclosure timing expectations and higher expected prepayments, but also lower expected foreclosure frequencies (FOF) for loans in higher original loan-to-value (OLTV) buckets and with longer terms.

Fitch says many Brazilian RMBS transactions to date have been characterised by a small number of loans and considerable exposure to a few borrowers. The agency conducts additional analyses to assess credit enhancement levels of portfolios with low granularity to account for the greater volatility and idiosyncratic risks resulting from loan concentration risk. While transactions of pools of homebuilder loans and loans from small institutions are rated in accordance with these criteria, Fitch will review their specific performance information on a case-by-case basis to incorporate any additional adjustments, given variations in underwriting standards and possible conflicts of interest.

Fitch has increased its MVD assumptions especially for lower stress scenarios to reflect the increased probability of significant real property price declines in the near to mid-term. At the same time, it no longer considers the federal district an especially vulnerable market. Property price data for the main metropolitan areas show that over the past three years average prices across Brazil continued increasing above income growth, starting from already high levels.

However, price movements have not been uniform across the country and average price growth has been slowing down to levels at or slightly below inflation in the last few months. In Brasilia real prices have been decreasing in recent years.

Overall, offer prices are at levels difficult to afford for the broader middle classes - especially in Rio de Janeiro - as house price-to-income ratios are high and rental yields low. The property market is also vulnerable to the adverse macroeconomic scenario characterised by low growth since 2011, high inflation and increasing benchmark interest rates.

Foreclosure timing assumptions were revised upwards, with a minimum of 24 months in a base-case scenario. Although the legal procedures to foreclose on properties within the Alienacao Fiduciaria regime should allow most cases to be completed within one year, Fitch has observed some obstacles that may significantly extend the period needed to complete the process.

Prepayment rates in recent years have been relatively high in Brazil, helped by the non-existence of prepayment penalties and decreasing DTIs for standard loans. The agency therefore increased prepayment assumptions by up to 5% per annum.

Loans with OLTVs greater than 80% are no longer assumed to be granted predominantly to lower-middle-income borrowers, based on observations for Fitch-rated transactions. As a consequence, FOF assumptions for such loans have been reduced to reflect their better than previously expected risk profile, although they remain significantly above those for loans in lower OLTV buckets.

At the same time, loans with terms of 20-30 years are no longer penalised by FOF adjustments. These loans have become standard in the Brazilian market and significant defaults after 20 years are improbable, due to a decrease of instalments over time for standard loans.

Fitch does not expect any rating changes to its currently rated portfolio resulting from the updated RMBS criteria.

RMBS

Russian RMBS downgraded

Moody's has downgraded 22 tranches and confirmed one tranche in 16 Russian RMBS transactions and concluded its review for downgrade for four transactions. The rating actions follow the weakening of Russia's credit profile, as reflected in Moody's recent decision to lower Russia's government bond rating to Ba1 and the lowering of the country's local-currency bond and deposit ceilings to Baa3 from Baa2.

The rating action also reflects the long-term senior unsecured debt ratings of the Agency for Housing Mortgage Lending (AHML) OJSC and the long-term domestic bank deposit rating of VTB24. Additionally, the reduction of the local-currency bond ceiling reflects an increased probability of high losses on the underlying collateral resulting from any political, economic or financial dislocation accompanying a material deterioration in Russia's credit environment.

Because of the increase in country risk associated with the lowering of Russia's local-currency bond ceiling, Moody's downgraded the ratings for the following: Closed Joint Stock Company (CJSC) Mortgage Agent AHML series 2010-1, 2011-2, 2012-1 and 2014-1, as well as Second Mortgage Agent of AMHL; CJSC Mortgage Agent VTB24-1 and VTB24-2; CJSC Mortgage Agent Vozrozhdenie 1, Vozrozhdenie 2 and Vozrozhdenie 3; CJSC Mortgage Agent Raiffeisen 01; Closed Specialised Mortgage Agent GPB-Mortgage 2; CJSC Mortgage Agent NOMOS; and CJSC Mortgage Agent Europe 2012-1.

Further, the linkage to AHML OJSC as a surety provider prompted Moody's to downgrade the A3 tranche in AHML 2014-1. The agency has taken off review for downgrade the ratings on all rated notes in CJSC Mortgage Agent of AHML 2014-1 and CJSC Mortgage Agent VTB24-2.

Moody's has also reviewed the ratings in two US dollar-denominated transactions. In addition, due to the increase in country risk associated with the decrease in the local-currency bond ceiling, it downgraded all ratings in Red & Black Prime Russia MBS No. 1 and tranches A and B in Russian MBS 2006-1.

Moody's has taken off review for downgrade the ratings on all rated notes in Red & Black Prime Russia MBS No. 1 and Russian MBS 2006-1. The agency notes that the redenomination concerns for these deals have eased in the near-term, but remain present.