Contents

Structured Finance

Green power

Renewables securitisation gaining traction

A number of initiatives in the US harness securitisation technology to facilitate the growth of the green energy market. The common challenges faced by these efforts are asset scalability and contract standardisation.

In the context of renewables securitisation, the similarities and differences between assets in a pool need to be as known and as clear as possible, according to Crowell & Moring partner Elliot Hinds. "There need to be enough similarities to create predictable and steady cashflows to cover coupon payments, but there also needs to be enough diversification to protect against potential losses. In addition, standardised contracts are critical, so that the similarities and differences of the aggregated asset pool are easy to identify and describe. Different contract forms give investors and lawyers fits."

He continues: "The green energy market has seen significant technological advancement over the last year, especially in solar, where the sector is increasingly adopting securitisation characteristics as it matures. The breadth, standardisation and scalability of solar assets have so far provided more opportunities for sponsors to tap the capital markets."

Similar standardisation efforts are underway in other green energy sectors, however. For instance, the aim of the metered energy efficiency transaction structure (MEETS) initiative is to figure out a way for energy efficiency measures to be 'owned' by an end investor, in order to raise capital to foster the rapid deployment of energy efficiency measures.

With the initial focus on commercial property, the major challenge faced by MEETS is the need for a large volume of energy efficiency upgrades to make the ABS approach viable, yet the nature of property ownership makes this problematic. In an ideal scenario, a portfolio of real estate would present the opportunity to make significant energy savings in the aggregate.

Cameron Prell, counsel at Crowell & Moring, nonetheless confirms that efforts are underway to design projects that allow for a number of different MEETS ABS structures. These include private placements, as well as potential public issuances.

He adds that there is also significant interest in the Warehouse for Energy Efficiency Loans (WHEEL) in terms of its potential scalability for some asset classes (SCI 14 April 2014), but the success of this platform is similarly tied to the ability to aggregate/standardise enough projects to attract a large amount of capital. While WHEEL differs to traditional ABS in that it is a revolving loan structure approach, it could also form the basis for hybrid securitisations.

"In this case, WHEEL structuring could depend on the ability of developers to design appropriate standardisation between projects and the creation of a pool income akin to a receivables financing," Prell explains. "The SPV would have to meet the objectives of both sponsor and investors; in other words, free up capital on the development side and throw off a return on the investor side."

Citi structured product strategists expect accumulated outstanding WHEEL loans currently being warehoused by bank conduits to be refinanced in the term ABS market, possibly as soon as this year. The inaugural WHEEL ABS transaction is anticipated to be sized at roughly US$50m, with market conditions determining the timing of the offering.

Meanwhile, the number of PACE deals coming to the market is expected to increase moderately this year, on the back of a couple of successful issuances in 2014. Prell says that PACE has taken a while to come to fruition, but has now reached the point where it can be a proven approach to energy efficiency upgrade financing.

"Proof of concept has been demonstrated and is gaining traction from developers and investors alike. However, the approach still relies upon which markets are conducive to PACE - it's not always as simple as the local municipal government legislating in favour of the mechanism," he observes.

Prell notes the FHFA's rejection in December of the adequacy of PACE reserve protection was viewed as a bump in the road and is unlikely to forestall market development. "PACE relies on the coordination of public and private partnerships: as more communities make PACE available, it becomes increasingly viable. Some communities, such as in Connecticut and Orange County, have used the programme very successfully."

Riverside County is another. California law grants PACE liens equal priority with real estate taxes, but the county also obtained a judicial order from the superior court affirming the enforceability, validity and seniority of PACE liens in connection with its issuances under the HERO programme (see SCI's deal database).

However, the Citi strategists warn that there is a risk of a judicial challenge to the order in a federal court. A successful federal court challenge could undermine the lien priority status, changing the economics of the trust assets and necessitating a re-assessment of the structural protection.

Nevertheless, the strategists note that overall performance of unsecured personal loans for renewable energy projects is projected to be reasonably good, given that early adaptors of residential property green projects are likely to be better educated, have higher incomes and demonstrate greater willingness to pay for renewable energy debt obligations than typical prime borrowers. Moreover, green projects typically pay for themselves in energy cost savings.

The US Energy Information Administration forecasts that renewable energy generation will rise by 3.3% in 2015. Non-hydropower technology is the fastest-growing segment, with its share expected to increase from 6.7% last year to 7.9% by 2016.

At end-2016, the US solar investment tax credit for residential properties is being eliminated and will decrease from 30% to 10% for all other properties. The move may result in a steep drop in US renewables investment into 2017, followed by a measured rise as financing sources evolve and pressure increases to meet green energy targets.

Against this backdrop, Prell suggests that the divergence between solar and other renewables assets will only broaden, as the sector is more advanced. "In addition to reliable returns and proven technology, institutional investor demand is increasing for solar assets - and may eventually outstrip supply, absent further standardisation of contracts and data collection."

Hinds believes that the reduction in tax incentives could transform the green energy market by creating pressure to more rapidly adopt securitisation techniques. "I expect various forms of renewables securitisations to emerge ahead of 2017. The market is aware that the tax reduction is coming and different ways of financing green energy projects have to be embraced as a result," he concludes.

CS

ABS

Ready for take-off

Aircraft ABS building momentum

After a flurry of deals at the end of last year and another one issued last month, aircraft ABS appears to be shrugging off the esoteric label and establishing itself as an asset class in its own right. The sector has a track record that investors can analyse and is showing signs of diversity in both structure and collateral.

"Aircraft ABS is considered to be an esoteric asset class in the broad sense of the term. However, aircraft ABS has evolved substantially since the early 1990s and is clearly considered a significant standalone asset class," says Lawton Camp, partner, Kaye Scholer.

The first wave of aircraft ABS issuance ended abruptly after 9/11. Stress in the aviation industry led to losses in junior tranches, although the market eventually recovered.

The second wave of issuance began around 2003 and ended with the financial crisis, as many transactions included bond insurance and so were impacted as those insurers experienced losses. But collateral performance held up well and the market is now entering into a third wave of issuance.

"For the first time, the market has reached the point where the bonds are being paid off or are coming close to being paid off. That is an important factor to revive investor confidence," says Weili Chen, senior director, S&P.

There are multiple funding sources in the aircraft ABS space. The well-established EETC market offers transactions that are generally recourse to the airlines themselves and is now expanding to non-US airlines.

"Aircraft lease securitisation has been regaining momentum after the crisis. The Emerald transaction by Avolon and a number of other transactions were helpful in re-establishing the market. There are a number of deals in the market at the minute," says Henry Morriello, partner, Kaye Scholer.

He adds: "As for aircraft loan securitisation, we have been active in representing banks who purchased aircraft loan portfolios from traditional lenders and then securitised all or a portion of the portfolios in ABS transactions."

Leasing companies are increasingly returning to the ABS market to get funding. As they grow larger, they are also selling off aircraft to mitigate over-concentration in their inventories.

"The way some of the bigger lessors manage their large portfolios, for example, is by transferring aircraft in a highly concentrated portfolio into the ABS market, which allows them to maintain the servicing rights. We have seen issuers, such as GE and others, take this approach when their portfolios get big enough, rather than sell off the aircraft on a one-off basis themselves," says Chen.

Multi-tranche deals remain a development that many market participants would welcome. While this year's US$667m AIM Aviation Finance Series 2015 deal had a simple A, B and C tranche structure, last December's US$380.5m Eagle I Series 2014-1 ABS had both an A1 and A2 tranche above the B and C tranches (see SCI's deal database).

"The increasing issuance of multi-tranche securitisations may signal maturity for the asset class and increased investor appetite for different levels of risks. Multiple tranches tend to attract a range of investors, which was common in earlier aircraft securitisations, but it is a new development for recently-issued transactions," says Chen.

Morriello notes: "We would be very happy to see more tranches in transactions, but we have not observed this to any great extent as of yet." What he has seen, however, is growing collateral diversity.

"There is a growing amount of newer aircraft in the market. There is still a good mixture of seasoned aircraft in aircraft lease securitisation transactions because they include leases to airlines in emerging markets, which gives you diversity of borrowers and markets," says Morriello.

One mooted step would be for issuance of deals backed by helicopter leases. However, it is unclear whether these would be included in aircraft ABS or form a whole new esoteric asset class.

The prospects for aircraft ABS appear strong. Chen notes that several leasing companies have expressed an interest in aircraft ABS, so more activity could be on the horizon.

"There is a financing gap and companies are looking to ABS as a potential tool to fill that gap," Chen says. "As companies get bigger, the need to sell off aircraft portfolios to avoid over-concentration becomes more pressing. Last year, there were some first-time lessors and that is a trend we expect to continue."

Morriello is also bullish on the market's prospects. He says: "With an increased need for yield by investors, we expect to see more and more deals getting done this year. It is an opportune time for borrowers to take advantage of market conditions."

JL

CLOs

Entrants encouraged

More managers could benefit European CLO market

The European CLO market is smaller than its US counterpart, but arguably provides greater scope for a good manager to outperform. With the pool of European managers currently limited, equity investors are among those who would welcome new entrants.

The CLO market has learnt many lessons from its 1.0 days, not least that in Europe there were too few assets. Vivarte provides one well-publicised example of a single loan used in many transactions (SCI passim). In the US, by contrast, there is far greater asset diversity.

"The US is a deep, liquid market, where managers are able to build par and ramp up quickly. The average first coupon for a CLO in the US in 2014 was around 24%, but in Europe it was more like 16%," says Chandrajit Chakraborty, principal, Pearl Diver Capital.

A US manager can choose from a few hundred different names in a liquid market, but in Europe the pool is limited to closer to 50 assets. Of those, maybe 20% are non-starters.

While the pool of available assets remains smaller than market participants would like, so too does the pool of available managers. "Our CLO exposure is to about 20 different managers in Europe. There are only about 25 active managers in total and we would definitely welcome new managers coming in," says Benoit Pellegrini, portfolio manager, Chenavari Credit Partners.

He adds that a new manager could provide a different perspective and that, rather than buying the market, they could be more selective. That would provide a better alignment of interests and would be healthy.

Like current managers, any new manager would still face challenges, such as working with a limited pool of assets. However, this is where the good managers are able to stand out.

"A CLO is not a static pool being leveraged up. The pool is dynamic and changes, so investing in equity is taking a view of the overall credit cycle. We have also seen that two similar starting portfolios in the hands of two different managers can perform very differently," says Chakraborty.

Size alone is not enough to guarantee a manager's success. While there are advantages to having a large credit team, a manager will succeed or fail on several other factors.

"For any new manager entering the market, you want to know that they have the right credit skills and sourcing. It is also important that any European manager has to be based here in Europe, rather than trying to manage European loans from the US," says Graham Rainbow, managing partner, Alcentra.

He adds: "A manager has to pick the right credits for the right price and proactively sell them early at the first sign of major problems. Around the edges, there are questions like how much sub debt and how much peripheral debt are acceptable and how triple-Cs are managed. But generally if a manager is doing a good job in avoiding defaults, then they are doing a good job for all their noteholders."

While different investor classes typically have different priorities, all are interested in managers who can maximise returns. European CLO 2.0 equity has been generating returns in the mid-teens and one equity investor expects that to continue.

Chakraborty currently sees an average cash-on-cash return in Europe in the mid-teens and in the US in the high-teens. Although that might not be as high as some investors hoped for, it only represents an average.

"CLO equity has not performed as well as expected. But some managers have outperformed and generated attractive returns," says Pellegrini.

He continues: "CLO 2.0 is the cheapest credit product out there. The widest asset the ECB is buying is only circa 100bp, double-A/single-A split-rated and over eight years WAL."

As a cheap product, many investors have long waited for CLO paper to rally. However, there are compelling reasons for the status quo to remain.

"The reason it has not rallied and CLO triple-As remain wider than ABS is because these are different products. There is extension risk and a dynamic pool. It is a different product," says Chakraborty.

Meanwhile, creating alpha - whether for an incumbent or a new manager - remains all about due diligence. Rainbow concludes: "If you are a good manager, then it is easier to outperform in Europe than it is in the US, but how you play peripheral Europe is very important. If you know what you are doing, you can outperform - and, if you do that with lower European liability costs, you can generate a decent return versus the US."

JL

CMBS

Waive, goodbye

Penalty waiver leads to rapid pay-off

The Pickwick Plaza loan securitised in GCCFC 2007-GG9 has paid off early, a month after it was modified to waive prepayment penalties (see SCI's loan events database). Although investors will typically be wary of such modifications, this case included an unusual claw-back provision.

The pay-off is understood to have resulted in US$188m in principal proceeds to the trust and a US$1.9m special servicing fee-related loss. That has allowed the A2 and A3 CMBS tranches to be paid off, while shortfalls on the AJ to F tranches have been repaid and 28% of the US$28m J tranche has been written off.

Penalty waivers were more common a few years ago as the market was still reeling from the financial crisis. The Pickwick Plaza modification follows more recent waivers for the Lincoln Square and Parkoff Portfolio loans - securitised in CD 2007-CD5 and MSC 2007-HQ12 respectively - the first of which allowed a B-note owned by the sponsor to be made whole while US$40m in prepay costs were waived.

"Prepayment penalty waivers were more common immediately after the economic downturn. When a loan is US$200m but the asset is only worth US$150m and is not likely to regain value in the near future, then it makes sense to maximise the dollars you can recover," says Tanya Little, ceo, Hart Advisors Group.

She continues: "In a recessionary environment such as the one we had in 2008 and 2009, prepayment waivers were common because values would not otherwise recover by loan maturity. However, now there is a lot more strength in the market, recoveries are stronger, asset values are in cases rebounding to the original unpaid balance of the loan and therefore waivers today of prepayment are less common."

Little says a deal would have to be "pretty broken for us to see a prepayment waiver". In the case of Pickwick Plaza, the office building had lost its two largest tenants and the most recent appraisal on the property was US$171.8m, although the loan balance was US$200m before its modification.

Senior investors will be particularly troubled by prepayment penalty waivers in order to refinance. However, despite their loss of yield, in the Pickwick Plaza case it may well turn out to be the best outcome overall.

"Within CMBS, there is always a conflict of interest between what is good for the different investors, so it is hard to find an outcome that suits everybody. In this case, they lost a major tenant, DSCR had dropped and it looked like they might be on the way to a loss, so this may be considered as a good outcome to some," says Jeffrey Berenbaum, director, Citi.

He adds: "It might be too early to call [penalties being waived] a trend, but it is far from an isolated incident. Each prepayment penalty is waived for its own reasons and comes after negotiations between servicer and borrower."

The claw-back provision in the Pickwick Plaza waiver is an interesting addition. The loan modification included standard features, such as a small write-down and a reduced pay rate, but the prepayment penalty waiver was accompanied by an agreement that the lender could claim additional proceeds.

"The lender has the right to claim any additional proceeds from a future refinancing or sale of the property. This claw-back will apply if there is something that improves the value of the asset within the next 18 months," says Berenbaum.

He continues: "The lender likely tried to make the claw-back period as long as possible, while the borrower likely wanted it to be as short as possible. In the end, they came to agree on 18 months, so it will be interesting to see whether it is ultimately used."

The next 18 months will be significant for the market as a whole. Little believes that there are worrying developments afoot.

"What concerns me most at the minute is the fact that commercial origination efforts are back to 2007 levels, particularly in the gateway cities. It is not clear that all of these properties will hold up in the coming years," she says.

Little continues: "But that is the nature of the real estate cycle. It has been seven years since the crisis and I am still doing modifications on loans from 2006-2008. When there is another downturn and loans start coming due, will servicers look to recover whatever they can or will they try to hold those loans into the future?"

Berenbaum notes that the market is now entering the maturity wall where a lot of loans are going to balloon. Pickwick Plaza is unlikely to mark the final prepayment penalty waiver seen in the CMBS market, as a number of situations will require either some form of modification or liquidation in the future.

"We have to be realistic about where we are in the cycle. Here in Texas, everything seems great, but it was like that in 2007, as well. I think we probably have another 24 months barring a global event, but in my opinion the clock will reset in 2017/2018," Little concludes.

JL

Secondary markets

Euro ABS/MBS unmoved

The European ABS/MBS secondary market was broadly unmoved at today's open despite wider market declines late Friday and into this morning.

The secondary market looks set to stay that was today with another very quiet day in prospect. Players' attention will undoubtedly be drawn toward broader credit markets thanks to the first day of QE as well as the ABS/MBS primary market, which continues to ramp up.

Further, there are currently no BWICs scheduled for today. However, the auction pipeline is building for the remainder of the week with the current highlight a 180+m 28 line mixed list due Wednesday at 14:00 London time.

Secondary markets

CLO controlling stakes surface

It's already ramping up to be another busy week in the US CLO secondary market, but unusually the auction calendar includes a notable number of controlling equity stakes.

"Unusually there's a decent amount of controlling equity on the schedule for this week," says one trader. "There's a total of around $205m of 1.0 and 2.0 equity in for the bid today and tomorrow and I think that's driven by equity holders seeing the rising market and wanting to test levels for their sector."

Consequently, the trader suggests the equity lists may well not trade. "Equity buyers typically don't jump the gun and these kinds of sales tend to have very high reserves, so it's possible not many trades will go through. What does trade is likely to do so strongly, however."

The first such list, also incorporating a double-B piece, comes from a large manager and is scheduled for trade at 11:00 New York time today. The five line $96.97m list comprises: CANNF 2006-1A INC, DRSLF 2011-22A SUB, JTWN 2012-1A SUB, LANDM 2006-7A PFD and ZIGG 2014-1A F. None of the bonds has traded on PriceABS in the last three months.

Overall the trader adds that the CLO secondary market rally continued right through until the end of last week and looks likely to carry on this week in a similar vein. "The double-A to double-B sector that saw so many strong prints last week remains the main focus and at the lower end of that manager quality and sector exposure are still the key differentiators."

Secondary markets

Focus returns to European ABS/MBS secondary

After a quiet few days, the European ABS/MBS secondary markets could see a pick-up in activity today as focus shifts away from primary.

"ABS continues to grind tighter although secondary volumes have been low," says one trader. "The focus has mainly been on primary in the last few days, but that could end up having some impact - talk on the latest STORM deal is out and it's wider than secondary so that might put a bit of pressure on Dutch spreads."

Nevertheless, overall tone remains positive and the secondary market could see an increased focus today. "The BWIC calendar is picking up for this week with a few sizeable lists for people to get their teeth into," the trader says.

There are six ABS/MBS lists already circulating for trade today. A mix of assets is on offer including Dutch prime and UK non-conforming, but a significant proportion of line items are Spanish mezz.

Secondary markets

Euro CLOs stay slow

The European CLO secondary market is continuing to see limited activity this week.

"There's still not much going on," says one trader. "What is trading revolves around 2.0 paper, plus some senior 1.0 and junior mezz 1.0."

The trader continues: "Everything else is at an impasse. That's primarily because we've reached a price versus DM point that means investors realise they can get 2.0 bonds at a better rating and better return, so have no need to look elsewhere."

The BWIC schedule is fairly quiet throughout this week. Only one list was scheduled for today a €3m 2 line list at 09:00 London time. Both were 2.0 double-B bonds - AVOCA 10X E, which covered at H92; and EGLXY 2013-3 E, which covered at MH96.

Secondary markets

US RMBS looks ahead

Activity remains strong in the US non-agency RMBS market secondary market, but at the same time participants are keeping an eye on future.

"We're continuing to see what's now normal BWIC activity," says one trader. At today's open just shy of $500m was in for the bid throughout the day as the market maintains its positive tone.

At the same time, extraneous events are attracting market participants' attention. "The progress in the Countrywide settlement is significant as it finally looks like it's on the way to reaching an end point and that will pave the way for other settlements not as far down the road," the trader says. "It's a constructive development for the RMBS market overall - once that's settled the door is open for the possibility of new issuance in more complex structures and is a positive for the those holding countrywide paper for which the secondary market has already factored the settlement into pricing levels."

Equally, macro trends are having an influence, according to the trader. "As we get ever closer to June when many expect the Fed to raise rates the duration of secondary market trading is being closely watched."

However, the trader adds: "That's in the background - in the meantime people are just trying to get involved in the RMBS market any way they can."

Secondary markets

Dutch prime slows as CLOs pick up

European secondary markets continue to see discrete activity with Dutch prime the latest area to see a slowdown as some European CLOs get a boost. Meanwhile, this week's heavy BWIC calendar continues to roll on.

"The price guidance for the new STORM deal, which is wider than secondary, hasn't pushed spreads wider as some thought but it has put the market on hold for the moment," says one trader. "Flows in Dutch prime are considerably down on what we've seen recently, so everyone is looking to see how this will play out."

One are that has begun picking up is 2.0 single-A to double-B CLOs. "There is real demand for those assets," the trader says. "Consequently they're trading very well - much tighter than primary. This activity started on BWIC, but we're now seeing activity in the Street on the back of it, which is giving the sector a bit more liquidity."

As note yesterday, the BWIC calendar was heavy one, which the market absorbed well and there are plenty more to come today. "It will be especially interesting to see how some of the more illiquid names due on BWIC this afternoon trade," the trader observes.

There are eight BWICs already scheduled for today offering an array of deal types and jurisdictions. Most notable is the previously mentioned 180+m 28 line list due at 14:00 London time, which consists of ABS, CDOs, CLOs, CMBS and RMBS.

Secondary markets

US secondary cools down

After a hectic start to the week US secondary markets have cooled down today.

"It's a relatively slow day today," says one trader. "We had decent volume yesterday, but that's slipped away today."

Nevertheless, the recent positive tone remains, the trader suggests. "The market feels in very decent shape and things are looking good for next week - we've had a bit of a lull in new issuance but it looks set to pick up then and that'll filter through into secondary."

The most notable decline in terms of BWIC volume came in US CLOs, which had only three lists circulating for trade today, predominantly with line items of fairly small size. The most notable exception was another controlling equity stake - a single $21m line of CIFC 2012-1A SUB due at 11:00 New York time. The cover has not yet been released, but the bond was talked in the region of 70.

However, the US CLO auction pipeline is building again for the remainder of this week with seven lists already scheduled, including some of considerably more significant size than seen today.

Secondary markets

Euro secondary BWICs surge

European secondary securitisation markets continue to be focused on BWICs as today sees especially heavy volumes.

There are already more than ten ABS/MBS BWICs circulating for trade today accounting over a 100 line items. "There is a wide mix of sellers including asset managers and hedge funds across a wide range of assets, plus there are a few CLO lists today as well," says one trader. "So, I expect pretty much everyone will be spending today pricing and executing lists."

Despite today's huge supply, expectations are that the market's positive tone will not be significantly diminished. Yesterday saw a fairly large BWIC schedule too and only the previously mentioned 180+m 28 line list had major difficulties.

"Most of that list DNT'd but they were mainly challenging bonds so I wouldn't read too much into it," the trader says. "Pretty much everything else yesterday traded well."

Secondary markets

US CLOs look to double-Bs

The US CLO secondary market appears to be shifting attention towards double-B paper.

"The market has shifted focus towards double-Bs and is now testing levels in that part of the stack," says one trader. "There are quite a few of relevant bonds appearing on BWIC and we'll have a clearer idea of where double-Bs are after those lists trade today and tomorrow."

Overall, the trader says the market has slowed slightly albeit from a very active week last week. "It feels like a little bit of a pause - not a softer tone, paper is still well-bid, but more a tapping of the brakes."

There are currently five US CLO BWICs circulating for trade today with line items from across the capital structure - first up, at 9:00 New York time, is indeed a 2.0 double-B list; after that there is a range of assets many A-rated; and the day currently closes out with a single piece of equity at 14:00.

The latter is a $7m slice of MAGNE 2012-7I SUB, which last covered with a price on PriceABS at 87h on 19 November 2014.

Secondary markets

Patchy week for US RMBS

The US non-agency RMBS secondary market has seen patchy activity in a quieter week, but there have been some unusual bonds on offer and the overall tone remains positive.

"This week has been a little quieter than usual - we've never really got going with busy mornings and then activity slipping right away in the afternoon, like summer Fridays," says one trader. "There are no really obvious reasons other than some places are on spring break already and there's been volatility in equity and fixed income, which often leads some people to step-off RMBS."

Despite the quieter market two rare structures have been circulating for trade - MASD 2004-2 CE and OOMLT 2001-D C. "Residuals are unusual to see in the broader market as they are settled physically and usually trade by appointment," the trader explains.

"It could be the sellers are running out of things to sell or it may be about looking to collapse the deals," adds the trader. "Either way it's interesting to see people looking for new ways to make money in the run up to quarter-end."

The RMBS market's broad base of sellers has also diminished somewhat this week and has been concentrated around a few big and frequently seen money manager names. Nevertheless, the tone continues to be broadly positive.

"Spreads are still tight across the board, though a little weaker on some individual bonds, says the trader. "Overall, the market is well-bid and holding in there in comparison to high yield."

At the same time, another strong trend of recent weeks is continuing with another big BWIC circulating for trade later today. The trader says: "It's around $1bn, most likely from a GSE and consists of bit of AMBAC wrapped subprime together with subprime pass throughs. As ever, the market will be to see where it will clear and to structure re-REMICs from the larger pieces."

Secondary markets

Liquidation list looms

The hectic pace in European secondary securitisation markets looks set to continue today with six BWICs currently due, but of those a large CDO liquidation list will dominate attention.

Despite the heavy volume of BWICs yesterday, the market absorbed the supply and the majority of line items traded well. Off-BWIC the tone was also positive particularly for Portuguese and UK non-conforming paper. Equally, secondary Dutch prime remained unfazed by the wider pricing of the latest STORM deal.

The CDO liquidation BWIC is due at 13:30 London time today. The 27 line €403.9m original/€130+m current face ABS, CMBS and RMBS list offers a range of jurisdictions and ratings.

The BWIC comprises: ATLAF 1 A, BBVAR 2007-2 A3, BCCM 1 A, BCJAF 10 A2, BCJAM 4 A3, BLST 2006-1 A2, BUMF 6 A2, ECLIP 2007-2X A, E-MAC NL05-3 A, E-MAC NL05-I A, E-MAC NL06-2 A, EPICP BROD A, ESAIL 2007-2X A3A, EURO 23X A, GHM 2006-1 A2B, LEASI 2 A, LGATE 2007-1 A2B, PELIC 3 A, SESTA 4 A1, SUNRI 2 A, TDAC 7 A3, TDAC 8 A, THEME 3 A, TITN 2006-2X A, TMAN 4 A, TMAN 5 A and WINDM X-X A.

Only two bonds on the list have covered on PriceABS in the past three months - GHM 2006-1 A2B last doing so at 96.4 on 3 February and LGATE 2007-1 A2B at 93.75 on 13 February.

Secondary markets

US CLO demand continues

The US CLO secondary market rally is continuing and so is investor demand.

"Bid lists are still trading well and we've seen some bonds trading at pretty steamy levels," says one trader. "Double-As have come in the most in percentage terms, but people are still fighting for paper further down the capital stack."

The trader sees no sign of demand letting up as the sector is attracting new entrants. "Even after the rally we've had, for the rating CLOs remain the cheapest asset out there and as the investor base continues to grow people are just scooping up more and more paper."

Today's US CLO BWIC schedule currently sees five lists circulating of predominantly 2.0 double-B and equity assets. The main exception being a 3.0 double-A list due at 11:30 New York time.

The $27m three line list consists of: AVOCE 2014-1A A2A, DRSLF 2014-33A B and SPARK 2014-1A B1. Only SPARK 2014-1A B1 has covered on PriceABS in the last three months, doing so at 97.375 on 15 January.

ABS

MMF restructuring impact eyed

Federated recently became the second major fund sponsor after Fidelity to announce changes to its money market funds (MMF) to comply with the upcoming US money market reforms. Each of the firms offer a different compliance structure for the industry, but neither approach leaves much room for any ABS investments, according to JPMorgan ABS strategists.

A-1 rated ABS tranches are unlikely to meet investment guidelines under a Fidelity-like approach, where 99.5% of assets are in cash or US government securities. Similarly, Federated's new 60-day maturity cap would limit investments in ABS, as 2a7 paper issued in 2014 had on average a 120-day weighted average life.

MMFs also have the option of floating their NAVs and/or putting up redemption fees and gates under the new rules. However, the JPMorgan strategists note that such an approach is likely to result in fund outflows, as surveys have shown that certain investors are averse to these features. The build-up in liquidity to fund these outflows would, in turn, likely result in less demand for A-1 rated ABS and other short-term non-government credit.

Nevertheless, the strategists suggest that other investors could replace this demand. Based on public filings that account for 80%-85% of MMF holdings, four fund complexes held ABS in their prime MMFs for a total of US$1.05bn, as of 31 January.

The strategists estimate that these MMFs account for 10%-15% of the A-1 ABS investor base (Federated represents the biggest holding at US$750m). Other asset managers and insurance companies make up the rest of the buyer base.

Buyers of short-duration credit product have a shrinking universe of investible assets to choose from. Monthly ABCP outstandings have shrunk from US$1.1trn in December 2006 to US$235bn in January 2015. During this period, outstanding bonds with maturities of less than one year have declined from US$436bn to US$340bn.

ABCP outstandings are expected to decline by an additional US$40bn and short-duration bond outstandings to only grow by an additional US$3bn. The strategists anticipate that limited supply of non-government issued short-term paper should mitigate the impact of money market reform.

"Insurance companies and asset managers that don't place ABS in MMFs will likely be in a position to pick up any lost demand from MMF buyers. However, these buyers are likely to expect wider A-1 spreads in sympathy with the broader non-government issued short-term sector," they observe.

Typically, prime auto and equipment A-1 yields closely track the 90-day ABCP market. As MMFs restructure and build up more liquidity, ABCP rates should move wider and bring A-1 ABS yields with them.

CS

Structured Finance

SCI Start the Week - 9 March

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

Pipeline
Deals stayed in the pipeline a little longer last week. At Friday's end there were 10 new ABS as well as an ILS and five RMBS.

The ABS were: US$219.3m American Credit Acceptance Receivables Trust 2015-1; US$350m Chase Issuance Trust 2015-1; US$1.4bn Chase Issuance Trust 2015-2; A$500m Crusade ABS Series 2015-1; US$712m Drive Auto Receivables Trust 2015-A; US$453.53m GreatAmerica Leasing Receivables Funding Series 2015-1; US$302.6m Michigan Finance Authority Series 2015-1; €820m Quarzo SQS; A$737.61m SMART ABS Series 2015-1US Trust; and US$816.25m Volvo Financial Equipment Series 2015-1.

US$300m Merna Re Series 2015-1 was the ILS. The RMBS were US$372.4m JPMMT 2015-IVR², A$750m National RMBS Trust 2015-1, £360.2m Paragon Mortgages No.22, A$500m Series 2015-1 REDS Trust and STORM 2015-I.

Pricings
While last week did not see quite as many deals pricing as the one before it, it was still a busy week for issuance. Ultimately there were 10 ABS, one ILS, five CMBS and eight CLO prints for the week.

The ABS were: US$318.75m CABMT Series 2015-I; US$350m California Republic Auto Receivables Trust 2015-1; US$500m Dryrock Issuance Trust Series 2015-1; US$280.725m Flagship Credit Auto Trust 2015-1; US$964.65m Hyundai Auto Lease Securitization Trust 2015-A; US$995m John Deere Owner Trust 2015; £185m NewDay Partnership Funding 2015-1; €888m Red & Black Auto Germany 3; CHF200m Swiss Auto Lease 2015-1; and US$395.55m Westlake Automobile Receivables Trust 2015-1.

US$225m East Lane Re VI Series 2015-1 was the ILS. The CMBS were: US$1.2bn CSAIL 2015-C1; C$325.4m IMSCI Series 2015-6; US$240m MSC 2015-420; US$545.1m MSCI 2015-XLF1; and US$1bn WFCM 2015-C27.

Lastly, the CLOs were: US$578m ACIS CLO 2015-6; €308m Aurium CLO I; US$611m Benefit Street Partners VI; US$506.7m BlueMountain CLO 2015-1; US$625m Sound Point CLO VIII; US$361m Steele Creek CLO 2015-1; US$617m Treman Park CLO 2015-1; and US$612.5m Voya CLO 2015-1.

Markets
While the US ABS primary market slowed down slightly last week, activity in the secondary market was fairly stable. "Interest in secondary was largely focused on higher spread product, such as subprime subordinates and private credit student loans," note JPMorgan analysts.

US CMBS continued to rally, as it has done now since the start of February. Barclays Capital CMBS analysts note that secondary spreads were helped by the tight pricing and heavy demand for the new issue CSAIL 2015-C1 conduit deal. "Secondary trading of recent issue triple-A LCF bonds tightened 1bp w/w, to swaps plus 85bp, 9bp tighter than in late January. Lower in the capital stack, triple-B minus bonds tightened 5bp, to swaps plus 334bp, and are 20bp tighter than late-January levels," they add.

The European CLO market has now priced five deals this year, with Spire's Aurium CLO I marking the entrance of a new issuer. In the secondary market it was a fairly quiet week. "There was limited movement in pricing for 1.0 bonds after the recent rally, though there remains decent demand for mezzanine bonds. Trading levels were generally strong for 2.0 bonds appearing in the secondary market, and levels appear tighter than where recent new issue deals have priced," say Bank of America Merrill Lynch analysts.

Deal news
• 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.
• 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.
• 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.
• 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.
• 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.

Regulatory update
• 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 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 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 Appellate Division of the New York Supreme Court has 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).
• 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.

Deals added to the SCI New Issuance database last week:
Apollo Series 2015-1 Trust; Ascentium Equipment Receivables 2015-1; Betony CLO; CIFC Funding 2015-I; CNH Capital Canada Receivables Trust series 2015-1; CNH Equipment Trust 2015-A; Denali Capital CLO XI; East Lane Re VI series 2015-1; Element Rail Leasing II Series 2015-1; Enterprise Fleet Financing Series 2015-1; Exeter Automobile Receivables Trust 2015-1; GE Equipment Transportation series 2015-1; Golden Credit Card Trust Series 2015-1; Harvest CLO XI; Hollis Receivables Term Trust II series 2015-1; Kentucky Higher Education Student Loan Corp series 2015-1; Madison Park Funding XVI; Oaktree EIF II series B1; Precise Mortgage Funding 2015-1; Toyota Auto Receivables 2015-A Owner Trust; Volkswagen Auto Lease Trust 2015-A; World Omni Auto Receivables Trust 2015-A

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-2; BSCMS 2007-PWR17; CD 2007-CD4; CGCMT 2007-C6; CGCMT 2012-GC8; EURO 28; GCCFC 2005-GG5; GSMS 2005-GG4; GSMS 2011-GC5; GSMS 2012-ALOH; JPMCC 2005-CB11; JPMCC 2007-CB20; JPMCC 2010-C1; JPMCC 2013-LC11; LBUBS 2006-C7; LBUBS 2007-C1; LBUBS 2007-C2, LBUBS 2007-C7, LBUBS 2008-C1 & JPMCC 2013-WT; MLMT 2002-MW1; MSC 2007-IQ16; UBSC 2011-C1; WBCMT 2005-C16; WBCMT 2005-C17; WFRBS 2011-C3; WFRBS 2013-C14; WINDM VII

CLOs

SOTUS boost for Euro CLOs

US regulators last month added new guidance to their list of frequently asked questions (FAQs) on the Volcker Rule that should permit most non-US banks to invest in covered funds that are sponsored, managed and marketed by third parties. The move is especially significant for European CLOs, as it indicates that non-US banks will be able to invest in European CLOs, even if they fall under the covered fund definition.

The new guidance significantly clarifies the availability of the 'solely outside the US' (SOTUS) exemption, so as to allow many non-US banking entities to acquire and retain ownership interests in third-party funds with US investors, according to a recent Allen & Overy memo. Previously it had been unclear whether non-US banks would be permitted to invest in covered funds, if the covered fund was offered for sale or sold to residents of the US.

The FAQ clarifies that the restriction on the offering and sale to residents in the US applies only to the marketing activities and participation of the non-US banking entity seeking to rely on the SOTUS exemption and not to the third party manager or sponsor offering and selling interests to US investors. Previously, there had been uncertainty over whether the marketing restriction applies specifically to the non-US bank intending to invest in the covered fund, or to any entity offering or selling ownership interests in the covered fund.

In other words, a non-US banking entity's acquisition and retention of an ownership interest in any investment vehicle that is a covered fund and that is sponsored, managed and marketed by a third-party unaffiliated with the non-US banking entity will not be prohibited by the Volcker Rule - subject to certain conditions. In addition to refraining from marketing a covered fund to US investors, these conditions include that the banking entity is not organised - or controlled by a banking entity that is organised - under the laws of the US. Neither must the investment be accounted for as principal by an affiliate organised in the US, nor financing for the investment be provided by an affiliate organised the US.

European securitisation analysts at Bank of America Merrill Lynch believe that the guidance is significant for European CLOs, as it indicates that non-US banks will be able to invest in European CLOs, even if they fall under the covered fund definition. "Arrangers and managers may no longer need to rely on loan-only securitisations, 3a7 exemptions or adjusting voting rights in order to sell to these non-US banks. In our view, each of these options involves a cost to CLO investors, such as reduced diversity and availability of collateral for loan-only securitisations, reduced manager flexibility for 3a7 exemptions and a loss of control where certain voting rights are removed," they explain.

In addition, the guidance should help increase liquidity for deals in which no measures have been taken to address the Volcker Rule, such as those deals issued before the final text was published in December 2013. "Non-US banks should no longer have to sell holdings of non-Volcker compliant CLOs and can also buy non-Volcker compliant deals, provided they were not involved in the marketing of the deal," the BAML analysts observe.

CS

ABS

Esoteric ABS firms combine

Springleaf has agreed to acquire OneMain for US$4.25bn, creating a potential market leader for the unsecured consumer ABS sector. The transaction is expected to close in 3Q15.

The two brands will be kept separate initially, before migrating to the OneMain brand in mid-2016. JPMorgan notes that both firms are active in the unsecured ABS market, as Springleaf issued US$559m of ABS last year while OneMain issued US$1.94bn. The combined entity is expected to actively use the ABS market.

Structured Finance

Credit research team bolstered

Towers Watson has appointed Kate Hollis to its credit research team. The team covers a number of areas, including direct lending and structured credit.

Hollis joins from S&P Capital IQ, where she was most recently global head of fixed income/alternatives fund research. Prior to that, she worked for various funds of hedge funds and in fixed income sales and trading for Deutsche Bank, Daiwa Securities, Scotia McLeod and Schroders.

CMBS

Consultant director tapped

CREFC Europe has hired Hans Vrensen as consultant director for research and education. His role will involve sourcing or providing up-to-date industry statistics and research to underpin the organisation's work, with a major additional focus on developing its training and educational offering for those involved in the European CRE lending market.

Prior to joining CREFC Europe, Vrensen was global head of research at DTZ. He was also involved in training and education in this role, as well as in previous roles for Barclays and Moody's.

CMBS

CMBS defeasance team bolstered

Waterstone Defeasance has hired Steve Hall as md. He will work on developing institutional relationships related to the defeasance of existing CMBS and Freddie Mac loans, as well as providing development coverage for the firm in the states of North Carolina, Texas, New York, Florida and California.

Previously, Hall was with Waterstone Asset Management, helping build and grow its CMBS and agency loan underwriting and special servicing platform. Prior to that, he worked for financial institutions, including Wachovia, Freddie Mac, Fannie Mae and BBVA Compass Bank, primarily in client and transaction management roles.

Insurance-linked securities

Pension risk transfer head named

Prudential Retirement has appointed Scott Kaplan as head of its pension risk transfer team. He will continue to report to Phil Waldeck, head of pension and structured solutions.

Kaplan previously led risk transfer and risk management strategies for pension plan sponsors as svp and head of global product and market solutions for Prudential's pension and structured solutions business. He also served as the senior finance leader for Prudential's individual life insurance business and as md within its treasurer's department, where he co-headed the corporate finance group and served as the firm's liaison with rating agencies.

In addition, Dylan Tyson - who held senior leadership roles in the firm's pension risk transfer business - will take on a new role in the senior leadership team at Prudential of Korea. He will focus on identifying, developing and driving a retirement strategy for the Korean market.

Insurance-linked securities

ILS unit strengthened

Credit Suisse Asset Management (CSAM) has appointed David Grill to help explore methods for expansion. CSAM is Credit Suisse's ILS and reinsurance arm, which currently manages approximately US$6.5bn in insurance-linked assets.

Grill currently serves as md for Credit Suisse and covers corporate finance, mergers and acquisitions, and capital markets. He has held previous roles with Sagent Advisors, Bear Stearns and Reliance Group.

Risk Management

CDS vet joins crypto start-up

Sunil Hirani and Don Wilson have launched Digital Asset Holdings and hired Blythe Masters as its ceo. The firm has developed a technology platform that facilitates the safe and efficient settlement between digital and traditional currencies. The aim is to bring the benefits of speed and cryptographic security to transferring, tracking and settling of mainstream financial assets as well.

The number of institutions seeking to transact in crypto assets is expected to grow exponentially, but obstacles remain in terms of settlement and transparency. Digital Asset intends to address these issues through a trusted ecosystem comprised of previously vetted counterparties.

Masters joins the firm following a variety of senior roles at JPMorgan, including head of global credit portfolio and credit policy. Hirani is the founder and ceo of trueEX and was previously co-founder and ceo of Creditex Group. Wilson is the founder and ceo of DRW Trading Group, as well as a founder and board member of Eris Exchange.

RMBS

IT exec hired for platform push

Stonegate Mortgage has hired Douglas Gilmore as cio to lead its IT and technology efforts, including the development of Stonegate Connect. Stonegate Connect is a technology platform that is designed to allow investors to connect with third-party originators, creating an online marketplace that facilitates institutional investment in mortgages and MBS.

Along with this, Gilmore will oversee all information technology for the firm, including origination, servicing and financing (NattyMac). He will report to Jim Cutillo, ceo of Stonegate Mortgage.

Prior to joining the firm, Gilmore held a number of senior executive positions with companies such as Bellwether, Gracenote and Haverstick Consulting. Most recently, he served as cio for ChaCha Search.

ABS

Solar programme commences

SCIO Capital has acted as sole arranger and placement agent on the first of a planned series of solar transactions. SCIO Clean Energy 1 is backed by the future operating cashflows generated by a portfolio of solar installations in the UK. The transaction was structured as a pass-through bond with a fixed-rate coupon.

ABS

TD rating linkages analysed

De-linking the credit profile of electricity tariff deficits (TD) securitisations from macroeconomic and regulatory risks is more difficult than for other assets like mortgages or consumer loans, says Fitch. The agency notes that the stronger influence of macroeconomic factors, utility system governance and regulatory risks explains why TD securitisations cannot achieve the maximum six notches above the relevant sovereign rating.

Fitch explains that a sovereign is more likely to intervene in a TD securitisation to alleviate hardship for its citizens at times of economic stress by amending governing laws or changing the regulatory framework. This is because such securitisations are backed by a socially essential service - electricity supply.

The agency's central expectation is that economic trends and regulatory policies have an impact on TD recoverability and the rating criteria need to consider this. Additionally, Fitch believes the combination of regulatory and macro risks is only compatible with a positive differential between the TD securitisation and sovereign ratings of up to three notches.

The agency's maximum achievable rating on TD securitisations is in contrast to Moody's approach, as it rates up to six notches above the sovereign issuer default rating. For example, Moody's rates the Volta I, II and III Portuguese TD transactions at A1, versus its Portuguese sovereign rating of Ba1 (see SCI deal database). In its Volta III pre-sale report, Moody's states that its rating "does not address the risk, should the decree-law be overturned by the Portuguese state in future", despite admitting that change in the Portuguese electricity framework may have a significant impact.

Fitch's preliminary triple-B/stable rating on Volta III is two notches higher than the Portuguese sovereign rating of double-B/positive. Although the agency believes the Portuguese electricity system is being managed in line with a credible plan to eliminate TDs, it says that high performance deviations in 2012-2014 have weakened the system's key performance indicators. For this reason, the maximum possible uplift of three notches has not been achieved.

Fitch rates six electricity TD securitisations in Spain, one of which is Fondo de Titulizacion del Deficit del Sistema Electrico (FADE) that is fully guaranteed by the Kingdom of Spain, and three in Portugal. As well as sovereign risk, the agency's rating approach focuses on the regulatory environment, electricity system sustainability, and assets and structural arrangements. The absence of structural subordination and sequential liability paydown of TD securitisations implies these transactions do not gain credit protection as the pool of assets amortises over time.

Structured Finance

Regulatory module included

Moody's Analytics has added a regulatory module to its Structured Finance Portal. The enhanced tool helps financial institutions assess the potential accounting and regulatory treatment of structured finance securities, including calculating capital ratios and other portfolio metrics, for the Comprehensive Capital Analysis and Review and Dodd-Frank Act stress tests.

The module is accessible through a customisable web-based interface. It applies the US Fed's macroeconomic scenarios to forecast deal and tranche cashflows to calculate estimated other than temporary impairment, simplified supervisory formula approach (SSFA) metrics and SSFA projections.

Structured Finance

Peripheral risk expectations improve

Many securitisations in Spain, Italy, Portugal and Ireland have benefited from an update to Moody's country risk ceiling methodology (SCI 26 January), says the agency. Risk expectations for senior ABS and RMBS tranches with assets located in these countries have improved, reflected by an uplift of the maximum achievable ratings for the affected securitisations.

Moody's notes that 86% of the outstanding senior tranches are now rated at single-A or higher. At the same time, risk expectations for junior and mezzanine notes have also improved.

While many ABS and RMBS transactions benefited from the methodology updates, Moody's believes that credit support ultimately remains a key factor. Low credit enhancement or counterparty risk exposure still acts as a constraint for some transactions.

Senior tranches remain on review in 16% and 7% of Italian and Spanish ABS respectively and 46% of Italian RMBS, in light of the increase in the related country risk ceiling.

Structured Finance

Russian arrears, defaults to be limited

Moody's expects any rise in arrears and defaults in Russian securitised mortgage and consumer loans to be limited in 2015. This is despite the looming possibility of a recession of a greater magnitude than that experienced during the 2009 sovereign debt crisis.

"The underlying loan characteristics support borrowers' ability to repay, with fixed interest rates for life and modest loan-to-value ratios," says Maria Divid, a Moody's analyst. "However, if the recession turns out to be considerably deeper than we currently expect, the ensuing performance deterioration would be much more severe, notwithstanding these mitigants."

The agency says that ratings in Russian transactions have remained fairly stable so far, supported by fast deleveraging and performance remaining consistent with its assumptions. The agency expects that the deterioration in asset performance will not be as dramatic as that observed in some European periphery countries during the crisis.

Additionally, Moody's observes that the collateral characteristics in most Russian RMBS are in line with the other prime European RMBS markets. Moreover, Russian transactions benefit from some favourable features compared with peer jurisdictions. Unlike other European markets, interest on both assets and liabilities in Russian transactions is typically fixed for life, so Russian transactions are not exposed to interest-rate risk.

Structured Finance

Property prices outpacing income

Post-crisis property prices have risen considerably more than effective gross income for core commercial and apartment properties in major US markets, according to Moody's. This is due to cap rate compression, driven in large part by historically low interest rates.

"The top performer for commercial was San Francisco, where prices were up more than 90% and effective gross income was up around 45% over the last five years," says Tad Philipp, Moody's director of real estate research. "The top performer for apartment was New York, where prices were up more than 100% and effective gross income was up around 45%."

According to Moody's RCA Commercial Property Price Indices (CPPI) national all-property composite index, the industrial segment has been the best-performing of the core commercial property types over the last three months, up 4.2%, as well as the last 12 months, up 17.8%. Industrial transaction volume rose in January, with both public and private REITs among the most active buyers.

In addition, Moody's index rose 2.1% in January, with prices now topping the 2007 pre-crisis peak by around 5%. Commercial property prices rose 2.4%, and the smaller apartment component, 1.4%. All of the CPPI segments have now recovered at least half of their post-crisis price decline, while ten of the 20 CPPI segments have recovered all of their post-crisis price decline.

Finally, the share of distressed properties used to calculate the CPPI has fallen below 10%, down from a post-crisis high of around 35%. Distressed transactions made up about 6% of recent transactions in major markets and roughly 12% of non-major market transactions. Around 6% of apartment, industrial and central business district office transactions - and 13% of retail and suburban office transactions - were distressed.

Structured Finance

India law change 'positive' for lenders

Recent proposals to designate Indian non-banking finance companies (NBFC) with assets of more than INR5bn as 'financial institutions' under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act is credit positive for lenders of loans against property (LAP), says Moody's. RMBS backed by LAPs originated by these NBFCs would also benefit from speedier loan recovery.

LAPs are often taken out by small business proprietors who repay the loan using cashflow from the business housed in that property. The SARFAESI Act would expedite NBFCs' repossession of the underlying property backing the LAP because NBFCs would have the ability to demand repayment of any defaulted loan within 60 days after the lender classifies such loans as non-performing assets (NPAs).

Among the NBFCs that are active in LAPs and would benefit from the proposal are Cholamandalam Investment & Finance, Indiabulls Financial Services, Magma Fincorp, Reliance Capital, Religare Finvest and Fullerton India Credit Company, which have all been active in securitisation.

If the defaulted borrower refuses to repay the outstanding loan in full within 60 days of notice, lenders would be allowed to seek repossession through the chief metropolitan magistrate or district magistrates in the jurisdictions in which the properties are located. This offers a speedier recovery process to the current practice, where NBFCs must resort to civil court proceedings to recover their loans and take repossession of a property whose recovery time is difficult to determine.

Structured Finance

TRACE expansion delayed

FINRA has delayed the implementation of CUSIP-level TRACE dissemination for non-mortgage ABS trades until 1 June, from the originally planned start date of 27 April. Prices for trades in SEC-registered public securitisations and private 144a transactions will be disseminated.

Assuming that CUSIP-level dissemination begins on 1 June, there will be an 180-day transition period, in which trade prices and sizes are required to be reported to FINRA within 45 minutes. After that, the trade reporting period will be reduced to 15 minutes.

Structured Finance

Negative interest rate impact examined

The increasing prevalence of negative interest rates in Europe - due mainly to extraordinary monetary policy measures - is credit negative for EMEA securitisations, according to Moody's. Sub-zero interest rates introduce negative carry and can potentially reduce credit enhancement if a structure has not already catered for such a situation.

Most European securitisations do not explicitly cater for sub-zero rates. Typically, note payments are either explicitly or effectively floored at zero; however, swap receipts, account bank interest and interest on eligible investments paid to the issuer are usually not floored at zero.

In a negative interest rate environment, this misalignment introduces negative carry, whereby the issuer's cashflows are less matched than before the negative rates situation, causing a drain on available cashflows. For transactions with little excess spread or credit enhancement, the issuer may have no way of recovering shortfalls in cash receipts.

In polling the main EMEA securitisation market participants, Moody's found a consensus view that there is a real or effective floor for note interest. In most European jurisdictions, the view among legal practioners is that there cannot be a payment obligation of the noteholders to the issuer, which would be implied by negative interest rates on the notes.

In terms of bank accounts, there was a consistent view that cash or eligible investments could be negatively yielding, meaning that the issuer would receive less at the withdrawal/redemption date than it had initially invested. Most transaction documentations do not explicitly exclude negative interest rates on monies held in the issuer accounts or in eligible investments and negative interest rates reduce the available funds at the next payment date. However, it is likely that the cash administrator would choose the least negatively yielding assets.

For the time being, Moody's notes that the credit impact of negative interest rates on ABS transactions is limited. However, given the recent spread tightening and margin reductions in the major ABS asset classes, this cushion is being reduced.

The majority of collection/issuer accounts are linked to EONIA/Euribor/Libor minus a margin, typically 10bp to 20bp. Since rates have been at or near to zero for the last half year, such accounts already feature negative drag if no explicit floor exists in the account agreements. However, Moody's says that rates would have to become materially negative to cause significant issues.

The agency notes that recently-issued transactions have catered for the current unusual interest rate environment by implementing floors in order to prevent changes in payment directions. In case of rates becoming materially negative, it believes that all parties have an incentive to clarify the issuer's position and expects future structures to accommodate this issue.

Structured Finance

Securitisation aiding US economy

Securitisation continues to contribute a significant share of funding to the US economy. Moody's cites as an example the fact that US businesses turned to CLOs and CMBS for US$208bn worth of capital and liquidity last year - representing nearly half of US securitisation volume in 2014 - which helped fund bank loans to commercial enterprises and CRE.

"The virtual disappearance of the private-label RMBS market, coupled with the replacement of FFELP with a direct Federal lending product, has led to a reduction in securitisation's relative share of annual capital market issuance from 48% in 2007 to 30% in 2014 and contributed to a 200% increase in annual US Treasury bond issuance over that same period," says Jim Ahern, head of Moody's Americas structured finance ratings.

Although securitisation represented only US$1.6trn of the roughly US$6trn in US bond issuance in 2014, SF issuance has been on the rise globally over the past five years. Moody's rated 2,268 new issues in 2013, almost double the 2009 level, but down from the peak of 28,781 issues rated in 2006.

Furthermore, none of the SF debt that Moody's rated investment grade in the past seven years has become impaired, contributing to the strong and stable credit quality of SF issuance across all asset classes. The agency finds that of the more than 10,000 rated SF issues rated between January 2009 and June 2014, only nine non-investment grade tranches became impaired.

Finally, the accuracy of Moody's ratings for global SF issuance over the past eight years - as measured by the average position of impairments - is above 98%. Moody's triple-A ratings of SF over the same timeframe have been quite stable, with an average 12-month stability rate of 96%. For ratings other than triple-A, there has been more upward than downward movement for SF issuance, the agency notes.

CDO

SME-backed CDO criteria updated

Fitch has updated its global rating criteria for CDOs backed by loans to SMEs. The updates particularly affect Spanish collateral and default probabilities.

In the latest criteria, Fitch has decreased the average annual default rate expectation for Spain to 5% from 6.25%. The revised benchmark results from a reduction in Fitch's expected annual default rate for the real estate and construction sector to 8% from 10% and a reduction in the proportion of debt assumed in this sector to 30% from 44%.

Fitch has also lowered the default probability for SMEs in the first year while keeping the five-year cumulative default probability unchanged. The adjustment in the first year probability of default is more pronounced for higher average annual default rates. For example, for a 5% average annual default rate the first year default probability has decreased to 7.5% from 9.2%, while for a 3% average annual default rate the first year default probability has only decreased to 4.1% from 4.2%.

CDS

CDS heat map unveiled

Fitch Solutions has launched a new interactive tool enabling users to identify average monthly changes in CDS, aggregated by country. The tool is available via Fitch's The Why? Forum portal and updated on a weekly basis.

CDS

Mexican telcos wider on weak currencies

Weaker Latin American currencies and regulatory issues appear to be driving CDS spreads wider for two Mexican telecom giants, according to Fitch Solutions. Five-year CDS on America Movil and Telefonos de Mexico (Telmex) widened by 28% and 29% last week respectively.

CDS referencing both companies' debt are now pricing at the widest levels observed since August 2013, with America Movil's CDS testing below investment grade spread levels. "CDS widening for America Movil and Telmex likely reflects market concerns stemming from weaker Latin American currencies as well as expected penalties resulting from the anti-monopoly regulations enacted by Mexico last year," says Fitch director Diana Allmendinger.

CLOs

Trader guilty of CLO fraud

Former Nomura and RBS CLO trader Matthew Katke has waived his right to indictment and pleaded guilty in a Hartford, Connecticut federal court to participating in an alleged multimillion securities fraud scheme. Katke also entered into an agreement to cooperate in the US government's ongoing investigation.

Between April 2008 and August 2013, Katke admitted that he and others conspired to increase RBS's profits on CLO bond trades at the expense of customers. As part of the scheme, Katke and his co-conspirators are alleged to have made misrepresentations to induce buying customers to pay inflated prices and selling customers to accept deflated prices for CLO bonds.

In certain transactions, Katke admitted to misrepresenting the CLO seller's asking price to the buyer - or vice versa - keeping the difference between the price paid by the buyer and the price paid to the seller for RBS. In other transactions, it was claimed that he misrepresented to the CLO buyer that bonds held in RBS's inventory were being offered for sale by a fictitious third-party seller invented by himself, which allowed him to charge the buyer an extra commission that RBS was not entitled to.

The investigation revealed numerous fraudulent transactions that cost at least 20 victim customers millions of dollars. Among the customers were firms affiliated with recipients of federal bailout funds through the Troubled Asset Relief Program.

Katke pleaded guilty to one count of conspiracy to commit securities fraud, which carries a maximum term of imprisonment of five years. He was released on a US$250,000 bond and is scheduled to be sentenced by US District Judge Robert Chatigny on 3 June.

CLOs

RFC on SME CLO approach

Scope Ratings is requesting comments on its new SME CLO rating methodology. Its proposals include forward-looking and through-the-cycle base-case assumptions, with the aim of providing more rating stability, particularly for high investment grade ratings.

In addition, Scope believes that the credit assessment of a sovereign is not an adequate anchor for a rating cap, particularly in eurozone countries. Rather, the agency considers factors like macroeconomic development, institutional meltdown and convertibility risk in the monetary and political context where a transaction originates, as well as the tenor of each rated tranche.

Rather than applying a one-size-fits-all approach, Scope says it will also use fundamental bottom-up analysis on different asset types, portfolios or structural characteristics. This should allow for greater rating differentiation among ratings of transactions from the same country or even the same originator.

Further proposals stress Scope's work with data templates provided by the originator, thereby eliminating data management redundancies and increasing the efficiency of the overall process.

Scope says the publication of the methodology does not have any rating implications on its outstanding SME CLO ratings. Market participants are invited to submit their comments by 30 April.

CLOs

New covenant boosts CLO diversity

Fitch says that the inclusion in recent European CLOs of an additional covenant on the largest ten obligors is credit positive, as they ensure greater portfolio diversity. The covenant should help to mitigate performance volatility, especially during stress periods.

The additional covenant appears to have been included in structures as market best practice and typically limits CLO exposure to the largest ten obligors at 20%. This compares with 26.5% for a typical European CLO.

The European leveraged loan market is still much smaller than the US market. Fitch has credit opinions on approximately 400 corporate issuers and typical CLO portfolios include between 60 to 130 corporate issuers. In contrast, US CLOs are more diversified with a larger number of corporates.

When analysing European CLOs, Fitch says it will differentiate between CLOs that have the covenant and those that do not. On average, the rating default rate (RDR) can be up to 2% lower at the triple-A level for CLOs that include the covenant.

However, Fitch has observed that some existing 2.0 deals have higher obligor concentrations than originally envisaged. Therefore, for CLOs that do not include measures to ensure diversity, it will reduce the maximum number of obligors included in the stress portfolio to be in line with the market observed minimum number of 60 for European CLO 2.0s.

The theoretical minimum for a typical European CLO without the additional covenant is 40 obligors. As a result, the triple-A RDR for a typical CLO without this covenant - or other diversity mitigants - could increase by up to 1%.

Fitch notes that this will not affect existing CLO ratings because managers do not fully use the flexibility they have under transaction terms and conditions. The RDR for actual portfolios is typically significantly below the RDR for the corresponding stress portfolios.

CMBS

CMBS 2.0 properties auctioned

Auction.com and RealCapitalMarkets.com data indicates that 66 CMBS properties with US$475m in balance and 23 distressed loans with US$95m in balance are up for auction in March and April. Among these loans, the US$14.7m The Hills property securitised in GSMS 2011-GC5 is one of the first 2.0 distressed properties to be auctioned.

The loan turned delinquent and became REO in 2013 after the largest tenant defaulted on its lease (see SCI's CMBS loan events database). The most recent appraisal for the property is US$20.1m, as of July 2014, which Barclays Capital CMBS analysts suggest would be just about enough to cover the principal, US$4.9m of advances and US$19,000 in ASER.

Another 2.0 property - the US$7.1m Holiday Inn Express Fayetteville in CGCMT 2012-GC8 - is also out for the bid. However, this loan is current and a sale would likely result in an assumption or possibly a defeasance.

Meanwhile, the largest loan up for auction is the US$38.6m Eastland Mall in LBUBS 2007-C1. The retail centre was last appraised at US$18.6m in June 2014 and, if the loan sells near its appraisal price, losses could approach 60%.

The second largest loan is the US$30.7m Seven Mile Crossing office complex in MLMT 2002-MW1, which represents 82% of the seasoned deal. The property is appraised at US$21.5m, which the Barcap analysts note should lead to recoveries of approximately 50% on the loan, despite its non-recoverable designation.

The auctions are widely dispersed across deals, with MLCFC 2007-6 having the largest exposure at five properties totalling US$42m in balance. MSC 2007-IQ16 has the second-largest exposure, with three loans totalling US$41.4m out for bid.

Two of these loans are the neighbouring US$19.5m Cotton Corporate Center Office and US$19.5m Cotton Corporate Center Flex office buildings. Both properties are appraised at about US$15m.

CMBS

US CMBS sectors stabilise

The US CMBS office and retail sectors are stabilising, with moderate improvement in overall fundamentals, says Fitch. Additionally, hotel and multi-family sectors continue to have stable outlooks as they have shown strong income growth over the past five years.

The rating agency says the office sector continues to show moderate improvement due to a number of factors including job gains taking hold - which is leading to more office-using employment - and vacancies falling in the low 16% range in 2015. Overall rents are also trending higher due to leasing activity on prime, CBD class A space and increasing demand for class B and suburban locations.

Despite the retail sector stabilising, Fitch remains concerned with continuing store closings and with under-performing assets in secondary and tertiary markets. Radio Shack and Sears provide contemporary examples of closures.

However, overall retail sales are forecast to grow by approximately 4% again in 2015, with vacancy rates continuing to slowly decline and rents slowly improving. New supply is also near non-existent.

Multi-family continues to look stable with the national vacancy rate at 4.2% from 3Q14 to year-end 2014 and is anticipated to rise slightly going forward but remain below 6%. Additionally, hotel performance remains strong, continuing its march to record levels, particularly in ADR growth.

CMBS

Exchangeable tranches upgraded

Moody's has upgraded by one notch the ratings of exchangeable classes in 11 US CMBS that were securitised in 2012 and 2013. The move reflects an error correction.

The affected notes are EC, PEZ or PST tranches issued by: COMM 2012-CCRE2 and 2012-CCRE3; JPMCC 2012-LC9; GSMS 2013-GCJ14; MSBAM 2012-C5, 2012-C6, 2013-C9, 2013-C10 and 2013-C11; and UBSBB 2012-C2 and 2013-C5. The ratings of the exchangeable classes were upgraded to correspond to the weighted average credit quality of the respective reference classes as measured by their WARF.

Moody's explains that because exchangeable notes are a combination of the component reference classes, which does not present any additional credit risk, Moody's generally rates them using the WARF of the reference classes. However, in rating the affected 11 notes, the WARF of the reference classes was reduced by one notch. This has now been corrected.

Risk Management

Platform adds ratings data

ClearStructure Financial Technology has made Fitch Solutions' full suite of global credit ratings data available to its clients via the Sentry PM portfolio management platform. The data includes structured finance ratings and will be available on the Sentry platform for asset managers, CLO managers, hedge funds and loan traders.

Risk Management

OTC operations tool launched

SunGard is launching a new tool for post-trade futures and cleared OTC derivatives operations. The tool seeks to enable derivatives brokers, including futures commission merchants (FCMs), to achieve greater efficiency, reduce operational risk and total cost of ownership by leveraging economies of scale in middle and back office processing and technology. The platform will cover more than 160 cleared derivatives markets in 38 countries.

Barclays is set to become the tool's first customer and will also migrate specific futures and OTC derivative clearing operations and technology processes to the platform. In addition, a number of Barclays employees will transfer to SunGard to work on the initiative.

Risk Management

CCP stress test review underway

The Committee on Payments and Market Infrastructures and IOSCO have begun a review of stress testing by central counterparties. They say that a review is timely, in order to identify how the relevant principles for market infrastructure standards are being implemented and whether additional guidance in this area is needed. CCPs, clearing participants and other relevant stakeholders will be consulted in the course of the review.

Risk Management

Clearing landscape surveyed

A lack of understanding about the processes clearinghouses use to manage defaults is contributing to a widespread belief that additional measures are needed to mitigate risk, according to a new Greenwich Associates report on systemic risk and central clearing. Nevertheless, 80% of institutional investors polled believe that mandatory central clearing of derivatives has reduced systemic risk in global financial markets.

Almost 70% of institutional investors interviewed by Greenwich Associates believe that the major clearinghouses have adequate financial resources to handle a major multiple bank default. But fewer than one in five say they have a clear understanding of the default management waterfalls at the CCPs that clear their trades.

When asked what additional steps clearinghouses can take to further limit the possibility of a bank failure, the two most frequent suggestions from investors include providing clearinghouses with access to central bank liquidity and requiring them to have more skin-in-the-game. Central bank liquidity has broadly been addressed, with the Bank of England providing registered CCPs access to its sterling monetary framework and the major clearinghouses in the US being designated systemically important financial market utilities, thereby allowing the Fed to provide them with liquidity in the event of a crisis.

Clearinghouse capital and skin-in-the-game requirements are more complicated issues, however. The cost of holding extra capital will ultimately be passed on to clearing members and their clients, according to Greenwich Associates.

"With the cost of clearing already a sore spot for institutional investors, a structural change like increasing skin-in-the-game requirements for CCPs must be examined carefully," the firm adds. "Ensuring clearinghouses' incentives are properly aligned with robust risk management practices is critical, but limited knowledge of individual default waterfalls could result in a push for market structure change that, over the long term, could prove detrimental to the derivatives market as a whole."

In 4Q14, Greenwich Associates conducted 72 interviews with key research participants to more deeply understand their views on systemic risk, the impacts of central clearing and their expectations for the interest rate derivatives market.

Risk Management

Collateral management tool upgraded

Lombard Risk Management has updated its collateral management, clearing, inventory management and optimisation solution COLLINE to now support margin requirements on non-centrally cleared derivatives. COLLINE aims to ensure that each new release includes functionality to enable its clients to meet their regulatory obligations across all capital markets.

RMBS

RMBS 'conduct issues' identified

The UK FCA has identified certain conduct issues in connection with some mortgages securitised in the Leek Finance Number 17 to 22 and Silk Road Finance Number 1 and 3 RMBS transactions. Under the resulting remediation exercise, the principal balances of the affected loans will be adjusted lower.

In order to mitigate the impact on noteholders, the principal balances will be written down permanently and a corresponding payment will be made by the Co-operative Bank to the issuers. Morgan Stanley European ABS strategists note that this will effectively result in some principal amortisation in the transactions, with the payment funded externally by the sponsor.

No information is available yet on the principal balance of affected mortgages, the expected pay-downs and the timelines.

RMBS

Rep and warranty frameworks weighed

The two types of US RMBS representation and warranty (R&W) frameworks that are prevalent post-crisis can adequately detect and remedy R&W breaches, according Moody's. However, the approaches have different strengths and weaknesses.

Transactions with open-ended reviews of loans - such as those recently sponsored by Redwood Trust and WinWater - can be very effective at catching R&W breaches if there is a controlling holder conducting the review. "As the most subordinate investor and the first to incur a loss, the controlling holder has skin-in-the-game and benefits from pursuing R&W breaches," says Moody's vp and senior analyst Peter McNally.

However, if the transaction does not have a controlling holder, then the appointed reviewer will likely limit the scope of its review and have difficulty remedying the breaches, which requires investor involvement.

Alternatively, prescriptive frameworks - such as those used in transactions sponsored by JPMorgan and Goldman Sachs - establish pass/fail tests that ensure that each loan receives the same review. However, they can be bounded in scope and therefore miss defective loans.

"Prescriptive frameworks are more transparent and don't rely on a reviewer to decide what elements to examine," explains Moody's vp and senior credit officer Yehudah Forster. "As a result, there is a lower likelihood of a misalignment of interests."

Remedying breaches in transactions with prescriptive R&W frameworks is also less costly because arbitration is less likely to occur. But the well-defined boundaries of prescriptive frameworks can leave openings for some defective loans to remain unremedied. If the pass/fail tests don't capture all of the elements of the R&Ws, they can miss certain breaches, while the framework can also provide mitigating factors that absolve the R&W provider from remedying certain breaches.

RMBS

Debt forgiveness implications evaluated

Recent legal changes that facilitate debt restructuring agreements for personal borrowers in Spain formalise practices that are already common, Fitch observes. While the changes introduce debt forgiveness to the Spanish personal insolvency regime, the agency believes that the attitude of mortgage borrowers who are able to pay will not materially change. This is because debt cancellation would only happen after the liquidation of assets, when a borrower is unable to follow a repayment plan.

As a result, Fitch views the changes as neutral for its Spanish RMBS and covered bond ratings. Willingness to pay is a key credit concern for mortgage debt and the agency does not expect borrowers' behaviour to materially change, nor does it believe that the full recourse recovery framework for Spain's mortgage market will be materially undermined.

Royal Decree 1/2015 will allow individuals with liabilities of up to €5m to approach a local notary and initiate restructuring of their financial and commercial debts. The restructuring options include maturity extensions, payment in kind, principal write-downs or debt-to-equity conversions if the debtor owns their own business, which was already used by mortgage lenders in Spain following the housing crash, in preference to lengthy and costly repossessions.

Fitch does not expect opportunistic applications, where borrowers test how the new procedure is implemented and whether the mediator can accurately assess their ability to pay, will be widespread. Not only do both the notary and creditors have to approve a restructuring plan, but if borrowers are found to have acted in bad faith, debt re-profiling and debt cancellation could be reversed. This can also happen if the economic situation of the borrower improves materially.

In addition, if the mediator cannot produce a viable restructuring plan, the case will be transferred to court to start an insolvency proceeding, which means liquidation of assets and potential debt forgiveness. Amounts of the mortgage loan left unpaid after the liquidation of the property are recognised as obligations to ordinary creditors, which Fitch says it has always ignored for additional recovery expectations.

RMBS

STACR yields mapped

STACR reference pools remain very clean, but the credit scores of the underlying borrowers are migrating lower. Against this backdrop, Morgan Stanley RMBS strategists examine how likely 3.5% of the STACR 2015-DN1 reference pool - equivalent to the B tranche detachment threshold - would be to experience a credit event.

In the inaugural STACR deal, over 88% of the reference mortgages had a FICO score of above 740. In the programme's first 2015 deal, that percentage had fallen to a shade over 65%. Concurrently, the concentration of borrowers with a FICO score of below 700 has risen from 6.1% to 13%.

The Morgan Stanley strategists note that the amount to which this slight loosening of the mortgage credit box matters to cumulative write-downs depends on which historical vintage is used as a proxy. They estimate that in 2000 the difference between STACR 2013-DN1 and 2015-DN1 would have led to only a 2bp increase in write-downs. In contrast, in 2007 the same difference in underlying borrowers would have led to a 67bp difference in realised write-downs through the deals' first six years.

Given that investors participated in the STACR 2015-DN1 first-loss piece, the strategists look to historical performance to estimate what realised loss-adjusted returns would have been. The collateral experience from 1999 through 2002 would have resulted in investors getting most of their principal back and realising loss-adjusted returns in the low-teens. However, from 2005 through 2007, the B tranche would have been written down quickly and returns would have been substantially negative.

In terms of mapping the loss-adjusted yields of the B tranche to prior vintage performance, the strategists suggest that the former scenario appears more appropriate, based on the early signals from loan performance - which would point to loss-adjusted returns in the low-teens.

RMBS

Mexican RMBS faces challenges

The Mexican RMBS market faces an uneven outlook for 2015 within its various sectors, which could limit growth in employment and household income levels, says S&P. Transactions from most sectors are expected to continue performing solidly but a good portion of the transactions from non-bank financial institutions (NBFIs) will be challenged in 2015 by Mexico's still-weak macroeconomic environment.

Notwithstanding these challenges, S&P expects ratings on deals from Infonavit and Fovissste - and most of its ratings on bank securitisations - to remain stable. However, it does expect to downgrade some classes from underperforming deals, especially from NBFIs.

In terms of new issuance, the agency expects this year's volume to remain depressed around last year's MXN20.05bn - which was a 33.8% decline from 2013 and the largest drop in the market's 11-year history. Similarly, the number of new transactions also fell during this period to four from six because Infonavit placed only one new transaction and banks did not return to the securitisation market.

S&P proposes that, despite modest projections, RMBS issuance could regain momentum in the future because construction has stabilised after years of decline. Other factors that could support expansion in this market include the new ability for borrowers to obtain a second mortgage loan after the first one is liquidated, combined Infonavit-Fovissste loans for couples, the gradual shift to peso-denominated loan originations from Infonavit and Fovissste and continued increases in average loan amounts.

RMBS

Servicer termination 'credit neutral'

Wells Fargo's recent decision to terminate two RMBS servicing agreements with Ocwen Loan Servicing (see SCI 2 March) is likely to have a neutral credit impact on these transactions, says Moody's. The agency pins this on strong participant incentive to implement an orderly transfer of servicing responsibilities from Ocwen to the desired successor servicer, Select Portfolio Servicing (SPS), as well as the capital structures of the two deals, which should mitigate risk through a strong interest shortfall reimbursement mechanism on the senior bonds.

Any possibility of cashflow disruption in the deals stems from features of the servicing agreement that entitle Ocwen to all fees and advances before the servicing transfer and uncertainty surrounding the timing and stability of the transfer. In the interest of an orderly transfer, Ocwen will either likely recoup its advances over time or the successor servicer will assume the advances from Ocwen and reimburse Ocwen outside of the trusts, minimising disruption to the bondholder payments.

Ocwen's termination was effective immediately upon notification, however it will likely perform certain servicing functions until the transfer is fully implemented. Moody's maintains a higher servicer quality assessment on SPS for subprime loans than it does on Ocwen, with the difference primarily driven by Ocwen's weaker servicing stability.

Moody's notes that the termination of the transactions sets a negative precedent for Ocwen. While most of its portfolio has not experienced servicer-quality-based EODs that would allow for forced transfer, around 695 transactions do have such triggers. Over the last several years, 482 of these deals experienced breaches, but the trustee generally did not seek termination in these instances. However, more recent breaches of thresholds and related scrutiny could trigger more trustee requests for direction from holders.