Contents

Secondary markets

Euro ABS/MBS stays positive

The positive tone in European ABS/MBS continued through to the end of last Friday and into today's open.

Another healthy BWIC calendar on Friday appears to have been comfortably absorbed by the market though no covers have yet been released for the large CDO liquidation list. Market tone remained positive across the board with Portuguese paper the main beneficiary.

Today attention shifts to dealer inventory where many of last week's auction bonds now reside as there is only a light BWIC schedule. In fact, there is currently only one BWIC circulating for trade today - a collection of mainly very small clips of prime RMBS due at 10:00 London time.

The eight line €5m list comprises: BERAB 2011-1 A1, GFUND 2014-1 A1, GRANM 2005-1 A5, GRANM 2005-2 A5, HERME 18 A1, STORM 2012-4 A1, STORM 2013-2 A2 and TENDE 2012-1 A. Four of the bonds have covered on PriceABS in the past three months, last doing so as follows: BERAB 2011-1 A1 at 99.513 on 26 January; GRANM 2005-1 A5 at 99.65 on 27 January; HERME 18 A1 at 100.245 on 13 February; and STORM 2012-4 A1 at 100.57 on 12 February.

Secondary markets

Gentle start for US CLOs

The US CLO secondary market is off to a gentle start this week.

After last week's sustained strong trading levels held spreads firm across vintages and the capital structure, the US CLO secondary market looks to be easing itself into what could be another busy week. The BWIC calendar is building strongly for tomorrow with six lists already on the block, but there is currently only one auction scheduled for today - a collection of 2.0 triple-Bs.

The nine line $18.25m list consists of: ECP 2013-5A C, two slices of HLA 2014-3A D, KEUKA 2013-1A D, KEUKA 2013-1X D, MVW 2013-1A D, WOODS 2013-10A D, WOODS 2014-11A D and WOODS 2014-11X D. Only one of the bonds has covered on PriceABS with a price in the past three months - WOODS 2013-10A D at 91 on 18 February.

Secondary markets

Euro ABS/MBS gets some momentum

The European secondary ABS/MBS market is being given some momentum again today thanks to primary activity and an uptick in BWICs.

"Supply has slowed down this week on BWICs after last week's high levels of activity, though there are a few now scheduled for today," says one trader. "At the same time, primary is really picking up, which is good to see and it's given the overall market some momentum."

An active primary market could distract from secondary trading, but the trader suggests that instead it is driving up secondary volumes as investors look to re-position into new deals. "Secondary levels are still strong across the board with increased activity around UK non-conforming and CMBS. The only disappointment continues to be around the size of ABSPP, but that hasn't had a major impact on spreads."

There are currently seven European ABS/MBS BWICs scheduled for today so far, albeit most are for small numbers of line items. They cover a reasonably broad spectrum of deal types and jurisdictions, including some autos, CMBS, Dutch prime, and Spanish mezz.

Secondary markets

US CLO rally keeps rolling

Despite a robust primary market and a pick-up in secondary activity from with eight BWICs circulating, the US CLO rally is continuing today.

"It's a very robust market with 2.0 paper in strong demand and we keep seeing new tights," says one trader. "This morning has been no different - for example, on the 9:00 double-B list, ALM 2013-7R²A D covered at about a 555DM and that's a new low for such a bond with an early 2016 reinvestment date."

The trader continues: "Mezz just keeps tightening. A lot of people were hoping for some price stability this week, but instead they're having to step up their bids."

Nevertheless, there is still some deal tiering, the trader says. "Deals with weaker managers or higher energy exposures will still get bids, but there isn't the same broad-based support for prices from dealers and asset managers as there is on stronger bonds."

The trader expects this week's BWIC calendar to continue to build and overall see a higher percentage of paper clear than last week. "Last week saw a high proportion of equity and there were a lot of DNTs; but it's a lot more about liabilities this week and more is likely to trade."

The bulk of today's BWIC calendar has already fallen due, but there is one large list still to come - a $100+m 15 line list of, inevitably, 2.0 mezz paper. Due at 13:00 New York time it consists of: ADML 2014-1A D1, ADML 2014-1A E1, BSMC 2013-1A C1, CAVY 2A C, ECP 2013-5A C, GALXY 2014-18A B, JFIN 2014-1A E, KVK 2014-3A B, OAKCL 2014-1A A2A, OCT16 2013-1A D, SLVS 2014-1A D, SUDSM 2013-1A C, WAMI 2014-1A D, WITEH 2014-1A C and WITEH 2014-9A B1.

Three of the bonds have covered with a price on PriceABS in the last three months  - OCT16 2013-1A D at 91.375 on 15 January; WAMI 2014-1A D at 93.68 on 18 February; and WITEH 2014-1A C at H93H on 28 January.

Secondary markets

Euro primary drives secondary

The European secondary securitisation markets are being driven by new issuance activity

"We're taking our direction from the primary market, but secondary tone remains positive," says one trader. "For example, the initial wider guidance on the latest Paragon deal weakened secondary buy-to-let, but the deal priced tighter and then tightened on the break yesterday causing secondary spreads in the sector to follow suit."

New issue activity may be taking centre stage, but it is generating two-way flows in ABS/MBS secondary. "Primary is driving secondary activity in terms of BWICs appearing as people make room for new paper and then we're seeing bits of trading on the follow," the trader says.

CLOs on the other hand are considerably quieter. However spreads are still holding firm as the market awaits news from the Fed meeting later today.

There are six European BWICs circulating for trade today so far covering core and peripheral ABS and RMBS as well as CMBS and CLOs. Perhaps the highlight is three large blocks of 2.0 CLO seniors due at 14:00 London time.

The list comprises €63m AVOCA 10X A, €74m CGMSE 2013-2X A-1 and €135m SPAUL 2X A. None of the bonds has covered on PriceABS before.

Secondary markets

US CMBS holds firm

The US non-agency CMBS secondary market is holding firm ahead of today's Federal Reserve statement.

"We've seen quite a few lists this morning ahead of the Fed," says one trader. "But that aside we're not seeing anything particularly unusual going through."

Overall, the CMBS market continues with the firm tone of recent weeks. "Secondary spreads are holding steady with a lot of bonds still continuously bid up and the new issue market is strong," the trader says.

The only notable discord appears in the 1.0 space. "There's a real gap opening up between money-good and non-money-good 1.0 paper," says the trader.

"Investors are increasingly skittish about bonds that could be credit impaired and they see that they can still get 500-600 over in the primary market with fewer headaches. So, they're moving toward new issue and leaving the legacy non-money-good deals behind."

Secondary markets

Euro secondary flows building

Two-way flows in the European secondary securitisation market are continuing to build this week.

"It's been very busy the last couple of days with a lot of BWICs and we're seeing flows building around that," says one trader. "There's been activity in peripherals, SMEs, UK non-conforming, CMBS - across the board really. Overall, the secondary market is continuing to take its direction from primary and secondary spreads are still on a positive tone."

Equally, the trader notes there are specific points of heightened activity and/or opportunity. "A gap is emerging between sterling and euro non-conforming/buy-to-let in primary and secondary is offering some value there. We've also seen CAPIM prices pickup now that it's ECB eligible."

Today's BWIC schedule currently sees another seven lists circulating for trade. Again, a range of assets are on offer, though RMBS dominates today, in mostly small to medium sizes.

Secondary markets

Liquidity challenges for US RMBS

The US non-agency RMBS secondary market continues to trade strongly, but there are potential challenges ahead as the market's liquidity is tested.

Today is a typical Thursday in a reasonably busy week with around $1bn in for the bid coming from a mix of hedge funds and money managers. Highlight of the week comes tomorrow at 10:00 New York time in the form of a 156 line $1.6bn re-REMIC BWIC, which is offered in three AON groups of assets - hybrids, fixed Alt-A and fixed prime.

"It's a bellwether list for this growing sector of the market," says one trader. "It faces challenges not only in terms of its size and more complex to price structures, but also because of the timing - a Friday when spring break and the national college basketball tournament are coming towards a close."

Further, the trader adds: "There have been a few re-REMIC lists already this week as sellers tried to get ahead of the big list. All in all, unlike the big GSE lists of less complex bonds, which typically drive a rally, this list could push us weaker if it doesn't trade well."

At the same time, activity could pick up again next week, but that may not be entirely positive, according to the trader. "This week we're still pretty much doing half days with all the trading happening in the morning, but next week everyone should be back and re-focused once spring break and the basketball are over and there are three large liquidation lists, of mostly subprime, already scheduled for the 24th, 25th and 26th. They're from large liquidators trying to close out client holdings by quarter end and others may well do the same, so the market may get more active again, but this supply could also test liquidity, which in subprime has been challenging for a little while already."

However, the trader says the overall market is still strong. "Paper is still trading well and we're not seeing many DNTs, but people now do want to be compensated for any potential macro risk, so bids are edging a little back."

Secondary markets

Euro secondary cools

After a busy week the European secondary securitisation markets saw a quieter day yesterday and today looks likely to cool still further.

Again, the bulk of yesterday's action surrounded BWICs most of which traded in line with expectations. Away from the lists it was major UK RMBS names that saw the most investor interest.

Today, the tone remains positive, but with a lighter auction calendar currently circulating, though the schedule is already building strongly for next week. There are two ABS/MBS lists on offer so far - a single line of CMBS and a collection of Dutch RMBS.

€2.075m of EURO 25X E is due at 13:00 London time. The bond has not traded with a price on PriceABS.

Then, at 15:00 there is the five line €69.9m Dutch triple-A list comprising: LUNET 2013-1 A2, STORM 2012-3 A2, STORM 2012-4 A2, STORM 2013-2 A2 and STORM 2014-3 A1. Four of the bonds have covered on PriceABS in the past three months, last doing so as follows: LUNET 2013-1 A2 at 103.165 on 3 February; STORM 2012-3 A2 at 103.065 on 10 March; STORM 2012-4 A2 at 102.611 on 17 March; and STORM 2013-2 A2 at 101.903 on 17 March.

There are also two European CLO BWICs scheduled for today - a €7.891m original face 1.0 double-B list and a single €5m line of 2.0 triple-B. The former is due at 13:30 and consists of GSCP 2006-3A E, HEC 2006-CA E and NWEST III-X E; while the latter involves CGMSE 2013-1X D1 at 14:00.

None of the CLOs has traded on PriceABS before.

Secondary markets

US CLOs quieten further

US CLO secondary market activity is easing further today after a distracting week.

"It's been a moderate pace most of the week and it's relatively quiet today," says one trader. "The market has been a little distracted first in anticipation of the Fed and then by new issuance activity."

Nevertheless, secondary spreads are holding firm. "In particular, double-Bs continue to trade well," the trader notes.

There are currently only two small US CLO BWICs scheduled for today. Both are due at 10:00 New York time and both involve triple-Bs.

One list is single $6.05m line of GOLD6 2012-6A D. The bond hasn't traded on PriceABS in the last three months but is being talked with a 100-handle.

The other list comprises $4m CIFC 2014-3A D, $3m KKR 10 D and $4.75m MCLO 2014-6A C. Only CIFC 2014-3A D has covered with a price on PriceABS in the last three months, doing so at M90s on 3 March. The list is being talked in the LM90s-M90s range.

ABS

SLABS forbearance eyed

The Obama Administration last week released a Presidential Memorandum directing the US Department of Education and other federal agencies to do more to help borrowers with their student loan repayments. Structured product strategists at Wells Fargo suggest that the proposals are unlikely to have a significant effect on expected student loan ABS cashflows or prepayment rates, unless forbearance policy changes are enacted.

The proposed 'Student Aid Bill of Rights' states that every student: deserves access to a quality, affordable education at a college that is cutting costs and increasing learning; should be able to access the resources needed to pay for college; and has the right to an affordable repayment plan and quality customer service, reliable information and fair treatment, even if they struggle to repay their loans. The plan focuses primarily on increasing resources for students to pay for college, repaying existing debts and on the servicing process.

According to the Wells Fargo strategists, the most noteworthy facet of the proposal is a reference to possible changes to the treatment of loans in bankruptcy proceedings. "The prospect that student loans might become dischargeable in bankruptcy has been an ongoing concern of investors in student loan ABS. However, federal legislation would need to be passed for any change in bankruptcy treatment to become effective," they observe.

The memo provided no additional details or even a timetable for reconsidering the current approach to student loans in bankruptcy. Nevertheless, the strategists note that introducing bankruptcy dischargability into the policy discussion with regard to government-issued loans appears to be a significant change in outlook.

For FFELP student loan ABS, the key credit issue would seem to be a continuation of the Department of Education guarantee in the event of borrower default. More defaults could nonetheless alter the prepayment profile of FFELP student loan ABS. A change in bankruptcy policy would likely have a more meaningful effect on private student loan ABS.

Also last week, Senator Dick Durbin introduced a bill in the Senate that would allow private student loans to be discharged in bankruptcy. The strategists point out that similar bills have been introduced in the past by Senator Durbin without much success.

"Although the likelihood of ultimate passage may be low, this is the sort of headline risk that has the potential to weigh on the trading of student loan ABS," they add.

The White House memo indicates that over 70% of students earning a bachelor's degree graduate with debt, which averages US$28,400 at public and non-profit colleges. The five states with the most student loans outstanding are California, Texas, New York, Florida and Pennsylvania. However, based on the average amount of student loans outstanding per borrower, the District of Columbia, 'other' (US territories and foreign countries where eligible borrowers reside), Georgia, Maryland and Virginia comprise the top-five states.

CS

Structured Finance

SCI Start the Week - 16 March

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

Pipeline
The pipeline saw a mix of new entrants last week. Of the newly-announced deals, six ABS, four CMBS, three RMBS and two ILS remained by Friday.

The ABS entrants comprised three auto transactions - US$1.61bn Ford Credit Auto Owner Trust 2015-A, US$400m Prestige Auto Receivables Trust 2015-1 and US$187.21m United Auto Credit Securitization Trust 2015-1 - as well as the US$250m Sierra Timeshare 2015-1 Receivables Funding and Volta III. US$580m BBCMS Trust 2015-SLP, US$280m BBCMS Trust 2015-VFM, US$210m CHCMT 2015-SSHP and US$1.3bn COMM 2015-CCRE22 accounted for the CMBS.

The newly-announced RMBS consisted of £258m Celeste 2015-1, Fosse 2015-1 and US$294m Agate Bay Mortgage Trust 2015-2. The US$75m Manatee Re Series 2015-1 and US$130m Sanders Re series 2015-1 catastrophe bonds rounded out the pipeline entrants.

Pricings
ABS dominated the primary market last week, with nine deals pricing. The remainder of the prints included six RMBS and three CLOs.

The majority of the ABS new issues were auto-related: US$219.3m American Credit Acceptance Receivables Trust 2015-1, A$500m Crusade ABS Series 2015-1, US$712m Drive Auto Receivables Trust 2015-A, US$452.62m GreatAmerica Leasing Receivables Funding Series 2015-1, US$259.4m OSCAR US 2015-1, US$350m SMART Trust 2015-1US and US$816.25m Volvo Financial Equipment Series 2015-1. The US$722m Nelnet Student Loan Trust 2015-2 and US$750m Synchrony Credit Card Master Note Trust 2015-1 also priced.

The RMBS prints comprised US$372.4m JPMMT 2015-IVR², A$1610m National RMBS Trust 2015-1, £370m RMS 28, A$372m RESIMAC Bastille Trust Series 2015-1NC, A$900m Series 2015-1 REDS Trust and €1.9bn STORM 2015-I. Finally, the US$569.93m Anchorage Capital CLO 6, US$512.4m ECP CLO 2015-7 and US$496.1m NewStar Commercial Loan Funding 2015-1 accounted for the CLO pricings.

Deal news
• 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 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.
• 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.
• SCIO Capital has placed 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.
• 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.

Regulatory update
• US regulators last month added new guidance to their list of 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.
• 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.
• 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.
• 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 said to be credit positive for lenders of loans against property (LAPs). RMBS backed by LAPs originated by these NBFCs would also benefit from speedier loan recovery.

Deals added to the SCI New Issuance database last week:
ACIS CLO 2015-6; Aurium CLO I; Barclays Dryrock Issuance Trust Series 2015-1; Battalion CLO VIII; BlueMountain CLO 2015-1; Cabela's Credit Card Master Note Trust series 2015-I; California Republic Auto Receivables Trust 2015-1; Flagship Credit Auto Trust 2015-1; Golden Credit Card Trust 2015-1; GoldenTree Loan Opportunities XI; Hyundai Auto Lease Securitization Trust 2015-A; John Deere Owner Trust 2015; Motel 6 Trust 2015-MTL6; Sound Point CLO VIII; Steele Creek CLO 2015-1; Voya CLO 2015-1; Westlake Automobile Receivables Trust 2015-1; WFCM 2015-C27.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; BACM 2006-5; CMLT 2008-LS1; CSMC 2006-C4 & CSMC 2006-C5; CWCI 2007-C2; DECO 2007-C4; EPICP BROD; GCCFC 2005-GG5; GCCFC 2007-GG9; JPMCC 2005-LDP5; JPMCC 2006-LDP8; JPMCC 2006-LDP9; MSC 2007-HQ11; MSC 2007-HQ12; MSC 2007-IQ13; MSC 2011-C1, COMM 2010-C1 & GSMS 2010-C1; NorthStar 2012-1; TITN 2007-1; TMAN 6; WFCM 2010-C1; WFCM 2014-LC16.

Structured Finance

Leads hired for multi-asset push

Assenagon has opened a new office in Frankfurt to establish its new multi-asset business. The business will be run by Thomas Romig, head of multi-asset, and Thomas Handte, senior portfolio manager.

Prior to joining Assenagon, Romig and Handte worked together at Union Investment, where Romig was head of multi-asset management. The new business will complement the existing Assenagon credit and equities/equity derivatives activities.

Structured Finance

MBO for fund services unit

TMF Custom House management is set to buy back the majority of TMF Group's holdings in the Custom House Fund Services business just over a year after it was sold (SCI 18 February). Subject to regulatory approval, the business will be run as an independent, stand-alone entity by Mark Hedderman, Custom House ceo, and James Osborne, a Custom House director. TMF Group will retain a minority shareholding.

The deal perimeter includes all of TMF Group's fund services operations in eight locations - Australia, Singapore, Hong Kong, Bulgaria, Malta, the Netherlands, Ireland and the US. However, TMF Fund Services Luxembourg will remain with TMF Group.

Structured Finance

Energy pro tapped for SF role

SolarCity has hired Marco Krapels as svp of structured finance and strategy. He will report to cfo Brad Buss and oversee the company's project financing division.

Krapels arrives from Pegasus Capital Advisors, where he was a partner. Prior to that, he was evp with Rabobank, managing various divisions in the bank, including its European corporate debt capital markets group, derivative sales group and renewable energy finance division in California.

Structured Finance

Asset manager makes cfo shake-up

Ares Management has hired Michael McFerran as evp, cfo and treasurer. Daniel Nguyen, Ares Management's current cfo and treasurer, will remain as cfo of the firm's private equity and tradable credit groups and will continue his involvement with its M&A activities.

Before joining Ares Management, McFerran was md at Kohlberg Kravis Roberts, where he served as cfo of the firm's credit business, as well as being coo and cfo of KKR Financial Holdings. Prior to this, McFerran was at Ernst & Young in its financial services industry practice, where he specialised in providing assurance and advisory services to financial services firms.

The cfo roles for each of the other two Ares investment groups - direct lending and real estate - will continue to be filled by Penni Roll and Tae-Sik Yoon respectively. In addition, Roll will continue as cfo of Ares Capital and Yoon will continue as cfo of Ares Commercial Real Estate.

Structured Finance

Energy firm names SF head

Brad Sterley has joined Terraform Global as head of structured finance. He arrives from Standard Chartered, where his most recent role was as global head of the bank's clean energy project finance group. Sterley was also an associate director for ANZ Investment Bank, where he worked in project and structured finance.

Structured Finance

Gleacher investigation disclosed

Gleacher & Company's board has determined to make a second liquidating distribution to company stockholders in the amount of US$0.50 per share of its common stock, which is approximately US$3.1m in the aggregate. The reduced distribution mainly reflects the company's evaluation of matters surrounding companion subpoenas issued by the US SEC and CFTC.

In their subpoenas, the regulators primarily seek information relating to the activities of a former employee in Gleacher's now-defunct trading operations, although the company believes that the inquiries are part of a broader investigation by regulators relating to trading and other activities of representatives of multiple financial institutions. To date, Gleacher believes that the regulatory investigations are in their preliminary stages and it has not been informed that it engaged in any improper conduct.

The second liquidating distribution is expected to be paid on or about 10 April. The firm expects to make one or more additional distributions to stockholders, but is unable to predict the amount or timing of these. Factors that it says could affect future distributions include the amount of expenses incurred by the firm and the timing of the resolution of matters for which it has established reserves.

The company's current estimated range of aggregate future recoveries in its liquidation is between US$32.8m and US$55.6m (US$5.31 and US$8.99 per share). This is compared to US$36.9m and US$57.2m (US$5.97 and US$9.25 per share) projected in the firm's unaudited financial statements issued on 16 December.

Structured Finance

SF vet poached for Italian expansion

Stormharbour Securities has hired Michele Rolleri as a partner and md. He will focus on expanding the firm's presence in the Italian market, which will include advising on securitisation.

Before joining Stormharbour, Rolleri was a board member and co-head of capital market commission at Assiom Forex. Prior to this, he was managing partner for Eidos, where he specialised in structured finance and derivatives. Rolleri has also held senior roles at Credit Agricole, UniCredit and Banco di Sicilia.

CLOs

CLO purchasing powered

Volta Finance has entered into a US$30m repurchase agreement with SG, under which the company has the facility to borrow US$30m that will be collateralised against some of its US dollar CLO assets. The proceeds will principally be used to purchase debt tranches of CLOs.

The company intends to increase the amount available under similar repo transactions by a further US$30m in the future, depending on market conditions.

CLOs

Internal transfer for Euro CLOs

MAN GLG Credit Advisers is set to assign, by way of novation deeds, collateral management responsibilities for three European CLOs to MAN Investments (CH). The affected transactions are RMF Euro CDO IV and V, as well as CLAVOS Euro CDO.

The novation deeds have received the consent from all parties to the documents. Moody's confirms that the move will not cause the current ratings of the notes to be reduced or withdrawn.

ABS

Low oil prices to benefit ABS

Moody's expects the dramatic drop in oil prices since 2014 to benefit most asset classes in the US ABS market, though it will have a negative impact on some sectors. In general, cheaper gasoline will put more money in consumers' pockets, providing a broad, if slight, uplift to securitisations backed by unsecured consumer receivables such as student loans and credit cards.

Lower oil prices are broadly credit positive for unsecured consumer credit securitisations because consumers will have more money available to pay their debt obligations. The average US household will spend about US$550 less on gas in 2015 than in 2014, according to the US Energy Information Administration, as every one cent decline per gallon in gasoline prices frees up US$1.1bn in the US economy over the course of a year.

This could reinforce several positive trends for US consumers, including low unemployment and low overall inflation, making gains in household real wages likely. Together, Moody's says these factors will help spur consumer spending and improve consumers' financial health.

For auto-ABS, consumers will have more money in their wallets, which will help them keep up their payment obligations on auto loans and leases, thus likely leading to a decline for in default rates for subprime borrowers. However, a shift in demand towards less fuel-efficient vehicles - such as trucks and SUVs - in a low oil price environment could have a negative effect on several auto-related sectors, if gas prices jump significantly.

Default rates could tick higher if oil prices jump significantly and some consumers can no longer afford to fill up the gas tanks of these vehicles. More significantly for auto lease transactions, a shift in vehicle mix in the securitisation pools and a resulting spike in oil prices could result in declines in asset values when vehicles are returned at the end of their leases.

For dealer floorplan ABS, higher sales of new vehicles spurred by rising consumer and corporate disposable income will generally increase payment rates and lower default risk. However, a shift to less fuel-efficient trucks and SUVs in a low oil price environment could slow payment rates temporarily if oil prices rise rapidly and dealers have to sell off their stock of these vehicles when demand for them drops.

For commercial and esoteric ABS, the aircraft ABS sectors will benefit from increased profits to their lessee bases resulting from lower fuel costs. Moody's forecasts that airlines will have operating margins of 12%-14% in 2015, up from its earlier forecast of 8.5%-9.5%, as lessees benefit from reduced operating costs. Container ABS lessees will also benefit, as fuel accounts for 20%-25% of their operating costs.

Contrastingly, lower oil prices will have a negative effect on rail car ABS, as weakening demand for tank cars to carry crude oil - coupled with pending federal regulations requiring retrofits of these tank cars - could reduce revenue while increasing expenses to railcar ABS trusts. In general, however, freight diversity and strong demand for other non-oil-related freight categories will help buffer the rail sector against any negative effects of oil price declines.

Moody's adds that lower oil prices will have a negative effect on select deals in the equipment ABS sector as a result of exposure to the oil industry. This includes fleet ABS, where exposure to the oil and gas industry accounts for up to 20% of collateral pools.

ABS

Fee cap impact anticipated

The European Parliament last week voted to cap interchange fees in credit and debit card transactions across the EU. Since the move is the culmination of long-standing regulatory pressure, Fitch says it has already been anticipated in the agency's UK credit card ABS ratings.

Interchange fees will be capped at 0.3% of the transaction value for consumer credit cards and 0.2% for consumer debit cards. Fitch suggests that the effect will be felt most at banks with operations concentrated in the EU that issue payment cards on the Visa and MasterCard networks.

The impact will vary depending on business models, as some banks rely more than others on transactions to drive revenue relative to loan balances. To maintain profitability targets, card issuers could introduce other fees - such as annual membership or account maintenance fees - or reduce benefits, such as reward systems, potentially making fee income more stable but reducing monthly payment rates. Because the interchange fee caps have been widely anticipated and will come into force towards the end of this year, Fitch believes that issuers have had time to prepare for the impact on revenue.

Data from Fitch-rated UK credit card master trusts shows that interchange fees contribute much less than interest income to portfolio yield - typically at around 10%-15% - which is unchanged since the caps were originally proposed. The exception is Tesco Bank's Delamare master trust, where the figure is around 35%-40%, reflecting the high proportion of transactors in the trust.

Regulatory pressure on interchange fees is reflected in Fitch's criteria in that it calculates an adjusted yield that considers only 50% of the interchange and fee income. The now-agreed interchange caps slightly exceed the 50% reduction, but the agency's analysis found that this is not sufficient to have an impact on its ratings. It expects to maintain the 50% haircut to interchange and other fee income specified in the criteria for UK trusts, as regulatory and competitive pressures are likely to continue.

Fitch expects the asset performance of UK credit card trusts to be stable in 2015, with gross yield and payment rates to remain largely unchanged. Charge-offs are expected to remain stable at around their historical lows, reflecting the solid prospects for the UK economy.

ABS

Decentralised servicing presents risks

Decentralised servicing models in consumer loan ABS increase operational and performance risk in the event that the servicer can no longer perform its function, says Moody's. However, the agency suggests that these models are effective at originating loans, due to the higher level of personal interaction between the branch and the borrower.

When operating smoothly, decentralised servicing models can help lower defaults and delinquencies in consumer loans because of the personalised service and rapport with the borrower, according to Moody's. However, performing servicing functions - such as collections and billing at individual locations - increases the risk of payment disruption in the event of branch closure or company bankruptcy.

"Branch closures can negatively affect borrowers' ability and willingness to repay when they can no longer make their loan payments at the local branch and have to change their payment behaviour," says Moody's vp and senior analyst Giyora Eiger.

In addition, there is a heightened risk of missing loan payments during the transition to a back-up servicer in a decentralised model. "The branch needs to maintain a local presence and provide an orderly, gradual transition to lower the chances of losing payments, which can increase losses," adds Eiger.

Loans originated by lenders that use a decentralised model require careful case-by-case analysis. This is because their policies for recognition of charge-offs and changing the delinquency status of delinquent accounts are not consistent with those of the Federal Financial Institutions Examination Council.

ABS

French ABS 'resilient'

Fitch says that French ABS transactions have shown strong resilience, despite a weak economic environment. This is due to a protective French consumer legislative and regulatory environment and strong structural features that characterise French consumer ABS transactions.

The last consumer protection measures introduced by the Lagarde law and the Hamon law aimed to limit risk of over-indebtedness and enhance borrowers' affordability. Further, the short asset maturities and the high and stable prepayment levels in French ABS result in rapid note amortisation and consequently rapid credit enhancement build-up. This also implies that the most senior notes benefit from an adequate level of credit enhancement at issue and, due to the rapid and sequential repayment, the notes are protected against substantial economic deterioration.

Fitch notes that the global economic recession since 2009 has had a clear impact on the performance of consumer loans, as seen in higher delinquency and default levels, despite a fairly cautious banking sector. The agency believes the unemployment increase in recent years has affected borrowers and will continue to pose a threat to performance. The agency also expects defaults to remain above pre-crisis levels over the next two years, though below 2009/2010 peaks.

Nevertheless, given the protective consumer environment and structural strengths, Fitch expects that only a substantial further deterioration in performance would have an impact on the ratings of French consumer ABS transactions.

ABS

Chinese auto defaults 'very low'

Fitch says that the cumulative default levels of Chinese auto loan ABS transactions in January remain very low at between 0.07% and 0.5%, based on trustee reports for the collection period. While all programmes are performing within expectations, a substantial divergence in performance can be observed between different transactions.

Fitch believes a growth slow-down in the Chinese economy - which hastened in 2H14, with GDP growth ending the year at 7.4% against the above-9% average of 1989 to 2014 - dulled the performance of 2014 transactions. However, the agency does not expect the weaker performance of recent transactions to affect current ratings.

Structured Finance

Oil prices spark positive outlook

The outlook is largely positive for global securitisation and covered bond performance if oil prices continue to hover around US$50 per barrel, Fitch observes. However, the agency cautions that some sectors and regions could be susceptible to performance declines over time.

With oil prices falling more than 50% since the middle of last year, lower gas prices and heating oil costs have made it easier for households to make debt service payments. "Consumers will benefit from lower oil and gas related expenses, which should translate into a mild improvement in arrears on their financial obligations," says Fitch md Kevin Duignan.

In particular, consumer assets like credit cards, auto loans and residential mortgages could all benefit. However, this benefit may be diluted in some regions by the impact of currency movements upon oil import prices.

Conversely, some asset types and regions could see a modest negative impact from lower oil prices. "Commercial and residential mortgage assets in securitisations with high exposure to Texas and Alberta, and covered bond collateral pools with exposure to parts of Norway, for example, would be negatively impacted by continued low oil prices," says Fitch director George Masek. "Unemployment is likely to increase in areas that rely heavily on the oil-industry, which could translate into modestly higher delinquencies and losses in transactions with high exposure to these areas."

Over time, Fitch does not expect significant rating movement on structured finance and covered bond ratings in either direction exclusively in relation to low oil prices. Their positive influence alone on collateral performance would not be enough to lead to rating upgrades. Additionally, the agency expects only a small number of idiosyncratic downgrades of deals with sizeable concentrations of oil-exposed collateral, or those with ratings linkage to oil-exposed transaction parties.

Structured Finance

SF upgrades trump downgrades

Global structured finance (SF) upgrades exceeded downgrades in 2014 for the first time since the financial crisis, says Fitch. Across the agency's universe, 12% of ratings improved and 7% were downgraded. The triple-A level exhibited the most stability, with almost 99% of ratings either remaining the same or paying off in full.

The number of CMBS downgrades decreased sharply in 2014, retreating to levels not seen since before the financial crisis. A majority of the downgrades that did occur last year were legacy multiborrower deals in the US and Germany. In addition, European CMBS transactions have suffered, as many loans have repaid and outstanding loans are backed by lower quality collateral with weaker refinancing prospects.

RMBS ratings also improved for the second consecutive year. Fitch attributes this to the strength of the US and UK residential markets and improvements in underlying collateral performance.

In the US, most peak-vintage legacy RMBS sectors have seen steady performance improvement over the last several years, reflecting the recovery in the housing and job markets and positive selection among remaining borrowers. US non-prime saw the most improved performance and received the majority of the US RMBS upgrades in 2014.

Fitch has a stable outlook for US RMBS in 2015, reflecting moderate home price growth and stable to improving collateral performance. EMEA RMBS also improved on the recovery in the housing markets and a rise in credit enhancement levels.

ABS continued to be robust, as upgrades accounted for 8% of the rating actions, while downgrades represented just 3%. Consumer ABS ratings continued to be particularly stable, with the majority of downgrades coming from the tobacco sector, which was weighed down by non-settling states and ongoing underperformance relative to expectations.

Finally, the structured credit sector experienced the lowest level of credit deterioration in a decade, as upgrades outstripped downgrades by more than a two-to-one margin in 2014. SME CDO transactions saw the most improvement, benefitting from the upwards revision of the sovereign-related cap on SF ratings in Spain and Italy.

Structured Finance

Counterparty risk assessments applied

Moody's has revised a number of its methodologies - including several cross-sector, primary and secondary rating methodologies for structured finance (SF) securities - to reflect the incorporation of bank counterparty risk (CR) assessments in the analysis of certain transactions. The move follows an RFC on the proposals issued in January (SCI 8 January).

CR assessments constitute Moody's opinion of probability of default on senior bank obligations and counterparty commitments other than debt and deposit instruments. Senior bank obligations and counterparty commitments include letters of credit, liquidity facilities, guarantees, swap agreements and other contractual obligations. The assessment also takes into account the issuer's standalone strength, as well as the likelihood of affiliate and government support in the event of need, reflecting the anticipated seniority of counterparty obligations in the liabilities hierarchy.

In transactions that are rated based on the its credit substitution approach for credit-backed, insured and guaranteed debts, Moody's will use the CR assessment of a bank providing contractual support to third-party obligations as an input to reflect both the long-term and short-term payment risk of the bank. In transactions supported by conditional liquidity facilities, the agency will use CR assessments to reflect short-term payment risk of banks providing liquidity support.

The agency says the position of the CR assessment relative to rated instruments will depend on a bank's jurisdiction. In the EU, Norway and Liechtenstein, the assessment will generally be at least as high as the deposit rating, while in Switzerland it will generally be at least as high as the senior unsecured debt rating.

For US banks subject to Title I under the Dodd-Frank Act, the CR assessment will generally be one notch higher than the baseline credit assessment (BCA). For those subject to Title II under the act, it will generally be at least as high as the senior unsecured debt rating.

Outside operational resolution regimes, the assessment will generally be no lower than the bank deposit rating. In all cases, the assessment will be subject to a cap of the lower of the local currency deposit ceiling or the local government bond rating plus one notch, or plus two notches where the adjusted BCA is already above the government bond rating.

The agency is set to undertake rating reviews relating to the changes. The updates to the SF rating methodologies will generally have a positive rating impact on SF transactions and Moody's expects to conclude the majority of the reviews in 1H15.

CDO

Slight decline for Trups defaults

The number of US bank Trups CDO combined defaults and deferrals marginally decreased to 20.7% at end-February, according to Fitch's latest index results for the sector. This compares with 20.8% at end-January.

In February, three banks representing US$16m of notional in two CDOs cured. Additionally, one previously cured issuer representing US$5m of notional in one CDO redeemed its Trups.

There were no new deferrals or defaults last month. A defaulted bank with total notional of US$15m has been exchanged with preferred stock in one Trups CDO and subsequently the notional has been removed from the index.

Across 78 Fitch-rated Trups CDOs, 233 defaulted bank issuers remain in the portfolio, representing approximately US$5.9bn of collateral. Of these issuers, 164 are currently deferring interest payments on US$1.9bn of collateral.

CDS

CDS trade counts jump

The average daily trade counts and notional volume in CDS increased during 2014, according to ISDA. Swap execution facility (SEF) volumes also increased during the year, while off-venue volumes decreased.

Average daily trade counts grew by 12.2%, from 754 trades per day during 2013 to 846 trades during 2014, while average daily notional volume grew from US$28.5bn in 2013 to US$30.5bn in 2014. However, the daily average size of a CDS index transaction decreased slightly from US$37.8m in 2013 to US$36.1m in 2014.

Cleared CDS index transactions continued to grow as a percentage of total volume during 2014. Average daily cleared trade counts and cleared notional volume accounted for 76.2% and 74.7% of the total volume in 2014, versus 35.5% and 37.7% in 2013.

Finally, average daily SEF trade counts accounted for 67.8% of total CDS index trading in 2014, while the SEF average daily notional volume comprised 62.4% of the total.

CDS

Scandal spurs record widening

Five-year CDS on Petroleo Brasileiro (Petrobras) widened by 24% last week to their widest levels ever, according to Fitch Solutions. CDS liquidity for Petrobras has also increased, with contracts currently trading within the second global percentile.

"CDS widening for Petrobras likely reflects market concerns stemming from the continued delays in publishing its audited fiscal results amid money laundering scandals surrounding the company's contracting practices," says Fitch director Diana Allmendinger.

CDS

CDX rolls to higher quality

The Markit CDX IG index is set to roll to series 24 tomorrow (20 March), with four name changes from IG23. Morgan Stanley credit strategists note that the names removed were of meaningfully lower credit quality and had been downgraded to high yield, meaning that on average IG24 should have higher quality and tighter spreads than its predecessor.

At the index roll, Avon Products, Genworth Holdings, MDC Holdings and Safeway will be replaced by Apache Corporation, Canadian Natural Resources, Domtar Corporation and Enbridge. The Morgan Stanley strategists anticipate that CDX IG24 will initiate trading flat to 2bp wider than CDX IG23.

"The impact of spread tightening from the addition of the higher quality names going into the new index was offset by curve shape. Curve shape in today's market remains relatively steep and this six-month maturity extension was worth around 8bp," they explain.

At the sector level, the composition of CDX IG24 is notably different with the addition of energy, materials and utilities names. Three of the names removed are in the consumer sector, with one in financials. However, even after this change, CDX IG still has a significantly higher proportion of consumer names compared to the broader investment grade cash index.

CLOs

Mezz CLO fund launched

AXA Investment Managers has launched a short maturity CLO opportunity fund. The fund aims to offer investors a net total return of 4% to 6% by investing in the vintage US CLO mezzanine universe, while maintaining an investment grade average rating.

Christophe Fritsch, co-head of securitised and structured assets and head of structuring at AXA IM, says: "The fund was immediately popular with a wide range of clients, including family offices, pension funds and insurance companies, and we expect to reach US$250m in the short term."

The fund offers monthly liquidity and units are available in euros and US dollars. It is currently available for distribution to eligible investors in the UK, France, Belgium, Italy, Luxembourg and the Netherlands.

CLOs

CLO index expands

JPMorgan has introduced a post-crisis single-B series to its CLOIE index. The bank estimates that this index surveys 80% of the US single-B universe and currently contains pricing information for US$2.2bn in original notional from 221 separate single-B tranches.

The single-B CLO sub-sector performed well in 2012 and 2013, returning 41.3% and 17.1% respectively, according to the index. However, returns underperformed in 2014 - returning 1.3% - largely due to energy-related credit stress in the second half of the year.

So far in 2015, US CLO single-B tranches appear to have underperformed double-A to double-B post-crisis tranches, given similar returns but higher risk. Single-B yields in the CLOIE index currently stand at 10.3%, with DMs at 822bp.

CMBS

CMBS delinquencies edge up

US CMBS delinquencies increased by 5bp in February to 4.77% from 4.72% a month earlier, according to Fitch's latest index results for the sector, due to a US$4.9bn decrease in the agency's rated universe. However, the dollar balance of late-pays was virtually unchanged at US$17.9bn.

New CMBS delinquencies finished February at US$327m, up slightly from US$274m in January, but still near post-recession lows. Resolutions slightly outpaced new delinquencies, finishing the month at US$357m.

Fitch-rated new issuance volume of US$200m for one transaction was far outpaced by US$5.1bn in portfolio run-off. However, the denominator is poised to increase next month due to a high volume of recent Fitch-rated new issuance of five transactions totalling US$6.2bn.

The February run-off was led by the refinance and pay-off of Motel 6 Trust 2012-MTL6. The loan was open to prepay without penalty - subject to certain conditions - on or after its prepayment release date of 13 November 2014.

Last month's run-off was also fuelled by the resolution of the US$348m AmericasMart loan, securitised in WBCMT 2005-C19 and WBCMT 2005-C20. The loan was defeased in November 2013 (see SCI's CMBS loan events database) and paid off at its first open date of 11 February, ahead of its 11 May maturity.

In addition, the US$113.5m Civica Office Commons (LBUBS 2005-C2) paid off on 11 February - its first open date. The loan had a maturity date of 11 April. Fitch adds that the three aforementioned loans were all current at the time of their pay-offs.

Current and previous delinquency rates by property type are: hotel from 6.15% in January to 6.36% in February; retail unchanged at 5.39%; multifamily at 5.23% from 5.21%; industrial at 5.2% from 5.4%; office at 5.08% from 5%; mixed use at 3.05% from 2.86%; and other at 1.09% from 10.08%. By transaction type, delinquency rates as of February were: large loan floaters at 16.38%, with 12 loans worth US$592m; conduit at 5.59%, with 1,040 loans worth US$17.3bn; small balance at 5.51%, with 25 loans worth US$35m; seasoned at 2.29%, with six loans worth US$13m; miscellaneous/other at 0.03%, with one loan worth US$309,000; and Freddie Mac at 0.02%, with one loan worth US$9m.

CMBS

Balloon date pay-offs dip

The percentage of US CMBS loans paying off on their balloon date fell in February, after a sharp rise in January and a large dip in December, according to Trepp. The latest reading is about 12 points lower than the January rate of 71.9%.

The February rate stands at 59.5%, which is below the 12-month moving average of 65.4%. The highest rate in the last five years was in November 2013, when pay-offs totalled 81.3%.

By loan count as opposed to balance, 67.6% of loans paid off in February. On this basis, the pay-off rate was down by over three points from January's 70.9% level. The 12-month rolling average by loan count is now 69.9%.

Insurance-linked securities

ILS gets Budget boost

In its 2015 Budget, the UK government announced that it will work with the industry and regulators to develop a new competitive corporate and tax structure for allowing insurance-linked securities to be domiciled in the UK. The move comes after the government said in the Autumn Statement 2014 that it would explore options to attract more reinsurance business to the UK. The Budget describes ILS as being a "key growth opportunity" for the capital markets, with the government expecting the UK to build upon its position as a "world leader in the global insurance market".

Insurance-linked securities

IG rating for Kizuna cat bond

S&P has preliminarily assigned its first investment grade rating - of triple-B minus - to a property-related natural catastrophe bond since 2008. Arranged by Aon Benfield Securities, the Kizuna Re II series 2015-1 transaction covers losses resulting from Japanese earthquakes, including fire following, tsunamis and volcanic eruption.

S&P says the rating is based on the lowest of the natural catastrophe risk factor (triple-B minus), the ratings on the assets in the collateral account (triple-A) and its rating on ceding insurer Tokio Marine & Nichido Fire Insurance Co. "To assign the nat cat risk factor, we applied an adjustment to the time-dependent and time-independent results to reflect the possibility that the probability of attachment may be greater than the models had anticipated," explains S&P credit analyst Gary Martucci.

Typically, the agency uses the more conservative of these results, but there was a large difference between the two for this particular transaction. "In year one, there was more than a 10-fold increase in the estimated probability of attachment by moving from time-dependent to time-independent modelling - 2.1bp versus 21.4bp. This large difference seems to result at least in part from the recent Tohoku earthquake. The time-dependent result is lower because such an event decreases the amount of stress on a fault, making subsequent events less likely," Martucci adds.

The deal has reportedly been upsized to Y35bn from Y25bn, with the class A notes talked at 2% above the return of the assets in the collateral account.

Risk Management

Margin framework revised

The Basel Committee and IOSCO have released revisions to the framework for margin requirements for non-centrally cleared derivatives. The organisations have agreed to delay the implementation of requirements to exchange both initial margin and variation margin by nine months and adopt a phase-in arrangement for the requirement to exchange variation margin.

The beginning of the phase-in period for collecting and posting initial margin on non-centrally cleared trades has been delayed from 1 December 2015 to 1 September 2016, while the six-month phase-in of the requirement to exchange variation margin will begin on 1 September 2016. The organisations say they will liaise with industry participants as they continue their work to develop initial margin models that will be required to comply with the margin requirements. This engagement will help ensure that emerging quantitative initial margin models are consistent with the framework, but will not provide an explicit review or approval of any initial margin model.

ISDA has welcomed the start date extension for non-cleared derivatives margin rules. "Firms have been working hard to prepare for the rules, but the changes would have been all but impossible to complete by the original December 2015 effective date - particularly as final rules have not yet been published by US, European and Japanese authorities," says Scott O'Malia, ISDA ceo.

The association says the new rules will require firms to make significant changes to their infrastructure, technology, processes and documentation. "While still challenging without final rules, the revised implementation date should give firms additional time to develop, implement and test new systems," it adds.

RMBS

IOS convexity examined

Markit has launched two new IOS indices, referencing FN pools issued in 2014 for the 3.5 and 4 coupons. Overall, the IOS 3.5 of 2014 are expected to demonstrate worse convexity than the IOS 3.5 of 2013.

To evaluate the new indices, Barclays Capital RMBS analysts compare the 3.5s of 2014 with the existing index for 3.5s issued in 2013. They note that the majority of 3.5s were originated in 2H14, when rates drifted lower, and so the index comprises pristine credit borrowers who were able to command a lower-than-prevailing rate.

As a result, the 3.5s 2014 cohort shows much higher FICO scores and loan size than the 2013 cohort. The purchase share is 30% higher than its 2013 counterpart.

The WAC on 3.5s of 2014 is also higher than those of 2013 (4.24% versus 4.03%), resulting in a much greater incentive in a rally than any other 3.5s vintage, according to the Barcap analysts. In addition, it has a 12% higher TPO share than its 2013 counterpart, which implies more exposure to solicitation from third parties.

For 2014, 4s were originated throughout the year and have similar WAC, loan size, LTV, FICO, SATO and TPO percentages to 2013 cohorts. They are anticipated to pay in line with their 2013 counterparts when fully seasoned.

"Running the new IOS tranches through the Barclays model, we find that both 3.5s and 4s of 2014 are trading 22bp wider OAS than their 2013 counterparts," the analysts conclude. "Both coupons have negative carry, given elevated speeds in the March and forthcoming April reports. The IOS 3.5 2014 picks up more negative carry than its 2013 counterpart, as indicated by a much worse convexity profile."

RMBS

ResCap distribution due

The ResCap liquidating trust is set to distribute US$2 per unit to unit holders on 31 March. Covered RMBS trusts own almost 26 million units and will consequently receive a US$51.9m cash payment in the April remittance, according to Barclays Capital figures.

The move marks the fourth distribution from the ResCap liquidating trust, which has previously made payments totalling US$20.3 per unit since December 2013. Barclays RMBS analysts note that ResCap liquidating trust units (RESCU) are currently trading at US$10-US$11, implying a further collective recovery of US$260m-US$280m for the covered RMBS trusts.

"Eventual recoveries and timing of those recoveries would depend on the outcome and the process for ResCap's litigations against third-party mortgage originators, which are currently ongoing," they add.

RMBS

Euro mortgage prepays rising

Fitch reports that borrower prepayments are becoming more common in the European mortgage markets. The drivers of rising prepayment rates vary across markets and include attractive alternative mortgage products in the UK, Belgium and Italy, the repurchase of mortgages by originators in Spain and regulatory measures in the Netherlands.

In all, 10 of the 11 European markets covered by Fitch's RMBS Compare tool show prepayment rates rising through 2H14. This follows a period of all-time low prepayment rates in many markets, due to low and stable mortgage interest rates, stagnant housing markets and constrained new lending.

UK borrowers typically refinance at the end of their fixed-rate periods, which can be up to five years. Increased competition among lenders has driven mortgage rates to a new low of around 2.2% fixed for two years for prime borrowers, with sub-75% loan-to-value ratios. A similar increase in the attractiveness of new loans for residential investment and higher LTV borrowers has driven up average prepayments across the buy-to-let and non-conforming sectors.

In Belgium and Italy, borrowers are repaying their existing loans with newer, cheaper mortgages. This caused a spike in prepayments to 32% on an annualised basis in 1Q15 in Belgium. Meanwhile, many Italian fixed-rate mortgage loans that were originated prior to 2009 are being repaid as borrowers switch to lower variable rates offered by lenders.

In the Netherlands, the recent up-tick in prepayment rates was the result of the end of a temporary tax exemption for parental gifts of up to €100,000. In addition, the reduction in the maximum NHG loan amount to €245,000 from €265,000 and the revision in the lending code of conduct - which reduces the amount that can be borrowed - were factors.

In Spain, rising prepayment rates were mostly a result of portions of the portfolios being repurchased by originators. This was either due to non-compliance with representations and warranties or as a result of the sale of originator bank branches.

Prepayment rates in Greece have remained stable throughout most of 2014, reflecting a weak economic environment and limited refinancing options. This was further fuelled by margins on existing loans being lower than those on new loans, thus reducing the incentive for existing borrowers to refinance.

RMBS

RFC on Israeli RMBS

Moody's is seeking comments on its proposals for analysing the credit risk of Israeli RMBS transactions. The agency plans to use the proposed approach in conjunction with its existing methodologies to rate RMBS and covered bonds in Israel.

To derive the calibration of the country-specific values and assumptions for Israel, Moody's benchmarked the Israeli residential real estate market to other jurisdictions. It says it has adapted many parameters from the emerging securitisation markets implementation of the methodology.

The emerging securitisation markets reference is a relevant benchmark for Israel, owing to similarities in high expectations for growth in credit - in particular with regards to the mortgage market - given relatively low household debt levels. It also holds relevance in positive demographics trends, with strong population growth and a growing workforce giving rise to increasing private consumption.

Further, it matches real estate markets characterised by robust house price appreciation in recent years, coupled with limited housing supply due to strict regulation of property construction and development. Finally, there is a similarity with the limited time series of relevant historical data, due to a lack of reliable data sources and lack of historical mortgage performance data during severely stressed economic cycles.

The proposed approach is a new methodology and therefore does not affect any outstanding transactions. Market participants are invited to submit their comments by 30 April.

RMBS

German affordability pressure emerging?

The German housing market showed a sharp slow-down in price rises in wealthy mid-sized cities in 2014, according to Fitch. This follows the moderation in prices already seen for large wealthy cities since 2011 and may reflect affordability pressure.

In its analysis of the German residential property market, Fitch uses four categories (A-D) based on a purchasing power index (PPI) that reflects individuals' disposable income by Landkreis (an administrative district between the federal states and municipalities). The agency uses the A-D categorisation, where A signifies a wealthy and D a low-wealth area, to help determine its residential mortgage loss assumptions.

For both metropolitan urban areas with populations of over 500,000 and regional areas with populations below 100,000, price growth levels for all wealth categories converged towards 4%-5% last year. This is in contrast to recent years, when growth rates have shown more variation. For example, in 2013 property prices increased by 4% in D-category regional areas and by more than 11% for A-category metropolitan areas.

However, prices did not converge across PPI categories in middle-sized urban areas with populations of 100,000-500,000. Instead, price growth fell sharply in the A-category cities, even dropping below the growth rates for D-category cities. The deceleration in apartment price growth in A-category cities was particularly pronounced, slowing to 3%, from around 10% in 2013.

This is notable because demand for German residential property has generally shifted from the largest urban areas to mid-sized and smaller urban areas since 2011. The exception is Munich, which continued to post strong price increases last year.

The significant slow-down in mid-sized A-category areas last year would be consistent with the moderation already seen in wealthier metropolitan areas, excluding Munich. Such moderation may reflect affordability pressures and would be consistent with Fitch's view that while German residential property prices continue to rise, near-term increases will be moderate and stable, at around 3%-4% a year in 2015 and 2016.

RMBS

Ocwen's performance highlighted

A number of news outlets are carrying a letter from United Capital Markets ceo John Devaney to Moody's, written in support of Ocwen. The letter indicates that Ocwen-serviced private label RMBS have performed better from 2009 to 2014 across all tranches on a combined basis relative to any other servicer.

When measuring all types of modifications, data shows that Ocwen has a far greater incidence of loans staying current for either 12 months or 24 months after the mod date, according to Devaney. In contrast, the recent Gibbs & Bruns report (SCI passim) is said to reflect a small cross-section of data from a limited time period, comparing only principal mods.

"Also, it is not fair to compare the Ocwen portfolio to the universe in this Gibbs & Bruns study, as Ocwen services loans that are far more delinquent, in number of months, and there is a strong correlation to the number of months delinquent pre-mod and the incidence of default thereafter," the letter adds. "It appears to some extent that this special interest group of Gibbs and Bruns is manipulating the data to further their cause to institute more liquidations, among other motives, that would improve their special class position to the detriment of the entire deal."

It also points out that undertaking mods (rather than liquidations) for struggling homeowners is in the overall public interest.

Devaney calls for governmental agencies to develop a universal framework for servicers of both private label and agency mortgage loans that will give direction with respect to NPV modifications, servicer advance requirements, recording keeping and documentation, universal PSA interpretation, internal compliance standards and surveillance, communications with homeowners, capacity constraints that will limit risks of some servicers growing too quickly and conflicts of interests among affiliates. "I am anticipating and hoping for an overhaul of the regulatory operating framework that will create a consistent set of rules that investors and servicers can count on into the future."

Further, he urges Moody's and other rating agencies to review the stabilisation initiatives and regulatory reforms that Ocwen is undertaking to put some issues in perspective with the myriad of issues that have been uncovered at other bank and non-bank servicers. "I would urge a particular sensitivity to how critical all of the private label mortgage servicers are to the continuing of their function while working to adhere to sweeping regulatory reforms that seem to be underway," he adds.

Meanwhile, Ocwen is set to sell to Green Tree Loan Servicing residential MSRs on a portfolio consisting of approximately 55,500 largely performing loans owned by Freddie Mac, with a total principal balance of approximately US$9.6bn. The transaction is expected to close by 30 April and the loan servicing to transfer in May.

Ron Faris, Ocwen ceo, comments: "We are pleased with the progress we are making on executing our plan. Over the next several months, we expect to generate proceeds of at least US$650m from sales and transfers of mortgage servicing rights. We are also committed to ensuring a smooth and accurate transfer of information to the buyers of these mortgage servicing rights."

RMBS

Ocwen terminated on two more trusts

Wells Fargo, as trustee, last week disclosed that the majority of the investors in the SBR 2004-OP11 and NTIX 2007-HE22 RMBS had voted to terminate Ocwen as a servicer or subservice of the trusts. The current deal balances of SBR 2004-OP1 and NTIX 2007-HE2 are approximately US$79.9m and US$403.6m respectively, according to Deutsche Bank figures. Pursuant to section 7.02 of the PSA and to the extent that Ocwen had not appointed a successor servicer, Wells Fargo stated that it intends to appoint Select Portfolio Servicing as the successor servicer under the PSA.

RMBS

Trustee settlement approved

New York federal judge Katherine Forrest last week approved the US$69m settlement agreement between the Retirement Fund Investors and Bank of America/US Bank as trustees for 50 RMBS trusts. The ruling should have a significant impact on other pending lawsuits against trustees, according to Deutsche Bank RMBS analysts, including lawsuits against the six largest RMBS trustees by large institutional investors.

The Retirement Fund Investors lawsuit was initially filed on 11 April 2012 by the Policemen's Annuity and Benefit Fund of the City of Chicago in the US District Court for the Southern District of New York. On 23 August 2013, Vermont Pension Investment Committee and Washington State Investment Board filed a similar lawsuit. The complaints asserted claims for alleged breaches of contract, alleged breaches of the implied covenant of good faith and fair dealing, and alleged violations of the Trust Indenture Act (TIA) against BAML and US Bank.

On 18 October 2013, the Court ordered to consolidate the two cases. On 17 November 2014, the Retirement Fund Investors reached a settlement agreement with the defendants (SCI 11 December 2014). Under the settlement agreement, plaintiffs shall obtain a court order to distribute the net settlement amount to all qualified certificate holders.

Of the trusts covered in the BAML/US Bank settlement deal, 44 are also covered by the trustee lawsuit led by BlackRock and PIMCO against US Bank as trustee. In June 2014, a group of institutional investors represented by Bernstein Litowitz Berger & Grossmann opened a new litigation front to recoup RMBS losses by suing Bank of New York Mellon, Citi, Deutsche Bank, HSBC, US Bank and Wells Fargo in the New York Supreme Court for their role as RMBS trustees overseeing the bonds.

This trustee lawsuit covers 2,213 deals securitised between 2004 and 2008, with the current deal principal balance standing at US$424bn. Based on the current deal balance, the trustee lawsuit covers approximately 54% of all the outstanding legacy non-agency RMBS securitised between 2004 and 2008.

The Deutsche Bank analysts suggest that the US$69m Retirement Fund Investors settlement pay-out to the 50 covered trusts could be used as a template to estimate the potential settlement amount from the six largest RMBS trust firms.