Contents

Secondary markets

US CLOs refocus

After a distracted end to last week, the US CLO secondary market is beginning to refocus.

The combined distractions of the Fed meeting, new issuance activity and 'March Madness' led to a softening of secondary CLO tone if not prices into Friday's close. It's too early to tell whether there is appetite to reignite the rally of recent weeks, but focus is returning to secondary and the BWIC calendar for the week is building healthily.

There are five dollar-denominated CDO/CLO BWICs circulating for trade today so far. Bonds in for the bid include Trups CDO seniors, double- and triple-A 1.0 paper, as well as a 2.0 mezz list.

The day is due to begin at 11:00 New York time with a single $7.5m line of emerging market CLO ICES 2007-1X A3. The bond has not traded on PriceABS before, but is being talked at around 90.

Secondary markets

Euro ABS/MBS themes continue

Recent themes in the European ABS/MBS secondary markets are continuing.

"Overall yesterday was very quiet, but where there was activity we saw a continuation of recent trading themes," says one trader. "For example Dutch prime moved in another 1-2bp, so it's very tight now - we're heading towards the mid-to-high teens for three-year bonds."

Elsewhere, activity was patchy, the trader says. "We saw some trading in autos and consumer loans and on-BWIC Spanish paper traded well, but nothing really significant went through."

At the same time, the trader reports that UK RMBS has settled down. "Post last week's UK government announcement, Granite and Aire Valley paper has now stabilised - bid-offers are tighter and those markets are returning to normal having priced in a much shorter average life and mezz is again on the up."

The trader expects more of the same today. "It's bit more active in terms of the number of BWICs, but it's mainly small sizes as was the case yesterday."

There are currently seven ABS/MBS lists scheduled for today. A mix of assets is on offer with CMBS being the deal type most strongly represented.

Secondary markets

Euro CLOs stay firm

European secondary CLO market activity has dropped from last week, but pricing levels are staying firm.

"Overall, secondary volume has picked up, but it's a lot quieter this week than last week, which was very, very, busy," says one trader. "However, we're not seeing any softening of pricing levels."

The shift in activity levels is a reaction to events in the primary market. "One new issue priced last week and was heavily oversubscribed, so people were scrambling around trying to pick stuff up in secondary," the trader explains. "But this week there are three new deals marketing, one of which should be done by quarter end, and so everyone is mainly focused on primary."

That is not to say secondary isn't getting some attention. "Demand is mostly around 2.0 paper, but there is a little for 1.0 double- and triple-A too," says the trader. "Customer engagement is limited, so we're not seeing a great deal of BWICs though there is a very large one due tomorrow."

The €275m 1.0 double- and triple-A list is scheduled for 14:00 London time tomorrow and forms part of a larger mixed dollar and euro list. The euro CLO element consists of: ADAGI III-X A1A, AVOCA VII-X A1, CELF 2006-1X A1, CLISL 1X II, DUCHS VI-X A-1 and JUBIL I-RX A. Only CELF 2006-1X A1 has covered on PriceABS in the last three months, doing so at 99.06 on 30 January.

Meanwhile, today's only euro CLOs in for the bid so far today also form part of a much larger US list. The two lines up for auction today at 14:00 are: €920k of ALME 2013-1X E and €3.18m of ALME 2013-1X PTC. Neither bond has traded on PriceABS before.

Secondary markets

US CLO buyers hold sway

US CLO secondary tone remains positive as buyers continue to outweigh sellers.

"The market continues to price things pretty firmly and bid lists are trading well for the most part," says one trader. "We're seeing customer demand for CLO paper including from investors new to the sector."

While demand remains broad-based there is one area the trader highlights. "Double-As are tightening into triple-As, which is primarily because capital requirements mean it's a sweet spot for banks to be buying. That part of the stack has gone from being a real orphan to being in very high demand recently."

There are seven US CDO/CLO BWICs circulating for trade today so far. Perhaps most eye-catching is a $57.5m 2.0 CLO equity list due at 11:00 New York time.

The list consists of: ACASC 2013-2A SUB, ARES 2012-2I SUB, CGMS 2013-3A SUB, WINDR 2012-1A SUBB and WINDR 2013-1A SUBB. None of the bonds has covered with a price on PriceABS in the last three months.

Secondary markets

Euro ABS/MBS supply keeps coming

The European ABS/MBS secondary market is continuing to see healthy BWIC supply and to absorb it well.

"We've seen plenty of supply from BWICs every day this week including today, but secondary ABS tone is still firm," says one trader. "Primary has been active too, but we're seeing no real softening as a result."

ABS/MBS secondary has also remained insulated from broader market volatility. "Even recent cash credit weakening hasn't had a major impact - we're just continuing as we were last week," says the trader.

There are five BWICs currently circulating for trade today. Again, a range off deal types and jurisdictions are on offer, but centre of attention is likely to be the euro and sterling pools of a larger BWIC that also contains US ABS, CLOs and MBS due at 14:00 London time, which has the potential to trade AON as a whole or by pool.

The euro/sterling list contains the €275m 1.0 double- and triple-A CLO tranches mentioned yesterday together with 189m original face of CMBS and RMBS. The 14 MBS bonds are: AIREM 2005-1X 2A2, BUMF 5 A2, CASTO 1 A, DECO 2006-C3X A1A, DECO 8-C2X A2, ESAIL 2006-4X A3C, ESAIL 2007-2X A3C, GHM 2006-1 A2A, GRANM 2005-4 A6, GRANM 2006-1X A8, KMS 2007-1X A3A, PARGN 8 A2A, RMACS 2006-NS2X A2A and TDAI 2 A.

Five of the bonds have covered on PriceABS in the past three months, last doing so as follows: AIREM 2005-1X 2A2 at 98.1 on 27 January; GHM 2006-1 A2A at 96.41 on 11 February; GRANM 2005-4 A6 at 99.57 on 26 January; GRANM 2006-1X A8 at 99.66 on 9 March; and RMACS 2006-NS2X A2A at 94.32 on 4 March.

Secondary markets

US CLOs trade sideways

Despite maintaining a broadly positive tone the US CLO secondary market is currently trading sideways as oil price concerns are again weighing heavily on the lower part of the capital stack.

"Overall the market is moving sideways now, but there continues to be manager and sector tiering thanks to the oil price moves," says one trader. "Consequently, the lower part of the stack is slightly wider than last week."

Market tone remains positive, however. "Primary did $3bn last week, but that's not having a real impact - demand is high enough that supply isn't hurting secondary," the trader notes.

Instead, the trader says: "The real issue is the equity and double-B part of the stack, which we expect to continue to be distressed as the oil price keeps on suffering. Some managers deal better with this sort of thing than others and the latest trustee reports are coming out now to give a clearer indication of how managers have coped with the latest bout of volatility."

Not well in some cases it seems, according to the trader. "We're hearing that some managers tried to double down and so we are seeing sellers trying to put out more paper on BWIC to get ahead of the market. But this issue is bigger than that, it's not just a trading gimmick - some of these names are in genuine risk of default if the market doesn't turn."

ABS

Credit card issuance starts slowly

US credit card ABS supply so far this year is half what it was at the same time in 2014, but this is anomalous for US ABS as a whole, as JPMorgan figures put non-card ABS supply at US$46.4bn for the year so far, having only hit US$38.5bn in the same period of 2014. By contrast, credit card ABS supply has reached US$6.1bn so far this quarter, compared to US$12.2bn last year.

Last year's largest credit card issuer was Citibank Credit Card Issuance Trust, at US$10.6bn, which had issued three deals by March alone in 2014. There have been no CCCIT deals so far this year.

Other programmatic issuers American Express, Capital One and World Financial have also failed to issue this year. Last year they, along with CCCIT, accounted for half of US credit card ABS supply.

However, issuance could pick up as existing deals start to mature. JPMorgan analysts predict 66.4% of domestic credit card ABS outstanding should mature by the end of next year, with 7% of the market expected to mature in the next three months.

"Already, US$6.9bn of card supply has matured in 2015, and we expect another US$23.5bn to pay off over the course of the year for a total of US$30.5bn in FY 2015. 18% of WFNMT's outstandings will mature by the end of the year and 32% of COMET's outstandings will mature by the end of next year," the analysts say.

American Express has waited until later in the year in each of the last two years to issue ABS. The earliest of the five AMXCA deals issued last year priced in May.

There will be 32% of AMXCA maturing this year, which should prompt new issuance sooner rather than later. Considering the number of deals expected to mature within the next year, the JPMorgan analysts say they would expect card issuers to issue more frequently.

However, forecasting supply is complicated by regulatory changes and the degree of spread widening which has happened since summer 2014. For example, while the liquidity coverage ratio incentivises banks to issue more credit card ABS, the global systemically important banking organisation surcharge rises as credit card ABS rolls down the maturity schedule.

In October 2014, three-year triple-A floating rate card spreads were Libor plus 28bp, but by the end of the year they were at plus 32bp. Sponsors began issuing card ABS when spread levels improved slightly last month, so to the extent that regulatory pressures allow, spread movements are likely to continue to drive issuance.

Credit card ABS should attract more foreign investors than other ABS products because of the stable collateral performance and soft bullet nature of the bonds, which makes it easier to hedge the foreign currency risk. However, strong performance would be expected to move spreads tighter, which would make it more difficult to attract those foreign buyers as hedging costs would wipe out the spread pickup over rival products such as European covered bonds.

"Tight credit card spreads are a key constraint for European investors, and until they move wider we do not expect to see significant participation from these buyers. The limited interest from foreign buyers is a positive for US investors, particularly in the context of low card supply, as it reduces pricing pressure in the near term," say the analysts.

Credit card spreads are expected to move tighter throughout the year, largely due to the continued stable performance of the sector. The three-month excess spread for JPMorgan's bankcard index increased 9bp from 12.9% to 12.99%, while charge-offs ticked up slightly by 8bp and 30-plus day delinquencies moved up 1bp.

Bank card charge-offs were 2.4% last month, down from 2.56% in March 2014 and 3.29% in March 2013. Charge-off rates have stayed between 2.12% and 2.67% over the past 12 months. With 90-plus delinquencies staying relatively flat in the same time period and reaching 0.84% in February 2015, the analysts expect bankcard performance to remain relatively stable going forward.

Retail card charge-offs rose by 15bp in February to 4.71% and have been fairly stable over the last 12 months, staying between 4.07% and 4.88%. The three-month excess spread on the retail card index moved higher by 29bp to 18%. Total delinquencies were up 1bp to 3.16%. For the most part, the key metrics on the bankcard and retail card indices are at or near their all time best levels. This continued strong performance along with improving technicals suggests that spreads should move lower as we continue through 2015, the analysts add.

JL

Structured Finance

Euro investors weigh UK opportunities

European investors are increasingly looking beyond euro-denominated assets in the search for yield. UK pound-denominated ABS is up 69% from last year and accounts for over a quarter of total placed European issuance year-to-date.

New lending by challenger banks and the ECB-induced scarcity of high-yielding assets have improved UK issuance prospects. If investors do rotate from low yielding euro assets to pound assets, then pound investors can benefit from potential price upside and higher carry.

Last week saw solid UK RMBS issuance as Paragon Mortgages No.22 and FOSSE 2015-1 both priced. Paragon's latest deal is particularly noteworthy for its inclusion of a euro tranche by that issuer for the first time since the crisis.

However, funds searching for euro-denominated ABS have been having a tough time. "Until Paragon introduced a senior euro tranche (50bp pricing, 3.77 year WAL), the ECB's ABS QE programme had made achieving this level of spreads impossible in the current triple-A market," say Citi securitised products analysts.

As most UK deals do not include euro tranches, the analysts advocate European investors studying pound-denominated tranches where there is decent maturity certainty and the ability to hedge most of the currency risk. The 30bp difference between the pound and euro senior Paragon tranches provide a guide for how much of a discount European investors should look for in pound-denominated tranches.

Investors would need to hedge cross-currency basis risk to convert a pound-denominated floating leg to a euro one, which in Paragon's case was satisfied by the issuer. The current cross-currency basis swap necessitates a bullet five-year floating rate euro bond to pay 27bp more than its stated spread over Euribor on a pound floating bond.

European buyers looking to invest in debt should not settle just for being compensated for the basis swap, though, the analysts argue. There is uncertainty around the bond life and differences in CPR will change the senior bond WAL.

"Moreover, the bond is callable in four years. If the call is not honoured like in many pre-crisis Paragon deals, the WAL could be significantly longer," they add.

Paragon No.21's offering documents put senior bond WAL varying between 2.56 to 4.08 years for 0%-20% CPR if the deal is called, and 3.09 to 12.06 years for the same CPR range with no call. Paragon No.22 has a significant step-up and cash sweep away from junior tranches, which makes a call a highly likely outcome.

European investors could therefore consider buying the pound tranche and doing a four year basis swap to the call date, say the analysts. "Should the WAL of the tranche be two years, and not four, the basis swap would need to be unwound in two years."

If global funds have a bullish view on the pound versus the euro then they may not want to hedge the currency risk. In that case they could hedge the principal on the four-year call date and keep the pound coupons in local currency, earning a higher interest rate.

Those who do wish to hedge their exposures would likely find a basis swap is the most appropriate step, the analysts say. The question is whether to do a four-year swap and possibly unwind earlier or do a two-year one and enter a new swap should prepayment rates be at the lower end of expectations.

"In our view there is a distinct chance that the ECB's sovereign and ABS asset buying programmes could fill the market with more euro liquidity, and widen the basis swap from current 27bp. So investors may be worse off entering a new swap after two years than entering a four year swap now," the analysts add.

On balance, the analysts recommend sticking with the most realistic CPR forecasts possible for the deal and setting a hedge accordingly. "In the case of UK BTL, Paragon's sponsors are professional landlords who are likely to keep their cheap financing outstanding as long as possible, with the result we would not see significant spikes in CPR. There may be some rebalancing in the portfolio, which is why recent Paragon deals have shown 3M CPR rates of 1-5% and we would use this to derive our basis swap hedge duration," they say.

JL

Structured Finance

SCI Start the Week - 23 March

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

Pipeline
The pipeline saw a variety of deals added last week, including four ILS. There were also five ABS, three RMBS and eight CMBS.

The ABS were: US$987m Ally Auto Receivables Trust 2015-SN1; Asset-Backed European Securitisation Transaction Eleven; E-CARAT 5; Penarth 2015-1; and €715.4m Purple Master Credit Card Note Series 2015-1. The ILS were: US$150m Citrus Re Series 2015-1; Kizuna Re II series 2015-1; US$100m Pelican III Re series 2015-1; and US$100m Queen Street X Re 2015.

Hypenn RMBS III, US$725m STACR 2015-HQ1 and US$287.74m WinWater Mortgage Loan Trust 2015-3 accounted for the RMBS. Meanwhile, the CMBS were: US$787m Core Industrial Trust 2015-CALW; US$371.8m Core Industrial Trust 2015-TEXW; US$455.6m Core Industrial Trust 2015-WEST; US$380m CSMC 2015-TOWN; €175m DECO 2015-HARP; US$810m Houston Galleria Mall Trust 2015-HGLR; US$875m JPMCC 2015-COSMO; and US$829.62m WFCM 2015-LC20.

Pricings
There were eight ABS prints last week. Also pricing were three RMBS, five CMBS and eight CLOs.

The ABS were: US$245m CPS Auto Receivables Trust 2015-A; US$1.61bn Ford Credit Auto Owner Trust 2015-A; US$1bn GM Financial Automobile Leasing Trust 2015-1; US$124m Navitas Equipment Receivables series 2015-1; US$400m Prestige Auto Receivables Trust 2015-1; US$350mn Sierra Timeshare 2015-1 Receivables Funding; US$187.21m United Auto Credit Securitization Trust 2015-1; and €502m Volta III.

US$288mn Agate Bay Mortgage Trust 2015-2, US$1.54bn-equivalent Fosse 2015-1 and £360.2m Paragon Mortgages No.22 constituted the RMBS. The CMBS were: US$580mn BBCMS 2015-SLP; US$280m BBCMS Trust 2015-VFM; US$210m CGCMT 2015-SSHP; US$1.12bn COMM 2015-CCRE22; and US$1.05bn Houston Galleria Mall Trust 2015-HGLR.

Lastly, the CLOs were: US$412.1m Canyon Capital CLO 2015-1; US$578.2m CENT CLO 23; US$350m Fortress Credit Opportunities 2015-6; US$518m Halcyon Loan Advisors Funding 2015-1; US$519.8m Highbridge Loan Management 6-2015; US$658.9m Greywolf V; US$616m Venture XX; and US$512.7m WhiteHorse X.

Deal news
• 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.
• 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.
• 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 subservicer 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.
• 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.

Regulatory update
• 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 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.
• 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.
• 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 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.

Deals added to the SCI New Issuance database last week:
American Credit Acceptance Receivables Trust 2015-1; Anchorage Capital CLO 6; Atlantes Mortgage No. 3 (re-offer); Benefit Street Partners CLO VI; Chase Issuance Trust 2015-1; Chase Issuance Trust 2015-2; Drive Auto Receivables Trust 2015-A; Driver Australia Two Trust; ECP CLO 2015-7 ; GreatAmerica Leasing Receivables Funding Series 2015-1; National RMBS Trust 2015-1; Nelnet Student Loan Trust 2015-2; NewDay Partnership Funding 2015-1; NewStar Commercial Loan Funding 2015-1 ; OSCAR US 2015-1; Pelican SME No. 2; Red & Black Auto Germany 3; Residential Mortgage Securities 28; SMART ABS Series 2015-1US Trust; Synchrony Credit Card Master Note Trust 2015-1; Volvo Financial Equipment Series 2015-1

Deals added to the SCI CMBS Loan Events database last week:
CGCMT 2006-C5; COMM 2005-C6; COMM 2005-LP5; COMM 2013-LC13; ECLIP 2006-3; ECLIP 2007-1; GECMC 2005-C3; GSMS 2007-GG10; JPMCC 2002-C3; JPMCC 2005-LDP2; JPMCC 2006-CB16; JPMCC 2006-LDP7; LBCMT 2007-C3; LBUBS 2001-C3; LBUBS 2005-C2; MLMT 2005-CIP1; MOTEL 2012-MTL6; MSC 2006-T21; TITN 2006-3; TITN 2007-CT1; TMAN 6; TMAN 7; WBCMT 2005-C19 & WBCMT 2005-C20; WBCMT 2005-C21; WBCMT 2007-C33

CMBS

First Irish CMBS since crisis

Deutsche Bank is in the market with the first Irish CMBS to be issued since the financial crisis began. €174.98m DECO 2015-Harp has four classes of notes and will be rated by S&P and Moody's, marking the first time Moody's has rated a conduit style CMBS in Europe since 2007.

The €90m class A notes have an advance rate of 32.3%, debt yield of 18.0% and a WAL of 3.8 years, note Bank of America Merrill Lynch analysts. The €55m class B notes have an advance rate of 52.1%, debt yield of 11.2% and a WAL of 5.1 years, while the €17.5m class C notes have an advance rate of 58.3%, debt yield of 10.0% and a WAL of 5.8 years and the €12.5m class D notes have an advance rate of 62.8%, a debt yield of 9.3% and a WAL of 5.8 years.

No credit ratings have yet been announced. However, as Ireland has a sovereign rating of Baa1 from Moody's and single-A from S&P, the BAML analysts believe it is unlikely to reach a triple-A rating.

The deal is expected to close by mid-April and contains three loans: the Shamrock loan, New York loan and Boland loan. The largest is the €87.6m Shamrock loan, which represents 50.1% of the loan pool.

The analysts believe the advance rate of the junior notes could be higher than the reported figure. "The Boland loan's 68.8% LTV implies that a decline in property value in excess of 31.2% would expose the loan to losses, and such loss would be borne by the class D notes, in our estimation. As such, we think the leverage of the class D notes is better represented by a 68.8% LTV, which is 6.0 percentage points higher than the 62.8% reported LTV," they say.

The CMBS is expected to benefit from a positive outlook for Irish prime commercial and residential property. GDP is expected to grow 3.7% this year and 3.8% next year, while unemployment is expected to continue to decrease.

JL

RMBS

Granite call more likely?

UK Chancellor George Osborne announced in last week's Budget that the UK government would look to sell £13bn of mortgage assets from the bailouts of Northern Rock and of Bradford & Bingley. This amount matches the current outstanding size of the legacy Granite RMBS programme.

JPMorgan analysts note that the Granite trust currently stands at £13.4bn, of which £1.5bn is GRAN bonds, £7.4bn is GRANM bonds and £4.4bn is the seller share. The senior class A GRAN and GRANM bonds total £4.8bn.

"The government expects public sector debt to fall by £10.9bn following the sale of Granite, allowing it to reach its debt-to-GDP target, as per the Chancellor's speech. However, the government's cash requirements for 2015-2016 would fall only by £4.2bn, as the remaining £6.7bn funding for the securitisation vehicle will be transferred to the buyer," note the analysts.

UKAR provided a notice after the Chancellor's speech, which noted a desire to ensure the stability and continuity of service to customers. This could limit the range of asset management strategies available to a potential buyer.

"The focus, therefore, has to be on the liability side of the trust. However, given the run-down mode of the programme, which cannot be reversed following the programme's non-asset trigger breach, the buyer would not be able to use Granite to issue new bonds," the analysts note.

The main benefit to a buyer would therefore probably be ultimate access to the seller's share, which is currently trapped. However, that value could not be unlocked within the current liability structure, the analysts warn, because the seller's share is currently providing time-subordination to the outstanding bonds and will only be freed up once all distributed liabilities have been paid down.

"Furthermore, given current pricing levels for even the most subordinated bonds within the trust (cash price of 98.75 for class C bonds), we view the potential for a 'traditional' (ie; equity-creating) liability management exercise (LME) as somewhat limited," the analysts say. That means it would be more attractive to call the bonds to access the collateral.

A buyer could therefore either call all outstanding bonds, which would require a large cash outlay, or could call the class A bonds first and seek approval from the remaining noteholders to release collateral in proportion to the redeemed bonds. The JPMorgan analysts note this option is broadly similar to the restructuring of AIREM, where the issuer asked investors' approval to redeem the retained notes and repurchase part of the pool.

The latter process could then be repeated at a later stage with each subordinate class. Under this scenario, the buyer could then fund the acquired collateral in smaller 'tranches' with, for example, a new RMBS or with covered bonds.

Redeeming bonds either as a whole or in a series of tranches would benefit investors, particularly subordinated investors, who would benefit from a reduced repayment window and shorter WAL. However, it remains far from a done deal and the analysts stress that, while the opportunity is very attractive, only a few potential bidders would have the resources to execute it in full.

JL

Structured Finance

Mortgage pro takes the reins

Tony Ward has been appointed as president and ceo of Clayton Euro Risk and will take up this role from the start of April. Co-ceo Michael Bolton is leaving the firm.

Ward joins Clayton Euro Risk from Home Funding, where he was ceo. Before that he founded Kleinwort Benson's mortgage origination and securitisation business Mortgage Funding Corporation and has also served as chairman of the Intermediary Mortgage Lenders Association and deputy chairman of the Council of Mortgage Lenders.

Structured Finance

Asset manager majority stake purchased

Vontobel Asset Management is set acquire a 60% stake in TwentyFour Asset Management. Together, the firms will offer clients a broader range of specialised fixed income strategies, with approximately £12bn in total fixed income assets under management.

TwentyFour's partners will continue to manage TwentyFour's day-to-day operations, retaining full authority over fund investment decisions. In addition, TwentyFour's partners and key employees will retain a 40% stake in the business, which will be acquired by Vontobel over the longer term.

TwentyFour's partners have agreed to reinvest a significant share of their consideration into existing TwentyFour or Vontobel investment funds. In line with Vontobel's multi-boutique structure, both firms' investment platforms will operate independently of each other to ensure a continuation of their strong performance record.

The transaction will be financed out of Vontobel's own funds and is expected to be accretive for Vontobel in the first year with no significant integration costs. The transaction, which is conditional on the approval of the UK FCA and the Swiss Financial Market Supervisory Authority, is expected to close in 2Q15.

Structured Finance

Bank names team leader

Miray Muminoglu has joined Barclays' treasury capital markets execution team to head up its long term unsecured funding and capital issuance capability. He will begin in April and will replace Jennifer Moreland, who was promoted to head of capital and leverage management.

Muminoglu moves from his position as director on the fixed income syndicate desk for Barclays, where he focused on financial institutions issuance across the capital structure in the EMEA region. Previously, he worked for JPMorgan in ABS structuring and syndicate.

CDO

ABS CDO manager switched

Rabobank International has resigned from its role as the collateral manager for Solstice ABS CDO III and designated Dock Street Capital Management as the replacement manager. Fitch says the terms of the proposed replacement collateral management agreement have remained almost identical, with only minor differences that are not material to the ratings of the transaction.

For other recent CDO manager transfers, see SCI's CDO Manager Transfer Database.

CDS

CDS vet moving up

LCH Clearnet Group has appointed Frank Soussan as global head of CDSClear, effective from 1 July. He will lead the group's continued expansion of the service, which is the only EMIR-authorised CCP for the clearing of CDS.

Soussan is currently head of in-business risk for CDSClear. He takes on his new role as a replacement for Gavin Wells, who will now focus exclusively on ForexClear.

Soussan began his career as a credit correlation trader at SG. From there, he moved to JPMorgan, where he managed the exotics and structured trading group. More recently, he worked for Renshaw Bay as a senior portfolio manager for its Credit Special Opportunities Fund.

CDS

Credit quartet recruited

Absalon Capital has launched two unconstrained credit strategies, which will be managed by four recent recruits. Klaus Blaabjerg, Toke Katborg Hjortshøj, Sune Højholt Jensen and Peter Dabros have joined the firm from Sparinvest.

One of the funds will invest across cash bonds and convertibles with the aim of taking advantage of differences in credit spread between cash bonds and CDS, using credit derivatives to hedge risk and improve liquidity. The other will follow a similar approach as it invests in corporate debt from global issuers across the capital structure.

Insurance-linked securities

Risk transfer head brought aboard

Willis Group has appointed Marc Paasch as global head of alternative risk transfer (ART) solutions. He will report to John Merkovsky, Willis' global head of risk and analytics.

Paasch joins from Marsh, where he was md, head of analytics and co-head of risk consulting in Europe, as well as a member of the Marsh France executive committee. Before that, he held senior management positions at Allianz and SG.

Insurance-linked securities

ILS manager poaches marketing director

Adam Maloney has joined Elementum Advisors as director of marketing and investor relations. He will also support the firm's business development efforts. Maloney joins the firm from JPMorgan Asset Management, where he was a portfolio manager in its global multi-asset group.

Risk Management

Manager hired for OTC phase-in push

The DTCC has appointed Oliver Williams as global trade repository (GTR) business manager in Sydney. Williams will oversee GTR on-boarding and regulatory collaboration.

The appointment is part of the DTCC's push to encourage institutions to act ahead of the third phase of OTC derivatives reporting requirements to be implemented by the Australian Securities & Investments Commission next month. Beginning 13 April, institutions with gross notional outstanding in reportable OTC positions between A$5bn and A$50bn across credit, interest rates, equities, FX and commodities, are required to report trades to the DTCC trade repository. This requirement will be extended to entities holding less than A$5bn on 12 October.

RMBS

SFR trust management changes

Starwood Waypoint Residential Trust has appointed Doug Brien as ceo and Charles Young as coo. Brien was previously co-ceo for the firm and is a co-founder and md of Starwood Waypoint, while Young was west division svp and has also served as regional director and division vp.

Additionally, Gary Beasley has resigned as both co-ceo and a member of the board, with Brien taking his place on the board. Separately, Colin Wiel has resigned as cio for the firm, but will remain a trustee on the board.

ABS

Upgrades could follow risk rethink

Moody's has updated its methodologies for rating US and Canadian credit card receivables-backed securitisations to reflect changes in how the agency measures the sponsor risk of default in relation to the exposure that credit card ABS transactions have to entities of banking groups. As a result several classes of notes have been placed under review for upgrade.

The rating agency now uses the sponsor's counterparty risk (CR) assessment, which the agency introduced for banks as part of its revised bank rating methodology, rather than the sponsor's senior unsecured debt rating to measure the probability that it will shut down its credit card portfolio. As a result, it has placed under review for upgrade the ratings of eight classes of ABS issued out of American Express Credit Account Master Trust and the related American Express Credit Account Secured Note Trusts, as well as five classes of ABS issued out of Capital One Multi-asset Execution Trust, three classes of ABS issued out of Synchrony Credit Card Master Note Trust and one class of ABS issued out of Chase Issuance Trust.

Moody's has placed under review for upgrade the ratings of seven Canadian card ABS notes. These are five classes of ABS issued out of Master Credit Card Trust II and two classes of ABS issued out of Eagle Credit Card Trust.

In addition, Moody's has placed on review for upgrade the ratings of eight classes of notes from five US student loan-backed transactions. The underlying collateral of these transactions consists of student loans that are originated under FFELP, which are guaranteed by the US government for a minimum of 97% of defaulted principal and accrued interest.

ABS

Card ABS to withstand slow rate rise

US credit card ABS performance should remain stable during a gradual interest rate rise, says Fitch. The agency expects the US Federal Reserve to start raising interest rates in mid-2015 and to follow a gradual tightening path, leading to 2% at year-end 2016.

Credit card ABS metrics for the February reporting period could weaken slightly in line with seasonal trends, but remain near record levels of strength. Prime chargeoffs will likely rise, after decreasing by 14bp to 2.67% in January, while prime 60-plus day delinquencies will likely tick up, Fitch reckons. Prime gross yield and monthly payment rate (MPR) will stay in their seasonal ranges - MPR fell to 27.36% in January.

Retail metrics, including private label cards, should also weaken slightly over the near term. Chargeoffs could rise in line with their seasonal trends, while 60-plus day delinquencies may decline slightly. Retail gross yield will also rise in line with its seasonal trends and the MPR is expected to decrease slightly.

Over the long term, if rates rise faster than Fitch anticipates, credit card ABS could see some increases in delinquencies and chargeoffs as consumers become pressured by higher required payments on their overall variable-rate debt obligations. However, Fitch believes the impact will be minimal, given the level of post-crisis deleveraging and the flexibility consumers have to cut back on card payments if necessary.

Additionally, Fitch says that improvement in the US labour market should continue to support credit card ABS collateral metrics, as the agency expects labour force participation to rise as more jobs are created. The Bureau of Labor Statistics reported this month that the unemployment rate had decreased to 5.5%, while the labour force participation rate continues to indicate some slowing in its declines, holding at just below 63% in February.

ABS

Tax impact 'limited' on Japan auto ABS

A 50% increase in Japan's ownership tax for mini-vehicles from April to ¥10,800 (US$90) a year will have a limited impact on the performance of new auto loan ABS, says Moody's. Although mini-vehicles account for approximately 40% of new car sales in 2014 in Japan, the agency says that the tax amount is still relatively low.

Furthermore, Moody's says that auto loan ABS obligors are typically of good quality and other government tax relief measures will help offset the impact of the mini-vehicle tax hike. The tax increase will also have no impact on the performance of existing auto loan ABS, because the higher tax rate will not apply to vehicles purchased before 1 April.

Additionally, auto loan obligors in Japan are generally of good credit quality when compared with those in other asset classes, such as credit cards. The delinquency rate for the Japanese auto loan ABS index is low at approximately 1.7%, compared with 4.9% for credit card ABS.

The Japanese government is also planning to lower taxes on ecologically friendly vehicles as part of a fiscal tax reform package in 2015. Such tax relief measures will also apply to mini-vehicles that meet ecologically friendly criteria, and will therefore help offset the impact of the higher annual ownership tax.

ABS

Oil prices mildly positive for Euro ABS

The sharp fall in oil prices will have a positive, yet limited, credit impact for most European ABS collateralised by loans granted to SMEs, Moody's says. However, the agency observes that securitised portfolios have very low direct exposure to the oil and gas industries, for which lower prices are credit negative.

For pools where borrowers are indirectly exposed to these sectors, the oil price decline will be slightly positive in terms of credit performance due to its strong positive effect on sectors such as airlines, shipping and packaged food, which represent up to 12% of some European ABS SME portfolios. However, for over 60% of the ABS SME transactions that Moody's has studied, the net effect of oil price exposures is negligible.

The general positive effect of the oil price decline on economic growth will be mild. By contrast, lower oil prices should benefit US ABS more strongly (see SCI 16 March).

ABS

Proposed bill could add to SLABS risk

The introduction in the US of the Bank on Students Emergency Refinancing Act of 2015 by Senator Elizabeth Warren and Representative Joe Courtney is the latest in a series of moves to modify the treatment of student loans in the bankruptcy process. Barclays Capital analysts believe this could pose headline risks for student loan ABS and could act as a headwind for spreads in the sector.

The proposed bill would allow borrowers to refinance their federal or private student loans taken out for undergraduate education and disbursed before 1 July 2015 into rates as low as 3.86%. Loans used to fund graduate studies could also be refinanced into either a 5.41% or 6.41% rate.

The Obama Administration released a Presidential Memorandum last week directing the US Department of Education and other federal agencies to do more to help borrowers with their student loan repayments (SCI 17 March).

ABS

Economy supporting UK auto ABS

Improving macroeconomic and lending trends and healthy signs in the underlying auto market continue to support the UK auto ABS market, says Bank of America Merrill Lynch. New passenger car registrations continue to grow faster than most of the other major European markets, with total registrations in the 12 months up to February 2015 9.5% higher than the previous 12 months.

BAML says that delinquency rates remain low and stable across the sector, with 0.5% average 30-90 day delinquencies and 0.15% average 90 day plus delinquencies across ten outstanding deals. The range is fairly narrow, and tiered by vintage, with the most seasoned deals displaying 30-90 day delinquencies of up to 1.1%, and 90 day plus delinquencies of up to 0.3%.

With BUMP 2012-5 having repaid all its tranches at the beginning of 2015, the remaining auto ABS deals are generally homogeneous in terms of the underlying obligors, with the vast majority of the remaining portfolios composed of loans or leases to private individuals, rather than corporates. However, some differences remain across the deals, such as the exposure to financing of new versus used vehicles.

Generally, the deals from captive lending companies, such as the DRVUK and ECARA deals, tend to include a much higher proportion of financing for new vehicles than the deals from non-captive companies, such as the MOTOR and TURBF deals. On average, 30-90 day delinquencies are 0.25% for the deals from captive originators and 0.74% for the deals from non-captive originators. Late delinquencies and defaults are also higher for deals for non-captive originators.

On top of this, defaults have generally been low across most UK auto ABS, with some variation. One-month CDRs have averaged around 0.5% in recent months. However, defaults have tended to be higher for the TURBF deals, with recent CDRs of 1.5-2% for TURBF 3 for example. This may be partly because of the stricter default definition usually used in these deals as well as the high proportion of used car financing in these deals compared to other deals.

In addition, CPRs remain high in UK auto ABS and have averaged 15-20% in recent months, generally higher than in the other main European auto ABS markets. BAML believes this is because the relatively high CPRs are supported by strong car sales in the UK.

ABS

Spanish spending to boost ABS

Stronger household spending will contribute to Spain's economic recovery and support SMEs, says Moody's. This, in turn, should benefit ABS backed by SME loans.

Household spending grew by 2.4% in 2014, outpacing economic growth, notes Moody's. Consumer confidence is also at its highest peak in a decade.

The rating agency notes that a positive consumer outlook is likely to keep Spain's recovery on track in 2015, in light of the correlation between consumer confidence and household consumption. Over 99% of Spanish companies are micro-enterprises or SMEs, which are heavily dependent on the domestic market.

Moody's expects different degrees of positive direct impact, depending on the industry composition of each transaction. Pools with high exposure to sectors that are closer to retail trade commerce - and household consumption in general - will benefit the most.

Structured Finance

TLTRO take-up provides surprise

Last week's TLTRO take-up provided a positive surprise with the allotted amount of €142.4bn, exceeding expectations by a factor of two, say Bank of America Merrill Lynch analysts. This could be a positive sign for banks' lending intentions, as it suggests a pick-up in demand for credit by the market and in supply for credit by the eurozone banks, but is not positive for securitisation.

This dovetails with recent surveys suggesting some relaxation in underwriting criteria of the eurozone banks and pick up in credit supply to large corporate initially and more recently to smaller corporates and the consumer. While this is encouraging, the BAML analysts note that the starting point is very low and the TLTRO take can be viewed as a confirmation of this trend. However, it will translate into some refinancing and in some new loan origination, which is an overall positive for the market.

The analysts point out that the cheap TLTRO money will reduce incentive for the banks to securitise, thus further depressing the already meagre supply of eurozone securitisation. The lack of new supply will continue to provide strong technical support for the pricing of existing deals, though.

Structured Finance

G-fee status updated

The FHFA's inspector general has released a report stating that, as policy perspectives change, the GSE guaranteed fee income could reduce in future, while citing the FHA MIP cut of 50bp as an example. This follows the result of execution levels on recent Freddie Mac risk transfer RMBS, which indicated a potential drop in fees (SCI 19 February).

The FHFA has also released a progress report describing the GSEs' efforts toward creating a common securitisation platform. The report mentions that the FHFA plans to issue a separate update on the status of single security and that a structure may be finalised for the same in 2015.

Structured Finance

ESMA begins SF consultation

ESMA has launched a call for evidence on its approach to disclosure for structured finance instruments (SFIs) originated and/or traded on a private and/or bilateral basis. The replies to the consultation will serve as an input for the phase-in approach on the extension of the disclosure requirements of the CRA 3 RTS for private and bilateral transactions in SFIs.

ESMA's first objective is to seek the views of market participants and gather information that may help it to define private and bilateral transactions in SFIs and to establish whether the two categories should be kept separate. The second objective is to gather evidence to assess whether the disclosure requirements could be used in their entirety for private and bilateral SFI transactions or whether they should be adapted.

Market participants are invited to submit their contributions by 20 May. ESMA will subsequently draft a consultation paper to be submitted during the course of 4Q15.

CLOs

Chinese CLOs performing well

Chinese CLOs have performed well, says Moody's, recording a minimal number of defaults on their underlying loan assets since the market re-opened in May 2012. However, defaults are expected to rise, given that in 2H14 some low quality loans were securitised by originators.

According to the trustee reports of Chinese CLOs, just two underlying loans, out of an aggregate of over 3,700 securitised loans, have so far defaulted. However, the fact that China's CLO sector is still young means assets have not seasoned enough to draw conclusions too quickly.

The weighted average remaining loan tenor for all but two CLO deals is less than two years. This short tenor means that loans are more likely to be repaid at a time when the Chinese economy is growing and borrowers are less likely to experience a deterioration in economic conditions.

However, if more loans with longer remaining tenors are securitised, some defaults may occur when the credit cycle changes. Furthermore, the quality of the loans securitised in 2014 is lower than that for loans securitised in 2012 and 2013, says Moody's.

In 2012 and 2013, nine CLOs with around 300 loans from 220 obligors were securitised. In contrast, shadow ratings provided by a Chinese rating agency in a transaction indicate that several loans in 2014 were at the triple-C plus level.

Moody's says that city commercial banks, rural commercial banks, and asset management companies joined the ranks of originators in 2014, however, their loans are not as diversified as the large state-owned and joint-stock commercial banks. In some CLOs, the loans show high levels of regional and industry concentrations, making them more prone to default when the economic cycle changes.

At the same time, although defaults are expected to rise, Moody's believes the non-performing loans of Chinese banks should not be seen as a direct indicator of the future performance of loans in CLO portfolios. This is mainly because the industry and geographic concentrations of loans in CLO portfolios can be quite different from those of bank loan portfolios.

CLOs

Delayed draw securities 'credit neutral'

Some US CLOs are issuing delayed draw securities at closing that they can use in the future for refinancings, re-pricings and issuing additional securities. Although delayed draw securities add some complexity to CLO structures, Moody's believes this new feature is credit neutral.

Some recent CLOs have issued one or several classes of delayed draw securities corresponding to each class of notes and, in some cases, to equity securities. However, Moody's notes that CLOs already had the ability to re-price, refinance or issue additional securities before the recent introduction of delayed draw securities.

In addition, CLO transaction documents prevent such notes from increasing credit risk to existing noteholders through several restrictions. For example, each class of delayed draw securities has an initial outstanding amount of zero and a notional amount equal to the outstanding amount of its corresponding class. When used to re-price or refinance existing notes, the funding of delayed draw notes cannot increase the aggregate outstanding amount of the applicable corresponding class of notes.

Further, when used to fund additional issuance of notes, delayed draw notes can only be funded if each over-collateralisation ratio test is maintained or improved, or, in some deals, is at least equal to its specified inception level. Also, except for interest rates, most terms of the delayed draw securities are the same or substantially similar to the terms of the previously issued corresponding class.

Moody's says it is unclear how regulators will apply US risk retention rules to this new feature, but using this feature could become a strategy for managers to refinance, re-price or issue additional securities without subjecting their deals to the rules after they become effective in December 2016.

CLOs

Euro CLOs relying on natural hedges

New European broadly syndicated loan (BSL) CLOs increasingly rely on natural hedges, suggests Moody's. The agency says that BSL CLO deal structures increasingly rely on natural hedges against interest rate fluctuations by issuing fixed-rate tranches in amounts that match their expected holdings of fixed-rate assets.

"All 2014-vintage CLOs have purely euro-denominated liabilities and use perfect asset swaps, or other derivative contracts, to hedge foreign-currency risk," says Moody's analyst Justyna Kochanska. "However, we expect non-euro denominated CLO issuances this year, in the amounts matching the expected holdings of non-euro collateral."

Moody's considers that evolving regulatory regimes and investor preferences will continue to shape European BSL CLO 2.0 structures. While 2014-vintage CLOs generally have similar collateral, structures and credit quality as 2013-vintage deals, structures continue to evolve with altered restrictions in the documentation. For example, some 2014 CLOs prohibit bond holdings to comply with the US Volcker Rule and all incorporate cov-lite limits.

Reinvestment criteria have also evolved slightly, permitting reinvestment from credit-improved sales during the amortisation period, while 2013 deals typically do not. 2014-vintage transactions waive trading restrictions more often and have introduced more lenient trading gain reclassification provisions.

Coverage test provisions remain broadly unchanged. However, collateral valuation provisions have evolved, as well as underlying terminologies for defaulted assets, deep discount collateral or excess collateral rated Caa or below.

In addition, collateral manager provisions are weaker for some 2014-vintage deals. Transactions issued last year do not allow note re-pricing, otherwise they contemplate unchanged note cancellation and early redemption options. They also have slightly different event of default triggers and implications.

CLOs

CLO refinancing emerging

After rapid spread tightening in February, CLO spread levels have stabilised over the last two weeks, says Deutsche Bank. This has prompted refinancing activity to re-emerge.

Spreads across the investment grade part of the capital structure are now back to where they were in late July and early August of 2014. The double-B rated tranches are also getting close to those levels but single-B tranches are lagging behind the capital stack.

In addition, issuance has picked up steam in March, as over US$10bn worth of deals have priced so far in the month. This is already on par with the average month of last year.

As spreads have tightened, refinancing activity is starting up again, with Voya Investment Management refinancing two of its 2012 CLOs. The reinvestment period for both deals ends in October 2016. The new coupons are also very similar between the deals, with the triple-A tranches pricing at levels of Libor plus 130bp and Libor plus 132bp and the rest of the stack pricing at identical levels.

On average, the CLOs lowered their funding cost by 29bp and 22bp, respectively, with the reduction in the mezzanine investment grade tranches contributing more to the funding cost reduction than the triple-A tranche repricings. Deutsche Bank notes that both deals are being made Volcker Rule compliant by getting rid of their bond buckets, while the second-lien bucket is getting increased, as well as the cov-lite bucket.

The refinanced part of the outstanding CLO universe is still small. Of the deals that exit their reinvestment periods in 2016, a large number have their reinvestment period ending in the second half of the year and the bulk is still up for refinancing.

CMBS

Hills sale loss projected

The US$14.7m The Hills property in Dallas, Texas, has been bid at auction to a high level of US$18.1m, according to Barclays Capital securitised products analysts. Should that bid be accepted, CMBS losses would follow.

While the property does not appear to have met a reserve price set by the seller, the bid was within range of the US$20.1m appraisal in July 2014, so it is possible that the high bid may be accepted. Proceeds would first repay fees and advances, leaving estimated principal proceeds of US$12.7m, which would indicate a loss of 14% on the collateral.

Potential losses of US$2m would write off 4% of the first-loss G tranche in GSMS 2011-GC5. The triple-B credit enhancement would only decline slightly, at less than 0.1%, and remain at 6.1%. Principal proceeds would pay off the A1 tranche and less than 1% of the A2 tranche in the trust.

CMBS

US CMBS delinquencies just up

The 60-plus day US CMBS delinquency rate for pre-2009 vintages increased slightly to 8.6% in March, according Barclay Capital securitisation research analysts. Increasing payoffs of 2005 vintage loans may push up pre-2009 delinquencies in the coming months.

Liquidations continued to fall to a multi-year low as liquidations with losses larger than 3% measured only US$261m, while those with losses below 3% measured US$574m. With fewer loans getting liquidated, average severity has increased with term defaults severity for losses larger than 3% above 65%, while maturity defaults severity increased to above 50%.

In addition, the rate of overall changes in 60-plus day delinquency increased by about 0.1%. New loans transferred to 60-plus day delinquency added 0.3% to the balance, while liquidations of delinquent loans in March reduced delinquencies by 0.2%, the same as last month.

CMBS

CMBS underwriting causing concerns

US CMBS underwriting has been moderately weaker in 2015 than in 2014, particularly considering the low rate environment, say Barclays Capital analysts. As a result, they believe that single-A and double-A rated tranches offer the best risk/return value, amid continued deteriorating credit quality.

As issuance has increased, one trend that has remained consistent is the growing share of hotel properties in conduit CMBS. Exposure to the lodging sector has increased to 17% in 1Q15, versus an average of 13-15% in the past few quarters, and has remained consistent since February. On the other hand, the multifamily share has come down to 15% in 1Q15 issuance, roughly in line with recent quarterly averages.

Moreover, while the overall office sector remains in good health, pockets of risk remain where supply is set to increase significantly in the next one to three years. The analysts believe this will be of particular note in Houston, Dallas, and the Bay Area.

Another cause for concern in new issue underwriting is the increasing share of full-term IO loans being securitised. So far, 24% of loans in 1Q15 have been full-term IO, compared with about 20% for most of 2014. Such loans provide no amortisation to mitigate balloon default risk when higher interest rates may make it harder to refinance. On the positive side, the overall amount of IO loans declined in 1Q15, with rises in full-term IOs offset by declines in the partial-term IO share.

Furthermore, underwritten average LTVs for new issuance remained stable at 65% compared with H214 issuance, and DSCRs remained steady at about 1.8x. However, the analysts expect these measures to improve as lower interest rates reduce loan coupons.

CMBS

Eastland auction to increase LBUBS losses

The US$38.5m Columbus, Ohio, Eastland Mall in LBUBS 2007-C1 has been bid at US$9.25m at auction. The mall was previously listed in auction last May (SCI 22 April 2014) but failed to meet the reserve price.

The property appears to have been sold well below its most recent appraisal of US$18.6m in June 2014. This follows recent deterioration in the property's performance and JCPenney's announcement that it was closing its location at the mall in January, say Barclays Capital securitised product analysts.

If the loan had sold near its appraisal price, losses were expected to approach 60% (SCI 9 March). After repaying US$1.1m in advances and US$672,000 in ASER, principal proceeds could net about US$7.3m on the sale, which would indicate an 81% severity.

The Barcap analysts note that losses will likely write off the K tranche and two-thirds of the J tranche in LBUBS 2007-C1. ASER reimbursements would go to repay outstanding shortfalls on the H tranche.

CMBS

REO liquidations could rise

While losses on REO liquidations have been declining in recent months, the trend may reverse later in 2015, says Fitch. This is due to US CMBS servicers holding on to these assets for longer periods of time.

In a year-over-year comparison, declines in REO portfolios have levelled off moderately, compared to a more rapid increase in the number of CMBS loan resolutions in the past 12 months. The number of CMBS loans in special servicing has decreased by 21% in the past 12 months to stand at 2,264 CMBS loans totalling US$38.5bn, compared to 2,879 CMBS loans totalling US$49.5bn in 2013.

Fitch observes that REO assets continue to be concentrated among its highest rated servicers, who account for approximately 90% of the REO assets in the agency's study. The remaining REO assets face market location and asset quality challenges, which contribute to the noted ageing of REO portfolios. While the aggregate losses of REO liquidations - including sales at foreclosure - declined from 54% in 2013 to 49% in 2014, Fitch believes the aggregate losses will rise given the increased ageing of remaining REO assets in special servicing.

Specially serviced portfolios for three of the largest Fitch-rated special servicers have remained weighted towards REO assets, which began to increase in 2012, and inventories have remained relatively stable as foreclosures become finalised. In 2014, REO assets made up 46% on average of specially serviced loans between C-III Asset Management, LNR Partners and CWCapital Asset Management, compared to 45% in 2013.

The increase in aging of REO inventories stands out against continued strong property performance and market liquidity and the pace of loan resolutions, which reflect the broader CRE market recovery. Fitch believes that the completion of judicial foreclosures that began two to three years earlier and adverse selection of remaining REO properties are still major factors contributing to the increased hold times of current REO inventories and future losses.

Insurance-linked securities

ILS budget boost examined

The UK Chancellor George Osborne's plan to make the country an international hub for ILS (SCI 19 March) is likely to help London maintain its leading position as a global reinsurance hub, observes Fitch. However, the scale of the impact is uncertain and will depend on many factors, including how a new regulatory regime that is designed to attract global capital might sit with frameworks such as Solvency 2.

Fitch says a regulatory and tax regime that enabled ILS to be domiciled in the UK could potentially strengthen London's position within the global reinsurance market by allowing reinsurance providers to offer a more complete suite of products and services. In addition, increasing competition among jurisdictions to become a hub for ILS issuance is reflective of a gained widespread acceptance for alternative reinsurance.

Further, Fitch believes that a significant proportion of investors will remain even if yields in other sectors improved or a major catastrophe event leads to losses. This is because investors gain portfolio diversification and there is low correlation between catastrophe risk and other investment risks.

Little detail is yet available on the plans and there are many uncertainties that could affect the attractiveness of London as a domicile for ILS and the impact on London market insurers. These include the regulatory framework they would be subject to and whether this might conflict with Solvency 2 requirements. Whether tax rules would be as attractive as those in Bermuda, Cayman or Guernsey would also be key, especially given the wider political environment and opposition to corporate tax breaks in the UK.

The impact of this could vary between reinsurers depending on where their existing business is focused. Companies underwriting lines of business that compete more directly with ILS products could find it harder to grow or maintain their market share, even if the reforms were successful in attracting additional reinsurance business to London.

RMBS

HSBC targeted in NCUA suit

The NCUA has filed suit in federal court against HSBC, alleging the bank violated state and federal law by failing to fulfil its duties as trustee for 37 RMBS trusts. The agency is suing as liquidating agent for five failed corporate credit unions, continuing a number of recent suits against various trustees (SCI passim).

The five corporate credit unions - US Central, WesCorp, Members United, Southwest and Constitution - purchased approximately US$1.97bn in RMBS issued from the trusts between 2004 and 2007. Those securities lost value, contributing to the failure of all five corporate credit unions, the NCUA says.

The complaint charges that HSBC failed to provide required notices to certificate holders and other parties, despite knowing about defects in the mortgage loans. In addition, the bank is accused of failing to properly monitor loan servicers and take timely action to force the repurchase, substitution or cure of defective mortgage loans or otherwise preserve trust remedies.

RMBS

Spanish housing to recover slowly

Recent data suggests that Spain's protracted house price correction is coming to an end, observes Fitch. Improving credit supply will support the housing market, but weak fundamentals in certain regions mean the recovery will be slow.

The Spanish National Institute of Statistics' (INE) data showed that house prices rose by 1.8% year-on-year in 4Q14, the largest increase since the start of the housing crisis in 2009. INE estimates that Spanish house prices have fallen 37% from their peak, while property valuation company Tinsa gives a figure of 42%.

Fitch believes the return of credit to the economy is one of the main causes of house price recovery and expects it to continue recovering, with real GDP forecast to grow by 2% in 2015 and 2.3% in 2016. But fundamental conditions for the Spanish housing market remain weak, as high unemployment, at 23.4%, and oversupply due to unsold new-builds from 2006-2007 may prevent a rapid rebound in prices.

Fitch believes low turnover will continue in coastal regions and those on the outskirts of big cities with a large stock of unsold properties. Alternatively, prime areas in the largest cities, such as Madrid and Barcelona, are likely to experience accelerating price growth.

The agency does not expect a rapid rebound in prices nationwide, but a slow recovery with nominal house prices almost flat in 2015 before starting to rise next year. Arrears will also decline, but slowly, with Fitch forecasting a slight drop in three-months-plus arrears in RMBS transactions from 1.8% last year to 1.7% in 2015.

RMBS

US refinancing opportunities restricted

Voluntary prepayments on modified re-performing US residential loans will remain low, says Moody's, with few refinancing opportunities available for the borrowers of these loans. This is because previously offered loan modifications have significantly reduced the interest rates on the re-performing loans, despite borrowers performing on their mortgages.

In all, Moody's expects that less than 15% of borrowers with modified re-performing loans could potentially benefit from refinancing opportunities. The overall collateral profile of loans to re-performing borrowers remains weak compared with the collateral profile of loans to always performing borrowers, with generally high current LTV ratios on the re-performing loans, low credit scores and low DTI ratios.

The current interest rates on re-performing loans are very low due to large interest rate reductions that borrowers received at the time of loan modification. The weighted average current interest rate on modified current subprime loans is about 3.5%, compared with the weighted average current interest rate of 5.3% for loans that were never delinquent. Similarly, for Alt-A loans, the 3.3% current interest rate on modified current loans compares with 4.5% on always-current loans.

Compared with the refinancing activity for always-current loans, the refinancing activity for re-performing loans has remained significantly low. Average 12-month voluntary prepayment rates (VPR) for subprime re-performing loans are around 0.2%, compared with 6.8% for always-current subprime loans. Similarly, a 0.4% VPR on 12 month re-performing Alt-A loans compares with a 10% VPR for always-current Alt-As loan.

In addition, about 25% of subprime re-performing loans currently are underwater, compared with about 23% for Alt-A re-performing loans. However, borrowers choosing to avail themselves of any refinancing opportunities would also have to meet strong credit criteria and have demonstrated a sustained period of re-performance history.

RMBS

Irish prime RMBS stabilising

The Irish prime RMBS market continued to stabilise in the three-month period ended January, according to Moody's latest index results for the sector. Arrears levels have decreased at both early and late stages on both a quarterly and annual basis, and 90-plus day delinquencies decreased to 17.5% of the outstanding balance in January from 18.6% in October 2014.

The 360-plus day delinquencies decreased to 12.3%, from 12.7% over the same period, while the 30-plus day delinquencies decreased to 19.9% in January, from 21.2% in October 2014 and 23.3% in January 2014. Moody's says a continued stabilisation of the housing market, robust employment trends and gradual restoration of consumer confidence will lead to a further measured reduction in arrears.

Outstanding repossessions remained stable at 0.4%, and cumulative losses rose to 0.2% in January from 0.1% in October 2014. Over the same period, the total redemption rate rose to 5.6% from 4.5%.

Moody's outlook for Irish RMBS is stable and the agency views positively the proposed regulation for RMBS released by the Central Bank of Ireland in late January. Moody's expects that the new regulation would improve the collateral quality of new RMBS transactions. Finally, as of January, 16 Moody's-rated Irish prime RMBS transactions had an outstanding pool balance of €33.1bn, compared with €35.5bn in January 2014, constituting a year-on-year decrease of 6.8%.

RMBS

Dutch RMBS prepayments improve

The number of properties sold in the Netherlands in December 2014 increased to a record high, according to Fitch's latest index results for the sector. This is due to a number of factors, which have also had an impact on prepayments in Fitch's portfolio of RMBS transactions.

These factors include the expiry of a temporary exemption in the gift tax framework, tightening of NHG criteria and stringent Nibud standards becoming effective from 1 January.

Early and late stage arrears across RMBS transactions have fallen again in the first two months of 2015. Fitch expects the performance of Dutch borrowers to lag behind the country's gradual economic recovery and, as a result, does not expect late stage arrears to decline significantly in 1H15.

Home prices have picked up for the third consecutive quarter, as prices increased 1.5% year-on-year at end-2014. Fitch expects the housing market to continue to recover slowly in 2015, supported by falling mortgage rates and decreasing unemployment.

RMBS

Japanese wage increase 'RMBS positive'

Japan's annual spring wage negotiations between employers and unions are expected to deliver the highest pay increases in 21 years, averaging around 3% in 2015 for workers of large companies, says Moody's. This situation will be credit positive for Japanese RMBS, because it will increase borrower ability to make loan repayments.

Japanese Prime Minister Shinzo Abe has been pushing Japanese companies to increase pay as part of a strategy to lift consumption and boost economic growth. The government is lowering corporate tax rates, which it says will give companies more capacity to fund wage increases.

Furthermore, Japan's unemployment rate was at an historic low of 3.6% in January. This is an indication that employment conditions are tight and putting upward pressure on wages.

Along with increased borrower ability to make repayments, Moody's says that higher wages also lead to lower DTI ratios and, in turn, exhibit a lower probability of default. However, RMBS backed by mortgages from major Japanese banks will benefit more than transactions backed by guaranteed mortgages from the Japan Housing Finance Agency (JHF) or other lesser quality loans, as the major banks' mortgage pools are of higher quality.

Relatively lower credit quality borrowers, such as those working part-time or at small companies, are typically excluded by the major banks, due to the banks' strict underwriting standards. On the other hand, JHF guaranteed loans are made to borrowers who satisfy origination criteria that often reflect government policies to support home ownership. As a result, JHF guaranteed loans, as well as loans pools from other non-conforming lenders, include a higher proportion of small company employees, contract workers or self-employed people.

Because full time employees of large companies typically make up the kind of borrowers in the mortgage pools of major banks, RMBS backed by mortgages from major banks will benefit most from pay increases resulting from annual spring wage negotiations. By contrast, mortgage pools backed by JHF guaranteed loans or non-conforming loans will benefit less from such pay increases.

RMBS

Ocwen posts rebuttal to trustees

Ocwen has sent a letter of rebuttal to trustees and master servicers for 119 RMBS trusts. This is in response to a notice of alleged non-performance issued by Gibbs & Bruns, on behalf of a group of RMBS investors (SCI 27 January).

Ocwen's letter claims that this is the latest effort in a long campaign by a number of RMBS investors - Blackrock Financial Management, PIMCO, Kore Advisors, Metropolitan Life Insurance Company and Neuberger Berman Europe - "bent on forcing changes to servicing practices". In turn, the servicer accuses these noteholders of attempting to benefit their specific tranche-level holdings through increased foreclosures, at the expense of long-term gains to the trusts as a whole through loan modifications.

Ocwen's letter also stresses that it is a leading provider of loan modifications under HAMP, which looks to help struggling borrowers remain in their homes by encouraging and guiding servicers like Ocwen to pursue profitable loan modifications, rather than rushing to foreclosure. By contrast, it accuses Blackrock of having a past record of dissension against such federal programmes and of previously targeting homeowners through legal proceedings.

In addition, Ocwen says the allegations in the notice are substantially the same claims that were refuted during a failed attempt to prevent Ocwen from acquiring a competitor's servicing portfolio in 2013. Those allegations were ultimately dismissed after being found to have no merit by independent experts, the servicer adds.

Ocwen adds that it has been compliant with the standard of servicing, which required the firm to service loans in the best interest of all investors. Each modification Ocwen performs is, it says, designed to yield a higher anticipated recovery to investors than foreclosure and no allegations have established that it breached this standard of servicing. Moreover, the letter says that the investors have maligned Ocwen's modifications through selectively presented data that does not comport with the facts.

RMBS

Further MSR sale agreed

Ocwen Loan Servicing has agreed in principle to sell to Nationstar Mortgage the residential mortgage servicing rights on a portfolio consisting of approximately 142,000 loans owned by Freddie Mac and Fannie Mae with a total principal balance of approximately US$25bn. Subject to a definitive agreement, approvals by Freddie Mac, Fannie Mae and FHFA and other customary conditions, Ocwen and Nationstar expect the transaction to close before mid-year.

"This transaction, on top of the one announced in February between Ocwen and Nationstar (see SCI 24 February), furthers our announced corporate strategy and demonstrates the strong working relationship we have developed with Nationstar," says Ron Faris, ceo of Ocwen. Ocwen also agreed to sell MSRs to Green Tree Loan Servicing earlier this month (see SCI 20 March).

RMBS

SFR vacancies may rise

Certificate holders of 15 single-family rental securitisations received full payment on the distribution date for this month, says Morningstar. While the agency expects that cashflows from these deals will remain sufficient to cover bond obligations in the months ahead, it notes that lease expirations are generally rising across multiple transactions, indicating that vacancies may rise in the future.

Additionally, after hovering near 9% in recent months, the vacancy rate for ARP 2014-SFR1 edged up to 10%. Lease expirations were scheduled to peak through February 2015, with 56.3% of the portfolio due to expire through this time period, but fewer lease expirations for the ARP deal are expected in the coming months. Furthermore, the number of delinquent tenants fell across most deals.

RMBS

Greek RMBS tiering witnessed

Market attention is back on Greece as reform negotiations continue. Performance from 4Q14 suggests that fundamental trends in Greek RMBS remain soft, with Morgan Stanley analysts noting significant transaction tiering.

Among Greek RMBS, ESTIA 2 has the most serious arrears, with 12.7% of the pool thus classified. KION 2006-1 and THEME 1 are the best performers, with 90-plus day delinquencies of only 1.5%.

Senior tranches across the board do however remain well protected against future defaults on account of healthy credit enhancement levels. In this context, the analysts emphasise that collateral risks are far outweighed by the uncertainty posed by potential Greece exit and currency re-denomination.

The likelihood of Greece leaving the eurozone is 25%, according to Morgan Stanley economists. However, the economic, banking and political situation of the country is deteriorating, reducing the chance for a quick compromise and leading to concerns about Greek sovereign bonds.

RMBS

Bankruptcy law could add losses

The new Spanish bankruptcy law for nonperforming, highly indebted individuals could add additional marginal losses to securitisations, says Scope Ratings. However, the agency's structured finance ratings will be unaffected.

Last February, the Spanish government passed a royal decree, which allows for the legal extinction of marginal debts under very tight conditions once and after an insolvency process has been finalised. The law erodes the full recourse over an obligor's future assets and income, which protected unsecured creditors to individuals in the past.

Scope's structured finance ratings will be unaffected, as its base case recovery assumptions already reflect a haircut to long term recovery proceeds after three or four years. Stressed recovery rate assumptions for secured mortgages only consider very low recovery rates of 10% or less on the marginal claims that may remain after the foreclosure of collateral.

Long term, the undermining of full recourse will marginally increase expected losses at origination for the weaker borrowers, something banks will likely compensate for by increasing their lending margins or by curtailing credit supply to marginal borrowers. Scope says this would be a positive development for banks' asset quality as it would push weaker borrowers outside of the banking system. In the same way, future securitisations could benefit from the tighter underwriting or higher excess spread resulting from the adjustments in origination.

RMBS

STACRs see large paydowns

The M1 bonds of STACR 2014-DN3 and STACR 2014-HQ1 experienced a large paydown in their March remittance, according to Barclays Capital securitised products analysts. STACR 2014-DN3 M1 and STACR 2014-HQ1 M1 paid down by 18% and 8.4%, respectively.

The large paydowns were the result of a jump in prepayments following the interest rate rally in January. While prepayment speeds jumped for other recent STACR issues as well, the entire unscheduled principal was diverted to the AH tranche - to build the required enhancement - and M1 paydowns did not surge. Prepayment in the CAS deals did not experience a similar jump since the reference collateral is much more seasoned and, in general, has lower WAC.

The analysts say that, while the jump in prepayment speeds could be expected after the rates rally earlier this year, the magnitude of the jump may seem higher than that in comparable agency cohorts. For example, March speeds for FGLMC 4 2013 came in at 29 CPR, whereas STACR 2014-DN3 prepays jumped to about 37 CRR, despite both including 2013-originated Freddie Mac loans with similar WAC.

However, there are reasons to explain the magnitude of the jump. The STACR DN collateral consists of 60%-80% LTV loans with greater WAC dispersion than agency cohorts. "Moreover, the STACR reference pool consists of loans originated in a single quarter and includes conforming-jumbo loans, whose prepayment speeds are more sensitive to interest rates. These incremental differences in collateral composition meaningfully affect the prepayment behavior and altogether explain the comparatively higher speeds for STACR pools," the analysts say.

They add: "About 4% CPR of the difference between 37% CPR on the STACR 2014-DN3 and 29% CPR on the Freddie 4s is due to the lower LTVs and the rest is due to a combination of WAC dispersion and higher loan balances."

RMBS

Non-agency defaults falling

The stabilisation of the labour and housing markets has had a positive impact on US RMBS mortgage credit across all credit spectrums, observes Deutsche Bank. The non-agency mortgage serious delinquency rate has declined 221bp year-over-year, and non-agency loans in delinquency have fallen 9% by loan balance since the 1Q10 peak.

Housing fundamentals have also shown steady improvement, although the US housing recovery has been uneven and the rate of appreciation has slowed. Consequently, the percentage of underwater home borrowers has declined from its peak level of 26% reached in December 2009, to roughly 10.8%.

The percentage of underwater borrowers varies greatly from state to state, primarily due to the uneven housing market recovery. Nevada, Florida and Arizona are the top three states with the highest percentage of underwater borrowers.

Across non-agency products, option ARM loans have a significantly lower cumulative default and loss rate than subprime loans, despite having similar serious delinquency rates and a higher negative equity position than subprime. Option ARM loans have lower loss severities than subprime too, due to higher average loan balances.

RMBS

Aussie mortgage delinquencies dropping

Australian residential mortgage delinquencies are at their lowest level for the country since 2006, according to Moody's. This is due to record-low interest rates, rising house prices and a relatively steady macroeconomic environment.

As of 30 November 2014, 1.19% of residential mortgages were more than 30 days in arrears, less than the 1.24% at the end of November 2013. Mortgage delinquencies are now at their lowest level since the 1.03% level in 2006.

Performance varies per region, with Sydney accounting for five of the best 10 regions in Australia and featuring heavily on the list of best postcodes. New South Wales and the Northern Territory were the biggest improvers over the 12 months to November 2014, while the latter region and the Australia Capital Territory had the lowest delinquencies in the country.

However, regions exposed to the mining industry recorded the biggest delinquencies. Some regions including Mackay and Queensland Outback have reversed their positive trends of only a few years ago and now show some of the highest delinquencies.