News Analysis
Structured Finance
Broadening the field
Diverse issuance signals deepening primary market
The European securitisation market has witnessed an influx of diverse primary issuance in recent weeks. Supply has bumped Q1 volumes up by nearly 50% over the same period last year and underlines the increasing depth of the sector.
Notable recent transactions include Australian RMBS, UK buy-to-let RMBS, Dutch RMBS, Italian consumer ABS, Portuguese future flow ABS, European CLOs and the first Irish CMBS since the financial crisis. "The last few months have been relatively dull," admits Mark Hale, cio of Prytania Investment Advisors. "So this new issuance is great for the market and we have been able to buy a variety of deals at decent spreads as a result."
He adds: "It is notable also to show that a pick-up in issuance is not necessarily a function of the ECB's buying programme."
Despite the recent surge in issuance, Hale cautions against overly optimistic projections for the rest of the year. "You cannot really extrapolate from this recent acceleration of issuance, because these deals often come in clusters and seasonal slow-downs will occur later this year, as usually occurs. However, with issuance on course to exceed €20bn in the year to date by Easter, this represents a near 50% acceleration from the pace in 2014."
At the same time, spreads have remained at reasonable levels relative to most other asset classes through 2014 and 2015. But the question is now whether spreads will continue to tighten.
"For example, the UK market has recently seen the Paragon Mortgages No. 22 and Fosse 2015-1 deals price relatively tight. The market's current momentum should hopefully encourage more issuance in the near future," Hale observes.
One recent deal in particular has garnered attention: the €174.98m DECO 2015-Harp Irish CMBS. "It is a relatively small deal, but its presence still inspires positivity for the market, as it highlights the gradual healing in the real estate sector since the crisis. With good execution, this could be a stimulus for further issuance," Hale suggests.
He expects a gentle pick-up in activity in the short term, but believes that pressure on the ECB to expand the ABSPP's scope and change its buying process is likely to occur a little later on. In the long run, the indirect impact of ECB buying is seen as more important that the nominal number of euros spent in the weeks ahead.
CMBS is one asset class where issuance is expected to be limited through the rest of 2015 relative to pre-crisis levels. "I do expect a steady rise in CMBS issuance through to 2017 though," Hale adds. He anticipates that many investors will continue to prefer distinct pools of assets in single jurisdictions over a pan-European pool typical of some pre-crisis conduit deals.
Nevertheless, new issuers are expected to continue tapping the market and further diversify the asset types on offer. "We have already had a new CLO manager enter the European primary market, with other US managers becoming more active," Hale says. "In addition, we had the third electricity securitisation - Volta III - come out of Portugal recently."
He continues: "Although this is not a big deal, it is still a noteworthy event, as it underlines the increasing depth in the market. Not too long ago, it was hard to imagine such a deal coming to the market, but now we are on the third transaction already."
While Hale does not expect issuance to reach pre-crisis levels in the foreseeable future, he stresses that volume is not the most important indicator at this stage in the market's recovery. "What is more important right now is where issuance is coming from, which shows a healthy diversity," he concludes.
JA
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SCIWire
Secondary markets
Euro ABS/MBS slows
The European secondary securitisation market appears to be slowing into month- and quarter-end.
Friday saw a late flurry of activity after a sizeable mixed BWIC went through at 15:00 and drove some activity off the back of it. This went some way to redressing the slightly softer tone that had been emerging in ABS/MBS secondary, albeit without any major spread moves, thanks to broader market volatility and continued primary activity.
That positive tone seems to have been maintained into this morning's session. However, the secondary market looks for now to have settled down to waiting out the month.
There are currently only two one line BWICs scheduled for today - at 14:30 there is €2m of RHIPO 7 C due and at 15:00 £44.438m of ESAIL 2006-2X A2C. Neither bond has traded on PriceABS in the last three months.
SCIWire
Secondary markets
US CLOs hold firm
US CLO secondary spreads are holding firm despite strong new issuance activity. However, activity levels look set to be down this week.
"Focus is on new issuance so secondary trading is pretty quiet, though we are seeing some lists on the back of primary purchases," says one trader. "With quarter-end and school holidays combined with not a lot of vol around I expect it to stay that way until next week when a lot of the new issuance will be out of the way."
There are five US CLO BWICs circulating for trade today so far. Bonds on offer primarily revolve around 2.0 triple-Bs and 1.0 triple-As, but the day is currently scheduled to close out with a solitary slice of 1.0 single-A.
$12.375m of CECDO 2007-14A C is due at 15:00 New York time. The bond hasn't covered in the last three months on PriceABS but is being talked in the low- to mid-90s.
SCIWire
Secondary markets
Euro ABS/MBS keeps quiet
Month-end and a lack of substantial BWIC volume are keeping the European ABS/MBS secondary market quiet, but there are still patches of activity.
"It was very quiet yesterday as you'd expect with month-end and a short week and today looks to be more of the same," says one trader. "That said, we got quite a bit done yesterday around the periphery and in Dutch names."
At the same time, market sentiment was boosted by a higher than average ABSPP number yesterday at €638m, albeit likely to be mainly primary purchases. "It's still not a huge total number, but at least it's beginning to get respectable," the trader says.
The positive ABS/MBS secondary tone has continued into this morning on the back of stronger broader markets. Nevertheless, spreads remain generally unchanged on last week's close with Spanish bonds looking the most vulnerable.
There are currently only two European ABS/MBS BWICs scheduled for the remainder of today. Both involve Dutch prime seniors and are due at 14:00 and 14:30 London time.
The latter list has fewer names than the former, but sees significantly larger sized pieces. It involves: €8m ARENA 2012-1 A2, €13.1m DUTCH 2013-18 A2, €4.8m LUNET 2013-1 A2 and €11.5m STORM 2013-4 A2. Two of the bonds have covered on PriceABS in the past three months - ARENA 2012-1 A2 at 102.626 on 17 March and LUNET 2013-1 A2 at 103.17 on 20 March.
SCIWire
Secondary markets
US CDO/CLO BWIC flurry
Secondary US CDO/CLO volumes are down this week, but a flurry of BWICs has emerged for trade today and tomorrow.
"Due to quarter-end, trading is lighter this week, but a bunch of BWICs have popped into the schedule for today and tomorrow," says one trader. "Despite the timing they're seemingly real, not pricing exercises, and so are expected to trade."
There is a broad variety of paper on offer on the three lists schedule for today so far. "There are bonds from the across the range," the trader says. "Today's first list includes some good size euro equity as well as some Trups mezz; then there's a mix of 1.0 and 2.0 equity; and finally some clean 2.0 double-As that should trade at a premium."
Tomorrow sees six lists already scheduled mainly revolving around 2.0 mezz and some equity. "Tomorrow's lists don't involve major volumes but there is the occasional piece of unusually large size," says the trader.
For example, at 10:00 tomorrow New York time there's a seven line list of predominantly small clips that includes $50m of ATCLO 2013-2A A1L and $157.5m of OCTR 2014-5X A1. Neither triple-A tranche has traded with a price on PriceABS.
In addition, the trader notes: "The list with the large Ocean Trails piece is from a fund that typically doesn't buy triple-As. It's probably something they got a deal on and are now looking to monetise their profit."
SCIWire
Secondary markets
US RMBS focuses on re-REMIC list
Month-end and the shortened week are reducing US non-agency RMBS secondary market activity and have heightened focus on the latest large re-REMIC list due today.
"Much like other markets we're fairly quiet this week because of quarter-end," says one trader. "But there's been one big re-REMIC list that has been holding everyone's attention and will, as always with these kinds of lists, be watched very closely for clearing levels."
The $187m list, which was due to trade at 10:15 New York time this morning, is the latest in a run of large re-REMIC auctions in recent weeks, but diverges from its predecessors in one major respect. "It's unusual in that all the line items are from one shelf - CSMC," the trader explains. "The list was brought by either a money manager or a bank portfolio and involves mostly 2009 and 2010 investment grade bonds, which should trade mainly in the high-90s to par range."
Overall, the trader says the RMBS market remains robust. "Spreads are still strong and the latest stock market volatility hasn't found its way across to us. Also, with the Fed on hold for now, expectations are positive for the quarter ahead."
At the same time, the trader expects many to utilise this week's respite in volume to plan ahead. "People are going to be looking at their month-end marks and try to figure new ways to make money as it's getting harder and harder to do so by normal means the way the RMBS market currently stands. It will be interesting to see if firms will continue to make markets in their own bonds, which has been on the increase lately, and how active the dealer community will be next quarter."
SCIWire
Secondary markets
Euro ABS/MBS sees pockets of activity
Despite a generally quiet week the European ABS/MBS secondary market is continuing to see pockets of activity.
"As you would expect for quarter-end, yesterday was quiet with most people busy with valuations and so on," says one trader. "However, we did see a couple of portfolio rebalancing BWICs from real money that mainly consisted of Dutch names and traded tight."
Overall, the trader says: "The prime sector is still very strong. We didn't see much activity in UK prime yesterday, but it feels as healthy as Dutch."
The market looks set to be remain very quiet in general today and tomorrow because of the shortened week, but there remain pockets of activity. The trader says: "Something we've been seeing this week is investors selling some Spanish names and buying Italian, though we saw more two-way flows in Italy as yesterday went on. It looks likely to be profit taking combined with people seeing opportunities because ECB buying hasn't been as fast as expected."
There are three BWICs currently scheduled for the remainder of the day. The first two offer a relatively conventional mix of ABS, CMBS and RMBS, while the trader notes the third is "one for the specialists".
Due at 16:00 the six line list offers a toll road bond, ROAMAN 3.642 03/31/28; an Italian muni bond, SALTCY 11/26/24; a credit-linked note referencing TELEREAL bonds, RBS 0 12/21/33; and three CMBS - FHSL 2006-1 A, ISLND 2007-1 B (an NPL deal) and TIBET 1 D. Only TIBET 1 D has covered with a price on PriceABS in the last three months, doing so at 102.05 on 26 February.
SCIWire
Secondary markets
Euro CLOs on the rise
Euro CLO secondary activity is on the rise though BWIC volumes remain limited.
"Activity has picked up quite a bit over the last few days," says one trader. "Pretty much all 2.0 paper is in demand and there isn't enough supply."
At the same time, the trader says: "Demand also continues for 1.0 at the triple-B and under level, but we're now seeing a lot more interest in original single-As as well - it's very WAL dependent and focused on the shorter end. Leveraged buyers appear to be reasoning that because of compression they might as well hold single-As instead of triple-Bs."
The BWIC market remains quieter, however, with currently only two BWICs in the European CLO calendar for today and tomorrow. Three CDO/CLO tranches were due at 11:00 London time as part of a larger ABS/MBS mixed list - €4.5m ALME 2013-1X A-2, €100k HEATM I-06 A1 and €2.5m PULS 2007-1 B. Only ALME 2013-1X A-2 has covered on PriceABS in the last three months, doing so at 98.05 on 4 March.
Considerably more substantial is an 11 line €233m original face list of mixed vintage seniors due at 14:00 tomorrow. It consists of: ALME 2013-1X A-1, AVOCA 10X A, AVOCA VII-X A1, AVOCA VI-X A1, BABSE 2014-1X A1, EGLXY 2007-2X A, EGLXY 2013-3X A-2, JUBIL 2013-10X A, MALIN 2007-1X A1, RMFE V-X I and SPAUL 2X A. Two of the bonds have covered with a price on PriceABS in the last three months - AVOCA 10X A at above par on 25 March and RMFE V-X I at 96h on 23 February.
SCIWire
Secondary markets
US CLOs remain robust
The US CLO secondary market remains robust in the face of continuing supply.
"Secondary spreads are holding firm across the board as both BWIC and primary supply keeps coming," says one trader. "For now, people are really only looking to colour on the macro level as the likely destabiliser."
The BWIC calendar remains heathy despite the holiday shortened week and includes a wide variety of bonds. "There's a good distribution of assets on lists over the next couple of days and they total around $500m including CDOs," the trader confirms.
As noted yesterday, the majority of bonds revolve around the belly of the curve, but there are some variations on the theme as well. "We're seeing quite a few first pay Trups popping up which is fairly unusual," says the trader. "There are also some physically settled equity pieces due tomorrow, but I'm not sure how well they'll trade - it could just be a month-end pricing exercise from the manager behind the list."
Meanwhile, there is growing demand on- and off-BWIC for two specific tranche types. "We're getting a lot of enquiries for high dollar 1.0 double-Bs with very low energy exposures - they're rare but when we do find them they trade very well indeed," the trader says. "Equally, there are a few end-accounts looking at 2.0 triple-As from the weaker names - if they can get them at 160 or so DM they'll take them."
SCIWire
Secondary markets
Euro BWICs busy
European secondary securitisation markets are closing out the holiday shortened week with a busy BWIC calendar.
"The market is continues to be generally positive, though we've mostly traded sideways this week," says one trader. "Flows have primarily been from BWICs and today looks to be the same and a busy one going into the Easter break."
Today's current BWIC schedule involves four lists from four distinct asset classes - CLOs (the large seniors list mentioned yesterday), CMBS, Dutch RMBS and UK non-conforming. The trader says there is nothing significant behind the BWICs' timing: "It's normal day to day stuff with a couple of them for profit-taking purposes; CMBS in particular have rallied recently."
Aside from the CLO BWIC, the other lists only involve a few names each. First up, at 11:00 London time is the Dutch paper - €22.2m of PHEHY 2013-1 A2 and €9.15m of SAEC 12 A2. Neither bond has covered on PriceABS in the last three months.
At 12:00 there are two lines of CMBS - €2m DECO 2014-BONX E and £5m TAURS 2014-UK1 C. only TAURS 2014-UK1 C has covered on PriceABS in the last three months, doing so at 100.51 on 15 January.
Last, at 15:00 are three lines of RMS triple-As - €12m RMS 20X A2C, £31.081m RMS 25 A1 and £20.051m RMS 26 A1. None of the bonds has covered on PriceABS in the last three months.
SCIWire
Secondary markets
US CLOs heading tighter?
The US CLO secondary market remains busy on the last trading day of the week, but is taking its cues from new issue activity.
"Secondary tone remains very positive as we look towards primary for direction," says one trader. "The Carlyle print showed tightening and I think the market is getting increasingly concerned about the lack of new issue loans, which will contribute to further spread narrowing."
The secondary market has had plenty of its own supply this week thanks to an upswing in the volume and range of BWICs. "We've seen a lot more variety on BWIC this week than we've seen for a while, but much of it appears to have been pricing exercises and so there have been a lot of DNTs," the trader says.
Nevertheless, the trader adds: "The bonds that do trade are continuing to trade well. Equally, today's schedule looks more likely to see a far higher proportion of bonds trading."
Today sees five US CLO BWICs on the calendar so far and again offers a variety of assets, though not quite as extensively as recent days. Tranches in for the bid include 1.0 triple-As, mezz and equity along with a single line of 2.0 triple-B.
The schedule currently concludes at 12:00 New York time with an 11 line $38.25m 2.0 single-A auction. It comprises: ALM 2012-7A B, AMMC 2013-13A A3L, BHILL 2013-1A C1, BTNY 2015-1A C, HLA 2012-2A C, LROCK 2014-2A C1, OCT15 2013-1A C, OCT18 2013-1A B, RACEP 2012-7A C, SNDPT 2012-1A C and SYMP 2012-9A C.
Three of the bonds have covered on PriceABS in the last three months, all doing so on 24 February as follows: BHILL 2013-1A C1 at 98.2; HLA 2012-2A C at 96.68; and OCT18 2013-1A B at 96.76.
News
Structured Finance
SCI Start the Week - 30 March
A look at the major activity in structured finance over the past seven days
Pipeline
The pace of deals joining the pipeline slowed slightly last week. At the final count there was one new ABS, two RMBS, three CMBS and three CLOs.
The ABS was US$250m Jamaica Merchant Voucher Receivables Series 2015-1, while the RMBS were US$297.17m Citigroup Mortgage Loan Trust 2015-A and US$604m IHSFR 2015-SFR2. The CMBS consisted of US$1.1bn CGCMT 2015-GC29, US$1.14bn JPMBB 2015-C28 and US$150m VFC Series 2015-3, while US$513.1m Babson CLO 2015-I, US$504.75m Mariner CLO 2015-1 and US$508m Shackleton 2015-VII constituted the CLOs.
Pricings
There was notably more activity in deals leaving the pipeline. There were seven ABS prints as well as three ILS, four RMBS, two CMBS and 11 CLOs.
The ABS were: US$987m Ally Auto Receivables Trust 2015-SN1; US$1.25bn Capital One Multi-Asset Execution Trust 2015-1; £500m E-CARAT 5; US$214m JGWPT XXXIV Series 2015-1; US$302.6m Michigan Finance Authority Series 2015-1; US$1.25bn Penarth 2015-1; and €820m Quarzo CQS.
Kizuna Re II series 2015-1, US$100m Manatee Re Series 2015-1 and US$100m Queen Street Re 2015 were the ILS, while the RMBS were £258m Celeste 2015-1, €700m Hypenn RMBS III, US$860m STACR 2015-HQ1 and US$287.74m WinWater Mortgage Loan Trust 2015-3 and the CMBS were €175m DECO 2015-HARP and US$830m WFCM 2015-LC20.
Lastly, the CLOs were: US$408m Arrowpoint CLO 2015-4; €309m BNPP IP Euro CLO 2015-1; US$416m Crown Point CLO III; US$515m Dryden 38 Senior Loan Fund; €310m GLG Euro CLO I; €362.2m Grosvenor Place 2015-1; €3bn IM Grupo Banco Popular Empresas VI; US$440m JFIN CLO 2015-3; US$559m Kitty Hawk CLO 2015-1; US$416m OHA Loan Funding 2015-1; and US$508m Shackleton 2015-VII.
Markets
In US agency RMBS, FN 3.0s-4.0s underperformed curve hedges by 1 to 4 ticks over the past week, report Citi analysts, while FN 4.5s went on a tear and appreciated by 9 ticks as the roll on the coupon spiked from 3-plus ticks to 7 ticks. "Given the outperformance of FN 4.5s over the past week, we think they are looking fairly priced now. We continue to think FN 4.0s are rich," they say.
The tone in the US non-agency RMBS market was relatively average last week, report Bank of America Merrill Lynch analysts. "Through Thursday, US$522m of investment grade bonds and US$4.8bn of non-investment grade bonds traded, according to TRACE data," they note.
US CMBS spreads ended their nearly two-month rally with a broad-based sell-off, which Barclays Capital analysts partly attribute to macro concerns, as some economic data disappointed and drove equities down and credit spreads wider. "For the CMBS market, the macro concerns were exacerbated by a large amount of new issue conduit supply this week. Secondary trading levels for recently issued triple-A LCF bonds widened 2bp, to swaps plus 84bp," they say.
Deal news
• 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.
• 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 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 for auction last May (SCI 22 April 2014) but failed to meet the reserve price.
• 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 for GSMS 2011-GC5.
• 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.
• 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.
Regulatory update
• 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.
• 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.
• 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.
• 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).
News
RMBS
Reinvestment opportunities limited
The rest of 2015 will see almost €20bn repaid to European RMBS investors, with around 75% coming from UK prime and Dutch RMBS. While months with large redemptions can be expected to coincide with investors looking to reinvest, those investors are likely to remain starved of paper.
The €20bn yet to be repaid this year excludes master trusts, with a similar amount due to be repaid in 2016. Barclays Capital European securitisation analysts note that October 2019 is set to provide the highest monthly redemptions over the remaining life of the European RMBS market, but the next highest four months are all in 2015 and 2016.
Months with high redemptions could provide opportune moments for originators to enter the primary market. They should also provide support to secondary valuations.
This April is set to be the sixth largest month of redemptions between now and the end of 2020 and is dominated by Dutch redemptions, with HERME 15 and Dutch 2010-15 both due to be called. Investors focused on euro-denominated investments are likely to look to reinvest redemptions, which should particularly support Dutch valuations.
Excluding October 2019, December 2015 will be the month with the most redemptions. September 2016 will have the next highest total, followed by April 2016 and March 2016.
Where investors will be able to reinvest remains a challenge, however. While the Barcap analysts expect more European RMBS bonds to be publically placed than in previous years, the ECB's ABSPP is likely to absorb a lot of issuance, leaving investors with similar volumes to previous years.
Central bank schemes such as FLS and TLTRO continue to replace potential RMBS issuances, handicapping the UK and Dutch markets, which remain Europe's most liquid and largest RMBS sectors. Regardless of whether the ECB successfully re-invigorates the primary market or not, the volume of paper remaining with the end investor is likely to be on par with previous years, and hence the analysts warn the market will continue to shrink.
Assuming there is no further issuance, the RMBS market will have shrunk by 12% by the end of this year and by a further 16% by the end of next year. Nearly three-quarters will have paid off by the end of 2020.
"We would expect almost €20bn to be returned to investors this year, and c.€40bn by end-2016," say the analysts. "[This] does not include the majority of master trust transactions."
They continue: "Hence the figure is likely to be significantly higher across European ABS. With the ECB also a sizeable investor given its ABS purchase programme, the term 'starved for paper' we expect is going to be used far more frequently."
JL
Job Swaps
Structured Finance
Institutional fundraising pro hired
Mark Smith has joined Medley Management as md in its institutional fundraising group. Based in New York, he will cover institutional investors for Medley's private funds and separately managed accounts and will also be involved in product development.
Smith joins the firm with over 25 years of institutional fundraising experience. Prior to joining, he was md and head of North America institutional marketing with CIFC Asset Management. Before that, he worked in various capital markets and corporate finance positions for Citi, Bankers Trust and The GreensLedge Group.
Job Swaps
Structured Finance
Liquid loan JV formed
Capitala Finance Corp has established a joint venture with Kemper subsidiary Trinity Universal Insurance Company to create Capitala Senior Liquid Loan Fund I. The vehicle is expected to invest primarily in senior secured loans to middle market companies.
Capitala and Trinity have committed to provide US$25m of equity to the joint venture, with Capitala providing US$20m and Trinity providing the remainder. In addition, the fund has obtained third-party asset-level financing. Capitala and Trinity expect to begin funding the portfolio with new investments during the second quarter.
Job Swaps
Structured Finance
Direct lending exec added
The Carlyle Group has appointed Kunal Soni as md, based in Los Angeles. In his new role, he will lead West Coast origination efforts for its Carlyle GMS Finance BDC and affiliated investment vehicle NF Investment Corp. The two vehicles are primarily focused on lending to private US middle market companies, many controlled by private equity firms.
Soni joins Carlyle from Medley Management, where he was md and head of direct lending for the Western Region. Prior to that, he was md at THL Credit, where he led the sourcing, underwriting and account management of direct lending transactions for the Western Region.
Job Swaps
Structured Finance
Law firm adds four more
Winston & Strawn has hired four finance and securities attorneys to its New York office from Pillsbury Winthrop Shaw Pittman. This includes leveraged finance attorney Mats Carlston, who will serve as Winston's co-chair of global finance.
Carlston represents lead arrangers, agents, lenders, investors and borrowers in domestic and cross-border financings, with an emphasis on leveraged buyouts and recapitalisations of private equity-sponsored enterprises. "The move also allows us to expand our structured finance, project finance and securities practices in the US and internationally," says Carlston.
In addition, the firm has hired William Egler as a partner, David Odrich as a partner to its M&A and securities practice, and Tim Kober as counsel for various areas. The additions follow Winston & Strawn's recent hiring of Jeffrey Stern to its SF practice (SCI 6 March).
Job Swaps
Structured Finance
Economics professor tapped for advice
BlueMountain Capital Management has entered into a consulting agreement with Harvard economics professor Jeremy Stein, who was a member of the Federal Reserve Board from May 2012 to May 2014. He will advise BlueMountain on a range of issues, including implications of monetary and macro-prudential policies, financial regulation and market evolution, and risk and capital management.
Stein is the Moise Y. Safra Professor of Economics at Harvard University and a fellow of the American Academy of Arts and Sciences, a research associate at the National Bureau of Economic Research and a past member of the New York Fed's Financial Advisory Roundtable. He served as president of the American Finance Association in 2008 and as a senior advisor to the Treasury Secretary and on the staff of the National Economic Council in 2009.
Job Swaps
Structured Finance
Middle market partnership formed
Intesa Sanpaolo and GSO Capital Partners have entered into a strategic partnership to provide an alternative source of funding to Italian middle market businesses. The partnership aims to significantly expand the availability of private debt capital in Italy, enabled by favourable recent changes in the Italian legal and regulatory framework.
The collaboration will focus on both existing corporate clients of Intesa Sanpaolo as well as the broader Italian middle market corporate universe. The private debt capital will be provided to sub-investment grade companies for a variety of purposes, including growth capital, acquisition financing and opportunistic refinancings.
Job Swaps
Structured Finance
Corporate development head named
Wells Fargo has appointed Julie Caperton as head of corporate development. Caperton will be responsible for supporting business leaders across the bank by managing its acquisition and divestiture process. She will report to Wells Fargo corporate treasurer Paul Ackerman.
Caperton joins corporate finance after serving as head of wholesale banking's asset-backed finance and securitisation team at Wells Fargo Securities. In this role, she led the origination, distribution and retained risk management for structured finance and securitisation transactions.
Caperton has also held executive leadership roles in the corporate trust services business under Wells Fargo's specialised lending, service and trust division. In her new role, she will replace former head of corporate development Bruce Helsel, who is set to retire.
Job Swaps
Structured Finance
Senior sales pro recruited
Vanessa Bradford has joined RBS as a senior sales person on asset-backed product (ABP) sales. She reports to Patricio Silva, head of ABP sales for EMEA.
Bradford arrives from Cantor Fitzgerald, where she worked in fixed income sales, focusing on structured credit. Prior to this, she worked for Lehman Brothers as head of hedge fund sales for European structured products.
Job Swaps
Structured Finance
Portuguese servicing partnership agreed
Arrow Global Group and CarVal Partners have partnered to jointly originate and service Portuguese loan portfolios over a five-year period. The agreement includes the purchase of €565.6m in face value of portfolios for €37m by Arrow Global, of which 61% of the purchase price is underpinned by secured assets. The portfolio purchases principally comprise the acquisition of securitisation notes.
In addition, Arrow Global will acquire Portuguese servicer - Whitestar Asset Solutions - from funds managed by CarVal. This will be for a total consideration of €47.8m, payable over two years, and is expected to complete during April. CarVal has agreed to remain on the board of Whitestar for the duration of the formal partnership.
Whitestar has circa 300 employees and manages portfolios with a face value of €2.3bn, with future portfolio servicing contracts agreed for a face value of about €1bn.
Arrow Global will also acquire Portuguese NPL servicer - Gesphone - and €77m face value of portfolios for a consideration of €8.3m, payable over four years. The firm, which has around 40 employees, has serviced portfolios for Arrow Global since 2010.
Arrow Global founder and executive director Zach Lewy will become a member of both the Gesphone and Whitestar boards on completion of the transactions.
Job Swaps
CDS
Determinations Committee members named
ISDA has announced the outcome of the annual process to determine members of its five regional Determinations Committees (DCs), which comprise the global decision-making structure around events in the credit default swap (CDS) industry. The newly-elected firms will serve on the committees from 29 April.
Voting dealers for all regions will now consist of: Bank of America, Barclays Bank, BNP Paribas, Citibank, Credit Suisse International, Deutsche Bank, Goldman Sachs International, JPMorgan, Morgan Stanley and Nomura International. Mizuho Securities and SG have been named as consultative dealers for all regions.
Voting non-dealers for all regions comprise: BlueMountain Capital Management, Citadel, DE Shaw & Co, Elliott Management Corporation and PIMCO. GSO Capital Partners is a consultative non-dealer for all regions.
The DCs each consist of 10 sell-side and five buy-side voting firms, alongside three consultative firms and central counterparty observer members. ISDA acts as a non-voting secretary to each DC and endeavors to co-ordinate this process in a transparent and operationally efficient manner.
A DC currently exists for the Americas, Asia excluding Japan, Australia-New Zealand, EMEA and Japan.
Job Swaps
CDS
Trading duo added
Commerzbank has hired Colin Webb as a director in its financials trading team. Webb previously worked for Deutsche Bank, where he traded investment grade financial credit swaps.
The bank has also recruited Donal Golden from Legal & General Investment Management. He will serve as a director in Commerzbank's high yield trading team.
Job Swaps
CLOs
Zohar fraud charges filed
The US SEC has charged Lynn Tilton and her Patriarch Partners firms of hiding the poor performance of loan assets in three CLO funds they manage. The Commission claims that the accused breached their fiduciary duties and defrauded clients by failing to value assets using the methodology described to investors in offering documents for the CLO funds, which have portfolios comprised of loans to distressed companies.
The charges allege that nearly all valuations of loan assets have been reported to investors as unchanged from the time they were acquired, despite many of the underlying companies making partial or no interest payments to the funds for several years. As a result, the SEC says that investors have not only been misled to believe that objective valuation analyses were being performed, but Tilton and her firms have also avoided significantly reduced management fees.
This is said to be because the valuation methodology described in fund documents would have given investors greater fund management control and earlier principal repayments if collateral loans weren't performing to a particular standard. Additionally, Tilton and her firms consequently have misled investors about asset valuations in fund financial statements, according to the charges.
"We allege that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost US$200m in fees and other payments to which they were not entitled," says Andrew Ceresney, director of the SEC's Enforcement Division.
The three CLO funds managed by Tilton and the Patriarch Partners firms are collectively known as the Zohar funds, through which more than US$2.5bn has been raised from investors. The SEC says that Tilton's investment strategy for the Zohar funds has been to improve the operations of the distressed portfolio companies so they can pay off their debt, increase in value and eventually be sold for a profit.
The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the allegations and determine what, if any, remedial actions are appropriate.
Job Swaps
CLOs
Equity investment disclosed
Fair Oaks Income Fund has acquired, in the primary market, US$19m notional of the equity notes issued by Arrowpoint CLO 2015-4. The acquisition represents 56% of the transaction's total equity.
Managed by Arrowpoint Partners, the CLO's current target portfolio has a principal value of US$400m across an expected 174 unique bank loan issuers, with an expected weighted average exposure per issuer of approximately 0.7%. Fair Oaks estimates the potential total return for this investment to be between 14% and 17% per annum.
Pro-forma following this investment, the fund's portfolio provides broadly diversified exposure to over 750 unique bank loan issuers, with a weighted average exposure per issuer estimated at 0.2%. The top-10 issuers represent an estimated 6.8% exposure and the portfolio is diversified across 40 industries.
Approximately 93% of the underlying loans in the fund's CLO investments are to US issuers, 4% to issuers domiciled in the UK, Germany, France and the Netherlands and less than 1% are to other European issuers.
Job Swaps
Insurance-linked securities
North America ceo named
JLT Re has appointed Ed Hochberg as ceo of JLT Re in North America. Hochberg was previously global head of analytics, banking and advisory at the firm, having joined as part of the Towers Watson Re acquisition in 2013. He will report to Mike Reynolds, global ceo of JLT Re.
Before joining Towers Watson, Hochberg was svp of financial products for PMA Re. He has also worked for PMA Capital and Deloitte & Touche, and has served on the board of directors of Cathedral Capital. He will retain the responsibilities for his current role until a replacement is appointed.
Job Swaps
Insurance-linked securities
Montpelier Re acquired
Endurance Specialty Holdings is set to acquire Montpelier Re Holdings for a consideration of 0.472 shares of Endurance and US$9.89 in cash for each Montpelier common share. This represents US$40.24 per Montpelier common share, or US$1.83bn in aggregate, based on Endurance`s closing price on 30 March.
As a result of the transaction, Endurance expects to achieve meaningful transaction synergies through cost savings and greater capital efficiencies. "Importantly, the acquisition materially increases our breadth of distribution with the addition of a good-sized and scalable Lloyd`s platform and an attractive property catastrophe business that complements our existing reinsurance portfolio. The acquisition also provides Endurance with a natural introduction to the business of managing insurance and reinsurance investment products for third-party capital investors," comments the firm's chair and ceo John Charman.
The cash portion of the consideration will be funded through a pre-closing dividend paid by Montpelier to its common shareholders. Following completion of the transaction, Montpelier`s existing shareholders will own approximately 32% of Endurance`s outstanding ordinary shares.
Endurance`s board of directors will expand at closing to include three of Montpelier`s current directors. Endurance`s senior management team will lead the combined company from its Bermuda headquarters.
The transaction is expected to complete in 3Q15, subject to the approval of both companies` shareholders and regulatory approvals.
Job Swaps
Insurance-linked securities
Non-traditional cat coverage enhanced
BMS Capital Advisory has appointed Steve Korducki evp of BMS Intermediaries, serving as general securities representative. Korducki currently serves on the BMS Intermediaries US executive committee as the leader of its Florida strategy. In his new role, he will assist the firm in the expansion of non-traditional catastrophe coverage solutions for BMS' clients and new business prospects.
Job Swaps
RMBS
NPL platform purchased
Clayton Holdings has acquired Red Bell Real Estate and its affiliate Main Street Valuation. The move is expected to serve as the foundation for new initiatives within the broader real estate market.
Red Bell offers advanced technology solutions that help investors monitor loan portfolio performance and direct loss mitigation activities; acquire and track NPLs; and value and sell REO properties through a secure platform. The firm will continue to operate under its current brand and remain in Salt Lake City. Co-founder Jeffrey Jonas and his senior management team are also staying in place.
Job Swaps
RMBS
Basinghall acquisition completed
Macquarie's commodities and financial markets group has assisted Bluestone Group in the acquisition of Basinghall Finance, the UK mortgage lending and servicing platform. The bank provided funding, structuring and distribution expertise to facilitate both acquisition finance and capital markets transactions in connection with the purchase.
The acquisition involved the purchase of mortgage assets and securities-related servicing contracts, along with the transfer of staff to Bluestone, forming the core of Bluestone Mortgages' UK division. The acquisition accelerates the growth of Bluestone's European lending and servicing businesses, which now include credit management, loan servicing and lending operations in the UK and Ireland.
The capital markets refinancing involved Macquarie acting as sole arranger for two separate transactions: the £250m Celeste Mortgage Funding 2015-1 RMBS, which was recently placed with European investors; and the repackaging and placement in December 2014 of two net interest margin securities relating to two outstanding securitisations.
News Round-up
ABS
Chinese auto ABS performance varies
Chinese auto loan ABS delinquency rates increased in 4Q14 compared with 3Q14, but remain low, explains Moody's. However, the performance of China's eight auto loan ABS transactions under review varied, based upon a number of factors.
The 30-day plus delinquency rate for Chinese auto loan ABS increased to 0.21% in 4Q14, compared with 0.12% in 3Q14. The 60-day plus delinquency rate was relatively stable at 0.07% in 4Q14, compared with 0.05% in 3Q14.
The eight auto loan ABS transactions Moody's rates varied in performance, upon a number of factors. For example, one transaction originated by a Chinese bank has a low cumulative default rate of 0.12% ten months after close, outperforming most of the other transactions, which were all originated by the captive finance companies of auto manufacturers. Moody's says the bank's existing relationships with and knowledge of its clients, along with its longer experience in consumer finance in China, provide it with an advantage in terms of the underwriting of loans.
Auto loan ABS transactions issued by originators with a shorter operating history in China have some of the highest cumulative defaults in the sector. Originators with a longer operating history have accumulated more experience in consumer finance in China, which helps with their underwriting process.
Further, Chinese auto loan ABS transactions backed by larger loan amounts to finance more expensive vehicles tend to have higher default rates. This is despite all eight Chinese auto loan ABS transactions having initial weighted average LTV ratios of 60%-70%. Therefore, Moody's believes that higher loan amounts show that the collateral backing transactions comprise more expensive vehicles.
Finally, the transaction with the highest proportion of zero interest rate loans outperforms the other transactions, with a cumulative default rate at 0.07% eight months after close. Zero interest rate loans can attract buyers who otherwise would make the purchase without any financing. Moody's explains that these customers with more liquidity have better credit profiles and are less prone to default.
News Round-up
Structured Finance
US lodging fundamentals supported
Fitch suggests that accelerating US GDP growth and low levels of new supply will support strong US lodging industry fundamentals during 2015. Robust demand has boosted occupancy rates, providing hotels with material pricing power, while US RevPAR is expected to increase by 6% this year based on a 1% occupancy gain and 5% average daily room rate growth.
Trailing 12-month (TTM) RevPAR growth has been positive for 54 sequential months, as of February, a relatively short time compared to the 112-month recovery that began in the early 1990s. However, Fitch expects further RevPAR gains over the next 1-3 years based on its review of key lodging cycle leading indicators.
The agency says that lodging C-Corps can benefit from increased room systems driven by the incremental supply and they typically earn higher incentive management fees as property cashflows increasingly surpass owners' priority returns. Lodging REITs tend to outperform earlier in the cycle due to their relatively high operating and financial leverage, and are more sensitive to supply changes.
Fitch expects the ratings of CMBS transactions with high hotel exposure to remain stable in 2015, but it has grown more conservative in its view of CMBS hotel collateral as this up-cycle progresses. It has increasingly capped room revenues at 2013 levels in its CMBS hotel collateral analysis or reduced the most recent TTM room revenue by 2.5%-5% when growth is driven by improving market conditions, rather than capital investments.
Fitch says it may assume even lower RevPAR if new competitive hotel products enter the market. It has sharply haircut - upwards of 15% to 20% - issuer underwritten cashflows in several large loan/single-borrower hotel deals it reviewed during 2015 and used more stringent hurdle rates and reduced diversity credit levels in its analysis.
Meanwhile, the agency expects stable timeshare ABS ratings in 2015 based on solid collateral performance and sizable levels of credit enhancement. It has observed consistent year-over-year delinquency improvements in the sector since 2012, while defaults improved in 2014 but remain elevated compared to pre-recession levels.
Timeshare companies capitalised on strong investor demand by accessing this market at attractive all-in rates during 2014. Wyndham Worldwide Corporation's US$204m securitisation of previously non-securitised receivables in late 2014 illustrates the strength of demand.
News Round-up
Structured Finance
Green bond principles updated
The executive committee of the green bond principles (GBP) initiative has published a second edition of the GBP, with the support of the International Capital Market Association. The GBP are voluntary process guidelines that recommend transparency and disclosure to promote integrity in the development of this market by clarifying the approach for issuance of a green bond (SCI 14 January 2014).
The 2015 update includes a comprehensive high-level definition of green bonds and has addressed the refinancing of green projects. The recognised broad categories of eligible projects have been updated and have also been complemented by four overarching areas of concern, which are climate change, natural resources depletion, biodiversity conservation and pollution. A particular effort has also been made to elaborate on assurances that issuers may be expected to obtain to confirm their alignment with the key features of their green bonds.
The green bond market grew substantially during 2014, with an estimated US$36.6bn of new green bond issuance from borrowers including international and national development banks, as well as municipal and corporate issues.
News Round-up
Structured Finance
CRA code of conduct revised
IOSCO has published a final report on its code of conduct fundamentals for credit rating agencies (CRAs), which includes significant revisions and updates to the current code. The move follows the organisation's request for comment on proposed changes to the code (SCI 11 February 2014).
The revisions to the code aim to enhance provisions protecting the integrity of the credit rating process, managing conflicts of interest, providing transparency and safeguarding non-public information. They also intend to add measures regarding governance, training and risk management.
Further, the revisions are designed to improve the clarity of the code by adding definitions of key terms and revising existing definitions, updating terminology, restructuring existing provisions to better group them thematically and eliminating extraneous text. IOSCO says the new code is intended to work in harmony with CRA registration and oversight programmes, and to continue operating as the international standard for CRA self-governance.
News Round-up
Structured Finance
Green bond market surging
S&P says that corporate green bond issuance could reach up to US$30bn by the end of this year, a near 50% increase on the current size of the market - US$19.1bn. However, the agency notes that this nascent asset class will face tough challenges in the coming months, which could test the viability and durability of the entire green bond concept.
"Corporate issuers have been a driving force in the strong growth of green bond issuance over the past 18 months, led by the utilities and real estate sectors," says S&P credit analyst Michael Wilkins. "Not only did they bring scale, but they also offered a range of currencies, geographic locations and maturities - all great for liquidity in the market."
The recent €500m seven-year issue by Danish wind turbine manufacturer Vestas, which was twice oversubscribed, illustrates the strong appetite that exists for such instruments. S&P expects green bond issuance to remain relatively buoyant, given investor appetite for green products, as well as issuers taking advantage of the exceptional demand.
One concern is whether green bonds will wither as declining oil prices make alternative energy investments less appealing. S&P believes that the market's strong growth should continue even with lower oil prices, as oil price movements may have less of an impact on renewables than many fear, due to the longevity of climate change as an investment driver. Moreover, funds raised by green bonds are used for energy-related and wider socially responsible projects.
S&P says the surge in green bond sales represents growing demand among investors for green investments amid concerns about climate change, but also highlights one major challenge - namely, what should qualify as an environmentally-friendly project? Wide association with attempting to be green raises the danger that the value of green bonds may get diluted by 'greenwashing'.
"Transparency for this developing market requires clear definitions and disclosure of how proceeds are used and how projects are managed," adds Wilkins. "Issuers and investors both require commonly agreed standards on what counts as a green bond, with sufficient transparency and monitoring to ensure funds are not misused."
Potential areas for growth in green bonds include China, whose market could grow substantially over the next 12 months, with Beijing stepping up its anti-pollution drive and investment in renewable energy. The Chinese market is also opening up to speculative-grade companies, with three high yield green bonds being issued in the energy, utilities and industrials sectors.
Furthermore, not all companies that are eligible have tapped the market, as financing climate change mitigation is not part of the mandates of corporates. Also, the current market is fairly small and a more liquid market - diversified with private placements - has to be developed in order for more issuers and investors to step in.
News Round-up
Structured Finance
Greek sovereign ceiling lowered
Fitch has downgraded 19 tranches from eight Greek structured finance (SF) transactions, covering one ABS and seven RMBS. The agency has assigned a negative outlook to all 18 RMBS tranches.
In addition, Fitch downgraded five covered bond programmes and maintained their ratings on rating watch negative. These rating actions follow the agency's recent downgrade of Greece's issuer default ratings from single-B to triple-C, as well as the revision of the country ceiling from double-B to double-B minus. As a result, it revised the Greek SF cap to single-B minus.
News Round-up
CLOs
Post-crisis CLOs still outperforming
The total amount of CLOs paid down in JPMorgan's CLO index (CLOIE) between the February rebalance and end-March was US$1.46bn in par outstanding, split between US$1.12bn and US$340m of pre-crisis and post-crisis CLOs. The post-crisis CLOIE added US$8bn with 114 tranches from 18 deals at the March rebalance.
Last month, the CLOIE experienced positive returns across all tranches, led by the post-crisis double-B sub index, which returned 0.93% and tightened by 4bp. Additionally, the post-crisis triple-A and double-A sub indices tightened 2bp and 4bp in March, respectively, resulting in 0.24% and 0.44% returns. The post-crisis single-B tranche continues to underperform, widening 7bp last month and returning 0.31%.
Pre-crisis CLO indices continued to underperform post-crisis CLO indices partially, with lower coupons and a slow prepayment rate in leveraged loans. Pre-crisis CLO triple-As returned 0.12% in March and have returned 0.23% to date in 2015.
News Round-up
CMBS
Oil causes Canada CMBS concerns
The negatives of a sustained period of low oil prices seem likely to outweigh the positives for assets in Canadian CMBS, notes Fitch. Canadian CMBS conduit performance could diverge sharply between oil-focused areas in Alberta, such as the cities of Calgary, Edmonton and Fort McMurray, and the rest of the country.
This is in contrast to US CMBS, where Fitch believes lower gasoline and heating oil prices will bolster consumer discretionary incomes and will likely lead to greater retail and travel spending, providing a moderate net benefit to US equity REITs. Shopping centres and hotels could experience the greatest benefit, while office properties in oil-exposed areas may have heightened vulnerability to tenant failures and increasing vacancy.
In the US, Houston is most at risk, says the agency, although portfolios have held up thus far. Exposure to lower oil prices for REITs is limited outside of Texas.
News Round-up
CMBS
Irish multifamily faces challenges
Fitch says high ratings on CMBS backed by Irish multifamily housing (MFH) assets will be difficult to achieve, given the lack of investment track record and the limited historical data on the sector. In the agency's view, bonds rated above single-A need to survive stresses significantly above those experienced in the recent residential downturn, including a slowing economic recovery.
MFH is not an established asset class in Ireland, which is traditionally a nation of homeowners, with rented accommodation provided socially or by small-scale domestic private investors. However, Fitch believes this may change as tighter mortgage finance narrows the route to owner occupation, while international investors may look to invest in MFH as a bet on structural change in the Irish housing market.
Nevertheless, availability of long-term data to support investment is limited, with little coverage of rental yields. The dataset available comes from multiple sources with different reporting conventions in terms of property type and location.
Fitch suggests that Dublin residential properties presented a MFH yield performance of between 2% and 5% at the market peak in 2007. As prices fell through to 2012, yields climbed to between 5% and 11%, with the highest yields in some outlying suburbs and significant variation in volatility by post code.
Over the same period, rents fell on average by 25%. However, Dublin has recovered strongly and Fitch expects rents in the commuter belt to continue to catch up as some suburban residents seek more affordable housing. Looking further ahead, the agency believes that Dublin housing will become more affordable in real terms, with downside risk to nominal rents, given the likelihood of additional supply and the lack of inflation.
The movement in yields and rents associated with the last downturn would provide benchmarks for a single-A rating analysis, according to Fitch. However, the outcomes of more severe rating stresses can be judged with less certainty due to the limited track record of Irish MFH and related data.
News Round-up
CMBS
CMBS delinquency rate flattens
The Trepp US CMBS delinquency rate was unchanged in March, interrupting the recent string of falling delinquencies which saw the rate fall four consecutive months and for 20 months in the last two years. The delinquency rate for US CRE loans in CMBS remains 5.58% and is 96bp lower than a year ago.
Almost US$1.1bn in loans became newly delinquent in March, which put 22bp of upward pressure on the rate. Over US$800m in loans were cured last month, which helped push delinquencies lower by 16bp.
CMBS loans that were previously delinquent but paid off either at par or with a loss totalled about US$570m in March. Removing the previously distressed assets helped move the delinquency rate down by 11bp.
Compared to previous months' liquidation volumes, the March total represents a significant drop off. In January, US$1.2bn in loans were liquidated, while US$1.8bn in loans were resolved with losses six months ago.
After a rapid pace in 2012 and 2013, the rate of loan resolutions has steadily slowed. However, as 2006 and 2007 10-year loans reach their maturities, Trepp expects the numbers to pick up again.
News Round-up
NPLs
NPL pools auctioned off
Freddie Mac has sold via auction 5,398 deeply delinquent non-performing loans, with an aggregate unpaid principal balance of US$985m, from its mortgage investment portfolio. The transaction is expected to settle in early May.
The loans were offered as three separate pools and investors had the flexibility to bid on one or more pools, or bid on the aggregate of all three pools. Pool One comprised 3,577 NPLs, with an aggregate UPB of US$629.6m and a BPO LTV of 74%; Pool Two comprised 1,331 NPLs, with an aggregate UPB of US$235.9m and a BPO LTV of 84%; and Pool Three comprised 490 NPLs, with an aggregate UPB of US$120m and a BPO LTV of 74%.
GCAT Management Services 2015-13 was the winning bidder on all three pools. The cover bid prices were in the low 80s percent of UPB for Pool One, in the low 70s for Pool Two and in the mid-70s for Pool Three.
The average loan size and note rate on the aggregate of the three pools are US$182,562 and 5.5% respectively. The aggregate weighted average LTV is 76%, based on BPOs of the underlying properties.
Freddie Mac notes that the loans have been delinquent for approximately three years on average. "Given the deep delinquency status of the loans, the borrowers have likely been evaluated previously for or are already in various stages of loss mitigation, including modification or other alternatives to foreclosure, or are in foreclosure. Mortgages that were previously modified and subsequently became delinquent comprise 24.7% of the aggregate pool balance," it adds.
At the same time that marketing began for the transaction on 2 March, the FHFA announced enhanced requirements for NPL sales. Winning bidders' servicers must now prioritise loan modifications over short sales or deeds-in-lieu of foreclosure, and foreclosure must be the last option. For loans that transition to REO, servicers must encourage sales to owner-occupants and non-profits.
In addition, servicers must: comply with the requirements of the US Treasury's Making Home Affordable programmes; evaluate all borrowers who are determined ineligible for HAMP for a proprietary modification; and honour completed modifications, as well as those in trial or applications in process at the time of sale.
News Round-up
NPLs
Italian NPL vehicle established
PVE Capital has acquired a portfolio of Italian non-performing loans with a gross book value of €408m. The firm has also created a vehicle under Italian Law 130 - for which Prelios Credit Servicing will act as master servicer - that will allow it to replicate similar deals in the future.
PVE originated the transaction as part of an ongoing investment opportunity it sees for private credit to enter the Italian NPL market, providing much-needed liquidity to small and medium-sized forced sellers of these assets. This first underlying portfolio has been acquired from a small private financial institution and is comprised primarily of secured loans against good quality residential property assets across Italy.
Concurrent with the transaction, PVE has formed an exclusive arrangement with special servicer Centaurus - founded by Ubaldo Palmidoro - to manage the loan servicing process. The relationship will seek to improve the maximum recovery potential of these loans.
News Round-up
Risk Management
CCP stability enhanced
The ECB and the Bank of England have announced a series of measures aimed at enhancing financial stability in relation to centrally cleared markets within the EU. In particular, the central banks have agreed enhanced arrangements for information exchange and cooperation in connection with UK central counterparties (CCPs) with significant euro-denominated business.
Under the arrangements, the ECB and the BoE are extending the scope of their standing swap lines to facilitate the provision of multi-currency liquidity support to CCPs established in the UK and euro area, should it be necessary and without pre-committing to the provision of liquidity. CCP liquidity risk management remains the responsibility of the CCPs themselves, the central banks stress.
The move follows the recent judgement by the General Court of the EU (SCI 6 March). In light of these agreements, the ECB and UK government have agreed to a cessation of all legal actions covering the three legal cases raised by the UK government.
News Round-up
Risk Management
Centralised trading principles promoted
ISDA has published a set of principles aimed at promoting regulatory consistency in the development and application of centralised trading rules for derivatives. Among the principles set out, ISDA says the trading liquidity of a derivatives contract should be determined by reference to concrete, transparent and objective standards, so that market participants have a clear understanding of when swaps will be required to move from the bilateral market to centralised trading venues.
The principles also outline that derivatives contracts subject to the trading obligation should be able to trade on a number of different types of centralised venues. The aim is for regulators to achieve a flexible trade execution regime that would allow contracts to be traded across jurisdictions and not be subject to costly duplicative compliance obligations and regulatory arbitrage.
Additionally, ISDA believes that trading venues must offer flexible execution mechanisms that take into account the trading liquidity and unique characteristics of a particular category of swap. It says that regulators will encourage centralised trading by permitting parties to communicate and execute trades freely, so long as the parties comply with the requirement to execute trades on a centralised venue.
The association notes that certain regulatory changes need to be made to the US swap execution facility (SEF) rules in order to comply with the new principles and to achieve a harmonised international regulatory regime. The principles have been formed out of concern about the potential for jurisdictional divergences in the rules on execution of standardised derivatives on an exchange or electronic trading platform. ISDA argues that a lack of cross-border basis for the rules can lead to market fragmentation, low trading liquidity, duplicative compliance requirements and increased risk.
News Round-up
Risk Management
CFTC swap exemptions outlined
The US CFTC has issued no-action relief stating that swap dealers involved with certain legacy SPV swaps are exempt from complying with particular regulations. The regulations relate to external business conduct standards and swap trading documentation that swap dealers would otherwise be required to adhere to.
When a swap dealer is required to take remedial action following the withdrawal, qualification or downgrade of the swap dealer's credit rating below certain thresholds, that action can include amending a legacy SPV swap or amending and transferring the obligations of the swap dealer under the legacy SPV swap. While such actions typically do not give rise to a change in the economic terms of a swap, any such amendment or transfer may cause a legacy SPV swap to be considered a 'new swap' for purposes of compliance with the CFTC'S regulations.
Consequently, a legacy SPV swap may become subject to the regulations solely on these actions. The CFTC says that it will not seek to take enforcement action against a swap dealer for failure to comply with the specified regulations so long as they apply to the swap dealer or legacy SPV swap solely as a result of certain remedial actions taken in accordance with applicable delinking criteria, and any remedial action taken in accordance with the applicable delinking criteria does not alter the material economic terms of the legacy SPV swap.
The CFTC defines a legacy SPV swap as a swap in existence prior to 10 October 2013, between an SPV whose obligations currently have a credit rating from one of Moody's, S&P or Fitch and a swap counterparty that, at the time the swap was executed, had a credit rating from at least one of the aforementioned agencies. In addition, the swap must have been in.
News Round-up
Risk Management
ESMA targets data centralisation
ESMA has launched two projects at the request of a number of National Competent Authorities (NCAs), focused on centralising data collection and accessibility. ESMA will attempt to provide a central facility for instrument and trading data and the calculation of MiFIR transparency and liquidity thresholds, and will also provide a single access point for trade repositories data under EMIR.
ESMA will collect data directly from approximately 300 trading venues across the EU. The trading venues will send their MiFIR/Market Abuse Directive data to ESMA, which will then perform and publish the necessary transparency and liquidity threshold calculations. Once finalised, the database will allow NCAs and financial market participants access to all data for financial instruments admitted to trading on EU regulated markets or traded on MiFID venues.
The trade repositories project will provide a single access point to trade repositories data under EMIR. This will provide ESMA and 27 NCAs with immediate access, through a single platform, to the 300 million weekly reports on derivatives contracts received from 5,000 different counterparties across the EU trade repositories.
News Round-up
RMBS
RMBS case dismissal denied
A US District Judge has granted in part and denied in part a motion to dismiss a complaint filed by HSH Nordbank against several RBS affiliates with regard to RMBS issued or underwritten by RBS. Judge Paul Gardephe of the Southern District of New York has allowed the fraud and aiding and abetting fraud claims to proceed, while dismissing claims for negligent misrepresentation and fraudulent concealment due to the absence of privity, as well as a claim for rescission based on mutual mistake.
The court held that there were sufficient allegations of fraudulent intent in connection with alleged misstatements concerning the underlying loans' compliance with underwriting guidelines. However, the court held that these allegations were not sufficiently connected to alleged misstatements concerning the loans' LTV and CLTV ratios, as well as the RMBS certificates' credit ratings and the validity of the assignment of the mortgages to the RMBS trusts.
News Round-up
RMBS
Divergent impact from criteria updates
S&P has published separate methodologies and assumptions for rating Irish and Portuguese RMBS. This follows the agency's request for comments on rating RMBS in the respective jurisdictions (SCI passim).
The changes align both criteria closely with S&P's global RMBS criteria and aim to increase the transparency of the ratings analysis. On application of the criteria, the agency expects to raise approximately 25% of its outstanding ratings on Irish RMBS, but downgrade approximately 25% of its outstanding ratings on Portuguese RMBS. The impact on individual Portuguese RMBS will vary, depending on a transaction's asset pool and its structural characteristics and features.
S&P says its impact analysis takes into consideration its current outlook on both jurisdictions' housing and mortgage markets, as well as on the overall economy. The agency expects to resolve any rating changes within six months of the effective date of the criteria, which is 13 April.
News Round-up
RMBS
Irish residential regs evaluated
Irish lenders believe that recently announced mortgage lending regulations could stabilise the property market in the long run, says Moody's. However, certain aspects are expected to increase rent costs and could see first-time buyers renting for longer.
"One set of rules limits the LTV ratio for owner-occupied and buy-to-let (BTL) mortgages, while another protects borrowers when unregulated entities purchase their loans," says Moody's. "The regulations are credit positive for the prime and BTL sectors, as the quality of new mortgage loans will improve."
On the other hand, lenders do not see the regulation as accommodating for buyers trying to get on the property ladder. The higher deposit required by the mortgage lending regulations announced in January (SCI 5 February) is expected to raise rents and keep first-time buyers renting for longer.
Moody's believes the strengthening economy and demographic factors, such as the projected population increase, will support Irish house prices in 2015, with an increase by 5% to 10%. House prices have recently been levelling off, following a surge in the months leading up to the January announcement, which was largely due to the impending regulations.
Lenders consider the consumer protection bill to be a preventative measure to protect consumers from unfair treatment and to ensure adherence with the Code of Conduct Mortgage Arrears processes on communication, financial information, assessment and resolution.
The bill will not affect Irish RMBS transactions, says Moody's. It aims to regulate the servicing, rather than the holders of the loans themselves. Therefore, although the legislation's scope includes RMBS deals, it will not have any impact because the servicers are regulated lenders, not unregulated credit servicing firms.
News Round-up
RMBS
Boom-and-bust housing 'overvalued'
Several US cities synonymous with the housing boom-and-bust environment nearly a decade ago are now emerging as some of the most overvalued housing markets in the country, according to Fitch. Austin and Houston remain the top two most overvalued MSAs, per Fitch's sustainable home price model.
However, Las Vegas, Phoenix, Riverside and Miami have all vaulted into the top 10. "Prices in each of these boom-and-bust cities have risen by over 45% after touching lows in 2011," says Fitch director Stefan Hilts.
Growth has primarily been driven by tight supply, as construction rates remain low and significant numbers of underwater borrowers limit the number of properties available for sale. With supply limited, the impact of outside investors and the modest recovery in housing demand has been magnified.
Much of the price growth is a recovery from depressed values that fell below long-term sustainable levels, as calculated by Fitch's model. For instance, in Las Vegas - which saw the worst declines of this group - the agency estimates that home prices fell as low as 25% below a sustainable level at the beginning of 2012. Miami, Riverside and Phoenix all fell more than 10% below their respective sustainable levels.
More growth in these markets, though, may be difficult to come by. "Upside is limited, as these boom-and-bust cities will struggle to absorb any increased supply without a significant impact on price growth," adds Hilts.
This comes as housing markets across the US overall are seeing significant home price gains, though only some seem to be benefiting from strong fundamentals. In the Bay Area, Seattle and Texas, recent price gains were driven by strong demand, while building rates are above long-term averages. San Francisco dropped out of the top 10 on strong income growth, although it was replaced by another Bay Area city - Oakland - where home prices are overvalued by 13%.
News Round-up
RMBS
Ratings corrections made
S&P has taken various rating actions on 853 ratings from 111 US RMBS transactions. The move follows the agency's recent placement of 338 ratings - 173 of which are included in this review - on credit watch with negative implications due to it underestimating default probabilities of many current-paying loans with LTVs of 60% or lower (SCI 19 February).
Of the 853 ratings, S&P has lowered 260 (165 of which were removed from credit watch negative), raised 42, affirmed 539 (eight of which were removed from credit watch negative), withdrew 10 and discontinued two. Error corrections accounted for 175 of the 260 downgrades and three of the 10 rating withdrawals.
Of these corrections, 159 were among the 338 ratings that S&P previously placed on credit watch with negative implications, and the other 19 are ratings on interest- or principal-only classes whose ratings are linked to one or more of the 159 affected ratings. The other 165 of the 338 ratings remain on credit watch with negative implications until S&P has completed its analysis.
Over three-quarters of the downgrades were within two rating notches, but few bonds were downgraded by four or more rating notches, according to Barclays Capital figures.
News Round-up
RMBS
Regional divide in 'mortgage prisoners'
The north-south divide persists in the UK's non-conforming mortgage market, says Moody's, as borrowers in the north are 1.9 times more likely to be 'mortgage prisoners' than borrowers in other regions. The agency describes borrowers who are unable to refinance to a better deal or move house because they fall outside lending criteria as mortgage prisoners.
Moody's reveals that about 75% of non-conforming borrowers in northern England and in Northern Ireland who took out IO loans when the market peaked in 2007 are mortgage prisoners. "The north-south divide remains firmly entrenched in the sector, due to the north's weaker housing market and slower economic recovery," observes Emily Rombeau, a Moody's analyst. "At 54%, over half of northern non-conforming borrowers are mortgage prisoners, compared with 32% of non-conforming borrowers in the rest of the country."
Across the UK, about 40% of non-conforming borrowers are mortgage prisoners. The agency's assessment corresponds to the share of borrowers who have a mortgage with an indexed LTV ratio above 85% or are more than 30 days in arrears on their payments. An inability to keep up with monthly payments is the main reason for being a mortgage prisoner, accounting for 68% of trapped borrowers.
In southern England, non-conforming borrowers benefit from at least a 9.4% increase in equity in their house on average. Southern England's housing market recovery has outpaced the rest of the country, with property prices rising above pre-crisis peaks in London and south east England.
Moody's expects the overall level of mortgage prisoners to moderately decrease over the next 12 months as house price increases will reduce indexed LTV ratios, thereby enhancing borrowers' ability to refinance. The LTV ratio is a key driver of defaults in the UK non-conforming RMBS sector, as loans with LTV ratios above 80% have a 2.2x greater likelihood of being repossessed.
News Round-up
RMBS
Multi-borrower SFR deal debuts
Blackstone affiliate B2R Finance is prepping what is believed to be the first multi-borrower single-family rental securitisation. The transaction is expected to consist of US$230m pass-through certificates rated by at least two rating agencies and backed by 144 mortgage loans secured by single-family residential properties, two- to four-unit properties, condominium properties, town homes, multifamily properties and mixed-use properties. The subordinate classes of the deal will be acquired by an affiliate of B2R Finance.
News Round-up
RMBS
Italian RMBS ratings reviewed
Moody's has upgraded the ratings of nine notes, kept two of these notes on review for upgrade, confirmed one note and downgraded six others across six Italian RMBS. The affected transactions are: Sestante Finance, Sestante Finance - Series 2004, Sestante Finance - Series 2005, Sestante Finance - Series 2006, Berica 6 Residential MBS and Capital Mortgages Series 2007-1.
The agency's rating upgrades reflect the upgrade of the Italian local currency country risk ceiling from A2 to Aa2 (SCI 21 January), as well as the updates to Moody's structured finance rating methodologies to incorporate the new counterparty risk assessment for banks (SCI 16 March). The placement on review for upgrade of two notes reflects the rating review actions of banks resulting from Moody's revised bank methodology.
In addition, Moody's confirmation of one note reflects its view that the available credit enhancement is sufficient to maintain the current rating on the affected note. The downgrades reflect the worse than anticipated performance in the Berica 6 and Capital Mortgage deals, which has also resulted in an increase of the key collateral assumptions for the transactions.
News Round-up
RMBS
Unified registration system 'credit positive'
Moody's says that China's unified real estate registration system, once operational, will be credit positive for Chinese RMBS. The system is expected to make transferring ownership of mortgage assets from loan originators to RMBS trustees more efficient, as well as improve the accuracy and consistency of registered information.
"The unified system will enable originators to conduct mortgage transfers through one centralised department - a major improvement from the existing system, where they have to go through different registration offices of different cities and counties to conduct a mortgage re-registration," says Cecilia Chen, a Moody's associate analyst.
The agency anticipates the unified system to save originators much time, effort and costs by referring to a single database only. RMBS transactions should benefit as a result, because the execution of perfection - the transfer of ownership of mortgage assets from originators to trustees - will be more efficient.
Lower rated and small bank originators will benefit most from the new system, observes Moody's. This is because they are typically required to complete mortgage re-registration at closing, whereas highly rated and large banks can adopt contingent perfection.
"The unified registration system is also an important step towards the establishment of a nationwide housing information network, which will make it easier to identify property owners and find mortgagees when they default on their loans," adds Chen.
The Interim Regulation on Real Estate Registration took effect on 1 March and marks the start of the process to unify individual city and county real estate registration systems into a single national real estate register. Registration procedures will also be standardised under the new centralised system, in turn enhancing the accuracy and consistency of information.
Moody's notes, however, that it will take until 2018 for the unified system to become fully functional, due to the complexity involved in unifying China's existing real estate registers - some of which are still paper-based and will need to be transferred to an electronic system.
News Round-up
RMBS
FNMA enhances Euro appeal
Fannie Mae has listed all of its outstanding Connecticut Avenue Securities (CAS) RMBS bonds on the Irish Stock Exchange (ISE). The company plans to list each new series of CAS notes on the ISE going forward and says it will also retain sufficient credit risk in each transaction to ensure compliance with EU risk retention requirements.
For each CAS offering, Fannie Mae has published a letter describing the means by which it will hold the required amount of credit risk under these requirements. The letters are included with the disclosure for the CAS transactions on the company's website.
"We are pleased to be able to help facilitate greater participation by European investors in our CAS offerings," comments Laurel Davis, vp for credit risk transfer at Fannie Mae. "Listing CAS deals on the ISE and complying with EU risk retention rules are part of our continuing effort to expand the investor base in the programme."
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