Contents

Secondary markets

Slow supply for US CLOs

The US CLO secondary market is currently experiencing a drop in activity.

"It's relatively slow right now," says one trader. "We're not seeing much supply from BWICs and there are only a few new deals being worked on."

At the same time, the trader adds: "People don't seem to be grabbing for bonds in the same was as they were a week or so ago. I'm not sure if that's holiday related or the market taking a pause at the start of a new quarter."

There are currently only three US CLO BWICs scheduled for today. 11:00 New York time sees a four line 2.0 triple-A list, which is followed at 12:00 by 10 lines of fairly small sized 2.0 mezz.

Last is a three line auction of 1.0 triple-As totalling $60m original face due at 14:00. It comprises: CECDO 2006-12A A, MDPK 2007-4A A2 and VENTR 2007-8A A1A. None of the bonds has traded with a price on PriceABS in the last three months.

Secondary markets

Euro secondary slowly picking up

As expected yesterday was quiet in the European secondary securitisation markets, but there are signs that the market is slowly picking up.

"Yesterday was very quiet with few flows or many BWICs to give any guidance," says one trader. "Hopefully it will pick up today and there are a few more BWICs circulating; but some people are still out so it's been a quiet start again this morning."

There have however been a few small pockets of activity. GRIF 1A is again finding buyers and UK RMBS is seeing some interest.

Today's European BWIC calendar currently consists of four lists. The schedule commences with a fourteen line list of small clips of ABS and RMBS seniors at 12:30 London time.

The remainder of the day sees smaller lists but larger sizes. First up are two lines of SLT mezz - £9m of SLT 1 B and £7m SLT 1 C at 14:00. The bonds last covered on PriceABS on 29 January 2015 at 100.68 and 100.12 respectively.

At 15:00 there is €13m of ABS CDO BRUCK IX A2-1. The bond hasn't traded on PriceABS before.

Also at 15:00 is €25m of NGATE 2007-3X A2B, which hasn't traded on PriceABS in the last three months.

Secondary markets

US CMBS shifts longer

The US non-agency CMBS secondary market is quiet this week so far, but is still seeing a shift towards longer dated paper.

"While there has been some volume in new issue the holiday has meant it's been relatively quiet in terms of BWICs," says one trader. "The auction calendar isn't currently showing up anything of specific interest either."

However, the trader cites one large BWIC from yesterday as being of note. "There was a $270m list of 2006/7 paper from a seller who has regularly been doing this trade recently - rotating out of 1.0 into 3.0."

The move is indicative of a broader trend, the trader suggests. "More and more we're seeing an overall shift from legacy guys out of one-to two year paper into new issue as they look to head to the longer part of the curve."

Secondary markets

Euro ABS/MBS ploughs its own furrow

Amid the broader credit market rally the European ABS/MBS market is ploughing its own furrow as activity continues to build slowly this week.

"Overall ABS/MBS secondary market tone is constructive, but on low volumes," says one trader. "There's a lot of activity in primary, which is distracting many players, but that new issue is slow coming through and we're not seeing much secondary trading off the back of it, which is a shame as the credit backdrop is very positive at the moment. That also means secondary spreads haven't come in as much as you'd expect with a broader rally."

Instead, spreads have held firm. "Yesterday's BWICs went well - everything other than a large block of NGATE traded and did so in line with recent prints," the trader notes.

Activity also remains focused on specific sectors, the trader says. "There continues to be strong real money bid for prime assets - autos, as well as UK and Dutch RMBS. At the same time, it's a bit quiet in non-conforming and CMBS, but we haven't seen spreads move in those spaces either."

There will at least be some activity in the latter two areas today as the three European ABS/MBS BWICs currently scheduled for today involve two CMBS auctions and one UK non-conforming.

The largest of those is the seven line £79.21m RMBS list due at 14:00 London time. It comprises: CLAVS 2007-1 B2, ESAIL 2007-1X D1A, ESAIL 2007-5X A1A, ESAIL 2007-5X A1C, LMS 2 C, RMAC 2004-NS2X A3 and SPS 2006-1X E1C.

Three of the bonds have covered on PriceABS with a price in the last three months, doing so as follows: ESAIL 2007-1X D1A at 73 on 15 January; ESAIL 2007-5X A1A at 94.54 on 26 February; and RMAC 2004-NS2X A3 at 93.6 on 16 January.

Secondary markets

Euro CLO demand surges

Off-BWIC activity in the European CLO secondary market has surged.

"Demand has been and continues to be very, very strong in both 1.0 and 2.0 paper," says one trader. "There is virtually no supply from primary or secondary, but investors across the board are still looking to buy euro CLOs in volume."

As a result, the trader says: "We've been lifted out of virtually everything across the capital stack. Double-As and single-As were once no man's land but there is even demand for single-As now."

There is a straightforward reason for the demand, the trader suggests. "There are a lot of people with capital that they need to deploy right now and CLOs have traditionally been the widest market and even with the recent buying we're not as tight as ABS and so on."

The BWIC calendar looks set to remain quiet today with only one euro-denominated line in for the bid so far - €10m of BLACK 2006-1X AE is due at 15:00 London time. The triple-A tranche hasn't previously traded with a price on PriceABS.

Secondary markets

US RMBS on hold

The US non-agency RMBS secondary market appears to be on hold for now and hoping for a pick-up in activity next week.

"We seem to be in a holding pattern this week," says one trader. "Spreads are unchanged as market activity continues to be diminished following on from quarter-end and with many people still on holiday."

There is around $1bn in for the bid today but that is mainly a result of an $800m list of mostly subprime floaters due at 11:30 New York time. "Overall, it seems awfully quiet for a Thursday," the trader reports.

However, the trader adds: "There was some pent-up demand earlier this week after the previous holiday shortened one, so we saw about $700m on BWIC both Tuesday and Wednesday. Liquidations from a few different liquidators have been the main source of supply each day and today is no different with today's liquidation list due at 14:00 consisting of zero factor bonds and small balance subs."

Meanwhile, another recent trend has remained in place this week, the trader says. "Customers are continuing to make their own markets and offers in lieu of dealer activity, but hopefully that will change next week when most people return and we'll see everything to pick up."

Secondary markets

Euro secondary flow holds sway

The European secondary securitisation market is currently focused on flow trading.

Securitisation markets are continuing to move independently of the rally in broader markets. Instead, spreads are being driven by technicals amid healthy if patchy flow trading.

Autos, CLOs, CMBS, UK non-conforming, UK and Dutch prime are all either tighter or staying firm this week thanks to continued investor demand in the face of insufficient BWIC and primary supply. Peripherals are quieter, but with a selling bias in evidence most sub-sectors have edged wider in the past few days.

Today looks set to see more of the same with only two BWICs currently circulating for trade. Both are due at 15:00 London time.

There is a five line £27.25m UK RMBS list comprising: ALBA 2007-1 F, LGATE 2007-1 E, LMS 2 D, MANSD 2007-2X B2 and SLT 1 E. Only MANSD 2007-2X B2 has covered on PriceABS in the last three months, doing so at LM97s on 19 March.

There is also a €3m line of QNST 2006-1X A1, which hasn't traded on PriceABS in the last three months.

Secondary markets

Slow end for US CLOs

Today looks set to be a slow end to a slow week for the US CLO secondary market.

"It's been a slow week in terms of both trading activity and the sizes going through," says one trader. "However, it's not entirely unexpected - after the rush through the door at the end of March for quarter-end it was always going to drop off to an extent especially with Easter in the first half of April, which is usually quiet anyway."

In any event, the trader adds: "The market is holding up strongly particularly in lower mezz where recent primary prints have translated through to secondary well. At the same time, there are currently diminished concerns on many of the CLOs with high energy exposure after recent action in that sector."

For CLOs near-term activity levels and market direction are unclear with little on the BWIC schedule for next week yet and many participants distracted by a variety of external factors. The trader says: "Many people are looking to macro drivers, especially what's going to happen on rates, to take their cues; others are focused on regulatory issues particularly the impact of risk retention on manager tiering; and at the same time there are a few CLO conferences in the next couple of weeks, which can also slow things down a little."

Away from the more visible market, bonds with shorter reinvestment periods are still in great demand with buyers willing to pay a significant premium for the right paper and to accumulate it in very small clips if necessary. "For example, the right triple-Bs are going through with a very-high-90s premium, but there is demand all along the curve," says the trader.

Meanwhile, there are currently only two US CLO BWICs on the calendar for today. At 10:00 New York time is a pair of 2.0 equity pieces - $7.5m of FLAT 2014-1X SUB and $8.3m of SMORE 2014-1X BSUB. Neither bond has traded on PriceABS before.

At 11:00 there is a three line 2.0 triple-A list totalling $3.595m, which consists of CECLO 2014-21A A1A, CECLO 2014-22A A1 and VOYA 2015-1A A1.Only CECLO 2014-21A A1A has covered on PriceABS in the past three months, last doing so at 99.91 on 18 March.

At 13:00 there is a nine line 1.0 triple-A list totalling $112.547m of original face. It comprises: BACUS 2006-1A A, FCLO 5A A2, FLAGS 2006-1A A, HICDO 2007-6A AT, HLCLO 2007-1A A1, INGIM 2006-3A A1, STANE 2006-1A A1B, VITES 2006-1A A1L and WGH 2006-1A A1. None of the bonds has traded on PriceABS in the last three months.

There are also two ABS CDO BWICs due today. At 11:00 there is a three line list totalling $49.799m - FULT 1X A1B, MKP 1A A1L and MULB 1A A1B. At 13:00 there is a single line of LAKES 2004-1A A1 representing $351.1m of original face/$24.99m current. None of the ABS CDOs has traded on PriceABS in the last three months.

CLOs

Bouncing back

The US CLO equity market is rebounding from a spate of volatility. Regulatory changes are squeezing out short-term players, while reduced issuance has helped improve loan pricing and structuring.

David Wishnow, a principal at Tetragon, says that the recent volatility was perpetuated by investors buying CLO equity in search of short-term gains, as opposed to underwriting the exposure. "With the recent clarification on risk retention rules, however, certain investors will need to own CLO equity for the long term, which should help stem short-term volatility. Therefore, short-term oriented investors should have less of an impact on the CLO market."

Fellow Tetragon principal Jeff Herlyn adds: "The bid for equity has slowed, but this is a good thing. Equity prices are not being bid up because certain investors, such as hedge funds and BDCs, have pulled back from the market recently."

This has produced a platform for established managers to handle the majority of pricing in the market. "Demand for bank loans has declined due to existing and proposed regulatory changes," explains Herlyn. "Additionally, lower CLO issuance and the reduced involvement by large banks in the bank loan space have led to better pricing and structuring discipline for bank loans."

Underlining the recovery is equity NAVs, which have increased by 10-15 points since December 2014. At the same time, debt spreads have tightened amid light supply.

"It's certainly an interesting time in the market," says Herlyn. "We are seeing contracting debt spreads, which is healthy. On top of that, there is reduced supply and higher demand for debt tranches, which makes for a more robust CLO arbitrage."

Herlyn's optimism is sparked, in part, by risk retention under the Dodd-Frank Act, which may push less established and less resourced managers out of the market (SCI passim). "Regulation will force market players to retain skin in the game, which will only allow the highest quality and financially well-resourced CLO managers to continue functioning within the market."

Such market dynamics should, in turn, support healthy secondary activity, with CLO 1.0 bonds providing a particularly interesting short-term investment opportunity. "I think 1.0s are attracting investors because of the pricing challenges they present," Herlyn concludes. "Most of these deals are now beyond the reinvestment period, heightening the importance of underlying loan prices on the deal's equity valuation. This leaves room for valuation differential among investors, as they may differ in their opinions on current and projected loan prices."

JA

CMBS

CMBS market cuts froth

Despite accelerating last month, US CMBS 2.0 B-piece BWIC volumes remain significantly lower than they were this time last year. As demand remains high, this change of pace appears to reflect the secondary market becoming more negotiated.

Morgan Stanley CMBS analysts welcome this more negotiated nature, noting that an increase in BWIC volumes is often a cautionary signal for frothy bond valuations. The current state of affairs suggests a more nuanced credit view from investors.

Over 2014 and 1Q15, there have been 105 CMBS 2.0 B-pieces appearing on BWICs a combined total of 194 times, resulting in US$1.5bn of BWIC volume. Selling has been concentrated in double-B rated bonds across 2011 and 2013 vintages and 91 of the 105 bonds sold came from a group of five original B-piece buyers - Rialto, Eightfold, Blackrock, Torchlight and Ellington.

Rialto was the original B-piece buyer on 27 bonds that appeared a combined 45 times on various BWICs. "Nearly 50% of the deals where Rialto was the B-piece buyer saw bonds on various BWICs since the beginning of 2014. On the other hand, Torchlight was the B-piece buyer on 14 bonds, but these appeared a combined 56 times on various BWICs," say the analysts.

The fact that B-piece BWIC volumes have slowed does not appear to be because of any drop in demand. What has happened instead is that the secondary market has become more negotiated, resulting in more 'out of comp' trades.

Insurance companies appear to be moving down the capital structure as bonds are increasingly traded off-BWIC. While there are 48 double-B bonds from 2014 vintage deals with NAIC marks, only 12 have shown up on BWIC since the start of last year.

From a broader analysis of 116 bonds which includes XC, XD and XE IOs, 74 bonds were rated between double-B plus and double-B minus. These showed up a combined 137 times, accounting for 66.8% of the bonds on BWIC. IO bonds accounted for 9.5% of the BWIC population.

Of those 116 bonds, six were 2010-vintage, 26 were 2011-vintage, 25 were 2012-vintage, 38 were 2013-vintage and 21 were 2014-vintage. These vintages showed up on BWICs six times, 65 times, 47 times, 62 times and 25 times, respectively.

Selling in the first half of last year was robust as BB.6 spreads tightened towards 450bp, reaching a monthly peak in May 2014 with 28 different bonds totalling US$211m on BWIC. However, they slowed significantly in 2H14 and particularly the final quarter of the year, as BB.6 spreads widened to 543bp.

"Given this relationship, it maybe should not come as a surprise that B-piece BWIC volumes have accelerated in March 2015 as the new issue market gained strength, with BB.6 moving to 470bp compared to an average of 500bp from the beginning of 2014. However, the absolute number of bonds on BWIC in March 2015 is well below the totals observed this time last year and volumes are still below the 1H14 average," the analysts say.

JL

Structured Finance

Premium recruits for multifamily push

Premium Point Investments has hired Stephen Jones as md to lead its investments in multifamily opportunities. Jones joins from Capmark Finance, where he led a team that managed over 30 REO properties.

Prior to this, he was md with RBS Greenwich Capital, where he was involved in the completion of a number of highly leveraged and structured transactions. He also worked for Credit Suisse First Boston, principally in its CRE group, and for GE Capital Commercial Real Estate.

Structured Finance

Corporate strategy head named

Julian Weldon has joined CIFC as head of corporate strategy. In this newly-created role, Weldon will lead the expansion of the firm's non-CLO businesses, reporting to co-presidents Steve Vaccaro and Oliver Wriedt.

Weldon's experience includes investments across structured credit, direct lending and distressed corporate credit. He arrives from Garrison Investment Group, where he was general counsel and chief compliance officer. Prior to this, he was senior counsel in the banking department of Allen & Overy.

Structured Finance

Investment manager brought onboard

HAS Capital has hired Christopher Trifilio as md of investment management. In this newly created position, he will be responsible for portfolio analysis and raising capital to support the firm's initiative to provide financing in the manufactured housing space.

Trifilio joins HAS Capital from Mesirow Financial, where he was svp of institutional sales and trading. In this role, he was responsible for generating investment ideas through research, technical analysis and networking. Prior to that, he was a principal at William Blair & Company.

"As we look to build out our senior management team with experienced investment management professionals, we look forward to Chris' contribution in identifying investment opportunities that can create liquidity in the ABS market for manufactured housing assets," says Stephen Wheeler, md and chairman of HAS Capital.

Structured Finance

Loan subsidiary launched

TIAA-CREF has launched Churchill Asset Management, a new majority-owned subsidiary focused on originating, underwriting and managing senior loan investments, primarily in US middle-market companies. The new venture will focus on investment opportunities through various vehicles designed to meet the needs of institutional and qualified investors, including CLOs, co-mingled funds and separately managed accounts.

Churchill will operate as a standalone business, led by Kenneth Kencel, and will be supported by a team of investment professionals headquartered in New York. Terms of the transaction have not been disclosed.

Structured Finance

GE divestment inked

Blackstone and Wells Fargo have agreed to purchase most of the assets of GE Capital Real Estate in a transaction valued at approximately US$23bn. Closing of the acquisition is expected to occur in stages beginning in 45-60 days.

As part of the transaction, Wells Fargo will purchase performing first mortgage commercial real estate loans valued at US$9bn in the US, UK and Canada. Blackstone's real estate fund, BREP VIII, has agreed to purchase the US equity assets - primarily office properties in Southern California, Seattle and Chicago - for US$3.3bn.

Blackstone's European real estate fund BREP Europe IV will acquire the European equity real estate assets for €1.9bn. These consist of office, logistics and retail assets, largely in the UK, France and Spain. The logistics assets will be integrated into Blackstone's European logistics platform - Logicor - and the retail assets into its European retail platform, Multi.

Meanwhile, Blackstone's real estate debt fund BREDS will purchase performing first mortgage loans in Mexico and Australia for US$4.2bn.

Finally, Blackstone's commercial mortgage REIT BXMT is set to acquire a US$4.6bn portfolio of first mortgage loans primarily in the US, with Wells Fargo providing the financing. The portfolio consists of 82 first mortgage loans secured by a diverse set of commercial property types across its core and target markets, including the US (68%), Canada (15%), the UK (10%) and Germany (7%). The assets have an estimated weighted average loan-to-value ratio in line with BXMT's existing portfolio.

CMBS

Work-out pro moves

Pepper UK has hired Alison Higgs as head of commercial loan servicing. She arrives from Irish Bank Resolution Corporation, where she was a property investment banker, managing CRE portfolios for loans in performing, sub-performing and non-performing categories. In her new role, Higgs will report to Pepper UK md Mark Caplan.

RMBS

MBS legal vet poached

Lender Service Provider has hired Sonny Abassi as chief compliance officer. In this role, he will primarily be responsible for compliance of daily and periodic operations of various residential mortgage lenders, as well as providing Home Mortgage Disclosure Act reporting for multiple medium-sized mortgage originators.

Abassi joins the firm from the Structured Finance Industry Group, where he was director of mortgage policy. Prior to this, he was a director of MBS policy at Fannie Mae and associate general counsel, where he was a lead attorney for the GSE's single-family MBS programme.

ABS

Hertz deadline extended

Hertz last month disclosed that it received a notice from the NYSE regarding its failure to timely file its 2014 annual report. The company now has until 17 September to file its 10-K, although the NYSE can extend this deadline for another six months at its discretion.

With its ongoing accounting review, Hertz still expects that it will be unable to file updated financial statements for 2011, 2012, 2013 and 2014 before mid-2015. If the company is unable to file updated financial statements by the deadline imposed by the NYSE, the exchange has the option to start proceedings to delist the company's stock.

Hertz's inability to timely file its financial statements also constitutes a potential early amortisation event on its rental car ABS trust (SC passim), but noteholders have granted a waiver of this amortisation event through 31 August. Barclays Capital ABS analysts believe that the ABS notes are well-protected, even if they are ultimately accelerated, given how well-collateralised they are.

In addition, according to Hertz's review of its 4Q14 operating results, the company has increased its purchase of programme vehicles over the past few months - thereby reducing its exposure to auto residual values. Sale proceeds from its non-programme vehicle dispositions also continue to hold up well, with proceeds over the past 12 months exceeding the net book value of vehicles sold by a healthy margin.

Structured Finance

Spanish SME performance improving

Spanish SME loan performance is improving upon a better economic outlook, less exposure to real estate and construction, easier access to credit and legal changes, says Fitch. The agency recently reduced the annual average default expectation on typical Spanish SME loan portfolios to 5% from 6.25%.

The reduction reflects the falling default rates in loans to SMEs in the real estate and construction sectors, as well as that these borrowers constitute a lower percentage of a typical portfolio than in previous years. Fitch believes the average annual default rate for real estate and construction SMEs will drop to 8% from 10%, while maintaining a 3.75% annual default rate for all other sectors, due to the still-weak outlook for Spain's residential property market.

New bank credit to SMEs was positive in 2014 for the first time in six years, growing at an annualised rate of 8.6%, according to Bank of Spain data. Further, SME financing costs have fallen significantly since 2H14, with the risk premium to German SMEs below 100bp. Fitch expects these trends to continue as the economy grows and the ECB pursues its expansionary monetary policy, which could benefit SMEs across all sectors.

Meanwhile, the performance of Spanish SMEs that are active in export markets will be supported by a weaker euro and improving external demand. Although export volumes tend to be concentrated in larger internationally-oriented businesses, Fitch says that a significant proportion of Spanish SMEs are exporters.

The agency also expects fewer defaults among Spanish SMEs, as the implementation of Law 17/2014 facilitates more debt restructurings between highly indebted SMEs and financial creditors. The total for restructured SME loans in Spain is estimated at 24% of outstanding credit at end-1H14, according to Bank of Spain data, of which 60% is classified as doubtful. The new regulation may reduce recoveries for secured claims, for example, if dissenting secured creditors are forced to accept haircuts and maturity extensions approved by a majority of creditors.

Fitch forecasts Spanish real GDP to grow by 2% in 2015 and 2.3% in 2016.

Structured Finance

Originator 'loophole' eyed

The Bank of England and the ECB have expressed concern over a "loophole" in the originator definition of the CRR. The comments are included in their joint response to the European Commission's consultation on a framework for simple, transparent and standardised securitisation (SCI passim).

In response to the EC's question about whether elements of the current risk retention rules should be adjusted for qualifying instruments, the central banks state that CRR Article 4(13)(b) could result in "misalignment of the interests of the party underwriting the underlying obligations and those of the final investors". They suggest that the "loophole should be closed in legislation".

The EBA has also previously said that a narrower and more detailed definition of an originator is necessary to reduce the potential misuse of the retention requirements and ensure real alignment of interests between originators and investors (SCI 9 January). Deutsche Bank CLO strategists note that while there appears to be growing pressure by European regulators to limit the use of the originator structure in risk retention for securitisations, this should not mean that the originator structure will be eliminated. Rather, the originator should be of 'real substance'.

The EBA provided an example of an originator of real substance where an SPV owned by third-party investors buys the collateral obligations and sells them within a day to a CLO. "So, the pressure is therefore for a legislation that narrows the originator definition, so that an originator is of real substance and thus complies with the spirit of the law as well as the letter. That puts the ball in the European Commission's court and it is hard to predict when such legislation could see the light of day," the Deutsche Bank strategists observe.

Structured Finance

Steady performance predicted for Japan

In its baseline scenario, S&P assumes that Japan's economy will stage a soft recovery in 2015, with real GDP growing by 0.8% year-on-year. Against this backdrop, the agency believes that the assets underlying RMBS, ABS and CMBS are generally likely to show steady performance.

Assets backing owner-occupied RMBS and condominium investment RMBS are expected to show steady performance in 2015 primarily because companies have begun to raise employees' wages, employment conditions have been improving and interest rates remain low. At the same time, S&P anticipates a positive rating trend for owner-occupied and condominium investment RMBS transactions based on its updated criteria for rating these deals.

However, performance of the assets underlying apartment loan RMBS is likely to be slightly negative because land prices continue to decline in regional areas, where many apartment buildings collateralising these deals are located, and vacancy rates at the properties backing some apartment loan RMBS remain high.

"Likewise, we expect a slightly negative rating trend for apartment loan RMBS transactions based on our updated criteria for rating these deals and after considering some performance-related factors," the agency adds.

Meanwhile, the performance of credit card receivables and consumer loan receivables backing ABS transactions will remain stable at current levels in 2015. Similarly, auto loan, auto lease, equipment lease and shopping credit receivables are expected to show steady performance.

"We expect our ratings on ABS deals backed by any asset class to remain broadly stable during the year," S&P observes.

Finally, the agency also assumes generally stable performance in 2015 for the assets underlying CMBS and expects a stable rating trend for Japanese CMBS during the same period.

CMBS

Mall loss severities pose risk

Moody's says that legacy US CMBS continue to face credit risk based on regional mall loan loss severities in smaller markets that were more than double those in larger metro areas in 2014. While overall loss severities for mall loans declined last year, they remain elevated relative to loss severities for loans on other CMBS property types.

In 2014, only mall loans in smaller markets experienced loss severities in excess of 100%. "In the context of an improving market for retail in 2014, the persistent high loss severities for mall loans in smaller markets is remarkable and negatively affects the performance of the CMBS backed by these loans," says Moody's analyst Wesley Flamer-Binion. The agency believes that the high loss severities heighten risk in legacy deals where a marginal, or troubled mall loan, comes to represent a larger and increasing share of the CMBS pool, as higher quality loans mature and the pool shrinks.

CMBS performance is also negatively affected by troubled malls in the top 25 markets, partly due to the larger absolute size of the loan. A large loan size paired with a moderate loss severity has the ability to be highly impactful on a deal's credit as much as a smaller loan with 100% loss severity.

However, resolutions of defaulted loans backed by troubled malls in smaller markets fared worse in 2014, suffering much higher loss severities than resolutions of defaulted mall loans in the top 25 metro areas. Loans secured by mall collateral in smaller markets averaged an 86% loss at liquidation, while in three cases the realised losses were 100% or more. Moody's says this trend has persisted in the smaller markets for two years.

The top 25 metros saw better loan performance compared with smaller markets too, with the average loss severity standing at 42% in the major markets and the highest loss at 70%. Moody's attributes the difference in loan performance to the major markets having higher land values, greater options to redevelop, stronger economies, favourable demographics and better financing and sales liquidity than the smaller markets.

Finally, mall loss severities decreased in 2014 overall, but continue to be high relative to other property types. For all mall loans, loss severities fell to 65% in 2014 from 82% the previous year, due partly to rising asset prices, increasing transaction volume and greater debt financing options.

CMBS

Property prices, dept capital aligning

US commercial property price changes have closely lined up with changes in CRE debt capital flows, reports Moody's. The agency says the price decline from the peak to the trough is now coinciding with a contraction of outstanding commercial debt capital.

"This close relationship makes sense, given that CRE is a leverage-intensive business," says Moody's director of CRE research Tad Philipp. "Property owners often seek debt equal to 70% or more of their property's value."

According to Moody's/RCA Commercial Property Price Indices (CPPI) national all-property composite index, the retail segment was the best-performing core commercial property type over the last three months, as prices rose by 6.5%. However, the CBD office segment cooled in the last three months, declining by 0.5%.

The index rose by 1.5% in February, due to a 1.9% increase in apartment prices, which is now topping the 2007 pre-crisis peak by roughly 7%. Commercial property prices improved by 1.3%, while the smaller apartment component rose by 1.9%. All of the CPPI segments have now recovered at least 60% of their post-crisis price decline, while 11 of the 20 CPPI segments have recovered their entire post-crisis price decline.

Further, apartment prices have exceeded their pre-financial crisis peak by 25.5%, while core commercial property prices are up by 0.6% since the pre-crisis peak. The core commercial price recovery was powered by CBD office prices at 22% higher than their pre-crisis peak. Other core commercial segments - retail, industrial and suburban office - are below their respective pre-crisis peaks.

CMBS

Seritage spin-off prepped

Sears has filed an S-11 Registration for Seritage Growth Properties, its REIT spin-off (SCI 4 March). The transaction will be sold through a rights offering that is expected to close by end-Q2.

Including possible debt issued by the REIT, the transaction is anticipated to generate proceeds of over US$2.5bn. The sale includes 254 Sears-owned anchor pads, 158 of which have Sears stores, 85 have Kmarts and 11 have third-party tenants. Sears also plans to sell 12 anchor pads, valued at US$330m, to a joint venture between GGP and the Seritage REIT.

The master lease agreement governing the lease back of the stores to Sears allows for the REIT to replace Sears with other tenants on up to 50% of the space occupied by Sears on all properties with a Sears or a Kmart, according to Barclays Capital CMBS analysts. This option is limited to 50 properties annually.

In addition, on 22 of the anchor pads occupied by Sears, the trust would have the ability to replace Sears with another tenant on up to 100% of the Sears-occupied area, subject to a termination fee to the extent that they recapture more than 50%. Of the properties being transferred, 11 are already leased fully to third parties and have no Sears tenant.

The Barcap analysts add that the master lease for the properties will consist of nine- to 11-year initial leases for the Sears/Kmart stores, with optional extensions for two to four additional five-year terms, and will be set at market value with 2% annual rent step-ups. The master lease also provides Sears with the right to terminate leases and close stores if the store earnings fall below the store-allocated rent costs, subject to a one-year termination fee.

For some malls, the replacement of Sears with a better-performing anchor store could be a modest positive. However, the transaction allows for Sears closures in these pads and envisions shrinking certain Sears stores by as much as 50%, which could potentially lead to depressed foot traffic and potential rent undercutting by the new REIT. Although this is unlikely to signal a failed mall, it could put meaningful pressure on the performance of any loan collateral linked to it.

But the analysts believe that the largest concern for CMBS investors are retail properties that have exposure to leased Sears stores not included in the REIT transaction. Sears Holdings will likely use the proceeds from the REIT transaction to pay down other borrowings, which could pave the way for further store closures later this year.

CMBS

Post-crisis performance issues highlighted

US$1.9bn of post-crisis CMBS loans were newly watchlisted in March, according to Barclays Capital figures. The major contributing vintage for watchlisted loans last month was 2014, while new 2011 vintage watchlists decreased month-on-month.

WFRBS 2013-C15 and WFRBS 2013-C12 face the highest new watchlist exposure, each with 10% of current balance watchlisted in March. A property in the US$116m RHP Portfolio II, securitised in the latter deal, faces immediate safety issues due to cracks in the front stairs of the clubhouse. However, it isn't expected to trigger a default, as the loan's 2014 DSCR NCF is 2.18x.

The US$110m Augusta Mall loan, securitised in the former deal, is being watchlisted for delinquent tax payment. The loan has performed with 2.33x DSCR NOI in 2014 and the last reported occupancy was 93%.

Other watchlists with high balances include the US$105m 597 Fifth Avenue loan, securitised in COMM 2014-UBS4, which reported a low DSCR NOI for 2014 of 1.15x and low occupancy at 46%. However, Barcap CMBS analysts note that it was underwritten at 52% occupancy as the borrower works to convert more space at the building to retail.

The next largest exposures - US$73m Harborplace and US$72m 231 South LaSalle, securitised in UBSBB 2013-C5 - were also watchlisted due to performance issues. Watchlist commentary on the former loan indicates that DSCR has fallen below 1.15x, but - with few near-term lease expirations - it is unclear why performance has declined from DSCR NCF of 1.55x as of September 2014. DSCR for the latter loan fell below the CREFC threshold due to increased expenses as it tries to fill up vacancies, which have risen to 24%.

CMBS

Single-borrower issuance rising

S&P says that US single-borrower CMBS issuance volumes have been rising over the past few years and will likely continue to do so in 2015. During 1Q15, new issuance in the sector stood at US$12bn, and is on pace to exceed 2014's full-year total of US$26bn.

Single-borrower offerings accounted for roughly 46% of CMBS issuance through 1Q15, up from just under 30% in both 2013 and 2014. S&P believes the higher volume resulted from several factors, including investor demand, the ability of CMBS originators to partner up to more efficiently compete with balance sheet lenders for loan assignments, relatively lower conduit CMBS deal sizes and higher overall CRE transaction volumes and prices.

The agency adds that it continues to see instances where non-recourse carve-outs for certain 'bad-boy' acts are limited to a small percentage of the outstanding loan balance, or lack a warm-body guarantor altogether. In some cases, there are mitigating factors, but S&P believes these situations should continue to be scrutinised.

CMBS

CMBS delinquencies dip

US CMBS delinquencies fell by 4bp in March to 4.73% from 4.77% a month earlier, according to Fitch's latest index results for the sector. Additionally, the dollar balance of late-pays fell slightly to US$17.8bn from US$17.9bn in February.

New CMBS delinquencies finished March at US$357m, up slightly from US$327m in February. The largest new delinquency was the US$58m Collin Creek Mall (securitised in JPMCC 2001-CIBC2), for which Fitch believes a deed-in-lieu of foreclosure seems likely.

However, resolutions outpaced new delinquencies, finishing the month at US$491m. The largest resolution was the US$54.4m Radisson Ambassador Plaza Hotel & Casino loan (CGCMT 2006-FL2), for which the controlling class holder exercised its fair value purchase option.

Fitch-rated new issuance volume of US$6.2bn over five transactions outpaced US$5.1bn in portfolio run-off. The March run-off was led by the US$570m 200 Park Avenue (LBUBS 2005-C5 and LBUBS 2005-C7), the US$420m Houston Galleria (JPMCC 2005-LDP5) and the US$403m LXR Hospitality Pool (WBCMT 2007-WHL8) loans.

The US$190m Pickwick Plaza (GCCFC 2007-GG9) and the US$153m Glenbrook Square Mall (MLMT 2005-CIP1) loans round out the pay-offs. Fitch notes that the loans in run-off were all current at the time of their pay-offs.

March also saw the US$113m 300 South Riverside Plaza (DBUBS 2011-LC1) reported as having defeased on 10 February (see SCI's CMBS loan events database). The five-year loan, which has a maturity of 6 January 2016, is open to prepay without penalty on or after 6 October.

Current and previous delinquency rates by property type are: hotel at 6.13% from 6.36% in February; industrial at 5.57% from 5.2%; retail at 5.41% from 5.39%; multifamily at 5.21% from 5.23%; office at 5% from 5.08%; mixed use at 2.69% from 3.05%; and other at 1.17% from 1.09%. By transaction type, delinquency rates as of March were: large loan floaters at 17.51%, with nine loans worth US$526m; conduit at 5.59%, with 1,025 loans worth US$17.2bn; small balance at 4.9%, with 21 loans worth US$31m; seasoned at 2.35%, with six loans worth US$13m; miscellaneous/other at 0.03%, with one loan worth US$309,000; and Freddie Mac at 0.02%, also with a single loan, worth US$9m.

CMBS

CMBS liquidations stay low

For the second consecutive month, Trepp reports that US CMBS liquidation volume was below US$1bn in March and fewer than 50 loans were liquidated with a loss. Overall, nine of the last 12 months have registered less than US$1bn in CMBS liquidations and have averaged US$1.4bn in liquidation volume overall.

The US$190m Pickwick Plaza, which took a 1% loss, was the only loan above US$25m to be liquidated with a loss in March. Liquidated loan volume was US$529.73m for the month (41% lower than the 12-month average of US$902.27m), while loss severity remained low at 36.28% (10% below the 46.28% 12-month average).

Looking only at losses greater than 2%, liquidation volume was US$257.51m with a whopping 73.55% loss severity. Trepp adds that 12 loans took losses greater than 80%, six of which suffered 100% losses.

CMBS

Special servicing universe shrinking

The US CMBS special servicing universe continues to shrink, dropping to levels not seen since 2010, according to Fitch's latest index results for the sector. CMBS loans in special servicing fell to US$38bn through end-2014, less than half the size of the US$91.7bn high-water mark observed in 2010.

"Transfers out of special servicing are still more than doubling the rate of CMBS loans going in," says Fitch md Stephanie Petosa. "The percentage of CMBS loans in special servicing was 5.5%, less than one-half of the 12% peak we saw in 2010."

Amid the overall decline, special servicers liquidated loans with larger balances instead of modifying them with more frequency last year, reversing a trend that had been in place for some time. Fitch reports US$23.6bn in loan resolutions during 2014, of which US$18.2bn (across 1252 loans) were liquidated rather than returned to performing.

NPLs

FNMA NPLs marketed

Fannie Mae is marketing its first bulk-sale of non-performing loans, featuring an overall pool of approximately 3,200 loans that total US$786m in unpaid principal balance. This follows Freddie Mac's recent sale via auction of 5,398 deeply delinquent NPLs (SCI 1 April).

The pool is available for purchase by qualified bidders and will be offered in two pools. The first pool comprises approximately US$180m in UPB, while the second pool comprises US$606m in UPB.

Bids for the assets are due on 6 May, with sales expected to close in June. Bank of America Merrill Lynch, Credit Suisse and The Williams Capital Group are acting as advisors on the sale.

Fannie Mae plans to build such sales into a programmatic offering over time.

Risk Management

Senior debt tool launched

Incol has launched a new analytics tool that is designed to allow issuers and investors to assess opportunities in senior secured term debt by accessing a new range of markets and data. The tool, dubbed InCol Intelligence, is powered by Quaternion Risk Management's risk engine.

InCol Intelligence seeks to provide issuers with access to previously unavailable debt markets to raise cost-efficient new funding. For investors, there is access to a new range of highly rated debt issues at risk-adjusted returns across a familiar issuer and collateral class. The tool aims to enable investors to reverse enquire and continually monitor, analyse and stress test the mortgage collateral pools backing each investment.

RMBS

Servicing advance rates increasing

US RMBS servicing advance rates increased slightly in 4Q14, according to Fitch's latest index results for the sector. While bank servicer advance rates have steadily declined over time, some non-bank servicers - particularly Ocwen - are gradually increasing their advance rates in line with economic conditions and housing market improvements.

Since Ocwen services a large portfolio of delinquent loans, including 45% of the RMBS subprime sector, Fitch says the increases in its advance rates notably impacted the total non-bank and overall RMBS figures. Loans being serviced by Ocwen saw an increase in advance rates by over 10% in the 15 months ending 2014, while other servicing entities declined by approximately 2% over the same period.

In 2015, Fitch believes overall advancing trends may be further impacted by Ocwen's advancing policies and the approaches taken by its contractual partner Home Loan Servicing Solutions, which owns rights to the majority of the mortgage servicing rights on Ocwen-serviced RMBS product and the associated advancing responsibility.

RMBS

Transaction manager oversight 'credit positive'

Oversight of private-label RMBS by a transaction manager improves transaction governance, which is a credit positive, Moody's notes. The agency says that such an independent and impartial transaction party will enhance investors' interests and underpin a stronger administrative infrastructure in RMBS transactions.

Redwood Trust is one issuer that has suggested that the inclusion of a transaction manager in private-label RMBS could address many structural deficiencies that exist in current deals. In its August 2014 response to the Treasury Department's request for comment on the private-label securitisation market, Redwood cited the addition of a transaction manager as one of many possible transaction improvements.

"In concept, a transaction manager can play many roles in private-label RMBS transactions," says Moody's svp Kruti Muni. "Specifically, a transaction manager can monitor servicers' performance and decisions, address ambiguities regarding the application of the transaction's cashflow, aid in the enforcement of representation and warranty breaches and provide additional transparency."

Moody's believes that the transaction manager's role in a deal is beneficial as it can help solve governance deficiencies in RMBS, albeit its expertise in performing the role and incentive structure will factor into that benefit. For example, the manager's oversight can lend additional value to the transaction by reducing unnecessary costs that servicers may pass on to the trusts.

A transaction manager can also ensure transaction cashflows are handled properly, thereby reducing errors and misallocation of funds. Further, it can better represent investors in the enforcement of representation and warranty breaches.

RMBS

Actual loss STACR prepped

Freddie Mac intends to pre-market its inaugural actual loss STACR offering, STACR 2015-DNA1, beginning 13 April. The RMBS will be similar to recent STACR deals, but instead of allocating losses to the debt notes based upon a fixed severity approach, losses will be allocated in this transaction based on the actual losses realised on the related reference obligations.

Freddie Mac says it will continue to sell the first loss and mezzanine tranches, while retaining a vertical slice of each tranche sold. The deal will be the GSE's third STACR transaction this year.

Credit Suisse will act as the structuring lead manager, with Citi as co-lead manager and joint bookrunner.

RMBS

RMBS upgraded on Radian merger

S&P has raised its ratings to double-A on 14 classes of mortgage pass-through certificates from 14 US RMBS that were insured by Radian Asset Assurance and removed the ratings from credit watch with positive implications. The move follows the completion on 1 April of Radian's merger with Assured Guaranty Corp.

S&P subsequently raised its long-term counterparty and financial strength ratings on Radian to double-A from single-B plus and removed them from credit watch with positive implications. The upgrades on the 14 RMBS notes reflect the financial strength rating of Assured, since Radian's insured obligations will now become Assured's.

The affected transactions are: ABFS Mortgage Loan Trust 2003-1 and 2003-2; Alternative Loan Trust 2005-13CB and 2005-19CB; Bear Stearns Asset Backed Securities Trust 2003-ABF1; CHL Mortgage Pass-Through Trust 2004-4; Morgan Stanley Mortgage Loan Trust 2004-1; Option One Woodbridge Loan Trust 2003-2 and 2004-1; Prime Mortgage Trust 2004-1 and 2005-1; RALI Series 2005-QS5 Trust; and RFMSI Series 2003-S20 Trust and Series 2004-S2 Trust. The underlying collateral consists of Alt-A, prime jumbo, subprime and document-deficient mortgage loans.

Assured Guaranty purchased Radian Asset for US$805m in cash. Radian Asset's insured par totalled about US$14bn, as of 28 February, comprising US$10bn in public finance transactions and US$4bn in structured finance transactions. Of the structured finance transactions, approximately US$2bn of high-quality corporate CDO exposures are due to mature by 2017.