Contents

Structured Finance

Sprawling landscape

SFR securitisation expands with multi-borrower option

B2R Finance and FirstKey Lending this month became the first sponsors to launch multi-borrower single family rental (SFR) securitisations (SCI passim). A number of key structural differences relative to single-borrower transactions have left investors weighing the costs and benefits of the two deal types.

The US$230m B2R Mortgage Trust 2015-1 was the first multi-borrower SFR securitisation to hit the market, followed in short order by the US$384.56m FirstKey Lending 2015-SFR1 Trust. The most notable distinction of these deals compared to single-borrower SFR transactions is the characteristics of the borrower profiles.

Whereas single-borrower SFR deals are secured by a sole institutional owner backed by thousands of SFR properties, multi-borrower deals are secured by multiple loans made to many smaller owners of SFR properties. "In many ways, this is the most challenging factor for multi-borrower deals," says Dan Chambers, md at Fitch. "Borrowers in the B2R transaction are materially more limited with financial resources, reporting capabilities and depth of property management relative to single-borrower transactions."

With multi-borrower SFR deals, certain standards need to be met before a property is considered to be in lease-ready condition. However, individual assessments of the properties are not feasible, leaving multi-borrower properties to rely on third-party property condition reports.

The result is a disparity in property quality between single-borrower and multi-borrower deals, according to Morgan Stanley securitised product analysts. They note that the appraisal values of properties underlying multi-borrower deals are significantly lower than those reported for recent single-borrower deals, with an average value of around US$120,000 compared to nearly US$200,000 respectively.

"Indeed, we find that the average monthly rent for single-borrower SFR properties of nearly US$1,500 is significantly higher than the average monthly rent for the FirstKey and B2R deals of US$1,051 and US$1,159 respectively," the Morgan Stanley analysts explain. "While this could be at least partially explained by the size of the property, we note the higher implied cap rates for the two multi-borrower SFR deals of 6%-7% compared to around 5% for single-borrower SFR deals. In our view, the higher cap rates are indicative of lower quality."

On the other hand, multi-borrower deals are distinctive for their borrower diversity, which provides for more varied cashflow. "The diversity comes in a number of forms too," says Chambers. "One of those ways is regionally, with the top three states in the B2R transaction representing 41% of the pool relative to the average of 68% for a single-borrower SFRs."

Properties in California, Georgia, Texas and Florida constitute the majority of the B2R pool, representing approximately 14.7%, 13.7%, 13% and 9.1% of the assets respectively. Meanwhile, properties in Florida, Georgia and California constitute the majority of the FirstKey pool, representing approximately 28.4%, 19.4% and 14.3% of the assets respectively.

Greater diversity also extends to the different property types in multi-borrower transactions, with the B2R and FirstKey deals including two- to four-unit properties, condominium properties, town homes, multifamily properties and mixed-use properties, as well as SFR homes. In contrast, single-borrower pools have so far only included SFR homes.

An important benefit of such diversity is the lessened dependence on the performance of any individual sponsor. As single-borrower transaction performance hinges on the execution of a sole sponsor's business plan, the deal is left with a higher risk of default.

But there are a number of leverage and refinancing risks to consider in multi-borrower deals. Although value is the primary measure of leverage for single-borrower SFRs, both cashflow and value are material to the refinance analysis of other income-producing real estate.

"Absent full amortisation or property liquidation, property cashflow should exceed debt service under reasonable refinance scenarios," Chambers says. "Debt yield, based on the issuer's underwriting, is 15.3% and 11.4% for the triple-A and triple-B classes of the B2R transaction respectively. This is materially higher than issuer triple-A and triple-B debt yields of 12.4% and 6.7% for floating-rate single-borrower SFR transactions."

Chambers notes that the issuer's all-in debt yield of 10.1% compares favourably to single-borrower SFRs, which ranges from 5.3% to 8.9%. However, he points to certain shortfalls surrounding borrower reporting requirements for certain loans in multi-borrower transactions.

"They are limited to quarterly rent and occupancy information and will not include property operating or capital expenses. So, given the absence or estimation of certain property expenses, property cashflow will be limited, inferred or not available," he explains.

Given that less than 1% of SFR is institutionally owned, Chambers suggests that multi-borrower transactions will eventually overshadow their single-borrower counterparts. Indeed, Colony American Finance is believed to be preparing a potential multi-borrower deal, while FirstKey is said to be working on its second issuance in the space.

Arranged by Citi, Credit Suisse, Deutsche Bank and Wells Fargo, B2R Mortgage Trust 2015-1 is backed by 144 loans secured by 3,160 properties. The transaction comprises five tranches rated by Morningstar and Fitch: US$112.84m triple-A rated class A1 notes; US$39.23m triple-A class A2s; US$20.66m AA/AA- class Bs; US$13.77m A/ A- class Cs; and US$16.35m triple-B class Ds. An additional three tranches were rated by Morningstar: US$4.88m triple-B minus class Es; US$11.48m double-B minus class Fs; and US$3.44m single-B minus class Gs. There is also US$6.89m unrated class H notes, as well as two triple-A rated interest-only tranches - US$152.06m class XAs and US$55.66m class XBs.

Arranged by Citi, Deutsche Bank and Wells Fargo, FirstKey Lending 2015-SFR1 Trust is collateralised by 16 loans secured by 3,628 properties. The transaction comprises four tranches rated by Morningstar and Kroll: US$149.89m triple-A rated class A notes (which also carry a Aaa Moody's rating); US$25.89m AA+/AA- class Bs; US$18.06m A+/ A- class Cs; and US$21.07m of BBB+/BBB- class Ds. Morningstar rated an additional three tranches: US$12.64m triple-B minus class Es; US$6.92m double-B class Fs and US$3.01m single-B class Gs. There is also a US$3.11m tranche of unrated class H notes and two triple-A rated interest only tranches - US$193.84m class XAs and US$46.96m class XBs.

JA

CMBS

Stepping out

European CMBS breaks new ground

New European CMBS deals are increasingly deviating from the cookie-cutter mould established in the market's post-crisis revival. Both deal structures and collateral are branching out.

"European CMBS is becoming more diverse. People are hunting for yield and looking for new ways to structure deals," says Jonathan Banks, director, Mount Street.

An example currently in the market is RBS' £175m Antares 2015-1 CMBS, which securitises a portfolio of office, retail and leisure properties throughout the UK. Most of the collateral is secondary or tertiary quality, but it is the deal's structure that is most interesting.

"The Antares deal is different in its structure to most 2.0 CMBS and in many ways resembles an early 1.0 structure. There is no liquidity facility and no X-note, so it shows that different structures are being tried," says Banks.

Bank of America Merrill Lynch's Taurus 2015-2 DEU is also interesting, in that the deal securitises a loan secured by office space - among other property - at Frankfurt airport. While the office accommodation is reported to be of a high standard, it is not a typical prime location.

An even more innovative deal in the works is Gatehouse Bank's proposed commercial rental-backed deal - securitising rental payments, rather than a mortgage - on a Paris property (SCI 19 January). "Gatehouse Bank has been looking at putting together a deal which is similar to traditional CMBS, but remains Shariah-compliant. It would be an innovative structure," says Banks.

The issuer also owns the property itself. It could provide a useful template for future issuance and would be one way of securitising French collateral while by-passing the country's sauvegarde procedure, which investors have been burnt by before.

While innovative structures are being rolled out, the market is also witnessing issuance from a greater variety of originators and jurisdictions. Indeed, Deutsche Bank's DECO 2015-Harp was the first CMBS to come out of Ireland since the financial crisis (SCI 23 March).

"The landscape has changed in European CMBS. There are more alternative lenders out there now, as all sorts of entities look to deploy capital. That is part of the reason why we have seen deals coming from places such as Italy, while there has also been an Irish deal recently," says Banks.

DECO 2015-Harp was also noteworthy for another reason, as it marked the first conduit style CMBS to be rated by Moody's in Europe since 2007. Conduit issuance has not rebounded strongly in Europe, but there are signs that it could take off again.

"New issuance has been largely focused on single loan, single-borrower securitisations, but a return to true conduit issuance could be on the cards. Investors would like to see more of that kind of product," says Banks.

He continues: "While conduit deals could come back, the question is really what kind of volume the market would see. The big investment banks have been vocal about wanting to do a deal and I think it could be well received, so it is certainly possible."

The focus in European CMBS in the early days of the 2.0 market was on addressing the lessons of the crisis, and to an extent that remains the case. However, as new deals are issued and new structures are developed, the market's frontiers continue to be rolled back.

"Issuance has largely looked to address certain pre-crisis quirks. For example, there is a lot of focus now on what happens after a default and in fact it is possible the market has focused on that a little too heavily," says Banks.

He concludes: "Regardless, it is encouraging to see tighter covenants and while we might not have seen quite as many deals as we would like, banks are building up their teams again and the market does keep moving forwards."

JL

Secondary markets

Euro ABS/MBS stays in range

The European ABS/MBS secondary market stayed range-bound on Friday and opened little changed this morning.

Broader market volatility meant that Friday saw a drop in ABS/MBS liquidity and bid-offer spreads move out. Both the Street and the buy-side were looking to sell peripheral paper weakening the tone there still further, but core assets remained firm.

BWIC activity slowed on Friday, but the schedule looks to be building reasonably healthily for this week. There are currently three European ABS/MBS BWICs circulating for trade today.

First up at 10:00 London time is €75m three line peripheral senior list. It comprises: CORDR 3 A2, HIPOT 5 A2 and IMCAJ 4 A. None of the bonds has traded on PriceABS in the last three months.

Then, at 15:00 there are three lines of CMBS - €4m ECLIP 2007-2X B, €30m EURO 23X A and €3m EURO 28X C. Two of the bonds have covered on PriceABS in the last three months - ECLIP 2007-2X B at 94.46 on 17 March and EURO 23X A at 95.08 on 24 March.

Last, at 16:00 are two slices of Debussy 1 CMBS - £1.7m DBSSY 1X B and £905k DBSSY 1X C. Neither tranche has traded on PriceABS in the last three months.

Secondary markets

US CLOs keep quiet

The recent run of quiet days in the US CLO secondary market, last Thursday's blip excepted, is likely to continue this week.

If anything, this week looks set to be even quieter than last. Both buy- and sell-side players appear to be taking this week's New York CLO conference as an opportunity to stay out of the market and sidestep any volatility driven by rate rise confusion.

There are currently no US CLO BWICs scheduled for this week. However, there are two CDO lists circulating for trade on Thursday.

11:00 New York time sees a four line $439+m current face ABS CDO list. It comprises: BAFC 2012-R4 M, TRIAX 2006-1A A1, TRIAX 2006-1A A2 and TRIAX 2006-1A B. None of the bonds has traded on PriceABS in the last three months.

Then, at 14:00 there is a 14 line $70.4+m current face Trups CDO auction. It consists of: ALESC 10A A1, ALESC 7A A1B, PRETSL 10 A1, PRETSL 12 A1, PRETSL 12 A1W, PRETSL 14 A1, PRETSL 15 A1, PRETSL 17 A1, PRETSL 21 A1, PRETSL 22 A1, PRETSL 23 A1, PRETSL 24 A1, USCAP 2 A1 and USCAP 3 A1. None of the bonds has covered with a price on PriceABS in the last three months.

Secondary markets

Euro ABS/MBS holds up

The European ABS/MBS secondary market was very quiet again yesterday and into this morning, but spreads are holding up.

Activity varies by sector, according to one trader. "Most of the activity in prime over the last few days has been around small size BWICs, which have traded well including some Italian bonds."

Away from BWICs, the trader adds: "We saw UK non-conforming drift out 1-2 basis points yesterday on the back of a strong new issue pipeline. There are still bids around in the sector but they are a bit softer."

On the other hand CMBS spreads are unchanged, the trader says. "CMBS is still very quiet, but we've not seen any sign of the price guidance on the latest TAURUS deal having an impact on secondary."

Peripherals too, are holding up. "General peripheral market tone is weaker, but spreads are relatively static on really low volumes," says the trader.

Activity across the secondary market is expected to pick up later in the week around a large Spanish BWIC due Thursday but for now the auction schedule remains relatively quiet. There are currently only two ABS/MBS lists scheduled for today.

At 14:00 London time is an odd lot mixed mezz list consisting of five lines totalling €1.2m original face, but market focus is on a larger list an hour earlier. The seven line €11.5m mixed RMBS list comprises: ARRMF 2011-1X A2B, CORDR 1 A2, GRANM 2005-4 A5, GRANM 2006-2 A5, GRANM 2007-1 3C1, HERME 12 B and UCI 6 B.

Only the three Granite deals have covered on PriceABS in the last three months, doing so as follows: GRANM 2005-4 A5 at 99.755 on 13 February; GRANM 2006-2 A5 at 99.7 on 19 February; and GRANM 2007-1 3C1 at L98 on 28 January.

Secondary markets

Euro CLO BWICs building

After a relatively quiet period the European CLO BWIC calendar is beginning to build once more.

"We're seeing a few more BWICs appearing so there's bit more happening in that part of the market now," says one trader. "A lot of people have been sitting on the sidelines trying to figure out the impact of the huge pay-downs we've been seeing on underlying loans."

The trader continues: "So far the pay-down news has not resulted in any price movement at all. However, we could see some moves on these BWICs going through over the next few days."

So far there are five European CLO auctions on the schedule for the remainder of this week. The one currently generating most market interest is the next - due at 14:00 London time today.

The €89.422m 21 line list consists of: AVOCA 12 B, AVOCA 12 D, BABSE 2014-1X D, CELF 2006-1X C, DALRA 1-X B, DUCHS VI-X C, GROSV III-X A3, HARVT 10X C, HARVT 10X D, HARVT 10X E, HARVT 11X C, HARVT III-X B, HARVT IV B1, HAYR 2X D1, HEC 2007-3X B, HPARK 1X C, JUBIL 2014-12 X D, LEOP IV-X C1, OHECP 2007-2X C1, QNST 2006-1X B and WODST IV-X C.

Five of the bonds have covered on PriceABS in the last three months. They did so as follows: CELF 2006-1X C at 93.01 on 17 February; DALRA 1-X B at VH99S on 16 February; DUCHS VI-X C at 96H on 23 January; GROSV III-X A3 at LM98S on 16 February; and HARVT III-X B at M97 on 17 February.

Secondary markets

Positive tone in US MBS

Despite macro issues the tone in the US MBS secondary markets remains positive.

"There continues to noise about Greece and so on, but when you bring it down to the sector level it feels pretty risk on right now", says one trader. "You only have to look at the primary market - there's just been a CMBS conduit price tight to guidance and on the resi side the latest STACR deal was well oversubscribed."

In secondary, the trader concedes that "list-wise it's pretty quiet at the moment" with nothing stand-out going through. However, flow trading is seeing increasing participation from real money investors.

Overall, the trader adds: "More and more people are coming into secondary looking for yield enhancement, particularly via single-A and triple-B cashflows."

Secondary markets

Europe focuses on BWICs

Quiet bilateral activity and consequently static spreads are increasing European secondary market focus on BWICs.

"It's generally pretty static," says one trader. "Greek paper is still drifting downwards but that's pretty much it on light flows."

The trader continues: "The primary market continues to be active, but it's not having any impact on secondary. A new issue premium is in evidence but it's not dragging secondary levels with it."

Thanks to the current light secondary flows market participants are increasingly looking to BWICs. Yesterday, all the European lists that went through traded strongly, notably the large CLO list due at 14:00.

Today, there are currently five ABS/MBS BWICs circulating for trade. They include a long mixed list of small clips, two single line CMBS auctions and a five line UK non-conforming BWIC.

However, the chunkiest items come on a two line CMBS BWIC due at 15:00 London time. It involves €116.404m original face of EPICP DRUM A and €30.545m original face of WINDM XIV-X B. Neither bond has covered with a price on PriceABS in the past three months.

In the CLO space there are two lists scheduled for today so far. At 14:30 there are six lines totalling €26.65+m original face - ALPST 1 E, BACCH 2006-1 D, CADOG 2X E, CADOG 3X E, MERCT III-X B2 and NPTNO 2007-1 D. Three of the bonds have covered with a price on PriceABS in the past three months - ALPST 1 E at 96 on 19 February; CADOG 3X E at H80S on 3 February; and NPTNO 2007-1 D at 91.07 on 19 February 2015.

Then, at 15:30 there is a seven line €19.775m original face list - AVOCA VII-X F, DUCHS V-X C, EUROC VI-X E, HSAME 2007-IX D, JUBIL VIII-X E, SPAUL 1X D and SPAUL 1X E. Two of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: DUCHS V-X C at VH90S on 3 March; and JUBIL VIII-X E at 96.03 on 30 January.

Secondary markets

US CDO/CLO lists added

After two days of being all but becalmed there are a growing number of lists being added to the US CDO/CLO calendar.

Over the past two days secondary trades have been limited with many participants absent at this week's New York CLO conference. However, there are currently two CDO/CLO BWICs due today and seven already scheduled for tomorrow.

Today's first auction is a $5m three line mixed vintage CLO list due at 10:30 New York time. It comprises: AMMC 2012-10A D, GEML 2006-3A A3 and VENTR 2012-11I D. None of the bonds have traded on PriceABS in the past three months.

Then, at 14:00 today there is a $5m original face single line of AJAX 2A C. The ABS CDO hasn't covered with a price on PriceABS in the past three months

The two CDO lists reported on Monday for trade tomorrow have been joined on Thursday's schedule by a further ABS CDO list - a five line $4.9m auction due at 11:00 - and four CLO lists. The CLOs in for the bid cover a 1.0 single-B tranche, four lines of 1.0 triple-A and 9 pieces of 2.0 equity.

Of the latter, the stand-out is the $40.1825m controlling stake of CIFC 2012-2A SUB due at 14:00. The bond hasn't covered with a price on PriceABS in the past three months and this size piece DNT'd last time out on 18 March 2015.

Secondary markets

Euro ABS/MBS BWICs trade well

Yesterday saw another active day in European ABS/MBS BWICs with almost all line items trading well.

"There were a lot of BWICs yesterday and everything traded well, with the big blocks of EPICP DRUM A and WINDM XIV-X B a particular highlight," one trader says. "At the same time, UK non-conforming is feeling softer but the BWIC execution levels of the past few days contradict that."

Away from BWICs, activity is limited. "The pipeline of new issuance, notably in the non-conforming and CMBS spaces, is taking away attention from secondary," says the trader. "However, we continue to see selective interest from investors outside of the auctions."

That interest has mainly excluded peripherals, with the exception of Italian paper, this week so far. However, the highlight of today's ABS/MBS BWIC calendar is a large peripheral RMBS BWIC due at 14:00 London time.

The 12 line €1.94bn original face/€383+m current face list comprises: BCJAF 4 A, BCJAF 6 A2, BCJAF 9 A2, BERCR 6 A2, BFTH 4 A, BFTH 5 A, FEMO 05 A, HMSF XI A, IMCAJ 3 A, IMPAS 2 A, LUSI 2 A and TDAI 2 A. Two of the bonds have covered on PriceABS in the past three months, last doing so as follows: BFTH 4 A at 98.25 on 1 April and HMSF XI A at 98 on 27 March.

Secondary markets

Euro CLO BWIC boost

The already active European CLO secondary market is being boosted by increased BWIC supply.

"Secondary continues to be extremely busy and the appearance of lot of BWICs this week has injected to some very welcome supply," says one trader. "Most line items have traded strongly with 2.0 mezz in particular trading extremely well and moving much tighter."

1.0 mezz has been more variable, however, the trader says. "It traded extremely well on one list, but less so on another. That's more an indication of the varying levels of demand between pristine bonds and weaker names."

While levels of demand may vary the overall picture is that there is demand for European CLO product across the board. Despite the flurry of lists, off-BWIC activity this week is as strong as it was last week, the trader says. "It continues to be very active albeit not quite to March's levels, but very significant nonetheless."

Nor is the sudden upswing in bonds in for the bid a cause for concern, according to the trader. "The emergence of the lists is simply sellers seeing spreads have now got tight enough to move some of their paper at a healthy profit and take stock of where the market is going next."

There are currently two European CLO BWICs due today - one involving 1.0 mezz and the other mixed vintage equity. Both are scheduled for 15:00 London time.

The mezz list consists of ten lines totalling €30.649m original face: CADOG 4X C, CELF 2005-2X C, DUCHS V-X C, EUROC VII-X E, GROSV II-X C, GSCP 2006-3A D1, HARBM PR3X B1, HARVT I-X D, LFE I IVB and LFE II IV. Three of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: CADOG 4X C at LM90S on 6 February; DUCHS V-X C at 99H on 22 April; and HARBM PR3X B1 at H80S on 12 March.

The equity list amounts to €7m across four line items - ADAGI III-X SUB, CGMSE 2013-2X SUB, CGMSE 2014-2X SUB, GROSV 2013-1X SUB. Only CGMSE 2013-2X SUB has covered with a price on PriceABS in the past three months, last doing so at 77.77 on 16 April.

Secondary markets

US RMBS loses focus

The US non-agency RMBS secondary market's focus has been distracted away from legacy paper in general and BWICs in particular.

"The new STACR deal priced yesterday which caused a flurry of activity on- and off- BWIC on those bonds, and at the same time SFR subs are continuing to tighten," says one trader. "Both of these elements are distracting the market's focus from legacy RMBS."

Equally the trader notes that DNTs are on the rise. For example on Monday a $170m re-REMIC list saw three of seven lines DNT, despite the sector being the fastest growing secondary asset class; and then yesterday an entire subprime mezz list failed to trade, although two line items did trade subsequently.

"The DNTs are an indication of the growing trend for people to trade post-list to use offers based on the best bid or to trade out of comp altogether," says the trader. "That's a sign that liquidity is starting to break down and that there is a growing realisation that BWICs not currently the best avenue to sell bonds."

Overall RMBS secondary activity is limited, the trader reports. "A lot of people are continuing to wait for a catalyst either in terms of events in Europe or a US rate rise before returning to market. So, it's extremely quiet though we do have over $1bn in for the bid today there's only one $230m list scheduled for tomorrow."

However, the trader is optimistic for something of a turnaround in the near-term. "This month's remits are due over the weekend and once people have absorbed them they'll be looking to position for month end, so I expect the market to pick up late Monday into Tuesday."

Secondary markets

Euro secondary staid but stable

Yesterday was quieter in European secondary securitisation markets than previous days and spreads remained stable. Today looks set to be the same with a limited total volume on the BWIC calendar and the market opening flat this morning.

Yesterday's quieter day was partly a result of very heavy focus on the previously mentioned 14:00 peripheral BWIC, for which the covers are yet to be widely circulated. At the same time, real money was notably absent yesterday having been the most active non-dealer segment recently.

Away from the list peripherals continued to be quiet. Meanwhile the usual sectors saw the most action - UK RMBS and particularly, once more, CLOs.

CMBS secondary had more news to feed including the tight pricing of TAURUS DEU, guidance circulating for new deals and a default on a legacy deal. Nevertheless, secondary spreads were broadly unmoved.

Today sees seven European BWICs circulating for trade so far, albeit mainly in small size and limited numbers. There are a range of deal types across core and peripheral names on offer but the standouts are single line of CMBS due at 14:00 London time and two CLO lines at 14:30.

The CMBS is €2m original face of DECO 2014-BONX E. The bond only previously appeared on PriceABS on 2 April when the same size piece did not trade.

The CLOs are €5m of HARVT 10X E and €2m of HARVT 11X E. Only HARVT 10X E has covered on PriceABS before, doing so at 98.35 on 21 April.

Secondary markets

US CLOs look ahead

Today sees a quiet end to a quiet week in the US CLO secondary market, which is giving traders the opportunity to look ahead.

"It was a little busier yesterday, but still not enough going through," says one trader. "Today is even quieter with many people still away from their desks following the conference earlier in the week."

Those that are around today are looking to identify future market direction, the trader says. "The realisation is that new issue volumes were splashed across Q1 and now there are far fewer warehouses in the pipeline, which will translate into far fewer deals in Q2. However, demand for paper is likely to continue given that CLOs are still offering good relative value compared to other securitisation asset classes."

Consequently, expectations are for a continued broad-based CLO rally, though the top and bottom of the capital stack are likely to lag. The trader says: "Mezz will continue to be the focus and Triple-B to double-A in particular will continue to tighten especially bonds involving strong managers."

The trader continues: "Everyone wants triple-As to tighten because loans are, but there aren't that many investors who can come in and compete to buy the $100m-$200m blocks that it takes to move those spreads in. At the same time, equity remains its own special case and is hard to price on anything but a bond-by-bond basis. Furthermore loan re-pricing in general is going to make it even harder."

For now, the trader suggests the plan is keep things simple. "The trade everyone is looking for is to buy cheap in primary - take advantage of 'sprint to market' deals, for example - and then wait for the rally to happen."

There is currently only one US CLO BWIC scheduled for today - $4.875m across three lines of 2.0 triple-A due at 13:00 New York time. The list consists of: BABSN 2013-IA A, DRSLF 2013-28A A1L and TPCLO 2013-1A A1.

Two of the bonds have covered with a price on PriceABS in the last three months - BABSN 2013-IA A at 98.76 on 5 March; and DRSLF 2013-28A A1L at 98.13 on 26 February.

Structured Finance

SCI Start the Week - 20 April

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

Pipeline
The number of deals joining the pipeline was steady last week, with more RMBS than the week before and less emphasis on ABS and ILS. At the final count there were five new ABS, one ILS, four RMBS and two CMBS added to the pipeline.

The ABS were: A$210m Flexi ABS Trust 2015-1; US$240m HERO Funding Trust 2015-1; US$1.126bn Ford Credit Auto Lease Trust 2015-A; US$365m LRF 2015-1; and US$637m PHEAA Student Loan Trust 2015-1. The ILS was US$250m Everglades Re II Series 2015-1.

US$241m Agate Bay Mortgage Trust 2015-3, Genesis Trust II Series 2015-1, US$720m STACR 2015-DNA1 and £1.8bn Warwick Finance 1 accounted for the RMBS. The CMBS, meanwhile, were €445m Taurus 2015-2 DEU and US$955m WFCM 2015-NXS1.

Pricings
It was a particularly busy week for ABS leaving the pipeline, as 11 deals priced. There were also four CMBS prints and seven CLOs.

The ABS were: US$554.45m ARI Fleet Lease Trust 2015-A; US$180m Axis Equipment Finance Receivables III Series 2015-1; US$1bn Dell Equipment Finance Trust 2015-1; US$223.64m First Investors Auto Owner Trust 2015-1; US$1.169bn Hyundai Auto Lease Securitization Trust 2015-B; US$475m Mercedes-Benz Master Owner Trust Series 2015-A; US$525m Mercedes-Benz Master Owner Trust Series 2015-B; US$997m Navient Student Loan Trust 2015-2; US$1.17bn Santander Drive Auto Receivables Trust 2015-2; US$704m SMB Private Education Loan Trust 2015-A; and US$360m World Financial Network Credit Card Master Note Trust Series 2015-A.

US$1.4bn BAMLL Commercial Mortgage Securities Trust 2015-200P, US$1.31bn FREMF 2015-K44, US$395m STORE Master Funding 2015-1 and US$796.6m WFCG Commercial Mortgage Trust 2015-BXRP constituted the CMBS.

Lastly, the CLOs were: US$552.5m ACAS CLO 2015-1; US$511m AMMC 16; US$477m Apollo Credit Funding IV; US$560m Jackson Mill CLO; US$764m OCP 2015-8; US$759m Octagon XXIV; and US$661m Stewart Park CLO.

Markets
US ABS spreads were stable to slightly tighter last week, with Barclays Capital analysts noting that prime auto and student loan ABS outperformed. "ABS trading in the secondary market was also very active, as an average of US$1.4bn traded each day during the first four days of the week, significantly higher than the US$850m average over the corresponding period last week," they add.

Citi US agency RMBS analysts note that larger Fed purchases and the recent pick-up in Asian buying supported the basis last week. They say: "Origination has also been fairly contained and the range bound 10-year has resulted in a fairly conducive environment for carry trades."

While nominal US CLO BWIC volumes totalled almost US$900m over the course of the week, nearly US$700m of that came from triple-A CLO 1.0. "Due to above-average supply, the secondary market saw some spread widening at the 1.0 triple-A level although part of this was also due to manager tiering. In the 2.0 space, risk-on sentiments and limited supply have boded well for mezzanine trading and we saw modest spread tightening over the week," comment Bank of America Merrill Lynch analysts.

In European ABS and RMBS, spreads continued to move slowly wider. "While weakness is peripheral govies provides some impetus for the weakening sentiment, the slow recalibration of clearing spread expectations on the back of underwhelming ABSPP activity volumes in the wider asset classes (i.e. peripheral) no doubt continues to weigh on the sectors," say JPMorgan analysts.

Editor's picks
ABSPP rethink proposed: While the ECB's ABSPP has brought benefits to the market, it has also underwhelmed. Increasing transparency could do more to support the recovery of eurozone ABS...
Growing appetite: US CLO managers are tapping strong demand from European investors for CRR-compliant paper. The originator route appears to be the most accessible structuring route for now...

Deal news
• Auction.com data indicates that 49 properties with US$320m in balance across 37 CMBS loans are out for the bid in late April and May. WBCMT 2006-C24 has the largest exposure to the auctions, accounting for three properties totalling US$63m, according to Barclays Capital CMBS analysts.
• Walgreens Boots Alliance plans to close 200 drugstores in the US, under a US$500m cost-cutting measure. The retailer is believed to be a tenant in 401 properties encumbered by 249 CMBS 2.0 loans with an allocated balance of US$1.5bn across 105 deals. The largest loan with exposure to a short-term lease is the US$98.8m Spirit Cole Portfolio, securitised in COMM 2013-LC13.
• April US CMBS remittances indicate that five loans totalling US$77.6m in balance have been liquidated from the MLCFC 2007-7 trust. The loans were previously listed for sale on Auction.com in February (SCI 4 February) and, together with an additional two properties from the US$15.5m Norcross Industrial Portfolio, generated US$62.2m in proceeds.
• Chotin Fund Management has resigned from its role as the collateral manager for Mercury CDO 2004-1 and designated Dock Street Capital Management as its replacement. Fitch says that terms of the proposed replacement collateral manager agreement have remained almost identical, with only minor differences that are not material to the ratings of the transaction.

Regulatory update
• BNY Mellon has presented the US$8.5bn Countrywide settlement agreement to the New York Supreme Court for final approval. The bank is seeking a modification of the language in the February 2014 judgment to bring it in line with last month's appellate division ruling (SCI 6 March), specifically by deleting any language regarding withholding the release of modification claims.
• First Tennessee, the regional bank for First Horizon National, has agreed in principle with the US Department of Housing and Urban Development and the US Department of Justice to settle claims related to the bank's underwriting and origination of FHA-insured mortgage loans from 1 January 2006 through to 31 December 2008. Under the agreement, First Tennessee has committed to pay US$212.5m.
• The London High Court has ruled in favour of Taberna Europe in a misrepresentation judgment against failed Danish financial institution Roskilde Bank. The court ordered the payment of damages in the amount of €26.42m, with €4.77m interest, plus costs to be assessed.

Deals added to the SCI New Issuance database last week:
A-BEST 11; AmeriCredit Automobile Receivables Trust 2015-2; Babson CLO 2015-1; Carlyle Global Market Strategies CLO 2012-1 (refinancing); Carlyle Global Market Strategies CLO 2015-2; Catamaran CLO 2015-1; CGCMT 2015-GC29; Chrysler Capital Auto Receivables Trust 2015-A; Citigroup Mortgage Loan Trust 2015-A; CORE 2015-CALW; CORE 2015-TEXW; CORE 2015-WEST; CSMC 2015-TOWN; CVC Cordatus Loan Fund V; Dolphin Master Issuer series 2015-1; Golub Capital Partners CLO 24(M); Invitation Homes 2015-SFR² Trust; JFIN CLO 2015; JPMBB 2015-C28; Mariner CLO 2015-1; MSBAM 2015-C22; Nissan Auto Receivables 2015-A Owner Trust; Palmer Square CLO 2015-1; PFS Financing Corp Series 2015-A; Purple Master Credit Card Note Series 2015-1; RevoCar 2015; Symphony CLO X (refinancing); Zais CLO 3

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-1; BACM 2005-3; BACM 2007-3; CD 2005-CD1; COMM 2005-C6; DECO 2006-E4; DECO 8-C2; FTST 2006-4TS; GCCFC 2005-GG5; GECMC 2005-C1; GSMS 2007-GG10; JPMCC 2006-LDP7; JPMCC 2006-LDP9; LBUBS 2006-C7; MLCFC 2006-4; MLCFC 2006-4 & JPMCC 2006-LDP8 ; MLCFC 2007-7; MLCFC 2007-9; MSBAM 2012-C5; MSC 2007-IQ16; TAURS 2006-1; THEAT 2007-1 & THEAT 2007-2; TITN 2007-1; TITN 2007-2; TMAN 6; TMAN 7; WBCMT 2006-C24; WFRBS 2013-C11 & WFRBS 2013-C12; WINDM X; WINDM XIV

CLOs

Risk retention views polled

Among respondents to JPMorgan's 2Q15 CLO client survey, it is generally felt that only a minority of CLO managers have a clearly defined risk retention strategy. About half of those surveyed - and overwhelmingly investors - believe that a manager should contribute at least 51% of the retention, with the remainder suggesting that the contribution should be 10%-30% or even zero.

In terms of US relative value, triple-A tranches remain the most favoured among respondents, despite CLO primary spreads being 8bp-10bp tighter on the year. Double-B and equity tranches also garner interest, with the latter more favoured in secondary than in primary. Both triple-A and equity tranches attract interest in the European CLO market.

Regarding risk factors, loan supply and arbitrage are now the two key concerns expressed by survey respondents. Risk retention is a close third.

"This is unsurprising, with net loan issuance down by 40% year-on-year," JPMorgan CLO strategists observe. "It is striking that Volcker Rule-related illiquidity attracted relatively few votes (especially with the first Volcker compliance date of 21 July 2015 on the horizon), while other concerns are illiquidity in general, loan underwriting standards and oversupply of CLOs."

Further, the survey indicates that 57% of investors hold low (0%-5%) cash - representing an all-time high - and 14% hold high or very high (10%-15% plus) cash, representing an all-time low since 2012. "Low cash may be due to the absorption of record new issuance in Q1. The composition of our survey may not be consistent over time, making trends challenging to analyse, but the results suggest that a number of investors have a restricted ability to take down a significant amount of paper in the near term," the strategists note.

Continuing the theme of potentially weakening investor-led technicals, the buyer/seller ratio remains positive, but at 3.6 to one has plummeted to a low not seen since 2011's 3.5x. However, the number of sellers appears to have decreased quarter-on-quarter, so the sharp drop in the ratio seems to be related to fewer buyers and more holders. The strategists suggest that this is unsurprising, given the circa 10bp-60bp tightening seen across US primary in the last few months.

CS

CLOs

Shifting investor base drives supply

Post-crisis record highs were set in both the US CLO secondary and primary markets in March. US$15bn of new issuance priced during the month (totalling US$39.2bn for the quarter, including refinancings), while BWIC volume hit US$3.5bn (US$7.5bn for the quarter), according to Citi figures. In comparison, CLO BWIC volume in 1Q14 reached US$4.9bn and the monthly average since 2013 has been US$2bn.

March saw record high monthly BWIC volume across double-A, double-B and equity tranches in particular. Citi structured credit strategists note that CLO 2.0 secondary activities doubled last September when the energy sector induced broad market volatility and BWIC activity has remained elevated since. However, they point out that volume in March was driven by broad spread tightening and profit taking, rather than a market sell-off.

The strategists believe that shifts in the CLO investor base have contributed to higher trading activities this year, along with a growing share of CLO 2.0 bonds. The fact that US CLO 2.0 spreads tightened by around 12.5bp for triple-A tranches to as much as 52.5bp for triple-Bs, coinciding with strong supply during the quarter, underlines this belief.

CLO 2.0 bonds represented three-quarters of BWIC volume in 1Q15, according to Citi, proportionate to CLOs outstanding. Meanwhile, CLO 1.0 BWIC volume declined sharply to 25% from 50% in 2014.

To measure market liquidity, the strategists identify bonds that did not trade and calculate the DNT percentage on a notional basis. Based on their observations, about 21% of CLO 2.0 and 14.3% of CLO 1.0 did not trade in March.

Banks' share in US primary CLO triple-As increased slightly from 40% to 45% in Q1 compared to full-year 2014, overtaking insurance companies and asset managers (38% combined), but remaining lower than their 77% share in 2013. For mezzanine tranches, 84% was bought by insurance companies, asset managers or hedge funds. Indeed, hedge funds bought more CLO mezz in Q1 (18% versus 9% in 2014) and less CLO equity.

CS

RMBS

LLPA changes unveiled

The US FHFA has announced the results of its comprehensive review of guarantee fees charged by Fannie Mae and Freddie Mac. The move is not expected to have a significant effect on mortgage valuations, prepayment speeds or agency RMBS issuance volumes.

The FHFA has determined that current fees, on average, are at an appropriate level and that modest adjustments to upfront guarantee fees are also appropriate. As a result of the review, the GSEs are tasked with eliminating the adverse market charge put in place in March 2008 and replacing the revenue with targeted increases in guarantee fees to address various risk-based and access-to-credit considerations.

Under the changes, LLPAs will be increased by 25bp for loans with both an LTV ratio of 80% or less and a credit score of 700 or more. LLPAs for investor loans, cash-out refinances and loans with second-lien financing will be increased by 37.5bp, while LLPAs for jumbo conforming loans will increase by 25bp. The changes to the LLPAs will be implemented for all loans purchased or delivered into MBS pools issued on or after 1 September.

Barclays Capital RMBS analysts suggest that the changes are unlikely to affect the majority of GSE loans. In particular, since there will be no net effect on upfront fees for the largest segment of borrowers, TBA prepayments and valuations should not change.

Although borrowers with LTVs of over 80% or with FICOs below 700 will benefit from the ADMC removal, the effect of this on the TBA market will be minor, as many of these loans are already being delivered into low FICO or high LTV specified pools. Equally, the elimination of the 25bp upfront ADMC effectively translates into an elbow shift of only 5bp is expected to have only a minor effect on valuations.

But the changes may have a small effect on FICO and LTV specified pools, since these borrowers will experience the full benefit of the 25bp ADMC removal. "In addition, since LLPAs will be increased by 37.5bp for investor loans and 25bp for CK pools, these pools may also experience some change in valuations. However...assuming constant OAS, these pools are expected to change in price by only a modest amount, 2-5 ticks," the Barcap analysts observe.

They add: "Overall, we view the announcement as a small positive for the basis to the extent that some reduction in LLPAs/refinance rates had already been priced into mortgages. The announcement also removes some uncertainty from the market by clarifying the specific changes that will be made."

The FHFA says it will continue to monitor guarantee fees closely and make adjustments, as necessary, on an ongoing basis.

CS

RMBS

Recoveries change RMBS landscape

Investors can find value in non-investment grade senior and mezzanine Spanish RMBS bonds, particularly as recoveries switch deals to pro rata paydown. Certain investment grade names also make for attractive investment candidates.

Citi RMBS analysts have estimated updated Spanish LTVs for 2005-2007 vintage deals. They find indexed LTVs for 2005 vintage deals range between 57% and 85%, while the range for 2006 and 2007 vintages is 69%-127%, with significant differences across deals.

Many legacy deals have significant defaulted loan buckets, meaning recovery levels will strongly impact senior and mezz note pricing. The analysts calculate that indexed LTVs of defaulted loans are generally only a little higher than those of the whole pool, although the difference is more pronounced for HIPO HIPO and KUTXH.

Theoretically the estimated defaulted loan LTVs should imply very high recoveries, but the properties underlying the loans typically actually sell at substantial discounts to their indexed valuations. Taking this into account, the analysts estimate recoveries of 37%-72%, with 53%-72% for the 2005 vintage.

If recoveries are high enough they can lead to shortened WALs for both senior and mezz tranches. Where deals only have modest defaults, recoveries have less of an impact on WALs and DMs.

Spanish RMBS deals with a high proportion of defaulted loans are typically amortising sequentially as they continue to fail triggers because of depleted reserve funds, with many also experiencing high delinquencies. Some deals, particularly if they are currently passing their delinquency triggers, could turn pro rata if recoveries are sufficient to top up reserve funds.

"While such a switch can be a good source of optionality for discounted subordinate tranches, we find that the switch will not impact the WALs of first pay bonds significantly. Based on our estimated recovery timelines, it would take at least five years for reserve funds to top up and by that time a good portion of first pay bonds would have been amortised, at current prepayment levels," say the analysts.

Non-investment grade senior bonds such as IMPAS 3A, IMPAS 4A and HIPO HIPO-10 A2 are particularly attractive, offering 180bp-250bp DM for a five or six year WAL, say the analysts. "This translates into unlevered yields of about 2.0-2.7%."

They add: "The relatively high DMs on these bonds also offer an opportunity to seek repo financing against these bonds at about 25%-35% haircut and Euribor plus 125bp-150bp financing cost. On this basis, we believe that investors can achieve mid-single digit levered returns especially on IMPAS 3A, which appears cheaper than the other two."

Investors who cannot invest in non-investment grade bonds could be tempted by TDAC 5A, TDAC 7A3 and HIPO HIPO-9 A2A. All three are ECB-eligible, with the two TDACs on a positive rating outlook with Moody's. The analysts estimate DMs at 110bp-130bp for four or five year WALs.

Among mezz bonds, IMPAS 4 C could well turn pro rata. At the current market price of around 28, it could offer very good value.

"Even in a conservative sequential only scenario, it offers about 800bp DM for about 19 year WAL, which drops to six to eight years if the deal turns pro rata, improving the DM to over 2000bp. Our analysis suggests that the deal will likely remain pro rata from 2019 to 2025, pursuant to our recovery estimates and current prepayment rates," the analysts say.

However, there is a note of caution. Should delinquencies fail to fall below the required 1% trigger, the IMPAS 4 class C bonds will continue to amortise sequentially and will not receive their first principal payment until 2033.

JL

ABS

ABS franchise strengthened

SG has hired Daniel McGarvey and a team of senior ABS bankers from RBS. McGarvey will manage an expanded team of ABS and CMBS professionals with the objective of building a US ABS franchise, both in mortgage and non-mortgage ABS segments.

McGarvey most recently headed RBS's non-mortgage ABS business. Prior to this, he marketed, structured and executed term ABS distribution at Banc One Capital Markets. He has also worked in ABS at JPMorgan.

Also joining McGarvey's team are Bob Pucel as head of ABS/CMBS syndicate and Carl Spalding as a lead ABS banker. In addition, Sean Whelan has been hired as a senior asset-backed products salesperson, while Parker McKee and Ryan Comins have been hired in sales and syndicate respectively.

ABS

Correlation trader reassigned

HSBC has reassigned Billy Burke to its ABS trading desk. Burke is a vp in structured credit products and focuses on credit correlation trading. He reports to Mark Wirth, md at the bank.

Structured Finance

SF team strengthened

TMF Group has appointed Michael Adams as global head of structured finance. He is promoted from regional md for the UK, Ireland and the Channel Islands.

Prior to TMF Group, Adams was md and business manager for BNY Mellon's corporate trust EMEA structured finance business. He was responsible for the business development, strategy and growth of ABS, MBS and CMBS. Before this, Adams held a variety of roles with Barclays Capital and Grant Thornton.

TMF has also hired Dennis Stone as a director within its structured financial services group. Stone joins from BNY Mellon, where he undertook multiple roles supporting the wider global structured finance products.

He started his career with RBS, working in client services, project and product management, and sales and business development. He has additionally been a CDO controller for a global hedge fund.

Structured Finance

Investor relations head named

Ruth Lane has joined CIFC as head of investor relations. In the the newly created position, she reports to CIFC head of business development Spencer Potts.

Lane joins CIFC from Mount Kellett Capital Management, where she was associate director of investor relations and marketing. At Mount Kellett, she was responsible for supporting the investor relations, marketing and business development activities of the firm. Before that, she worked in institutional research sales and equity sales trading for Credit Suisse Securities.

Structured Finance

Due diligence trio added

Houlihan Lokey has hired Richard Forgione as a director in its due diligence services practice. He joins from EY, where he was a senior manager in the firm's transaction advisory services practice. Forgione also previously worked in EY's structured finance advisory services practice, working with investment banking clients on securitised product issuances.

Houlihan Lokey has additionally hired Carl Ashqar and Matthew Petrillo as vps in its due diligence services practice. They also previously worked as senior managers in EY's transaction advisory services practice.

Structured Finance

Lending portfolio acquired

A fund managed by Ares Management's commercial platform has agreed to acquire First Capital Holdings' asset-based lending portfolio. The transaction is expected to close during 2Q15.

The acquisition will take the Ares Commercial Finance platform to US$700m of loan commitments and will expand the team through the addition of members of the First Capital investment team. Ares Commercial Finance was formed last year (SCI 6 June 2014) and provides asset-based and cashflow loans to small and middle-market companies, as well as asset-based facilities to specialty finance companies.

Structured Finance

Direct lending exec moves on

Carmen Alonso has joined Tikehau's private debt team, where she will lead direct lending activities in the UK, Spain, Germany and Scandinavia. She will also seek to further develop the group's interaction with private equity funds, direct lending funds and banks.

Alonso was most recently md in Morgan Stanley's European leveraged finance team. Prior to this, she worked in leveraged finance at HVB, Merrill Lynch and UBS. She was also vp in the corporate finance group of GlaxoSmithKline.

CLOs

CLO pro swaps managers

HIG Capital has hired Asmat Doza as a director. She was previously an executive director at CIFC Asset Management, where she was responsible for marketing corporate credit and structured credit strategies, including CLO debt and equity mandates. Doza has also held senior roles at Boutique Advisory Firm and PineBridge Investments.

CMBS

CMBS originator recruited

Greystone has hired Steve Cho as md. Reporting to Robert Russell, head of production for Greystone's CMBS group, he will focus on building the firm's CMBS presence in the central US states through Texas.

Prior to joining Greystone, Cho was md at RBS and the bank's sole CMBS originator in the US central region. Before that, he worked in the private equity acquisitions and financial engineering groups at Fortress Investment Group.

Insurance-linked securities

ILS broker poached

TigerRisk Partners has appointed Paul Karon as vice-chairman. In his new role, he will be a senior leader, dealmaker, mentor and strategic advisor to the Tiger leadership team. This is the second high-profile hiring by the firm in the last week, following the appointment of Tony Ursano as chairman (SCI 17 April).

Karon joins from AQR Re, where he was vice-chairman and a member of the board. Prior to this, he co-founded Benfield, serving as president and coo.

Following the firm's purchase by AON, he served as chairman Americas of AON Benfield and was a member of its global executive committee. Karon began his career at EW Blanch.

Risk Management

ISDA directors elected

ISDA has elected 12 directors at its latest AGM in Montreal. Two new directors were added to its board, while 10 were re-elected.

The new members of the board are Yasunobu Arima and Sam Skerry. Arima is a general manager of the global markets planning division at The Bank of Tokyo-Mitsubishi, where he is responsible for global regulatory affairs relating to derivatives and market business. Skerry is global head of structured products and commercial support for BP's integrated supply and trading business.

The re-elected directors are: Keith Bailey (Barclays); Nitin Gulabani (Standard Chartered Bank); Rich Herman (Deutsche Bank); Kieran Higgins (RBS); Jonathan Hunter (RBC Capital Markets); TJ Lim (UniCredit); Eric Litvack (SG); Christopher Murphy (UBS); Ciaran O'Flynn (Morgan Stanley); and Emmanuel Ramambason (BNP Paribas).

ABS

Auto ABS collateral weakening

US prime auto ABS collateral has been marginally weakening in recent months, says Fitch. This is due, in part, to heightened competition among auto finance companies.

Since 2011, credit quality of the underlying pools has declined marginally, but remains stronger than pre-recessionary levels. Fitch explains that competition and low loss levels are encouraging slightly riskier loan attributes for auto ABS. For example, finance companies are catering to consumer demand for low monthly payments by extending loan terms, namely loans with terms of greater than 60 months.

"Auto finance companies are increasingly offering 73- to 84-month loans to borrowers across the FICO spectrum," says Fitch director Joyce Fargas. This trend is likely to continue throughout 2015, adds the agency, which could drive higher loss severity in ABS transactions.

"Prime auto lenders are also showing a higher propensity to lend to non-prime borrowers," Fargas continues. "As a result, we're seeing slight increases in non-prime concentrations within prime auto loan securitised pools."

Fitch expects exposure to borrowers with FICO scores of below 650 to trend higher in prime auto ABS portfolios in 2015, but to be contained to around 10% of ABS pool.

Nonetheless, the agency is maintaining its stable performance outlook and positive rating outlook for prime auto ABS. It expects upgrades to be strong and consistent with the rate seen last year: Fitch upgraded 51 prime auto ABS tranches through the end of 2014, representing the highest rate in six years.

Structured Finance

CDPC note ratings withdrawn

Moody's has withdrawn its ratings on five senior subordinated and three subordinated notes issued by Athilon Capital Corp, affecting US$238m of debt securities. The rating action comes after the CDPC distributed capital from eligible investments to selected investors in connection with the cancellation and retirement of US$312m of notes in a manner that, in Moody's opinion, is not contemplated by the deal documentation.

"In rating these notes, Moody's relies significantly on the governing principles contained in the deal documents regarding the notes and their structural relationship within the transaction. The recent activities taken by the issuer have greatly diminished the quality and reliability of the information provided within these deal documents," the agency explains.

Consequently, it has withdrawn the ratings because it believes it has insufficient or otherwise inadequate information to support the maintenance of the ratings. The agency notes, however, that Athilon continues to provide certain reports containing information that is sufficient and adequate for the purpose of maintaining its counterparty ratings.

Structured Finance

Euro decline sparks SME benefits

SMEs in the euro area are poised to reap greater potential gains from the falling value of the euro than previously thought, according to Moody's. The sectors that benefit the most could weigh up to about 10% of European SME ABS portfolios.

"The overall effect of the euro's depreciation is limited on the euro area economy in general and subsequently on SMEs in particular, because a small number of SMEs directly stand to benefit from the cheaper euro," observes Monica Curti, a Moody's vp and senior analyst.

Accounting for the exposure to segments that are partially related to tourism, the potential impact on European SME ABS performance is sizeable. For all of the European SME ABS transactions that the agency analysed, the number of sectors that benefit from the falling euro outweigh the penalised sectors.

Auto manufacturing, chemical production and tourism are cited as the biggest beneficiaries of the euro's slide. This is especially the case for Spanish SME ABS transactions, where a relatively high portion of SMEs provide accommodation and food services. However, other SME ABS portfolios' concentrations are lower than 4% for sectors that are positively exposed to the weaker euro.

The largest non-euro area exporting destinations remain within Europe, particularly the UK. SMEs will be competing with each other for market share outside the euro area and they will also have an advantage over non-euro area SMEs operating in their sectors.

Finally, the weaker euro has indirect positive effects for SMEs that non-euro area export figures alone do not reflect. Exports outside the bloc will become more competitive and SMEs are well-positioned to provide substitutes for costlier imported products within the euro area. German and Italian SMEs will benefit the most, as about 60% of their overall exports are to countries outside the euro area.

Structured Finance

SME issuance faces obstacles

Public issuance of European SME CLOs is currently hindered by two main obstacles, says Scope Ratings. One of these is the regulatory framework surrounding capital charges and liquidity coverage ratios, which make SME CLOs less appealing to institutional real money investors than other products, such as covered bonds.

In addition, the ECB eligibility rules under the repo collateral framework favour instruments that compete with SME CLOs, such as sovereign bonds, or secured and unsecured bank debt. Scope believes this differential treatment discourages originators from issuing SME CLO transactions when there are viable alternatives.

However, Scope determines that other drivers of public SME CLO issuance fail to explain the lack of transactions intended for public placement. The agency notes that there is currently a positive environment for the creation of SME CLO collateral, as banks are adjusting their strategy to meet increasing demand for credit from the real economy. Additionally, the spread demanded by real money investors enables the issuance of SME CLOs at economically viable cost levels, while yield compression indicates growing appetite among investors.

CLOs

Effective date process refined

S&P has introduced a new alternative to its effective date rating agency confirmation process for CLOs. The update is intended to increase the transparency and predictability of the effective date process for collateral managers as they ramp up their CLO portfolios.

The alternative effective date process relies on the non-model version of CDO Monitor introduced by S&P last year, which is built on a foundation of six portfolio benchmarks intended to provide insight into the characteristics that inform the agency's view of CLO collateral credit quality. When expressed using a formula, these six benchmarks produce a close approximation of the triple-A scenario default rate (SDR) that would be generated by the CDO Monitor model.

This SDR can then be compared with a breakeven default rate (BDR) - generated using a CLO-specific formula that S&P provides in connection with the new issue CLO rating process - to determine if the CDO Monitor test is passing. Inputs for the CLO-specific BDR regression formula typically include weighted average recovery rate, weighted average spread and other portfolio parameters.

Collateral managers and trustees now have the option to use - with two analytical adjustments in connection with the calculation of weighted average spread and principal cash - the non-model version of CDO Monitor to indicate whether or not their CLO is passing its effective date analysis. If the analysis indicates a passing result, the CLO can assume an effective date ratings confirmation from S&P, provided that a number of conditions are met.

These conditions include the manager or trustee certifying to S&P that the requirements outlined in the CLO transaction documents for the effective date process have been met.

CLOs

CLO 1.0 WARFs improving

The median trustee-reported weighted average rating factor (WARF) of US CLO 1.0s rated by Moody's is improving as the deals amortise. This is not due to improving credit quality, but rather is a result of the exclusion of defaulted assets from WARF calculations, the redemption of CLOs with relatively high WARFs and the sale of high risk assets.

The removal of defaulted assets from WARF calculations accounted for over a third of a 101-point WARF improvement among US CLO 1.0s in 2014, according to Moody's latest CLO Interest publication. Furthermore, CLOs redeemed in 2014 had higher WARFs than those that remained outstanding in December 2014, accounting in part for the WARF improvement.

The median US CLO 1.0 WARF declined by 101 points to 2416 in December 2014 from 2517 in January 2014. However, if the assets that defaulted in 2014 are removed from the January WARF calculations for deals that held defaulted assets in December, the WARF improvement shrinks to 61 points.

Moody's expects new defaults to continue contributing to WARF improvement in 2015. "CLO 1.0 collateral pools are becoming less granular as they amortise, which will magnify the impact of a single default on WARF calculations. Furthermore, we expect an increase in US speculative grade defaults in 2015 to 2.8% from 1.9% in 4Q14, as well as a slight increase in exposure to companies rated B3 negative and lower," it observes.

Among US CLO 1.0s the agency rated as of December 2014, Texas Competitive Electric Holdings Co and Education Management were the two most widely held credits that defaulted last year.

CLOs

Coal exposure eyed

The deteriorating credit quality of four US coal companies is stressing some US CLOs with sizable exposures, Moody's reports in its latest CLO Interest. However, most US CLOs have small exposures to the credits, limiting the negative impact of the companies on the CLO universe.

Moody's notes that Alpha Natural Resources, Arch Coal, Patriot Coal Corp and Walter Energy are most vulnerable to the weak US metallurgical coal market. All have ratings of Caa1 or lower and all but one carry negative outlooks. Although the median US CLO exposure to the US coal industry is just 0.63% of par, these four weakest credits are widely held, appearing in 234 of the 828 US CLOs the agency rates and constituting the majority (US$808m of par, or 59%) of the coal exposure in CLOs.

Of the deals rated by Moody's, 31 have exposures of at least 1.5% to the four credits, with eight transactions experiencing stress to their Caa-rated collateral limits. Because of rating downgrades on the four coal companies, each of the eight CLOs' Caa-rated holdings has increased from January to February 2015, reducing the buffer against indenture-specified limits for excess Caa exposures.

Furthermore, two deals have breached their excess Caa limits. In the case of Franklin CLO V, this resulted in a par haircut in its overcollateralisation tests.

Some transactions have recently reduced their coal exposures through sales, but in doing so realised par losses. For instance, OHA Credit Partners VII sold the majority of its Arch Coal position at 81.3% of par in January 2015, losing US$1.4m of par.

Poor coal industry fundamentals have combined to create a 'perfect storm' of credit challenges over the past year, adversely affecting US coal production economics. Moody's expects that met coal prices will remain soft through 2H16, which, in turn, will pressure US met coal producers' earnings during the next 12-18 months.

CLOs

CLO trading gain use 'credit negative'

The practice of treating trading gains as interest proceeds is on the rise among new CLOs in both the US and Europe, observes Moody's. The agency says this is credit negative, because it allows cash to 'leak' from the deal to equity holders, rather than be retained, used for reinvestment or used for note amortisation.

While relatively common in European CLOs, trading gains distributions as a tool to ensure risk retention regulatory compliance are a recent and increasing phenomenon in US CLOs. However, they typically do not include the stringent restrictions seen with performance-based trading gains distributions.

Moody's says the absence of such restrictions increases the likelihood of portfolio quality deterioration, most notably a worse portfolio WARF and par loss. Without a requirement to pass the WARF test after giving effect to the trading gains distribution, a portfolio's WARF that may have already deteriorated because of manager underperformance or general market deterioration would experience additional WARF deterioration.

The absence of OC test satisfaction as a requirement could also lead to par erosion. Few CLOs that permit risk retention trading gains distributions incorporate par maintenance requirements.

CLO indentures' definitions of trading gains differ. CLOs that define trading gains as the excess of an asset's sale proceeds minus its principal balance do not raise additional credit concerns. However, Moody's says that CLOs that define trading gains as the excess of an asset's sale proceeds minus its purchase price do raise credit concerns because the magnitude of potential leakage is much greater.

If a CLO does not have to satisfy its WARF test after distributing trading gains, Moody's will apply a WARF stress to account for distributions when the portfolio WARF has deteriorated materially below the covenant. In addition, if a CLO does not need to satisfy OC test levels after distributing trading gains, Moody's will run a stress that lowers the junior-most OC test to its trigger level to account for par deterioration.

Furthermore, if a CLO indenture's definition of trading gains is based on the purchase price instead of the principal balance of the sold asset, the agency will incorporate the WARF and OC stresses in its base case assumptions to account for the potentially much greater trading gains leakage.

CLOs

Euro CLO issuance rising

Total European CLO issuance to date in 2015 has exceeded the level observed during the same period in 2014, according to S&P. Nine new transactions totalling €3.75bn have priced, compared with €3.52bn from eight transactions last year.

S&P expects total CLO issuance for 2015 to be between €15bn-€20bn, driven by greater average yields compared with other structured finance products, historic low default rates in the asset class and improving macroeconomic conditions. More transactions are expected to adopt the originator route to meet risk retention requirements, while turbo redemption features, UK sterling-denominated tranches and zero-Euribor floors on CLO liabilities could also emerge.

S&P also notes that the percentage of assets rated in the triple-C category has increased for all European CLO 2.0 cohorts since the last quarter, with the exception of the 2013 vintage. At the same time, from December 2014 to February 2015, the percentage of defaulted assets in collateral portfolios for all CLO cohorts have decreased from the previous quarter. In particular, 2013 vintage CLOs show no defaults from total assets, down from 0.23% in November 2014.

CMBS

Resolutions outpacing defaults

€10.4bn of European CMBS loans are currently in special servicing, representing 31% of the outstanding market, according to Morgan Stanley figures. As loan maturities moderate and servicers continue working out legacy defaults, loans worth over €5bn have exited the special servicing bucket since January 2014.

Loss severity of worked-out loans averaged 17% last year and the average time in special servicing was 2.5 years. Morgan Stanley securitised product analysts note that this is broadly in line with longer-term averages of 15% and 1.9 years respectively.

In terms of geographical variations, French loans continue to underperform on both metrics, mainly on account of select large loans skewing results. Outcomes for other countries are broadly comparable.

Across strategies, loss severities were the highest in loans resolved via discounted pay-offs (at 30%), followed by forced sales (at around 20%). Consensual sales yielded the best results at 15% severity in the work-outs undertaken in 2014. However, in terms of timing, DPO resolutions remain the quickest to execute.

The analysts expect resolutions to outpace new defaults in 2015 for the second year in a row. "The loan maturity pipeline for 2015 is modest, with 26 loans worth under €2.9bn scheduled to mature over the remainder of the year, of which we expect not more than €500m-€700m to default. We also expect the performance of worked-out loans to remain stable both in terms of recovery rates and recovery timelines."

CMBS

Conduit credit quality weakening

The credit quality of loans in US CMBS conduits is continuing to weaken, says Moody's. Conduit loan leverage as measured by Moody's LTV (MLTV) is increasing steadily and is now at 117.1%, only marginally below its pre-crisis peak of 117.5%.

The credit enhancement level on super senior Aaa has consistently been at the 30% mark, but the average cushion between the super senior and next-highest Aaa class has dwindled from 10% to less than 5%, and in some case less than 2%.

Moody's says its approach to value helps identify shifts in credit quality despite continuous ups and downs in market prices over time. "For example, loans sized to 70% of peak values are likely to underperform ones sized to 70% of trough values," says Tad Philipp, Moody's director of CRE research.

He continues: "This was amply demonstrated in the performance of first generation CMBS loans, say by comparing those from 2007 to those from 2003. Each had similar underwritten LTV, while the MLTV for the 2007 vintage was much higher."

Moody's adds that underwritten LTVs, which are tied to current market values and reflect the recent run-up to pre-crisis price peaks, fail to recognise signs of deteriorating credit quality. Underwritten LTVs on second generation CMBS have remained at 67%.

A review of the pipeline for 2Q15 shows further credit quality erosion, as well as the possibility that conduit loan leverage will exceed its pre-crisis peak, says the rating agency. It also underlines significant differences in other key loan credit attributes between types of originators, noting bank originated loans are commonly backed by higher quality properties than non-bank originated collateral, while the share of full-term interest-only loans originated by banks is meaningfully higher.

Finally, the MLTV ratio of bank originated loans is roughly comparable to that of non-bank loan originations. Most individual loan contributors, bank and non-bank alike, made loans on average within 5% of the overall market average MLTV.

CMBS

EMEA CMBS stabilising

EMEA CMBS performance stabilised in 1Q15 as CRE loans past their original maturities have remained flat since 4Q14, at just above 63%, says Fitch. Similarly, the number of loans in special servicing increased only slightly.

The agency notes that two loans matured last quarter without being repaid. DECO 14's Cottbus Shopping Centre entered special servicing, while Hercules (Eclipse 2006-4)'s Cannon Bridge loan was granted a short-term extension to allow the borrower more time to finalise a loan exit. Fitch says three further loans are scheduled to mature without repaying on a timely basis in 2Q15.

Meanwhile, the looming bond maturities from 2016 onwards are keeping the pressure on special servicers to resolve defaulted loans in a timely manner. Workouts, which in some cases have lasted for five years or more, are coming to an end and are reducing the defaulted loan count. Fitch believes that recent stabilisation and improvement in secondary property markets and increased investor appetite will likely be beneficial for ultimate recoveries and resolution timing.

Next year 32 loans with an aggregate balance of €5bn are scheduled to mature, which constitutes a sizeable increase from 2015's 23 loans of €2.7bn. However, refinancing efforts, property auctions and loan sales will be dominated by the defaulted 140 loans at €9.3bn that matured between 2009 and 2014. With no equity remaining in the majority of cases, Fitch expects losses to widen across property types and jurisdictions.

Fitch says that once the bulk of legacy loans have been repaid, the Fitch-rated EMEA CMBS portfolio will predominantly consist of long-dated transactions and recent issuance, which are of sounder credit quality. The former are mostly UK transactions, heavily or fully amortising over term and either credit-linked to their sole tenants or secured on multi-let prime assets, while the latter were structured to avoid the weaknesses witnessed among CMBS 1.0 and subject to tighter lending criteria.

CMBS

Prepayment error for 2.0 loan?

The latest trustee report for DBUBS 2011-LC1 shows that the US$55.3m Rookwood Commons loan has prepaid in full without penalty. Morgan Stanley CMBS strategists suggest that this may be an error, since prepayment prior to 1 May is only permitted with the greater of yield maintenance and 1%.

The loan has never been delinquent, but was on the servicer watchlist, given a total debt DSCR of less than 1.10x. The Morgan Stanley strategists believe that a US$533,000 prepayment penalty equal to 1% of the loan balance was owed on the loan. They note that the penalty should have first been applied to the A1 class, with any remaining amounts paid to the XA class of bonds.

Prepayment of the loan would have been permitted without penalty on/after 1 May.

CMBS

Mall performance hit

April remittances indicate that the US$50.1m Hudson Valley Mall loan, securitised in CFCRE 2011-C1, has transferred to special servicing. This represents the largest CMBS 2.0/3.0 loan to move into special servicing so far, according to Barclays Capital CMBS analysts.

JC Penney announced in January that it would be closing its store location at the mall (see SCI's CMBS loan events database). But performance of the property had been deteriorating anyway, with DSCR NCF falling to 0.99x at end-2014, versus 1.08x at end-2013 and 1.54x in 2011.

Special servicer LNR's commentary also indicates a rapidly deteriorating situation at the mall, with six tenants closing since mid-January, increasing vacancies to 35% from just 7% at end-2014. An additional 17% of leases are month to month, and another 18% expire in the next 12 months or can terminate in the next 12 months unless sales improve.

"The decline in performance for the mall increases the risk that the loan will ultimately be liquidated, and it has the potential to take significant losses. The mall could also be a candidate for a modification, particularly considering the high 6.7% coupon of the mortgage note, which could be reduced to give the borrower time to stabilise the property," the Barcap analysts observe.

CMBS

Loan terms examined

Of the over 12,000 loans outstanding in Fitch-rated US CMBS transactions issued since 2010, approximately 65% of the loans were issued with 10-year terms, according to the agency. In contrast, approximately 8% of the outstanding universe were issued with loan terms of five years or less.

Fitch-rated deals issued between 2010 and 2015 include 875 five-year loans and 8,157 10-year loans. An additional 3,111 loans have loans terms between six and nine years, while 304 loans have loan terms beyond 10 years.

The outstanding breakdown of five- and 10-year loans by vintage is: 238 loans in 2010, including 47 on five-year terms and 167 on 10-year terms; 1,495 loans in 2011, including 186 on five-year and 832 on 10-year terms; 3,097 loans in 2012, including 155 on five-year and 1,751 on 10-year terms; 3,609 loans in 2013, including 200 on five-year and 2,507 on 10-year terms; 3,655 loans in 2014, including 276 on five-year and 2,681 on 10-year terms; and 506 loans so far in 2015, including 11 on five-year and 219 on 10-year terms.

Fitch sees refinance risk as the largest risk to CMBS 2.0 performance, regardless of the loan term. Given the relatively conservative underwriting profile of 2010 and 2011 vintage loans, along with improving property fundamentals and low current mortgage rates, the agency expects that five-year loans from 2.0 vintage transactions that mature in the near term should be able to refinance. Additionally, 84 2.0 loans for a total of US$68bn have been defeased, taking advantage of the current low interest rate and strong lending environment.

CMBS

Loan override feature added

A new Trepp loan override feature has been added to Kroll's credit profile (KCP) portal. The tool enables users to upload the agency's loss scenarios directly into Trepp's analytics engine to perform cashflow analysis on CMBS certificates. The overrides come in an Excel workbook that is available on the KCP portal for each CMBS deal in Kroll's coverage universe.

Within the workbook, users can adjust the valuation assumptions for any Kroll loan of concern by selecting concluded, optimistic or conservative scenarios for their Trepp cashflow analysis or, alternatively, choosing their own assumptions. Users can also generate a file for a portfolio by using the 'bulk downloads' feature, which contains analysts' assumptions for Kroll's concluded scenario.

CMBS

CMBS 1.0 shortcomings tackled

Fitch reports that progress is being made on addressing the more contentious structural weaknesses of European CMBS, but without delivering on calls for greater standardisation of documentation. With the sector set to remain dominated by complex large financings of secondary property portfolios, the agency believes vigilance is key to preventing deterioration in competition.

Issuer profit extraction mechanisms that were skewed in favour of the originator have been amended, as class X notes are now subordinated upon loan default and tend to be more appropriately haircut for issuer costs. However, there is still scope for profit to be extracted from defaulted loans in the form of surplus interest recoveries.

Interest rate caps have so far been used instead of swaps. Fitch says the more egregious examples of pre-crisis hedging, such as long-dated swaps, are unlikely to make a reappearance.

Meanwhile, loan agreements for the first wave of post-crisis transactions provided for automatic revaluations at prescribed intervals. However, Fitch does not take a positive view of some recent transactions that are using the servicing agreement to make up for laxer facility agreements when it comes to restoring automatic revaluations. The agency believes this innovation may eventually give rise to servicer discretion over revaluations being reinstated.

The related issue of the controlling class, and its influence over special servicing, has also been tightened. Significantly, the interests of the controlling class in post-crisis transactions are now more aligned with other noteholders, although the bolder industry suggestion of enfranchising more senior investors in special servicer appointments has not materialised.

In addition, much of the ambiguity around sequential principal triggers has been removed. This ambiguity may have contributed to the widespread sanctioning of maturity extensions for loans in special servicing during the crisis, where the alternative - formal loan default - would have deprived 'valued-out' controlling class investors from further principal distributions. In post-crisis CMBS, a transfer to special servicing is explicitly recognised in sequential triggers.

Standardisation of transaction documentation may only come about with a return of multi-loan issuance. With balance sheet limitations militating against portfolio aggregation among investment banks, EMEA CMBS issuance remains significantly down from its 2006 peak of €62bn. Underlying loan volumes are growing, but most loans are being syndicated - particularly those secured on higher-quality properties.

Without standardisation, CMBS is more susceptible to structural erosion as competition in the wider real estate debt markets intensifies. Absent a concerted effort to employ simpler structures capable of enjoying greater market liquidity, Fitch believes that regulators are more likely to maintain a highly cautious approach to the asset class.

NPLs

NPL sales to deepen market

The moves by Fannie Mae and Freddie Mac to establish programmed sales of non-performing loans (SCI passim) will increase the depth of the distressed residential mortgage market, says Fitch. This could have positive implications for US banks seeking to sell their own NPLs.

As more NPL buyers emerge and pricing trends develop, the magnitude of the impact to banks' NPL valuations and selling opportunities will become clearer. Fitch believes that a deeper NPL market could help further extinguish the GSEs' and banks' crisis period residential mortgage asset quality issues. At a minimum, the GSEs' NPL sales are an indication of further healing in the US housing market.

Appetite for high-quality US residential mortgage paper has been slow to recover since the financial crisis, as indicated by the tepid volume of securitisations of new residential loan pools. Seasoned distressed mortgage loan buyers initially tended to be specialised alternative investment firms, but as the market has matured, more major institutional buyers hungry for new, higher-yielding opportunities have emerged.

Residential mortgage NPLs are far less of a threat to the GSEs and US banks relative to five years ago, but 90-plus day past due loans are still elevated compared to historical averages and in relation to their contributions to total NPL levels. Fitch believes this implies that both the GSEs and banks remain motivated to address this lingering asset quality issue.

FDIC-insured banks in the US held a total of about US$61bn in 90-plus days past due one-to-four family mortgages at end-2014, down by almost 22% from US$78bn as of year-end 2013. However, Fitch notes that the average level of 90-plus day past due one-to-four family loans pre-crisis was just US$4.8bn between 2001 and 2004, in comparison. Over that same period, these 90-plus day past due loans ranged from just one-quarter to one-third of the total 90-plus day past due loans held by US banks, compared with 80% of the total NPLs on US banks' balance sheets as of year-end 2014.

In contrast to US banks, Fannie and Freddie hold about US$86bn of 90-plus day delinquent loans. The shrinkage of their NPL balances between year-ends 2014 and 2013 was about the same rate as the US banks, but the balances also still remain elevated relative to pre-crisis levels.

Risk Management

Global liquidity pools fragmenting

Global derivatives markets are continuing to fragment along geographic lines, as a result of divergent regulations across jurisdictions, according to ISDA. European interdealer volume in euro interest rate swaps (IRS) traded between European dealers dropped from 94.3% between July and October 2014 to 84.5% in December 2014, a potential reflection of a general decline in euro IRS trading activity between European institutions in 4Q14.

However, in comparison, the exclusive European dealer pool for euro IRS averaged 73.4% in 3Q13. The change coincided with the introduction of US SEF rules in October 2013, which required electronic trading venues that provide access to US persons to register with the US CFTC and comply with SEF rules.

The proportion of euro IRS trades conducted between European dealers rose by 20% between September and October 2013 to reach 90.7% in October 2013, suggesting non-US participants started to avoid trading with US dealers where possible to avoid being subject to the new rules. Just 2.9% of euro IRS trades were between a European and US dealer in August 2014, compared with 28.7% in September 2013.

Although regional pools exist in the market for US dollar IRS, evidence of fragmentation is more subtle than in the euro IRS market. US dollar IRS trading between European and US dealers in the European regional interdealer pool reached a low of 35.9%, following the introduction of the SEF rules in October 2013. Since then, the cross-border pool has steadily increased and surpassed the exclusive European pool in September 2014.

ISDA says that continued growth of the cross-border pool will rely on the harmonisation of rules in various regions, as well as participation on SEFs. This coincides with the association recently publishing a set of principles for the centralised execution of derivatives, aimed at encouraging regulatory consistency of centralised trading rules (SCI 1 April).

Risk Management

SEF trading catching on

More than half of interest rate derivatives (IRD) and over 70% of CDS index average daily notional volumes were traded on SEFs in 1Q15, reports ISDA. Analysis compiled using ISDA's SwapsInfo service shows that electronic trading has continued to grow as a proportion of overall trading activity, following the introduction of the first SEF trading mandates in the US in February 2014.

SEF trading accounted for 54.5% of total IRD average daily notional volume in 1Q15, compared with 52.4% over the whole of 2014. For CDS, SEF trading accounted for 70.7% of total average daily notional volume in 1Q15, compared with 62.5% in 2014.

In addition, a large proportion of average daily IRD and CDS index notional volume is now cleared. Cleared trades comprised 72.5% of total IRD average daily notional volume in 1Q15, compared with 76.5% over the whole of 2014 and 71.7% in 2013. Meanwhile, just over 80% of CDS index average daily notional was cleared in the first three months of 2015, compared with 74.7% in 2014 and 37.7% in 2013.

Risk Management

Netting tool enhanced

Online netting analysis tool, netalytics, has been enhanced to cover ISDA clearing opinions. The tool is a joint venture between ISDA and Allen & Overy affiliate aosphere, and provides analysis on ISDA netting opinions across 63 jurisdictions.

The opinions relate to the ISDA/Futures & Options Association client cleared OTC derivatives addendum when used in conjunction with an ISDA master agreement. Priority jurisdictions were identified by members and ISDA has since commissioned a number of clearing member and client reliance opinions, covering close-out netting and other issues from the perspective of the clearing member and client respectively.

These opinions will be included within the netalytics service, which provides a standard colour-coded report with answers to 14 key netting questions for each jurisdiction covered by an ISDA netting opinion. Features include a compare function, version control and source hyperlinks. Reports are updated to reflect new or updated opinions published by ISDA.

RMBS

Green Tree settlement 'credit neutral'

Green Tree Servicing, a subsidiary of Walter Investment Management, has agreed to a US$64m settlement with the US Federal Trade Commission and the US Consumer Financial Protection Bureau over investigations into mistreating borrowers. The servicer has agreed to pay US$48m for consumer redress and a civil money penalty of US$15m, without admitting or denying any allegations to injunctive relief.

Moody's says the proposed settlement is credit neutral for the US RMBS transactions that Green Tree services, with any changes in servicing practices not having a material impact on the future performance of the US private-label RMBS that the agency rates. The majority of Moody's-rated transactions that Green Tree services are backed by manufactured housing loans and closed-end second loans, and for the most part these loans are performing poorly and will likely continue to do so.

Increased loss mitigation efforts by Green Tree are not expected to lead to material changes in projected losses because Moody's estimates of future performance already assume that Green Tree has in place procedures for mitigating a certain level of potential pool losses. Historically, Green Tree has offered payment deferrals as a loss mitigation tool to keep borrowers in their manufactured housing units.

However, some of the servicing practices that the settlement addresses, as well as repercussions of the settlement itself could negatively affect Green Tree's servicer quality assessment. Under the proposed agreement, Green Tree must meet specific servicing requirements, including honouring prior loss mitigation offers to borrowers on transferred loans, improving its staffing capabilities and enhancing data accuracy.

The settlement will also require Green Tree to make substantial process improvements, resulting in increased servicing costs, longer foreclosure timelines and increased regulatory scrutiny for the servicer. In addition, the settlement could negatively influence the decision of other GSEs to approve future servicing transfers to Green Tree.

The settlement also will likely compel Green Tree to implement system enhancements, additional notifications and possible staffing increases, which in turn will cause its servicing costs to rise. Moody's expects that Green Tree, and not the RMBS trusts, will bear responsibility for these costs.

RMBS

RMBS sets post-crisis high

The volume of newly issued US prime jumbo RMBS during 1Q15 set a post-crisis milestone, according to Fitch's latest index results for the sector. The agency reports 13 RMBS deals coming to the market, representing the most active issuance quarter for prime jumbo RMBS since the financial crisis.

"The roughly US$4.7bn of issuance in 1Q15 was nearly half the total issuance of 2014 and reflects an increasing number of active issuers in the market," says Fitch director Sean Nelson. "The high credit quality of prime 2.0 collateral is reflected in the performance, with only four borrowers out of roughly 28,000 more than two months behind on their mortgage."

Mortgage rates have dropped by over 75bp from the start of 2014, resulting in a modest increase in prepayment speeds.

RMBS

Foreclosure timelines plateau

The average amount of time it took to liquidate a distressed US mortgage loan rose again in 1Q15 to 42 months, according to Fitch's latest index report. However, while timelines on liquidated loans continue to increase, there are signs that the pace may soon begin to slow.

Among loans still in foreclosure, the average amount of time since making a payment has begun to plateau. While still increasing modestly, the rate of increase over the last two quarters has been the lowest since 2008.

"The timeline-to-date trends of loans in the pipeline could be a bellwether of a turnaround in liquidation timelines in the medium term," says Sean Nelson, director at Fitch. Liquidation timelines are expected to continue to increase in the short term, as average pipeline timelines still exceed observed timelines on loans that have liquidated.

The elevated timelines seen during the past few years have kept loss severities at historical highs despite the benefit of recent home price gains. "The increased costs associated with extended foreclosures have led to higher losses incurred at liquidation," adds Nelson.

When liquidation timelines do begin to fall, Fitch believes that loss severities should see a meaningful retreat from their current levels.

RMBS

USDA programme boosted

Ginnie Mae has enhanced its securitisation programme for US Department of Agriculture (USDA) Section 538 multifamily loans, allowing those with a maximum loan amount of 70% of total development costs to be eligible for pooling into Ginnie Mae MBS. This is an increase from the previous maximum loan amount of 50% of the total development costs, with the association seeking to subsequently generate additional liquidity for more multifamily projects. Under the Section 538 Guaranteed Rural Rental Housing Program, the USDA provides credit enhancements through government guarantees to encourage lenders to make new loans to multifamily developers for the construction and preservation of affordable rental properties for low- and moderate-income tenants in rural areas of the country.

RMBS

Global RMBS recovering

Moody's notes that US economic growth has driven RMBS arrears lower, while GDP growth and servicers' loss mitigation activities will support the performance of legacy subprime RMBS in 2015. In Europe, stabilising unemployment could help to steady collateral performance, as prime RMBS have seen double-digit decreases in severe arrears of more than 90 days.

The credit quality of new private-label RMBS in the US will remain strong, adds Moody's, and the risk of occasional cashflow disruptions are expected to be lower than in 2014. In addition, the credit performance of prime jumbo, subprime and Alt-A RMBS will should improve slightly.

In Europe, stable unemployment, low interest rates and rising house prices will underpin performance in 2015. Moody's notes that severe arrears in the prime RMBS sector have plunged by 34.4% in Spain year-on-year, 18.8% in the UK, 10.7% in Germany and 16.1% in Portugal.

In the euro area, the agency forecasts GDP to rise by 1% in 2015 and 1.5% in 2016 from 0.8% in 2014. A strong economic recovery and low interest rates could boost UK RMBS performance, including that of non-conforming deals. Further, Moody's believes that increasing employment will strengthen the financial position of some borrowers in the UK, the Netherlands and Germany.

On the regulatory front, European authorities are focusing on borrower affordability and lenders maintaining underwriting criteria. Regulators are restricting the portion of 'risky' assets on banks' balance sheets in the UK and Ireland. Underwriting standards in the UK and the Netherlands are tighter than pre-crisis levels too, which will improve asset quality.

In the US, regulatory guidelines and scrutiny could help servicers to improve their processes regarding loan modifications and related borrower contact, thereby supporting legacy subprime RMBS. The credit quality of new US private-label RMBS will remain strong, supported by improved underwriting standards, while the credit quality of 2015-vintage US RMBS will also continue to benefit from thorough third-party reviews and risk retention rules that are due to come into effect in late October.

In Australia, Moody's suggests that the credit quality of new RMBS collateral could slip, as the underlying loans are being underwritten at historically low interest rates during a period of rapidly rising house prices. However, overall performance is expected to stay strong with low delinquency rates, although persistent underemployment will remain a potential concern.

Finally, Moody's says that Japanese defaults could remain low, house prices may rise in 2015 and beyond, and the unemployment rate will remain low at 3% to 4% in 2015. The combination of these factors should support collateral performance, with competition among lenders keeping interest rates low, especially with the Bank of Japan's aggressive quantitative easing. Strong borrower credit profiles and tight lending criteria are also helping to curtail performance deterioration.