Contents

CLOs

Calling it

Euro CLO calls up sharply

More European CLOs have been called already this year than in any previous full year. This is due to several factors, just one of which is the last legacy deals exiting their reinvestment periods.

"The high number of calls so far this year is a function of the state of evolution of vintage CLOs and which part of the lifecycle they are in," says Chandrajit Chakraborty, principal, Pearl Diver Capital. "Some of the most prolific CLO issuance was in 2006 and 2007 and those deals are now generally two to three years out of their reinvestment periods."

He continues: "That means this is a great time to call these deals, as the loan portfolios have factored down and the capital stack has been amortised to an extent such that the effective cost of CLO debt financing increases and the ongoing equity coupons diminishes to a sub-optimal level."

Chakraborty notes that the market has generally been expecting calls to pick up this year. Of the six deals called in 2013, four were issued in 2007 or 2008, while the other two were from 2005 and 2006. All of the deals called in 2014 were issued in either 2007 or 2008.

Dryden XV and Harbourmaster CLO 11, both called in the first quarter of this year, also come from the 2007 and 2008 vintages. However, other deals called this year were issued earlier.

Alzette European CLO and Duchess III CDO are both from 2004. Meanwhile, Cheyne Credit Opportunity CDO I, Dryden X and Grosvenor Place CLO are all from the 2006 vintage.

Of the seven deals called this year, three ended their reinvestment period in 2012 and one in 2013, but the others ended in 2011, 2010 and 2007, so it is not simply that deals are exiting their reinvestment periods and being called. Another strong factor is the recovery of loan prices, which has made it easier to redeem debt tranches as part of a call.

Bank of America Merrill Lynch European securitisation analysts note that loan repayment rates have also increased steadily over the last couple of years. This year is expected to again see a high level of repayments.

"The European loan market has been active for most of the last 12 to 18 months, which has pushed up prepayments. That, along with average life constraints restricting the ability of CLOs to buy new loans, leads to loan collateral pools being factored down. It also means it is increasingly attractive to roll into a new deal, with a fresh reinvestment period and WAL," says Chakraborty.

A key attraction of calling deals and issuing fresh CLOs is that deleveraging of legacy CLOs is typically well underway. As senior debt tranches are repaid and capital structures become more expensive, equity motivations to call become stronger.

"As an equity investor you are starting to receive diminishing coupons, while the cost of financing is rising. In those circumstances, a call becomes far more economical," says Chakraborty.

He continues: "As CLO issuance picks up, the trade becomes continuing with a vintage deal and waiting for the market to hit the next cycle. As a first-loss holder, you do not want to go through a different cycle."

While this is typically portrayed as something for debt investors to be wary of, there are also benefits. For example, in many US CLO refinancings, the introduction of more modern structural elements is often welcome (SCI 29 April).

"There is upside for debt investors where their bonds are trading at a discount. In fact, debt has traded very well in the secondary market as deals have begun to amortise," says Chakraborty.

He concludes: "As calls become more likely, anything trading at a discount shoots up in demand. However, as a buyer looking to exploit that opportunity, it is becoming increasingly difficult to source that paper because holders recognise its value."

JL

Secondary markets

Euro CLO BWIC bandwagon rumbles on

As expected Friday was a comparatively quiet day across European secondary securitisation markets, but today sees the European CLO BWIC schedule take the lead once more.

The end of week drop in European BWIC volume had a knock on effect in flow trading - diminishing volumes there as well. Nevertheless, the usual pockets of activity surrounding autos, CLOs and prime RMBS ensured spreads were broadly unchanged despite some weakness in Portuguese and Spanish names.

The market has opened flat this morning, but with signs of buying interest in peripherals re-emerging. At the same time, there is one ABS/MBS BWIC circulating for trade today - two lines of CMBS due at 13:00 London time: €12m of TAURS 2006-3 B and €1m TAURS 2006-3 C. Neither bond has covered on PriceABS in the past three months.

However, it is the CLO BWIC schedule that looks set to hold centre stage today with three lists due so far. First up at 11:00 are eight lines totalling €11.4m original face - AVOCA III-X B, AVOCA VI-X A1, BOYNE 1X C1, HARVT 8X A, HARVT II-X B, JUBIL 2014-14X C, JUBIL VI-X C and LEOP III-X C1. Two of the bonds have covered with a price on PriceABS in the past three months - HARVT 8X A at 100.051 on 24 February; and HARVT II-X B at VH90S on 3 March.

Then, at 14:00 there are two lines of single-A - €5m HARBM PR3X A4 and €1m HARVT IV C. Only HARBM PR3X A4 has covered on PriceABS in the past three months, doing so at VH80s on 3 March.

Last, at 16:30 are two lines of double-B - €3.9m DRYD 2013-29X E and €3m SPAUL 3X E. The bonds last covered on PriceABS as follows: DRYD 2013-29X E at 99.12 on 23 April; and SPAUL 3X E at 98.5 on 15 April.

Secondary markets

No immediate upswing for US CLOs

Despite hopes of an upswing in activity after last week's conference diminished volumes, it looks like a slow start to this week for the US CLO secondary market.

The BWIC schedule currently only shows three lists for this week, one of which is due today. Meanwhile, spreads are broadly unchanged on light volume this morning from the firm levels seen across the capital stack into Friday's close.

Today's list involves five lines of mixed 1.0 paper including a double-B slice from an emerging markets deal, due at 10:00 New York time. The $21.9m auction comprises: COAC 2007-6A B, GCMAN 2007-1A C, GEMC 2005-8A D1, HARCH 2007-1A E and MVEW 2006-1X B1.

None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro ABS/MBS picking up again?

The European ABS/MBS secondary market continues to keep one eye on primary, but there are signs that activity is beginning to pick up again.

"It was very quiet again yesterday, but activity looks to be picking up today helped by a few more BWICs coming out," says one trader. "That said, there's still a strong focus on primary with the VCL and Delamare deals marketing."

Overall, the trader says: "Secondary spreads are still pretty much static. The exception remains peripherals where we continue to see a little bit of weakness."

There are five ABS/MBS BWICs circulating for trade today so far including the RMBS residuals auction postponed from 17 April. The four new lists offer a mixed euro and dollar RMBS BWIC at 11:00 London time; three lines of small size UK non-conforming at 12:00; four fairly small pieces of sterling and euro CMBS at 15:00; and at the same time the list currently generating the most interest - a €20m clip of Irish RMBS LANSD 1 A2.

The bond hasn't covered on PriceABS in the last three months, but is currently being talked in the mid-to-high 80s.

Secondary markets

Euro CLOs tighten

The European CLO secondary market continues to see tightening spreads amid strong execution and healthy volumes on- and off-BWIC.

Secondary spreads edged in further yesterday, particularly in 2.0 mezz, as the demand for European CLO product continued unabated. Narrower spreads are encouraging additional sellers to market, but for now at least are not discouraging buyers.

There are three CLO BWICs on the schedule for today. All are due AT 15:00 London time.

There is a single line of 2.0 equity - €2m of SPAUL-5X SUB. In addition, there is a seven line list of 1.0 mezz totalling €34.3m original face comprising: AVOCA IV-X D, EUROC VIII-X D, GSCP II-X D1, HEC 2007-3X D, NPTNO 2007-2X D, OCI 2007-1X E and STRAW 2007-1X B.

Finally, there is a 12 line mixed ABS CDO, Trups CDO and CLO list accounting for €171+m original face. It consists of: CBMEZ 2006-1 A, CBMEZ 2006-1 B, DEKAE II-X A1, DEKAE II-X A2A, FAB 2002-1 A1, FAB 2002-1 A2, FAB 2005-1 A1, FAXT 2003-1 BE, GARDC 2006-1X F, HEATM I-07 C, HTIDE I C and PGAEA 2007-1 A.

None of the bonds on today's lists has covered with a price on PriceABS in the last three months.

Secondary markets

US RMBS remains positive

Secondary activity is still light in US non-agency RMBS, but the outlook for spreads remains positive.

"BWIC volume today is pretty light even for a Tuesday," says one trader. "There's an element of people holding back waiting for some macro event to happen, but a bigger issue is that primary is still taking a lot of attention away from secondary."

The trader continues: "We hit $5bn in new issuance in Q1, which was a benchmark a lot of people were waiting for and has meant an increased focus on new deals. At the same time, there are new structures, particularly the SFR deals, which are not really like any other RMBS and so require more time to get a proper understanding of each bond."

Nevertheless, the broad outlook for secondary spreads remains positive. "Legacy is still holding in there with very little volatility," the trader says. "If you look at the latest collateral statistics and loan level data everything continues to improve, so most paper should just grind tighter."

Secondary markets

Euro secondary takes back seat

Activity is on the rise in European securitisation secondary markets this week so far, but the primary market is still traders' main focus.

"BWICs picked up a bit yesterday and flows were reasonable," says one trader. "ABS/MBS Secondary is still taking a little bit of a back seat to primary where the Warwick print was the main talking point yesterday and the deal pipeline remains strong."

Activity on- and off-BWIC was scattered across a number of areas with peripherals, including Greek paper returning to favour; UK non-conforming; and UK and Dutch prime the main sectors to see some action. CLOs continue to be very active with strong execution across the board.

It's quiet start for today though, the trader says. "There's not much activity yet this morning, but while there's obviously as lot going on at a macro level, secondary spreads are holding in."

There are currently six BWICs circulating for trade today. The bulk of the line items are Spanish RMBS, there are also a variety of CMBS tranches in for the bid as well as a single line of Italian ABS due at 15:00 London time - €2m of ARISP 1 B, which hasn't traded on PriceABS in the last three months.

However, it is CLOs that are likely to take centre stage again especially given that there is currently only one list on the calendar today. The €10m five line auction comprises: AVOCA 10A E, AVOCA 10X E, CORDA 3X SUB, HARVT 8X SUB and RMFE III-X SUB.

Only AVOCA 10X E has covered on PriceABS in the last three months, doing so at H92 on 10 March.

Secondary markets

US CLOs drift sideways

Activity in the US CLO secondary market has picked up today, but for the most part it is trading sideways with little conviction.

"It's fairly busy day today, but from the week's perspective it still looks very quiet," says one trader. "Most stuff is trading sideways and everyone seems happy to follow one another."

While market tone remains positive lack of activity is an issue, the trader notes. "Most people now expect shrinking volume in primary, which can only help secondary and there's no real impact from volatility. However, the lack of volatility means no one is really looking to sell and while some desks are trying to create some volume and offering decent bid support, nobody is tripping over each other to buy paper."

Consequently, the trader says: "For now, the market seems content to drift along working Tuesday to Thursday, but there is a danger it could get complacent and caught out if there there's a sudden change. That could be macro changes, such as a spike in vol, or a change from within the market - CLO secondary is pretty much led by individuals and if a few of the big guys suddenly decide they've had enough and start selling one sector or another everyone else will follow and we could see prices decline quickly."

So far there have been a total of six US CLO BWICs circulating for trade today. The majority of line items are 2.0 equity, with the bulk in small size. The largest slice in for the bid today is a single line auction of 2.0 double-A due at 13:00 New York time - $7.5m of SUDSM 2013-1X B1. Meanwhile the only 1.0 paper currently doing the rounds today is two lines of single-A due at 14:00 - $5m CECDO 2007-15X B and $5m SYMP 2006-2A B.

None of the above-mentioned bonds has covered on PriceABS in the past three months.

Secondary markets

Euro ABS/MBS unsettled

The European ABS/MBS secondary market has become unsettled as broader market volatility spikes, but for now spreads are holding firm.

A mix of the sell-off in Bunds and month- and week-end for most of Europe limited flow trading activity across European ABS/MBS yesterday. BWICs generally traded in line with expectations though some Spanish names took a hit. Overall, spreads held firm apart from peripherals, which edged wider once again.

There are two mixed ABS/MBS BWICs scheduled for today for far. There is a collection of very small clips due at 11:15 London time today, but more substantial is an eight line 59.608m euro and sterling at 15:30.

The latter comprises: CHSNT 2014-1 A, E-MAC DE06-I A, GALRE 2013-1 B, GALRE 2013-1 C, GRAN 2004-2 3C, PENAR 2014-2X A1, PSF 1 A and TMSE 1 B. Five of the bonds have covered on PriceABS in the last three months - CHSNT 2014-1 A at 100 on 17 March; GALRE 2013-1 B at 101.57 on 27 April; PENAR 2014-2X A1 at 100.01 on 27 March; PSF 1 A at M97 on 10 February; and TMSE 1 B at 100.1 on 26 February.

Secondary markets

Euro CLOs keep 2.0 focus

The European CLO secondary market continues to focus on 2.0 assets.

"Overall, secondary activity is down a bit this week because some of the deals in primary are getting close to pricing," says one trader. "However, market focus is still very much about 1.0 versus 2.0 and if you can't get allocation on a new deal you come to secondary for 2.0 assets."

The trader continues: "There's still appetite for deep 1.0, but little else. At the same time, demand for 2.0 paper continues to be very strong particularly in the mezz - double- and single-Bs keep tightening."

Away from primary and flow trading, the European CLO BWIC schedule is continuing its recent relatively busy phase with three lists circulating for trade today so far. The smallest, due at 15:00 London time, is a €700k single line of EMPOP 2006-1 D. The bond last covered on PriceABS at 99.3 on 10 March.

Also at 15:00 is a six line €22.6m list of 1.0 single-As and triple-Bs that comprises: CRNCL 2007-2X C, EUROC VI-X C, HSAME 2006-IX D, MAGI I-X B, MSIMC 2007-1X C and VALLA 2X C. Only CRNCL 2007-2X C has covered on PriceABS in the past three months, last doing so at 97.12 on 26 February.

Then, at 15:30 are four lines of 1.0 and 2.0 equity and double-B totalling €31.15m original face. The deals involved are: EUROC VII-X SUB, LEOP IIX D, RPARK 1X SUB and SPAUL 3X SUB. None of the bonds has traded with a price on PriceABS in the last three months.

Secondary markets

Muted month-end for US RMBS

The recent trend of muted activity in the US non-agency RMBS secondary market is continuing in to month-end.

"We've got around $350m in for the bid today, which is low for a Thursday and overall it's fairly quiet for month-end," says one trader. "It's early and some stuff is still trickling in, but I don't expect today's pattern to change significantly."

Market tone remains positive, however, the trader says. "Spreads are still holding in quite well overall. RMBS market participants continue to watch fixed income elsewhere in the US and in Europe for a sense of direction and given our legacy spreads are a little wider than similar assets they present a good opportunity to add. So, barring any unforeseen events spreads should narrow further."

Consequently, investors are holding on to their legacy paper, which is acting as an anchor to secondary RMBS broadly. At the same time, the wings of the market are moving more quickly and counterbalancing one another to offer diverse trading opportunities.

"CRT has moved 5-10bp wider with a number of end-accounts very active in the space at the moment," says the trader. "Meanwhile SFR grinds tighter as more people get comfortable with the processes and structures in the sector."

Secondary markets

Euro secondary on hold

The European secondary securitisation markets are now effectively on hold until Tuesday.

With European and/or UK public holidays today and Monday and another EU-Greece meeting tomorrow, unsurprisingly yesterday saw no major change in the patterns seen in recent days and looks set to remain the same today. Flows were again light yesterday, but spreads held up with the exception of Spanish and Portuguese names, which generally continue to exhibit a weaker tone.

In the ABS/MBS space most buying activity was once again seen around Dutch prime and UK non-conforming. Meanwhile, GRIF 1 A continued its rollercoaster ride closing up yesterday in the 68-area.

CLOs were the exception to the unchanging rule, however. Trades continued to go through off-BWIC, but yesterday's lists saw a number of DNTs for the first time in the recent flurry including the entire 15:30 equity focused list. Lack of market participants given the list's timing is the likely reason for the result rather than any sudden cessation in the huge demand for CLO paper.

There are currently no European BWICs circulating for trade today. The one list that was due, two lines of 2.0 double-B CLOs, has been postponed until 14:30 London time on Tuesday.

The list consists of €3m BABSE 2014-2X E and €2m CGMSE 2014-3X D. Neither bond has traded on PriceABS in the last three months.

ABS

SLABS EOD likelihood gauged

Approximately US$7bn FFELP student loan ABS bonds tracked by JPMorgan ABS strategists have a legal final maturity date that is within the next five years. At current speeds, the strategists expect most of the outstanding bonds with final maturities that are within the next three years to pay off without triggering an EOD. Only one of the bonds in their analysis, ACCSS 2004-2 A2, is unlikely to mature by its January 2016 legal final and therefore could trigger an EOD.

Of the US$164bn FFELP bonds tracked by JPMorgan, around US$214m mature in 2016, US$1.2bn in 2017, US$967m in 2018 and US$4.6bn in 2019. At current speeds, four bonds - SLMA 2007-7 A3, SLMA 2008-1 A3, SLMA 2008-4 A3 and SLMA 2008-4 A2 - should pay down with around six months to spare. The other bonds pay off well before the legal final maturity date.

In contrast, over the past year ACCSS 2004-2 A2 has received US$7bn to US$8bn of principal per quarter, which translates to speeds of roughly 3% to 4% CPR. In a 3% CPR scenario, the bond has a 5.14-year WAL, while running the deal at 4% CPR does not materially shorten the life of the bond. Neither scenario is expected to cause the bond to take principal write-downs.

The bond has been previously downgraded by Fitch, Moody's and S&P due to the low prepayment rates.

The strategists note that some bonds with legal final maturities that are four to seven years out will have to rely on issuers calling them to avoid the EOD trigger. Since these bonds are fairly low down the capital structure, they should become callable at least a year before their legal final maturities.

Navient, for one, also amended its servicing agreements in December to allow it to purchase up to 10% of the initial pool balance of the loans in 17 trusts issued between 2002 and 2008. These amendments cover all of the trusts under review by Moody's (SCI 17 April), apart from two bonds that are currently callable (SLMA 2005-1 A2 and 2005-2 A5). The bonds affected by the review are nevertheless trading about 10bp back from where the most recent Navient new issue priced (see SCI's new issuance database).

Navient has begun its repurchases, which seems to have improved prepayment speeds over the last few quarters, according to the strategists. Two trusts - SLMA 2002-1 and 2003-3 - have already paid off.

"Navient is likely to use the clean-up call where required because, as its management stated in [last] week's earnings call, the company is interested in preserving ABS as a future funding source," they observe.

Based on non-consolidated Navient speeds, prepayment rates were as high as 50% CPR before 2008 and have since dropped to 6%-10%. Low FFELP speeds are concerning for some bonds with shorter maturities, as extending beyond the legal final typically triggers an EOD. At this point, cashflow can be routed to other class A bonds in the capital structure until those principal balances are reduced to zero, which locks out other bonds lower down the capital structure.

CS

Structured Finance

Euribor goes below zero

Last week, three-month Euribor entered negative territory for the first time. As one-month Euribor was already negative, more than half of the available distributed European ABS market is now affected by negative interest reference rates.

The three-month reference rate is now -0.002. One-month Euribor is -0.034, while six-month and 12-month both remain positive, at 0.066 and 0.173, respectively.

As interest paid to ABS investors is typically calculated as Euribor plus a spread, negative Euribor can be expected to result in noteholders being paid the net amount, whereby the negative reference rate partially offsets the spread. The auto ABS market typically uses one-month Euribor and has already experienced this situation since mid-January. For example, JPMorgan analysts note that DRVON 13's class A notes, which were printed at one-month Euribor plus 25bp, are currently paying 0.217%.

Negative Euribor also raises the prospect - theoretically at least - of investors having to pay to hold bonds if Euribor becomes sufficiently negative to eliminate the positive spread. However, the JPMorgan analysts work to the assumption that payments would instead be floored at 0%.

There is support for this from the UK mortgage market when the Bank of England base rate (BBR) was reduced to 0.5% in 2008/2009. It is also supported by ABS documentation language specifying that interest is payable on the notes.

The POPYM 2007-2 A3(G) note pays investors three-month Euribor plus 0bp. The JPMorgan analysts report that the interest rate on the bond has now reset to 0%, despite the negative reference rate.

"For new issue deals we can already see remedial language being inserted into documentation by newer issuance vehicles. For example, the recent Storm 2015-1 prospectus includes the following language around the note rate of interest: 'The rate of interest on the notes shall at any time be at least zero per cent'," say the analysts.

Negative Euribor also causes changes to cashflows for ancillary services for securitisation transactions. Issuer and collection bank accounts and any eligible investments will be affected.

"Sub-zero interest rates for transaction bank accounts will actually draw cash from the top of the waterfall and thereby naturally eat into a structure's excess spread," the analysts say. Deals with longer lead times between collection and disbursement, those that hold larger cash balances or those with lower excess spread will be most affected.

Negative carry is possible on any eligible investments a structure holds. However, any expenses that an SPV typically pays which are linked to Euribor will become cheaper.

Negative reference rates can also affect the transaction payments made to swap counterparties. Under a typical fixed-floating swap, the issuer would pay the fixed rate payments received from the collateral pool and receive floating rate payments from the swap provider, which are then passed on to noteholders, but negative Euribor means the issuer could also have to pay on the floating leg of the swap as those do not generally have floors.

Such a scenario would only occur if three-month Euribor plus spread becomes negative, rather than simply negative Euribor. However, because it is a senior cost in the waterfall, it would reduce available cashflows to more subordinated noteholders, or at least reduce excess spread which would otherwise have returned to the originator.

For securitisation structures with currency swaps, the swapping of payments can lead to effective 'under-hedging' within a deal, the analysts warn. A UK deal with euro-denominated tranches could result in the SPV receiving mortgage payments of BBR plus a spread but having to make Euribor plus a spread note payments.

Swap payments would therefore be to pay over the pound-denominated receipts and receive euro payments, but have to also pay on that leg should Euribor plus spread become negative. The SPV would be required to go into the market with pound cashflows and change them to euro to make the additional payments on the receiver leg at spot. As with the fixed-floating example, this would reduce available excess spread.

JL

Structured Finance

SCI Start the Week - 27 April

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

Pipeline
A modest number of deals remained in the pipeline at the end of last week. The new entrants consisted of two ABS, one ILS, four RMBS and three CLOs.

C$766m Master Credit Card Trust II Series 2015-1 and €725m VCL 21 were the ABS. The sole ILS was US$200m Long Point Re III Series 2015-1.

The RMBS consisted of Skr3.5bn Bluestep Mortgage Securities No.3, US$274m CSMC Trust 2015-3, US$267m OAKS 2015-1 and US$380m Tricon American Homes 2015-SFR1. The CLOs, meanwhile, were US$325m CIFC Funding 2015-II, €438m Jubilee CLO 2015-XV and US$317.5m OZLM XII.

Pricings
ABS dominated the primary market in another busy week of issuance. As well as 12 ABS deals pricing, there were also two ILS, seven RMBS, three CMBS and four CLO prints.

The ABS were: €455m Alba 7; US$1.2bn BA Credit Card Trust 2015-2; US$775m Chase Issuance Trust 2015-A3; €473m Claris Lease Finance 2015-1; US$800m Discover Card Execution Note Trust 2015-2; A$210m Flexi ABS Trust 2015-1; US$902m Ford Credit Auto Lease Trust 2015-A; US$500m Golden Credit Card Trust Series 2015-2; US$240m HERO Funding Trust 2015-1; US$250m LRF 2015-1; US$637m PHEAA Student Loan Trust 2015-1; and €700m SC Germany Vehicles 2015-1.

€285m Benu Capital and US$300m Cranberry Re 2015-1 accounted for the ILS. The RMBS were: £273.5m Alba 2015-1; €3.9bn Emilia 1; C$780m Genesis Trust II Series 2015-1; A$500m Liberty Series 2015-1 Trust; A$350m Pepper Prime Private Placement Trust 2015-1; US$306m Sequoia Mortgage Trust 2015-2; and US$720m STACR 2015-DNA1.

US$288m CGBAM 2015-SMRT, €445m Taurus 2015-2 DEU and US$955m WFCM 2015-NXS1 were the week's CMBS. Lastly, the CLOs were US$210m A10 Term Asset Financing 2015-1, US$612m KVK 2015-1, US$409m NXT Capital 2015-1 and US$515m TICP CLO IV.

Markets
Steady US ABS primary supply has kept secondary spreads stable to slightly tighter, report Barclays Capital analysts. "ABS trading in the secondary market was active for the second straight week, with an average of US$1.47bn traded each day during the first four days of the week," they say.

US agency RMBS performance remained directional to rates, say Citi analysts, outperforming on the sell-off initially but then underperforming the last two sessions of the week. "Over the week, FN 3s slightly underperformed curve hedges whereas FN 3.5s are flat," they say.

In the US non-agency RMBS market, activity was robust and supply and trading volumes were above the year's average levels. "Much of the supply this week, about 57%, came from hedge funds. Legacy paper prices remained firm week over week, while next generation asset classes in general saw spread tightening of about 5bp-25bp," say Wells Fargo analysts.

"New issue [US] CMBS spreads across the capital structure were firmer in secondary trading following the launch on Monday of the latest conduit deal, the US$955m WFCM 2015-NXS1," say Bank of America Merrill Lynch analysts. Pricing levels on that deal were up to 10bp tighter than guidance levels and as much as 35bp tighter than similarly-rated tranches from the last conduit deal.

European ABS and RMBS were both a little less active last week, according to JPMorgan analysts. "BWICs remained the mainstay of market activity. As in the recent past, we saw peripheral debt pricing weaken marginally-albeit on comparatively light trading flows," they say.

Editor's picks
Stepping out: New European CMBS deals are increasingly deviating from the cookie-cutter mould established in the market's post-crisis revival...
Sprawling landscape: B2R Finance and FirstKey Lending this month became the first sponsors to launch multi-borrower single family rental (SFR) securitisations...
Two-tone CMBS: With around US$14bn of new issuance hitting the market last quarter, the single-asset/single-borrower (SASB) sector appears to be the sweet spot in US CMBS at present...
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 pay-down...

Deal news
• EMEA CMBS performance stabilised in 1Q15 as CRE loans past their original maturities have remained flat since 4Q14, at just above 63%, says Fitch. 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.
• 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%.
• 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.
• 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. 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.

Regulatory update
• 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.
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
ACAS CLO 2015-1; AMMC CLO XVI; Apollo Credit Funding IV; ARI Fleet Lease Trust 2015-A; Axis Equipment Finance Receivables III Series 2015-1; B2R Mortgage Trust 2015-1; BAMLL 2015-200P; Dell Equipment Finance Trust 2015-1; First Investors Auto Owner Trust 2015-1; FirstKey Lending 2015-SFR1; FREMF 2015-K44; FREMF 2015-KF07; Hyundai Auto Receivables Trust 2015-B; Jackson Mill CLO; JFIN Revolver CLO 2015-II; KKR CLO 11; Mercedes-Benz Master Owner Trust Series 2015-A; Mercedes-Benz Master Owner Trust Series 2015-B; Navient Student Loan Trust 2015-2; Ochiba 2015; OCP CLO 2015-8; Octagon Investment Partners XXIV; Santander Drive Auto Receivables Trust 2015-2; SMB Private Education Loan Trust 2015-A; Stone Street Receivables Funding 2015-1; WFCG 2015-BXRP; WFCM 2015-NXS1; World Financial Network Credit Card Master Note Trust Series 2015-A

Deals added to the SCI CMBS Loan Events database last week:
BACM 2007-5; BSCMS 2007-T28; CFCRE 2011-C1; CGCMT 2014-GC23; COMM 2014-UBS3; CSFB 2005-C5; DBUBS 2011-LC1; DECO 2006-C3; DECO 2006-E4; DECO 2007-E6; DECO 2014-TULIP; DECO 8-C2; ECLIP 2006-4; EPC 3; GCCFC 2007-GG9; GRACE 2014-GRCE; GSMS 2011-GC3; JPMCC 2011-C5; JPMCC 2012-C8; JPMCC 2013-C10; JPMCC 2013-LC11; LBUBS 2006-C6; LCCM 2014-909; MSC 2007-IQ15; RIVOL 2006-1; TAURS 2006-1; THEAT 2007-1 & THEAT 2007-2; TITN 2007-2; TMAN 6; TMAN 7; UBSCM 2007-FL1; WBCMT 2006-C26; WBCMT 2007-C31; WFRBS 2014-C23; WINDM X; WINDM XIV

CLOs

CLO refis racking up

US CLOs are being refinanced in ever greater numbers as the risk retention deadline draws nearer. While regulatory compliance and economic benefit provide incentive to equity holders, debt investors benefit through better transparency and performance, so demand for refinanced paper should remain high.

The previous quarter saw six 2012-2013 vintage deals refinanced and another two in the market, bringing the number of 2.0 deals that have refinanced since the start of 2014 or are refinancing up to 29. The majority come from the 2012 vintage.

Of the 27 US CLO 2.0 transactions to have been refinanced since the start of last year, Morgan Stanley analysts find that triple-A coupon spreads were reduced by an average of 24.8bp. There was an even greater spread reduction for double-A and triple-B spreads, although double-B spreads were least affected by refinancing and in some cases were actually offered at a higher spread than the original terms.

Equity cash distributions increased by 0.6 percentage points per quarter compared to their performance before refinancing. However, to compensate for the cost of refinancing, there was an average 2.2% reduction in cash distributions in the quarter immediately following a refinancing, so it has generally taken a year for equity tranche holders to break even on the cost of refinancing.

Deal documents were amended in 18 deals to achieve Volcker compliance, generally by using a loan-only exemption. Other common amendments include raising the covenant-lite bucket and prohibiting further refinancing of debt tranches.

The analysts' term structure and total return analyses show refinanced CLOs - particularly triple-A, single-A and triple-B tranches - are positioned in a "sweet spot" along the term structure. The analysts favour their shorter WAL, better cashflow certainty and attractive carry levels.

"We expect CLO equity investors will continue to refinance deals of which the refi-option is in the money. We think the demand for refinanced paper from debt investors is likely to continue in the following months, and the investor base for shorter duration paper will continue to exist," say the analysts.

They continue: "Compared to new issue CLOs, refinanced CLO deals provide better transparency both with regard to the documents and to the performance of the deals. Furthermore, not only do many of these deals have economic incentive to refinance, but we argue that they may be well served to do so sooner rather than later, given the potential for a wave of refinancing prior to the risk-retention deadline."

Investors would be well served sourcing mezzanine tranches of refinancing candidates at a discount for their convexity upside, say the Morgan Stanley analysts. They believe the most likely refinancing candidates are deals that: have weighted average cost of debt running above the pricing levels of refinanced paper; are not Volcker compliant; and are out of non-call period by less than one year.

"Given all else equal, we also find deals by larger managers with higher CLO AUMs are better received in the refinancing market, compared to those from a smaller, relatively newer manager," they add.

JL

CDS

Embedding liquidity

eBond Advisors co-founder and managing partner Richard MacWilliams and ceo Bryan Jennings answer SCI's questions

Q: How and when did eBond Advisors become involved in the derivatives markets?
RM: Mac McQuown and I founded eBond Advisors in 2010, with the goal to explore improvements in the structure of corporate bonds so they could be purchased by more investors. This effort was a direct outgrowth of the credit crisis where corporate bonds were unnecessarily affected by market structure problems that had little to do with corporate creditworthiness. The upshot was the creation of eBonds, short for exchangeable bonds, which embed a cleared CDS into a corporate bond to produce a hybrid security (SCI 17 March).

Since its founding, the company has benefited from investment and participation by leaders in banking, financial engineering and money management. It also enjoys important ties with leading investment banks that recognise the need to evolve the corporate debt markets to accommodate the current and future needs of issuers and investors.

Q: What are your key areas of focus today?
BJ: Dozens of articles have been appearing now for months detailing the risks that have developed in the corporate bond markets. A recent report by the Bank for International Settlements raised some fundamental issues, such as falling trading volumes and substantial declines in the dealer positions in corporate bonds. Most experts attribute this decline to a significant drop in the willingness of dealers to hold positions in corporate bonds, resulting from new capital requirements and the consequential decline in secondary market liquidity.

In addition, US corporate bond issuance has nearly doubled since the financial crisis, with much of the marginal new supply being purchased by fixed income mutual funds and ETFs. These asset managers have also steadily increased their degree of market concentration as well. What we are seeing is market liquidity increasingly dictated by the portfolio allocation decisions of a few large asset management institutions.

RM: Finding liquid positions is proving to be far more difficult than expected for such institutions, especially during an adverse shift in market sentiment. The result is that the cost of debt capital is going up. In the past six months alone, corporate borrowing costs have risen by 25bp to 75bp in relation to CDS pricing to accommodate the lack of liquidity.

This is particularly telling since CDS trading volumes are experiencing meaningful growth again, while bond trading volumes struggle to keep pace with issuance volumes. In fact, more risk is being traded in single-name corporate CDS than in the cash bond market on an annual basis.

We are clearly now at a point where liquidity is declining in the corporate bond market and improving in the CDS market, but issuers need a mechanism to access the incremental liquidity made available by the CDS market. eBonds allow issuers to access the pools of capital being transacted in the synthetic credit markets.

Q: How do you differentiate yourself from your competitors?
RM: While other market participants have focused on adjusting trading practices, eBond Advisors has focused on making improvements to the structure of corporate bonds themselves; specifically, providing the means for investors to manage credit risk independently of duration/funding risk within the actual bond. Embedding cleared CDS directly into a corporate bond structure gives investors this credit risk management flexibility.

BJ: eBonds provide more alternatives for investors and issuers. Investors will enjoy single security accounting treatment, with no bifurcation of the bond and CDS contract. eBonds - if enhanced with CDS protection - will provide favourable risk weighting treatment for regulated financial institutions and favourable financing treatment, since the CDS is perfected within the pledged security.

For investors, the ability to choose, price and purchase independent risks improves immeasurably. Issuers of eBonds will also have the option of accessing wider capital pools, since bond investors will be competing with CDS credit investors. This should serve to limit or eliminate needless liquidity premiums for borrowers. Two markets, both pricing credit risk, will finally compete for the same risks in the market.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
BJ: We have already accumulated significant weight with investors and Wall Street firms. Among our investors and partners are several business leaders, such as John Reed, chairman of MIT Corporation and former chairman of the NYSE, and former Barclays Global Investors ceo Blake Grossman.

We have discussed eBonds with close to 50 companies at this stage. Thus far, we are tapping into a market that many players have distanced from in recent years, mainly due to the bad reputation that the derivatives market gained following the crisis. Because of their caution, we've had to educate many clients on how the product can save them meaningful amounts of money.

Q: What major developments do you need/expect from the market in the future?
RM: We expect to see eBond transactions coming through relatively soon. Additionally, although eBonds are largely US-centric for now, we would like to eventually branch into Europe.

The reason this has not yet happened is due to compliance barriers with some ISDA terminology. The differing standards were creating a mismatch between the bond terms and CDS terms, but these have recently been updated and now provide us with the avenue to begin shifting our attention in due time. We will likely use the same underwriters that we have used in the US, but there will be some scope to approaching the main European banks too.

JA

Structured Finance

Agency's shareholders expanded

Scope Ratings has raised its capital base by issuing new shares totalling €7.5m so far in 2015. New shareholders include investors from Germany, the UK, Spain and Switzerland.

In particular, Stefan Quandt is taking an 18% share in Scope through his investment holding company, AQTON. This will make AQTON the second largest shareholder in Scope after the rating agency's founder, Florian Schoeller, who remains the majority shareholder.

Structured Finance

Distressed credit pro recruited

Newfleet Asset Management has hired Edwin Tai as senior md and senior portfolio manager in distressed credit. He will be responsible for incorporating distressed credit capabilities, as well as managing the Virtus Credit Opportunities Fund, a new open-end mutual fund.

Tai joins from Third Avenue Management, where he co-managed distressed and high-yield credit assets as the lead portfolio manager of the Third Avenue Special Situations Fund and co-portfolio manager of the Third Avenue Focused Credit Fund. He has also held senior roles at the Seaport Group, Barclays Capital and Credit Suisse.

Structured Finance

Political risk exec poached

David Callis has joined Lockton Companies as vp and producer. He will work closely with Lockton's clients and prospects on international risk issues, sharing expertise in political risk and structured credit. Previously, Callis was an associate at Rutherfoord International, where he established its political risk and structured credit practice.

Structured Finance

Risk retention agreement inked

Kramer Van Kirk Credit Strategies has formed a strategic partnership with Public Pension Capital (PPC). Under the terms of the agreement, PPC's minority investment will allow KVK to meet anticipated risk retention requirements for new CLO issuance and expand its non-CLO investment strategies. Additionally, the investment from PPC will support the ongoing commercialisation of KVK Technology Solution's Mariana Credit Portfolio Analytics.

Structured Finance

Originations expert snapped up

HAS Capital has hired Scott MacFarlane as president of originations. In the newly created position, he will be responsible for the ongoing management of the firm's current manufactured housing funding programmes, as well as for the development and expansion of its new originations platform. He will report to Stephen Wheeler, md and chairman of HAS Capital.

MacFarlane arrives from US Bank, where he was vp of national sales for the bank's manufactured housing operations. Prior to that, he held roles at Green Tree Servicing, Security Pacific National Bank, Bank of America and Green Point Credit.

Structured Finance

Rival BDC acquired

PennantPark Floating Rate Capital (PFLT) is set to acquire MCG Capital for US$175m in a stock and cash transaction. The move follows MCG's exploration of strategic alternatives with the aim of maximising value for stockholders (SCI 10 February).

PFLT's acquisition comes in at US$4.75 per MCG share, representing a 15.8% premium to MCG's closing stock price. The boards of directors of both companies have each unanimously approved the transaction.

Under the terms of the transaction, MCG stockholders will receive US$4.521 in PFLT shares for each MCGC share, resulting in the expected issuance of approximately 11.8 million PFLT shares in exchange for the approximately 36.9 million MCG shares that are anticipated to be outstanding at closing. Additionally, each MCG shareholder will receive US$0.226 per share in cash from PennantPark Investment Advisers. To the extent PFLT's 10-day volume-weighted average price is less than PFLT's NAV, the adviser will pay up to an additional US$0.25 per PFLT share issued in this transaction.

Following completion of the transaction, PFLT stockholders are expected to own approximately 56% of the combined company and MCG stockholders will own approximately 44%. The combined company will remain externally managed by PennantPark Investment Advisers and is expected to have an equity base of approximately US$376m. In addition, two members of MCG's board will be appointed to PFLT's board.

Completion of the transaction is subject to the approval of both PFLT and MCG stockholders and other customary closing conditions. The transaction is expected to close in 3Q15.

Keefe, Bruyette & Woods and SunTrust Robinson Humphrey served as financial advisers to PFLT, while Dechert and Venable served as its legal counsel. Morgan Stanley served as financial adviser to MCGC, with Wachtell, Lipton, Rosen & Katz serving as its legal counsel.

CDO

CDO manager replaces two

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

In addition, Dock Street Capital Management has replaced TCW Asset Management as investment advisor to Davis Square Funding I. Moody's says that there will be no immediate impact to its ratings of the class A or class B notes in the transaction.

For other recent CDO manager transfers, see SCI's database.

CLOs

CLO stake purchased

Fair Oaks Income Fund has acquired, on the primary market, US$21.5m notional of equity notes (representing 52% of the total equity) and US$11m notional of class F notes of TICP CLO IV. The manager of the CLO is TPG Institutional Credit Partners.

The CLO's current target portfolio has a principal value of US$500m across an expected 125 unique bank loan issuers, with an expected weighted average exposure per issuer of approximately 0.9%. Fair Oaks estimates the potential total return for the investment to be between 14% and 16% per annum.

The fund has committed to investments in new CLOs totalling around US$44m since its US$45m share placings in February. It received US$4.7m worth of cashflow from investments in April, including the first distributions from Arrowpoint 2014-3, Covenant Credit Partners CLO II and OZLM 8 CLO, and a scheduled distribution from Harvest CLO VII.

CMBS

MBS trio tapped

Cello Capital Management has recruited Toby Maitland Hudson, Scott Grabine and Kashif Akhtar. All three arrive as traders from Saba Capital Management.

Prior to joining Cello, Maitland was md at Saba and executive director in CMBS trading at JPMorgan before that. Akhtar has also held senior roles at Saba and JPMorgan, both with an emphasis on CMBS trading. In addition, he was previously an analyst at Bear Stearns, focusing on financial analytics and structured transactions.

ABS

Challenger card risks examined

The credit card pools of UK non-high street bank lenders - also known as challenger banks - entail additional risks than those of established originators, says Moody's. As a result, challenger entrants' transactions usually require additional mitigants to achieve the agency's Aaa rating.

"We undertake a closer analysis of certain risks for the pools of new entrants, or issuers with less performance history," says Greg O'Reilly, a Moody's avp and analyst. "We view the high street banks' pools as being less volatile because of their experience in the market and the stability of their historical performance."

Challenger entrants are driving growth in the UK's credit card market, causing the all-issuer market to grow by 1.1% more than the high street banks' credit card borrowing in March. However, a number of pertinent risks for challenger entrants relate to the originator's financial strength, data quality, pool diversification and potential performance volatility.

For example, challenger entrants have less diversified funding sources, which increases the likelihood of entering insolvency. Their sponsors may be more likely to consider exiting the market, which would lead to a rapid amortisation of the portfolio and increase risk for noteholders.

In addition, there is the sponsor default scenario, which Moody's believes is the greatest risk to a credit card transaction. Challenger entrants may have lower credit quality or be unrated. As a result, their servicing and liquidity provisions for a securitisation will typically already anticipate the consequences of a sponsor's default on the transaction.

Moody's adds that the historical performance data of challenger entrant pools may be less reliable indicators of future performance. These pools often grow through acquisition or through specific credit offerings, such as affiliations with a club or an affinity group, where card usage earns points with an affinity partner such as a football club or airline. This makes historical performance less consistent due to changes in the business strategy, such as underwriting processes and risk tolerance, or the evolution of pool composition.

The pool composition of challenger entrants' securitisations may vary more than those of traditional lenders, as high street banks usually have more granular data over a longer duration and of a more consistent nature. Moody's says this is because they typically benefit from information about their customers' behaviour across other product lines and their long-standing presence in the market.

Structured Finance

Standardisation, transparency promoted

The CFA Institute says that policy recommendations contained in its new study on shadow banking are particularly relevant for the EU's Capital Markets Union project in terms of facilitating markets-based finance to revive the economy (SCI 18 February). Of note, the study suggests that securitisation policy initiatives should focus on increasing standardisation and simplification of issuance structures, as well as improving transparency via initial and ongoing disclosures to investors. Standardisation of legal frameworks across markets would also improve the ease and certainty of enforcing ownership rights and creditor protections.

A second area of focus in the study is securities financing transactions and collateral. The CFA Institute indicates that a robust framework surrounding the reuse of collateral is needed to mitigate the build-up of excessive leverage and to prevent associated financial stability risks. Key elements include greater transparency for securities financing transactions via reporting transaction data to trade repositories and to investors.

"Amid the myriad of shadow banking policy initiatives, the challenge facing regulators is to achieve coherence in the implementation of these measures and to minimise regulatory gaps and overlaps," comments Rhodri Preece, head of capital markets policy EMEA at CFA Institute. "Shadow banking feeds directly into the capital markets union agenda because there is a desire from the policy perspective for markets-based finance to flourish and deepen the sources of finance available for European companies. Non-bank finance has the potential to deliver many benefits to the financial markets in Europe and indeed globally, if the right measures are put in place to stimulate demand and justify investor confidence."

The study is informed by a CFA Institute member survey that identifies the perspectives of over 600 investment professionals globally on the risks and policy priorities surrounding shadow banking. Of survey respondents, 55% globally identified a need for greater standardisation and simplification of issuance structures in securitisation markets, while 47% agree that the risks associated with securities financing transactions would be mitigated most effectively by reporting to trade repositories and to investors. Improving transparency and disclosures over shadow banking activities should be the highest priority for regulators, according to respondents in Asia-Pacific and EMEA.

The survey was conducted in April 2014 to obtain the perspective of investment professionals on the risks and policy issues concerning shadow banking. The shadow banking sector globally is estimated to represent US$75trn by the Financial Stability Board.

Structured Finance

Further loan disposal agreed

RBS is set to sell a portfolio of US and Canadian corporate loans to Mizuho Bank, comprising US$5.6bn of loan commitments, including US$500m of drawn assets as of 28 February. This follows a previous agreement between the two banks for the sale of a portfolio of loans in February, with approximately two-thirds of RBS' North American corporate loan portfolio now disposed of.

The portfolio generated a profit after tax in the region of approximately US$20m in 2014. The cash consideration will be approximately US$500m, generating a loss on disposal of around US$30m, or £20m. Final cash consideration and loss will depend upon settlement date portfolio balances, while sale proceeds will be used for general corporate purposes.

The transaction is expected to be complete by the end of 3Q15. The previous transaction remains on track for completion and is subject to progressive closing as customer and agent banks' consents are obtained.

Structured Finance

APAC ratings remain stable

Fitch reports that 243 Asia Pacific structured finance tranches were affirmed in 1Q15. Rating actions in Australia and New Zealand were once again supported by strong economic performance, with most ratings reviewed during the quarter being affirmed, contributing to 90% of the total affirmations in the region. In addition, nine Australian tranches were upgraded.

In Japan, 11 ratings were affirmed, including seven tranches from two RMBS transactions, three structured credit transactions and one CMBS tranche. The only downgrade in the quarter was to the class E tranche of JCREF CMBS 2007-1, the rating of which was lowered to single-D from single-C following the completion of workout activities of all defaulted loans backing the transaction. The rating was simultaneously withdrawn.

An improved economic background in India led to a revision of the outlooks assigned to four tranches from three ABS transactions - from negative to stable - as delinquencies stabilised and credit enhancement continued to build. A further eight Indian auto loan ABS tranches were also affirmed, with stable outlooks in the quarter.

Additionally, three tranches from two Korean auto loan transactions were affirmed.

Finally, most long-term ratings in APAC have stable outlooks. The exceptions are negative outlooks on two credit-linked structured credit transactions, and positive outlooks for three Australian and two Japanese transactions.

Structured Finance

Spanish law boosts ABS

Spain's new securitisation law will provide a more flexible framework for transactions, observes Moody's. The agency believes that this will be beneficial for new Spanish issuance across the ABS and covered bond markets.

"The new law seeks to consolidate existing securitisation regulation, bring the Spanish legal system in line with its European counterparts and bolster transparency and investor protection," says Alberto Barbachano, a Moody's vp - senior analyst.

The law is articulated around three pillars, in line with international trends. The first aim of the law is to consolidate the regulatory framework governing securitisation into one legal body, providing more certainty and enhanced legal protection to market participants. For example, the new law will unify the two existing fund types of Fondo de Titulizacion Hipotecaria and Fondo de Titulizacion de Activos under the legal category of Fondo de Titulización (FT).

Second, the law will promote the integration of the Spanish legal system with those of other European jurisdictions that have a more advanced position. To this end, the operational aspects of FTs will be more flexible, removing a number of obstacles that previously prevented Spain from replicating innovative securitisation strategies that have already proven to be successful in neighbouring countries.

"Issuers can more easily create conditional pass-through structures in structured covered bonds than in cédulas, which mitigates the risk of a fire sale in case the issuer becomes insolvent," explains José de León, a Moody's svp and manager.

Finally, the law aims to reinforce transparency and investor protection, in line with international best practice. The law sets out specific role requirements for management companies, including the administration and management of assets in securitisation funds.

Structured Finance

China SME securitisation 'credit positive'

Moody's says that securitisation of Chinese SME and micro loans, a sector traditionally underserved by Chinese banks, is credit positive. Securitisation could diversify funding channels to SME and micro enterprises and pave the way for internet finance providers to grow into privately-owned commercial banks in China.

Ant Micro Loan, an affiliate of Alibaba, in December 2014 became one of the first small loan lenders approved by the China Insurance Regulatory Commission to issue ABS backed by micro loans. "The China Banking Regulatory Commission has indicated that it is prepared to license more privately-owned commercial banks, stating it as a top priority for the year - which could pave the way for securitisation by internet banks and free up funding for the country's SME and micro enterprises sector," says Georgina Lee, a Moody's avp and research writer.

Moody's explains that small loan lenders in China play a key role in financing new business start-ups and SMEs, but often face funding pressure because they have limited access to interbank funding that banks have and are restricted in their funding sources. The clients of small loan lenders - the SMEs and micro enterprises - are often not the targeted borrower-clients of commercial banks.

Instead, commercial banks have traditionally favoured lending to large state-owned enterprises, because they view them as having a lower risk profile than SMEs and micro enterprises. However, the SME and micro enterprises sector is a key driver of China's economic growth, accounting for 65% of GDP growth, 50% of total tax revenue and 75% of employment in 2014.

Meanwhile, as an alternative to securitisation, some small loan lenders in China have raised funds through so-called quasi-securitisation schemes, where loan assets are packaged and sold on peer-to-peer websites. These schemes are not subject to the same regulatory oversight as securitisation transactions though and do not offer the same structural protection to investors.

The use of securitisation to fund SME lending comes at a time when China's GDP growth trajectory has slowed, and the government has placed greater priority on facilitating private sector development and innovative entrepreneurship to spur new growth momentum.

Structured Finance

'Green' securitisation supported

The European Commission's Directorate-General on Climate Action has released a policy paper, entitled 'Shifting Private Finance Towards Climate-Friendly Investments', which considers using securitisation as a financing tool for green investments. The report focuses on mobilising institutional investors to provide capital for such investments.

The study examines current demand for climate-friendly investment; current channels of supply for climate-friendly investment; barriers to the use of those supply channels; and the policies, tools and instruments policymakers have at their disposal to address these barriers. It identifies two main barriers related to climate-friendly investments: those external to institutional investors' decision-making framework and barriers arising from that framework.

The former includes issues such as the lack of a liquid market, less favourable risk-return, high transaction costs, small scale projects and the lack of accounting and disclosure. The latter includes the short time horizon of decision-making, limited integration of climate in stewardship and fiduciary duty, and the lack of relevant climate-related risk and performance methodologies.

The paper suggests integrating actions to increase climate-friendly investments with the EU Capital Markets Union project (SCI 18 February), such as developing green mortgage-backed covered bonds and securitisations, and including renewable assets in covered bond regulatory frameworks. According to a recent Baker & McKenzie briefing, one item listed in the paper's short- to medium-term action plan is placing a greater emphasis on climate-friendly "high-level" securitisation, including the development of industry standards for loan contracts for climate-friendly assets. Support for warehousing structures to pool climate-friendly assets could also be provided, while the model used for the SME initiative - whereby credit enhancement is provided by the European Structural and Investment Funds - could be adopted for climate-friendly assets.

Additionally, the paper notes that securitisation can help break down the barriers to investors' access to financial markets by: addressing high transaction costs; supporting the refinancing of smaller loan portfolios; and enhancing market liquidity by increasing the volume of climate investment opportunities.

Among the actions to be taken by way of follow-up to the paper include the formation of an EU-wide group of stakeholders to develop standard contracts and agreements for the green securitisation of loans and to integrate green securitisation issues into existing EU legislation.

CDO

Trups defaults continue falling

The number of US bank Trups CDO combined defaults and deferrals decreased to 20% at end-March, according to Fitch's latest index results for the sector. This compares with 20.4% in February.

In March, 12 banks representing US$150.5m of notional in 19 CDOs cured. Additionally, four previously cured issuers representing US$23m of notional in four CDO redeemed their Trups.

There were no new defaults in March; however, six banks representing US$55m of notional in seven CDOs re-deferred on their Trups. Two defaulted banks with a notional of US$29.5m in two CDOs have been exchanged for preferred stock and the notional has been removed from the index. Additionally, full recovery was received on a defaulted issuer with total notional of US$7m across two CDOs.

Across 78 Fitch-rated Trups CDOs, 214 defaulted bank issuers remain in the portfolio, representing approximately US$5.8bn of collateral. Of these issuers, 156 are currently deferring interest payments on US$1.8bn of collateral.

CDS

OTC market contracting

The OTC derivatives markets contracted in 2H14, according to BIS statistics. The notional amount of outstanding contracts fell by 9% between end-June 2014 and end-December 2014, from US$692trn to US$630trn.

The BIS notes that exchange rate movements exaggerated the contraction of positions denominated in currencies other than the US dollar. However, even after adjusting for exchange rate movements, notional amounts were still down by about 3%.

In addition, the gross market value of outstanding derivatives contracts rose sharply in 2H14, increasing from US$17trn to US$21trn between end-June 2014 and end-December 2014 - their highest level since 2012. The increase was likely driven by pronounced moves in long-term interest rates and exchange rates during the period.

Central clearing made further inroads too, as the share of CDS contracts that cleared through central counterparties rose from 27% to 29% in 2H14.

CLOs

Operational assessment urged

Fitch says that the broad array of US CLO managers means that focusing on risks and understanding the manager are even more important in the current environment. In particular, the agency notes that assessing the operational platform of a CLO manager is valuable for investors.

"Business concentration and a smaller investor base can make newer CLO asset managers more vulnerable to event risk," comments Fitch director Russ Thomas. "This risk can be mitigated by demonstrating shareholder commitment and sufficient cash to fund operations in adverse markets, making a proven ability to navigate market cycles a desired trait for managers."

A lack of separation of responsibilities and independent oversight can also pose control issues for some smaller CLO asset managers. Additionally, formalised risk management and controls are not always a priority for smaller managers, given their limited resources.

Larger institutionally-affiliated managers have established robust frameworks that go beyond compliance with regulation. Moreover, simple investment strategies in a well-identified area can offset the risks posed by limited resources.

"Although the current credit environment is benign, noticeable differences in CLO performance and how the portfolios are managed tend to appear as broader economic conditions deteriorate," Thomas adds.

CLOs

CLOs to meet funding needs

New and existing CLOs will play a large part in meeting US corporate funding needs as companies seek to refinance before a five-year high of speculative grade debt matures in 2019, says Moody's. Assuming that the financial system remains stable, transactions issued in 2015 and beyond will play a larger role than existing deals in meeting such demand.

The agency suggests that the decline in new CLO issuance starting this year as risk retention rules take effect and interest rates rise will not dampen their ability to meet refinancing needs. It assumes that new CLO issuance will continue at a steady, albeit, lower pace in a benign credit environment.

Moody's expects that new CLOs issued in 2015 and beyond will provide the bulk of this re-financing in 2018-2019, after debt maturities more than double to US$349bn from US$133bn in 2017. Pre-2015 CLOs should help provide financing through 2018, but then will likely drop off as they end their reinvestment periods.

"As long as the economy continues to improve and CLOs remain attractive to debt and equity investors, corporate issuers can rely on new CLOs to meet a large share of their financing needs," says Oksana Yerynovska, a Moody's vp and senior analyst.

Other investors - such as high yield bond investors, hedge funds, loan funds and pension funds - are expected to provide the remaining funding to corporate issuers through 2019.

CMBS

Expected loss inches lower

Moody's base expected loss for US conduit/fusion CMBS fell to 7.7% in 1Q15, from 7.9% the previous quarter. In addition, the share of specially serviced conduit loans declined for the tenth consecutive quarter, to 6.96% in Q1 from 7.32% in 4Q14.

"We expect the positive momentum to continue in the commercial real estate sector as favourable financing conditions and economic growth foster business development," says Keith Banhazl, an svp in Moody's CMBS and CRE CDO surveillance group. "Low energy costs and rising wages will also boost disposable income, spurring consumer spending."

The agency expects performance in the multifamily sector to remain solid as strong demand absorbs the increase in construction. The office and retail sectors should also continue to improve, although retail store sales are likely to grow at a more measured pace as the sector continues to deal with retailer downsizing and the growth of e-commerce.

Moody's projects that hotel performance will remain strong, with occupancy on track to hit an all-time high in 2015. Downward pressure on RevPar is occurring in some markets as a result of new construction.

Lenders modified 23 loans, amounting to US$555.6m in Q1, for an average of eight loans and US$185.2m per month.

CMBS

Macerich JV exposure gauged

Sears is forming its third real estate joint venture, this time with Macerich (MAC), involving nine Sears properties located at MAC malls. The purchase price for the properties is US$300m, with MAC contributing US$150m in cash for its 50% interest.

The JV will lease back existing stores to Sears under a triple-net master lease agreement, with a 10-year initial term and two five-year renewal options. Morgan Stanley CMBS strategists identify two CMBS loans totalling US$476m with direct exposure to two of the properties included in the JV.

Additionally, the strategists identify 10 CMBS loans totalling US$76m by allocated balance with shadow exposure to seven of the properties in the JV, seven of which are in CMBS 2.0 deals. The largest loan with exposure is US$280m Vintage Faire Mall, securitised in BBCMS 2015-VFM. Three of the loans have exposure to the Sears in Deptford Mall, with the largest being the mall itself, at US$196m and representing 32.6% of GSMS 2013-G1.

The strategists estimate that total CMBS exposure across Sears' JVs with GGP, SPG and MAC stands at US$1.16bn across 20 loans. US$997m of this exposure is to CMBS 2.0 transactions.

CMBS

GSA stress emerges

The US$200.1m NGP Rubicon GSA Pool loan - which is split pari passu in the WBCMT 2005-C20 and WBCMT 2005-C21 CMBS - has transferred to special servicing with CWCapital. The move appears to be due to recent performance declines and the pending maturity of the loan in June.

The 14 properties in the portfolio were all originally primarily leased to the General Services Administration (GSA), which manages leases for departments of the US Government. With reductions in spending, the government has been consolidating office space, which has caused stress for offices with these tenants.

The original loan balance was US$389m, which has shrunk due to partial defeasance. Four properties - in Sacramento, Houston, San Diego and Washington, DC - were released from the portfolio in January 2015, defeasing US$162.3m in current balance after amortisation (see SCI's CMBS loan events database).

After the release of the four assets, the remaining properties have reported deteriorating performance, with DSCR NOI falling to 0.96x in 2014 from 1.21x DSCR NOI for the entire portfolio in 2013 before the sale. "The exact terms to be met for partial defeasance were not available in the prospectus, but it appears that the borrower was able to take out better-performing properties from the portfolio, leaving a sub-1.0x DSCR NOI portfolio behind," Barclays Capital CMBS analysts suggest.

Two of the properties are currently vacant and a third in Philadelphia appears to be in the process of becoming vacant. No lease extends beyond 2020 and there is considerable near-term rollover risk that is partially offset by a US$5.5m reserve, according to the Barclays analysts.

They note that watchlist commentary indicates that the borrower planned to pay the loan off through a sale of the portfolio and it is possible that the borrower is simply looking for a short-term extension to complete a sale. "However, with the portfolio's weak performance, it is possible that bids are below the loan's value and the loan could fall into delinquency. The current debt yield is about 7% and the properties may need significant capital to maintain or increase occupancy."

CMBS

CMBS 2.0/3.0 watchlistings drop

The volume of newly watchlisted US CMBS 2.0/3.0 loans fell in the April remittance to just over US$1bn, from US$2.1bn in February and US$1.9bn in March, according to Barclays Capital figures. The 2013 and 2014 vintages accounted for the bulk of the watchlistings, with some the result of pro-forma underwriting leading to low initial DSCRs.

JPMBB 2013-C15 has US$100m of exposure to the watchlistings, from the 1615 L Street property (which also backs US$34m of collateral in JPMCC 2013-C16 through a pari passu note). The loan was watchlisted due to low DSCR attributed to the loss of a tenant, but is currently performing and the 2014 full-year DSCR NOI was 1.24x.

"We do not expect this watchlist to trigger a default by itself, given the vacating tenant's small percentage of the total leasable area and no additional immediate lease expirations for the larger tenants," Barclays CMBS analysts observe.

COMM 2014-UBS3 has the second largest exposure, via two large watchlistings: the US$52.5m 1100 Superior Avenue and the US$20.5m North Penn Business Park loans. The former is watchlisted with a low DSCR because of rent abatements, while the latter is watchlisted for near-term lease rollover risks.

The second largest watchlisted loan is the US$68.5m National Industrial Portfolio (securitised in JPMCC 2012-C8), with two major leases - Coca-Cola and Lego - set to expire within the next 12 months (see SCI's CMBS loan events database).

The analysts suggest that the watchlisted US$46.3m 24 West 57th Street loan (JPMCC 2011-C5) may be at greatest risk of facing debt service shortfalls in the near term, however. The second-largest tenant - the Ana Tzarev art gallery - is vacating this month, leaving 15.8% of the space vacant.

"The tenant will forfeit the security deposit and pay a termination fee, helping to alleviate the cashflow distress while a replacement is being found," the analysts note. "The loan has performed steadily in the past with DSCR NOI staying above 1.3x consistently. We expect the vacated space to be filled eventually, given the property's prime Manhattan location; however, cashflow disruptions could erupt in the short term and potentially put the loan into special servicing."

CMBS

CMBS 2.0 special servicing remains light

Fitch says that the incidence of US CMBS 2.0 loans entering special servicing remains infrequent and will likely stay this way for the foreseeable future, at least until the loans approach maturity. This is because in-place cashflow is generally sufficient and 2.0 loans should continue to benefit from low interest rates.

Currently 27 conduit loans, totalling US$282m from the 2010 through 2015 vintages, are in special servicing. This represents only 0.1% of all outstanding loans from the Fitch-rated US CMBS 2.0 universe. The majority of CMBS 2.0 transfers have been idiosyncratic in nature and centred around sponsor issues, with 16 of the 27 loans remaining current on debt service.

The average loan size for the 2.0 loans in special servicing is US$10.5m, with 18 of the 27 below US$10m. Two loans are over US$20m and both are retail properties. The largest is the US$50m Hudson Valley Mall (securitised in CFCRE 2011-C1), which recently transferred to the special servicer (see SCI's CMBS loan events database), and the second largest is the US$30.4m Commons of Manahawkin Village (WFRBS 2011-C3).

Insurance-linked securities

Mortality cat bond issued

AXA Global Life has closed its latest extreme mortality catastrophe bond - the €285m Benu Capital. Based on an indemnification mechanism, the transaction provides the sponsor with protection against the risk of extreme mortality events occurring in France, the US and Japan for a five-year period of coverage starting from 1 January.

The deal comprises two classes of notes rated by S&P: €135m of double-B plus class As and €150m of double-B class Bs. The issuance spread over the yield of the collateral structure during the period of coverage is set at 2.55% for the class As and 3.35% for the class Bs.

The deal is the largest extreme mortality catastrophe bond since the 2006 Osiris Capital transaction placed for the benefit of AXA. Swiss Re was lead arranger on the transaction, with NATIXIS as co-arranger and joint bookrunner. Aon Benfield and BNP Paribas were also bookrunners.

Risk Management

Third-country CCPs recognised

ESMA has recognised 10 third-country central counterparties established in Australia, Hong Kong, Japan and Singapore. The recognition allows these CCPs to provide clearing services to clearing members or trading venues established in the EU.

The recognised third-country CCPs are: ASX Clear Futures, ASX Clear, HKFE Clearing Corporation, Hong Kong Securities Clearing Company, OTC Clearing Hong Kong, SEHK Options Clearing House, Japan Securities Clearing Corporation, Tokyo Financial Exchange, Singapore Exchange Derivatives Clearing and The Central Depository.

Risk Management

Non-US dealer rules proposed

The US SEC has proposed new rules on requirements related to security-based swap transactions connected with a non-US person's dealing activity. The rules require a non-US company that uses US personnel to arrange, negotiate or execute a transaction in connection with its dealing activity to include that transaction in determining whether it is required to register as a security-based swap dealer.

The specified transactions would also be subject to the reporting and public dissemination requirements under Regulation SBSR and, if the non-US firm is a registered security-based swap dealer, to the external business conduct standards of Title VII. The proposals also address certain other matters, including who is required to report certain transactions involving non-US persons.

The comment period for the proposed rules will close 60 days after they are published in the Federal Register.

RMBS

Super-priority warning 'credit positive'

The US FHFA last week issued a statement warning that Federal law prohibits state courts from involuntarily extinguishing Fannie Mae and Freddie Mac liens to give precedence to super-priority liens, such as energy retrofit programmes or homeownership association (HOA) liens, while the two GSEs are under conservatorship. Moody's notes in its latest Credit Outlook that the action is credit positive for Freddie Mac's newest risk-transfer securitisation, STACR 2015-DNA1, and other future GSE risk transfer deals in which investors bear actual losses. This is because the FHFA's stance, if developing case law supports it, will result in lower losses from super-priority liens.

Court rulings in Washington, DC and Nevada last year increased the risk of losses for RMBS trusts on loans secured by homes in super-lien states whose owners fail to pay HOA or condominium fees and the association then files a lien that it later forecloses on. The rulings held that an HOA lien foreclosure wiped out the first mortgage, resulting in nearly 100% losses for the holders of those loans.

Moody's suggests that similar results could occur for loans in these states or others that adopt a similar legal interpretation, if mortgage servicers don't take action to protect the RMBS liens, such as paying off the delinquent HOA fees prior to foreclosure or asserting a valid legal defence. In its statement, the FHFA confirms that it does not consent to any extinguishment of GSE liens in connection with HOA foreclosures.

The move has no direct benefit for other GSE risk-transfer securitisations because investors in those deals bear losses according to a fixed formula regardless of the magnitude of actual losses. It also has no direct benefit for private label RMBS because the Federal law cited by the FHFA won't apply to those deals.

"Indirectly, however, the FHFA's statement - as well as servicing requirements Freddie Mac previously issued - are credit positive for the entire mortgage sector because they raise awareness about the risk of HOA super liens and encourage servicers to find ways to protect against them," Moody's concludes.

RMBS

GSE credit spectrum broadens

Fannie Mae and Freddie Mac are continuing to expand the credit spectrum of loans included in their risk-sharing transactions, according to Fitch. The weighted average FICO score of borrowers in deals issued in 1Q15 was 752, down from the 765 seen in the inaugural transactions issued in 2013.

Even with the inclusion of slightly weaker borrowers, agency mortgages included in recent reference pools continue to show better credit attributes than historical averages. "The drop in credit scores among GSE risk-sharing transactions since 2013 is notable, but the average FICOs in the most recent transactions are still 30 points higher than those seen in strong performing vintages originated prior to 2005," says Fitch director Sean Nelson.

GSE risk-sharing transactions are expected to contribute a consistent supply to the market for the foreseeable future. First quarter supply started off strong, with Fannie and Freddie issuing roughly US$2.3bn, which surpassed total issuance from 2013. Roughly US$10.8bn was issued in 2014.

RMBS

Aussie housing affordability steady

Low mortgage interest rates have helped keep Moody's Australian housing affordability measure steady at the national level over the past year, according to the agency. This has offset the impact of higher property prices and relatively flat household incomes.

However, the affordability measure deteriorated for Sydney and Melbourne, where house price rises have been more pronounced. "Furthermore, stress testing in four scenarios also shows that Sydney's market is most at risk of a further deterioration in housing affordability," says Natsumi Matsuda, a Moody's analyst.

Moody's Australian housing affordability measure calculates the share of income needed, on average, to make monthly mortgage loan repayments. A rise in the index is an indication of a drop in affordability. As of end-March, Australian households with a home loan needed 27% of their income, on average, to make such repayments, which is steady when compared with March 2014.

"In Sydney however, where dwelling prices have been rising rapidly, households spent, on average, 35.1% of their income on repayments as of March, higher than the 10-year average for the city and up from 32.8% in 2014," adds Matsuda. "Affordability also deteriorated in Melbourne, but improved in Perth and Brisbane, while it was steady in Adelaide."

In both Sydney and Melbourne, the deterioration in affordability was driven by higher prices for houses, rather than units. Moody's believes this is credit negative for new mortgage loans from these cities and thus also for RMBS backed by such loans. This is because less affordable mortgages increase the risk of delinquency and default, particularly if interest rates rise from their current low levels. In contrast, Moody's adds that the affordability of units improved slightly on a national level.

RMBS

Sustained decline for Irish arrears

Irish RMBS loans in arrears by more than three months reported a sustained decline in 2Q15 - to 17.7% - for the first time since 2005, Fitch observes. This is a drop from their peak of 19.3% in 3Q14 and 18% in the previous quarter.

Fitch attributes the decline to ongoing servicing activities aimed at resolving long-term arrears cases and an improvement in the domestic macroeconomic environment. However, market data provided by the Central Bank of Ireland shows that the portion of loans in arrears by more than 720 days continues to rise, implying that further loan renegotiations are yet to take place.

In January, the Central Bank of Ireland announced limits on LTV and loan-to-income ratios on new mortgage loans. Fitch says this is likely to lower credit growth, but should have a limited impact on home price recovery.

The start of the ECB's quantitative easing programme in January triggered a decrease in the three-month Euribor rate, leading to a fall in mortgage rates since the beginning of the year. Rates are expected to decline further and should remain low in the coming year, which could support home price recovery and partially offset the impact of the new mortgage lending regulation.