Contents

Secondary markets

Uptick for European secondary

With the UK public holiday the European secondary securitisation markets remained extremely quiet yesterday, but activity should see an uptick today.

With the Greece story still rumbling on in the background, focus is, for now, on the two BWICs scheduled for trade today so far. One is the previously mentioned re-scheduled CLO list due at 14:30 London time; the other is ten lines of Italian senior and mezz paper due at 11:00.

The €16.439m original face Italian ABS and RMBS list comprises: BERCR 1 B, BERCR 5 A, BPLR 2004 C, BPSPL 1 B, CLAAB 2012-1 A, LOCAT 2005-3 B, LOCAT 2006-4 B, MECEN 2 B, SESTA 3 A and SIENA 2010-7 A3. Three of the bonds have covered on PriceABS in the past three months, doing so as follows: LOCAT 2005-3 B at 99.751 on 12 March; LOCAT 2006-4 B at 97.81 on 14 April; and SIENA 2010-7 A3 at 99.23 on 29 April.

Secondary markets

Euro liquidity hampered

Broader market volatility combined with a holiday shortened week continues to hamper liquidity across European secondary securitisation markets.

Yesterday saw another quiet day in European secondary with low volumes on- and off-BWIC. However, yesterday's Italian BWIC did trade reasonably well.

Overall, spreads remained unchanged to slightly wider as market sentiment continued to soften on macro news. CLO paper remains the notable exception and is still seeing healthy demand particularly in 2.0 mezz. Again, yesterday's BWIC in the space traded well.

The BWIC calendar is still very light with one list scheduled for trade today so far. At 10:30 London time are eight lines of ABS and RMBS totalling 39.911m of euro and sterling original face.

The list comprises: DRVON 10 A, DRVON 11 A, FOSSM 2011-1X A6, PERMM 2011-2X 2A, SMI 2012-1X 2A2, STORM 2011-4 A1, VCL 16 A and VCL 18 A. Only SMI 2012-1X 2A2 has covered on PriceABS in the last three months, doing so at 102.58 on 18 March.

Secondary markets

US CLO activity drops

Activity in the US CLO secondary market has dropped again this week and looks set to stay that way for now.

"It's very, very quiet at the moment - volumes have dropped by more than half in the last week or so and currently feel like they're dipping further," says one trader. "The broad themes that have made CLOs a compelling buy are still in place, but there are just no real sellers right now."

The trader notes there are still quite a few desks with people away again this week, which could be discouraging selling activity. However, he believes it is a more fundamental issue that is drying up supply.

"Primary is being squeezed partly because of warehouse risk and partly because the big banks are trying to clean up their pipes at the moment. That in turn is squeezing secondary - the perception is there's less paper around so people are sitting on what they've got and in our market the crowd mentality rules so until someone starts to sell in size no one will follow."

Meanwhile, the trader adds: "There are some bonds changing hands off-comp, but nothing really notable. A lot of it is the same old bonds being pumped round the market."

On-BWIC there are currently four US CDO/CLO lists circulating for trade today. Three of those auctions were due at 10:00 New York time.

There were three lines of CLO mezz totalling $16.75m - ELM 2014-1A B1, OZLM 2014-9A C and PLMRS 2013-2A C. Also, there was a single $25m piece of BMI 2013-1AR A1R. In addition, there were five ABS CDO tranches worth $50m - PTNM 2001-1A B, PTNM 2001-1A B, DUKEF 2003-5A 1A2, DUKEF 2003-5A 3 and RFCCD 2005-3A A2.

Then, at 14:00 there is a $63.325m three line list of triple-A CLOs. The list consists of: EASTL 2007-1A A2B, INGIM 2006-2A A2 and WESTW 2007-2A A1.

None of the above bonds has covered on PriceABS in the last three months.

Secondary markets

Euro secondary mixed

European secondary securitisation markets are seeing a mixed tone amid continuing low volumes.

Volumes were light again yesterday though a few more BWICs joined the schedule as the day wore on and there is a considerable increase in lists circulating for trade today. Prime assets remain the strongest ABS/MBS sector across autos and UK and Dutch RMBS, while CLOs continue to see very good demand.

Peripherals are still the weakest sector, excepting Italian paper, which continues to outperform. A strong selling bias is seeing Portuguese and Spanish spreads edge wider.

Peripherals form the majority of line items on today's ABS/MBS BWIC schedule, which currently amounts to five lists. The largest of those is six lines of peripheral RMBS seniors due at 15:00 London time.

The €111.501m original face list consists of: LANSD 2 A2, LUSI 6 A, TDAC 9 A1, TDAC 9 A2, TDAC 9 A3 and UCI 16 A2. Only UCI 16 A2 has covered on PriceABS in the last three months, doing so at 88.77 on 26 February.

In the CDO/CLO space there are five lists so far. They include two slices of ABS CDO CARN 2007-1; very small clips of EGLXY 2006-1X A2 and WODST I A; and two pieces of 1.0 equity - AVOCA VII-X G and GROSV III-X SUB.

In addition, there are two auctions involving current CLO hot spot 2.0 mezz. At 14:30 London time is a three line list representing €5.5m original face. It comprises: ACLO 1X F, DARPK 1X E and SPAUL 3X D. Only SPAUL 3X D has covered on PriceABS in the last three months, doing so at 100h on 26 March.

Then, at 15:00 is a pair of double-Bs - €1m JUBIL 2014-14X E and €3m NEWH 1X E. Only JUBIL 2014-14X E has covered on PriceABS in the last three months, doing so at M95h on 12 March.

Secondary markets

US RMBS keeps going

Despite broader market concerns combined with liquidity challenges the US non-agency RMBS secondary market is keeping going.

"Market participants have been distracted by the back up in rates and soft stocks, which has led to trepidation in RMBS," says one trader. "That's meant liquidity has continued to be challenging. At the same time, many of the sell-side have been out at a US dealer conference this week."

The trader continues: "Consequently, it's been challenging for the buy-side to move bonds. However, paper is still trading but we're seeing lot more offers after lists have gone through and people putting out reserves."

Nevertheless, headline BWIC volumes are still strong as the RMBS market sets itself for tomorrow's non-farm payroll number. "Yesterday was busy lining up for non-farm payrolls with $800m in for the bid and today's focus is a 21 line $1bn current face list, which looks to be from a GSE," says the trader.

"As always with a big list everyone will be watching closely to see where it trades and that will feed into tomorrow morning's payrolls. Any interest rate volatility around that could jar out some RMBS bonds and inform the pattern for next week," the trader concludes.

Secondary markets

Euro ABS/MBS stays stable

In the face of heightened broader credit market volatility yesterday the European ABS/MBS secondary market remained relatively stable with spreads unchanged to slightly softer.

However, volumes remained low with many investors opting to wait it out for now. Consequently, BWICs saw an increase in DNTs and bid-offers continued the week's widening trend. Little is expected to change today with sentiment still broadly weak, though UK RMBS are likely to get a boost following the election result.

There is currently only one BWIC on the European schedule today - six lines of non-conforming RMBS due at 15:00 London time. The list consists of: £3m EHMU 2007-2 B1, €1.9m GHM 2007-2X DB, €4m RLOC 2007-1X D1A, €4m RMACS 2006-NS3X B1C, €5.8m RMACS 2007-NS1X B1C and €2m UROPA 2007-1 B1B. Only RMACS 2006-NS3X B1C has covered in the last three months, doing so at 84.28 on 15 April.

ABS

DOT rule to dent railcar ABS?

The US Department of Transportation last week issued its final rule for tank car safety improvements. The more stringent standards are generally seen as negative for railcar ABS, given that retrofitting costs are paid from securitisation cashflows at the top of the waterfall.

The rule requires new tank cars constructed after 1 October 2015 to meet enhanced specifications, including thicker shells, full-height head shields, top fittings protection, thermal protection systems and enhanced braking systems. Existing tank cars are permitted to be retrofitted at currently authorised shell thicknesses and the authorised steel grade at the time of their construction.

However, the implementation of these upgrades will be phased in over a longer timeframe than previously expected. Rather than a five-year schedule based on a tank car's packing group (PG), the final rule adopts a ten-year horizon based on tank car type and PG, where the older DOT-111 tank cars carrying the most flammable liquids will be upgraded first.

Finally, the regulations require high-hazard flammable trains to implement a functioning two-way end-of-train device or a distributed power braking system. High-hazard flammable unit trains (HHFUT) are prohibited from transporting one or more PG1 loaded tank cars unless operated with an electronically controlled pneumatic (ECP) braking system by 1 January 2021. HHFUT transporting one or more PG2 or PG3 loaded tank cars must have an ECP braking system by 1 May 2023.

Although the required retrofits are mostly in line with expectations, the requirement for ECP braking systems was not, according to Barclays Capital ABS analysts. The estimated cost per tank car for ECP brakes ranges from US$5,300 to US$15,000, while there are concerns that adding the new braking systems could further constrain the already-limited shop capacity for retrofits.

Nevertheless, the Barclays analysts view the longer horizon for the implementation of the new standards as positive. They also point to other factors that may mitigate the risk of significant disruption to the cashflows of railcar ABS, such as a trust's ability to re-negotiate lease rates following a required modification and the limited number of legacy DOT-111 tank cars transporting flammable liquids in many securitisations.

"As such, we are more optimistic that railcar securitisations will be able to withstand the costs associated with the new regulatory requirements and have a positive outlook for transactions with strong DSCRs and limited exposure to older tank cars carrying flammable liquids," they conclude.

CS

CMBS

Sharp rise in CMBS early prepays

While US CMBS 2.0 loans have increasingly paid off with yield maintenance or been defeased, the pace has picked up even more since the second half of 2014. This is particularly noticeable for five-year loans, despite the upfront penalty involved.

The low level of rates relative to loan coupons makes it expensive for loans to pay off in this way, but payoffs and defeasance reduce credit risk to deals and can lead to windfall gains for certain tranches. Five-year loan speeds typically seem to be picking up at one or two years before maturity.

Barclays Capital analysts note that most yield maintenance payoffs for post-crisis CMBS have come from the 2010 and 2011 vintages. These have had longer to season and have substantially higher cash-out incentives as the strengthening economy has improved NOIs and underwriting standards have loosened.

Because of the penalties involved in prepaying with yield maintenance or in defeasing a loan, it is expensive to do until a loan is close to maturity and has seasoned. The cost of either option can be over 20% for 5% coupon loans with seven or more years remaining because of how low rates are.

By contrast, yield maintenance costs drop below 10% for loans with two years or less until they are open to prepayment. The loans that most often meet these criteria are five-year loans from 2010 and 2011 and as a result around 60% of all 2010-vintage five-year loans have prepaid or defeased, while more than a quarter of 2011-vintage five-years have prepaid with yield maintenance or defeased.

Of the five-year loans from the 2011 vintage, the analysts find office properties have shown the highest propensity to prepay with yield maintenance or to defease. A third of 2011-vintage five-year office loans have prepaid, as well as 27% of multifamily loans.

Most loans which have prepaid reported debt yields over 10% in the month that they prepaid. This is roughly in line with the overall averages for the 2011 and 2012 vintages, which are at 13.5% and 12.4% respectively, although these data may be lagged if borrowers are paying off loans before improved NOI performance is reported.

"We believe that the potential for early prepays will remain steady for the next couple of years and could even increase if rates rise slightly (which will help cut the cost of the penalty). That said, given the drop in penalties by remaining term, we expect that most of the early prepayments will continue to come from the 2012 and earlier vintages, which faced the tightest underwriting of the current business cycle," note the analysts.

By contrast, later loans will have less incentive to prepay because of more aggressive underwriting and less time for performance to improve. The analysts find there is about US$23bn in loans from the 2010-2013 vintages under yield maintenance or defeasance protection that have less than five years until their open period.

Of the US$23bn, around a quarter is protected by yield maintenance, with the rest protected by defeasance. Should the economy remain strong, the analysts expect a substantial amount of penalty prepays in 2017 and beyond, as 10-year loans from the 2011-12 vintages enter their final two years of protection. Prepays would also become more likely if Treasury rates rise modestly but cap rate spreads to Treasuries continue to compress, which would reduce penalty costs.

Triple-B bonds and B-pieces generally can be expected to benefit from a prepayment or defeasance as subordination is increased. Yield maintenance prepays see the penalty cashflow split between the front cashflow bonds that are paid down and the XA IO tranche, so when this penalty amount is larger than the premium over par for the bond it leads to a net benefit for these bonds.

However, middle and last cashflow triple-A bonds can suffer with these prepays, as they may shorten the bond without passing on any compensation. Defeasance cashflows are spread more broadly and can reduce cash flow volatility for the last cashflow tranche, as a defeased bond has less payoff timing uncertainty.

JL

CMBS

German CMBS value examined

Price rallies for Gagfah's three outstanding multifamily CMBS ended in March as both Gagfah and Deutsche Annington, with which it is merging, had their earnings calls. Those calls caused a re-evaluation of the assumption that the CMBS would prepay quickly, yet despite a change in timelines, prepayments are still expected.

While the timing of early prepayments on Taurus 2013 GMF1, German Residential Funding 2013-1 and German Residential Funding 2013-2 is difficult to predict, Barclays Capital CMBS analysts remain convinced that early prepayment is the most likely outcome. This is because of the low corporate bond spreads open to Deutsche Annington, S&P's positive rating upgrade of the company and its redemption of Florentia 2012-1 soon after it took over that deal's sponsor.

The analysts note that many market participants expected Gagfah's CMBS to be prepaid in this quarter or in 3Q15, potentially triggering sizeable prepayment fees for investors. This expectation was fuelled by reports of a bridge loan facility being syndicated to refinance Gagfah debt, but was then dampened by the earnings calls.

On those calls, each company emphasised the importance of making the most economically rational decision. "Given that prepayment fees of the Gagfah CMBS are substantially lower three years after their respective launch dates, such statements triggered a rebalancing of expectations; they imply that prepayments during 2016 appear more likely now," the analysts say.

While prepayment fees present an obvious cost factor for early redemption, the gains possible from markedly cheaper refinancing transactions could more than offset those costs, the analysts argue. While Deutsche Annington does not have to prepay, the analysts note that the contractual subordination of the company's unsecured bonds will increase after the merger and its ratio of NOI generated by encumbered assets will exceed 50%.

Deutsche Annington is understood to be determined to keep that ratio well under 50%. Refinancing either Taurus 2013 GMF1 or German Residential Funding 2013-1 - but not German Residential Funding 2013-2 - with unsecured debt would be sufficient to achieve this.

The Barcap analysts' base case assumes all three transactions are prepaid before 2017. For Taurus that would be after the third anniversary of its closing date - so later than May 2016 - while the two German Residential Funding deals are more likely to be prepaid early.

Relative value between the three CMBS depends on the timing of potential prepayments. Losses are not expected on any of the bonds.

"Of the three Gagfah German multifamily transactions we think that GRF 2013-2 offers most value on a relative basis. In our view, it could prepay before the lower prepayment fee regime starts, and offers the highest expected return in late prepayment scenarios. Within GRF 2013-2, we think that class C is slightly expensive, however," the analysts say.

They add: "In GRF 2013-1 and TAURS 2013-GMF1 we think that the junior notes are overvalued compared with the transactions' more senior notes. Within GRF 2013-1 we like class B the most, which also looks least overvalued compared with GRF 2013-2 class B."

The analysts believe most Taurus bonds look expensive compared to the German Residential Funding transactions. Within Taurus, they say class A offers the most value.

JL

ABS

Rating agency adds director

Morningstar has hired Peter Danna as director of business development for ABS ratings. He will be responsible for managing all relationships with ABS issuers and investors, and ensuring awareness and understanding of the agency's ABS ratings business and methodologies.

Before joining Morningstar, Danna was svp of risk management for Radian Asset Assurance. He has also worked for Munich Re America, S&P and Arbor National Mortgage.

Structured Finance

Director duo hired

THL Credit Advisors has hired Thomas Lane as md and Brett Hinton as director. Lane will focus on leading the origination, structuring, underwriting and execution of investments in the media and information services sector for the firm's direct lending business. Hinton will focus on new business development across the firm's direct lending and tradable credit platforms.

Prior to THL, Lane was most recently md at Wells Fargo Capital Finance, where he focused on both asset-based and cashflow lending. He was a founding member of Wells Fargo's technology finance division and served as its national underwriting manager. Lane also previously held positions at IBM Credit, CIT, Heller First Capital and Fremont Financial.

Hinton joins THL from Fortress Group, where he was a director that focused on distribution, origination and fund advisory. Previously, Hinton was a senior acquisitions and investment analyst at InterContinental Hotels Group and has also held analyst roles at Genesis Capital and UBS Financial Services.

Structured Finance

Bank executive promoted

Kurt Niemeyer has been appointed national structured credit executive for Merrill Lynch. He was originally a senior structured credit executive for the bank and was later promoted to division structured credit executive, where he was responsible for leading a team of high net-worth lenders serving several regions in the US. Niemeyer is also a current md at Merrill Lynch.

Structured Finance

HC2 launches counter bid

HC2 Holdings has sent a letter to MCG Capital proposing that the two companies immediately engage in discussions regarding a potential merger. HC2 is proposing to acquire 100% of the common stock of MCG in a fully-diluted cash and stock transaction, in which MCG stockholders would receive US$5 per share.

The proposal represents a total equity value of approximately US$185.4m, topping PennantPark Floating Rate Capital's (PFLT) recent US$175m offering (SCI 30 April). HC2's US$5 per share offer also represents a premium of 5.3% from the US$4.75 offered by PFLT.

HC2's offer consists of two options for MCG stockholders. First, HC2 is offering 0.434% of a share of HC2 common stock valued at US$4.77. Second, the firm is offering 0.191% of a share of a newly created class of HC2 cumulative perpetual preferred stock at US$4.77 and US$0.23 in cash.

MCG says it acknowledges receipt of the unsolicited letter from HC2 and that its board of directors, in consultation with its financial and legal advisers, will review the terms of the proposal. However, MCG's board has not changed its recommendation in support of the merger with PFLT and will have no further comment on HC2's proposal until it has completed its review.

Structured Finance

Structured credit team acquired

LMCG Investments has acquired the Serenitas Capital investment team. Serenitas is a five-person team that specialises in mortgage and corporate credit markets, with its master fund trading in non-agency MBS and structured credit products - including CLOs. The team is led by Serenitas cio David Weeks.

Structured Finance

Agency taps research head

Darrell Wheeler has joined S&P as head of research for global structured finance. He arrives from Amherst Securities Group, where he was a CMBS strategist. Prior to this, he was global head of securitised research at Citi. 

Structured Finance

REIT brings in quartet

Annaly Capital Management has beefed up its agency MBS investment team and corporate infrastructure with a number of hirings. The appointments include Ilker Ertas, who joins as md in the firm's agency portfolio team. Ertas arrives from Citi, where he was most recently md in securitised products and head of mortgage derivatives trading.

In addition, Michael Fania and Roman Shimonov join Annaly as vps in the agency portfolio team. Fania was most recently an associate director at MetLife Investments, where he was responsible for trading and portfolio strategy for a non-agency RMBS portfolio. Shimonov joins Annaly from the New York Fed and was previously involved with the day-to-day management and disposition of legacy mortgage securitised products within the bank's Maiden Lane portfolios.

Finally, Steven Campbell has been appointed md, head of credit strategy at Annaly. He was previously md in Fortress Investment Group's strategic capital group and has also held positions at DB Zwirn, GE Capital and Dean Witter Reynolds.

Structured Finance

Global markets division overhauled

SG has launched an asset-backed products business line, created jointly with the global finance division. Jerome Jacques and Hatem Mustapha have been appointed as co-heads of this new venture.

In addition, the bank has made a number of appointments within its global markets division, which remains under the supervision of Daniel Fields. Among the appointments, Danielle Sindzingre heads a broadened fixed income and currencies business line, encompassing both flow and structured fixed income services. Richard Quessette has also been made head of the newly created equities and derivatives business line, with Bruno Benoit as deputy.

Regionally, François Barthelemy remains head of global markets in the Americas, with Peter McGahan appointed as deputy. Franck Drouet remains head of global markets in Asia Pacific, with Yann Garnier appointed as deputy.

David Escoffier will be in charge of supervising the sales teams, while Marc Saffon is appointed head of engineering. Jean-François Gregoire remains head of trading, with Arie Boleslawski and Guillaume Buathier as deputies, while Patrick Legland remains head of global research.

Finally, Laure Lemaignen replaces Christophe Lattuada as head of strategy and corporate development for global banking and investor solutions. She will report to head of global banking and investor solutions Didier Valet and his deputy Christophe Mianné.

Structured Finance

Agency banks credit officer

Kroll Bond Rating Agency (KBRA) has appointed Ira Powell as chief credit officer. He will report to Jim Nadler, president and coo of KBRA.

Powell joins from Goldman Sachs, where he was vp and head of money market origination within the investment banking division. Prior to Goldman Sachs, he was vp at Merrill Lynch.

Powell has also held roles at Clifford Chance and Fitch, where he was a founding member of the latter's ABCP group.

Structured Finance

Transport pro to head new team

Bill Bowers has joined Winston & Strawn as chair of transportation structured finance. In this newly created team, he will represent underwriters, placement agents, issuers, lessors, lenders and liquidity providers in a variety of structured finance and securitisation transactions.

The team will focus on transactions on a full range of transportation assets, including aircraft, aircraft engines, ships, railroad rolling stock and containers. In addition, it will include the restructuring, transfer and repackaging of such financings.

Prior to Winston & Strawn, Bowers served as general counsel to GPA Capital and associate general counsel to GE Capital Aviation Services.

Structured Finance

Structured credit platform bolstered

Fifth Street Asset Management has hired David Heilbrunn as md and a member of its management committee. He will be responsible for expanding the firm's growing structured credit products platform, developing its institutional client relationships and optimising its various financing arrangements.

Heilbrunn arrives from The Carlyle Group, where he was md. Prior to that, he was a senior md and head of corporate strategy at Churchill Financial. Heilbrunn has also held senior roles at Bear Stearns and JPMorgan.

CDO

CDO manager set to change

Reservoir Funding plans to remove its incumbent collateral manager, Cutwater Asset Management, at the direction of the holders of a majority of its controlling class. Cairn Capital North America has been chosen as the ABS CDO's successor manager.

Fitch says the appointment is due to be effective on or about 22 May, pending the satisfaction of certain requirements. 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.

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

CLOs

Key persons replaced

Blackstone/GSO Debt Funds Europe has confirmed a couple of key-person replacements with respect to Habourmaster CLO 9. The firm says that Debra Anderson and Mark Moffat ceased to be involved in the daily and managerial activities of the collateral manager on 31 December 2012 and 15 April 2015 respectively.

Pursuant to the collateral management agreement, if any two key persons cease to be involved in the daily and/or managerial activities of the collateral manager or its affiliates, the manager must designate an existing employee as a replacement or hire a suitably qualified professional within 60 calendar days. Such a replacement must be acceptable to the trustee and the holders of a majority by aggregate principal amount of the class F notes outstanding and in respect of whom a rating agency affirmation is received.

Blackstone/GSO intends to appoint md Alex Leonard as a replacement for Anderson and md Fiona O'Connor as a replacement for Moffat. The firm says it considers each person to be a suitably qualified professional with the comparable experience of Anderson and Moffat respectively.

Insurance-linked securities

Catlin acquisition completed

XL Group has completed its acquisition of Catlin Group, following both parties' previous agreement to form a combined business (SCI 12 January). The combined company will be marketed as XL Catlin, with a global advertising campaign and new public website to be launched in due course.

The closing of the transaction follows the receipt of all necessary regulatory approvals, Catlin shareholder approval and sanctioning of the scheme of arrangement by the Supreme Court of Bermuda. The name of the parent company will remain XL Group.

Mike McGavick will continue as ceo, while Catlin Group founder and ceo Stephen Catlin joins XL as executive deputy chairman and a serving member on its board of directors. Additionally, previous ceo of insurance operations at XL Greg Hendrick is now ceo of reinsurance, while Paul Brand, formerly chief underwriting officer of Catlin, is now chief underwriting officer for insurance and serves as chair of the insurance leadership team. Kelly Lyles, previously XL's head of professional lines, also stays on as chief regional officer of insurance and deputy chair of the insurance leadership team.

ABS

Project Fi to have mixed impact

Google's entry into wireless services with its Project Fi will have positive and negative credit effects on wireless tower ABS, according to Moody's. While efforts by Google to expand its usage-based Wi-Fi service throughout the US will increase mobile data traffic on wireless towers, it could also pave the way for low-cost carriers to enter the space, increasing competition and lowering wireless service costs.

"The lower price point of the Project Fi service compared with the single-line account pricing offered by major carriers will help increase mobile data traffic in North America, a credit positive for securitisations backed by revenues generated from operating the towers," says Jayesh Joseph, a Moody's avp and analyst.

However, the entry of low-cost carriers - such as cable operators and Wi-Fi first carriers - may have credit-negative implications on cell tower securitisations. "If increased competition leads to price declines among new carriers, it would decrease their profitability and cause their credit quality to decline," says Luisa de Gaetano, team leader of Moody's commercial and esoteric group. "Such a scenario would offset the benefits of rising mobile data traffic."

Project Fi will initially use Sprint and T-Mobile's existing cellular network to help it gain expertise in the wireless services market and eliminate the need to purchase spectrum and build or maintain wireless towers.

ABS

Record solar loan facility secured

SolarCity has closed a US$500m financing aggregation facility with Bank of America Merrill Lynch, Credit Suisse and Deutsche Bank, which is expected to be the largest of its kind for distributed generation solar projects. Once deployed, the facility will finance more than 500 MW of solar power systems for homeowners, businesses and government organisations.

The facility will be secured by a portfolio of high quality, long-term customer systems and contracts. The revolving loan will permit fully developed systems to be continuously refinanced through ongoing securitisations or other capital markets solutions. The financing could allow SolarCity to fund customer installations at an earlier stage in their development cycle, enabling a faster return of working capital to support growth in the company's forecasted installations.

ABS

Marketplace lending risks surveyed

Investors in the nascent marketplace lending sector are exposed to certain increased risks than if they were investing in securitisations from traditional lenders, says Moody's. However, mitigating these risks is the large amount of data that marketplace lenders provide to investors, which differentiates them from their traditional counterparts.

The risks particular to marketplace lending ABS include the securitisations' limited performance history, as most marketplace lenders have only operated for a couple of years. Although some companies back-test their business models in comparison with other consumer ABS sectors, there are limits to comparing different asset classes in past economic scenarios to determine future performance.

In addition, marketplace lenders' operational frameworks for collections, loan servicing, customer service and cash management are less developed than those of traditional lenders. "The operational framework is the backbone of securitisation because its goal is to provide for uninterrupted cashflow payment to investors, even if the originator fails," says William Black, a Moody's md and team leader of the agency's ABS group. "If these lenders do not develop their operational structure at the same rate as their rapid growth, there is increased risk that the securitisation would not survive an originator failure."

Thus far, marketplace lenders have not sponsored their own securitisations and, as such, have not retained a direct economic interest in the securitisation's performance. Moody's believes this lack of skin in the game poses increased performance risk for investors.

Further, because marketplace lenders are small and the sector relatively new, they have not received the same regulatory scrutiny as larger, more traditional lenders. However, this could change as the lenders and the sector grow in size. One risk is that the current use of third-party banks to originate loans could come under scrutiny, which could call into question whether the bank is the true lender and, in the worst case, render the loan unenforceable.

On the other hand, Moody's notes that marketplace lenders have superior data transparency compared with traditional lenders. "They amass, organise and share this data with retail and institutional investors alike, whereas traditional lenders are typically more guarded with their data," adds Black.

Structured Finance

ECAI consultation underway

The EBA has launched a consultation regarding draft implementing technical standards (ITS) on the mapping of external credit assessment institutions' (ECAIs) credit assessments for securitisation positions. The ITS will become part of the Single Rulebook in banking aimed at enhancing regulatory harmonisation across the EU and will allow the credit ratings of all registered credit rating agencies to be used for the purposes of calculating institutions' capital requirements.

The draft ITS specify the mapping between credit ratings and credit quality steps that shall determine the allocation of appropriate risk weights to credit ratings issued by ECAIs on securitisations where the standardised approach (SA) or the internal ratings based (IRB) approach for securitisations are used. In the short term, the EBA proposes to maintain the current mapping in place for all ECAIs, but it is considering whether to develop a securitisation-specific systematic mapping methodology.

This methodology would be fully based on the historical performance of securitisation ratings, as it is the case for the ECAI mapping on non-securitisation exposures under the SA. However, the EBA deems that some caution is needed for the time being due to a number of factors, including the representativeness of the data used and the ongoing review of the regulatory framework for capital requirements on securitisations at both the international and EU levels.

The draft ITS also include a proposal that the overall approach to the mapping of securitisation ratings be reviewed by 2018 and that the performance of issued securitisation ratings be constantly monitored in order to assess, at any time, the appropriateness of a specific mapping table.

The consultation will run until 7 August, with a public hearing taking place at the EBA premises on 11 June.

Structured Finance

SPV end-user exception clarified

The US CFTC has published a letter clarifying that a securitisation SPV that is wholly-owned by, and consolidated with, an entity described in Section 2(h)(7)(C)(iii) of the Commodity Exchange Act (CEA) qualifies as a captive finance company. Consequently, the SPV is eligible to elect the end-user exception from a clearing requirement determination issued by the Commission under Section 2(h) of the CEA. The move is in response to letters that the Commission received from Ford Motor Credit Company, American Honda Finance Corporation, CNH Industrial Capital, General Motors Financial Company, Mercedes-Benz Financial Services, Mitsubishi Motors Credit of America, Nissan Motor Acceptance Corporation, Toyota Financial Services and VW Credit.

Structured Finance

Greek notes downgraded

Moody's has downgraded 18 notes and affirmed one note in eight Greek structured finance transactions. The action follows the agency's lowering of Greece's country ceiling to B3 from Ba3 and the downgrading of its sovereign rating to Caa2 from Caa1. The maximum achievable rating for outstanding Greek structured finance securities is now B3, down from Ba3 previously.

The following tranches are affected by the agency's rating actions: €1.62bn of EPIHIRO class A notes; €1.14bn of Estia Mortgage Finance II class As; €897.7m of class As, €23.8m of class Bs and €28.5m of class Cs in Grifonas Finance No. 1; €553.8m of class As, €28.2m of class Bs and €18m of class Cs in Grifonas Finance No. 1; €690m of class As, €37.5m of class Bs and €22.5m of class Cs in Themeleion II Mortgage Finance; €900m in class As, €20m in class Bs, €40m in class Cs and €40m in class Ms in Themeleion III Mortgage Finance; €1.35bn in class As, €155m in class Bs and €46.6m in class Cs in Themeleion IV Mortgage Finance; and €5bn of Titlos class As.

Moody's says the bond ceilings essentially reflect the risk of Greece leaving the euro area and the impact of the resulting currency redenomination on holders of Greek debt. The agency acknowledges that default need not entail exit, which would ultimately reflect a political decision. However, the lower ceiling reflects Moody's view that the probability of the one leading to the other has risen.

Concurrently, Moody's lowering of the local- and foreign-currency bank deposit ceilings reflect the increase in the risk of the government placing restrictions on accessing foreign- and local-currency deposits. The decision to lower the deposit ceilings to one notch below the level of the government bond rating reflects the agency's view that the risk of the government imposing deposit freezes or similar capital restrictions in order to contain deposit outflows and preserve financial stability is now slightly higher than the risk of the government defaulting on its own debt.

Structured Finance

Credit assessment practices proposed

IOSCO has published a consultation report on alternatives to the use of credit ratings to assess creditworthiness. The report proposes 13 'sound practices' for large market intermediary firms to consider in the implementation of their internal credit assessment policies and procedures.

IOSCO believes that identifying sound practices should help reduce the potential overreliance of large intermediaries on credit rating agencies. In turn, this reduction could help increase investor protection, while contributing to market integrity and financial stability.

The practices outlined by IOSCO include the recommendation to establish an independent credit assessment function that is clearly separated from other business units. This could involve the development of appropriate policies and procedures to ensure that decision-making is not unduly affected by operations from other areas of the firm.

In addition, the proposals suggest the involvement of senior management in order to ensure the successful implementation of a robust credit assessment process, including promotion of a risk-sensitive culture throughout the organisation. This would coincide with establishing a coherent oversight structure to ensure that the credit assessment process is properly implemented and adhered to.

Among the other proposals, IOSCO stresses the need to invest in staff to develop a robust internal credit assessment management system and avoid exposure to particular credit risks whenever the firm does not have the internal capability to independently and adequately assess the exposure. The proposals further recommend regular internal audits and continuous updates of firms' credit risk assessments.

IOSCO invites comments on the proposals by 8 July.

CLOs

CLOs post positive returns

The total amount of CLOs paid down in JPMorgan's CLO index (CLOIE) since the March rebalance through end-April was US$4.39bn in par outstanding, split between US$2.26bn and US$2.12bn of pre-crisis and post-crisis CLOs. The post-crisis CLOIE added US$12.37bn across 156 tranches from 26 deals at the April rebalance.

CLOIE experienced positive returns across all tranches last month, as well as spread tightening in eight of the 11 sub-indices. Double-B and single-A tranches were the top performers, tightening by 10bp and 11bp respectively, resulting in returns of 1.09% and 0.73%.

Post-crisis CLO triple-As tightened by 3bp in April and by 15bp year-to-date, while tracking a 3.2% return for 2015, compared to JPMorgan's 2015 return forecast of 2.25%. However, post-crisis single-B tranches continues to underperform, widening for the second consecutive month by 1bp and returning 2.23%.

Pre-crisis CLO indices experienced widening in two out of five tranches. Triple-As widened by 4bp and returned a barely positive 0.2% in April, the lowest monthly return for the tranche since January, when it posted a 0.15% return.

CLOs

SME CLO approach confirmed

Scope has finalised its methodology for rating SME CLOs. The agency's original proposals have not been modified following its earlier call for market comments (SCI 12 March).

Among the features of Scope's methodology is an incorporation of wider factors in assessing its rating cap that go beyond the credit assessment of a sovereign. These factors include macroeconomic development, institutional meltdown and convertibility risk in the monetary and political context where a transaction originates. Also included in the methodology is the consideration of post-crisis counterparty risk, bottom-up analysis on different asset types, portfolios or structural characteristics and detailed originator analysis.

CLOs

CLO risk retention approaches vary

US CLO managers will continue to actively issue CLOs while meeting upcoming risk retention requirements through a wide range of approaches, according to a Fitch risk retention survey. In addition to multiple approaches being considered, half of the CLO managers surveyed stated that they plan to vary their approach on a deal-by-deal basis.

Most of the polled managers are considering meeting risk retention requirements through horizontal and/or vertical interests in future CLOs - 42% and 35% respectively. Other approaches are less common, with only 8% of managers considering the option of taking L-shaped interests and no managers looking into the possibility of using eligible horizontal cash reserve accounts.

Regarding the type of entity that will be used to meet risk retention requirements, 29% of respondents stated that they may vary their approach on a deal-by-deal basis. Managers appear to be considering all the possible solutions, including using a majority-owned affiliate of the manager (41%), the existing manager (29%) or a newly-created manager (22%).

"Despite the challenges associated with meeting risk retention requirements, all CLO managers surveyed intend to issue new deals over the next two years," says Fitch senior director Gioia Dominedo. "In fact, managers are not only considering the upcoming US risk retention rules, but are also often addressing existing European risk retention requirements in their deals."

Of the managers polled, 15% responded that they are structuring all of their new deals to comply with European regulation, with an additional 44% of managers sometimes doing so.

CMBS

Sharp increase in CMBS pay-offs

Trepp reports that the percentage of US CMBS loans paying off on their balloon date increased sharply in April. The latest reading of 80% is more than 15 points above the March rate, resulting in the highest reading since the 81.3% pay-off total in November 2013. The April rate of 80% is also well above the 12-month moving average of 66.7%.

By loan count as opposed to balance, 71.8% of loans paid off in April. On this basis, the pay-off rate was up by more than 10 points from March's level of 61.2%. The 12-month rolling average by loan count is now 70%.

CMBS

CMBS loss severities declining

US CMBS loss severities are declining year-over year, with a sizable decline to 44.8% in 2014 from 51.2% in 2013, says Fitch. However, total losses are on the rise, due in part to fewer modifications by special servicers in 2014.

"CMBS loans were modified and returned to the master servicer earlier on in the recovery cycle, which delayed realised losses," says Fitch senior director Karen Trebach. "Now that special servicers are biased to resolve the loans rather than modify, total CMBS losses are rising rather than being postponed."

In 2014, US$10bn of loans were disposed of for a loss greater than 1.5% compared with US$7.7bn in 2013, representing an increase of 30%. However, total resolved loans in 2014 by number and dollar amount fell slightly - by 5.2% and 3.7% respectively - with most of those resolutions coming from the 2005-2007 peak vintages. Fitch expects 2015 resolutions to remain fairly constant and average loss severities to be stable relative to those seen in 2014.

For property type, office led loan resolutions last year, with nearly US$5bn resolved in 2014 compared with US$2.5bn in 2013. The average loss severity for office loans dropped to 45.3% from 48.5% and included two large office loan resolutions that each resulted in over US$200m in losses. Of the major property types, retail once again had the highest average loss severity at 52.1%, but it improved significantly from 2013 when it was 62.1%.

CMBS

Delinquency rate inches down

Trepp's US CMBS delinquency rate inched lower in April, increasing the number of months during which it has fallen in the last two years to 21. The delinquency rate now stands at 5.57%, down by 1bp from February and March, and 87bp lower than the level a year ago.

Last month, US$1.35bn in loans became newly delinquent, which put 26bp of upward pressure on the delinquency rate. Over US$700m in loans were cured last month, which helped push delinquencies lower by 14bp.

CMBS loans that were previously delinquent but paid off either at par or with a loss totalled almost US$600m last month. Removing these previously distressed assets from the numerator of the delinquency calculation helped move the rate down by 11bp. Finally, almost US$1.9bn in loans were defeased in April, not including loans from agency deals.

CMBS

Ty Warner loan eyed

The US$96.4m Ty Warner Hotels & Resorts Portfolio, securitised in MSC 2012-C4, has become the largest CMBS 2.0 loan to transfer to special servicing to date. Reported as being due to imminent non-monetary default, the transfer appears to be related to the troubles of owner Ty Warner, who pled guilty to felony tax evasion in 2014.

Barclays Capital CMBS analysts note that two of the properties in the portfolio - the Four Seasons Biltmore and the San Ysidro Ranch - are in California, which prohibits felons from holding a liquor license. The third property - Las Ventanas al Paraiso - incurred major hurricane damage last year from Hurricane Odile (see SCI's CMBS loan events database), which resulted in the loan being watchlisted. The hotel is set to re-open in June after repairs.

Special servicer Midland Loan Services states that the loan is performing as agreed, with no payment default expected. Further, Kroll Bond Rating Agency reports that the special servicer is working to facilitate the transfer of the liquor licenses to a third-party operator, with all income passing through to the collateral's property operations. While the third-party operator's fee is expected to be nominal, the exact amount is not known at this time and the potential impact on the portfolio's cashflows has yet to be determined.

As of the trailing twelve-month period ending November 2014, the hotel portfolio achieved RevPAR of US$753 based on average occupancy of 75.8% and an ADR of US$993. DSC as of the trailing twelve-month period ending September 2014 stood at 3.73x.

Given the strong underlying property performance, the Barclays analysts do not expect the loan to be at risk of principal losses, despite the liquor license and hurricane damage issues. However, the special servicing transfer will result in an ongoing special servicing fee equal to 0.25% per annum of the loan's outstanding balance. In addition, if the default is resolved and the loan returned to the master servicer, a 1% workout fee will be charged to the trust (capped at US$1m).

The Ty Warner Portfolio is the second largest loan in MSC 2012-C4 CMBS and currently represents 9.1% of the transaction's outstanding principal balance. The deal is facing additional credit issues from the US$19.6m Independence Place - Fort Campbell military housing loan that is in REO.

NPLs

NPL pools up for bid

The US Department of Housing and Urban Development has announced its first NPL sale under the Distressed Asset Stabilization Program for 2015 (SFLS 2015-1). Freddie Mac also announced its next standard pool NPL sale, scheduled for 20 May.

HUD's latest sale consists of two portfolios: the first comprising geographically diversified NPLs (dubbed national pools), to be auctioned on 24 June; and the second comprising regionally concentrated NPLs (NSO pools), to be auctioned on 15 July. One of the NSO pools - in the Detroit area - will only be offered to non-profit bidders or units of local government.

Meanwhile, Freddie Mac's latest sale consists of US$233m geographically diversified Ocwen-serviced NPLs. This is in addition to a US$35m extended timeline pool concentrated in Miami-Dade county, which was put up for bid previously.

Risk Management

Non-dealer reporting agreement launched

ISDA's 2015 multilateral non-dealer Canadian reporting party agreement is open for adherence. The agreement has been published to facilitate single-sided reporting for non-dealer trades that involve a local Canadian counterparty.

Under rules in place in Ontario, Manitoba and Québec, transactions between non-dealers are required to be reported from 30 June. Parties must adhere to the agreement by 16 June in order to meet this 30 June start date.

A corresponding agreement for transactions between dealers, the ISDA 2014 multilateral Canadian reporting party agreement, was published in September 2014. Both documents are designed to be extended to incorporate derivatives transaction reporting requirements that may be issued by other Canadian regulators.

Risk Management

UTI prefix service launched

ISDA has launched a service that enables counterparties to obtain a unique trade identifier (UTI) prefix in order to create UTIs for the reporting of derivatives trades. UTIPrefix.org provides derivatives users with the ability to apply a standard methodology to generate a 10-character UTI prefix using their 20-character legal entity identifier (LEI) code.

A UTI prefix is designed to be distinct to the party generating the UTI and, along with a transaction identifier, ensures each reportable transaction is unique. UTIPrefix.org is available to ISDA members and non-members alike at no cost. WM Datenservice provides the global LEI data for the website.

RMBS

Stop-advance provision introduced

Redwood Trust's Sequoia Mortgage Trust 2015-2 has become the first US prime RMBS to limit the time over which a servicer can advance principal and interest on delinquent loans. Moody's says that such a stop-advance feature benefits senior bonds by reducing the risk of loan losses associated with servicers' interest advances on long-delinquent loans.

The feature prevents a servicer from advancing principal and interest on loans delinquent by 120 days or more, preserving principal recoveries for senior bonds in the event that the servicer must liquidate the property backing the loan. In prior RMBS transactions, the servicer is only required to stop advancing once it deems that further advances on the loan would be unrecoverable from eventual property sale proceeds.

Moody's explains that a limited advancing period stops junior bonds from continuing to receive interest payments related to delinquent loans. This limit can be credit positive for senior bonds because the servicer can recoup interest advances from the proceeds of sales of the properties backing the defaulted loans that it advanced upon - proceeds which would otherwise go towards repaying senior bond principal. The more interest that the servicer advances, the less net recovery proceeds will be available to repay the senior bonds.

Further, a shorter advancing period could decrease the risk of cashflow disruptions in the event of a servicing transfer, because the acquiring servicer would have fewer advances to recoup. Acquiring servicers can recoup previously made advances from loan collections if they deem those advances unrecoverable, and those recoupments can lead to shortfalls on the bonds because those collections would otherwise have gone to cover interest payments.

There are structural nuances associated with the feature, however, that can lead to senior bond interest shortfalls if there are large amounts of stop-advance loans. The shortfalls can result from the reduction in the bonds' monthly interest entitlement by the amount of interest that accrues on the stop-advance loans, without an effective mechanism to reimburse the accrued interest.

However, Moody's notes that an advancing restriction similar to the one in Redwood's latest transaction would avoid this risk if the junior-most bonds' principal balances absorb any monthly interest shortfalls before the more senior bonds lose interest payments. The risk could also be avoided if the transaction allocates liquidation proceeds to cover interest shortfalls before applying them elsewhere.

RMBS

RMBS settlements progressing

The US$8.5bn Countrywide RMBS rep and warranty settlement was last week fully approved, with a modified judgement entered into the New York Supreme Court. Separately, a letter submitted by the trustee's counsel in Citi's proposed US$1.125bn settlement has confirmed that no objections were filed in that case.

Following the Countrywide judgement, trustee-appointed experts will now calculate the allocable shares for each deal/group within 90 days and Bank of America should make the payment to each covered trust within 120 days, as stipulated in the settlement agreement. Barclays Capital RMBS analysts note that this scenario is based on the assumption that the trustee (Bank of New York Mellon) has the required IRS approvals. But, even if the approval process has not yet started, they believe that overall it should not take more than a few months for trusts to finally receive the settlement pay-outs.

Meanwhile, those who wished to be heard in opposition to the Citi Settlement Agreement were required to submit their objections by 17 April. Given the absence of objectors, the court could reach a summary determination in favour of the trustees and approve the settlement quite soon, according to the Barclays analysts.

"The next hearing on this case is scheduled for 19 May and we see a high likelihood that the trusts could receive the settlement-related pay-outs this year," they note.