Contents

Secondary markets

Slow return for European secondary

European securitisation secondary markets look set to return to life this week, but progress is slow.

Wider market positivity on the back of the UK election and US non-farm payrolls has improved the tone in European ABS/MBS secondary markets. However, spreads remain broadly unchanged for now as activity is only slowly picking up again.

Many buy-side participants are still sitting on the sidelines waiting for broader market volatility to dissipate further. Meanwhile, Friday's non-conforming RMBS BWIC covered in line with expectations, but only two of the six bonds actually traded. At the same time, the CLO secondary market continues to thrive with mezz paper still executing at increasingly tight levels.

There is currently only one BWIC on today's schedule, though tomorrow's calendar is already building strongly. Today's list involves €19.75m across five lines of CMBS - DECO 9-E3X C, LEMES 2006-1 E, TAURS 2007-1 B, TAURS 2007-1 C and TAURS 3 B.

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

Secondary markets

US CLOs pick up

Activity in the US CLO secondary market looks to be picking up.

"Activity picked up at the end of last week and looks to be doing the same this week," says one trader. "We're seeing paper from all parts of the structure in for the bid and given the recent lack of supply most BWICs are likely to be well-received."

Despite the low volumes last week prices remained strong, the trader reports. "Given the lack of BWIC activity for most of last week there wasn't much in the way of observable pricing but my sense is that broadly spreads came in a little - we saw some double-Bs settle in the low 600s for example."

There are already some notable price indicators on this week's calendar, according to the trader. "There are some big blocks of triple-As due, which looks to be hedge funds unwinding some positions and indicates stability across the front part of the capital stack. At the same time, there is a controlling stake in MAGNE 2014-8A SUB on Wednesday and it will be very interesting to see how that trades given there has been softness in new equity lately."

There has also been some softness in the Trups sector. "We're seeing a drop in pricing pretty much across the board in Trups CDOs at the moment, though there's not a lot of trading activity. So the drop is very much in theory," says the trader.

There are currently three US CLO BWICs circulating for trade today. First up are two lists at 10:30 New York time - one of 2.0 double-Bs and the other mixed vintage triple-As.

The seven line $30.8m double-B list comprises: ACASC 2014-2A E, BTNY 2015-1A E, FIG 2014-1A E, JTWN 2015-6A D, MDPK 2014-15A D, VENTR 2014-19A E and WINDR 2013-2A E. Three of the bonds have covered on PriceABS in the last three months - ACASC 2014-2A E at M90S on 19 March; VENTR 2014-19A E at 89.71 on 24 February; and WINDR 2013-2A E at 89.27 on 12 March.

The triple-A list accounts for $147.955m original face across six line items and consists of: ALM 2012-5A A1R, AVLN4 2012-1AR AR, CGMS 2012-1AR AR, INGIM 2012-1RA A1R, LANDM 2007-9A A1 and ROSED I-A B. Again, three of the bonds have covered on PriceABS in the past three months, last doing so as follows: AVLN4 2012-1AR AR at 99.92 on 26 March; INGIM 2012-1RA A1R at 99.991 on 26 March; and LANDM 2007-9A A1 at 99.13 on 23 April.

Then, at 14:00 are a further two lines of 2.0 triple-A - $20m AVERY 2014-5A A and $20m OCTLF 2014-1A A1. Neither bond has appeared on PriceABS before.

Secondary markets

Euro ABS/MBS holds steady

European ABS/MBS secondary spreads are holding steady despite broader market weakness.

As expected, volumes on- and off-BWIC picked up yesterday and look set to continue to do so today. Market tone is improving and secondary spreads are holding steady initially unfazed this morning by the overnight sell-off in rates.

The focus of activity still surrounds autos, UK non-conforming and UK and Dutch prime. Spanish and Portuguese names continue to lag in terms of buying interest, but remain range-bound for now.

There are four European ABS/MBS BWICs on the schedule so far today offering a range of deal types and jurisdictions. The highlight is perhaps the 133.3m original face mixed RMBS list due at 12:00 London time today.

The 11 line auction comprises: BPMO 2007-1 A2, BPMO 2007-2 A2, CAPIM 2007-1 A1, ERF 5 B, HIPOT 5 A2, LUSI 3 A, LUSI 6 A, RMAC 2005-NS1X M1, RMAC 2005-NS2X M1C, TDAC 9 A1 and TDAC 9 A2. Three of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: ERF 5 B at 79A on 6 February; LUSI 3 A at 95.5 on 23 February; and RMAC 2005-NS1X M1 at 91.56 on 16 April.

Secondary markets

Euro CLO appetite undiminished

The European CLO secondary market is continuing to see strong demand despite broader market volatility and increasing prices.

"Even with what's going on in the sovereign markets we haven't seen appetite go away," says one trader. "The position remains the same - severe lack of assets and a lot of buyers."

The trader continues: "Demand for 2.0 debt has increased if anything - I'd expected it to become suppressed as spreads tightened, but it seems to have gained momentum and even triple-As are getting interest now. In 1.0 single-As and above are still unloved, but demand remains strong in triple- and double-Bs."

However, overall activity has not reached the heights of April the trader says. "Flow volume is still down in May compared to April, but it's still well an above average month."

There are three European CLO BWICs today. First up at 13:30 London time was a €300k line of HARBM 9X A1T as part of a larger mixed RMBS list. At 14:30 are three line items totalling €8.25m - CGMSE 2014-1X D, CGMSE 2015-1X D and GLSPE 2007-1X D. Last, at 15:00 is €55.5m of original face across three senior tranches - ALPST 2X A2, HARBM 7X A2 and HARBM 8X A2.

Of all of the above bonds only HARBM 7X A2 has covered on PriceABS in the past three months, last doing so at 98.96 on 11 March.

Secondary markets

US CLOs see more supply

The US CLO secondary market is at last seeing more serious sellers return to market.

"It's busier today but not a busy Tuesday by any means," says one trader. "We're seeing about $490m current face in for the bid today with good distribution across the capital stack."

Overall, the trader adds: "There's a little bit more serious selling than we've seen in a while. There are still relatively small clips going through from separate managed accounts, but there's some real and hedge fund money in there too - it looks like some of those firms bought in primary and are now coming back to secondary to capture the spread differential."

The trader suggests that the markets renewed strong tone will continue and secondary levels will broadly follow primary tighter. "CLOs continue to remain insulated from macro volatility and to be demand driven, so I expect more of the same provided there are no vol surprises and primary stays in the same issuance pattern."

In particular, the trader adds: "Triple-Bs should outperform having been shielded from the wider CLO rally because of energy exposure, but now that sector is improving they're reaping the benefits. At the same time, I like Double-Bs as they look like the next leg up in secondary - the loan arb here is very attractive."

Among today's BWICs the highlight is perhaps the list containing two large blocks of triple-As mentioned yesterday. Due at 11:30 New York time the three item auction consists of $140m CECLO 2013-17A A1, $120m GALXY 2013-15A A and $42.75m of double-A WSTC 2012-1A A2.

Two of the bonds have covered on PriceABS in the past three months, last doing so as follows: CECLO 2013-17A A1 at 99.61 on 30 April; and GALXY 2013-15A A at 99.11 on 12 March.

Secondary markets

Euro secondary liquidity on the rise

European securitisation secondary market liquidity is continuing its rise this week.

"There's more activity this week than last overall," says one trader. "With more and more trades getting done off-BWIC."

While market tone remains broadly positive, some areas are softer than others. "There is some weakness in peripherals," notes the trader. "That's particularly true in Portuguese names, where, for example, we saw the LUSI bonds on BWIC yesterday covering a point or so lower than a few weeks back."

However, the trader adds: "Spanish and Italian names are holding firm. Equally, core RMBS and CMBS remain unmoved."

Meanwhile, CLOs continue to see strong demand. Most of the names on BWIC yesterday traded up once again.

Today's BWIC schedule sees six lists circulating for trade so far. Of those, the ABS/MBS highlight is two lines of Italian RMBS due at 14:00 London time - €34.8m BERCR 8 A and €40m CLAAB 2011-1 A. The bonds last covered on PriceABS at 98.8 on 29 April and 99.16 on 5 May, respectively.

The most eye-catching list in the CLO space is an eight line list of 1.0 mezz due at 14:30. The €20.74m list comprises: AXIUS 2007-1X D, DALRA 2-X D, DRYD 2006-14EX E, HARBM 5X B1E, HARBM 5X B1F, MARQ 2006-1X C2, MARQ 2006-1X D2 and VALLA 2X C.

Only DALRA 2-X D has covered with a price on PriceABS in the last three months, doing so at 98.06 on 27 February.

Secondary markets

US CLOs back to life

The spike in activity in the US CLO secondary market over the past few days is showing ever more signs of being sustainable. At least for as long as concerns over new issuance persist.

"Everything has come back to life - secondary is the busiest it's been for more than a month," says one trader. "It was very busy yesterday and is again today."

The trader continues: "There is some movement in triple-As, but most of the action is further down the capital stack. We're seeing very firm levels particularly in triple- and, especially, double-Bs though mezz more broadly is in great demand."

The trader suggests the upswing in activity is being driven by investor concerns over new issue supply. "There appears to be a belief that managers are showing deals that they won't be able to ramp up because of the scarcity of assets and high loan price levels. Sellers are seeing that bid and taking advantage of it."

The US CLO BWIC calendar today sees less headline volume than yesterday but there are already seven lists circulating and, unsurprisingly, primarily revolving around mezz. The largest of the auctions involves ten lines of 2.0 double- and triple-Bs at 10:30 New York time.

The $42.75m list comprises: ACIS 2014-3A E, ARES 2013-2X D, AVERY 2013-3A E, BATLN 2014-7A D, CIFC 2015-1A D, CRNPT 2013-2A B1L, FINNS 2012-1A C, LCM 18A D, SRANC 2013-1A D and SUDSM 2013-1A E. Only AVERY 2013-3A E has covered on PriceABS in the past three months, last doing so at 90 on 17 March.

Secondary markets

Euro ABS/MBS ebbs

The recent flow of secondary market activity is likely to ebb away today because of the Ascension Day holiday.

"Secondary has picked up over the past couple of days and a couple of primary deals have priced at the tight end of guidance, so there's still a good amount of demand for assets," says one trader. "However, I expect it to be very quiet today because of the holiday across most of Europe."

What trading there is today is likely to follow a similar patter to recent days, where spreads for the most part have remained range-bound. "We're mainly seeing activity, including some real money buying, around prime assets, but not necessarily in large size," says the trader. "Italian paper is also better bid off the back of the bonds on BWIC yesterday. At the same time, it's still difficult to trade Spanish and Portuguese names."

There are currently only two ABS/MBS BWICs due today so far. First, at 13:30 London time is a 31 line auction of odd lots across a wide mix of assets and jurisdictions.

20 of the bonds on the 38.837m original face list have traded on PriceABS in the past three months. Last doing so as follows: ALBA 2005-1 B at 92.15 on 12 March; BCJAF 7 B at 90 on 18 March; CORDR 1 C at 96.31 on 12 March; DECO 7-E2X B at 99.12 on 1 April; GRANM 2006-1X C2 at 99.23 on 22 April; GRF 2013-1 C at 103.5 on 16 April; ITALF 2007-1 A at 98 on 12 March; LEASI 2 C at 97 on 18 March; PARGN 10X C1A at 93.85 on 22 April; PARGN 9X CA at 93.25 on 24 March; PARGN 9X CB at 92.75 on 22 April; POPYM 2006-1 C at 95.13 on 18 March; PRS 2006-1X B1C at 94 on 12 March; PRS 2006-1X C1C at 90 on 18 March; RIVOL 2006-1 B at 93.375 on 12 March; RMAC 2004-NS1X A3 at 93.133 on 20 February; TAURS 2013-GMF1 B at 102 on 22 April; TAURS 2013-GMF1 C at 102.85 on 16 April; and TMAN 5 A at 98.15 on 16 March.

Then, at 15:00 are two lines of UK non-conforming RMBS - £3m EHMU 2007-2 A3 and £5m MANSD 2006-1X M1. Only EHMU 2007-2 A3 has covered on PriceABS in the last three months, doing so at LM89 on 23 March.

Secondary markets

Euro CLOs keep momentum

The European CLO secondary market is maintaining its positive momentum in the 2.0 space, though that could change.

"2.0 paper continues to trade well on- and off-BWIC with double- and triple-Bs continuing to be the most active part of the stack," says one trader. "There's still strong demand for CLO paper more broadly as shown by another new deal pricing yesterday once again oversubscribed and tighter than its predecessor."

However, the trader warns: "While we haven't quite reached a ceiling in secondary, there could be something of a slowdown from recent very active levels. A result of the rally is that a lot of 2.0 bonds are getting close to par and it's difficult to sell paper above par because of call issues."

Meanwhile, the trader says: "1.0 paper is much quieter and bonds are more difficult to shift." Nevertheless, reasonably strong levels are being seen for the right names.

Thanks in part to the European holiday, there is only one CLO BWIC on the schedule today, so far - two lines of 1.0 equity due at 15:00 London time. The list involved €3m of MALIN 2007-1X F and €5.2m of HARBM PR3X C. Neither bond has traded on PriceABS in the last three months.

Secondary markets

US RMBS active again

The US RMBS secondary market has emerged from its relative slumber of recent weeks and activity is on the increase again.

"Interest rate volatility has shaken some accounts out of their complacency," says one trader. "So we've had a much more active this week with a lot more BWICs going through."

The trader continues: "We've seen good two-way flows with hedge funds the notable sellers, both in and out of competition, steadily throughout the week. Though today, in what is a typically busy Thursday once more, we're seeing a wide range of BWIC sellers."

Today's auctions account for over $2.1bn in original face or around $1bn in current and include a large liquidation. That liquidation has been divided into three lists: at 10:00 New York time there were 38 mixed bonds with $196+m original face; at 14:00 30 HEQs with $176+m original face; and at 16:00 73 zero factor bonds totalling $375+m.

Meanwhile, the trader notes that primary activity is also having an impact on secondary. "We've seen a number of accounts selling NPLs and SFRs to raise funds in anticipation of the new Fannie Mae deal due next week."

Secondary markets

Euro ABS/MBS looks ahead

With a quiet end to the week likely the European ABS/MBS secondary market is looking ahead.

As anticipated yesterday was a much quieter day in European secondary though a few more trades went through than first thought to be likely. On-BWIC the bonds that did trade did so broadly in line with recent levels and off-BWIC flows were constrained to the usual pockets of activity - Dutch and UK RMBS, along with autos.

Overall, secondary spreads were unchanged on the day and are expected to remain range-bound again today as another light volume session is in prospect and broader credit appears calmed. Instead, attention is turning to the already strongly building BWIC calendar for next week and the growing primary pipeline in the hope that either or both will give secondary some direction.

In the meantime, there are two lists on the BWIC schedule for today. First up at 11:00 London time is a £26.357m three line pub ABS auction - ANNFIN 0 01/10/23, MABLN 0 12/15/33 and SPRTLN 0 12/28/28. None of the bonds has traded on PriceABS in the last three months.

Then, at 13:30 is a €5.95m four line mixed list consisting of: MORGT 2014-1 C1, MORGT 2014-1 D1, NDPFT 2014-1 C and TRICO 2014-1 B. Two of the bonds have covered with a price on PriceABS in the past three months - MORGT 2014-1 C1 at 97.5 on 26 February and MORGT 2014-1 D1 at 96 on 14 April.

Structured Finance

SCI Start the Week - 11 May

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

Pipeline
Additions to the pipeline last week were mainly new ABS deals. As well as six of those there was a single ILS, one RMBS and four CLOs.

The ABS were: US$1.064bn Capital Auto Receivables Asset Trust 2015-2; US$450m Exeter Automobile Receivables Trust 2015-2; US$601m GMF Floorplan Owner Revolving Trust Series 2015-1; US$180m New Jersey Student Loan Revenue Bonds 2015-1; US$700m Porsche Innovative Lease Owner Trust 2015-1; and US$2.425bn Wendy's Funding Series 2015-1.

US$150m Residential Re 2015-1 was the ILS and €3.28bn BBVA RMBS 15 was the sole RMBS. The CLOs were US$348.5m Anchorage Credit Funding 1, US$450m Cutwater 2015-I, US$413.7m Garrison Funding 2015-1 and €415m Orwell Park CLO.

Pricings
There was a little more variety among the completed issuance. The week's activity consisted of six ABS prints, one ILS, one RMBS, three CMBS and three CLOs.

The ABS were: US$1.165bn CarMax Auto Owner Trust 2015-2; US$1bn CNH Equipment Trust 2015-B; £300m Delamare Cards MTN Issuer Series 2015-1; US$106.3m Foursight Capital Automobile Receivables Trust 2015-1; US$834m MMAF 2015-A; and US$750m Synchrony Credit Card Master Note Trust Series 2015-2.

US$200m Long Point Re III Series 2015-1 was the ILS, while the RMBS was €360m-equivalent Bluestep Mortgage Securities No.3. The CMBS consisted of US$375m Crown Castle Towers Series 2015-1, US$375m Crown Castle Towers Series 2015-2 and US$1.58bn FREMF 2015-K45, while the CLOs were US$516.5m Avery Point VI, US$309m FS Senior Funding CLO and €414m Penta CLO 2.

Markets
US ABS secondary spreads were generally unchanged last week as BWIC volume was well above average at around US$2.3bn, say Bank of America Merrill Lynch analysts. "With the exceptions of triple-A credit card ABS and equipment ABS, which are trading slightly wider than the mid-point of their respective 12-month trading ranges, the secondary spreads for the triple-A rated notes in most sectors are near the mid-point of their respective 12-month trading ranges," the analysts say.

Production coupon US agency RMBS outperformed duration hedges last week by around 3 ticks, according to Citi analysts. "The 10-year Treasury yield sold off to 2.24% during the week only to rally back to 2.11%, almost exactly the same level as last Friday," they say.

US CMBS secondary spreads were flat, but Barclays Capital analysts note that they showed signs of rallying on Friday. They add: "In secondary trading of recent issuance, LCF triple-A bonds were flat week-over-week on Thursday, at swaps plus 84bp, and LCF yields are now back above 3% with 10-year swaps at about 2.2%."

The picture in European ABS and RMBS remains very similar to the last few weeks, with peripheral weakness continuing to weigh on the market. "To date, the benchmark asset classes of Dutch and UK Prime senior RMBS bonds have generally held in, however over the course of the week we have noted a change in sentiment even around these bellwethers," report JPMorgan analysts.

Editor's picks
Idiosyncratic risk?: The US$96.4m Ty Warner Hotels & Resorts Portfolio loan, securitised in MSC 2012-C4, has become the latest high-profile CMBS 2.0/3.0 loan to face difficulties. Such instances are being portrayed as idiosyncratic in nature, but they could herald a broader trend towards defaults...
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...
DOT rule to dent railcar ABS?: The US Department of Transportation has 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...

Deal news
• 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.
• 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.
• 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.

Regulatory update
• 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 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 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.
• 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.

Deals added to the SCI New Issuance database last week:
A10 Term Asset Financing 2015-1; Agate Bay Mortgage Trust 2015-3; CGBAM 2015-SMRT; Chase Issuance Trust 2015-4; Chase Issuance Trust 2015-5; CIFC Funding 2015-II; Cranberry Re series 2015-1; Dryden Senior Loan Fund XXIV; Edsouth Indenture No. 9 Series 2015-1; Everglades Re II series 2015-1; FREMF 2015-K45; Genesis Trust II series 2015-1; Jubilee CLO 2015-XV; Madison Park Funding XVII; Midas Funding UK; Oak Hill European Credit Partners III; OZLM XII; Sequoia Mortgage Trust 2015-2; VCL 21; Warwick Finance Residential Mortgages No. 1

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; CD 2005-CD1; COMM 2013-CR8; COMM 2014-CR16; COMM 2014-CR²0; CSFB 2005-C5; EPICP DRUM; GCCFC 2007-GG9 & JPMCC 2005-LD2; GSMS 2006-GG8; GSMS 2011-GC3; GSMS 2011-GC5; GSMS 2012-GCJ9; GSMS 2013-GC16; GSMS 2014-GC22; JPMCC 2010-C1; LBUBS 2004-C1; MLCFC 2007-9; TAURS 2006-3; TAURS 2007-1; TITN 2007-1; TMAN 7; WBCMT 2006-C24; WBCMT 2007-C32; WFRBS 2011-C3; WFRBS 2011-C4; WFRBS 2012-C10; WFRBS 2012-C6; WFRBS 2012-C7; WFRBS 2012-C8

CLOs

Libor floor trade mooted

CLO equity investors can sell long-dated Libor floors matching those embedded in CLO asset portfolios to monetise the time value in such embedded options. With a Fed hike possible this year, now may be the time to act.

A Fed hike before the end of the year is increasingly expected, which could move Libor floors quickly out-of-the-money. Selling the floors before that happens would also act as a hedge to potential deterioration of CLO equity cash distributions, believe Morgan Stanley CLO analysts.

The analysts argue that CLO market pricing methodology inefficiently prices the optionality of embedded Libor floors in leveraged loans, particularly by underpricing their time value. Long-term investors in CLO equity could therefore monetise these, especially where floorlets expire more than 12 months away.

The current forward curve indicates most Libor floors that strike at 100bp will be out-of-the-money by the end of 2016. Longer-expiry floorlets are therefore modelled to have zero value, but this mispricing can be monetised by selling the Libor floors in today's interest rate options market, say the analysts.

"Monetising the time value of the longer-expiry floorlets by selling the floors always holds as a strategy to realise some of the embedded Libor floor option value in CLO equity tranches. However, this trade has become a more timely one in 2015," they add.

The analysts compared the effect on a modelled trade of the forward curve being realised or of a first Fed funds rate hike in December with Libor closely following it. They also looked at selling all floorlets or only selling those with longer-term expiration dates.

By selling Libor floorlets with expiration dates matching those of a deal's payment dates, the CLO equity tranche's IRR is enhanced by realising the time value of the option premium upfront. Selling all floorlets in today's interest rate options market could bump equity investors' IRR up from 9.4% to 12.1%, according to the analysts.

However, they recommend investors execute the Libor floor monetisation trade by only selling the longer-expiry floorlets that expire in more than 12 months. This generates an IRR of 12% if the forward curve is realised and avoids selling floorlets with near-term expirations, which would have higher risk of expiring in-the-money.

"By putting up this trade, CLO equity investors are economically net-net long Libor for those payment periods that they sell the matching floorlets. However, this trade creates a short position in Libor put options that will not close until expiration or forced closing of the position," say the analysts.

They continue: "Such short position will experience mark-to-market fluctuations on a daily basis. CLO equity tranches are much more illiquid as compared to interest rate options, and they do not typically price in the daily change in valuation of the embedded floorlets. Therefore, the mark-to-market loss (gain) of the short Libor floor position cannot be completely offset by the mark-to-market gain (loss) in the CLO equity positions, on a daily basis."

A change in interest rates and rates volatility could have significant mark-to-market implications for Libor floors. Delta risk is particularly high for near-term expiry in-the-money puts, so selling longer-expiry floorlets only should help to mitigate some of that mark-to-market risk.

JL

CMBS

CMBS warehousing times eyed

The average time taken from origination for US CMBS loans to be placed in conduit deals appears to be lengthening. The trend is somewhat surprising, given that the pace of maturities in 2015 should allow originators to issue deals faster and reduce the time the loans spend on their books.

The balance-weighted average days for loans to originate has risen to nearly 60 days in 2015, compared with about 45 days for 2013 and 2014, according to Barclays Capital figures. The data further shows that the percentage of loans taking longer than 90 days to originate rose to 15% of loans in 2015, compared to around 5% in 2014, and that the percentage of loans taking about half a year to originate rose to 3%-4% from less than 1%.

"It is not clear yet if this is just a transitory trend for the first half of the year or a new trend. However, it does fit in with conduit issuance running slightly below expectations so far this year and potentially losing market share to bank/insurance company portfolio lending," Barclays CMBS analysts observe.

Multifamily and hotel loans, in particular, appear to be taking slightly longer to originate this year. The analysts note that such assets are generally more volatile, which may be leading to longer warehousing times.

However, at least part of the trend is attributable to new shelves, where originators may have built up a sufficient pipeline before launching a deal. For example, Credit Suisse launched its first transaction (CSAIL 2015-C1) in March and that deal had the most seasoned origination pipeline so far this year at 114 days from origination to pricing.

COMM 2015-DC1 (issued in February) and WFCM 2015-NXS1 (April) follow closely behind, at 95 and 93 days respectively, while the timeline drops to 57 days for JPMBB 2015-C28 (April). The effect from the new shelves is expected to be temporary, however, as newer transactions from these dealers will likely have shorter warehousing times.

Further, the analysts suggest that longer origination timelines could indicate that loans are being delayed in issuance due to underwriting concerns, such as B-piece buyers kicking a loan out of a deal or a loan being removed to achieve the desired credit enhancement for a specific rating. These loans may be removed from one deal only to be placed in a later one.

"However, we do not see any clear indication that loans with longer warehousing times had higher LTVs, as many of the ones taking longest to securitise had LTVs roughly in line with the average LTV in the high 60s. Also, longer-to-originate loans did not show a clear trend towards higher pro forma underwriting," the analysts add.

They conclude: "Overall, we would generally take it as a negative signal if warehousing times continue to increase, as lenders are generally discouraged from doing so - particularly in the relatively stable environment for issuance so far in 2015."

CS

CMBS

Pulled CMBS may need rethink

RBS has postponed the sale of its £141m Antares 2015-1 CMBS, which was being publically marketed last month. When the deal might return to the market is unknown, but it may look significantly different when it does so.

No official reason was given for the postponement, but Bank of America Merrill Lynch analysts believe that pricing levels were significant. Instead of being part of a wider market trend, they suggest this is because of the way Antares was structured.

"We think this serves to illustrate the challenge in CMBS origination that each asset is unique and comparable pricing evidence is limited. Execution is challenging even in an environment of generally positive market conditions," they say.

The Antares notes were issued at the end of March and retained to then be publically marketed last month. The class A and B notes were printed with margins of 150bp and 180bp, respectively, for a blended weighted average margin (WAM) of 157bp.

With 10bp of issuer fees, the operating cost would have been 167bp over Libor. The loan margin is 180bp, offering 13bp of excess spread per year.

However, when the notes were offered, they did not achieve those pricing levels. Instead, the class A notes were covered at an expected DM of around 185bp and the class B notes at around 300bp.

"Based on the guidance levels, the Antares WAM would have been 212bp, some 32bp more than the loan margin, implying that RBS would have had to sell the loan at a discount to par and the CMBS would have resulted in a loss to RBS (assuming the loan had been marked at par)," say they analysts. They add that even the initial price thoughts of 180bp for the As and 275bp for the Bs would have resulted in a WAM of 202bp, which still exceeds the 180bp loan margin and "suggests that RBS understood from the outset that it would likely take a loss on the loan".

The analysts suggest Antares has struggled to price in line with the market not only because of the secondary quality of its portfolio but also because of its modified pro-rata principal waterfall, relaxed counterparty replacement triggers and lack of a liquidity facility, which all limited the rating Fitch was willing to give.

Restructuring the transaction to include a liquidity facility could be beneficial. The initial structure raised questions about the timeliness of coupon payments, say the analysts, and they suggest the additional cost of a liquidity facility would be more than offset by the improved pricing level the class A notes would be likely to achieve.

"However, we think Antares would still struggle to price inside the 180bp loan margin - the pricing on the class A and the class B would need to tighten by more than 30bp from current guidance, in our estimation. We expect RBS may consider selling down the Antares loan as a loan syndication rather than a CMBS," the analysts conclude.

JL

Structured Finance

CRE bridge lender launched

Sutherland Asset Management has launched Ready Capital Structured Finance (RCS), a commercial bridge lending division. The new division will attempt to strengthen Sutherland's existing nationwide direct commercial lending platform by providing non-recourse, bridge and mezzanine CRE debt financing to its clients.

RCS will originate, manage and finance non-recourse floating and fixed rate loans of up to five years on transitional, value-add and event-driven commercial and multifamily real estate opportunities. Loan amounts will be up to US$25m - larger on a case-by-case basis - to middle-market and institutional CRE sponsors. RCS will offer short-term, interest-only loans with advances up to 80%, for cash flowing and non-cash flowing properties, with flexible prepayment schedules and customised structuring solutions to accommodate borrowers' needs.

David Cohen and Dominick Scali have each joined RCS from Doral Property Finance. Both join as mds, with Cohen as national production manager and Scali as head of credit. Cohen was most recently national production manager at Doral, prior to which he held positions as a regional director for GE Real Estate and md at CIBC World Markets' CRE finance group. Scali was most recently a director and head of underwriting at Doral, prior to which he held positions at Anglo Irish Bank and Citi.

Also joining RCS are Jordan Goforth and Casey Lewis, as director of originations and vp of credit respectively. Goforth was most recently avp of originations at Doral, prior to which he held positions at Loews Corporation and Auction.com. Lewis was most recently an associate within the underwriting team at Doral, in addition to holding previous positions at Doral's recovery bank, Bootstrap Asset Management and Arbor Commercial Mortgage.

Structured Finance

Secured finance group beefs up

Pritesh Solanki has joined Insight Investment's secured finance group. He arrives from MKP Capital Management, where he served as vp. Prior to MKP, Solanki was an associate at HSBC, focusing on UK and European RMBS, global consumer cash structured credit and US private student loan ABS.

Structured Finance

Origination head recruited

Demica has hired Tim Davies as head of origination for Europe. In the newly created role, he will seek emerging opportunities in the trade receivables finance landscape by forming new customer relationships, originating, structuring and placing structured finance and securitisation transactions, and helping Demica's clients to optimise their working capital positions. Davies will report directly to the firm's ceo Matt Wreford.

Prior to joining Demica, Davies was a director at Lloyds' asset-backed solutions conduit and balance sheet team, where he was responsible for originating and structuring securitisation transactions for multinational and regional clients. Previous to that, he was securitisation and structured finance senior director at RBS, covering the UK, France and Benelux countries. He has also worked for RBC's securitisation group, covering the bank's North American clients.

Structured Finance

Law firm taps CMBS vet

Ropes & Gray has appointed Partha Pal to its finance group. He will focus on structured finance transactions and related restructurings, regulation and dispute resolution, with particular emphasis on matters that involve CRE assets with real estate lending and CMBS transactions.

Prior to joining Ropes & Gray, Pal was a partner at Chadbourne & Parke. He has also held roles at Sidley Austin, as well as being involved in the CRE Finance Council, where he served as co-chair of its hedging sub-committee.

Structured Finance

CRE group bolstered

Annaly Capital Management has beefed up its CRE investment team with a number of hires, including Jeffrey Thompson. He will serve as co-head of Annaly's CRE platform, along with current executives Michael Quinn and Robert Restrick.

Thompson arrives from GE Capital Real Estate, where he was md - strategic capital group, leading the firm's CRE direct lending balance sheet programme. In this role, he focused on institutional sponsors, operating partners and brokers across the US.

Further additions to Annaly's CRE group include Patrick Maroney and Daniel Jagoe. They both joins as mds, following senior roles at GE Capital.

Neetika Gandhi also joins the group as a director, following her role as vp - underwriting/risk management at GE Capital. Clive Brown rounds out the additions and will join as a director to Annaly's CRE group, having previously been an underwriting leader at GE Capital.

CDO

ABS CDO manager replaced

Dock Street Capital Management has replaced Rabobank International as collateral manager for Solstice ABS CBO. Based on the terms of the restated collateral management agreement, Moody's says there will be no withdrawal, reduction or any other adverse action to any related ratings.

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

CLOs

Fund manager taps CLO pro

Lucy Panter has joined Oak Hill Advisors as a senior analyst. She arrives from GoldenTree Asset Management, where she was responsible for oversight of the firm's European CLOs. Panter has also held roles at P. Schoenfeld Asset Management and Goldman Sachs.

Insurance-linked securities

EXOR ups offer

EXOR has increased its offer to acquire all of the outstanding common shares of PartnerRe to US$137.5 per share in cash (SCI 15 April), valuing PartnerRe at US$6.8bn. The offer represents a 10% premium to the implied value per share of US$125.17 for PartnerRe under the amalgamation agreement between PartnerRe and AXIS Capital (SCI 26 January), based on the AXIS closing price on 5 May.

EXOR says the offer is underscored by the decision to invest US$572m in PartnerRe, representing 9.32% of the total outstanding common shares. EXOR's board unanimously approved the binding offer, which includes a signed merger agreement that can be executed by PartnerRe immediately upon termination of the AXIS agreement.

The binding offer will expire on the earlier of two days after the AXIS transaction is terminated, or 11 July - which is two days after PartnerRe's expected special general meeting date. EXOR is filing preliminary proxy materials with the US SEC in connection with PartnerRe's upcoming special general meeting of its shareholders, saying that if the PartnerRe board chooses to work in favour of a transaction with AXIS, the filing will enable EXOR to solicit PartnerRe shareholders to vote 'against' the AXIS transaction.

PartnerRe acknowledges that it has received EXOR's revised offer and will not make any further comments until its board has completed a review of the offer. Credit Suisse is acting as financial advisor and Davis Polk & Wardwell and Appleby (Bermuda) are acting as legal counsel to PartnerRe.

RMBS

MBS mis-selling case concluded

A US district court has ruled that Nomura made false statements in selling MBS to Freddie Mac and Fannie Mae prior to the 2008 financial crisis. The court's opinion cites figures stating that the GSEs' conservator, the US FHFA, is entitled to US$624.4m in compensation.

However, the court has set out an order for the FHFA to submit a proposed judgment with updated damages figures. The judgement will be issued on claims relating to the following transactions: NAA 2005-AR6, NHELI 2006-FM1, NHELI 2006-HE3, NHELI 2006-FM2, NHELI 2007-1, NHELI 2007-2 and NHELI 2007-3.

The opinion adds that a schedule will also be set for submissions concerning attorneys' fees.

ABS

Marketplace lending event unveiled

SCI is holding a marketplace lending securitisation seminar on 25 June in New York. The event will be hosted by Kaye Scholer, located at 250 West 55 Street.

SCI's Marketplace Lending Securitization Seminar will provide an in-depth examination of the nascent marketplace lending securitisation landscape. Together with overviews of transaction structuring/credit considerations and the biggest platforms involved, panel discussions will focus on opportunities and challenges from the perspective of both aggregators/sponsors and investors. A sector outlook will also gauge prospects for growth and demand, as the asset class continues to evolve.

Speakers include representatives from: CAPFUNDER, Citi, Credit Suisse, First Associates, Lift Forward, Orchard, Peer IQ, Prospect Capital Management and Prudential.

Delegates may take advantage of an early-bird rate, with a 15% discount, for a limited time only. To attend, email SCI for a registration code or click here to register.

Structured Finance

SME hybrid touted

The European Covered Bond Council (ECBC) has unveiled a plan to create instruments to finance SME lending, in response to the European Commission's Green Paper on Building a Capital Market Union. The proposed instruments are called European Secured Notes (ESN) and blend covered bond and securitisation techniques.

The ECBC has proposed two kinds of ESNs: an on-balance sheet format that would be closer in design to covered bonds; and an off-balance sheet format, allowing risk transfer and structured in a similar way to high-quality securitisations. The ESN will have more disclosure requirements for the asset pool compared to traditional covered bonds.

The assets in the off-balance sheet instrument are intended to be issued by an SPV in a tranched format and be compliant with risk retention rules. Unlike regular securitisations, these ESNs are intended to benefit from dual recourse in the form of additional guarantees. The ECBC has suggested that the issuer guarantees the senior tranches, the national development banks guarantee the mezz and supranationals guarantee the most junior note.

Fitch says it could rate the on-balance sheet ESN format under its existing covered bonds rating criteria and the capital-relief ESN format under its global structured finance rating criteria. In both formats, the credit risk of the collateral, consisting of loans to SMEs, would be analysed using Fitch's criteria for rating granular corporate balance-sheet securitisations (SME CLOs).

In the agency's opinion, the credit quality of pools of SME loans would still likely differ substantially between countries and between originators within the same country, even if there were a generic definition of which assets can be used as collateral for ESN. This is the case too for pools of mortgage loans securing covered bonds, despite their shared characteristics and similar loan-to-value limits. Fitch expects pools of SME loans to show even more differentiating risk characteristics.

Details of the proposed instruments are limited at this stage. Among other aspects, there is no indication of whether the maturity of the ESN is intended to match the scheduled redemption date of the longest SME loan included in the portfolio, increased by a buffer to account for recovery lag on defaulted loans.

In the case of the Commerzbank structured SME covered bonds, for instance, the documentation specifies that the bonds can switch to pass-through amortisation, which ends 24 months after the last asset has matured. Such a protection against maturity mismatches would be likely to make a large difference to the rating of an ESN.

In addition, the current relative illiquidity of SME loans means that the timely payment of notes could be jeopardised if loans had to be sold or refinanced to meet a hard bullet redemption or a soft bullet redemption with a short extension period. Nevertheless, the underlying pool could provide recoveries if there were a default of the on-balance sheet ESN.

Structured Finance

Second Spanish portfolio acquired

Sankaty Advisors has acquired a €560m portfolio of secured loans from BFA-Bankia Group. The portfolio is made up of defaulted bilateral and syndicated Spanish loans to real estate developers and SMEs, secured primarily on a variety of real estate collateral.

The purchase is Sankaty's second loan portfolio transaction in the Spanish market during the past six months. Sankaty and Starwood Capital Group previously acquired an €800m portfolio of secured and unsecured loans from BFA-Bankia Group (SCI 27 October 2014).

Copernicus assisted Sankaty in transaction due diligence and will also act as the servicer for the portfolio post-acquisition. J&A Garrigues acted as legal advisor and Aura REE provided real estate valuation advice on the transaction.

Structured Finance

Transparency recommendations released

The Joint Committee of the three European Supervisory Authorities has published a report detailing its findings and recommendations regarding the disclosure requirements and obligations relating to due diligence, supervisory reporting and retention rules in existing EU law on structured finance instruments (SFIs). The report's recommendations include the need to harmonise due diligence requirements across EU sectorial legislation.

The report says that, irrespective of the type of investors, due diligence should be seen as a dynamic process which starts with the investment decision and ends when the SFI matures or is divested. In particular, it recommends that investors' due diligence requirements are reflected in the SFI disclosure requirements.

In addition, the report proposes that investor reports should be standardised and stored in a centralised public space, while measures could be implemented to help investors in conducting effective stress tests on all types of SFIs. An adequate level of transparency should also be ensured irrespective of the place where the issuer, originator and sponsor are established and the nature of the SFIs.

In order to avoid discrepancies, the Joint Committee's report also recommends reviewing the use of different definitions and key terms across the relevant sectorial legislation. Finally, it highlights the necessity of complementing a harmonised due diligence and disclosure framework with a comprehensive framework for supervision and enforcement regarding SFIs.

Structured Finance

APAC ratings hold firm

Ratings stability was extremely high across Fitch's Asia-Pacific structured finance (SF) ratings in 2014, as 99% of tranches either remained unchanged or were paid in full. The economies of countries in the region were strong during 2014 and obligors faced minimal stress in terms of servicing their debt.

There were no APAC SF rating downgrades in 2014, the first year since 2006. Upgrades remained low at just nine, as over 60% of the portfolio was rated triple-A at the beginning of the year.

In addition, no impairments were recorded for the first time in seven years. Impairments of APAC SF tranches were previously driven by the performance of Japanese large loan CMBS transactions, however only one such transaction is currently outstanding.

Overall, the rating outlook for APAC SF remains stable, with over 98% of outlooks stable at end-1Q15. Positive outlooks are currently assigned to four prime RMBS tranches and one CMBS tranche.

Following some deterioration in 2013, asset performance in India stabilised in 2014, and outlooks assigned to Indian SF ratings were revised from negative to stable in March. Additionally, delinquencies have stabilised and credit enhancement has grown rapidly.

The strong ratings performance has continued into 2015 with 234 long-term ratings being affirmed in 1Q15, accounting for 96% of the rating actions during the three months. Nine Australian tranches were upgraded, driven primarily by higher CE levels, and one Japanese tranche was downgraded and simultaneously withdrawn. Fitch expects this high rating stability in the APAC region to continue throughout 2015. 

Structured Finance

SPV loss case concluded

The English High Court's ruling in the 'Fondazione Enasarco v (1) Lehman Brothers Finance S.A. and (2) Anthracite Rated Investments (Cayman) Limited [2015] EWHC 1307 (CH)' case yesterday has repercussions for the structured products and derivatives markets. Among the judge's findings is that a structured product SPV can calculate its loss by reference to the cost of a replacement transaction entered into by the investor.

A Sidley Austin memo highlights a number of other noteworthy findings in the case: a calculation 'as of' a date several months after the early termination date may still be "as soon as reasonably practicable" under the definition of loss; a quotation from a leading dealer is likely to be stronger evidence of a party's loss of bargain than a financial model, even if the terms of the replacement transaction differ from the original; and a party wishing to challenge a loss calculation must show that the non-defaulting party's determination was irrational in the 'Wednesbury' sense. The Wednesbury test requires only that the non-defaulting party does not take into account matters irrelevant to the calculation itself and that the non-defaulting party must not arrive at a determination which no reasonable non-defaulting party could come to.

The case arose from Enasarco's investment in principal-protected notes issued by Anthracite Rated Investments (Cayman) (ARIC) with a maturity date in 2023, the proceeds of which were indirectly invested in a managed pool of funds. Lehman Brothers Finance (LBF) agreed to protect the principal of the notes under a cash-settled put option documented under the 1992 ISDA Master Agreement.

Following termination of the derivative agreement in September 2008, Enasarco negotiated terms for replacement protection with dealers. Due to issues such as impairment of the notes and market turmoil, Enasarco was in May 2009 only able to execute a replacement transaction, with some terms different from those of the derivative agreement.

The derivative agreement provided for calculation of a payment upon early termination using second method and loss. Following termination, ARIC - as non-defaulting party - used the price for the replacement transaction as the basis for its calculation of loss and determined that approximately US$61m was due to it from LBF.

Although LBF challenged ARIC's calculation, the court found that ARIC's loss had been calculated reasonably and in good faith in accordance with the terms of the derivative agreement.

Structured Finance

CMU, HQS responses released

AFME has published its responses to the European Commission's Green Paper on Building a Capital Markets Union (CMU) and to its consultations on high quality securitisation. The responses provide guidance as to what AFME's members view as immediate objectives and overarching priorities.

The association says that the consultation is a clear indication that the Commission recognises the positive benefits of securitisation for the functioning of the financial markets and supports the rehabilitation of 'qualifying securitisation' so it can play a key role in CMU. "It is therefore disappointing that yesterday, the Joint Committee of the European Supervisory Authorities published recommendations on due diligence and disclosure [SCI 12 May] which, if implemented, will have precisely the opposite effect and hinder the recovery of Europe's securitisation markets," it notes. "We fully support sensible disclosure and the Joint ESAs' calls for greater harmonisation and consistency, especially across different types of investors. However, our members are very concerned by new proposals, which are intrusive, unnecessary and risk damaging both confidentiality obligations to customers and legitimate commercial interests in proprietary know-how, such as credit scoring."

In mandating new qualitative as well as quantitative disclosure requirements, AFME says the proposals create uncertainty around liability under securities laws and "cross the line" between the information and tools that it is reasonable and legitimate for an issuer to supply, on the one hand, and the due diligence and critical analysis that an investor should undertake on the other.

AFME suggests five overarching priorities: building an equity culture to develop entrepreneurship, business growth and new jobs; improving the market ecosystem to better serve companies at different stages of growth, including the development of standardised and proportionate reporting templates for SME credit data; preserving necessary market efficiency and liquidity, taking into account the combined market liquidity impact of MiFID, the BCBS fundamental review of the trading book and other regulations; tackling market fragmentation in Europe and internationally; and supporting the Commission's 'Better Regulation' approach to produce better policy outcomes. To unleash the full potential of European capital markets, the association believes that work on essential pieces of the CMU jigsaw - such as insolvency law and securities law reform - needs to start early, as it will take longer to achieve progress.

Structured Finance

Spotlight on P2B lending

Moody's says that European market participants and policymakers are increasing the spotlight on peer-to-business (P2B) lending to help fund SMEs where traditional bank lending has been declining. The agency expects securitisation to positively affect the development of P2B lending, which relies on online platforms that match businesses with lenders.

"The development of non-bank funding alternatives such as P2B and securitisation can play an important part in facilitating capital flows to a broader range of European corporate borrowers, but no single funding channel is likely to be a panacea for the supply of credit to European SMEs," says Igor Zelezetskii, a Moody's vp and senior analyst.

Although SME borrowers are part of the corporate universe, Moody's says it is important to understand the key credit drivers specific to SMEs. "The expansion of non-bank SME financing will depend on factors such as a customised regulatory environment and the incentives for market players to maintain adequate origination standards," adds Zelezetskii.

Moody's believes that securitisation of P2B loans has the potential to boost SME funding, with UK businesses having obtained about £1.4bn through P2B lending so far. Most of the assets in the P2B portfolios that Moody's has examined consist of loans granted to prime and near-prime borrowers. In terms of their credit profile, these borrowers are broadly comparable to the UK SME population and the obligors in the UK balance-sheet securitised SME transactions that Moody's rates.

Amid anticipated growth and the expected constraint on traditional SME funding availability, Moody's considers that issuers will enter the P2B SME securitisation market in the near future. Non-SME peer-to-peer securitisations have issued a total of US$1.5bn in the US, with consumer or student loans as underlying collateral.

Investors who cannot directly invest in P2B loans could do so indirectly through securitised holdings. Securitisation would allow some investors to use leverage to increase their exposure to SME borrowers, and can also provide additional incentives for P2B platforms to raise their due diligence and origination standards. Co-operation between P2B platforms and large financial institutions can also improve the alignment of interests in the securitised transaction with underlying P2B-originated loans.

However, Moody's notes that there are a number of inherent risks in P2B lending. The agency's analytical approach would take into account potential limitations to the availability of historical data in P2B portfolios and loan recoveries, and would consider if accumulation of historical performance data would benefit the future securitisation of P2B-originated SME loans.

Moody's would also address pool characteristics, borrower profile and asset concentration in a consistent manner with its approach to comparable securitised transactions with underlying SME loans that lenders have originated through traditional channels, outside of the P2B framework.

CDO

Trups defaults drop marginally

The number of US bank Trups CDO combined defaults and deferrals marginally decreased to 19.9% at end-April, according to Fitch's latest index results for the sector. This compares with 20% at end-March.

In April, four banks representing US$51.1m of notional in nine CDOs cured. Additionally, three previously cured issuers representing US$23m of notional in four CDOs redeemed their Trups.

Three banks representing total notional of US$16.2m across three CDOs re-deferred on their Trups in April. For each of the issuers, the length of the previous deferral was close to the maximum allowed number of periods. All three issuers re-deferred on the next payment date, suggesting that they may be resetting the clock on their deferral.

Across 78 Fitch-rated Trups CDOs, 231 defaulted bank issuers remain in the portfolio, representing approximately US$5.8bn of collateral. Currently 152 issuers are deferring interest payments on US$1.7bn of collateral, compared with 224 issuers that were deferring on US$2.6bn of collateral in April 2014.

Fitch says reduction in the deferrals is primarily due to cures and - to a smaller extent - defaults, sales and removal of the deferring collateral related to CDOs that are no longer rated by the agency.

CLOs

SME CLO approach back-tested

Scope says that previous application of its new SME CLO rating methodology (SCI 7 May) would have allowed for higher rating stability for senior European SME CLO tranches through the period from 2007 to 2014. The agency believes its approach would have created less rating migration and subsequently reduced rating volatility through this period of severe financial stress.

Scope tested its current rating methodology under the conditions and information available for the rating of Spanish SME securitisations issued in 2007. Spain was chosen because it has exhibited the highest peak-to-trough delinquency volatility in the most recent credit cycle, compared to other European jurisdictions, and experienced the largest number of rating downgrades as a result of the financial crisis.

In Scope's view, one of the most prominent reasons for the rating volatility experienced in the SME CLO asset class was that credit enhancement levels, in particular for triple-A ratings, proved too low to support these ratings throughout economic stress. The resulting poor rating performance led to higher credit enhancement levels for transactions issued during and after the crisis. However, Scope's new rating approach aims to dampen the impact of economic swings on the stability of SME CLO transactions rated triple-A.

Scope says it is important to incorporate long-term performance data to analyse a portfolio's position throughout the economic cycle and calibrate adequate protection levels for highly rated tranches. The agency believes there is the need for an upward adjustment of default references from a benign economic period, but also calls for a downward adjustment of data which already reflects an economic stress situation.

CLOs

US obligor investment 'credit positive'

Moody's reports that European CLO 2.0s are buying significant amounts of euro-denominated US speculative grade debt, which is credit positive for both European CLO 2.0 deals and the US obligors. US obligors now constitute around €1.5bn, or 12.7%, of total par in 30 European CLO 2.0s that the agency rates.

The exposure to US obligors varies significantly by deal, ranging between 4.4% and 20.9% of par. Notably, 25 of the 30 deals have exposures over 10%, compared with the typical 15% to 20% maximum US asset holdings in European CLOs. The deal with the largest exposure, Toro European CLO I at 20.9%, has a 30% limit for US assets.

Moody's believes that exposure to US obligors improves the geographic diversification, liquidity, expected recovery and credit quality of European CLO portfolios. Most US obligors in European CLOs are large entities with significant global presence, such as the top obligor Dell, which represents more than 8% of US collateral in European CLO 2.0s. All of these obligors carry public ratings, adding liquidity to European CLOs.

As a result, all of the US assets - except for €26.1m in par of bonds - are first-lien loans and thus command high expected recovery rates. These first-lien exposures boost the expected weighted average recovery rate in European CLOs, which typically invest in a larger share of bonds than their US counterparts.

In addition, the credit quality of US obligors, as measured by their default probability ratings, is better than that of European CLO 2.0 collateral. The par-weighted, adjusted weighted average rating factor (WARF) for US obligors is 2598, equivalent to a rating of between B1 and B2, compared with the 2722 WARF, approximately B2, for European CLO 2.0 collateral.

Moody's says that the ownership of US assets poses little currency risk for CLOs because the vast majority of assets are denominated in euros. In the few instances where the assets are dollar-denominated, the CLOs hedge currency risks using cross-currency swaps with highly rated counterparties.

Finally, Moody's notes that US obligors have incentives to issue euro-denominated debt in Europe, including the depreciation of the euro by almost 20% against the dollar since the beginning of 2014, which provides a very favourable exchange rate.

The other main incentive is the lower borrowing costs, as three-month Euribor has been negative since 21 April, while three-month Libor has hovered around 0.28%. The benefit of the lower financing cost over the past year explains in part the increasing gap between the spread-to-maturity and spread issuance, with euro-denominated loans currently on average 49bp cheaper than their dollar-denominated counterpart.    

CLOs

LMA voices STS concerns

The LMA has responded to a number of criteria proposed by the EBA and BCBS/IOSCO for identifying simple, transparent and standardised (STS) securitisations, as well as a number of criteria put forward in the delegated acts of Solvency 2. The response states that the current proposals, if implemented, would exclude managed CLOs from being able to qualify as STS securitisation largely on the basis that the portfolio of assets is actively managed.

The LMA says it does not believe a securitisation should be excluded on the basis that it is actively managed. The association argues that the proposed criteria seem to be predicated on the belief that active management of a portfolio adds a layer of complexity to a securitisation, which would make it ineligible for inclusion as an STS securitisation.

However, it argues that CLOs should not be disadvantaged in comparison to other securitisations because they are actively managed, stating that the expertise of a CLO manager can add a great deal of value to a transaction through managing recoveries on credit-impaired and defaulted credits. As evidence, CLO managers have consistently outperformed static loan indexes, while default rates on European CLOs remained very low at just 0.1%, which is better or comparable to other securitisation vehicles.

The LMA adds in its response that such managed CLOs provide banks, pension funds, insurance companies and other institutional investors with access to investment in the European corporate debt market, but with robust portfolio quality requirements, structural protections and credit enhancement built into the transaction to reduce risk.

CLOs

US CLO performance stable

US CLO performance remained stable in 1Q15, according to Fitch's latest index results for the sector. Only one newly defaulted name, Quicksilver Resources, was held by one CLO at the end of the quarter.

While several leveraged energy issuers filed for bankruptcy or initiated debt restructuring in the beginning of the second quarter, CLOs tracked by Fitch's index are minimally impacted. The overall credit quality of leveraged loans within the index remained stable.

At approximately 5% of the total index, the average exposure to the oil and gas sector has not changed since last quarter. However, there were differences in managers' reactions to the sector distress, with some CLOs adding and others trimming down their energy exposure. In most CLOs that increased their sector holdings, the additions came from mid- and down-stream subsectors that are more insulated from the fall in crude prices.

Even though most 1Q15 energy sales occurred at prices below par, the average net portfolio gain remained relatively stable over the quarter, at 37bp. Many managers were able to minimise par loss by offsetting these sales with below par purchases, for example, by swapping a weaker credit for a stronger one within the energy sector.

Overcollateralisation (OC) ratios also remained stable compared to the end of last year. On a year-over-year basis, both index average portfolio gain and average senior OC ratio declined by slightly over 20bp.

Fitch also notes an elevated level of amendment activity in 1Q15, driven by updating the S&P recovery rate tables and changes to CLO transaction terms to comply with the Volcker Rule. The updated recovery rate tables benefited the S&P weighted average recovery rate assumptions for the CLO collateral quality tests, ultimately giving managers more reinvestment flexibility.

Finally, 41 new CLOs that became effective in 1Q15 were added to Fitch's index, with 124 CLOs included in the index at the end of the quarter.

CMBS

CMBS 2.0 ratings boost

S&P has upgraded the JPMCC 2012-C8 class B, C, EC and D notes by one notch each to double-A plus, single-A plus, single-A plus and single-A minus respectively. The move is believed to be the first rating action on a CMBS 2.0 bond rated by S&P and follows Moody's upgrading of two COMM 2010-C1 tranches last month.

The latest upgrades reflect S&P's expectation of the available credit enhancement for the affected classes, as well as its views regarding current/future collateral performance and available liquidity support. Additionally, the action reflects amortisation of the transaction's outstanding principal balance since issuance, as well as sustainable improved performance exhibited by the US$125m Battlefield Mall (accounting for 11.54% of the deal) and US$48.5m Hotel Sorella CITYCENTRE (4.5%) loans.

Of note, reported DSC has trended up for both properties and now respectively stands at 3.42x as of year-end 2014 and 2.1x as of September 2014 (versus 3.16x and 2x for 2013). Reported occupancy is 97.8% and 81% respectively.

The top 10 loans in the transaction have an aggregate outstanding balance of US$627.9m (accounting for 58% of the deal). Using servicer-reported numbers, S&P calculates a weighted-average DSC and LTV of 1.61x and 75.4% respectively for the top 10 loans.

The COMM 2010-C1 B and C tranches were upgraded to Aa1 and A1 from Aa2 and A2 respectively in April. The action was based primarily on an increase in credit support resulting from loan pay-downs and amortisation. The deal has paid down by 19% since Moody's last review.

The only other rating action on a 2.0 CMBS was Moody's downgrade of five JPMCC 2010-C1 tranches late last year (SCI 9 December 2014).

CMBS

Liquidations hit GG9

May remittance indicates that the GCCFC 2007-GG9 CMBS received a wave of cashflows and realised losses, after eight loans were liquidated and another prepaid with yield maintenance. One of the liquidated loans was the Schron Industrial Portfolio, which incurred a full B-note loss.

The Schron Industrial Portfolio was paid off early. The US$220m A-note received its principal back in full, while the US$85m B-note suffered a 100% severity. The A-note pay-off repaid US$5.8m in accrued interest, which was partially offset by a US$2.3m work-out fee, according to Barclays Capital CMBS analysts.

Another of the liquidated loans - the US$140m Hyatt Regency, which had been in REO for over two years - was resolved with proceeds of US$92m. The loan was last valued at US$106.5m in November 2014. After repaying ASER, interest shortfalls and other advances, the loan received US$73m in recovery, equating to a 48% severity.

Six of the liquidated loans, worth US$102.1m in UPB, were previously listed for auction in February and early March. The largest of these loans - the US$33m Southern California Portfolio - had already been partially liquidated. The remaining properties generated proceeds of US$10m, above the latest appraisal of US$8.1m, but still resulting in a US$25.4m loss.

The second-largest loan was the US$31.2m Blackwell II, which generated proceeds of US$14.7m, above the US$12m appraisal. The Barclays analysts calculate that overall the six auctioned properties generated US$48.6m in proceeds, compared with a US$47.4m combined appraisal, and resulted in a loss of US$70.1m (or 69%).

Finally, the Hidden Ridge multifamily property prepaid after incurring a US$1.5m yield maintenance charge.

The principal proceeds from the prepayments and liquidations resulted in US$345m flowing down the principal waterfall, paying off the A3 and AAB tranches and reducing the principal balance outstanding for the A4 tranche by US$229m or 9%. Total losses were US$222m, which wrote off the J, H, G and F tranches and reduced the outstanding principal balance of the E tranche to US$36.5m, according to the analysts. However, ASER and modification interest recoveries resulted in large interest payments to the written-off securities, resulting in a US$7.1m payment to the F tranche and a US$10.5m payment to the G tranche.

CMBS

CMBS delinquencies fall again

The US CMBS delinquency rate fell again last month, fuelled by strong new issuance led by hotels, according to Fitch's latest index results for the sector. Loan delinquencies fell 6bp in April to 4.67% from 4.73% a month earlier, while the dollar balance of late-pays fell just slightly to US$17.75bn from US$17.80bn in March.

Fitch says the delinquency drop was mostly due to an increase in the index denominator thanks to a high volume of Fitch-rated new issuance, with eight transactions totalling US$9bn in March. This was led by hotel loans, which totalled US$4.4bn, mostly via single borrower transactions. The hotel transactions were: the US$1.8bn MOTEL 2015-MTL6; the US$875m JPMCC 2015-CSMO; the US$580m BBCMS 2015-SLP; and the US$380m CSMC 2015-TOWN.

Meanwhile, portfolio runoff totalled US$5.2bn in April, in line with US$5.1bn in March. Further, new CMBS delinquencies finished April at US$376m, which is up slightly from US$357m in March. The largest new delinquency was only US$29m, the Fort Knox Executive Office Center (JPMCC 2005-LDP2), which was reported as a non-performing matured balloon loan.

Resolutions in April outpaced new delinquencies, finishing the month at US$407m. The largest resolution was the US$55m RiverCenter I&II (BSCMS 2007-TOP28), which was disposed of at the end of March for a 33% loss (see SCI's CMBS loan events database).

Current and previous delinquency rates by property type are: hotel at 5.53% from 6.13% in March; retail at 5.46% from 5.41%; industrial at 5.29% from 5.57%; multifamily at 5.19% from 5.21%; office remained unchanged at 5%; mixed use at 2.59% from 2.69%; and other at 1.21% from 1.17%. By transaction type, delinquency rates as of April are: large loan floaters at 18.67%, with ten loans worth US$537m; conduit at 5.59%, with 1,031 loans worth US$17.2bn; small balance at 4.53%, with 19 loans worth US$28m; seasoned at 2.4%, with six loans worth US$13m; miscellaneous/other at 0.03%, with one loan worth US$306,238; and Freddie Mac at 0.02%, with one loan worth US$9m.

Fitch also notes that single asset/borrower and Canadian transactions had no delinquencies as of April.

CMBS

Loss severities drop dramatically

Trepp says that US CMBS loss severity came in at 18.14% during April, which is 26 percentage points below the 44.17% 12-month average. In total, monthly severity reduced by 18%, as 16 loans and 61% of the monthly disposed balance liquidated with less than 2% loss.

The US$375m Belnord loan, backed by a large multifamily property in Manhattan, along with the US$115.8m 1818 Market Street office loan in Philadelphia were liquidated with losses of 1.26% and 0.01% respectively in April (see SCI's CMBS loan events database). Liquidated loan volume was US$1.02bn for the month, nearly double March's total and near the 12-month average of US$917.08m. Looking only at losses greater than 2%, volume was US$395.71m with a 45.27% loss severity.

CMBS

Hotel price growth outperforms

Hotel price growth has surged by 33% in the last 12 months to within 1% of its 2007 pre-crisis peak, observes Moody's. The surge in prices is nearly double that of the apartment, retail, industrial and office sectors.

"Although hotels are not among the sectors that comprise the Moody's/RCA Commercial Property Price Indices national all-property composite index, their price growth has been torrid over the last 12 months," says Moody's director of CRE research Tad Philipp.

The index increased by 1.4% in March, with prices now topping the 2007 pre-crisis peak by approximately 8%. Apartment prices rose by 1.2%, while prices in the larger commercial segment gained 1.5%.

Apartment and central business district office in major markets are among the best performers post-crisis, and have improved 47.3% and 32.6% above their respective pre-crisis peaks. In non-major markets, retail and suburban office lag other sectors in recovery and are 17.5% and 19% below their pre-crisis peaks respectively.

Moody's notes that a rebound in demand has been a primary driver of the lodging sector's strong recovery. Limited supply has also been a factor, albeit the construction pipeline is building, with ample development in some cities.

However, the agency believes the current levels are not sustainable, as forecasts by STR show that occupancy in US hotels will reach an all-time high of 65% in 2015. Increasing supply has already started to pressure RevPAR growth in New York, a dynamic that may start to affect other cities as well.

Moody's analysis of lodging fundamentals indicates that the mismatch between lodging demand, which is highly cyclical, and supply, which is sticky, leads to large supply-demand imbalances and contributes to the volatility in hotel performance. Meanwhile, RevPAR growth is expected to slow and will be driven mostly by increases in average daily rate, signalling that the hotel sector is in the latter stages of its upswing.

Risk Management

Bail-in valuation consultation begins

The EBA has launched a public consultation on its draft regulatory technical standards (RTS) defining the valuation of derivative liabilities for the purpose of bail-in resolutions. The standards have been developed within the framework of the Bank Recovery and Resolution Directive, which sets procedures for the recovery and resolution of credit institutions across the EU.

The draft RTS provide resolution authorities with a series of tools to carry out a swift and objective valuation of derivative liabilities while avoiding discrepancies with the insolvency counterfactual, which could lead to breach the non-creditor-worse-off principle. The approach applies a statutory valuation methodology based on the costs or gains that would be incurred by the counterparty in replacing the contract.

Derivative counterparties will be given the opportunity to provide evidence of commercially reasonable replacement trades and to determine the close-out amount within a certain deadline. If no feedback is received, then resolution authorities will apply their valuation based on mid-market prices and bid-offer spreads.

The EBA standards also specify that resolution authorities should establish the value of derivative liabilities at the date of close-out or when a price is available in the market for the contract or the underlying assets, which allows for a final valuation within a matter of days with maximum accuracy. As early terminations of derivatives may bring specific additional costs, the RTS further specify the circumstances in which resolution authorities might exempt contracts from close-out and bail-in where the application of the bail-in tool is likely to bring destruction in value exceeding the bail-in potential of the corresponding liabilities.

The standards also take into account the specific regulatory framework applicable to centrally cleared derivatives, for which EMIR has introduced rules and procedures for valuing derivatives in resolution. In very exceptional circumstances, resolution authorities will impose their own valuation where central counterparties do not deliver a close-out amount or do not apply default procedures within an agreed deadline.

Additionally, the framework proposed in the EBA standards will allow resolution authorities and independent evaluators to effectively conduct a reliable valuation in a short timeframe. In cases of particular emergency constraints, resolution authorities will also be able, under certain conditions, to apply resolution actions on the basis of preliminary valuations and even before pricing is available in the market.

The consultation will run until 13 August, with a public hearing taking place at the EBA premises on 2 July.

Risk Management

Prudent valuations practices examined

SCI is hosting a complimentary webinar exploring how IPV and prudent valuations practices are adjusting to new European regulatory requirements. The event is being held at 12pm UK time on 21 May, but will also be available to download from the SCI website afterwards.

The webinar will attempt to define what constitutes a prudent valuation under the EBA directive, as well as the rules' key requirements for the sell-side and the buy-side. It will also examine the role of the risk management function, sourcing/deploying data and which controls/infrastructure should be in place to facilitate prudent valuations.

Panellists include Neil Douglas, director, PwC Financial Services Risk and Regulatory Practice, and Fraser Malcolm, partner at Prytania Investment Advisors. To register for the webinar, email SCI or click here.

RMBS

Debut on-SEF MBS swap traded

Tradeweb Markets has completed the first packaged MBS and US dollar swap transaction on a SEF. Axonic Capital executed the trade on the Tradeweb TW SEF prior to the US CFTC's no-action relief deadline (SCI 12 November 2014), with the trade clearing at CME Group.

The CFTC extended no-action relief for made available to trade (MAT) swaps executed as part of MAT v. agency MBS package transactions until 15 May. Following the expiration of no-action relief, the MAT leg of these package trades is required to be traded on a SEF or designated contract market.

RMBS

REIT preps risk transfer

PennyMac disclosed in its 1Q15 results that it has entered into a credit risk transfer structure with Fannie Mae in relation to the REIT's correspondent mortgage production. Under the programme, PennyMac will continue to produce conventional conforming loans and securitise up to US$1bn of them on a flow basis through a new SPV, dubbed PMT CRT 2015-1.

The REIT will deposit cash into the SPV in exchange for a class M1 bond, which will cover first losses on a pool delivered to Fannie Mae. The structure will create an IO strip, which will in turn pay the coupon on the M1 bond.

PennyMac reported 1Q15 US$0.09 EPS and US$111.9m proceeds from the liquidation of distressed mortgage loans and REO. The REIT's distressed mortgage portfolio comprises over half of its mortgage assets. As of 31 March, it held US$2.32trn UPB of non-performing whole loans, versus US$2.25trn on 31 December 2014.

RMBS

AOFM to auction RMBS

The Australian Office of Financial Management (AOFM) has been directed to divest the Australian government's investments in RMBS, which currently total A$4.6bn in holdings. The AOFM expects to sell A$300m to A$500m of RMBS per calendar month, based on the total amortised face value of notes to be sold, which will exclude accrued interest, gains on disposal and repaid capital.

The first monthly auction is planned for June. The specific timing and securities to be offered will be announced at least one week prior to each auction. However, the auctions are unlikely to be held on the same date of each month, so as to avoid potential complications arising from ex-coupon periods.

The AOFM is now inviting counterparties from the investment facility panel member list to register for participation in the RMBS auction process, with registration of interest due by 28 May. No fees will be paid by the AOFM to panel members for participating in the auction process.

RMBS

DSB loss expectations lowered

The DSB Bank trustees last week provided an update on the progress of the duty-of-care claims process for the Chapel 2003 and 2007, Monastery 2004 and 2006 and Dome 2006 RMBS. As of end-March, 69,000 requests had been filed under the Mass Claims Settlement Act (WCAM) at a run rate of 300 applications per week.

Despite the high number of applications, the trustees have revised their loss expectations significantly lower. The trustees now expect total losses to be €320m across the bank, compared to a 2011 loss estimate of €555m, according to European ABS analysts at Morgan Stanley.

For the affected RMBS, this translates into total losses of €132m, compared to €195m estimated earlier. For the placed deals, losses in CHAPE 2003 are now expected to reach €55m, €52m for CHAPE 2007, €6m for MONAS 2004 and €13m for MONAS 2006.

The trustees anticipate a 100% pay-out from the estate over the "long term". The Morgan Stanley analysts note that so far the cumulative pay-out ratio has been 74%, but for the next five years further pay-outs are not expected as a special loan facility needs to be repaid first. The trustee has clarified that the 74% recovery on unfiled claims will be paid on time and only the additional recoveries will be subordinated to the special loan repayment.

"Reduced loss expectations and increased certainty of resolution support our long-held constructive view on the DSB securitisations. We expect this increased certainty to benefit the ratings of the senior and mezzanine notes across all MONAS and CHAPE deals," the analysts observe.