Contents

Secondary markets

Euro ABS/MBS shows caution

Some signs of caution are entering the European ABS/MBS secondary market, but it may not last.

The quiet end to last week, which saw ABS/MBS spreads close unchanged has morphed into an even more cautious tone today with some signs of softening as broader credit edged wider on Greek concerns this morning. However, it is hoped that the building BWIC pipeline for this week will motivate some activity from the investors who increasingly sat on the sidelines as last week wore on.

This morning's large block two line auto BWIC traded reasonably well. DRVON 12 A covered at 100.275 and VCL 18 A at 100.09.

There are currently two more ABS/MBS lists scheduled for this afternoon. First up at 13:00 London time is a €13.99+m five line CDO/CMBS auction.

It comprises: DECO 2007-E6X C, ECLIP 2007-2X C, EUMAX VI A, WINDM X-X B and WINDM X-X C. Only WINDM X-X C has covered on PriceABS in the last three months, doing so at 93.41 on 24 March.

Then, at 15:00 is a four line 80+m mixed list consisting of: CANWA II A7, EPICP DRUM A, ESAIL 2007-5X A1A and LMS 3 A. Only EPICP DRUM A has covered on PriceABS in the past three months, last doing so at 89.41 on 22 April.

Secondary markets

US CLOs still going strong

US CLO secondary market is still going strong with the BWIC pipeline growing and paper trading well.

"BWICs are continuing to trade very well," says one trader. "Many bonds are going through right at par or just above."

The trader attributes this to the relative value the sector offers. "Right now, CLOs seem to be offering the best opportunities rating for rating versus any other structured finance asset class."

The trader is optimistic that the rally will continue for now. "The sector appears to have good sponsorship across the credit curve in primary as well as secondary and I'm not sure the tightening will stop any time soon."

There are currently six US CLO BWICs circulating for trade today. The largest comes at 13:00 New York time and includes 2.0 triple-A and mezz.

The 15 line $82.75m list consists of: ADML 2014-1A A2, BSMC 2013-1A D, ECP 2013-5A C, JFIN 2014-1A E, LROCK 2014-3A D, MHAWK 2013-1A D, MHAWK 2014-3A D, OAKCL 2014-1A C, OCT20 2014-1A E, OCTLF 2014-1A A1, SLVS 2014-1A D, SNDPT 2014-3A A, TICP 2014-2A A1A, WAMI 2014-1A C and WITEH 2014-9A C.

Five of the bonds have covered with a price on PriceABS in the last three months - LROCK 2014-3A D at 91 on 27 March; MHAWK 2014-3A D at 93H on 08 April; OCT20 2014-1A E at 91.52 on 12 March; OCTLF 2014-1A A1 at 100H on 11 May; and WITEH 2014-9A C at 95H on 28 April.

Secondary markets

Euro ABS/MBS builds up steam

The European ABS/MBS secondary market looks to be building up a head of steam.

Yesterday was, as expected, a quiet day with caution prevailing. However, there was patchy trading in the usual sectors plus an increase in interest in specific Spanish names. BWICs traded in line with expectations and overall spreads remained range-bound.

With broader credit improving, today is likely to see an increase in flow trading. At the same time, supply is on the increase for the remainder of this week both from primary and a now very healthy BWIC calendar.

Today's European ABS/MBS auction schedule already sees seven lists circulating. Bonds in for the bid offer a wide variety of deal types and jurisdictions - highlight include a mixed dollar-euro-sterling RMBS list at 14:00 London time and four ABS CDO tranches at 14:30.

The ten line 126.433m original face RMBS list comprises: E-MAC DE05-I A, GHM 2006-1 A2B, GHM 2007-1 A2B, GHM 2007-1 CA, GHM 2007-2A AC, LMS 2 AA, RMAC 2005-NS4X M1A, ROOF 2 B1A, SPF 2005-B A and SPS 2005-3X B1C. only one bond has covered with a price on PriceABS in the last three months - GHM 2006-1 A2B at 96.725 on 16 March.

The €20.15m ABS CDO list consists of: CAVSQ 1 A1N, FAB 2002-1 A2, PANTH III-X B and RENOR 1 A. None of the bonds has covered on PriceABS in the last three months.

Secondary markets

Euro CLOs see demand and supply

The European CLO secondary market is continuing to see strong demand and supply.

The unabated demand for 2.0 European CLO paper was underscored by the two line items on BWIC yesterday, GROSV 2015-1X D and RPARK 1X C, covering above par. Off-BWIC paper was changing hands across the capital structure for both 1.0 and 2.0 bonds.

The rest of this week sees an upswing in European CLO BWIC supply as sellers, including a range of end-accounts, emerge to capitalise on investor appetite. There are eight lists already scheduled primarily revolving around 1.0 mezz.

For today, there is one auction scheduled so far, due at 15:00 London time. The €43.12m eight line mix of single-As and triple-Bs consists of: ARESE 2007-2X D, DALRA 4-X C, GSHAM 2007-4X D, HARVT IV C, MERCT III-X A3, MSIMC 2007-1X C, VALLA 2X C and WODST VI-X D.

Only one of those bonds has covered with a price on PriceABS in the last three months - HARVT IV C at 93.5 on 27 April.

Secondary markets

US CMBS stays stable

US non-agency CMBS secondary market levels are staying stable.

Despite recent broader market volatility CMBS secondary spreads up and down the capital structure have been reasonably stable. Now, with equities and rates recovering, that stability looks set to continue.

"Investors are definitely axed to buy bonds and we expect spreads to remain stable for the rest of the month," says one trader. "We continue to see potential for a flattening of the credit curve as investors move below LCFs down the stack in search of yield."

While, the last week generated around average secondary volume of about $1.2bn, this week has been quieter so far. Today currently has five BWICs with a total current face of $157+M circulating for trade, though that will undoubtedly grow and the schedule for the rest of the week is already building.

Secondary markets

Euro ABS/MBS BWIC spike

After another relatively quiet day yesterday, the European ABS/MBS secondary market looks set for a busy day today with a spike in BWIC volumes.

For the most part secondary spreads remained range-bound yesterday on light activity. Although one trader notes: "Market tone is a little bit weaker away from core product - peripherals and mezz 2.0 CMBS have edged out, but it is contained."

Everything could change today, however. "There are a lot of BWICs out today, so it looks like it's going to be a very busy session," says the trader.

At the last count, there are seven ABS/MBS BWICs circulating for trade today. Thanks to yesterday's announcement of the first new public Spanish RMBS since the crisis, Prado I from UCI, it is the auctions with bonds in that sector and from that issuer that will be most closely watched.

There are currently two lists that fit that description due today. At 14:00 is a nine line €62m peripheral mezz list comprising: AYTH M3 B, BCJAF 10 B, BCJAM 3 D, CAPIM 2007-1 B, GCPAS 5 B, IMPAS 4 B, TDAC 7 B, UCI 16 B and UCI 17 B. None of the bonds has traded on PriceABS in the last three months.

Then, at 15:00 is another nine line list, this time of Spanish seniors with a €159.5m total original face. It consists of: AYTCH I A, AYTGH IX A2, BCJAF 6 A2, BFTH 6 A, HMSF XI A, IMCAJ 1 A, IMPAS 2 A, TDA 18 A1 and UCI 7 A. Only one of those bonds has traded with a price on PriceABS in the last three months - HMSF XI A at 98 on 27 March.

Secondary markets

US CLOs shift up

The US CLO secondary market has shifted up a gear this week in terms of trading volumes and pricing levels.

"There's been a lot of pressure to push lists out before the end of what will be a short week ahead of Monday's public holiday," says one trader. "So today, like the last couple of days, is very busy with a wide mix of collateral in for the bid. Even so, we've been seeing new high covers across the board."

The trader continues: "Everyone believes mezz is just going tighter because of what's going on in primary. At the same time, there's no noticeable tiering at the bottom end of the secondary stack anymore - the market has brushed off concerns about energy for now."

Recent highs are most noticeable in single-Bs, the trader adds. "For example, there were some single-Bs on BWIC yesterday that covered really tight at about 775, but did not trade because the seller thought they should be even tighter in this market."

Despite record tights CLOs continue to offer good relative value. "Top name double-Bs are now all the way down to 590, but that is still wider than, say, double-B CMBS," says the trader.

Consequently, the trader expects the market to keep heading the same direction for now. "Looking at covers and talk over the past couple of days we seem to have hit the second leg of the rally and the market is unlikely to take pause until we reach the third leg, which appears to be a way away yet."

Nevertheless, the appetite for mezz paper will be strongly tested today with the sector accounting for two-thirds of the $238+m across 11 BWICs scheduled for trade today so far. Tomorrow's calendar is considerably quieter with only four lists due, but they include the biggest test for equity this week in the form of a $100.627m nine line list due at 11:00 New York time.

Tomorrow's list consists of: ARES 2012-1A SUB, ATCLO 2013-1X SUB, BABSN 2006-2X INC, DMNLK 2006-1A PREF, GOLD4 2007-4X SUB, MDPK 2007-5A SUB, MDPK 2007-5X SUB, OAKC 2013-8X SUB and TRMN 2007-1X C1. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Euro ABS/MBS holds up

European ABS/MBS secondary spreads are mostly holding up despite a heavy BWIC calendar and a general risk-off attitude.

"There were a lot of BWICs yesterday and nearly all line items traded well," says one trader. "The calendar is quieter today, but overall volume in BWICs significantly up."

This contrasts with the rest of the secondary market, the trader adds. "Elsewhere liquidity is not great and bid-offers have moved wider. Dealers are not currently looking to build inventory and people in general are reluctant to take on more risk."

Nevertheless, ABS/MBS secondary spreads generally held firm yesterday and into this morning's open, though broader credit has already begun to edge wider today. The one ABS/MBS sector to see some adverse price movement yesterday was Italy following news of Banca delle Marche's failure to repay a loan.

"There aren't that many Marche bonds out there, and some are heavily amortized, but the news brought fears of a wider impact and drove selling," the trader explains. "Other Italian names suffered as well and spreads in the sector are 3-5bps wider."

There are six European ABS/MBS BWICs due so far today, with the most substantial in terms of original face due at 13:00 involving €486.5m in peripheral paper. At the same time, the announcement of a 134 line mixed asset CDO liquidation for next Thursday is drawing some attention already.

Today's 13 line peripheral list involves: BANKP I A2, CRSM 9 A2, DOURM 2 A1, DOURM 3 A, EMERM 4 A, IMCAJ 3 A, KDRE 2007-1 A3, LUSI 5 A, RHIPO 9 A2, SABA 1 A2, SANTM 3 A2, TDAC 8 A and UCI 15 A. Three of the bonds have traded with a price on PriceABS in the last three months: RHIPO 9 A2 at 97.75 on 23 March; SABA 1 A2 at 96.51 on 30 April; and TDAC 8 A at 93.31 on 16 March.

Secondary markets

Euro CLOs stay strong

European CLO secondary spreads are remaining firm in the face of continuing heavy supply.

"CLO secondary price levels are still strong across the board," says one trader. "We're seeing good two-way flows and BWIC supply remains heavy."

In particular, the trader says: "There's still a lot of demand in 2.0 mezz even though more new transactions are coming market. At the same time, 1.0 paper is seeing some sellers, but the market is absorbing what's on offer easily."

Yesterday's BWICs traded at or above expectations or DNT'd with strong covers and there was even sufficient appetite for all six line items on a 2.0 double-B list scheduled for today to trade early. There is another three line list of bonds with the facility to trade ahead due tomorrow and two of the line items have sold this morning.

The orthodox BWIC calendar for today now sees six lists circulating for trade so far. Of those, the largest is due at 14:30 London time and includes both 1.0 and 2.0 double-Bs.

The seven line €36.7m original face list consists of: CGMSE 2014-1X E, CLAV 2007-1A V, CRNCL 2007-2X E, DUCHS IV-A E, GROSV II-X E, KNTYR 2007-1A E and MERCT III-A B2. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

US RMBS winds down

The US non-agency RMBS secondary market is winding down ahead of the holiday weekend, but the week has had its talking points.

"It's been an interesting week," says one trader. "We've seen a lot of hedge fund selling in an effort to shed some assets to raise cash for calendar-based opportunities. They're now beginning to look for paper both in and out of comp that's cheaper because holders need to sell before quarter-end."

In any event, the trader adds: "Bonds are trading well and the market remains orderly. Interest rate vol has been down and that's enabled people to concentrate on trying to get things done before the holiday and take the opportunity to end the week early."

Clearly they have succeeded. "Today is very quiet indeed for a Thursday with only five or six BWICs totalling around $200m due and scheduled to end early afternoon. The highlight list was a re-REMIC auction earlier this morning, which involved $44m of paper structured off hybrids."

However, the trader expects the market to pick up quickly next week. "When we come back on Tuesday the latest remits will be available and people will, as ever, be looking to see where we are and put in place trades off the back of that in advance of month-end."

Secondary markets

Euro BWICs ease

The BWIC-led week in European securitisation secondary markets is easing to a close today.

BWICs dominated ABS/MBS secondary trading once again yesterday and the bonds that traded did so in line with expectations. Flow trading was patchy once more, but broadly spreads remained unchanged though Italian and Portuguese paper continued to weaken.

At the same time, European CLO secondary activity remained robust with strong execution seen across 2.0 paper in particular. On BWIC both 1.0 and 2.0 paper again traded, or at least covered, well.

With the impending public holiday either side of the Atlantic and a fairly busy day in primary, today's BWIC schedule is considerably lighter than recent days. ABS/MBS sees three small lists circulating so far covering prime RMBS, two pieces of TAURS 2015-DE2 and five small clips of mixed Spanish paper; while there are two CLO auctions due.

The first CLO BWIC is the previously mentioned list where two of the three line items traded ahead. However, the €3m DRYD 2014-35X E has now be joined by €3m SORPK 1X C and €3m CGMSE 2014-3X C and all are scheduled to trade at 13:30 London time. Only CGMSE 2014-3X C has covered on PriceABS in the last three months, doing so at 96.16 on 26 February.

Then, at 14:00 is a €14.45m original face seven line mezz list, consisting of: AVOCA V-X E, HARVT III-X E1, JUBIL 2013-10X E, JUBIL VII-X E, LIGHP 2007-1X E, RMFE IV-X V and RMFE V-X IV. Two of the bonds have covered on PriceABS in the last three months - AVOCA V-X E at 92H on 1 May and HARVT III-X E1 at 96H on 23 February.

Structured Finance

SCI Start the Week - 18 May

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

Pipeline
It was another active week for the pipeline. At the final count there were 13 new ABS, one ILS, three RMBS, five CMBS and one CLO.

The ABS were: US$500m Avis Budget Series 2015-2; C$479m BMW Canada Auto Trust 2015-1; £490m CPUK (refinance); US$809m DRIVE 2015-B; US$1.88bn Ford Credit Auto Owner Trust 2015-B; €543.5m Globaldrive Auto Receivables 2015-A; US$180m GO Financial Auto Securitization Trust 2015-1; US$402m Nelnet Student Loan Trust 2015-3; €518m Pass Compartment France; A$500m SMART ABS 2015-2; Swiss Credit Card Issuance 2015-1; and Swiss Credit Card Issuance 2015-2.

US$200m Compass Re II Series 2015-1 was the ILS, while Dilosk RMBS No.1, £350m Gemgarto 2015-1 and WinWater Mortgage Loan Trust 2015-A were the RMBS. The CMBS were: US$360m BBCMS Trust 2015-RRI; US$775m CSMC 2015-DEAL; US$1.24bn GSMS 2015-GC30; US$255.6m MSCCG Trust 2015-ALDR; and US$181m RAIT 2015-FL4.

The CLO was US$500m Galaxy XX CLO.

Pricings
The week's issuance consisted of a further 11 ABS, as well as one ILS, two RMBS, one CMBS and five CLOs.

The ABS were: €450m Bavarian Sky France Compartment French Auto Leases 1; US$1.26bn Capital Auto Receivables Asset Trust 2015-2; US$650m Capital One Multi-asset Execution Trust 2015-2; US$425m Capital One Multi-asset Execution Trust 2015-3; US$550m Exeter Automobile Receivables Trust 2015-2; US$750m GMF Floorplan Owner Revolving Trust Series 2015-1; C$241m Hollis II 2015-2; US$1bn Honda Auto Receivables 2015-2 Owner Trust; US$130m North Mill Equipment Funding 2015-A; US$1.25bn OneMain Financial Issuance Trust 2015-2; and US$700m Porsche Innovative Lease Owner Trust 2015-1.

US$700m Alamo Re Series 2015-1 was the ILS. The RMBS were €3.28bn BBVA RMBS 15 and A$1bn Firstmac Mortgage Funding Trust No.4 Series 1-2015, while the CMBS was US$1.47bn FREMF 2015-K718.

Lastly, the CLOs were: US$513m Apidos CLO XXI; €3.75bn FTA PYMES Santander 11; US$413.7m Garrison Funding 2015-1; US$566m Mountain View CLO 2015-9; and €415m Orwell Park CLO.

Markets
"The [US] ABS primary and secondary markets were active this week, with approximately US$7.2bn of transactions priced and US$1.3bn traded in the first four days," comment Barclays Capital analysts. Auto ABS spreads widened amid solid primary issuance and heavy trading.

Activity picked up meaningfully in the US CLO market, say Bank of America Merrill Lynch analysts. Triple-As comprised the largest share among the 2.0 BWIC line items. "With primary issuance having slowed down from April, spread levels tightened across the entire 2.0 capital stack to 145bp, 190bp, 290bp, 390bp, 625bp and 790bp from triple-A to single-B. As we expect near-term CLO issuance to be constrained by limited loan supply and the tight arbitrage, we remain constructive in the sector and continue to favor 3.0 mezz," the analysts say.

The European ABS and RMBS secondary markets were quiet last week. "On the back of thinner volumes, spreads demonstrated an indifference to broader market moves, with only mild weakening in levels put on peripheral risk. Generically, Portugese RMBS seniors have now retraced to levels last seen in September - giving back all of the intervening ABSPP-inspired rally," comment JPMorgan analysts.

Editor's picks
Old haunts: The spectre of redenomination risk has reappeared in the European RMBS market with the possibility of a Greek exit from the EU...
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...
Pulled CMBS may need rethink: RBS has postponed the sale of its £141m Antares 2015-1 CMBS, which was being publically marketed last month...
CMBS warehousing times eyed: The average time taken from origination for US CMBS loans to be placed in conduit deals appears to be lengthening...

Deal news
• 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 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.
• 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.
• 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.
• 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.

Regulatory update
• 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 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 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 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 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.
• 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.
• 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. 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 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.

Deals added to the SCI New Issuance database last week:
Allegro CLO III; Avery Point VI CLO; Bluestep Mortgage Securities No. 3; CarMax Auto Owner Trust 2015-2; CNH Equipment Trust 2015-B; COMM 2015-CCRE23; Delamare Cards MTN Issuer 2015-1; Foursight Capital Automobile Receivables Trust 2015-1; FS Senior Funding CLO; LCM XII (refinancing); Monroe BSL CLO 2015-1; Penta CLO 2; Synchrony Credit Card Master Note Trust series 2015-2

Deals added to the SCI CMBS Loan Events database last week:
BACM 2004-6; BACM 2005-3; BACM 2006-6; BSCMS 2006-PW13; BSCMS 2006-PW14; BSCMS 2006-PWR11; CD 2006-CD3; CSFB 2004-C5; CSMC 2006-C4; DECO 2006-E4; ECLIP 2006-2; EMC VI; EURO 28; GCCFC 2004-GG1; GCCFC 2005-GG3; GCCFC 2006-GG7; GCCFC 2007-GG9; LBUBS 2005-C5; LBUBS 2006-C6 & LBUBS 2006-C7; LBUBS 2007-C1; MSC 2011-C3; TAURS 2006-1; TAURS 2006-2; TAURS 2007-1; Taurus 2015-1 IT; THEAT 2007-1 & THEAT 2007-2; TITN 2006-3; UBSCM 2012-C1; WBCMT 2006-C23; WBCMT 2007-C30, LBUBS 2007-C1 & LBUBS 2007-C2

Structured Finance

Middle market pro recruited

Chip Cushman has joined Golub Capital as md in its middle market lending group. He will be responsible for originating, underwriting, executing and monitoring investments for the firm.

Cushman was previously md at GE Antares, a division of GE Capital. In this role, he was responsible for developing and maintaining relationships with private equity firms, and originating and evaluating new lending opportunities, including first lien, second lien and unitranche loans.

In addition, Matt Fulk and Craig Palmer will be taking on new roles in origination for Golub. They will look to increase the firm's client base in their new business development roles.

Structured Finance

Dubai SF platform set up

SG has strengthened its presence in the Middle East by launching a new structured finance platform in Dubai. Charles Emmanuel de Beauregard will assist in spearheading the group as director of structured finance and will be responsible for export, infrastructure and asset-based finance.

Additionally, Karim El Zein has been appointed vp for debt capital markets. He joins from Credit Suisse, where he originated and executed debt capital market transactions for corporates, financials and sovereigns in the Middle East, Turkey and Africa.

Finally, Cem Orekli has been hired as director of natural resources and joins SG after having held senior roles in natural resources activities at ING and UniCredit.

Structured Finance

Agency beefs up board

Scope Ratings has expanded its executive board by appointing Stefan Bund. In his current role as chief analytical officer, Bund directs rating and analysis in the agency's four current active areas - banking, corporate bonds, structured finance and alternative investment funds. Prior to Scope, Bund held senior roles at Portigon, WestLB, Fitch and Landesbank Baden-Wuerttemberg.

Structured Finance

Private debt pro moves

Eiffel Investment Group has hired Mathias Choussy as part of its credit team. He arrives from Federis Gestion d'Actif, where he was responsible for private placements activity, particularly with co-managing investments in private credit instruments issued by European mid-caps.

Choussy has also held a number of senior roles that encompassed portfolio management and research in the investment grade, high yield and securitisation markets. The firms he previously worked at include Oddo Asset Management, Banque d'Orsay Asset Management, West LB and Credit Agricole.

CDO

CDO manager takes over

Vanderbilt Capital Advisors has resigned from its role as collateral manager for six transactions, with Babson Capital Management designated as the replacement manager. The transactions are: Dunhill ABS CDO, Lakeside CDO I, Streeterville ABS CDO, Burnham Harbor CDO 2006-1, Highgate ABS CDO and Monroe Harbor CDO 2005-1.

Fitch says that terms of the proposed replacement collateral manager agreement have remained almost identical, with only minor differences that are not material to the ratings of the transaction. In addition, Moody's notes the actions will not result in the withdrawal, reduction or other adverse action with respect to any of its current ratings on the deals.

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

Insurance-linked securities

PartnerRe readies negotiations

PartnerRe's board of directors says it is prepared to engage in discussions with EXOR to determine whether its cash offer to acquire all of the outstanding common shares of PartnerRe for US$137.5 per share (SCI 13 May) can be improved so that it is compelling, on price and terms, to PartnerRe's shareholders. AXIS Capital has provided PartnerRe with a waiver, allowing direct engagement with EXOR with customary access, including due diligence.

PartnerRe says that it expects to undertake these discussions with EXOR as expeditiously and constructively as possible in order to come to a decision that is in the best interest of the company and its shareholders. However, the company notes that there can be no assurance that the discussions with EXOR will result in a transaction that the PartnerRe board is prepared to recommend or that there will be a consummation of a transaction.

Concurrently, the PartnerRe board has issued a letter to its shareholders responding to alledged mischaracterisations and misstatements made by EXOR regarding its proposal and the discussions between the two parties. The board has also not changed its recommendation with respect to, and continues to support, the pending merger with AXIS Capital.

Credit Suisse and Lazard are acting as financial advisors and Davis Polk & Wardwell and Appleby (Bermuda) are acting as legal counsel to PartnerRe.

RMBS

Nomura given damages figure

Nomura has been ordered by a US district court to pay US$806m to the US FHFA following a ruling that the financial holding company made false statements in selling MBS to Freddie Mac and Fannie Mae prior to the 2008 financial crisis (SCI 12 May). The court set out an order for the FHFA to submit a proposal for damages during the announcement of the ruling.

Nomura says it will review the judgment and consider all options, including appeal. The judgment is expected to have no significant impact on the company's consolidated performance.

ABS

Timeshare delinquencies 'stable'

US timeshare ABS delinquencies were stable in 1Q15 and remain within historically normal levels, according to Fitch's latest index results for the sector. Total delinquencies were 2.9% for the quarter, consistent with 2.89% in 4Q14 but below the 3.19% observed in 1Q14.

Fitch says there was a slight increase in defaults in 1Q15, due to typical winter performance. Defaults stood at 0.68%, up from 4Q14 at 0.55% and up just slightly from 0.65% observed a year ago in 1Q14. Although they are still somewhat elevated compared to pre-recessionary levels, defaults have displayed overall modest improvement over the last three years.

On a rolling 12-month basis, defaults were at 6.55% for 1Q15, down from 6.73% for 4Q14. This represents three years of consecutive quarterly improvement, as well as the lowest level of defaults for timeshare ABS in six years.

Overall, Fitch has observed consistent year-over-year improvement since 2012 in US timeshare ABS delinquencies. The agency's rating outlook for the sector remains stable, which it attributes in part to the delevering structures found in timeshare transactions and ample credit enhancement levels.

ABS

ABS survey signals stability

ABS investors remain comfortable with performance in the market, according to JPMorgan's mid-year ABS investor survey. This will likely be reflected in continued participation in the sectors that the investors currently invest in.

JPMorgan ABS analysts expect ABS supply to reach US$200bn by year-end 2015, which would supplant the US$190bn of primary issuance in 2014. Survey respondents concurred, with 45% of those polled expecting supply of US$200bn, 34% projecting US$195bn or lower and 14% estimating US$220bn or more.

Meanwhile, spread forecasts for three-year triple-A fixed-rate credit card ABS for the end of 2015 reveals that 53% of respondents anticipate spreads to tighten below the current 24bp spread. In contrast, 37% anticipate spreads widening from 25bp to 40bp over the course of the year.

For high-yielding ABS, investors expect three-year triple-B subprime auto ABS spreads - currently at 155bp - to reach 125bp to 250bp by year-end 2015. A tenth of respondents see spreads staying exactly the same, while 40% expect some tightening.

JPMorgan's survey also asked if Moody's rating actions in the FFELP student loan space affected investors' outlook on the sector. Excluding the 36% of respondents that answered 'not applicable', 78% said that the rating action did not alter their view of the sector. This could be a result of increasing expectation that FFELP bonds will pay off through a combination of voluntary prepayments, Navients' loan purchases and clean-up calls.

With regard to preferred ABS asset class, bank investors preferred private credit student loans, prime auto and subprime auto equally, while pension funds were split evenly between credit card and FFELP student loans. Money managers were divided among all sectors, with the exception of FFELP SLABS. In addition, 30% of insurance companies favoured esoteric ABS, down from 42% in JPMorgan's December 2014 survey, and likely reflecting the lower spreads in the sector compared to a year ago.

Investor sentiment on credit card ABS performance was uniform, with 80% of respondents looking for bankcard charge-offs to range between 2%-2.5% in 2015.

Finally, investor responses placed CLOs as the favoured sector within fixed income, polling at 36%. On the other hand, 14% identified consumer ABS as their top choice, 16% chose non-agency RMBS and 14% selected private-label CMBS.

The largest groups of respondents to the survey were money managers and insurance companies. Money managers made up 52% of respondents, while insurance companies and banks accounted for 10% and 6% of survey respondents. Pension funds, hedge funds and other investors made up the remainder.

ABS

CDQ activity picking up

The Italian Cessione del Quinto (CDQ) market will remain active in 2015 based on cheap available funding and an improved macroeconomic forecast for Italy, says Moody's. Most CDQ transactions are currently either performing in line with, or exceeding, the agency's expectations and arrears are low in absolute terms.

"CDQ financing represents about 17% of the Italian consumer lending market," says Pier Paolo Vaschetti, a Moody's vp and senior analyst. "Cheap available funding and improved expectations for the Italian economy will have a positive impact on CDQ loan origination in 2015."

CDQ and Delegazione di Pagamento (DP) loans are Italian consumer loans that differ from standard unsecured consumer loans, as payments are directly debited from the obligor's salary. The loans benefit from insurance against unemployment and mortality risk. In Moody's view, this implies that the level of losses in a CDQ or DP transaction would remain stable even if unemployment is high during a downturn, as long as the insurance company fulfils its contractual obligations.

About 15% of total outstanding CDQ loans are securitised, with a 14% increase in securitisation in 2014 year-on-year. Total issuance decreased by 0.7% year-on-year in 2014, mainly as a result of a 2.3% reduction in lending to pensioners. At the same time, lending increased to employees in the public and private sectors by 0.8% and 0.3% respectively.

Meanwhile, delinquencies and defaults are low, with a weighted-average 90-plus day delinquency ratio of about 1% across the six transactions. Arrears are low, but high levels of repurchased loans in some transactions suggest that actual default levels could be higher than reported.

Moody's says that repurchases are credit positive in the short term because the issuer uses the cash injection to repay the notes, but they can mask pools' actual credit quality. However, performance could deteriorate unexpectedly if the originator stops repurchasing delinquent loans.

Finally, regulatory changes in the CDQ market are likely to have mixed effects on performance. The notification process to public employers and insurance companies following a portfolio transfer at closing or during the revolving period is now simpler, mitigating the associated operational and legal risks. On the other hand, Moody's considers the option for the employees to receive part of their severance pay in cash as part of their salary to be credit negative for transactions.

Structured Finance

SSFA guidance released

The US Fed has issued guidance indicating when a banking organisation that determines its risk-based capital using the advanced approaches may apply the simplified supervisory approach (SSFA) rather than the supervisory formula approach (SFA) when determining the risk weight of a securitisation exposure. The guidance modifies the previous 2013 guidance and sets forth more general guidelines as to when the SSFA may be used by advanced approaches banks.

Under the risk-based capital rules, an advanced approaches banking organisation must determine the risk weight of a securitisation exposure that does not require deduction from capital or a 1,250% risk weight using the SFA where the bank can reasonably calculate the necessary formula inputs on an ongoing basis. In all other cases, the SSFA must be applied, or the exposure is assigned a 1,250% risk weight.

Under the Fed's 2013 guidance, banks are required to make "good faith efforts" to obtain the data necessary to calculate the SFA. A Chapman and Cutler memo notes that in the accuracy of estimates, banks may nonetheless apply the SFA, provided that the approach taken to estimate the necessary inputs is reasonably conservative.

Structured Finance

Revolving structures evaluated

Despite revolving structures not yet emerging in the growing Chinese securitisation market, Fitch believes they are both necessary and desirable. This is particularly true for ABS transactions, where the underlying assets have a short tenor.

The agency says that without the use of revolving structures - which would allow issuers to reinvest repaid receivables into purchasing new receivables - an ABS transaction that securitises short-term receivables will be inefficient. As a result, it may not be feasible for originators who incur relatively high upfront transaction costs for very short-term funding, depending on the principal payment terms of the assets.

This issue is particularly relevant to auto loan transactions and the potential development of a credit card ABS market. In China, typical credit card receivables have an average monthly payment rate of up to 80%, which means an ABS transaction backed by these receivables could be repaid in as little as two months.

On average, 43% of senior notes in auto loan transactions have been repaid within six months of closing. The rapid pay-down of transactions impacts issuers who need to access the market frequently to maintain funding levels and investors who are required to reinvest the repaid proceeds.

Fitch explains that revolving structures allow principal payment from the underlying assets to be used to purchase additional assets during the revolving period instead of paying down the ABS notes as in a pass-through structure, which is the prevailing structure adopted in China. A revolving structure also provides the benefit of a longer-term, more predictable debt instrument, but it is not without risks.

Additional risks that may not be present in static transactions include a longer time horizon, during which the underlying economy can change, as well as additional losses during the revolving period before the transaction starts to amortise. In addition, changes occur in the portfolio as assets mature and are replaced, which may weaken the credit quality of the portfolio. This could happen through a change of product mix or changing underwriting and collection policies during the revolving period when new receivables are added to the securitised pool.

Therefore, Fitch notes that a number of features are essential in revolving structures to ensure the protection of noteholders. An example is asset concentration limits, which set proportion boundaries for certain product or obligor types on a portfolio basis, thus preventing portfolio migration to risky product or obligor types. Further, transaction triggers relate to asset performance - such as delinquency ratio and excess spread ratio thresholds or originator financial health - which, if breached, will cause the revolving period to end and early amortisation to begin.

CMBS

Auction listings up

Auction.com and RealCapitalMarkets.com listings indicate that 84 properties with US$575m in balance from 80 distressed CMBS loans are out for bid in May and June. GCCFC 2005-GG5 has the highest exposure to the auctions at US$145m across nine properties, followed by LBUBS 2006-C4 with US$101m exposure from 13 properties, according to Barclays Capital figures.

US$45m Meadowbrook North, US$34m Senator Office Building and US$30m River Park Plaza - all securitised in GCCFC2005-GG5 - are the three largest loans put up for sale. The three largest loans from LBUBS 2006-C4 are US$18m Oxford Court Business Center, US$17m Southridge Plaza and US$11m NBSC Building.

Meanwhile, auction results for the April listings are emerging, the largest of which involved the US$33m Goodwin Square securitised in CD 2005-CD1 (see SCI's CMBS loan events database). The property was last valued at US$13.2m and has been sold for US$17.6m, which Barclays CMBS analysts calculate will leave the trust with approximately US$6.6m after outstanding advances and ASER are repaid.

Additionally, the modified US$9.8m/US$4.2m Evergreen Apartments and US$5.1m/US$1.3m Ridgewood Apartments - both securitised in MLCFC 2007-7 - appear to have sold for US$9.3m and US$4.5m respectively. The US$1.8m Chicago Heights - also securitised in MLCFC 2007-7 - received a bid of US$1.9m, but this likely did not meet the minimum reserve price.

CMBS

Court proceeding for TITN 2006-3

US Bank, as trustee for the Titan Europe 2006-3 CMBS, is seeking directions from the English courts under a Part 8 proceeding as to matters of contractual interpretation relating to noteholder entitlements under the priority of payments. The move is due to a continuing dispute between the class X noteholders and the other noteholders, the resolution of which is required prior to making distributions to the notes (see SCI's CMBS loan events database). This follows the enforcement of the notes in July 2014 and the application of interest on unpaid amounts under the transaction.

The class X noteholders have also introduced an issue in relation to the determination of the net mortgage rate and the court will be invited to determine this issue as well. Certain class A noteholders have formed a group to engage in discussions with respect to resolving the dispute and to participate in the Part 8 proceedings. The class A group is represented by Quinn Emanuel Urquhart & Sullivan UK.

CMBS

Financing portal debuts

Auction.com has introduced its CRE Financing Portal, which enables investors to apply for financing on qualified assets via the Auction.com site. The portal provides investors with the opportunity to complete financing applications, view their loan application status in real time, upload documents from their desktop, laptop or tablet, access their term sheet and communicate with lenders directly.

Financing options will be provided by the company's preferred lenders and will count towards a buyer's proof of funds - a requirement for bidding on all properties offered for sale on the Auction.com platform. Auction.com says that the platform offers complete transparency to the large pool of bidders it attracts.

CMBS

CMBS 2.0/3.0 watchlistings continue

US$1.2bn across 92 US CMBS 2.0/3.0 loans were newly watchlisted this month, mostly from the 2013 and 2014 vintages, according to Barclays Capital figures. The first 2015-vintage watchlisting also contributed to the overall balance.

MSBAM 2013-C8 has the largest exposure to May's watchlistings at 10%, or US$120m, primarily from the largest watchlisted loan this month - the US$115m The Crossings Premium Outlets, which has deferred maintenance items tied to life safety. Barclays CMBS analysts suggest that this should not trigger any default event, as the loan has performed strongly, with a DSCR NOI of 4.1x in 2014.

GSMS 2013-GC14 has the next largest exposure from four loans totalling US$62m, the biggest being the US$49.47m Mendoza Multifamily Portfolio. The loan was also watchlisted for deferred maintenance and has a DSCRNOI of 2.18x, which isn't expected to trigger any immediate distress.

Meanwhile, the US$48.89m U-Haul Storage Portfolio - securitised in COMM 2013-CCRE12 - was watchlisted due to approximately US$330,000 in missed tax payments on two of its properties. The loan had a consolidated 2014 DSCR NOI of 3.17x, with a 79% occupancy rate, and shouldn't trigger any default event.

But the US$45m Burnham Center - securitised in MSBAM 2013-C10 and C12 - was watchlisted as its DSCR NOI decreased to 1.35x, due to increased operational costs, which could add stress. The Barclays analysts note that 27 new leases were added and renewed during 2014, with occupancy at 92%, so DSCR is likely to revert to a positive trend once operational costs are fully absorbed.

US$22m Aspen Heights Charlotte - securitised in COMM 2015-LC19 - has become the first loan from the 2015 vintage to be watchlisted. The properly was watchlisted due to payment delinquency, despite being reported as current in its payments.

CMBS

Performing maturity wave projected

The US$64.2m Watergate loan - the fourth-largest in GSMS 2006-GG6 - is among some US$40.21bn of performing CMBS loans maturing this year, according to Morningstar. The agency says that this marks the start of a wave of loans securitised during 2005 to 2007 that are now approaching their maturity dates.

Over an expected three-year wave, Morningstar says that US$264.63bn worth of performing CMBS loans are expected to mature. In 2016, US$112.66bn of performing CMBS loans will mature, followed by US$111.76bn in 2017.

The agency expects an on-time pay-off rate of approximately 80% for loans maturing this year, based on LTVs. However, it projects the on-time pay-off rate to dip in 2016 and 2017 as loans underwritten during the height of the market, when underwriting standards relaxed, come due.

Because the Watergate loan has a low DSCR (0.41x), Morningstar has had the loan on its watchlist for the past three years. The collateral's improving occupancy and borrower's capital investment, combined with the strengthening market, could benefit the loan's refinance prospects though.

In 2011, Penzance bought the complex for US$76m and embarked on a multimillion-dollar renovation of the building's entrance, lobby and common areas to attract new tenants. After losing one large tenant, a Safeway store in 2011, Penzance signed CVS as the largest tenant in Watergate's retail plaza, with the drug-store chain taking 13,000 square feet of space in 2013. Strong leasing activity has commenced since then, allowing Morningstar to project occupancy to be in the mid-80% range prior to the loan's maturity.

While Morningstar remains concerned that the Watergate loan may have difficulty refinancing as its maturity approaches in November, its analysis estimates the LTV ratio to be 85% based on the 2011 sale price. What's more, sales of comparable office properties within one mile averaged about US$572 per square-foot, which would put the value at about US$149m and result in an LTV of about 43%.

Another area of the Watergate complex serves as collateral in another CMBS loan. A 12-story, nearly 300,000 square-foot office building in the complex backs a US$132m loan, one of the top 10 loans in LBUBS 2007-C2, which is performing as expected and doesn't mature until April 2017.

NPLs

FNMA completes debut NPL sale

Fannie Mae has disclosed the results from its first non-performing loans sale. The transaction comprised 3,068 loans with a UPB of US$762m, divided into two pools.

Pool 1 accounted for 710 loans (US$173.8m), while Pool 2 accounted for 2,358 loans (US$587.9m). The winning bidders for the pools were SW Sponsor and Neuberger Berman Fixed Income Funds respectively. The cover bid prices were 58.8% UPB for Pool 1 and 57.8% UPB for Pool 2.

Risk Management

Liquidity indicators prepped

Interactive Data is set to launch a new liquidity indicators service in July. The service leverages the same fixed income evaluated pricing and reference data content that supports pricing and trading functions from buy-side and sell-side firms.

The service's liquidity indicators include estimates of the projected trade volume capacity of a fixed income security, which can be used in conjunction with firms' actual position sizes to estimate the potential number of days to exit a position under various stressed assumptions. In addition, liquidity scores are offered to help firms understand their portfolios' liquidity profile. They can facilitate analysis of a variety of comparable groupings, including security versus universe, security versus asset class and security versus sector, offering flexibility to a range of firm types and functions.

Risk Management

HQLA trading platform unveiled

Tradition is set to launch a new marketplace for collateral and secured deposits, with the platform expected to go live in Europe later this year. DBV-X will offer market participants access to a range of counterparties and high-quality liquid assets that can be traded as collateral on a peer-to-peer basis.

The platform will offer full pre-trade counterparty anonymity, price transparency and a choice of execution models. Market participants are able to trade automatically within their risk limits to access a wide range of standardised liquid general collateral 'baskets', encompassing a broad spectrum of eligible assets. The aim is to enable customers to raise cash against collateral, perform collateral upgrades or generate additional yield according to their individual investment, funding and margin requirements.

DBV-X is free to join and is open to corporates, asset managers, pension funds, insurance companies, hedge funds, brokers, dealers and banks. The firms will have access to a range of maturities, currencies and collateral options, with a choice of tri-party or central counterparty cleared trades.

Euroclear has been appointed to act as the platform's tri-party agent in Europe, with DVB-X adopting its RepoAccess GMRA-based legal model.

Risk Management

UCITS changes suggested

ESMA has published an opinion to the EU institutions on the impact of EMIR on UCITS. In the opinion, ESMA calls for a modification of the UCITS Directive to take into account the clearing obligations for certain types of OTC financial derivative transactions under EMIR.

ESMA says it is seeking to find out how the limits on counterparty risk in OTC financial derivative transactions that are centrally cleared should be calculated by UCITS. In addition, ESMA's opinion asks whether UCITS should apply the same rules to both OTC financial derivative transactions that are centrally cleared and exchange-trade derivatives (ETDs).

ESMA believes that the UCITS Directive should no longer distinguish between OTC financial derivative transactions and ETDs. Instead, it says that the distinction should be between cleared and non-cleared OTC financial derivative transactions. For OTC financial derivative transactions that are not centrally cleared, ESMA suggests that there is no need to modify the UCITS Directive and the current counterparty risk limits of Article 52 of the UCITS Directive should continue to apply.

Further, ESMA's opinion suggests that counterparty risk limits should be calibrated to the different types of segregation arrangements, taking into account elements such as the portability of the position in the case of a default of the clearing member. In particular, ESMA believes that under individual segregation UCITS should not apply counterparty risk limits to clearing members, whereas under omnibus client segregation UCITS should apply some counterparty risk limits.

Moreover, ESMA believes that UCITS' counterparty risk limits to EU central clearing counterparties (CCPs) and some non-EU CCPs recognised by ESMA should take into account the relatively low counterparty risk of these entities.

Risk Management

Corporate derivatives usage growing

The use of derivatives is growing in anticipation of a hike in global interest rates, according to a report by Greenwich Associates. The firm suggests that increased demand for hedging instruments is placing a strain on dealers, which are facing rising derivatives trading costs as a result of recent regulation.

The report finds that corporate use of derivatives has climbed since the financial crisis, with the annual interest rate derivatives trading volume of the big corporate users growing to US$3bn in 2014 from US$2bn in 2006. The vast majority of these users, representing 87% of study respondents, say new regulations have had no impact on their use of derivatives.

However, while Dodd-Frank exempted corporate end users from its trading and clearing mandates, dealers executing bilateral trades with these clients are subject to much higher capital costs than those imposed on cleared trades for other clients. Over half the corporates participating in the study are paying credit charges to their dealer as part of the initial transaction to offset the dealer's cost of capital under Basel 3.

The report explains that these new cost dynamics have caused some banks to cut back their focus on corporate customers. As a result, corporates are increasing their counterparty lists to ensure they have access to the liquidity and services they need. The biggest beneficiaries have been second-tier dealers with large balance sheets and high credit ratings, with HSBC, RBC and Wells Fargo all examples that have seen strong growth over the past year.

"Even with these moves, corporate derivative end users won't be able to continue on as if it's 2007 forever," says Kevin McPartland, head of market structure and technology research at Greenwich Associates. "Rates will eventually rise and Basel 3 will start to make its mark on dealer-provided pricing and service, both causing a further adoption of central clearing."

The report suggests that corporate end users need customisation in their swaps more than most, which is a big factor in their choice to stay away from the more standardised derivatives encouraged by global financial reform. As the cost of that customisation rises and clearinghouses begin to clear more customised contracts, the report proposes that a move away from bilateral transactions is inevitable.

RMBS

Matching engine launched

ICAP e-Commerce has launched a US agency securities matching engine, powered by the company's US agency securities desk. ICAP says that the matching engine brings together buyers and sellers in the US agency securities marketplace by using both traditional and new execution methods to provide a liquid user experience for new and existing customers. 

RMBS

Broker-originated mortgages scrutinised

Fitch expects new Spanish broker-originated residential mortgages to suffer much larger credit losses than prime loans over the medium term, if the economy deteriorates or interest rates rise sharply, despite improved underwriting standards since the financial crises. The agency says this is because it may be in some brokers' economic interest to submit weak loan applicants to the lender. Broker origination also tends to have loan features that ease the financial burden on borrowers, such as very long tenors or reduced initial instalments, which attract weaker-than-average borrower profiles.

The default probability of broker-originated loans in Spain can be up to three times higher than prime origination, according to Fitch's loan-by-loan regression analysis of thousands of mortgages through an economic cycle. Broker portfolios in Spain have shown significant performance volatility, with an annualised default rate of 2.7% compared to 1.1% for all Spanish RMBS deals and 0.8% for UK non-conforming, as of 1Q15.

"Our analysis of Spanish repossessed residential properties, which are typically linked to weaker-than-average borrower credit quality, shows that in periods of economic stress recovery cashflows can be substantially lower than initial property values," the agency notes.

An average 52% recovery rate on initial property values is estimated for the almost 9,000 properties sold in 2008-2014, although this is gradually improving as property appraisal techniques continue to be revised. For example, the average recovery rate on younger origination vintages since 2010 is 64% relative to initial property values.

"We therefore think securitisation bonds collateralised by Spanish broker mortgages and with a target investment grade rating, such as the recently announced FTA RMBS Prado I (the first broker-originated Spanish RMBS deal to come to market for seven years), need to survive significant stresses above those experienced in the recent residential downturn. In our view, a reasonable credit loss rate on this type of collateral in an environment of significant stress commensurate with a double-A stress would be close to 20%, a 2.5x multiple on historical cumulative losses," Fitch concludes.

RMBS

Swiss house prices to stabilise

Signs of house price stagnation in Switzerland herald a soft landing for the market rather than a residential property crash, Fitch suggests. Sustained demand is expected to offset the downward pressure from Swiss franc appreciation, macro-prudential regulation and possible restrictions on immigration. The agency believes that prices will stabilise in the medium term.

Nationally, residential property price growth slowed in 2013 and 2014, following more than a decade of price rises. In some of the most expensive regions, prices are stagnating or even falling. Affordability - as measured by the ratio of house price to GDP per capita - appears to have stabilised, which suggests prices have peaked.

Fitch suggests that severe price falls are unlikely. Construction is constrained by capacity bottlenecks, while low interest rates, low unemployment and economic and income growth will maintain demand. Additionally, low and stable vacancy rates (below 1% for Switzerland overall) indicate that fundamentals will continue to support prices.

The Swiss National Bank has introduced measures to tighten lending criteria, such as a required minimum of 10% equity funding. Further, immigration has been a major source of demand, but looks likely to be subject to a quota following last year's referendum. Swiss franc appreciation since the SNB abandoned its euro/franc ceiling should slow economic growth and could reduce demand from foreign buyers.

RMBS

Ohio, Michigan RMBS performance warning

US RMBS deals backed by delinquent loans concentrated in Ohio and Michigan will perform worse than those backed by delinquent loans in other states because of high loss severities, Moody's suggests. The agency says this higher level of loss has been driven in part by significantly higher rates of home value depreciation.

Average loss severities for defaulted loans from Ohio and Michigan over the last two years were higher, at 84% and 77% respectively, than average loss severities on defaulted loans in other states at 59%. "Certain cities, such as Detroit and Cleveland, had much higher numbers of loans liquidated with high loss severities," says Moody's associate analyst Ilana Fried.

The extent of the home price deterioration from the peak to current levels in cities such as Flint, Michigan and Toledo, Ohio have driven loss severities higher for liquidated loans in the cities. As a result, the current weighted average LTV ratio of liquidated loans in Ohio and Michigan is also significantly higher than in other states.

"If loans with higher LTV ratios default, they will probably default at a higher severity, raising the risk that high loss severities in these states will continue," adds Fried.

In addition, Moody's says that loss severities are higher due to the liquidated loans in the two states having smaller loan balances on average than liquidated loans in other states. Lower loan balances reduce recovery proceeds upon liquidation owing to the high fixed foreclosure costs reimbursed from the proceeds by the servicers.

RMBS

TRID to raise loss risk?

Moody's says that the risk of losses for RMBS trusts have been raised by the initial operational challenges for lenders to implement and comply with the new TILA-RESPA Integrated Disclosure Rule (TRID). Lenders could also be challenged with the potential for increased costs in the event of non-compliance.

TRID expands and replaces the current disclosure requirements of the Truth in Lending Act and the Real Estate Settlement and Practices Act. The new rule expands the scope of erroneous information for which secondary market purchasers, such as RMBS trusts, are liable. As set forth by the US Consumer Financial Protection Bureau, the new rule goes into effect on 1 August.

"Just how much RMBS trusts will be liable for the errors of lenders will depend largely on the interpretation of the courts," says Yehudah Forster, a Moody's vp and senior credit officer. "The huge operational challenge for the industry to implement and comply with TRID will likely cause a spike in compliance errors."

Loans with uncured errors will have higher expected losses, given the potential for increased legal costs and damages. This is the result of the expanded set of errors for which RMBS trusts could be held liable under TRID.

However, Moody's believes that securitisations are unlikely to contain loans that violate TRID as long as they continue to follow post-crisis procedures. This can be done by having a third party perform due diligence on 100% of the loans before closing to unearth any TRID violations.

RMBS

Qualitative underwriting examined

Greater insight into how US prime RMBS perform can be achieved by observing the qualitative mortgage loan underwriting factors that supplement quantitative measures in a pool, says Moody's. The agency believes these measures would be useful to examine during an economic downturn.  

In general, RMBS pools backed by loans with similar quantitative measures but weaker qualitative measures will perform worse than pools backed by loans with stronger qualitative measures. Quantitative measures include borrower credit scores, LTV and debt-to-income ratios, while qualitative factors include the absence of negative events in the borrower's credit history, the number of unblemished lines of credit and explanations for any past late payments.

"These soft measures tell a story about the borrower that helps indicate both ability and willingness to repay the loan," says Lima Ekram, a Moody's avp and analyst.

For example, Moody's believes these measures can provide meaningful insight into a borrower's credit score. The presence of a past bankruptcy or foreclosure can indicate financial mismanagement on the part of the borrower. Conversely, multiple debts on credit lines with timely payments indicate that the borrower can successfully manage debt.

Additionally, a borrower's likelihood of default decreases as more time elapses since a negative credit event. Lenders such as Chase and New Penn have requirements for how much time must pass before extending a loan to borrowers with bankruptcy or foreclosure events in their history, while aggregators WinWater, PennyMac and Redwood will not even acquire loans made to borrowers who have had a past bankruptcy or foreclosure.

"Qualitative factors relating to a borrower's asset reserves are also important in determining whether the borrower will maintain the ability to repay during an economic downturn," explains Ekram.

The composition of a borrower's reserves is just as important as their size, because some, such as retirement funds, have restrictions on their availability. In addition, borrowers who use more of their own money for a down payment rather than gift funds are less likely to default.

Lenders can better assess a borrower's ability to repay by verifying a borrower's income and assets using a third party. These factors paint a more complete credit picture and help determine whether the borrower will be able to withstand higher payments during adverse economic times.

RMBS

Ocwen downgrade eyed

HSBC, as trustee to three Ocwen-serviced deals (RAMC 2005-4, RAMC 2006-1 and RAMC 2006-3), last week sent notices to noteholders requesting votes on terminating Ocwen as servicer. The notices refer to Fitch's downgrade of Ocwen's rating to RPS4 from RPS3 in February.

In the servicing agreements between Wells Fargo as master servicer and Ocwen as servicer, the downgrade constitutes a servicer EOD, according to Bank of America Merrill Lynch RMBS analysts. As long as such an event has not been remedied and at the direction of at least 51% of certificate holders, Ocwen can be terminated as servicer on the deals.

The BAML analysts note that S&P is the only rating agency that has not recently revised Ocwen's ratings. "A rating action from S&P could have significant impact to Ocwen," they observe. "Of particular importance is the MSR purchase agreement between HLSS and Ocwen dated on 6 April 2015, which states that the extension of Ocwen's servicing on the HLSS portfolio will not apply to any servicing agreement that is affected due to a downgrade of Ocwen's servicer rating to below average or lower by S&P or to SQ4 by Moody's."

RMBS

Granite upgraded on improved performance

Fitch has upgraded 52 tranches of the Granite master trust RMBS programme and nine tranches from the Whinstone transactions. The agency has affirmed all other tranches and revised the outlooks on 19 tranches.

The agency's actions are a result of a number of factors, including improving asset performance within the transactions. The balance of loans in arrears by more than three months has continued to trend downward over the past year to fall to just below 4% of the outstanding pool as at February, representing a substantial improvement compared with the 6.9% peak reached in 2011.

The Granite programme is backed by a portfolio of UK residential mortgages originated prior to 2008 by Northern Rock Asset Management, which is now owned by UK Asset Resolution. The five earlier Granite issuances (Granite Mortgages 2003-2, 2003-3, 2004-1, 2004-2 and 2004-3) form the capitalist structure of the master trust programme, while the later nine (Granite Master Issuer 2005-1, 2005-2, 2005-4, 2006-1, 2006-2, 2006-3, 2006-4, 2007-1 and 2007-2) comprise the socialist structure. Whinstone and Whinstone 2 are synthetic securitisations, which each reference the performance of a Granite structure's reserve fund.

As well as a shared amortising reserve fund, each capitalist series has its own reserve fund. These funds are currently all at their target levels and do not amortise, which has led to credit enhancement across all issuances, with certain tranches being able to support higher ratings.

RMBS

RMBS 3.0 servicing improvements touted

Successive years of difficulties in the mortgage servicing sector have prompted a call for change among new-issue US RMBS market participants, according to Fitch. Most mortgage servicers have already begun undergoing significant transition since the mortgage crisis, including reductions in bank servicing portfolios and growth of non-bank servicing portfolios.

However, changes now being sought by the market include improved incentive alignment, more consistent reporting across servicers, improved access to servicers and more effective arrangements for the reassignment of servicing responsibilities in cases of servicer underperformance or disruption. Market participants also expect that a high degree of servicing focus will be placed on any loans in new transactions that become delinquent or underperform.

Fitch says that a certain amount of these changes could be implemented directly by servicers themselves. Additionally, some cases might warrant the use of a transaction manager (TM) or similar entity for oversight purposes.

In concept, a TM taking on a deal supervisory role would be empowered to direct actions, including those involving the servicers, for the benefit of investors. The manager would seek to hold servicers accountable for not meeting the terms and conditions specified in detail in new transaction pooling and servicing agreements, which might include termination. This would likely mean a high degree of operational and data integration between the RMBS servicer and the TM.

Fitch notes that such oversight can add particular value for weaker credit mortgage pools with higher rates of delinquency. Additionally, a TM working in tandem with a master servicer could add value to transactions which have unrated servicers or multiple primary servicers.

While many servicers remain focused on their legacy servicing portfolios and regulatory matters, Fitch adds that opportunities currently exist for improvements in servicer effectiveness. Potential changes could be seen to traditional servicing fee arrangements and the use of special servicers for the management of delinquent loans. However, the agency believes that those servicers that are able to evidence an ability to respond to the heightened investor expectations - while fulfilling all of their servicing responsibilities and requirements - will have greater success over the longer run.

RMBS

Non-agency RMBS approach released

Morningstar has published its US non-agency RMBS resecuritisation methodology, while updating its current RMBS ratings methodology and US residential mortgage loan reps and warranties framework. The agency's framework covers its analytical approach to various types of RMBS transactions, including qualified mortgages, non-qualified mortgages, reperforming loans, non-performing loans and resecuritisations of existing classes of RMBS.

Generally, Morningstar utilises a proprietary loan-level simulation-based credit model to gauge the risk of residential loans. Inputs to the model include loan-level static and dynamic data, as well as macroeconomic data.

The model outputs loan-level and monthly performance vectors - including default, prepayment, delinquency and servicer advance projections - at various rating levels. Morningstar applies qualitative adjustments to these results and may run a cashflow model to understand how the loan performance impacts payments to the securitised bonds. For a resecuritisation, the agency says it may run a cashflow model at the resecuritisation level to understand how the underlying bond performance impacts payments to the resecuritisation bonds.

RMBS

Ocwen sells agency MSRs

JPMorgan has agreed to purchase the mortgage servicing rights from Ocwen for 266,000 high-quality Fannie Mae loans worth an estimated US$45bn. The agreement follows a number of recent MSR sales by the servicer (SCI passim), as it continues in its attempt to raise capital.

RMBS

Single security determinations issued

The FHFA has published details of progress made on the single MBS that would be issued by Fannie Mae or Freddie Mac. Finalising the structure of the single security is a 2015 Scorecard item for both companies and for Common Securitization Solutions.

The FHFA last year issued a request for input on all aspects of a proposed structure for the single security (SCI passim). This latest update contains its decisions based on careful consideration of the responses and further dialogue with industry stakeholders.

"While the single security remains a multi-year initiative, we believe this update represents another significant milestone we have reached in defining the structure and processes necessary to transition successfully to a single security," comments FHFA director Melvin Watt. "Our objective is to continue to make progress on building a new securitisation infrastructure for Fannie Mae and Freddie Mac that is adaptable for use by other secondary market participants in the future."

Overall, the FHFA has made eight determinations on the single security structure. First is that each GSE will issue and guarantee first-level single securities backed by mortgage loans that it has acquired. The enterprises will not cross-guarantee each other's first-level securities and the Federal Home Loan Banks will not be eligible issuers of single securities.

The second determination is that key features of the new single security will be the same as those of the current Fannie Mae MBS, including a payment delay of 55 days. Third, first-level single securities will finance fixed-rate mortgage loans now eligible for financing through the TBA market. Fourth, lenders will continue to be able to contribute mortgage loans to multiple-lender pools.

The fifth determination is that each enterprise will be able to issue second-level single securities (resecuritisations) backed by first- or second-level securities issued by either GSE. In order for a legacy Freddie Mac Participation Certificate (PC) to be resecuritised, the investor would have to first exchange the PC for a single security issued by Freddie Mac, so that the payment date of all of the securities in the collateral pool backing the resecuritisation would be the same.

The sixth is that loan- and security-level disclosures for single securities will closely resemble those of Freddie Mac PCs. The seventh confirms that current enterprise policies and practices related to the removal of mortgage loans from securities (buyouts) are substantially aligned today and will be generally similar and aligned for purposes of the single security.

Finally, Freddie Mac will offer investors the option to exchange legacy PCs for comparable single securities backed by the same mortgage loans and will compensate investors for the cost of the change in the payment delay. Fannie Mae will not offer an exchange option for legacy MBS because the FHFA expects investors to treat them as fungible with single securities.

The FHFA welcomes feedback on these single security structure determinations.