Contents

Euro secondary subdued

A distracted European securitisation secondary market looks to be closing the week in subdued manner.

With traders distracted by a busy primary market and the large CDO liquidation, for which the results are yet to be released, yesterday's European secondary market was relatively quiet. Month-end today should ensure more of the same.

Away from the big list the large ABS blocks did trade well, however. Meanwhile, spreads broadly remained range-bound though Spanish names saw some additional weakness thanks in part to the imminence of the PRADO new deal.

There are currently two European BWICs circulating for trade today. First up at 14:30 London time is a mixed ABS/RMBS UK auction.

The five line £37.559m list comprises: DELAM 2014-1 A2, GRAN 2004-1 3A, GRANM 2005-2 A7, GRANM 2006-4 A8 and PENAR 2014-1X A2. Two of the bonds have covered on PriceABS in the past three months, last doing so as follows: GRAN 2004-1 3A at 99.7 on 20 May and GRANM 2005-2 A7 at 99.763 on 26 March.

Then, at 16:00 are three lines of European CLOs in a 50.35m five line mixed dollar and euroTrups CDO and CLO list. The bonds involved are: EUROC VII-X SUB, LEOP IIX D, LONGF 2013-1X SUB, MMCAP 19A C, RPARK 1X SUB and SLOSO 2005-1A A2L. None of the bonds has covered with a price on PriceABS in the last three months.

Secondary markets

US CLOs tick over

The US CLO secondary market continues to tick over into month-end.

US CLOs have not seen the high secondary volumes of the weeks in the run up to the long weekend, but for a holiday-shortened month-end week the secondary market continues to tick over satisfactorily. At the same time, bonds have continued to trade, or at least cover, reasonably well throughout the week.

Today sees five US CLO BWICs circulating for trade today all involving 2.0 paper. In addition to the mixed euro list mentioned earlier, they include two mezz lists of mainly small clips.

In addition, there are auctions from either end of the capital stack - two hefty slices of triple-A and a fairly substantial piece of equity. The triple-As are due at 11:00 New York time and are $75m of BLACK 2012-1A A1 and $100m of CIFC 2012-2A A1L. Only CIFC 2012-2A A1L has covered with a price on PriceABS in the last three months - at H99H on 5 May.

The equity piece is $16m of MUIRW 2012-1A SUB due at 12:00. The bond has not covered on PriceABS in the last three months.

Secondary markets

Euro secondary starts settled

Last week ended quietly as anticipated for European secondary securitisation markets and, following the long weekend either side of the Atlantic, looks likely to begin this in settled form barring any interference from macro-driven volatility.

Secondary spreads ended last week broadly unchanged on the day on the back of continued light flows. Meanwhile, the few BWICs there were on Friday once again traded well for the most part. This morning's open sees a more cautious tone, but little direct impact so far from Greek-based concerns.

It's a quiet start to the week in terms of BWICs, but the schedule is already building for the remainder of the week across all asset classes. Notable among the lists already on the calendar is the previously mentioned 134 line mixed asset CDO liquidation due on Thursday.

There is currently only one European BWIC scheduled for today. At 15:00 London time is a €10.481m three line CLO list comprising: JUBIL VI-X F, MSIMM 2007-1X SUB and SPAUL 1X M. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Slow return for US CLOs

The US CLO secondary market is taking its time to return after the long weekend.

The frantic activity of last week may have introduced some buyer fatigue to cause the low levels of activity expected today in secondary CLOs. However, as more and more traders return after the holiday as this week wears on it is likely the pace will pick up and then it will become clearer whether the rally will be maintained.

For now, the BWIC calendar is sparse. There are no US CDO or CLO auctions scheduled for today so far and just four lists are visible for the remainder of the week.

The bulk of line items currently due involve 2.0 triple-A CLOs, but perhaps the most interesting list is a Trups CDO BWIC scheduled for 14:00 New York time on Thursday. The six line $152.5m original face list comprises: ALESC 1 B2, PRETSL 4 MEZZ, TPREF 3 B2, TRAP 2005-9A B3, USCAP 1 B1 and USCAP 2 B1. Only one of the bonds has covered with a price on PriceABS in the last three months - TPREF 3 B2 at LM40s on 24 March.

Secondary markets

Euro secondary stays stable

European securitisation secondary markets are staying stable despite the broader credit market weakness of the past couple of days.

"Macro noise is keeping investors on the sidelines and there's quite a bit of new issuance to distract from secondary too," says one trader. "However, the general tone remains unchanged and we're still experiencing the status quo of the past couple of weeks."

Nevertheless, the trader adds: "There's quite a few BWICs hitting the screens now for the next few days, including tomorrow's large CDO liquidation. So, they will drive secondary activity for now as flows remain relatively quiet since the holiday."

There are currently eight European ABS/MBS and CLO BWICs circulating for trade today. The chunkiest is a mixed MBS auction due at 15:30 London time.

The 10 line 65.593m euro and sterling list consists of: ATLAM 2 A, DECO 8-C2X C, EPICP BROD F, ESAIL 2007-5X A1A, HIPO HIPO-8 B, LMS 2 BC, TAURS 2006-3 C, TAURS 2006-3 D, TDAC 9 A2 and WTOW 2007-1 A. Five of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: ESAIL 2007-5X A1A at 93.75 on 9 April; HIPO HIPO-8 B at 85.15 on 19 March; TAURS 2006-3 C at 70A on 28 April; TAURS 2006-3 D at 38.75 on 24 March; and TDAC 9 A2 at 90.7 on 12 May.

Secondary markets

US CLOs stay firm

Despite a slower pace than recent weeks, US CLO secondary spreads are staying firm.

"We started relatively slowly after the holiday yesterday and while there are a few more BWICs today it's still slower paced than the last couple of weeks," says one trader. "However, it also feels slower on the primary side, which will support secondary."

Indeed, the trader continues: "Market tone is generally constructive. There is a little fatigue following the high volumes of the last few weeks, but it doesn't seem to be translating into softness."

Equally though, there is no clear sense of direction. "There is no real theme to the BWICs out there in terms of either vintage or part of the capital stack," says the trader. "It's a holiday shortened week so there's an element of wait and see about the market and so it's too early to tell if and when the market will really pick up again."

There are currently six US CLO BWICs circulating for trade today, the largest of which involves 15 lines of 2.0 double- and triple-As due at 11:00 New York time. The $195.5m original face list consists of: ALM 2012-7A A1, ANCHC 2013-1A A2A, ARES 2012-2A A, AWPT 2013-1A A1, CIFC 2013-2A A2L, ECP 2012-4A A1, HLA 2012-1A A1, LCM 11A A, MAGNE 2012-6A A, OAKC 2012-6A A, OCP 2012-1A A1, OCP 2012-2A A2, OFSBS 2013-5A A1LB, SARAT 2013-1A A2 and WSTC 2013-1A A2A.

Two of the bonds have covered with a price on PriceABS in the last three months - ALM 2012-7A A1 at H99H on 5 May and ECP 2012-4A A1 at 99H on 28 April.

Secondary markets

Euro ABS/MBS sees weak peripherals

While broader markets have been boosted overnight by news on Greece, the European ABS/MBS secondary market is still showing signs of peripheral weakness.

"It's been a slow week but we are bit weaker in Portuguese and Greek names," says one trader. "As a result of peripheral concerns we're seeing customers bringing out more and more paper."

At the same time, core vanilla bonds remain reasonably well-supported and consequently spreads there are unchanged. Today, though, the focus will be in the BWIC market.

There are currently four European ABS/MBS BWICs circulating for trade today, with one €21m piece of ISLND 2007-1 B postponed until Monday. However, it is the previously mentioned 134 line mixed asset CDO liquidation due at 14:00 London time that dominates the schedule. The auction offers a range of ABS, CMBS, RMBS and SME CLO assets across a variety of jurisdictions - €52.472m current face in Dutch bonds; €1.233m French; €8.549m German; €77.395m Italian; 26.651m Portuguese; €87.126m Spanish; and €75.958m UK.

Away from the CLO liquidation, two large ABS blocks due at 11:00 are receiving the most attention. The list involves €18.22m current face of BSKY GER² A and €22.357m SILVA 5 A. The bonds last covered on PriceABS at 100.09 on 27 March and 100.05 on 9 April, respectively.

Secondary markets

More of the same for European CLOs

The European CLO secondary market is continuing to see strong demand for paper.

"This week is seeing more of the same patterns we've been seeing in the past few weeks," says one trader. "Appetite is strong for paper and we continue to see investors with money to put to work in this sector."

The trader continues: "There's still not as much interest in 1.0 single- and double-As, but everything else of that vintage is doing fine - the good names continue to trade well and the less good ones just a bit behind. At the same time, 2.0 paper across the board remains in high demand."

There is one area that is underperforming, however. "There are signs of weakness in primary triple-Bs and below, but it's not having a significant impact," the trader says.

There are currently four European CLO BWICs circulating for trade today including one €2m line of HARVT I-X E in the large CDO liquidation list. All six bonds in for the bid are small clips of 1.0 primarily in mezz, but the largest piece is an equity tranche - €3.77m of JUBIL VI-X F, which hasn't covered with a price on PriceABS in the last three months and DNT'd last time out on 26 May.

Secondary markets

Supply returns to US RMBS

Pent up supply following the holiday weekend has burst on to the US RMBS secondary market.

"It's a very busy week for month-end," says one trader. "We saw $500m in for the bid on Tuesday, which is high for the first day back from a long weekend, with large lists announced for today and tomorrow."

Today's BWIC volume is sizeable even for a Thursday at $1.3bn. The big list today is a $650m AON auction due at 13:00 New York time split into two parts - one consisting of Home Equity and POA deals and the other of seven RAMC bonds. Tomorrow's highlight involves 11 Home Equity, POA seniors and mezz bonds accounting for $650m in current face due at 10:00

"These large lists always bring out the sellers, so we're seeing hedge funds and money managers putting similar assets in for the bid too, which is also driving up volumes," says the trader. "At the same time, talk of a new CAS deal is generating lists of SFR paper in what's become an increasingly correlated move - talk of a new deal causes selling of relatively similar recent bonds to make room in portfolios."

Despite the heavy supply spreads are holding firm, the trader notes. "Sellers are just taking advantage of strong levels rather than being forced into it and bonds continue to trade well as the real money investors who are currently buying most of the paper see RMBS as offering high relative value and worth holding on to."

RMBS

SFR market moves east

While the single-family rental securitisation market continues to grow, the profile of the underlying properties is changing. Where earlier deals were overwhelmingly backed by properties from the western US, more recent deals contain heavier concentrations of eastern properties.

SFR issuance this year has passed US$4.3bn and is on course to surpass last year's total, say Morgan Stanley analysts. It is the eastward drift, however, and the implications that brings, which is the market's most interesting development.

Progress Residential 2015-SFR², which priced last week, demonstrates the eastbound trend. The top five states in that deal - accounting for more than 80% of the properties - are Florida, Georgia, North Carolina, Texas and Tennessee. Arizona and Nevada, which dominated the first wave of SFR deals brought to market, are conspicuous by their absence.

"This is a substantial shift from the deal Progress priced as recently as January 2015, in which Arizona and Nevada were the third and fifth most represented states, respectively. It is an even more sizeable shift from their first deal, in September 2014, in which Arizona was the most represented state and Nevada fourth," the analysts note.

This eastward migration can be seen to different extents across every operator that has issued multiple SFR deals, say the analysts. This is partly because institutional investors have changed their buying behaviour.

A significant factor for deal performance is the fact that homes in the Midwest and South are more expensive to renovate and bring online than those in the West, believe the analysts. This could either indicate lower-quality properties or older homes, which would likely also entail higher ongoing expenses.

Looking at annual underwritten expenses as a percentage of total cost basis suggests that operators are assuming higher expenses in the South and Midwest. However, it is worth noting that the difference between MSAs does shrink if annual real estate taxes are removed from the equation.

The geographic shift is also significant for realised HPA within deals. Western locales such as Phoenix and Las Vegas have seen much higher trough-to-current price appreciation (at increases of 48% and 53%, respectively) than the likes of Charlotte and Dallas (20% and 28%).

The combination of higher costs and lower home price appreciation for Midwestern and Southern MSAs suggests deal performance will change. However, lower HPA is still HPA and the analysts note that even the most recent deals have already realised double-digit price appreciation from the time the properties were acquired.

JL

Structured Finance

GSO co-founder steps down

Doug Ostrover is stepping down as senior md of Blackstone and will become a senior adviser to the firm. Along with Bennett Goodman and Tripp Smith, Ostrover was one of the founders of GSO, Blackstone's alternative credit platform. Prior to this, he was chairman of the leveraged finance group of Credit Suisse First Boston.

Structured Finance

Strategic partnership agreed

Fortress Investment Group and Mount Kellett Capital Management have reached an agreement for an affiliate of Fortress to become co-manager with Mount Kellett with respect to the latter's investment funds and related accounts. Mount Kellett affiliates will continue to serve as general partner of the funds, with affiliates of Fortress becoming special limited partners.

The transaction is subject to receipt of Mount Kellett investor consent and certain other approvals, and is expected to close on or about 30 June. Financial terms of the transaction were not disclosed.

Structured Finance

FCA fines investment bosses

The UK FCA has published notices setting out its decision to fine and prohibit three former members of Keydata Investment Services' senior management from performing any role in regulated financial services. Stewart Ford, Mark Owen and Peter Johnson have received the notices on the accusation of misleading investors, as well as the UK FSA, regarding the performance of certain investment products. The FCA has decided to fine Ford, Owen and Johnson the sums of £75m, £4m and £200,000 respectively.

According to the FCA's allegations, Keydata designed and sold investment products to retail investors via independent financial advisors. The products were underpinned by Keydata's investment in bonds issued by Luxembourg SPVs called SLS Capital and Lifemark. In turn, SLS and Lifemark invested in portfolios of life settlement policies, with the products sold as eligible for ISA status - despite not being eligible.

The FCA claims that Keydata continued to sell the Lifemark-backed products to retail investors when the accused individuals were aware that it was highly likely the products did not comply with the ISA regulations or that the financial promotions were unclear, incorrect and misleading. Further, the FCA says that the accused individuals were aware that the due diligence on the products was inadequate and that there were problems with the performance of the portfolio ultimately underlying the products.

Ford, along with trusts set up for the benefit of his family, allegedly received £72.4m in fees and commissions on sales of the Lifemark products, while Owen received commissions on sales of the Lifemark products in the amount of £2.5m. In the FCA's opinion, Owen's commissions were not properly disclosed, nor was Ford's conflict arising from the payment of these fees and commissions adequately managed. The individuals have also been accused of making false representations to the FCA in compelled interviews about the performance of the investment products. 

All three individuals have referred their decision notices to the upper tribunal, where they and the FCA will each present their case before appropriate action will be determined.

CDS

Deutsche settles LSS charges

The US SEC has charged Deutsche Bank with filing misstated financial reports during the financial crisis that failed to take into account a material risk for large potential losses on certain leveraged super senior (LSS) trades. The bank has agreed to pay a US$55m penalty to settle the charges.

Results of an SEC investigation allege that Deutsche Bank overvalued a portfolio of LSS through which the bank purchased protection against credit default losses. Because the trades were leveraged, the collateral posted for these positions by the sellers was only a fraction - approximately 9% - of the US$98bn total in purchased protection.

According to the allegation, this leverage created a gap risk that the market value of Deutsche Bank's protection could at some point exceed the available collateral, and the sellers could decide to unwind the trade rather than post additional collateral in that scenario. Therefore, Deutsche Bank was protected only up to the collateral level and not for the full market value of its credit protection. Deutsche Bank supposedly took the gap risk into account in its initial financial statements by adjusting down the value of the LSS positions.

According to the SEC,  the bank steadily altered its methodologies for measuring the gap risk when the credit markets started to deteriorate in 2008. Each change in methodology reduced the value assigned to the gap risk until Deutsche Bank eventually stopped adjusting for gap risk altogether.

The SEC claims that Deutsche Bank essentially measured its gap risk at zero and improperly valued its LSS positions as though the market value of its protection was fully collateralised. However, according to internal calculations, Deutsche Bank estimated that it was exposed to a gap risk ranging from US$1.5bn to US$3.3bn during that time period.

In addition to the US$55m penalty, the SEC's order requires Deutsche Bank to cease and desist from committing or causing any violations or future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and rules 12b-20, 13a-1 and 13a-16. Deutsche Bank neither admits nor denies the SEC's findings in the order.

CMBS

CMBS originations head named

Wells Fargo has promoted Eric Gunderson to regional manager of US CMBS originations for the southwest US. He replaces Brad Wilmot, who has moved to Goldman Sachs in an undisclosed role.

Gunderson is a director at Wells Fargo and was a senior commercial originator for the bank, prior to his new appointment. He has previously held senior roles at JPMorgan, RBS and Credit Suisse, and is also the founder of CRE loan advisory firm Highland Advisory Partners.

Insurance-linked securities

PartnerRe saga continues

PartnerRe has responded to a letter from EXOR regarding its offer to acquire all of the outstanding common shares of PartnerRe for US$137.5 per share in cash. The company says that EXOR has effectively rejected its board's good faith offer (SCI 21 May) to engage in discussions on price and other terms for the improvement of EXOR's current offer to a more compelling proposition for PartnerRe's shareholders.

PartnerRe says that the waiver it obtained from AXIS Capital to engage with EXOR contained no restrictions whatsoever that would impede full and open discussions. As a result, it reiterates its willingness to proceed on this basis to determine whether the current EXOR offer can be improved.

In the meantime, PartnerRe will now proceed to shareholder approval of the transaction with AXIS Capital. Its board remains firm in its stance in supporting the pending merger with AXIS Capital.

EXOR, for its part, says that it welcomes the PartnerRe shareholder vote on the AXIS transaction. EXOR also urges the PartnerRe board to announce a record date and a date for a shareholder meeting without delay.

ABS

Aircraft debt methodology released

Kroll Bond Rating Agency (KBRA) has released its methodology for rating enhanced equipment trust certificates (EETC) and secured aircraft debt. The methodology reviews the key risk factors that KBRA considers in rating full-recourse secured aircraft debt instruments issued by airlines and aircraft lessors.

Of the two corporate secured aircraft-debt types, EETCs are the most common form of publicly issued secured debt financing for airlines. They are typically used by a single obligor for securing larger, strategically important pools of aircraft (usually more than 10), tend to have standardised legal and structural features, and are often issued in the public market or as 144a debt. KBRA says EETCs are designed to be most effective when issued in jurisdictions that either benefit from the same or better than Section 1110 US bankruptcy law.

Secured aircraft debt transactions are issued by both airlines and lessors and are generally backed by fewer aircrafts than EETCs, could have a variety of structural features and enhancements, and are mainly issued in the private market. Such securities are generally not backed by a particularly strategic pool of aircraft collateral. Jurisdictional frameworks for these securities vary and are often not as clearly defined or tested as those present in EETCs.

KBRA's key ratings determinants for EETCs and secured aircraft debt transactions include the credit quality of the ultimate obligor, US bankruptcy law special protections, the LTV of the pool of aircraft in stress scenarios and structural features, such as liquidity facilities.

ABS

Chinese ABS benefits anticipated

Fitch suggests that the growth and development of China's ABS market should allow greater operational flexibility for banks in terms of liquidity and capital management, provided that the securitised assets are sufficiently transferred outside of the banking system. The Chinese government has placed increasing emphasis on asset securitisation as a means to free up idle assets within the banking system, and easing regulations could spur rapid growth in the ABS market over the short to medium term.

Latest figures from the People's Bank of China (PBOC) show outstanding ABS in China had reached CNY300bn (US$49bn) as of end-April, with potential for significant further expansion this year. Chinese financial institution ABS issuance totalled more than CNY350bn (US$57bn) from August 2013 to April this year.

Fitch expects non-bank financial institutions to play a bigger role in the asset securitisation market, although in the medium term they are unlikely to overturn the dominant position held by banks. Chinese banks reportedly sold CNY269bn of securities backed by loans in 2014, which is up from CNY16bn in 2013.

Formal securitisation provides an additional source of liquidity for banks and the potential for better asset-liability management, since it can release bank capital to stimulate lending to the real economy. However, it remains to be seen if the credit risk will be sufficiently transferred outside the banking system. Fitch believes that the potential benefits may be limited if the norm is for exposures to be supported - for example, via forbearance - and banks end up investing in other banks' ABS.

Meanwhile, the central government is encouraging banks to use the proceeds from their securitisation to support particular areas, including water resource projects, slum clearance and housing renovation, as well as railway construction in central and western China. Fitch maintains the view that large-scale state-directed lending could lead to over-investment and capital misallocation, and that the freed-up capital from securitisation could be easily consumed by a subsequent expansion in assets.

The impact on banks' overall profitability would depend on the extent of residual credit risk. PBOC and China Banking Regulatory Commission risk-retention rules require originators to hold at least 5% of the issued ABS and that the proportion of ABS in the lowest tranche of a deal held by an originator should be at least 5%.

Fitch says that if disclosure over ABS and for the financial sector as a whole improves, market participants may gain a better understanding and greater transparency into the underlying assets and their asset quality. Greater information disclosure may attract a wider range of investors, especially foreign investors, which could allow credit risks to be more effectively dispersed beyond the banking system.

ABS

Residual value risk examined

Moody's says that European auto ABS are increasingly exposed to residual value risk through the securitisation of lease products as a means of financing vehicle sales. Residual value transactions will be ineligible for repo with the ECB from August, underlying the importance for investors to be aware of residual value risk (SCI 4 March).

The growth of residual value exposure in securitisations reflects originators' incentives to use leases, rather than loans that do not entail residual value exposure, as a financing product. Leasing is a commercially attractive product to originators for a number of reasons, including the potential to retain a relationship with a customer that they can use to sell a replacement vehicle when the customer hands the car back.

An additional attraction is that, by leveraging the retained value in the vehicle, originators are able to make instalments cheaper for customers. By offering the product as a lease too, the consumer is only informed of the affordability and not the financing cost, which reduces the comparability with competitors who may be willing to offer more attractive financing terms.

Moody's notes that the overall health of the economy and market features direcly affect resuidual values. For example, market-wide movement in used car values is affected by changes in the supply and demand ratio. New cars purchased at year zero create the supply of used car vehicles on the market at the time of lease maturity, meaning volatility in new car sales can imply volatility in used car values.

This relationship occurs because the amount that consumers are willing to spend can vary depending on the economy, as can the quality of car available. As a result, during either times of difficulty or when there is a glut of used cars in the market, consumers can choose to keep their old car for longer or buy a used car instead of a new one.

Moody's says that lessees make fixed monthly instalments over a lease's life, including an implicit interest charge and an implicit principal amount, which represents the vehicle's expected depreciation. When the lease term expires, there is usually a large unamortised amount, which is the residual value of a lease. The risk is that at the lease's maturity, the lessee will choose to turn in the vehicle when its value is lower than the lease's outstanding balance.

Therefore, forecasters' predictive capacity could be essential to mitigating residual value loss in a securitisation. Moody's uses a scorecard that systematically accounts for risk considerations and helps to determine its baseline triple-A haircut for a transaction in a given market.

The agency explains that some forecasters rely heavily on third parties to provide their forecasts, while others may use the additional granularity of data they possess with respect to supply trends at the model level, regional trends and car colour to overlay third-party forecasts in a more sophisticated framework. Other considerations could include the extent of the use of residual value as a tool to increase vehicle affordability and the frequency with which forecasts are updated.

Structured Finance

Credit recovery initiative set up

A corporate credit recovery (CCR) initiative funded by HIG Capital affiliate Bayside Capital plans to invest in Italian mid-sized enterprises in distressed situations. Idea CCR, a platform managed by IDeA Capital Funds, aims to help such enterprises restructure and turnaround, and consequently to help banks maximise the recovery of their original loans.

Idea CCR is currently in discussions with a number of Italian banks, which are expected to contribute a portfolio of medium- and long-term corporate loans. Currently, such a portfolio is expected to have a nominal value of around €250m at closing, but over 12 months further loans could be contributed up to a total amount of €500m.

In exchange for such contributions, the respective banks will receive notes issued by Idea CCR. The platform is also expected to raise funding from HIG Bayside and other investors of up to 20% of the nominal value of the contributed portfolio, which will be made available to Idea CCR in order to support the financial and operational restructuring of the distressed debtor companies.

The operating governance of the companies is expected to be controlled by Idea CCR through restructuring agreements. It will be managed by a team led by Francesco Gori and Vincenzo Manganelli for the financial restructuring process.

Structured Finance

ABS surveillance standard introduced

Bishopsfield Capital has introduced a new standard for the surveillance of ABS investments in response to regulatory requirements. The standard entails a number of proposals that attempt to maintain formal monitoring procedures for ongoing, timely surveillance and stress-testing of securitisation investments, as well helping investors avoid stringent penalties for non-compliance.

"Although guidelines have been set out, regulators have not been clear in drawing a specific path for investors to maintain compliance," says Simon Collingridge of Bishopsfield. "The goal of our new standard is to chart a best practice approach for investors to reach compliance in a timely manner."

A key principle of Bishopsfield's standard rests on avoiding the preponderance of data. Although the firm states that the availability of data is at a strong level, the ability to use that data remains an issue. Therefore, its proposals attempt to provide investors with guidance in terms of creating a robust framework for using their data.

At the forefront is the proposal for conducting periodic investment credit reviews that study not only historic information, but also establish key performance indicators (KPIs) and stress scenarios to act as early warning signals. The KPIs and scenarios are aimed at identifying trends that prompt investors to initiate effective remedial action, while the reviews should inform senior management 'big picture' analysis and thinking, and examine systemic risks.

In addition, Bishopsfield proposes the performance of regular analysis and stress testing of investments and the overall portfolio. Performance should be benchmarked against the KPIs informing management decision-making through clear signals, with management reporting occurring on a regular basis.

The proposals also stress the monitoring of counterparty and market risk, regular reviews of information from independent credit information and analysis providers, and regular testing of the technology used to download and analyse loan-level data.

Structured Finance

Call for clarity on repo eligibility

Another 31 Spanish prime RMBS and SME ABS bonds were dropped from the ECB's repo-eligible list (SCI 6 March) last week. It appears that the move was due to non-compliance with the subordination rule, which requires that no tranche other than the eligible tranche is given priority over the receipt of principal and interest payments post a delivery of acceleration or enforcement notice.

European securitisation analysts at Bank of America Merrill Lynch point to the difficulty of knowing when a bond may become eligible or ineligible, given that the eligibility criteria seem to be continuously under review. They suggest that such uncertainty has serious consequences for investors, in light of the pricing differential and volatility differential that exist between eligible and ineligible bonds.

The recent bout of market volatility affected eligible and ineligible bonds in a different way: eligible bonds experienced minor spread widening and very limited price volatility compared with non-eligible bonds. "The difference in price volatility and relative spread levels leads to different investor bases for the two types of bonds, dominated by real money investors and banks for the former, and quick money investors for the latter. The type of investor base associated with a given investment instrument enhances further its price behaviour," the BAML analysts observe.

They add that transparency "leaves a lot to be desired", noting that there is lack of clarity regarding how eligibility criteria are interpreted, what drives the decisions on specific bond eligibility and why some bonds from a given shelf and visibly identical structures are eligible and others belonging to the same programme are not. Another area of uncertainty is the timeframe of the eligibility review.

CMBS

Corinthian Colleges exposure gauged

Corinthian Colleges recently announced closures for the remainder of its 28 campuses (see SCI's CMBS loan events database). Morgan Stanley CMBS strategists identify five CMBS 2.0/3.0 loans totalling US$94m with exposure to the closures, potentially representing idiosyncratic risk.

The largest of the loans is the US$47.4m Netpark Tampa Bay (securitised in COMM 2014-UBS4), where Corinthian Colleges is the third largest tenant representing 14.5% of the GLA. The loan is current and not on the watchlist.

The next largest loan is the US$19.6m 1600 Terrell Mill Rd (WFRBS 2011-C3), where Corinthian Colleges is the second largest tenant representing 9.85% of the GLA. The loan is also current and not on the watchlist.

Corinthian Colleges-affiliate Everest University is also the second largest tenant in the US$5.7m Sarno Business Park (COMM 2014-UBS5), occupying 14.15% of the GLA. Similarly, the property is current and not on the watchlist.

Meanwhile, the two properties in the US$12.2m Heald Colleges Portfolio (securitised in COMM 2012-CR1) were 100% occupied by Corinthian Colleges-affiliate Heald College. The master servicer received notification of lease termination on 28 April, although the borrower plans to keep the loan current and is marketing the space for lease.

Finally, the US$8.6m Pacific Center (WFRBS 2013-C12) - where Corinthian Colleges is the third largest tenant, occupying 22.16% of the GLA - is current, but has been watchlisted for lease rollover, tenant issues and vacancy. As of year-end 2014, the occupancy remained unchanged at 75.49%.

Additionally, the Morgan Stanley strategists identify 12 legacy CMBS loans totalling US$125m with exposure to the closures.

CMBS

CMBS workouts exceed transfers

Moody's reports that a total of 122 European CMBS loans were in special servicing at the end of April, securitised within 45 large multi-borrower and 36 single-borrower CMBS transactions. One European loan was newly transferred into special servicing in April, while six loans were worked out.

The pace of workouts continues to exceed new transfers, with the Government Income Portfolio loan - the sole remaining loan in Windermere XI - the only transfer in April, following a payment default at maturity. Three properties remain in the portfolio and, with the legal final maturity of the notes less than 24 months away, Moody's expects the loan will be worked out in the near future.

Six loans previously in special servicing have been worked out this quarter, as two loans made a full repayment, while four loans realised a principal loss. The €75m Urbis loan, which represents 31% of the pool in Titan Europe 2007-2, was worked out via a consensual asset sale. By original balance, this is the largest loan in special servicing to have repaid in full since Moody's began reporting on the sector in April 2010.

Further, of the four loans worked out with realised principal losses, three were secured over collateral located in continental Europe. Three of the loans were worked out via a forced sale of the security, while one loan - the €17m Six Hotels Loan in Titan Europe 2007-2- was worked out via a discounted purchase offer (see SCI's CMBS loan events database). The principal loss severities ranged from 9% to 34%.

As of May, Moody's tracked 62 loans worth a total of €6.4bn, and 51% of loans in special servicing, as undergoing liquidation either through consensual property sales or forced sales. For an additional 11 loans worth €2.4bn, the respective special servicers have already sold the underlying properties and are working towards finalising recoveries.

By location, Germany leads European countries with loans in special servicing at 72, with the UK next at 23 loans and France following with 10 loans. Moody's notes that its weighted average expected principal loss for loans in special servicing is currently 47%.

CMBS

Specially serviced loan values rising

The average appraised value for specially serviced US CMBS loans has increased slightly by 1%, according to Fitch. While the increase is marginal, there is a considerable range between the average for increases in appraisal values and the average for decreases.

Approximately 51%, or 330 of the 641 loans in Fitch's study, experienced an increase in appraised value from the previous appraisal, with values rising approximately 11.5%. Appraised values decreased for 286 of the 641 loans, with an aggregate decline of 14%, while the remaining 25 loans had valuations that stayed the same.

Loans greater than US$50m saw their appraised values improve over last year by 3.2%, while loans worth less than US$10m saw their values fall slightly by 0.5%. As legal fees and liquidation expenses are often higher on a relative basis for smaller loans, Fitch expects that fees and expenses will continue to make up a larger proportion of their loss expectations.

The aggregate appraised value for specially serviced loans in peak vintages (2005-2008) increased in value by an average of 1% over the last year, while appraisal values for loans from vintages prior to 2005 declined on average by 0.1%. Loans from seasoned vintages (10 years and older) that still remain in special servicing tend to be assets that have become obsolete or otherwise non-competitive and, despite generally rising CRE market valuations, have continued to fall in value.

Meanwhile, multifamily valuations continued an upward trend with a 7.8% increase in appraised values. Hotels and industrial properties also saw valuations rise by 5.1% and 2.7% respectively. In contrast, retail saw a 3% decline, while office was basically flat.

Fitch says that approximately 443 loans, or 69%, in the study are REO. REO appraisals experienced an increase in the aggregate AV of 2.3%, reversing the trend from last year when REO values fell 2.2%.

The agency has observed numerous examples of large reductions in appraisal values over the past 12 months, with 20 assets experiencing a decline of greater than 40%, compared with 31 last year. The three largest declines in appraised value for loans greater than US$20m are headed by the Coventry Mall in Pottstown, Pennsylvania, which saw the US$48.6m loan - securitised in MSC 2005-T17 - see its appraised value fall 55% to US$17.4m in March 2014 from its previous value one year earlier.

Next is the Texarkana Pavillion in Texas, which is a US$34.3m loan securitised in CD 2007-CD4. The property's appraised value fell 45% to US$9.6m in December 2014 from the prior year and has fallen 78% from its appraised value at securitisation in 2007. Finally, the US$38.2m Interstate Corporate Center loan - securitised in LBUBS 2007-C7 - saw its value fall by 40% to US$22.5m in August 2014 from January 2014.

RMBS

Agency auction completed

Freddie Mac has sold via auction 1,052 deeply delinquent Ocwen serviced NPLs from its mortgage investment portfolio, making it the GSE's third standard pool offering this year. The loans have an aggregate UPB of US$201m and the transaction is expected to settle in July.

The loans were offered as a single pool of mortgages, with LSF9 Mortgage Holdings the winning bidder. The cover bid price was in the mid-70s, while weighted average BPO LTV, average loan size and note rate are 93%, US$191,177 and 5.28% respectively. The loans are believed to have been deeply delinquent for approximately three years, on average.

Bank of America Merrill Lynch, Wells Fargo Securities and CastleOak Securities advised Freddie Mac on the transaction.

RMBS

Reverse mortgage approach published

Moody's has finalised its global rating methodology for rating reverse mortgage securitisations. The implementation will result in a number of rating changes, which the agency will publish as it completes its analysis of each affected transaction.

Moody's global approach to rating reverse mortgage securitisations details the rating agency's assumptions for assessing whether the value of the underlying homes at their maturities will be sufficient to pay off the original loans and any accrued interest. The methodology is based on the analysis of: the future price of the home; the timing of mortality and mobility events; interest rate risk; liquidity risk; legal and operational risk; and the structure of the transaction.

Moody's requested comment from market participants on the methodology in January (SCI 9 January) and has adjusted the methodology as proposed to address some comments. These adjustments include several clarifications on how the agency: assesses the availability of other sources of cash in the transaction; and derives its prepayment and morbidity rates assumptions.

RMBS

Italian mortgage prepays rise

Italian mortgages saw a sharp increase in annual prepayment rate to 3.2% in 1Q15 from 2.5% in 4Q14, according to Fitch's latest index results for the sector. The agency suggests that loan refinancing was the dominant factor in the rising wave of prepayments, while low interest rates and renewed lender appetite resulted in growth in new lending volumes.

Fitch adds that lenders perceive the refinancing of existing mortgages as a less risky form of origination, with it representing more than 50% of total new mortgage origination. The increasing prepayment rate of existing loans and origination of new replacement loans are both expected to continue in coming months.

Italian home prices continued to decline by 0.3% quarter-on-quarter, to stand at 16.3% below the 2008 peak. This is driven by the relatively wide gap between housing demand and supply. Fitch believes that further home price correction is likely, with a trough of 20% from peak being reached in 2016.

In addition, the proportion of loans in late-stage arrears in 1Q15 and the constant default rate both contracted by 10bp, with the averages now standing at 1.5% and 1.3% respectively. The falling arrears level may constitute a first sign of stabilising performance after years of deterioration. However, with a patchy economic recovery underway, Fitch says it is too early to expect a continuous improvement in arrears performance in the coming quarters.

Originator intervention in RMBS transactions boosted cumulative recoveries to 21.8% of cumulative defaults in 1Q15, up from 20.1% a year earlier. A substantial amount of defaulted loans were repurchased in the period to replenish transaction cash reserves. In general, the recovery process in Italy is lengthy and is expected to produce only limited proceeds in the short term.