Contents

Structured Finance

Rewriting the rules

Spanish law change boosts securitisation

Spanish legislators have adopted a new securitisation law, bringing the market more in line with the rest of Europe (SCI 28 April). While the changes are positive and should boost the Spanish ABS market, change on a broader level is also required.

"The new law 5/2015, published on 28 April 2015, explicitly acknowledges the key role in funding that the securitisation marked had in Spain before 2007 and the need for the revitalisation of the asset class that plummeted after the onset of the financial crisis. In this context, the focus of the law is the modernisation of the Spanish securitisation framework, initially set up in 1992, in order to adapt it to the practices of the more developed European countries in this regard," says Rosa Gómez Churruca, BBVA Research principal economist.

Clifford Chance partner José Manuel Cuenca underlines the importance of updating what had been "quite old-fashioned" regulations. He says: "The new legislation undoes a number of restrictions that were unique to Spain and allows Spanish deals to be structured in the same way as they are in other jurisdictions. While a few restrictions remain, most have been removed."

The new law unifies the two current fund types - Fondo de Titulización Hipotecaria (FTH) and Fondo de Titulización de Activos (FTA) - under the single legal category of Fondo de Titulización (FT). This simplifies the securitisation framework, which should provide more legal protection to market participants.

The law also reinforces transparency and investor protection and promotes the integration of the Spanish system with the rest of Europe, says Churruca. She adds: "The operational aspects of FTs will be more flexible, removing a number of obstacles that previously prevented Spain from replicating innovative securitisation strategies that have already proved to be successful in neighbouring countries."

There are several ways in which FTs will have more flexibility. For example, an SPV previously could not be fully financed by loans as 50% of its liabilities had to be bonds. "That was a peculiar requirement and it has been scrapped," says Cuenca.

He notes that managers are now allowed to actively manage the portfolio, which is new for the Spanish market. "You can also have a warehouse period, although it is short because it can only last for four months."

Previously, every securitisation bond had to have a credit rating. That was an expensive requirement and often seemed superfluous, particularly for first loss tranches.

Cuenca says: "There was also the requirement that for assets to be transferred to the SPV, the originator could not retain any repurchase option, even if it was at market price. That was prohibitive and has been removed, so now repurchase options can be the same as they are in the UK or continental transactions."

Cuenca continues: "Even more important is the removal of the prohibition on originators providing any kind of guarantee. That requirement came about because of a piece of accounting legislation, but it has been fixed now."

Asset pools no longer need to be homogeneous and assets can be purchased in any legally recognised way, rather than simply through true sale. Significantly, the FT can also be structured in isolated compartments that each have their own asset and liability structure, with no cross-collateralisation among them.

"The new law also allows an FT to guarantee third-party liabilities, paving the way for structured covered bonds (SCBs). These SCBs, different than ordinary CBs, could be supported by cover pools with any type of loans, such as loans granted to SMEs. Another difference is that issuers could create conditional pass-through structures in SCBs to mitigate the risk of a fire-sale in case the issuer becomes insolvent," notes Churruca.

Churruca views these as favourable changes that should support the Spanish securitisation market. Originators should find it more attractive to operate entirely within Spain, rather than relying on foreign vehicles. The fact that the legal changes also affect funding instruments, such as SCBs or dual recourse bonds, is also positive.

Instruments that incorporate features of covered bonds and ABS - for example, Euro Secured Notes issued by major French banks and German SCB issued by Commerzbank - are in the early stages of development in some European countries. "Although its future relevance remains uncertain at the moment, and the European Commission's and regulators' stance towards these products is yet to be determined, these asset classes could play a role in funding ineligible loans under the domestic covered bond frameworks, such as SMEs," says Churruca.

However, for all the benefits it is expected to bring, a change in the law is not in and of itself enough to restart the market. Broader regulatory change and macroeconomic developments will also be pivotal.

"These are positive changes, but changing the law is not enough to restart the Spanish market. Where there is strong enough economic incentive for a product then no legal obstruction can stop it, but it does not work the other way around," says Cuenca.

He continues: "There is increasing appetite for Spanish securitisation in Europe. A combination of high buy-side demand and the updated legislation means we will see more Spanish securitisations than in the past. However, it remains to be seen whether this adds to the total number of European CLOs, or just means deals which would have been done with Spanish loans in other jurisdictions are done in Spain instead."

Churruca agrees that, while the legal changes are positive, more is needed in order to revitalise the market. The continued rehabilitation of securitisation's image is a central part of this.

"There is a considerable consensus that it is important to eliminate the stigma attached to all types of securitisation and differentiate high quality securitisation (HQS) from more complex and opaque structures," says Churruca. "The ECB's ABSPP has contributed as a positive signal to counter the ABS stigma, as has EIB-EIF use of securitisation tools to leverage public intervention to support funding to the real economy."

Churruca notes that differentiating and supporting HQS could be the basis for the revival of a more sustainable securitisation market that is less prone to systemic disturbances. This would require a revision of the EU's regulatory framework to lift unjustified burdens on both the supply and demand sides, with preferential treatment for simple and transparent structures.

"A public consultation has recently finished on 13 May and we have sent our opinion, stressing that a core regulatory element that requires adjustment is the capital framework for banking and insurance sectors. We are now waiting for the Commission's decision on the measures; that will be disclosed in 2H15," says Churruca.

She concludes: "Even if the Spanish securitisation framework, as revised by this law, will allow Spanish ABS markets to potentially reactivate as soon as the EU regulatory landscape incorporates a more favourable treatment of HQS, we consider that the improvement of the macroeconomic situation will possibly be also required for a substantial recovery of ABS markets."

JL

Secondary markets

Euro ABS/MBS stays positive

The European ABS/MBS secondary market ended last week quietly and looks to be starting the month in a similar fashion, but market tone remains positive.

In Friday's quiet as anticipated session core prime paper was the main focus for buying interest. The few BWICs there were, mainly revolving around UK bonds, also traded reasonably well.

Meanwhile, peripherals seem to have made it through the large CDO liquidation last week with spreads for the most part holding up despite the flurry of supply the mixed BWIC brought. However, Spanish names are still suffering from a selling bias.

Today looks set to be another fairly quiet day on the BWIC front with only two single line lists scheduled so far, though the calendar for the remainder of the week is already building. At 14:00 London time there is a €1.5m slice of SAEC 12 A2. The bond last covered on PriceABS at 102.552 on 2 April.

Then, at 15:00 is the Italian CMBS NPL auction postponed from last week involving €21m of ISLND 2007-1 B. The bond hasn't traded with a price on PriceABS before.

Secondary markets

Trups flurry

A flurry of US Trups CDO BWICs are circulating for trade this week.

There are currently three Trups CDO auctions due in the next three days. As one trader says: "In a market with less obvious price activity seeing a few lists coming out together creates a decent buzz."

The trader continues: "Last week we saw one of the large regional banks come out with a good size BWIC and it traded fairly well. On the back of that they're now circulating another list scheduled for Wednesday."

That list has in turn has attracted other sellers. "Those type of lists create a lot of interest in the market and as a consequence there are another two lists due this week," says the trader. "The first is from a legacy seller later today and the other is a collection of first pays being sold via an agent."

Today's list is due at 14:00 New York time and is made up of three line items totalling $7.5m in original face. It comprises: PRETSL 7 MEZZ, PRETSL 12 B1 and PRETSL 13 B1, none of which has traded on PriceABS in the last three months.

The first pay auction involves ten line items with $56.22+m original face and is due at 11:00 tomorrow. The bonds are: PRETSL 10 A1, PRETSL 9 A2, REGDIV 2004 A1, TRAP 2003-3A A1B, TROPC 2004-1A A1L, TROPC 2004-1X A1L, TROPC 2004-4A A1L, USCAP 1 A1 and USCAP 2 A1. Three of the bonds have covered on PriceABS in the last three months - PRETSL 10 A1 at H80S on 23 April; REGDIV 2004 A1 at MH70S on 14 April; and USCAP 2 A1 at MH80S on 23 April.

The seven line $127.5m regional bank list is due at 14:00 on Wednesday consists of: PRETSL 12 A2, PRETSL 18 A2, PRETSL 24 A2, TRAP EDGE A2, TRAP 13 A2A, TROPC 2 A2L and TROPC 3 A2L. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Euro ABS/MBS searches for direction

With low levels of activity and spreads range-bound the European ABS/MBS secondary market is looking to new issuance for a direction.

"Yesterday was very slow with most players sitting on the sidelines waiting for news on Greece," says one trader. "There is good activity in primary however and most people are looking there for some direction."

The trader continues: "With broader credit weaker there is no real incentive to participate in secondary right now and so even if you want to trade it's hard to get things done. The only sectors trading quite well continue to be Dutch and UK. At the same time peripherals remain quite soft."

Softness in peripherals is also an indication of the further ineffectiveness of ABSPP despite yesterday's announcement of the ECB purchasing €982m last week, the trader suggests. "The big number from the ECB is a bit mystifying - it's not clear exactly what they bought. There was no impact in secondary, so it must just be a mix of private placements and chunks of new issues, which continues to disappoint our market."

There are three euro-denominated ABS/MBS BWICs scheduled for today so far. At 10:00 London time is a 17 line mixed senior MBS list of fairly small clips.

Then, at 14:30 there is a two line Irish and Spanish RMBS auction comprising €36.7m LANSD 1 A2 and €8.5m RHIPO 9 A3. Only LANSD 1 A2 has covered with a price on PriceABS in the past three months, last doing so at 85.77 on 28 April.

Last, at 15:00 is a €115m original face single line of TAURS 2007-1 A1. The CMBS tranche has not covered on PriceABS in the last three months.

Secondary markets

US CLOs slow

The US CLO secondary market is experiencing a slow start to the month.

"It's very slow this week so far with not a lot of volume in the calendar for the days ahead," says one trader. "It feels like the continuation of the recent pattern of declining BWIC volumes - $10bn in April, then $6.5bn in May - and follows on from the very quiet month-end last Friday."

Overall, the trader adds: "There's a lack of positive tone at the moment - it's a seller's market, which means lower volumes and less enthusiasm. That's not to say I've seen anything to say the market is widening it's just less active."

Indeed, buyers are still out there, albeit a little more targeted than in recent weeks. The trader says: "People are still looking for bonds, but focusing on the ones they like and sellers are spotting that and only putting out a part of their relevant positions. Those small pieces are being easily absorbed, but it does mean we're drifting and could do for a while, though if the few lists that are around at the moment trade very well that could change."

There are just three small US CLO BWICs scheduled for today. At 11:00 New York time are three line items totalling $11.75m - CIFC 2014-4A E, MCLO 2014-6A C and SYMP 2013-12A E. Two of the bonds have covered with a price on PriceABS in the past three months, last doing so on 21 May as follows: CIFC 2014-4A E at 92.79 and SYMP 2013-12A E at M95H.

Then, at 13:30 is another three line list amounting to $10m - OFSBS 2013-5A B2L, PLMRS 2014-1A C and TRMPK 2015-1A E. None of the bonds has covered on PriceABS in the last three months.

Last, at 14:00 is a single $1.5m slice of ATRM 9A B1, again the bond has not covered on PriceABS in the last three months.

Structured Finance

SCI Start the Week - 1 June

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

Pipeline
Several deals joined the pipeline during the holiday-shortened week, including a Chinese auto loan ABS. In total there were nine new ABS as well as two RMBS and three CMBS.

The ABS were: €500m Driver France Two; US$750m Huntington Auto Trust 2015-1; US$747.76m Hyundai Auto Lease Securitization Trust 2015-B; CNY3.58bn Rongteng Individual Auto Mortgage-Backed Securitization 2015-1; RUB7.8bn Special Financial Organization Europa 14-1A; US$415.5m State Board of Regents of the State of Utah Series 2015-1; US$425m TCF Auto Receivables Owner Trust 2015-1; US$129.6m Welk Resorts 2015-A; and US$512.7m Wheels Series 2015-1.

RUB3bn Mortgage Agent Vozrozhdenie 4 and US$425.6m Structured Agency Credit Risk 2015-HQ2 made up the RMBS. The CMBS, meanwhile, were US$281.5m LSTAR 2015-3 Commercial Trust, US$984m JPMBB 2015-C29 and €480m-equivalent Mint 2015.

Pricings
There was a little more variety among the deals leaving the pipeline. At the final count there were five ABS prints as well as one ILS, eight RMBS and one CLO.

The ABS were: US$675m Ally Master Owner Trust Series 2015-3; C$500m BMW Canada Auto Trust 2015-1; US$390m California Republic Auto Receivables Trust 2015-2; £490m CPUK Finance (refinance); and €558m Pass Compartment France. The sole ILS was US$705m Compass Re II Series 2015-1.

The RMBS were: US$670m Colony American Homes 2015-1; €206m Dilosk RMBS No.1; £423m Gemgarto 2015-1; £500m Gosforth Funding 2015-1; US$380m JPMMT 2015-3; A$250m La Trobe Financial Capital Markets Trust 2015-1; US$705m LSTAR Securities Investment 2015-6; and A$2bn Series 2015-1 WST Trust. Lastly, the CLO was €335m Euro Galaxy IV.

Markets
US non-agency RMBS volumes were light last week, according to Bank of America Merrill Lynch analysts. "Spreads in the legacy non-agency and CRT space are mostly unchanged. With the issuance of the new SFR deal, the F tranches widened by about 10-20bp. Since 2015, the SFR E and F tranches tightened by 95-100bp. We think the tightening has been too fast," they say.

US CMBS spreads moved last week for the first time in nearly a month, report Barclays Capital analysts. "The CMBS market slipped in the Memorial Day-shortened week, in line with other securitised credit sectors in a week when rates rallied," they comment. "In secondary trading of recent issuance, LCF triple-A bonds were 2bp wider, to swaps plus 88bp. More credit exposed single-A rated mezzanine tranches were 3bp wider, to swaps plus 210bp, and triple-B rated mezzanine tranches were also 3bp wider, to swaps plus 341bp."

The picture remains the same in European ABS and RMBS, as ECB-eligible assets continue to leak wider. JPMorgan analysts say: "While ECB-eligible (and ineligible) bonds from Italy stand back at the levels last recorded at the time of ABSPP launch (74bp and 99bp), the Spanish equivalent are 10bp and 20bp wider than at unveiling. A similar story is also true for Portugal."

Editor's picks
Expanding horizons: The Chinese securitisation market continues to show promising signs of growth. The authorities are now exploring new ways to strengthen the market by involving foreign investment and reinvigorating secondary activity...
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...

Deal news
• 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.
• The average appraised value for specially serviced US CMBS loans has increased slightly by 1%, according to Fitch. 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.
• Corinthian Colleges recently announced closures for the remainder of its 28 campuses. 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.

Regulatory update
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
Ares XXIV CLO (refinancing); Avis Budget Rental Car Funding series 2015-2; Bank of the West Auto Trust 2015-1; BlueMountain CLO 2015-2; Cairn CLO V; Chase Issuance Trust 2015-6; CSMC 2015-DEAL; CSMC Trust 2015-3; Dilosk RMBS No. 1; Doral CLO II (refinancing); Drive Auto Receivables Trust 2015-B; Dutch Residential Mortgage Portfolio I; Euro-Galaxy IV CLO; Ford Credit Auto Owner Trust 2015-B; Fortress Credit Funding V (refinancing); Fortress Credit Funding VI (refinancing); Galaxy XX CLO; Globaldrive Auto Receivables 2015-A; GO Financial Auto Securitization 2015-1; Golub Capital Partners CLO 23(B); Gosforth Funding 2015-1; Harley-Davidson Motorcycle Trust 2015-2; Magnetite XIV; Master Credit Cards Pass Compartment France 2015-1; MSG 2015-ALDR; Nelnet Student Loan Trust 2015-3; RAIT 2015-FL4; SMART ABS Series 2015-2 Trust ; Swiss Credit Card Issuance 2015-1; Swiss Credit Card Issuance 2015-2; Wendy's Funding series 2015-1

Deals added to the SCI CMBS Loan Events database last week:
CGCMT 2007-C6; COMM 2012-CR1; COMM 2014-UBS4; DECO 8-C2; ECLIP 2007-1; EURO 23 & EURO 28; EURO 28; LBUBS 2006-C4; MESDG CHAR; MLCFC 2007-5; MLCFC 2007-5 & JPMCC 2007-CB18; MLMT 2005-CKI1; MSC 2011-C3; TITN 2007-1; WBCMT 2007-C30; WFRBS 2011-C3

Structured Finance

TRACE reporting underway

Yesterday (1 June) marked the first day of ABS transaction data reporting via TRACE, which saw 213 trades with total volume of at least US$614m (original face) being reported, according to Bank of America Merrill Lynch figures. These trades consisted of 151 separate securities with an aggregate original face of at least US$412m and current face of at least US$367m.

Of these securities, 38 traded more than once, causing total volumes of the securities to exceed their original face. Only one price was given for these 38 securities. A further 21 trades, involving 13 securities, equalled or exceeded the US$10m cap.

BAML ABS analysts note that just over half (53%) of the reported trades were sized at less than or equal to US$1m, with 45% comprising securities in the auto ABS sector, with average lives of 1-2 years (31%) and ratings of triple-A (72%). The average price was US$100.24.

The new TRACE standards create a pilot programme that will expire on 4 December, in which ABS trades must be reported no later than 45 minutes from the time of execution. After that date, the reporting window narrows to 15 minutes from the time of execution.

Transaction information to be disseminated includes: CUSIP, price, size, trade date/time and settlement date. The exact trade size will be reported for trades of less than US$10m, but trade sizes over this cap will be reported as equal to or greater than US$10m.

The BAML analysts suggest that the biggest questions facing the market, as a result of the advent of TRACE reporting, are: whether broker/dealers will be willing to provide the same level of liquidity when the market price of their positions is more readily broadcast to the market; and whether investors will be willing to hold/trade certain securities when the most recent price could result in forced revaluations of their holdings. "The experience in the corporate bond market indicates volume could drop. At a minimum, we expect the grind to tighter spreads for ABS will stall," they observe.

The impact is expected to be more muted for on-the-run sectors, where primary and secondary market prices for these securities are already fairly transparent. A more significant impact may be seen in the more off-the-run sectors - such as aircraft, container, railcar, franchise fee, royalty payment and structured settlement ABS - where primary and secondary trading volume is more limited and there is less transparency regarding how prices have changed since issuance.

FINRA notes that transactions in the secondary ABS market represent approximately 400 trades, totaling US$3.5bn in original principal balance, on an average daily basis. The authority says it is currently reviewing comments received in connection with its proposal to expand dissemination of TRACE data to include CMOs, CMBS and CDOs (SCI 17 February).

CS

Structured Finance

ABSPP purchases revealed

The ECB yesterday (1 June) published for the first time a detailed breakdown of the ABS holdings under the ABSPP, showing the amount purchased in the primary and secondary markets for each month. Such additional information has been welcomed for bringing the level of disclosure to that the CBPP3, although Barclays Capital European securitisation analysts note that it remains below that of the public sector purchase programme (PSPP), for which a breakdown by country is provided.

Based on the newly disclosed data, it appears that primary market purchases contributed 22%, with the Eurosystem buying approximately €1.6bn out of €11bn investor-placed ABSPP-eligible issuance by end-May. Hence, approximately €9bn was available for investors (excluding the Eurosystem) - a decline of nearly 45% from the same period in 2014, according to the Barclays analysts.

Having bought €183m in the primary market at the start of ABSPP, the Eurosystem did not participate in any new issue in the three months from December 2014 to February 2015. The analysts estimate that during this period approximately €2.5bn in investor-placed ABSPP-eligible paper settled in the primary market, mostly in the European periphery (Italy and Spain).

Primary market purchases were highest in March at €570m and fell back to approximately €400m per month in April and May. For the last week of May, the ECB reported €1bn of ABSPP purchases - its most active week yet, at ten times the figure from the prior week and almost four times the running average.

Reconciling issuance distribution statistics with the ECB's ABSPP numbers, the analysts estimate that ABSPP has been most active in Dutch RMBS, followed by German auto ABS. Further, the Eurosystem appears to have bought relatively more of all ABSPP-eligible Dutch RMBS and French credit card ABS (25% and 30% respectively) than of all ABSPP-eligible Italian consumer ABS or Portuguese RMBS issuance, for example (7% and 10% respectively).

Since the start of the ABSPP, the Eurosystem has bought 14% of all ABSPP-eligible issuance. However, it did not participate in all eligible deals, buying between 5% and 45% of the eligible bonds in the primary market. This compares with a 70% maximum participation, according to the workings of the ABSPP.

The level of secondary market purchases have ranged between €600m and €1.4bn per month. Activity was highest in December 2014, but has been increasing recently from its low level in March 2015. If the €900m average monthly secondary market purchase level is upheld, it would equate to the Eurosystem buying €11.5bn of European ABS in the secondary market by year-end 2015, according to Barclays figures.

CS

CLOs

CLO compression trades touted

US CLO triple-A tranches are lagging the spread compression in the CLO credit curve as the loan market increasingly trades above par, creating fundamental value. However, JPMorgan CLO analysts point to the trade-off of carry versus convexity as prices rise.

"High coupon triple-As - such as new issue or 2.0 - could be a more defensive play, with more price protection in a spread widening environment, all else equal, but these bonds offer limited upside in a rally, as bids appear to have been capped at US$100.25 for triple-As and US$100.5 for double-As to triple-Bs," the JPMorgan analysts observe.

Currently, US$73bn and 257 tranches (representing 46% and 44% of the outstanding CLOIE post-crisis universe) of post-crisis triple-As have coupons between Libor plus 140bp to 150bp, and 70% of the outstanding market has a coupon of above Libor plus 140bp. At present, 46% of post-crisis triple-As price at or above par, meaning a smaller percent of the universe is eligible to benefit from further spread tightening from a price perspective.

As a result, price upside may be limited for certain triple-A bonds, unless the CLO market radically changes. However, the analysts believe that some carry-focused investors may be willing to bid above par and take a view on the likelihood and timing of a specific call.

In terms of positioning for a year-end primary target of Libor plus 135bp-140bp, the analysts suggests that such carry-focused investors should buy middle-market triple-As at Libor plus 180bp, which have higher coupons but lower likelihood of being called, given the smaller investor base. For total return and levered buyers, they propose that triple-As issued in the first seven months of 2013 may offer the most upside near-term, depending on liquidity.

US CLO issuance in May totalled US$6.6bn, equating to 58% of April supply and 55% of the US$12bn average monthly supply in February to April, according JPMorgan figures. The analysts attribute the slowing in US CLO formation to the lack of collateral supply, which has subsequently led to a smaller average deal size in May at US$472m - about US$70m less than the US$541m average in the first four months of the year.

In contrast, European CLO issuance and US CLO 2.0 refinancings have picked up, with May the second most active month in the European CLO market during the post-crisis era. Six new issues totalled €2.4bn, although this is somewhat overshadowed by the risk of a slowdown with year-to-date institutional loan volume of €16.4bn at a slower pace than 2014's final total of €49bn.

As for US CLO refinancings, eight deals totalling US$2.7bn priced in May, the most in a one-month period on record. Refinancing activity has capitalised on overwhelming demand for mezz paper, as well as double-A and single-A tranches. The analysts expect the pace of refinancings to increase to the extent that the primary market remains subdued and spreads continue to tighten.

JA

RMBS

Split liability for WaMu claim

The judge overseeing the Washington Mutual rep and warranty case yesterday ruled that JPMorgan will be liable only to the extent the liabilities were on the books of WaMu as of 25 September 2008. The exception to this is liabilities for the entity Washington Mutual Mortgage Securities Corporation (WMMSC), which will travel to JPMorgan. The remaining rep and warranty liabilities will remain with the WaMu estate.

Deutsche Bank requested the court to determine the size of damages owed to the 127 covered trusts, although it estimated that total claims could be US$6bn-US$10bn.

As per the motion for summary judgment previously filed by the FDIC (SCI 16 July 2014), WMMSC served as seller and depositor for 44 of the 99 primary trusts in the complaint. However, based on some sample PSAs, Barclays Capital RMBS analysts suggest that this will likely be limited to pre-2005 trusts from the WaMu shelf. In addition, it is possible that WMMSC served as loan seller to other deals on some portion of loans.

"In the absence of specific information on the breaches, we estimate that the total rep and warranty liability is likely to be a function of the total historical plus future expected losses on the deals," they note. "Based on this measure, most of the losses and hence the liability are likely to emanate from the Long Beach shelf subprime deals and WaMu deals from 2006 and 2007. As a result, based on our first read of the judgment, a relatively small portion of the actual liabilities may have transferred over to JPMorgan, if this order is upheld."

It is possible that the FDIC and JPMorgan may appeal the order. But assuming the order is upheld, the next step is to determine the extent of the liabilities.

Once these are determined, the resolution on the JPMorgan side is expected to be reasonably straightforward and to take the form of a pay-out by the bank. However, resolution of the liability that remains at WaMu could be more complicated.

First, of the total liability at WaMu, the amount that transferred over to JPMorgan based on the booked value as of 25 September 2008 will likely have to be paid in full by JPMorgan. It remains unclear if this booked liability is on non-agency deals or other loans and whether it is enumerated on a deal-by-deal basis. If it is, the Barclays analysts suggest that some transactions may benefit from this transfer more than others.

On all the other claims, RMBS holders will likely be on par with other WaMu Bank bondholders. There is also a possibility that JPMorgan could assume some money from the estate, based on certain indemnity claims that could be senior to the RMBS/bondholder claims.

"As such, while some movement towards eventual pay-outs in this case is likely, the upside case where JPMorgan is forced to pay on all these claims in full seems less likely. While a claim amount of about US$6bn would still pay out about the same or more than Countrywide on these bonds (about 10% of overall losses), the downside risk is from a potential successful indemnity claim from JPMorgan that eats into the WaMu estate's assets," the analysts observe.

CS

Structured Finance

Trading duo reunited

Brean Capital has hired Rich Barry and Reggie Fernandez as mds in its fixed income sales and trading team. The pair will focus on CLOs, CDOs and esoteric ABS.

Barry arrives from KGS-Alpha Capital Markets, and was also previously head of securitised product sales and trading at Aladdin Capital. Fernandez joins Brean from Canaccord Genuity, but also has experience at KGS, as well as at UBS and Deutsche Bank.

Structured Finance

Europe chief hired

MarketAxess has appointed Scott Eaton as coo for MarketAxess Europe and Trax. In this role, he will oversee business operations for Europe and assist clients in meeting evolving regulatory challenges, reporting to MarketAxess ceo Rick McVey.

Eaton was most recently md and global head of emerging markets trading at UniCredit. He has also held various other senior positions, including head of credit structuring and ABS at Dresdner Kleinwort.

Structured Finance

Mid-market vet moves

The Carlyle Group has hired Dan Cohn-Sfetcu as md to originate and execute middle market credit investments for Carlyle GMS Finance, as well as its affiliated investment vehicle NF Investment. Cohn-Sfetcu joins from American Capital, where he was a md, responsible for coverage of middle market private equity firms and executing credit investments throughout the capital structure.

Structured Finance

Elian extends SF footprint

Elian has opened a new office in New York in an attempt to grow its corporate services, which include corporate structuring, structured finance and asset finance. The firm has hired John Wallace to run the office as md and be responsible for developing a network of clients and intermediaries in the Americas.

Wallace arrives as a founding member of Guardian Director Services, where he provided independent directors to boards of alternative funds. He also previously held a number of senior roles at Deutsche Bank, including separate positions as director and vp of the bank's structured finance trustee services.

Structured Finance

Asset finance pro rejoins bank

Credit Suisse has rehired Vaibhav Piplapure as md to run its European asset finance business. He joins the bank after working in asset management for KKR. Prior to this, Piplapure was head of structured and illiquid credit at Avoca Capital, as well as head of global credit solutions and European asset finance for Credit Suisse in his first stint at the bank.

Structured Finance

SF practice beefed up

Shearman & Sterling has hired Charles Thompson as counsel in its structured finance group. His practice focuses on corporate and financial matters, with a particular emphasis on structured finance and capital markets derivatives products.

Thompson joins from Cleary Gottlieb and previously worked as primary coverage lawyer for the structured products group at Morgan Stanley. His experience includes representing investors and derivative counterparties in connection with cash and synthetic CLOs, structured note programmes, securitisations and credit-linked securities.

Structured Finance

Portfolio advisor moves on

Adrian Chopin has joined Orchard Global Asset Management, where he has been tasked with building a new business line in law firm and litigation funding, as well as assisting the development of the firm's existing structured credit platforms. He joins as a member of Orchard's senior portfolio management team, reporting to Gary Wee, chairman and cio.

Chopin arrives from Deutsche Bank where was most recently head of the its North American debt and equity solutions group. He began his career at Allen & Overy, working in the law firm's derivatives group.

Structured Finance

Investment head tapped

Invictus Capital Partners has hired Carl Bell as md and co-head of investments. In this role, Bell will focus on the analysis and management of credit assets identified from consumer, real estate and corporate obligations.

Most recently, Bell was deputy cio and head of securitised credit for Amundi Smith Breeden. Previous to this, he was co-founder of Five Ten Capital, a firm focused on deploying debt and equity capital into the SFR sector. He has also served as md and team leader for structured credit at Putnam Investments.

CDO

CDO manager exchanged

Dock Street Capital Management has taken over Delaware Investment Advisors' role as collateral manager to Longport Funding II. Under the provisions of an amended and restated collateral management agreement, Moody's says there will be no adverse action with respect to any of its current ratings for the transaction.

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

CLOs

CLO origination head appointed

Peter Melichar has joined Jefferies as head of European CLO origination. He moves from Maybird, where he was md, involved in fundraising, investor relations, and merger and acquisition advisory.

Melichar has held a number of roles related to CLOs, including working in origination and structuring in European CLOs for Deutsche Bank and trading European CLOs as vp at SG. He has also been a director and structurer for Key Capital and Citigroup respectively.

CMBS

Bridge loan partnership formed

Thorofare Capital and DoubleLine Capital have formed a partnership under which  the former will originate, underwrite and service middle-market CRE bridge loans to be purchased for clients whose accounts are managed under the DoubleLine Opportunistic CRE Debt Strategy. Thorofare will serve as the exclusive originator for the loans within a range of underwriting criteria mutually defined by both companies.

The programme will fund senior whole loans ranging from US$5m to US$20m for the acquisition and refinance of multifamily, retail, industrial, hospitality and office properties with terms between two and five years. It will also finance NPLs, discounted note pay-offs and note portfolios.

DoubleLine's debt strategy seeks to generate risk-adjusted returns and produce stable current income through direct origination of CRE loans and investments in subordinate CMBS securities from the primary CMBS market. The partnership is also in accordance with Thorofare's floating rate bridge strategy.

Insurance-linked securities

EXOR files lawsuit

EXOR has filed a definitive proxy statement with the US SEC in opposition to the proposed merger transaction between AXIS Capital and PartnerRe. This enables EXOR to communicate directly with PartnerRe shareholders regarding its all-cash binding offer of US$137.5 per share for PartnerRe and to solicit them to vote against the AXIS transaction.

A lawsuit has also been filed by EXOR in the Supreme Court of Bermuda, which seeks to obtain customary beneficial ownership information from PartnerRe in order to facilitate direct communication with PartnerRe shareholders, so that they are fully and correctly informed of their options. The lawsuit alleges that despite EXOR's request, PartnerRe has thus far refused to share the shareholder lists.

EXOR claims that the refusal is evidence of the PartnerRe board's intention to protect its transaction with AXIS to the detriment of its shareholders, employees and clients. PartnerRe has remained firm in its support of a pending merger with AXIS throughout the bidding process (SCI passim).

In a short response, PartnerRe says that it has complied with its obligation regarding the disclosure of shareholder information under applicable Bermuda and US laws. The company has now set a shareholder meeting to vote on its proposed AXIS transaction for 24 July.

EXOR has subsequently extended the outside date on which its binding offer is valid to 26 July. This is to ensure that EXOR's offer is available to PartnerRe if its shareholders vote down on the proposed AXIS transaction.

Insurance-linked securities

Reinsurer adds ILS expertise

Essent Group has recruited Joseph Hissong to serve as president of its Bermuda reinsurance company, Essent Reinsurance. In addition, Paul Wollmann has been promoted to chief underwriting officer for the subsidiary.

Prior to joining Essent, Hissong's most recent position was as executive director with ILS manager Cartesian Re. Previous to this, he was the executive director and head of private equity and strategic investments for PartnerRe.

Meanwhile, Wollmann was md of structured and asset-backed finance for RAM Holdings before joining Essent. His other previous positions include separate md roles at RCS and Ritchie Capital Management, as well as svp for ACE Capital Re International.

Insurance-linked securities

Insurance trio recruited

Twelve Capital has made a trio of hirings to enhance its insurance debt and ILS portfolio services. The hires include Ulrich Beck, who will be responsible for sourcing within the firm's insurance private debt team.

Beck arrives from KPMG's corporate finance team, where he focused on mergers and acquisitions, as well as strategic and transformational advisory. He was also involved in capital markets and financial structuring related advice to insurance clients.

Marcus Rivaldi and William Hardcastle are the other additions made by Twelve Capital. Rivaldi was an executive director with Morgan Stanley in his most recent role, delivering both equity and fixed income coverage of the European insurance sector. Hardcastle joins Twelve Capital following his position as vp with Bank of America Merrill Lynch, where he delivered equity coverage of the European insurance sector.

ABS

SLABS acceleration feature added

Nelnet's latest student loan ABS includes a structural feature that should help mitigate the negative effects of slow FFELP pay-downs, says Moody's in its recent Credit Outlook publication. The underlying collateral in the deal, Nelnet Student Loan Trust 2015-3, consists of FFELP non-consolidation, consolidation and rehabilitated student loans.

Moody's notes that FFELP student loan borrowers are using repayment plans that reduce or defer their monthly payments and the percentage of borrowers who are making any extra payments beyond the required amount remains low. Approximately 35% of borrowers in the Nelnet Student Loan Trust 2015-3 are currently enrolled in such repayment plans. Moody's recently placed several tranches from FFELP transactions on review for downgrade due to the risk of default from tranches not amortising fast enough to pay down by their final maturity dates (SCI 17 April).

As a result, Nelnet's new deal includes a structural feature which accelerates principal payments on the notes, increasing the likelihood that they will pay off by their final legal maturity if the collateral amortises at a slower rate than initially expected. Transaction terms stipulate that after June 2025 - 10 years into the life of the transaction - the deal must use any excess funds to pay principal sequentially to the class A and class B noteholders until all notes are paid off, regardless of the overcollateralisation level of the transaction.

This structure differs from that of a typical FFELP student loan ABS transaction, in which most excess funds are released to the deal sponsor throughout the life of the deal. In the case of low loan amortisation, the Nelnet transaction will pay down faster than a similar deal without such a structural feature.

ABS

Nordstrom card ABS affirmed

Nordstrom's recent agreement to sell its existing US Visa and private-label consumer credit card portfolio to TD Bank Group has no immediate impact on the rating of notes issued by the Nordstrom Credit Card Master Note Trust II, according to Moody's. The portfolio currently totals approximately US$2.2bn in receivables.

Under the agreement, TD Bank USA will become the exclusive US issuer of Nordstrom-branded Visa and private-label consumer credit cards to Nordstrom customers. It will also own the credit card accounts and fund the associated receivables, while Nordstrom will continue to perform account-servicing functions. The transaction is expected to close in 2Q15, subject to regulatory approvals and other customary closing conditions.

Moody's notes that together with its affiliates, TD Bank USA has extensive experience as a credit card issuer, or originating bank, in the US and Canada. The agency says it will analyse the specific details of the transaction as they emerge and assess their potential impact on the trust's asset pool performance. It will also assess whether TD Bank USA's financial strength is consistent with the current credit enhancement and rating on the trust's ABS.

Moody's currently rates the Nordstrom Credit Card Master Note Trust II Series 2011-1 class A notes Aaa. The assets of the trust consist of receivables from Nordstrom private-label credit card accounts and a participation interest in receivables from Nordstrom-branded VISA credit card accounts.

ABS

ETD debt burden lightens

Moody's reports that new Spanish electricity tariff deficit (ETD) debt for year-end 2014 fell to a 10-year low, at €465m. The agency says this drop could mark a turning point in the Spanish electricity sector's tariff deficit trajectory, helping it to achieve sustainability in the medium term.

"This figure is merely one-tenth of the yearly deficit levels in preceding years, considering the average creation of new ETD debt soared to €4bn per year since 2008," observes Antonio Tena, a Moody's avp and analyst. "We consider this to be credit positive for existing ETD transactions, as all ETD debt ranks pro rata."

Although cumulative ETD in Spain is likely to decrease over the next few years, it still amounts to 150% of yearly revenues. This weak starting point for the electricity sector's debt burden weighs on the recent decline in new debt. A steady improvement in performance over the coming years would be necessary to tame ETD debt at reasonable levels over total revenues, but if the debt remains high, it may lead to regulatory changes that could weaken transaction terms.

However, Moody's considers that legal changes over the past two years are starting to yield positive results in terms of reducing ETD debt. The ratio of cumulative debt over regulated revenue dropped significantly to 150%, as of year-end 2014, from 170% as of year-end 2012. Moody's says that if the electricity sector generates surpluses, it could use these amounts to repay outstanding debt.

The government's regulatory measures over the last two years are starting to yield results too, in the agency's view. The most relevant measures increased revenue through new taxes on energy production and reduced costs by capping special regime generators' remuneration formula.

Law 24/2013 of December 2013 introduced additional structural features, such as the change in the repayment of system costs. Moody's says that this change benefits ETD credit rights holders as it grants seniority in the system and reduces recovery lags for newly-created ETDs. This provides additional protection for existing ETD debt holders and a stronger structure for potential future ETD debts to be originated.

ABS

Auto ABS recoveries divided

Moody's assumes that European auto ABS presents higher recovery rates in its core markets compared to those markets in the periphery. A key determinant in the agency's recovery rate assumptions is the security interest in the underlying vehicle that vests with the issuer, which happens to vary in European markets.

In the main auto ABS markets, such as Germany, the UK and France, Moody's assumes on average a 35% to 40% recovery rate and does not see a large difference in rates between auto loan and auto lease ABS. In contrast, Moody's assumes lower recovery rates of 10% and 30% for auto ABS transactions in Italy and Spain respectively. The main reason why such recovery rates do not fluctuate across transactions is that, since 2008, there has only been a very small number of new transactions from different originators in Spain and Italy.

Nevertheless, recovery rates in Spain and Italy are higher for auto ABS transactions than for unsecured consumer loan ABS, which are usually between 5% and 15%. This is mainly due to the fact that auto loans are linked to the purchase of the vehicles, even if they are not secured by the vehicles.

In German and most French auto loan ABS, the originator has security interest over the vehicles, which it assigns to the issuer. The security interest can be a pledge granted by the borrower to the originator securing the auto loan, and when the loan is assigned to the issuer the pledge is transferred as collateral.

In Spanish auto loan ABS, the issuer generally does not acquire security over all vehicles, while the originator typically has no security over the vehicles that it can assign to the issuer in Italian auto loan ABS. In the UK, the issuer does not receive any right, title or interest in the vehicles and has no direct right to repossess the vehicle.

However, there are additional factors that affect Moody's recovery rate assumptions, including the level of equity that the borrower has in the vehicle. Further, the level of new versus used cars also influences the agency's expected recovery rates, with contracts relating to older used cars normally having higher recovery rates that those relating to new cars sold after two to four years.

Structured Finance

Transparency boost for loan reviews

The US SEC's Rule 15Ga-2 takes effect for ABS on 15 June. The rule - which requires issuers or underwriters of transactions rated by NRSROs to publish the findings of due-diligence reports on loan quality undertaken by any third-party review (TPR) firms - is expected to increase transparency around credit quality.

Moody's notes in its Credit Outlook publication that Rule 15Ga-2 will improve the ability of investors to assess the risk in the assets that back transactions. Prior to the rule becoming effective, issuers and underwriters typically kept loan-level TPR findings private and made them available only to rating agencies while providing a summary of the findings to investors.

For prime jumbo RMBS in particular, once the rule becomes effective, investors will be able to view reports that include: credit reviews that assess the extent to which the loans in the transaction conform to the originator's lending guidelines; property valuation reviews that assess whether information in the loan files reasonably support appraised values; compliance reviews that assess whether the loans were originated in accordance with federal, state and local laws; and data integrity reviews that assess whether the data provided by the issuer is the same as the information in the loan files. Transactions backed by other types of loans may also be accompanied by other types of reports. For example, TPR reviews for RMBS backed by re-performing loans have typically covered the quality of additional reporting fields, such as borrower pay histories.

Moody's anticipates that issuers will develop their own formats for summary reports that satisfy Rule 15Ga-2, with the quality of the TPR information varying across transactions. Over time, these variances should diminish as due diligence reports become more standardised as investors provide feedback to issuers.

Some issuers may remove detail from their reports now that they will be more broadly distributed, in an effort to reduce their potential legal liability. Any such deletions are likely to consist of redundant data or borrower personal information, so the reports should not exclude information that would have helped rating agencies form a credit opinion. Deleted redundant data might include data that are available from loan data tapes, TPR firms' own internal flags or codes, and data that are available on other reports.

"If, however, an issuer makes more material omissions that make it more difficult to assess loan quality, the added uncertainty could mean that the transaction would need more credit enhancement to achieve particular ratings. We would likely decline to rate a transaction if, in an extreme case, we thought that the information an issuer provided was insufficient for us to analyse the loans' risk," Moody's warns.

CDS

Sabine credit event called

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a failure to pay credit event occurred in respect of Sabine Oil & Gas Corporation (formerly known as Forest Oil Corporation). The firm filed a Form 8-K on 22 May in respect of its entry into a forbearance agreement and third amendment to the credit agreement, dated 20 May.

The Committee also resolved to hold an auction in respect of outstanding CDS transactions on the entity. ISDA will publish further information regarding the auction in due course.

CLOs

Strong returns continue for CLOs

The total amount of CLOs paid down in JPMorgan's CLO index (CLOIE) since the April rebalance through end-May was US$4.7bn in par outstanding, split between US$2.27bn and US$2.43bn of pre-crisis and post-crisis transactions. The post-crisis CLOIE added US$9.4bn across 110 tranches from 20 deals at the May rebalance.

CLOIE posted a positive return of 0.5% overall, with the post-crisis index continuing to outperform, returning 0.58% versus 0.19% in the pre-crisis index. All post-crisis tranches experienced spread tightening for the second consecutive month. Of particular note, post-crisis double-B and single-B tranches outperformed, tightening by 43bp and 60bp on the month and returning 3.23% and 4.62% respectively.

In comparison, pre-crisis CLO indices experienced widening in one out of five tranches. The triple-A tranche widened 1bp and returned 0.13% in May. The top performing tranche within the pre-crisis index year to date is the triple-B tranche, which has tightened 22bp and returned 2.20%.

CLOs

CLO indicators remain sound

Moody's has published an inaugural report that aims to provide a 360-degree view of the US CLO market and its 1Q15 performance by analysing macroeconomic and financial market conditions, high yield corporate sector trends and credit conditions that correlate with credit quality. The report forms part of a new framework for tracking the aggregate performance of US CLOs and assessing whether the underlying factors that help determine CLO credit quality are trending away from or towards long-term historical averages.

The report suggests that the credit quality of US CLO and corporate markets is in line with average long-term trends, but there is some deterioration in certain strength-determinant factors. Higher leverage in the high yield corporate market suggests that lending standards have slipped, as does the increased market share of covenant-lite loans and lower-rated speculative grade issuers.

Lower first-lien loan subordination in loans widely held by US CLOs raises the risk of higher losses for such loans in the event of default. However, despite the deterioration in some of these metrics, CLO transactions continued to perform well for 1Q15 as credit enhancement remained high, CLO overcollateralisation test failures remained at historic lows and US CLO tranche prices continued to trade close to par.

From a macroeconomic perspective, market conditions in the equity, bond and loan markets stabilised in the quarter. High yield credit spreads tightened and the St Louis Fed's financial stress index reported below-average market stress conditions. In addition, Moody's default rate projection model indicates a low corporate default rate environment in the next 12 months.

CLOs

'Unique' SME CLO touted

GIAC Gestion's recent cashflow CLO is an example of a viable way forward for European SME CLOs in the context of increased bank disintermediation in Europe, suggests Moody's. GIAC OLT II is backed by bonds issued by French SMEs and mid-caps.

"GIAC OLT II illustrates how securitisation can finance SMEs and mid-caps without the direct involvement of an originating bank and its unique features ensure the alignment of interests between the manager, investors and obligors," observes Monica Curti, a Moody's vp and senior analyst.

The transaction has unique features compared with standardised European CLOs and granular SME securitisations. It uses its low cost of funding to provide cheaper financing to SMEs and mid-caps, while providing strong protection against adverse portfolio selection. But compared to European BSL CLO 2.0s, the structure has additional challenges, relating to the assets securitised and structural features such as the long two-year ramp-up period.

Moody's says that GIAC's transactions have performed in line with expectations, despite the recession in France. Defaults remained limited during the credit crunch, often resulting from the fact that French banks decided to cut financing to companies.

CMBS

B-piece stripping risks examined

The practice of B-piece coupon stripping increases the risk of interest shortfalls and credit losses in investment grade classes of US conduit CMBS, reports Moody's. This is particularly due to the slippage in CMBS collateral quality over the past two years.

B-piece coupon stripping reduces the fixed coupon payment of below investment grade securitised principal and interest bonds and allocates this payment to an interest only bond paid at the top of the CMBS transaction's cashflow waterfall. The result is an increase in the the credit risk for class D notes.

However, the extent of the losses resulting from B-piece stripping depends on the timing of loan defaults, with loan defaults that occur early in a transaction's life incurring higher losses. Losses are also dependant on how much of the B-piece interest has been stripped.

"The likelihood of conduit loans in collateral pools defaulting early on in the transaction's life is currently low given strong debt service coverage," says Moody's director of CRE research Tad Philipp. "However, if debt service coverage slips due to rising interest rates or more aggressive underwriting, then the risk of early-term defaults and interest shortfalls will increase."

In such a scenario, increased credit enhancement or other structural changes to the transaction would be necessary to offset the higher credit risk to class Ds and above. Moody's suggests that a bigger risk to CMBS investors is the continuing deterioration in conduit loan quality.

The agency has accounted for this by adjusting its credit enhancement levels for class Ds upward by about 600bp on average over the last two years. However, the actual average credit enhancement for this class - as reflected in the investment grade ratings assigned by other rating agencies - has only moved up by about 10bp. As a result, class Ds typically do not have enough credit enhancements to achieve Moody's lowest investment grade rating of Baa3.

CMBS

Theatre Hospitals restructuring closes

The long running Theatre Hospitals CMBS restructuring closed on 28 May. This was confirmed in an announcement from law firm Paul Hastings, who represented Capita Asset Services in connection with the restructuring of the £1.65bn loan financing, which included a restructuring of the existing swap positions with an approximate value of £600m.

Capita acted as servicer of the £960m senior loans, held by a syndicate that included two separate CMBS transactions - Theatre Hospitals No 1 and Theatre Hospitals No 2 - as well as other senior lenders. The debt was secured by properties leased to BMI Healthcare, which is part of the General Healthcare Group.

Moody's notes that Capita, on behalf of the senior lenders, had to manoeuvre with a number of complex issues in the process. These issues included court directions to clarify noteholder voting rights for the CMBS, competition commission investigations relating to the operations of the tenant and restructuring of 'out-of-the money' long-dated swaps - including the conversion of swap mark-to-market into a super senior term loan. Notwithstanding the complexity of the issues confronting this restructuring, a restructuring agreement was reached in December 2014.

As part of the restructuring, noteholder consent from all classes of notes from both CMBS transactions was required before the restructuring could be implemented. Capita obtained noteholder approval on 5 May from almost 100% of all classes of notes, which is one of the highest results obtained in any CMBS restructuring to date.

Paul Hastings led on the drafting and negotiation of the restructuring agreement that set out the framework for resolving all of the issues in the restructuring.

CMBS

Retail portfolio transfers mooted

Moody's has been informed that Franklin C. Gatlin III has proposed to transfer the ownerships of Pacific Coast Plaza, Eastlake Terraces and Chula Vista II portfolios to three potential Delaware-based companies. The companies, still to be formed, will be indirectly majority owned and controlled by a real estate investment fund affiliated with Angelo, Gordon & Co.

In connection with the transactions, affiliates of Angelo, Gordon & Co. will become the new guarantors and indemnitors for the non-recourse carve outs and environmental indemnities. Voit Real Estate Services will become the property manager and an affiliate of Citivest will become the asset manager of the properties, while certain modifications will be made to the loan document covenants and obligations.

Moody's suggests that the transactions will not result in a downgrade or withdrawal of any of its ratings for any class of certificates of JPMorgan Chase Commercial Mortgage Securities Trust 2007-LDP12.

CMBS

CMBS losses shift up

Trepp reports that 105 US CMBS loans totalling US$1.25bn were liquidated with a loss in May, following three months of relatively few loans being disposed of with losses. However, the results were somewhat skewed by the US$80m Schron Industrial Portfolio's B-note that was written off in full, while the US$220m A-note paid off without loss.

Another six loans totalling US$57.46m took 100% losses, while nine more loans totalling US$76.17m took at least 80% in losses. The US$140m Hyatt Regency Bethesda loan, which had been on the delinquent rolls for years, was finally resolved with a 47.84% loss in May (see SCI's CMBS loan events database).

Liquidated loan volume stood at US$1.25bn in May, up from April's total and near the 12-month average of US$936.01m. Loss severity was back up to the normal range at 46.37%, but severity is 39.43% when including the A-note of the Schron loan. Looking only at losses greater than 2%, volume was US$1.03bn, with a 55.05% loss severity.

CMBS

US CMBS loss severities drop

The weighted average loss severity of US CMBS loans liquidated at a loss dropped to 24.5% in 1Q15 from 50.8% in 4Q14, according to Moody's. This is largely due to the liquidation of four large loans with disposition balances higher than US$100m for loss severities of less than 1.5%.

"Loss severities actually decrease the larger the size of the loan because these loans generally have institutional sponsorship and are located in larger metropolitan areas that can better absorb the fixed legal and administrative costs," says Keith Banhazl, a Moody's svp.

Among the four loans with a disposition balance greater than US$100m that liquidated with a loss severity of less than 1.5%, two of the loans - Parkoff Portfolio and The Belnord - were secured by multifamily properties in Manhattan (see SCI's loan events database). In addition, the 1818 Market Street loan was secured by an office building in the central business district of Philadelphia.

Meanwhile, there was an unusually high dollar volume of loans in 1Q15 - 55.7% by balance - with a loss severity of less than 2%. Excluding these loans, the loss severity was 54.3%, which is down from 61.7% in 4Q14.

Overall, 141 loans liquidated with an average disposed balance of US$16.5m during 1Q15, compared with 213 loans with an average disposed balance of US$11.9m in the previous quarter. The cumulative weighted average loss severity for all loans liquidated at a loss dropped to 42.1% in 1Q15 from 42.7% in 4Q14.

Excluding those with losses of less than 2%, the cumulative loss severity was 53%, which is down slightly from 53.1%. Loans with losses of less than 2% account for 20.9% of the sample size by balance and 19.3% by number.

CMBS

Daily returns index launched

FTSE Group and the National Association of Real Estate Investment Trusts (NAREIT) have launched the FTSE NAREIT PureProperty index series, which provides daily real estate price and total returns at the level of both property and equity investments. The index series' values are inferred from price appreciation and income distributions generated by portfolios of properties owned by listed US equity REITs.

Values are computed daily on the basis of the stock market valuation of constituents of the FTSE NAREIT equity REITs index, coupled with information on their property holdings and balance sheets. Property-level indices are also based on the values of fixed income indices that reflect the cost of debt employed by REITs and that correspond to liquid fixed income investment products.

Property returns are available on a US aggregate, regional and property sector basis, as well as for region and property type combinations. Returns can be found on the apartment, health care, hotel, industrial, office and retail sectors, and for property markets in the East, Midwest, South and West regions of the US.

CMBS

CMBS upgrades turn the corner

The annual number of upgrades among S&P-rated North American CMBS exceeded the number of downgrades in 2014 for the first time since 2007. The upgrade-to-downgrade ratio reached 1.28, which is up from 0.79 in 2013.

In total, of the North American CMBS ratings that were outstanding at the beginning of 2014, S&P lowered 244 during the year and raised 312. In 2013, the agency lowered 399 ratings and raised 317.

The more positive ratings trend may be a reflection of the quality of the loan collateral that matured in the past year, with 2005 often considered a turning point in the quality of CMBS loan underwriting. S&P explains that 2004 reflects the last year before riskier underwriting practices - such as higher leverage, more speculative pro forma cashflow underwriting and more interest-only lending - began to affect CMBS transactions' collateral pools.

S&P adds that 10-year term loans from the 2004 vintage matured in a CRE financing environment that was still flush with liquidity in 2014, leading to better pay-off performance and higher transaction credit enhancement levels, which were supportive of more rating upgrades. Among all outstanding CMBS transaction vintages, the 2004 vintage had the most upgrades in 2014, accounting for 22.1% of total S&P upgrades. S&P says that improving fundamentals in the CRE environment, with occupancy rates and cashflows generally steady-to-increasing, helped ease downward pressure on CMBS ratings in 2014 too.

Anticipated stable-to-improving CMBS collateral performance, as well as continued strong liquidity in the CRE lending market, could maintain this positive trend in rating transitions in 2015. However, the agency warns that the volume of relatively riskier loan maturities scheduled for the remainder of 2015 remains a concern, at US$37.7bn of fixed-rate loan collateral.

CMBS

CMBS delinquencies brake sharply

The Trepp US CMBS delinquency rate dropped dramatically in May after six months of hovering within a 23bp band. From the start of 2015 through April, the rate inched down from 5.66% to 5.57%, but the delinquency rate for US CRE loans in CMBS is now at 5.4% in May and down by 17bp.

In the last 25 months, the delinquency rate has fallen 22 times and is now 87bp lower than the year-ago level. The May decrease is the biggest drop since November 2014, when the rate fell 34bp. Moreover, the percentage of loans seriously delinquent in May is now 5.23%, which is 21bp lower. 

During the month, US$1.2bn in loans became newly delinquent, while almost US$700m in loans were cured, helping push delinquencies lower by 13bp. CMBS loans that were previously delinquent but paid off either at par or with a loss totalled over US$1.2bn in May. Removing these previously distressed assets from the numerator of the delinquency calculation helped push the rate down by 24bp.

If defeased loans were taken out of the equation, the overall 30-day delinquency rate would be 5.69%, which is down 21bp from April. There are currently US$28.7bn in delinquent loans, excluding loans that are past their balloon date but are current on their interest payments.

CMBS

Lodging CMBS growing strong

Trepp expects the volume of US CMBS backed by lodging assets to grow over the next several years as new loans are issued and maturing loans are refinanced. However, the sector faces several challenges, including slower global growth and a stronger US dollar, which could reduce hotel room demand in the US.

Trepp estimates that US$11bn in lodging sector CMBS loans will mature in 2015, before growing to US$19.6bn in 2016 and then dropping to US$10.9bn in 2017. Many of these notes are 10-year loans that were originated at the height of the last cycle between 2005 and 2007. As a result, the total dollar amount of maturing lodging loans will drop significantly in 2018 and 2019, but lodging will still represent a large proportion of total maturing CMBS loans in these years.

Trepp says that refinancing the maturing loans will be easier, as lodging CMBS delinquencies have fallen from a peak of almost 20% in late 2010 to 4.2% in April this year. The fact that most of the loans maturing through 2017 are current should also improve borrowers' ability to refinance, while the small number of lodging loans with appraisal reductions is another illustration of the strength of the underlying market.

The fear of slower global growth and the strong US dollar could weaken lodging sector fundamentals, although Trepp notes that the dollar's strength does not appear to have affected international travel to the US so far. In addition, increased traffic from China - where obtaining a visa has become easier - has offset a reduction in travel from Europe.

Therefore, healthy market fundamentals, low interest rates and the impending wall of maturities have led to increased lending in the hotel sector. Despite prepayment penalties and other costs of paying off loans early, some borrowers are refinancing sooner to lock in low rates, with lodging leading all major property types in origination for the first five months of 2015.

The volume of newly issued lodging CMBS loans ballooned from US$150.6m in 2010 to US$21.7bn in 2014. Loan originations in 1Q15 were well ahead of the same period in 2014, another indicator of the strength of new lodging CMBS so far in 2015.

Insurance-linked securities

Alamo Re upgraded on reset

Fitch has removed from rating watch positive and upgraded, with a stable outlook, the US$400m Alamo Re series 2014-1 class A notes to single-B plus from single-B. The move follows the resetting of the catastrophe bond's modelled attachment probability to 2.09% from its initial annual attachment probability of 3.80%. The crossover point between single-B and single-B plus on Fitch's insurance-linked securities calibration table is 3.015%.

The reset moves the attachment level of the series 2014-1 class A notes up to US$3.2bn from the initial attachment level of US$1.9bn and increases the insurance percentage to 50% of its respective layer, up from approximately 30%. The interest spread for the 2014-1 class A notes has consequently been revised lower to 5.24%, a decrease from the initial spread of 6.35%.

The reset date of 1 June 2015 marks the beginning of the second of three annual risk periods for the series 2014-1 notes over their term. If the sponsor TWIA does not elect to reset the attachment probabilities, the reset agent (AIR) will adjust the attachment level to maintain the exceedance probabilities of the preceding risk period, using the updated subject business profile.

If a qualifying covered event occurs, Fitch will downgrade the notes to reflect an effective default and issue a recovery rating. In the case of a reset election by TWIA, the rating would not be sensitive to a movement from the initial 3.80% exceedance probability to a probability as high as 4.40%, since both probabilities imply a single-B rating. However, if as of the 1 June 2016 reset date TWIA elects to move closer to an exceedance probability approaching 1.75%, the notes at that time could be upgraded to as high as double-B minus.

The notes are exposed to insured catastrophe losses due to named storms and their ensuing perils on a per-occurrence indemnity basis. The subject business covers the 14 first-tier seacoast counties of Texas and a small portion of Harris County.

Risk Management

Risk management proposals issued

The Joint Forum has published a report on developments in credit risk management across sectors. The report provides insight into the current supervisory framework around credit risk, the state of credit risk management at firms and implications for the supervisory and regulatory treatments of credit risk.

A number of recommendations have been put forward in the report, including the Joint Forum's proposal that supervisors should be cautious against over-reliance on internal models for credit risk management and regulatory capital. Where appropriate, the report suggests that simple measures could be evaluated in conjunction with sophisticated modelling to provide a more complete picture.

In addition, the report says that supervisors should be cognisant of the growth of risk-taking behaviour in light of the current low interest rate environment possibly generating an increased search for yield through a variety of mechanisms. It adds that consideration should be subsequently made for firms to have appropriate risk management processes in place.

The Joint Forum also highlights in its report how supervisors must be aware of the growing need for high-quality liquid collateral to meet margin requirements for OTC derivatives sectors. The report says that the Joint Forum's parent committees - BCBS, IOSCO and the International Association of Insurance Supervisors - should consider taking appropriate steps to promote the monitoring and evaluation of the availability of such collateral in their future work.

The report adds that these respective organisations should also consider the objective of reducing systemic risk and promoting central clearing through collateralisation of counterparty credit risk exposures that stems from non-centrally cleared OTC derivatives. Finally, the report recommends that supervisors should consider whether firms are accurately capturing central counterparty exposures as part of their credit risk management.

Risk Management

SIMM licensing launched

ISDA has launched a licensing programme for its proprietary and patent-pending standard initial margin model for non-cleared derivatives, offered commercially under the name ISDA SIMM. The aim is to establish a single model that meets regulatory standards, which all authorised licensees can use to exchange collateral in a manner that is consistent with margin requirement rules.

By using a single framework to calculate initial margin, licensed counterparties can reduce the potential for disputes, according to ISDA. A common methodology also permits timely and transparent dispute resolution and allows consistent regulatory governance and oversight.

As part of the ISDA SIMM licensing programme, service providers will receive patent and copyright approvals necessary to implement and use the model in connection with the services provided to their respective clients, as well as rights to the ISDA SIMM trademark for use in connection with the offering of such services. There is no charge for market participants to use ISDA SIMM to calculate margin with respect to their own non-cleared trades.

Risk Management

OTC margin tool updated

AcadiaSoft has launched MarginSphere 2, the latest version of its electronic margining platform for OTC derivatives. The tool is specifically designed to help buy-side and sell-side firms comply with the new regulatory standards for non-centrally cleared derivatives that will take effect in 2016.

MarginSphere 2 will attempt to tackle a potential surge in margin volumes from impending regulations by providing a clear audit trail and increased transparency for margin transactions. The tool seeks to fully automate the margin process by including matching of margin, comparison of necessary inputs and agreement of calls and movements. The aim is to match margin calls immediately, so disputes can be resolved or minimised before agreeing margin movements.

RMBS

RMBS reporting improvements urged

Increased consistency in performance data reporting across European jurisdictions would improve transparency and comparability in RMBS, suggests Moody's. The agency notes that focus on the standardisation of European securitisation remains high, while all policy initiatives include measures that aim to increase disclosure requirements.

"The ECB and Bank of England's standardisation initiatives have improved the information available to investors," observes Moody's vp Ariel Weil. "We think the European Commission and ESMA's initiatives will lead to further transparency. Transparency will be enhanced by the implementation of Article 8b of Regulation 1060/2009 and the creation of ESMA's website relating to information on securitisation instruments."

Moody's research shows that differences in default definitions is an important driver of variations in investor reports. Although transactions in the UK and the Netherlands typically lack formal default definitions, investor reports are more consistent across servicers in these countries. Italian and Spanish servicing reports vary to a greater extent, partly because of dissimilar default definitions across transactions.

The agency says that, despite an improvement in reporting standards since 2009, definitions of key transaction performance concepts vary in investor reports. These variations can reflect different legal frameworks, contractual arrangements or servicer practices. Investor reports typically aggregate key performance indicators, such as defaults, losses and prepayments, but show variations in their definition, detail or calculation.

Moody's adds that UK and Dutch RMBS show more standardisation and consistency, despite a lack of formal default definitions, while Italian and Spanish RMBS reports vary between different transactions or servicers. The agency stresses that comparing transactions domestically and internationally will continue to require further data analysis and adjustments.

RMBS

Granite short-term ratings withdrawn

Fitch has withdrawn its short-term F1 ratings on three Granite Master Issuer bonds, following the termination of conditional purchaser agreements for the notes. The affected tranches were structured to be issued on an annual revolving basis.

The tranches are: Granite Master Issuer Series 2006-1 class A1, Series 2006-3 class A4 and Series 2007-2 class 4A1. Unless noteholders exercised their right to retain the notes, historically they would be automatically tendered for remarketing. The remarketing bank would then first try to sell the notes in the open market or, if unsuccessful, would require the conditional purchaser to acquire them.

Given that the conditional purchaser agreements have been terminated, the tranches are effectively no longer revolving, but rather are long-term obligations of the issuers. Consequently, Fitch has decided to withdraw the short-term ratings as the agency no longer considers them to be relevant for the securities. The long-term ratings are unaffected, however.

RMBS

Mortgage initiative impact gauged

A recent programme set up by the Russian Agency for Housing Mortgage Lending (AHML) to support mortgage borrowers facing payment difficulties will have a limited effect on Russian RMBS, according to Moody's. This is due to the programme's restricted scope, owing to its funding constraints and tight eligibility criteria.

The AHML's programme, which has been in effect since May, enables the agency to offer a six to 12 month payment holiday to borrowers of rouble-denominated loans. The AHML will offer to redenominate loans denominated in foreign currencies into roubles, with a new maximum interest rate of 12%, and partially compensate the lender for the loss.

Moody's believes that the programme will not affect the performance of outstanding Russian RMBS transactions, as the eligibility criteria in these transactions do not permit restructured loans in the collateral portfolios. In addition, the programme is targeting low income borrowers, whereas most of the underlying borrowers in Russian RMBS transactions that Moody's rates earn more than one and a half times the subsistence level and would thus be ineligible to take part.

The programme is also only limited to certain socially vulnerable borrower categories, for whom affordability is tight. Consequently, the level of mortgage penetration among these borrower categories is lower than average in Russia. Only borrowers in arrears for at least 30 days are eligible to take part in the programme, thus limiting the pool of eligible borrowers to those with no capacity to pay.

Moody's believes the programme will have less of an effect than the ARIZHK programme - launched in 2008 - due to a challenging economic environment in Russia. Unemployment is likely to remain high and real wages will remain low in 2016, which could mean that the programme's term will be insufficient for many borrowers to resolve their payment difficulties.

If borrowers do not receive further support when their loans fail to re-perform after restructuring, lenders have to bear the costs of the delayed repossession. However, costs will likely be constrained with house prices expected to remain largely stable over the next 12 months, at least in nominal terms.

RMBS

Israeli RMBS approach finalised

Moody's has published its approach to rating Israeli RMBS transactions, using its MILAN model framework. The agency plans to use the proposed approach in conjunction with its existing methodologies to rate RMBS and covered bonds in Israel.

Benchmarking the Israeli residential real estate market to other jurisdictions that also use MILAN was the key driver behind the calibration of MILAN for Israel. Moody's has used many parameters from the emerging securitisation market (ESM) settings of MILAN for Israeli residential mortgage pools, with a few changes to reflect Israeli-specific elements.

Although Moody's has used the ESM settings, some of the underlying assumptions and parameters differ for the Israeli proposal. Among the most important of these differences are the MILAN settings associated with house price stress rates, foreclosure costs and interest rate type in the application of MILAN within Israel.

The finalisation of the approach follows Moody's request for comments on its proposals to its methodology (SCI 18 March). The agency says market participants suggested that the assumptions on the probability of default of individual loans and portfolio as a whole are too conservative. In addition, it was suggested that some of the loan-specific characteristics are penalised too strictly.

However, Moody's has decided not to make any adjustments to the initially proposed parameters. It explains that the decision to keep the original proposals was motivated mainly by the limited historical data available on the Israeli market and by the benchmarking of the available historical data and the associated assumptions with other comparable markets.

RMBS

QM underwriting scrutinised

By reviewing QM originator guidelines and evaluating how they address approximately 70 crucial aspects of underwriting, Morningstar says it has identified a benchmark for what it considers to be industry standards. To demonstrate differences and similarities across guidelines, the agency focused on 10 of the more active originators and aggregators of QM loans. It notes that each company's guidelines have strengths and weaknesses, with many companies operating both aggressive and conservative policies, which can offset each other in their overall grade.

Morningstar's analysis shows that the maximum LTV ratio/combined LTV ratio is typically 80% for purchases or rate and term refinances of primary residences and is lower for other transaction types. However, one company allows for 90% LTV for loan amounts up to $800,000, while another allows for 90% LTV for loans up to US$1.5m for primary residence purchases and US$1m for second home purchases. A third allows for 89.9% CLTV for US$1m loans on adjustable rate mortgages.

Typically, companies allow 70% of the balance of stocks, bonds and mutual funds and 60% of the balance in retirement accounts to be counted towards asset reserves. However, one company differs by allowing 100% of stocks, bonds and mutual funds, while not allowing any portion of retirement accounts, unless the borrower is of retirement age. In Morningstar's view, this is an example of conservative and aggressive policies offsetting each other.

The maximum loan amount is usually US$2m-US$3m. One company will, however, lend up to US$5m in certain states.

Companies don't tend to allow any late mortgage or rent payments over the most recent 24 months. However, one company allows for one late rent payment in the past 24 months and another allows for one late mortgage payment in the past 24 months, but not within the past 12 months. This is an example of how certain applicants could obtain financing from one QM loan originator but not another, Morningstar observes.

Meanwhile, copies of complete tax returns are usually not required unless the borrower earns income that must be verified from a schedule of the tax return, such as interest, dividend or capital gains income or income from self-employment. However, two companies always require complete tax returns. While more income documentation is preferred for verification, this requirement makes for a more burdensome application process for borrowers at these two companies, Morningstar suggests.

Originators and aggregators typically review tax return transcripts from the Internal Revenue Service as part of the underwriting process to ensure the tax returns provided are those actually filed with the IRS. However, one of the same companies that always requires tax returns does not review tax return transcripts, thereby creating the possibility for fraud.

The analysis further indicates that full appraisals - which include an interior and exterior inspection - are typically required, with two appraisals typically required when the loan amount exceeds US$1m-US$2m. However, one company allows for exterior-only appraisals and another leaves a second appraisal to its discretion.

Finally, companies often require additional asset reserves for each additional property owned. Often, this policy applies only to financed properties and the requirement is typically six months of mortgage, tax and insurance payments per property. However, one company requires reserves equal to only two months of expenses for each financed property owned, if the subject property is a second home, while another originator has no policy in place for additional real estate owned by a potential borrower.

Morningstar says that these examples illustrate that even in the generally homogenous QM lending environment, originators and aggregators vary from industry standards. Some of these examples also illustrate the importance of understanding underwriting guidelines when evaluating certain loan characteristics, such as asset reserves, which may be calculated differently.

The agency also analysed the due-diligence results on more than 22,400 loans originated by more than 350 lenders between 2013 and 2015. It found that 2,531 loans (or 11.3%) contained a credit exception to the originator's guidelines and 1,965 loans (or 8.8%) had a compliance exception. However, few of these exceptions were considered material, with many being for LTV ratios slightly exceeding guidelines or for FICO scores being a few points below guidelines.

The originator with the most credit exceptions in the analysis had an exception rate of 25.8%. The same originator also had the most compliance exceptions, with an exception rate of 42%. By contrast, one originator had a credit exception rate of only 2.4% and another had a compliance exception rate of 1.6%.

Morningstar suggests that exceptions to guidelines that allow higher DTI ratios, lower FICOs and limited income documentation would likely be more concerning than exceptions to more conservative guidelines. "Underwriting guidelines and due-diligence results, viewed in tandem, provide insight into the strength of originators and aggregators," the agency concludes. "While guidelines of QM loan programmes today are similar, some material differences in policies exist that could allow an applicant to qualify for a loan with one originator but not another. In addition, there are vast differences among due-diligence results, but these must be viewed in conjunction with the strength of the underwriter's guidelines, the compensating factors present and the firms completing the diligence process."

RMBS

Eurosail losses curbed

Moody's reports that in five UK non-conforming RMBS deals where Lehman Brothers Special Financing acted as the currency swap counterparty, the recovery proceeds from the claims on defaulted currency swaps and the sale of the remaining claims were sufficient to restructure the transactions and limit noteholder losses. The transactions that were exposed to currency exchange rate risks after Lehman Brothers filed for bankruptcy in 2008 were Eurosail-UK 2007-5NP, 2007-4BL and 2007-6NC, Eurosail PRIME UK 2007-A and EMF-UK 2008-1.

"On average, the total recoveries achieved through the claim distributions and the sale of the remaining claims equalled 63% of the total claim amounts," says Carole Bernard, a Moody's vp and senior analyst. "We had expected recoveries to amount to 45% of the claim amounts."

Moody's explains that the default of a currency swap counterparty does not necessary lead to an immediate loss or default to the transaction. Other factors come into play, such as the deal structure, cashflow distribution, excess spread and available liquidity, as well as the market's spot rate and interest rate.

Since April 2012, the five affected transactions have received multiple distributions from the claims against Lehman Brothers and Lehman Brothers Special Financing on the defaulted swaps. The issuers then sold the remaining claims in the market in 2013 and 2014 (SCI passim).

Following the sale, the transactions were restructured using the received recovery proceeds. The restructurings aimed to distribute the recovery proceeds and eliminate future currency risks.

To eliminate each transaction's ongoing exposure to unhedged currency exchange rate risk, the euro-denominated tranches were changed to sterling along with their notional amounts. Higher than expected recovery proceeds enabled the restructured sterling-denominated notes to pay down to a total balance that is close to the outstanding collateral balance.

Consequently, note-level losses were limited in Eurosail-UK 2007-5NP and 2007-6NC, Eurosail PRIME UK 2007-A and EMF-UK 2008-1, as the restructuring increased the notes' credit enhancement. Eurosail-UK 2007-3BL, which has similar currency risk exposure following Lehman Brothers' default, is still to be restructured. The issuer is currently exploring restructuring opportunities.