Contents

RMBS

Special offer

Investors set to gain from Australian triple-A auctions

The first of the Australian Office of Financial Management's (AOFM) planned series of RMBS auctions is expected this month. The sales present investors with an attractive opportunity.

The AOFM has been instructed to sell off the Australian government's A$4.551bn triple-A rated RMBS holdings. Monthly sales of A$300m-A$500m are planned (SCI 13 May).

"Conversations I have been having have revealed a lot of interest in triple-A paper. For those looking to park cash for six months or more, or looking for alternatives to government debt, this process offers the opportunity to get paid well for taking almost no risk," says Jonathan Rochford, portfolio manager at Narrow Road Capital.

The timing of these sales seems to be politically-driven rather than being motivated by economic factors. The government stands to make a small capital gain and reduce its overall debt outstanding.

"The government would be giving up a little future yield for the sake of being able to reduce the pace of the growth in the national debt. It certainly makes political sense to be able to show a better debt-to-GDP figure," says Rochford.

The triple-A paper that the Australian government is putting up for sale is of particularly high quality. It is also well seasoned, with the underlying mortgages now at least three years old and so clear of the period when borrowers are most likely to default.

"These mortgages were written prior to the recent run-up in Australian house prices, so the concerns about a house price bubble that impacts the current vintage are not as relevant here," says Rochford.

He continues: "This is no ordinary triple-A; you could call it quadruple-A. If you are an investor who has any security concerns, then this paper is about as good as it gets. The tranches to be sold almost all have double or triple the subordination required to receive a triple-A rating, even when the credit for lenders mortgage insurance is excluded."

Several of the names that are due to be auctioned were first issued in 2009. This group includes bonds from the Apollo Series 2009-1 Trust, Progress 2009-1 Trust, Series 2009-1 Harvey Trust, Series 2009-1 REDS Trust, TORRENS Series 2009-1 Trust and WB Trust 2009-1 transactions.

The SMHL Securitisation Fund 2008-2 RMBS is even earlier-vintage. However, while paper from a range of vintages and sponsors will be made available, Rochford notes that these would not be his guiding criteria.

"All of the names being sold are solid, so I would pick names based on subordination and pricing rather than which originator it comes from. The non-bank originators are likely to price wider than the small banks, which will price wider than the regional banks," says Rochford.

Which names will be included in which auction and the precise dates of those auctions is not yet known. However, as the overall quality appears so strong, investors should not struggle to find suitable paper.

"There is plenty of interest, but this is a very big portfolio at A$4.5bn, so there is enough to go around. This is a good opportunity for buyers to deploy a large amount of capital quickly," says Rochford.

He adds: "We expect to see A$300m-A$500m sold per month. The first auction will be late this month or early in July. The schedule gives investors a chance to reassess on a month-by-month basis and monitor how these sales progress."

While the fact that most Australian RMBS is denominated in Australian dollars may put some investors off, JPMorgan European securitisation analysts continue to view the product favourably to European RMBS, where the ABSPP-inspired rally has driven benchmark spreads tighter.

"Australian RMBS continues to exhibit both stable (and superior) performance versus its Dutch and UK securitised peers," they note. "From a prepayments perspective, Australian RMBS continues to lead the pack, recording a monthly average of nearly 22% during the period 2008 to 2014 (touching a low of 17.3% in February 2011). The average figures for Dutch and UK RMBS master trusts stand at 11.7% and 12.9% respectively over the same period."

JL

Structured Finance

Lift off?

Institutional investors boost marketplace lending securitisation

The marketplace lending securitisation sector appears set for take-off, fuelled by the proliferation of online lending platforms and an influx of institutional investor capital. However, increased visibility around credit criteria and better representations and warranties are necessary for the asset class to become mainstream.

An estimated 100 platforms are already active in the marketplace lending space, including the biggest brands LendingClub, OneMain Financial and Prosper Funding. US$5.5bn of marketplace loans were issued in 2014, but PricewaterhouseCoopers projects that annual volumes could rise to US$150bn or more within a decade.

Indeed, a recent survey undertaken by Richards Kibbe & Orbe and Wharton FinTech indicates that the marketplace lending industry could soon see a transformative influx of capital from institutional investors. Of the over 300 institutional investors polled in the survey, 85% expressed interest in entering the sector in some way, although only 29% have allocated capital to the space so far (see box for more).

"Technology start-ups are bringing incredible energy to the credit market. Marketplace lending platforms are highly motivated and will continue to grow in size as consumers recognise their utility," says Lawton Camp, partner at Kaye Scholer.

Henry Morriello, chair of the finance practice at Kaye Scholer, adds: "The concept of using technology to bypass traditional methods to originate loans is attractive and there is a great need for this from under-served borrowers. The marketplace lending industry is only two or three years old, but it is growing at a rapid rate."

The driver of growth from a consumer perspective is that marketplace loans provide incremental access to credit over credit cards, at a more cost-effective rate. Indeed, many marketplace loans are being used to consolidate existing credit card debt, but lenders are also diversifying into student loans and home equity loans (albeit residential loans are more complicated to originate online).

From an investor perspective, marketplace lending securitisations have a more appealing structure than, for example, credit card ABS. Transactions typically have an amortising balance and are backed by loans with three- to five-year terms.

However, Camp notes that asset performance remains a significant unknown. "Most of the platforms have yet to be tested during a significant downturn in the credit cycle. One of the first questions asked by potential investors in these platforms is how each platform approaches the servicing of distressed and defaulted loans."

Another area in need of clarity is the different origination methodologies across platforms: one group's approach is based on algorithms, while another's is based on analysing historical data. "There is a certain opacity to origination and credit quality in the marketplace lending industry," explains Morriello. "Lenders tend to provide details on the general underwriting criteria considered, but not on the precise process of their credit decisions. Investors are, therefore, seeking increased visibility on credit criteria and more representations and warranties with respect to the underlying loans."

The US SEC's Rule 15Ga-2 - which requires issuers and underwriters to disclose third-party due diligence services employed in connection with the issuance of rated ABS - goes live on 15 June (SCI 1 June). It is hoped that the rule will, at least, help reveal how due diligence is used to diligence marketplace loans that become subject to rated ABS transactions.

Nevertheless, Camp suggests that institutional investors can differentiate between platforms based on their attractiveness from a securitisation standpoint and their ease of use. "The question is whether to partner with an established platform and be one of many associated with it or go to a new platform and potentially get a better deal?"

Other points to take into consideration are whether a platform is willing to work with sponsors, underwriters and rating agencies to provide the necessary due diligence and disclosure required to securitise a pool of loans and whether the rating agencies have reviewed the platform's origination process and servicing arrangements. "Consistency and transparency are important for securitisation: the more transparent a platform's origination and servicing, the easier it will be for sponsors to securitise their loans," Camp observes.

LendingClub, OneMain and Prosper are widely regarded as having well-developed platforms in the US. Morriello agrees that their systems are advanced and suggests that any new entrant to the sector will have to reach a similar level to compete at the same plateau.

"The barrier to entry is perceived to be low, but in reality it is significant," he observes. "The process of origination and servicing is subject to significant Federal and state regulation, so it's important that new programmes have the same attention to detail as the incumbents. So far, institutional investors appear to be aligning with the better-known platforms."

Examples include Varadero Capital partnering with LendingClub and Apollo-affiliate MidCap Financial partnering with LendKey. BlackRock and Prosper teamed up to bring Consumer Credit Origination Loan Trust 2015-1, the sole rated marketplace transaction to date (SCI 30 January).

Rated by Moody's, the US$345m deal was oversubscribed. The US$281.32m triple-B rated class A notes priced at EDSF plus 240bp (with initial credit enhancement of 23.5%) and the US$45.38m double-B class Bs at swaps plus 425bp (11%). An unrated US$18.15m class C tranche and a residual certificate were retained.

Moody's projects 8% cumulative net losses for the CCOLT 2015-1 transaction, based on the collateral and historical trends.

The majority of marketplace lending securitisations have so far been unrated private placements, however. To move the asset class to a rated environment, rating agencies need to be additionally comfortable with the ongoing loan servicing and the verifiability of underlying data, according to Morriello.

He concludes: "I suspect that it won't be too long before we see platforms doing their own deals. There is plenty of opportunity for different parties to pursue different strategies. But the more the sector moves towards the traditional securitisation approach and the more transparency there is around loans, platforms and aggregators, the better."

CS

RMBS

Trigger effect

Call for consistency in UK non-conforming RMBS definitions

Improving performance in UK non-conforming RMBS is strengthening mezzanine bondholder positions as an increasing number of deals switch to paying pro rata. However, anticipating when switches will occur is being complicated by ambiguous trigger terminology.

Barclays estimates that seven UK non-conforming RMBS transactions which are currently paying sequentially have a higher likelihood of switching to pro-rata before the end of 2016. Moreover, five transactions - having switched to pro-rata - remain close to their triggers and face a certain period of time before switching back to sequential pay-down.

"Most transactions in this asset class, particularly pre-2007 vintages, have a provision that switches pay-downs from sequential to pro-rata," says Barclays director for European ABS strategy Dipesh Mehta. "At the time, they were created without issuers envisaging the extent of the crisis that we later saw."

Most triggers are based on conditional requirements, particularly performance-based. Among the most common criteria are increased credit enhancement of senior notes, long-term arrears within specified limits, no recorded PDLs and an undrawn liquidity facility.

"The key issue for investors is anticipating when the potential switch will occur," Mehta adds. "However, we have noticed numerous occasions of mismatches and ambiguity in the terminology used by both investor and rating agency reports. This is creating confusion with respect to current performance and trigger values."

Much of this ambiguity lies in the definition of arrears and whether repossessions are included. To add to the complexity, the definition can then vary as to whether sold and unsold repossessions are included. Such differences underline the need to strengthen definitional consistency, particularly at a time when standardisation is being stressed by regulators.

"We want to avoid this back-and-forth between investors and third-party companies, and gain clarity," says Mehta. "I have been seeing notable mismatches, such as the discrepancies in the waterfall definition in LMS 1, which is being paid sequentially when it probably should be paying pro-rata."

LMS 1 and LMS 2 have performed similarly and have near-identical language regarding conditions for triggering pro-rata payments. However, unlike LMS 2, LMS 1 is not paying pro-rata, due to the trustee's claim that its PDL condition failed.

If UK non-conforming RMBS performance continues to improve, similar scenarios could lead to greater imbalances. As a result, Mehta proposes that the next step for the market is a grassroots push by investors to exert pressure on third-party providers.

"It makes sense for third-party providers, and within investor reports themselves, to give coverage to a decent standard. It is astonishing that these issues still persist, so the market has to help itself by now focusing on remedying the situation as soon as possible."

While some concern remains over the potential impact of an interest rate rise on non-conforming arrears and prepayments, a dramatic downturn is unlikely, given the Bank of England's indication that a rate rise - which is forecast for early 2016 - would be moderate in order to prevent any detrimental volatility to the economy. "Governor Mark Carney has made it clear that it will be a slow, steady process and the expectation is for interest rates to rise and settle around 3%," says Mehta. "So the majority of investors in UK non-conforming RMBS should be unscathed."

In addition, the market should continue to benefit from the fallout of the ECB's ABSPP programme, coinciding with improving domestic conditions. The ECB's involvement alongside the TLTRO has extended the imbalance between supply and demand in the European ABS sector and crowded out investors, which has caused investors to search for yield elsewhere (SCI passim).

Mehta believes this has provided such yield-hungry investors with two options: either moving down the capital structure to invest in a familiar asset class, such as Dutch RMBS; or moving away from the mainstream towards sectors such as the UK non-conforming space. "When investors weigh their options, they will look for what's appealing with the UK non-conforming RMBS sector," he concludes. "For a start, it boasts some of the best data levels out there. UK issuers are using this attribute to push their product to investors who possess spare cash and are maybe looking for an alternative investment."

JA

Secondary markets

Euro ABS/MBS mixed

Despite wider market volatility and an overall weakening tone European ABS/MBS secondary market sectors continue to see mixed fortunes.

The latter half of last week saw an upswing in BWIC supply, but was not met with sufficient demand as many line items did not trade. Overall market tone softened on the back of Greek concerns and broader credit weakness, but some sectors fared better than others.

Peripherals across the board moved wider on the week on the back of minimal liquidity. Whereas, prime bonds arrested any reverses by Friday with buyers emerging - notably in Autos, and Dutch/UK RMBS - to ensure spreads in the sector were unchanged on the day.

Meanwhile, a strong new issue pipeline in UK non-conforming has seen secondary prices slide a little. However, some buyers have begun to appear to take advantage of the widening.

UK non-conforming assets play a central role in today's ABS/MBS BWIC calendar, which currently contains three lists. The day commences at 12:00 London time with a nine line mixed list of small clips and is currently scheduled to end at 16:00 with another relatively small sized list of five UK non-conforming and Spanish mezz bonds.

The chunkiest list today comes at 15:00 - a three line seniors auction totalling £118.06m original face/£59.67+m current. It comprises: ALBA 2006-2 A3A, ESAIL 2006-2X A2C and NGATE 2007-2X A3.

Only ESAIL 2006-2X A2C has covered on PriceABS in the last three months, doing so at 96.88 on 30 March.

Secondary markets

US CLOs diverge

The US CLO secondary market continues to move along at a decent pace, but a divergence in vintages at the top of the stack is a appearing.

"The market continues to be fairly busy and we're seeing reasonably good demand in post crisis bonds," says one trader "However, there is less in pre-crisis paper."

Notably, the trader adds: "We've seen 1.0 triple-As widen out to over 100DM as people who were buying such paper have backed away. I'm not sure why - they could be out of money or just got full up."

Nevertheless, the BWIC calendar remains strong. "There are a decent amount of lists already generated for the remainder of this week," says the trader.

Today currently has four US CLO BWICs scheduled. The largest consists primarily of 2.0 triple-As, but also involves some 1.0 triple-As, so will be watched closely.

Due at 12:00 New York time the $113.97+m current face 14 line list comprises: AMMC 2014-14A A1L, BABSN 2014-IA A1, BABSN 2014-IIA A, CECLO 2013-18A A, EATON 2014-1A A, FLAT 2014-1A A1, GOLD7 2013-7A A, INGIM 2014-1A A1, JASPR 2005-1A A, JFIN 2007-1A A1A, LROCK 2014-3A A1, PANG 2007-1A A1, REDRI 1A A, SYMP 2013-11A A, TELOS 2006-1A A2 and VOYA 2014-4A A1.

Nine of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: AMMC 2014-14A A1L at H99H on 5 May; BABSN 2014-IA A1 at 100H on 5 May; BABSN 2014-IIA A at MH99H on 5 May; CECLO 2013-18A A at 98.79 on 1 June; EATON 2014-1A A at H99H on 5 May; FLAT 2014-1A A1 at MH99H on 5 May; GOLD7 2013-7A A at 99A on 21 May; REDRI 1A A at M99H on 30 March; and TELOS 2006-1A A2 at M99H on 21 April.

Secondary markets

Euro secondary stabilises

After a week of softening and amid continued broader market volatility the non-peripheral European securitisation secondary markets stabilised yesterday and have opened unchanged this morning.

"It was a bit more active yesterday and the market appears to have stabilised," says one trader. "We saw two-way flows in quite a few sectors, though mainly in prime paper - from autos, to Granite, to Dutch, to senior 1.0 CLOs."

The trader suggests the more positive tone is being assisted by a reduction in supply after last week's heavy volumes. "The BWIC volumes announced for this week so far are quite a bit lower this week and there's not much in the primary pipeline either. So, with Barcelona next week meaning an off week for most the technicals are much more constructive for secondary now."

However, peripherals remain the exception. "Peripherals are still weak, especially Spain and Portugal. Even Italian paper, which has been in demand, is a bit softer - we traded a couple of bonds yesterday 3bp lower than last week," says the trader.

There are currently six BWICs circulating for trade today. The most sizeable pieces in the ABS/MBS space come in a two line Italian auction due at 14:00 London time - €50m CLARF 2008 A and €15m QUADF 2011-1 A2. In the two CLO BWICs scheduled, the largest slice comes at 15:00 as a €6m single line of STRAW 2007-1A D.

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

Secondary markets

US CLOs pick up

Volumes in the US CLO secondary market have picked up today and focus continues its shift towards senior paper.

"The market has really picked up today after a typically quiet Monday and a low to medium week last week," says one trader. "At the same time, focus has moved to the top of the capital structure."

The trader continues: "There are quite a few people looking to move senior risk. I haven't seen this many triple- and double-As in for the bid in quite a while."

However, the trader suggests the change in focus is unsurprising. "New issue triple-As are grinding in so people are testing secondary to see if there's anything behind those moves. At the same time, the market perhaps needs to take pause from the heavy mezzanine bias of the last few weeks."

Overall, US CLO secondary remains buoyant across the board. "There's no change in tone - there's maybe a deceleration of the tightening, but it's not soft either," says the trader.

There are 11 US CLO BWICs circulating for trade today accounting for $866.958m in original face. Of those, the chunkiest triple-A list was a four line mix of 1.0 and 2.0 bonds totalling $156.115m due at 11:00 New York time.

The auction comprised CECLO 2013-20A A, CRMN 2013-1A A, OZLMF 2013-5A A1 and SUDSM 2013-1A A1. Two of the bonds have covered with a price on PriceABS in the last three months - OZLMF 2013-5A A1 at 99.7 on 20 March and SUDSM 2013-1A A1 at 99.68 on 12 May.

Secondary markets

Euro ABS/MBS hindered

The risk-off attitude across the European ABS/MBS secondary market is continuing to hinder activity.

"Liquidity is pretty terrible at the moment," says one trader. "The tone of the market is generally weak with concerns about Greece hampering broader markets and ABS specific issues around the disappointment over the ABSPP."

BWICs continue to be churned out however and are going through with mixed success dependent on the quality of the names involved. The trader suggests there is nothing unusual in the selling activity. "The vast majority of what is on the auction calendar is just normal fund reallocation business."

There are six European ABS/MBS BWICs due today so far. Assets in for the bid range across deal types, jurisdictions and parts of the capital structure, though sterling paper has the strongest showing.

Perhaps the most interesting auction involves a €16m line of PMACC 2015-1 A. The French credit card deal has not traded on PriceABS before.

Secondary markets

Euro ABS/MBS drifts

The European ABS/MBS secondary market is continuing to drift without volume or direction.

"The combination of Greek headlines and the run up to Barcelona is making for a difficult environment," says one trader. "Liquidity continues to be exceptionally poor with a lot of investors sitting on the sidelines. There are still quite a few BWICs but we're only seeing very limited colour being released from them and a lot of DNTs."

As a result, market tone continues to weaken. "On limited flows we're drifting wider with non-conforming and select peripherals being the major underperformers," the trader says. "With limited information and trades it's now a question trying to find the point of client interest and attempting to get a sense of direction from there."

There are currently four European ABS/MBS BWICs circulating for trade today. They include a 31 line item mixed odd lot list at 15:30 London time, but the most eye-catching involves three lines of UROPA 2008-1 at 15:00.

The £85+m UK non-conforming mezz list consists of UROPA 2008-1 B, UROPA 2008-1 C and UROPA 2008-1 M2. None of the bonds has traded on PriceABS before.

Secondary markets

Euro CLOs soften

The European CLO secondary market is seeing prices soften as summer hoves into view.

"In common with other markets, we're a little bit weaker," says one trader. "It's in 1.0s chiefly, but even there double-Bs, for example, haven't seen a dramatic move - just a couple of points. In 2.0s the weakness is most evident in double- and single-Bs but that's more a result of them having rallied too far in the first place."

Activity has also reduced, the trader reports. "Volumes are down but that's not a surprise given the run we now have - the IMN conference next week; then half-year, which is always significant for the buy-side in particular; and then we hit summer. At the same time the political backdrop isn't helping, though that appears to be hitting ABS harder than CLOs."

Nevertheless, this week has seen a relatively large number of BWICs. "The secondary supply is a result of people asking when is the best time to try to sell bonds ahead of half-year and they've been told to do it this week to get the best chance of high participation," the trader explains.

There are four European CLO BWICs currently circulating for trade today. Of those, the largest pieces come in a two line equity auction due at 15:00 London time.

The pieces involved are €5m DRYD 2013-27X SUB and €5m SPAUL 2X S. Neither bond has traded on PriceABS before.

Secondary markets

US CLOs thinning

The US CLO secondary market is continuing to see heavy BWIC volumes but liquidity is thinning.

"It's very busy this week in terms of BWICs despite Barcelona next week, quarter-end and rate moves," says one trader. "But because of those three factors the market is thinner with fewer guys bidding on bonds and the bid-ask has widened significantly."

As a result, the last couple of days have seen a high number of DNTs because reserves have not been met. However, the trader adds: "There is a lack of liquidity but it doesn't have any significant meaning yet - I'm not seeing any panic or forced sellers so I expect a lot of DNTs again today, but there is still some demand, so we should still see some of the good names trade well."

Further, the trader notes that the spike in BWIC volumes is not a result of the instinct. "We're not seeing the big guys come in with large blocks and start things off. Sellers over the past few days and today are typically mid-tier players and smaller hedge funds trying to run through the door before liquidity dries up completely next week."

Overall, the trader suggests that the current pattern is likely to be temporary. "We'll have to wait and see what all this is going to translate to in terms of market direction once quarter-end is over. At that time it'll be interesting to see if any of the larger players start to come in looking for bargains as I know many of them still have cash to put to work."

There are currently nine US CLO BWICs circulating for trade today. The largest is a $50.05m 2.0 mezz auction due at 11:00 New York time.

The 12 line list comprises: ACIS 2014-4A D, ACIS 2014-5A D, ALLEG 2014-1A D, ANCHC 2015-6A D, BNPIP 2014-2A D, CECLO 2014-22A E, CECLO 2015-23A C, CIFC 2014-4A F, FLAGS 2014-8A F, OCP 2015-8A C, VOYA 2014-4A E and WINDR 2014-2A E. Only two of the bonds have covered with a price on PriceABS in the last three months - ALLEG 2014-1A D at 95.81 on 21 May and WINDR 2014-2A E at 87.75 on 18 March.

Secondary markets

Euro ABS/MBS struggles on

The European ABS/MBS secondary markets continue to struggle with poor liquidity and broader market volatility.

Market tone continued to be weak on light volumes yesterday and looks unlikely to change today in the penultimate gasp before Barcelona amid further Greek concerns. Prime assets continue to attract what activity there is and spreads there are holding up reasonably well, while peripheral paper remains very quiet with most names softening further.

Sellers keep coming to market with BWICs however and while DNTs continued to make a strong showing yesterday a fair proportion of bonds did go through albeit below recent levels. Today currently sees another four ABS/MBS BWICs.

Today's BWICs are a mixed bunch involving three lines of German auto seniors; two slices of Spanish RMBS form a CDO liquidation; and a 75m dollar denominated slice of HCARD 2012-1A A. However, most attention will be focused on a large mixed list involving the hardest hit sectors of late - peripheral and UK non-conforming - due at 15:00 London time.

The 29 line item auction amounts to 407.916m original face factored down to 96.13+m current face. The list comprises: ALSPV 5 A, ARRMF 2010-1X MB, ATLSM 3 A, ATLSM 4 A, AYTPY II T2, BCJA 5 B, BCJAM 1 A, BERAB 2011-1 A1, BRNL 2007-1X A4A, BTOA 2 A2, CLAAB 2011-1 A, COMP 2012-2 A, CORDR 4 A2, E-MAC DE06-I A, FGOLD 1 A2, INTS 3 A3, LEEK 17X A2C, LOCAT 2005-3 B, MAGEL 2 A, RPYME 2 A2G, SANTM 3 A2, SUNRI 09 A, SUNRI 2 A, SUNRI 2014-1 A, TDCAM 3 A2, UROPA 2007-1 A2B, VELAA 2006-1 A, VERSE 3 SNR and VOBAF 2012-4 A.

Ten of the bonds have covered with a price on PriceABS in the last three months, last doing so as follows: ARRMF 2010-1X MB at 100.735 on 22 May; BERAB 2011-1 A1 at 99.51 on 10 June; BRNL 2007-1X A4A at 99.05 on 02 June; CLAAB 2011-1 A at L99 on 21 May; E-MAC DE06-I A at 96.6 on 30 April; LOCAT 2005-3 B at 99.7 on 05 May; MAGEL 2 A at 97.55 on 02 June; SUNRI 2 A at 99.785 on 16 March; SUNRI 2014-1 A at 100.25 on 10 June; and UROPA 2007-1 A2B at 98.56 on 23 March.

Secondary markets

US CLOs winding down

The US CLO secondary market is winding down after a busy week.

As expected, yesterday's CLO BWICs saw a high proportion of DNTs with reserves not met thanks to reduced liquidity. At the same time, there was a high amount of line items where no colour was released.

Nevertheless, there were a few buyers in evidence and some bonds did go through at reasonably decent prints. However, liquidity is expected to be further diminished today and even the high BWIC volumes seen this week look to have finally dissipated ahead of Barcelona.

There are three US CLO BWICs circulating for trade today so far. At 10:00 New York time is a single $17.75m line of CIFC 2014-5A E1. At 10:30 is a $5.7m three line list - HLA 2012-1X B, KVK 2013-1A C and LIBR 2005-1A A3. Then, at 12:00 is a four line $46.5m auction comprising: ARES 2013-1A B, HLA 2012-1X A2, MAGNE 2015-12A B and WAMI 2014-1A B1.

None of the above bonds has traded with a price on PriceABS in the past three months.

Structured Finance

SCI Start the Week - 8 June

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

Pipeline
Another Chinese deal joined the pipeline last week. It was one of six newly announced ABS, while there was also an ILS, four RMBS, four CMBS and one CLO.

The ABS were: CNY2.36bn Bavarian Sky China 2015-1; US$250m CPS Auto Receivables Trust 2015-B; US$410.5m Hertz Fleet Lease Funding Series 2015-1; €100m Highway 2015-I; US$300m Ford Credit Floorplan Master Owner Trust A Series 2015-3; and US$758.2m Navient Student Loan Trust 2015-3.

€150m Azzurro Re I was the sole ILS. The RMBS consisted of US$252.92m Agate Bay Mortgage Trust 2015-4, US$219.78m Citigroup Mortgage Loan Trust 2015-RP2, A$500m Pepper Residential Securities Trust No.14 and A$500m TORRENS 2015-1.

US$290m DBWF 2015-LCM, US$1.59bn FREMF 2015-K46, US$506m JPMCC 2015-FL7 and €191.5m REITALY Finance accounted for the CMBS. Meanwhile, the CLO was US$500m ALM VI.

Pricings
It was a particularly busy week for deals leaving the pipeline. There were 13 ABS prints as well as four RMBS, four CMBS and six CLOs.

The ABS were: US$183m Access Point Funding I 2015-A; US$500m Barclays Dryrock Issuance Trust Series 2015-2; €500m Driver France Two; €1.3bn FTA FADE; US$750m Huntington Auto Trust 2015-1; US$747.76m Hyundai Auto Lease Securitization Trust 2015-B; £594m-equivalent Penarth Master Issuer 2015-2; US$411.9m SoFi Professional Loan Program 2015-B; US$415.5m State Board of Regents of the State of Utah Series 2015-1; €347m Sunrise Series 2015-1; US$425m TCF Auto Receivables Owner Trust 2015-1; US$129.6m Welk Resorts 2015-A; and US$492.8m Wheels Series 2015-1.

RUB3bn Mortgage Agent Vozrozhdenie 4, €795m Orange Lion 2015-11, €342m Prado I and US$425.6m Structured Agency Credit Risk 2015-HQ2 made up the RMBS, while US$1.3bn COMM 2015-LC21, US$984m JPMBB 2015-C29, US$281m LSTAR Commercial Mortgage Securities Trust 2015-3 and US$1bn MSBAM 2015-C23 made up the CMBS.

The CLOs were: US$399m Carlyle GMS Finance MM CLO 2015-1; US$720.25m GoldenTree Loan Opportunities X; US$512m Halcyon Loan Advisors Funding 2015-2; US$757m OCP 2015-9; US$719m Venture XXI; and US$401m Z Capital 2015-1.

Markets
Production coupon US agency RMBS underperformed their duration hedges by 9 ticks last week, according to Citi analysts, "suggesting we were too early to upgrade the basis to neutral last week". The sell-off in Treasuries was once again triggered by bunds.

In US non-agency RMBS, spreads were mostly unchanged. "Market tone seemingly softened as investors are trying to re-evaluate after the latest economic data and look ahead to the June FOMC meetings in two weeks," say Wells Fargo analysts.

The US CMBS market sold off in line with broad rates and equity markets. Barclays Capital analysts say: "In secondary trading of recent issues, LCF triple-A bonds were 2bp wider, to swaps plus 90bp. Further down in the capital structure, more credit exposed single A-rated mezzanine tranches were 5bp wider, to swaps plus 215bp, and triple-B rated mezzanine tranches were 8bp wider, to swaps plus 349bp."

It was a fairly busy week for the US CLO market, where Bank of America Merrill Lynch analysts note BWIC volumes totalled close to US$1.2bn. "The offering in the 2.0 space was concentrated in the mezzanine part of the capital structure while the lion's share of 1.0 paper carried triple-A original ratings. Bidding levels remained overall healthy in the 2.0 space despite the significant spread tightening seen over the past few weeks especially in the mezzanine part of the capital structure," they say.

European ABS and RMBS spreads broadly weakened as BWIC activity was heavy. "While 'Hedge Funds' (more accurately, read, higher yield investors) were the most likely liquidators of collateral during the week, 'real money' investors also joined in the downward spiral," say JPMorgan analysts.

Editor's picks
At a crossroads: The US auto ABS market appears to be approaching an inflection point in fundamentals, with prime auto losses beginning to rise from record lows and subprime losses declining. Such a normalising of credit could help address the negative perception of subprime auto ABS and facilitate investor appetite for the paper...
Rewriting the rules: 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...
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...

Deal news
• 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.
• 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.
• 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.
• 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.
• 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%.
• 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.
• 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.
• 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.

Regulatory update
• 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.
• 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.
• 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.

Structured Finance

Spectrum fund partnership inked

Coherence Capital Partners and James Alpha Management have agreed to an exclusive partnership to distribute Coherence Capital's flagship Spectrum Fund. The fund is a long/short alternative investment vehicle predominantly focused on North American and European corporate and sovereign debt exposures.

James Alpha will make a principal investment in the fund and focus on distributing it through its investor network. The two companies will also collaborate to create new private and liquid alternative products in the credit space. Coherence's spectrum fund has a 34-month track record with a cumulative return profile of 41.72% on the series B interests.

"Additionally, we are looking to integrate Coherence into our multi-strat alternative income mutual fund, JAIMX, and will explore other opportunities with Coherence within our expanding family of liquid alternative mutual funds," says James Vitalie, partner and president of James Alpha.

Structured Finance

ABS fund manager named

Amundi Asset Management has recruited Francois Morin as senior portfolio manager of the Amundi ABS Fund. He arrives from Natixis, where he was head of European ABS and CLO trading. Morin has also held various positions in CDC Ixis Capital Markets' credit risk department.

Structured Finance

Duo hired for SF push

Watson Farley & Williams (WFW) has hired Rob McBride and Sian Withey to help establish and lead a new debt securities and structured finance practice for the firm. Both partners arrive from Fried, Frank, Harris, Shriver & Jacobson, where they were part of the firm's global capital markets and finance practice.

In accordance with establishing a new practice, McBride and Withey will advise new and existing clients, including investment banks and other financial institutions. They will also advise clients across WFW's energy and infrastructure, maritime, natural resources, transport and real estate sectors.

Structured Finance

Private debt pro tapped

David Hirschmann has joined Permira Debt Managers as head of private credit, leading its direct lending fund. He arrives from Babson Capital Europe, where he worked on the firm's private debt instrument funds as md. Prior to that, he was an associate for UBS Warburg, focusing on leveraged finance and financial sponsor coverage.

Structured Finance

Toro investments underway

Chenavari affiliate Toro Limited has closed its first primary investment under its private asset-backed finance portfolio strategy. The move comes after the company last month raised net proceeds of approximately €330m in a share placement on the LSE in connection with the voluntary liquidation of the Toro Capital I ABS fund.

In its first investment, Toro has acquired €26.5m in junior instruments in a short-term loan warehousing transaction backed by a portfolio of leveraged corporate loans. The company says that senior finance was provided by a leading global bank and that Chenavari was selected by the bank and its client to participate in their newest transaction, as a result of a previous similar transaction that the bank had successfully executed with Chenavari.

The portfolio provides exposure to primarily European and UK corporates with ratings at or higher than single-B minus. The junior instruments represent first loss risk and the company expects the thickness of the tranche (approximately 20%) to provide a "resilient feature".

The transaction represents approximately 7.5% of the company's net asset value and it is now approximately 92% invested. The target return of the private asset-backed finance investment is approximately 15% and the portfolio manager continues to work on a pipeline of originated transactions with attractive risk-adjusted returns.

Fred Couderc, partner and co-cio at Chenavari, comments: "Toro Limited is the continuation and extension of a strategy that we have successfully managed since mid-2009. Whereas the strategy to date has typically involved acquiring securitisations at a discount to face value, we believe that there is now an additional opportunity to acquire assets at a discount and securitise them. Toro Limited's long-term capital allows it to take advantage of this opportunity."

The investment objective of Toro is to deliver an absolute return from investing and trading in ABS and other structured credit investments in liquid markets, and investing directly or indirectly in asset-backed transactions, including through the origination of credit portfolios. As such, the company's investment strategies include an opportunistic credit strategy (where it will opportunistically invest or trade in primary and secondary market structured credit investments, including private asset-backed finance investments) and an originated transactions strategy (where it will invest in transactions on a buy-to-hold basis via a variety of means, including warehouse credit facilities, which can originate credits that may be refinanced in structured credit markets).

The company acquired a portfolio of seed assets from the liquidation of Toro Capital I in return for the issue of 188,043,539 million shares. It expects to be able to acquire approximately €130m of further similar assets.

Toro directors are Frederic Hervouet, John Whittle and Roberto Silvotti.

CDO

ABS CDO manager resigns

Vertical Capital has resigned as collateral manager of Kleros Preferred Funding. Pursuant to Section 12 of the management agreement, the issuer will appoint a successor collateral manager at the direction of a majority-in-interest of preference shareholders. If a successor has not assumed all of the collateral manager's duties and obligations under the management agreement within 60 days after a manager's resignation, then the controlling class has the right to appoint a successor that satisfies the replacement manager conditions.

CLOs

CLO manager brought in

Pim van Schie has joined Neuberger Berman as svp and portfolio manager on its floating rate loans team. He will primarily focus on the continued expansion of the firm's CLO business, in addition to helping build a strategy platform centered on investing in CLO liabilities.

Prior to joining Neuberger Berman, Schie was an executive director within CLO banking at Morgan Stanley. Before that, he worked at BNP Paribas and McDermott International.

Insurance-linked securities

EXOR request rejected

The Supreme Court of Bermuda has rejected a request by EXOR for PartnerRe to disclose certain customary beneficial ownership information related to PartnerRe's shareholder base (SCI 4 June). Despite PartnerRe's refusal to provide the requested information, EXOR says it will now actively solicit PartnerRe's common and preferred shareholders to vote against the AXIS transaction at the PartnerRe special general meeting on 24 July. In a short response, PartnerRe says it is pleased with the outcome of the ruling and notes that EXOR has been ordered to pay PartnerRe's costs.

Insurance-linked securities

Catastrophe risk division launched

Guy Carpenter has launched CAT Risk Studio (CRS), a new division that will support the company's Model Suitability Analysis (MSA) initiative and will work closely with GC Securities on the development of parametric products for catastrophe risk transfer. The CRS division will be based in Dublin.

Headed by global head of CAT risk research Guillermo Franco, Guy Carpenter's MSA initiative provides assessment of worldwide catastrophe models. Through the execution of tests - including the comparison of catastrophe model assumptions with independent data sets - MSA identifies a specific model's strengths and weaknesses, while also allowing users to fine-tune their own tolerances for risk in order to evaluate a model's result.

Guy Carpenter has also added to its team to strengthen the web technology platform for CRS. Jaime Silvela joins as CRS head of software development, while Sergio Pucciano arrives as a CRS research analyst.

Insurance-linked securities

EXOR publishes shareholder letter

EXOR has sent a letter to PartnerRe preferred shareholders as part of an ongoing process to ensure all PartnerRe shareholders have the information needed to make an informed decision with regard to the future of the company. The letter follows an ongoing battle over the future control of PartnerRe between EXOR and AXIS Capital (SCI passim).

EXOR continues to solicit common and preferred shareholders to vote against the proposed AXIS transaction at the upcoming special general meeting of PartnerRe shareholders on 24 July. EXOR says that this will enable PartnerRe to accept EXOR's all-cash US$137.5 per share binding offer for the company.

"EXOR's proposed transaction does not rely on incurring new debt or distributing any extraordinary dividends from PartnerRe and will adopt a more conservative capital distribution policy to common shareholders than in PartnerRe's recent past," the letter notes. "Hence, there will be no impact on the existing leverage, financial strength or capital structure of PartnerRe, resulting in no changes in the future dividend streams of your preferred securities and in a potential enhancement of their current value and triple-B rating."

The letter also argues that PartnerRe presented its shareholders with an inferior transaction in the form of the proposed AXIS amalgamation. EXOR claims that the push to vote for the AXIS proposal has been engineered by some members of the PartnerRe board of directors, specifically the transaction committee, which EXOR claims stands to benefit both financially and personally from the transaction.

RMBS

Business development pro recruited

Suzanne Singer has joined Clayton Holdings as senior md of business development. She will be responsible for expanding Clayton's customer base and developing and executing strategic initiatives with its parent company, Radian Group.

Singer most recently served as evp of sales and marketing for Litigation Guard, a provider of mortgage-lending risk management tools and technology services. She has also held various client management and business development roles at Auction.com, Wingspan Portfolio Advisors, GMAC-RFC and Option One Mortgage Corporation, after beginning her career as as specialist in the community development investment group at Freddie Mac.

In her new position, Singer will report directly to Tom Donatacci, Clayton's evp of sales and marketing.

RMBS

Nomura appeals fine

Nomura has filed an appeal to the US Second Circuit Court of Appeals with regard to a recent US district court ruling that required the firm to pay US$806m in damages to the US FHFA (SCI 18 May). The figure was based on the court finding that Nomura had made false statements in selling MBS to Freddie Mac and Fannie Mae prior to the 2008 financial crisis. In its appeal, Nomura says that the district court made "significant legal errors" in its ruling last month.

RMBS

RMBS analyst switches banks

Anish Lohokare has joined Wells Fargo as a director and senior research analyst in structured products research. He will cover RMBS, develop strategies, publish research and generate investment ideas for institutional investors, with a focus on prepayment analysis and pass-through strategies.

Lohokare joins from BNP Paribas, where he was the lead RMBS strategist with a focus on both agency RMBS and interest rates. His previous sell-side research experience includes serving as agency RMBS and rates strategist for Deutsche Bank. He also worked at Fannie Mae and Freddie Mac, where his duties included pricing credit and structuring CMOs.

Lohokare will now report to Greg Reiter, head of residential mortgage research, with oversight by Marielle Jan de Beur, head of structured products research at Wells Fargo.

ABS

Auto ABS sets 'poor benchmark'

An international rating - assigned by Moody's - for the Rongteng Individual Auto Mortgage Backed Securitization 2015-1 transaction has set a global precedent, according to Fitch, as the deal does not have an initial liquidity facility available to protect against any payment disruption nor back-up servicing arrangements in place. Liquidity facilities or reserve funds that are available or pre-funded at closing are common features in virtually all global auto ABS transactions.

The transaction, a static cash securitisation of auto loans extended by SAIC-GMAC Automotive Finance to obligors in China, is just the third auto finance ABS from China to be rated by an international rating agency. Fitch notes that the transaction structure meets the standards of a domestically rated securitisation in China, but says that it is unusual for an internationally rated transaction assigned such high ratings to be issued without liquidity support.

Moody's assigned RMB3.58bn of senior notes in the transaction a Aa3 rating, while the RMB420m of junior notes are unrated. The senior notes were rated on the basis of a number of strengths in the transaction, including a diverse collateral pool composition and favourable pool characteristics, with 100% of repayments made via direct debit.

However, Fitch says that the Chinese ABS transactions that have obtained international ratings to date have been conservatively structured and have followed international best practice in this area. A prime example is Driver China One, originated by Volkswagen Finance, whose most senior notes were rated double-A by Fitch and which included a 1.2% cash collateral account in its structure. In contrast, Fitch believes the Rongteng transaction structure is significantly weaker than international benchmarks and weaker than similar transactions issued by GM-related companies in other parts of the world.

Moody's indicates that there are mitigants to the deal's operational and liquidity risks. These include the support available to the servicer through the joint venture partners, the trapping of excess spread in the reserve account following certain trigger breaches and the short tenor.

Fitch does not believe the factors listed sufficiently mitigate the risks to achieve international ratings in the double-A category. For example, there is no explicit guarantee agreement between the originator/servicer and the parent entities, even if they were rated sufficiently to support such a high rating. In the agency's view, rating such transactions that depart from international best standards "provides a poor benchmark for future transactions to follow". 

Structured Finance

ABS, RMBS principal losses drop

Moody's expects the resilience of senior European ABS and RMBS tranches to deterioration in collateral performance and counterparty risk to continue this year. None of the European ABS and RMBS bonds that the agency has rated triple-A have incurred principal losses to date.

"On the back of macroeconomic re-balancing, we expect the number of notes that are likely to incur principal losses to fall," observes Carole Bernard, a Moody's vp and senior analyst. In fact, less than 2% of all of the ABS and RMBS tranches that Moody's rates are likely to incur high losses.

Meanwhile, deterioration in collateral performance and exposure to weak counterparties led to high loss expectations for 174 European ABS and RMBS tranches, down from 184 tranches in June 2014. The agency expects less than 2.5% of the RMBS tranches that it has rated since 1993 (142 tranches) to incur high losses, which is an improvement since last year when it identified that 151 tranches were likely to incur high losses. The number of the junior ABS tranches Moody's expects to incur high losses has decreased slightly to 32 from 33 last year, and is less than 1% of rated ABS tranches.

Improvement in the collateral performance of Irish and UK non-conforming RMBS led Moody's to lower its loss expectations for these sectors. As a result, the likelihood of high losses fell for four junior UK non-conforming RMBS tranches and five Irish tranches, which in turn led Moody's to upgrade their ratings. 

Less than 0.3% of all the European ABS and RMBS tranches that Moody's rates (including junior and mezzanine notes) experienced principal losses over the past year. 

Structured Finance

Spanish legal exceptions highlighted

Scope believes that the new Spanish corporate finance promotion law (Ley 5/2015 de fomento de financiación empresarial) governing changes to corporate financing allows for more flexible financing of Spanish SMEs and, in certain cases, may positively affect their creditworthiness. The main purpose of the new law is to promote financing of Spanish SMEs by making it both more accessible and flexible, and by developing alternative means of funding (SCI passim).

One feature of the law requires a notification on liquidity line terminations or reductions, which lowers the risk of default of Spanish SMEs. The advance notice strengthens the ability of SMEs to manage their liquidity, allowing more time to find alternative refinancing options, as banks must notify SMEs three months in advance of their intention either to terminate certain financing agreements or reduce the maximum commitment by 35% or more.

However, Scope suggests that the intended effect is limited by the law itself, which contains several exceptions. One exception relieves the credit institution of its notification obligation if there are 'objective reasons that the SME's financial situation has deteriorated suddenly and significantly after the date when notification should have been given'. This could present a material loophole, as both 'sudden' and 'significant' are open to interpretation, leaving ample room for credit institutions to justify financing cuts without notice.

Another exception to the notification requirement relates to termination of financing agreements due to breaches of contractual obligations by the SME borrower. Scope expects this exception to increase the incentive for banks to include financial covenants in documentation to avoid the need for notifications. This could increase the risk for SMEs in breaking covenants due to the inherent volatility of their cashflows and key financial ratios.

However, the law does also include more transparency in the relationships between SMEs and banks. SMEs will have the statutory right to receive free financial and credit risk information from credit institutions, which they could use to support a new credit application from a competing bank. Scope believes this transparency should allow for better risk pricing and help performing SMEs find alternative funding in the event of a withdrawal or reduction in financing.

Therefore, the rating agency notes that the law must prove in practice that it achieves the desired effect and cannot be circumvented. Further, the effectiveness of the law in regards to mandatory financial reporting will depend greatly on the format and content of the report, which is still to be defined and published by the Bank of Spain.

Structured Finance

Payment holiday 'credit positive'

The Italian Banking Association's two-year renewal of its payment holiday scheme will support both Italian companies and individuals whose liquidity position is stretched amid the sluggish economy, according to Moody's. The agency says that the new moratorium is credit positive for SME, ABS and RMBS transactions, as it will reduce payments on loans and thus lower borrowers' propensity to default.

"In the short term, the payment holiday scheme will ease the debt service burden for borrowers, a credit positive," says Valentina Varola, a Moody's vp - senior analyst. "In the long run, while loan maturities could lengthen and defaults could simply be pushed back, we do not expect a negative credit impact on the securitised portfolios."

For SMEs, the renewal extends for another two years the payment holiday schemes, which were originally finalised in 2009 and have been renewed several times since then. This extension comes at a time of slow economic growth and a still-high unemployment rate of around 13% in Italy, allowing SMEs and individuals to improve their financial situation.

The option has been extended for mortgage loan borrowers and SME debtors, while consumer loan borrowers will benefit for the first time from such a scheme.

Structured Finance

CRA reliance remedies proposed

IOSCO has published its final report on good practices for reducing reliance on credit rating agencies (CRAs) in asset management. The report stresses the importance of asset managers having the appropriate expertise and processes in place to assess and manage the credit risk associated with their investment decisions in addition to the influence of CRA ratings.

IOSCO notes in its report that the use of external ratings by asset managers is mainly demand-driven, as various forms of reliance on external credit ratings remain on the investor side. References to external credit ratings may derive from regulatory requirements or an investor's own internal rules, which may result in mechanistic reliance and could trigger forced asset sales in the event of downgrades.

To address such concerns, IOSCO has proposed eight good practices in an attempt to reduce overreliance on CRA ratings. The proposals include asset managers making their own determinations as to the credit quality of a financial instrument before investing and throughout the holding period.

In addition, the report suggests that asset managers have the appropriate expertise and processes in place to perform credit risk assessment appropriate to the nature, scale and complexity of any investment strategy they implement. As a result, it suggests that asset managers should refrain from investing in products or issuers when they do not have enough information to perform their own appropriate credit risk assessment.

Further suggestions include asset managers gaining a greater understanding as to the methodologies, parameters and the basis on which the opinion of a CRA's rating was produced, as well as managers regularly updating their internal assessment process. In addition, the report suggests that, where external credit ratings are used, a downgrade should not automatically trigger the immediate sale of the asset.

CDS

SEF adds index options

MarketAxess has expanded its SEF offering to include CDS index options and says it is the only credit e-trading platform to offer the instrument along with CDS indices and single-names. Six market-makers currently provide liquidity on the SEF platform, with more expected to be added in the coming months.

The firm reports that it increased its year-over-year SEF volumes by almost four times (390%) in March and consequently more than doubled its market share, compared to the same period last year, according to the FIA SEF Tracker. "Market participants have been leveraging our technology to find the liquidity they need and have been more comfortable executing trades above the block threshold," says Grigorios Reppas, CDS product manager at MarketAxess.

CDS

Sabine auction scheduled

An auction to settle the credit derivative trades for Sabine Oil & Gas Corporation CDS will be held on 23 June. The firm last month filed a Form 8-K in respect of its entry into a forbearance agreement, which triggered a credit event (SCI 2 June).

CDS

Dealer contraction dampens CDS activity

The notional amount of outstanding OTC derivatives contracts fell by 9% between end-June and end-December 2014, from US$692trn to US$630trn, according to the latest BIS Quarterly Review. Exchange rate movements exaggerated the contraction of positions denominated in currencies other than the US dollar, but even after adjusting for this, notional amounts were down by about 3%.

The gross market value of outstanding derivatives contracts rose sharply from US$17trn to US$21trn between end-June and end-December 2014, reaching their highest level since 2012. The increase was likely driven by pronounced moves in long-term interest rates and exchange rates.

However, credit derivatives notional amounts fell to US$16trn at end-December from US$19trn at end-June 2014 and a peak of US$58trn at end-2007. The market value of CDS also continued to decline, to US$593bn at end-December in gross terms and US$136bn in net terms.

The BIS suggests that the recent decline in overall CDS activity reflects mainly a contraction in inter-dealer activity. The notional amount for contracts between reporting dealers fell from US$9.5trn at end-June 2014 to US$7.7trn at end-December. Notional amounts with banks and securities firms also decreased in 2H14, from US$2trn to US$1.3trn.

As a proportion of all CDS activity, central clearing continued to make inroads. The share of outstanding contracts cleared through CCPs rose from less than 10% in 2010 to 26% at end-2013 and 29% at end-2014. The share of CCPs is highest for multi-name products (at 37%) and much lower for single name products (at 23%).

CLOs

CLO benchmark indices launched

Palmer Square Capital Management has teamed up with the NYSE to launch two new indices designed to benchmark the CLO markets. The Palmer Square CLO Debt Index and Palmer Square CLO Senior Debt Index are the first broadly distributed daily benchmarks for US dollar-denominated CLOs backed by broadly syndicated leveraged loans.

Palmer Square's CLO Debt Index is a rules-based observable pricing and total return index for CLO mezzanine debt for sale in the US, rated at the time of issuance as single-A, triple-B or double-B - or an equivalent rating. The firm's CLO Senior Debt Index applies the same pricing and rules for US CLOs rated at the time of issuance as triple-A or double-A.

Palmer Square's investment team developed the proprietary methodology for calculating the indices. The NYSE serves as the calculation agent for the indices and will disseminate index values daily.

CLOs

Extension provisions scrutinised

Loan amend-and-extend (A&E) provisions are a common feature of CLO 2.0 deals and are structured in various ways. But Moody's notes that if they could potentially result in a CLO portfolio's WAL exceeding the initial WAL test level or cause long-dated asset (LDA) exposure, the agency will conduct stress scenarios that may result in lower ratings being assigned.

Some recent CLOs have introduced structural features that allow senior investors to benefit from A&E activity by using any economic gains to pay down the CLO's liabilities, which Moody's says is credit positive. Specifically, those CLOs treat any A&E-related fees and increases to a coupon as principal proceeds, which are used to pay down liabilities during the post-reinvestment or restricted trading periods.

"In our presale reports, we disclose CLOs' A&E provisions and any additional rating analysis addressing A&E credit concerns. Although still uncommon, we consider certain credit positive provisions - such as the treatment of fees and coupons the CLO receives to consent to A&E activity - as principal proceeds and disclose them in the presale reports," the agency explains.

Conversely, a managers' ability to consent to A&E activity is largely credit negative to a CLO without sufficient portfolio covenants, according to Moody's. "Giving CLO managers the ability to amend and extend loans in CLO portfolios can be an effective tool to avoid defaults or other negative consequences for distressed corporate borrowers, but it also increases the risk of breaching CLOs' LDA and WAL limits, and extends the WAL of the senior notes. Virtually all CLO 2.0s have provisions allowing A&E activity, but some deals' provisions are more permissive than others. If a CLO has particularly relaxed A&E provisions, we apply additional stress scenarios in our rating analysis."

Large LDA exposures introduce additional market value risk to CLOs because, unless these assets prepay, managers must sell them by a transaction's legal maturity. Loan maturity extensions also increase portfolio WAL, which increases the probability that those assets will default during the CLO's life.

CLO 2.0 A&E provisions typically include at least two constraints, with the strength of each constraint varying from deal to deal. One constraint requires CLOs to satisfy their WAL tests following any A&E activity; the other prohibits A&E activity from extending an asset's stated maturity past the CLO's.

The most common variations on CLOs' A&E provisions is to allow some flexibility regarding the WAL test, but prohibit any A&E that would create an LDA and, occasionally, limit the number of years by which the obligor can extend its loan. CLOs that permit A&E activity that creates an LDA usually also include an LDA concentration limit that will constrain the A&E activity.

Frequent variations on the WAL test condition include exemptions for certain types of amendments, such as credit amendments (to prevent the asset from becoming defaulted or to minimise material losses) and amendments in connection with a reorganisation of the loan obligor. To mitigate the risk of these exemptions, CLOs sometimes incorporate one or several limits on them, or include principal repayment conditions. Moody's suggests that although such conditions are credit positive, they are not meaningful if the indenture does not indicate a material minimum amount of repaid principal.

CMBS

Auction listings spike

The latest Auction.com listings indicate that a further 44 properties with US$622m in allocated balance across 30 CMBS loans are up for bid in late June and July (SCI 19 May). This is the highest monthly auction volume year-to-date, driven primarily by several large loans, according to Barclays Capital CMBS analysts.

"The increase in large loans was noticeable, with 13 properties with more than US$20m in balance. Other than the large CWCapital bulk liquidations, we have generally seen smaller loans in Auction.com listings," they observe.

The US$75m Manhattan Towers, securitised in CD 2007-CD4, is the largest loan out for bid. The property's occupancy rate has remained below sub-market par of 85% since Northrop Grumman, which occupied 75% of the leasable area, decided not to renew its lease in 2010.

The building has since slowly picked up tenants, reporting 25% occupancy in 2013 and 46% in May 2015, likely due to a capital renovation programme. However, lack of leasing commitment ultimately led the building to be listed for sale in the July auctions, with an expected resolution by end-August.

The US$44m Victoria Place Apartments, also securitised in CD 2007-CD4, is another large loan up for sale. The property's most recent reported DSCR NOI is 0.67x, despite a 97% occupancy, primarily due to increased rental concessions and reduced rental rates.

The second largest loan listed this month is the US$68m Computer Sciences Building, securitised in LBUBS 2008-C1, which has remained 100% vacant since sole tenant Computer Sciences Corp vacated in December 2013.

Meanwhile, at US$135.4m - across four loans and six properties - LBUBS 2008-C1 has the highest exposure to the auctions. The Barclays analysts suggest that these liquidations could result in sizeable losses that would first hit the J tranche and repay interest shortfalls that are currently reaching to the AJ tranche.

CD 2007-CD4 has the second largest exposure to the auctions, which could help repay shortfalls currently reaching the deal's C tranche.

CMBS

CMBS divide emerging

Fitch reports that a number of recent US CMBS deals have seen credit enhancement levels drop, despite the fact that collateral credit quality did not improve and in some cases declined. The agency notes that this goes against the conventional theory that credit enhancement rises as loan quality slips.

The transactions in question, not rated by Fitch, are: COMM 2015-CCRE23; CSAIL 2015-C2; WFCM 2015-C28; and GSMS 2015-GC30. "Not only was credit enhancement for each of these CMBS deals insufficient for Fitch to rate at, but the deals were not that different in quality to earlier transactions that Fitch had rated from each of these shelves," says Fitch CMBS group head Huxley Somerville.

The agency explains that had it rated each of these four CMBS deals, either the credit enhancement would have been higher at each rating level or the ratings themselves would have been lower.

CMBS

IRP updated

The CRE Finance Council has updated its CMBS investor reporting package (IRP), with the aim of providing more comprehensive information. CREFC IRP version 7.1 will be effective from 30 June and includes updated servicer watchlist and portfolio review guidelines, as well as an updated loan modification report sample. Additionally, the IRP best practices now cover special servicer transfers, loan/REO liquidation reports and servicer watchlist implementation.

CMBS

CRE equity cushion restored

Moody's says that the equity cushion for pre-crisis CRE loans originated at a 75% LTV has improved to 30% or more on average over the past year as the recovering economy has boosted property values. Loans originated at a 75% LTV in 2004-2008 now have LTV ratios of between 43% and 68% as adjusted by Moody's/RCA Commercial Property Price Indices (CPPI) national all-property price index.

"Default risk has dropped significantly for loans from these vintages, especially for the 2008 vintage, whose CPPI adjusted LTV reached 125% at the height of the crisis," says Tad Philipp, Moody's director of CRE research.

However, not all commercial property sectors have improved to the same degree. While 13 of the 20 CPPI segments have on average recovered to at or below their original 75% LTV level, loans in seven of the segments have not.

"Suburban office loans in non-major markets originated in 2007 is the worst-performing segment," adds Philipp. "Those loans would now have a CPPI-adjusted LTV of 89%."

Commercial property prices increased by 2% in April, while the smaller apartment component increased by 0.5%. Apartment prices now exceed their pre-financial crisis peak level by 27.6%. Finally, core commercial property prices are approximately 4% above their pre-crisis peak level, driven by the recovery in central business district office prices.

CMBS

CMBS delinquencies at year low

US CMBS delinquencies fell by their largest margin in over a year thanks to high resolution volume and steady new issuance, according to Fitch's latest index results for the sector. Loan delinquencies fell by 19bp in May to 4.48% from 4.67% a month earlier, while the dollar balance of late-pays fell by US$646m to US$17.1bn from US$17.7bn in April.

The drop was driven by resolutions of US$1.03bn outpacing new delinquencies of US$411m. The largest resolution in May was the US$140m Hyatt Regency - Bethesda (securitised in GCCFC 2007-GG9), an REO asset sold in May for a 48% loss (see SCI's CMBS loan events database). The largest new delinquency was the US$56.5m Penn Center East (GSMS 2007-GG10), which was reported as a non-performing matured balloon loan.

Meanwhile, Fitch-rated new issuance volume of US$7.2bn over seven transactions in April outpaced the US$5.8bn in portfolio run-off in May, causing an increase in the index denominator. Despite improving month-over-month, retail ended May with the highest delinquency rate of all property types for the first time since Fitch began formally tracking delinquencies in 2004. Historically, hotels and multifamily have experienced the highest CMBS delinquency rates.

The only loans over US$100m to enter the index over the past 12 months have been loans backed by retail properties. These are: the US$240m Westfield Centro Portfolio (JPMCC 2006-LDP7), which entered the index in August 2014; the US$190.8m Gulf Coast Town Center Phases I & II loan (CSMC 2007-C5), which also entered the index in August 2014; and the US$110m Westfield Shoppingtown Independence loan (JPMCC 2006-CIBC17), which entered in October 2014.

All three loans had not experienced prior delinquencies, but struggled recently due to cashflow issues. The ten-year interest-only loans are scheduled to mature in 2016, 2017 and 2016 respectively and remain in special servicing as resolutions are pursued.

Current and previous delinquency rates by property type are: retail at 5.26% in May from 5.46% in April; hotel at 5.18% from 5.53%; multifamily at 5.03% from 5.19%; industrial at 4.97% from 5.29%; office at 4.77% from 5%; mixed use at 2.61% from 2.59%; and other at 1.19% from 1.21%. By transaction type, delinquency rates as of May were: large loan floaters at 20.95%, with ten loans worth US$536m; conduit at 5.42%, with 985 loans worth US$16.5bn; small balance at 4.57%, with 19 loans worth US$28m; seasoned at 2.2%, with five loans worth US$11m; miscellaneous/other at 0.03%, with one loan worth US$300,654; and Freddie Mac at 0.02%, with one loan worth US$9m.

CMBS

Originator influx weakening CMBS

Fitch says it is finding disparities in the underwriting metrics of US CMBS loans based on originator type, having measured 30 originators that range between large banks, small banks and non-banks. Against the five credit metrics it measured, the agency notes an overall decline in credit quality in recent months.

"CMBS investors are becoming increasingly concerned about the ability of conduit originators to maintain credit quality, given the growing number of loan originators," says Fitch md Stephanie Petosa.

Credit metrics for loans that large issuing banks are bringing to new CMBS deals are showing stronger attributes than those contributed by smaller banks and non-banks. The influx of smaller originators to the CMBS market has led to the recent weaker deal metrics. In fact, six of the smaller CMBS loan contributors had three or more breaches of Fitch's metric hurdles.

Additionally, larger banks have been contributing less to new deals over the last few quarters. However, Fitch says that large issuing banks are becoming more vocal about trying to increase the percentage they contribute to their securitisations.

CMBS

Balloon date pay-offs slip

The percentage of US CMBS loans paying off on their balloon date dipped sharply in May after an impressive April reading, reports Trepp. The latest reading is 69.8%, more than 10 points below the April rate, which was the highest reading since November 2013. The May rate is a little above the 12-month moving average of 66.1%.

By loan count as opposed to balance, 63.8% of loans paid off in May. On this basis, the pay-off rate was down about eight points from April's level of 71.8%. The 12-month rolling average by loan count is now 69.1%.

Trepp suggests that the percentage of loans paying off could see some slippage over the next 24 months. Last year, the majority of loans coming due were 2004 ten-year loans. However, a roster of maturing loans dominated by 2005 vintage notes are now coming to the fore.

Trepp notes that 2005 is remembered as the year in which underwriting standards began to loosen and therefore expects to see even more aggressively underwritten loans reach their maturity date during the rest of 2015 and 2016.

CMBS

Further Mint scrutiny stressed

Fitch suggests that the exposure of hotel profitability to changes in supply and demand for rooms would have led to lower ratings on some tranches of the recent multi-jurisdictional Mint 2015 CMBS transaction, if rated by the agency. The difference is more pronounced for senior classes denominated in euros, where Fitch would not have assigned a triple-A rating.

Fitch says that this is because the Amsterdam market suffers from a structural declining trend in hotel revenues, which would affect its analysis at the higher rating levels. The agency would also estimate sustainable free cashflow for the London hotels more conservatively than the other rating agencies, in light of threats from market competition and an overheating market.

As one of the best hotels in its market, the profitability of the Amsterdam asset is well insulated from a potential increase in the supply of rooms in the vicinity. Fitch says it would view current ADR of €166 as sustainable.

However, historical market data on RevPAR suggest that the Amsterdam market as a whole is above trend and therefore vulnerable to a later correction. Moreover, the underlying long-term trend is downward, which in Fitch's CMBS analysis would warrant a greater haircut, particularly in the higher rating stresses.

For the hotel in question, the agency would expect management - faced with a negative demand shock - to look to sacrifice occupancy to defend ADR as this would relieve a portion of room-related costs without jeopardising the significant income from its destination SkyBar. Nevertheless, the agency estimates sustainable free cashflow of around €13m a year, well below the estimate of one of the other agencies, and would expect it to come under further pressure in a sharp economic downturn.

Fitch does not regard either hotel property as best in class or unique in its offering, and their current outperformance is likely to be unsustainable. Allowing for competition over the medium term, the agency expects sustainable ADR to be 5%-10% down from current levels, at £150-£155 for London Tower and £130-£135 for London Westminster. With this adjustment, Fitch says that the premium in the hotels' profit margins over the market average would fall to a level commensurate with the quality of the properties.

Further, Fitch estimates sustainable free cashflow at around £20m a year, about 15% below the other agencies' published levels. In a downturn, the agency would expect management to have less flexibility to protect ADR than in a market-leading London hotel, but overall would view operations as more resilient to market stress than the Amsterdam asset.

A sustainable market value of around £350m for the London hotels is estimated, which is about midway between the estimates of the other agencies. However, in Amsterdam - despite falling sharply below the five-year average in the last 18 months - prime yields remain around 150bp higher than in London. Fitch estimates a sustainable market value of €175m for the Amsterdam hotel, which is around 10% below the other agencies' levels.

CMBS

Credit profile portal integrated

Kroll Bond Rating Agency says its CMBS credit profile (KCP) analysis is now fully integrated onto Trepp's analytics platform. Features include KBC opinions that will be available for each class, a newly created KCP snapshot (which provides the transaction's aggregate losses in all three of Kroll's loss scenarios) and the ability for clients to view deal commentary via KCP reports.

In addition, users will be able to view numerous KCP data points on Trepp's loan/property detail page, including loan level loss assumptions, values, probability of default, and default and resolution timing. KCP premium clients that subscribe to Trepp will also be able to access all Kroll's loan level loss scenarios on the bond analytics page via a new 'model override' field. This will allow users to integrate Kroll's loan level loss estimates in their bond level cashflow analysis.

CMBS

Values-to-appraisals trending upwards

Kroll Bond Rating Agency (KBRA) has released a report summarising trends in KBRA values to third-party appraisals, as well as KLTVs and credit enhancements across US CMBS. The KBRA value variance to appraisal has trended upwards across the agency's rated universe since it began rating conduit transactions in 2Q12, as property prices have increased over the same period.

The average variance across KBRA's rated transactions now stands at 34.8% and is the highest for lodging assets located in primary markets at 40.7% (versus 34.9% in 2Q12). The variance in secondary/tertiary markets was less pronounced over the same period, increasing from 33.8% to 35.1%.

As KBRA value variances to third-party appraisals have climbed, so have KLTVs. Since 2Q12, weighted average KBRA LTVs have increased from 91.2% to 102.5%. Appraised LTVs have also risen, from 64% to 66.6%.

This increase in KLTV, along with other factors, has contributed to credit enhancement levels trending upwards. Of the 15 conduits that KBRA has rated to date in 2015, it says it was the constraint on nine at the triple-B minus category. For the remaining six deals, the agency's triple-B minus level was at or within 0.14% for three transactions and was tighter by a range of 0.25% (two deals) to 0.50% (one deal) for the remainder.

In an effort to produce consistent results and mitigate ratings volatility, KBRA says it determines its own valuations and generally does not rely on third-party appraisal values, although the information that is provided in the appraisals is considered in its analysis. The KBRA methodology provides guidelines on how the agency derives property revenue, expense and capital expenditure amounts to arrive at its measure of sustainable net cashflow (KNCF). To establish value, KNCF is divided by a stabilised long-term asset-specific KBRA capitalisation rate.

Absent a market dislocation, the agency does not expect its value variance to appraisal, KLTVs or credit enhancement levels to deviate much from recent trends.

CMBS

Loan-loss data added to mix

Morningstar's loan-loss data is now available to subscribers of the agency's CMBS ratings and surveillance service via TreppAnalytics, TreppTrade and TreppDerivative services. In addition, Morningstar's monthly DealView surveillance analysis and loan calculation report - which highlights multiple property valuation approaches, valuation assumptions and loan-loss forecasts - are available on the Trepp deal snapshot. This follows the integration of Kroll Bond Rating Agency's CMBS credit profile (KCP) analysis onto TreppAnalytics and TreppTrade (SCI 8 June). 

Insurance-linked securities

ILS taskforce holds first meeting

An ILS industry taskforce established by the London Market Group held its first official meeting with representatives from HM Treasury on 5 June. The task force was established with the purpose of working with the UK government to investigate ways in which it can attract ILS business to London, following a commitment made by Chancellor of the Exchequer George Osborne in the Budget Statement on 18 March (SCI 19 March).

The group will look at potential changes to the tax, regulatory and company law regimes that could make the UK a more attractive domicile for ILS business and managers. The initial aim is to produce a series of recommendations that could be included in the Chancellor's Autumn Statement later this year.

The taskforce is chaired by Malcolm Newman, ceo of Scor's Paris-London hub. Other members of the group include LMG Secretariat's Christopher Croft and Crown representative Michael Wade. The taskforce also comprises Des Potter (Guy Carpenter), Chris Parry (Aon), Paresh Thakrar (Hiscox), Rob Procter (Securis), Joanna Buckenham (Lloyd's) and Dave Matcham (International Underwriting Association of London).

Risk Management

OTC service goes live

SunGard's new service for post-trade futures and cleared OTC derivatives operations has gone live, with Barclays as its anchor customer. Barclays has completed the migration of specific futures and OTC derivatives clearing operations and technology processes to the platform, as well as the transfer of a number of the bank's employees to SunGard following a commitment earlier this year (SCI 10 March).

SunGard has subsequently appointed Andrew Whyte as president of the new service. Whyte has held various senior leadership positions in derivatives, clearing and credit operations globally with Goldman Sachs and JPMorgan. In these roles, he focused on driving process improvement, standardisation and compliance with regulatory reforms.

Whyte will join SunGard in mid-August and report to Brian Traquair, evp of SunGard Financial Systems. Until then, current SunGuard post-trade strategy head, Alun Green, will have responsibility for all functions and day-to-day operations regarding the company's new platform.

Risk Management

Transitional relief extended

The European Commission has adopted an implementing act that will extend the transitional period for capital requirements for EU banking groups' exposures to central counterparties (CCPs) under the Capital Requirements Regulation for six months to 15 December. The Commission says the move aims to give the market the legal certainty it needs while "continuing to work hard on solving the underlying issues".

Separately, the EC has adopted a delegated act in accordance with Article 85(2) of EMIR that extends transitional relief from central clearing requirements for pension scheme arrangements until 16 August 2017.

Risk Management

ESAs consult on margin requirements

The European Supervisory Authorities (ESAs) have launched a second consultation on draft regulatory technical standards (RTS) margin requirements for non-centrally cleared derivatives under EMIR. For OTC derivative transactions that will not be subject to central clearing, the draft RTS prescribe the regulatory amount of initial and variation margin that counterparties should exchange, as well as the methodologies for their calculations. In addition, they outline the criteria for the eligible collateral and to ensure that such collateral is sufficiently diversified and not subject to wrong-way risk.

The draft RTS also review/clarify several aspects of the proposed rules from the first consultation. These include: the exchange of margins with third country entities and the treatment of non-financial counterparties; the treatment of covered bonds swaps; the timing of margin exchanges; and concentration limits for sovereign debt securities.

Additionally, there has been a review or clarification on: the requirements on trading documentation; minimum credit quality of collateral; initial margin models; haircuts for FX mismatch; the treatment of cash collateral for initial margin; and reviewed criteria on intragroup exemptions. Finally, following the margin framework amendments made by the Basel Committee and IOSCO (SCI 19 March), the new RTS include a revised phase-in for initial margin requirements and a new phase-in for variation margin.

The consultation will run until 10 July.

Risk Management

Collateral management tool launched

MUREX has released MX.3, a collateral management tool designed to support sell- and buy-side financial institutions in creating an effective pre- and post-trade collateral optimisation framework. The tool provides a single framework for the support of listed, OTC, OTC-cleared and securities finance margin processes.

MX.3 introduces: a margin engine supporting pre-trade initial margin; a real time and settlement-aware collateral inventory; an optimisation engine for determination and collateral assets rebalancing; automated portfolio reconciliation; and connectivity with servicers, such as AcadiaSoft, SWIFT and TriOptima.

The tool is available as a standalone platform or integrated with MX.3 trading, risk and back office solutions.

RMBS

RMBS repurchase suit dismissed

The New York Court of Appeals has upheld a ruling dismissing a lawsuit - which alleged that Deutsche Bank Structured Products (DBSP) had breached reps and warranties with respect to US$330m in MBS mortgage loans - as time-barred. A ruling in favour of the appellant's arguments in Ace Securities Corp, Home Loan Equity Loan Trust, Series 2006-SL2 v. DBSP would have had the effect of extending the limitations period for claims alleging breaches of contractual reps and warranties indefinitely.

However, the court determined that such claims accrue on the date the reps and warranties are made and are subject to a six-year limitations period. DPSB's legal representative for the case, Simpson Thacher, says the decision could have significant implications for other RMBS transactions by precluding repurchase claims that were not commenced within six years of the closing of those transactions.

RMBS

RMBS manager benefits weighed

The inclusion of a transaction manager (TM) in new US RMBS transactions would likely benefit investors in higher loan default scenarios, according to Fitch. In an effectively designed framework, the TM would bear responsibility for coordinating with all transaction parties, including servicers, trustees, custodians, specialty vendors and investors.

In addition to assuming or directly replacing servicer responsibilities (SCI 19 March), Fitch says the TM's main value is in minimising losses on distressed loans. As such, Fitch believes that a TM will have a greater impact in RMBS transactions that experience higher loan defaults, either due to riskier loan attributes or stressful economic environments.

The agency adds that the TM compensation agreement will be important in determining the net benefit of the TM role. In an effectively designed arrangement, the agency would expect the fee structure to properly align the incentives of the TM with that of investors throughout the capital structure. The compensation arrangement might include both initial and ongoing fees designed to effectively motivate the TM in a broad range of mortgage pool default scenarios.

Fitch expects to conduct operational reviews of TMs to assess core competencies. These include management and staff experience, effective use of technology, ability to maintain strong relationships with transaction parties, and the  ability to monitor and enhance performance at the loan and pool level.

The financial stability of the TM will also be considered in the operational review process. Transactions that contain TMs with favourable operational assessments and well-designed responsibilities may potentially warrant modestly lower credit enhancement requirements.

RMBS

Sequoia structural innovations evaluated

Redwood Trust's RMBS offering from April, Sequoia Mortgage Trust 2015-2, includes several new structural enhancements for the asset class (SCI 5 May). Fitch says that the features are intended to mitigate potential conflicts of interest, many of which are a plus, but could also introduce a new risk.

The transaction wasn't rated by Fitch, as the agency says it is currently assessing the new structure. The most notable enhancement seen in SEMT 2015-2 requires RMBS servicers to stop advancing principal and interest on mortgage loans that over four months overdue.

"The stop-advance feature is a net positive for senior classes as it redirects cash from subordinate holders taking advantage of extended liquidation timelines to senior bondholders," says Fitch md Grant Bailey. "It also helps mitigate potential conflicts of interest, where servicers might be influenced by subordinate bondholders."

However, the new structure introduces risk in the form of reduced interest, specifically when the 120-plus day delinquency percentage exceeds the credit enhancement percentage of the affected class. Fitch says that the risk of extended periods with reduced - or even no - interest receipts becomes more acute in stressed scenarios further down the capital structure.

The agency suggests that a better alternative would be to limit stop-advance interest reductions to the most subordinate class and allow principal collections to pay interest for more senior classes. This approach would leave the risk of higher delinquencies concentrated within the most subordinate class.

RMBS

STACR pool risks downplayed

Freddie Mac's newest risk-sharing RMBS transaction is the first to share a reference pool of loans with a previous transaction, says Moody's. However, the agency believes this feature will not increase credit risk for investors.

Principal payments for STACR Debt Notes Series 2015-HQ2 will not come out of payments from STACR 2014-HQ2's portion of the shared reference pool, but rather from a portion that Freddie Mac retained in a 2014 transaction. The GSE used part of its 58% retained interest in the mezzanine portion of the 2014 reference pool to transfer risk to mezz investors in the 2015 transaction.

Moody's suggests that Freddie Mac's interests remain aligned with those of investors, despite this risk transfer, because the GSE still retains 75% of the first-loss risk for 2014-HQ2 - about 6% of the mezz risk - and all of the senior risk. "Because of Freddie's strong alignment of interest with investors, it also has a strong incentive to make sure that the loans it buys and puts in the reference pools are of strong credit quality and to oversee and monitor the loans' servicers," says Peter McNally, a Moody's vp and senior analyst.

RMBS

MSR sale 'credit positive'

Ocwen's sale of US$90bn in mortgage servicing rights is credit positive for the servicer, according to Moody's. The agency says this is due to the likelihood that Ocwen will use the proceeds to significantly decrease its financial leverage.

Proceeds from the MSR sales could provide Ocwen with sufficient liquid resources to repay its outstanding corporate debt, specifically its US$1.2bn in senior secured bank term loans. The outstanding debt could even be paid in a stressed scenario, such as if Ocwen were to be terminated as servicer on its remaining MSR contracts without compensation.

Because of the expected sale, Moody's upgraded Ocwen's corporate family and senior secured bank term loan ratings to B2 from B3. The agency additionally upgraded Ocwen's senior unsecured debt rating to B3 from Caa1 with a stable outlook.

Moody's warns, however, that Ocwen still faces challenges generating new business and building a sustainable franchise. "Even assuming the worst is behind it, the residual effects of Ocwen's regulatory issues will pose an ongoing obstacle to its ability to compete and generate new business," says Moody's svp Warren Kornfeld. "We expect the ongoing scrutiny from regulators to result in elevated operational costs that will depress Ocwen's core profitability and hinder its ability to grow."

The approximately US$90bn in UPB of performing agency loans that Ocwen has either signed a letter of intent to sell or already closed on comprises about 23% of the loans the company serviced or subserviced as of 31 December 2014. The servicer is required to apply 75% of the MSR sale proceeds to repay its senior secured bank term loans.

RMBS

SFR default remedies differ

Moody's suggests that special servicers will likely pursue different strategies to remedy defaults between single-borrower and multi-borrower SFR securitisations. This is because differences in the size of the borrowers of the loans backing these securitisations will affect the defaulted loan's recovery values under different resolution options.

"Special servicers will be more likely to forbear or modify defaulted loans in single-borrower SFR securitisations because these borrowers are typically larger and more likely to recover from a default," says Moody's avp and analyst Padma Rajagopal. As a result, remedies such as forbearance or loan modification could help the special servicer avoid the costs associated with foreclosure.

Special servicers may be better able to intervene early with large borrowers because declining revenues and increasing vacancies in their large portfolios will likely foreshadow the financial distress of these borrowers. In addition, periods of financial hardship for larger borrowers will tend to coincide with market downturns.

"Loan modification and forbearance can help the borrower weather these periods, and the size and financial sophistication of the borrower will increase the likelihood that it will regain its financial footing," says William Fricke, a Moody's vp and senior credit officer.

However, multi-borrower SFR transactions tend to be backed by loans to smaller borrowers, whose defaults could relate more to poor financial or property management rather than market fluctuations. Therefore, the special servicer may move more quickly to resolve a defaulted loan through a note sale or foreclosure. It would likely attempt a note sale first, because it could be completed more quickly than a foreclosure.

Special servicers have not yet had to remedy defaults given the newness of this asset class. However, when defaults start to occur, Moody's says that servicers will largely base their decision on an analysis of net present value models to determine which strategy will maximise recoveries from the defaulted loan.

RMBS

AOFM auctions announced

The Australian Office of Financial Management (AOFM) has announced details of its first two RMBS auctions (SCI 9 June), to be held on 24 June and 14 July. The results of the sale will be announced on the same day as the auctions, with settlement due on 29 June for the first auction and on 17 July for the second.

Securities to be auctioned in the first sale are class A2 bonds from APOLLO 2010-1 (A$300m face value), IDOL 2010-1 (A$250m) and PROGRESS 2011-1 (A$138m). The second sale will see six bonds up for bid: APOLLO 2009-1 A3 tranche (A$319.2m), HARVEY 2010-1 A1 tranche (A$143m), PROGRESS 2012-1 A tranche (A$195.65m), REDS 2010-2 A2 tranche (A$497.6m), RESIMAC 2011-1 A tranche (A$170m) and SMHL 2010-1 A tranche (A$250m).

On completion of the June auction, the AOFM will announce the specific notes to be offered and the timing of the August auction. It says this pattern of announcements will continue, with the aim of providing notice of its specific divestment intentions for between five and eight weeks in advance.

Counterparties that have registered to participate in the auction process - referred to as the RMBS divestment panel - comprise ANZ, Citi, Commonwealth Bank of Australia, Deutsche Bank, Macquarie, National Australia Bank and Westpac. The AOFM says it will continue to accept applications to join the divestment panel from members of its investment facility panel.

Bids are to be submitted by divestment panel members by 11am AEST/AEDST on the auction day. Members have been provided with a spreadsheet template to be used for the submission of bids. The AOFM reserves the right to scale bids subject to minimum transaction and increment volumes set out in the documentation associated with each security.

An undisclosed reserve price and fair value assessment will be set for each security offered and the bids will be ranked against these criteria. Bids will be filled in order of their ranking, from highest to lowest, with scaling of bids to occur on a pro-rata basis with respect to the volume bid.

RMBS

Spanish foreclosures stabilising

Spanish RMBS performance will benefit from a stabilisation in mortgage foreclosures, reports Moody's. With the foreclosure rate dropping by almost 14% since the peak of the crisis in 2010, the downward pressure on the performance of residential mortgages is easing, which is credit positive for the asset class.

"We expect that a lower number of foreclosures will be accompanied by a shortening of time to process individual foreclosures, which will benefit transaction performance because the accrual of interest during the foreclosure period affects the severity of note-level losses," says Alberto Barbachano, a Moody's vp and senior analyst.

The number of foreclosed mortgages has declined year-on-year in the past two years, by 2.3% in 2014 and by 9.76% in 2013. The autonomous regions of Cantabria, Galicia and Madrid recorded the highest drop in foreclosure cases in 2014. In contrast, Valencia, Extremadura and Murcia reported a significant increase in the number of foreclosures in 2014, after a drop in 2013.

Despite the decrease in foreclosures, banks are avoiding selling the assets at a loss, as they are waiting for market conditions to improve. Bank of Spain data shows that Spanish banks' holdings of repossessed real estate assets increased to €83.4bn as of end-2014. Moody's believes that a delay in selling properties may expose Spanish securitisation funds to higher loss severities.

Meanwhile, the build-up of arrears has slowed down in Spanish RMBS, with delinquencies for more than 90 days decreasing to 1.37% in December 2014 from 2.17% in December 2013. Low interest rates and slight economic improvements are believed to be driving down delinquencies.

In addition, new arrears are now building up at a slower pace than old arrears are turning into defaults. Moody's considers that slight improvements in the economy will be supportive of this trend going forward.

RMBS

Uplift for Tunisian RMBS

Moody's has upgraded the global and national scale ratings of five tranches from a pair of Tunisian RMBS - FCC BIAT-CREDIMMO 1 and FCC BIAT-CREDIMMO 2. The move follows the upgrade of the Tunisian local-currency bond and deposit ceilings to Baa2 from Baa3 and further deleveraging of the two transactions. The rating agency had placed the deals on watch for upgrade in March after updating several of its structured finance rating methodologies.

Banque Internationale Arabe de Tunisie's (BIAT) long-term domestic deposit rating was affirmed at Ba3 and its counterparty risk assessment was assigned at Ba3 on 28 May. BIAT acts as the originator, servicer and the account bank in both the affected transactions.

The upgrade of the Tunisian local-currency bond and deposit ceilings reflects heightened economic and institutional strength. Moody's has also affirmed Tunisia's government issuer rating at Ba3, with a change in outlook to stable from negative.

The FCC BIAT-CREDIMMO 1 Parts P2 and Parts S notes have both been upgraded to Baa2/A1.tn, while the FCC BIAT-CREDIMMO 2 Parts P2, P3 and S notes were upgraded to Baa2/A1.tn, Baa2/A1.tn and Ba1/Baa1.tn respectively.