Contents

CDS

Revival instincts

Push to reinvigorate CDS market gaining traction

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, according to the latest BIS Quarterly Review (SCI 9 June). As concern over potential liquidity shocks grows, industry attempts to revive the CDS market appear to be gaining traction.

"I believe there are a number of issues the CDS market must tackle, but curing regulatory uncertainty remains the key building block," says James Cawley, ceo of BGC Derivative Markets. "A state of uncertainty favours nobody, so the key is to push for the US SEC to start proposing some clear mandates."

He suggests these mandates must come in four areas and are essential to reinvigorating the market. "The most obvious mandate is clearing, because a safer and more efficient product has greater appeal. But then we also need mandates on execution, reporting and margining."

Although little progress has so far been made on these fronts, Cawley believes it is not the fault of the market. In his view, CDS proponents have been generally proactive in seeking to further the success of the market.

"Recent talk of reinvigoration is encouraging, but there must be caution. Clearinghouses - in particular CME Group and ICE - have been searching for more favourable conditions to clear and trade single-name CDS, but have so far fallen short."

He adds: "Their attempts to produce initiatives to stimulate the market were done with the expectation that the SEC would parallel their moves, but this has not happened."

An example of the dysfunction between the regulator and the market was underlined in 2013 when the SEC sent a proposal to seven clearing broker-dealers, which stated its intent to increase the cost of clearing trades in CDS. ICE subsequently dropped all plans at the time for clearing single-name CDS.

In contrast, the current health of the interest rate swaps (IRS) market is founded on a strong relationship between regulator and market. As a result, Cawley credits the US CFTC for being open and transparent, while engaging with the industry at an early stage in the process.

"The IRS market was presented with clear rules early on. It is now benefiting from consumers, while making adjustments where necessary," he says.

He adds: "We are five years down the line from the Dodd-Frank Act and not many envisaged the CDS market would be lagging so far behind. The market is capable of becoming a lot more liquid, but it needs a platform."

The lack of progress has prompted ISDA to examine the prospect of reducing the quarterly roll to a semi-annual basis for single-name CDS. "A number of market participants have advised ISDA that an amendment to the schedule on when single-name CDS roll to the new on-the-run contract would likely improve liquidity in the market and would be a general improvement to current market structure," says the association.

Citi credit research analysts note that rolling contracts every three months can act as a tax on investors engaging in buy-and-hold strategies, as they have to cross bid or offer to roll their positions to the on-the-run contract. A reduction in rolls could therefore be beneficial for liquidity, as it may encourage investors currently put off by the prohibitive capitals costs of quarterly rolling to trade more frequently.

Nonetheless, only 42% of respondents to a recent Citi survey on single-name CDS liquidity believe such a change would have a material positive impact on trading volumes. Lighter capital requirements/leverage ratios and a push to centralised clearing scored the next highest as potential remedies.

But the Citi analysts suggest that changing the regulatory framework is not a viable option in the short to medium term. Instead, they propose that dealers initially focus on correcting any CDS market idiosyncrasies, even if it does not necessarily lead to a large pick-up in trading activity.

"More dealers would provide liquidity if there was appetite to take it," the analysts observe. "Similarly, more contracts could be introduced if there was sufficient demand to trade them. The issue seems to be more about the ability of the dealers to take risk and the demand/need to hedge credit risk."

Another initiative reportedly being explored by the industry is overhauling the CDS indices, including amending composition rules to better reflect activity in the underlying corporate bond market.

Cawley notes that those who exited the market following the crisis would likely return, with both regulatory certainty and a firm belief that there is money to make. His justification is based not only on his faith in the market catering to more liquid CDS, but in the single-name CDS product itself.

"The product's attributes are not in doubt and it is here to stay," he notes. "It has a number of benefits and its ability as a good hedging tool is invaluable."

In Cawley's view, it is neither a product nor a market issue. "At the same time, no-one is stressing a restoration of the extreme pre-crisis leverage levels. Expectations are remaining grounded, with buy- and sell-side players wanting to simply see an amenable environment for a robust, growing and cleared product."

A grassroots effort to re-energise the market could go some way to spurring activity. Cawley is aware, however, that demand must be evident, with potential entrants presenting a real interest in reviving the market.

"Entirely new entrants will be hard to reel in and a plethora of various players is unlikely. I think previous market players with credit to use could be enticed back into the space and they are the best hope for leading a revival in the near future," he concludes.

JA

ABS

Diverse distinction

Aircraft ABS strengths, weaknesses weighed

The US$1.21bn ECAF I deal, which priced this week, is notable for being the first on-the-run aircraft ABS to print since the crisis. The diversity of the transaction's lessee and country profile is one of its strengths, but replacement programmes are being introduced in the coming years for much of the collateral.

"We've seen other aircraft deals launch since the crisis. But they've had features - such as a loan element, unusual collateral or only one rating agency or underwriter - that made them less attractive to money managers," explains John Kerschner, global head of securitised products at Janus Capital Group and co-portfolio manager of the Janus Multi Sector Income Fund.

He adds: "Money managers typically need at least two rating agencies (preferably from the main ones) and more than one underwriter (preferably three, with a couple of co-leads) to get comfortable with a transaction. The ECAF deal also benefited from being a decent size, which helps with liquidity."

Another favourable feature of the transaction is the inclusion of tranched senior notes: the structure comprises an amortising fast-pay A1 tranche, with a 3.5-year WAL; a longer soft bullet A2 tranche, with a seven-year WAL; and a subordinated 16-year tranche. Rated by Fitch and S&P, the US$459.38m A-/A rated A1 notes priced at 3.25%, the US$590.63m A-/A A2s at 5% and the US$160m BBB/BBB B1s at 5.5%.

Still, Kerschner suggests that even though there was a fairly lengthy marketing process to get accounts comfortable with the collateral, the deal struggled somewhat. The sponsor BBAM hired Element Financial as structuring agent - as well as BNP Paribas, Citi and Deutsche Bank as joint bookrunners - and seemingly already had a few private orders lined up, so there was some concern about whether as much information was provided as usual. Difficult market conditions may also have been a factor, with the typical summer caution and looming interest rate rise impacting sentiment.

Nevertheless, a further 8 to 10 on-the-run aircraft ABS are expected to hit the market this year. The sector remains cheap compared to other asset classes, yielding 50bp-75bp more than unsecured aircraft leasing debt and other single-A rated esoteric ABS and CMBS.

"If you believe in the macro story - that strong demand for air travel will continue - the big question is what the liquidity will be for the bonds. This premium is difficult to price, but at current yield levels, you're getting compensated well enough for the risk," Kerschner observes.

However, he stresses the importance of getting comfortable with a sponsor's story, how the business is run and the underlying collateral. ECAF I is backed by 49 commercial passenger aircraft and their related leases, comprising 44 narrow-body planes (19 Airbus A320 family and 25 Boeing 737 Next Generation airliners) and five wide-body planes (three Airbus A330-300, one Boeing 777-200ER and one Boeing 777-300ER).

In contrast, previous post-crisis aircraft ABS pools have comprised 20-28 planes. S&P notes that because the number of aircraft in the ECAF portfolio is much higher than those of the transactions it recently rated, the portfolio is more diverse in terms of lessee and country.

The portfolio's initial appraised value was US$1.49bn, as of 30 September 2014, with a 2:1 split between narrow-body and wide-body aircraft by value.

Kerschner recommends minimising exposure to wide-body planes, as they are three or four times more expensive than narrow-body planes, so account for a larger percentage of a pool. They also cost more to refit - about US$7m, compared to US$1m-US$1.5m for narrow-body aircraft, which don't need reconfiguring as much - should they need to be re-leased. The mitigant to the risk of including wide-body aircraft in a pool is that, having undertaken an expensive refit, the lessee is incentivised to maximise its use.

In the case of the ECAF deal, 38 airlines in 26 countries will lease the aircraft, with a 5.7-year weighted average remaining lease maturity. A large portion of the lessees are not household names, including AtlasJet, Jet2.com and Sun Express, for example. Approximately 59% of the lessees are domiciled in emerging markets where the commercial aviation market has evolved rapidly during the past few years and has positive long-term growth prospects, according to S&P.

The initial aircraft leases contain provisions specifying maintenance standards and the aircraft's required condition on redelivery. Some leases require the lessee to provide monthly maintenance reserves, but others do not have regular payment provisions. Of the initial 49 leases, 30 leases require either monthly cash maintenance reserve payments or a letter of credit to secure maintenance obligations, while 19 leases require end-of-lease maintenance adjustments.

"If one of the lessees fails, it is possible to repossess the aircraft and re-lease them, so the exposure to an individual airline is minimised. But the question then is whether the collateral is worth what it is said to be worth and whether it will be possible to re-lease the aircraft," Kerschner continues.

Macro risk and fuel price hikes are a couple of the issues that may impact the ability to re-lease aircraft. However, the weighted average age of the planes securitised in ECAF I is 6.7 years, meaning that they should be easier to re-lease if necessary.

Another risk to be aware of is how quickly the new generation of aircraft will come into usage and the planes securing a transaction become outdated. Fitch notes that despite their current popularity, the ECAF pool is largely composed of aircraft with replacement programmes approaching introduction. However, the agency expects the large operator bases and long lead-time for full integration of replacement aircraft to partially mitigate this risk.

Boeing's successor technology is the MAX versions of the B737-800, which features more fuel-efficient engines and will enter service later this decade. Airbus is introducing its fuel-efficient engine option NEO version of the A320 later this year, but replacing all of the current A320-200s and A321-200s is anticipated to take many years.

S&P suggests that the recent decline in oil prices could increase demand for current-generation aircraft because their operating costs would decrease. If fuel prices remain low, utilisation, lease rates and residual values could all benefit. However, the agency also believes that lower oil prices will not reduce demand for the new engine variants of aircraft because these engines offer benefits other than fuel efficiency, such as reduced noise, emissions and lower maintenance expenses.

According to Airbus and Boeing forecasts, airline passenger traffic is expected to grow by 5%-6% per year through 2031, with most of the growth coming from the Middle East and Asia-Pacific regions. Airbus is projecting 26,350 new passenger aircraft deliveries, while Boeing projects 34,000 during that period. Most of the aircraft will either be delivered to Asia-Pacific and emerging markets to meet demand or to replace aging aircraft in North America and Europe.

CS

Structured Finance

Setting priorities

Structured finance recruitment takes backseat to regulatory push

The recruitment outlook for the structured finance sector continues to suffer from regulatory uncertainty. This state of ambivalence has dampened positivity in the European market, while resources in the US are being diverted towards other pressing needs.

Despite relatively strong activity in broader European financial recruitment, one London-based headhunter suggests the trend has not been replicated in the structured finance space. "Some recruiters are trying to talk up the market, but the fact is that there have been no significant developments to provoke optimism," he says. "The state of the ABS market is particularly troubling, with some banks slowly putting the brakes on their structured finance businesses."

The headhunter cites JPMorgan as one example, indicating that sources have told him that the bank is winding down its foothold in the market. "Now we are seeing established players ceding their commitment," he adds. "This exacerbates the problem that there are just not enough players involved in the European primary market, be that issuers or investors."

The state of decline has been felt cross-sector, with the headhunter suggesting that a number of markets are in the same boat. "Combined, the ABS, RMBS, CMBS and covered bond markets have provided absolutely nothing on the recruitment front either."

However, he adds: "There remain a few rays of hope, as CLO recruitment is still bubbling along gently. Any sort of leveraged finance is doing relatively well right now and should continue to stay healthy."

Across the pond, US recruitment prospects remain closer to stagnant. The main source of interest has been from a regional banking level, says Chadrin Dean, managing partner at Integrated Management Resources.

"There has been some warm interest from a trading perspective by regional banks," he notes. "There is one bank looking to hire an ABS origination team and we have had interest for a global CLO head. But it's nothing that signals an upward swing for the market."

This sentiment is reflected in the inactivity of the top banks in the US. Although Canadian banks are involved in some recruitment activity, most large US banks are sitting tight and have been happy to look for established faces in the market rather than poaching new prospects.

"Banks are cut down to the bone on numbers," adds Dean. "The popular mindset among the bigger banks is that they can handle the large volume of workload by maximising the manpower they already have. The best talent in the structured finance market is already in significant positions, so there is no urgency to bring in anybody new."

A similar mentality is prevailing in Europe, with both markets sharing regulatory uncertainty as the key issue. "I have talked to a key player in the ECB's regulatory discussions and drafting process," notes the London headhunter. "An announcement is due soon, but until we know the content of that, I believe the European market could be in some real trouble."

In his view, the ECB's ABSPP symbolises the issues that persist in the market, as its presence has left firms hesitant to increase manpower. It is a wider reflection of market sentiment, which has so far been disappointed with the lack of regulatory development after a contrastingly cautious optimism only six months ago (SCI 24 December 2014).

Dean believes that the US Fed's simultaneous presence in the US has prompted banks to divert recruitment resources towards regulatory and counterparty risk issues. With banks having to often readapt their policies to comply with revised standards, staying on top of requirements has become the priority.

"It is creating a bit of a tedious cycle, as banks are hiring teams to achieve regulatory compliance only to be told that the regulation has been pushed back or modified, or that they have failed a stress test," explains Dean.

Both the European and US markets would therefore appreciate a firmer and more concrete message from the respective regulatory bodies. The London headhunter believes the next big statement could be essential to the market's ability to stay afloat come the end of 2015.

"The market should keep above water going into 2016, but it is in a fragile state," he says. "It will be more a case of rotation and keeping the major players in the space, rather than bringing in anybody new."

He concludes: "Confidence in regulators and politicians is at a low point. Not many people have faith in them revitalising the market right now, but they hold the key to keeping the market ticking into 2016."

JA

Secondary markets

More of the same for European ABS/MBS?

Last week's weaker tone in the European ABS/MBS secondary market looks set to continue.

Last week saw overall ABS/MBS spread widening on the back of negative market sentiment, poor liquidity and broader rates volatility. This week is likely to see even more of the same with continuing Greek concerns and most market participants away from their desks in Barcelona.

There are currently two BWICs on the European ABS/MBS calendar for today. First up, is an eight line mixed list accounting for €20.414m original face/€8.95+m current due at 10:00 London time.

It consists of: CRSM 9 A2, FSTNT 2 A2, INFIN SOPR A, MAGEL 3 A, TAURS 2006-3 A, TITN 2006-3X A, WINDM X-X A and WTOW 2007-1 A. Four of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: FSTNT 2 A2 at 94.11 on 16 April; INFIN SOPR A at 91.658 on 4 June; MAGEL 3 A at 92.27 on 24 March; and WINDM X-X A at 98.42 on 29 April.

Then at 12:00 is a four line 31.2m RMBS list comprising: BERAB 2011-1 A1, CLAAB 2011-1 A, GRANM 2006-2 A5 and LUNET 2013-1 A2. The bonds last covered on PriceABS as follows: BERAB 2011-1 A1 at 99.51 on 10 June; CLAAB 2011-1 A at L99 on 21 May; GRANM 2006-2 A5 at 99.68 on 20 May; and LUNET 2013-1 A2 at 102.8 on 9 June.

Secondary markets

US CLOs still seeing sellers

In the face of expected limited liquidity for the bulk of this week the US CLO secondary market is already seeing a healthy number of line items in for the bid.

Despite Barcelona and the swathe of DNTs on last week's heavy auction schedule the US CLO BWIC calendar is already growing for this week. For the most part the sizes involved are reasonably small, but over the next two days there are currently eight lists scheduled involving 56 line items with tranches from all parts of the capital structure.

There are five BWICs circulating for trade today so far. The largest of which is a seven line $28.425m 1.0 and 2.0 mezz list due at 11:00 New York time. It consists of: BABSN 2005-3A D, BLUEM 2014-4A C, GOLD6 2012-6A D, LCM 9A C, SYMP 2013-11X C, VENTR 2005-1A C and VENTR 2012-10A D.

Only GOLD6 2012-6A D has covered on PriceABS in the last three months, doing so at 100.3 on 20 March.

Secondary markets

Euro secondary quiet

With the Barcelona conference getting fully underway today it is expected to be very quiet in the European securitisation secondary markets over the next couple of days.

The participants that remain at their desks are likely to maintain the risk-off stance of the past week as Greece and broader credit market volatility continue to dominate attention. However, there is one euro-denominated BWIC circulating for trade today so far.

Due at 11:00 London time the auction involves two lines of CMBS - €1.75m ECLIP 2007-2X C and €9.877m TITN 2007-2X C. Only ECLIP 2007-2X C has covered on PriceABS in the last three months, doing so at 45A on 18 May.

Secondary markets

US CMBS widening

US non-agency CMBS secondary spreads are heading wider.

"Spreads are generally backing up and the market feels weaker overall," says one trader. "However, it's not universal and there are no fire sales going on."

Market sentiment is also being impacted by activity in primary. "The new issue market is only really limping along at the moment," says the trader. "For example, COMM 2015-LC21 priced on Friday and was not particularly well-received and priced wider than the previous deal."

At the same time, tiering around ratings agencies is emerging. "A lot of new issues have been moving away from Fitch and we're seeing those bonds trade differently in secondary - thanks to its more conservative approach Fitch deals are now trading better," explains the trader.

Overall, the market remains mixed, the trader says. "Money good deals are trading well, but elsewhere it's getting pretty ugly and could stay that way for the rest of the summer with broader market volatility and concerns over Greece having a detrimental effect on our market."

Secondary markets

US CLOs take a pause

After a flurry of BWICS over the past two days the US CLO secondary market now looks to be taking something of a pause until participants return from Barcelona.

"We're at last seeing a pause in the BWIC frenzy of the past few weeks with the large number of sellers putting real pressure on buyers," says one trader. "As a result spreads have moved out, notably in mezz, and there's not a whole lot of appetite right now."

There's similarly less appetite in 1.0 triple-As, the trader says. "We've seen a lot of sellers in that sector in the past couple of days where bonds have moved from going through at 65-75DM to 125-150DM."

At the same time, tiering between Volcker and non-Volcker compliant deals has become increasingly evident. "The Volcker basis has moved wider as it often does when the market is under pressure," confirms the trader.

Overall, Monday's four US CLO BWICs saw, as expected, limited participation and yesterday's seven lists again saw a very high proportion of DNTs as well as a number of bonds trading but with no colour released. However, as the trader notes: "We'll have to see where we are when everyone is back from the conference before we draw any firm conclusions."

Today sees two BWICs circulating for trade so far. Both involve 2.0 mezz paper.

First, at 10:00 New York time is a $34.775m seven line list consisting of: AIMCO 2014-AA E, ATCLO 2014-6A D, ATRM 11A E, BRCHW 2014-1A D1, CRMN 2014-1A D, KKR 2013-2A C and VENTR 2013-13A D. Two of the bonds have covered on PriceABS in the past three months, last doing so as follows: AIMCO 2014-AA E at LM90S on 19 May and CRMN 2014-1A D at 86.88 on 19 March.

Then, at 13:30 is an eight line $11.05m list comprising: BABSN 2013-IIA D, CGMS 2013-1A D, DRSLF 2014-34A D, OCT14 2012-1A D, OCT16 2013-1A B1, SYMP 2014-14A E, VOYA 2014-2A D and VOYA 2014-4A C. Four of the bonds have covered on PriceABS in the last three months - OCT14 2012-1A D at 94.76 on 8 April; OCT16 2013-1A B1 at 98.55 on 4 June; SYMP 2014-14A E at 89.45 on 19 March; and VOYA 2014-2A D at 89.93 on 27 March.

Secondary markets

US CLOs ticking over again

After yesterday's pause the US CLO secondary market is ticking over again today with the auction schedule picking up once more.

Yesterday saw two US CLO BWICs where nine line items out of 15 did not trade. Of the lines that did trade one had no colour released but the others all traded at or around talk, albeit with current softer levels factored in.

Nevertheless, sellers are picking up the pace again today, albeit not back to recent high volumes. There are currently five auctions scheduled for trade encompassing bonds from a range of vintages and across the capital stack.

The chunkiest BWIC is also the first due today at 9:30 New York time and primarily offers 2.0 equity, including one euro-denominated piece, plus a single-B slice. The list comprises: $10m ACIS 2013-1A SUB, $7m BHILL 2013-1A SUB, $3.045m BLACK 2013-1A SUB, €16.5m HYDEP 1A SUB and $5m ZIGG 2014-1A F.

Only BHILL 2013-1A SUB has covered on PriceABS in the last three months, doing so at 72.52 on 8 April.

Secondary markets

US RMBS volume dips

The US non-agency RMBS secondary market has seen a dip in volume over this week, which could be the precursor to a longer-term trend.

"We saw a bit of volume earlier in the week with around $800m on Tuesday, but today is quiet for a Thursday with around $400m in for the bid," says one trader. "That's primarily a result of people looking to get any sales off before the Fed meeting yesterday."

While the meeting provided no immediate changes it will have a long-term impact on the RMBS market, the trader suggests. "The expected future path of rates has put a dampener on easy money and consequently RMBS liquidity has started to decay."

At the same time, the trader notes that a number of dealers are exiting the secondary market to increase focus on whole loans and new issues partly because of the capital requirements on legacy RMBS. "Fewer dealers around will of course impact liquidity too, but those that remain continue to be active and support the market."

Despite such support, over the past week or so secondary spreads have edged a little wider overall and DNTs have increased. However, the trader says: "I'd take those moves with a pinch of salt as the market has been impacted by conferences in the US last week and Europe this; combined with geopolitical concerns that mean even though performance of the underlying continues to improve there's no real desire to add right now."

Structured Finance

SCI Start the Week - 15 June

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

Pipeline
It was another busy week for the pipeline. There were nine new ABS added - including yet another Chinese deal - as well as three RMBS, three CMBS and a CLO.

The ABS were: US$214m American Credit Acceptance Receivables Trust 2015-2; US$96.4m CommonBond Student Loans Trust 2015-A; CNY1.9bn Driver China Two Trust; A$285m Flexi ABS Trust 2015-2; US$114.83m ReadyCap Lending Small Business Loan Trust 2015-1; US$750m Santander Drive Auto Receivables Trust 2015-3; €1.1bn Sunrise Series 2015-2; US$1bn SunTrust Auto Receivables Trust 2015-1; and US$450m Westlake Automobile Receivables Trust 2015-2.

US$1.2bn Invitation Homes 2015-SFR3, US$343m Sequoia Mortgage Trust 2015-3 and US$405m WinWater Mortgage Loan Trust 2015-4 accounted for the RMBS, while the CMBS were US$380m BXHTL 2015-JWRZ, US$206m RIAL Series 2015-LT7 and US$1.2bn WFCM 2015-C29. The sole CLO was US$450m Marathon CLO VIII.

Pricings
A significant number of deals also printed. The week's issuance included ten ABS, two RMBS, a CMBS and six CLOs.

The ABS were: US$250m CPS Auto Receivables Trust 2015-B; US$344m DT Auto Owner Trust 2015-2; US$970m GM Financial Automobile Leasing Trust 2015-2; US$290m Hertz Fleet Lease Funding Series 2015-1; €700m Highway 2015-I; US$758.2m Navient Student Loan Trust 2015-3; US$180m New Jersey Student Loan Revenue Bonds 2015-1; CNY3.58bn Rongteng Individual Auto Mortgage-Backed Securitization 2015-1; US$443.4m Santander Drive Auto Receivables Trust 2015-S1-S7; and US$864m Toyota Auto Receivables 2015-B Owner Trust.

A$500m Pepper Residential Securities Trust No.14 and A$500m TORRENS 2015-1 were the two RMBS. The CMBS was €480m-equivalent Mint 2015.

Lastly, the CLOs were: US$475m ALM VI (reissue); US$411m Cathedral Lake 2015-2; US$408m Fortress Credit Investments CLO 2015-4; US$411m ICG US CLO 2015-1; US$616m THL Credit Wind River 2015-1; and €354.7m Tikehau CLO 2015-1.

Markets
Front-end US ABS spreads widened 5bp last week and 2bp-5bp the week before. Citi analysts attribute the widening to a robust new issue market, heavy BWIC activity and rate volatility. They add: "We believe that the technicals are driving the market and wider spreads represent a buying opportunity. The pace of rate lift-off should be measured, justifying market weighting ABS. The sector's short WAL is inherently defensive."

There was significant widening in US non-agency RMBS for CAS and STACR. "In the CRT space, the M1 and M2 tranches widened about 5bp-15bp and the M3 tranches widened about 20bp-30bp," note Bank of America Merrill Lynch analysts.

The US CMBS market sold off for the third straight week. "In secondary trading of recent issues, LCF triple-A bonds were flat, at swaps plus 89bp. Further down the capital stack, more credit-exposed single A-rated mezzanine tranches were 4bp wider, at swaps plus 219bp, and triple-B rated mezzanine tranches were 5bp wider, at swaps plus 354bp," report Barclays Capital analysts.

US CLO secondary spreads have been moving wider over the last two weeks. "Triple-B spreads are approximately 10bp-15bp wider, and double-B spreads have widened approximately 15bp-25bp," say Wells Fargo analysts. "We believe that the widening is due to the continued large amount of secondary supply, combined with the fact that triple-B and double-B spreads were at or close to post-crisis tights."

European RMBS weakness continued as spreads once again leaked wider. "End-clients became more skittish as the week wore on, unsettled by wider offers and weaker bids. In particular, Spanish and Portuguese RMBS senior bonds were generically 10bp and 20bp wider respectively over the week, reaching levels last seen in August 2014," note JPMorgan analysts.

Editor's picks
Trigger effect: 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...
Post-auction headache: The US Department of Housing and Urban Development (HUD) has been an increasingly significant source of NPL supply, but recent changes to its loan auction post-sale requirements make purchasing and securitising loans more challenging and expensive. Although the HUD is far from the only source of NPL supply, these changes are likely to have significant implications for the NPL securitisation market...
Special offer: 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...
Lift off?: 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...

Deal news
• 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). The US$75m Manhattan Towers, securitised in CD 2007-CD4, is the largest loan out for bid.
• 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.
• 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.
• 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.
• 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.
• 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).
• 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.

Regulatory update
• 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.
• 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".
• 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.
• 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).
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
Access Point Funding I 2015-A; Ally Master Owner Trust Series 2015-3; Babson CLO 2012-II (refinancing); Barclays Dryrock Issuance Trust Series 2015-2; BBCMS 2015-RRI; Cadogan Square CLO VI; California Republic Auto Receivables Trust 2015-2; Canadian Credit Card Trust II series 2015-1; Carlyle GMS Finance MM CLO 2015-1; Carlyle GMS Finance MM CLO 2015-1; CIFC Funding 2012-II (refinancing); Compass Re II series 2015-1; CPUK Finance; Crown Castle Towers series 2015-1; Crown Castle Towers series 2015-2; Cutwater 2015-I; Driver France FCT Compartment Driver France Two; FTA RMBS Prado I; Gemgarto 2015-1; GoldenTree Loan Opportunities X; GTP Acquisition Partners I series 2015-1; GTP Acquisition Partners I series 2015-2; Halcyon Loan Advisors Funding 2015-2; Hollis Receivables Term Trust II series 2015-2; Huntington Auto Trust 2015-1; Hyundai Auto Lease Securitization Trust 2015-B; IBL Finance (retained); Long Point Re III series 2015-1; Magnetite CLO VI (refinancing); Master Credit Card Trust II series 2015-1; OCP CLO 2015-9; Orange Lion 2015-11 RMBS; Penarth Master Issuer 2015-2; Progress Residential 2015-SFR² Trust; REAL-T series 2015-1; Residential Reinsurance series 2015-1; Series 2015-1 WST Trust; STACR 2015-HQ2; State Board of Regents of the State of Utah Series 2015-1; Sunrise 2015-1 (private placement); TCF Auto Receivables Owner Trust 2015-1; Towd Point Mortgage Trust 2015-2; Venture XXI CLO; Welk Resorts 2015-A; Wheels SPV 2 Series 2015-1; Z Capital Credit Partners CLO 2015-1

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-6; BACM 2006-2; BACM 2006-3; BACM 2007-2; BACM 2008-1; CD 2006-CD2; CD 2007-CD4; CFCRE 2011-C1; CGCMT 2006-C5; CGCMT 2014-GC21; COBALT 2006-C1; COMM 2007-C9; COMM 2012-CCRE2 & COMM 2012-CCRE3; COMM 2014-CR15; COMM 2015-3BP; DECO 2006-E4; DECO 2007-E5; DECO 2007-E6; DECO 8-C2; ECLIP 2006-2; ECLIP 2007-2; EPC 3; EURO 23; EURO 28; GSMS 2010-C2; GSMS 2011-GC3; GSMS 2014-GC20; JPMBB 2013-C17; JPMCC 2003-C1; JPMCC 2006-LDP7; JPMCC 2006-LDP9; JPMCC 2007-LD12; JPMCC 2007-LDP12; JPMCC 2011-C4; JPMCC 2013-C16; JPMCC 2013-LC11; LBUBS 2003-C5; LBUBS 2006-C6; LBUBS 2008-C1; MESDG CHAR; MLMT 2007-C1; MSBAM 2013-C7 & MSBAM 2013-C8; MSC 2007-HQ12; MSC 2008-T29; RIVOL 2006-1; TAURS 2006-3; THEAT 2007-1 & THEAT 2007-2; TITN 2006-3; TITN 2007-2; TMAN 4; TMAN 5; TMAN 7; WBCMT 2006-C23; WBCMT 2006-C26; WBCMT 2006-C29; WBCMT 2007-C32; WFRBS 2012-C7; WFRBS 2013-C14; WINDM VIII; WINDM XI

Structured Finance

Successful ED project 'requires support'

While the European DataWarehouse (ED) has continued to make strides over the last 12 months, data shortcomings in the market which are beyond the ED's power to address threaten to derail further progress. For this reason, it may be necessary for the ED's mandate to be expanded.

The ED tracks loan-level data for 890 deals, backed by more than 40 million loans from 13 countries. It now has 370 customers, with 150 data users - 110 of which are active or passive investors.

While the ED's achievements since it was established three years ago (SCI passim) have been impressive, Bank of America Merrill Lynch European securitisation analysts believe they also reveal shortcomings in European financial data disclosure. Such shortcomings are beyond the power of the ED to resolve and would require top-down policy action.

"The reported data is correct for each given issuer and according to that issuer's systems and practices, but the data is not comparable across issuers as they use definitions and report data in different ways even when they use the same terms," say the BAML analysts. As an example, some issuers track loan delinquencies at 90 days, but others record a loan as delinquent at 30 days past due. There are also differences in when a default occurs or when a loan can no longer be collected.

"The best solution is to introduce standard taxonomy across the EU or across the eurozone. This issue, however, goes well beyond reporting standards for securitised pools and encompasses the overall bank reporting standards. Hence, we think it is not in the power of ED to resolve, but rather a prerogative of the bank supervisory authorities (SSM, ECB, EBA, etc) to mandate its resolution, thus facilitating their own supervisory work," say the analysts.

They continue: "Data comparability is in our view the most intractable issue related to loan-by-loan reporting. If not resolved satisfactorily, this issue could undermine the whole edifice of loan-by-loan reporting data and usage."

The issue is complicated because banks across and within countries use different accounting and servicing standards. However, if the issue is not resolved then it could undermine the introduction of the credit quantitative and qualitative criteria embedded in the EBA's proposal for single transparent and standard (STS) ABS, the analysts warn.

The analysts say it would be beneficial for the ED to become the most comprehensive loan data warehouse in Europe and to reach beyond securitisation pools to include covered bonds, SME, infrastructure and more. Even if the ED achieves 100% securitisation covered - which the analysts think is possible - it would not be enough to provide a strong quantitative data foundation for the European fixed income markets, the analysts say.

This is because the exclusion of covered bond pools prevents a complete picture being available for European residential and commercial real estate data and a lack of data limits the use of loan data for such markets. The motivation for loan-by-loan data disclosure is linked to ECB repo and ABSPP eligibility, so not all data is provided, and also the analysts warn that mandatory disclosure of loan-by-loan data for securitisation only makes securitisation less competitive on cost basis and for proprietary information purposes.

"More loan disclosure is necessary in order to assess the state of the banking system in Europe and the loan book performance of individual banks. It is ironical that one of the very few public sources of SME loan performance in the eurozone comes from the securitised SME pools and the related trustee performance reports. This is increasingly the case, when it comes to the availability of more detailed data for other loan assets, too," the analysts say.

JL

Structured Finance

STC clarification underway

Plans are underway for European policymakers to homogenise the various European securitisation acronyms to the simple, transparent and comparable (STC) framework, according to the Bank of England's executive director of prudential policy David Rule. In the second keynote address at IMN's Global ABS conference on Wednesday, Rule outlined the plan to bring together a single set of criteria to European legislation, intended to apply consistently across all sectors.

With the Basel Committee agreeing to now implement STC - also referred to as STS - into its framework later this year, Rule notes that the aims for addressing its clarification are threefold. The first is to avoid terminology confusion and mismatches trapping investors.

In addition, the criteria will assist issuers in benefiting from more robust risk transfer, while aiding regulators with risk sensitive asset classes. "Setting risk sensitive capital requirements for securitisation tranches is challenging," says Rule. "Including a differentiation based on STC in that capital calculation helps to capture other important dimensions of risk related to structure, transparency and governance."

When probed as to what specific asset classes could be left out of the STC criteria, Rule noted that all would be treated equally. "An educated answer would likely count synthetics out of eligibility though," he adds. "Requirements on granularity will also likely affect some CMBS."

One issue that has not been addressed so far is the status of ABCP, which is currently not covered by the STC criteria. Rule said that plans are underway to address this issue with a separate initiative, which should hopefully clarify its standing for eligibility.

Rule also provided another olive branch for the market, arguing that there is a case for lowering Solvency 2 standardised capital requirements. A comparison was made to the covered bond market, which has tended to receive favourable conditions within EU regulation.

"Covered bonds have a legitimate role in the market as a source for secured long-term funding," he said. "But we support moves for a more level playing field for securitisation. This begins by continuing to de-stigmatise the market."

JA

Structured Finance

Liquidity squeeze

Osmo Timonen, an expert in bank regulation at management and technology consultancy BearingPoint, discusses the likely impact of the Fundamental Review of the Trading Book on the secondary ABS market

Since 2012, the Basel Committee on Banking Supervision has been working on a major overhaul of market risk capital requirements for banks´ trading-book positions. The regulatory initiative - entitled the Fundamental Review of the Trading Book (FRTB) - will increase regulatory capital requirements and, as a result, drive up the cost of trading. The secondary market for securitised products is on the line for a potential liquidity squeeze, as banks engaged in market making will have to reassess their business practices.

At this point, the timeline for the coming changes is still open. Authorities are now completing a study phase on the feasibility of the proposed new rules. Most likely, decisions about new requirements will be made by the end of 2015, with requirements for implementation set for 2018.

One of the main goals of the FRTB is to address inconsistencies in the current regulation for market risk. A 2012 study of the Basel 3 implementation, the Regulatory Consistency Assessment Program (RCAP), revealed that banks report widely different risk exposures for similar portfolios. One key driver of inconsistent reporting was trading book market risk requirements.

The FRTB will completely transform current market risk models. Banks can now choose whether to follow the standardised approach to count their risk exposures or, if they prefer, use internal models. Internal models require more resources, but often result in a favourable understanding of exposures to risk-weighted assets. This gives big banks with more resources an advantage over their smaller peers.

The existing standardised approach for market risk will be replaced by a 'sensitivities-based standardised approach' that all banks will be required to model. The internal model approach will face a complete overhaul that includes replacing the widely used Value-at-Risk model with a new Expected Shortfall calculation. According to the Basel Committee´s working proposal, the new sensitivities-based standardised approach should be used as a floor for capital requirements, effectively removing the advantage of using internal models.

The regulatory initiative also aims to reduce regulatory arbitrage between the banking book and the trading book, with a new, stricter definition of the boundary between the two books. In essence, the decision about which products belong to the trading book would no longer depend on banks' perceived intentions to trade, but rather on preset criteria provided by the regulators.

All these new rules will increase capital requirements, particularly for trading book institutions that currently rely on internal models for market risk calculations. The banking industry has been gradually signaling growing concern about the coming changes.

Three major bodies that represent the banking industry globally - ISDA, the Global Financial Markets Association and the Institute of International Finance - have joined forces in an attempt to raise regulators' awareness of the systemic risks that further decreases in market depth can cause. They point out that the increased costs of trading will likely be passed on to customers. If the cost of trading goes up, some market participants might choose not to hedge their risks, which raises the chances of increased market volatility.

In particular, the FRTB is likely to impact the secondary market of securitised products. From a regulatory point of view, banks that act as market makers in the secondary market enter temporary risk positions in their trading books.

As the regulatory capital costs for market making increase, trading desks are likely to curb their activities by pulling out completely or by widening the bid-ask spreads and decreasing the immediately available volume. This would most likely result in worse investment conditions for the buy-side and a less efficient market.

A regulatory paradox is clearly in play with the FRTB. By making banks safer on an individual basis, regulators will impact the liquidity of financial markets on a global scale. Structured credit professionals can only hope that the Basel Committee pays attention to the concerns the banking industry is now voicing.

ABS

Aviation ABS lawyer added

Milbank, Tweed, Hadley & McCloy has boosted its transportation and space group with the addition of London-based partner Nick Swinburne. He has extensive ABS experience and focuses on aviation, shipping and other transportation deals.

Swinburne will lead Milbank's London practice alongside James Cameron, who is also a partner at the firm. He joins from Clifford Chance, where he has spent the last 17 years.

Structured Finance

Agency grabs Europe head

DBRS has hired Detlef Scholz as group md, head of Europe. In the newly created position, Scholz will be responsible for overseeing all of the agency's day-to-day operations in the EMEA region, focusing on the strategic development of its rating business and senior outreach activities. He will report to ceo Dan Curry.

Prior to joining DBRS, Scholz held a range of positions at Moody's, including most recently as md, ratings management. He also served as global head of structured finance and global head of financial institutions while at the agency.

Structured Finance

Securitisation head tapped

Richard Burke has joined Mizuho as head of securitisation. He replaces Shinichi Nochiide, who is relocating to Japan for the bank.

Burke arrives from HSBC, where was md and head of asset-backed finance for the Americas. He has additionally held senior roles at JPMorgan and Merrill Lynch.

Structured Finance

Corporate trust team bolstered

BNY Mellon has appointed Adam Gelder as head of financial institutions for its EMEA corporate trust team. Gelder will be responsible for the growth and development of the company's financial institutions business in EMEA, reporting to Robert Wagstaff, head of UK sales and relationship management at BNY Mellon. Gelder has worked at Deutsche Bank for the last 18 years in client service, relationship management and sales.

Structured Finance

Structuring vet returns

Paul Levy has rejoined GreensLedge as md. He arrives from Hayfin Capital Management, where he worked in structured credit investment.

Before Levy's previous stint at GreensLedge, he was European co-head of FICC structuring at UBS. He has also held senior roles at Prytania Investment Advisers, Bank of America Merrill Lynch and Deutsche Bank.

Structured Finance

CRE pro poached

Jonathan Pollack has joined Blackstone as a senior md in its real estate group. He will be the cio for Blackstone Real Estate Debt Strategies (BREDS), reporting to global head of BREDS Mike Nash. Pollack was previously md and global head of CRE for Deutsche Bank, as well as head of risk for structured finance.

Structured Finance

Solutions director recruited

Aidan McKeown has bolstered Lloyds' financial institutions relationship solutions team by joining as a director. He joins from StormHarbour Securities, where he was md and a founding member of the firm's structuring & advisory team, with a specific focus on bespoke market-driven solutions to assist financial institutions with their regulatory capital and funding requirements. McKeown has also previously held roles with Linklaters and Citi, providing legal advice on derivatives, structured credit and securitisation products.

Structured Finance

Private debt hedge fund launched

Rob Allard and Jonathan Egol, both former mds at Goldman Sachs, have launched a dedicated private debt hedge fund named Firebreak Capital. The firm aims to be an alternative balance sheet in the illiquid lending and investment sector, leveraging the emerging trends in consumer and commercial direct lending, as well as providing private credit, asset-backed and structured finance solutions predominantly across the US, the UK and Europe.

Allard - founding partner and ceo of Firebreak Capital - was previously head of structured product origination and distribution at Goldman Sachs, having been head of structured product sales at Deutsche Bank before that. Egol - founding partner and cio - was previously head of Goldman's mortgage CDO, correlation and derivatives trading business, in addition to sitting on its bank risk and counterparty credit risk committees. Prior to that, he was a consultant at Accenture.

CDO

CDO holdings divested

Zions Bancorporation says it has sold the remainder of its CDO holdings. The move is expected to substantially reduce its modeled risk to capital, particularly under severely adverse economic scenarios.

The company sold US$574m (amortised cost) of CDOs for proceeds of US$437m during 2Q15, generating a realised pre-tax loss of US$137m. Prior to these sales, it received pay-downs and pay-offs of approximately US$13m in the second quarter.

The value achieved through the sales represents a moderate improvement relative to the carrying value as of 31 March, which reflected an unrealised loss of US$149m. Because this unrealised loss was included in GAAP capital as of 31 March, the exit from the CDOs at a somewhat better value is slightly accretive to pro forma GAAP book value and capital ratios.

The securities had a weighted average risk weighting of 178% and accounted for approximately 2% of the company's US$46.3bn of risk-weighted assets at 31 March. The net reduction of capital is therefore more than offset by the reduction of risk-weighted assets and should have a slightly beneficial effect on the company's regulatory capital ratios.

The annual interest income from the securities was approximately US$9m, which is expected to be replaced in the near term with additional purchases of US agency RMBS.

CDO

New manager for ABS CDO

Dock Street Capital Management has been appointed as successor collateral manager to Fort Sheridan ABS CDO. Under the terms of the appointment, Dock Street will assume all responsibilities, duties and obligations of the collateral manager.

Moody's says there will be no rating impact on the notes. For other CDO manager transfers, see SCI's database.

CLOs

CLO structurer brought in

A former GreensLedge director has moved to Deutsche Bank to take up a CLO structuring role in London. Nikunj Gupta replaces Peter Melichar, who left to join Jefferies (SCI 5 June).

Gupta spent more than two years at GreensLedge, where his key focus was CLO structuring. He has also worked for UBS and Bank of America Merrill Lynch in indices and CDOs.

CMBS

Starwood Property promotes CRE pair

Starwood Property Trust has promoted Adam Behlman and Isaac Pesin each to co-president for its real estate investing and servicing team. They will oversee the CMBS and real estate investment platform and also lead LNR Partners.

Behlman has served as head of capital markets and chief risk officer for LNR since 2011. He was previously head of real estate finance and CMBS at UBS and has also worked at firms such as Deutsche Bank, Prudential Securities and Deloitte.

Pesin was most recently md of investments and business development for LNR. He has spent 11 years at the firm in various roles and previously worked in the real estate practice group at JPMorgan's private equity arm and also served a stint at Morgan Stanley.

ABS

CFPB oversight extended

The US Consumer Financial Protection Bureau has published a rule that will allow the agency to supervise larger non-bank auto finance companies for the first time. The agency also released the examination procedures that examiners will use to ensure that auto finance companies are following the law.

Currently, the CFPB supervises auto financing at the largest banks and credit unions. The rule extends this supervision to any non-bank auto finance company that makes, acquires or refinances 10,000 or more loans or leases in a year. Under the rule, those companies will be considered 'larger participants' and the CFPB may oversee their activity to ensure they are complying with a number of federal consumer financial laws.

In total, the CFPB estimates that it will have authority to supervise about 34 of the largest non-bank auto finance companies and their affiliated companies that engage in auto financing. These companies together originate around 90% of non-bank auto loans and leases, and in 2013 provided financing to approximately 6.8 million consumers.

The CFPB says it is finalising the rule largely as proposed, with minor changes. The final rule broadens the category of transactions involving ABS that are not counted toward the 10,000 transaction threshold. It also makes a minor modification to the definition of refinancing for the purpose of the threshold.

In accordance with an update to its supervisory and examination manual, CFPB examiners will also be evaluating whether auto finance companies are: fairly marketing and disclosing auto financing terms; providing accurate information to credit bureaus; and treating consumers fairly when collecting debts.

The rule will take effect 60 days after publication in the Federal Register.

Structured Finance

European regulatory barriers discussed

The European securitisation market's regulatory capital costs are a barrier to demand and liquidity, according to a recent Moody's roundtable discussion. The agency reports that investors do not believe the capital treatment of European structured finance instruments reflects their associated risks.

Investors noted in the discussion that if the current levels of regulatory capital associated with structured finance instruments remain the same, the European structured finance market will not return. However, the concept of a qualifying securitisation provides an opportunity to revisit the rules on capital and liquidity treatment of structured finance instruments and align them with instruments of equivalent risk.

The discussion also revealed that the expansion of the European structured finance market depends on the entrance of more bank investors. A change in the capital framework might help create more liquidity in the structured finance market. Investors consider that banks do not want to invest in instruments that cannot be easily liquidated though.

Moody's argues that improving the standardisation of capital treatment of structured finance instruments versus other instruments would help increase the investor base, thereby increasing liquidity in the secondary market. The shallowness of the secondary market is said to affect the appetite of real money investors.

Finally, the agency notes that investors believe issuers must find a broader, active investor base for mezzanine and equity tranches. With spreads tightening, Moody's suggests that hedge funds may exhibit less demand for subordinated tranches.

Structured Finance

Counterparty risk approach released

Scope Ratings has published its rating methodology for counterparty risk in structured finance transactions and is requesting comments on the proposal by 31 July. The proposed methodology describes how the agency analyses the credit risk introduced into a structured finance transaction by financial or operational counterparty exposures.

Scope says that financial institution counterparties with credit quality of BBB/S-2 or higher, combined with appropriate risk substitution triggers, can support the triple-A and double-A rating categories on a structured finance transaction. The agency says that the trigger levels it has identified "build on post-crisis realities", including the new regulatory and supervisory framework for banks - such as bail-in and stronger prudential metrics - resulting in a lower likelihood of banks defaulting in the short term.

Scope proposes a clear and transparent analytical framework focused on the materiality of counterparty risks and the efficiency of structural remedies to those risks. The methodology highlights how 'one size fits all' is often inadequate to capture the complexity of counterparty risks and that risk mitigation has to be assessed in the context of each transaction.

The agency considers early replacement of a counterparty as the most effective remedy to protect a transaction against a counterparty's deteriorating credit quality. Replacement trigger levels mark the minimum credit quality of a counterparty where Scope deems replacement to be early enough to shield a transaction from this counterparty's credit risk. In addition to rating-based replacement triggers, pre-arranged operational remedies or structural protection can act as adequate risk mitigants.

The methodology applies to structured finance transactions and covered bonds, as well as other debt ratings that rely on structured finance techniques to be rated higher than the supporting counterparty. Scope does not anticipate the implementation of the methodology to have significant rating implications on its outstanding structured finance ratings: potential rating changes should be moderate and likely no higher than one notch.

Structured Finance

Appeals ruling 'credit negative'

Moody's says that the recent New York Court of Appeals ruling that representations and warranties in most RMBS and CMBS transactions have a life span of only six years, beginning on the closing date of the securitisation (SCI 12 June), is credit negative. This is because some R&W breaches may only be apparent much later than six years after a deal closes and because the ruling is now controlling law in New York, where many RMBS and CMBS R&W breach lawsuits are heard.

However, from a potential credit-positive perspective, the court obliquely indicated that agreements expressly providing that R&Ws last for the life of the loan should be enforceable. In addition, by deciding that R&W statute of limitations run from the date of securitisation, the court may have implicitly decided that investors could be materially and adversely affected by a bad loan, even if it has not defaulted.

Residential loans typically last up to 30 years and commercial loans typically last up to 10 years. Some loan defects only materialise when a loan defaults and the servicer brings or prepares to bring a foreclosure action. Nearly all RMBS and CMBS trusts are New York trusts, and most mortgage loan purchase agreements select New York jurisdiction and venue for lawsuits.

In future transactions, sponsors may choose to provide explicit 'life of loan' protection in the mortgage loan purchase agreement, Moody's suggests. The Court of Appeals observed that "nothing in the [mortgage loan purchase agreement] specified that the cure or repurchase obligation would continue for the life of the loans" and declared that "parties may contractually agree to undertake a separate obligation, the breach of which does not arise until some future date". Given this support, the agency believes life of loan repurchase obligations would be enforceable under New York law, if issuers elect to do so.

In a rough and preliminary examination last year of Form 15G repurchase demands filed by most major CMBS issuers for 2009-2013, Moody's found less than half of 1% of all CMBS were subject to document defect or R&W repurchase demands. For RMBS, collateral performance of older pre-crisis deals has already sustained the effect of any widespread breaches of R&Ws and any remaining issues to be discovered after the six-year cut off are likely to be idiosyncratic and not a key driver of future performance, according to the agency.

Structured Finance

Marketplace lending line-up revealed

Panellists have been announced for SCI's Marketplace Lending Securitization Seminar, which is taking place on 25 June in New York. The event is being held at Kaye Scholer's offices at 250 West 55 Street.

The seminar will provide an in-depth examination of the sector, with overviews of transaction structuring/credit considerations and the biggest platforms involved, as well as panel discussions focusing on opportunities and challenges from the perspective of both aggregators/sponsors and investors. A sector outlook will also gauge prospects for growth and demand as the asset class continues to evolve.

Panels include representatives from: Apollo, Avant, BNY Mellon, CAPFUNDR, Citi, Common Bond, Credit Suisse, DBRS, First Associates, Funding Circle, Goldman Sachs, LiftForward, Moody's, Orchard, Peer IQ, Prospect Street, Prudential, QuietStream and Servatus.

To attend the event, email SCI or click here to register.

Structured Finance

Euro survey predicts growth

European structured finance issuance is expected to rise this year compared to 2014, according to the results of a Fitch survey. Asked how publically-placed issuance would compare to last year, 59% of respondents said it would increase.

That 59% consists of 46% of survey respondents replying that issuance would rise 10%-25% and 13% of respondents replying it would rise by 25% or more. Only 1% of overall respondents expect a fall in issuance of more than 25% and 5% expect a more moderate decrease, while 35% expect 2015 volumes to be largely in line with 2014 levels of €80bn.

Fitch notes that 37% of respondents believe consumer ABS will see the largest increase in issuance volume, while 31% think it will be CLOs. As for the biggest challenge facing the European structured finance market this year, 60% say regulatory treatment is a greater concern than economic activity, declining yields, quantitative easing or limited assets,

"Confidence is a key part of a healthy structured finance market and our survey results show it continues to return, albeit issuance levels are coming from a very low base. The survey results also support our own opinion that greater clarity and consistency on the regulatory treatment of securitisations remains an important challenge to address before the market can return to its potential," says Marjan van der Weijden, EMEA head of structured finance at Fitch.

The survey was conducted this week. It polled 76 investors, bankers, issuers and other related market participants at the industry conference in Barcelona.

CDO

Lehman payments due

Liquidators PPB Advisory has made a final call for claims from potential CDO creditors of the Lehman Brothers Australia (LBA) estate prior to the payment of the first dividend under the scheme of arrangement (SCI 6 November 2013). The final date for claims to be lodged is 24 June and payment is expected to occur after 8 July, the date by which PPB hopes to adjudicate on all claims.

Amicus Advisory notes in a recent client memo that the payment range specified is 32-52 cents on the dollar for client creditors. This is made up of a 12 cent payment due to a successful insurance claim from the adverse court judgement against LBA, plus between 20-40 cents from the general fund.

The reason for the variation in payments from the general fund is due to 'hold backs' for future claims, according to Amicus. "PPB is required by law to ensure sufficient funds are available to meet all valid claims equally. The major claims left outstanding are those made by S&P for LBA misusing its ratings to sell CDOs - as a counter claim against investors who are suing S&P alleging their CDO ratings methods were flawed - and by Lehman Brothers Holdings Inc in the US seeking recoveries of monies previously paid out on the Federation CDO," the memo explains.

If PPB is successful in negotiating caps on the S&P claim, the first dividend payment will be at the higher end of the range. If the firm isn't successful, it will be at the lower end.

Amicus suggests that there will likely be three dividend payments in total, with a second payment in around 12 months' time when one of the outstanding claims is resolved. A final payment could occur when every issue in connection with the liquidation is completed.

"It is unknown at this stage what the eventual total pay-out will be, but the numbers for the first dividend payment indicate it will likely be higher than the estimates given by PPB some years ago of around 50 cents on the dollar," the firm observes.

Claims can still be made against LBA via a proof of debt, which PPB has indicated will be accepted in a claims resolution process (CRP) format. Any successful claims that aren't lodged in time the first dividend payment will be equalised at the time of a second dividend payment.

CDO

Trups default drop continues

The number of US bank Trups CDO combined defaults and deferrals decreased marginally to 19.7% at the end of May from 19.8% at the end of April, according to Fitch's latest index results for the sector. In addition, two banks representing US$15m of notional in two CDOs cured in the month.

There were no new deferrals or defaults in May. One issuer that has been deferring since March 2010, with a notional of US$4m in one CDO, was sold from the portfolio with an estimated recovery of 13.8%.

Across 78 Fitch-rated Trups CDOs, 231 defaulted bank issuers remain in the portfolio, representing approximately US$5.8bn of collateral. Currently 146 issuers are deferring interest payments on US$1.7bn of collateral, compared with 223 issuers that were deferring on US$2.6bn of collateral in May 2014.

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

CDS

DTCC issues data harmonisation suggestions

The DTCC has issued global data harmonisation recommendations to the CPMI IOSCO Harmonisation working group, with credit derivatives identified as the first step. The recommendations involve harmonising around 30 credit derivatives data fields across global trade repository providers.

The DTCC operates a derivatives trade reporting service for brokers, buy-side firms and corporates but says data gathered thus far has not been leveraged to its full extent due to inconsistencies and data quality. This is because of the absence of harmonised global data standards, it says.

"As the world's largest global trade repository, DTCC has remained committed to ensuring that the service is able to deliver upon the transparency goals that were called for by the G20 following the financial crisis," says Larry Thompson, DTCC vice chairman. "In order to be able to fully capitalise on all of the benefits of this data, greater data standardisation across repositories is required."

CLOs

Anchorage closes 'unique' deal

Anchorage Capital Group's newest deal - Anchorage Credit Funding 1 - has a number of unique structural features, notes Moody's. These are largely included to mitigate the additional risk brought by its ability to buy a significant amount of non-first lien senior secured loan assets.

Anchorage Credit Funding 1, which closed last week, must buy a minimum of only 35% first-lien secured loans or notes, compared with the typical CLO 2.0's 90% minimum and prohibition of bonds altogether. The deal also has high single-industry concentration limits, although it does have higher subordination and a market-value-based OC test.

The fact that Anchorage Credit Funding 1 only has to buy 35% senior secured assets is a credit negative, says the agency. The deal could buy 100% bonds.

High single-industry exposures could result in a highly concentrated portfolio and the deal has a 12% single-industry concentration limit - slightly higher than the 10% typical of most CLOs. Also, its two allotted exemptions to the limit allow the deal's largest two industries to represent up to 20% and 15% of par, respectively, compared with the typical 15% and 12%, so theoretically three industries could potentially comprise 47% of the portfolio.

To mitigate against increased risk, the deal has three main structural features which are rare among CLO 2.0 deals. First, the deal has significantly higher subordination levels than the average CLO; the liability structure has only three rated tranches above the equity notes and the triple-A notes have 51.6% effective subordination, compared with 38.5% for the triple-A of Anchorage's most recent CLO.

Second, in addition to standard OC tests, the deal also has a market-value OC test. If the market value test fails, it must use excess spread to purchase additional assets or pay down notes instead of making equity payments.

Third, to address the heightened risk of portfolio weighted average recovery rate (WARR) deterioration as a result of trading into bonds, Anchorage Credit Funding 1 will calculate its collateral quality tests slightly different than typical CLO 2.0s while the tests are failing.

"If ACF 1 is failing any of its collateral quality tests, the deal will assign principal proceeds resulting from the sale or disposition of an asset the same characteristics of the sold or disposed assets until the principal is reinvested or the tests regain compliance. This ensures that the deal maintains or improves the collateral quality tests when adding additional assets during periods of test failures," says Moody's.

There are further unusual features also present. Anchorage Credit Funding 1 has a lower WARR covenant (27.5%) than most comparable structured products (typically above 40%). It also has a longer WAL test and reinvestment period and allows no reinvestment once that period ends.

"The WAL test is 9.25 years, compared with the typical CLO's eight years, the reinvestment period is 5.1 years, compared with the typical four years, and its legal final maturity is 15.1 years, compared with the typical CLO's 12 years," notes Moody'.s. Additionally, the deal does not have the typical weighted average spread test and instead will count floating-rate assets' spreads toward the weighted average coupon test.

CLOs

Trustee enhances online platform

US Bank Global Corporate Trust Services has enhanced its online platform, Pivot, by expanding access to CLO managers that outsource middle office services. The platform will attempt to help these clients gain cost efficiencies and improve the process of managing their loan portfolios.

US Bank's middle office group expects to grow its presence as a result of this upgrade. The platform will help clients manage their portfolios online by sharing deal data and test results, critical alerts, file sharing, self-service reporting and data comparison tools that streamline the reconciliation process.

CLOs

Euro CLO retail exposure 'positive'

The selective retail exposure of European CLO 2.0 deals is credit positive, says Moody's. While European CLO 2.0 exposure to retail is only 4.63% of collateral, two-thirds of that is exposure to UK, German or Dutch retail.

The rating agency includes the non-durable consumer goods sector in the retail category. A preference for retail credits in more economically stable countries has resulted in names included in CLOs being of higher credit quality than the overall retail sector.

"The issuer weighted rating factor of CLO 2.0s' retail exposure is 3000, consistent with a weak B2 rating and much better than the 3345 issuer weighted rating factor for all high-yield names in the retail industry, which is consistent with a B3 rating," says Moody's vp and senior analyst Javier Hevia Portocarrero.

The retail names held by at least 10 CLOs are rated between Ba1 and B2, while the publically-rated most widely held names in the industry all have stable outlooks and are all - bar one - rated at least B2. The credit quality of retail credits in CLO 2.0 deals is comparable to the wider 2.0 collateral universe.

CLO exposure to UK retail, which is expected to outperform the euro area, is credit positive. The outlook for the Netherlands' retail sector is less positive, although Moody's notes that CLOs are mainly exposed to just two Dutch obligors - Action Holding and EFR Group, which are rated B1 and B2 respectively, with stable outlooks for both.

Retail sales volume in Germany has been stable over the last few years and CLOs are mainly exposed to a single obligor - Beauty Holding One. That obligor is rated B2 with a stable outlook.

Performance of the retail sector will continue to vary significantly by country in Europe, says Moody's. Euro area consumer confidence is at its highest level since 2007, although overall retail turnover has not recovered to pre-crisis levels and retail growth is uneven.

CLOs

CLO recovery rates compared

S&P has published a case study on recovery rates in European CLOs, following the incorporation of additional information on loan recoveries into its analysis of CLO transactions (SCI 4 August 2014). In the analysis, the agency considered the top 100 publicly-rated obligors with the highest exposure in 25 European CLO 2.0 deals it rates.

S&P found similarities between the weighted-average recovery rates generated using the top 100 publicly-rated obligors and the recovery rates in recent European 2.0 CLOs that it has rated. In the agency's view, these weighted-average recovery rates may help to provide investors with a suitable benchmark statistic, against which to compare similar portfolios.

It believes that incorporating the new recovery information into its CLO analysis will yield several benefits. "The additional granularity provided for loans with recovery ratings of 2 through 5 will reduce the spacing between CLO recovery assumptions among loans with different recovery ratings," the agency explains. "This should reduce the CLO rating impact of positive or negative movements in loan recovery ratings and further enhance CLO credit stability. Additionally, the changes will enable us to better differentiate between portfolios of loans with similar recovery ratings but differing recovery prospects."

CMBS

Online CRE loans offered

RealtyMogul.com says it has received US$250m in direct fincial commitments from large institutional investors. The commitments will allow the online marketplace to offer two new products to CRE borrowers, including a three- to five year-floating rate bridge product priced in the 4% to 6% range.

The other product is a fixed rate programme - which is priced in the 4% range - that primarily follows the standards set by the CMBS market. "Although CMBS loans have existed offline for some time, this is the first time an online marketplace is able to offer a competitively priced CMBS loan," says Jilliene Helman, ceo of RealtyMogul.com.

CMBS

Gap exposure gauged

Gap has announced that it plans to close 175 Gap branded stores in the coming years, including 140 this fiscal year. Barclays Capital CMBS analysts identify 81 loans with US$6.8bn in conduit CMBS balance that have Gap listed as a top-five tenant (excluding outlet stores and closed stores).

The store closings will not affect Gap outlet stores or other brands owned by Gap, such as Banana Republic or Old Navy. The closures represent around 25% of Gap's mainline stores, leaving the brand with 500 standard stores and 300 outlet stores.

"The closure of mainline stores is particularly concerning for malls, where many of these are located. Which stores the company would target for closure was not clear at this time, but we would be most concerned for class B/C malls already struggling to maintain occupancy," the Barclays analysts observe.

Of the stores with exposure, US$4.2bn of the collateral is securitised in CMBS 2.0/3.0 deals, including several large class A retail properties. The analysts estimate that 12 securitised properties have over 10% exposure to Gap, seven of which are in 2.0/3.0 transactions. The US$70m 170 Broadway (securitised in CGCMT 2015-GC29 and GSMS 2015-GC30), US$10.29m Gap - Fordham loan (LBUBS 2006-C1), US$4.23m 269 King Street (CGCMT 2015-GC27) and US$2.98m 622-628 King Street (MSC 2008-T29) loans are 100% exposed to the retailer.

The analysts point out that Gap remains a going concern, so it will still have to honour lease agreements and has set aside money to buy out leases where necessary. "This may lessen initial loss of income from a Gap store departure, but the long-term stability of the property would remain an issue," they suggest.

CMBS

CMBS 2.0 mod requested

A 2010-vintage loan securitised in JPMCC 2010-C1 has been unable to refinance on its maturity date and the borrower has requested a modification. The US$13.7m Aquia Office Building loan accounts for 4.37% of the CMBS.

The loan was unable to refinance at maturity at the start of this month due to its largest tenant - TASC - exercising its lease termination option last year (see SCI's loan events database). Morgan Stanley analysts note that the borrower has now requested a two-year extension with a reduced interest rate to allow time to get the property more fully leased. Negotiations regarding a modification are ongoing.

The US$86m Courtyard Midtown East, US$20.3m San Clemente Building B and US$40.6m Centre Market Building loans, securitised in CSAIL 2015-C1, JPMBB 2015-C25 and JPMCC 2012-CBX, respectively, have also been watchlisted. The Courtyard loan has experienced a sharp drop in DSCR due to a decline in room revenue, while the San Clemente and Centre Market loans are each exposed to significant lease roll risk.

Risk Management

ISDA principles gain backing

A group of 11 industry associations has published a letter supporting a set of principles developed by ISDA aimed at improving consistency in regulatory reporting standards for derivatives (SCI 26 February). The principles call for derivatives reporting requirements to be harmonised across borders, as well as further development and adoption of global data standards.

The associations signing the letter are: the Australian Financial Market Association, the Alternative Investment Management Association, the British Bankers' Association, the German Investment Funds Association, the European Fund and Asset Management Association, the Futures Industry Association, the Global Foreign Exchange Division of the Global Financial Markets Association, ISDA, the Managed Funds Association, the Securities Industry and Financial Markets Association and its Asset Management Group, and The Investment Association.

ISDA says that significant progress has been made in meeting a G20 requirement for all derivatives to be reported to trade repositories to increase regulatory transparency. However, a lack of standardisation and consistency in reporting requirements within and across jurisdictions has led to concerns about the quality of the data being reported, increasing the cost and complexity for firms that have reporting obligations in multiple jurisdictions.

As a result, the associations believe adherence to the ISDA data reporting principles will result in greater consistency in the content and format of the data being reported, further improving regulatory transparency. They also believe that market participants could benefit from greater specificity and harmonisation in their reporting across multiple regimes.

Risk Management

Leverage ratio standards updated

The EBA has updated its implementing technical standards (ITS) on disclosure and supervisory reporting of the leverage ratio for EU institutions. The standards aim at harmonising reporting and disclosure of the leverage ratio across the EU by providing institutions with uniform templates and instructions.

The updated disclosure framework consists of four templates: a table reconciling the figures of the leverage ratio denominator with those reported under the relevant accounting standards; a table providing a breakdown of the leverage ratio denominator by exposure category; a table providing a further breakdown of the leverage ratio denominator by group of counterparty; and a table with qualitative information on leverage risk.

The authority says the amendments to its delegated act on leverage ratios will, on aggregate, lead to a reduction in size and consequently a lower number of cells. Validation rules, data point model and XBRL taxonomies reflecting the amended templates are being finalised and will be published at a later stage.

RMBS

Aussie structural differences analysed

Fitch has published a special Q&A report highlighting key differences in Australian RMBS structures and the impact that structural features can have on the risk profile of both senior and junior investors. Over the past 12-18 months, the market has seen some notable changes in Australian RMBS structures as issuers adapt to changing market conditions.

"No longer do we find standardised Australian RMBS transactions based on the same template. The clear trend has been towards individualised, bespoke transaction structures, in many cases with multiple junior tranches carrying various ratings below triple-A," the agency explains.

Changes have been driven by issuers' desire to sell the entire capital structure, adhering to regulatory guidelines and investor-specific requested features. RMBS structures are also shaped by funding costs, capital treatment, funding requirements and asset characteristics. However, Fitch notes that the biggest driver is the use of lenders' mortgage insurance (LMI) in transactions and recognition that LMI is not an insurance wrap paying 100% of losses.

The report also outlines some of the mitigants used to address excessive principal draws, concentration and tail risk. In addition, it covers the type of risks class AB noteholders face in a capital relief structure versus class A noteholders in a funding-only structure, as well as how Fitch determines if the rating of the class A note is LMI independent.

RMBS

Peripheral RMBS strengthening

Fitch says that the features of new RMBS in Italy, Spain and Ireland have strengthened, thanks to improved credit standards of their underlying portfolios and simpler capital structures, which have better alignment of interest between issuers and investors. However, uncertainties remain regarding ongoing legislative changes and implications of an evolving interest rate environment.

More stringent underwriting standards by lenders have improved the quality of new mortgage origination over the past few years. In Ireland, recent regulatory changes restrict the proportion of loans with original LTV ratios above 80% and 70% for investment loans.

In Italy, 'big tickets', very long tenors and broker-originated loans have almost disappeared, while in Spain lenders are focusing on plain vanilla prime residential mortgages. Overall, Fitch believes these improved underwriting standards should turn into future positive collateral selection for new RMBS transactions.

The agency adds that capital structures are simpler, in order to maximise the amount of senior notes used for repo operations with the ECB. The alignment of interest between issuers and investors has also improved.

Nonetheless, there are some uncertainties particularly around the impact of ongoing legislative changes. In Spain, parliament introduced debt forgiveness into the personal insolvency regime. Additionaly, Ireland has a detailed process for dealing with distressed borrowers - including debt restructuring - and has removed legal obstacles to repossession.

The continued lengthy foreclosure process in Italy calls for improvement too, says Fitch. The agency does not believe that the respective changes will materially affect borrowers' willingness to pay, though.

Finally, while current low interest rates are supporting performance across all three countries, rate rises represent a potential threat to borrower affordability and residential mortgage performance in the long term. This is particularly the case in Spain and Italy, as most originators do not consider a stressed interest rate when measuring borrower payment capacity at origination. On the other hand, if Euribor slips deeper into negative territory, unless mortgage rates are floored at zero, borrower affordability could improve.

RMBS

Global RMBS prepays 'steady'

Moody's expects CPRs to remain steady in RMBS globally for several region-specific reasons. This could support ongoing stable collateral performance in RMBS throughout the world.

"In the UK, the number of homeowners taking out new mortgages or refinancing existing mortgages will likely rise in 2016, nudging CPRs gradually upward," says Moody's structured finance md Annabel Schaafsma. "In the euro area and the UK, a number of seasoned borrowers hold mortgages with interest rates that are lower than currently available in the market, and these borrowers will be unlikely to refinance."

Moody's believes future prepayment rates in the UK will depend on the timing of interest rate increases and the extent to which lenders increase their standard variable rates. Non-conforming and interest-only borrowers could benefit as non-bank lenders increase their appetite for these mortgage types.

Meanwhile, the rating agency suggests that CPRs will mostly stay flat in continental Europe, as competition among lenders is increasing. "In European RMBS, CPRs will increase slowly for most countries in the continent over the next two-to-three years, as competition for borrowers increases among lenders, owing to improving macroeconomic conditions in the euro area," observes Schaafsma.

Moody's says that Dutch CPRs will modestly increase from a low base, mainly following increased competition among lenders and activity in the Dutch housing market. Prepayments may increase going forward as mortgage interest rates continue to fall.

In Spain and Italy, the agency expects CPRs to increase slightly, as increased competition between banks and a decrease in mortgage spreads in both countries will make it more appealing for borrowers to renegotiate their mortgages. Low interest rates, very high unemployment and very low job stability should not incentivise borrowers in Spain to repay their mortgages, Moody's adds.

In the US, because many borrowers have already refinanced at attractive rates, CPRs in US private-label RMBS will likely remain steady for the rest of 2015. Prepayments in US RMBS will slow later this year when the Fed raises the benchmark funds rate and long-term interest rates climb, making refinancing options less attractive to borrowers.

CPRs in Japanese RMBS will stay at their current level and the Bank of Japan's quantitative easing measures should keep interest rates low. In Australia, Moody's believes that the macro-prudential focus on banks' underwriting criteria will reduce the amount of activity in the market, leading to lower CPRs in Australian RMBS.

RMBS

New lender mitigants outlined

Fitch says that global RMBS transactions backed by mortgages from new lenders need to be analysed cautiously, as they pose a number of additional risks compared with transactions from more established lenders. The agency has recently received multiple enquiries to rate transactions from new lenders and notes that that the lack of historical data is the main challenge.

Fitch says it typically expects to receive originator-specific historical performance data relevant to the securitised asset pool for the longer of five years or a period covering all phases of at least one economic cycle. A new lender is unlikely to be capable of producing historical performance data that conforms to this expectation. Where such data limitations exist, the agency may limit the ratings that are achievable, apply higher asset stresses or decide not to rate the transaction.

For individual requests from new lenders in connection with standard mortgage products, strong mitigating factors would need to be present for such a transaction to achieve Fitch's highest ratings. The types of mitigants that the agency may consider are include: proxy data (for example, alternative but comparable sets of performance data); regulatory framework (strict regulatory guidance provides support when considering leverage, consumer protection, affordability and credit history); third-party service providers; lender strategy, experience and incentive (to ensure management interests are aligned with investors); strict loan eligibility criteria; and an extensive operational review.

Fitch may conduct a more detailed analysis if it is asked to review transactions backed by mortgage pools with lower credit quality. In its analysis the agency will also consider broader market dynamics and the implication of several new lenders entering the market at once. For instance, it will examine the implications of the different lenders' growth strategies on the sustainability of the individual businesses and the overall housing and mortgage market.

RMBS

RFC issued on Dutch RMBS

S&P has requested comments on proposed changes to its methodology for rating Dutch RMBS. The proposals align the criteria for Dutch RMBS closely with the agency's global RMBS criteria, and apply to all new and existing ratings on Dutch RMBS and to the analysis of Dutch residential mortgage covered bonds.

S&P says the proposed criteria constitute a starting point for assessing portfolios that vary substantially from historical pools and for analysing structures that involve structure-specific risks. The key aspects of the proposed criteria are to adopt the global framework and methodology for analysing the credit quality of RMBS and to revise modelling and cashflow assumptions for typical Dutch RMBS transactions.

The agency believes that application of these proposed criteria would negatively affect less than 25% of ratings outstanding on Dutch RMBS, with downgrades of one notch in approximately 70% of cases. It expects that the effect will mostly be concentrated on the lower investment grade and speculative grade rating levels. Application of the proposed criteria could also lead to a limited number of minor upgrades.

Market participants are invited to submit comments to S&P by 12 July.

RMBS

Australian mortgage conditions improve

Despite Australian property market conditions improving, Fitch's Dinkum RMBS Index increased only 2bp last quarter, to 1.17%. Sturdy issuance volume, high house prices, stable unemployment and low interest rates should keep arrears low for 2Q15, though further arrears improvements are not expected.

The rating agency notes that Christmas and holiday spending pressures on mortgage performance were offset last quarter by an interest rate cut by the Reserve Bank of Australia and the temporary fall in petrol prices. Arrears performance has now reached its lower bound, they say.

The low-doc Dinkum index worsened 61bp to 5.44%. The performance of non-conforming loans also worsened, as 30-plus day arrears rose 88bp to 7.58% and repayment rates declined from 35.1% to 26.8%, although 90-plus day arrears actually decreased 26bp.