Contents

Secondary markets

Euro ABS/MBS slow return

The European ABS/MBS secondary market is slowly returning to life following the Barcelona conference.

Friday was slow with only a few trades going through and a handful of line items on BWIC. Today's open sees most ABS/MBS participants seemingly content to sit on the sidelines awaiting news on the Greece-EU meetings despite the emerging more positive tone in broader markets.

There is currently one European ABS/MBS BWIC on today's schedule. Due at 11:00 London time the two line CMBS list comprises €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 CLOs ease back in

The US CLO secondary market looks to be easing its way into this week.

After a surprisingly active week last week in terms of the number of bonds in for the bid despite significant absences due to Barcelona, the start of this week appears more circumspect. Last week's high proportion of DNTs and weakening tone proved little other than the lack of forced sellers and the impact of broader market volatility on already thin liquidity.

However, with desks fully manned once more this week is likely to present a sterner test for the US CLO market. Perhaps with this in mind there are only two BWICs scheduled for today so far, though the calendar is building for the remainder of the week.

The first of today's auctions is due at 13:00 New York time is a three line $8.15m single A list comprising: OCT21 2014-1A B, VENTR 2006-1A B and VENTR 2012-12A C1. Only OCT21 2014-1A B has covered on PriceABS in the last three months, doing so at 100.85 on 8 May.

Then at 13:30 is a $181.95m double- and triple-A auction. The ten line items involved are: ALM 2014-11A A2A, ARES 2014-31A A2, AVOCE 2014-1A A1A, BABSN 2013-IIA A2, CGMS 2014-3A A1A, KVK 2014-3A B, MAGNE 2014-9A A1, MRNPK 2012-1A A1A, OCP 2013-4A A1A and REGT4 2014-1A B.

Two of the bonds have covered with a price on PriceABS in the last three months - CGMS 2014-3A A1A at VH99 on 24 March and MRNPK 2012-1A A1A at 100H on 27 May.

Secondary markets

Euro secondary turns positive

The European securitisation secondary markets are taking a positive turn albeit at a statelier pace than broader markets.

"Sentiment is a little bit better though our markets are slower to come back than others," says one trader. "Spreads haven't moved much this week so far, but are slightly tighter since Barcelona and there's definitely more liquidity around."

Activity remains patchy, however, the trader says. "Prime assets saw two-way flows yesterday though mainly in small size. Meanwhile, peripherals remained very quiet and, even more surprising, so did CLOs, which have widened noticeably recently."

Nevertheless, the trader expects the secondary market more broadly to start heading in a positive direction. "The technicals are good, with primary usually quiet at this time of year and continued eurosystem support - the ABSPP number was disappointing again yesterday for last week, but at least they had the excuse of the conference. At the same time, secondary ABS/MBS will obviously be increasingly boosted over the coming days if the Greek solution remains in place."

There are currently two ABS/MBS BWICs circulating for trade today. At 12:30 London time is a 15 line mixed list totalling €40.9m original and €16.157+ current face. The auction primarily comprises reasonably small clips of regularly seen names.

Then, at 14:00 is a single €11.798m original/ €5.14+m current line of TMAN 6 A. The CMBS tranche last covered on PriceABS on 2 June at 98.91.

There is also one euro CLO BWIC due today. Scheduled for 15:00 it consists of €1m of ARESE 7X C and €400k of HARVT IV B2. Neither bond has covered on PriceABS in the last three months.

Secondary markets

US CLOs still soft

Tone in the US CLO secondary market has remained soft into this morning's open, but that could change later today as the BWIC calendar cranks up once more.

"There has been a degree of illiquidity and it's hard to say where it's coming from - it could be Greece, it could be the Fed," says one trader. "There is no obvious credit issue, but there is a softness and the Street is less aggressive."

However, that could change quickly, the trader says. "It's hard to tell which way it's going to break now - it could settle down or go softer."

Overall, the trader adds: "Activity is slower and we are some way off the go-go environment of a month ago. That said, there is a fair amount of BWIC activity scheduled for this week."

There are already eight BWICs circulating for trade today and four more on the calendar for tomorrow. "The lists today will be a good indication of where we are now everyone is back from Barcelona," says the trader. "We'll see if the high numbers of DNTs we saw last week continue or if we're now on a firmer footing."

The auctions due today provide a range of bonds across the capital stack and vintages, though many are of small size. The largest pieces in for the bid so far today come on the first list due at 9:30 New York time.

The two line triple-A list consists of $25m ALM 2014-14A A1 and $24.8m of GOLD8 2014-8X A. Neither bond has traded on PriceABS before.

Secondary markets

Euro ABS/MBS firms up

The European ABS/MBS secondary market is showing a firmer tone, but is not yet fully back up to speed.

"Yesterday was very busy especially in peripherals with Spanish and Portuguese names the big movers," says one trader. "Overall, market tone is much better than we've seen for a while."

However, the trader adds: "I'm not reading too much into it yet. We're still playing catch-up to other markets because most people were away last week and the Greece situation is so fluid it doesn't take much for us or other sectors to seize up."

At the same time the auction calendar is still relatively quiet. "There aren't too many BWICs at the moment, just a few each day, but that's mainly because there was quite a bit of selling before Barcelona," says the trader.

There are currently three ABS/MBS BWICs circulating for trade today. They include a three line 64m Dutch and UK prime list at 12:00 London time and an 18 line 47.661m mixed auction at 14:00.

Last up at 14:30 is perhaps the most eye-catching list involving a senior and mezz piece of the same UK non-conforming RMBS - £26m MANSD 2007-1X A2 and £24m MANSD 2007-1X M1. Neither tranche has traded with a price on PriceABS in the last three months.

Secondary markets

US CLOs improve

Sentiment in the US CLO secondary market looks to be improving.

"Yesterday the tone was a little better, though 50% of the mezz in for the bid DNT'd," says one trader. "BWICs keep coming but we're not seeing anything significant to raise the flag that forced selling is underway. In fact, the lists that are trading are not from fast money, but mainly involve assets that have been sitting around for a while."

The trader continues: "The primary market is choked up and that's having an impact on secondary and producing more sellers than buyers. Overall, though even with the DNTs bids are very slightly improving this week."

As a result, the trader is guardedly optimistic. "Provided everything on a macro level remains OK and primary functions properly, we could return quite quickly to a tightening cycle. However, that's unlikely to be certain for a while and until then it's very much wait and see for the market."

Today sees seven US CLO BWICs circulating for trade today so far. A range of assets and vintages are on offer primarily from real money managers.

However, the trader notes: "There's a single-B list from a hedge fund. That should be interesting as we've not seen any single-Bs lately - a lot of talk but no prices."

Due at 14:00 New York time, the six item $7.282m auction comprises: AVERY 2013-2A F, BABSN 2014-IIA F, BATLN 2013-4A E, FLAT 2013-1A E, OCP 2014-6X E and SPARK 2014-1A F. Four of the bonds have covered on PriceABS in the last three months, doing so as follows: BABSN 2014-IIA F at 82.27 on 9 April; BATLN 2013-4A E at 87.875 on 29 May; FLAT 2013-1A E at 85.22 on 15 May; and SPARK 2014-1A F at 84H on 15 April.

Secondary markets

Euro ABS/MBS illiquid again

The European ABS/MBS secondary market is once again hampered by illiquidity.

"Flows are once again very poor," says one trader. "The bounce we saw on Tuesday, particularly in Portuguese and Spanish names, was short lived and we've been pretty flat to weaker since then."

The trader expects little to change in the near future. "With the continued volatility surrounding Greece most are looking to stay on the sidelines and so liquidity is unlikely to improve much until quarter-end."

However, more deals have been announced in primary and that has brought out some sellers in secondary. There are six European ABS/MBS BWICs circulating for trade today so far. They include wide a range of assets, from French and Italian ABS to UK CMBS, but today's calendar is dominated by UK RMBS.

In a break from the recent pattern many of the bonds are offered in reasonably substantial size. The heftiest list currently amounts to £222.271m original face across five lines of UK prime.

Due at 14:00 London time, it comprises: FOSSM 2011-1X A6, FRIAR 2014-1 A, GFUND 2011-1 A2, KENRI 2 A and LAN 2012-2X 2A. Two of the bonds have covered on PriceABS in the past three months, last doing so as follows: GFUND 2011-1 A2 at 100.73 on 21 May and FRIAR 2014-1 A at 100.301 on 29 April.

Secondary markets

Euro CLOs weaken

European CLO secondary market activity and prices are weakening.

"The market has become illiquid as we run in to half-year end," says one trader. "Plus obviously the volatile headlines surrounding Greece haven't helped."

The illiquidity has softened prices across vintages, the trader says. "We've seen a weakness in client activity and interest across the capital structure in 1.0 paper. At the same time, 2.0s are also widening and the primary market is having difficulty placing deals at initial levels."

The European CLO BWIC market has been quiet this week too, but there is one list on the calendar for today. Forming part of a larger mixed list there are two lines of 1.0 single-A due at 14:00 - €3m HARBM 7X A4 and €2m HEC 2007-3X C. Only HARBM 7X A4 has covered on PriceABS in the past three months, doing so at H95H on 1 June.

Secondary markets

US RMBS slows further

Activity in the US non-agency RMBS secondary market has slowed still further after last week's dip in volume.

"As is the case with other sectors, it's been very slow this week and today there is barely over $300m current face in for the bid - extremely low for a Thursday," says one trader. "It seems we've hit full summer a little early and even then in recent years we've not seen such a slowdown as this."

There are a number of factors contributing to the drop in activity, the trader says. "It's remit day in US RMBS today so people are tied up this morning going through the numbers and working out what they have to sell or what they have capacity to buy."

In addition, the trader notes: "Next week is a holiday shortened-week with an early close on Thursday. We might see a brief flurry of activity ahead of that, but the bulk of quarter-end selling was done in early- to mid-June, so it could stay quiet until the second week of July."

Reasons behind the slowdown also extend beyond seasonal causes, the trader adds. "End-customers are using other markets as a risk barometer. In particular news around the China Stock Exchange and Greece is grabbing investors' attention and while there isn't a major impact on a low beta product like RMBS it's enough to make people wary."

Consequently, the trader says: "Most bonds are a little wider because of the lack of overall liquidity and customer activity in particular. However, US housing fundamentals remain strong so there is still a strong bid for paper at these wider levels."

Secondary markets

Euro secondary stalemate

The European securitisation secondary markets remain in stalemate as uncertainty over Greece and a consequent risk-off attitude pervades.

Secondary spreads remained unchanged yesterday on the back of very limited liquidity and only some isolated small pockets of flow trading. Equally, the flurry of BWICs yesterday saw covers lower than earlier in the month for similar assets and a significant number of DNTs.

There are three BWICs scheduled for today so far and all involve CLOs the hitherto quietest sector this week. In fact, there is only one list that currently involves any non-CLO paper - a four line very small clip mixed auction due at 14:00 London time.

The €900k list consists of: ALPST 2X D, FSTNT 2 C, NPTNO 2007-1 C and SESTA 4 B. Only NPTNO 2007-1 C has covered on PriceABS in the last three months, doing so at 93 on 21 May.

Also due at 14:00 are two €3m lines of CLO double-Bs - DARPK 1X D and RYEH 1X E. Neither bond has traded on PriceABS in the last three months.

Last, at 14:30 are another three lines of ALPST 2X - €2m ALPST 2X C, €19.902m ALPST 2X D and €2.9m ALPST 2X E. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

US CLO secondary supply stutters

After a week of steady supply the US CLO BWIC market has stuttered to a halt today.

Four days of poor liquidity across the US CLO secondary market has taken its toll, with sellers finally staying away today. The high percentage of DNTs seen earlier in the week continued into yesterday with buyers content to stay on the sidelines as macro concerns held sway.

There are currently only two US CLO BWICs on the schedule today. Both are single line item auctions.

First, at 11:00 New York time is $7m CECLO 2013-20A D and then at 12:00 is $25m GCLO 2006-1A A1A. Neither bond has traded with a price on PriceABS in the last three months.

Structured Finance

SCI Start the Week - 22 June

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

Pipeline
Ten new transactions entered the pipeline last week, with each asset class represented. Three CMBS and three RMBS began marketing, together with two ABS, one CLO and one catastrophe bond.

The newly-announced RMBS comprise CFHL-2 2015, US$334m New Residential Mortgage Loan Trust 2015-1 and US$950m STACR 2015-DNA2, while the CMBS consisted of US$723.3m CGCMT 2015-GC31, US$715m Great Wolf Trust 2015-WOLF and US$885.4m MSCI 2015-MS1. The ABS are €1.18bn Driver Master Compartment 1 and C$424m MBARC Credit Canada 2015-A. Finally, US$200m Acorn Re Series 2015-1 accounts for the ILS and €475.6m Atlantes SME No.5 for the CLO.

Pricings
A mixed bag of deals priced last week, dominated by auto ABS. Aircraft, consumer and equipment ABS were also represented, as well as CLOs, CMBS and RMBS.

The auto ABS prints comprised: US$214m American Credit Acceptance Receivables Trust 2015-2, US$750m Nissan Auto Lease Trust 2015-A, US$1bn Santander Drive Auto Receivables Trust 2015-3, US$1bn SunTrust Auto Receivables Trust 2015-1 and US$450m Westlake Automobile Receivables Trust 2015-2. US$165.01m BCC Funding X series 2015-1, US$96.4m CommonBond Student Loans Trust 2015-A, US$1.2bn ECAF I 2015-1, A$285m Flexi ABS Trust 2015-2 and £283m NewDay Funding 2015-1 accounted for last week's other ABS issues.

In terms of CLO issuance, US$461.37m Marathon CLO VIII, US$410.15m Neuberger Berman CLO XIX, US$585.97m Octagon Investment Partners XXIII and US$415m Parallel 2015-1 priced. The CMBS comprised US$722m BXHTL 2015-JWRZ and US$290m DBWF 2015-LCM, while the RMBS consisted of US$1.2bn Invitation Homes 2015-SFR3 and US$343m SEMT 2015-3.

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

Deal news
• Anchorage Capital Group's newest deal - Anchorage Credit Funding 1 - has a number of unique structural features. 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.
• 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.
• Gap has announced that it plans to close 175 Gap branded stores in the coming years, including 140 this fiscal year. An estimated 81 loans with US$6.8bn in conduit CMBS balance have Gap listed as a top-five tenant (excluding outlet stores and closed stores).
• 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.

Regulatory update
• 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 being seen as 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.
• 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.
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
Azzurro Re I; ALM VI (refinancing); Cathedral Lake 2015-2; CPS Auto Receivables Trust 2015-B; DT Auto Owner Trust 2015-2; Fortress Credit Investments CLO 2015-4; Fraser Sullivan CLO VII (refinancing); FREMF 2015-K46; FREMF 2015-KF08; GM Financial Automobile Leasing Trust 2015-2; Hertz Fleet Lease Funding series 2015-1; Highway 2015-I; ICG US CLO 2015-1; JPMBB 2015-C29; Marine Park CLO (refinancing); Mint 2015; Navient Student Loan Trust 2015-3; Pepper Residential Securities Trust No. 14; THL Credit Wind River 2015-1; Tikehau CLO 2015-1; TORRENS Series 2015-1 Trust; Toyota Auto Receivables 2015-B Owner Trust.

Deals added to the SCI CMBS Loan Events database last week:
BSCMS 2006-PW14; CD 2007-CD4; CGCMT 2007-C6; CGCMT 2008-C7; CGCMT 2015-GC27 & WFCM 2015-C27; CSAIL 2015-C1; CSMC 2006-C3; CSMC 2007-C2; ECLIP 2006-3; ECLIP 2007-2; GCCFC 2005-GG3; GCCFC 2005-GG5; GECMC 2005-C4; JPMBB 2015-C25; JPMCC 2007-CB20; JPMCC 2010-C1; JPMCC 2012-CBX; LBUBS 2005-C5; LBUBS 2006-C6; LBUBS 2006-C7; LBUBS 2007-C6; LBUBS 2008-C1; MLCFC 2006-4; MLMT 2007-C1; MSC 2006-HQ8; MSC 2007-HQ12; SELK 2013-1; TAURS 2006-3; TAURS 2007-1; TITN 2006-3; TITN 2006-5; TITN 2007-CT1; WBCMT 2006-C24; WFCM 2015-NXS1; WINDM XIV.

CMBS

CMBS 2.0/3.0 financials analysed

A Morgan Stanley review of the US CMBS 2.0 loans that have reported 2014 year-end financials suggests that the majority of properties are performing well compared to underwriting. However, some idiosyncratic concerns remain across property types and MSAs.

Over 6,600 CMBS 2.0 loans totalling nearly US$121bn have now reported updated financials for FYE 2014, representing approximately 75% of the entire 2010-2014 universe. Of these loans, 1% reported DSCRs below 1.0x and only around 6% have a DSCR below 1.3x.

The 2013 vintage has the smallest percentage of loans with reported DSCRs of less than 1.5x, which Morgan Stanley CMBS strategists suggest may indicate a 'sweet spot' of better properties and underwriting. Across the major property types, lodging has the lowest percentage of loans reporting less than 1.5x DSCR at around 6%, while multifamily has the largest percentage at 30%.

The review shows that 16% of the sample reported NOIs that are at least 10% lower than underwritten and only 6.5% reported a decline greater than 20%. But the 2014 vintage is reporting NOI declines that are greater than the other vintages - which could partially reflect rent concessions, according to the strategists.

"We find that there are a greater percentage of loans secured by properties located in larger MSAs with declining NOIs. While this is surprising at first glance, it is consistent with our analysis of broader commercial real estate fundamentals, where smaller MSAs have recently realised stronger NOI growth than major markets," the strategists observe.

Of the major property types, multifamily and office appear to have a greater percentage of properties with NOI declines compared to underwritten.

Meanwhile, larger originators show a smaller percentage of loans with NOI declines and lower DSCRs. For instance, around 13% of loans originated by larger originators had NOI declines of greater than 10% compared to underwritten NOI versus 16% for smaller originators. But when the NOI decline was greater than 20%, around 4.9% were originated by larger originators and 4.8% by smaller originators.

"This begs the question if smaller investors are underwriting more aggressively and/or the properties are underperforming. In our view, it's a combination of both, as smaller originators had a greater percentage of loans with underwritten DSCRs less than 1.5x and it has only increased since then," the strategists note.

CS

Structured Finance

Direct lending JV inked

Ares Capital and Varagon Capital Partners have established a new joint venture that will make senior secured loans to middle-market companies. Dubbed the Senior Direct Lending Program (SDLP), the JV follows the success that Ares Capital enjoyed with its previous senior loan joint venture - the Senior Secured Loan Program (SSLP) - with GE Capital.

The SDLP will underwrite and hold first lien loans - including stretch senior and unitranche loans - that are originated by Ares and Varagon. The programme will provide sponsors and management teams with continued access to flexible capital with speed and certainty and without syndication requirements.

It is expected that the SDLP will commit and hold individual loans of up to US$300m. Ares Capital may also co-invest with the SDLP to accommodate larger transactions.

Ares Capital is a business development company that is externally managed by a subsidiary of Ares Management, whose direct lending group had approximately US$29bn in assets under management as of 31 March. Varagon was formed in 2013 as a lending platform by AIG and other partners.

Structured Finance

Chinese expansion completed

Intex Solutions has opened an office in Shanghai, which the firm hopes will further enhance its ability to support its worldwide client base and enable it to proactively meet the demands of the emerging Chinese securitisation market. Yunwen Zeng has been appointed general manager of the new location.

She comments: "The recent surge in government support and market interest has confirmed that now is the right time to open an office in China. The Shanghai office will prove strategic in our efforts to support our clients in China and the surrounding markets in Australia and Asia."

Headquartered in Boston, Intex also has offices in London and Tokyo.

Structured Finance

Valuations team beefs up

MountainView IPS has added Alvin Hsu in a vp role and Alex Kolesnikoff in a senior analyst role. The two hires fill vacant positions while addressing a strategic plan to enhance the company's valuation processes and expand into new asset classes.

Hsu joins MountainView IPS with over 10 years of experience in structured products and credit markets. He previously spent eight years in several positions with Barclays, eventually rising to avp in the strategic credit portfolio management team.

Kolesnikoff previously spent seven years at KPMG, where he most recently served in a senior associate role. While at KPMG, he was a valuation specialist, focusing on MBS and other securitised assets.

The pair join a team of analysts that specialises in valuation and price verification of performing, re-performing and non-performing residential whole loans; non-agency RMBS; CMBS; ABS; CLOs; and CDOs. The hires are specifically targeted to broaden the group's reach into CLO and consumer whole loan assets.

CDO

ABS CDO manager removed

The controlling class noteholder of Crystal Cove CDO has directed the issuer to terminate and remove the collateral manager - Vertical Capital - without cause. The removal of the collateral manager shall not be effective unless an appropriate successor collateral manager has been appointed and it has assumed the collateral manager obligations. Further notice will be provided when a replacement manager is appointed by the issuer.

CLOs

CLO investment disclosed

Fair Oaks Income Fund has entered into binding contracts to acquire in the primary market US$26.4m notional of equity notes of Neuberger Berman CLO XIX. The purchase represents 75% of the transaction's total equity.

The CLO's current target portfolio has a principal value of US$400m across an expected 160 unique bank loan issuers, with an expected weighted average exposure per issuer of approximately 0.6%. The estimated potential total return for this investment is between 14% and 16% per annum.

After this investment, Fair Oaks says it will be 90% invested. In light of the current cash balance and the shareholder authorities granted at its recent AGM and the continuing deployment into attractive investments, the company is considering its options to issue ordinary or C shares. It is expected that any new shares would be issued on terms comparable to recent issues by the company.

CMBS

Incoming chairman named

CREFC Europe has appointed Madeleine McDougall as its next chairman. Presently Lloyds Bank's head of institutional clients in the commercial real estate business, she has joined the CREFC Europe board and will begin her one-year term on 9 November.

The association says that McDougall has signalled a desire to focus on: supporting education initiatives and greater diversity across the sector; improving the consistency and efficiency of real estate finance transactions through implementation of best practice protocols; clarity on, and effect of, the changing regulatory environment; building upon its relationship with other industry bodies. Deutsche Pfandbriefbank's Andreas Wuermeling will remain as CREFC Europe's chairman until 9 November and will remain on the board for another year as immediate past chairman.

CMBS

CMBS practice strengthened

Nelson Mullins Riley & Scarborough has opened an office in New York City and strengthened its real estate capital markets group with a pair of new hires. JPMorgan executive director Steve Hantz joins the firm as a partner, together with associate Gillian Deutch, who was previously at Watson Farley & Williams.

Hantz has spent the past seven years in the CMBS loan closing group, focusing on structuring and closing CMBS loans for multi-borrower securitisations and large loans for single-borrower securitisations. Before joining JPMorgan, he worked in a similar role at Bear Stearns.

Nelson Mullins' capital markets group works largely out of the firm's Atlanta and Charlotte offices, and the group plans to expand its practice in those locations as well as the New York office. The team focuses on analysing, documenting, closing, warehousing, servicing, staging and selling commercial and multifamily mortgage loans destined for securitisation, as well as asset-backed lending.

The team is led by Bradley Denson in Atlanta and Jonathan Nugent in Charlotte.

Insurance-linked securities

Business development team bolstered

Leadenhall Capital Partners has appointed Edward Johnson to its business development team, reporting to business development head Lorenzo Volpi. Johnson was previously at Aon Benfield in London, where he advised on and structured catastrophe bonds, collateralised reinsurance and sidecars. Before that, he worked at Lane, Clark & Peacock and JPMorgan.

Insurance-linked securities

EXOR 'material risks' outlined

PartnerRe has made available additional shareholder information relating to what it describes as the "significant walk-away, regulatory and timing risks" posed by EXOR's unsolicited and "opportunistic" bid for the firm. PartnerRe claims that EXOR has refused to address such material risks inherent in its offer.

"In addition to a wholly inadequate price, the EXOR offer presents an unacceptable level of risk to PartnerRe and its shareholders relative to both the AXIS Capital transaction and a standalone proposition. PartnerRe's board has reaffirmed its recommendation of the AXIS Capital transaction and urges all shareholders to vote for the amalgamation agreement with AXIS Capital," PartnerRe notes.

It adds: "It would be irresponsible for the PartnerRe board to abandon a transaction with compelling value and certainty to PartnerRe shareholders in favour of a potential transaction with substantial optionality, thereby exposing PartnerRe shareholders to the loss of any transaction and US$315m out-of-pocket expenses [due to AXIS Capital termination fees]."

ABS

SLABS review expanded

Moody's has placed on review for downgrade the ratings of 106 tranches across 57 FFELP student loan ABS transactions. The move impacts approximately US$34bn of securities.

The reviews for downgrade are a result of the increased risk that the tranches will not fully pay down by their respective final maturity dates. Failure to repay a note on the final maturity date represents an EOD under the trust documents. But Moody's notes that because of the government guarantee and available credit enhancement, recoveries upon default would be very high - although the timing of such recoveries would depend on the structure of and voting rights upon default for each transaction.

The elevated risk is a result of low payment rates on the underlying securitised pools of student loans, driven by a combination of low rates of voluntary prepayments, persistently high volumes of loans in deferment and forbearance, and the growing popularity of the income-based repayment (IBR) and extended repayment programmes (SCI passim). Some transaction sponsors have repurchased loans from the collateral pools pursuant to the transaction provisions that allow a limited amount of loan repurchases.

During the review period, Moody's will evaluate recent and expected pool amortisation trends, conduct detailed cashflow analyses and examine structural features of the transactions. In addition, it will analyse the impact of such repurchases on the pay-down speed of the respective securitisations. These analyses could help the agency identify additional tranches that would be subject to potential downgrades, it says.

The securitisation programmes affected by the rating action are Access Group, Nelnet Student Loan Trust, SLC Student Loan Trust, SLM Student Loan ABS Repackaging Trust and SLM Student Loan Trust.

ABS

RFC on tobacco ABS approach

Fitch has published an exposure draft with respect to its criteria for rating US tobacco settlement ABS. The agency expects about 64 notes to be downgraded due to the proposed changes.

The main proposals include: the application of the most recent MSA payment received as the starting point on Fitch's cashflow model; and revising the rating floor to triple-C from single-B minus, given the long tenor of most tobacco bonds, the upside potential from potential higher inflation rates or further NPM-disputed amounts and other factors. Feedback on the proposals is invited during the consultation period, which will end on 22 July, after which the agency expects to finalise the revised criteria.

ABS

Railcar rules impact outlined

New regulations for railcars transporting crude oil and other hazardous material will be costly for railcar manufacturers and lessors, given their short implementation timeframes, Fitch says. Since all mandatory expenses are paid at the top of securitisation waterfalls, certain outstanding railcar ABS transactions could see decreased available funds for interest and principal, depending on their respective levels of tanker concentrations (SCI 5 May). The impact could be broader, should the pricing spread between West Texas Intermediate (WTI) and Brent continue to remain at historically low levels.

The US Department of Transportation and Transport Canada last month issued regulations requiring tank cars constructed after 1 October to meet the new DOT-117 design, which features thicker shells and head shields, heat-resistant jackets, thermal protection and improved pressure valves. DOT-111s transporting crude oil are to be completely replaced within 2-3 years, although they may be modified to carry ethanol, extending their useful life to 2023. The newer CPC-1232s will generally require retrofit within five years.

The regulations also require electronically controlled pneumatic (ECP) braking systems to be installed by 2021, an addition largely unexpected by the industry. The new braking installations are estimated to cost up to US$10,000 per railcar by the American Association of Railroads (AAR) and will add further cost pressures, despite their longer lead time for implementation.

Fitch suggests that railcar ABS transactions could take a further hit if these upgrades are conducted during the narrowed WTI-Brent oil price spread, which has negatively affected demand for tankers. The sharp rise in railcar utilisation over the past five years has largely followed the substantial increase in North American oil production.

According to the AAR, average weekly carloads of crude oil increased substantially in nearly each month from 2009 to 2014, as North American oil refineries took advantage of the lower domestic crude transportation. However, crude by rail traffic declined in each month of 1Q15 as oil prices decreased and the WTI-Brent spread reached an inflection point that made it cheaper for refineries to use shipments of foreign oil. Although the average weekly crude carloads recovered in April and May, the continued low pricing spread is expected to continue to negatively impact demand.

"In our view, the high excess spread structured into railcar ABS transactions - as well as increased lease rates - should cover a portion of the retrofit expenses," Fitch notes. "Substantial increases in average lease rates in recent railcar ABS transactions suggest lessees can tolerate the increased rates, although lessees could turn to foreign oil if lease rates were to increase beyond feasible levels. Railcar lessors are likely to stagger the retrofits, which will avoid pronounced expense periods."

ABS

SLABS purchase flexibility highlighted

Navient has bought receivables from nine student loan ABS amounting to US$421.38m since it amended the servicing agreements for 17 trusts last year (SCI 27 April), two-thirds (US$284.44m) of which occurred in May, according to Citi figures. Navient has also called two transactions so far this month - SLMA 2002-4 and 2002-5 - committing US$82.61m of proceeds to redeem them.

In total, the lender has called six deals since 2014, allocating US$231.68m to the redemptions. Citi ABS analysts note that each of these transactions had a balance of approximately US$30m-US$43m and suggest that one potential investment strategy would be to identify class Bs that are likely to be called.

The nine deals impacted by optional purchases are SLMA 2007-2, 2007-3, 2007-7, 2008-1, 2008-3, 2008-4, 2008-6, 2008-7 and 2008-8. The eligible purchase amount as a percentage of current balance ranges from 22%-70% for these transactions.

Meanwhile, the final maturities that would trigger a default - if breached - range from 2021 to 2029. Further, less than 10% of the borrowers in the Navient pools are understood to have elected the income-based repayment option and they have generally shifted out of the deferral or forbearance buckets.

Combined with ongoing default reimbursements and principal amortisation, the purchases thus appear to be equipping Navient with significant flexibility to avoid a technical maturity default in the future. "We continue to believe that most FFELP trusts will avoid a technical maturity default. Most issuers depend on the capital markets for funding and a technical maturity default would be counter to their interest. Navient, the largest FFELP issuer, has already committed significant cash to solving the problem of slow-paying loans," the analysts conclude.

Structured Finance

QS framework unveiled

The EBA presents its recommendations on an EU framework for qualifying securitisations at a public hearing at its offices today. The European Commission last year requested the EBA's advice on criteria for identifying a prudentially sound securitisation market and its regulatory treatment. The EBA will deliver the opinion to the Commission early next month and today's hearing is intended to give advance information of its findings to market participants.

The EBA advice on securitisation defines a series of criteria to identify simple standard and transparent term securitisation and ABCP transactions. One of the salient points is that capital charges foreseen by the 2014 Basel securitisation framework can be lowered for qualifying securitisations to reflect their relative lower riskiness. The EBA opinion specifies the conditions under which transactions could qualify for a differentiated treatment within this new international framework.

A qualifying securitisation framework in the EU should drive the development of a securitisation market that is sustainable and provides both issuers and investors with a more risk-sensitive regulatory treatment, according to the EBA. While these are seen as the conditions to widen long-term funding opportunities for the EU economy, the Authority also stresses that regulatory capital should be maintained well within the prudential perimeter foreseen by the new international standards.

Structured Finance

RRL disclosures adopted

Fitch is set to adopt disclosures highlighting rating agency removal language (RRL) in its rating communications for new covered bond (CVB) programmes and structured finance (SF) transactions, following a recent request for market feedback (SCI 14 April). The disclosures will show where RRL is present and what its implications could be for contractual obligations, credit protection and ratings, if exercised.

In its request for feedback, Fitch had previously considered limiting ratings where RRL is present in documentation and where the rating opinion depends on contractual provisions relating to the agency's analytical approach. Investor feedback suggested that decisions on rating agency removal may not be significantly different in a situation where investors are actively consulted compared with one where investors are not. This feedback related to transactions or programmes with three ratings, which are mostly where RRL has been seen so far.

On this basis, Fitch says there is no reason to believe that rating migration for programmes and transactions with RRL would be greater than for others without RRL. This addresses the key risk cited by the agency in its request for comment, which led to it considering rating limitations in relation to RRL. Nevertheless, certain investors did express their disapproval of RRL, with some saying they would prefer negative consent provisions.

Use of RRL has so far been limited to a few large SF structures (such as master trusts) and CVB programmes, mostly with three ratings that involve numerous issuance and note classes, where active investor consultation would be burdensome for the issuer.

Fitch adds that it will continue to monitor future use of RRL and whether such language starts to extend beyond its current restricted use into simpler transactions or programmes or more with fewer ratings. "Signs of this could give us cause to revisit this topic in the future, given that fewer ratings mean an investor decision on rating agency removal may differ to one taken by the issuer, for example, given the specifics of their investment mandates. As a result, this could result in different decisions to remove rating-related contractual provisions that support the rating opinion."

Structured Finance

Rates impact 'largely credit neutral'

Moody's expects rising short-term interest rates in the US to have varied credit effects on new and existing mortgage-backed, asset-backed and other securitisations. The agency suggests that rising rates will be credit negative for CMBS and largely credit neutral for most consumer and commercial ABS sectors, RMBS and CLOs.

For newly originated loans backing CMBS deals, rising interest rates are expected to result in lower debt service coverage ratios and increased risk of default during the loan term. Existing CMBS deals will also be at risk as capitalisation rates rise and pressurise property values, making it more difficult to refinance a loan at maturity or pay it off with a property sale.

"Competition is intense among CMBS loan originators," says Tad Philipp, Moody's director of commercial real estate research. "Underwriting standards continue to slip as CMBS lenders vie for share and rising interest rates will exacerbate this trend."

Meanwhile, although rate hikes will negatively affect some ABS sectors, the extent of the impact will largely depend on the exposure in individual transactions to obligors with variable-rate debt. "Obligors with variable-rate debt have less disposable income when interest rates rise, which affects their ability to make their loan payments and in turn lowers the credit quality of the securitisations backed by these loans," says William Black, a Moody's md for ABS.

The agency notes that if the US economy continues to strengthen as interest rates rise, falling unemployment and increased income gains could positively affect performance in consumer and commercial ABS. However, rising rates will be credit negative for most student loan ABS because they will likely drive increases in delinquencies and net losses, while also accelerating refinancing activity and reducing excess spread.

Rate changes are not anticipated to materially affect existing RMBS, according to Navneet Agarwal, a Moody's md for RMBS. But the impact on new RMBS deals will depend on what happens with long-term interest rates, which will affect the attractiveness of different types of mortgage loans to borrowers.

Finally, new CLOs will either adapt or decline in number in response to rising interest rates. Excess spread will decline in existing deals and at least initially be credit negative by reducing this source of income, says Yvonne Fu, a Moody's md for CLOs.

Structured Finance

Unique covered bond structure primed

DBS Bank has established a US$10bn global mortgage covered bond programme, a first for the Singapore market. Rated triple-A by Fitch and Moody's, the structure features a unique mechanism that increases flexibility for banks to include loans funded through the Central Provident Fund (CPF) in cover pools.

Similar to other covered bonds structures, DBS' programme establishes an SPV to hold the cover pool assets - mortgage loans originated by DBS that are secured by private residential properties in Singapore - and to guarantee the covered bonds. But in addition to transferring the assets from the issuer to the SPV by equitable assignment, as is done in other countries, the programme uses a trust structure with DBS as trustee holding a large portion of the loans in the cover pool for the benefit of the SPV. This trust structure, the use of which was confirmed by a regulatory amendment this month, preserves banks' priority to enforcement proceeds of the mortgage when borrowers are using their savings under the CPF - Singapore's pension system - to fund down payments and service the loans.

Moody's notes that the programme provides DBS with a new source of low-cost stable funding, which could lower funding costs and ensure access to funding even in times of market disruption. The agency expects the structure to set a precedent for Singapore's two other banking groups, Oversea-Chinese Banking Corp and United Overseas Bank.

Structured Finance

Default rate hits post-crisis low

The default rate for global structured finance securities rated by S&P fell for the third successive year to 4.2% in 2014, the lowest level since 2008. The downgrade rate also declined to an eight-year low of 10% in 2014, while the upgrade rate increased to 8.4%.

"Overall global structured finance credit quality declined again in 2014, with the number of rating downgrades still exceeding the number of upgrades. However, the rate of credit deterioration continued to slow significantly and we expect credit performance to improve slowly in line with the global economic outlook," comments Andrew South, md at S&P.

Most downgrades continued to be in the US RMBS sector. By contrast, both the US and European structured credit sectors exhibited strong credit performance.

In Europe, the number of structured finance upgrades exceeded downgrades for the first time since 2007. This partly reflects stabilisation in the macroeconomic and wider credit market backdrop and its effects on consumers, corporates and sovereigns.

Asia-Pacific structured finance securities' ratings remained relatively stable in 2014. In Japan, the downgrade rate declined to a nine-year low of 3.2% in 2014, down from 5.1% in 2013.

"Positive performance in sectors such as structured credit helped slow the rate of decline in average credit quality for global structured finance in 2014. While ratings have been declining on average since 2007, the rate of downward transitions has slowed significantly, with investment grade ratings beginning to show modest increases in credit quality on a 12-month rolling basis from late 2014," adds South.

Structured Finance

Opportunities fund prepped

Deer Park Road is set to launch the SBF Opportunities Fund, a long/short fixed income fund focused on investing in a variety of MBS and ABS. Sam Barron-Fox will act as leading portfolio manager for the fund, while Deer Park Road ceo Michael Craig-Scheckman and cio Scott Burg will provide risk oversight.

The fund is intended to complement the firm's two previous funds - the STS Partners Fund and Burgess Creek Fund. The new offering will expand on its predecessors by comprising of a wider mandate, providing the flexibility for a more active trading component.

"We want to take a more vertical slice of the capital stack with this fund, as opposed to the more common horizontal approach," says Deer Park Road md Will Bashan. "It's a case of trying to be as flexible as possible with opportunities in the asset class."

Barron-Fox says the fund will also feature interest rate directional trades, leverage and credit hedges where necessary. "With the right risk controls too, we might broaden the mandate over time to potentially include derivative swaps and related equities," he adds.

The fund is set to launch on 1 July.

Structured Finance

QS hearing scheduled

The EBA is set to hold a public hearing on its draft report on qualifying securitisation on 26 June at its premises in Canary Wharf. The objective of the hearing is to gather views from all concerned stakeholders on its recommendations on the matter.

The EBA draft report on qualifying securitisation will inform EU policymakers in their legislative process and proposes a framework to define simple standard and transparent securitisation transactions, as well as prudential capital treatment for qualifying securitisation positions. An overview of the conclusions and policy recommendations in the report will be given during the public hearing.

Interested parties are invited to register for the public hearing by 23 June.

Structured Finance

Regulatory capital rules finalised

The US Fed, the FDIC and the OCC have finalised revisions to the regulatory capital rules adopted in July 2013. The final rule applies only to large internationally active banking organisations that determine their regulatory capital ratios under the advanced approaches rule.

The agencies published changes to the rules affecting such organisations on 18 December 2014 and the final rule adopts these changes substantially as proposed. However, the final rule corrects and updates certain aspects of the advanced approaches rule, including the calculation requirements for risk-weighted assets for advanced approaches banking organisations. Many of the changes enhance consistency of the advanced approaches with international capital standards, according to the agencies.

The final rule will become effective on 1 October.

CDS

Ukreximbank credit event called

ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a restructuring credit event occurred in respect of The State Export-Import Bank of Ukraine. The move follows the approval by holders of the US$750m 8.375% loan participation notes due 2015 issued by Biz Finance approved a three-month extension of the notes to 27 July. ISDA says it will publish further information, including whether a credit default swap (CDS) auction will be held, in due course.

CDS

Sabine results in

The final price for Sabine Oil Gas Corp CDS was determined to be 15.875 at yesterday's auction (SCI 9 June). Eleven dealers submitted initial markets, physical settlement requests and limit orders to settle credit derivative trades across the market referencing the entity.

CDS

Financials clearing underway

LCH.Clearnet's CDSClear service has begun clearing Markit iTraxx Senior Financials Indices, along with all single name constituents of these indices. This marks the first time that credit default swaps (CDS) referencing banks - including some of CDSClear's clearing members - can be centrally cleared.

The platform says that clearing the full range of senior financials single names along with indices provides CDSClear members with significantly enhanced capabilities for margin offsets through effective portfolio margining. CDSClear expanded its eligible product set to include these instruments in response to member demand.

iTraxx Senior Financial Indices from Series 5 onwards in five- and 10-year tenors, as well as all 36 single names that have ever been a constituent of the indices are now eligible for clearing through CDSClear.

CLOs

Spanish SME CLOs scrutinised

Scope Ratings has published a research report that compares and contrasts a pair of Spanish SME CLOs it recently rated - FTA PYMES SANTANDER 10 and FTA PYMES SANTANDER 11. In particular, PYMES 11 is backed by weaker obligors than PYMES 10, yet has been assigned a lower mean lifetime default rate.

In terms of Santander's internal probabilities of default, the average quality of the obligors in PYMES 11 (WA PD of 5.6%) is 74% worse than in PYMES 10 (WA PD of 3.2%). Of note, non-credit line obligors in the portfolio have a WA PD of 7.8%, 1.5x higher than for PYMES 10.

However, Scope assigned a mean lifetime default rate to this transaction (13.9%) that is lower than PYMES 10's (17.8%). The agency says this is because of the shorter WAL of the portfolio (1.9 years versus 2.8 years for PYMES 10), which prevents defaults accumulating.

The transaction has a higher probability of seeing large portfolio default rates under stressed scenarios than PYMES 10, as the quality of the obligors means they are more vulnerable to downturns. For example, self-employed individuals - which exhibit more stable credit performance than micro-SMEs because SMEs benefit from limited liability - account for only 1.9% of this portfolio versus 13.4% in PYMES 10.

Finally, the capital structure of PYMES 11 provides 31% less credit enhancement to the class A notes than PYMES 10 - at 30%, versus 43.5% for PYMES 10.

Scope says the single-A rating assigned to the class A notes of PYMES 11 reflects the credit strength of Santander and the very short life of the credit lines in the pool. These factors strongly mitigate the short-term default rate volatility of the portfolio.

CLOs

Euro CLO calls gather pace

European CLO calls are gathering pace (SCI 30 April), with five redemption notices issued in the last month alone, including the first for a CLO 2.0 deal. This brings 2015 redemptions to €1.9bn across 13 transactions, compared to 14 redemptions seen in 2013 and 2014 combined, according to Deutsche Bank figures.

So far in June, redemption notices have been issued for Invesco's MOCLO 2005-1, New Amsterdam Capital's MERCT I-X and Sankaty Advisors's Nash Point CLO, while Cairn CLO 1 noteholders approved a motion to redeem the deal on the next IPD. Notably, GSO/Blackstone's Grand Harbour I CLO also became the first European CLO 2.0 to redeem, as subordinate noteholder Mediterranean Bank elected to call the deal.

European securitisation analysts at Deutsche Bank point out that the economics in terms of debt financing are not immediately obvious when calling Euro CLO 2.0s, where coupons remain cheaper than secondary spreads. For example, coupon/generic secondary spreads for GRHRB 1 class A2, D and E notes are 160/195, 425/540 and 550/740 respectively.

Meanwhile, a subordinate noteholder vote in connection with redeeming Versailles CLO ME I failed to pass this month, as it did not receive the necessary two-thirds approval. "This should remind us once again that calls are not obvious, even if it is economical, since the two-thirds required vote will remain a hurdle in some widely held 2006/2007 deals," the analysts observe.

They expect the recent flurry of CLO redemptions to somewhat alleviate ramp-up issues for new transactions.

CLOs

CDO Monitor guidance released

A new S&P report provides guidance on how to form an example spreadsheet that incorporates the formulas used in its new non-model CDO Monitor approach. The non-model CDO Monitor is used by CLO collateral managers and trustees to provide an indication as to whether portfolio changes are generally consistent with the parameters the agency assumes when initially assigning ratings to their transactions.

The non-model version is intended to enhance transparency while remaining analytically consistent with S&P's model-based approach. It also aims to increase operational simplicity for CLO collateral managers and trustees.

CMBS

CMBS 2.0/3.0 watchlistings highlighted

A total of 102 CMBS 2.0/3.0 loans with an aggregated balance of US$1.7bn were newly watchlisted in the June remittance, according to Barclays figures. The majority of the watchlists involve 2012 vintage loans, with 2010 and 2015 vintages accounting for the least watchlist transfers.

GSMS 2011-GC3 has the largest exposure to the new watchlistings at 12% (US$209m), largely driven by the US$101m Inland/Centro JV Portfolio I and US$92m Inland/Centro JV Portfolio II loans. The two retail portfolios were watchlisted for delinquent tax payment and deferred maintenance issues.

However, the loans appear to have performed well recently, with Inland/Centro JV Portfolio I reporting a 1.90x DSCR NOI in 1Q15 and Inland/Centro JV Portfolio II reporting 1.99x DSCR NOI for the first three quarters ended in 2014. Barclays CMBS analysts do not expect the loans to experience any immediate distress, due to the healthy performance and watchlisting reasons being non-operational.

The largest loan watchlisted this month is the US$105m 260 and 261 Madison Avenue, securitised in COMM 2012-CR² and COMM 2012-CR3, which recently suffered an equipment accident that resulted in a temporary vacate order (see SCI's CMBS loan events database). The vacate order is expected to be lifted imminently, however, and the borrower expects no major effect on DSCR.

The US$86m Courtyard Midtown East loan, securitised in CSAIL 2015-C1, was also watchlisted this month due to a decrease in income, despite an occupancy rate of 85% for 1Q15. DSCR NOI nevertheless fell from 1.83x in 2014 to 0.84x in the first quarter.

Finally, the US$51m Royal Ridge loan securitised in MSC 2011-C3 was watchlisted, as Capital One - which has been occupying 100% of one of the underlying properties - is expected to vacate. Capital One occupies approximately 26% of the total leasable space, with lease expiry at end-2015. The borrower is reportedly actively marketing and searching for a replacement tenant.

CMBS

TMAN 4 recoveries gauged

A noteholder call convened by special servicer Hatfield Philips last week confirmed that the remaining loan - DT12 - securitised in the TMAN 4 CMBS won't be repaid ahead of the July legal final maturity. Ultimate proceeds are expected to be around €77m-€82m, which should be enough to pay down the class A notes at least.

The situation regarding the class B notes remains highly fluid, depending on costs and whether the coupon on the notes reverts to 8% post-legal final, according to European securitisation analysts at Deutsche Bank. "In our understanding, this is dependent on: if this is specified in the trust deed; and if not, from our discussions with contacts in the legal profession, the unclear point as to whether the provisions of English debt law (via the deed) automatically apply to non-English companies, which most CMBS issuer vehicles are. Taking these factors into account, we calculate recoveries in the range of 10%-37.5%," they note.

The sale of the 12-office portfolio is progressing on a dual front, with four asset sales - for the Nurnberg, Kronshagen, Berlin and Duren properties - at €22.3m about to settle and sales for the remaining eight expected to settle by year-end.

CMBS

Senior delinquencies decline

The 12-month rolling loan maturity default rate for S&P-rated European CMBS increased to 24.6% from 23.7% at end-May, according to the agency's latest EMEA CMBS monthly bulletin. However, the senior loan delinquency rate decreased to 50.2% from 51.1%.

The delinquency rate for continental European senior loans decreased slightly to 63.6% from 63.7%. The rate for UK loans decreased to 21.4% from 23.6%.

CMBS

Scratch and dent fund launched

Värde Partners has announced the final close of its Real Estate Credit Fund with US$500m of committed capital. Described by the firm as a 'scratch and dent' fund, the offering will focus on performing and sub-performing credit in the US$2.8trn US commercial real estate market. Through both secondary purchase and new origination strategies, it will target loans with unpaid principal balances below US$50m.

The offering represents Värde's first real estate-focused fund and aims to take advantage of the firm's real estate expertise and strong relationships in this market. "With our long history of investing in real estate through both credit and assets, we saw an opportunity to extend our investment programme into the performing segment of this market to capture what we believe to be attractive returns and current yield," comments Marcia Page, the firm's co-ceo and co-founding partner. "Seven years after the financial crisis, there continues to be a scarcity of capital and resources focused on small balance commercial real estate loans, which is driving a new set of opportunities for Värde."

Insurance-linked securities

ILS upgraded on final reset

S&P has raised its rating on the US$250m Everglades Re Series 2013-1 notes to single-B plus from single-B. The action follows the final reset for the catastrophe bond.

When S&P initially rated the notes, the baseline probability of attachment was 2.91% and the warm surface sea temperature (WSST) probability of attachment was 3.29%. At each reset, the baseline probability of attachment could range between 2.75% and 3%.

Now that the final reset for the notes has occurred, the agency no longer has to factor in the potential for the probability of attachment to be 3%. The probability of attachment after the current reset is 2.76% and the WSST probability of attachment is 3.14%. Once an adjustment to the WSST results is applied, the updated nat-cat risk factor is 'b+'.

S&P also affirmed its single-B rating on the Everglades Re Series 2014-1 notes. The current probability of attachment is 2.87% and the WSST probability of attachment is 3.31%.

"Next year, the probability of attachment for these notes will be reset for the final time. If the probability of attachment is reset to levels similar to this, the notes could be upgraded by one notch," the agency observes.

NPLs

Spanish NPL decline highlighted

Spanish bank non-performing assets (NPA) will continue to decline and even gain downwards momentum, supported by the country's ongoing macroeconomic recovery, according to a new Scope Ratings analysis. The agency estimates that the Spanish banking sector's NPA stood at €211bn, as of April 2015 - 16% below its peak of €251bn in December 2013.

Scope calculates that if the pace of decline of the first four months of the year is sustained, NPAs will reach €190bn by year-end - a 15% year-on-year decline and 25% below the peak. The decline may ultimately be even faster, judging by the acceleration seen in April.

The positive macro backdrop for Spain should help bank asset quality by lowering new entries into non-performing loans and boosting NPL recoveries. It should also facilitate NPL transactions, as well as foreclosed real estate assets sales - a trend that has already gained momentum in recent quarters. Stronger underlying asset quality will likely translate into a lower need for P&L provisions for banks, as well as cleaner balance sheets, which will generally be supportive for bank credit profiles.

Nevertheless, Scope highlights structural macroeconomic imbalances built up in the years before the crisis, which may weigh on recovery in the medium term. Spanish banks' financial performance, as well as their credit risk profile, remains negatively impacted by large portfolios of non-performing assets built up largely in the past five years. In the agency's view, the pace of reduction in NPAs is important, as a high level of NPAs would be a heavy burden to carry through the next recession.

Risk Management

LCR standards updated

The EBA has published its updated implementing technical standards (ITS) on supervisory reporting of the liquidity coverage ratio (LCR) for EU credit institutions. The ITS include templates and instructions to update the LCR reporting framework following the Commission's adoption of the Delegated Act on the liquidity coverage requirement (SCI 13 October 2014).

The new templates and instructions aim to capture all the necessary LCR items and to adequately ensure a supervisory reporting of the LCR according to the Commission's Delegated Act. In addition, the ITS outline all the necessary steps needed for the calculation of the ratio.

These new templates and instructions will only be applicable to credit institutions and not to investment firms, which will continue reporting the LCR items using the current instructions and templates. However, credit institutions will start reporting using the new instructions and templates only as of the application date of the amended technical standards, which will be specified in their final publication in the EU Official Journal.

For information purposes only, the EBA is also publishing an excel-based LCR calculation tool. Validation rules, data point model (DPM) and XBRL taxonomies reflecting the amended templates are being finalised and will be published at a later date.

Risk Management

Pricing service enhanced

Thomson Reuters has launched Thomson Reuters Pricing Service Plus (TRPS Plus), a new DataScope capability for structured notes and hard-to-value OTC derivatives. The offering aims to provide transparency into the evaluated price, methodologies and market data associated with the price. TRPS Plus also provides risk analysis, such as VaR, CVA and Greeks.

By using TRPS Plus, customers receive a tailor-made transparent evaluated price with complete access to cashflow descriptions, market data inputs, numerical methods and model assumptions to help address transparency and regulatory requirements. The offering is accessible via Thomson Reuters DataScope Select, the strategic global data delivery platform for non-streaming content.

Risk Management

NSFR disclosure standard agreed

The Basel Committee has issued the final net stable funding ratio disclosure standards, following the publication of the NSFR standard in October 2014 (SCI passim). Similar to the LCR disclosure framework, this requirement aims to improve the transparency of regulatory funding requirements, strengthen market discipline and reduce uncertainty in the markets as the NSFR is implemented.

The Committee notes that it is important that banks adopt a common public disclosure framework to help market participants consistently assess banks' funding risk. To promote the consistency and usability of disclosures related to the NSFR, it has agreed that internationally active banks in all member jurisdictions will be required to publish their NSFRs according to a common template.

In parallel with the implementation of the NSFR standard, supervisors will give effect to these disclosure requirements and banks will be required to comply with them from the date of the first reporting period after 1 January 2018.

Risk Management

RFC issued on CCP ratings

Moody's has published a request for comment on its proposed global methodology for rating central counterparty clearinghouses. The approach considers clearing member default-management capabilities and related structural protections, as well as CCPs' business and financial fundamentals and their operating environments. The proposal also lays out the key quantitative metrics and qualitative factors the agency considers when reaching a rating determination for CCPs.

As part of the RFC, Moody's proposes a new clearing counterparty rating (CCR), which will reflect its opinion of a CCP's ability to meet its clearing and settlement obligations to its clearing members (probability of default) and the financial loss that would result if a CCP were unable to meet such obligations (severity of loss). The CCR will reflect a bottom-up analysis of each clearing service in a rated legal entity.

Moody's notes that CCPs play a central role in the risk management of financial markets, with the CCP industry showing a strong history of default avoidance. For instance, all clearinghouses successfully managed Lehman's default without incurring financial stress.

The agency currently rates four CCPs from two family groups under its global securities industry methodology and expects to convert these ratings to CCRs, utilising the new CCP methodology upon its adoption. Moody's does not expect rating changes as part of this methodology transition.

Feedback on the proposals is invited by 21 August.

RMBS

UK arrears diverging

Fitch reports that UK residential mortgage arrears trends diverged in 1Q15. While prime three-months plus arrears fell by 27% during the quarter to 1% of the outstanding collateral balance, the redemption of two large Leek RMBS portfolios led to an artificial increase of 2.7% in non-conforming late-stage arrears. Meanwhile, buy-to-let arrears were flat at 1.4%.

With low interest rates likely to prevail for the rest of the year, Fitch does not expect a marked upward trend in arrears. "A fairly low volume of late-stage arrears has kept the pace at which properties are being taken into possession and their subsequent sales subdued. Coupled with a sustained increase in home prices, losses have remained limited across portfolios, while excess spread and reserve funds remain stable," the agency explains.

Prepayment rates remained broadly unchanged in Q1, although a distinction remains between prime and non-conforming borrowers and particularly those with post crisis-originated mortgages. Prime borrowers who took out mortgages after 2010 are best-positioned to take advantage of competitive market rates and are incentivised to do so following the end of their respective discounted/teaser rates, Fitch notes.

The agency's affordability indicators for the UK show that home price increases continue to outpace income growth, more so in London and the south-east than the north and the rest of the country. However, the pace of this disparity is expected to slow, as home price growth decelerates in London and the south-east and accelerates in the north.

RMBS

August auction scheduled

The AOFM's third Australian RMBS auction is to be held on 18 August. The announcement comes after the results from its first auction were published.

The total volume sold in amortised face value in the inaugural auction was A$160.5m, with bids accepted at just over par for the IDOL 2010-1 and Progress 2011-1 A2 bonds. No bids were accepted for the Apollo 2010-1 A2s.

Up to A$500m face will be made available in the third auction, with settlement due on 21 August. The securities will comprise: Barton 2011-1 A2s (A$40m), Conquest 2010-2 A3s (A$139.25m), GBS No. 4 A1s (A$95m), Illawarra 2010-1 As (A$157.5m), Light Trust No. 2 A1s (A$190m), SMHL 2008-2 A1s (A$500m), Torrens 2010-2 A4s (A$476.5m) and Wide Bay 2010-1 A2s (A$81.2m).

RMBS

Ocwen downgrade examined

S&P last week downgraded Ocwen Financial's residential mortgage servicer ratings to below average from average, after they were placed on credit watch negative earlier in the month. Bank of America Merrill Lynch RMBS analysts suggest that the rating action is unlikely to lead to a large-scale movement of servicing away from the servicer, however.

S&P cited regulatory and investor scrutiny, internal audit findings and challenges in hiring and training offshore staff as major weaknesses impacting ratings. Positively, the agency stated that Ocwen had made progress since mid-2014, but that not enough time has passed to determine the effectiveness of newly added controls.

The BAML analysts note that of the circa 4,100 non-agency RMBS servicing agreements that Ocwen is party to, around 700 (representing US$45bn UPB) have minimum ratings criteria. For about 400 of these (US$25bn), the minimum servicer ratings criteria have already been triggered, as of 31 March 31 - although less than 1% of UPB have actually transferred servicing to date.

Nevertheless, improving its servicer ratings is expected to be a priority for Ocwen in the longer term. If the S&P ratings do not improve by April 2017, NRZ will be able to transfer servicing from the servicer, which poses a material risk.

Second, the lower servicer ratings could also increase borrowing costs on Ocwen's other advance funding facilities. Third, the below average servicer rating could impact its ability to maintain its status as an approved Fannie Mae and Freddie Mac servicer.

"We think Ocwen will focus its attention to improving its servicer ratings as soon as possible, which is likely to also increase expenses in the near term, as Ocwen works to enhance its audit function and expedites remediation actions," the analysts observe.