Contents

Secondary markets

US CLOs keep quiet

The US CLO secondary market is sticking to the pattern seen at the end of last week.

With wholesale selling continuing to remain absent as today wears on in the European securitisation markets, US CLO secondary for this morning at least is staying as quiet as it did on Friday. Events in Greece combined with a heavy new issue pipeline and the approach of quarter-end have already pushed investors to the sidelines and drained the market of liquidity.

Consequently, the market may see little change until after month-end. Further, a true sense of future CLO secondary direction is unlikely to become clear until some time after 1 July thanks to Friday's US public holiday.

There is one US CLO BWIC circulating for trade today so far. Due at 11:00 New York time the $95m three line list comprises: AVOCE 2014-1A A1B, BLUEM 2014-3A A1 and MDPK 2014-14A A2. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Euro secondary stays calm

Tone continues to be weak across European securitisation secondary, but the market has remained calm.

"Not much happened yesterday - as broader markets headed down volumes in ABS/MBS were very thin," says one trader. "Peripherals were better offered in the Street, but there was no panic selling from customers."

Indeed, the trader adds: "There was very little customer activity at all yesterday. The one exception was in prime where we saw some selling in small size, but that seemed to be purely for liquidity purposes."

The CLO market was similarly quiet, the trader notes: "We did see some buyers in very short term senior bonds, but the better sellers of lower mezz we saw last week have stepped out. However, that trade is only on hold because of the current situation, not because the market has improved."

Overall, the trader expects little to change today. "Today is likely to be another tough one especially as it's month-end. Broader markets are again down this morning, but we remain very quiet with little price movement so far."

There is currently only one euro-denominated BWIC due today - three CLO line items as part of a larger mixed dollar-euro CDO/CLO list due at 16:00 London time. The bonds involved are: €6.75m EUROC VII-X SUB, €700k LEOP IIX D and €20.5m RPARK 1X SUB.

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

Secondary markets

Waiting game for US CLOs

US CLO secondary market continues to wait for risk aversion to subside and activity to pick up.

"There's nothing going on again today," says one trader. "We just sit and wait with no clear direction for the market."

The trader continues "The only signifier of any kind I see right now is that primary deals are getting their triple-Bs subscribed first, which suggest that's where tiering is starting in the cap stack. That might play out once we get going again, but for now macro issues and Greece in particular are dominating and will continue to do so in the near term."

The trader also reports that secondary supply is poor in terms of both quantity and quality. "There are only two lists due today and both appear to be pricing exercises, so I doubt they'll trade."

At 11:00 New York time is the previously mentioned mixed dollar-euro CDO/CLO BWIC, which includes three dollar-denominated traches - $5.3m LONGF 2013-1X SUB, $3.1m MMCAP 19A C and $14m SLOSO 2005-1A A2L. Then, at 16:30 are two lines of CRTOS 2007-1A - $15.3m CRTOS 2007-1A D and $20.25m CRTOS 2007-1A E.

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

Secondary markets

Euro secondary stable

The European securitisation secondary market remained stable yesterday amid the varying Greece headlines and is holding firm for now ahead of further news from the ECB later today.

Yesterday once again saw very light flows as the majority of both buyers and sellers remain content to sit out the wider market volatility. Consequently, spreads were broadly unchanged on the day.

However, there was an increase in buying interest across asset classes, albeit with little actual trading to back up that interest away from prime assets, which continue to see pockets of activity. Nevertheless select Portuguese and Italian paper saw a little improvement and even GRIF 1 A had an uptick on the day.

There are no European BWICs currently scheduled for today.

Secondary markets

US CLOs becalmed

The US CLO BWIC market remains becalmed as the holiday weekend hoves into view.

Macro concerns are still keeping the majority of participants on the secondary CLO sidelines and now many traders are also away in advance of the end of the holiday shortened week. Consequently already thin market liquidity has thinned still further and supply continues to be sparse with just two US CLO BWICs doing the rounds for trade today.

The first of which was a two line auction that fell due at 10:30 New York time and comprised: $97.3m CIFC 2014-2A A1L and $29.3m CIFC 2014-2A A2L. The tranches last covered on PriceABS at 100.063 on 9 June and 99.95 on 10 March respectively. There were talked today in the mid-99 to high-99 and low-to-mid-99 to mid-to-high-99 ranges but covers are yet to be released.

Second is a recently announced six line $3.85m triple-A list due at 13:30. It consists of: APID 2014-18A A1, GALXY 2014-18A A, JTWN 2014-4A A1C, NEUB 2014-16A A1, VENTR 2013-13A AX and VOYA 2014-2A A1. Only VOYA 2014-2A A1 has traded with a price on PriceABS in the past three months last doing so at 100.06 on 28 May.

Secondary markets

Euro secondary seeks clarity

The European securitisation secondary markets continue to suffer poor liquidity and lack of supply as participants await further news on Greece.

"It's still very quiet with everyone sitting on the sidelines," says one trader. "We got through quarter-end OK and had hoped things would then pick up but it looks like no one is willing to do anything until we get further clarity on Greece."

Yesterday saw secondary spreads for prime assets remain broadly unchanged on the back of tiny pockets of activity. Meanwhile, peripherals have again edged in from Monday's wides albeit primarily on the evidence of re-racked offers rather than the handful of real trades going through.

A few BWICs eventually emerged yesterday but in low volume as has been the case throughout the week and in the end a high proportion of line items did not trade. At the same time, the primary market is still effectively shut further diminishing the opportunities for secondary supply.

There is one European BWIC on the calendar for far today - six €5m lines of 2.0 triple-A CLOs. Due at 13:00 London time, the list comprises: ALME 2X A, CGMSE 2014-2X A1, CGMSE 2014-3X A1A, HARVT 8X A, PHNXP 1X A1 and SPAUL 5X A.

Only HARVT 8X A has covered on PriceABS in the last three months, doing so at 100.03 on 27 April.

Secondary markets

US RMBS quiet for now

The US non-agency RMBS secondary market has had a quiet start to July, but that could change as the month moves on.

"It's been a very low volume week - we've seen around $50m per day in for the bid over the last couple of days and today's BWIC calendar is negligible," says one trader. "There aren't a lot of people in this week ahead of the holiday weekend and those that are aren't looking to step in front of Greece."

Even though Greece isn't a major direct issue for US RMBS there are still widely-held concerns over contagion in Europe and these have combined with issues closer to home. "Events in Europe along with worries around Puerto Rico and uncertainty over the future path of US rates means most participants are happy to sit it out for now," says the trader. "A notable exception is some of the fast money crossover guys who are looking into distressed opportunities around wrapped Puerto Rican bonds."

Overall, the trader suggests: "The strategy for most people appears to be to let the dust settle from events over the past few days, reassess next week and take it from there and I think then we're in for a busy July. It feels like something going to shake out sooner or later - people are sitting waiting for something to happen and that tends to be a self-fulfilling prophesy."

Secondary markets

Euro secondary holds up

European securitisation secondary market spreads are holding up as the wait for the Greek referendum continues to keep most participants sidelined.

Flows remained light yesterday and are expected to stay the same today especially given the US public holiday. Prime assets again saw the most activity though it was still very patchy and market sentiment has slightly improved in peripherals albeit without any notable movement in pricing levels. At the same time, yesterday's solitary euro CLO BWIC traded slightly below talk, but all line items did at least trade.

There is one European BWIC currently circulating for trade today. Due at 15:00 London time is a single €55m line of auto ABS BILK 5 A, which last covered on PriceABS at 100.285 on 30 March.

Structured Finance

SCI Start the Week - 29 June

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

Pipeline
CMBS entrants dominated the pipeline last week, closely followed by ABS transactions, which included a couple of new issuers to the market. In total, five CMBS, four ABS, two RMBS and a CDO were announced.

The CMBS comprised US$1.46bn COMM 2015-PC1, US$185m JPMCC 2015-MAR7, US$312.8m Velocity Commercial Capital 2015-1, US$914.4m WFCM 2015-NXS2 and US$200m WP Glimcher Mall Trust 2015-WPG. The ABS consisted of US$158.75m Cazenovia Creek Funding I series 2015-1, US$136.77m GLS Auto Receivables Trust 2015-1, US$125m Oportun Funding I series 2015-B and US$111m Sunrun Callisto Issuer 2015-1. The RMBS were Kingswood 2015-1 and Precise Mortgage Funding 2015-2B, while the US$285mn Carlyle Global Markets Strategies Commodities Funding 2015-1 accounted for the CDO.

Pricings
The volume of pricings decreased last week. Three CLOs, two ABS, two RMBS and one CMBS printed.

The CLOs comprised €475.6m Atlantes SME No.5, US$515.6m CIFC Funding 2015-III and US$569m Voya CLO 2015-2. The ABS consisted of €1.18bn Driver Master Compartment 1 and €1.11bn Sunrise series 2015-2, while the RMBS were €3.1bn FTA RMBS Santander 4 and US$950m STACR 2015-DNA2. Finally, the US$715m Great Wolf Trust 2015-WOLF CMBS rounded the issuance out.

Editor's picks
Opportunity knocks: The ECB's ABSPP was a hot topic at IMN's 2015 Global ABS Conference, as it continues to exert downward pressure on European securitisation spreads. Panellists noted an expanding mandate among many investors, with relative value opportunities shifting towards the UK non-conforming RMBS and European CLO sectors...

Deal news
• 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.
• 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.
• 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.
• A recent noteholder call convened by special servicer Hatfield Philips has 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.
• 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.
• 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 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.
• 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.

Regulatory update
• The EBA presented its recommendations on an EU framework for qualifying securitisations at a public hearing at its offices last week, during which it called for a reduction of the risk-weighting floor for qualified securitisations from 15% to 10%. The Authority will deliver the opinion to the European Commission early next month, with the hearing intended to provide advance information of its findings to market participants.
• 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 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.

Deals added to the SCI New Issuance database last week:
American Credit Acceptance Receivables Trust 2015-2; Bavarian Sky China 2015-1 Trust; BCC Funding X series 2015-1; BXHTL 2015-JWRZ; COMM 2015-LC21; CommonBond Student Loan Trust 2015-A; DBWF 2015-LCM; DRB Prime Student Loan Trust 2015-A; Driver Master Compartment 1; ECAF I; FADE series 21; Flexi ABS Trust 2015-2; FREMF 2015-KPLB; JPMCC 2015-FL7; LSTAR 2015-3; Marathon CLO VIII; MSBAM 2015-C23; Neuberger Berman CLO XIX; NewDay Partnership Funding 2015-1; Nissan Auto Lease Trust 2015-A; Octagon Investment Partners XXIII; Parallel 2015-1; Rongteng Individual Auto Mortgage-Backed Securitization 2015-1; Santander Drive Auto Receivables Trust 2015-3; Silverback Finance; STACR 2015-DNA2; SunTrust Auto Receivables Trust 2015-1; Westlake Automobile Receivables Trust 2015-2; WFCM 2015-C29.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-5; CD 2007-CD4; Cobalt 2007-C2; CSMC 2006-C4; ECLIP 2007-1; GCCFC 2005-GG5; GSMS 2011-GC3; GSMS 2013-GC12; JPMBB 2013-C15; JPMBB 2014-C25; JPMCC 2011-C3; LBUBS 2005-C5; LBUBS 2006-C1; MESDG CHAR; MLCFC 2007-8; MSBAM 2014-C15; TAURS 2006-1; TAURS 2007-1; TMAN 4; TMAN 5; TMAN 6; WBCMT 2007-C34; WINDM X.

Structured Finance

QS recommendations weighed

The EBA has adequately addressed most of the valid concerns raised by parties interested in the prudentially sound revival of the European securitisation market, according to Bank of America Merrill Lynch research analysts. In its qualifying securitisation recommendations, the Authority calls for the risk weight floor for senior tranches to be lowered from 15% to 10% under the IRB and standardised approaches (SCI 26 June). Under the ERB approach, the floor is 10% and 15% for one- and five-year tranches respectively.

The EBA recommends that a framework for qualifying securitisation be reflected in a two-stage approach: a combination of simple, standard and transparent transaction criteria; and an underlying securitisation assets credit criteria. Of note, the proposals envisage allowing assets from jurisdictions other than EEA with 'equivalent' regulatory framework to qualify.

They also allow for differentiation between term securitisations and short-term securitisations, such as ABCP conduits. "We think that the adequate treatment of multi-seller fully-supported ABCP programmes was one of the main omissions of BIS3," the BAML analysts observe. "The approach that EBA is taking to adapt the criteria for qualifying term securitisation to the specificities of the ABCP market is commendable."

Nevertheless, they believe that some of the ABCP-related criteria need further consideration. For instance, the maturity of the underlying is explicitly limited to one year, which should be modified to reflect the WAL of the underlying portfolio to embrace a wider range of assets.

Another of the main recommendations highlighted in last week's EBA presentation is a holistic review of the regulatory framework for securitisations and other investment products to ensure a level playing field. "We view EBA's proposal for a qualifying securitisation as only the first step in the potential establishment of a level playing field, the next step being a public consultation (or maybe an EU request for technical advice) regarding covered bonds and a revamp of Solvency 2 to incorporate changes in the treatment of covered bonds, whole loan portfolios and securitisations," the analysts observe.

The analysts add that the EBA's recommendations demonstrate a reasonable non-cliff capital calibration for qualifying and non-qualifying securitisations, as well as a high degree of realism that takes into account established European practices -which they believe should be used elsewhere, for example, in Solvency 2. However, they suggest that recommendations regarding a number of other issues were missing.

For example, no details were provided in connection with the implementation of the QS framework, such as attestation of compliance and proof of due diligence. Further, there was no recommendation for qualifying synthetic securitisations, although the EBA indicated that it intends to do more work in this respect. The analysts additionally call for changes in required retention levels for qualifying securitisations and LCR eligibility, which is related to levelling the playing field between covered bonds and qualifying ABS.

They note that the timeline for the QS framework remains unclear and "contentious" in light of the implementation of Solvency 2 by 1 January 2016 and the ECB's ABSPP until September 2016. "A more forceful approach is needed by the European Commission to see an adequate revamped securitisation framework in Europe completed before the end of 2016. EBA has set the tune for that, we think," they analysts conclude.

CS

CMBS

Below-appraisal bids win

Over US$500m in allocated loan balance from 34 properties securing 13 US CMBS was disposed of last week via Auction.com. The proceeds are anticipated to flow through to the affected trusts in the August or September remittance, likely resulting in large liquidations.

Barclays CMBS analysts note that the majority of the properties in the auction appear to have sold, with only four not listed as sold or sold subject to the seller's approval. "The auctions appear to have come in slightly below appraisal, with auctions coming in at about 88% of the latest appraisal for loans with recently updated appraisals. With many of the loans already heavily distressed, the liquidations will likely lead to large losses when the sales are finalised, as many of the properties were already marked to low appraisal values," they observe.

The auctions underlined the distressed nature of Washington, DC area office properties, with the US$67.8m Computer Sciences Building (securitised in LBUBS 2008-C1) and the US$22m Prince Georges Metro Center IV (JPMCC 2003-C1) bid to levels below appraisal value. The former property was bid to US$20.35m (versus the most recent appraisal of US$22.5m), while the latter was bid to US$7.03m (versus a US$12.3m appraisal).

Heavily distressed malls also performed weakly in the auctions, such as the US$37m Mall at Steamtown (LBUBS 2003-C5) and the US$12.6m Hot Springs Mall (WBCMT 2004-C14), which both received top bids below already significantly discounted appraisals. The former property sold for just US$5.25m (versus an appraisal of US$9.7m), while the latter sold for US$5.5m (versus a US$8.6m appraisal).

But stabilised retail centres appeared to perform better, according to the Barclays analysts, with the US$28m Shoppes at Jupiter (JPMCC 2006-LDP7) selling at US$5m above appraisal for US$26.5m and the US$26m Sutton Plaza (LBUBS 2008-C1) selling at appraisal for US$22.3m. The sale of the latter property should lead to a 3% loss on the US$21m A-note and a 100% loss on the US$5.6m B-note.

Also securitised in LBUBS 2008-C1, two of the three remaining properties in the US$24.3m Memphis Retail Portfolio sold, while a third appears to have not met reserves. The US$5.51m Chickasaw Gardens and US$11.17m The Shops of Collierville sold for sold for US$3.03m and US$7.43m respectively (versus appraisals of US$3.64m and US$7.39m), while the US$4.63m Country Club Collections was bid to US$3.39m but wasn't sold.

The other properties that appear not to have sold are the US$13.49m East Park Plaza (LBUBS 2006-C1), US$12.46m Mills Pointe/Arapahoe Village Portfolio (GCCFC 2005-GG3) and US$10.38m Shoppes at Letson Farms (GCCFC 2005-GG3).

Meanwhile, the US$16.64m Park 100 - Portfolio (LBUBS 2008-C1) was sold for US$6.65m, below a US$9.28m updated appraisal. After repaying US$5.5m in advances, losses are likely to total US$15.7m.

After the Computer Sciences Building, the second-largest property to sell was the US$44.98m Meadowbrook North office complex (GCCFC 2005-GG5), which saw a final bid of US$34.25m versus the latest appraisal of US$38.7m. After repaying US$3.7m in advances and ASER, the analysts project US$15.1m of losses for a 33% severity.

Also securitised in GG5, the US$29.82m River Park Plaza sold for US$20.1m - above its US$16.6m appraisal - leading to an estimated US$20.6m loss.

CS

ABS

Rater moves to sell-side

Brad Sohl has joined Bank of America Merrill Lynch's ABS banking team as vp. He was previously a senior director in Fitch's ABS group, having joined the agency in 2004.

Structured Finance

Structured credit vet recruited

Natixis has named Matthew Zola as head of fixed income Americas. Zola assumes the role previously held by Kevin Alexander, who has been appointed head of global markets Americas. He reports locally to Alexander and globally to Alain Gallois, global head of fixed income.

Zola joins Natixis CIB Americas from UBS, where he had been head - FICC Americas and global head - FICC distribution. Before that, he worked for almost 16 years at Morgan Stanley, where he was md, fixed income division, global head - structured credit.

Structured Finance

Record-keeping fine imposed

ESMA has censured DBRS for failing to comply with corporate governance, compliance and record-keeping requirements under the Credit Rating Agencies Regulation. The rating agency has also been fined €30,000 in respect of the record-keeping failings, after it had been found to have acted negligently. ESMA's decision takes into account the steps taken by DBRS to remedy the infringement.

The decision by ESMA to take enforcement action results from its prior investigation into DBRS. That investigation examined corporate governance, compliance and internal control functions of DBRS.

ESMA found that DBRS did not meet a number of requirements set out in the CRA Regulation regarding: adequate record-keeping and audit trails of its credit rating activities; sound internal procedures and control mechanisms; and a permanent and effective compliance function. Based on the provisions of the CRA Regulation, the Authority decided that the relevant breaches warranted enforcement action, marking the first fine imposed on a rating agency under the rules.

Structured Finance

SF vet appointed

Oppenheimer has appointed John Tonelli as md and head of debt capital markets and syndication. He brings over 20 years of fixed income experience, especially in structured credit and secured financings, first as an attorney at Cadwalader, Wickersham & Taft and later as senior md and head of international structured finance at Bear Stearns and JPMorgan.

Tonelli most recently served as cfo of Corporacion America. In his new role, he will be based out of Oppenheimer's New York headquarters and report to Robert Lowenthal, senior md - global head of fixed income.

Structured Finance

Private debt head recruited

Hermes Investment Management has appointed Patrick Marshall as head of private debt and CLOs, responsible for establishing and building the firm's business in the leveraged loan, private debt and CLO markets globally. Based at the firm's headquarters in London, he will report to Zoe Shaw, head of fixed income.

With over 20 years of debt market experience, Marshall joins from Tikehau Capital, where he was a member of the management committee and was responsible for developing the firm's direct lending activities in London and setting up a CLO programme for Tikehau as first-time issuer. He was previously responsible for managing the loan portfolios for the US chapter 11 process of the Lehman Brothers bankruptcy and also has experience of setting up a debt management business in London during his work at WCAS Fraser Sullivan Investment Management.

Structured Finance

Risk chief recruited

Mariner Investment Group has appointed Dmitry Green as chief risk officer, responsible for monitoring investment risk across all of the firm's businesses. Previously md and cro at Saba Capital, he will be a member of Mariner's investment and risk committees, reporting directly into the firm's operating committee.

Prior to Saba, Green was head of risk management at BlueMountain Capital. Before that, he led the build-out of BlackRock Solutions' capability in credit derivatives.

CDO

CDO manager replaced

Vanderbilt Capital Advisors has resigned from its role as collateral manager for Bristol CDO I and designated Dock Street Capital Management as the replacement manager. Terms of the proposed replacement collateral administrative advisory agreement remain almost identical, with only minor differences that are not material to the ratings of the transaction, according to Fitch. Given that Bristol is a static pool transaction and the class B notes are rated single-C, the agency does not expect the manager replacement to have any impact on the rating of the notes.

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

CDO

Dock Street set to take on CDO

Dock Street Capital Management has been put forward as successor collateral manager for Crystal Cove CDO, following the controlling class noteholder's removal of Vertical Capital without cause (SCI 25 June). Pursuant to the management agreement, the removal of the collateral manager will only be effective if preference shareholders don't object to the proposed replacement. The trustee should be notified of any objections by 30 July.

CLOs

CLO partners tapped

Scott Faga and Eugene Ferrer have joined Paul Hastings as partners from Ashurst, where they were respectively global co-head of the securities and derivatives group and managing partner for the US offices. The pair's practice focuses on securitisation and structured finance, with a particular emphasis on CLOs.

Faga is based in Washington, DC, and Ferrer is based in New York. They join Paul Hastings with a highly experienced team of lawyers, including Nicole Skalla and Brian Whaley. The team serves as principal counsel to a number of CLO arrangers and in 2014 was involved in representing the arranger or collateral manager in over US$25bn of US CLO issuance.

Insurance-linked securities

EXOR modifications dismissed

PartnerRe says that the limited modifications to EXOR's revised offer do not address the "fundamental risks and uncertainties" of the proposal (SCI passim). The firm notes that the only material modification to EXOR's offer is that it will now assume responsibility, should one of its shell subsidiaries breach the contract.

PartnerRe adds that it had identified this as a significant risk from the onset. "EXOR's effort to address this risk - after four intervening revisions to the merger agreementterms since April 2015 - is confirmation that EXOR has clearly been attempting to mislead PartnerRe shareholders while limiting its own liability," it comments.

PartnerRe continues to believe that EXOR's offer poses significant and unacceptable risks, while also substantially undervaluing the firm.

Insurance-linked securities

Insurance merger agreed

Willis Group and Towers Watson have signed a definitive merger agreement under which the companies will combine in an all-stock merger of equals transaction, with the new company named Willis Towers Watson. Based on the closing prices of Willis and Towers Watson common stock on 29 June, the implied equity value of the transaction is approximately US$18bn.

Upon completion of the merger, Willis shareholders will own approximately 50.1% and Towers Watson shareholders will own approximately 49.9% of the combined company on a fully diluted basis. The combined company will have approximately 39,000 employees in over 120 countries, and pro forma revenue of approximately US$8.2bn and adjusted/underlying EBITDA of over US$1.7bn for the twelve months ended 31 December 2014. The combination is expected to result in US$100m-US$125m in cost savings to be fully realised within three years of closing, primarily related to the elimination of duplicate corporate costs and economies of scale, in addition to increased efficiencies.

Pursuant to the terms of the merger, Towers Watson shareholders will receive 2.6490 Willis shares for each Towers Watson share. Towers Watson shareholders will also receive a one-time cash dividend of US$4.87 per Towers Watson share pre-closing.

Subject to Willis shareholder approval, Willis expects to implement a 2.6490 for one reverse stock split, so that each one Willis share will be converted into 0.3775 Willis Towers Watson shares. If the reverse stock split is approved, Towers Watson shareholders will receive one share of Willis Towers Watson for each Towers Watson share. Willis shareholder ValueAct Capital - owner of approximately 10.3% of the firm's common stock - has entered into an agreement to vote its shares in favour of the transaction.

Upon closing of the transaction, James McCann will become chairman, John Haley will be ceo and Dominic Casserley will be president and deputy ceo. The new company's board will consist of 12 directors: six nominated by Willis and six by Towers Watson, including the firms' current ceos. Additionally, Roger Millay will be cfo.

Casserley, together with Gene Wickes from Towers Watson, will oversee the integration team. The transaction is expected to close by 31 December, subject to customary closing conditions and shareholder approval.

Insurance-linked securities

Capital markets partner named

TigerRisk Partners has appointed Jarad Madea as partner with TigerRisk Capital Markets & Advisory in New York. In his new position, he will advise insurers and reinsurers on mergers and acquisitions and capital markets products, reporting to TigerRisk president Tony Ursano.

Madea began his career in Banc of America Securities' financial institutions investment banking group, where he executed a wide range of transactions, including M&A, equity, hybrid securities and debt. He further developed his insurance industry expertise as an svp at Willis Capital Markets & Advisory, where he originated and led numerous sell- and buy-side M&A transactions, and advised Willis Re brokerage clients on capital markets solutions.

NPLs

Securities purchase agreement inked

CV Holdings has entered into a securities purchase agreement and an investor rights agreement with an affiliate of Tricadia Capital Management, in connection with the sale in a private placement of shares of the firm's newly created non-convertible senior preferred stock and shares of common stock to grow its non-performing loan business and develop other business lines, as agreed with Tricadia. The Tricadia investment is expected to replace the existing funding source for CV Holdings' co-investment requirements on its NPL business. The firm is currently evaluating several other investment opportunities and, subject to Tricadia's approval, may decide to pursue one or more of them.

The Tricadia affiliate may purchase up to US$50m of preferred stock through multiple issuances, subject to certain agreed-upon conditions. It has already purchased US$20m of preferreds and received 4,350,000 shares of common stock, plus the right to receive an additional 8,271,596 shares at its option, together comprising 20% of the fully diluted common equity of CV Holdings.

At each subsequent funding by the affiliate, the firm will issue additional shares of common stock comprising 1% of fully diluted common equity for every US$1m of preferreds purchased. If the full US$50m of preferreds were to be issued to the investor, it would consequently also own 50% of the firm on a fully diluted basis. In addition, the investor has pre-emptive and other rights allowing it to purchase any new issuances of securities.

The investor has material corporate governance rights, including the equivalent of two board seats and approval rights over major corporate decisions.

Risk Management

Post-trade unit bolstered

ICAP has appointed Jenny Knott as ceo, post-trade risk and information services. She joins the firm from Standard Bank Group, where she was ceo of Standard Bank and CIB International, most recently serving as strategic advisor to the Group ceos. Prior to this, she worked at Nomura for nine years and at UBS for five years.

Based in London, Knott will sit on the global executive management group of ICAP, reporting to group ceo Michael Spencer. She will be responsible for leading the strategic direction of the division, heading the Traiana, TriOptima, Reset, Euclid and ICAP Information Services businesses.

Risk Management

Data services strengthened

Intercontinental Exchange has made two hires within ICE Data Services. Lynn Martin has been named president and coo of the business, while ICE chief strategy officer David Goone has been appointed chairman, in addition to his current roles. Martin previously served as coo of ICE Clear US and before that was ceo of NYSE Liffe US.

RMBS

Manager charged with fraud

The US SEC has charged AlphaBridge Capital Management and its two owners with fraudulently inflating the prices of RMBS in hedge fund portfolios they managed. A Commission investigation found that the firm told investors and its auditor that it obtained independent price quotes from broker-dealers for certain unlisted thinly-traded bonds, but instead gave internally-derived valuations to broker-dealer representatives to pass off as their own. The inflated valuation of these assets caused the funds to pay higher management and performance fees to AlphaBridge.

AlphaBridge and its owners Thomas Kutzen and Michael Carino agreed to pay US$5m combined to settle the charges.

The SEC separately charged Richard Evans for assisting in the pricing scheme while working as a broker-dealer representative. Evans, who cooperated with the SEC's investigation, agreed to pay a US$15,000 penalty and be barred from working in the securities industry for at least one year. He neither admitted nor denied the findings.

According to the SEC's orders instituting settled administrative proceedings, AlphaBridge misled the funds' auditor during two year-end audits by suggesting that Evans independently generated data to support the firm's prices when Carino actually developed the data himself. AlphaBridge, Kutzen and Carino consented to the entry of the SEC's order without admitting or denying the findings.

AlphaBridge and Kutzen are censured and Carino is barred from working in the securities industry for at least three years. The firm will return more than US$4m in disgorgement and nearly US$1m in penalties to compensate for the funds' overpayment of management and performance fees, and the firm will then close down the funds.

RMBS

Mortgage duo recruited

Cantor Fitzgerald has expanded its fixed income team with the appointment of John Altier and Andrew Javorsky as mds. Altier will focus on US government agency and Treasury securities, while Javorsky will focus on all mortgage products.

Altier was previously a partner at CRT Capital Group and worked as an md at UBS before that. Javorsky was previously an md in mortgages and structured product sales at RBS and served as senior md in mortgage sales at Bear Stearns before that.

ABS

FFELP SLABS under review

Fitch has placed 57 tranches from 23 US FFELP student loan ABS on rating watch negative, affecting approximately US$8bn of securities. The action is based on analysis conducted by the agency that identified trusts with tranches that have heightened risk of missing legal final maturity dates based on principal repayment to date.

The transactions identified will be subject to additional analysis by Fitch over the next few months. The agency will focus on the remaining time to maturity, recent and historical payment trends, breakeven payment speed thresholds and structural factors to ensure that the likelihood of payment at maturity is commensurate with the ratings assigned.

The magnitude of the rating actions could vary significantly depending on remaining time to maturity, recent payment trends, issuer actions such as loan purchases or other external factors. Absent any issuer actions, structural or other mitigants, it is possible that triple-A ratings could be lowered to non-investment grade rating categories. Fitch expects to complete its review and resolve the rating watch status for all trusts over the next three to six months.

The transactions impacted by the move are: Access Group 2004-2 and Series 2007-1; Nelnet Student Loan Trust 2008-1 and 2008-3; North Carolina State Education Assistance Authority - 1995 Master Trust (NC); SLC Student Loan Trust 2004-1, 2008-2 and 2009-1; and SLM Student Loan Trust 2002-7, 2003-2, 2005-1, 2005-2, 2007-2, 2007-3, 2007-7, 2008-1, 2008-3, 2008-6, 2008-7, 2008-8, 2012-5, 2012-7 and 2013-1.

ABS

Auto ABS gains in LatAm

Brazil and Mexico have become the two largest markets in Latin America for the automotive industry over the past 15 years. Demand for automobiles and their financing products is rooted in the growing stability of the countries' middle class population, S&P suggests.

"The securitisation of auto finance assets in Mexico and Brazil seems to have been related to the total amount of vehicles sold, combined with the costs associated with direct funding," comments S&P credit analyst Alvaro Rangel. "We expect that the increase in car sales in Mexico and, consequently, the related increase in the outstanding balance of car loans will be reflected by more securitisations in the market, as they have proven to be a viable funding option for lenders to meet that demand."

S&P credit analyst Hebbertt Soares adds: "Historically, securitisation was used in Brazil mainly by lenders of used cars loans. More recently, captive finance companies have been using this instrument to diversify their funding sources, replicating their experience with global securitisation programmes."

In both Brazil and Mexico, ABS could help financial institutions diversify their funding sources, better match their assets with their liabilities on their balance sheets and achieve attractive funding costs. However, the growth and relevance of this funding method will be closely linked to an economic rebound and householder ability to take out loans.

Brazil's auto market has lost momentum compared with the Mexican auto market, according to S&P. The country's weak economic performance and increasing inflation and interest rates have been pressuring consumers' ability to take on new debts.

In the agency's view, current economic conditions will continue to limit both auto loans and car sales growth in Brazil during 2015. Nevertheless, it believes that structured finance funding alternatives could become relevant over the coming quarters.

In Mexico, auto loans have gradually regained importance as new car sales have accelerated consistently over the past five years. At the same time, non-bank financial companies have become more relevant for new car financing.

S&P expects interest rates in the US to begin increasing over 4Q15, which it believes could affect local Latin American markets by reducing liquidity and increasing funding costs for all players. "Considering these conditions, structured funding alternatives have represented a viable option for these small non-bank financial companies to continue competing with captive finance and big banks in the auto loan market," it notes.

ABS

Blade sale affirmed

The proposed sale of one aircraft engine from the Blade Engine Securitization transaction is unlikely to impact the ratings on the ABS, says Fitch. The issuer intends to sell a CF6-80C2A5 out of the trust to a third party.

The proposed sale price of the engine is below the note target price, as defined by the transaction documents. But Fitch notes that the engine is currently grounded, therefore the sale would provide cashflow to the trust from what would otherwise be a non-earning asset.

While the agency does not anticipate that the engine sale will adversely impact the ratings on the trust, the class B notes have a negative rating outlook, indicating that downward rating movement is likely over a one- to two-year period. The negative outlook reflects Fitch's concerns regarding the engines' ability to generate sufficient collections and repay the notes under certain stress rating scenarios.

Structured Finance

Spanish structured covered bonds eyed

Changes introduced by the new Spanish Law 5/2015 will provide increased flexibility in creating securitisations and should foster the issuance of transactions beyond RMBS, which has been the predominant transaction type in the Spanish market, according to Scope Ratings. In particular, the possibility of issuing structured covered bonds may become a widely used tool that results in significant competition for the traditional Cédulas.

The new law is expected to significantly enhance the robustness and flexibility of the securitisation framework in Spain (SCI 3 June). "These changes will foster the financing of SMEs and allow for more robust securitisation structures. The new law will also encourage the issuance of managed funds, SME CLOs and other forms of asset securitisation with recourse to the originating bank, such as structured covered bonds," Scope notes.

But the agency warns that investors should pay close attention to the assets being securitised because the legal form (FTH or FTA) of the securitisation fund will no longer offer indications regarding asset quality. The law consolidates the existing fragmented regulation by unifying the regimes for securitisation and creating one single type of fund - Fondo de Titulización (FT).

The creation of compartments is one of the main steps to bring the Spanish securitisation framework in line with international standards. For an FT, the law allows the creation of separate compartments that are ring-fenced and liable only for the costs, fees and obligations assigned to it, as well as being subject to limited recourse provisions that limit a creditor's rights to the assets in a given compartment. A compartment can also be liquidated separately from other compartments in the same FT.

Further, the law allows for non-ECB eligible securitisations, as it removes the requirement of assets being of 'homogeneous nature'. It also maintains the possibility of synthetic securitisations.

Scope expects the issuance of structured covered bonds to take off in Spain because the conditional pass-through and dual-recourse nature of these instruments may appeal to investors looking for more rating stability. For this purpose, the law now allows FTs to issue guarantees that cover obligations of third parties.

Beyond that, the funding base for securitisations has been broadened as an FT may fund itself through bonds and loans from any third party instead of just credit institutions. The restriction that the vehicle's funds must not consist of more than 50% of loans has been removed as well.

Meanwhile, investors will see more managed transactions in Spain that require detailed scrutiny of management quality. The law provides for open securitisation funds to carry out active asset management to maximise profits, guarantee the quality of asset selection, manage risks or maintain conditions established in the deed of incorporation.

Closed securitisation funds will be allowed to ramp up their asset pool and increase their funding up to a maximum amount during an initial four-month phase from incorporation date. Under tight conditions, closed securitisation funds may also substitute and acquire assets to manage cashflow mismatches between liabilities and the asset pool.

The quality of a fund manager therefore becomes more relevant, Scope says. However, comfort is provided by the strengthened regulatory requirements that apply to them. The law encompasses a new detailed regime for fund managers, including a minimum equity capitalisation in line with the value of assets under management.

"The new regulation brings the Spanish securitisation framework in line with international legislation. Whereas most new elements do not impact the credit risk of Spanish securitisations, as a whole they allow for more robust structures," Scope concludes.

Structured Finance

Greek sovereign ceiling lowered

Fitch has downgraded 18 tranches across seven Greek RMBS, one ABS tranche and four covered bond programmes issued by Alpha Bank, National Bank of Greece and Piraeus Bank. The move follows the downgrade of Greece's IDR to double-C and the revision of the country ceiling to triple-C, as well as the downgrade of Greek banks.

The RMBS tranches have been lowered to triple-C, now the highest achievable rating for Greek issuance, while the Aeolos ABS was downgraded to double-C from triple-C as it's guaranteed by the Greek government.

Fitch believes that capital controls in Greece may restrict money transfers to offshore-based SPVs, which could heighten the risk of missed interest payments on the affected securities. However, this risk is mitigated by the available cash reserves - currently held with single-A rated offshore banks - that provide sufficient liquidity to support interest on the securities for several payment periods.

Structured Finance

Private placement demand eyed

Midsize companies will need to address investor demands for greater transparency in order to diversify their sources of funding away from bank loans, says S&P. In a new report, the agency examines the growth of alternative funding in Europe.

"We estimate that mid-market companies - which we define as those with revenues below €1.5bn per year and debt below €500m (€250m for leveraged buyouts) - will need to raise sizable debt over the coming years to fund their development and refinance existing loans," says S&P credit analyst Alexandra Krief. "With the banks focused on restructuring their balance sheets to meet regulatory requirements, alternative financiers - such as institutional investors and direct lenders - have an opportunity to step in and assist in funding these companies. And, with investor appetite for higher yields growing stronger, we can be confident that the demand for mid-market assets exists."

Alternative lending has grown rapidly over recent years. S&P research shows that European companies issued roughly €31bn of private debt in 2014 alone.

The development of the European private placement (PP) market is notable. Indeed, it is now establishing itself alongside the much larger US PP and German Schuldschein markets as a viable option for corporate funding.

"Last year, we saw approximately €6.4bn invested via the European private placement market, up from €3.5bn in 2012," Krief observes.

In S&P's opinion, this growth is largely due to the fact that investors in the European PP market are embracing a wider range of company credits than those in the US PP and Schuldschein markets, which lend almost exclusively to investment grade companies.

The European direct lending market has also shown considerable growth. In 2014, it reached more than €10bn spread across over 200 transactions, up from about €5bn at end-2013. However, this market targets a different range of credits to the European PP market, focusing predominantly on speculative grade companies.

But even though alternative lenders in Europe are broadening their scope, some midsize firms are reluctant to tap them for investment. This is partly because of the uncertain economic outlook in most European countries, which is limiting corporate investment, but also because European banks are returning to levels of liquidity last seen before the financial crisis.

Despite the return to prominence of banks, S&P suggests that prospects for growth in Europe's alternative lending markets look promising. Midsize companies are becoming more comfortable with the level of information disclosure required by investors. What's more, the increased standardisation gained through improved transparency can help achieve better pricing, although this also requires comparable benchmark tools to complement the alternative funders' own analysis.

CLOs

CLOIE softens on volatility

The total amount of CLOs paid down in JPMorgan's Collateralized Loan Obligation Index (CLOIE) since the May rebalance through 30 June was US$4.96bn in par outstanding, split between US$1.98bn and US$2.97bn of pre-crisis and post-crisis CLOs. The post-crisis CLOIE added US$8.4bn from 101 tranches across 18 deals at the June rebalance.

JPMorgan CLO analysts note that CLOIE was not immune to the rise in overall market volatility on the back of Greece and other event risks, having experienced some volatility in June. Pre- and post-crisis triple-A discount margins widened, but so far at least, the move has been more pronounced on a relative basis in the pre-crisis index. CLOIE subs softened along with high yield loans, with pre- and post-crisis double-Bs respectivley 10bp and 30bp wider, versus JLLI at 16bp wider.

CMBS

PILOT programme affirmed

The borrower - an affiliate of Macerich - behind the single-borrower COMM 2013-GAM CMBS has entered into a payment in lieu of taxes (PILOT) arrangement with the Town of Hempstead Industrial Development Agency (IDA). The transaction is backed by a mortgage loan secured by the borrower's fee and leasehold interests in 1.7 million square-feet of the Green Acres Mall in Valley Stream, New York.

In connection with the PILOT programme, the borrower entered into a lease agreement with the IDA pursuant to which the borrower leased 71.9 acres of land and the improvements thereon (which constitute part of the loan collateral) to the IDA and the IDA sub-leased the land and improvements back to the borrower. Kroll notes that the servicer KeyCorp consented to the PILOT transaction on behalf of the trust, but classified it as the execution of a 'major lease' as opposed to a 'transfer' of the mortgaged property.

Under the loan agreement, a transfer includes an agreement by the borrower pursuant to which all or substantially all of the property is leased, other than for actual occupancy by a space tenant. A major lease is any lease, sublease or sub-sublease with a tenant (or an affiliate operating under the same brand) that - either individually or in the aggregate - is for more than 25,000 rentable square-feet, contains an option to purchase any portion of the property, is with a borrower affiliate as the tenant or is entered into during an EOD. While a no downgrade confirmation is required in connection with a transfer of the mortgaged property, it is not required in connection with the execution of a major lease.

The subject PILOT programme has an initial ten-year term and expires on 31 December 2026, with one five-year extension option. From 2016 through 2020, the borrower must make an annual PILOT payment of US$13.7m; from 2021 through 2025, the annual PILOT payment increases to US$14.6m.

Based on the PILOT payment schedule, the borrower estimates that the annual real estate tax savings will be US$6m during the programme's initial term. The full-year 2013 tax payment was US$23.9m and, as such, KBRA does not anticipate that the implementation of the PILOT will have a negative economic impact on the collateral.

In addition, the IDA and the borrower have agreed that the PILOT documents will be fully subordinate to the mortgage loan and that the interests in the mortgaged property created by the mortgage loan documents will be superior to any interests in the property created under the PILOT documents. If the borrower defaults on its obligations under the PILOT documents, the IDA can terminate the PILOT arrangement (including the related lease agreement).

Subsequent to its review of the terms of the PILOT programme and the servicer's responses to the agency's supplemental information requests, KBRA concludes that no rating action with respect to the COMM 2013-GAM certificates will be taken at this time.

CMBS

GPA portfolio drives losses

A total of 75 US CMBS loans worth US$950.26m were disposed of with a loss in June, according to Trepp. One B-note and eight other loans totalling US$142.45m took over 100% losses, including a 137% severity on the US$27m Long Island office building at 1025 Old Country Road.

The largest loan disposed of with a loss during the month was the US$89.79m Government Property Advisors Portfolio, which took a 42% loss after being delinquent for almost four years (see SCI's CMBS loan events database).

Loss severity for June was 40.39%, down by six percentage points month-over-month. Focusing only on losses greater than 2%, volume was US$681.56m with a 55.91% loss severity, which is in line with the recent average.

CMBS

Delinquencies inch higher

The Trepp US CMBS delinquency rate moved modestly higher in June to 5.45%, up by 5bp for the month. Over the last 26 months, the delinquency rate has fallen 22 times and is now 60bp lower than the year-ago level and 30bp lower year-to-date.

In June, US$1.4bn in loans became newly delinquent, which put 27bp of upward pressure on the delinquency rate. About US$400m in loans were cured during the month, which helped push delinquencies lower by 8bp.

CMBS loans that were previously delinquent but paid off either at par or with a loss totalled over US$1.1bn in June. Removing these previously distressed assets from the numerator of the delinquency calculation helped move the rate down by 21bp.

Risk Management

CVA consultation underway

The Basel Committee has issued a consultative paper on its Review of the Credit Valuation Adjustment Risk Framework. In undertaking this review, the Committee says its objectives are to: ensure that all important drivers of credit valuation adjustment risk and CVA hedges are covered in the Basel regulatory capital standard; align the capital standard with the fair value measurement of CVA employed under various accounting regimes; and ensure consistency with the proposed revisions to the market risk framework under the Fundamental review of the trading book.

The paper envisages a CVA risk framework that takes into account the market risk exposure component of CVA along with its associated hedges. The regulatory capital requirement for CVA risk would be based on exposure models that banks also use to determine their accounting CVA, subject to conditions intended to reduce potential variability due to risk-weighted asset calculations or remaining discrepancies in financial reporting practices across banks and jurisdictions.

The Committee acknowledges that, for a broad range of internationally active banks, accounting CVA is fair-valued through the P&L account and is sensitive to the same risk factors as instruments held in the trading book. The consultative paper therefore proposes an internal models approach and a standardised approach for CVA risk that have been adapted from the revised market risk framework under the Fundamental review of the trading book.

A basic approach for CVA risk is also proposed for banks that are less likely to regularly compute CVA sensitivities to a large set of market risk factors, owing to the nature of their trading operations.

Comments on these proposals are invited by 1 October 2015.

Risk Management

Cross-border swap rule proposed

The US CFTC has voted unanimously to propose a rule that would apply margin requirements for uncleared swaps in the context of cross-border transactions. The proposed rule would apply to Commission-registered swap dealers and major swap participants that are not subject to the margin requirements of other prudential regulators. The comment period ends 60 days after the publication in the Federal Register.

Under the proposed rule, covered swap entities would be required to comply with the Commission's margin rules for all uncleared swaps in cross-border transactions, with a limited exclusion. In addition, covered swap entities would be able to comply with comparable margin requirements in a foreign jurisdiction as an alternative means of complying with the Commission's margin rules for uncleared swaps (substituted compliance).

With regard to substituted compliance, the proposal sets forth proposed procedures for requests for comparability determinations - including eligibility and submission requirements - as well as the standard of review that would apply to Commission determinations.

Risk Management

ISDA SIMM tender launched

ISDA has launched a tender process to select a third party to build and operate a crowdsourcing utility for its Standard Initial Margin Model (SIMM). The utility is intended to aggregate and compile risk data to enable market participants to implement the ISDA SIMM consistently (SCI 2 June).

In order to ensure a consistent implementation of the model, the treatment of risk weights and correlation parameters to sensitivity values needs to be the same among ISDA SIMM users. Risk weights for certain asset classes are clear and therefore treatment will be the same among ISDA SIMM users. However, the consistent allocation of net sensitivity values for other asset classes will require sensitivities generated to each risk factor to be mapped consistently to an ISDA SIMM risk bucket.

ISDA believes a centralised crowdsourcing solution is needed to achieve this consistent mapping. The value of crowdsourcing is that parties will use the consensus results instead of their own internal determination of risk buckets and weightings.

The utility will consequently: accept data from participants that are in scope for non-cleared margin rules; analyse data and produce consensus results; provide results reports to users; establish policies and procedures for the utility; and ensure continuity and integrity of the utility and associated data. The utility needs to be fully operational in time for onboarding, connectivity and user testing prior to 1 September 2016, the effective date for implementation of non-cleared margin rules for the exchange of both initial margin and variation margin.

The deadline to submit a tender response is 30 July. ISDA expects to announce the successful bidder by 10 September.

RMBS

Greek arrears rising

Greek mortgage arrears have risen during the prolonged negotiations between the country's government and its official creditors, Fitch reports. The agency suggests that a deteriorating economy and almost total absence of bank credit may have combined with retail borrowers withholding loan repayments during the extended period of uncertainty.

"Some mortgage borrowers may already be strategically entering early-stage arrears as the crisis damages the banking sector. They may also be choosing to make payments on other debts rather than mortgages, as they are aware that banks are unlikely to enforce against their property collateral," it adds.

Greek mortgage performance appeared to be stabilising before the January elections. Loans with at least one monthly instalment overdue represented around 16% of total loan balance. But they climbed to 16.9% in February in the aftermath of the elections and continued to rise, even after a temporary bailout programme extension was secured at the end of that month, reaching 17.3% in May.

Fitch expects early-stage arrears to have increased further during June. "The failure to agree an extension of the existing bailout programme, the announcement of a referendum and capital controls over the weekend and popular opposition to austerity in Greece suggest that negotiating a third bailout programme (or equivalent) will be challenging. The consequent uncertainty about Greece's relationship with its official creditors, and what this means for sovereign and bank liquidity and solvency, will therefore persist - potentially affecting borrower behaviour," the agency notes.

RMBS

Granite reviewed on counterparty risk

S&P has placed on credit watch negative its ratings on 90 Granite RMBS tranches. The move corrects an error made in February when the agency took various rating actions on a number of UK, German, Austrian and Swiss banks, following its review of government support. At that time, S&P placed 377 European structured finance ratings on credit watch negative, including some but not all affected Granite tranches.

The agency notes that the overarching principle behind its current counterparty criteria is the replacement of a counterparty when the rating on the counterparty falls below a minimum eligible rating. Without the incorporation of a replacement mechanism or equivalent remedies in the terms of the agreement with the counterparty and if there are no other mitigating factors, the rating on the supported security is generally no higher than the long- or short-term issuer credit rating on the counterparty, or the counterparty's ICR plus one notch for any supported security that constains a replacement provision that is in line with previous versions of its counterparty criteria.

An EOD on any series of notes issued at the socialist Granite Master Issuer level would lead to an EOD on all other series issued by Granite Master Issuer. Therefore, any rating action on any of the notes issued by Granite Master Issuer linked to any of the transaction participants' ICR or ICR plus one notch would lead to an equivalent rating action on all of the outstanding series of notes issued by Granite Master Issuer, in S&P's view.

Granite Master Issuer series 2005-1, 2005-4 and 2006-3 are weak-linked to RBS as swap currency provider. Consequently, the agency has placed its single-A ratings on all of the outstanding notes in these series on credit watch negative.

The EOD provision does not apply to the five capitalist issuers (Granite Mortgages 2003-2, 2003-3, 2004-1, 2004-2 and 2004-3), as they have different and specific events of default. However, Granite Mortgages 2003-2 series 1 and 3, Granite Mortgages 2004-1 series 3 and Granite Mortgages 2004-2 series 2 are weak-linked to RBS as swap currency provider. S&P has placed its single-A ratings on all of the outstanding notes in these series on credit watch negative, as a result.

RMBS

Portuguese housing on the up?

Fitch reports that recent sales of properties from the possession of lenders point to greater liquidity and transparency in the Portuguese housing market, as the economy continues to recover.

The distressed sale discount to the indexed original valuation - the quick-sale adjustment (QSA) - has been on a declining trend, according to the agency. In 2014 the average QSA fell to 31.9% from 40.1% in 2010, indicating increased market liquidity. The data also suggests enhanced accuracy of revaluation upon lender possession.

In 2Q15 the proportion of loans in early-stage arrears drifted lower, while late-stage arrears - excluding defaults - are below 1% for the third consecutive quarter. The pace of newly defaulted loans and the stock of outstanding defaulted loans increased only slightly during the quarter.

New mortgage lending remained depressed in 1Q15, but crept above its three-year low. Fitch expects lending volumes to remain stable throughout 2015.

RMBS

Post-crisis RMBS affirmed, upgraded

Fitch has taken various rating actions on 791 classes from 47 US prime jumbo RMBS that were issued after 2010. The agency affirmed the ratings for 93% of the classes reviewed and upgraded the ratings for 7%.

The rating actions reflect the high credit quality and the superior performance of the collateral. The transactions reviewed have an average FICO score of 770 and an average mark-to-market CLTV of 54%.

Less than 2% of the outstanding pool balance of the reviewed deals is delinquent, with the vast majority of transactions having no delinquent loans. None have incurred a realised loss to date.

The ratings of subordinate classes from several transactions were upgraded due to strong performance and an improved relationship between credit enhancement and collateral loss expectations. On average, the current credit enhancement percentage for classes that were upgraded is over 2x higher than the original CE percentage.

Due to strong home price growth to date and amortisation, the average mark-to-market LTV ratio of loans backing upgraded classes has declined to 48% from 66% at origination. All upgrades were a single rating category in magnitude and were only considered for transactions with at least two years of seasoning.

A number of classes originally rated double-A were upgraded to triple-A, despite more senior classes remaining. The upgraded classes are projected to recover full principal in a collateral loss scenario more stressful than the triple-A scenario, across a number of cashflow timing sensitivities. In addition, they are generally expected to be paid in full before the senior classes that were originally rated triple-A, due to a redirection of prepayment principal related to the fixed CE floor.

Fitch notes that several of the more seasoned transactions have relatively low remaining loans counts, as a result of prepayments. However, all of the transactions reviewed have additional structural support in the form of fixed credit enhancement floors that mitigate tail risk. Consequently, Fitch did not apply rating caps tied to small loan counts in this review.

Upgrade caps associated with long remaining bond life were not applied to all classes in this review, due to the high collateral quality, strong performance and structural strength of the transactions.

RMBS

Canadian ABCP impact highlighted

The Canadian government last month proposed regulations restricting the use of insured mortgages as collateral in non-CMHC-sponsored securitisation vehicles and requiring mortgages that are portfolio-insured after the effective date to be funded through CMHC securitisation programmes. The stated rationale of reducing taxpayer exposure, increasing market discipline and restoring portfolio insurance to its original purpose is consistent with previous measures taken over the past few years, according to DBRS.

The new regulations are expected to come into effect on 1 January 2016. They provide a five-year transition period for insured mortgages funded through affected mediums, such as ABCP. By the beginning of 2018, the amount of insured mortgages in collateral pools must decrease to 50% of the amount outstanding as of 30 June 2015, and by the beginning of 2020 insured mortgages must be removed from collateral pools completely. Basing the limit on the amount as of 30 June 2015 reduces the ability of issuers to ramp up funding during the six months prior to the proposed regulations coming into effect.

The requirement for portfolio-insured mortgages to be funded through NHA MBS does not apply to insurance written before 1 January 2016. However, funding of such mortgages in non-CMHC-sponsored programmes such as ABCP is still subject to the transition period.

Covered bonds backed by insured mortgages are carved-out in the proposal, which allows existing programmes to run-off naturally and maintain minimum overcollateralisation levels. There is also a carve-out that allows low ratio loans insured on an individual basis to not be securitised through the NHA MBS programme.

DBRS notes that as of 31 December 2014, the size of the Canadian residential mortgage market - including HELOCs - was approximately C$1.5trn, with slightly less than C$700bn (or 47%) insured. Roughly 40% of the insured mortgages are portfolio insured.

The largest funding source of insured mortgages is NHA MBS, followed by other traditional sources and legacy covered bonds. Slightly over 1% of insured mortgage funding is through ABCP, originated by large non-deposit-taking mortgage finance companies. While not critical to their overall funding, ABCP provides flexibility of funding options for certain insured mortgages that do not meet eligibility criteria for NHA MBS.

Since 2011, funding of insured mortgages through ABCP has increased significantly from C$2bn to C$8bn. While this amount is small compared with the entire market, it represents a significant amount of total ABCP funding at 29%.

Failure to comply with the proposed regulations will result in the insurance of affected mortgages becoming invalid.

RMBS

RFC issued on Polish RMBS

Moody's is seeking feedback on the methodology it is proposing for analysing the credit risk of Polish RMBS. The agency plans to use the proposed approach in conjunction with its existing methodologies to rate RMBS and covered bonds in Poland.

To derive the calibration of the country-specific values and assumptions for Poland, Moody's benchmarked the Polish residential real estate market to other jurisdictions. The agency has also adapted many parameters from the emerging securitisation markets implementation of the methodology.

It says the emerging securitisation markets reference is a highly relevant benchmark for Poland, due to similarities in: high expectations for growth in credit, in particular with regards to the mortgage market, given relatively low household debt levels; and a limited time series of relevant historical data, due to lack of reliable data sources and lack of historical mortgage performance data during severely stressed economic cycle.

The proposed approach does not affect ratings on any outstanding transactions. Comments on the proposal are invited by 7 August.