Contents

Structured Finance

Further ABSPP purchases detailed

The ECB this week  provided an updated breakdown of its ABSPP holdings. As of the end of last month, the Eurosystem held €8.8bn in securities purchased under the programme - with €6.6bn purchased in secondary and €2.2bn from the eurozone primary market.

The ECB previously provided an ABSPP breakdown for April at the start of June (SCI 2 June), so these updates may become a monthly trend. June purchases included €1bn of ABS in the secondary market and €0.6bn in primary, out of what Barclays Capital analysts calculate was €2.6bn of monthly ABSPP-eligible issuance.

The analysts continue to assume €800m-€900m of ABSPP secondary market purchases per month, to reach a total of €11bn-€12bn by year-end. However, the Greek situation is expected to affect ABS liquidity negatively and reduce market activity over the summer, with secondary market purchases in July and August expected to be low.

June primary market purchases were the highest since ABSPP started. This was partly due to slightly higher ABSPP-eligible issuance than in the previous three months, but also a higher Eurosystem participation rate.

Primary market purchases last month accounted for 25% of ABSPP activity, comfortably within the analysts' estimate of 20%-25% of available eligible issuance. However, the proportion of primary purchases is not expected to increase much over the coming months.

The ECB has only used the ABSPP to buy more than 25% of available primary paper once before, when it bought the only deal available in November 2014. The primary market participation rate was between 15% and 18% from March to May, with no primary purchases from December 2014 to last February.

The ECB's involvement in Prado 1 brings Spanish RMBS into the ABSPP fold, although the bank likely limited its involvement to no more than 10% of the senior tranche, reckon the analysts. Primary market purchases are understood to remain dominated by Dutch RMBS (at around 58%), while German auto ABS is the second most prominent sector (at 16%).

Peripheral ABSPP ABS exposure grew from 9% in May to 15% in June as two of the five eligible deals last month were from the eurozone periphery. However, future activity in the peripheral eurozone ABS market will depend heavily on primary market activity, which is not expected to increase substantially in the coming months.

Enhancing transparency, the ECB has not only provided a purchase breakdown, but has also outlined how it conducts its purchase programme (SCI 8 July). The bank's seven guiding principles focus on transparency, simplicity and safety.

JL

RMBS

Greek RMBS prisoner to politics

As well as the obvious implications of any exit from the euro, Greek RMBS could also be affected by another political decision: a fresh moratorium on home repossessions. Both political paths could be pursued, with negative RMBS consequences, say JPMorgan analysts.

The Greek RMBS universe is around €2.2bn. There are three large shelves of €600m-€800m outstanding (Estia, Grifonas and Themelion) and a fourth shelf of only €71m (Kion).

The performance of collateral pools backing Greek RMBS continues to weaken, which is unsurprising considering recent headlines. Repayment speeds are around 1.3%, while 90-plus day delinquencies reached 6.9% in April as they continue to rise.

"There is, however, a notable variation in the performance of Greek RMBS deals, with the indexed levels notably affected by the much weaker delinquency rate of Estia 2 (12.7% as at April). For the asset class as a whole, cumulative defaults increased to 2.5% in April, up from 2% a year prior," note the analysts.

Greek RMBS would be directly affected by any new moratorium on home repossessions, which the government has signalled its intention to impose. A previous moratorium expired at the end of 2014 and prohibited foreclosures on properties where annual household incomes were less than €35,000 and the property was worth less than €200,000.

"As we have seen in other jurisdictions where there is a reluctance to repossess (most notably, Ireland), such policies also lead to increased volumes of strategic defaults (borrowers who are unwilling, rather than unable to repay their mortgage obligations). Both the inability to realise losses and increased moral hazard in a 'no repossession' regime affect the projected cashflow repayments of securitised bonds," say the analysts.

However, the greater threat remains the more obvious one: Grexit. The redenomination of mortgage collateral into a new currency while securitisation liabilities remain denominated in euros and the ensuing asset-liability mismatch could cause significant solvency issues.

JL

Structured Finance

Sterne Agee loses two

Michael Krull has joined Seer Capital Management as md and portfolio manager. He arrives from Sterne Agee, where he focused on CMBS trading as md. Krull has also held previous senior positions at StormHarbour, Hypo Real Estate Bank and GE Real Estate.

David Jacob has also left his position as md at Sterne Agee, moving to Prudential Financial as a pricing and structuring team leader for CMBS. Prior to these roles, Jacob was co-head for CMBS/CRE and CDO trading at StormHarbour. He also held senior positions at Hypo and GE Real Estate.

Structured Finance

Law firm brings in trio

Morgan Lewis has beefed up its global structured transactions team by hiring Matthew Duncan, Julian Goodman and Paul Matthews as partners to the firm. The hirings are part of the law firm's attempt to expand its structured finance offerings to clients in the US, Europe and Asia.

Duncan will work with Morgan Lewis clients on a variety of banking, capital markets and derivative matters. He will advise clients that operate, invest in or deal with businesses that provide financial services and products to the consumer sector in the UK and other jurisdictions.

Goodman's background centres on real estate finance and general real estate, covering property acquisitions, disposals and leases for investment and occupational clients. He also advises clients on property finance loan origination, CMBS and RMBS transactions.

Matthews assists clients with the application and integration of derivatives and derivatives technology in structured finance transactions. Serving a range of entities including funds, investment managers and advisers, financial institutions, banks and dealers, he has been involved in the European credit derivative and synthetic securitisation markets since their inception.

CLOs

CLO vet moves west

Laila Kollmorgen has joined PineBridge Investments, where she is md within its leverage finance group. She is responsible for managing the investments in CLOs issued by third-party managers, and is based at the firm's Los Angeles office.

Prior to PineBridge, Kollmorgen was most recently head of European structured products trading for Raymond James Financial in London. She has also had senior roles at Cohen & Co, Dresdner Bank, BNP Paribas and Bank of America Merrill Lynch.

Insurance-linked securities

EXOR sweetens offer

EXOR held an investor meeting yesterday for PartnerRe shareholders, in which chairman and ceo of EXOR John Elkman presented further enhancements to its binding offer for the firm (SCI passim). The initial EXOR offer for PartnerRe proposed a US$137.5 per share fully financed all-cash offer, and was backed by the balance sheet of its listed parent - a public company with a net asset value of approximately US$15bn.

Following discussions with PartnerRe shareholders, EXOR's proposed enhancements for common shareholders now include a 'go shop' provision, permitting PartnerRe to actively solicit bids, share due diligence materials and negotiate with third parties until 31 August. During this period, EXOR will reduce the termination fee of its potential agreement to US$135m, which is 2% of the deal value.

Additionally, in the event that both PartnerRe and AXIS shareholders vote down the PartnerRe/AXIS transaction, EXOR has committed to pass the value of the termination reimbursement fee to PartnerRe shareholders in full. The fee is US$315m, or US$6.39 per share for PartnerRe shareholders, which would effectively increase the value of EXOR's binding offer to US$143.89 per share.

Another proposal to common shareholders is a legally binding personal commitment by Elkann to underscore regulatory certainty in EXOR's merger agreement. The final proposal would include EXOR legally committing to launch a tax-free exchange offer for PartnerRe preferred shares promptly following a closing of a potential merger with EXOR.

EXOR has also proposed a number of enhancements to PartnerRe's preferred shareholders upon exchange, including a 100bp increase in the dividend rate. The firm also proposes to provide call protection to all preferred shareholders until January 2021, as well as promising five years of limiting capital distribution to common shares to an amount not greater than 67% of earnings.

EXOR continues to solicit common and preferred shareholders to vote against the proposed AXIS transaction at the upcoming special general meeting of PartnerRe shareholders to be held on 24 July.

Insurance-linked securities

EXOR makes PartnerRe plea

EXOR has sent an open letter to all PartnerRe employees who are shareholders, urging them to vote the gold proxy card against the AXIS amalgamation agreement. The move is the latest in a number of attempts by EXOR to convince shareholders to accept its rival bid for PartnerRe (SCI passim).

The letter reiterates EXOR's objectives in its bid, insisting that PartnerRe will remain independently operated, backed by a strong group with a confirmed investment grade rating, substantial cash resources and a net asset value of approximately US$15bn. The letter also echoes EXOR's previous claims to maintain the PartnerRe brand as it currently is, as well as noting that there will be no integration risk for employees in light of a completed transaction with EXOR.

PartnerRe shareholders, including employees, are urged in the letter to vote the gold proxy card against all three proposals related to the AXIS transaction. EXOR also asks shareholders not to sign or return any white proxy cards they receive from PartnerRe. "Shareholders who have already returned a white proxy card, can change their vote by simply returning the gold proxy card," the letter concludes.

ABS

Chinese auto delinquencies edge up

Delinquency rates for Chinese auto loan ABS increased in 1Q15 from the previous quarter, Moody's reports. The agency says the increase is due to the gradual economic slowdown in China and the rapid decline in the outstanding portfolio balance in the asset class, but delinquency levels still remain low.

The 30-day plus delinquency rate of Chinese auto loan ABS issued in 2014 increased to 0.32% at end-1Q15 from 0.21% at end-4Q14, continuing an upward trend. As for the 60-day plus delinquency rate, the rate increased to 0.13% from 0.07% over the same period.

"Of the eight Chinese auto loan ABS transactions that we reviewed, deal performances varied depending on originator and portfolio characteristics," says Kan Leung, Moody's avp and analyst. "The one bank-originated transaction outperformed those originated by captive finance companies of auto manufacturers, as did one transaction with a high proportion of zero interest rate loans."

She continues: "But transactions backed by larger loans underperformed those backed by smaller loans."

ABS

Tobacco upgrades, downgrades made

Moody's has upgraded 14 tranches in eight tobacco settlement revenue securitisations and downgraded 12 tranches in five transactions. The bonds are backed by payments of major tobacco companies to the issuer states pursuant to the 1998 Master Settlement Agreement between certain domestic tobacco manufacturers, 46 states and certain US territories.

Moody's says that the upgraded tranches are either fully supported or predominantly supported by cash in the respective transactions' reserve accounts, and also benefit from relatively short term maturities. These structural features minimise the impact of the potential cigarette consumption declines over the long term, where even significant declines should not disrupt timely payments of interest and principal to the bondholders.

The downgrades reflect the continuous decline in cigarette consumption and weaker credit profile of a major tobacco company, Reynolds American. Domestic cigarette shipment volume, which is a proxy for cigarette consumption, declined almost every year since 2000 - with a latest drop of 3.8% during 2014.

The affected transactions are: Arkansas Development Finance Authority, Tobacco Settlement Revenue Bonds, Series 2001; Buckeye Tobacco Settlement Financing Authority, Tobacco Settlement Asset-Backed Bonds, Series 2007; California County Tobacco Securitisation Agency Series 2006A Convertible Turbo Bonds; California Statewide Financing Authority Series 2002; Golden State Tobacco Securitisation Corporation, 2007; Michigan Tobacco Settlement Finance Authority, Tobacco Settlement Asset-Backed Bonds, Series 2006 and 2008; New York Counties Tobacco Trust II, Series 2001; Northern Tobacco Securitisation Corporation, Series 2006; Rensselaer Tobacco Asset Securitisation Corporation, Series A; The California County Tobacco Securitisation Agency Series 2002; and Tobacco Settlement Financing Corporation (New Jersey), Series 2007-1.

ABS

RFC threatens FFELP downgrades

Moody's is seeking comments on proposed changes to the cashflow assumptions that it uses in its approach to rating US FFELP student loan ABS securitisations. The agency proposes to adjust its current assumptions regarding defaults, voluntary prepayments, deferment and forbearance, and to introduce a new assumption to address the income-based repayment programme.

"Low prepayment rates, persistently high rates of deferment and forbearance, and the growing use of IBR and other similar programmes have increased the risk that some tranches will not pay off by their final maturity dates, which would trigger an event of default for the securitisations," says Irina Faynzilberg, a Moody's vp and senior credit officer.

In April and June of this year, Moody's placed approximately US$37bn of FFELP ABS on review for downgrade (SCI passim). The agency identified those tranches based on the low pay-down rates on the securitised pools. If Moody's adopts the proposed assumptions, their implementation might also affect the ratings of additional tranches not currently on review.

"If we adopt the proposed cashflow assumptions, we expect that the ratings of downgraded tranches will range between low investment grade and non-investment grade," says Moody's md Debash Chatterjee.

The extent of the downgrades will depend on the composition of the underlying loan pools, the position of the securities within the capital structure, the remaining time to maturity of a tranche and a tranche's expected repayment date relative to the final maturity date under different stress scenarios. Moody's will also consider the ability and willingness of transaction sponsors to accelerate pool amortisation rates by optionally repurchasing loans from the underlying collateral pools.

Moody's invites market participants to submit their comments on the proposals by 7 September.

Structured Finance

SME financing proposals outlined

IOSCO has published a report providing recommendations for regulators to facilitate capital raising by SMEs in emerging markets. Among the measures proposed is further tapping into alternative methods of financing such as securitisation.

The report follows a survey sent out by IOSCO's growth and emerging markets committee, which looked to gain insight into the challenges and best practices of SME financing. IOSCO notes that although SMEs are major contributors to long term economic growth and employment, they often struggle to find financing due, in part, to the relatively high investment risk they represent.

The organisation's survey results outline that bank loans were seen as the primary source of financing for both publicly and privately held SMEs in most jurisdictions. However, respondents also outlined the importance of securitisation, issuance of debt securities and equity financing, among other options.

With the fear of relatively high regulatory costs from raising capital financing, most of the jurisdictions surveyed have been reviewing their respective regulatory frameworks and taking specific initiatives to facilitate SME access to capital markets. In recognition of this, IOSCO's board will have a roundtable on the issue of SME access to market based finance at its next meeting in Toronto in October.

Structured Finance

Mortgage REIT diversity dawns

Kroll Bond Rating Agency says there are signs that some traditional agency mortgage REITs are diversifying towards CRE securities. The agency says residential mortgage REITs could be faced with either increasing leverage or diversifying due to rising funding costs and margin compression.

Strong investor demand has allowed mortgage REITs to significantly grow portfolios by issuing over US$50bn in equity and US$7.8bn in senior debt since 2008 for both the residental and commercial sectors. The commercial subsector is smaller, consisting of 13 companies with total market capitalisation of roughly US$23bn as of 30 June. However, Kroll believes that agency REITs will start leaning towards the inclusion of CMBS, commercial mortgage loans, distressed commercial mortgage loans, mezzanine loans and development land.

In contrast, the residential subsector may have to begin increasing leverage with a potential interest rate rise, margin compression and rising prepayments. Many companies face limitations on levering up, however the traditional repo lenders - investment banks - have taken the necessary steps since the financial crisis to amend repo financing agreements with mortgage REITs, which now among other covenants include leverage covenants limiting mortgage REITs ability to significantly increase leverage.

Another option could be to increase diversification, which Kroll believes is more attractive to tradition mortgage REITS. Annaly Capital Management has taken steps to diversify away from its agency-only mortgage business model by hiring a team of CRE investors from GE Capital Real Estate group to its CRE platform (SCI 15 May).

Annaly's investment guidelines allow the company to invest up to 25% of its equity in "real estate assets other than agency MBS". In Kroll's view, these assets will be most likely related to CRE, which currently account for approximately 4% of the company's assets.

Kroll adds that Annaly's strategic move will serve as a template for other traditional mortgage REITs that exclusively focus on residential MBS, which exposes the portfolios to interest rate risk. As interest rates move up, the value of MBS in the portfolio should go down, thus offsetting some of the related risk.

Structured Finance

Italian insolvency reforms 'positive'

Scope says that recent announcements to reform Italian bankruptcy procedures and fiscal treatment of loan losses could help banks' asset quality and spur new securitisation transactions in the country. The Italian government announced a decree law on 23 June containing measures aimed at facilitating the supply of credit to the real economy, via a smoother management of bad credits.

The reforms include a change in the tax regime for loan losses, allowing full deduction for tax purpose in the year the loan loss provisions are taken. Scope says this is a positive step in addressing structural causes for high NPLs in Italy and should boost such transactions. The agency also notes that faster monetisation of loan loss tax shields could help boost provisioning, while in the long run reducing the creation of deferred tax assets.

In addition, the decree proposed a number of changes to bankruptcy procedures, including the possibility for third parties to bid on assets and for creditors to propose competing restructuring plans. Along with other provisions - including a means for faster and more efficient liquidation - Scope says the reforms will reduce the actual economic losses to banks from delinquencies through a quicker recovery process.

Finally, to the extent that the reform reduces collateral enforcement times, Scope expects that the decree law will also boost the performance of outstanding Italian structured finance transactions. This is because banks can enforce collateral quicker and preserve its value, possibly resulting in improved recovery proceeds and reduced recovery lags.

Structured Finance

ABSPP principles published

The ECB has released a set of seven guiding principles with regard to purchases made under its ABS purchase programme. Rather than serving as eligibility criteria, the guidelines are provided for intensive due diligence on proposed transactions prior to purchase, with a view to safeguarding the Eurosystem's balance sheet.

Among the guidelines, the ECB proposes that the collateral should be a diversified pool of granular and performing assets. For example, a loan should not be in dispute, default, or unlikely to pay at the time of inclusion in a securitisation, nor should the borrower be credit impaired.

In addition, the ECB says that the underlying exposures should be originated according to sound underwriting criteria, while the transaction should also be 'straightfoward and robust'. Adding to this, the guidelines suggest that the originator is in good financial health and has ideally demonstrated a regular presence in the ABS markets. This should coincide with a clear alignment between the interests of originators and investors.

Further, the guidelines state that interest rate risks should be mitigated, if applicable, and the transaction documentation will clearly specify the mitigation measures for these risks. As an example, any hedge arrangement should be simple and transparent, and able to be easily replaced in case of trigger events.

The guidelines also stress the need for transactions to display a high degree of transparency, with recommendations for identical loan-level data and investor report pool cut-off dates. This will be in accordance with the transaction documentation clearly specifying process and responsibilities necessary to ensure that, for example, the default or insolvency of the current servicer in a transaction does not lead to a disruption of the servicing of the underlying assets.

Structured Finance

Distressed credit partnership formed

Stone Point Capital has partnered with former Bank of America Merrill Lynch global credit head Graham Goldsmith to form Cross Ocean Partners. The new venture is an asset management platform that will focus on stressed and distressed credit investment opportunities in a broad range of asset classes, including structured credit, CRE, liquidations and corporate loans.

Goldsmith will serve as the company's ceo and co-cio. Funds managed by Stone Point together with Goldsmith and other members of management have committed US$240m to Cross Ocean.

Concurrent with its launch, Cross Ocean has acquired the European Special Situations business (ESS) from Capula Investment Management. ESS is led by Steve Zander, who will oversee its European business and serve as co-cio. Cross Ocean will be the investment adviser to ESS's initial funds going forward.

Barclays acted as financial advisor to Capula Investment Management on the sale of ESS.

CDS

Non-cleared derivatives hub unveiled

ICAP, the DTCC, Euroclear and thirteen global banks have teamed up with AcadiaSoft to solve one of the largest problems involving margin flows. AcadiaSoft will link its MarginSphere messaging service for OTC derivatives with ICAP TriOptima's triResolve trade reconciliation service and the Margin Transit Utility to be operated by the DTCC-Eurorclear GlobalCollateral joint venture.

The collaboration creates an open, seamless, end-to-end margin processing hub for non-cleared derivatives. BNP Paribas, Citi, Societe Generale and UBS join existing bank investors Bank of America Merrill Lynch, Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and State Street as investors in AcadiaSoft. DTCC and Euroclear are also new investors. ICAP is an existing investor that is increasing its stake in AcadiaSoft.

The new hub will provide workflow support for participants to issue and respond to margin calls, compare necessary inputs that include risk factor sensitivities, and enable participants to identify and minimise disputes at the input level before issuing margin calls. It is intended to reduce costly market fragmentation and drive standardisation, transparency and automation.

At the same time, AcadiaSoft's coo Chris Walsh has become ceo. Former ceo Craig Welch has retired.

CDS

CDS roll reform proposed

ISDA has published a recommendation to amend the single-name CDS roll frequency to a new on-the-run semi-annual basis following feedback from market participants (SCI 17 June). This would shorten the roll-call tendency from its current quarterly basis and further align single-name CDS contracts with CDS index trades, says the organisation.

Under the current convention, market participants roll to a new on-the-run contract each quarter on 20 March, 20 June, 20 September and 20 December. However, the recommendation proposes that the frequency of this roll be reduced to March and September.

The new standard schedule intends to achieve a number of objectives, which includes boosting liquidity, increasing the clearing of eligible single-name CDS transactions, encouraging further buy side protection and improving the affordability of the product by reducing capital costs. There is no requirement to adopt the proposed roll frequency, and market participants can continue to use the current calendar if they prefer.

The implementation schedule for the new calendar is still under consideration, with a potential go-live date of 20 December. ISDA says that is working with market participants in order to determine if this tentative implementation date is appropriate and to consider whether any changes should be proposed for legacy transactions to align with the recommendation.

ISDA also notes that all other features of the current standard single-name CDS contract will remain unchanged.

CDS

End-user CDS trading grounded

Daily end-user trading volume for single-name CDS from July 2010 to end-June 2015 has been very low, according to a report by Kamakura Corporation. Only two reference names, the Federative Republic of Brazil and Republic of Italy, averaged 20 or more non-dealer trades per day in this time period.

Of the 1,256 reference names for which CDS trades were reported by the DTCC during the 259 week period ended 26 June 2015, only eight names averaged more than 10 non-dealer trades per day and 56 averaged five or more. In contrast, 99% of names averaged fewer than 8.6 trades per day, while 95% of reference names averaged fewer than 4.7 daily trades and 75% of reference names averaged fewer than 2.1 trades.

Further data shows that the average reference name only averaged 1.7 non-dealer daily trades, while the median name averaged 1.1.

"After reviewing the non-dealer trading volume reference name by reference name, we repeat the warning from our January 4, 2012 analysis: a sophisticated observer should assume that both traded CDS spreads and quoted spreads are highly likely to have been affected by collusion," says Kamakura ceo Donald van Deventer. "Indeed, the first lawsuits in this regard were filed in 2013. Any other assumption could be hazardous to your wallet."

CDS

Puerto Rico pushes MBIA wide

CDS spreads on MBIA moved 19% wider last week as the risk around Puerto Rico's municipal bonds rose, according to Fitch Solutions. Although Puerto Rico and the institutions that have exposure to it have faced bouts of souring sentiment in the past, Fitch says that statements made by the Puerto Rico's governor last week likely contributed to the heightened risk.

Meanwhile, Fitch adds that news of continued challenges at Venezuela's largest oil refinery impacted Petroleos de Venezuela's investors last week as the company's CDS spreads inverted. "Investors may be seeking downside protection as the risk of operational challenges rises," says Mark Lindup, head of credit analytics for Fitch. CDS spreads on the oil and gas industry in the Americas were nearly 2% wider last week.

CLOs

CLO non-call periods shortening

Moody's says that some US CLOs are shortening their non-call periods and adding make-whole provisions to give themselves an opportunity to refinance ahead of the approaching effective date of the Dodd Frank Act's risk retention rules. The agency believes that shorter non-call periods are generally credit positive to noteholders.

Moody's has found non-call periods as short as one and a half years in CLOs that it has recently rated. Of the 67 CLOs the agency sampled that closed between January and May 2015, 25 have non-call periods shorter than the typical two years.

Because CLOs are eligible to be called only if proceeds from the sale of the deal's assets would be sufficient to pay down liabilities in full, which occurs in sequential order, shortening the non-call period makes it possible for the CLO to repay noteholders sooner. Likewise, Moody's notes that mezzanine and junior notes will benefit sooner from a reduction in liability costs via any refinancing.

Further, CLOs generally include safeguards to protect against the possibility that redemptions could be credit negative. For example, most deals require the transaction to maintain or improve over-collateralisation ratios, and maintain or improve collateral quality tests.

In addition, some deals, including six of the 25 CLOs, use interest proceeds in connection with make-whole payments if it does not cause a deferral for secured notes. Make-whole costs typically are the present value of interest payments due on the redeemed notes received between the redemption and make-whole dates.

CLOs

CLO issuance forecast broadened

US CLO issuance totalled US$59bn in 1H15, which is approximately 3% lower compared to 1H14, according to Morgan Stanley's CLO Market Tracker results. Nonetheless, Morgan Stanley still projects an annualised issuance of nearly US$120bn, which is well in excess of its original forecast of US$75bn-US$85bn.

At the same time, US leveraged loan issuance has declined to US$143bn during the first six months of the year, which is approximately 41% lower compared to the same period last year. In comparison, European CLO issuance totalled €8.42bn in 1H15, 11% lower compared to 1H14.

Nearly 40% of US CLO deals issued in 1H15 were brought by repeat managers with more than 10 CLO 1.0 deals under management, while 34% were brought by managers with only CLO 2.0 deals under management. Morgan Stanley's analysis shows an increase in tiering in 2015, with deals pricing in a 15bp-20bp range during the first six months of the year.

In June, existing US CLO 2.0 portfolio median weighted average spread across vintages compressed, and Morgan Stanley expects to see the impact of such compression filtered through next payment of many US CLO equity tranches. There was also a 9.7% decline in median US CLO 2.0 equity NAV, and a 5.7% decline in median European CLO 2.0 equity NAV.

Further, CLO triple-A bonds that are not Volker-compliant have significantly widened over the prior month in advance of the compliance deadline on 21 July. Morgan Stanley estimates that the basis to Volker compliant CLOs is now 50bp plus.

While the regulators extended the deadline to 21 July 2017 for CLOs held by banking entities as of 31 December 2013, US broker dealers will still be restricted in their ability to make markets in bonds that are not Volker compliant. Morgan Stanley believes this diminished liquidity is the primary reason for the widening.

CLOs

CLO risk retention readiness weighed

Moody's believes that most post-crisis manager entrants into the US CLO market will be able to meet the US risk retention requirements which become effective in December 2016. This is due to many of those managers already having access to the capital necessary to retain a portion of their own deals.

The agency notes that some post-crisis CLO managers are public companies with large, diverse asset management businesses, including Och-Ziff Loan Management with approximately US$48bn AUM and Oaktree Capital Management with around US$100bn AUM. Other managers, such as Benefit Street Partners, Onex Credit Partners and TPG Institutional Credit Partners, are already backed by well-capitalised private equity sponsors that can provide capital to satisfy risk retention.

The agency adds that most new SME CLO managers will also be able to comply with US risk-retention rules because they already retain risk in loans they originate and the entire equity tranche in their CLOs. Unlike broadly syndicated loan CLO managers, SME managers use CLOs as a source of funding for their lending activities. Some new managers, for example KCap Financial, could also retain equity through their business development company affiliates - a source of permanent capital.

Nonetheless, most CLO managers could still seek external financing to keep growing their platform and improving the economics of risk retention. Potential solutions include vertical strips or via majority-owned affiliate structures funded with third-party capital. If the economics do not work, Moody's says that both large and small managers could stop issuing CLOs after 2016.

The agency believes this could create opportunities though, with some new managers acquiring smaller managers unable to retain sufficient risk on their own. For example, Man Group acquired the established CLO manager Silvermine Capital (SCI 17 December 2014) in January, which had US$3.8bn of AUM compared to $US70bn by its purchaser.

Moody's also says that US risk retention rules have not deterred new managers from starting or growing their CLO business either, with 10 managers closing their first US CLOs between 1 April 2014 and 30 June of this year. In addition, managers that entered the CLO market post-crisis have maintained a healthy pace of issuance, as eight of them already have five or more deals under their belt.

CMBS

CMBS certificates removed

Morningstar has made an amendment from its June 17 pre-sale report on the capital structure of Citigroup Commercial Mortgage Trust 2015-GC31. Based on an update to the offering circular the class X-B certificates have been removed from the transaction in the agency's post-sale report. No other key changes have been made.

CMBS

BBC-linked deals 'manageable'

The announcement from the UK government's summer budget that the BBC will have to meet the £650m cost of free TV licences for over-75s could impact the three securitisations linked to the broadcaster but remain manageable, according to Barclays Capital securitisation analysts. The transactions are: Juturna, White City and Pacific Quay.

As a partial mitigant, the BBC is expected to be allowed to charge for using the BBC iPlayer. In addition, the BBC will be allowed to increase the cost of the license at CPI over the next charter review period subject to conclusions of the charter review and efficiency savings made that are equivalent to the rest of the public sector.

The analysts believe the BBC will be able to maintain its ratings but note that, as a non-repeat issuer, it is not focused on credit ratings. Instead, it will likely be looking to balance the need for high quality programming versus its cost-savings requirement.

CMBS

Taurus safeguard proceedings open

An event of default (EOD) has led Moody's to downgrade the ratings of two classes in Taurus CMBS (Pan-Europe) 2007-1. The EOD resulted after a non-payment of interest in May on the most senior class of notes, as well as an increase in Moody's loss expectation driven by the underperformance of the pool's largest loan, Fishman JEC.

However, due to the opening of safeguard proceedings in respect of the borrowers under the Fishman JEC loan, all income is frozen in respect of the Fishman JEC whole loan until a safeguard plan is adopted by the French courts. Drawings under the liquidity facility were insufficient to cover the entire shortfall on the notes mainly due to legal costs associated with the safeguard proceedings.

The safeguard plan, if adopted in its current form, will entail a property disposal plan which extends beyond the notes' legal final maturity date in February 2020. Due to the currently proposed timing of the repayment plan, the risk is increased that noteholders do not receive recovery proceeds by that date.

The downgrades by Moody's are: €407.6m of A1 notes to B1 and €21.3m of A2 notes to B3. The agency does not rate the class B, C, D, E, F, X1 and X2 notes.

Insurance-linked securities

Sandell blasts PartnerRe board

Sandell Asset Management has issued a public letter to the PartnerRe board and its chairman Jean-Paul Montupet questioning their behaviour and commitment to fair process in the ongoing bidding war for the firm (SCI passim). In particular, the letter outlines Sandell's dismay towards the PartnerRe board's decision to deny the customary request by EXOR to be provided with a list of PartnerRe preferred shareholders, in order to provide such holders with information about the EXOR offer.

Signed by Sandell ceo Thomas Sandell, the letter describes the actions of PartnerRe's board as 'unreasonable', while accusing the board of frustrating the ability of preferred shareholders to fairly evaluate the AXIS transaction in comparison to the EXOR offer. The letter accuses the board of taking such action to protect the AXIS transaction and disregard the shareholders' best interest.

"We find this action egregious in today's corporate environment of increased shareholder engagement, and to constitute an intentional failure to conform to current corporate best practices," the letter says. "This conduct is particularly outrageous in light of EXOR's improved and superior offer which includes, among other things, a 100bp increase in dividends for PartnerRe preferred shareholders, call protection until 2021 and five years of capital distribution limits."

The letter urges the board to disclose to EXOR the identity of PartnerRe's preferred shareholders. It also expresses its understanding that the PartnerRe is looking to maintain a cordial relationship with AXIS, but stresses the importance of putting the company's shareholders first and foremost.

The letter closes by suggesting, as investors, Sandell will not hesitate to exercise its rights to hold the PartnerRe board accountable.

Insurance-linked securities

Innovation inspiring ILS positivity

Innovation continues apace within ILS, with the asset class remaining well placed given its low correlation to broader financial markets and strong risk-adjusted yields, according to Twelve Capital's half yearly outlook. The firm adds that private ILS could tap into a variety of reinsurance opportunities that are continuing to generate returns in excess of comparable catastrophe bond securities.

Twelve Capital says that these contracts generally offer 12 month protection to buyers - a premium earned above the return for traditional cat bonds - due to the illiquid nature of the investments. This sub-asset class provides a broad degree of diversification to ILS portfolios, resulting in exposure to harder-to-find natural peril regions, such as Australia or Europe, as well as access to man-made perils such as marine and fire.

Further, the private ILS market has seen a continuation of spread erosion within the space. Yet, throughout 1H15, capital markets reflected their pricing discipline by rejecting a number of cat bond issuances with less than favourable risk/return characteristics. Twelve Capital suggests that this is often the first sign of a turnaround in the underlying reinsurance space, with prices for some industry loss warranties having already stopped retreating.

The private ILS space is expected to provide positive returns moving through the second half of this year, with a firmer market expected. Even without a significant event, Twelve Capital believes that the next round of renewals will likely see pricing stabilisation within the space.

Meanwhile, cat bonds have seen around US$5bn in volume of new issuance in 1H15, split between more than 20 tranches placed in the market. "Innovation, driving the development and growth of the cat bond space, was seen affecting both trigger types and the wide spectrum of territories covered - transactions varied from parametric matrix US hurricane coverage to Italian earthquake risk," says Twelve Capital.

Average coupon at issuance for 1H15 was around 5.3% and the respective expected loss amounted to around 2.2%. Spreads widened on the secondary market as a result of a healthy pipeline of primary issuance, combined with the decay of excess institutional capital within the market.

Issuance is expected to remain strong for the rest of the year, with the majority of cat bonds expected to be marketed during the fourth quarter - following the hurricane season. Twelve Capital projects total issuance by year end will be at least US$7bn for publicly offered cat bonds. The private cat bond space is also predicted to expand, both in terms of issuance and covered perils/risks.

For additional investment opportunities, Twelve Capital is wary of the presence of Solvency 2 driving asset value ambiguity. The firm believes this could create some unique opportunities, with private debt spreads widening at the looming January 2016 implementation date of the regulation. Spread widening experienced in liquid markets for subordinated insurance debt is similarly anticipated among the smaller issuers, which could be a positive prospect for the remainder of the year.

RMBS

CSP advisory group established

Freddie Mac, Fannie Mae and Common Securitisation Solutions (CSS) have formed an Industry Advisory Group to provide feedback and share information on efforts to build the Common Securitisation Platform (CSP) and implement the single security. This follows the US FHFA's recent progress update on the single security, outlining the objective to finalise its structure in 2015 (SCI 18 May).

In addition to Freddie Mac, Fannie Mae and CSS, participants in the Industry Advisory Group will come from: The Center for Responsible Lending; Financial Services Roundtable; FICC; Mortgage Bankers Association; Independent Community Bankers Association; American Bankers Association; SIFMA; and the SFIG.

The single security is a joint initiative of Freddie Mac and Fannie Mae, under the direction of the FHFA, to develop a single MBS that will be issued by the GSEs to finance fixed-rate mortgage loans backed by one- to four-unit single-family properties. The CSP is a technology and operational platform that is being developed by CSS - a joint venture of Freddie Mac and Fannie Mae - and will perform many of the core back office operations for the single security.

RMBS

New players spurring UK RMBS

Moody's says that new players in the UK's prime mortgage market and pre-crisis legacy assets hold the keys to deal issuance for the next 12 months. In the 18 months from January 2014 to June 2015, such pools accounted for almost half of all newly issued UK RMBS at 15 out of 33 deals, which is £8.2bn out of total issuance of £27.9bn.

"Assuming no major disruption to the global recovery, a mix of positive factors - including GDP growth of 2.7% in 2015, falling unemployment and good borrower affordability - will help the UK's mortgage market stay strong," says Emily Rombeau, a Moody's analyst. "UK house prices will continue to rise by up to 5% in 2015. Low interest rates will keep containing debt servicing costs this year, as we don't expect a hike before early 2016."

Moody's predicts a slight increase in lending activity in 2015, with monthly figures gradually increasing, albeit from a low base, and pointing to a recovery in the activity. Recent entrants' mortgage lending activity is outpacing the increase in gross mortgage lending across the UK, which the agency believes could support issuance over the next year.

"For example, Aldermore Bank's total residential mortgage loan balance increased by 53% in 2014, to £2.6bn from £1.7bn in 2013," adds Rombeau. "This compares with a year-on-year increase in gross mortgage lending in the UK of 14.3% between 2013 and 2014."

Further, Moody's says that a total of 10 securitisations of pre-crisis legacy assets came to the market over the last 18 months, boosting the share that these types of deals claim in the overall UK RMBS market. New mortgage market entrants have issued five transactions, collectively worth £1.5bn over the same period.

The agency adds that, while newer lenders comply with the Mortgage Market Review's standards on affordability and income verification, lenders such as Aldermore Bank, Kensington Mortgages and Precise Mortgages can position themselves as alternatives to high street bank lenders by targeting borrowers whose credit profiles may not be strong enough to qualify for mortgages from mainstream mortgage providers.

RMBS

RBS settlement losses expected

RBS could face potential settlement fees totalling US$13bn (£8.3bn) relating to alleged violations linked to the sale of US$32bn of MBS to Fannie Mae and Freddie Mac, according to Fitch. The figure is outlined in court filings made on behalf of the US FHFA.

Fitch says this latest round of conduct and litigation fines that may be imposed on RBS is already reflected in the bank's standalone viability rating of triple-B plus. The agency considers RBS' creditworthiness capable of gradual improvement, but it faces strong medium term challenges due in part to uncertainty about the size and timing of further regulatory fines.

Legal procedures are likely to take several months and the final outcome is still unclear. However, Fitch says that the impact a fine of this magnitude could have on RBS' capital adequacy ratios is manageable due to the existing litigation reserves - £2.1bn at end-March - and the positive boost to regulatory capital to be generated by the deconsolidation and sale of Citizens Financial Group (CFG) by end-2015.

Fitch warns that there is a risk that some material charges will be borne before the capital benefit from exiting CFG will be realised. Nonetheless, a meaningful underlying cushion to absorb further potential fines will come from the capital base of £40bn core equity tier 1 at end-1Q15, and there will be a likely reduction in risk-weighted assets from £394bn to £300bn by end-2015 to be achieved through further de-risking and the CFG sale.

RMBS

House sales boost Dutch RMBS

A recovery in house sales in the Netherlands will increase the proceeds that originators recover in cases of foreclosure, says Moody's. This should reinforce the stable performance of the Dutch RMBS market, with the agency forecasting a maximum house price increase of up to 5% in 2015.

Available data shows that a 16% rise in house sales in the first five months of 2015 has boosted the Dutch house price index, which has risen by 2.6% year-on-year. On a 12-month rolling basis, 31% more homes were sold in total as of May 2015.

"The Netherlands' housing market has gathered momentum, growing more robust against a backdrop of rising consumer confidence and growing economy," observes Jeroen Heijdeman, a Moody's avp and analyst. "We expect that real GDP will increase by 1.7% in 2015 and that unemployment will remain low, further supporting borrower affordability and lessening the likelihood of mortgage arrears."

Borrowers are expected to continue benefitting from low interest rates and increased lender competition. Delinquencies are also expected to remain stable, with average arrears of 60 plus days in the range of 0.5% to 1.5% in 2015-2016.

Loan-by-loan foreclosure data from key Dutch RMBS originators provides evidence of increasing average recovery ratios, and therefore decreasing losses, from property sales since 2012. At the same time, the volume of property work-outs is decreasing, demonstrating the market's recovery.

However, Moody's forecasts that further tightening of underwriting criteria and the high proportion of negative-equity home owners will limit the recovery's speed in 2016. The maximum LTV ratio is set to decline gradually to 100% in 2018, which is still high by international standards. Excluding mortgage-linked repayment policies, approximately a third of Dutch homeowners are in negative equity.

In view of these factors, Moody's expects a more moderate recovery in 2016 after an initial, more significant house price increase. With clear government measures in place to date, a further decline in maximum LTV ratios could also dampen the recovery path, with potentially fewer first-time buyers.