Contents

Secondary markets

US CLOs stay quiet

The US CLO secondary market remains quiet but market sentiment is improving.

"Market tone feels much better than in recent weeks, though there are no trades to prove that yet," says one trader. "1.0 paper in particular is better bid and the bid-ask is coming in, but the market is still very quiet."

The improving tone is being driven by both fundamentals and technicals, the trader suggests. "Macro risk, particularly round China, is perceived to have reduced and the CLO new deal pipeline has been cleaned up with not much expected in August - so people are returning their attention to secondary."

However, the trader adds: "They are looking to buy stuff cheap, but there has been no capitulation in any shape or form from sellers and bond holders appear to be capable of riding their marks so redemptions won't come into play either. As a result, no one is putting any paper out."

There are currently no US CLO BWICs circulating for trade today.

Secondary markets

Euro ABS/MBS continues to pick up

The European ABS/MBS secondary market is continuing to pick up.

"Tone continues to improve now we've finally got some stability and clarity in broader markets," says one trader. "However, while there is more activity we're not seeing lots of volume, though that could also be to do with the time of year and people heading off on vacation."

Peripherals in particular continue to benefit from the growing positivity, the trader says. "Peripherals are starting to get a bid across the board - earlier in the week it was just Greece and Portugal, but it's extended to Italian and Spanish paper now too."

In terms of deal types CMBS are receiving plenty of attention. "For example, we traded some Italian CMBS double-Bs yesterday and German MF bonds are on the rise," says the trader.

Meanwhile, the BWIC market is starting to pick up too after a few quiet weeks. There are currently seven ABS/MBS BWICs circulating for trade later today offering paper across a range of deal types and jurisdictions, though much of the focus is around autos.

The largest is a 12 line auto mezz auction due at 15:00 London time. The list comprises: €2.8m ABEST 10 B, €1m BUMP 6 B, €2.1m CAR 2014-F1V B, €1.4m DRVON 10 B, €1.4m DRVON 11 B, £4m DRVUK 2 B, €2.6m ECAR 2013-1 B, €2.6m ECAR 2014-1 B, £3.8m ECARA 4 B, €4m GLDR 2012-A B, €300k KIMI 2013-1 A and €5m KIMI 3 B.

Three of the bonds have covered with a price on PriceABS in the last three months - DRVON 10 B at 100.17 on 16 April; DRVUK 2 B at 99.971 on 25 June; and KIMI 2013-1 A at 100.15 on 10 June.

Secondary markets

Turnaround for US RMBS

The US non-agency RMBS secondary market is seeing a turnaround from last week's low levels of activity.

"After a very quiet week last week, we've turned full circle and the market is back to some kind of normality," says one trader. "With positive headlines around Greece and Puerto Rico combined with a clearer view on US interest rates paper is trading again."

However, the trader adds that there is also a sense that the problems haven't completely gone away. "There's a belief that, especially in terms of China and the risk of Greek-based contagion, the can has just been kicked down the road."

Nevertheless, the trader says: "Market sentiment is broadly positive for now and accounts have come in to take advantage of this and sell paper, which in turn has improved liquidity and attracted further sellers including a range of hedge funds and larger money managers. So, BWIC volumes have been strong over the last couple of days including two notable lists."

First, was a 66 line $600m mixed list yesterday, which saw all line items trade, although the REOs circulating this morning are lower than pre-auction talk. Today sees a 13 line $1bn notional IO list, which contributes nearly half of the day's total volume.

Overall, the trader says: "The market is an unusual position - neither risk-on nor risk-off, but somewhere in the middle. Overall we're a little wider, maybe 25bp in yield terms, which is enough to ensure lists are trading as dealers appear willing to add at these levels."

Secondary markets

Euro secondary stabilises

The European securitisation secondary market continues to stabilise.

Yesterday was another solid day with spreads holding form to edging tighter across the board. Buying interest off- and on-BWIC continues to increase, while auction activity is also growing.

Yesterday's lists saw mixed results with most line items going through at or around talk, but a handful of mezz autos failed to hit expectations and a couple of DNTs were also seen. At the same time, a two line CLO BWIC due today - involving €3m BABSE 2014-2X C and €2m CADOG 6X C1 - traded yesterday afternoon.

There are currently three BWICs circulating for trade today, alongside a French ABS/MBS OWIC due at 10:30 London time. The BWICs involve a mixed odd-lot prime RMBS auction at 13:00; a mix of CDO, CLO and RMBS small clips at 14:00; and two pieces of 2.0 CLO equity at 15:00.

It is the latter that offers the chunkiest slices on offer today so far - €10m of ALME 2A PTC and €7.401m of ALME 3X PTC. Neither bond has traded on PriceABS before.

ABS

FFELP repacks put forward

The FFELP student loan ABS sector could yet fend off downgrades if refinancing solutions come forward, according to Citi consumer ABS analysts. Some novel ideas are already surfacing that expand the possible fixes beyond bondholder extensions or trust cash injections.

Rating agencies Moody's and Fitch have collectively placed over 160 FFELP student loan ABS tranches on review for downgrade (SCI passim). Moody's has also recently proposed changes to its approach to rating the asset class (SCI 10 July).

However, the Citi analysts suggest that a number of viable solutions could remedy the current maturity date and EOD issues that loom over the watchlisted tranches. Although details remain sketchy regarding such proposals, re-REMIC and re-pack structures have been put forward as potential solutions.

While the analysts are confident that a solution will be found in the capital markets, doubts remain about whether the rating agencies will delay downgrades for long enough for them to be implemented. They add that rating agency agreement in principle for many of the potential solutions is essential for them to have a platform to be tested.

In addition, despite the lack of obligation to do so, the analysts note that sponsors are showing a continued willingness to help cure the issues. Navient, for example, has already pumped US$421m into trusts to avert EODs. However, a number of concerns remain, including costs becoming excessive, maturity extensions reaching unfeasibility or solutions not materialising as expected.

The analysts believe that Navient may have to pump an addition US$887m into the nine trusts it is already supporting, which could lead to the sponsor electing to separate a deal support decision from downgrades. In this scenario, the sponsor would have the ability to stand on the sidelines as rating agencies downgrade bonds and support deals over time to prevent default as it becomes necessary.

Meanwhile, the analysts have a made a number of assumptions based on a Moody's call on Wednesday on the topic, most notably that the agency will downgrade bonds to low-investment grade or non-investment grade if its recently proposed methodology is adopted. With triple-A tranches at risk, these events could undermine rating agency attempts to recover the market's trust after the financial crisis by elevating a fear of contagion and ratings unpredictability.

Another key point from the call is that maturity remains the key factor for Moody's, with the agency citing two recent new issues that have legal maturities ranging from 2050-2060. The structures newly incorporate a cashflow turbo, but the subordination level remains at 3%. Credit enhancement is less of a concern because principal is not at risk.

For investors, potential ratings volatility is a negative for FFELP student loan ABS, but forced selling is yet to have emerged. "ABS spreads have already gapped out since the potential for downgrade surfaced as a risk," explain the analysts. "Class A one-year spread indications are in the low-40s area, three- to five-year class As in the 80s DM and premium bonds in the low-100s area."

For now, they advise that forced selling is an unattractive risk. They recommend that investors remain patient, as they maintain an optimistic outlook that solutions will come forward.

JA

Structured Finance

SCI Start the Week - 13 July

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

Pipeline
A number of deals joined the pipeline last week. These were largely ABS and CLOs, although activity remains quieter than it was a few weeks ago.

The ABS were US$1.02bn Ally Auto Receivables Trust 2015-1, US$718m Drive Auto Receivables Trust 2015-C and US$250m Navistar Financial Dealer Note Master Owner Trust II Series 2015-1. There was also a single CMBS, which was US$1.33bn JPMBB 2015-C20.

The four CLOs were €400m Black Diamond CLO 2015-1, €400m Carlyle Global Market Strategies Euro CLO 2015-2, US$400m KRR CLO 12 and US$374.15m Palmer Square CLO 2015-2.

Pricings
A similar number of deals also departed the pipeline. This included five ABS, two RMBS and two CLOs.

The ABS were: US$400m Cabela's Credit Card Master Note Trust Series 2015-II; €650m FCT Ginkgo Debt Conso 2015-1; US$184.8m Massachusetts Educational Financing Series 2015A; US$125m Progreso Receivables Funding; and US$275m Sierra Timeshare 2015-2.

€950m Berica ABS 4 and US$671.8m MSCI 2015-MS1 were the RMBS. The CLOs were US$509m Battalion IX and US$379m Dryden 40 Senior Loan Fund.

Editor's picks
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...
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...

Deal news
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.
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.
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.

Regulatory update
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.
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.
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.
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.

RMBS

RMBS settlement resolutions 'years away'

Several recent legal developments could affect cashflow distributions from ongoing settlements and lawsuits. Morgan Stanley analysts believe these developments could also affect the likelihood of investors recouping any cash from future settlements.

Citigroup's ongoing US$1.125bn settlement is well shy of Countrywide (US$8.5bn) or JPMorgan (US$4.5bn), but is unusual in having no investors object to it. Countrywide attracted the majority of the market's attention and JPMorgan remains mired in the discovery portion of their Article 77 proceeding, allowing the Citi settlement to pass by almost unnoticed.

However, "the fact that no one has objected to the settlement does not mean that cash is going to be distributed to the trusts tomorrow," the analysts warn. The current proposed date for oral arguments is 17-19 August.

"While those dates have not been finalized - and Justice Friedman did warn that summer vacation conflicts could push a trial date into September - let's assume that mid-August comes to fruition. If the trial takes the same five months that we saw in Countrywide, a conservative assumption given the lack of objectors we noted earlier, that would mean that it would wrap up in January 2016, with Justice Freidman's decision coming in March 2016," the analysts say.

Should the judge rule in favour of the settlement, there could be appeals. However, taking the experience of Countrywide into account, the analysts expect the settlement to be approved, suggesting it could then take up to 90 days for each trusts allocable share to be calculated and a further 30 days for Citi to pay. That means an expected payment in July or August 2016.

As for JPMorgan's settlement, there are substantial differences from the Countrywide settlement which have delayed progress. This is because there are multiple trustees - as opposed to solely BNY Mellon for Countrywide - and also because of the 90% discount to losses that JPMorgan is applying to its aggregator shelves.

The next important date for this case is 20 January 2016, when the trial is set to begin. Based on the Countrywide settlement, the trial is expected to conclude around this time next year, with a decision in September.

"Unlike Citi's settlement, our best estimate here is that there will be some sort of appeals process given the presence of objectors. If that timeline looks anything like Countrywide's, we might not see payment until the middle of 2018," the analysts say.

They add: "However, if final court approval is not achieved by 31 December 2016, JPMorgan can walk away from the settlement. While we are not quite clear on the mechanics of that, it does lead us to believe that objectors would be incentivised to wrap things up before year-end 2016, meaning payment could come at some point in 2017."

New York State's Court of Appeals last month affirmed a 2013 ruling that mortgage bond claims must be filed within six years after a deal is closed (SCI 12 June). The analysts believe this will limit the number of legacy non-agency RMBS settlements in the future.

Several institutions - including Goldman Sachs and UBS - have agreed to tolling agreements, which extend the time that investors have to sue. Goldman Sachs says it has been contacted by counsel representing investors which wish to enter into a settlement dialogue for securitisations issued between 2003 and 2007.

Last month also saw a decision passed down on what should happen with the Washington Mutual trusts (SCI 4 June). The decision makes JPMorgan responsible for potential putback claims on some of the trusts at issue, with the FDIC liable for others.

"While this is certainly a step forward for a case that has been in various stages of the court system since August 2009, it appears we are far from any binding resolution here. The next steps for this case appear to be 24 July - the deadline for the FDIC to ask the court for an order that would allow them to appeal the decision - 21 August - when responses are due - and 11 September- when the replies to those responses are due," the analysts note.

The amount of any potential settlement can only be decided once the matter of who is ultimately responsible for the trusts is decided. The trustee, Deutsche Bank, could still seek an Article 77 proceeding, so it appears there will be no cashflows into these trusts for quite some time.

Meanwhile, as the statute of limitations from the Deutsche Bank case appears to limit the liabilities faced by the institutions that issued RMBS before the crisis, investors have found a new option to attempt to recoup losses from trustees. Last month, a group of investors led by BlackRock, Pimco and Prudential filed lawsuits against six RMBS trustees: BNY Mellon, Citigroup, Deutsche Bank, HSBC, US Bancorp and Wells Fargo. They argue the trustees did not act on evidence that banks failed to comply with their own underwriting criteria and that their inaction allowed the statute of limitations to expire in some instances.

"On 18 May the trustee in the largest of these six cases - US Bank, which the investors claim is liable for alleged defects in 843 RMBS trusts backed by US$778.6bn in mortgages - won the first round when Judge Katherine Forrest ruled that the plaintiffs incorrectly pleaded their case as to 33 of the trusts in question and that she didn't even have jurisdiction over the other 810 trusts. That being said, the plaintiffs have been given a chance to amend their complaints," say the analysts.

They continue: "However, in the third largest of these six requests - a US$34bn lawsuit against HSBC as trustee for 271 RMBS trusts - HSBC lost a request for dismissal on 1 June. HSBC did agree to sit down with the plaintiffs and a magistrate judge to discuss a settlement, but not before February 2016."

Plaintiffs and BNY Mellon have also proposed a schedule for their lawsuit which references 260 trusts with an initial unpaid principal balance of US$177.6bn. The plaintiffs ask that all parties be ready for trial in January 2017, while BNY Mellon is waiting for the court to rule on a motion to dismiss, saying the court does not have jurisdiction over 248 of the 260 trusts.

"While trustee settlements seem to be the next frontier in settlements and litigation in the legacy non-agency space, it appears that any resolution could be months, if not years away," the analysts conclude.

JL

RMBS

CRT, NPLs 'both attractive'

Macro developments over the last few weeks have pushed residential credit wider, with CRT spreads at the LCF level now around 40bp wider than in April. However, fundamentals in this space are unlikely to be affected by those macro events and so LCF bonds could present an attractive buying option.

The is "especially [true] on deals with some seasoning or enhancement. At the M2 level as well, bonds remain 25bp-30bp wide versus 1m/3m levels. These bonds have very little credit risk and, with an IG rating and 220bp-230bp of spread, remain attractive at current levels," say Barclays Capital analysts.

The analysts continue to believe that GSE CRT LCFs offer value against legacy RMBS, picking up around 200bp in spread and presumably remaining well protected, even in a moderate housing downturn. CRT widening and court decisions limiting rep and warranty upside for many non-agency bonds have led to LCF CRT bonds looking even more attractive, the analysts argue.

"Front cash flows also look attractive, given their minimal credit risk and IG rating, although sustained high prepayments pose a risk to some premium bonds. At the STACR M2 level, on the more seasoned deals, we continue to find value at the current 220bp-230bp spreads due to their minimal credit risk and IG ratings," the analysts say.

NPL senior bonds also offer shorter safe cashflows, while SFR investment grade-rated mezzanine bonds, particularly from FRM deals, are also recommended. For shorter floater deals, the analysts advocate going down the capital structure to pick up spread. SFR triple-As also remain attractive compared to other securitised triple-As, with CLOs providing a possible exception.

Meanwhile, the NPL securitisation sector has grown this year, with US$10.5bn issued in 1H15, compared to US$14bn for the whole of last year, and value can be found here as well. Senior-most NPL bonds appear attractive.

"As in 2014, the VOLT shelf dominates issuance with about 70% of the deals issued so far in terms of balance (~60% in 2014). We have been recommending the senior NPL tranches as attractive yielding short assets for the past 12-18 months," say the analysts.

The analysts favour senior NPL bonds on the basis that they should remain callable. This is based on the view that NPL securitisations are likely to be viewed by the larger market as shorter-term financing vehicles before the properties end up in more efficient structures such as RPL or SFR deals.

RPL and SFR securitisation volumes have remained strong, providing tighter financing spreads and lower enhancement levels than NPL deals and encouraging mezzanine and equity owners to convert these loans as quickly as possible to an RPL deal or sell to a SFR bid. "This dynamic also means that these deals will remain callable, even if rates increase somewhat," the analysts add.

VOLT deals have generally been called after 12-14 months. BOMFT calls have taken longer, but they have generally been called in 18-24 months.

The creation of A2 bonds makes senior NPL bonds even more attractive. VOLT 2015-NPL8 A1 bonds hold up well under a number of different scenarios, only taking losses (of about 56%) in the analysts' most dire scenario.

"In all other non-call scenarios, the bond extends but actually returns a higher spread at the approximate issuance price. This is due to the coupon stepping up to 6.5% on the bond at the expense of the A2 bond (which Negams in that scenario)," the analysts say.

So long as the A2 is called within a year, it remains very attractive. However, in a three-year call scenario, the bond extends and could take losses.

"In most reasonable scenarios, however, the A2 bond holds up fairly well, as long as it is called within three years. In the never call scenarios, the bond receives no principal in the most severe 60% severity scenarios. However, as long as the severities and CDRs remain contained, the accrual (Negam due to paying the A1 a higher coupon) is likely to be paid back," say the analysts.

JL

Structured Finance

Finance chief named

Steven Noreika has been promoted to cfo of Fifth Street Finance (FSC) and Fifth Street Senior Floating Rate (FSFR), replacing the departing Richard Petrocelli. FSC and FSFR are subsidiaries of Fifth Street Asset Management. Prior to his promotion, Noreika was chief accounting officer of FSAM. He previously held roles at Time Warner and Marcum & Kliegman.

Structured Finance

Special situations pro recruited

400 Capital Management has hired Chris Schiavone as director, special situations investment management. He will be responsible for special situation credit origination and portfolio management at the firm.

Previously, Schiavone was part of Perella Weinberg Partners' asset management business, where he was responsible for sourcing, structuring, executing and managing distressed investments in commercial and residential mortgage debt, among other related investments. Prior to this, he was md and head of RMBS origination at Bank of America.

Structured Finance

European loans team strengthened

Intermediate Capital Group (ICG) has recruited Michael Curtis and Benjamin Edgar as portfolio managers and co-heads of its European loans business. They will join the firm's credit fund management team, which covers strategies that include senior secured credit and structured credit solutions.

Curtis joins ICG from 3i Debt Management, where he was a portfolio manager across a number of CLO funds, separate accounts and 3i's global income fund. Prior to this, he was md of his own debt advisory firm, South Square Capital.

Edgar arrives from CVC Credit Partners, where he was  responsible for managing credit funds and CLOs as md. He worked as an executive director at Alcentra prior to this, for its European CDO business.

Structured Finance

Maples forms Dutch footprint

Maples Fiduciary, a division of MaplesFS, has opened a full-service office in Amsterdam. MaplesFS svp Jan Hendrik Siemssen will lead the Netherlands office. His experience includes a number of roles within Dutch trust companies, where he had responsibility for covering various operations and divisions that covered structured finance, securities lending, risk management and corporate trust.

Structured Finance

Santander names new chair

Blythe Masters has been appointed non-executive chairman of the board for Santander Consumer USA (SCUSA). Currently ceo of the recent crypto start-up Digital Asset Holdings (SCI 12 March), she succeeds Stephen Ferriss, who remains on the SCUSA board.

Prior to leading Digital Asset Holdings, Masters held senior executive roles at JPMorgan, serving most recently as head of its global commodities business. She was also head of global derivatives marketing for the bank and head of North American securitised products, managing businesses that included ABS and CLOs.

Joining Masters on the SCUSA board are new directors Jose Garcia Cantera, Victor Hill, Monica Lopez-Monis Gallego, Javier Maldonado, Robert McCarthy and William Rainer. The independent directors are: Ferriss, Masters, Robert McCarthy, William Rainer, Wolfgang Schoellkopf and Heidi Ueberroth.

Structured Finance

Real estate vet poached

Rick White has rejoined Bryan Cave as a partner in the real estate capital markets team. His practice focuses on structured finance and servicing matters relating to CMBS and RMBS.

White represents lenders, primary servicers, master servicers and special servicers in all aspects of mortgage-backed loan servicing. He also represents loan originators and issuers in securitisation matters, as well as hedge funds, banks and other entities in the acquisition and disposition of mortgage loan pools.

Prior to returning to Bryan Cave, White was a name partner with Busch White Norton, and before that an equity partner with Jones Day. Two associates who have worked with White in the past, Jason Ebert and Allysa Piché Hopson, also are joining Bryan Cave.

Insurance-linked securities

PartnerRe meeting pushed back

PartnerRe and AXIS Capital have moved back their joint special meeting of respective shareholders from 24 July to 7 August as they explore enhancements to the terms of their amalgamation agreement. This follows rival bidder EXOR's recent enhancements to its all-cash offer for PartnerRe (SCI 8 July).

PartnerRe and AXIS intend to communicate any enhancements to their agreement to shareholders in the near-term. Both companies have recommended that their respective shareholders vote for their agreement and have encouraged shareholders to carefully evaluate the investor presentations filed by both companies on 1 June as part of their consideration of the transaction.

However, PartnerRe and Axis note that there can be no assurance that they will reach agreement on any enhancements. The transaction still remains on track to close in 3Q15.

EXOR has responded by describing the postponement as an attempt by PartnerRe to rescue an inferior transaction. The company continues to urge PartnerRe shareholders to vote the gold proxy card against all three proposals related to the AXIS transaction and asks shareholders not to sign or return any white proxy cards they receive from PartnerRe.

Insurance-linked securities

European head appointed

Willis Group has appointed Brian Shea as head of Europe for Willis Capital Markets & Advisory. He will officially join in August and report to WCMA co-ceos Rafal Walkiewicz and Michael Guo. The pair also only recently joined the firm in their current roles (SCI 16 April).

Shea joins WCMA from SCOR, where he was chief corporate strategy officer, reporting to the chairman of the board and ceo. Prior to this, he was md and head of the European insurance equity research team at Bank of America Merrill Lynch.

ABS

Solar uncertainties lingering

S&P says that the limited operational history of the solar sector is currently capping its ratings for solar ABS transactions at a ceiling of triple-B. The agency has so far rated three solar securitisations in this rating category, but says there are other contributing factors that market participants have flagged up.

S&P explains that the operational history of the solar sector, or lack thereof, has limited meaningful operational and analytical data for the last four to five years. In addition, the asset class has a number of uncertainties surrounding technological improvements and soft costs that may weaken the current value proposition. Dynamic and often confrontational regulatory frameworks in different US states are among other key concerns for the agency.

Other operational aspects will be monitored as the industry further develops, including an examination into how disruptive servicer and maintenance provider replacements would be, as well as the cost and frequency for the maintenance or replacement of systems and parts. Another unique risk factor will be how a portfolio's credit profile changes as homes are sold and solar PPAs and leases assigned to new homeowners with unknown credit quality.

ABS

Volatility to benefit auto ABS

Auto ABS should benefit if overall conditions remain volatile in the broader securitisation markets, says Bank of America Merrill Lynch analysts. As markets recover, spreads likely will remain unchanged with higher yielding opportunities presenting themselves in other markets.

The spread for three-year, triple-A rated prime auto loan ABS widened in 2Q15 and into the current quarter by 11bp since the end of 1Q15, leaving spreads at the wide end of their 12-month trading range. The spread for three-year, triple-A rated non-prime auto loan ABS also widened in 2Q15 and into the current quarter by 16bp after tightening in 1Q15.

Supply in the sector has also exceeded expectations, with new issue volume in the auto ABS sector reaching US$61bn in 1H15, up 4% versus 1H14. Due to the current pace of issuance and vehicle sales, the BAML analysts have revised their forecast up by US$25bn to US$125bn.

The retail lease sector's share of total new issue volume has reached record high levels, at 18.9%, while the prime auto loan sector's share has reached record low levels, at 37.7%. The analysts believe that new issue volumes in the retail loan and lease sectors, along with the floorplan sector, have been supported by increases in vehicle sales and the willingness to lend and borrow.

On the regulatory front, the BAML analysts believe that the US Consumer Financial Protection Bureau's (CFPB) recent publishing of a final rule over the supervision of larger non-bank auto finance companies (SCI 15 June) should not have an impact on spreads for retail auto loan and lease ABS. Similar to other undertakings by the CFPB, the analysts believe the agency will find areas where lenders or lessors need to change policies and procedures to ensure that they comply with all consumer protection regulations and laws, although the lengthy experience of most these larger participants should minimise this risk.

Meanwhile, the US Federal Reserve Board of Boston has issued an enforcement action against Santander Holdings USA, identifying 'deficiencies' in the company's governance, risk management, capital planning, and liquidity risk management. The headlines associated with the action could result in some near softness in spreads for subsidiary Santander Consumer USA's auto ABS but ultimately a response of stronger oversight should be positive for the company's operations, the analysts conclude.

ABS

FFELP doubts, opportunities arise

Despite a number of recent headwinds, bondholders in the FFELP ABS sector should ride out the current waves, JPMorgan analysts suggest. However, the very real possibility of money-good bonds backed by US government guaranteed collateral falling off the rating precipice from triple-A down to non-investment grade means the situation could worsen in the short term.

With the current state of the sector, Moody's has placed 106 tranches across 57 transactions of FFELP ABS on review for possible downgrade (SCI 23 June), while Fitch placed on rating watch negative 57 tranches from 23 trusts (SCI 29 June). Additionally, Moody's followed up its rating action with proposed changes to its approach to rating securities backed by FFELP student loans (SCI 10 July).

Although the rating uncertainties could push investors back to assuming the worst for FFELP ABS speeds. Prepayment speeds have stabilised since the financial crisis with the economy growing, the labour market improving and consolidation/refinancing opportunities increasing. In addition, the analysts note that while IBR participation has increased, investors should note that borrowers need to re-qualify for IBR every year. Navient has also noted that loans going into IBR are generally coming out of non-payment status. 

FFELP ABS sponsors are also expected to take action to avoid events of default. Navient has amended documentation for 17 of its transactions to increase the allowed repurchases to 10% of initial pool balance from 2%. To date, the company has repurchased roughly US$420bn across nine transactions from 2007 and 2008 vintages.

The analysts believe that the possible rating actions in the FFELP ABS space could create an opportunity for select intrepid investors that are able to stomach volatility. A slew of triple-A rating downgrades to possibly non-investment grade could disrupt the sector and impair liquidity. Should this lead to forced selling, investors could have the opportunity to take advantage of the potentially very attractive discounts to added FFELP ABS exposure.

However, challenges remain in modelling FFELP ABS assumptions and accessing FFELP ABS pool information. For investors able to take on the risk and hold possibly very long WAL bonds, the potential windfall could be significant, especially if issuers deliver on optional repurchases/calls.

ABS

FFELP payment scenarios tested

Moody's has provided illustrative examples of how slow pay-down rates could affect the pay-off dates of ABS backed by FFELP non-consolidation student loans. This follows the agency's recent request for comment (SCI 10 July) on proposed changes to the cashflow assumptions it uses to rate FFELP securitisations.

For its analysis, Moody's assumed that 'Securitisation 1' had a lower voluntary prepayment rate and shorter maturity for subordinated class B notes, which is representative of securitisations closed before the recession. In contrast, 'Securitisation 2' had a higher voluntary prepayment rate and longer maturity for the class B notes, and is intended to represent securitisations closed after the recession.

"Our analysis showed that the notes in Securitisation 1 were at higher risk of missing their final maturity dates than those in Securitisation 2 because the underlying loans in Securitisation 1 had near-zero voluntary prepayment rates during the financial crisis," says Moody's vp and senior analyst Nicky Dang. "Securitisation 1's most junior class A and class B notes would have a substantial amount of principal outstanding at final maturity, even if the pay-down speed increased as a result of higher voluntary prepayments or lower use of deferment, forbearance and IBR."

On the other hand, Moody's cashflow projections for Securitisation 2 indicate that less than 5% of the most junior class A notes would be outstanding at final maturity. Additionally, the subordinated notes would pay off in full before that date.

Moody's developed three scenarios to test how the two hypothetical securitisations would perform. The first was a base case that used current rates for each assumption; the second doubled the current voluntary prepayment rate while holding the other assumptions at the base case; and the third held voluntary prepayments at the base case, but halved the current percentage of loans in deferment, forbearance and IBR.

"For the pre-recession type Securitisation 1, between 20% (if the voluntary prepayment rate doubled) and 30% (if rates of deferment, forbearance and IBR declined by 50%) of the balance of the class A3 notes would remain unpaid on the final maturity date, even under the two more favourable scenarios, while half the principal would be outstanding for the class B notes at final maturity," explains Moody's vp and senior credit officer Irina Faynzilberg. "Meanwhile, both the class A3 and class B notes of Securitisation 2, the post-recession transaction, would pay off in full under the two more favourable scenarios."

ABS

Credit card charge-offs projected

Revolving US credit card debt stood at US$901bn outstanding at the end of May, reports S&P. The agency has developed a regression equation to project future US securitised credit card charge-offs under a variety of economic scenarios and relative to a number of variables, such as the unemployment rate and revolving credit growth.

"Our base-case projection, which calibrates the regression variables to their performance over the most recent 24 months, calls for credit card charge-offs near 3% in late 2016 - up from the current level of 2.4%, but still well below the historical 5.4% average," notes Darrell Wheeler, S&P's head of global structured finance research.

"We expect that continued relatively low interest rates, favourable consumer debt levels and job gains over the next year will keep consumer bankruptcies low," he continues.

S&P's downside forecasts show that charge-offs could reach 10% if the US falls into a recession similar to the last two. Charge-offs could even reach near 13% in a more dire projection, with the unemployment rate potentially hitting 15%.

Meanwhile, the agency's upside projection does not differ much from its base-case forecast. S&P says that charge-offs are unlikely to decrease inside of 2%, as upside conditions will eventually lead to greater availability of credit. This could cause credit card charge-offs to rise again.

Structured Finance

Italian SME arrears to drop

The stronger credit quality of Italian companies will accompany lower arrears in deals that securitise SME loans, according to Moody's. However, the agency believes that regional inequality will persist, with northern Italy outpacing the rest of the country due to the better credit quality in the area.

"The crisis hit small Italian companies hard, but the north was comparatively more resilient," says Valentina Varola, a Moody's vp and senior analyst. "Italian NPLs reached €184bn by the end of last year. New NPLs for northern SMEs only accounted for 3% of total Italian SME loans, while their southern peers recorded a much higher value, at 5.3%.

According to data from ABI and Cerved, new NPLs for Italian SMEs will fall to 3% in 2016, from 3.7% at year-end 2014. This has led Moody's to lower its average mean default assumptions for ABS backed by Italian SME loans.

The agency adds that NPLs could decline even further in the 33 Italian SME loan and lease ABS transactions that it rates, than in the overall Italian SME universe. The segment's outperformance has been linked to originators' positive loan selection. In addition, total delinquencies in Italian SME and lease ABS deals decreased to 7% in January 2015 from 9.4% in January 2014.

Moody's mean cumulative default assumption has averaged 18.3% for SME loan ABS deals that closed since 2013, with an average life of 4.6 years. This is equivalent to a Moody's proxy rating in the Ba range. For Italian SME lease ABS deals, Moody's average mean cumulative default assumption has been lower, at 15.7% for a shorter average life of 3.7 years.

Structured Finance

APAC ratings stay solid

Fitch says it affirmed a total of 111 Asia-Pacific structured finance tranches in 2Q15. During the quarter, 10 Australian tranches, one Japanese tranche and one Chinese tranche were upgraded, while one ABCP conduit from Australia was downgraded.

The agency claims that rating actions in Australia continued to be supported by a strong economy, with most ratings affirmed in the quarter. However, three RMBS tranches were placed on rating watch negative, following the downgrade of RBS.

A total of 17 Japanese tranches were affirmed during the quarter, including five tranches from three outstanding RMBS transactions and 10 RMBS ratings that were ultimately withdrawn. The only downgrade in the quarter was to a structured credit note, following the downgrade of the underlying collateral issuer's long-term issuer default rating.

Elsewhere, the class B note from Driver China One Trust was upgraded following a substantial build-up of credit enhancement and asset performance. Five other international ratings backed by assets in India, China and Thailand were affirmed, as were six national ratings backed by assets in Thailand.

Most long-term ratings in APAC have stable outlooks. The exceptions are the three RMBS tranches placed on rating watch negative and three positive outlooks in Australia.

Structured Finance

RFC issued on SF approach

Scope has issued a request for comment on proposed updates to its structured finance rating methodology, emphasising fundamental analysis of underlying assets in a European context and forward-looking views on economic cycles. The proposals also include no sovereign rating cap and a post-crisis counterparty risk approach.

Scope generally uses a fundamental bottom-up analysis to capture the rating impact of different asset, portfolio or structural characteristics, taking into account the context of origination and relevant jurisdictions. The agency says that this avoids the application of one-size-fits-all assumptions and can particularly apply for its analysis of securitisations in Europe. Scope favours a loan-by-loan approach in regard to its increasing focus on loan underwriting standards in the continent.

The proposals also include an analysis of counterparty risks, building on post-crisis realities. This will cover the new regulatory and supervisory framework for banks, such as bail-in and stronger prudential metrics, and the resulting limited likelihood for banks to default in the short term.

In addition, Scope does not mechanistically limit the maximum achievable rating of a securitisation as a function of the sovereign credit quality of the country of issuer or the securitised assets. A further adjustment to the methodology would include clarifying sensitivity test and break-even analysis with elements about long-term assessment of senior protection buffers. There would also be the addition of 10-year default probability tables and an update of the 10-year expected loss reference table to improve consistency of the table and better reflect key rating properties.

None of the proposed adjustments are expected to lead to any rating action on the structured finance instruments rated by Scope. The agency invites market participants to submit comments on the methodology by 21 August.

Structured Finance

ECB guideline impact 'mixed'

The ECB's recent ABSPP purchasing guidelines (SCI 8 July), which followed the EBA's proposed lower risk weights for certain qualifying securitisations (SCI 26 June), will likely shape the nature of new deals at least in the euro-area, according to Citi analysts. However, certain elements of the guidelines could actually work against the ECB's desire of reviving ABS markets.

As an example, despite including various checks to ensure a high degree of de-linkage from originators, the guidelines stress the need for the originator to be in good financial health. Securitisations of banks that are under special administration or those that have not performed satisfactorily in regulatory stress tests are discarded.

However, securitisation funding may not be attractive for top tier banks in pristine financial health because they can raise cheaper funding in covered and unsecured markets. Conversely, smaller banks which are in a weaker state of financial strength, but are more likely to tap securitisation markets, may not get the ECB blessing even though they meet other requirements on underwriting criteria and ABS structures.

Separately, the analysts envision that a few of the structural requirements will potentially hinder issuance. The ECB's aversion to revolving structures and to 'ramp-up' arrangements in otherwise static deals may worsen the economics of certain ABS for many issuers.

Moreover, the ECB's preference for purely sequential structures is not conducive for the demand for mezzanine and subordinate bonds, add the analysts. Bringing back investors in non-senior tranches could be essential to achieving the ECB's other goal of facilitating risk transfer away from the banking system.

Even for senior investors, purely sequential structures are also likely not ideal in a more normalised credit and lending markets because they leave senior bonds overly exposed to prepayment risk. However, the analysts note that as long as the triggers are clearly defined and contain provisions to switch back to sequential when deal performance deteriorates, pro-rata amortisation could be a more useful approach.

Structured Finance

Euro upgrades trump downgrades

S&P's upgrades exceeded downgrades in European structured finance for the first time since 2007, according to the agency. This partly reflected stabilisation in the macroeconomic backdrop and its effects on consumers, corporates and sovereigns.

"While the average change in credit quality for structured finance securities remained slightly negative, with a decline of 0.02 notches, this was the smallest net deterioration in creditworthiness for seven years," says S&P md Andrew South.

The downgrade rate fell to 13.6% in 2014, down from 22% in 2013, and the lowest in seven years. By contrast, the upgrade rate increased to 14.1% from 7.3% over the same period. In addition, the default rate decreased for the second consecutive year to a five year low of 1.8%.

"Some rating downgrades were due to changes in our analytical methodologies, including the application of our updated criteria for rating single-jurisdiction securitisations above the sovereign foreign currency rating and for transactions backed by Spanish and Italian mortgage loan collateral," adds South.

Structured Finance

New deposit guarantee 'credit positive'

The implementation of a revised German deposit guarantee scheme is credit positive for SME securitisations in the country, reports Moody's. The new law, which came into effect this month, guarantees corporate deposits in the German public sector and cooperative banks for €100,000.

Moody's says that the new statute mitigates set-off risk from the corporate credit exposure within SME transactions . A borrower might often set off its debt by the amount of an unpaid bank deposit. However, obligors will not be able to exercise set-off on deposits for which they have received a deposit guarantee payment in the event of a lender's default.

German SME securitisation portfolios may include 20%-25% loans from entities whose turnover is equal to or exceeds €50m. The prior guarantee scheme only covered deposits from private individuals and SMEs, and explicitly excluded corporate deposits. The new statute remedies this by harmonising the German deposit guarantee with other national deposit guarantees within the EU.

Although German SME securitisations do not make up a large portion of SME securitisations within the EMEA region, and the synthetic transactions are not exposed to set-off risk, Moody's says that their corporate risk exposure is greater than that of SME securitisations in other European countries. SME securitisations in Italy and Spain, countries that make up the majority of the EMEA SME market, generally include loans extended to microenterprises and SMEs rather than corporates.

Until now, set-off risk in German SME transactions has been addressed by the originator's commitment to establish a set-off reserve upon the breach by the originator of a rating trigger. The reserve covers potential borrower set-off amounts. Moody's expects larger companies to have deposits that typically exceed the maximum threshold of €100,000, which is well above the deposits of their smaller counterparties.

On average, the German deposit guarantee would cover approximately 10% of the loan amount. Moody's adds that the new law does not necessarily imply a change in the structure of German SME securitisation, but would likely reduce the amount of the set-off reserve.

Structured Finance

Chinese expansion predicted

The Chinese auto ABS and RMBS markets have high potential for growth over the medium term and should expand on the success of CLOs in China, says Moody's. This is due to high demand for auto loans and mortgages in the country on the back of higher consumption and rapid growth in the housing sector.

The result has left auto loan and mortgage originators increasingly shifting to securitisation to manage their balance sheets. Three auto ABS transactions sponsored by auto captive finance companies totalling RMB9.5bn have been issued in the China inter-bank market so far this year. Moody's expects the total volume of auto ABS issuance in 2015 to exceed that of 2014, when eight deals totaling RMB15.9bn were issued.

The agency's expectations reflect the fact that originators increasingly view ABS issuance as a way to diversify their funding sources and lower funding costs. In addition, existing auto ABS transactions tend to have a short weighted average life, so repeat issuance is likely to be needed to refinance the auto loan books of originators.

There is also a lot of interest in lease receivables backed transactions under the Asset Backed Specific Plan. For these transactions, the main analytical concern is whether investors can enforce on the security interest over the collateral if the project manager becomes bankrupt.

Although China's securitisation market is growing, Moody's says that both investors and originators are also interested in seeing more ABS issuance and more active trading in the secondary market. The recent move to the quota registration system from the approval process under the Credit Asset Securitisation scheme may help increase transparency and growth of the market, and subsequently improve market liquidity.

Finally, Moody's has clarified how it assesses RMBS in China, following interest from market participants. Adopting its global criteria, Moody's use its default frequency curve and loss severity assumption as a starting point to analyse a portfolio on a loan by loan basis, using its MILAN model.

In China, there are strict LTV rules for bank underwritten mortgages and the mortgage lender has full recourse right against defaulted borrowers, which means that the overall quality of the mortgages in a securitised pool is much better quality than US subprime mortgages or high LTV non-conforming mortgages in the UK. All else being equal, the portfolio MILAN credit enhancement in China may be lower than the average for US sub-prime mortgages and UK non-conforming mortgages.

CLOs

'High quality' managers negating risk

The top 20 European CLO 2.0 issuers account for €3.31bn, or 28%, of a total €11.5bn of collateral, says Moody's. In addition, the largest issuers have better weighted-average rating factors (WARF), at 2526, than the greater European CLO 2.0 universe, at 2944.

"European CLOs 2.0 are beset by heavy concentration: both in terms of their obligors and their exposure to the telecoms industry, for which we have a negative outlook," says Moody's analyst Branimir Jovanovic. "However, the higher credit quality of the obligors makes up for the related risks."

Among obligor domiciles and industries, European CLO 2.0s' top 20 obligors are mostly concentrated in the telecommunications industry at 23.9%, and operate in multiple countries. Liberty Global, with €501.7m of debt across 29 CLOs, is the most widely held among the top 20 issuers.

Moody's rates 23% of the top 20 issuers Ba3 or higher, compared with 9.9% of the remaining European CLO 2.0 universe. In addition, Moody's does not rate any of the top 20 issuers Caa1 or lower, compared with 8.7% of issuers in the rest of the European universe.

However, the agency says that the top 20 issuers are less diversified by industry than the rest of the collateral universe in Europe, with roughly 61% of the top 20 issuers operating in four industries. In comparison, there is just a 40% top-four industry concentration for the rest of the European collateral universe.

Further, the top 20 issuers are 15.2% concentrated in the media, broadcasting and subscription sector, which is second to the telecommunications sector. The remaining European CLO 2.0 collateral is mostly concentrated in the business sector, at 14.7%.

Moody's notes that, since most of the top 20 issuers have a global presence, the higher exposure to European countries does not pose increased risk. The rest of the CLO 2.0 collateral universe is more likely to have regional footprints. France (23.4%) and the Netherlands (18.03%) are the highest country concentrations among the top 20 issuers, and the UK (16.82%) and Germany (15.27%) are the highest country concentrations for the rest of the CLO 2.0 universe.

CLOs

Green Oak receives hope note mod

July remittance indicates that the US$62m Green Oak Village Place retail plaza in Brighton, Michigan, received a large hope note modification. The retail centre loan securitised in BACM 2007-5 had re-defaulted in December 2012 after receiving an earlier modification in 2009 that resulted in a partial pay-down, and the most recent appraisal of the property in March 2014 had placed it at US$28m.

The modification splits the loan into a US$28m class A note and a US$32.3m class B note. The A note rate has been reduced to 5% from 5.6%, and the B note will have a 0% pay rate. The remaining US$1.4m in principal appears to have been taken as a realised loss, according to Barclay Capital analysts.

The modification extends the maturity date to June 2016 with an additional one year extension option, and appears to have recouped US$3.8m in servicer advances that have been taken from generic deal principal proceeds, which resulted in a US$3.8m loss. The recouped advances and principal forgiveness totalled US$5.2m in principal losses. In addition, ASER of US$2.7m was repaid, which led to interest shortfall recoveries on the AJ-F tranches.

The new pay rate of 5% on the A note and 0% on the B note led to a monthly shortfall of US$156k this month, compared with ASER of US$217k in June. The analysts say this should lead to lower ongoing shortfalls, although shortfalls may return to the B or AJ tranches after the one-time ASER repayment.

Meanwhile, the July remittance also saw the US$94m Mall at Stonecrest (in BACM 2005-1) modified with an extension and a payment change from amortising to interest only. The Atlanta, Georgia, mall was most recently appraised at US$84m in 2014, and a BOV from March of this year indicated the value may now only be US$70m.

The modification changes the amortisation term to interest only from amortising for the remainder of the loan, but the loan rate is unchanged at 5.6%. The loan has been extended by one year to October, with an additional one-year extension option.

The borrower contributed US$7m of new equity, of which US$5.8m will be applied to a tenant leasing and improvement reserve. While the loan was current, penalty default interest of US$2.7m will remain due when the loan is paid off.

The Barcap analysts believe modification should be a credit positive for BACM 2005-1, as the modification includes no B note or interest reduction. With most of the deal paid off and the loan representing 47% of the deal outstanding, the successful payoff could be critical for mezzanine bond recoveries.

CLOs

CLO supply booms in June

June's US$14.6bn in US CLO supply is the third highest monthly figure of all time and nearly US$1bn more than the pre-crisis record of US$13.7bn set in November 2006, according to JPMorgan CLO analysts. However, a recent survey undertaken by the analysts outlines ongoing concerns over challenging arbitrage and a lack of collateral.

Softer CLO liabilities may be somewhat blunted by the near 20bp widening in loan prices since 11 June, but the JPMorgan analysts expect CLO supply to begin to slow until macro visibility improves and spreads stabilise. Chinese equities, global commodities and the situations in Puerto Rico and Greece appear to be weighing on the market. Nonetheless, with US$62.5bn in supply so far in 2015, the analysts believe that their projection of US$100bn-US$110bn of gross supply at year-end will be met.

The survey points to a lack of collateral as a primary concern among CLO investors, followed by risk retention and credit deterioration in second place, while Volcker Rule-related illiquidity was also reasonably meaningful in third place. But only a handful of CLO equity investors polled intend to hedge their interest rate duration risk, showing a general calmness over the US Fed's potential interest rate hike. The ratio of responses is about six to one, with 40 investors choosing to remain unhedged versus seven willing to hedge using various means, including interest rate futures and interest rate options.

In terms of relative value, the analysts note that triple-A CLO tranches are again most favoured in US and European markets, while interest in double-Bs and equity has slightly increased and is now fairly meaningful in the US secondary market. Meanwhile, the ratio of buyers to sellers rose sharply last quarter to 23 to one, although the analysts note that this is misleading as the number of buyers only slightly increased while the number of holders reached a two-year high.

Finally, the survey found that investor cash is slightly up from last quarter's all-time low, with circa 52% of investors holding low (0%-5%) cash and 18% holding high or very high (10%-15% plus) cash. This is only a very small improvement on the all-time low for cash since the bank started tracking the sector in 2012 and may be due to continued heavy new issuance.

CMBS

CMBS auction listings dip

The latest update of CMBS auction listings includes 40 properties from 36 CMBS loans with an allocated balance totalling US$179m, according to Barclays Capital analysts. Barcap figures reveal that the volume is somewhat lower than it was in 1H15, and the average property balance is also smaller than in past months with only three properties having an allocated balance over US$10m.

GCCFC 2007-GG11 has the largest exposure this month with four listings. The US$13.7m East West Shops in Austell, Georgia, is the loan with highest allocated balance in the transaction that is for sale. The US$6.6m multifamily property Sunpointe Place, US$4.8m retail property Chelsea Crossings and US$2.8m office building Mercado at Scottsdale are the other three loans securitised in GCCFC 2007-GG11.

The largest property in July is the Residence Inn Fishkill in the state of New York, which has been underperforming. It is part of the US$45m Residence Inn Hotel Portfolio 1, securitised in MLMT 2005-CIP1, and represents approximately US$15.6m in allocated balance.

The US$6m Residence Inn Tyler is another property from the loan included in this month's auction from the same portfolio. Finally, the US$11.8m Greensboro, North Carolina, based student housing property Collegiate Commons is the last loan with a balance over US$10m this month.

CMBS

Bulk liquidation completed

July remittances indicate that US$109.85m across 14 loans securitised in MLCFC 2007-7 has been disposed of at a 61% severity in a bulk liquidation. Four of the loans had previously been bid for auction in May.

Barclays CMBS analysts note that the disposals generally came in below appraisal, with recoveries of US$63.98m versus updated appraisals totalling US$67.22m. The US$6.4m 4220 Von Karman loan was the only one to be resolved significantly above appraisal, receiving US$7.3m in proceeds compared with a US$3.9m appraisal.

Two of the liquidations - the US$9.79m/US$4.2m Evergreen Apartments and US$4.89m/US$1.34m Ridgewood Apartments - involved modified A/B notes and proceeds were insufficient to generate B-note recoveries.

After liquidation expenses were deducted, the US$66.63m in principal losses wrote off the MLCFC 2007-7 B tranche and led to AJ losses. "The AJ loss appears to have been applied to the AJFL tranche only, but we believe this to be an error, as the prospectus states that losses are applied to the AJ and AJFL on a pro rata/pari passu basis," the Barclays analysts observe.

They add: "Assuming this is corrected, the loss on the AJ tranche would total US$34m (or 20% of the US$174m AJ tranche) and US$8.8m of the US$45m AJFL tranche. Additional losses are likely on the AJ tranches, with US$72m of loans still in special servicing, even after this month's liquidations."

CMBS

CMBS delinquencies climbing

US CMBS delinquencies climbed slightly last month led by two large newly delinquent loans, according to Fitch's latest index results for the sector. Loan delinquencies rose 6bp in June to 4.54% from 4.48% a month earlier, while the dollar balance of late-pays increased by US$65m to US$17.17bn from US$17.1bn in May.

The rise was driven by new delinquencies of US$876m exceeding resolutions of US$780m. The Fitch-rated new issuance volume of US$1.6bn in May - through one US transaction - was outpaced by US$5.4bn in portfolio runoff.

The largest new delinquency was the US$199.5m mixed-use NGP Rubicon GSA pool, which failed to pay off at its 11 June maturity and is now reported as a non-performing matured balloon. The second largest new delinquency was the US$122.6m office IRET portfolio, which has been in special servicing since July 2014 and fell 60 days delinquent in June.

Current and previous delinquency rates by property type are: retail at 5.44% from 5.26% in May; hotel at 5.2% from 5.18%; multifamily at 5% from 5.03%; office at 4.69% from 4.77%; industrial at 4.65% from 4.97%; mixed use at 3.68% from 2.61%; and other at 1.15% from 1.19%.

CMBS

15-year Freddie K debuts

Freddie Mac issued its first 15-year K programme CMBS last week under the ticker FREMF 2015-K1501, reports Wells Fargo. The 14.5-year WAL LCF A3 tranche priced 2bp tighter than the original price talk, in contrast to the week-over-week spread widening for most structured products.

Freddie Mac guarantees the payment of principal and interest on FREMF 2015-K1501 A3, even though the transaction was not rated by any rating agency. The secured and 10% credit-enhanced A3 tranche offers approximately 37bp in yield over similar duration to Freddie's agency debentures.

The tranche also yields more than the agency RMBS Fannie current coupon and certain municipal bonds such as North Carolina's state general obligation bond, albeit some of the yield pick up came from duration extension. Wells Fargo says the difference between the 10-year swap rate and the 14.5-year swap rate is approximately 26bp.

Compared to high-quality, similar-duration corporate and university bonds, Wells Fargo believes that the FREMF 2015-K1501 A3 is more attractive in most cases. Even though university bonds tend to offer a higher yield, the bank attributes the difference to better liquidity for the Freddie issuance.

The 15-year part of the curve could also be attractive to some buyers such as life companies, which may have a partial duration gap to fill in that part of the curve. In addition, the dealers' willingness to provide liquidity could also play a role. Based on TRACE data, dealers provided approximately US$3bn of additional liquidity in agency CMBS as dealer balances sheet grew to US$8.8bn in 2015 from approximately US$6bn at year-end 2014.

CMBS

Conduit leverage bumps up

The credit quality of US conduit/fusion CMBS continues to deteriorate, according to Moody's. As measured by the agency's LTV ratio, conduit loan leverage in 2Q15 pushed past its 2007 peak, rising to 117.8% - above the pre-crisis high of 117.5%.

In contrast, underwritten LTVs have remained substantially unchanged for the last six quarters at about 66%. Moody's says that underwritten LTVs are tied to current market values, which have run up well beyond their pre-crisis peak.

"Our approach to value helps identify loan credit quality trends throughout the credit cycle," says Moody's director of CRE research Tad Philipp. "For example, loans sized to 70% of peak values likely will underperform to those sized to 70% of trough values, as can be seen by comparing loans from the 2007 peak with those from mid-cycle 2003."

He continues: "While each had a similar average underwritten LTV in the low-70s, the market prices on which the 2007 loans were based were approximately 50% higher than the prices on which the 2003 loans were based." Moody's third-quarter pipeline indicates that LTVs are likely to increase further too.

Meanwhile, for the second straight quarter, Moody's class D assessment has exceeded the enhancement levels that other rating agencies assigned to class C notes - a class that is typically intended to carry a rating of three notches higher. Since 1Q13, enhancement levels assessed by others for class D notes have been largely unchanged, despite considerable deterioration in loan credit quality. In the meantime, Moody's assessments - which reflect both collateral quality and diversity - have risen by more than 500bp.

Risk Management

EMIR classification letter published

ISDA has published a new classification letter that will enable counterparties to notify each other of their status for clearing and other regulatory requirements under EMIR. The letter allows counterparties to bilaterally communicate their status by answering a series of questions.

The aim is for derivative users to know and communicate their classification status to counterparties in advance of the first clearing mandates that are due in 2016. Financial and non-financial counterparties are subject to a variety of regulatory obligations under EMIR, but the extent of compliance depends on their categorisation under the EMIR taxonomy. The classification also determines whether and when the EMIR clearing obligation applies.

The clearing categorisation component of the letter initially covers interest rate derivatives only. Final draft regulatory technical standards on the interest rate swaps clearing obligation were submitted by ESMA to the European Commission for endorsement in October 2014. ISDA intends to use the letter in the future to cover other classes of products that may become subject to the clearing obligation.

ISDA developed the letter as a bilateral version of the classification tools that currently exist on ISDA Amend. The online service includes the EMIR counterparty classification tool and the EMIR clearing classification tool.

Risk Management

FpML enhanced

ISDA has published its recommendation for Financial products Markup Language (FpML) version 5.8. The enhancements to the standard introduce support for a variety of commercial loan processes, schema changes to improve the data quality of regulatory reporting and coverage of repos. In addition, the latest version includes coverage for the 2014 standardised credit support annex.

"Multiple steps have been taken in version 5.8 to increase the regulatory reporting data quality," comments Karel Engelen, senior director at ISDA. "Data quality will continue to be a priority when we cover the SEC and revised MIFID II/MIFIR reporting requirements in version 5.9."

A first working draft for version 5.9 has been released simultaneously. The association says that regulatory reporting, clearing and electronic execution continue to be the focus areas for the FpML standards committee.

RMBS

Jumbo RMBS on record pace

US prime jumbo RMBS is on pace to exceed last year's issuance levels after another strong quarter, reports Fitch. Eight RMBS deals came to market in 2Q15, only slightly below the previous quarter in volume, combining to roughly US$7.1bn of issuance for 1H15.

In comparison, the 2014 total of issuance was US$8.3bn, while 2013 saw a figure of US$13.1bn. "Only eight borrowers out of roughly 32,000 are more than three months behind on their mortgage," adds Fitch director Sean Nelson. In addition, mortgage rates have dropped about 50bp from the start of 2014, resulting in a modest increase in prepayment speeds.

On 2 July, Fitch upgraded 56 ratings in 14 transactions to reflect the improved relationship between credit enhancement and collateral loss expectations. On average, the current credit enhancement percentage for classes that were upgraded is over two times higher than the original credit enhancement percentage. All upgrades were a single rating category in magnitude and were only considered for transactions with at least two years of seasoning.

RMBS

Bulk upgrades for Spanish RMBS

Moody's has upgraded the ratings of 254 tranches, confirmed 23 tranches and affirmed 106 tranches in 115 Spanish RMBS transactions. The agency's actions are a result of its update to several of its cross-sector, primary and secondary rating methodologies for structured finance securities, in order to incorporate the new counterparty risk assessment that it recently introduced for banks (SCI 16 March).

The agency also accredits its actions to a change in key collateral assumptions for some deals and completion of rating review actions of banks. Moody's says it is taking action on 18 additional deals following further completion of rating review actions of banks and assignment of counterparty risk.

RMBS

AOFM announces auctions

The Australian Office of Financial Management (AOFM) has confirm that its third RMBS auction will take place on 18 August. It has also notified the market that its fourth auction will take place on 15 September.

The August auction will incorporate up to A$500m in amortised face value. It will include tranches such as Barton 2011-1 A2, SMHL 2008-2 A1 and Torrens 2010-2 A4.

The September auction will also consist of up to A$500m of line items. Names to be sold include Firstmac 1-2012 A2, IDOL 2010-1 A2 and Torrens 2011-1E A3.

RMBS

Further actual-loss deals expected

Fitch expects more US GSE securitisations to be issued in 2H15. The agency says that Freddie Mac's first two actual-loss risk-sharing transactions are a sign that US RMBS investors are willing to buy more risk.

As per Freddie Mac's first two STACR DNA transactions, losses are passed to investors based on actual recoveries at loan liquidation. All previous risk-sharing transactions from Fannie Mae and Freddie Mac had used pre-set loss severity schedules that were tied to cumulative credit events.

"The significance of the actual loss deals is that they increase the amount of risk that the GSEs are able to offload," says Fitch director Sean Nelson. "We expect actual-loss transactions to become more common in the future as they provide this type of risk-offload for the GSEs and are likely more sustainable over the long run."

In addition, the first two STACR DNA transactions have a different definition of a credit event and a longer legal maturity than previous risk-sharing transactions. The new actual-loss transactions define credit events as loan liquidations through REO dispositions, short sales or note sales occurring within 12.5 years of the closing date. In previous risk-sharing transactions, credit events were defined as a loan becoming 180 or more days delinquent or liquidating before becoming 180-days past due, and the legal maturity window was 10 years.

In addition to increased activity from Freddie Mac, Fitch says that Fannie Mae is expected to issue its first actual-loss risk-sharing transaction later this year. The GSE risk-sharing transactions are expected to contribute a consistent supply to the market for the foreseeable future after issuing roughly US$6.8bn in 1H15 - on pace to surpass 2014's total issuance of roughly US$10.8bn.

RMBS

New risk sharing deal debuts

Fannie Mae has completed an additional credit risk sharing transaction - CIRT 2015-1 - that aims to further diversify its counterparty exposure and reduce taxpayer risk by increasing the role of private capital in the mortgage market. The credit insurance risk transfer (CIRT) deal shifts credit risk on a pool of mortgage loans to a panel of reinsurers.

In this transaction, Fannie Mae retains risk for the first 50bp of loss on a US$4.68bn pool of loans. If this US$23.4m retention layer were exhausted, reinsurers would cover the next 250bp of loss on the pool, up to a maximum coverage of approximately US$117m.

Coverage is provided based upon actual losses for a term of 10 years. Depending on the pay-down of the insured pool and the amount of insured loans that become seriously delinquent, the aggregate coverage amount may be reduced at the three-year anniversary and each anniversary of the effective date thereafter. The coverage may be cancelled by Fannie Mae at any time after the five-year anniversary by paying a cancellation fee.

The reference loan pool consists of 30-year fixed rate loans with loan-to-value (LTV) ratios greater than 60% and less than or equal to 80%. The loans were acquired by Fannie Mae from September through December 2013.

The GSE says that this form of risk transfer has been "well received" by the market and, based on the indicated support by reinsurers, it intends to bring further similar transactions in the future.