News Analysis
CLOs
Sterling effort
European CLOs testing creative palette
European CLOs remain an attractive option for yield-hungry investors, but a shortage in quality collateral persists. As managers attempt to broaden the investor universe, a fresh phase of innovation has expanded the structural scope of new transactions.
The current new issue European CLO pipeline seems to have been temporarily interrupted by the uncertainty surrounding Greece and the evolving situation in China, according to Julie Bothamley, md and portfolio manager at PineBridge Investments. An ongoing demand and supply imbalance is also precipitating a wave of repricing activity and spread compression (SCI passim).
"Despite the ebbs and flows of supply and demand in 2015, we have seen some first-time managers entering the market and some 1.0 managers returning to it," she says.
Consequently, a number of managers are structuring their CLOs to stand out from the increasing competition, while meeting a combination of European and US retention requirements at the same time. AXA Investment Managers is one such manager, with its recent closing of the US$415m Allegro CLO III.
The deal is the first CRD IV-compliant CLO managed by the firm, with a portfolio that consists of corporate assets only and a minimum of 90% first-lien senior secured leveraged loans. Up to 10% of the portfolio may consist of second-lien loans and unsecured loans.
"The loan-only structure makes the transaction more accessible to investors that may otherwise have been exempt due to Volcker regulations," says Jean-Philippe Levilain, head of US structured finance at AXA. "Certain European managers, most often banks, will have US operations that will deter them from buying into a triple-A part of a portfolio if there is a bond within that pool. However, this is not an issue for loan-only transactions."
Levilain says there are still ways in which investors can achieve purchase eligibility for pools that do contain bonds, however. One such solution is through the manager implementing a voting/non-voting rule to the tranche, which allows the investor to purchase into the pool as long as they do not possess a voting right to remove the CLO manager.
However, perhaps a more urgent issue is the relative scarcity of certain assets within the European CLO space. "It is not even necessarily an issue of finding assets, as there is sufficient volume. It is the quality of assets that investors are struggling to obtain," Levilain says. "This is why managers are introducing sterling tranches to not only add some quality to the asset class, but also offer the product to a wider universe."
The sterling risk retention strip is a structure that recently debuted off the back of investor demand. Credit Suisse Asset Management branched into this space when it closed in May its €400m Cadogan Square CLO VI, the proceeds of which is being used to purchase a mixture of sterling- and euro-denominated loans and bonds (see SCI's new issuance database).
Since then, US dollar-denominated tranches have emerged in European deals. The recently-priced Black Diamond CLO 2015-1 securitises a portfolio of primarily euro and US dollar senior secured loans granted to speculative grade European and US corporates.
Specifically, the transaction includes triple-A to single-B floating rate euro-denominated tranches, a triple-A US dollar floating rate tranche, a double-A US dollar fixed rate tranche and a US dollar equity tranche. The euro tranches priced at Euribor plus 130bp, 210bp, 280bp, 370bp, 525bp and 650bp. The triple-A dollar tranche priced at Libor plus 140bp.
"Given that the European loan market is still relatively small, having access to non-euro denominated loans - whether sterling or US dollar - can increase desirable CLO portfolio attributes like diversity, liquidity and spread," explains Bothamley.
Levilain adds that sterling loans also have higher recovery rates than other Continental Europe loans, due to local jurisdictions being more lender-friendly. However, regardless of loan by loan recoveries, he notes that rating agencies always apply a stress case to any given bucket that considers the worst case possible, even if unrealistic.
"Typically, they could suggest that if all sterling loans defaulted, there would then be no sterling-denominated revenues to pay for the liabilities," says Levilain. "This is where you can end up with less efficient leverage."
Bothamley explains that the consequent haircut on the equity is an additional stress on investors, which has resulted in the sterling retention strip gaining less traction than is perhaps desired. "Given the cost of mitigating FX risk, they are not accretive to CLO equity returns right now."
Indeed, efforts to broaden the pool of available collateral have been met by calls from certain investors to drop sterling tranches altogether over validity concerns. Pramerica, for instance, is believed to have recently scrapped a dual-currency CLO structure it had planned in favour of a solely euro-denominated deal.
Despite such concerns, Bothamley suggests that there remains an upbeat outlook for the market. She notes that this is particularly due to Europe's current lead on the US in addressing and understanding CLO regulatory issues.
"Any lingering doubts among the CLO investor community about the various approaches to risk retention should wane with the passage of time as retention-compliant CLOs are examined by auditors and regulators," she observes.
Levilain expects European CLO issuance to reach about €100bn by end-2015 and believes it will provide a strong platform for managers to work from. "This should pave the way for more collateral and provide plenty of opportunities for CLO managers to ramp up their portfolios," he concludes.
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News Analysis
CMBS
Expanding brand
CRE appetite spurs European CMBS variety
European CMBS primary issuance remains slow in relative terms, but the sector continues to innovate. Regulatory pressures are driving alternative options to rated CMBS, as demand for real estate continues.
A recent Paul Hastings report suggests that European CMBS issuance is set for its best year since 2007. A total of €3.3bn of new CMBS has already been issued in Europe in 1H15, compared with €887m in 1H14.
"The last 18 months have provided some interesting issuance in the market," says Iain Balkwill, partner at ReedSmith. "The market is certainly creeping forward and there seems to be a level of added complexity with each deal that hits market."
Just over four years ago, Deutsche Bank launched Deco 2011-CSPK, which Balkwill believes was a defining moment in the return of CMBS primary issuance. The deal was designed to overcome many of the flaws that were associated with the CMBS 1.0 market and set the trend for innovation to pick up in recent years.
"We saw a number of new deals last year that caught the eye; most notably Deco 2014-Tulip, which was the first multi-loan CMBS deal that comprised of different sponsors," adds Balkwill. "It was also the first deal backed by Netherlands real estate since the global crisis, which is a jurisdiction that should continue to come back into the fold."
Balkwill's projections are already bearing fruit, with Deutsche Bank currently marketing a multi-jurisdictional CMBS - the €316m Deco 2015-Charlemagne - backed by three loans secured by 37 properties, 70% of which is located in the Netherlands. "Another welcome development has been the emergence of CMBS 2.0 deals backed by assets located in new European jurisdictions. This year alone we have seen deals secured by properties in Spain and Ireland, as well as the emergence of transactions backed by assets located in more than one jurisdiction," he continues.
Asset pools have also become more diverse. One example has been through the inclusion of leisure centres in CMBS portfolios, with the £175m Antares 2015-1 deal from March the most recent transaction to incorporate such collateral.
Goldman Sachs also recently unveiled REITALY Finance, a €181.9m CMBS that has a large exposure to leisure property, including a number of cinemas. The deal has been postponed, but it still represents the market testing uncommon ground.
"Deals backed by leisure and entertainment centres would not have been viable a short while ago. Given that deals such as this are being brought to the market can be regarded as a huge thumbs up to CMBS as a financing tool for a range of CRE assets," says Balkwill. "The next step is to build on these structural and underlying asset nuances."
Although the lack of issuance has been frustrating, Balkwill believes the CMBS 2.0 market has never been so bullish, given the nature and type of deals that are being launched. Despite a strong consensus that regulation has been particularly tough on the sector, investors appear to have an appetite for new product.
This has led to the popularisation of CRE loan notes, which Bank of America Merrill Lynch structured finance analysts describe as a product similar to loans and traditional secured bonds, or even CMBS. CRE loan notes offer an alternative option to investing in CRE debt, which could appeal to certain debt and hedge funds that would like to buy loans but are only permitted to own bonds.
The BAML analysts suggest that the loan note structure sits between loan syndication and securitisation. The structure allows a loan to be held within a bond vehicle and the bond could be bought by more than one investor in the same way as a loan syndication.
The notes are privately placed pass-through structures, with the default risk mirroring that of the loan. They do not contain structural enhancements, such as liquidity facilities or credit ratings, and typically comprise a single-tranche of notes as opposed to having subordinated classes.
"They are being labelled as a new product, but they have always been around and have historically been used for a range of reasons, such as overcoming lender restrictions in underlying documentation," says Balkwill. "The fact that they are gaining popularity is a positive sign, as it demonstrates that there is a strong appetite for structured products backed by CRE."
The analysts are aware of four transactions that have been structured in this way since 2014: Midas Funding UK, Mint Mezzanine 2014, Zephyrus (European Loan Conduit No. 30) and Reni SPV (see SCI's new issuance database). Three of the deals are backed by UK assets and one by Italian assets, totalling €653m in volume.
Similarly, the private placement of unrated CMBS has provided an avenue for arrangers to both limit regulatory costs and experiment with structures. The Paul Hastings report says that nine unrated CMBS have completed to date in Europe. Two of those deals were completed this year - the Midas Funding and Mint transactions.
"The overriding reason to issue unrated bonds in a CMBS is cost. Engaging a rating agency to rate a transaction will involve paying an upfront fee and an annual surveillance fee," the report notes.
In addition, CRA 3 regulation states that a rated structured finance transaction must obtain the ratings of two agencies, which are additional costs that unrated CMBS are able to avoid. Unrated CMBS may also benefit from specific exemptions to regulations and hence save certain compliance costs.
Balkwill expects similar methods to be pursued as arrangers continue to come to terms with regulations. The potential entrance of new arrangers could drive this trend.
"Increasing the number of arrangers certainly can be a positive next step. The European CMBS market needs a number of arrangers that are actively and consistently issuing primary CMBS product," he says.
With the correct provisions now put in place by established players, Balkwill believes the market is prepared for its next step. One potential development could be deals comprising a greater number of loans. "As the CMBS 2.0 market has been finding its feet, the deals that we have seen to date have been confined to the securitisation of a small number of chunky loans. What would be great is a deal comprised of some of those moderate sized loans that have so far been barred from securitisation due to their size."
He concludes: "If we start to see deals backed by a number of loans in the €20m-€50m size range, then CMBS 2.0 will become a very exciting proposition for financing CRE."
JA
SCIWire
Secondary markets
Euro secondary stays positive
European securitisation secondary markets are remaining positive, although activity is still limited.
Sentiment continues to improve across the board, but volumes remain light. Prime ABS/MBS and 1.0 CLO paper saw increased two-way flows on Friday, but peripherals, particularly Portuguese and Spanish names, are still lagging albeit in a tightening trend.
The resurgent primary market is also having an impact - generating auto and UK RMBS sellers as they seek to switch into new deals in the same sectors. However, secondary auction supply remains scant with no BWICs currently scheduled for today.
SCIWire
Secondary markets
Euro ABS/MBS coming back to life
The European ABS/MBS secondary market is slowly coming back to life.
Yesterday saw a continuation of the recent increasingly positive sentiment across most European ABS/MBS deal types and jurisdictions. Consequently secondary spreads remained robust aside from UK non-conforming RMBS, which is still experiencing some softness thanks to primary activity. At the same time, buying interest continues to increase from recent very low levels though the usual summer liquidity issues are also having an impact.
Meanwhile, European ABS/MBS BWIC supply looks to be picking with a few lists scattered across the forward calendar already. After yesterday's eventual flurry of predominantly small clips, today sees two sizeable auctions circulating for trade so far.
At 14:30 London time there is a 13 line UK non-conforming BWIC comprising: £6.7m ALBA 2006-2 E, £7m ALBA 2015-1 B, £2.5m ALBA 2015-1 E, £7.55m CELES 2015-1 B, £5m CELES 2015-1 C, £2m CELES 2015-1 E, £4.5m EHMU 2007-1 B1, £3m LMS 3 B, £3m MPS 4X B1A, €2m RLOC 2007-1X B1A, €3.24m RMACS 2006-NS3X M2C, €2m RMACS 2006-NS4X M2C, £6m RMS 28 C and £6m UROPA 2007-1 B1A. Two of the bonds have covered with a price on PriceABS in the last three months - CELES 2015-1 E at 93.8 on 21 May and RMS 28 C at 98.61 on 24 June.
Then, at 15:00 is a 31 line 78.35m mixed euro and sterling CMBS and RMBS list. 15 of the bonds involved have covered with a price on PriceABS in the last three months: DECO 2014-BONX E at 102.61 on 24 April; DECO 2014-GNDL D at 100.26 on 3 June; ECLIP 2006-4 B at 95.58 on 21 May; ECLIP 2007-1X B at 97.81 on 10 July; GRF 2013-1 B at 100.711 on 17 July; GRF 2013-1 C at 102.91 on 21 May; GRF 2013-1 D at L104S on 28 May; MORGT 2014-1 C1 at 96.25 on 15 May; MORGT 2014-1 D1 at 95.5 on 15 May; RLOC 2007-1X A3A at 91.01 on 9 June; TAURS 2013-GMF1 C at 102.25 on 14 May; TAURS 2014-UK1 C at 100.25 on 3 June; TAURS 2015-DE2 D at 99.51 on 14 July; WARW 1 D at 95.8 on 25 June; and WARW 1 E at 93.1 on 25 June.
SCIWire
Secondary markets
US CLOs stay slow
The US CLO secondary market remains quiet despite a few BWICs appearing on this week's schedule.
"Things are pretty slow," says one trader. "It's not all negative - there are no forced sellers and things have improved in terms of market tone, it's just there's not a lot of secondary activity."
The lack of activity is a result of a combination of macro concerns, summer slowness and supply fatigue, the trader suggests. "As a result, bid-offers are still a little wide and we look to be heading into a period without any real direction where everyone adopts a wait and see attitude."
Nevertheless, the trader adds: "There is at least a little bit of BWIC activity this week with about $100m already on the schedule. There's no clear theme to what's being sold though - a mix of 1.0.and 2.0, with a little mezz and some equity."
Today's auction schedule currently sees two US CLO lists. At 10:00 New York time are ten dollar-denominated line items totalling $49.6m original face as part of a euro-dollar mixed BWIC, which also includes €9.9m of ALPST 2X C, ALPST 2X D and ALPST 2X E.
The dollar tranches are: APID 2013-15X E, BABSN 2014-IA SUB, BLUEM 2013-2A SUB, JTWN 2014-4A SUB, MCLO 2014-6A E, ROCKW 2007-1A A2L, ROCKW 2007-1A B2L, ROCKW 2007-1X B2L, WINDR 2014-2A INC and ZING 9A B. From the whole list only one bond has covered with a price on PriceABS in the last three months - ALPST 2X D at 89.13 on 17 July.
Then, at 12:00 is a seven line $27.35m list, which involves: BLACK 2006-1A B, BRENT 2006-1A A1A, CORNR 2007-1A A1S, DUANE 2007-4A D, GSC 2007-8A A2, OZLMF 2012-2A B and RACEP 2007-4A C. Two of those bonds have covered with a price on PriceABS in the last three months - CORNR 2007-1A A1S at M98s on 8 July and DUANE 2007-4A D at H98H on 18 May.
SCIWire
Secondary markets
Euro secondary sees slow progress
The European securitisation secondary market continues to see improvement, but progress is still slow.
"Activity has picked up over the last few days," says one trader. "But we're definitely in summer mode now - it's not improving as quickly as we'd hoped."
Nevertheless, the trader adds: "In Dutch and UK prime two way flows keep strengthening and spreads are grinding tighter. We're now seeing good interest from the buy-side so overall the sector is much healthier."
CLOs are also moving quickly closely reflecting credit index movement. "2.0 triple-Bs in particular are outperforming," the trader notes. "They're trading in the 360 area, which is inside new issue and last seen secondary levels. They look to be dragging the other parts of the capital stack with them, though triple-As are still lagging a little."
Peripherals are seeing more activity too, though it remains patchy. "ABS/MBS isn't going as fast as sovereigns, but peripheral paper is definitely better bid in the Street, although clients are slower to join in," says the trader.
Meanwhile, UK non-conforming remains hampered by the strong primary pipeline. At the same time, CMBS is also an area of difficulty.
"CMBS and German MF in particular are suffering," says the trader. "We saw a BWIC go through yesterday at levels close to Street bids, which isn't great and somewhat surprising as it means customers are staying on the sidelines even though there's little supply."
In total five BWICs are currently circulating for trade today. They include a mixed ABS/MBS list of small clips; a collection of peripherals; and single lines of German ABS GMITE 2 A and CLO CRNCL 2014-4X C.
However, the chunkiest list again attempts to attract some CMBS buying interest through a three line auction of such bonds due at 14:00 London time. It comprises €9m RIVOL 2006-1 C, €40m TITN 2006-5X A1 and €3m TITN 2006-5X A2. None of the bonds has traded on PriceABS in the last three months.
SCIWire
Secondary markets
US CMBS drifts
US non-agency CMBS secondary market tone is improving but spreads and activity levels appear to be drifting.
"The CMBS market has definitely improved from where it was a few weeks back," says one trader. "Overall tone is better thanks to the big headwinds of China and Greece abating for now."
However, the secondary market still has no strong sense of its own direction and appears just to be drifting along. "Secondary is being impacted by macro not market specific issues and while spreads are moving in they are just doing so in lock-step with other credit markets," says the trader.
Secondary trading volumes have also been light and are unlikely to take off dramatically any time soon, the trader suggests. "Secondary supply has not been as robust as primary although the BWIC schedule has begun to pick up over the past week or so. Focus will remain on the new issue calendar as it continues to be heavy - for example, there are three conduit deals marketing right now - and looks set to stay the same way until mid-August."
SCIWire
Secondary markets
Euro secondary improves again
The European securitisation secondary market volume again saw a little improvement yesterday as spreads remain firm.
Secondary trading activity continues to improve across the board with each session. Yesterday saw continuing investor interest in the prime segment and 1.0 CLOs. UK non-conforming had a better day than of late, but the primary market continues to weigh heavily on the sector, while new deals are increasingly distracting other secondary asset classes now as well.
Peripherals also continued their tightening trend, but still on the back of very low volumes. The sector will remain in focus today with the current sole Europpean BWIC made up of peripheral mezz.
The €30.8m 12 line list due at 14:30 London time comprises: BBVAL 2007-1 C, BCJAF 10 D, BCJAF 11 D, GCPAS 5 C, HIPO HIPO-10 C, PAST 4 E, SANFI 2006-1 E, SESTA 4 C2, TDA 27 D, TDA 27 E, TDAC 9 C and UCI 17 C. None of the bonds has covered on PriceABS in the last three months.
SCIWire
Secondary markets
US RMBS elevates
The US non-agency RMBS secondary market is seeing elevated trading volumes this week.
"Things have really swung back from the last couple of weeks and it's been very busy this week," says one trader. "We've seen elevated volumes with $1bn going through on Tuesday, $800m yesterday and over a $1bn today."
The trader goes on to explain: "Many people are taking advantage of the current lack of headline risk and putting bonds out to bid. At the same time, they're looking to get ahead of the traditionally quiet period in August."
Despite the spike in supply bonds are trading well, the trader reports. "There's a lot of pent up demand because the start of July was so quiet and so paper is selling well both on BWIC and out of comp. While last week saw softer pricing levels, this week spreads are now either flat or have recouped recent widening."
Equally, the market is seeing a range of sellers, structures and cashflows. "We're seeing the full variety from asset managers and hedge funds; from wrapped bonds to AON auctions to CDO Liquidations," says the trader. "It's returned to being a normal fully functioning market - it's quiet in terms of volatility, but very healthy and more reminiscent of March than July."
SCIWire
Secondary markets
Euro secondary stays firm
Tone and spreads in the European securitisation secondary market are staying firm.
Yesterday saw another solid day in secondary market activity across the board. The usual hotspots continued with prime assets seeing most flows once more, although Italian paper is receiving increasing attention.
BWIC activity remained reasonably healthy yesterday with most line items going through at or around expected levels and there are currently four European BWICs circulating for trade today. They include a single £5m line of pub ABS SPRTLN 0 12/28/28 and a 12 line mix of ABS/MBS and CLO small clips.
In addition, there is a slightly more substantial RMBS list due at 14:30 London time. The six line €8.6+m current face auction, comprises: CHAPE 2003-I A, GRIF 1 A, GRIF 1 C, TDA 25 A, THEME 3 C and UCI 16 D. None of the bonds has traded on PriceABS in the last three months.
There is also a four line €17.55m CLO BWIC due at 15:00. The 1.0 mezz list consists of EUROC VIII-X D, HARVT I-X D, OCI 2007-1X D and VERS I E. One of the bonds has covered on PriceABS in the last three months - EUROC VIII-X D at 99.62 on 28 April.
News
Structured Finance
SCI Start the Week - 20 July
A look at the major activity in structured finance over the past seven days
Pipeline
Pipeline activity continued to normalise last week. There were eight ABS, five RMBS and five CMBS additions.
The ABS were: US$203.1m Access Funding 2015-1; US$170m Diamond Resorts Owner Trust 2015-1; US$460m Driven Brands Funding Series 2015-1; E-CARAT
8; US$650.1m Enterprise Fleet Financing Series 2015-2; US$810m Ford Credit Auto Owner Trust 2015-REV2; US$476.19m NextGear Floorplan Master Owner Trust Series 2015-1; and US$687.59m World Omni Automobile Lease Securitization Trust 2015-A.
Auburn Securities 9, US$300m FWLS 15-SC01, JPMMT 2015-4, Lanark Master Issuer Series 2015-1 and A$460m SMHL Series Securitisation Fund 2015-1 accounted for the RMBS. The CMBS were US$140m CFCRE 2015-RUM, US$215m Citigroup Commercial Mortgage Trust 2015-SHP2, €316m DECO 2015-Charlemagne, US$1bn GSMS
2015-GC32 and US$935.4m MSBAM 2015-C24.
Pricings
A significant number of deals priced. This included 10 ABS, an ILS, six RMBS and four CLOs.
The ABS were: US$1.02bn Ally Auto Receivables Trust 2015-1; US$1.03bn American Express Credit Account Master Trust Series 2015-1; US$900m BMW Floorplan Master Owner Trust Series 2015-1; US$275m Capital One Multi-Asset Execution Trust 2015-4; US$700m Capital One Multi-Asset Execution Trust 2015-5; US$664m Drive Auto Receivables Trust 2015-C; CNY1.9bn Driver China Two Trust; US$1.5bn MBART 2015-1; US$1.3bn Nissan Auto Receivables 2015-B Owner Trust; and €646.3m Thetis Finance 1.
The ILS was US$300m Acorn Re Series 2015-1. The RMBS were: US$1.56bn CAS 2015-C03; €500m IM EVO RMBS 1; €139m Kingswood 2015-1; €5.235bn Orange Lion 2015-12; £310m-equivalent Paragon Mortgages No.23; and €225m Precise Mortgage Funding 2015-2B.
Lastly, the CLOs were US$1.12bn ALM XVI, €427m Black Diamond CLO 2015-1, €414m Carlyle Global Market Strategies Euro CLO 2015-2 and US$400m KKR CLO 12.
Markets
Spreads widened in US ABS, except for esoterics, report Bank of America Merrill Lynch analysts. "As we expected, secondary spreads for FFELP ABS have widened in recent weeks as investors digested Moody's and Fitch's rating actions. Additionally, private student loan ABS spreads have moved wider," they say.
US non-agency RMBS trading activity picked up, but remains below the yearly average. "Investors took risk off the table by selling more than US$700m in non-agency RMBS paper and then adopting a wait-and-see approach to the situations in Greece and China. This was the highest amount of net selling in a given week over the last three to four months. Dealer balance sheets began to reverse course after several weeks of decline as they absorbed the selling in below-investment-grade paper," say Wells Fargo analysts.
After steadily widening since mid-May, Barclay Capital analysts believe the US CMBS market showed signs of bottoming last week. "In secondary trading of recent issues, LCF triple-A bonds were 6bp tighter, to swaps plus 95bp. More credit-leveraged, single-A rated mezzanine tranches were 15bp tighter, to swaps plus 235bp, and triple-B rated mezzanine tranches compressed 18bp, to swaps plus 382bp. Agency CMBS spreads missed out on the rally, with the 10-year Freddie K A2 tranches flat at swaps plus 56bp on low volume," they say.
Editor's picks
FFELP repacks put forward: The FFELP student loan ABS sector could yet fend off downgrades if refinancing solutions come forward. Some novel ideas are already surfacing that expand the possible fixes beyond bondholder extensions or trust cash injections...
RMBS settlement resolutions 'years away': Several recent legal developments could affect cashflow distributions from ongoing settlements and lawsuits. These developments could also affect the likelihood of investors recouping any cash from future settlements...
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...
Deal news
• 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.
• 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.
• 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.
• 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.
• 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. GCCFC 2007-GG11 has the largest exposure this month with four listings.
Regulatory update
• 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.
• 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.
• 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.
Deals added to the SCI New Issuance database last week:
Battalion CLO IX; Berica ABS 4; Cabela's Credit Card Master Note Trust Series 2015-II; Dolphin Master Issuer series 2015-2 ; Dryden 40 Senior Loan Fund; FCT Ginkgo Debt Conso 2015-1; Jefferson Mill CLO; Oportun Funding I series 2015-B; Palmer Square CLO 2015-2; Sierra Timeshare 2015-2 Receivables Funding; Vibrant CLO (refinancing)
Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-1; BACM 2007-5; BSCMS 2007-T28; CMLT 2008-LS1; COMM 2008-LS1; CSFB 2006-TFL2; CWCI 2007-C2; DECO 2007-E5; DECO 2007-E6; DECO 6-UK2; ECLIP 2006-2; ECLIP 2006-3; EPICP BROD; EPICP DRUM; EURO 28; GCCFC 2006-GG7; GCCFC 2007-GG11; GCCFC 2007-GG9; GSMS 2006-GG8; GSMS 2007-GG10; INFIN SOPR; JPMCC 2008-C2; LBCMT 2007-C3; MESDG DELT; MLCFC 2006-4; MLCFC 2007-7; MLMT 2005-CIP1; MSC 2007-T27; MSCI 2007-IQ16; TAURS 2007-1; TITN 2006-3; TMAN 5; TMAN 6; TMAN 7; WINDM X; WINDM XIV
News
CDS
Crossover tranchelet trades touted
Investors are increasingly looking to trade slices of the 0%-10% equity tranche of the on-the-run iTraxx Crossover S22 portfolio. With the opportunity to express views either through a 0%-5% tranchelet or 5%-10% tranchelet, Bank of America Merrill Lynch credit derivative analysts recommend going short 0%-5% and long 5%-10%.
High dispersion on the wide end of the tail and low dispersion for tighter names hampers the 0%-5% tranchelet's risk-reward appeal from a long-risk perspective, reckon the BAML analysts. They suggest the 0%-5% tranchelet's performance will be closely linked to the performance of the index and therefore view it as a better short, although the 5%-10% tranchelet provides a more attractive opportunity to reach for yield with decent subordination and break-evens.
Since the Crossover S22 tranches launched nine months ago (SCI 14 October 2014), investors have used the product as a risk-on tool. Preference for more junior tranches has been based on a belief that wider names would outperform during a rally.
However, portfolio dispersion has been rising. At the same time, the first loss tranche base correlation has also moved higher, with better sellers of protection on 0%-10% over the past few months.
"Thus the performance of the first loss 0%-10% tranche was dislocated from fundamentals, purely based on the reach for beta/yield in a levered format. Despite rising dispersion among the names in the Crossover S22 pool, default correlations increased for the 0%-10% equity tranche," say the analysts.
Excluding Norske Skog, single name CDS dispersion among the remaining 74 Crossover S22 names has increased meaningfully over the past few months. Dispersion when the five widest names are excluded has still increased, but less notably. The dispersion of the 65 and 55 tightest constituents has been broadly unchanged.
The widest tail underperformed the rest during the recent widening and the gap between the four widest names - still excluding Norske Skog - and the next five has increased considerably. Apart from the six widest names, the rest of the tail is very concentrated, although this was not the case when the index started trading.
The 0%-5% tranchelet's risk-reward profile is just not that attractive, the analysts say. They comment: "Even though the wide-end of the portfolio has been significantly dispersed, the rest seems to be relatively concentrated. We feel that there is significant spread jump risk from names that are trading below the widest-end of the spread distribution (the seventh to 20th names) as these names trade in a tight range, making it difficult to identify the ones to hedge for jump."
From a mark-to-market point of view, they believe current levels favour being short risk on the junior tranchelet. They say there is significant risk that the distribution of the wide-end of the tail could change significantly, becoming more dispersed. This would add more downside risks to the valuation of the 0%-5% tranchelet.
"The equity tranchelet already reflects the risk of the widest six names. When we stress the jump-to-default profile of the equity tranchelet, we find that there is a significant lower jump risk from these names. Thus the risk is predominately in names that trade tighter to that level where the dispersion is the lowest and thus spread jump risk is the more pronounced," the analysts say.
For a longer-term investor, analysis shows that if there are no defaults until the December 2019 maturity of the Crossover S22 five-year contract, an investor could make 92% of their invested notional. In an extreme downside where all events occur on Day 1 of a trade, an investor would be liable for a loss of 30 points.
There is better value and subordination for the 5%-10% tranchelet, argue the analysts. The 5% subordination provides an important cushion and analysis shows the tranchelet could still provide positive return in scenarios with eight or nine credit events.
JL
News
CLOs
No-action impact gauged
Prior to publication of the US SEC's no-action letter (SCI 21 July), an estimated US$261bn of US CLOs had to refinance before 24 December 2016 to avoid risk retention for the refinanced tranches. The ruling means that an additional US$152bn of CLOs should be able to refinance during 2017 without triggering the risk-retention requirement, according to Wells Fargo figures.
There are a number of limitations on the refinancing that can occur without triggering risk retention, as contemplated by the no-action letter. Broadly, the coupon must be reduced, but no other changes can be made.
CLO notes must be refinanced within four years of issuance to avoid the risk-retention requirement. Consequently, Wells Fargo structured products analysts suggest that the volume of CLOs eligible to be refinanced after 23 December 2016 should decrease over time, as more deals age beyond four years from issuance.
Of the US$94bn in CLOs that become eligible for refinancing in 2H16, the analysts estimate that US$78bn is able to be refinanced after 2016 with no risk-retention requirements, subject to the four-year post-issuance limit. They identify approximately US$17bn of US CLOs that must refinance in 2H16 or face risk retention at refinancing.
The analysts believe that the no-action letter is positive for most CLO equity holders. "For equity investors of pre-2015 CLOs, the ruling greatly reduces the pressure on managers and equity holders to refinance prior to 2017," they observe. "For equity investors of 2015 CLOs with a refinancing option prior to risk retention's effective date, we see this ruling as negative, but these deals should face less refinancing competition. For equity investors of 2015 CLOs with post-2016 refinancing dates, this ruling is neutral to negative."
The latter investors are assumed to have already contemplated risk retention in a refinancing. Nevertheless, these deals could face more competition to refinance after 2016.
The no-action letter also reduces the likelihood of a significant uptick of CLO calls in 2017, as more CLOs will be able to refinance and would not be pushed towards a full call to lower funding costs.
CS
Job Swaps
ABS
ABS syndicate head appointed
Lloyds Bank Commercial Banking has promoted Kristan Gochee to head of North America ABS syndicate. She will report to Wesley Fallan, director of US bond syndicate in the US, and Bob Patterson, md and head of ABS syndicate in the UK.
Gochee joined Lloyds last year (SCI 11 April 2014) and will be replaced as credit trading svp by Thomas Oh, who will report to head of credit trading Kerry Stein. Oh arrives from Robert Baird, where he was a director and consumer ABS fixed income trader.
Job Swaps
Structured Finance
Private debt pro recruited
CVC Credit Partners has brought in Chris Fowler as md for its private debt team. He will be responsible for investments in CVC Credit's European mid-market lending strategies, reporting to md and portfolio manager Neale Broadhead.
Fowler joins from GE Capital, where he was md in the mid-market leveraged finance origination team. Prior to this, he worked for Morgan Stanley in both the investment banking division and the firm's corporate VC fund, Morgan Stanley Strategic Ventures.
Job Swaps
Structured Finance
Capital markets vet hired
Patrick Beranek has joined Mischler Financial Group's capital markets division as md, structured products. In this newly-created role, he will oversee structured products primary market activities and report to Robert Karr, Mischler's head of capital markets.
Beranek moves from RBS, where he was head of asset-backed trading. He has also run asset-backed trading and syndicate for Mizuho and Bank of America respectively. Prior to these sell-side roles, Beranek was a portfolio manager for Federal National Home Mortgage.
Job Swaps
Structured Finance
UK SME fund prepped
Beechbrook Capital is launching a new fund to support UK SME businesses turning over between £5m and £50m, with the target range spanning an estimated 40,000 businesses. The fund intends to raise between £100m and £200m with a first close planned for October, and will focus mainly on senior secured loans in non-private equity-backed UK companies.
To lead the project, Beechbrook has hired Jon Herbert as md of the fund and a member of its investment committee. He was previously director of LDC, after being head of acquisition finance at Lloyds, where he was responsible for sourcing, executing and managing leveraged loans in the SME market.
Beechbrook has also hired Jon Penfold as a member of its advisory board and investment committee. He joins from RBS, where he was engaged in managing loans and equity investments linked to SMEs.
Job Swaps
Structured Finance
Energy pro brought in
Khalil Qasimi has joined Empower Energies as senior director, structured finance. Working with Empower cfo John Clapp, Qasimi manages the company's corporate capital initiatives, as well as mergers and acquisitions. He will also take a lead role in the development and deployment of Empower's integrated finance facilities.
Qasimi most recently served as principal in corporate development at Exelon, where he managed the M&A process for generation facilities. Previously, he served as principal in distributed generation and solar project structuring at Constellation. He managed structuring, financial modelling and valuation for the firm's solar, combined heat & power, battery storage and other renewable energy projects.
Job Swaps
Structured Finance
REIT ceo replaced
Kevin Keyes has been appointed ceo of Annaly Capital Management, while retaining the title of president. Annaly co-founder, chairman and current ceo Wellington Denahan will remain chairman of the board and will also serve as executive chairman, focusing on strategic and capital allocation decisions. Keyes will officially replace Denahan in September.
Job Swaps
Structured Finance
Financial risks head tapped
RKH Specialty, a subsidiary of Hyperion Insurance Group, has appointed Gert Schlossmacher as co-md of its financial risks division. Schlossmacher will join the firm in January 2016, reporting to Barnaby Rugge-Price, ceo of RKH.
Schlossmacher will contribute to all key product lines, which includes political risks and structured credit. He joins from Euler Hermes, where he was most recently group head of global sales.
Job Swaps
CDO
Dock Street continues CDO grab
Cambridge Place Investment Management is set to be replaced as collateral manager for the Camber 3 ABS CDO, after CPIM revealed its intention to retire from the role. Subject to the satisfaction of conditions set out in the collateral management agreement, Dock Street Capital Management will be appointed as its replacement, with details expected to be finalised in August.
For other recent CDO manager transfers, see SCI's CDO manager transfer database.
Job Swaps
CLOs
European CLO team boosted
Tikehau has hired Alison Goold as a portfolio manager for its European CLO business. She will be part of the firm's London-based team, headed by Debra Anderson.
Goold arrives from BNP Paribas, where she was a director in the leveraged syndications team. Prior to that, she was head of corporate credit and a portfolio manager at AgFe.
Job Swaps
Insurance-linked securities
Axis amends PartnerRe terms
AXIS Capital and PartnerRe have agreed to enhanced merger terms, providing common shareholders with an increased special dividend of US$17.5 per common share prior to the closing of their potential amalgamation agreement. The response follows EXOR's own recent enhancements to its rival bid for PartnerRe (SCI 8 July).
PartnerRe and AXIS have also agreed to match the terms contemplated by EXOR's proposed exchange offer for PartnerRe preferred shares. However, both firms state that they believe there is a material risk that EXOR's proposed exchange offer for PartnerRe preferred shares could be viewed as a 'listed transaction' under applicable IRS rules.
In this scenario, they warn that EXOR's offer could subject preferred shareholders, and possibly common shareholders, to an onerous annual reporting and penalty regime applicable to prohibited tax shelter transactions under US income tax laws. If PartnerRe and AXIS are successful in obtaining a private letter ruling from the IRS that an exchange offer would not result in this reporting requirement, PartnerRe preferred shareholders would receive newly issued preferred shares reflecting a 100bp increase in the current dividend rate.
Subject to certain exceptions, preferred shareholders would also receive an extended redemption date of the later of the fifth anniversary of the date of issuance and 1 January 2021. The firms state that terms of the newly issued preferred shares would be otherwise identical in all material respects to the applicable existing PartnerRe preferred shares.
PartnerRe and AXIS have also agreed that each party's obligation to close the amalgamation is no longer conditional on the absence of a three-notch rating downgrade from AM Best. The amalgamation remains on track to close in 3Q15, subject to approvals by the shareholders of both companies, remaining regulatory clearances and customary closing conditions.
Both firms' boards have approved the enhanced terms, stating that the amalgamation is accretive to operating earnings and ROE in year one, achieving double-digit EPS accretion and a double-digit ROE by 2017. A portion of the funds allocated to previously announced share repurchases will be used to fund the increase in the special dividend.
The AXIS and PartnerRe boards also continue to urge holders of both their common and preferred shares to promptly use their white proxy card to vote for the amalgamation agreement at the shareholder meetings on 7 August.
Job Swaps
Insurance-linked securities
ILS team reinforced
SCOR Investment Partners has recruited Sidney Rostan and Pierre Mouilhade as portfolio managers for its ILS team. Both will report to Vincent Prabis, who heads the ILS team.
Rostan will focus on collateralised reinsurance and private transactions for SCOR. He joins after being head of Natixis' ILS business, where he worked on origination, structuring and placement of catastrophe bonds and private transactions. He has also held senior roles at Marsh, Crédit Foncier de France and Dexia.
Moulihade, who will analyse and manage cat bonds at SCOR, arrives from AXA. He headed the teams modelling complex risks in AXA's risk management department.
Job Swaps
Insurance-linked securities
Business development pro poached
Mt Logan RE has hired Chris Caponigro as head of business development. He joins from Platinum Underwriters, where he served as head of North American catastrophe lines, prior to its acquisition by Renaissance Re. Previous to this, Caponigro was involved in a number of roles at St Paul Re, covering property, specialty and structured underwriting.
Job Swaps
Insurance-linked securities
EXOR offer increased again
EXOR is offering PartnerRe common shareholders a pre-closing dividend of US$3 per share in addition to its confirmed US$137.5 per share all-cash offer in relation to a potential deal to purchase PartnerRe. The offer is in response to AXIS' enhancements to its rival offer for the firm (SCI 20 July) and brings EXOR's total consideration to US$140.5 per share.
EXOR says it has added the US$3 per share special dividend to compensate PartnerRe shareholders for the expected closing of the EXOR transaction in early 2016. This is due to EXOR submitting its binding offer in May on the assumption that the PartnerRe special general meeting would be held in June, with the potential closing of a transaction in 4Q15.
In addition, despite PartnerRe's claims, EXOR says that it does not believe that the IRS will treat the preferred shares in its proposed exchange offer as part of a 'listed transaction' or 'prohibited tax shelter' involving 'fast-pay stock'. EXOR reiterates its commitment to delivering full enhancements to PartnerRe preferred shareholders.
Job Swaps
Insurance-linked securities
PartnerRe opens EXOR talks
PartnerRe has responded to a revised proposal from EXOR offering a special dividend of US$3 per common share (SCI 21 July). The offer is the sixth revised proposal by EXOR in its attempt to outbid AXIS for the acquisition of PartnerRe (SCI passim).
In response to the offer, the PartnerRe board has determined that the proposal would reasonably be likely to result in a 'superior proposal', as defined in the amalgamation agreement with AXIS. As such, the board will now seek to engage in negotiations with EXOR and offer the firm the opportunity to conduct due diligence to determine whether the current offer can be improved both in its price and terms with respect to items previously identified.
However, the PartnerRe board believes that the recently revised agreement with AXIS is superior in value, terms and certainty of closing to the current EXOR proposal. Therefore, PartnerRe reaffirms its recommendation that shareholders vote for the agreement with AXIS, with the transaction remaining on track to close in 3Q15.
Job Swaps
RMBS
Housing scheme chief revealed
Venn Partners has hired Roger Bright as chairman of its subsidiary Private Rented Sector Operations. This follows Venn's recent appointment as delivery partner to the UK government's PRS housing guarantee scheme (PRSGS).
Bright was most recently ceo and board member of The Crown Estate. Prior to this, he was head of the investment business department at the UK FSA, following a number of senior positions at the Personal Investment Authority. Bright was also deputy ceo for The Housing Corporation after previously working for the Department of the Environment.
Venn says there have been over 130 potential borrowers expressing interest since the PRSGS was announced in December 2014, with the first series of applications expected to complete by autumn this year. The scheme aims to accelerate institutional investment in the private rented sector by providing access to long-term loans, initially for £3.5bn, with the potential to increase up to £6.5bn.
In April, the bonds to be issued under the scheme were awarded a provisional Aa1 rating from Moody's and the first bond issue is expected to be launched later this year. The scheme is targeting large-scale purpose-built private sector projects worth over £10m, which will be held within the private rented sector for the length of the guarantee.
Job Swaps
RMBS
Record MBS settlement reached
JPMorgan has agreed to pay US$388m to settle a suit of investors represented by Robbins Geller Rudman & Dowd, who accused the bank of misleading them when it sold nine 2007 RMBS offerings worth a total of US$10bn. The settlement represents, on a percentage basis, the largest recovery ever achieved in an MBS purchaser class action and is more than 2.5 times greater than the average percentage recovery in previous MBS purchaser class action settlements.
The settlement was achieved after six years of litigation and an extensive investigation into all facets of the defendants' securitisation practices. Lead plaintiffs and court-appointed class representatives Laborers Pension Trust Fund for Northern California and Construction Laborers Pension Trust for Southern California played a key role in the result, according to Robbins Geller partner Luke Brooks.
News Round-up
ABS
Redemption to avoid EOD
Access Group says it intends to redeem the US$89.1m ACCSS 2004-2 A2 bond in full at its legal final maturity (25 January 2016) via a deposit of additional funds into the trust. Slow payment rates and insufficient cashflow would otherwise have resulted in a technical default on the tranche. The deal's offering memorandum allows defeasance of the notes at maturity, according to JPMorgan ABS analysts.
With respect to the A3 to A5 and B notes from ACCSS 2004-2 - which are also under rating review - Access Group reports that the cash infusion to repay the A2 notes will result in a significantly higher total asset percentage than the required 101%. According to the cashflow priority, principal payment to outstanding bonds will be reduced or eliminated until the asset level realigns to 101% of debt. As such, this action does not accelerate repayment of the transaction's remaining tranches.
In addition to 2004-2, tranches from ACCSS 2007-1 and 2008-1 have been identified by Moody's and Fitch as being at risk for possible rating downgrade due to maturity risk (SCI passim).
Access Group is currently marketing its latest FFELP student loan ABS, the US$203.1m ACCSS 2015-1. The structure incorporates a full turbo feature set on or after July 2019, with the legal final on the senior and subordinate notes set at July 2056 and July 2058 respectively. Moody's and Fitch have assigned preliminary ratings of Aaa/AAA for the class A notes (at a WAL of 5.54 years) and A2/AA for the class Bs (13.27 years).
This is the third FFELP student loan ABS to incorporate a full turbo feature to address the legal final maturity issue, following NAVSL 2015-3 and NSLT 2015-3. The pre-set turbo payment dates are May 2032 for NAVSL 2015-3 and December 2031 for NSLT 2015-3.
The JPMorgan analysts note that at pricing NAVSL 2015-3 A2 notes had an expected maturity date in November 2028 at 100% PPC and May 2032 at 0% PPC to call. NSLT 2015-3 A3s had expected maturity in December 2031 at 100% PPC and July 2035 at 0% PPC to call. Legal final for NAVSL 2015-3 A2s and NSLT 2015-3 A3s are in June 2056 and July 2051 respectively.
News Round-up
ABS
SLABS rating corrections made
Moody's recently placed on review for downgrade one US FFELP student loan ABS tranche and corrected erroneous review actions on three other tranches, affecting in total approximately US$1.1bn of securities. The agency's amendments reflect the correction of an error in assessing the risk that the tranches will not fully pay-down by their respective final maturity dates.
Moody's says that it used incorrect final maturity date information for these tranches in its June rating action (SCI 23 June). Using the corrected information, it has now identified class A6 in SLM Student Loan Trust 2003-14 as a class that might not fully pay off by its final maturity date, while classes A5A and A6 from SLM Student Loan Trust 2005-6 are less likely to default due to the failure to fully amortise by their respective final maturity dates based on the current payment rate of the underlying loans.
In addition, class B in SLM Student Loan Trust 2002-5 - which was also erroneously placed on review on 22 June - was in fact paid off in full on 15 June as the sponsor called the bonds. Moody's has therefore withdrawn the rating on the class B tranche as of that date.
The loans are guaranteed by the US government for a minimum of 97% of defaulted principal and accrued interest. Navient Solutions is the sponsor, administrator and servicer of the affected transactions.
News Round-up
ABS
CPUK note exchange due
A tender offer for CPUK Finance class B notes has been launched in connection with the acquisition of the Center Parcs group by an affiliate of Brookfield Asset Management. The move is considered a change of control under the class B note issuer/borrower loan agreement and, following the acquisition, the borrowing group is required to offer to repurchase the class B notes at a price of 101% of the aggregate principal amount of the notes' repurchase plus accrued interest.
The tendered class B notes will be purchased by the borrowing group on the acquisition date, which is expected to be 3 August. The purchase is anticipated to be funded as part of a multi-stage process that includes the issuance of £560m new CPUK Finance class B2 notes, rated single-B by S&P.
"Pending the acquisition of the Center Parcs group by an affiliate of Brookfield Asset Management, we understand that exchangeable notes will be issued by an issuer (an entity separate from CPUK Finance) and the proceeds from the issuance of exchangeable notes will be retained in an escrow account. The exchangeable noteholders will only have security granted, under an exchangeable note issuer deed, over the escrow account and will not have security over any assets of the borrowing group," S&P notes.
But the class B2 note security package changes from the escrow cash to the operating assets of the borrowing group, granted under the issuer deed of charge, following a mandatory exchange of the exchangeable notes. In addition, the class B2 notes have indirect benefit over all of the shares in CP Cayman Midco 2 (the topmost entity in the securitisation group outside of the corporate securitisation).
On the class B2 note closing date, a portion of the funds in the escrow account will be disbursed to the issuer and will be drawn down to the borrowers via a class B2 loan. In addition, the borrowers will use the borrowed funds both to purchase the class B notes that were tendered (with a commensurate portion of the class B loan being discharged by the issuer) and to redeem the remaining portion of the class B loan.
The issuer will place the funds from the redemption of the class B loan into a prefunding account to repay the class B notes that were not tendered after the expiration of the redemption notification period. This will be 30 days after the third closing date, expected to be 2 September.
If the acquisition does not proceed by 30 November (longstop date), the cash held in the escrow account will instead be applied to fully redeem the exchangeable notes together with accrued interest and the existing class B notes will remain outstanding.
From the closing date, the class B2 notes will rank pari passu with any further class B notes issued and will be subordinated to the class A notes. They are structured as a bullet note due in February 2042, but with interest and principal due and payable to the extent received under the B2 loan. As such, if the B2 loan is repaid at the expected maturity date (August 2020), the class B2 notes will be redeemed three days later.
However, our analysis focuses on scenarios in which the loans underlying the transaction are not refinanced at their maturities. Under the terms and conditions of the class B2 loan, if the loan is not repaid on its expected maturity date (August 2020), interest will no longer be due and will be deferred. The deferred interest, and the interest accrued thereafter, becomes due and payable on the maturity of the class B2 loan in 2042. We therefore consider the class B2 notes as deferring accruing interest after their expected maturity date and receiving no further payments until all of the class A debt is fully repaid.
S&P says its rating on the class B2 notes is limited by the borrowing group's creditworthiness, since when assessing the likelihood of repayment for deferrable notes, it may look for both the deferred interest and the full principal to be repaid prior to the final few years leading up to the legal final maturity on the notes. However, the agency adds that the notes have several features that improve credit quality compared with the notes they are refinancing, including improved pricing - which reduces the amount of interest up to the expected maturity date.
News Round-up
ABS
Madden ruling fuels ABS doubt
A recent federal appeals court decision in Madden v. Midland Funding could have negative implications for ABS backed by bank-originated marketplace lending loans, reports Moody's. If interpreted broadly, interest rates on some loans backing marketplace lending transactions could be reduced, or the loans themselves made void.
The US Court of Appeals for the Second Circuit ruled in the case in late May that a non-bank debt collector that purchased written-off credit card accounts from a bank could not rely on the bank's federal pre-emption of state usury laws. "If courts were to interpret the Madden ruling broadly and apply it to marketplace lending loans, a non-bank entity that buys a loan from a bank would be subject to applicable state usury limits," says Moody's analyst Alan Birnbaum. "Therefore, the loan buyer might not be able to charge and collect interest at the contract interest rate, while in the worst case a loan could be unenforceable."
If broadly applied, the Madden decision could affect a wide array of bank-originated loans that are subsequently sold to non-bank entities. However, Moody's notes that the risk would be lower for other consumer loan ABS asset classes than for marketplace lending ABS because interest rates on the loans are generally below state usury limits or structural features of the transactions mitigate risk.
"The decision adds more legal uncertainty for the burgeoning marketplace lending asset class," adds Matias Langer, who leads Moody's consumer loans ABS team. "If interpreted broadly, it could also negatively affect other types of consumer loan ABS, though the risk for these securitisations is lower. Nevertheless, the ruling will likely lead to a reduction in bank sales of written-off loans to non-bank debt buyers."
Credit card ABS transactions generally include receivables that carry high interest rates, though the credit card bank usually continues to own the accounts and hold an interest in the receivables. Therefore, it is assumed that the Madden ruling is unlikely to affect the interest rates of those receivables. The Second Circuit has also indicated that a bank continuing to own the credit card accounts would be a favourable factor in determining whether federal pre-emption would apply to the loans.
News Round-up
ABS
Hertz acceleration avoided
Hertz has filed its 2014 10-K, including restated financials for 2012-2013 and some restated financial information for 2011. In addition, the company filed its 1Q15 financials and is now up-to-date on all filings with the US SEC.
The filings cure Hertz's filing deficiency notice from the NYSE and bring the company back into compliance with NYSE listing requirements (SCI 7 April), according to Barclays ABS analysts. Hertz's inability to file had constituted a potential early amortisation event on its rental car ABS trust, but noteholders granted a waiver of this amortisation event through 31 August 2015.
"Although we believe the ABS notes are well-protected, given how well collateralised they are, [the] filing eliminates the risk of the ABS notes being accelerated," the Barclays analysts observe.
News Round-up
ABS
Italian ABS legal risks identified
Fitch says that Italian ABS issuers are exposed to legal risks when the securitised pools contain loans that finance insurance policies in addition to the product purchased with the loan agreement. An example scenario could be a theft and fire protection contract combined with the purchase of a car.
The agency explains that the insurance premiums are typically paid upfront by the lender/originator to the insurance companies and are then repaid by the borrowers as part of the loan instalments. The insurance premium usually accounts for 6%-7% of the outstanding balance of the consumer loan, with auto loans typically having a higher exposure of about 10%.
Legal opinions received so far by Fitch have not expressed a view on whether, due to a default of an insurance company on any of its obligations under a financed policy, a right to terminate the loan agreement or claim a refund of unearned premium from the issuer would be granted to borrowers. In the absence of legal opinions, the agency believes that transactions are exposed to the risk that a borrower may begin legal action following a default by the insurer to avoid repaying at least the part of the instalments that finance the premium, as well as receiving a favourable judgment.
With Fitch-rated transactions, the agency has identified a number of factors that affect the materiality of the legal risks facing different issuers and the likelihood and size of the potential loss. These include the creditworthiness of the insurers and the probability that a default of the insurer would result in a discontinuation of the insurance protection.
When the originator is obliged to indemnify the issuer for loss related to this risk, the creditworthiness of the originator is also an important factor. These and other relevant factors, together with the available credit enhancement, have provided adequate protection with Fitch's analysis to date.
When analysing transactions with a revolving period, the agency takes into account the heightened risk introduced by this element, as the insurance exposures of the initial portfolio could significantly change during the revolving period. Shifts in the insurance products purchased by the borrowers could change the exposure in terms of its split among different insurers. Possible changes in the commercial partnerships of the originators could also affect terms of insurance entities underwriting the policies.
News Round-up
ABS
Credit enhancement upped for marketplace ABS
Citi is in the market with a US$376.7m marketplace lending securitisation, dubbed Citi Held for Asset Issuance 2015-PM1 (CHAI 2015-PM1). Moody's has assigned a preliminary rating to the senior tranche that is three notches higher than that of the inaugural public marketplace lending deal - Consumer Credit Origination Loan Trust 2015-1 (CCOLT 2015-1) - from February.
CHAI 2015-PM1 comprises three tranches: US$227.28m of class A notes (rated A3), US$86.29m of class Bs (Baa3) and US$63.13m of class Cs (Ba3). This compares with US$281.32m of class A notes (rated Baa3), US$45.38m class Bs (Ba3) and US$18.15m class Cs (unrated) in CCOLT 2015-1 (see SCI's new issuance database).
Both transactions securitise unsecured consumer instalment loans originated and serviced through the online platform operated by Prosper Funding, in partnership with WebBank. The loans in the latest ABS were purchased from Prosper by Citi subsidiary CIGPF I, which has a flow purchase agreement with the lender whereby it purchases a nearly pro-rata portion of the loans originated via the Prosper platform.
Moody's cumulative net loss expectation is 8% for both deals and the assets backing them are described as "very similar". "The asset quality of the pool backing CHAI 2015-PM1 is marginally weaker when comparing certain credit characteristics, such as FICO, but does not come with the uncertainty that CCOLT 2015-1's prefunding feature caused. As both pools represented roughly pro-rata slices of recent
Prosper originations and differences were minor, our expected loss is 8% for both pools," the agency explains.
However, CHAI 2015-PM1 offers more credit enhancement for each class of notes than CCOLT 2015-1. Credit enhancement for the class A, B and C notes of the former is 46.5%, 26% and 11%, compared to 23.5%, 11% and 6% respectively for the latter.
In addition, the CHAI 2015-PM1 class A notes benefit from a shorter life than those of CCOLT 2015-1, which reduces their exposure to tail-ended losses. Similarly, the CHAI 2015-PM1 class Bs have more credit enhancement and are expected to pay off faster than the CCOLT 2015-1 class As. Moody's notes that they consequently have a lower probability of default, but a higher loss-given default than the CCOLT 2015-1 class A notes.
News Round-up
ABS
Multi-state PACE deal debuts
Ygrene Energy Fund has completed the first property-assessed clean energy (PACE) securitisation that combines both residential and commercial assets. The US$150m private transaction is also the first PACE deal to combine projects in multiple states, including California and Florida, and to include both special taxes and assessments in a single securitisation.
The class A notes have been rated double-A by Kroll Bond Rating Agency with a 97% advance rate. In partnership with local municipalities, Ygrene provides 100% financing for residential, commercial and agricultural property owners to deploy energy efficiency, renewable energy and water conservation upgrades to their buildings. In total, the transaction will help fund 6,210 energy and water conservation projects.
News Round-up
Structured Finance
Final STC criteria published
The Basel Committee and IOSCO have released their final criteria for identifying simple, transparent and comparable securitisations, following the proposals they set out last year (SCI 11 December). The organisations have amended certain aspects to the proposals that were considered overly prescriptive and have clarified other issues that raised doubts about interpretation or implementation.
The two organisations note that criteria promoting simplicity refer to the homogeneity of underlying assets with simple characteristics and a transaction structure that is not overly complex. Equally, criteria promoting comparability should assist investors in their understanding of such investments and enable more straightforward comparison between securitisation products within an asset class.
Finally, criteria on transparency should provide investors with sufficient information on the underlying assets, the structure of the transaction and the parties involved in the transaction, thereby promoting a more thorough understanding of the risks involved. The form in which the information is available should not hinder transparency, but instead it should support investors in their assessment, according to the two organisations.
The criteria apply only to term securitisations and are non-exhaustive and non-binding. The organisations admit that additional and or more detailed criteria may be necessary based on specific needs and applications. The Basel Committee says it is also exploring how these criteria could be incorporated into the securitisation framework revised in December 2014.
News Round-up
Structured Finance
Survey suggests bearish stance
The results of JPMorgan's latest international ABS survey - which gauges both investor and issuer attitudes towards the European and Australian securitisation markets - suggests an overall marginally bearish stance from respondents. The most significant change between the previous 1H15 and the latest 2H15 surveys appears to be the large proportion of respondents who believe that conditions are merely neutral for the asset class, both today and over the next six months.
"While this is an extremely weak reading of the ABS index, we do not believe this is entirely a reflection of instrument-specific woes. This is confirmed when putting the ABS results in context alongside respondents' views on the outlook for other funding instruments and the broad financial markets," observe ABS analysts at JPMorgan.
The main output of the survey is a confidence index, compiled by each response being assigned a weight between +10 and -10, with +10 being 'excellent' and -10 being 'disastrous'. The overall index reading for 2H15 stands at -0.8, compared to 2.4 at the start of the year and a high of 3.8 in 1H14.
The latest outlook index (representing views on the next six months) came in at +0.6, pointing to a modest improvement in ABS market conditions over the remainder of 2015. The outlook reading had been +3.4 at the beginning of the year and as high as +3.8 in 2H14 following the ABSPP announcement.
News Round-up
CLOs
Refinancing relief confirmed
The US SEC last week issued a no-action letter clarifying that CLOs originally issued before December 2014 can be refinanced and remain exempt from risk retention requirements. The letter is in response to a request for no-action relief in connection with a proposed refinancing of one or more classes of pre-existing CLO securities submitted by Cleary Gottlieb on behalf of Crescent Capital Group.
The SEC's Division of Corporation Finance confirmed that it will not recommend enforcement action to the Commission if Crescent Capital does not retain an eligible risk retention interest under Section 15G of the Securities and Exchange Act of 1934 in connection with a refinancing of a CLO transaction priced prior to the 24 December 2014 publication of the credit risk retention final rules in the Federal Register. The division says its position is based on the representations made to it by Crescent Capital, after consulting with the staffs of the US Fed, the OCC and the FDIC.
In its letter, Cleary Gottlieb states that no-action relief is warranted to protect investor expectations that would be frustrated by application of risk retention requirements to the refinancing of a CLO that was priced prior to the implementation of the rules.
News Round-up
CLOs
Collateral supply leads CLO concerns
Reduced collateral supply is considered a bigger risk to US CLO issuance than risk retention requirements, according to a recent survey by Citi. In comparison, sticky CLO spreads and reduced arbitrage worry European CLO players most.
Risk retention still ranks as the second biggest risk in both US and European markets, followed by reduced arbitrage in the US and reduced collateral supply in Europe respectively. A flat interest rate curve and low CLO debt yield is least concerning among the factors polled in the survey.
Notably, retained US CLO equity is currently viewed as the most attractive market opportunity under the new risk retention regime by 41% of respondents. Risk retention-compliant broadly-syndicated loan US CLO debt followed closely behind at 37%, while there was also meaningful interest in both non-retained US CLO equity (at 20%) and financing the vertical strip CLO retention piece (at 18%).
With access to various financing options emerging and strong interest in the retained CLO equity portion, Citi structured credit analysts believe it is unsurprising that many market players have developed a much more optimistic view on the risk retention issue. Risk retention-compliant US middle market CLOs also garner investor interest, a phenomenon that has picked up this year.
Views on CLO equity IRRs are somewhat split between managers and investors, but 90% to 100% of respondents expect US CLO equity to generate at least a low-teen IRR, regardless of its risk retention status or term. Investors are demanding the highest IRR from non risk-retention compliant CLO equity, with nearly a quarter expecting at least high-teens.
The majority of CLO investor and manager respondents expect at least low-teens IRR in retained CLO equity, with 55% expecting a mid-teens return or more. The Citi analysts add that they are already seeing early signs of differentiated trading views depending on investors' opinion over liquidity, trading flexibility and deal call/refinance options, as well as other interest alignment with managers.
In addition, 40% of respondents believe the Libor forward curve is too steep and that the US Fed will not hike interest rates until next year, echoing the trade of monetising the forward curve in CLO equity. Another 40% of respondents feel the forward rate curve is realistic, while only 22% believe the forward rate curve is too flat and that the Fed will hike interest rates this September or sooner.
About half of US and European players expect both US and European primary triple-A spreads will hit 120bp-130bp by end-2016. However, a third of US players expect US triple-As to hit Libor plus 140bp or higher and only 10% think US triple-A will end up inside of Libor plus 100bp by the US risk retention deadline.
Among a number of factors that could impact spreads, respondents actually showed no real consensus as to how a CLO triple-A tranche would change if it were to become risk retention compliant. However, 54% of participants believe CLO triple-As should be 1bp-5bp tighter if the deal has a three-year non-call period (as opposed to a two-year period), indicating that the longer period is viewed as a positive protection against potential interest rate rises.
News Round-up
CMBS
CMBS delinquencies dip
The European CMBS 12-month-rolling loan maturity default rate increased slightly to 25% from 24.6%, according to S&P. However, the delinquency rate for continental European senior loans decreased to 63.1% from 64%, with the rate for UK loans decreasing to 20.6% from 21.4%.
Overall, the senior loan delinquency rate decreased to 49.8% from 50.5%. The total number of delinquent loans decreased to 108 from 111, as three loans from three transactions repaid with a loss
Meanwhile, the number of loans in S&P's special-servicing index decreased to 129 from 133. One loan repaid, along with three loans repaying with a loss. Only one loan, the Signac loan in EuroProp (EMC VI), was scheduled to mature in June.
Out of the €51.3bn outstanding loan balance, €2.5bn is scheduled to mature in the coming 12 months. The outstanding loan balance increased from €49.8bn in May.
News Round-up
CMBS
A&P bankruptcy stirs CMBS
Kroll Bond Rating Agency says it is monitoring the potential impact that Great Atlantic & Pacific Tea Company (A&P) store closures could have on CMBS that the agency has rated. A&P filed for chapter 11 protection on 19 July, just three years after emerging from a previous bankruptcy filing.
The company operates 296 grocery stores under several brands, including A&P, Food Emporium, Pathmark, Super Fresh and Waldbaum's. As a result of the bankruptcy filing, A&P announced plans to sell 271 stores and close the remaining 25.
MSBAM 2015-C22 has so far been identified as the only KBRA-rated transaction that may be impacted from the store closures. The deal has exposure to one loan (accounting for 1.2%), Pathmark-Linden, that appeared on the closing list.
The related collateral is a 59,250 square-foot free standing Pathmark store located in Linden, New Jersey. The property was appraised at US$17.7m in March, resulting in a 75% LTV at securitisation. No upfront re-leasing or re-tenanting reserves were established at closing, with a monthly reserve of US$4,361 required, resulting in US$8,721 currently.
KBRA re-evaluated the property value, should the loan default, and also considered potential carrying costs and disposition fees. The analysis resulted in an estimated potential loss severity of 43.5% of the loan's credit support.
At this juncture, the agency says that the store closing will not prompt any ratings actions. Should the loan transfer and its loss be materially higher than the agency's current projection, it could result in a watch placement and/or downgrade of the single-B minus rating on the transaction's class G notes. KBRA will continue to monitor any additional impacts on related transactions to the A&P store closings or sales.
News Round-up
CMBS
CRE rating approach inserted
Moody's has revised its approach to rating EMEA CMBS transactions. The methodology has been extended to include the approach to rating CRE loans that are not part of a securitisation structure.
Main considerations in Moody's analysis are the cashflow assessment based on the property quality, the in-place tenancy quality and lease terms, and property cost expectations. The agency's cashflow projection is the basis for determining a property's value, as well as the property's ability to generate sufficient cashflow to cover debt service payments over the loan term.
The main driver of the CRE loan rating is the default risk of the loan during the term and at the maturity date, even though there may be significant recoveries post loan maturity. Moody's notes that CRE loans usually do not benefit from external liquidity support, which increases the risk of non-payment of interest according to the terms of the loan. CRE loans usually do not benefit from a tail period between a scheduled and a final repayment date too.
In addition, the uplift from the assessed loan default risk that Moody's allows by considering expected recoveries to determine the CRE loan rating is limited. Similar to its approach for CMBS notes approaching legal final maturity and which face increased refinancing risk, Moody's applies a cap to the CRE loan ratings, with the maximum achievable rating level at Baa3.
An LTV test for the Baa3 rating must be met too. The LTV threshold is based on a Moody's whole loan refinancing LTV of no greater than 65%.
The agency says that the uplift and the rating level can only be higher if the loan includes features similar to CMBS structures that effectively lead to a tail period between a scheduled and final repayment date. It could also rise for fully amortising loans structured without refinancing risk and for fully amortising credit-tenant-lease type transactions without refinancing risk.
Moody's says that the republication of its methodology will not result in any changes to outstanding ratings of EMEA CMBS transactions.
News Round-up
NPLs
Second batch of NPLs offered
Fannie Mae is marketing the sale of its second round of NPLs, which includes two large pools of approximately 3,900 loans totalling US$777m in UPB. The GSE is also offering a smaller community impact pool to encourage participation by non-profits, and minority- and women-owned businesses.
The community pool is focused in the Tampa, Florida-area and totals US$11m in UPB. The sale of the NPLs is being marketed in collaboration with Credit Suisse, Wells Fargo and the Williams Capital Group.
News Round-up
NPLs
Volatility may hit NPL ratings
Volatile and uncertain cashflows may prevent Fitch from rating new Italian NPL securitisations for timely payment of interest on the notes in the absence of substantial cash reserves or liquidity lines. This could subsequently deter the agency from assigning such transactions high investment grade ratings.
Based on comments from market participants, Fitch says that new deals may limit or minimise the size of cash reserves or liquidity facilities by allowing interest payments on the notes to be deferred. Extended periods of interest deferral may further reduce the achievable rating level.
The agency also expects new deals to have a large component of seasoned, unsecured claims. Recoveries for these have typically been negligible or very low, at less than 5%.
They have also been significantly lower than those so far in secured Italian NPL deals, with a 40% gross recovery rate from claims backed by properties. Together with Italy's sluggish growth outlook, these factors could contribute to Italian NPL deals struggling to obtain high investment grade ratings.
Even when claims are secured, some pre-crisis deals have had slower recoveries than the special servicer originally envisaged, as cash has sat in Italian courts awaiting distribution to creditors. Cumulative recoveries have been 35%-40% lower than the servicer's original business plan at the same point in time.
Fitch estimates that only 30%-50% of the defaulted amount at closing has been fully resolved within five to seven years, based on the performance of the two outstanding Fitch-rated Italian NPL transactions. Liquidity lines under the two outstanding deals have recently been drawn to pay interest on the rated notes, which also means investors have not received any principal distribution on some payment dates.
A recent law decree aims to accelerate the property enforcement process (SCI 6 July). Fitch expects the new rules to shorten the recovery process for new defaulted loans over the medium term, but says it is too soon to tell exactly how effective they will be.
The agency also suggests that the continuing rise in NPL ratios at Italian banks means they may turn to NPL securitisations to try to clean up their balance sheets. The NPL ratio hit a record high of 10.1% in May, according to Bank of Italy data. New defaults are continuing to come through, while Italy's long recovery process means it takes even more time to clear existing NPLs.
News Round-up
Risk Management
Derivatives targets set out
ISDA says that although significant progress has been made in implementing derivative market reforms - five years on from the signing into law of the Dodd-Frank Act - a number of outstanding issues remain unresolved. As a result, the organisation has put forward a number of targeted amendments that could help tackle the outstanding challenges.
Most of the requirements contained within derivatives-related Title VII of the Dodd-Frank Act are now implemented, according to ISDA. Data submitted to US swap depositories show that approximately 75% of CDS and interest rate derivative index average daily notional volume is now cleared. In addition, US margin rules for non-cleared derivatives are close to finalisation, and capital rules are being phased in.
However, ISDA reiterates that regulatory regimes must become more consistent and harmonised across borders, as a lack of coordination and cooperation still lingers. Therefore, ISDA's proposed amendments include the suggestion of transparent and clearly articulated substituted compliance determinations based on broad outcomes to boost cross-border harmonisation.
In addition, the association recommends that regulators should identify and agree on the trade data they need to fulfill their supervisory responsibilities, and then issue consistent reporting requirements on a global basis. It adds that further work is also needed by the industry and regulators to develop and adopt standardised product and transaction identifiers, as well as reporting formats.
ISDA also believes that targeted amendments of US SEF rules would encourage more trading on these venues. Allowing greater flexibility in execution methods in certain cases could bring US rules closer to those proposed in Europe.
The importance of central counterparties is also stressed, with a call for greater transparency on margin methodologies and minimum standards for stress tests. Moreover, ISDA adds that finalising national-level non-cleared derivatives margin rules swiftly is important to maximise the time for preparation, while also suggesting that greater consistency be established in capital rules to prevent non-financial corporates in one jurisdiction being put at a competitive disadvantage.
News Round-up
Risk Management
RWA consistency considered
The EBA has published two reports covering the consistency of risk weighted assets (RWAs) across large EU institutions for large corporate, sovereign and institutions' IRB portfolios. The reports also cover the calculation of counterparty credit risk exposures under the internal model method and credit value adjustments according to the advanced approach (ACVA).
The analysis in the reports explains how much of the variability in RWAs is led by difference in riskiness, such as idiosyncratic portfolio features, and attempts to identify residual drivers that are linked to banks' practices. A key finding is that three-quarters of the observed difference in 'global charge' levels across institutions could be explained by the proportion of defaulted exposures in the portfolio and the portfolio mix.
When looking at each portfolio separately, the analysis shows that the impact of defaulted exposures explains about 40% of the global charge differences for the large corporate portfolios. The remaining 60% may be due to differences in bank-specific factors, such as risk management practices.
As for the CCR and ACVA analyses, the reports suggest that there is significant variability across banks in both, especially for equity and FX OTC derivatives. The EBA says that a deeper understanding of what drives differences in RWAs will allow it to explore a number of options to address specific concerns.
News Round-up
Risk Management
Blockchain adoption polled
Global financial services firms are exploring ways to adopt the technology behind Bitcoin for use in institutional finance, according to a new report from Greenwich Associates. Settlement, counterparty and custodial risk reduction are identified as key drivers for adoption, while OTC derivatives, repo and loan markets are viewed as the asset classes most likely to benefit from distributed ledger technology in the medium term.
The technology that allows Bitcoin to exist and to be transferred safely without an intermediary is called the blockchain. Also known as digital or distributed ledgers, these networks record transaction information and ensure that a digital asset cannot be spent twice or used by someone who doesn't own that asset.
Between May and June 2015, Greenwich Associates interviewed 102 institutional financial professionals to determine the level of awareness and understanding of distributed digital ledger technologies among financial services firms. While actual adoption in the capital markets remains limited, 94% of those interviewed believe distributed ledger technology could be applied in institutional markets, with nearly half actively reviewing the technology within their firms.
"In both par loans and CLOs, a month-long settlement cycle is common and often includes the use of a fax machine," says Dan Connell, head of Greenwich Associates market structure and technology practice. "For a market so obviously in need of technology, it makes sense to implement improvements with the latest tools and approaches available, like blockchain."
However, a number of questions remain unanswered regarding capital markets' adoption of distributed ledger technology. Primary among these are whether Bitcoin and the blockchain can be separated effectively and whether private blockchains can operate without losing the benefit of the public blockchain.
News Round-up
RMBS
SFR substitution risks outlined
Provisions that allow single-family rental operators to replace properties in securitised portfolios with those from unsecuritised portfolios add risks to SFR transactions, according to Moody's. Voluntary substitution provisions may lead to a reduction in the use of premium release and to the replacement of more valuable properties with less valuable ones.
"The option to substitute properties in SFR transactions could lead operators to release fewer properties at a premium," says Moody's vp and senior analyst Peter McNally. "And if this occurred, transactions would miss out on premium payments, as well as the deleveraging the buyout of released properties allows."
Moody's notes that premium release enables a transaction to share in any appreciation in the value of a property that an operator removes from a transaction. The operator must put cash equal to the allocated value of the removed property, along with a premium, back into the transaction. A property's allocated value represents the portion of the loan it backs and the premium increases along with the cumulative value of the properties removed from a transaction.
Under voluntary substitution provisions, an operator could also replace securitised properties with properties that are in weaker rental markets, have less value or that increase portfolio market concentrations. However, the provisions may include stipulations that mitigate some of these risks by limiting the total property value an operator can substitute and requiring that replacement properties are at least of equal value to those being removed.
Moody's suggests that voluntary substitution also presents more risk to SFR transactions than it does to CMBS transactions. This is because more information is available on the properties in typical CMBS pools, making it less likely that operators could replace stronger properties with weaker ones.
In addition, while further credit enhancement could offset the risks from substitution in the case of SFR transactions, less enhancement would be needed where strong stipulations increase the likelihood that replacement properties are of comparable value to those being removed.
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