Contents

Secondary markets

Euro secondary holds up

The European securitisation secondary market is continuing to hold up despite thin liquidity.

Buy-side activity remains patchy with volumes overall still very light away from prime. What flows there are are mainly two-way though a selling bias in autos has emerged as investors seek to make room for new issues in the sector among a reasonably strong primary pipeline overall.

There are currently three European BWICs circulating for trade today. They involve a 19 line mixed CLO and RMBS list of small clips at 14:00 London time and two CMBS auctions.

The first of those CMBS lists is at 14:30 and comprises: €12.3m DECO 2007-E6X B, €15m EMC 6 A, €18m GRF 2013-1 E, €18.95m GRF 2013-2 F, €8m MESDG DELT A, €14.174m TAURS 2013-GMF1 D and £6.55m TAURS 2014-UK1 B. Four of the bonds have covered on PriceABS in the last three months - EMC 6 A at 95.01 on 16 July; MESDG DELT A at 91.28 on 9 June; TAURS 2013-GMF1 D at 100.75 on 21 July; and TAURS 2014-UK1 B at 99.7 on 21 July.

Then, at 16:00 is a single £5m piece of DBSSY 1X A, which has not traded on PriceABS before.

Secondary markets

US CLO sellers return

Sellers appear to be returning to the US CLO secondary market.

After a very quiet month so far the US CLO BWIC schedule is now building strongly for this week in anticipation of month-end. There are already ten lists on the calendar over the next few days mainly involving mezz and equity paper across a range of vintages.

Today currently sees four CLO auctions including a long-ish 2.0 triple-A list and two mezz BWICs. However, the chunkiest auction involves four pieces of equity totalling $43m.

Due at 14:00 New York time, it comprises: CECLO 2015-23A SUB, MDPK 2014-13X SUB, SYMP 2012-10X SUB and TRMPK 2015-1A SUB. None of the bonds has traded on PriceABS before.

In addition to the CLOs there are some large blocks of ABS CDO seniors in for the bid at 12:00. The four line list consists of: $900m original/$366.19m current face of CHYN 2004-1A A1LT; $100m/43.96m MADRE 2004-1A A1A; $236m/$103.76m MADRE 2004-1A ALTB; and $8.5m/$8.5m MADRE 2004-1A B. None of the bonds has appeared on PriceABS in the last three months.

Secondary markets

Euro secondary shows caution

It's been a cautious start to the week for the European securitisation secondary markets, but BWIC volume is increasing.

"Overall, market tone is reasonably cautious both because of macro issues, especially China, and also because of the time of year," says one trader. "However we continue to see decent client interest in non-conforming and select peripherals."

Meanwhile, with month-end approaching secondary supply has picked up. "Today and yesterday there have been a lot of BWICs to focus on," the trader says.

"Yesterday's levels were a touch softer as a result of the names and sizes on offer, but those large sizes traded so there's still decent liquidity," the trader adds. "Today again sees a variety of assets and reasonable sizes in for the bid, so it will be a good gauge of where we are."

There are five BWICs circulating for trade today so far involving 20 line items across CLOs, CMBS and RMBS. The schedule currently starts at 14:00 London time with two lines of UK non-conforming seniors - £6m MFD 2008-1 A1 and £5m MORGT 2014-1 A1.

Another highlight is a single €7m line of HIPO HIPO-7 D due at 15:00. The day rounds off at 16:00 with two lines of 2.0 CLO double-As - €10m AVOCA 14X B2 and €4.5m CADOG 6X B1.

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

Secondary markets

US CLOs seek clarity

As the US CLO BWIC calendar continues to build strongly this week, market participants are hoping for clarity on pricing levels.

"It's looking like the most active week in several," says one trader. "That's partially thanks to month-end, but it is also due to sellers sensing that a bid has developed in mezz, which is teasing out higher numbers of BWICs."

Unsurprisingly, the trader adds: "The lists are generally mezz, involving a lot of double- and single-Bs, with a 2.0 bias. It's a good opportunity to see where these bonds clear and generate some good mezz data points although we're not seeing any clear pricing definition further up the capital stack yet."

Despite the spike in supply the trader expects the auctions will go well. "There's definitely demand with many people looking to take advantage of relative bargains compared to a couple of months ago."

There are currently six US CLO BWICs circulating for trade today. The largest of which is an 18 line mix of 2.0 mezz and equity due at 14:00 New York time.

The $46.2225m list comprises: ALM 2013-7R²A SUB, ALM 2013-8A E, ALM 2015-12A E, ALM 2015-12A PREF, BATLN 2014-6A E, BATLN 2014-6A PREF, EATON 2013-1A PREF, ECP 2013-5A E, HLM 3A-2014 SUB, JTWN 2012-1X SUB, MAGNE 2015-12A F, MAGNE 2015-12A PREF, OCP 2014-5A E, RACEP 2015-9A E, RACEP 2015-9A INC, SMLF 2012-1X LP, TELOS 2014-5A E and TELOS 2014-5A F. None of the bonds has traded with a price on PriceABS in the last three months.

Secondary markets

Euro ABS/MBS mixed

The European ABS/MBS secondary market continues to see a mixed tone and levels of trading activity.

Yesterday saw a continuation of the patchy activity seen of late with Dutch prime seeing some signs of softness for once. Peripherals continue to garner increasing interest and consequently spreads closed flat to very slightly tighter. However, liquidity remains extremely thin across the board with participants sidelined by both macro concerns and the usual summer caution.

Nevertheless, the month-end BWIC flurry continued through yesterday and into today. There were mixed results yesterday, with some DNTs as well as covers of varying success, but today sees another seven lists already circulating for trade.

The auction calendar has a strong resi bias today and mainly involves mixed lists, though there is a stand-alone Dutch prime collection at 15:00 London time. There is also a pair of residual BWICs - Mansard 2006-1X at 13:30 and RMACS 2006-NS3X at 15:00.

In addition, there are also two OWICs. First up at 12:00 are six lines of Spanish RMBS - AYTGH VIII A2, AYTGH IX A2, BFTH 13 A2, RHIPO 7 A1, RHIPO 8 A2A and TDAC 4 A.

Then, at 14:00, Dutch paper is again in the spotlight in a mix with some Irish RMBS. The OWIC comprises: ARENA 2011-2 A2, DRMP 1 A1, DRMP 1 A2, FSTNT 9 A1, FSTNT 9 A2, LUNET 2013-1 A1, SAEC 13 A2 and SAEC 14 A1.

Secondary markets

Euro CLOs stand still

The European CLO secondary market remains very quiet.

"Nothing is going on - it's been a long time since there's been any real activity," says one trader. "There's been a couple of deals in primary, but secondary is at a standstill."

Spreads have come in slightly from where they were earlier in the month, however. "There's been little bit of tightening in primary and a few dealers have been looking to buy some 2.0 for inventory," the trader says. "But that's pretty much it and given that it's August next week that's the way I expect it to stay - very quiet."

There are two European CLO BWICs due today so far, both scheduled for 14:30 London time. One involves three line items totalling €29.73m - ARESE 7X SUB, JUBIL I-RX D and NEWH 1X SUB. None of the bonds has traded with a price on PriceABS in the last three months.

The other list comprises €30.6m across six bonds as part of a larger mixed euro-dollar auction. The euro tranches are: CELF 2005-1X C1, DUCHS VII-X C, DUCHS VII-X D, HARBM 6X A4E, HSAME 2006-IIX D and NPTNO 2007-1 D. Two of the bonds have covered on PriceABS in the last three months - CELF 2005-1X C1 at 95.05 on 21 April and NPTNO 2007-1 D at 95.77 on 22 April.

Secondary markets

US CLOs stay murky

Despite this week's upswing in auction activity the US CLO secondary market is still not getting much in the way of price clarity.

"This week looks to be the busiest since June, but we're not seeing forced sellers it's more about people trying to wrap things up ahead of month-end," says one trader. "However, yesterday saw quite a few DNTs and line items where no cover was released, so while it feels like the market is much firmer there are no real prints to prove it."

In particular, the trader says: "There feels like a tightening bias in cleaner mezz paper, which makes it surprising that yesterday's all single-B list did not trade in its entirety. It was bid weak and saw only light participation, so reserves weren't met."

Equally, the trader adds: "Highly liquid triple-Bs, primarily those with good managers and very small energy exposures, are feeling strong across the board, but yesterday also saw DNTs there. For example, a piece of CGMS 2014-4A D saw healthy interest, but I hear the seller was looking for very high 300s and no one was willing to raise above 400 - people aren't yet quite ready to make that final step to push a rally ahead."

Nevertheless the trader reports: "There's a good mix of bonds in for the bid again today with the focus again around 1.0 mezz and equity. So, once more we'll all be waiting to see how things and hoping for a better sense of direction."

There are five US CLO BWICs circulating for trade today so far. The chunkiest list involved four pieces of 1.0 equity and was due at 10:30 New York time.

The $97.77+m list consisted of: BABSN 2006-2A INC, FOURC 2006-3A SUB, GCFL 2007-1A INC and KATO 2006-9A SUB. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Euro secondary slows again

The European securitisation secondary market has slowed down again.

"We had a relatively busy start to the week, but yesterday was a bit slower and today looks to be the same," says one trader. "It's typical for high summer except we're still in July!"

The trader continues: "We're once again mainly seeing activity round prime assets - particularly autos and Dutch RMBS - and have for example seen secondary autos tighten in to the mid-20s, which is in line with guidance for the latest BMW deal. Prime activity includes some real money involvement, but elsewhere the market is very quiet."

Indeed, the trader adds: "There's still very little happening in peripherals despite the positive news of the Nostr deal being called. CMBS too remain slow in secondary, though primary is seeing some activity."

CLOs provide a slight exception, the trader notes. "Yesterday we saw 2.0 double-As in the 220s and double-Bs in the 580s confirming recent tightening seen on a few BWICs, but otherwise activity is very patchy there as well."

There are currently three European BWICs circulating for trade today. At 13:45 London time is a single €1m line of ARRMF 2010-1A A2B, which has not traded on PriceABS in the last three months.

Then, at 14:00 is a single €40m line of HARVT 8X A. The CLO last covered on PriceABS at 99.8 on 2 July.

Last, at 16:00 is a ten line 8.469m mix of CMBS and pub ABS. The list comprises: EPICP DRUM A, FOURSN 12 1/4 06/15/20, INFIN SOPR A, PUNTAV 5.267 24, PUNTAV FLT 10/27, THEAT 2007-1 C, THEAT 2007-1 D, THEAT 2007-2 B, THEAT 2007-2 C and THEAT 2007-2 D.

Two of the bonds have covered on PriceABS in the past three months, last doing so as follows: EPICP DRUM A at 89.75A on 18 May and INFIN SOPR A at 91.15 on 15 June.

Secondary markets

Status quo for US RMBS

The US non-agency RMBS secondary market has returned to the status quo this week after a bumpy start.

"We had a volatile start to the week with the Asian sell-off on Monday, but the RMBS market settled down fairly quickly as broader volatility eased," says one trader. "Certainly since the Fed meeting it's been pretty quiet and we've returned to the status quo."

Throughout the week there have been fairly low BWIC volumes, with today's $600m total small for a Thursday. Even then, today's schedule mainly revolves around one $300m list of 31 bonds, which is a mixed auction, but consists mostly of sub-prime seniors and mezz and POAs.

"The drop in volume despite month-end is a result of sellers taking advantage of the lack of volatility last week to get their BWICs out early," the trader explains. "Nevertheless we're still seeing people trying to get off strategic sales when they can."

Buying appetite also appears to have adjusted to fit in with the calmer tone. The trader says: "While there aren't huge numbers of players looking to add at current levels, bonds are still trading reasonably on BWIC, though the high level of out of comp trading we saw last week has dropped off, and spreads are staying solid."

Secondary markets

Euro secondary dries up

Yesterday saw another very quiet day in the European securitisation secondary market and today looks to be little different as liquidity appears to have dried up into month-end and potentially the rest of the summer.

Even flows in prime assets faded away yesterday as ABS/MBS was becalmed across the board. CLOs too saw only a handful of trades, but the sector does at least provide the solitary BWIC on today's European schedule so far.

The three line list is due at 14:00 London time and comprises: €3.42m CELF 2005-2X C, €4m HEC 2007-3X C and €3m WODST VI-X C. None of the bonds has covered with a price on PriceABS in the last three months.

ABS

IDR data points to payment

Navient has released historical income-driven repayment (IDR) data for some of its FFELP student loan ABS pools currently on review for downgrade due to heightened maturity risk. The data - which was released as a new line item in the firm's historical trust performance data spreadsheets - provides much-needed transparency into the performance of the pools affected by Moody's and Fitch's ratings review, according to Deutsche Bank ABS analysts.

In trusts backed by consolidation loans, the data shows that for the June payment period, 8% of the loans in repayment are enrolled in some sort of IDR plan on average. In trusts backed by non-consolidation loans, about 12% of the loans in repayment participate in IDR on average. For both loan types, the average IDR payment is about 20% of the amount scheduled under full repayment.

In the absence of issuer-specific data, Moody's assumes that 10% of the borrowers in the loan pool are in an income-based repayment (IBR) plan and that 75% of the borrowers either make no payments or make payments that barely cover loan interest.

The IDR release coincides with an update to Intex's student loan ABS model that allows users to forecast a flat proportion of forbearance and deferment loans, expressed as a percentage of current balance, for the remaining term of the ABS. "This better reflects Moody's proposed changes to its deferment and forbearance assumptions. With the IDR data, investors modelling SLMA ABS can now adjust forbearance assumptions to better reflect actual performance," the Deutsche Bank analysts note.

Using the updated Intex model and the recently released IDR data, they ran two senior SLMA ABS bonds that are on review for downgrade - the SLMA 2007-3 and SLMA 2008-1 class A3 tranches - to gauge the impact of Navient's optional repurchases. Following Moody's guidance, they adjusted IBR by 75% to address the impact of borrowers that contribute little or no cashflow and applied three prepayment (CPR) assumptions. The first CPR assumption is based on the prepay experience one year before the amendment took place; the second is based on the average CPR during the optional repurchase period; and the third is for the bonds to trigger an EOD.

The analysis suggests that given the boost in prepayments provided by Navient's support via optional repurchase, if prepayments slow down to the level experienced before Navient amended the respective trusts, these bonds will pay in full before the legal final dates. For the SLMA 2008-1 A3 bond - which is near its 10% repurchase limit - the analysts did not model a scenario in which the prepays remained elevated, but modelled a worst-case scenario of zero CPR. Under this scenario, the bonds pay in full at the legal final.

CS

ABS

Auto issuers cleaning up

US auto ABS issuers are calling more deals on time, with 18 out of 22 issuers demonstrating a perfect call record between December 2012 and May 2015. This performance is positive for investors and supports confidence, and is expected to continue to improve.

The 82% on-time call rate compares to a rate of 72% for September 2011 to November 2012. Including issuers which delayed by one month, 91% of issuers exercised punctual calls over the more recent observed period.

"This is a marginal improvement over recent post-crisis auto ABS call performance and a vast improvement from crisis-era call performance, when new issue ABS market ceased to function and certain lenders conserved their cash and missed eligible calls," note Citi consumer ABS analysts. Only 41% of issuers called on time between June 2008 and September 2009.

The analysts add: "It is unsurprising to observe such good performance in this period of extraordinarily low interest rates and tight spreads. These factors are facilitating the record call performance."

Certain issuers, including Ford, Harley-Davidson, Honda and Nissan, have an unblemished optional call exercise track record since 1999. In the December 2012-May 2015 period, Mitsubishi was the only prime issuer and CPS was the only subprime issuer to delay calling deals by more than one month.

Mitsubishi delayed calling a deal by two months, while CPS delayed calling two deals by six months. However, CPS did call its latest deal promptly this year.

There are strong incentives to call deals promptly. Sponsors typically exercise clean-up calls regardless of the prevailing interest rate, because clean-up options have a structural in-the-money bias and other factors - such as the inefficiency of maintaining a trust with a small pool balance, freeing up seasoned collateral and maintaining investor relationships - make it attractive to call without delay.

Over the December 2012-May 2015 period, the interest rate incentive for a clean-up call - defined as the difference between the cost of debt of a trust eligible for a call and the cost of debt of a newly-issued securitisation - ranged from less than 0.4% to 19%. It has averaged 0.8% this year.

The timing of the call has an obvious impact on returns and auto ABS are typically priced to call rather than to expected maturity. The failure to call promptly is an opportunity cost for investors who forego incremental yield.

"Even if rates and/or spreads drop enough for the investor to receive an above-market coupon from a missed call, it is still undesirable as the remaining collateral pool is negatively selected and the missed call may be due to sponsor's distress," the Citi analysts add.

The analysts expect the good call performance to continue. "The good track record is very important as it helps to develop and maintain investor confidence in the sector that accounts for roughly half of all new-issuer ABS supply this year," they say.

JL

Structured Finance

SCI Start the Week - 27 July

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

Pipeline
The pace of pipeline additions was steady last week, although there was more variety in the names. The week's additions consisted of seven ABS, an ILS, two RMBS, six CMBS and two CLOs.

The ABS were: €800m Bavarian Sky Compartment German Auto Loans 3; €1.45bn BBVA Consumo 7; US$376.7m CHAI 2015-PM1; US$260.75m Diamond Head Aviation 2015; US$450m Flagship Credit Auto Trust 2015-2; US$160m HERO Funding Series 2015-2; and US$155m JGWPT XXXV.

US$100m Bosphorus Series 2015-1 was the sole ILS. The RMBS were US$489.64m JPMMT 2015-5 and US$814.05m Towd Point Mortgage Trust 2015-3.

The CMBS consisted of: US$273.5m BAMLL 2015-ASTR; US$275m BAMLL 2015-HAUL; US$1.4bn COMM 2015.CCRE24; £646m Logistics UK 2015; US$334m PFP 2015-2; and US$740m WFCM 2015-C30. Meanwhile, the CLOs were €350m Adagio IV CLO and US$800m Ares XXXIV CLO.

Pricings
The week's prints were also considerable. In total there were 12 ABS, four RMBS, four CMBS and four CLOs.

The ABS were: US$203.1m Access Funding 2015-1; US$700m Chase Issuance Trust 2015-A7; US$170m Diamond Resorts Owner Trust 2015-1; US$410m Driven Brands Funding Series 2015-1; E-CARAT 8; US$850.2m Enterprise Fleet Financing Series 2015-2; US$850m Golden Credit Card Trust Series 2015-3; US$250m Navistar Financial Dealer Note Master Owner Trust II Series 2015-1; US$433.33m NextGear Floorplan Master Owner Trust Series 2015-1; US$664m SMB Private Education Loan Trust 2015-B; US$500m USAA Auto Owner Trust 2015-1; and US$687.59m World Omni Automobile Lease Securitization Trust 2015-A.

The RMBS were £525m Auburn Securities 9, US$300m FWLS 15-SC01, £500m-equivalvent Lanark Master Issuer Series 2015-1 and A$1.5bn SMHL Series Securitisation Fund 2015-1.

US$215m Citigroup Commercial Mortgage Trust 2015-SHP2, US$140m CRCRE 2015-RUM, US$1.45bn FREMF 2015-K47 and US$200m WP Glimcher Mall Trust 2015-WPG accounted for the CMBS.

The CLOs were US$512m Babson CLO 2015-2, US$617.5m Cumberland Park CLO, US$308.4m Great Lakes CLO 2015-1 and US$510m Halcyon Loan Advisors Funding 2015-3.

Markets
European ABS and RMBS spreads continued to retrace as the threat of Grexit has been - at least temporarily - dealt with. "Spanish and Italian RMBS seniors shed 5bp generically, while their Portuguese counterparts strengthened 10bp during the week. UK BTL and NCF seniors tightened 1bp, similar to the Dutch and UK prime RMBS senior bonds," say JPMorgan analysts.

US ABS spreads were generally flat, although student loan ABS underperformed as spreads widened. "Secondary trading volumes were light for the fourth straight week, with an average of US$1bn trading each day through Thursday, below the daily average of US$1.3bn traded during the previous three months," report Barclays Capital analysts.

US CLO secondary activity picked up, with BWIC volumes totalling US$500m-US$600m. "With the Volcker compliance deadline having hit this week, US CLO 1.0 triple-A levels remained soft. The mezzanine part of the 1.0 cap stack felt firmer even though there is still no broad consensus over what constitutes an ownership interest in this part of the structure for compliance with the Volcker rule. Spread levels were overall unchanged from last week's levels," say Bank of America Merrill Lynch analysts.

Editor's picks
Sterling effort: 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...
Expanding brand: 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...
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 now be able to refinance during 2017 without triggering the risk-retention requirement...
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, going short 0%-5% and long 5%-10% is recommended...

Deal news
• 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.
• 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.
• 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.
• 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.
• 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.

Regulatory update
• 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 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.
• 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 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).
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
Acorn Re series 2015-1; Ally Auto Receivables Trust 2015-1; ALM XVI; American Express Credit Account Master Trust Series 2015-1; Black Diamond CLO 2015-1; BMW Floorplan Master Owner Trust Series 2015-1; Capital One Multi-Asset Execution Trust 2015-4; Capital One Multi-Asset Execution Trust 2015-5; Carlyle Global Market Strategies Euro CLO 2015-2; CAS 2015-C03; COMM 2015-PC1; Drive Auto Receivables Trust 2015-C; Driver Master Compartment 3; Entergy New Orleans Storm Recovery Funding I; FREMF 2015-K1501; GSMS 2015-GC32; JPMCC 2015-MAR7; Kingswood Mortgages 2015-1; KKR CLO 12; Mercedes-Benz Auto Receivables Trust 2015-1; Nissan Auto Receivables 2015-B Owner Trust; Orange Lion XII RMBS ; Paragon Mortgages No. 23; Precise Mortgage Funding 2015-2B; Thetis Finance No. 1; WFCM 2015-NXS2

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-6; BACM 2007-3; BACM 2008-1; BSCMS 2006-PW11; BSCMS 2006-PW13; BSCMS 2006-PW14; BSCMS 2007-T28; CD 2005-CD1; CD 2007-CD4; CD 2007-CD5 & CWCI 2007-C3; COMM 2012-CCRE4; COMM 2013-LC6; COMM 2014-UBS2; CRFREE 2014-CARE; CSMC 2006-C4; CSMC 2007-C4; DECO 2006-E4; DECO 2007-E5; ECLIP 2006-4; ECLIP 2007-1; ECLIP 2007-2; EMC VI; GCCFC 2006-GG7; GCCFC 2007-GG9; GECMC 2005-C4; GECMC 2007-C1; GSMS 2006-GG6; GSMS 2012-GCJ9; GSMS 2014-GC18; JPMCC 2005-CB12; JPMCC 2006-LDP7; JPMCC 2012-C8; JPMCC 2012-LC9; JPMCC 2013-LC11; LBCMT 2007-C3; LBUBS 2006-C6; MESDG CHAR; MLCFC 2007-5; MLCFC 2007-9; MLMT 2005-CK11; MLMT 2005-LC1; MSBAM 2015-C22; MSC 2006-HQ9; TITN 2006-5; TMAN 4; TMAN 5; TMAN 7; WBCMT 2006-C23; WBCMT 2006-C27; WFCM 2010-C1; WFCM 2015-C27; WFRBS 2011-C3; WFRBS 2013-C12 & WFRBS 2013-C11; WINDM XIV

Structured Finance

Hiking cycle history considered

As the likely Fed rate hike date draws nearer, Barclays ABS analysts have examined the performance of securitised products during previous hiking periods. The effect on securitised product credit sectors has previously generally been benign.

The Barclays analysts paid particular attention to agency RMBS both before and during previous hiking cycles. A typical hiking cycle lasts a year and a half, with the 1999-2000 cycle hiking 200bp per year and the 1994-1995 cycle increasing 300bp per year.

Previous hiking cycles have caused the curve to bear-flatten and end very flat, regardless of where it started. The majority of the curve flattening has tended to take place in the latter part of a hiking cycle - generally in the period more than six months after the first hike.

Volatility also tends to decrease. Despite a possible increase initially, volatility has ended previous cycles either unchanged or slightly lower than where it started.

The analysts note that the curve today is flatter than it was at the start of either the 2004-2006 or the 1994-1995 cycles. While volatility picked up early in the 1999-2000 cycle, it continuously declined in 2004-2006, which the analysts attribute to better Fed communication.

Equity returns have generally been positive during these cycles, although the picture for high yield spreads is far less clear - widening in 1999-2000 and tightening in 2004-2006. Agency RMBS spreads have widened during hiking cycles, while LOAS has generally tightened.

Nominal RMBS spreads have widened in all of the previous hiking cycles. However, most of that widening has taken place in the latter part of the cycle, which is in line with the curve flattening.

ZV spreads also widened, but OAS tightened in all cycles except 1999-2000. The flatter curve also increased option costs.

Gross issuance decreases over hiking cycles. The Barclays analysts expect close to US$1trn for a 3% level on the 10-year. CMO issuance would be expected to be lower, considering lower gross issuance and a flatter curve.

GN/FN swap returns have been in a narrow range over previous cycles, with no clear trend. However, faster discount speeds might favour them this time around, reckon the analysts. TBA hedged IO performance was negative, but is not conclusive.

"Credit spreads have been biased tighter to flat during the past two cycles as risk premiums have usually declined," say the analysts. They note that credit spread widening in mid-2013 and in May and June this year was driven partly by hike expectations.

JL

CLOs

Volcker deadline drives BWICs

The first half of 2015 saw US$18.5bn of US CLO bonds on BWIC, US$11bn of which occurred in Q2, according to Citi figures. A record US$4.7bn was out for bid during June alone, ahead of the Volcker Rule deadline.

Triple-A supply has been trending upwards since November 2014 and represented the largest percentage of BWIC volumes in 2Q15, at 60%. US$2.8bn in triple-A CLO paper was out for bid in June, beating May's US$2bn level and shattering the 2014 monthly average of US$767m.

Citi structured credit strategists estimate that as much as US$2.4bn of non-Volcker Rule compliant triple-A bonds appeared on BWIC last month, 37% of which did not trade. This compares with US$6.1bn in non-compliant triple-A paper and 28% DNTs for Q2 as a whole. However, with the passing of the Volcker deadline, the urgency to move non-compliant CLO 1.0 paper should decrease.

The overall CLO 1.0 market posted very high DNT levels in the second quarter, reaching 32% of total 1.0 BWIC volumes - more than twice the 2014-2015 monthly average DNT percentage of 15%. DNTs accounted for 40% and 36% respectively of May and June's 1.0 BWICs.

Meanwhile, CLO 2.0 paper continued to dominate BWICs in the US, with a 73% share of volume in May and 67% in June. The Citi strategists note that DNT levels for 2.0 bonds remained at normal levels during Q2, with 19% of BWICs not resulting in a trade. However, June posted a significantly higher 29% of DNTs on US$3.2bn of BWIC volumes, the largest of the 2014-2015 period.

Over the first half of 2015, generic CLO 1.0 triple-A spreads have widened by 36bp, from 96bp in January to 132bp by end-June. This widening has been driven by a slower amortisation rate and increased supply ahead of the Volcker deadline.

The Volcker deadline appears to have played a role in shifting dynamics in the primary investor base too. For example, bank demand for triple-A bonds has decreased from representing 85% of the market in 2012 (the post-crisis high) to 40% in 2014 and 38% in 1H15. Similarly, whereas banks purchased 35% and 25% of primary mezzanine bonds in 2012 and 2013 respectively, they comprised only 11% and 9% of 2014 and 1H15 allocations.

"Asset managers are catching up quickly to match up with banks' demand of senior most paper. Yield-starved pension funds have made an arrival into the CLO space and seem to be here for the long haul," the strategists observe.

Last year pension funds made up 10% of primary triple-A allocation and 3% of mezz allocation. So far this year, they have snapped up 8% of triple-A primary issuance and 7% of mezz issuance.

CS

CLOs

Europe emerging

European CLO, loan markets discussed

Representatives from Thomson Reuters, Credit Suisse, CVC Capital Partners and Goldman Sachs discussed the European CLO and loan markets in a live webinar hosted by SCI earlier this month (view the webinar here). Topics included primary CLO issuance, loan market developments and the impact of developments in Greece.

Q: How has the European primary CLO market fared?
A: Alex Lembcke, senior market analyst, Thomson Reuters: The European CLO market essentially shut down after the global financial crisis but reopened in 2013. Once it did reopen, issuance increased steadily until mid-2014, when it levelled off. Since then it has averaged above €1bn per month, with three or four new CLOs priced each month.

Most of the CLO market participants I talk to expect around €15bn-€20bn of issuance this year, which would put us at roughly half the issuance we saw in 2006 and 2007, which was €30bn-€35bn of issuance. But still, following the financial crisis, this is very good issuance.

However, CLO aggregate principal balance has decreased as CLO 1.0 deals have wound down. It is now climbing a little but not much, so for the CLO market to grow, issuance will have to be closer to €2bn per month.

Michael Malek, director, Credit Suisse: Despite uncertainty, the market had a strong second quarter, with €4.5bn of new issuance. By way of comparison, there was €4.4bn in 2Q14, although before the crisis there was €10bn in 2Q07.

The CLO issuer market is diversifying away from the larger, more established managers that dominated the early 2.0 issuance. Seven managers priced debut 2.0 transactions this year in Europe and we could see more in 2H15. We can also add that we see more US CLOs being structured to be European risk retention-compliant and this is something which has expanded quite considerably.

Q: What developments have there been in the loan market?
A: Lembcke: There is a large pipeline growing of LBOs, which were put on hold while the Greek situation played out. Leveraged loan issuance has been alright, although demand remains high, so margins are reflecting the fact that it really is a seller's market right now.

If you look at the average margins for term loan Bs and term loan Cs - which is what CLOs generally invest in - this year they started at around 500bp and now are down to about 400bp, so pricing has tightened here. It is still above what it was before the crisis, when levels were around 300bp, but it is down from the start of the year and some people are attributing this to ECB QE and investors chasing yield.

There is a lot of demand for loans at the moment, especially leveraged loans, because of the margin. At 400bp with a 1% Libor floor, you are looking at 5% and that is pretty good in this market.

All of these trends have been reflected in the secondary loan market as well. Yields have come down and bottomed out at around the same area - 400bp. The secondary market is much quicker to react to recent events than the primary market, so in the secondary market you have actually seen yields jump up in the last month from 400bp to 450bp, reflecting some of the recent issues we have been seeing with China and Greece.

Dominic Ashcroft, md, Goldman Sachs: The loan market has been recovering for the last 18-24 months. It was broken after the crisis and significant refinancing was going to the bond market, but while the bond market has grown a lot over the last four or five years, the loan market has now started to come back into favour.

Loan demand comes from CLOs - including US managers as well as European ones - and also from managed accounts and alternative asset managers. When we are looking at a new LBO or are underwriting a piece of capital, we are much more balanced between the loan and the bond product than we may have been a couple of years ago, when loan market demand was less dynamic.

Through the last couple of months we have seen some volatility return to the secondary market, although we still see the European loan market being very well technically bid. If you think about the relative value that we have seen from the trading levels we have observed in the market, the European loan market has not really changed or moved substantially, particularly in the last month, versus some of the movements we have been seeing on the bond side of the market.

Greece has stolen the headlines, but we remain bullish on the technical bid from the loan market going forward. That is going to drive the way banks think about underwriting new commitments that will bring more supply to the loan market over the next six to 12 months.

Q: How has CLO collateral changed?
A: Malek: CLO portfolio construction is broadly as it was and generally changes have been limited. There has been a slight increase in cov-lite allowance from a typical maximum last year of 20% to 30%-35% now. There are also more multi-currency structures, allowing some liabilities to be issued in sterling notes.

That allows the manager to have a bucket for sterling assets without entering into asset swaps, so that gives more flexibility to the manager and allows the manager to increase diversity in the portfolio. We expect to see this feature more in 2H15.

Q: How challenging has portfolio ramp-up been?
A: Jonathan Bowers, senior portfolio manager, CVC Credit Partners: Primary loan issuance this year has been patchy. While January, March and June were strong, we had some fairly slow months in between, and that has made it challenging to put together quality portfolios.

The secondary leveraged loan market is very well bid, particularly in Europe where the market is much more finely balanced than the US. There was a spate of repricings in the second half of May and first half of June, the last three of which received significant pushback and were subsequently dropped.

Large primary deals are pricing a little wide or having structural changes made, partly due to volatile bond flows in the US. This, in turn, brings loan and bond pricing more into line, meaning that when there is no competing bond bid - or the bond bid is wide - loan pricing will move up quite rapidly.

We witnessed that in the second half of last year, when the primary market declined almost 100bp in the first half of the year, clawing it all back in the second half. I do not think we will see that to the same extent this year.

While we believe certain M&A transactions are on hold, we expect more deals to be launched into the market in September, when hopefully macro issues such as the Greek crisis have been put to bed. I think we will see some more interesting deals coming through in the remainder of the year.

In addition, for deals above a certain size, typically about €1.5bn, you really need to go to the US market or capital markets for financing, where we are now starting to see some of the larger buyouts come through again. I think that also makes primary pricing a bit more interesting.

My view is that we will see pricing move up. The main challenge is getting consistent, quality deal flow through. So far, we have seen some fairly patchy issuance in terms of credit quality, interspersed with some stellar credits which are suitable for CLOs.

Q: Where are liability spreads and how does the arbitrage look?
A: Malek: Spreads across the capital structure have tightened since the end of 2014. This is particularly the case at the bottom of the capital structure. Triple-A, double-A and single-A have generally been stable in the regions of 130bp, 200bp and high-200s respectively. Triple-B has tightened a little from the low-400s to mid-350s and double-B from mid-600s to low-500s. Single-B has tightened from mid-800s to high-600s.

Considering Greek events, it is hard to say where a transaction would price today. Despite high volatility, we have seen good resiliency in ABS trading where we have seen some more opportunistic bids, but the offer moved very little.

We would expect the top part of the capital structure to be relatively stable. There could be a little widening at triple-A. Widening could be more pronounced at the bottom of the capital structure.

It is also interesting to note that the US market typically has spread tiering between managers, with triple-A at 140bp for established managers and 15bp-20bp wider for first-time issuers. In Europe this gap is only 5bp-10bp.

Bowers: The interesting interplay is that there is a very large senior secured bond market pricing against a senior secured leveraged loan market and any volatility in the bond market - whether it is a taper tantrum, Greece, Chinese growth concerns - will have an impact on primary pricing. That, in turn, puts the onus on the leveraged loan market to pick up the slack.

Although there has been spread compression on the asset side with repricings, particularly in 2Q15, I think some of that will reverse itself over the course of this year. Additionally, CLOs now have the ability to invest in bond capital - whether it is an FRN format or fixed rate - giving them the opportunity to increase spread on the asset side, both from an absolute basis and from a yield perspective.

That is a real advantage and should bolster the arbitrage opportunity as rates start to edge up and the yield curve enables some floating rate product on the bond side.

Q: What are the implications of the Greek situation for Europe's CLO market?
A: Ashcroft: In the near term Greece has curtailed primary issuance, especially in the bond market, and scaled back the issuance we have been seeing on the loan side of the market.

Somewhat surprisingly, Greece has actually had a more modest impact on secondary trading levels - both on the loan side, which is not too surprising, but also on the bond side - so we have generally seen bond pricing move down a point and a half or two points over the end of June and start of July, albeit with some inter-week volatility. The overall movement has really been following the direction of equity markets.

Equities are back up 2%-2.5% and we have seen the iTraxx move in again to the level that we saw before the Greek referendum. So from that perspective, while Greece has driven a lot of the headlines, it has not had such an adverse effect on the secondary market as we might have anticipated, perhaps because the market has factored in the likely outcomes in advance.

Looking forward to the rest of the summer and into September, there have not been as many outflows as people anticipated, so the net effect - given we have not seen many primary market deals come through - is that people are sitting on a little more cash than they were four or six weeks ago and therefore our view is that if we do get some stability coming back into the market, then primary issuance could start to step up pretty meaningfully, if not in July then certainly when market participants are back from the beach in September.

JL

Structured Finance

Credit firm merger agreed

Ares Management and Kayne Anderson Capital Advisors have agreed to merge and form Ares Kayne Management. The firm will provide a combined US$113bn of AUM, with the transaction expected to close on or around 1 January 2016.

The new business will focus on tradable credit, direct lending, energy, private equity and real estate. Upon closing of the merger, Kayne Anderson chairman and founder Richard Kayne, and Ares chairman and ceo Tony Ressler, will serve together as co-chairmen of Ares Kayne.

Kayne Anderson president and ceo Robert Sinnott will become chairman of the newly-formed energy group at Ares Kayne, which will include all of Kayne's energy investment activities including energy private equity, private energy income and energy infrastructure marketable securities. Kayne, Sinnott and Kevin McCarthy will also join Ares Kayne's board of directors. Ressler, Michael Arougheti and Michael McFerran will continue their respective Ares roles as ceo, president and cfo.

Moelis & Company and Bank of America Merrill Lynch served as financial advisors to Ares, while Wells Fargo served as a financial advisor. Proskauer Rose served as Ares' legal counsel. JPMorgan served as financial advisor to Kayne Anderson and Paul Hastings served as the firm's legal counsel.

Structured Finance

Macro trader tapped

Marinus Capital Advisors has hired Aaron Garvey as a senior macro trader. Garvey will focus particularly on structured products portfolios for the firm's investment team, reporting to Marinus cio and managing partner Najib Canaan.

Garvey was formerly a senior portfolio manager and partner at MKP Capital Management. Following his time at MKP, he was a senior portfolio manager at Brevan Howard and Davy Capital.

Structured Finance

Credit risk pro moves east

Moody's Analytics has appointed David Hamilton as md, stress testing and credit risk analytics for the Asia Pacific region. Based in Singapore, Hamilton will be responsible for business development across the region, providing insight into solving the practical challenges of credit risk measurement and management.

Prior to his new role, Hamilton worked as md for Moody's Analytics' capital markets research group. He has also worked on corporate, sovereign and municipal credit risk, as well as structured finance. Before joining Moody's, he worked in the regional economics group at the US Federal Reserve Bank of Philadelphia.

Structured Finance

Real estate team boosted

Brian Olasov has joined Carlton Fields Jorden Burt as executive director, financial services consulting. He will be a member of the firm's real estate and commercial finance practice group as a non-attorney professional.

Olasov will work closely with the law firm's clients and attorneys to provide financial due diligence on mortgage loan portfolios, credit restructuring, valuation challenges, mortgage loan servicing and securitisation activities. Outside of his new role, he will continue to provide witness testimony involving MBS, real estate finance and mortgage loan servicing disputes to other law firms

Olasov joins from McKenna, Long & Aldridge, where he was md. He currently serves or has served on a variety of boards and committees, including the National Policy Committee of the CRE Finance Council and Commercial Mortgage Securitisation Association.

CDS

CDS trader switches banks

Basile Delaville has joined Deutsche Bank to trade CDS indexes. He arrives from Bank of America, where he was a member of the structured credit trading group. Before this, Delaville started his trading career with CDOs at Calyon.

CLOs

Key man vote solicited

Sound Harbor Partners is seeking to create consistency across its CLO stable by replacing the key managers on the Landmark transactions it acquired from Aladdin Capital (SCI 16 October 2012). The firm plans to implement what it describes as a two-step restructuring that would avoid a key man event.

Specifically, notices have been issued in connection with Landmark VIII CLO and Landmark IX CDO requesting noteholders to vote on the proposed replacement of William Lutkins and Thomas Bancroft by Michael Zupon and Dean Criares respectively by 19 October. The replacement of Bancroft will occur a day after the replacement of Lutkins.

If the requisite noteholders do not affirmatively object to the proposal within 90 days after the ballot is sent, the proposed key managers will be deemed approved.

Criares and Zupon, Sound Harbor senior partners and principal owners, are named as key managers on Sound Harbor Loan Fund 2014-1. Bancroft and Lutkins are expected to continue as employees of the firm.

Sound Harbor says that since assuming the Landmark CLOs, it has accomplished "several milestones" that have reduced risk and improved collateral value, as measured by rating upgrades, lower WARF, increased OC ratios, debt repayment and meaningful returns to income noteholders.

CLOs

CLO consultant tapped

Eric Bothwell has joined Ashurst as a senior consultant within its CLO practice. He arrives as md from UBS, where he was most recently involved in the sale and unwinding of non-core asset portfolios.

Bothwell was also one of the founding members of Goldman Sachs' new issue CLO team, responsible for all aspects of transaction structuring, execution and marketing. His legal experience includes traditional ABS and MBS, as well as CLOs, CDOs, early credit derivatives, SIVs and equity and debt repackagings.

CMBS

CMBS duo recruited

Butler Burgher Group (BBG) has made a number of hires in an attempt to enhance its advisory, financial reporting and appraisal review services. Among the new recruits are Andrew Babienco and Helen Peng, who join as directors.

Having both arrived from Deutsche Bank, Babienco and Peng will provide appraisal review services for CMBS and other loan types on behalf of BBG's financial institution clients. Louis Yorey has also joined BBG as a senior md and practice leader of the advisory services group. He will oversee financial reporting services on a national basis and arrives from PwC.

BBG has also undertaken a recapitalisation effort led by Silver Oak Services Partners, which was completed in partnership with BBG management and co-investors. BBG leadership retains a significant ownership stake in the business and continues to drive the day-to-day operations and long-term strategy of the firm.

Deloitte acted as exclusive financial adviser to BBG on the transaction. Terms of the transaction were not disclosed.

CMBS

Commercial lending vet hired

Jon Trauben has been hired by Hunt Mortgage Group as senior md. He will focus on expanding the company's capital markets activities and its overall commercial lending business.

Trauben comes to Hunt from Barclays, where he was md, holding positions that included head of large loan origination and head of subordinate debt origination and distribution. Prior to Barclays, he was with Cantor Fitzgerald's real estate finance business CCRE, where he was md and head of capital markets and high yield real estate and loan syndications.

Insurance-linked securities

Montpelier purchase approved

Endurance Specialty Holdings says it has received all regulatory approvals required in connection with its previously announced acquisition of Montpelier Re Holdings (SCI 1 April). The acquisition was made for a consideration of 0.472 shares of Endurance and US$9.89 in cash for each Montpelier common share, representing US$40.24 per Montpelier common share, or US$1.83bn in aggregate at the closing price.

The cash portion of the consideration will be funded through a pre-closing dividend paid by Montpelier to its common shareholders. Montpelier's existing shareholders will own approximately 32% of Endurance's outstanding ordinary shares at the final close of the completion. Endurance will also be expanding its board to introduce three of Montpelier's current directors.

The transaction is scheduled to be completed after the close of trading today (31 July).

Risk Management

Risk officer recruited

Churchill Asset Management has hired Christopher Cox as senior md and chief risk officer. The appointment follows the recent launching of the firm by TIAA-CREF, with its focus on originating, underwriting and managing senior loan investments (SCI 10 April).

Reporting to Churchill president and ceo Kenneth Kencel, Cox will serve as a member of the investment committee and is responsible for overseeing the firm's risk management infrastructure - including all risk management processes and policies. Prior to Churchill, his most recent role was as a principal and chief risk officer of Carlyle GMS Finance.

ABS

Solar tax partnership prepped

SolarCity is in the market with its fourth residential distributed generation solar ABS. The US$123.5m SolarCity LMC Series IV Series 2015-1 is the firm's inaugural securitisation structured as a tax partnership.

The transaction is secured by distributions to the managing members of the related financing funds - Blue Skies Solar I, Solar Integrated Fund I and II, and Visigoth Solar I - from power purchase agreements (PPA) and lease agreements from 16,400 photovoltaic residential solar installations (PV systems). The tax equity investor members behind the four financing funds are American Honda Motor Co, Solar TC Corp and Capital One.

The PV systems were financed via tax partnerships (the financing funds) between a managing member and the related tax equity investor. Each financing fund holds the right to an investment tax credit (ITC) in an amount that is based on the fair market value of the related PV systems at the time of purchase. The related tax equity investor retains a substantial interest in the financing fund, which entitles it to 99% of the ITCs until the 'flip date', which occurs on the later of a specified date or once the investor realises a specified rate of return.

Approximately 55.3% and 44.7% of the PV systems in the pool are PPA and lease agreements respectively. At closing, the issuer will have the benefit of a tax loss insurance policy for each financing fund to cover tax loss payments to the tax equity investor up to 35% of the investment tax credits claimed by the financing fund and related fees and expenses.

The aggregate discounted solar asset balance (ADSAB) of the securitisation pool, consisting of the discounted present values of the PPA and leases, is approximately US$214.1m. The transaction's share of the ADSAB is US$182m.

Kroll Bond Rating Agency has assigned preliminary ratings to the deal, which comprises two tranches - US$103.5m single-A rated class A notes and US$20m triple-B class Bs. KBRA notes that the transaction benefits from credit enhancement in the form of overcollateralisation, excess cashflow, an interest reserve account and a supplemental reserve account. The supplemental reserve account shall be used to fund the costs associated with the replacement of the inverters of the PV systems, the deductibles associated with the respective tax loss insurance policies and the purchase options of the related financing fund after the respective flip dates.

ABS

Card payments hit historic highs

Fitch reports that average US credit card monthly payment rates reached all-time historical levels during 2Q15 as consumers kept payment obligations in check. Borrower credit profiles have remained stellar as a result, allowing the sector's improvements to continue on from the previous quarter.

Late payments continued to ease, also hovering at historical low levels, leaving charge-off rates steady and delinquency rates at new lows. "Improvements in the labour market heading into the summer helped keep credit card ABS metrics near their records," says Herman Poon, director in Fitch's ABS group.

An improvement in yield performance, coupled with modestly stable losses, gave way to new highs for excess spread in 2Q15. Current levels more than doubled in performance from the crisis at end-2009.

Fitch expects credit card ABS prime gross yield and prime monthly payment rates to improve in the short term, in line with seasonal trends. Prime 60-plus day delinquencies are expected to decline near historical lows, while prime charge-offs are expected to increase slightly as this metric slowly normalises.

Structured Finance

Duke pursues rate reduction bond

The Florida Public Service Commission has selected Saber Partners to advise it on financing a new securitisation bond that has been authorised for issuance following a new Florida law. The Commission is permitted by the state law to allow Florida investor-owned utilities to issue rate reduction bonds to recover costs associated with closing nuclear power plants.

Duke Energy became the first utility to apply to issue these new bonds when it filed a petition with the Commission to issue approximately US$1.3bn of securities. Saber says that the bonds are expected to achieve a triple-A credit rating and, if properly structured and marketed to investors, will save electric utility customers hundreds of millions of dollars. Yields from the bonds could slightly exceed those in US Treasuries and agency bonds.

Structured Finance

Turbo boost for marketplace deal

SoFi has priced its US$417.6m ABS offering of refinanced student loans, the first marketplace lending transaction to have its senior notes rated triple-A by a rating agency. DBRS assigned the top rating for the class A1 and A2 notes in SoFi 2015-C, while Moody's assigned an Aa2 rating to the senior notes, which equaled US$387.3m.

The notes are backed by a trust certificate representing 100% of the beneficial ownership interest in a grantor trust, the assets of which consist of loans originated through SoFi's private student loan programme. The variable-rate class A1s will be primarily secured by a group of variable-rate loans. The fixed-rate class A2s will be primarily secured by a group of fixed-rate loans, while the class Bs will be secured by both the variable-rate and fixed-rate loans.

To build additional credit support early in the transaction, DBRS says that the structure will incorporate a full turbo feature. In this scenario, 100% of the remaining available funds after paying senior transaction fees, note interest and shortfalls will be used to pay principal on the class A notes.

Overcollateralisation, reserve account amounts and excess spread have also created credit enhancement levels that DBRS believes are commensurate with the assigned ratings. Initial overcollateralisation for the class A1s, A2s and Bs will be 14.63%, 13.11% and 6.89% respectively. The agency also explains that transaction cashflows are sufficient to repay investors under all triple-A and triple-B high stress scenarios in accordance with the terms of the transaction documents.

The borrower credit within the transactions exhibits high quality, adds DBRS. The portfolio contains a weighted average credit score of 777, while the student loans have a weighted-average borrower income of US$143,132 and a weighted-average monthly borrower free cashflow after expenses of US$6,007.

SoFi says it plans to broaden its securitisation programme into other asset classes following this transaction, potentially incorporating personal loans and mortgages.

Structured Finance

Synthetic sale agreed

Raiffeisen Bank International (RBI) has agreed to sell part of a €705m loan portfolio composed predominately of seasoned CRE loans and select corporate loans to Mariner Investment Group. The International Infrastructure Finance Company Fund, managed by Mariner, has agreed to purchase notes corresponding to the junior credit risk in the RBI portfolio as part of the agreed synthetic risk transfer.

RBI says that the transaction is designed to enable it to more efficiently manage its balance sheet, optimising the bank's risk weights while also freeing up capital. The transaction results in a reduction in RBI's RWA of approximately €340m, thus strengthening the CET1 ratio by 4bp. RBI cfo Martin Grull says that the bank aims to strengthen its equity position by at least 20bp per year through securitisation.

Structured Finance

ABCP maturity cap impact gauged

Fitch believes that the EBA-proposed one-year maturity cap for underlying exposures in ABCP securitisations (SCI 29 June) will prevent existing European ABCP programmes from achieving qualifying securitisation eligiblity and the associated lower capital charges. As at May, the agency's data reveals that 54% of funded assets have medium- and longer-term maturities and would leave the programmes ineligible.

All 12 programmes rated by Fitch include assets with maturities exceeding a year, although the proportion varies. In three programmes, all of their assets would be ineligible, while the proportion of ineligible assets would range from 19% to 86% in the remaining nine programmes.

The EBA proposed the one-year maturity cap response to last year's call for advice on long-term financing of the European economy by the European Commission. The proportion of potentially eligible underlying assets under the proposed cap largely reflects the proportion of trade receivables in the asset pool. Trade receivables often have maturities of less than one year, unlike many other ABCP-funded assets.

Most of the other assets are auto loans and leases, which make up 32% of all funded assets. The remainder includes consumer loans, credit card receivables, equipment leases and loans, and corporate/commercial loans that Fitch notes have typical maturities of five to seven years. Only 2.1% are much longer-dated assets, such as residential mortgages.

The EBA also proposed that underlying exposures should have a risk weight under the standardised approach of no higher than 75% for retail exposures or 100% for any other exposures on an individual basis. Fitch says this could prevent transactions backed by claims on low-rated or unrated obligors, such as trade receivables and SME loans, being classified as qualifying securitisations.

The agency believes the EBA's proposed limit on the aggregate value of exposures to a single obligor - 1% of all underlying exposures - would be impossible to monitor, due to data protection restrictions and the dynamic nature of the programmes. The limit is meant to ensure a minimum level of granularity, but the most dynamic asset pools will be those with a high proportion of very granular assets, such as trade receivables and auto loans and leases.

If it were adopted, Fitch says that the full impact of the maturity cap on the ability of existing ABCP programmes and transactions to achieve qualifying securitisation status would depend on how the cap were implemented. For example, it is possible that provisions could be made for ineligible assets to be removed.

CDO

Error corrected for PF CDO

S&P has taken a number of credit rating actions in relation to the Stichting PROFILE Securitisation I project finance CDO. The move follows the agency's review of the transaction's performance and the withdrawal of its recovery estimates for investment grade project finance loans for which it provides credit estimates.

Specifically, S&P has: lowered to triple-C from triple-C plus its rating on the deal's class E notes; placed on credit watch positive its single-B plus rating on the class B notes; and affirmed its ratings on the class A+, A, C and D notes. Since the agency's previous review, the transaction has benefitted from positive rating migration of the reference portfolio, as the weighted-average rating improved to triple-B from triple-B minus.

S&P has also corrected an error in the application of its project finance framework methodology by withdrawing its recovery estimates for investment grade project finance loans. Consequently, when applying its criteria for rating CDOs of project finance assets, the agency has used for the investment grade assets in the portfolio recovery rate levels based on corporate CDO criteria for senior secured loans in the UK.

The withdrawal of the recovery estimates has negatively affected its average expected recoveries in the portfolio - from 68, 81 and 85 across the triple-B, double-B and B/CCC rating scenarios respectively, as of the March 2014 review, to 63, 75 and 79. S&P notes that, due to the withdrawal of its recovery estimates for the investment grade assets in the portfolio and despite the portfolio's positive rating migration, the class E notes' current subordination is not sufficient to maintain a triple-C plus rating.

Due to the positive rating migration of the portfolio, the class B notes' SROC exceeds 100% at a higher rating level than single-B plus. S&P says it will continue to review the transaction's performance and will resolve the credit watch placement in due course.

Stichting PROFILE Securitisation I is a synthetic CDO backed a portfolio of UK public infrastructure loans originated by NIB Capital Bank and Sumitomo Mitsui Banking Corp. The transaction closed in December 2005 and the reference portfolio has been amortising since the end of the replenishment period in December 2009.

CDO

Trups defaults drop again

The number of US bank Trups CDO combined defaults and deferrals marginally decreased to 19.3% at end-June from 19.6% at end-May, according to Fitch's latest index results for the sector. There were 12 banks representing US$111.7m of notional in 15 CDOs that cured during June, while no defaults occurred. 

One previously cured issuer representing US$4m of notional in one CDO also redeemed its Trups. Further, three banks representing US$35m of notional in six CDOs and one issuer representing US$5m of notional in one CDO re-deferred and deferred respectively on their Trups. One defaulted bank with the notional of US$20m in one CDO has been exchanged for preferred stock and the notional has been removed from the index.

Across 78 Fitch-rated Trups CDOs, 231 defaulted bank issuers remain in the portfolio representing approximately US$5.7bn of collateral. Currently, 132 issuers are deferring interest payments on US$1.6bn of collateral.

CLOs

Euro CLO 2.0 repricing proposed

A notice has been issued for Carlyle Global Market Strategies Euro CLO 2013-1, which - if passed - would trigger the first repricing of a European CLO 2.0 deal. CELF Advisors is seeking consent from the sole investor to reduce the class A coupon margin from 130bp to 115bp from the 17 August IPD and to eliminate their right to remove and replace the collateral manager, thereby making the transaction Volcker-compliant.

The first European CLO 2.0 deal to be called was Grand Harbour 1 (SCI 25 June), but Deutsche Bank European securitisation analysts note that three others - CRNCL 2013-3, ALME 2013-1 and DRYD 2013-27 - are now past their non-call dates. Meanwhile, CLO 1.0 calls are continuing apace, with equity investors in Duchess IV deciding to call the deal and redemption expected on the August IPD. This brings 2015 redemptions to €2.7bn across 14 deals so far, according to Deutsche Bank figures.

CLOs

Global CLO approach updated

Fitch has updated its global rating criteria for CLOs and corporate CDOs. The update includes an explicit description of the stress portfolio construction for managed CLOs, as well as publications of the FX stresses on US dollar- and sterling-to-euro multicurrency CLOs and the default skew assumptions for multicurrency CLOs.

For constructing stress portfolios in rating new transactions, the agency typically starts with the initial indicative portfolio provided by the arranger and then maximises certain concentration limitations. The agency says this portfolio will provide a good indication of the portfolio that the manager is likely to purchase, at least for US CLOs with a broader universe of leveraged loans. In the case of most European CLOs, which are selected from a much smaller universe and therefore exhibit significant overlap, the agency uses a standardised stress portfolio that is customised to the specific portfolio limits for each transaction.

For developing its assumptions on US dollar- and sterling-to-euro stresses, Fitch conducts a historical analysis of the exchange rate movement, as well as exchange rate forecasts. The agency also considers in its historical analysis macro-economic explanations for significant exchange rate movements.

Additionally, it has published the default skew that would apply a proportionately larger share of defaults to one currency bucket in multicurrency CLOs. Discretion will be used in applying this skew, depending on the size of the unhedged exposure.

Further, Fitch will no longer apply the portfolio credit model default timing in its cashflow analysis for rating CLOs. The agency believes a simplification of its analysis will be beneficial, as default timing is not a driver of its analysis.

Finally, in addition to using recovery ratings, Fitch has incorporated the specific recovery estimates issued by the corporate group. The portfolio credit model was updated to allow users to enter both the recovery rating and recovery estimate, where available. The use of recovery estimates in the analysis means the base-case recovery rate will match the weighted average recovery rate computed by CLO managers who use these estimates for their European CLOs.

Fitch expects the criteria changes to have a minimal impact on the ratings for leveraged loan CLOs. The inclusion of Fitch recovery estimates could be marginally positive, since the estimates are currently slightly above the midpoint of the corresponding recovery rating range, with any impact on existing ratings expected to be limited to one notch.

CLOs

Called CLO profiles examined

A recent Wells Fargo analysis of US CLO redemptions suggests that the average time between end of reinvestment (EoR) and when a deal is called is 30 months. The median senior note factor at the time of the call was 7.8%.

The analysis examines the profile of called CLOs by issuance vintage and by year of EoR, based on a sample of 337 CLO redemptions that have occurred since 2010. Almost 70% of CLOs from the 2003-2005 vintages have been called, while almost half of the 2006 vintage has been called. Over 70% of the 11 CLOs issued in 2010 have been called.

So far in 2015, 47 CLOs have been called for a total of almost US$8bn outstanding balance at the time of the call (US$21.5bn in original face).

For the 2004-2006 vintages, the median senior note factor at the time of call was 2%-3%, according to Wells Fargo structured products analysts. For the 2004-2005 vintages, it was 31-33 months past the reinvestment period, while 2006 vintage CLOs were called at 26 months after end of reinvestment.

In general, CLOs are called for three primary reasons: note amortisation leads to smaller equity returns; the CLO structure was sub-optimal and equity investors refinance to higher-yielding vehicles; or equity investors own notes at such a discount to make a call economical.

The analysis shows the importance of loan market conditions during amortisation. CLOs with EoR in 2008-2009 were in the amortisation period longer compared to CLOs with EoR in the more benign conditions of 2010-2012, when loan repayments and prices were higher.

When analysing calls for CLOs with similar EoRs, the analysts find that structural provisions - namely the WAL test - is the key differentiator. Currently outstanding pre-crisis CLOs with 2012-2013 EoR are typically those with more permissive WAL test limits and, therefore, larger WAL test cushions.

Outstanding CLOs with 2012 EoR have an average WAL test cushion of positive 26bp, compared to all outstanding CLO 1.0s, which have a median WAL test cushion of negative 30bp. Over 80% of post-crisis CLOs that end reinvestment prior to 2017 have a WAL cushion of less than one.

CLOs

CLO 2.0 overlap highlighted

European CLO issuance levels in 2015 have surpassed end-2Q14 levels, according to S&P. So far, 12 new European transactions have brought total issuance for 2015 to €8.62bn from 21 transactions, compared with €6.92bn of issuance from 16 transactions during the same period last year. Four new managers - Oak Hill Advisors, Partners Group, Tikehau Capital Europe and Black Diamond Capital Management - have issued their first European CLO 2.0 transactions.

However, S&P notes that portfolio overlap between European CLO 2.0 transactions remains significant, with average pair-wise deal overlap at 38% and average intra-manager overlap at 65%. The agency notes that the top five obligors feature in approximately 93% of CLO 2.0 transactions and the top 10 feature in approximately 85%. Managers are invested across 37 industries, with healthcare overtaking business equipment and services as the most common industry, moving from 11% exposure in 2014 to 14% in 2015.

But the credit quality of European CLOs remains stable, with the assets in CLO 2.0 portfolios concentrated in the single-B rating category at 80.6%, compared with 81.5% in 2014. The credit quality of the collateral also remains stable, with assets rated in the triple-C categories falling to 2% from 2.6% in 2014. Assets rated in the triple-C category have remained constant in number for most of the vintages in S&P's index, except for the 2005 vintage, which has seen an increase in number due to deleveraging.

Further, except for the 2013 and 2014 vintages which showed no defaults, European CLO default rates have increased for all vintages. The 2005 vintage has seen the largest increase, with 3.24% of total assets defaulting, up from 1.74% in February 2015.

Finally, S&P says that senior overcollateralisation cushions have increased in all of the vintages included in its index between Q1 and Q2, with the exception of 2013. The subordinate cushions have seen the same results in this category.

CLOs

CLO commodity defaults growing

The number of defaults and impacted US CLOs increased in 2Q15, with 19 of 142 CLOs affected by defaults at the end of the quarter, according to Fitch. Five new defaults were reported in the agency's index, including two distressed debt restructuring events.

One of the defaulted issuers, Sabine Oil & Gas, was held by eight CLOs. However, the exposure was largest - at or near 1% the portfolio notional - in only two of the affected transactions. One CLO in the index held a loan to Patriot Coal, at 0.6% of the portfolio notional amount.

While the remaining new defaults were outside of the commodity-related sectors, Fitch believes that issuers from energy, oil, gas, metals and mining remain the most vulnerable to an ongoing downturn in these sectors. In particular, the agency notes that a number of coal producers held in CLOs are distressed and may be nearing a default event.

The exposure to these sectors is contained at the aggregate and deal-level though. The index's overall exposure stood at 4.3% for energy, oil and gas, and 1.7% for metals and mining. At the deal level, energy holdings exceeded 10% of the portfolio notional amounts in six CLOs and only two CLOs held more than 5% in metals and mining companies at the end of Q2.

The majority of CLOs in Fitch's index remain in their reinvestment phase, which provides more latitude for CLO managers to offset par losses from defaults and distressed sales with purchases at a discount. The average par gain across the 142 CLOs in the index declined marginally to 0.34% from 0.37% at the end of the previous quarter.

In 12 CLOs, portfolio par is currently below a par target after applying haircuts to the defaulted targets, but the shortfall is only 0.2% of par target on average. Fitch adds that the initial portfolio construction and ongoing reinvestment keep portfolios well diversified across obligors, with a median obligor count of 191, resulting in only one CLO reporting aggregate defaults to date slightly over 1%.

CMBS

EMEA CMBS performance 'stable'

The stable performance of the Fitch-rated EMEA CMBS portfolio in 2015 is largely due to a limited number of loans maturing so far this year, according to the agency. The percentage of loans in default (44.4%) and post-maturity (63.7%) increased marginally in 2Q15, while the proportion of loans in special servicing (42.3%) fell slightly.

The agency's maturity repayment index improved to 68.3% in 2Q15 from 67.5% in the previous quarter. Fitch say this was mainly driven by the repayment of the Forest Finance deal, together with the DD Karstadt Hilden (securitised in DECO 14) and Ranstadt (EPC 3) loans. The latter two loans had been in special servicing and repaid with losses.

Five loans were scheduled to mature in 3Q15, compared with three in the last quarter. This is in contrast to an average of 28 per quarter in 2013 and 2014.

One of the maturing loans - Mapeley in DECO 6 - has been in special servicing since 2011 and assets are being liquidated, with completion expected at or after loan maturity. Two loans, the underlying facility in the Vesteda Residential Funding II transaction and Criterion in Indus (Eclipse), have since repaid in full.

Another of the five maturing loans, Tishman in Vulcan (ELoC28), was restructured and extended after its original maturity in July 2014. A further extension is being negotiated to grant the borrower more time to sell the remaining asset.

However, Fitch believes that a non-repayment of the I/S Scandinavian Property Investment loan (DECO UK Conduit-1) would result in enforcement and ultimately moderate losses, as less than two years remain until bond maturity.

Once the bulk of legacy loans have repaid, the Fitch-rated EMEA CMBS portfolio will predominantly consist of long-dated transactions and recent issuance. The long-dated deals are mostly UK transactions, heavily or fully amortising over term and either credit-linked to their sole tenants or secured on multi-let prime assets. The recent issuances were structured to avoid the weaknesses witnessed in CMBS 1.0 and are subject to tighter lending criteria, comparable to the performing pre-2006 vintages.

CMBS

Legacy LLF risks flagged

A review by Fitch of large loan floating-rate (LLF) CMBS deals issued between 2005 and 2007 shows that sponsors' business plans require careful evaluation and that the risks of downside performance remain. The agency says that LLF deals, often backed by transitional assets, could be an important indicator as more than U$300bn of CRE loans will need to be refinanced from 2015 to 2017.

LLF deals from 2005 to 2007 have seen high defaults, but low incidence of losses. For those deals that have experienced losses, loss severities were 63.6% among a group of 25 loans with at least a 1.5% loss severity level.

Of the US$44.9bn in collateral (across 509 pooled class A-notes) in the 31 Fitch-rated LLF 2005-2007 transactions, 97.4% have either repaid in full (92.2%) or liquidated (5.2%). Fitch expects additional losses on the 14 loans that remain, as many have not yet stabilised and have been unable to refinance or sell. Of the loans remaining, ten are hotel loans (77% by balance), two are office loans (16%) and two are retail loans (7%).

The largest losses were in hotels (54% of total losses), retail (25%) and land loans (16%). At securitisation, these hotels often featured repositioning plans or had revenue-generating amenities, such as a casino, spa, waterpark or conference centre.

Of the original 509 loans, 41% were hotel by balance, followed by office (24%) and retail (14%). Additional losses stemmed from land loans and loans with a large reliance on pro forma income from repositioning an asset.

Meanwhile, the LLF peak vintages have experienced a high cumulative default rate of 30.6%, with many loans defaulting as a result of over-leverage and an inability to repay at maturity. Yet, only 17.5% of the defaulted loans experienced a loss, as many loans that defaulted ended up paying in full. By comparison, the cumulative default rate for 2005-2007 vintage conduit transactions was 21% as of year-end 2014, although Fitch says this number is likely to increase as additional loans will be unable to refinance at maturity.

CMBS

CMBS loan losses drop

Trepp reports that monthly US CMBS loan losses fell 28% month-over-month to US$679.84m in July, despite several 100% losses. The July total was low in comparison to the totals hovering near US$1bn over the prior three months, which was due in part to smaller average loan sizes.

In total, 72 loans were disposed of with losses in July, down just three from June's 75. However, the average liquidated loan size fell from US$12.7m to US$9.4m.

Two class-B notes and four other loans totalling US$38.09m took over 100% losses, including a 150% loss on a US$2m loan backed by manufactured housing in Vermont. The largest loan disposed of with a loss in July was the previously modified US$65m Philips at Sunrise Shopping Center in Long Island, New York, which took a 21% loss after being delinquent since 2012 (see SCI's CMBS loan events database).

Trepp says that since hope note recoveries of greater than zero used to be unheard of, another two losses worth noting were the US$1m West Park Building One and the US$670,000 West Park Building Three B-notes. Backed by industrial properties in Hampton, Virginia, the hope notes took losses of 39% and 59% respectively.

Loss severity for July was 33.94%, down six percentage points for the second straight month. Looking only at losses greater than 2%, volume was US$414.61m with a 54.98% loss severity, which is in line with the recent average.

CMBS

CMBS default rate 'steady'

The US CMBS default rate has held steady at 13.3%, the same as year-end 2014, reports Fitch. This is due to stable to lower new defaults and steady new issuance levels.

In 1H15, 109 loans totalling US$1.5bn were newly defaulted, representing a decrease from 1H14 when 161 loans totalling US$2bn defaulted, and from 2H14 when 133 loans totalling US$1.8bn defaulted. The average size of the newly defaulted loans was US$13.3m, with 12 loans having an original balance over US$20m. This made up approximately 54% of the total newly defaulted loans by balance.

Office properties were the largest contributor to new 1H15 defaults by loan balance, with 35 loans comprising 46% of defaults - three of them over US$20m. Retail properties were the second largest contributor at 38 loans (30%), with the defaults in these sectors generally due to struggling occupancy levels and declining rents. Eleven industrial and seven hotel loans defaulted too, representing 10% and 8% of total defaults respectively.

The five largest defaults in 1H15 were headed by the US$265m 400 Atlantic Street property in Stamford, Connecticut, securitised in GSMSC 2007-GG10. The 527,424 square-foot class A office building was 84.6% occupied in May, but a large tenant is scheduled to vacate at year-end. The borrower is currently in talks with the special servicer about a possible loan modification (see SCI's CMBS loan events database).

Next is the US$122.6m IRET portfolio, which is secured by nine low rise suburban office properties across four Midwestern states. Rounding out the top five properties are: the US$74m Collin Creek Mall in Plano, Texas; the US$65m Scottsdale Plaza Resort in Scottsdale, Arizona; and the US$54.5m First Industrial portfolio in Various, Georgia.

Meanwhile, eight loans from the 2010-2015 vintages defaulted in 1H15 with a total balance of US$69m. The largest of the loans (US$11.2m) is secured by a student housing property in Bloomington, Indiana and securitised in MSBAM 2014-C15.

The second largest is a US$10.9m loan secured by a limited service hotel in Bossier City, Louisiana and securitised in CFCRE 2011-C2. A loan guarantee by Caesar's Entertainment was rejected in bankruptcy court, triggering a default under the loan documents.

Fitch adds that other CMBS 2.0 defaults were generally related to sponsor issues or technical defaults, rather than property performance issues.

Insurance-linked securities

Cyber-catastrophe linked securities mooted

A new Z/Yen Group report explores how a public-private cyber-catastrophe reinsurance scheme could help secure information and communication technology (ICT) prosperity in the UK by creating cyber-catastrophe linked securities. Such a scheme would provide cover to a group of insurers above a catastrophic loss threshold; in effect, creating a pool funded by the insurance industry.

Z/Yen Group says that in the face of rapidly growing cyber-risk, the tools of insurance need to be rapidly grown and deployed. "If society wishes to bring insurance to bear on helping to manage cyber-risk, then cyber-catastrophe reinsurance needs to be available for property damage, business interruption and third-party liabilities in order to remove blockages to rapid take-up of cyber insurance by businesses," it explains.

Key recommendations outlined in the report include: providing more standardised wordings linking cyber-catastrophe to the policies members write and more standardised data collection for analytical purposes; promoting the use and evolution through learning of ICT security and risk management standards; and government facilitating (but not underwriting) the scheme's reinsurance, including the issuance of cyber-catastrophe linked bonds. The report notes that the UK government's role would be one of promotion and a last resort insurer only in the event that industry retentions and the scheme's reserves have been exhausted.

Risk Management

OTC intermediary review released

IOSCO has published a review of the implementation progress in regulation of derivative market intermediaries. The report sets out the findings on the progress that jurisdictions have made in adopting legislation, regulation and policies in relation to derivatives market intermediaries in the six reform areas addressed in IOSCO's 2012 report (SCI 6 June 2012).

The DMI standards are for the regulation of market participants that are in the business of dealing, making a market or intermediating transactions in OTC derivatives. They were developed as part of the G20 commitment to reform the OTC derivatives market in response to the crisis.

The six reform areas are: scope of regulatory reform, including the framework for regulation and definition of DMIs; registration/licensing standards; capital standards or other financial resources requirements for non-prudentially regulated DMIs; business conduct standards; business supervision standards; and recordkeeping standards.

In general, the review found that participating jurisdictions have made significant progress in adopting legislation, regulation or policy in the areas covered by the DMI standards. Many jurisdictions are in the process of amending their regimes in respect of DMIs and derivatives-related activities. IOSCO believes that generally the development of regulatory frameworks referred to in the responses should be well progressed or completed by 2016.

The review was conducted by a team co-chaired by representatives from ASIC Australia and Ontario OSC. It also comprised representatives from the OTCD Task Force (Quebec AMF, Italy Consob and Dubai FSA), representatives from the Assessment Committee (Japan FSA and South Africa FSB) and the IOSCO Secretariat.

RMBS

RMBS reviewed on Countrywide settlement

Fitch has placed 48 US RMBS classes on rating watch positive in anticipation of potential future upgrades related to pending payouts from the US$8.5bn settlement between Countrywide and Bank of America (SCI passim). The agency's actions reflect the potential for increased credit enhancement resulting from payments of the pending settlement.

Each trust's share of the US$8.5bn settlement is expected to flow to the bondholders per the transaction's principal waterfall, as if the payout were a large prepayment. In general, outstanding senior classes are expected to receive the bulk of the principal payments, reducing their balances. Certain subordinate classes that have incurred write-downs to date are expected to have their balances written back up, thus increasing the credit enhancement of all classes they support.

The settlement payout is to be allocated pro-rata among the 530 subject trusts based on each trust's expected lifetime losses. The agency estimates that each deal will receive a settlement payment roughly equal to 10% of its expected lifetime losses.

Fitch has outstanding ratings on only 203 of the 530 transactions included in the settlement. Of the roughly 3,000 classes included in the settlement that the agency actively rates, 74% have incurred principal write-downs to date and are currently rated single-D. These already-defaulted classes were not considered for placement on rating watch positive.

While the settlement payouts are expected to improve the recovery prospects for many defaulted classes, Fitch says it is unlikely that it would upgrade such classes above single-D. This is because the lost interest to date related to the write-down is not expected to be recovered.

RMBS

Freddie launches whole loan deal

Freddie Mac has priced its inaugural Freddie Mac Whole Loan Security, a cash offering of approximately US$300m of actual loss RMBS securities. The transaction follows the GSE's recent STACR and ACIS offerings (SCI passim) in its continued attempts to sell a portion of its credit risk.

Freddie Mac Whole Loan Securities Trust Series 2015-SC01 comprises US$278m in guaranteed senior certificates and approximately US$23m in unguaranteed subordinate certificates. The collateral backing the certificates is 574 fixed-rate super conforming loans originated in 4Q14 and 1Q15.

The principal payments on the loans are allocated to the senior and subordinate certificates on a pro-rata basis, subject to certain collateral performance and credit enhancement tests. The senior certificates have fixed coupons, while the IO and subordinate certificates have net weighted average coupons.

Credit Suisse is the lead manager and sole bookrunner. Bank of America Merrill Lynch is co-lead manager, while Barclays is co-manager and CastleOak Securities serves as a selling group member. The transaction is expected to settle later this month, but pricing details have not been disclosed.

RMBS

Mexican RMBS criteria revised

Fitch has updated its rating criteria for Mexican RMBS that are sponsored by commercial banks and Sofoles/Sofomes. The update includes the revision of assumptions related to the agency's expected base-case frequency of foreclosure as a result of the stable macroeconomic expectation for the country.

The update is also a response to the stable trends observed in delinquencies of mortgage portfolios. Fitch has additionally added established stresses related to recovery timing for RMBS transactions that have been impacted by servicer substitutions, as performance continues to vary depending on fee structures and overall incentives of the specific servicer.

Finally, while most of the loan modification programmes applied to delinquent loans were meant to benefit from a more expedited repossession procedure - as the borrower is required to sign a judicial agreement - Fitch notes that historical performance data has not supported this assumption. In this way, the foreclosure process for these modified loans will be treated similarly to the foreclosure process for a regular loan.

Some RMBS transactions are already placed on rating watch negative or assigned a negative outlook as a result of the additional delays in foreclosure timing and processing of mortgage insurance. Fitch says these transactions are being monitored and, depending on their performance, may see some rating impact as a result of the changes in criteria.

RMBS

SFR vacancies trending up

Vacancy rates are generally trending higher across single-family rental (SFR) securitisations, according to Morningstar Credit Ratings. The agency says that this was anticipated based on the higher number of lease expirations seen in recent months.

For example, a slight increase in vacancy rates for five Invitation Homes transactions corresponds to higher levels of lease expirations in the summer months. In fact, Morningstar data shows that the retention rate of month-to-month (MTM) leases dropped in 15 of the 17 transactions for which there is enough seasoning to calculate this metric, while the retention rate of scheduled lease expirations also dropped slightly. Most notably, the retention rate of scheduled lease expirations was 68.2% for CAH 2014-1 and 69.9% for CAH 2014-2 in May, down from 81.7% and 81.2% respectively.

Monthly retention rates for the most part remain in the mid-70s to low-80s, which is within Morningstar's expectations. Delinquency rates generally remain low. However, ARP 2014-SFR1's delinquency rate increased to 3% in June from 2.5% in May and continues to be the highest among all transactions.

The count of MTM leases for TAH 2015-SFR1 is higher compared with all other transactions and stands at 17.2% of properties by count, as of the June data tape. As in prior months, ARP 2014-SFR1 and SBY 2014-1 continue to have higher counts of MTM leases relative to other deals.

Tenants in a month-to-month status occupied 11% of properties for ARP 2014-SFR1 and 8.1% for SBY 2014-1 in June, up from 10.8% and 7.4% respectively. Other SFR securitisations typically report MTM concentrations of below 5%.

Morningstar notes that cashflows remain sufficient to cover bond obligations and the performance of the SFR asset class is generally in line with its recent history.