Contents

Secondary markets

Euro secondary stays strong

European securitisation secondary market spreads are holding on to recent stronger levels amid low volumes.

As anticipated, flows were very light across the board on Friday, which left spreads for the most part unchanged. However, the day's previously mentioned CLO BWIC did trade well.

There are currently no BWICs on the European calendar for today.

Secondary markets

US CLOs tick over

After a very quiet end to the week and month on Friday the US CLO secondary CLO market is ticking over once more.

There are currently three US CLO BWICs scheduled for trade today - relatively busy for a Monday in August. However, the calendar looks a little sparse for the remainder of the week with only a further four lists visible so far.

Today's auctions involve a mix of senior, mezz and equity paper. First up at 10:30 New York time are three A-rated tranches totalling $2.5m - ALM 2013-7RA A2, LCM 13A B and OAKC 2012-7A A. Only the latter has covered on PriceABS in the last three months doing so at H99H on 5 May.

Then, at 13:00 is a $33.7m seven line 2.0 triple-B list comprising: APID 2014-18A C, ARES 2015-1A C, BABSN 2013-IA D, BABSN 2014-IIA D, BRCHW 2014-1A D1, MDPK 2014-14A D and PPARK 2014-1A D. None of the bonds has covered with a price on PriceABS in the last three months.

Last, at 14:00 is a single $11.25m slice of ATRM 9I SUB. The equity piece hasn't covered with a price on PriceABS in the last three months.

Secondary markets

Euro secondary flat

The European securitisation secondary market continues to see low levels of activity with spreads for the most part staying flat.

"It's pretty quiet and as we head further into summer while we'll be watching for macro events it's likely that the market will continue to move sideways," says one trader. "There are now a lot of continental clients away so finding liquidity is more of a challenge and that will only increase as August continues."

However, the trader notes: "There is a fairly big BWIC this morning, which is grabbing everyone's attention." Due at 10:00 London time the list is a mix of UK and Dutch NC/BTL RMBS accounting for 36.43m across 17 line items.

It comprises: ALBA 2015-1 A, EMFNL 2008-1X A3, ESAIL 2007-NL2X B, GHM 2007-1 CB, LGATE 2008-W1X A2B, MPS 3X M1B, NGATE 2007-1X MB, NGATE 2007-3X BA, PARGN 10X B1A, PARGN 10X B1B, PARGN 17 C, PRES 2012-1 B, RMAC 2005-NS2X M1A, RMACS 2006-NS1X M2C, RMACS 2006-NS3X M1C, RMACS 2006-NS4X M2C and RMS 21X M2C. Three of the bonds have covered with a price on PriceABS in the last three months - GHM 2007-1 CB at 77 on 28 May; RMACS 2006-NS4X M2C at 83.9 on 21 July; and RMS 21X M2C at 94 on 24 June.

There are currently a further two European BWICs scheduled for today. There are four small clips of mixed RMBS due at 14:00 and then at 15:00 there is a single €13m line of ECLIP 2007-2X A. The CMBS last covered on PriceABS at 98.17 on 10 July.

Secondary markets

Student loan resistance?

The strong recent selling bias in the US student loan ABS secondary market driven by rating agency downgrades caused by extension risk may be seeing some resistance at last.

"Student loan ABS has easily been the most active sector in securitisation secondary of late," says one trader. "We've seen a lot of lists, albeit with a lot of DNTs, and plenty of activity out of competition."

Sellers have had the upper hand throughout, the trader notes. "Everything has gone wider - both the downgraded stuff and the non-downgraded stuff - it's just been by different degrees."

However, there are now indications that buyers may be emerging. "One dealer who has for a while had the most aggressive offer we've seen out there finally traded a chunk of it yesterday. So maybe that's a sign the bottom feeders are coming in and we might see some more buying."

Secondary markets

US CLO hope

There are hopes that activity in the US CLO secondary market could start to rise once again this week, but similar expectations have been dashed before.

"Last week was another quiet one in the end for both CLO secondary and primary," says one trader. "It feels like there's going to be a little bit of a pick-up this week, but that's what we thought this time last week."

Indeed, the trader adds: "It really doesn't seem like customers are back in a big way. We've got plenty of suitable bonds that we've worked on extensively, but it's still very difficult to persuade people to actually trade."

Meanwhile, the US CLO BWIC calendar continues to tick over with four lists due today so far. The first two went through at 10:00 New York time and the next two are scheduled for 11:00.

Of the latter lists, one involves $13.51m of 2.0 mezz and equity across four line items. It comprises: CRMN 2014-2A D, CRMN 2014-1A SUB, INGIM 2013-3A E and NEND 2013-1X F. Only CRMN 2014-2A D covered with a price on PriceABS in the last three months, doing so at 92.18 on 19 May.

The other 11:00 auction amounts to $21.109m of five lines of 1.0 equity - ARES 2007-3RA SUB, CARL 2006-8A N, HLMK 2006-1A SUB, RMPRT 2007-1A SUB and ROSED I-A PREF. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Euro secondary keeps it light

With light flows and a light BWIC calendar summer is taking its toll on the European securitisation secondary market.

"With primary active last week and now that we're into August there's very little going on in secondary," says one trader. "The BWIC calendar is pretty light as well."

Overall, the trader describes secondary spreads as mixed with light flows ensuring that most levels remain unchanged though there are some sectors still moving around. For example, the trader says: "Last week new issuance put pressure on CMBS secondary spreads and they were a little softer, but they have recovered slightly this week and now appear to have stabilised."

There are currently two European BWICs due today. First, at 12:30 London time is a five-line mixed list consisting of £1.4m ALBA 2012-1 A, €3.5m GRAN 2004-3 2B, €1m HARBM 8X A2, £600k PMF 2014-1 A and £1.82m RMS 26 A1. Then at 14:30 there is a five-line €11.5m CMBS list, comprising: DECO 2007-E5X E, EPICP DRUM E, INFIN SOPR E, TMAN 6 D and TMAN 7 F.

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

Secondary markets

US CLOs patchy

Activity in the US CLO continues to occur in patches as volumes stay reasonably low.

"We're chugging along," says one trader. "I wouldn't say it was busy, but it's not as quiet as it was two weeks ago and there's a consistent drip of BWICs so it's not a ghost town."

The middle of the capital structure remains the main market focus, the trader says. "People are continuing to test mezz liquidity with single-, double- and triple-Bs coming across the screens and it seems to be holding up well. So far it's only the triple-Bs that have rallied, but it's the first real move since the June sell-off and now everyone is watching closely to see if the rally moves into double-Bs."

Meanwhile more senior paper continues to lag. "Bid-offers are still wide at the top of the capital stack," the trader confirms.

Today's BWIC schedule currently sees three lists. At 10:00 New York time there is a seven-line $18.2m 2.0 double-B auction, consisting of: ARES 2015-1X D, ATCLO 2013-2X B2L, CECLO 2014-16X DR, OAKC 2013-9X E, OCT14 2012-1X D, SHPLF 2014-1X D and VIBR 2012-1X DR.

Then, at 11:00 are two three-line mixed lists. One comprises: $3m AMMC 2014-15A D, $5m JTWN 2012-1A SUB and $4.8m TRAL 2007-1A B. The other: $18.5m INGIM 2006-3A A2B, $3m CNOVA 2006-1A C and $9.831m BABSN 2007-2A A1.

None of the above US CLOs in for the bid today has traded with a price on PriceABS in the last three months.

Secondary markets

Euro secondary improves

Levels are improving in the European securitisation secondary market, but activity remains patchy and limited.

"The market has generally got better in terms of spreads over the past couple of days," says one trader. "However, flows remain very thin - there's not a lot going on by way of BWICs, primary has slowed and the client side is very quiet, but that's all only to be expected given that it's August."

Consequently, the trader expects little to change for the rest of the month. "Those technicals will carry on over the next few weeks and will support the market combined with continued ECB activity and the improved global credit picture."

Most current activity continues to revolve around prime assets, the trader says. "Four-year STORM is trading in the very-low-20s and we've seen auto ABS trade in the high-teens, so both sectors are a couple of bips tighter. Even UK prime is a bit better, though still slow."

The trader reports that elsewhere trading is even more patchy. "CMBS is fairly quiet though we hear the new DECO deal is trading tighter in secondary, but given it priced pretty wide that's not a great surprise. UK non-conforming is still struggling and while the market appears to be looking to find a bottom it continues to trade heavy."

Meanwhile, in European CLOs 2.0 mezz continues to generate the most attention. "Double- and triple-Bs are 5-10bp tighter so there's growing momentum there," says the trader. "However, it's still difficult for triple-As which show no signs of coming back from the 140area where they're currently stuck."

There are currently three European BWICs due today. First up at 13:00 London time is a ten line CLO BWIC amounting to €44.15m original face.

The list comprises: AVOCA VII-X F, AVOCA VI-X F, EGLXY 2006-1X D, EUROC VII-X E, HARBM 5X B2F, HARBM 5X CS, HARVT IV E1, NWEST III-X D, NWEST III-X E and NWEST III-X SUB. None of the bonds has traded with a price on PriceABS in the last three months.

Then, there are two smaller lists - at 14:30 €2.5m CIREN 2006-1 D and €1.5m CIREN 2006-1 E; followed at 15:00 by a single €12.96+m line of TITN 2006-2X F. None of the bonds has traded on PriceABS in the last three months.

In addition, there is an Italian OWIC at 14:00, consisting of: BERAB 2011-1 A1, BERAB 2012-2 A1, BERAB 2012-2 A2, BERAB 3 A, BERCR 8 A and BESME 1 A1X.

Secondary markets

US RMBS stays respectable

The US non-agency RMBS secondary market continues to see respectable volumes for the time of year.

"It's been fairly quiet since month-end, which is only to be expected in August," says one trader. "We saw about $400m in for the bid on Tuesday and Wednesday, which is respectable but far from busy."

One trend that has emerged this week is the return of the AON list. "In the last couple of days we've seen AON lists from both hedge funds and money managers. They've been fairly small, so are probably being used as an efficient way to clean up some odd-lots," the trader explains.

Meanwhile, today sees two sizeable BWICs standing out from the rest of the schedule. "There was a $280m MTIL list at 10:30 and those auctions are usually pretty orderly so we''ll see some colour in the next few hours, which is always eagerly awaited," says the trader.

Similarly closely watched thanks to the large block sizes and therefore their re-REMIC potential is list from a GSE due at 11:30 New York time. It involves $665m across 14 line items of mainly subprime seniors but also includes two investment grade bonds. "The list has an average dollar price in the 70s, so the bonds aren't pristine but still of interest to a range of players," the trader says.

After today, the BWIC schedule is very quiet with no lists scheduled for tomorrow and only one visible for next week so far. However, the trader suggests that could easily change. "People are still looking at the macro picture - primarily the oil price and tomorrow's non-farm payrolls and their impact on the Fed."

So, the trader adds: "Sellers are holding back lists and will decide what to do after tomorrow's number. That could make for either a volatile and active Friday or a very sleepy one."

Secondary markets

Euro secondary on the up

Yesterday was another positive day in European secondary, though today looks to be quiet.

Secondary activity improved again yesterday with higher levels of end-user involvement than in recent days. Nevertheless, volumes remain fairly light and patchy.

In line with recent patterns prime assets led the way, but there were also pockets of activity in CLOs, CMBS, Italian ABS/MBS and UK non-conforming. Spreads for the most part remained unchanged on the day.

As might be expected for an August Friday, today looks set to be quiet and there is currently only one BWIC on the schedule - a single €19m line of STORM 2012-2 A1 due at 14:00 London time. The bond has not traded on PriceABS in the last three months.

Structured Finance

SCI Start the Week - 3 August

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

Pipeline
The pace of deals joining the pipeline slowed last week. At the final count there were 11 additions.

The five ABS were: US$1bn AmeriCredit Automobile Receivables Trust 2015-3; US$1bn CarMax Auto Owner Trust 2015-2; US$255m MVW Owner Trust 2015-1; US$100m NewStar Commercial Lease Funding 2015-1; and US$123.5m SolarCity LMC Series IV Series 2015-1.

The five CMBS were: US$1.035bn 1211 Avenue of the Americas Trust 2015-1211; US$660m BBCCRE Trust 2015-GTP; US$1.1bn CGCMT 2015-P1; US$1.4bn CSAIL 2015-C3; and US$235m CSMC 2015-SAND.

The sole CLO was US$510m ACAS CLO 2015-2.

Pricings
There were more deals which priced. At the final count there were five ABS, three RMBS, four CMBS and five CLO prints.

The ABS were: €800m Bavarian Sky Compartment German Auto Loans 3; US$376.7m CHAI 2015-PM1; US$450m Flagship Credit Auto Trust 2015-2; US$160m HERO Funding Series 2015-2; and US$417.6m SoFi Professional Loan Program 2015-C.

€1.2bn CFHL-2 2015, US$489.64m JPMMT 2015-5 and US$814.05m Towd Point Mortgage Trust 2015-3 made up the RMBS. The CMBS were US$275m BAMLL 2015-HAUL, US$1.4bn COMM 2015-CCRE24, €316m DECO 2015-Charlemagne and US$740m WFCM 2015-C30.

Lastly, the CLOs were: €362m Adagio IV CLO; US$814m Ares XXXIV CLO; €416m Babson Euro CLO 2015-1; €415m Dryden 39 Euro CLO 2015; and US$558m Golub Capital Partners CLO 25.

Markets
US RMBS CRT spread volatility was low last week. Bank of America Merrill Lynch analysts report that M1 and M2 spreads were relatively unchanged, while non-rated and double-B tranches tightened 5bp-15bp. "BWIC volumes in the legacy non-agency space dropped to US$1.3bn," they say, with pricing levels relatively unchanged.

The US CMBS market widened on heavy issuance and Barclays analysts warn that there could be further underwriting slippage unless spreads revert to tighter levels. "In secondary trading of recent issues, LCF triple-A bonds were 1bp wider, to swaps plus 101bp. More credit-leveraged, single-A rated mezzanine tranches were 1bp wider, to swaps plus 243bp, and triple-B rated mezzanine tranches widened 1bp, to swaps plus389bp," they add.

In the US CLO space, Citi analysts note that 2.0 double-A, single-A and triple-B minus classes are wider by 20bp, 15bp and 23bp, respectively, than mid-June. "The CLO 2.0 triple-B minus spread had recently been 35bp wider than its mid-June level, but has tightened 12bp over the past two weeks," they say.

The European ABS and RMBS markets tightened last week as comparatively heavy BWIC supply was met with lower bids. JPMorgan analysts say: "On the back of this reduced liquidity and wider prices, month-end marks should not be expected to be pretty, likely exacerbating the 'selling into a soggy market' phenomenon for the next few weeks. It looks increasingly hard to have an optimistic outlook for spread progression in the near-term."

Editor's picks
RMBS exit: An estimated €99bn of assets remains earmarked for sale by European bad banks. RMBS is providing an exit for many legacy mortgage portfolio acquisitions, but whole loan funding is expected to become increasingly common in the future...
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 provides much-needed transparency into the performance of the pools affected by Moody's and Fitch's ratings review...
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. A record US$4.7bn was out for bid during June alone, ahead of the Volcker Rule deadline...
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...
Hiking cycle history considered: As the likely Fed rate hike date draws nearer, a new analysis examines the performance of securitised products during previous hiking periods. The effect on securitised product credit sectors has previously generally been benign...

Deal news
• 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.
• 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.
• 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 equalled US$387.3m.
• 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.
• 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.
• 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.

Regulatory update
• 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).
• 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.

Deals added to the SCI New Issuance database last week:
Access Funding 2015-1; Adagio IV CLO; Auburn Securities 9; Babson CLO 2015-2; Babson Euro CLO 2015-1; BBVA Consumo 7; Cars Alliance Auto Loans Italy 2015; CFHL-2 2015; Chase Issuance Trust 2015-7; COMM 2015-CCRE24; CPUK Finance; Cumberland Park CLO; Diamond Head Aviation 2015; Diamond Resorts Owner Trust 2015-1; Driven Brands Funding Series 2015-1; Dryden 39 Euro CLO 2015; E-Carat Compartment 8; Enterprise Fleet Financing Series 2015-2; Geldilux TS 2015; Golden Credit Card Trust Series 2015-3; Great Lakes CLO 2015-1; Halcyon Loan Advisors Funding 2015-3; HERO Funding Trust 2015-2; IM EVO RMBS 1; JPMBB 2015-C30; Lanark Master Issuer series 2015-1; Lusso; NextGear Floorplan Master Owner Trust Series 2015-1; OZLM Funding (refinancing); Quarzo series 2015; SMB Private Education Loan Trust 2015-B; SMHL Series Securitisation Fund 2015-1; USAA Auto Owner Trust 2015-1; Wendelstein 2015-1; WFCM 2015-C30; World Omni Automobile Lease Securitization Trust 2015-A

Deals added to the SCI CMBS Loan Events database last week:
CD 2007-CD4; CGCCRE 2014-FL2; DECO 2006-C3; DECO 2007-E5; DECO 2007-E6; EPICP DRUM; GCCFC 2006-GG7; JPMCC 2005-LDP5; JPMCC 2013-C10; MSC 2011-C3; TAURS 2007-1; TITN 2006-3; WTOW 2007-1

CDS

Basis 'favours CDX hedging'

The recent sharp divergence in the performance of cash and synthetic products has taken the cash-CDS basis on either side of the Atlantic to its most negative levels since 2012. Cash credit spreads are wide in Europe and close to two-year wides in the US, but CDX and iTraxx spreads are only 15bp off their tights for the cycle.

Cash underperformance has been driven by weak technicals, high US supply and global rates volatility. Morgan Stanley credit derivatives strategists believe the basis is now at attractive levels and is likely to compress irrespective of market direction.

"If this correction in credit flags an imminent cycle turn (not our base case), then CDS spreads should eventually widen to reflect increased risk of defaults. On the other hand, if this is part of an extended late-cycle playbook (our base case) where spreads touch 'wider wides' and 'wider tights' through the cycle, we think there is more tactical upside for cash spreads relative to CDX," they say.

Hedging cash portfolios with synthetic products is currently attractive due to the negative basis and richness of synthetic indices relative to intrinsics, the analysts suggest. They favour payer spreads in CDX IG and 1x2 payer spreads in iTraxx Main and also recommend hedging with tranches which have outperformed the index in the move wider, such as 7%-15% in IG23.

There are several ways to monetise the cash-CDS basis and one trade idea the Morgan Stanley analysts put forward is to go long US investment grade TRS and short CDX IG. A challenge with this play is that there is a significant duration difference between the iBoxx IG and a standard five-year maturity on the CDX, but investors could manage this mismatch by weighing the CDX five-year leg on DV01 basis, the analysts say.

Another attractive option is to buy payer spreads in CDX IG. This could be either so as to manage risk against further weakness in cash markets or to position for a catch-up between cash and CDS spreads.

"CDX IG options skew has flattened from the peak in July, but remains toward the steeper end of the 12-month range. We like monetising the skew by owning payer spreads as hedges against a modest downside scenario," the analysts say.

Specifically, they advocate owning a 75x90 September expiry payer spread in CDX IG at an upfront cost of 14bp. If CDX widens around 15bp from current levels and catches cash spreads, the trade would offer more than four times leverage. The risk, however, is that spreads could stay at current levels or rally, which would see investors lose the upfront premium.

JL

CMBS

Paying up for quality

Sourcing seasoned US CMBS triple-B minus bonds remains challenging, but Deutsche Bank CRE debt research analysts suggest that 2014 vintage paper is worth a closer look, given its spread pick-up to the 2013 vintage and only modest pay-up versus the weaker 2015 deals. Indeed, trading activity in better quality 2014 deals seems to have picked up recently.

The Deutsche Bank analysts studied triple-B minus bond trading and spread observations for the period between 24 July and 3 August, capturing activity for 48 securities. The analysis shows that spreads have a well-defined upward slope, with the tightest spread (255bp) notched by a 2012 bond and the widest spread (435bp) observed in the 2015 vintage, as would be expected due to underwriting trends. All triple-B minus bonds within each vintage show dispersion of 40bp-50bp, excluding the outliers.

Using the corporate seasoning curve as a rough indicator of what roll-down is worth, the analysts estimate that it is likely only 5bp-10bp per year at this point in the credit term curve. The steepest portion of the seasoned triple-B minus vintage curve occurs between the 2013 and 2014 vintages, where the average 2014 triple-B minus bond picks up 52bp versus 2013 bonds.

Mapping the sample by current credit enhancement indicates that the pattern is still dominated by vintage rather than enhancement, since earlier vintages were assigned lower original credit enhancement levels due to better-quality loan underwriting. However, the differences between 2014 and 2015 credit enhancement appear to be comparable.

The analysts believe this dynamic is partly driven by an increase in pool barbelling in 2015. "In 2015, weak collateral is increasingly offset by low-leverage loans to help reduce the overall required enhancement. However, triple-B minus bonds have little - if any - true exposure to these high-quality low-leverage loans. Thus, credit enhancement is not a good predictor of spread levels," they explain.

They continue: "Triple-B minus investors are basically exposed to the tail loans in the pool and this tail has got worse in 2015. As such, investors may argue that triple-B minus enhancement levels - while higher - have not moved enough to offset the weak loans in the tail."

Based on BWIC activity by stressed LTV, 2014 vintage triple-B minus trading appears to have been focused on better quality deals, albeit 2014 triple-B minus spreads are generally wider than 2013 levels. For example, the stressed LTV for 2014 CUSIPs with BWIC activity was 102.6%, while the average stressed LTV for the 2014 vintage was 108%.

Finally, the analysts plotted initial pricing levels against Deutsche Bank's generic triple-B minus spread curve for deals issued in 2015 and separated out deals that include Fitch's ratings from those that do not at the triple-B minus level. Early in the year, non-Fitch-rated deals offered spread pick-up, but at relatively small levels. In recent transactions, this pick-up has become more pronounced, including some notable outliers in the June/July timeframe.

The analysts remain biased towards paying up for quality in bonds. "We think cleaner 2014 bonds have the potential to trade towards bonds rated one full category higher from new issue deals. These bonds should gradually gain stronger real money sponsorship and are one sector of the market where high single-digit returns are possible, given their long duration and solid carry," they conclude.

CS

CMBS

Ruling requires servicer replacement rethink

A recent UK legal ruling contradicts what had appeared to be an established precedent for European CMBS special servicer replacements. The ruling for DECO 15 - Pan Europe 6 will now add to the considerations that trustees, issuers and special servicers must make when a special servicer is being replaced.

Last year's landmark judgement in US Bank v Titan Europe 2007-1 (NHP) appeared to provide a framework for special servicer replacements in light of Fitch's policy not to issue rating agency confirmations (SCI 29 April 2014). In that particular case, Fitch's refusal to issue RACs did not prevent an otherwise valid replacement attempt, so long as other replacement requirements were satisfied.

However, DECO 15 - Pan Europe 6 has not followed the template which Titan was thought to provide. In this case Cheyne Capital, as operating adviser for the controlling class, requested the issuer and trustees to replace Hatfield Philips as special servicer with Solutus Advisors.

The provision for replacing the servicer stipulated that they must first have notified each rating agency in writing of the identity of the successor servicer and the rating agencies must have confirmed that such a succession would not result in an adverse rating event, "unless each class of noteholders have approved the successor issuer servicer or successor issuer special servicer, as applicable, by extraordinary resolution," says Reed Smith in a client memo.

Considering Fitch will not provide RACs on special servicer replacements, and with the US Bank v Titan decision in mind, the trustee approached the court for an interpretation of that provision. The court was asked whether the pre-conditions to replacing the servicer in the servicing agreement allow this to happen when an agency such as Fitch will not say whether there would be an adverse rating event.

"Cheyne argued that Fitch's refusal to provide RACs in respect of the replacement should not frustrate the replacement of a special servicer in this instance. The trustee advanced the alternative argument that the rating agencies must all have confirmed to the trustee that the replacement of the issuer special servicer will not result in an adverse rating event; i.e., all rating agencies (including Fitch) must provide a rating agency confirmation, even where Fitch has a policy of not providing RACs," notes Reed Smith.

The judge sided with the trustee's interpretation of the documents. While Fitch's refusal to issue RACs provides a problem, the fact that noteholders can approve a successor servicer via extraordinary resolution provides an answer to that problem.

Cheyne was relying on the US Bank v Titan decision, but that case did not allow for noteholder approval via an extraordinary resolution, among other differences. The US Bank v Titan decision was also based on commercial considerations, which do not apply in the same way for DECO.

"Given the differences in the language used in EMEA CMBS, and the contrasting judgments in DECO 15 and US Bank v Titan, we should be wary of adopting a broad brush approach to special servicer replacements and in each case trustees, issuers and special servicers should consider the provisions carefully to determine whether or not the situation corresponds more to Titan or to DECO or includes factors that have yet to be considered by the court," says Reed Smith.

JL

RMBS

Enhanced CAS data scrutinised

Fannie Mae has begun providing an enhanced monthly single-family loan performance dataset, offering greater transparency to the market before it moves to an actual loss framework for the Connecticut Avenue Securities risk-sharing RMBS as early as 4Q15. The enhanced dataset includes credit performance information up to and including property disposition.

"We are providing access to this data now in order to give the market sufficient lead time to become comfortable with the information. Our hope is that by allowing broad access to the data, we can increase the transparency and liquidity of our credit risk offerings," comments Laurel Davis, vp for credit risk transfer at Fannie Mae.

The data covers 21.6 million fixed rate fully amortising and full documentation loans, originated since 1999 and acquired by Fannie Mae post-January 2000 with original terms of between 25 and 35 years. The actual loss data components disclosed at property disposition include net sales proceeds, proceeds from MI claims and indemnification payments from lenders, repurchase make-whole proceeds, other foreclosure proceeds, asset recovery costs, associated taxes, foreclosure costs, property preservation and repair costs. To protect borrower privacy, certain data fields have been masked.

A Citi analysis of the data shows that the default rate peaked for 2006-2007 originations at 7.1% and 7.4% respectively, while the loss severity on the 2005-2007 originations was 42%, 45.5% and 39.9% respectively. For the post-2009 originations, default rates have been significantly lower, due to higher FICO scores, lower DTIs and lower LTVs on an average. Loss severities on post-2009 originations have also been lower at 20%-25% for 2009-2010 and 16%-17% for 2011 and 2012 originations.

The 2012 and 2013 originations have significantly lower defaulting balances and hence their loss severities could be noisy, especially while looking at smaller cohorts of these vintages, according to RMBS analysts at Citi. Meanwhile, CDRs have dropped significantly over the last two years, driven by the rise in home prices.

At the same time, net sales proceeds increased significantly and repurchase proceeds declined significantly. Over the last year in particular, costs arising out of delinquent interest, foreclosure and property preservations have declined significantly.

The analysis suggests that loss severities for non-judicial states were lower than those for judicial states through mid-2007, while they were roughly on top of each other in 2008-2011. Since 2012, loss severities for non-judicial states have been printing significantly lower and currently the differential is around 23 points. Loss severities for modified and unmodified loans were roughly on top of each other through 2011, but over the last three years loss severities on modified loans have been printing lower, with the differential being 5-10 points.

Loss severities for loans with mortgage insurance (MI) are significantly lower, but the differential in severities has declined over time. Of the recent liquidations, loans with MI have around 10 points lower loss severities than those without MI.

Finally, loans that spend 24-plus months in delinquency appear to have significantly higher loss severities compared to the other buckets. Liquidation timelines have declined since the beginning of the year, but timelines in judicial states are 10-12 months higher than in non-judicial states.

CS

Risk Management

Demonstrating prudence

Prudent valuation practices discussed

Representatives from PricewaterhouseCoopers and Prytania Solutions recently discussed how IPV and prudent valuation practices are adjusting to new European regulatory requirements during a live webinar hosted by SCI (view the webinar here). Topics included the definition of a prudent valuation and investment bank key requirements, as well as the role of the risk management function. This Q&A article highlights the main talking points from the session.

Q: The EBA is expected to finalise its regulatory technical standards (RTS) related to prudent valuation adjustments of fair valued positions in the coming months. How has the provision of valuation services changed in response to such regulatory reporting requirements?
Fraser Malcolm, head of Prytania Solutions: The prudent valuation directive is the latest in a long line of regulatory initiatives designed to facilitate transparency and accountability around the valuations process, specifically in connection with banks. It follows on the heels of IFRS 13 and includes some elements of the Basel 3 and Solvency 2 standards.

The prudent valuation adjustment is essentially a way of conveying the uncertainty around valuations on a bank's balance sheet. Such uncertainty is being driven by a number of factors: the prudent valuation directive focuses on model uncertainty and uncertainty around the realisation of profit and loss, as well as close-out uncertainty - which can be directly linked to a lack of liquidity for certain instruments.

Over the last 12 to 18 months, clients have begun requiring much more than just a price in connection with their valuation activity. They now require all sorts of information around that price and how it was derived, as well as transparency around the model inputs and market observables used to derive the price.

This is symptomatic within the context of additional valuation adjustment (AVA), as defined by the prudent valuation directive, which is proving to be a significant data challenge. Essentially, more than just a price is required in order to adhere to the new regulations.

Q: How would you define what constitutes a prudent valuation under the EBA directive?
Neil Douglas, director at PricewaterhouseCoopers: It's important to bear in mind that ultimately demonstrating an appropriate prudent valuation is actually a matter of demonstrating to the regulator how you comply with the rules. The standard was borne out of the regulator's concern that fair value (FV) was no longer representing what is required from a capital perspective.

Consequently, the first component of what constitutes a prudent valuation is to address the concern that FV does not adequately cover prudence and leading to more aggressive marks than the regulators desired for capital purposes. The market price uncertainty AVA, close-out costs AVA and model risk AVA lead on from this, with the emphasis on revisiting a valuation and working out what needs to be done to reach the 90% confidence level required in terms of prudence and conservatism.

The second component of what constitutes a prudent valuation is additional adjustments, which the regulator considers important for capital purposes, but may not be allowed for fair value purposes. This leads to adjustments, such as concentration risk AVA, future admin costs AVA and operational risk AVA.

Q: Are there any other differences between a prudent valuation and fair value?
ND: The major difference is clearly that additional prudence is explicitly incorporated in the prudent valuation in order to produce a value considered by the regulators to be more appropriate for capital purposes. Another concern of the regulators is that firms across different jurisdictions were perhaps applying the FV standard in an inconsistent manner - depending on GAAP and so on - and, through the RTS, they've established a consistent standard across the EU. Obviously, how consistently that standard will be interpreted and applied is a different question.

Q: When implementing a prudent valuation framework, what are the key requirements for the sell-side and how do they translate to the buy-side?
ND: Most sell-side firms have been able to establish an approach to calculating prudent valuations and they are now performing that calculation. But this has taken a fairly significant amount of effort - and that's for investment banks that already have established independent price verification (IPV) functions and model approval processes, into which prudent valuation items can be integrated.

However, this is only part-way to the final solution. The problem is that although sell-side approaches are generally in agreement at a very high level as to how prudent valuation calculations ought to be approached, differences remain in the details of how banks have implemented them. For example, there are methodological differences in how to treat netting, how to aggregate the various AVA and what offsets are permissible with a prudent valuation.

This methodological disparity and the subjective nature of the calculation mean that every decision must be very well documented. One of the issues that banks are finding is that there is a lot of work to be done on the documentation side to ensure that every step in the process is appropriately justified.

The other side of the equation is controls and governance. The key requirements here are to build a methodology that complies with the rules, then document everything that has been done and ensure that the governance around it is appropriate. There's probably a fair amount of disparity around how well prepared banks are for the final implementation of the prudent valuation directive.

FM: Certainly investment banks seem to be more advanced in their approaches to prudent valuation and in terms of the information that they require than those on the buy-side. There also seems to be better connections between the different regulatory requirements on the sell-side.

Q: Could you provide more detail on the controls and infrastructure that should be in place under a prudent valuation framework?
ND: The first aspect is documentation. There is a fair amount of disparity across the industry as to how the regulations are being implemented and there is a significant level of subjectivity that needs to be applied in working out the prudent valuation rules, especially for illiquid assets.

So documenting this is a prerequisite: firms need to be able to demonstrate not only what they've done, but also why they did it. Without that last step, it's considered as bad as not having done anything at all.

On the sell-side, such documentation varies considerably - from thousands of pages of information to much smaller documents. Ideally, firms start with the high level generic guidance of the RTS and map it to the specifics of their business to produce an overall policy and then document each application of that policy by area to the positions that are on their books, detailing the assumptions made. The key is to document the expert judgments made and that boils down to getting the appropriate expertise together, with as much data as possible.

If a firm has documented everything at this level of detail, the conversation with the regulator can become more about the reasoning leading to a given valuation, as opposed to simply an argument about the valuation itself.

In terms of governance, it's important to demonstrate adequate senior management involvement, with their sign-off on the key assumptions and limitations. Another area of focus is on how the approach should be integrated with a firm's other valuation teams because there are important overlaps with risk management and the broader finance function, as well as how communications should function between them.

Q: Are institutions already making allowances for valuation risk?
ND: There are two parts to this: in fair value, some institutions are making allowances for valuation risk to a limited extent. Some parts of the accounting standards explicitly allow adjustments to be made for valuation uncertainty.

Others are making allowances for model risk within their FV frameworks; it often depends on their attitude and the local GAAP. But no-one's making allowances across the board with respect to prudent valuation.

There is also a capital question: whether firms are taking AVA calculations to capital or not. The larger banks are, although the degree to which the calculations comply with the standards varies. It also varies significantly outside of the UK; generally they're not yet being taken in Europe.

FM: Some of the institutions we speak to are looking at model risk uncertainty. They want information on how a price was derived and where the vectors came from and so on, and this is being used to some extent to adjust the FV. But many institutions still only require a price at the moment.

Especially at the more illiquid end of the fixed income spectrum, firms will need a management information system to organise the data in an effective manner. That is a significant challenge for many institutions.

Q: Are there any other issues that investors should be aware of regarding the roll-out of the prudent valuation regulations?
FM: Different institutions are taking different approaches, so the quest for standardisation isn't necessarily being resolved by the prudent valuation rules, although they bring the market closer to this goal. The challenge for institutions that aren't yet in a position to deal with this extra information burden is that it's a huge data issue. It's a question of not only collecting the data, but also being able to understand and use it effectively.

Q: Market data will be a crucial component of the prudent valuation infrastructure. Do you have any advice on the sourcing of data and how it should be used?
FM: We've been rolling out our pricing and valuation framework, which collects market data, cleans and sorts it, and creates a hierarchy of usefulness. But this information is not always readily available, given the illiquid nature of the product - and where it is available, it can be very patchy and thin.

So it's incumbent on any organisation to create a data framework that allows for an ordered use of pricing data. This is something that can be provided as a service, while the bigger investment banks have their own sophisticated systems in-house.

As a standard requirement, firms need market observable data, model inputs and information about how many other proxy positions were used to derive a price.

ND: The full range of reliable data sources should be considered. Whereas many investment banks have historically relied on consensus prices, the trend recently has been towards persuading them to consider a broader range of market data sources to do a proper data scrub - looking at all the data sources that could be relevant for the positions, including market prices, evaluated and consensus data.

The next step is to rank them in terms of trust and then come up with an overall measure, rather than relying on a single source. Then firms need to demonstrate that the sources used have the maximum reliability and that every attempt has been made to capture trade data and consider it in a price assessment.

Q: Can you provide a practical example of how to approach the modelling of a prudent valuation?
ND: The broad sell-side industry consensus as to how modelling ought to be approached is as follows. Generally the calculation of market price uncertainty is linked in some way to the IPV approach - including certain thresholds, which trigger adjustments when breached. How those thresholds are calculated varies significantly; often they're consensus-based for many assets.

There is fairly significant divergence in terms of how netting requirements are interpreted within prudent valuations. Two articles - 9.4 and 9.5 - in the final standard outline how the final numbers can be netted up for market price uncertainty. This is important because if valuation uncertainty is grossed up across each instrument on a book, the final number will be a very large number, whereas it will be much smaller if everything is netted out.

The EBA has tried to normalise this situation with a hedging efficiency test, where variances can be compared. You can either approach the test on a sample basis or take a whole curve approach.

For close-out cost adjustments, there is also a netting challenge, but generally here firms are scaling up their bid/offer adjustments. The scaling factor generally comes from the variance in broker quotes over time and by applying a consistent methodology to come up with a FV multiplier.

These two items - market price uncertainty and close-out cost adjustments - represent a good portion (around 40%-50%) of the final number for most firms, although there is some overlap with model risk.

The next component is model risk. The better firms are looking at the different sources of model risk for each item and working out ways of quantifying those sources in the most material areas. We're also seeing score card-based approaches, where a model is scored on a range of different factors driven by the RTS and assign numerical values to those factors.

It's important to think carefully about how model risk overlaps with market price uncertainty risk because, depending on what your parameters are for each, you get very different results for how each risk should be considered. For example, firms should ensure that where they're performing output price testing, their model risk number takes account of the reduced uncertainty in that scenario.

Meanwhile, funding and unearned credit spread adjustments are generally wrapped up into market price uncertainty and close-out costs, so institutions will consider their FVA, CVA and collateralised funding models as part of those processes.

One remaining item is concentration, and there are a number of models for this, which vary considerably depending on whether a firm is based in the US (where they are somewhat allowed to include concentration in FV) or Europe (where they aren't). For cash positions, the concentration approach is fairly well understood - most firms calculate the standard market size and number of days to divest; then come up with a liquidity adjustment depending on the volatility of the price. For derivatives, the approach varies considerably and an industry consensus has yet to emerge.

There has been some confusion about what future admin costs are, but the general approach is to take some kind of cost base for your firm, scale it down to reflect the fact that you've wound down and multiply it by an average maturity. The regulators have indicated that they don't expect this to be a very big number. The main challenge has been to help banks square this with their recovery and resolution numbers for what would happen in a wind-down situation, which tend to be much larger.

The early termination adjustment is very small (often zero). Here, banks generally identify their historical profile of non-contractual terminations and situations where they've lost money.

So far, we've only seen a few cases of early termination AVA. There are some markets where it's accepted practice for firms to buy back assets from clients, even if that would cause them to incur a P&L loss. This is often already reflected in FV.

Finally, the EBA has provided a formula for the operational risk calculation, so the approach tends to be a fairly simple application of that formula.

Q: Industry consensus on the risk management function is yet to emerge. How do you view the role of the risk manager?
ND: Both the market risk functions and risk management functions need to be involved in a prudent valuation, partly because they have some level of involvement on the model risk side and partly because these calculations can overlap with the calculations used for VaR.

An equally interesting question is what the role of the front office should be. What we've seen on the sell-side is that the front office hasn't been involved in this as much as might be expected. Its role has been limited to being informed and being asked, rather than coming up with the calculations, whereas the regulator would like to see this front and centre of the front office's thinking when they're trading.

Maybe this will begin to happen when the capital hit becomes more real and the capital starts to be distributed back to desks. There is a divergence at present between the role of the front office within investment banks and where the regulators would like to see it because the whole point of the prudent valuation standard is to engender behavioural change in those making investment decisions.

FM: Our dialogue with risk management functions is increasing, specifically with regard to model risk. Some institutions have a risk management function that sits alongside the IPV function, reporting up the cfo line. The risk management function at other institutions reports directly into the business.

The risk management function is important in the context of prudent valuations. With these types of initiatives, typically the front office is either not informed or doesn't want to be informed so it can concentrate on doing business. But the reality is that prudent valuation has significant implications for business - there's obviously a capital implication, plus the valuation adjustment hit.

Model risk in illiquid assets is a hugely important aspect of front office activity, especially in structured finance. For instance, with respect to close-out costs for illiquid assets, the front office is putting on the risk and should really know what the valuation uncertainty associated with a position is. The smart organisations will therefore have the front office suitably involved in this process.

Q: Ideally, where should the prudent valuation group sit within an organisation?
FM: I believe that it should sit within or adjunct to the IPV group - assuming the IPV group is set up and sophisticated enough to carry out prudent valuation processes. While most investment banks are organised in this way, smaller banks may have some major resource and organisational weaknesses in this regard.

Q: Is an independent review of a valuation ultimately likely to be necessary?
ND: The standards make it clear that an independent review is required, but what isn't clear is whether that is independent of the risk-taking units or independent of the person who's performing the calculation. Where there's ambiguity, regulators have a tendency to follow the more stringent version and so most firms are opting for the latter interpretation.

For example, if the IPV person is performing the calculation, someone else within the firm has to review it. There are a variety of ways to approach this: some firms are adopting a peer review; some have a model risk function that reviews it; while others have an internal audit.

There is also a question of how external audit should be involved - to which the answer seems to be 'not very'. However, uncertainty remains over how best to conduct such a review because often the expertise isn't available within the organisation, so it's unclear how an independent review should be achieved. One trend is to outsource much of the IPV operations to lower-cost locations and there are questions around whether this is feasible for prudent valuation and what the resourcing model should look like.

Q: How should institutions be positioning themselves for the future from a prudent valuations perspective?
ND: Having a methodology in place and performing a calculation is only half the battle; it's the documentation and controls around this that take up significant time and resources to achieve the standard that regulators expect. While there is a methodological consensus, key areas of disagreement remain - including the approach to netting, what can be offset against a prudent valuation and how it should be integrated into the rest of the capital framework.

The EBA considers that its job is done, so we're unlikely to see additional guidance with respect to the application of the standard. Interpretation appears to be up to the individual supervisors now.

FM: The AVA is ultimately a capital expense. These adjustments may actually deter firms from becoming involved in the more illiquid markets because the organisational implications of adhering to the directive could have a real cost, which obviously impacts a firm's bottom line. However, based on polls conducted during the webinar, it appears that the majority of the audience feels they are somewhat or fully prepared for the introduction of the prudent valuation requirements.

For more information on the EBA's draft RTS on prudent valuation adjustments and the complete webinar poll results, download SCI's prudent valuations paper here.

CS

Structured Finance

Alpha alternative

Indus Valley Partners co-founder Bijesh Amin answers SCI's questions

Q: How and when did Indus Valley Partners become involved in the securitisation market?
A: I co-founded Indus Valley Partners in 2000 to provide a specialist solutions firm focused exclusively on the alternative asset management industry. We are now the largest firm specialising in this field.

We currently have 380 professionals, working across four time-zones, covering the US, India and Europe, and our clients currently manage around US$830bn in AUM. Around 60 to 70 of our 80-plus clients are hedge funds, with the rest made up of largely private equity firms, real estate investors and commodity traders.

We play a key role supporting our clients in their pursuit of alpha by using our solutions to help them analyse their portfolio and investment data, helping to institutionalise their fund platforms as they grow and helping them to reduce their non-investment risks. Our services and solutions are tailored to the specific requirements of any fund, across strategies and asset classes - including structured credit-related issues.

A key objective for a lot of our clients is to add more AUM and investors, but to still keep tight control over their operational processes. We allow these firms to get a better grip on their businesses and assets with our solutions. For example, we can come in and build the time series of returns across a portfolio of CDOs or help model a leveraged loan for subsequent data analysis, if that is what the client requires.

Q: What are your key areas of focus today?
A: In the current market, regulation and regulatory compliance is a hot topic and we are seeing a great deal of funds buying our RAPTOR solution, so they are compliant with AIFMD, UCITS or EMIR. In the US we have many clients using our solution for filing Form PF. Since we cater for both single- and multi-jurisdiction funds, we are very busy in this area.

Another key area is that of data governance; ensuring that a fund has a practical way of reconciling its portfolio and valuation data with its counterparties, that there is sufficient control over model/pricing inputs and subsequently investor reporting.

Q: How do you differentiate yourself from your competitors?
A: All of our solutions from our data warehouse to our securities modeller support multiple strategies, counterparties and asset classes. Many competitors do not have the breadth and depth of asset class coverage that we do. They also lack the sheer range of solutions and services we offer.

One of our clients recently won a prestigious award for best-in-class data management. They had developed many proprietary solutions for their data management and performance reporting during a period where few third-party solutions existed, so they brought us in to both update and consolidate their systems.

Through the IVP Polaris data warehouse, we provided a solution that served a variety of constituencies within their funds, such as portfolio managers, risk, compliance and operations. By ensuring each set of users operates on the same underlying data sets, we achieved an unprecedented level of data quality and control.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: We would like to add to the list of funds that we work for in the European market. Right now we have four clients in London, two of which are hedge funds, and we have several European clients.

But we want to expand further in this market. Regulatory upheaval and greater institutional investor activism has meant that funds - now more than ever - need to look at putting in place solutions such as ours.

Another challenge is actually finding the companies that need the technology to scale their business. Investment firms that are more in need of software expertise and solutions to scale their business are more likely to be in greater need of our services. We need to tap this area of the market.

Q: What major developments do you need/expect from the market in the future?
A: Regulation is playing an increasingly key role in shaping the market. For example, we are helping a major investment bank spin out their structured finance trading arm right now as a consequence of regulatory pressures. More and more structured finance activity is heading to alternative asset managers as regulatory capital requirements, such as Basel 3, change the economics of these businesses for banks.

If the current players are squeezed out of the market, we could see a form of structured finance shadow banking. The onus could shift to hedge funds and others to take the space, but we could also see a new form of financial entity chart a new path for the market.

These entities would likely be quasi-regulated and take in external investor capital under an explicit yield-plus model. We are already seeing developments like this in middle-market lending and I would not be surprised to see this develop next in other credit markets, such as potentially leveraged loans or ABS.

JA

Structured Finance

MBS trading vet hired

Semper Capital Management has hired Zachary Cooper as deputy cio. In this role, he will be responsible for a number of Semper's mortgage-centric funds, which focus on MBS.

Prior to joining Semper, Cooper was md at Treesdale. He has also traded MBS and ABS for a number of firms, including Deutsche Bank.

He brings with him the Treesdale Rising Rates Strategy Fund to Semper's current range of product offerings. The fund trades mortgage derivatives for gains in a rising rate environment.

Structured Finance

Law firm boosts SF expertise

Rupert Wall has joined Sidley Austin as a partner in its global finance practice. His focus is on structuring and restructuring deals across the securitisation spectrum. He advises arrangers, originators and investors on all aspects of structured finance and derivatives, while also advising counterparties with capital markets issuances, leveraged finance transactions and portfolio sales.

Wall arrives from Weil Gotshal and Manges, where he was a partner. He has held roles additionally at Barclays and Freshfields Bruckhaus Deringer.

Structured Finance

Mid-market manager recruited

Medley Management has hired David Indelicato as md and head of credit management. He will focus on providing capital solutions to middle market companies and private equity sponsors.

Prior to joining Medley, Indelicato was svp at GE Antares Capital, where he was a risk team leader responsible for underwriting, structuring and managing private equity sponsor-backed leveraged finance transactions. Previous to this, he was md at CDG Group, focusing on a broad range of financial and operational restructuring services.

Structured Finance

SF practice adds another

Chris McGarry has joined Ropes & Gray as a partner in the firm's finance practice. He will advise on structured finance transactions, with a focus on CLOs and securitisations for clients including arrangers, sponsors, originators and investors.

Prior to joining, McGarry practiced at Weil, Gotshal & Manges and, previous to that, Clifford Chance. He also served as vp in RBS' structured finance front office, where he originated and structured public and private securitisations on a global basis.

McGarry has also worked on all types of consumer ABS, trade receivables and restructurings across asset classes. His hiring bolsters Ropes & Gray's structured finance expertise following its recent hiring of Partha Pal (SCI 12 May).

Structured Finance

Investment adviser acquired

Benefit Street Partners (BSP) has agreed to acquire TICC Capital's investment adviser TICC Management, with the intent to transition TICC Capital's investment strategy from syndicated loans and CLO investment vehicles to primarily focus on private debt investments. The closing of the transaction is contingent upon approval by TICC Capital stockholders, as well as the election of four new independent directors, among other conditions.

The planned addition of four new directors will accompany the three current independent directors on TICC Capital's board. Founder and ceo of BSP Thomas Gahan and BSP president Richard Byrne will replace the two current interested directors.

The other conditions include BSP replacing the current members of TICC Management's investment committee. Further, TICC Capital's current executive officers will be replaced with individuals affiliated to BSP, with the company stating that a name change will also occur.

TICC Capital intends to file a preliminary proxy statement with the US SEC to solicit stockholder approval of the new investment advisory agreement. The company's board has unanimously approved a new investment advisory agreement to the proposed transactions and its related changes. Completion of the transaction is expected to occur in 4Q15.

UBS served as financial adviser to TICC Management, while Houlihan Lokey served as financial adviser to BSP. K&L Gates acted as legal counsel to TICC Management and Sutherland Asbill & Brennan acted as legal counsel to BSP.

Structured Finance

Chimera internalises management

Chimera Investment Corporation has entered into an agreement with Fixed Income Discount Advisory Company (FIDAC), a subsidiary of Annaly Capital Management, to internalise its management. In connection with the transaction, Chimera will purchase Annaly's 4.4% stake in the firm for a purchase price of US$126.4m or US$14.05 per share.

Annaly and the independent members of the Chimera board agreed to the internalisation in order to facilitate the pursuit of independent strategies at both companies. Given the resulting benefits that both companies have agreed on, no contractual penalties will be associated with the management agreement termination.

As a result of the internalisation, FIDAC personnel who focus their efforts on Chimera will become employees of Chimera. All of Chimera's executive officers will remain in place. FIDAC will continue to provide Chimera with infrastructure and personnel assistance while Chimera transitions fully to its independent systems.

Credit Suisse is serving as financial advisor to Annaly, while DLA Piper is its legal counsel. Dechert is legal counsel to the independent members of the Chimera board.

Structured Finance

Cairn majority stake sold

Mediobanca has agreed to acquire RBS' 51% majority interest in Cairn Capital Group. The majority will be purchased from Cairn Capital's institutional shareholders, following which RBS will have no remaining interest.

The acquisition is part of Mediobanca's strategy to continue developing its alternative asset management business through a number of strategic partnerships. As part of the transaction, Mediobanca will be providing Cairn Capital with seed capital, enabling the launch of new investment strategies. Cairn Capital management will continue to be responsible for day-to-day operations and retain full autonomy over its investment processes.

Mediobanca will have the ability to increase its interest in Cairn Capital after three years, with an option to acquire some or all of the remaining 49%, the majority of which is held by the management and staff of Cairn Capital. Paul Campbell will continue to be ceo of Cairn Capital.

Mediobanca says that the transaction value does not have a material impact on CET1 of Mediobanca Group. The transaction is subject to customary conditions, including approval from the relevant regulatory authorities, and is expected to close before year-end.

Structured Finance

Structured products pair recruited

Schulte Roth & Zabel has hired Boris Ziser and Thomas Weinberger as partners in the firm's structured products and derivatives group. Both arrive from Stroock & Stroock & Lavan.

Ziser, who will co-head the group, has expertise in public and private ABS, warehouse facilities, secured financings and commercial paper conduits. His practice encompasses a variety of asset classes, including life settlements, equipment leases, structured settlements, lottery receivables, timeshare loans, litigation advances, cell towers and franchise loans, in addition to other esoteric asset classes such as intellectual property.

Weinberger focuses his practice on ABS and corporate finance, with an emphasis on insurance and risk-linked securities, and specialty finance companies. He has expertise in life settlements, reserve funding transactions, premium finance, longevity and pension risk transfer, alternative risk transfer, marketplace lending and other non-bank finance products.

Structured Finance

Mid-market originator tapped

Brian Davis has joined Golub Capital as md to develop a network of non-sponsored deals in its middle market lending group. He will be responsible for originating and executing new investment opportunities from intermediaries, service providers and outbound calling efforts.

Davis joins Golub from TPG, where he was founder, president and md of Sourcing Advisors, a business that sourced new investment opportunities for mid-market equity platform TPG Growth. Prior to this, he was md and head of business development at Sentinel Capital Partners, where he led deal sourcing and business development efforts. Davis has also been md and partner at Deloitte.

Structured Finance

Law firm continues SF push

Bryan Cave has appointed Rachel Kelly as a partner in its financial services group. She arrives from Macfarlanes, where she had been head of structured finance and capital markets, having previously been a partner in Clifford Chance's structured debt group.

Kelly specialises in structured finance and debt capital markets, particularly CLOs. She advises clients on a number of areas, including real estate finance, infrastructure and project finance, and liability management.

The appointment continues Bryan Cave's push to add to its structured finance expertise, following the recent return of Rick White to the law firm (SCI 17 July).

Structured Finance

Private debt pro hired

Intermediate Capital Group (ICG) has hired Adam Goodman as md to strengthen its US private debt investment team. He joins ICG from MetLife, where he was head of mezzanine investments and served as portfolio manager with responsibility for direct private debt, mezz and credit fund investments.

Prior to MetLife, Goodman was principal at Allied Capital, where he sourced, structured and executed principle investments across the capital structure. His prior experience also includes working at Credit Suisse First Boston.

Structured Finance

ABS lawyers promoted

Katten Muchin Rosenman has named nineteen new partners, among them Christina Burgess and Don Macbean for structured finance and securitisation. Burgess' experience includes ABS and MBS, with an emphasis on prime and sub-prime automobile loan and lease, dealer floorplan receivable and equipment lease securitisations and warehouses. Macbean's practice encompasses structured energy and commodity-related transactions, market-value CLOs and structured derivatives transactions.

Structured Finance

Compliance partner named

Dentons has appointed Joshua Jordon as a partner in its capital markets practice. He joins from American Mortgage Consultants (AMC), where he was svp, general counsel and compliance officer. In his new role, Jordon will focus on mortgage banking and consumer finance regulatory matters as part of Dentons' regulatory compliance group.

At AMC, he regularly advised on complex mortgage banking compliance issues and was responsible for the oversight of all legal matters related to the company and its subsidiaries. Prior to joining AMC, Jordon was associate general counsel at Franklin Credit Management Corp, where he handled the compliance and transactional aspects of residential mortgage portfolios, real estate and consumer investment assets.

Insurance-linked securities

Reinsurer taps into Asia

TigerRisk Partners has established its first presence in Asia by opening an office in Hong Kong. Subsidiary TigerRisk China Partners will lead the effort, with a team that will be headed by Houqin Zhu. The team will also include Michael Fung and Raymond Chen.

Before TigerRisk, Zhu was a reinsurance broker for Willis Re, where he led its China operation. He has also been a treaty underwriter for American Re and QBE Re. 

TigerRisk says it will be supporting the new operation in Asia by providing analytic, technical and capital markets advisory resources resident in its US, London and Bermuda offices.

Insurance-linked securities

Insurance risk project set up

Vanbridge holdings has made a capital investment in Atlas General Holdings as part of a new partnership between the firms. Vanbridge will hold a seat on the Atlas board of managers, but other terms of the transaction have not been disclosed.

The partnership is part of an attempt by the firms to pursue a range of projects that involve origination and underwriting of commercial insurance risks. They will also look at distribution of these risks into the traditional and alternative reinsurance markets.

"This partnership and investment by Vanbridge will bring Atlas closer to alternative asset managers, the capital markets and new sources of deal flow, acquisition opportunities, capital and capacity," says Bill Trzos, ceo and president of Atlas.

Dowling & Hales acted as advisor to Vanbridge on the investment.

Insurance-linked securities

EXOR wins PartnerRe battle

EXOR has agreed to acquire PartnerRe at approximately US$6.9bn, ending a long-standing bidding war with AXIS Capital in pursuit of the firm (SCI passim). The agreement involves EXOR purchasing all PartnerRe outstanding common shares for US$137.5 per share in cash plus a US$3 per share special dividend, for a total consideration of US$140.5 per share.

PartnerRe preferred shareholders will also receive the enhancements recently announced by EXOR to its offer (SCI 21 July). The agreement follows the mutual decision between PartnerRe and AXIS to terminate their own amalgamation agreement and cancel the special general meeting that was planned for 7 August.

A 'go shop' period will now commence, during which the PartnerRe board is entitled to solicit and evaluate any competing offers to the EXOR transaction. The PartnerRe board may enter into negotiations related to proposals received prior to 14 September, in each case subject to customary restrictions.

The transaction with EXOR still requires the approval of PartnerRe shareholders at a special general meeting to be called as soon as reasonably practicable. It is expected to close no later than 1Q16, subject to obtaining the necessary shareholder approval, receipt of regulatory clearance and customary closing conditions. If certain transaction approvals are not received within 12 months following signing or if there are certain non-appealable legal prohibitions to closing, EXOR has committed to pay PartnerRe US$225m as a partial reimbursement of the termination fee paid by PartnerRe to AXIS.

RMBS

Class action MBS deal approved

A federal court has approved a US$235m settlement over a class action lawsuit brought forward by New Jersey Carpenters Health Fund on behalf of investors in MBS that were issued by Residential Accredit Loans (RALI) in 2006 and 2007. Judge Katherine Faila of the US District Court for the Southern District of New York gave final approval to the agreed settlement made with underwriters Citi, Goldman Sachs and UBS on 31 July.

Faila also approved a plan for distribution to investors of those funds, as well as the previously approved US$100m settlement with RALI that was reached in 2013. The resolution resolves an ongoing dispute in which RALI and its affiliates were accused of making Securities Act violations in connection with public offerings of the related MBS. They were also accused of systematically disregarding the applicable underwriting guidelines when originating the mortgage loans underlying the securities at issue.

Cohen Milstein Sellers & Toll served as lead counsel in the consolidated class action.

RMBS

PIMCO sent Wells Notice

PIMCO has received a Wells Notice from the US SEC indicating that its staff have recommended that the regulator commence a civil action against the investment manager stemming from a non-public investigation relating to PIMCO's Total Return Active ETF. The matter principally pertains to the valuation of smaller sized positions in non-agency MBS purchased by the fund.

The purchases that are being investigated were made between the ETF's inception on 29 February 2012 and 30 June 2012. PIMCO says that the SEC's notice is in relation to the fund's performance disclosures for this period, as well as the firm's compliance policies and procedures related to these matters.

PIMCO notes that a Wells Notice is neither a formal allegation of wrongdoing nor a finding that any law was violated. It stresses that it is using the current notice as an opportunity to demonstrate to the SEC staff why it believes its conduct was appropriate and that no action should be taken.

RMBS

WMS offloaded

The Co-operative Bank has entered into agreements with Capita regarding outsourcing its mortgage processing services for all of its residential mortgage portfolios, with effect from 1 August. Under the transaction, Capita Asset Services has acquired Co-op subsidiary Western Mortgage Services (WMS). WMS will simultaneously enter into a master services agreement with the Co-op and certain of its subsidiaries to service its mortgage processing and administration operations.

The terms of the agreement comprises the servicing of over 200,000 mortgage accounts and £20bn of lending. As a result, the employment of approximately 380 Co-op staff currently servicing the mortgage portfolios will move to WMS.

WMS will continue to service the third-party portfolios it previously serviced directly or indirectly under Co-op ownership through different contractual arrangements, including Warwick Finance Residential Mortgage Number 1, as well as the Leek and Silk Road RMBS programmes. For each of these issuances, the original servicer or administrator remains servicer of record and liable for the performance of the servicing obligations.

ABS

Card delinquencies at record low

Prime US credit card ABS delinquencies fell to record-low levels in July for a second straight month, according to Fitch's latest index results for the sector. The positive trend comes on the back of jobless claims and personal bankruptcies falling to new lows.

The US Department of Labor's initial jobless claims for the week of 18 July fell to 255,000, reaching their lowest level in 42 years. Additionally, personal bankruptcy filings exceeded Fitch's expectations, falling 11.6% during 1H15 relative to the same period one year earlier.

The agency's prime credit card 60-plus day delinquency index decreased for the fourth month in a row, from 0.98% in June to 0.95% in July. Delinquencies have now fallen below 1% for two months in a row, reaching that benchmark only three times historically. Current performance remains 79% below its peak level in December 2009.

The prime monthly payment rate index also improved for the second consecutive month to 28.25%. This is 4.32% higher than the same period last year and well above its historical average of 17.64%.

Retail credit card 60-plus day delinquencies also held steady in July at the historical low of 2.14%, while credit card charge-offs declined by 3.26% month-over-month. The index is slightly higher year-over-year, but is still 53.5% lower than its all-time high of 13.41% reached in March 2010.

ABS

Renewables deal prepped

Hannon Armstrong Sustainable Infrastructure Capital (HASI) is marketing a US$125m securitisation that is backed by a pool of 80 contractual rights to payments associated with ground leases for utility scale projects. The contractual rights in HASI SYB Trust 2015-1's collateral pool include a mixture of variable and scheduled payments, 28.4% of which arise from wind projects and the remainder from solar projects.

The inclusion of the wind projects follows HASI's acquisition last year of American Wind Capital (AWCC), which is contributing to origination in the pool. HASI acquired the ground lease portfolio from AWCC, along with the related leases and cashflow in May 2014.

On closing, approximately US$111.9m in class A notes and US$14m in class Bs will be issued. Kroll Bond Rating Agency has assigned a preliminary single-A rating to the class As and a triple-B rating to the class Bs.

The transaction is structured to pay interest first on the class As and then on the class Bs, with the same process for principal payments. The transaction also benefits from a six-month interest reserve that will be fully funded at closing. The transaction has a 30-year final maturity date in 2045, with an anticipated repayment date of 20 July 2040.

The transaction is HASI's inaugural securitisation. HASI SYB Trust 2015-1 will be a Delaware statutory trust, while Hannon Armstrong Capital will service the portfolio of ground leases on behalf of the issuer.

ABS

MSA payments move up

Fitch has completed its annual review of US tobacco ABS ratings accounting for the amount of Master Settlement Agreement (MSA) payment received by each trust in 2015. The aggregate MSA payment was 0.36% higher this year than the amount in 2014.

Fitch is placing 66 tranches on rating watch negative due to the pending outcome of the tobacco criteria revision. It is expected that most downgrades will be one to two notches, which could potentially be lower than the current rating floor of single-B.

The review includes 10 downgrades, 11 upgrades and 164 affirmations. Although the MSA payment was stable year-over-year, many of these downgrades result from having model-indicated grades that were below the current rating for two consecutive years. The upgrades were mostly on California issued trusts and Puerto Rico, which received a settlement in 2013.

Buckeye Tobacco Settlement Financing Authority 2007 (Ohio) and Suffolk Tobacco Asset Securitisation Corporation Tobacco Settlement Asset-Backed Bonds,Series 2008 continue to have debt service reserve balances below their required levels. As a result, Fitch does not give them the benefit of a rating one notch above the model-indicated grade, regardless of whether the state received a settlement.

Meanwhile, Nassau County Tobacco Settlement Corporation Tobacco Settlement Asset-Backed Bonds Series 2006 had been drawing on its reserve account in the past, but now is at its required level.

Structured Finance

HQLA impact gauged

Global capital requirements have the potential to become impediments to providing financing via securitised products, S&P notes. Of particular focus among market participants recently are various regulators' evaluations of what actually constitute high-quality liquid assets (HQLA) in order to calculate the Basel 3 liquidity coverage ratio (LCR) and associated market value haircuts.

"Many regulators seem to have interpreted what high-quality and liquid mean differently and, as a result, there is still some uncertainty as to what final standards may emerge for global institutional investors. For example, currently the EU regulation includes certain RMBS, auto loan ABS, SME ABS and consumer loan ABS as level 2B HQLA, whereas the US regulation does not," S&P observes.

The LCR is intended to ensure that banks have enough HQLA available to cover net cash outflows over a 30-day stress period. However, S&P credit analyst Darrell Wheeler suggests that differences in which assets are included or excluded for HQLA purposes - and at what level - will likely have a significant impact on structured finance and fixed income investors as a whole, since the new rules are likely to and may already be influencing what bank investors are able to buy.

In a new report, the agency examines the different jurisdictional levels for potential HQLA and looks at trading data and market sizes to determine whether these rules are generally appropriate. The overall data indicates that the classification systems and haircuts are generally appropriate, but may need to be further researched and enhanced before being fully phased in. For example, agency MBS is only classified as level 2A HQLA in the US, in contrast to Canada's approach, which would classify its government entity-insured mortgage bonds as level 1.

"Average daily trading volume suggests that agency MBS is the second most-traded fixed income product after Treasuries and has been for at least the past 10 years," Wheeler adds. "It is understandable that US regulators may want to distinguish between an implied and full-faith-and-credit guarantee by the government, but there may be an unintentional effect on the global bond ecosystem if investors begin to trade out of the US$7trn agency bond market en masse and into a very limited number of other liquid alternatives."

Overall, S&P views the task of analysing and creating an international framework for assessing liquidity and the resulting appropriate capital charges as "very challenging". Looking ahead, the agency expects regulators to remain open to market input.

Structured Finance

Rating correlations analysed

S&P has published four reports illustrating how ratings on European ABS, CMBS, RMBS and structured credit transactions may change over time. The agency's analysis includes sensitivity of ratings to underlying analytical assumptions, as well as a discussion of how various market developments that move parameters built into the rating analysis may influence credit ratings.

S&P notes that its European structured finance ratings can modify over time, due to changing transactions characteristics or changes in the agency's assessment of the risks that a transaction faces, such as developments in the macroeconomic environment. Data spanning 2000 to 2014 show that European GDP, unemployment rate and interest have been correlated with credit quality for all the major European structured finance asset classes.

In addition, RMBS rating movements are correlated with house price growth and net mortgage lending, CMBS rating movements have changed with CRE values and inflation, and structured credit ratings have done the same with corporate downgrade and default rates. For example, empirical evidence based on the 2007 to 2014 period reveals that a 1% real terms contraction in EU GDP corresponded with an average decline in credit quality of 0.2, 1.2, 0.5 and one notches for European ABS, CMBS, RMBS and structured credit respectively.

Further, a 5% decline in house prices was associated with a one-notch decline in average European RMBS credit quality. A 5% decline in CRE values was associated with a 3.5-notch decline in average European CMBS credit quality too.

The rating analysis hinges on a number of assumptions made by S&P, with European RMBS ratings relating to factors that include foreclosure frequency, loss severity, foreclosure and recovery timing, prepayment rate and interest rate. For a hypothetical RMBS transaction, a 50% increase in S&P's base-case foreclosure frequency or loss severity assumption could lead to a one-notch downgrade for investment grade tranches and a three or more notch downgrade for some speculative grade tranches.

Some key rating assumptions may also be transaction-specific, such as the importance in creditworthiness of financial institutions that act as counterparties in securitisations for structured finance ratings analysis. Country risk also matters, with declines in sovereign debt ratings potentially affecting structured finance ratings by limiting the maximum rating that S&P will assign to a structured finance security.

Structured Finance

SME lending consultation opens

The EBA has launched a paper inviting stakeholders to provide their input and evidence in support of an ongoing analysis on bank lending to SMEs and its impact on the SME supporting factor. The final document, which will inform the European Commission's own report on the impact of own funds requirements on lending to SMEs, is expected to be published in 1Q16.

The EBA describes SMEs as key players in the EU economy in terms of their share in employment and value added, but is aware that they remain largely reliant on bank-related lending to finance their activities. In this context, and given the increased regulatory burden following the financial crisis, a capital reduction factor for loans to SMEs - dubbed the supporting factor - was introduced in the CRR to allow credit institutions to enhance lending to such companies.

As a result, the EBA has the mandate to report to the European Commission on an analysis of the evolution of the lending trends and conditions for SMEs. It will also attempt to provide an analysis of effective riskiness of European SMEs over a full economic cycle and the consistency of own funds requirements laid down in the CRR for credit risk on exposures to SMEs.

The EBA welcomes comments and evidence related to the consultation by 1 October.

CDS

Alpha credit event called

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in respect of Alpha Appalachia Holdings. Alpha Natural Resources filed for chapter 11 bankruptcy relief on 3 August to "enhance the company's future as it weathers a historically challenged coal market." ISDA will publish further information, including whether a CDS auction will be held, in due course.

CDS

Emerging market CDS trading drops

Emerging market CDS trading volumes stood at US$275bn in 2Q15, according to a survey by the Emerging Markets Trade Association. This represents a 29% decrease in volume compared to the US$389bn in reported transactions in 2Q14 and a 28% contraction from the US$383bn seen in 1Q15.

Prior to the current quarter, reported volumes had remained somewhat steady, at approximately US$380bn per quarter for the past year. The results were the lowest quarterly CDS volume levels since 4Q13.

Simon Sassenberg, CDS trader at Bank of America Merrill Lynch, sees the decline in CDS trading volume as transitory. "I expect volumes to rebound, as deteriorating credit fundamentals in emerging markets are generating a renewed interest to hedge exposure," he says. "A higher interest rate environment will contribute to increase macro volatility."

The largest CDS volumes in the survey during the quarter were those on Brazil, at US$55bn. Survey participants also reported US$34bn in Russian CDS, with Turkish volumes following at US$30bn.

The survey included volumes on nine corporate CDS contracts, with the highest reported quarterly volume on Gazprom, at US$2bn. Participants also reported US$1.9bn in Pemex contracts and US$1.4bn in Petrobras CDS.

CLOs

Negative net issuance posted

US CLO prepayments narrowly exceeded new issuance in July, resulting in the first negative net issuance month since January 2014. Deutsche Bank figures put new issue volumes at just under US$7bn and prepayments at just over US$7bn for the month.

Part of the explanation for the unusually large payments in July is that many CLOs pay quarterly. But the prepayment rate also picked up significantly in June and stayed high in July, following rises in loan prices in April and May and the accompanying loan refinancings.

"In each of the months of June and July, around 15% of the balance of deals out of reinvestment was returned to investors and that translates to a 47% annualised prepayment rate, given the quarterly payment cycle. Since the loan sell-off towards the end of last year, the annualised prepayment rate has stayed relatively muted, at 25%-30% until June," Deutsche Bank CLO analysts observe.

CLOs

Negative returns hit CLO index

The total amount of CLOs that paid down in JPMorgan's CLO index (CLOIE) since the June rebalance through 31 July was US$7.24bn in par outstanding, split between US$4.18bn and US$3.05bn of pre-crisis and post-crisis CLOs. The post-crisis CLOIE added US$11.2bn, with 137 tranches from 25 deals at the July rebalance.

The CLOIE total index exhibited negative returns in the month of July in four out of six tranches. Those that showed negative returns were the double-A, single-A, double-B and single-B tranches.

The pre-crisis indices outperformed the post-crisis indices during July. All five pre-crisis sub-indices exhibited positive returns, led by the triple-B and double-B tranches, which returned 0.28% and 0.4%. The post-crisis index underperformed in subordinate debt for the second consecutive month, with double-B and single-B tranches returning -0.66% and -1.33% respectively.

CLOs

Top CLO managers revealed

The rankings of the top 10 global CLO managers are relatively unchanged from January, according to Moody's latest CLO manager league tables. The tables show that in the US the top 10 managers' market share has declined slightly as other large managers have grown their share, and CLO issuance remains strong.

"In the US, the top 10 managers' market share has declined to 29% from 32% a year ago, while medium-sized managers have increased their market share to 28% from 22% through strong issuance and acquisitions, bumping them into the large-manager group," says Moody's md, structured finance, Yvonne Fu. "Meanwhile, the market share of small managers, half of which entered the CLO market after the financial crisis, has shrunk to 16% from 21% in the past year."

Large managers are defined by Moody's as those with 10 or more CLOs under management. Medium-sized managers are categorised as those with between five and 10 CLOs under management and small managers with between one and four CLOs.

In the US, Moody's rated US$49bn of CLOs in 1H15, up from US$45bn during the same period last year. In comparison, European new issuance totalled €6.5bn in the first six months of the year, up from €4.6bn in the same period last year. The 10 largest managers now control about 60% of the European market, up 10% from 2014.

Alcentra moved up to tie with GSO/Blackstone for the most European deals at 15. However, GSO/Blackstone maintained a slight edge in AUM at €4.8bn, compared with Alcentra's €4.7bn. GSO/Blackstone has experienced a strong 2015 so far as it has also surpassed Carlyle as the most prolific global CLO manager, with US$17.4bn in AUM through 39 deals.  

CIFC Asset Management remains the leader by number of deals in the US, with 30 CLOs under management, while Ares has now moved from its ninth place position in 1H14 to fifth. Credit Suisse Asset Management tops the league table by total AUM, with US$14.3bn of CLO assets, followed by CIFC in second, and Carlyle and GSO/Blackstone tying for third. Notably, GSO/Blackstone moved up the scale after issuing several deals this year, while Highland fell to seventh place due to low new issue and the amortisation of existing deals.

CLOs

Alpha exposure 'limited'

The bankruptcy of Alpha Natural Resources is expected to have a limited impact on the US CLO market, with fewer than 170 deals exposed to the issuer. Thomson Reuters LPC data indicates that CLOs own US$308m of total exposure to Alpha Natural Resources and only US$265.2m of its Term Loan B.

A Wells Fargo analysis of Intex data also shows that no post-crisis CLO has more than 1.3% exposure to Alpha Natural Resources and only four post-crisis CLOs have more than 1% exposure. An additional 33 transactions (32 post-crisis and one pre-crisis) have between 0.5% and 1% exposure to the issuer.

Wells Fargo structured products strategists note that the loan market default rate continues to be low, with the issuer-based default rate remaining below 1% since May 2014. Nevertheless, recent pressures in energy and mining have led to investors anticipating higher defaults in the future.

Intex data suggests that only 2.1% of post-crisis CLO collateral is in metals and mining and only 9% of deals have more than 4% exposure to the industry as a whole. "We believe CLO equity investors buy with the understanding that defaults can happen and the CLO structure is built to take advantage of volatility," the strategists observe. "However, even relatively small exposure to a default can reduce equity par NAVs. The default of a portfolio asset with an exposure of as low as 0.5% can reduce the CLO equity par NAV by more than two points, due to the leverage in the CLO structure."

Alpha Natural Resources filed for Chapter 11 bankruptcy relief on 3 August to "enhance the company's future as it weathers a historically challenged coal market".

CLOs

CLO equity fund launched

American Capital has launched a new US$450m fund focused on investing in CLO equity tranches and comprising entirely of third-party investors. The American Capital CLO Fund I will purchase US$300m of American Capital's existing CLO equity portfolio at its fair value as of 30 June, while the additional US$150m will comprise of investment capacity.

Closing of the fund is expected to occur within 90 days. Affiliate American Capital Asset Management will manage the fund for customary management and incentive fees. The proceeds are expected to be used by American Capital for general corporate purposes, including for its investment and lending activities.

Kirkland & Ellis is serving as lead counsel to American Capital on the transaction. Cleary Gottlieb Steen & Hamilton is serving as lead counsel for the investors.

CMBS

CMBS 1.0 expected losses fall

Fitch says that US CMBS expected losses for peak vintages have fallen since its last report in February. In the six months since then, expected losses for 43 transactions fell, 17 rose and nine stayed about the same.

Expected losses have fallen due to recently resolved specially serviced loans with losses near or below Fitch's expectations. In addition, the pace of new transfers to special servicing has continued to temper.

Nevertheless, the agency remains watchful of the many assets that still remain unresolved and those with upcoming maturities, with the 2004 and 2005 vintage deals currently winding down. These pools are becoming more concentrated, with many of the remaining loans either in special servicing or having been extended. As such, Fitch notes that adverse selection remains a risk factor.

The agency's weighted average expected losses of the original pool balance, including realised losses, are: 28 transactions from the 2004 pool, at 4.1%; 34 transactions from 2005, at 7.6%; 34 transactions from 2006, at 12.9%; 43 transactions from 2007, at 15.2%; and four transactions from 2008, at 12.3%.

CMBS

Gap closures compared

Gap recently released a list of 20 stores slated to close on 26 July, as part of its plans to shutter 175 of its North America specialty stores over the next few years (SCI 17 June). A Morgan Stanley analysis identifies 16 loans totalling US$1.66bn of CMBS exposure across 15 deals to 12 of the stores on the list.

Of these, 10 loans totalling US$1.05bn are securitised in nine CMBS 2.0 deals. One property, the Destiny USA mall, is the sole asset securing the US$430m JPMCC 2014-DSTY transaction.

The 2.0 loans with exposure to the Gap closures have an average underwritten LTV of 66%, according to Morgan Stanley figures. NOI DSCR for the properties rose to an average of 2.34x in 2014 from 1.90x at underwriting. NOI debt yield has stayed roughly stable, at around 10.66% in 2014 compared to 10.75% at underwriting.

The analysis highlights two cases - the Destiny USA and Tempe Marketplace assets - where Gap may have had different reasons to close stores. The former property's performance is stable from a sales per square-foot perspective (US$541 for in-line tenants), but in-line occupancy costs are high, at 16.1%.

"The Gap store has an occupancy cost of 26.7%, much higher than Old Navy's 8%. We think this could explain why Gap Inc decided to close the Gap store rather than Old Navy. We note, however, that Old Navy's lease expired in January and it's not clear what the new lease terms are," Morgan Stanley CMBS strategists observe.

Meanwhile, the largest exposure to the Gap closures is the US$187m Tempe Marketplace loan, securitised in DBUBS 2011-LC1. "While there was no data available on Gap's performance, deal documents show the overall property had sales per square-foot of under US$243. In our view, this suggests a low quality mall and may have incentivised Gap's closure," the strategists conclude.

CMBS

CMBS delinquencies resume drop

The Trepp US CMBS delinquency rate resumed its descent in July after a brief time-out in June, inching down 3bp to stand at 5.42%. Over the last 27 months, the delinquency rate has fallen 23 times and is currently 62bp lower than the year-ago level and 33bp lower year-to-date.

In July, US$1.4bn in loans became newly delinquent, which put 27bp of upward pressure on the delinquency rate. About US$600m in loans were cured last month, which helped push delinquencies lower by 12bp.

CMBS loans that were previously delinquent but paid off with a loss or at par totalled just over US$800m in July. Removing these previously distressed assets from the numerator of the delinquency calculation helped move the rate down by 15bp.

CMBS

Geographic distress highlighted

New research from 1st Service Solutions indicates that while much of the recovery in the US commercial real estate market is real, the CMBS maturity market remains on "shaky ground". From a geographic perspective, the Las Vegas, Phoenix and Chicago markets in particular are showing signs of severe distress for CMBS borrowers.

GlobeSt.com figures illustrate this distress, in connection with loans that are set to mature before end-2017. The Chicago market has 194 CMBS-financed properties, 53 of which have a loan-to-value (LTV) ratio greater than 100% and 112 loans with an LTV greater than 80%. The Phoenix market has 150 CMBS-financed properties, 32 of which have an LTV greater than 100% and 80 loans with an LTV higher than 80%, while the Las Vegas market has 106 CMBS-financed properties - 30 of which have an LTV greater than 100% and 60 loans with an LTV greater than 80%.

In each of these three markets, over half of all CMBS loans are overleveraged. Such high loan-to-value ratios indicate that these CMBS borrowers will likely be unable to pay off their notes at maturity without some form of assistance.

"These local snapshots focus on some of the worst examples of CMBS loan distress, but the issue neatly mirrors a nationwide problem that likely won't conclude prior to 2017. This is because these 10-year notes, originated before the financial meltdown in 2008, were very aggressively underwritten," 1st Service Solutions notes.

CMBS

CRE momentum pushes on

US CRE continued its positive momentum in 2Q15 due mainly to the strengthening US economy, according to Moody's. Though GDP growth will be constrained by the strong dollar, the agency notes that the economy is on solid ground and interest rate increases are likely to be slower than in previous monetary tightening cycles.

Moody's base expected loss for conduit/fusion CMBS transactions fell to 7.4% in 2Q15 from 7.7% in the prior quarter. In addition, the share of specially serviced conduit loans declined for the eleventh consecutive quarter, to 6.7% from 7% in the first three months of the year.

"US economic activity is healthy, with corporates showing strong profits and real incomes rising," says Moody's svp Keith Banhazl. "As a result, we expect performance to continue to improve in all sectors of the CRE industry."

The agency expects multifamily construction to remain strong due to solid demand. Further, improving vacancy rates should ensure continued growth in the retail sector in the coming quarters, while the office sector could benefit from low interest rates, solid job reports and a robust real estate investment market.

Hotel sector fundamentals are projected to continue performing well too, though at lower RevPAR growth rates. While demand has outstripped supply due to suppressed construction growth in the past few years, new supply is now on an upswing and, in certain markets, Moody's says that the forward pipeline is formidable.

Meanwhile, lenders modified 13 loans for a total of US$244.1m in 2Q15, representing a decline of ten loans, or 44% by loan count. The numbers were also a decline by US$308.6m, or 56% by loan balance, on the first quarter.

CMBS

RFC on CMBS rating enhancements

Moody's is requesting comments on three proposed enhancements to its approach to rating multi-borrower large loan and single-asset/single-borrower (LL/SASB) CMBS transactions. One enhancement would help align Moody's collateral assessments with historical performance and would apply to LL/SASB transactions in North America, while another would refine the adjustments that the agency makes to these collateral assessments.

For transactions in Latin America and Asia-Pacific (excluding Japan), Moody's proposes to continue using current LTV targets. However, a third proposed enhancement would establish credit neutral tail period standards, while adding rating caps during the tail period for those loans that remain outstanding past the contractual loan term.

The proposed changes would result in rating upgrades of between one to three notches on the majority of US and Canadian LL/SASB transactions that Moody's currently rates, with the upgrades the direct result of the recalibration of its benchmark advance rates. There would be little or no ratings impact on US conduit/fusion or CRE CLO transactions that share the collateral analysis approach with LL/SASB transactions, or on the LL/SASB transactions outstanding in APAC or Latin America.

"The main objective of the proposed changes for North American securitisations is to realign the rating/advance rate relationship to better reflect the historical performance of transactions and our quantitative analysis of property value and income trends," says Moody's svp and director of research Tad Philipp. "We are also refining the adjustments we make to the benchmark advance rates to reflect collateral and structural attributes unique to each transaction."

During and for some time after the financial crisis, CRE and LL/SASB transactions came under high levels of stress, but large CRE loans and SASB deals performed in line with or exceeded Moody's expectations. The agency currently adjusts the ratios for a given transaction up or down to reflect whether the collateral has stronger or weaker value preservation attributes than those suggested by benchmark Moody's LTV levels and to take into account the strengths and weaknesses of the loan and transaction structures.

A total of 54 large loan and SASB deals are currently rated by Moody's, representing a 32% market share, according to Morgan Stanley figures. However, CMBS strategists at the bank indicate that Moody's market share has fallen significantly for 2014- and 2015-vintage deals, to 16% and 11% respectively. They suggest that the proposed methodology change may serve to increase the number of deals rated by the agency - and hence its market share - in the future.

Insurance-linked securities

Mortgage insurance cat bond closed

AIG's mortgage insurance business United Guaranty Corp (UGC) has completed a novel ILS that funds US$298.9m of indemnity reinsurance for a portfolio of mortgage insurance (MI) policies issued from 2009 through 1Q13. Dubbed Bellemeade Re series 2015-1, the Bermuda-domiciled special purpose insurer issued three classes of 10-year notes.

The US$140.17m class M1 notes priced at one-month Libor plus 250bp, the US$144.29m class M2s at plus 430bp and the US$14.43m class B1s at plus 630. The transaction was arranged by AIG, BNP Paribas and Credit Suisse.

AIG says that Bellemeade Re expands the scope of risk it has brought to investors to include mortgage insurance. Over the last several years the insurer has used the ILS market to successfully transfer over US$3bn of risk to the capital markets from its property portfolio through natural catastrophe bonds.

Risk Management

OTC messaging service launched

AcadiaSoft has introduced MarginSphere Xpress, an email messaging service that allows clients to extend communications to counterparties who are currently not connected to its OTC derivatives service.  MarginSphere 2 clients can now automate their entire margin call process through the new messaging enhancements, which are expected to provide substantial cost savings. Xpress follows the recent launch of AcadiaSoft's updated MarginSphere 2 platform (SCI 3 June).

Risk Management

Swap registration rules adopted

The US SEC has adopted new rules for supervising the business operations of security-based swap dealers and major security-based swap participants in their registration process with the regulator. The rules address all aspects of the registration regime, setting forth the extensive set of information required to be provided and kept up to date by a registrant.

The rules require senior officers to make certifications about the registrant's policies and procedures for compliance with the federal securities laws at the time of registration. The SEC also proposed a rule for market participants to apply to the Commission for permission to continue to have certain persons subject to statutory disqualifications involved in effecting their security-based swap transactions if such continuation is consistent with the public interest.

The new rules will be effective 60 days after they are published in the Federal Register. Comments on the proposal will be due 60 days after.

Risk Management

EBA consults on CVA exemption

The EBA has launched a consultation on its regulatory technical standards (RTS) on the procedures for excluding transactions with non-financial counterparties (NFCs) established in a third country from the own funds requirement for credit valuation adjustment (CVA) risk. The proposed RTS align the treatment of NFCs established in a third country with the treatment of EU NFCs.

However, as NFCs established in a third country are not directly subject to EU regulation, the RTS specify that it is for the institution to check that a counterparty established in a third country would qualify as a NFC, if it were established in the EU. In such a scenario, the institution would also be required to check that the NFC calculates and does not exceed the clearing threshold in accordance with EMIR provisions.

In some instances, the EBA says it could be disproportionate to require NFCs established in a third country to compute the EMIR clearing threshold at the inception of each trade. Therefore, the EBA is consulting on two options: the first one requires institutions to meet the requirements of these RTS at trade inception, while the second option introduces a quarterly frequency for institutions' due diligence requirements.

A public hearing on the subject will take place at the EBA on 12 October. Comments on the consultation are invited by 5 November.

RMBS

RMBS calls edge up

Fitch reports that close to 50 legacy US RMBS transactions were called through optional redemptions in 1H15. This is on pace to slightly exceed the number of transactions called in prior years, but is still a relatively low percentage of the approximately 1,000 prime and Alt-A transactions that are currently eligible to be called.

Mortgage pools in transactions called this year had average loan coupons of 5.3% and 87% of the loans were performing. Almost all of the transactions called were prime or Alt-A and roughly one-third of the transactions were issued by Countrywide Home Loans. Optional redemptions of Countrywide transactions have increased significantly since servicing on a number of their mortgage pools was transferred to Nationstar Mortgage in 2013.

US RMBS transactions are typically eligible to be called when the mortgage pool declines below 10% of the original pool balance, with call rights often held by the servicer or an affiliate of the servicer. Fitch estimates close to half of legacy prime RMBS transactions are currently callable, although the rate of redemptions is likely to remain limited by high delinquency in the majority of the eligible transactions.

RMBS

RMBS loss criteria enhanced

Fitch has updated its criteria for estimating losses on US mortgage pools for RMBS transactions. The criteria now includes a treatment for loans with mortgage insurance in risk-sharing transactions issued by GSEs.

The core principle of Fitch's loan loss framework remains the interaction between borrower equity and market value declines in determining expected loss for each loan. In addition, the methodology accounts for both loan level attributes and macroeconomic factors in deriving loss expectations.

However, Fitch explains that agency risk-sharing transactions issued by GSEs may benefit from a mortgage insurance backstop by the GSEs guaranteeing the full payment of all eligible mortgage insurance claims. Fitch will assume all eligible claims are paid for loans benefitting from mortgage insurance with a GSE backstop.

The treatment of retail loans from originators that Fitch has not reviewed has also been revised. Previously, the agency typically withheld the probability of default benefit for retail loans from unreviewed originators, but it will now apply the retail benefit to unreviewed originators where a satisfactory due diligence sample indicates a reliable channel designation for that originator.

For RMBS pools issued since 2009, Fitch believes the revisions will likely result in modestly lower projected losses. The agency expects to review all outstanding RMBS potentially affected by the changes within the next six months, but does not expect any rating revisions as a result of the criteria update.

RMBS

Freddie launches SB certificates

Freddie Mac has expanded its credit risk transfer programme with the introduction of SB certificates, a new form of multifamily MBS which are backed by small balance loans underwritten by Freddie Mac and issued by a third-party trust. Approximately US$108m is expected to be guaranteed in the first series (SB1), which are anticipated to price this week and settle on or about 18 August.

The small balance loan origination initiative was first announced in October 2014. The loans in the programme generally range from US$1m to US$5m and have five or more units.

Freddie will purchase and aggregate loans by seller and will then securitise each seller's deals when pool sizes are approximately US$100m-$125m. Wells Fargo will operate as sole lead manager and bookrunner for the SB1 ceritificates. Greystone Servicing originated the 44 small balance multifamily mortgages that are underwritten by Freddie Mac and that back the SB1 certificates.

Freddie Mac guarantees the senior securities issued by the FRESB 2015-SB1 Mortgage Trust and acts as mortgage loan seller and master servicer. The third-party trust will also issue certificates consisting of the classes B, X2 and R, which will not be guaranteed by Freddie Mac and will be sold to private investors.

RMBS

Fed plans bulk MBS streamline

The New York Fed's open market trading desk will begin to streamline the administration of the agency MBS held in the System Open Market Account (SOMA) on 17 August by consolidating some of these securities through Fannie Mae and Freddie Mac's CUSIP aggregation. Aggregated CUSIPs are formed by consolidating existing agency MBS with similar characteristics into larger pass-through securities.

Although this process is commonly used by market participants, the scale of aggregation in this case will be large by market standards. The aggregation process will significantly reduce the number of individual agency MBS CUSIPs held by the Fed to 20,000, thereby reducing the administrative costs and operational complexity associated with managing the MBS portfolio.

The SOMA currently holds approximately 80,000 individual agency MBS CUSIPs. In 2011, the desk conducted a CUSIP aggregation programme that consolidated the roughly 44,000 CUSIPs in the SOMA at that time to fewer than 10,000 (SCI 11 Jan 2011).

RMBS

BTL record issuance projected

Moody's suggests that the restriction of mortgage interest relief for UK buy-to-let (BTL) landlords will curb lending in the sector for the short term, which currently makes up 15%-16% of mortgage lending. At the same time, 2015 is on track to become the best year for BTL mortgage deal issuance since the credit crunch.

"The government's decision to restrict BTL mortgage interest relief reflects a willingness to put investors and owner-occupied borrowers on a more level playing field, given that the latter cannot claim tax relief on their mortgages," observes Emily Rombeau, a Moody's analyst.

She explains that first-time buyers' affordability has declined, as they struggle to get on to the property ladder. "Affordability constraints and demographic changes have increased the share of privately rented housing - this sector's evolution has strongly contributed to the rapid growth of the BTL sector in recent years."

Repeat issuers and new players could support a robust pipeline of BTL RMBS deals this year (SCI 30 July). Issuance for this segment has accounted for 25.6% of total UK RMBS issuance so far in 2015, up from 10.2% in 2014.

Moody's forecasts that reduced demand for BTL properties will soften UK house price growth over the coming months, but notes that prices should still rise by up to 5% in 2015 nonetheless. "Notwithstanding the softening in house price growth, the risk of an immediate house price decrease is limited, given the housing shortage and the economic recovery," adds Rombeau.

The BTL market has grown at a steady pace since early 2010, accounting for 16.8% of total gross mortgage lending and 25.3% of total house purchases as of 1Q15. BTL gross lending volumes have substantially increased, rising to £7.6bn in 1Q15 from £2bn in 1Q10.

Paragon, the UK's largest buy-to-let specialist, has accounted for around 40% of BTL issuance since the financial crisis, with a total of nine transactions collectively worth £3.2bn. A number of building societies have also tapped the securitisation market, including Coventry Building Society and Co-operative Bank in 2012 with Mercia No.1 and Cambric Finance Number One, and Leeds Building Society in early 2015 with Guildford No. 1. Precise Mortgages also entered the BTL securitisation sphere this year, with the recently established specialist lender already completing two BTL transactions for a total amount of £426m since January (see SCI's new issuance database).