Contents

Insurance-linked securities

Capacity gains

ILW supply and demand picking up

The ILS secondary market continues to see price volatility in non-peak risks, but certain peak catastrophe zones are witnessing some stabilisation. Insurance loss warranties (ILWs) are the latest product to be driven by a surge in demand as the US wind season kicks on.

The past 18 months have seen approximately US$18bn of new capital entering the market through ILS investments, according to Guy Carpenter. Total capital dedicated to reinsurance is currently estimated to be approximately US$400bn, US$66bn of which is accounted for by convergence capital - including catastrophe bonds, ILWs, collateralised reinsurance and sidecars.

An abundance in capacity - particularly in collateralised reinsurance - was a recent driver in peak zone prices, although this sector is now seeing some softening. In contrast, the US wind ILW sector has been witnessing some price hardening, with strong levels of activity resulting from high demand.

"We are right in the middle of the US hurricane season, so we are seeing some seasonal risk pricing in the market," says Rishi Naik, head of ILS sales and trading at BNP Paribas. "This time of year technically embeds higher risk, which has the effect of driving premium levels wider. Despite this, there has been a pick-up in supply and demand for ILWs. "

Although high capacity in more traditional non-marine retrocession could bring some downward pressure on ILW pricing, the segment has remained resilient so far. Pricing has been dependent upon timing and capacity size, but has increased by between 5%-15% since January.

"It's an area that facilitates a certain type of risk transfer, but the pricing can vary depending on the time of year," says Naik. "There are some riskier profiles being transferred in the ILW market and so the attraction there is coming from the higher yield that the space is currently providing."

Demand was seen in the July renewal period for US first-event wind coverage, particularly in Florida, both from ILS funds looking to hedge out exposures and traditional reinsurers looking to manage their probable maximum losses. "There is also some rotation on strategies playing out, and your high volatility and high yield funds are looking to assume more risk for increased prospective returns," Naik adds. "The higher premium levels are proving popular, particularly for buyers of US risks."

Meanwhile, catastrophe bond spread tightening may have finally reached a pricing floor. Swiss Re notes that a divergence trend is starting to pick up in certain cat bond spreads: some riskier layers are seeing further tightening due to scarce availability, while more risk-remote bonds are experiencing mild widening.

From a secondary trading volume perspective, Naik says that approximately 20% of the average market outstanding is expected to turn over in 2015. Activity has been strong for this time of year, following a trend that saw 1Q15 posting the most active first quarter in recorded history for the ILS market.

Naik believes that steady volumes in trading, as well as issuance on the primary market, have been due to the impervious nature of the market to macro-economic factors. "The sector proved one of the few to remain immune from the recent volatility in the rates and credit markets. Another trend that also remains is the diversity in demand within the market, with investors able to access the full risk/return spectrum."

Indeed, investors continue to dip into a number of different sectors, with Willis Re noting in particular competition for life catastrophe risk, as well as an oversubscription in political risk. "We could also see some interesting developments soon, such as the pricing of underlying instruments changing as the seasonal risk-on/risk-off dynamic plays out," adds Naik.

On the primary market, he notes that some portfolio rebalancing around the new issues likely played a role in recent pricing movements. So far, he says that about US$5bn of issuance has reached the market in 2015, but not in its typical pattern.

"A lot of the new issue activity has actually happened a bit deeper into the year than it typically does," Naik concludes. "I'd expect one or two more issues to come to the market soon, but then it should begin to tail off in August."

JA

Secondary markets

Euro secondary limited

Activity in the European securitisation secondary market remains limited as seasonal illiquidity prevails.

Nevertheless, Autos alongside Dutch and UK prime continue to see some signs of life. At the same time, there is selective demand for Italian, Portuguese and Spanish paper.

Today, currently sees one BWIC on the schedule - at 14:30 London time there is a single €700k line of ADAGI II-X D2. The triple-B CLO has not traded on PriceABS before.

In addition, there is a three line French Auto and RMBS OWIC at 15:30. It comprises: CAR 2014-F1V A, CFHL 2014-1 A2A and COMP 2013-2 A.

Secondary markets

US CLOs keep quiet

The US CLO secondary market looks set to keep to the relatively quiet trend of recent weeks.

Despite ever-present hopes of a pick-up in activity the combination of Friday's non-farm payrolls fuelling September rate rise speculation and mid-August illiquidity is encouraging reticence in the US CLO secondary market, which makes another quiet start to the week likely. However, since the NFP top tier mezz names have continued to hold up well, though the rest of the capital stack is still drifting a little.

There is currently one US CLO BWIC scheduled for today - a $22.25m five line 2.0 double-B list due at 14:00 New York time. It consists of: CTWTR 2014-1A D, HLA 2014-1X E, MAGNE 2014-11A D, SNDPT 2014-3X E and WITEH 2014-1A E.

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

Secondary markets

Euro secondary winds down

The European securitisation secondary markets continue to wind down as seasonal factors hold sway.

"We're really in summer mode now with not a lot of flows," says one trader. "Activity is down to a minimum with little BWIC supply and no major credit news to stimulate trading."

One piece of relevant news did however come from the similarly quiet primary market, with initial price talk issued yesterday on the latest THRONES deal. "Talk was very wide to the rest of the market, so that doesn't bode well for UK non-conforming," the trader says. "However, we've seen very little secondary activity there recently, albeit the tendency is towards widening."

Elsewhere, secondary tone is primarily stable to tightening, the trader reports. "We saw a few UK prime trades yesterday and spreads are tighter there, even the sterling tranches. High beta Portuguese and Spanish bonds are also on the up - they're in by only by a quarter point and a few cents respectively, but it is an inward direction."

There are currently two European BWICs scheduled for today, both are due at 15:00 London time. One is a 57.4m nine line mixed list comprising: BUMF 3 M1, CLEF Float 06/30/50, DECO 2007-E5X A2, DECO 2007-E5X A3, ECLIP 2007-2X A, FIPF 1 A2, SPIRIT 0 12/28/11, THEAT 2007-1 D and THEAT 2007-2 D. Three of the bonds have covered with a price on PriceABS in the last three months - ECLIP 2007-2X A at 98.17 on 10 July; and THEAT 2007-1 D and THEAT 2007-2 D both at 96.65 on 30 July.

The other auction also involves pub ABS consisting of: £5m ENTINN 5.659 06/30/27 and £4.4m ENTINN 6.542. Neither of the bonds has covered on PriceABS in the past three months.

Secondary markets

US CLOs head sideways

Recent low volumes and sideways price moves look set to continue in the US CLO secondary market.

"Last week was quiet and it's even quieter this," says one trader. "It's really turned into an unusually slow summer and it looks like we'll be trading sideways until mid-September because of when Labor Day falls and expectations over the Fed."

Secondary supply continues to be an issue the trader says. "There's certainly not much paper in for the bid and what there is on offer is mainly 2.0 lower down the stack and that comes at a time when higher commodity portfolios are coming under greater scrutiny once more and investors are bidding them wide."

As a result, the trader adds: "2.0 double- and single-Bs with bigger energy exposure are feeling softer, but top name mezz with low exposure is still seeing strong demand. Overall, across the stack spreads are pretty much unchanged this week."

There are currently four US CLO BWICs circulating for trade today. The largest of which is a seven line $37m 2.0 single-B auction. It comprises: CECLO 2014-21X E, HLA 2014-1X F, ICG 2014-1X E, JTWN 2014-5A F, MDPK 2014-13X F, OCT22 2014-1A F and SNDPT 2013-3A F. None of the bonds has traded on PriceABS before.

Secondary markets

Euro secondary limps on

Despite broader market volatility the European securitisation secondary market continues to limp along on very thin volumes.

"There's not a great deal happening with only a few BWICs and a couple of OWICs due all this week," says one trader. "We're fully into summer and the weaker macro picture isn't helping."

So far, the European ABS/MBS market has been insulated from events around China. "It's too early to tell if there will be any impact in our space," the trader says. "But the handful of trades we did yesterday in peripheral and UK non-conforming indicated that we're doing OK for now."

There are currently two BWICs on today's calendar. At 12:00 London time there is a three line €1.15m mixed asset auction involving ESAIL 2007-NL2X A, HEC 2006-2NX A and SLMA 2003-7X A5B. At 14:30 there is a 13 line 87.027m distressed CMBS list consisting of: DECO 2007-C4X E, DECO 6-UK2X C, DECO 6-UK2X D, ECLIP 2006-3 C, EMC 4 D, EMC 4 E, ESTAT UK-3 D, SANDW 2 E, TITN 2006-1X C, TITN 2006-1X E, TMAN 7 I, WINDM VII-X E and WTOW 2007-1 D.

None of the above bonds has traded on PriceABS in the past three months.

In addition, there is a 14 line Dutch prime OWIC due at 10:00. It comprises: ARENA 2012-1 A1, ARENA 2014-1NHG A2, DMPL IX A1, DMPL IX A2, DMPL X A2, LUNET 2013-1 A2, ORANL 2015-11 A, PHEHY 2011-1 A2, SAEC 10 A2, SAEC 12 A2, SAEC 14 A2, SAEC 15 A1, SAEC 15 A2 and SAEC 9 A2.

Secondary markets

US CMBS stutters

The US non-agency CMBS market has stuttered on the back of broader market volatility.

After a smooth and fairly active start to the week secondary CMBS activity and pricing levels have dipped since yesterday's open. Spreads edged wider throughout yesterday as a result of concerns over China and commodity prices. Further overnight broad market volatility has seen dealers re-rack their CMBS offers wider this morning.

Meanwhile, today's BWIC calendar is looking very thin so far with the bulk of it made up of small clips. The chunkiest list is currently a $35m three line legacy duper auction due at 11:30 New York time.

The BWIC comprises: JPMCC 2007-CB18 A4, LBUBS 2007-C2 A3 and MSC 2007-IQ14 A4. Only JPMCC 2007-CB18 A4 has covered on PriceABS in the past three months, last doing so at 120/e on 30 June.

Secondary markets

Euro secondary stays insulated

The European securitisation secondary market remains quiet despite broader market volatility.

"It's still pretty slow," says one trader. "We've remained insulated from the China news, but it's August so the market is illiquid."

The latest THRONES deal remains the chief talking point. "Price talk on the new deal is weak and while that should have a knock-on impact in secondary it's not yet been borne out in the non-conforming space," the trader says.

There are currently four European BWICs on the schedule for today. First, at 10:00 London time, is a mix of sterling RMBS small clips, at 13:00 is a four line GRANM odd-lot list and then there are two CLO auctions at 14:00.

One CLO list involves three blocks of 2.0 triple-As - €15m ALME 2X A, €25m ARBR 2014-1X A and €22m SPAUL 5X A. Two of the bonds have covered on PriceABS in the last three months: ALME 2X A at 99.75 and SPAUL 5X A at 99.85, both on 2 July.

The other is a seven line €36.84m combination of 1.0 single- and double-As, comprising: AVOCA V-X B, BACCH 2006-1 C, DRYD 2006-14EX B, DRYD 2006-14EX C, LIGHP 2006-1X C, LIGHP 2007-1X B and OHECP 2006-1X C1. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

US CLOs pick up

Activity in the US CLO secondary market has picked up slightly over the past 24 hours.

"Activity has ticked up a little," says one trader. "But it's still only at moderate levels for August."

The trader continues: "We saw a bit more trading overall yesterday, but we're still range-bound. It doesn't seem like there's a lot of focus on CLO secondary - people are instead trying to work out whether or not there's a direct impact from China and thinking about the new issue pipeline for September."

Nevertheless, there is a significant upswing in the BWIC calendar today, albeit from low recent levels. "There's around $100m in BWICs today and pretty much all of it is 2.0 mezz, so we'll see if the firm bid for that part of the curve is still there," the trader says. "My sense is that it is and provided there is enough focus I expect most lists to trade as they don't seem like pricing exercises."

There are currently six US CLO BWICs circulating for today. The most closely watched is likely to be the day's solitary pure single-B list given the large proportion of DNTs on single-B auctions over the past week.

Due at 13:30 New York time, the $37m seven line BWIC comprises: CECLO 2014-21X E, HLA 2014-1X F, ICG 2014-1X E, JTWN 2014-5A F, MDPK 2014-13X F, OCT22 2014-1A F and SNDPT 2013-3A F. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

US RMBS oscillates

The US non-agency RMBS secondary market has shifted around in line with broader market volatility this week.

"Events around the yuan have seen us oscillate between risk-off and risk-on this week," says one trader. "Currency moves tend to push the market off the rails, as was the case with the Swiss franc earlier this year."

Nevertheless, BWIC headline volume continues to be reasonable for August. "This summer Wednesday seems to be the new Thursday in terms of being the busiest day of the week," the trader reports. "There's $500-$600m in for the bid today compared to $1.2bn yesterday, which involved some decent hedge fund selling but there was a fair proportion of DNTs including one big list where only half the line items went thorough."

Overall, the trader says: "RMBS paper is a little bit wider - maybe 25bp week on week. However,  because of low volumes due to the time of year it's hard to figure out exactly where we are right now and where we are going."

A continuing move wider might encourage some investors off the sidelines, the trader suggests. "A lot of people are sitting this out and there's not a lot of customer buying interest at the moment because they have serious concerns with what's going on in the world, but if there are bargains to be had that might change."

Secondary markets

Euro secondary stays calm

The European securitisation secondary market continues to stay calm in terms of both activity and price volatility.

Summer illiquidity along with broader market volatility, albeit reduced, kept most market participants on the sidelines again yesterday. Activity continued in pockets with autos and a handful of CLOs being the main signs of life, though spreads overall remained unmoved.

Nevertheless, with wider credit markets stabilising European secondary tone is likely to remain positive through today and into next week even though flows are expected to grow ever thinner. Meanwhile, there are two European BWICs on today's schedule so far.

At 10:00 London time there is a €11.8m three line CLO list, comprising: AVOCA VI-X E, EUROC VI-X D and WODST IV-X D. None of the bonds has traded on PriceABS ion the last three months.

At 15:00 there are $5m slices of both GRANM 2007-1 2A1 and KDRE 2007-1A A2. The bonds last covered on PriceABS on 3 June at 99.47 and 99.72 respectively.

Structured Finance

SCI Start the Week - 10 August

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

Pipeline
Pipeline activity picked up again last week, with significant ABS additions. There were also four new RMBS, three CMBS and three CLOs added.

The ABS were: US$1.064bn Capital Auto Receivables Asset Trust 2015-3; US$750m CNH Equipment Trust 2015-C; US$247m Credit Acceptance Auto Loan Trust 2015-2; US$260m DRB Prime Student Loan Trust 2015-B; Ford Credit Floorplan Master Owner Trust A Series 2015-4 and Ford Credit Floorplan Master Owner Trust A Series 2015-5; US$125.9m HASI SYB Trust 2015-1; US$600m NRZ Advance Receivables Trust 2015-ON1 Series 2015-T1, US$400m NRZ Advance Receivables Trust 2015-ON1 Series 2015-T2 and US$500m NRZ Advance Receivables Trust 2015-ON1 Series 2015-VF1; and CNY1.5bn VINZ 2015-1 Retail Auto Loan Securitization Trust.

US$300m Agate Bay Mortgage Trust 2015-5, A$500m RESIMAC Triomphe Trust Premier Series 2015-1, Shellpoint Co-Originator Trust 2015-1 and £302m Thrones 2015-1 accounted for the RMBS, while the CMBS were US$1.1bn COMM 2015-CCRE25, €485m Crescendo 2015 and US$1bn JPMBB 2015-C31. The CLOs were US$500m Anchorage Capital CLO 7, US$370.2m CENT CLO 24 and US$600m Madison Park Funding XVIII.

Pricings
There were six ABS prints last week, as well as four CMBS and four CLOs.

The ABS were: US$1.2bn AmeriCredit Automobile Receivables Trust 2015-3; US$450m-equivalent CARDS II Series 2015-2; US$1bn CarMax Auto Owner Trust 2015-3; US$255m MVW Owner Trust 2015-1; US$700m Navient Private Education Loan Trust 2015-B; and US$123.5m SolarCity LMC Series IV Series 2015-1.

US$1.035bn 1211 Avenue of the Americas Trust 2015-1211, US$1.1bn CGCMT 2015-P1, US$1.4bn CSAIL 2015-C3 and US$270m Resource Capital Corp 2015-CRE4 accounted for the CMBS. Meanwhile, the CLOs consisted of US$510m ACAS CLO 2015-2, US$412.7m Loomis Sayles CLO II, US$415.5m Mountain View X and US$512m Oaktree 2015-1.

Markets
US ABS prime auto and student loan spreads widened last week, while credit card and equipment spreads were unchanged. "The widening in prime autos was due partly to this week's wider pricing of CARMX 2015-3, which priced close to levels seen in some recent subprime auto ABS issuances. Although student loan ABS spreads have mostly stabilised, the prospect of significant FFELP downgrades continues to weigh on the sector," say Barclays ABS analysts.

The US RMBS market witnessed spread tiering for CAS and STACR deals, as on-the-run spreads on non-rated or double-B rated tranches widened 3bp-8bp for low-LTV paper, but tightened 5bp-15bp for off-the-run paper. "Excluding dealer-to-dealer transactions, weekly volumes were more than US$273m, with at least US$110m on CAS and US$162m on STACR, according to TRACE. BWIC volumes in the legacy non-agency space increased slightly to US$1.38bn this week dominated by the GSE list," say Bank of America Merrill Lynch analysts.

US CMBS LCF triple-A spreads widened to swaps plus 107bp last week, which is their widest level since October 2013. "Post-CREFC conference sentiment began the widening trend in June, with the benchmark spread increasing 12bp by the start of July," say Citi analysts, with high summer supply exacerbating the trend.

Editor's picks
Small strides: SMEs continue to be billed as the backbone of the European economy, as a number of initiatives seek to remedy the lack of traditional bank support for the sector. Securitisation is expected to play a key role in this process, but a number of obstacles must be overcome if it is to make a significant contribution...
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...
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...
Alpha alternative: Indus Valley Partners co-founder Bijesh Amin answers SCI's questions...

Deal news
• 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. Freddie Mac guarantees the senior securities issued by the FRESB 2015-SB1 Mortgage Trust and acts as mortgage loan seller and master servicer.
• 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.
• 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.
• 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). One property, the Destiny USA mall, is the sole asset securing the US$430m JPMCC 2014-DSTY transaction.
• 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."

Regulatory update
• The US CFTC has ordered Morgan Stanley to pay a US$300,000 penalty for failing to hold sufficient US dollars in segregated US accounts to meet all of its obligations to cleared swaps customers. The regulator has also ordered the bank to implement adequate procedures to prevent future regulatory violations.
• 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.
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
ALM V (refinancing); Ares XXXIV CLO; BAMLL 2015-HAUL; Bavarian Sky Compartment German Auto Loans 3; Bellemeade Re series 2015-1; CFCRE 2015-RUM; CGCMT 2015-SHP2; Citi Held For Asset Issuance 2015-PM1; Co-operative Bank RMBS Trust Series 2015-1; DECO 2015-Charlemagne; Driver China Two Trust; Flagship Credit Auto Trust 2015-2; Ford Credit Auto Owner Trust 2015-REV2; Freddie Mac Whole Loan Securities Trust 2015-SC01; FREMF 2015-K47; GLS Auto Receivables Trust 2015-1; Golub Capital Partners CLO 25(M); JG Wentworth XXXV series 2015-2; MSBAM 2015-C24; Navistar Financial Dealer Note Master Owner Trust II series 2015-1; NYCTL 2015-A Trust; Panda Re series 2015-1; PFP 2015-2; SoFi Professional Loan Program 2015-C; WP Glimcher Mall Trust 2015-WPG

Deals added to the SCI CMBS Loan Events database last week:
BACM 2007-1; CD 2007-CD5; COMM 2013-LC6; COMM 2014-CR14 & COMM 2014-LC15; CSMC 2007-C5; DBUBS 2011-LC1; DECO 2007-E6; FREMF 2011-K14; GSMS 2012-GCJ7; GSMS 2012-GCJ9; GSMS 2014-GC24; JPMBB 2014-C19; JPMCC 2005-LDP4; JPMCC 2006-LDP9; JPMCC 2011-C4; JPMCC 2013-C12 & JPMCC 2013-C13; JPMCC 2014-DSTY; JPMCC 2015-COSMO; LBUBS 2006-C1 & LBUBS 2006-C7; LBUBS 2006-C6; LBUBS 2007-C7; MLCFC 2007-8; MSC 2011-C3; TAURS 2006-1; UBSBB 2012-C4; VEST 2; WBCMT 2007-C33; WFRBS 2011-C4; WFRBS 2012-C9

Structured Finance

Greater supply, risks widen spreads

New issue spreads for RMBS and CMBS deals are widening on either side of the Atlantic as supply remains higher than demand. It appears to be a trend that will last beyond the usual summer slump.

"There is a very large pipeline of expected deals, but a shortage of investors lining up for them," says one European ABS trader. "The excuse was originally Greece and now it is China, so investors are looking for whatever they can blame to avoid committing themselves."

The trader believes that weakness began creeping into the market in May, although there are a few related reasons rather than a single overriding one. While summer is typically tough for traders, that has been exacerbated by an oversupply of new deals and concerns about underwriting.

The spread weakness is underlined by Mars Capital's £302m Thrones 2015-1 RMBS currently in the pipeline. When Mars issued a Thrones deal last year the top-rated notes priced at 105bp over Libor (see SCI's new issuance database), but the equivalent notes this time around are being offered some 75bp wider at plus 180bp.

"This shows how far spreads have been widening, but it does not tell the whole story. For that particular transaction, the collateral is also - as I understand it - pretty bad, so investors are wary for that reason," says the trader. "Issuers are eager to get their deals away, but investor appetite is just not there."

It is a similar story in CMBS, where last month's DECO 2015-Charlemagne priced wider than the DECO 2015-HARP deal that came out just a few months earlier. Spreads in the US are also at their widest levels in almost two years, with Morgan Stanley analysts noting US conduit CMBS spreads on new issue single-A paper reached 275bp last month, having been just 190bp in April.

Investors are concerned that both US and European CMBS deals are being structured more loosely. With supply remaining so high, investors are able to be more selective.

"The dealers do not want to hold large inventories and that is hurting liquidity. The hedge funds, meanwhile, were badly burnt last year and have been very quiet," says the trader.

He continues: "Last year spreads tightened a lot on expectations of ECB buying, but the central bank's market involvement has underwhelmed investors. Hedge funds had loaded up quite heavily and, while they may not have lost money, they did not make the profits they expected to and were left stranded."

The trader adds: "But the pipeline keeps building. If underwriting continues to weaken and supply does not slow down, spreads will just keep drifting wider throughout the year."

JL

CLOs

Equity exits spark concerns

Investors have been left in doubt over the potential impact of two BDCs shifting their focus away from US CLO equity, accordings to Wells Fargo structured product analysts. In one case, a Benefit Street Partners (BSP) affiliate is set to acquire TICC Management (SCI 5 August), while the other concerns THL Credit (TCRD).

Specifically, a BSP proxy filing stated that TICC's portfolio will transition from syndicated loans and CLO investment vehicles to primarily focus on senior secured loans. To a lesser extent, it will also shift its focus towards mezzanine or subordinated debt.

Meanwhile, TCRD announced in its earnings call that it will be exiting its CLO equity positions over time to redeploy capital to senior secured loans. TCRD stated that it has already sold two CLO equity positions after quarter-end.

In its 2Q15 earnings presentation, TICC reported CLO equity holdings of US$283m. In comparison, TCRD's remaining three CLO equity positions have a total worth of US$19m and account for 2.5% of its portfolio.

Management, in both instances, discussed how BDCs that own CLO equity have lower valuations than other comparable BDCs. In fact, TICC pointed out that more pure-play CLO equity funds tend to trade at a premium, while BDCs with large CLO equity holdings tend to trade at a discount.

The Wells Fargo analysts believe these exits are based more on how BDC investors view CLO equity rather than CLO equity performance. They also state that the management teams of TICC and TCRD have "a great deal" of CLO expertise - both as investors and managers - and understand the dynamics of the CLO equity market, which should limit the chance of a hasty exit that could push secondary equity prices lower.

JA

CLOs

OC degradation analysed

The average par NAVs and overcollateralisation (OC) cushions in US balance sheet CLOs fell in almost half of the quarterly issuance seen in 2Q15, according to Wells Fargo structured product analysts. In most quarterly issuance samples they studied, over 40% of deals experienced OC degradation between 1Q15 and 2Q15.

The Wells Fargo analysts believe that the decrease in OC is due to increased credit concerns in the loan market dating from 4Q14 to 1H15. Specifically, CLO collateral par balances decreased due to exposure to defaults and managers selling credits at low prices.

CLOs from 4Q14 have the highest equity par NAV of any 2013-2014 issuance cohort, potentially reflecting the low loan prices of late-2014 during ramp-up. However, the data could also be skewed by the fact that only 44% of CLOs from the quarter had single-B tranches, compared to the 60%-plus of CLOs that featured a single-B tranche between the first and third quarters of 2014.

In addition, US CLOs have built on average approximately 6bp-8bp of OC cushion per quarter. The 2012 vintage has been the best performing post-crisis US CLO vintage from a quarterly par building perspective. The analysts suggest that this is likely due to the 2012 vintage experiencing more periods of loan volatility and may reflect an issuance selection bias.

Middle-market and European CLOs have shown steady par building in comparison. Managers of these CLOs often have fewer trading opportunities and are less likely to sell at lower prices, since the assets are less likely to have suffered large price swings.

The analysts note that par-based metrics should be used only as a directional marker of the state of the loan market, however. Looking only at par-based metrics at one point in time could punish managers that acted proactively to exit pressured credits. For example, they point to a manager that sold loans in the low-70s in 1Q15 - thus realising a loss - while other managers are still holding those assets, which are now trading in the 50s.

Consequently, the analysts put forward a number of recommendations, including examining market value coverage and the lower priced assets that make up the tail risk of a CLO. They also suggest that investors ask managers how they view timing the exit of a pressured credit.

JA

CLOs

Oil exposure affects CLOs

The percentage of US CLO 2.0 loans trading below 90 has increased above 6% for the first time since the start of the year, with a clear inverse relationship to oil prices. Meanwhile, having steadily climbed for years, the percentage of US loans with Libor floors has also finally fallen.

A continued fall in oil prices - and rise in the percentage of loans trading below 90 - could have significant default and tail risk implications. Across the Atlantic, however, the percentage of European CLO 2.0 loans trading below 90 has remained stable at around 2%, report Morgan Stanley analysts, despite the turmoil caused by Greece. There is not such a strong relationship between European CLO loans and oil prices, due to much more limited exposure.

2015-vintage US CLO 2.0 deals have significantly less exposure to loans trading below 90 than loans from the 2013 or 2014 vintages. However, the analysts note that the dispersion across deals within vintages is "surprisingly consistent", which suggests that idiosyncratic risks may be pervasive.

Of the 34 loan issuers with price drops larger than five points from 3 July to 3 August, 11 were oil and gas issuers and six were metals and mining issuers. There are 685 CLOs with exposure to these 34 issuers, with a median exposure of 2.34% across 259 CLO 1.0 deals and 2.21% across 426 CLO 2.0 deals.

The percentage of outstanding US loans with Libor floors has also decreased slightly month-over-month for the first time since April 2010. Currently, 91.82% of US leveraged loans have Libor floors, the average level of which was 100.6bp at the end of July.

Morgan Stanley expects the Fed's first rate hike in mid-December. The five-year US swap rate has declined from 1.77% at the end of June to 1.67% at the end of July.

"While Libor floors valuation has moved slightly towards being more in-the-money over the course of July, we maintain our view that with the prospect of a rate hike drawing near, cash distributions to CLO equity tranches might start to be deteriorated," the analysts comment.

JL

CMBS

Liquidations allow GG5 repayments

All outstanding cumulative interest shortfalls for GCCFC 2005-GG5's AJ to E tranches have been repaid in full, following the liquidation of six loans totalling US$108m. However, the H tranche and vast majority of the G tranche have been written off.

The six loans were listed for auction earlier in the year and sale prices exceeded latest appraisals for all six. Furthermore, Barclays CMBS analysts expect the US$45m Meadowbrook North office building backing the deal to be liquidated in next month's remittance (see SCI's CMBS loan events database).

The loans were liquidated at a 58% severity. They had generally spent a long time in foreclosure and had large amounts of advances and ASER outstanding.

"The highest severities were in River Park Plaza and Fisher and Kahn Building, at 78% and 79% respectively. The largest loan liquidated, the Senator Office Building, saw its severity come in somewhat lower at 39%," note the Barclaya analysts.

"In total, US$80m in proceeds were received and US$45m was available to the trust and bondholders after repaying approximately US$34.5m of expenses, including advances and ASER. As a result, loss to the trust amounted to US$62.6m," they add.

While interest shortfalls on the AJ to E tranches were repaid in full, US$2.8m was repaid on the F tranche, leaving a further US$2.7m outstanding. After repaying outstanding advances and ASERs, US$45m of net liquidation proceeds was available for principal distribution, which contributed to paying off the A5 tranche in full and left the AM tranche with an ending outstanding balance of US$255m.

JL

Structured Finance

Guggenheim settles fiduciary breach

Guggenheim has agreed to pay a settlement fee of US$20m to the US SEC following charges that it breached its fiduciary duty. The settlement is believed to be the culmination of a four-year probe into the firm's relationship with Michael Milken.  

According to the SEC's charges, Guggenheim failed to disclose a US$50m loan that one of its senior executives received from an advisory client. The executive supposedly obtained the loan in July 2010 so he could fund his personal investment in a corporate acquisition led by parent company Guggenheim Partners. In August that same year, Guggenheim invested in two transactions in which the client that made the loan also had invested, but on different terms.

The SEC claims that the Guggenheim executive and the client that made the loan discussed the two transactions, and that the Guggenheim executive also played a role in structuring them. Multiple senior officials at Guggenheim supposedly knew of the loan, but failed to inform the firm's compliance staff, thus ignoring the potential conflict of interest.

The SEC adds that Guggenheim inadvertently categorised certain investments of an institutional advisory client as managed assets when they were not and charged the client approximately US$6.5m in asset management fees that it did not earn. After Guggenheim identified the error, the firm allegedly failed to issue a credit to the client until November 2014 - nearly two years later.

The regulator notes that Guggenheim also failed to enforce its code of ethics, including with respect to Guggenheim employees taking dozens of unreported trips on clients' private airplanes. As a result, the SEC believes that Guggenheim's compliance programme was not reasonably designed to prevent violations of the federal securities laws. 

Structured Finance

Credit manager brought back

Terrence Matthews has rejoined Millenium Capital Partners as credit portfolio manager. He arrives after serving in the same role at Arrowgrass Capital Partners, as well as for Millennium during his first stint at the firm. Mathews has also been md at UBS and Toronto Dominion Bank, and has previous experience in structured products and credit derivatives.

Structured Finance

Trade finance unit launched

Vecron Lordstock Group has launched a new independent trade finance business. Vecron Exim is designed to provide companies with fast access to working capital for export, import and domestic trade by providing direct loans, including those aimed at structured trade finance.

The firm will also will focus on providing loans related to pre-export/working capital finance, purchase order finance and factoring/accounts receivable finance. Jonathan Tseelon will serve as the global president and ceo of Vecron Exim.

Structured Finance

Structured credit pro tapped

Lloyds has bolstered its financial institutions business with the appointment of Thomas Sandberg as associate director. He will join the bank's relationship solutions team, which is responsible for delivering bespoke solutions to financial institutions, as well as providing strategic advice around navigating regulatory and economic change.

Sandberg joins from Bank of America Merrill Lynch, where he was vp of the Nordic market solutions group. In this role, he provided strategic advice to bank treasury teams on a range of issues including capital raising, liquidity management, hedging and legacy investments.

Prior to this, Sandberg was a director in RBS' structured credit products team, where he originated and executed a range of CLO and ABS CDO transactions. He has also held senior structured credit products roles with Citigroup, Morgan Stanley and JPMorgan.

Structured Finance

Real estate lender acquired

Jones Lang LaSalle is set to acquire Oak Grove Capital. The purchase includes Oak Grove's full service platform, encompassing debt financing for multifamily and seniors housing real estate, as well as its CMBS, life and specialty finance companies.

The acquisition will enable JLL to expand its housing and healthcare financing expertise, as well as complement its multifamily sales and equity services. The firm says the purchase will lead to a profitable annuity revenue through a combined US$14bn loan servicing portfolio. The combined companies also generate a total of US$4bn in originations.

All 120 Oak Grove employees will join JLL at completion of the acquisition. JLL says the Oak Grove leadership team will take an active role in shaping and leading its multifamily business in partnership with their new colleagues.

JLL expects the acquisition to close by year-end, subject to standard closing conditions and approvals.

CDS

Nomura cuts back fixed income

Nomura is slashing around 60 positions within its fixed income and credit derivatives departments as it reassesses the structure of its global markets operations. Among those believed to have been released are CDS trader Shaz Amir, high yield traders Chris Derry and Karan Anand, and analysts Duncan Lake and Bilal Khan.

The cuts were made as part of a review to reduce complexity of the management structure, as well as adapt to toughening regulatory pressures and challenging market conditions. By cutting back its activity in a number of asset classes, the firm is looking to create a leaner structure for future operations and provide more sustainable profit.

Nomura plans to retain a presence in the credit trading market and will continue to seek out new opportunities. It does not have plans to exit any businesses related to its broader credit operations.

CMBS

Finance group partner appointed

Alston & Bird has bolstered its financial expertise again with the addition of Gregg Loubier as partner in the firm's finance group, based in Los Angeles. He joins from Allen Matkins Leck Gamble Mallory & Natsis, where he was partner and chair of the real estate finance practice group.

Loubier's expertise encompasses commercial lending, portfolio and CMBS finance, construction lending, loan participation, loan servicing, workouts and the exercise of mortgage lender remedies. He also focuses on the acquisition, financing, leasing, management and disposition of real estate assets.

Loubier is the latest addition by Alston & Bird, following its recruitment of Bert Greenwell to its real estate finance and investment group in New York (SCI 11 August).

CMBS

CRE counsel recruited

Bert Greenwell has joined Alston & Bird as counsel in its real estate finance and investment group. His practice focuses on the representation of institutional lenders for both securitisations and portfolios in all aspects of CRE transactions.

Greenwell has also represented investors in the acquisition, development, operation and disposition of commercial real estate. He moves from Kelley Drye & Warren, where he was an associate.

CMBS

CRE financing firm launched

A new mortgage financing firm has been established with the brief of placing debt and equity for a variety of real estate. Wool Finance Partners will also look to structure forward-funding loans, participating mortgages and mezzanine financing, and will accommodate lenders that include those involved in CMBS.

Gary Wool, Martin Siegal and Matt Lebenson have established the firm as partners. Wool was owner of Janko & Wool Real Estate Finance prior to the establishment of Wool Finance. Previous to this, he was svp at Baird & Warner.

Lebenson was most recently partner for L&N Real Estate Consultants, a commercial mortgage and advisory platform that he launched. Siegel is also president of Siegel & Associates, where he prepares CRE appraisals and consulting reports.

Insurance-linked securities

ILS team formed

Lombard Odier Investment Managers (LOIM) has recruited an ILS team that includes Gregor Gawron, Simon Vuille and Marc Brogli. Based in Zurich, the team will report to LOIM cio Jan Straatman.

The team will pursue a wide-ranging approach, targeting different risk types and regions. Straatman says that the team will target cat bonds due to their higher starting yield and floating rate coupon in a time when fixed income could be subject to volatility from rising interest rates.

Gawron - who will head LOIM's new team - previously led the cat bonds and ILS offering at Dynapartners, after serving in the same role at Falcon Private Bank. Prior to this, he was a portfolio manager in the ILS team at RMF/Man Investments.

Insurance-linked securities

Sirius sold off

White Mountains Insurance Group has agreed to sell Sirius International Insurance to CM International, the investment arm of China Minsheng Investment. The amount of the purchase price will equal 127.3% of Sirius's closing date tangible common shareholder's equity, plus US$10m.

Based on Sirius's tangible common shareholder's equity of nearly US$1.75bn at 31 December 2014, the price equates to over US$2.2bn. White Mountains has the option to replenish Sirius's tangible common shareholder's equity to this level, should it fall below that level at closing. The seller expects that the transaction will increase its adjusted book value by approximately US$65 per share, subject to Sirius's interim results through closing.

White Mountains chairman and ceo Raymond Barrette adds: "Net of the OneBeacon and Symetra positions to be repurchased by White Mountains from Sirius in connection with the transaction, our undeployed capital is expected to increase by US$1.4bn to about US$2bn. The board will carefully review the additional capital management options available to the company when proceeds have been received."

JPMorgan acted as lead financial advisor to White Mountains with Willis Capital Markets & Advisory also acting as financial advisor. Cravath, Swaine & Moore served as legal advisor to White Mountains.

The transaction is expected to close within six months, subject to regulatory approval and other customary closing conditions.

Insurance-linked securities

ILS unit revamped

Munich Re has established a new unit within its special and financial risks division. Launched in July, Munich Re Capital Partners has taken over the firm's risk trading, ILS and catastrophe bond activities. It is led by August Probst, who previously headed Munich Re's corporate insurance partner unit.

Munich Re says the move is an attempt to cater for an ever-increasing demand for capital optimisation and other complex solutions for clients. The intent is provide its entire product range from a single source.

Risk Management

Software firm buys rival

Fidelity National Information Services (FIS) has agreed to acquire 100% of OTC services provider SunGard. FIS will purchase the firm through a combination of cash and stock at a value of US$9.1bn, including the assumption of SunGard debt, which FIS expects to refinance.

The combined company will have over US$9.2bn in annual revenues. In addition, it will have more than 55,000 employees and support thousands of clients in over 100 countries worldwide.

The transaction is subject to regulatory approvals and other customary closing conditions. FIS expects the transaction to close during 4Q15.

Bank of America Merrill Lynch and Centerview Partners acted as financial advisors to FIS in the transaction. Willkie Farr & Gallagher served as FIS' legal advisors. Goldman Sachs, JPMorgan, Barclays, Deutsche Bank and Credit Suisse acted as financial advisors to SunGard. Simpson Thacher & Bartlett and Shearman & Sterling served as SunGard's legal advisors.

Risk Management

Swaps supervision penalty issued

The US CFTC has ordered Morgan Stanley to pay a US$300,000 penalty for failing to hold sufficient US dollars in segregated US accounts to meet all of its obligations to cleared swaps customers. The regulator has also ordered the bank to implement adequate procedures to prevent future regulatory violations.

The CFTC claims that on numerous days from 12 March 2013 to 7 March 2014 Morgan Stanley failed to hold sufficient US dollars in segregated accounts in the US to meet all US dollar obligations to the its cleared swaps customers. On those days, Morgan Stanley held the amount of the US dollar deficits in euros and other currencies, rather than in US dollars.

Because the firm held the amount of the US dollar deficits in other currencies, it did not have a shortfall in overall cleared swaps customer collateral. The size of the deficits ranged from approximately US$5m to US$265m, at times representing more than 10% of the amount that the bank was obliged to maintain in US dollars for cleared swaps customers.

In addition, the CFTC found that in the period between 8 November 2012 to about 8 April 2014, Morgan Stanley did not have in place adequate procedures to comply with the currency denomination requirements for cleared swaps customer collateral, and did not train and supervise its personnel to ensure compliance with relevant CFTC regulation. As a result, the firm is accused of failing to supervise diligently its officers, employees and agents, while not having sufficient procedures in place to detect and deter the violations found herein.

The CFTC's order recognises that Morgan Stanley promptly reported the deficiencies, implemented corrective procedures and cooperated with the CFTC's Division of Enforcement in its investigation.

ABS

Timeshare delinquencies at record low

US timeshare ABS delinquencies fell again this past quarter to their lowest level in eight years, reports Fitch. Total delinquencies for 2Q15 were 2.66%, down from 2.79% in 1Q15 and 2.92% observed in 2Q14.

The trend continues a consistent year-over-year improvement since 2012, as defaults also decreased to 0.57% in 2Q15. This figure is down from 0.67% in 1Q15 and 0.66% a year ago in 2Q14.

On a rolling 12-month basis, defaults were 6.42% for 2Q15, down from 6.51% in 1Q15. This represents three years of consecutive quarterly improvement, as well as the lowest level of defaults for timeshare ABS in six years.

Fitch says its rating outlook for timeshare ABS remains stable, due in part to the de-levering structures found in timeshare transactions and ample credit enhancement levels.

ABS

FFELP trust trio called

Navient has exercised call options on three FFELP student loan ABS trusts that represent a total of US$216m in bonds. The three trusts - SLM Student Loan Trusts 2002-6, 2003-8 and 2003-9 - will now be repaid on 15 September.

"The exercise of our option represents our continued support of an active and liquid student loan ABS market," says Jack Remondi, president and ceo of Navient.

Earlier this year, the company repurchased US$212m in bonds from five trusts, bringing the year-to-date total to US$428m across eight trusts. Navient's actions are part of a response to alleviate investor concerns in light of the increased risk of default associated with slowing repayments on US FFELP student loans (SCI passim).

Structured Finance

Alternative finance growth predicted

European institutional investors predict that the alternative finance market will grow by 23% over the next two years, according to a new study by Amicus Finance. This could be driven by the demand for expansion finance by SMEs, which is already generating momentum with a number of recent financing initiatives (SCI passim).

In total, just under three-quarters (73%) of institutional investors surveyed in the study believe institutional appetite for alternative finance will grow, due to ongoing attractive risk-adjusted returns in the sector. Meanwhile, 74% believe that growth of alternative non-bank finance could increase the resilience of the financial system by lessening the burden on banks. As of now, 64% say that UK and European SMEs are too reliant on traditional bank finance.

"As the economy continues to recover, institutional investors see a strong opportunity for the capital markets to play a bigger role in financing SMEs, which continue to face capital constraints due to bank deleveraging," says Amicus ceo John Jenkins. "Institutions increasingly recognise they can generate attractive returns through investing in alternative finance without taking on large risks."

As an example, Jenkins notes that Amicus is seeing a high level of interest from investors looking for exposure to its short-term bridging loans secured against UK residential and commercial property.

Structured Finance

Counterparty risk approach finalised

Scope has published its final rating approach for counterparty risk in structured finance transactions. The methodology analyses whether additional credit risk is introduced into a structured finance transaction by financial or operational counterparty exposures, and considers post-crisis realities that result in the limited likelihood of banks defaulting within a short timeframe.

Scope notes that counterparties, being both financial institutions with a triple-B/S-2 credit quality or higher and possessing appropriate risk substitution triggers, can support triple-A and double-A rating categories on a structured finance transaction. The trigger levels identified by Scope build on post-crisis realities that include the new regulatory and supervisory framework for banks such as bail-in and stronger prudential metrics, resulting in the lower likelihood of banks defaulting within a short timeframe.

The implementation of the methodology will not have any rating impact on Scope's outstanding structured finance ratings. The methodology is also unchanged following the conclusion of Scope's request for comment on its approach (SCI 15 June).

CLOs

CLO credit quality remains strong

Moody's has released its debut 360-degree report of the European CLO market and its 2Q15 performance, analysing macroeconomic and financial market conditions, high yield corporate sector trends and credit conditions that correlate with credit quality. The report adopts the same approach that the agency recently used in its report on the US CLO market's performance in 1Q15 (SCI June 3).

The report shows that the European CLO and corporate credit markets have been strong, with most credit metrics outperforming long-term trends. In 2Q15, credit market spreads and economic stresses both remained low, despite the uncertain outcome of Greece's negotiations with its lenders, which increased equity market volatility. The speculative grade credit market remained strong too, owing to a low prevailing default rate and strong liquidity.

"CLO collateral credit quality, as measured by the WARF, improved among CLO 1.0s in 2Q15 after hitting an all-time worst 1Q15," says Moody's senior analyst Hevia Portocarrero. "Meanwhile, CLO 2.0 WARF decreased slightly in Q2 and remained well below that of CLO 1.0s."

The agency's data show that CLO 2.0 exposure to Caa-rated assets and collateral defaults were very low. CLO 1.0 exposure to collateral defaults increased, driven by the default of a widely held name and while Caa exposure remained above the long-term average, this was mainly because of the deleveraging within the transactions where higher rated names prepaid.

CLOs

Euro CLO 2.0 bond re-priced

The class A noteholder of Carlyle Global Market Strategies Euro CLO 2013-1 has approved the reduction of the margin on the notes from 130bp to 115bp and the elimination of its right to remove/replace the collateral manager (SCI 31 July), with effect from the 17 August IPD. The move marks the first time that a European CLO has been 'Volckerised' and the first time that the coupon of a European CLO 2.0 bond has been lowered.

European CLO 2.0 deals generally include an option for equity investors to refinance individual tranches after the end of the non-call period and in some cases also have the option to simply re-price the coupons for individual tranches, providing the noteholders agree or replacement investors can be found at the new re-priced levels. These options are available for CGMSE 2013-1 and the non-call period is scheduled to expire on 15 August, according to Bank of America Merrill Lynch European securitisation analysts. However, in this case, the changes appear to have been executed via an amendment rather than a refinancing or re-pricing, approved through an extraordinary resolution.

Several early European CLO 2.0s have now exited or are about to exit their non-call periods, opening up the possibility of equity investors choosing to redeem, refinance or re-price debt tranches. This could potentially lead to coupons being lowered for bonds in other transactions, particularly if debt spreads tighten from current levels.

CLOs

US CLO credit weakening

US CLO credit quality weakened slightly between the first and second quarters of 2015, according to Moody's latest 360-degree report on the sector. The most notable change was a rise in the number of companies rated B3 or lower with negative outlooks, which could suggest an increase in default rates.

Although somewhat improved from last year, high-yield corporate credit standards remain weak too. This is evident in the high level of borrower leverage, as well as the high percentages of both covenant-lite loans and lower-rated, speculative-grade issuers. Recovery rate expectations for leveraged loans also continued to decline in 2Q15, particularly for CLO 2.0s.

Meanwhile, equity, bond and loan market volatility increased in the past quarter. Nevertheless, volatility is still below long-term averages, while the financial stress index remains subdued. However, Moody's warns that its three-year refunding index indicates that long-term refinancing risk for US speculative-grade companies will continue to increase.

CMBS

CMBS pay-offs jump up

Trepp says that the percentage of US CMBS loans paying off on their balloon date jumped impressively last month. The July reading is 74.5%, more than 14 points above the June rate, and well above the 12-month moving average of 65.9%.

By loan count as opposed to balance, 72.9% of loans paid off in July. On this basis, the pay-off rate was a shade lower than June's level of 73.4%. The 12-month rolling average by loan count is now 69.1%.

CMBS

Hotel prices lift up

Hotel prices have risen 37% over the past 12 months, outpacing the central business district (CBD) office segment by more than 10 percentage points over the same timeframe, according to Moody's/RCA Commercial Property Price Indices (CPPI) national all-property composite index. The CPPI rose 1% in June, led by a 1.3% rise in the core commercial segment.

Moody's says that hotel prices now stand at 4.8% above their 2007 peak. In comparison, the CBD office in major markets was the best-performing component over the past three months, with prices increasing by 11%.

The apartment segment of the index increased by 0.2% from May to June, while the core commercial segment increased by 1.3% over the same timeframe. Major market prices exceeded their November 2007 pre-crisis peak by approximately 28.9%, while non-major market prices are about 1% below their pre-crisis peak.

CMBS

Delinquencies 'nearly unchanged'

US CMBS delinquencies were nearly unchanged in July amid low resolution and new delinquency volume, according to Fitch's latest index results for the sector. Loan delinquencies moved just 1bp lower in July to 4.53% from 4.54% a month earlier, while the dollar balance of late-pays fell by US$70m to US$17.1bn from US$17.17bn in June.

July resolution and delinquency activity was low, with resolutions of just US$485m edging out new delinquencies of US$455m. This compares with US$780m of resolutions and US$876m of new delinquencies in June. Further, Fitch-rated new issuance volume of US$5.1bn in June over five transactions was outpaced by US$5.7bn in portfolio run-off, causing a decrease in the index denominator.

The largest new delinquency in July was the US$54.6m 2 Rockledge Centre loan, which failed to pay off at its 1 July maturity date. The loan transferred to special servicing at the end of May for imminent maturity default.

Meanwhile, the largest resolution reported last month was the US$67.5m Green Oak Village Place loan, which was modified in June (see SCI's CMBS loan events database). In second place was the US$61.5m Penn Center East loan, which was also modified and extended in June. The extension was its second, with a new maturity date of 6 April 2018 following a previous extension of its maturity date to 6 April 2015.

Current and previous delinquency rates by property type are: retail at 5.41% from 5.44% in June; hotel at 5.34% from 5.2%; multifamily at 4.9% from 5%; industrial at 4.87% from 4.65%; office at 4.73% from 4.69%; mixed use at 3.61% from 3.68%; and other at 1.12% from 1.15%.

By transaction type, delinquency rates are: large loan floaters at 21.16%, with 10 loans worth US$536m; conduit at 5.55%, with 974 loans worth US$16.5bn; small balance at 2.53%, with 18 loans worth US$22m; seasoned at 1.53%, with four loans worth US$7m; miscellaneous/other at 0.03%, with one loan worth US$294,988; and Freddie Mac at 0.02%, with one loan worth US$9m.

CMBS

Ty Warner EOD waived

A settlement agreement has been reached with Ty Warner, sponsor of the US$96.4m Ty Warner Portfolio loan securitised in MSC 2012-C4, whereby the lender will waive the EOD and allow a partial defeasance of the Las Ventanas property to proceed. The loan defaulted in May after Warner failed to disclose at loan origination his potential tax liability associated with a guilty plea to tax evasion (SCI 6 May).

The loan is collateralised by three luxury resort hotels: the Four Seasons Biltmore in Santa Barbara, California (representing 52% of the allocated loan balance); Las Ventanas al Paraiso in San Jose del Cabo, Mexico (34.8%); and San Ysidro Ranch in Santa Barbara, California (13.2%). Under the agreement, the Las Ventanas property will be released for US$41.67m (120% of the ALA) and replaced with US government securities. The defeasance is expected to close prior to 30 September, with the balance of the note recourse to the sponsor if there is an additional EOD, according to Kroll Bond Rating Agency.

The property was damaged by Hurricane Odile in September 2014, but is now operational, having re-opened on 1 June.

Due to his felony conviction, Warner is no longer an acceptable liquor license holder for the State of California. Consequently, a third-party concessionaire will hold the liquor licenses and operate the food and beverage operations of the two remaining California collateral properties until he is once again an acceptable liquor license holder, expected no sooner than the end of his probation period in January 2016. For the Four Seasons Biltmore property, the concessionaire will hire Four Seasons as the sub-concessionaire to operate the food and beverage operations and Ty Warner Hotels will be the sub-concessionaire for the San Ysidro property.

KBRA notes that the loan will return to the master servicer after the defeasance is closed. The borrower has paid all special servicing fees and the special servicer will waive future fees unless there is a subsequent default.

Risk Management

Annual margin results published

ISDA has released its latest survey on OTC derivatives margin activity, revealing a small decline in the total amount of collateral supporting non-cleared derivatives transactions in 2014. This is due in part to a continued shift to central clearing, with a significant increase in collateral supporting cleared transactions.

Total collateral supporting non-cleared derivatives transactions decreased by 6.2%, from US$5.34trn in 2013 to US$5.01trn in 2014. In comparison, the amount of collateral received against non-cleared derivatives increased slightly by 4.4%, but the amount of collateral delivered rose substantially, growing by 28.6% between years-end 2013 and 2014.

The collateral-received figure was driven by a 6.7% increase in cash, which represented 76.6% of the total. Although US dollar and euro accounted for the bulk of cash, the largest year-over-year increases were seen in yen and 'other' currencies. Cash was a large driver in the rise of collateral, representing the most delivered asset class at 77.7%.

Further, total reported collateral for cleared derivatives transactions rose 54%, from US$295bn to US$455bn, between 2013 and 2014. Total collateral - received and delivered - related to client clearing more than quadrupled, increasing by 262.5%.

The survey also reveals that the number of client cleared collateral agreements experienced sharp growth, as an increasing number of end-users began clearing in response to regulatory changes. Similar to previous years, the 1994 ISDA Credit Support Annex (CSA) New York Law comprised the largest share of non-cleared agreements by accounting for 46.8%, and was followed by the 1995 ISDA CSA English Law, which made up 30.1% of the total.

Meanwhile, nearly two-thirds (65.9%) of cleared trades used central counterparty agreements, with cash being by far the most popular collateral type for amount delivered to meet initial margin and for variation margin. The US dollar was the most used currency delivered to meet initial margin requirements, increasing sharply from 2013 levels.

The majority of firms helped increase the number of agreements supporting client cleared transactions, as large firms increased client clearing agreements by approximately 67% year-over-year. More than 85% of all firms surveyed this year indicated they manage their collateral processes in-house, with small firms managing collateral exclusively internally.

Finally, the survey shows that the largest portfolios consisting of more than 5,000 trades are reconciled most frequently. Figures reveal that 87.1% of large portfolios are reconciled daily versus 82.9% for portfolios with 2,500-5,000 trades.

Risk Management

ESMA provides EMIR rethink

ESMA has published four reports that focus on how the EMIR regulatory framework has been functioning. Three of the reports cover non-financial counterparties (NFCs), pro-cyclicality and the segregation and portability for central clearing counterparties (CCP), while the fourth responds to the European Commission's review of EMIR by providing input and recommendations.

Among ESMA's proposals for amending EMIR is streamlining the process for determining clearing obligations and introducing tools allowing the suspension of the clearing obligation when certain market conditions arise. It also proposes removing the frontloading requirement.

In addition, ESMA proposes a rethink of the entire equivalence and recognition process with third-country CCPs to increase efficiency and to better respond to regulatory differences between third countries. The recommendation is that the jurisdiction decision be governed by regulatory technical standards and that any recognition process should also include additional risk-based considerations that allow the recognition of a third-country CCP to be denied or suspended.

The final proposal in ESMA's fourth report is for improved supervision of trade repositories (TR) by changing ESMA's supervisory and enforcement powers and procedures. This can include increasing fine levels, broadening the enforcement decisions available to ESMA, providing appropriate timeframes to consider applications in the registration process and clarifying TR obligations in relation to data quality and reconciliation and supervisory reporting.

In its first report, ESMA recommends removing the hedging criteria from EMIR and using other measures to determine the systemic relevance of NFCs. It believes this would allow regulators to identify the few NFCs with the highest systemic importance, while greatly simplifying the process and reducing the compliance costs for the majority of small and medium NFCs.

ESMA additionally recommends in its second report to further specify the rules for implementing the counter-cyclical tools adopted by CCPs for margins and collateral. This includes regular testing and transparency on the results to further improve their effectiveness.

Finally, ESMA has identified some differences in CCP practices in the implementation of the relevant provisions. In order to promote convergent practices and achieve a level playing field, it proposes introducing clarifications and more detailed requirements by RTS, along with incentives related to margin period of risk depending on the safety of the chosen account structure. It also proposes monitoring the take-up of the different types of account models to confirm adequacy and efficiency.

Risk Management

OTC clearing rules adopted

The European Commission has adopted new rules that make it mandatory for certain OTC interest rate derivative contracts to be cleared through central counterparties (CCPs). This is the first clearing obligation that has been proposed by ESMA and it is expected that the mandate will be extended to other types of OTC derivative contracts in the near future, which may include CDS.

EMIR regulations mandate ESMA to review clearing eligible contracts and, with the overarching aim of reducing systemic risk, to propose clearing requirements for products meeting certain criteria. On the basis of ESMA's proposal, the European Commission should determine the types of OTC contracts that it believes should be subject to mandatory clearing by a CCP.

The Commission's decision covers interest rate swaps denominated in euro, sterling, Japanese yen or US dollars that have specific features, including the index used as a reference for the derivative, its maturity and the notional type. The clearing obligation will enter into force, subject to scrutiny by the European Parliament and Council, and will be phased in over three years to allow additional time for smaller market participants to begin complying.

Risk Management

Post-trade transparency report released

IOSCO has published its final report on the potential impact of mandatory post-trade transparency in the CDS market. The organisation concludes that greater post-trade transparency in the CDS market - including making the price and volume of individual transactions publicly available - would be valuable to market participants and other market observers.

The report's analysis is based upon a number of relevant works, including publicly available transaction-level post-trade data about CDS transactions before and after the introduction of mandatory post-trade transparency in certain CDS markets in the US. IOSCO concludes that the data does not suggest that this introduction of mandatory post-trade transparency had a substantial effect on market risk exposure or market activity for those products.

The term post-trade transparency in this report refers to a regulatory system that mandates disclosure of information - widely accessible to the public - about the price and volume of each relevant transaction. The term does not refer to regulatory structures that allow for voluntary or selective disclosure of data.

Because post-trade transparency requires public dissemination of information about the price and volume of individual transactions, the term also does not apply to regulatory structures that require dissemination of data only in an aggregate form. As the information is for the benefit of market participants and the public generally, post-trade transparency does not entail disclosure of counterparty identity either.

IOSCO encourages each member jurisdiction to take steps toward enhancing post-trade transparency in its CDS market as part of the effort to increase the efficacy of the G20 commitments to reform the OTC derivatives markets. IOSCO anticipates that additional data from jurisdictions with mandatory post-trade transparency will enable further studies of the impact of post-trade transparency in the CDS market and other OTC derivatives markets.

Risk Management

'Slotting' disparity highlighted

CREFC Europe has submitted a response highlighting two primary concerns over the EBA's draft regulatory technical standards on assigning risk weights to specialised lending exposures. The association notes that the consultation is especially relevant to UK banks, which account for the majority of affected exposures in the EU, since the UK regulator required them to use 'slotting' for their real estate lending after the crisis.

The EBA is proposing to improve consistency in the way slotting is used by mandating the use of the same criteria across the EU - a proposal that CREFC Europe supports. However, the association warns that the proposed criteria - which it says are similar to those in the Basel 2 framework - are pro-cyclical and do not deal adequately with real estate, so would benefit from a full review.

More contentiously, the EBA has put forward two mechanistic approaches for how firms assign risk weights to specific loans under slotting. In its response, CREFC Europe argues that slotting is already prescriptive enough and there is no compelling evidence that a mechanistic approach should replace judgment when assigning risk weights to loans.

The other major concern identified by the association is the distortive impact of the large differences that arise in risk weights between banks using slotting and banks using other approaches. "The problem is particularly acute for the lowest risk real estate loans, where the minimum risk weights under slotting are far higher than those applicable under internal rating-based models used by banks competing in the same market," it says. "The focus should be on reducing the gap in regulatory capital outcomes between firms that use slotting and firms that don't, especially at the 'strong' end of the spectrum."

RMBS

US housing demand shifts

A return of significant housing demand in US city centres is elevating into a countrywide demographic shift, according to Fitch. The shift in demand is occurring amid stabilising US home price growth.

Since 2000, home prices have grown 50% faster in urban centres than in the broader MSA areas, with population growth trends beginning to favour city centres too. "This demand shift implies that city centres will continue to see growth, even where regional prices have been stagnant, such as Atlanta or Chicago," says Fitch director Stefan Hilts.

The trend is clear in nearly every city that the agency analysed, but seems to be particularly strong among growing mid-sized markets, including Nashville, Denver, Portland and Cincinnati. With increased preference for urban living, Fitch believes that one implication going forward is the likelihood for home ownership rates to remain persistently low and declining as more potential buyers opt to live in cities where rentals dominate.

The demand shift also comes amid a high level of house price sustainability nationally, with the median city now 2% undervalued, and only 46 markets more than 10% overvalued. There is also evidence of price moderation in the Texas MSAs, including Houston, Austin and Midland, which have been amongst the most overvalued in recent Fitch reports. That said, booming cities like San Francisco continue to see prices skyrocket.

RMBS

GNMA hits record issuance

Ginnie Mae guaranteed a record US$47.06bn of MBS last month, surpassing the previous record of US$46.1bn set in July 2009. The GSE has guaranteed more than US$346bn in MBS so far in 2015, up from US$242bn at this point of the year in 2014.

"The scalability of our platform allows Ginnie Mae to support the shift from traditional depository institutions to new entrants - which have primarily been non-depositories," explains Ginnie Mae president Ted Tozer.

Ginnie Mae adds that government lending could be boosted further, given the FHA's recent mortgage insurance premium drop and competitive interest rates for FHA, VA and RHS loans. Purchase activity has been increasing over the last several months, with July's activity comprising more than 60% of total issuances, compared to an approximately 34% increase for loan refinances.

Currently, Ginnie Mae's MBS portfolio stands at US$1.57trn in UPB. Last month, Ginnie Mae II single-family pools led the way, with more than US$43.8bn in MBS issuance, while Ginnie Mae I single-family pools totalled nearly US$1.6bn. Total single-family issuance for July was more than US$45.5bn.

In addition, Ginnie Mae's multifamily MBS issuance was nearly US$1.5bn. The Ginnie Mae Home Equity Conversion MBS, included in Ginnie Mae II single-family pools, totalled US$809m in July.

RMBS

Polish RMBS methodology released

Moody's has published its approach to rating Polish RMBS transactions using its MILAN framework. The approach implements the proposals made in its request for comment last month (SCI 3 July) and will be used in conjunction with the agency's existing methodologies to rate RMBS and covered bonds in Poland.

The agency says that benchmarking the Polish residential real estate market to other jurisdictions that also use MILAN was the main driver behind the calibration of MILAN for Poland. Moody's has used a number of parameters from the emerging securitisation market (ESM) settings of MILAN for Polish residential mortgage pools, with a few changes to reflect Polish-specific elements.

Although Moody's has used the ESM settings, some of the underlying assumptions and parameters differ for the Polish criteria. Among the most important of these differences are the MILAN settings associated with house price stress rates and foreclosure period in the application of MILAN within Poland.

RMBS

QM exception penalties analysed

Fitch suggests that residential mortgages in US RMBS with material exceptions to the income documentation standards required to achieve qualified mortgage (QM) status will likely be penalised with both higher default and loss severity assumptions. The combined penalty could increase loss projections by 1.3 to two times that of a similar non-QM loan with documentation that meets the QM standard.

Fitch notes that the amount of the adjustment will depend on the specific programme's guidelines, compensating factors and the lender's history. The small number of non-QM loans that have been included in US RMBS to date have been very high credit quality, despite some disqualifying attributes, such as an interest-only feature or a debt-to-income ratio in excess of 43%.

However, identified deviations from income documentation standards prescribed for QM loans in Appendix Q of the ability-to-repay rule have thus far been minor and mostly unintentional. For non-QM loans with immaterial deviations from Appendix Q, Fitch has not adjusted its standard non-QM default and loss severity treatment. Examples of immaterial deviations include missing signatures or dates on tax returns as long as the 4506 forms are obtained.

Nonetheless, a number of potential issuers have inquired to Fitch about the treatment of non-QM loans with deviations from appendix Q standards that are programmatic and more substantial than those already described. The most common example is a loan programme for self-employed borrowers that relies on bank statements, rather than tax returns, to determine income.

Fitch believes such programmes would be more vulnerable to borrower claims that the loan violated the ability-to-repay rule than loans underwritten with documentations standards that met Appendix Q. Consequently, the agency would likely increase the claims probability and claims success rate from those described in its published criteria. If it assumed twice the claims probability and twice the success rate of those claims, loss severity would increase 1.1 to 1.2 times that of a non-QM loan with standard documentation.

In addition, the relative adjustment to the probability of default for material deviations from Appendix Q could be greater than the loss severity adjustment. A self-employed borrower underwritten with bank statements would likely be treated as low or limited income documentation by Fitch. Based on the historical performance of borrowers qualified with non-full income documentation, the probability of default would likely be increased 1.25 to 1.75 times that of a non-QM borrower underwritten with standard documentation.

RMBS

Ocwen makes settlement strides

Joseph Smith - the monitor of the US National Mortgage Settlement - has filed his final report on his investigation into the independence of Ocwen's internal review group (IRG) and compliance with the settlement for the first and second quarters of 2014. The report to the US District Court for the District of Columbia includes the results of the independent retesting of at-risk metrics and the corrective action steps that Ocwen took and continues to implement to address these issues.

Under the monitor's direction, consulting firm McGladrey was tasked with reviewing the metrics deemed to be at risk for 1Q14 and 2Q14, with it determining that Ocwen failed one metric for the first quarter. Ocwen's IRG independently found another failure, but the servicer has since submitted a corrective action plan (CAP) for each failed metric, which Smith has approved.

Smith also found previously reported-on letter-dating issues at Ocwen associated with sending incorrect dates on certain correspondence to borrowers. Under his direction and approval, Ocwen has created a global CAP to remedy these issues, with the anticipation that it will be implemented for testing to resume in 3Q15.

The first report on Ocwen's US$2bn consumer relief obligations under the settlement has also been released by Smith. As of 31 December 2014, he confirms that there has been over US$881m in credited relief to 8,861 borrowers through first lien mortgage modifications.

Smith says he will continue to closely monitor Ocwen's compliance with the settlement and agreement, and plans to report on the servicer's compliance for 3Q14 and 4Q14 in the coming weeks. The servicer continues to recover from a variety of regulatory and investor pressures following the exposure of a number of its operational weaknesses (SCI passim).

Further, Smith also filed a report on SunTrust's consumer relief progress. He credited SunTrust, which is required to provide US$500m in consumer relief by 30 September 2017, with distributing US$7.8m in consumer relief. The filing is based on SunTrust's initial submission of 100 loans through 31 December 2014.

RMBS

Aussie waterfalls scrutinised

Moody's says that recent Australian RMBS transactions issued by Bendigo and Adelaide Bank and Members Equity Bank include a new principal payment waterfall feature that affords fewer protections to their senior class A1 triple-A rated notes. In contrast, the feature will provide more protections to the A2s.

"In these transactions, the A1s and A2s rank pari-passu in relation to principal payment allocations throughout the life of the transaction," says Robert Baldi, a Moody's avp and analyst. "Such a ranking differs from the typical structure in Australian RMBS deals."

He adds: "The new feature negatively impacts A1s, because the absolute amount of credit enhancement available will reduce over time, regardless of the performance of the transaction." Baldi also says that the new structure is beneficial for the A2s because it lowers significantly the loss severity when these notes experience losses.

Moody's points out that the transactions with the new payment structures incorporate various features that mitigate the negative impact on the A1s. This includes the fact that the A2s are subordinated in relation to charge-offs and interest payments, the interest accrual is shut off on any notes that have been charged off in full, and liquidity and/or principal draws for junior note interest payments are shut off if there are any charge-offs on those notes.

The two latter mitigants can help strengthen senior notes by limiting principal leakage through principal draws to pay junior note interest. Such a characteristic is particularly important in situations where losses are occurring, because there will be fewer assets to generate the trust's required income payments.

For transactions with the new principal payment waterfall feature, the senior A1s begin taking losses earlier and exhibit a lower level of overall portfolio losses, when compared with a typical Australian RMBS structure that changes from sequential to pro-rata and back to sequential. Moody's adds that the waterfall feature will negatively affect the rating sensitivity of the A1s in different loss scenarios.