Contents

Structured Finance

Capital plan

Definitional issues weigh on HQS progress

The European Commission is set to unveil proposals to reduce capital charges on high quality securitisations (HQS) next month. However, the lack of cohesiveness among different regulatory authorities means that concern over definitional issues remains.

"There is somewhat of an irony in that inconsistency between definitions of qualifying securitisation slides in the face of the goal of creating more simplicity within transactions," says Simon Collingridge of Bishopsfield Capital. "It is leaving open the danger that deviations in definition could be troubling down the line."

The Basel Committee set a precedent last year when it proposed strengthening capital standards on securitised assets within its framework (SCI 12 December). The EBA, in turn, recently issued a number of recommendations to the Committee, among which it suggested that capital charges be lowered for HQS in accordance with their reduced associated risk (SCI 26 June).

The Basel Committee and IOSCO joint task force subsequently issued their final proposals for simple, transparent and comparable (STC) securitisations, signalling an openness to more lenient capital requirements for qualifying transactions (SCI 23 July). In the latest development, the European Commission is expected to propose on 30 September an average reduction of 25% for capital charges on holdings of STC assets.

However, speculation that this benefit will be tied to public declarations as to the quality of the related bonds has sparked some concern. "Self-certification by an issuer of a securitisation is not enough to provide investors with certainty," The Investment Association states. "An independent third party needs to certify that the issuance in question does what it says on the tin - that it is simple, transparent and standard. Once that is done, investors can get on with doing due diligence and focus on the actual credit analysis."

Further, a leaked Commission document indicates that penalties will be draconian for investors who hold a STC/HQS security that ceases to qualify.

Kevin Hawken, partner at Mayer Brown, believes that while economic and other factors also apply, the wave of new and amended regulations have been and remain a drag on the market. The EBA's recent proposal for a HQS framework to reform securitisation regulation is a positive development, though interpreting the expansive set of criteria presents challenges.

"It includes more than 20 criteria, many of which have several subparts, so there are really more than 40 criteria," Hawken explains. "Many of them require interpretation or qualitative judgement, so there will be questions about how market participants can be sure that the criteria are met."

The EBA says - based on its own quantitative impact study of publicly available data on European securitisations - that its proposed changes would reduce average capital requirements under the internal ratings-based approach and the securitisation standardised approach by less than 30%. Under the external ratings-based approach, it would be by only 7%, though reductions would be greater for senior tranches.

On the other hand, the Basel/IOSCO report is much less detailed than the EBA's, but still fails to satisfy the majority of the market. "It's a step in the right direction, but the issue is no longer over investor confidence. The regulators need to start aligning these regulations more appropriately to the risk associated with the product," says Colingridge.

Deutsche Bank European securitisation analysts suggest that the criteria's approach is short-sighted, because it assesses assets at a transaction level rather than a tranche level. "A senior tranche with very high attachment points against marginally weaker, but ineligible, collateral (such as non-conforming mortgages) can be of far higher credit quality than senior bonds with low attachment points against prime eligible collateral," they explain. "Nevertheless, the one with ineligible collateral can be disqualified without any consideration to transaction structure."

Hawken notes that because capital requirements are so much higher for junior tranches, the sum of bank capital requirements for all the tranches of a securitisation would often be much higher than for the underlying assets held on a bank's balance sheet or financed by covered bonds. Nevertheless, he welcomes the European Commission's attempt to create an STC framework - although he believes it will be challenging to define criteria that will serve regulatory goals while also being practical for the market.

Collingridge adds that the Commission's plan is unlikely to satisfy everyone on an administrative basis. "People are realistic when it comes to securitisation, but there remain a number of fears," he says. "Along with uncertainty as to how any proposals on capital relief are policed, there is a worry that the costs of administering the necessary conditions to fit capital compliance could offset the potential benefits."

He also states that the onus must be put on originators and investors to adapt to standards on a consistent basis. "It's good that assets are being accordingly adjusted for the initial criteria, but there needs to be a greater emphasis on making sure assets stay qualified through the life of the transactions. This will be essential for retaining capital exemption benefits further down the line."

An additional issue involves the number of aspects that must be tied in to a global framework on top of capital requirements, including the assessment of the liquidity of an asset. As a result, uncertainty remains around whether certain asset classes will fit the final HQS framework.

The Deutsche Bank analysts note that UK prime, Dutch prime and UK buy-to-let RMBS, as well as CMBS and SME CLOs are all vulnerable to missing out on HQS eligibility and therefore the capital exemptions associated with qualifying. Certain intricacies could come into play, such as interest-only and bullet loans, which may be defining factors.

"Some of these RMBS sub-classes could be okay because they already have good loan level data and are mostly standardised already," says Colingridge. "SMEs have an added political factor to take into consideration, with this push to increase the source of financing their way."

He concludes: "They could benefit massively with eligibility, but may have further to go with regards to data reporting."

JA

Secondary markets

US CLOs on the up?

While still quiet the US CLO secondary market appears to be on the up.

Market sentiment looks to be improving on the back of some stronger trading levels in secondary and tighter pricing in primary over the past week. However, secondary volumes remain typically low for August and the BWIC calendar is currently sparse for the remainder of this week.

There are two BWICs on the US CLO schedule for today so far, both involving 2.0 mezz. First, at 12:00 New York time are six line items amounting to $19.45m - ARES 2014-30A E, BALLY 2014-1A B, BALLY 2014-1A C, CECLO 2013-17A D, DRSLF 2012-25A E and FLAT 2014-1A D. Two of the bonds have covered on PriceABS in the past three months - BALLY 2014-1A C at L96H on 24 July and DRSLF 2012-25A E at 98H on 11 June.

Then, at 13:00 there is a $40.59m six line list comprising: ALM 2013-10A D, BLUEM 2014-3A D, CGMS 2014-1A E, INGIM 2013-2A C, SYMP 2013-11A D and TPCLO 2013-1A D. Two of the bonds have covered on PriceABS in the past three months, last doing so as follows: CGMS 2014-1A E at 88.47 on 28 July and SYMP 2013-11A D at 99.77 on 13 August.

Secondary markets

Euro secondary drifts

The European securitisation secondary market continues to drift through August.

For the most part secondary spreads remain unchanged since last week and volumes are extremely light. There are occasional flurries of activity notably, as ever, in prime assets, but also in a few major CMBS names.

There are no BWICs on the schedule for today so far, but summer inertia is interrupted with a three line autos OWIC. Due at 12:00 London time it involves: ABEST 9 A, ABEST 10 A and KIMI 3 A.

Secondary markets

Euro secondary unchanged

European securitisation secondary spreads remain unchanged as the seasonal lull continues.

Yesterday once again saw very limited flows across the board. Small and patchy exceptions came in selected autos, cards and CMBS.

Today's European BWIC schedule currently contains three lists. At 10:00 London time there is mixed sterling RMBS list involving small clips.

In the afternoon there are two CLO lists. At 14:30 there is a €1.5m single line of DARPK 1X C, which has not traded on PriceABS before.

At 15:00 there is a €10.8m three line auction comprising: ALME 3X F, GROSV 2013-1X D and GROSV 2015-1X D. Only the latter has covered on PriceABS in the last three months, doing so at 100.035 on 18 May.

Secondary markets

More mezz for US CLOs

The US CLO secondary market continues to be quiet overall, but mezz supply keeps coming.

The past few days have seen a steady supply of 2.0 mezz BWICs. The lists have continued to trade reasonably well, with top tier names seeing some strong prints.

Consequently, sellers continue to be encouraged despite typical August illiquidity across CLO secondary in general. Today sees two US CLO BWICs on the schedule so far and both again involve 2.0 mezz.

First, at 11:00 New York time are 12 line items amounting to $8.96m - CERB 2014-1A D, FCBSL 2013-2A C, FCF 2012-6A DR, FCO 2014-3A C, FCO 2014-5A C, GOCAP 2014-18A C, GOCAP 2014-18A D, GRTLK 2014-1A D, MCFCL 2013-1A E, MOCAP 2014-1A D, NWSTR 2014-1A D and PANG 2007-1A B. Only PANG 2007-1A B has covered on PriceABS in the last three months - at 98 0n 29 July.

At 11:30 is a $27.5m seven line auction it comprises: ACASC 2014-1A E, BTNY 2015-1A E, REGT4 2014-1A C, WAMI 2014-1A B1, WITEH 2015-10A C, ZAIS2 2014-2A A2 and ZIGG 2014-1A C. None of the bonds has traded with a price on PriceABS in the last three months.

Secondary markets

Euro secondary sidelined

Broader market volatility is adding to the summer doldrums in the European securitisation secondary market as it is keeping even more players on the sidelines.

The market continues to lack conviction as activity remains patchy and very light. What little trading there was yesterday was once again mainly focused on prime assets.

Meanwhile, BWIC activity also remains negligible and yesterday's handful of lists saw a scattering of DNTs across them. Today only has one European BWIC on the schedule so far.

It involves two lines of Italian RMBS due at 15:00 London time - €700k BERAB 3 A and €400k CLARF 2014-1 A1. The bonds last covered on PriceABS at 100.81 on 8 July and 101.15 on 10 June, respectively.

Secondary markets

Waiting game for US RMBS

The US non-agency RMBS secondary market is waiting on greater clarity in broader markets.

"It's very quiet and everyone seems to be in wait and see mode," says one trader. "Today is the busiest day of the week, but there's less than $500m on BWIC and the bulk of that comes from a $200m 23 line item list of subprime seniors from a hedge fund. The rest of today's calendar comes from liquidations."

The trader suggests market reticence is a result of wider volatility combined with lack of clarity over future price direction. "We're getting more and more data points, but some of them are contradictory. There's uncertainty over the Fed, concerns over the oil price and today the stock market is trading down and high yield is selling off. At the same time, the dollar is strong and Treasuries are well bid."

While RMBS is typically bolstered from the full impact of broader market moves thanks to the lack of new supply helping to support prices, there is still potential for damage, the trader warns. "These factors could trickle down into our market, especially if the US economic picture deteriorates and house price appreciation slows, and that will push paper wider and people will back off further."

For now though, the trader says: "RMBS secondary spreads are a bit weaker, but that's partly to do with summer illiquidity, so we'll only really find out where we are when people are back from holiday. In the meantime, stuff is still trading though we are seeing a few more DNTs at the moment - they accounted for 30-40% of line items yesterday, but it was a very low volume day so it's harder to read anything into that proportion."

Secondary markets

Euro secondary fades further

The European securitisation secondary market continues to be weighed down by seasonal illiquidity and macro concerns causing the hitherto positive tone to fade further.

Activity remains extremely patchy with only small pockets of trading surrounding CMBS and prime ABS/RMBS. Elsewhere, a selling bias is emerging with wider market volatility beginning to bite and bid-offers are widening as even more participants exit into the last week of August.

There is currently one BWIC on the European calendar for today - a six line €21.55m mixed list. Due at 13:30 London time, the list comprises: BFTH 10 A2, CREDI 5 A, HIPO HIPO-8 A2, MECEN 4 A2, SUNRI 2015-2 A and TAURS 2013-GMF1 A.

Two of the bonds have covered on PriceABS in the last three months - SUNRI 2015-2 A at 99.5 on 8 July and TAURS 2013-GMF1 A at 100.65 on 25 June.

Structured Finance

SCI Start the Week - 17 August

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

Pipeline
There were fewer additions to the pipeline last week than there had been the week before. The final count consisted of two ABS, an RMBS, a CMBS and two CLOs.

The ABS were US$210.52m First Investors Auto Owner Trust 2015-2 and US$1.06bn Santander Drive Auto Receivables Trust 2015-4, while the RMBS was A$500m PUMA Series 2015-3. US$716.3m WFCM 2015-SG1 was the sole CMBS, while the CLOs were Avoca 15 and US$315.3m Shackleton 2015-VIII CLO.

Pricings
Several deals did price, however. The week ended with 11 ABS prints, along with an ILS, three RMBS, two CMBS and three CLOs.

The ABS were: €800m A-Best 12; US$682m Capital Auto Receivables Asset Trust 2015-3; US$750m CNH Equipment Trust 2015-C; US$300m Credit Acceptance Auto Loan Trust 2015-2; US$158.7m ENGS Commercial Finance Trust 2015-1; US$375m Ford Credit Floorplan Master Owner Trust A Series 2015-4; US$392m Ford Credit Floorplan Master Owner Trust A Series 2015-5; US$850m Honda Auto Receivables 2015-3 Owner Trust; €250m KMU Portfolio Compartment 2015-1; CNY1.5bn VINZ 2015-1 Retail Auto Loan Securitization Trust; and US$475m World Financial Network Credit Card Note Trust Series 2015-B.

US$100m Bosphorus Series 2015-1 was the ILS. The RMBS were €555m Asti RMBS 2015, €460m Abruzzo RMBS 2015 and A$500m RESIMAC Triomphe Trust Premier Series 2015-1.

US$660m BBCCRE Trust 2015-GTP and US$1.03bn COMM 2015-CCRE25 accounted for the CMBS. Lastly, the CLOs were €557m Abruzzo SME 2015, US$710m CENT CLO 24 and US$775m Madison Park Funding XVIII.

Markets
US ABS secondary spreads followed the primary market wider, with subordinated auto loan notes widening the most. "Spreads for most ABS sectors are trading at the wide end of three-year trading ranges and even five-year trading ranges. The exceptions include: sub-prime auto loans, private student loan ABS and certain esoteric ABS, which are currently trading closer to one year trading ranges," say Bank of America Merrill Lynch analysts.

The US CMBS market widened sharply last week, largely on the back of China's currency devaluation. Barclays analysts comment: "The CMBS market suffered its sharpest sell-off of the year this week, widening spreads to levels not seen in two years. The spread widening was driven partly by the weaker liquidity period and the upcoming supply but was also exacerbated by worries around China, which sparked a broad sell-off across equities, credit, and much of securitised products."

Editor's picks
FFELP fix: Market participants appear confident that a fix for a significant portion of the US$36.8bn of FFELP student loan ABS bonds on review for downgrade by Moody's can be found during the comment period for its proposed criteria update. At the same time, efforts are underway to increase transparency around the historically complex issue of modelling prepayments in the sector...
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...
Capacity gains: 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 are the latest product to be driven by a surge in demand as the US wind season kicks on...

Deal news
• 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 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.
• 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.
• 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).

Regulatory update
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
ACAS CLO 2015-2; AmeriCredit Automobile Receivables Trust 2015-3; AOTA 2015-1211; BBCCRE 2015-GTP; Canadian Credit Card Trust II Series 2015-1 (re-open); CARDS II Trust Series 2015-2; CarMax Auto Owner Trust 2015-3; CGCMT 2015-P1; CSAIL 2015-C3; FREMF 2015-K719; Honda Canada Auto Receivables 2015-1 Owner Trust; JP Morgan Mortgage Trust 2015-4; JP Morgan Mortgage Trust 2015-5; Logistics UK 2015; Loomis Sayles CLO II; Mountain View CLO X; MVW Owner Trust 2015-1; Navient Private Education Loan Trust 2015-B; Oaktree 2015-1; Resource Capital Corp 2015-CRE4; Siena PMI 2015 (preplaced); SolarCity LMC series IV 2015-1; Towd Point Mortgage Trust 2015-3; VINZ 2015-1

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-4; BACM 2006-3; BACM 2007-3; BSCMS 2006-PW14; CD 2006-CD2; CSMC 2006-C4; GCCFC 2005-GG5; GCCFC 2007-GG9; JPMCC 2005-CB13; JPMCC 2007-CB20; LBUBS 2007-C7; MLCFC 2006-3; MSC 2006-T21; MSC 2007-1Q15; MSC 2012-C4; TAURS 2006-3; TITN 2006-1; WBCMT 2004-C11

CMBS

'High severities' for distressed CMBS

The volume of distressed US CMBS loans up for auction in August and September is down slightly from previous months. Barclays figures show the deals with the largest exposures are BACM 2006-5 and LBUBS 2007-C6.

BACM 2006-5 has the greatest exposure, which comes from a single US$62.5m loan. The loan is for Temecula Town Center in California and has been in delinquency and special servicing since 2010.

The Temecula Town Center loan reported average DSCR NOI of 0.74x from 2013-2015, with 71% occupancy. The most recent appraisal a year ago valued the property at US$41.3m, which Barclays analysts estimate would lead to a 50% severity.

LBUBS 2007-C6 has US$54m of auction exposure as the PECO Portfolio has three listings. The portfolio moved into special servicing in 2012 (see SCI's CMBS loan events database) and the analysts believe it is heading to liquidation via REO, with the special servicer currently selling properties off piecemeal.

"Overall, the underlying performance across the retail properties listed in the PECO Portfolio exhibits a variation with an average DSCR NOI of 1.24x reported in 2014. Two of the listed properties have a DSCR NOI of 1.20x and 1.62x, while the last one, PECO Portfolio - Southside Plaza, has a DSCR NOI below 1.00x," the analysts note.

The third largest loan put up for auction is the US$35.4m Mercantile Bank & Trust Building, which has been in special servicing since 2011 and had occupancy of only 9% in 2014. The most recent appraisal in January 2015 was at US$15m, which could lead to high severity. The loan is securitised in WBCMT 2005-C18.

JL

Insurance-linked securities

ILS underwriting scrutinised

The reinsurance sector is adapting to the influx of alternative capital by providing innovative solutions and lower prices to reinsurance purchasers, S&P notes. However, the agency warns against the growth of the ILS market coming at the expense of looser underwriting discipline and less due diligence.

As capital enters the reinsurance market, it is creating opportunities for buyers. At the same time, covered perils are expanding and event definitions are becoming broader. Given the ease with which capital has been flowing into this space and the benign natural catastrophe losses during the past few years, S&P expects the alternative capital market to continue to innovate and push boundaries, which should ultimately transfer into the catastrophe bond market.

Specifically, the agency points to the difficulty in modelling new covered perils, such as volcanic eruptions, meteorite impact and wildfire (outside of California). It says that the probability of these events occurring has been for the most part calculated deterministically and is very small. Consequently, under the current market conditions, it has been easier for cedants to buy protection for these perils and align the coverage with traditional reinsurance contracts.

As for event definitions, S&P cites a recent transaction that increased the duration of the event to 240 hours from 168 for named storms and earthquakes in the US. "Expanding the time clause in the event definition is common in a soft reinsurance market," it observes.

The agency warns that increased demand for diversifying perils may push rates and returns lower than what the technical price should be. Indeed, many of the diversifying perils do not even make it into a tradable cat bond format, as sophisticated investors value the illiquidity premium they can earn by writing the same risks via collateralised reinsurance contracts or private cat bonds.

"It is our understanding that several large ILS fund managers declined to participate in the new diversifying deals with a low coupon of around 2%. However, for some funds, the coupon on these issues does not provide enough return to compensate for the risk they would take, which includes immense uncertainty in modelling," S&P continues.

Nevertheless, the fact that these bonds are being placed successfully suggests that there are investors for whom the diversification benefit is more important than the return they will earn. "If these end investors are pension funds, the long-term effect should not be of any concern for the whole market. But if these are opportunistic investors, a portion of this capital could leave the market once yield on other assets increases," the agency adds.

Sponsors have also tested the market by lengthening and shortening the maturities of their issuances. Five-year issuances are becoming more common, with even a six-month deal covering one hurricane season being placed successfully. A recent seven-year deal failed to be placed, however.

A further sign that the ILS market is currently a buyer's market is the inclusion of early termination provisions, which make terms and conditions more flexible for issuers. This is in addition to the variable reset options that have been seen in most issuances for the past two years. Most issues that feature variable resets have had their first resets by now and cedants have used the optionality to adjust the layers to better fit into their annual protection buying.

In addition, more structures are coming to market where investors do their own risk modelling and the risk analysis is no longer part of the security offering documents. While sophisticated ILS funds have historically performed their own risk analysis, this begs the question of how new investors are accessing the market.

"We continue to see a drive to reduce costs and increase speed of execution to connect risks with appropriate counterparties," S&P notes.

The past 12 months have also seen increased activity in the placement of private longevity swaps between corporate pension funds and large life reinsurers or banks. S&P believes that it is now only a question of time until a sponsor tries to access the capital markets as well.

Meanwhile, for investors to gain interest in embedded value or value-in-force (VIF) securitisations, the agency believes that the primary risk transferred to investors should be related to the covered business - with sponsors minimising asset risk. "Because most investors have significant credit risk, an asset with primarily insurance risk could be attractive to them, even with longer terms to maturity. There are insurance companies with mature large blocks of business that could find accessing the capital markets a viable way to raise capital, in our opinion."

The agency calculates that about US$24bn in cat bonds is currently outstanding, over US$5bn of which have been issued this year (including US$1.3bn rated by S&P). In total, Aon Securities estimates that alternative capital invested in the reinsurance market stands at US$66bn, as of 30 June 2015, up from US$59bn in June 2014.

"Although the progression may not be linear, during the next few years, we believe the cat bond market will continue to grow - by 10% to 20% per year - as investors accept new risk models assessing perils across the globe (on at least a parametric basis)," S&P concludes.

CS

Structured Finance

SF head preps new firm

Michael Millette is set to launch Hudson Structured Capital Management following his departure from Goldman Sachs. He will serve as managing partner for the new investment manager, as it looks to manage assets across multiple sectors, including reinsurance and transportation.

Prior to his new venture, Millette was partner, md and global head of Goldman's structured finance group. He also served as co-chairman for the bank's structured finance capital committee. Previous to Goldman, Millette was portfolio manager at John Hancock, as well as an analyst at Citi.

Structured Finance

Business development head hired

Custom House Fund Services has appointed Richard Hale as director, business development UK. Based in the company's newly established London office, Hale will also be responsible for business development in Europe across alternative investments.

He joins from Royal Bank of Canada, where he was most recently head of business development for the RBCIS global fund platform. Hale has also held roles at Citi, HSBC and JPMorgan.

Structured Finance

BDC acquisition approved

PennantPark Floating Rate Capital (PFLT) and MCG Capital stockholders have voted to approve the merger agreement between the two firms (SCI 30 April). The merger is now expected to close on or about 18 August, despite HC2's previous intervention with its own rival bid for MCG (SCI 6 May).

PFLT's stockholders approved the issuance of PFLT common stock in connection with the agreement, with approximately 89% of the shares voted at the special meeting in favour of the proposal. MCG's stockholders approved the agreement, with more than 90% of the shares voting in the proposal's favour.

Keefe, Bruyette & Woods and SunTrust Robinson Humphrey are serving as financial advisers to PFLT, while Dechert and Venable are serving as its legal counsel. Morgan Stanley is serving as financial adviser to MCG, with Wachtell, Lipton, Rosen & Katz serving as its legal counsel. Sutherland Asbill & Brennan is serving as legal counsel to MCG with respect to the Investment Company Act of 1940.

Structured Finance

Hedge fund fraud settled

Two Citigroup affiliates have agreed to pay nearly US$180m to the US SEC to settle charges that they defrauded investors in two hedge funds that they claimed were safe, low-risk and suitable for traditional bond investors. The funds eventually collapsed during the financial crisis.

The regulator's investigation found that the Citigroup affiliates made false and misleading representations to investors in the ASTA/MAT fund and the Falcon funds, which collectively raised nearly US$3bn in capital from approximately 4,000 investors before collapsing. The Falcon fund was a multi-strategy fund that invested in ASTA/MAT and other fixed income instruments, such as CDOs, CLOs and ABS. The ASTA/MAT fund was a municipal arbitrage fund that purchased municipal bonds and used a Treasury or Libor swap to hedge interest rate risks.

The funds, both highly leveraged, were sold exclusively to advisory clients of Citigroup Private Bank or Smith Barney by financial advisers associated with Citigroup Global Markets (CGMI). Both funds were managed by Citigroup Alternative Investments (CAI). Investors in these funds effectively paid advisory fees for two tiers of investment advice: first from the financial advisers of CGMI and secondly from the fund manager, CAI.

In talking with investors, the SEC found that the Citigroup affiliates did not disclose the very real risks of the funds. Even as the funds began to collapse and CAI accepted nearly US$110m in additional investments, the affiliates did not disclose the dire condition of the funds and continued to assure investors that they were low-risk, well-capitalised investments with adequate liquidity. These assurances were at odds with disclosures made in marketing documents and written materials provided to investors.

CGMI and CAI agreed to bear all costs of distributing the US$180m in settlement funds to harmed investors. Both firms agreed to be censured and must cease and desist from committing future violations.

Structured Finance

BlackRock wins vendor role

The US NAIC has selected BlackRock Solutions as sole vendor to conduct financial modelling for the next three years for both RMBS and CMBS. The association had previously issued two separate RFPs, seeking firms to model CMBS and RMBS respectively (SCI 12 February).

The NAIC has used BlackRock Solutions to perform financial modelling of CMBS since 2010, but had previously used PIMCO for RMBS. The association says that the appointment of BlackRock Solutions as sole vendor follows "an extensive review process".

Looking forward, the NAIC has begun working with BlackRock Solutions to evaluate the potential impact of the change in vendors. The results of this analysis will be shared with the insurance industry to allow insurers to gauge the likely impact to carrying values and risk-based capital requirements.

The association will also conduct a series of public calls to consider macroeconomic factors and scenarios to be used by BlackRock Solutions in its modelling of RMBS and CMBS.

Structured Finance

Portfolio manager steps up

Robert Zable has been appointed as the lead portfolio manager of Blackstone/GSO's Senior Floating Rate Term Fund, Long-Short Credit Income Fund and Strategic Credit Fund. The appointment follows the retirement of the current lead portfolio manager of the three funds, Lee Shaiman.

Zable is md at GSO Capital Partners and serves as the chairman of GSO Debt Fund Management's (DFM) investment committee. He is also the senior portfolio manager for GSO DFM's US CLOs and high yield separately managed accounts. Before joining GSO, Zable was vp at FriedbergMilstein, where he was responsible for both credit opportunity investments and junior capital origination and execution.

Shaiman will retire following the transition of his duties to Zable on or before 30 September. Gordon McKemie will remain a portfolio manager of the funds.

Structured Finance

Finance practice beefed up

Allens has bolstered its banking and finance practice with the appointment of Benjamin Downie as managing associate. He joins from Gilbert + Tobin, where he was a special counsel. His experience branches into securitisation and debt capital markets.

Structured Finance

Redemptions hit hedge fund

Claren Road Asset Management has received around US$2bn in investor redemption notices, according to an SEC filing by parent company Carlyle Group. This figure represents approximately 48% of the hedge fund's AUM, which stood at around US$4.1bn at the end of June.

The filing notes that the carrying value of the credit hedge funds managed by the firm was US$216m at end-June, making up the majority of Carlyle's open-ended funds within its global market strategies operations. The redemptions are believed to be driven by losses suffered by the hedge fund. Claren Road's issues began last year when it posted its first annual loss and its assets are now down from a reported peak of US$8.5bn in September 2014.

The net impact will be seen in 3Q15, when Carlyle is expected to write down the value of its investment in Claren Road by between US$100m to US$175m. The charge is subject to change and will be determined by future inflows and outflows, the performance of Claren Road's funds and the its plans for managing the redemptions.

Structured Finance

Trading vet brought in

Luca Favero has joined Numen Capital as portfolio manager and research analyst. He arrives from SG, where he was director - credit trading, and was European head of credit derivatives trading for Calyon prior to this. Favero's experience spans CDS and structured finance, with roles also at Nomura, Credit Suisse and Lehman Brothers.

Structured Finance

Monroe, Channel form partnership

Monroe Capital and Channel Partners have entered into a joint venture relationship. Monroe has additionally acted as sole lead arranger and administrative agent for a US$50m senior credit facility to support the growth of Channel Partners.

Channel Partners provides small business working capital loans exclusively through partnerships with equipment leasing and finance companies. It will look to utilise Monroe's capital resources and relationships in the banking and asset management industries, according to Channel Partners ceo Brad Peterson. Monroe specialises in providing senior and junior debt and equity co-investments to middle-market companies in the US and Canada.

Structured Finance

Marketplace lender hires Zinn

ApplePie Capital has appointed Jeff Zinn as head of capital markets. He joins from Jefferies, where he was md, specialising in structured product sales that included ABS, MBS and CLOs.

Zinn will now be responsible for accelerating ApplePie Capital's growth and expanding the company's relationships with institutional investors. He has also held roles at The PrinceRidge Group, Bank of America and UBS.

Structured Finance

Hedge fund adds ABS trader

Scott Eichel has joined Brevan Howard as a partner in its New York office. He will focus on senior fixed incomes securities for the firm, specifically ABS. Prior to joining, Eichel was head of securitised debt at RBS.

Structured Finance

SF team expands

Morgan Lewis continues to expand its global structured transactions capability in London with the addition of structured finance partner Theresa Kradjian, who joins the firm this month, and corporate tax partner Paul Beausang, who will join in October. The pair will become part of the structured finance team formed last month, led by Matthew Duncan, Julian Goodman and Paul Matthews (SCI 9 July). The five partners previously practiced as a core structured transactions group at K&L Gates.

Kradjian focuses on a variety of MBS and ABS and structured finance transactions. In recent years, she has concentrated on CP conduits, CLOs and RMBS in the UK, as well as covered bond transactions. Beausang assists clients with a broad range of corporate tax issues, with particular emphasis on structured finance transactions, big ticket indirect real estate projects and public/private development partnerships.

"It has been our experience that recruiting teams who have practiced together for many years is the most successful way to assist our clients with their increasingly sophisticated global needs," comments Morgan Lewis structured transactions practice leader Reed Auerbach.

CMBS

CMBS lending team boosted

Walker & Dunlop has hired Jeffrey Taschler to its CMBS and high yield-focused commercial property funding (WDCPF) team. As coo and svp, Taschler will be responsible for originating commercial financing opportunities for clients nationwide in the US and will report to WDCPF ceo Tim Koltermann.

Prior to his arrival, Taschler served as md at Ladder Capital, where he led a team specialising in the origination of high yield bridge, CMBS and mezzanine debt. Before that, he was md and head of US lending/originations at UBS.

Insurance-linked securities

ILS chief replaced

Adam Szakmary has been appointed ceo and portfolio manager of Blue Capital Management. He replaces Bill Pollet, who has stepped down from his positions as ceo and president at the ILS investment manager.

Szakmary was promoted from his role as portfolio manager for Blue Capital. Previously, he was both an underwriter of the US property treaty portfolio and vp of risk management at Montpelier Re.

In addition to stepping down at Blue Capital, Pollet has resigned from his numerous executive roles at Montpelier, which includes chief corporate development and strategy officer, treasurer and svp. The news follows the recent approvals granted for Endurance Speciality Holdings to complete its acquisition of Montpelier (SCI 31 July).

Risk Management

Capital markets head named

David Myers has been appointed as Deloitte UK's head of capital markets. He is also a partner at the firm and focuses on trading, exchanges, ECNs, clearing houses and central depository systems, as well as investment bank operations, including clearing, prime brokerage and collateral management. He has worked in a variety of business lines, covering both cash and derivatives processing.

RMBS

MBS pro recruited

Rob Smialek has joined Wunderlich Securities as svp, capital markets. In this role, he is responsible for leading efforts in MBS sales and whole loan trading, focusing on the US residential mortgage banking community, banks and credit unions.

Prior to his arrival, Smialek was head of trading and hedging for New Penn Financial. His duties included pricing, selling forward contracts in agency and non-agency MBS and agency pooling for US GSE securitisation. His experience also includes roles at Bank of America, Barclays, GE Capital and Apollo Global Management.

RMBS

REIT bolsters tech capability

Two Harbors Investment Corp has appointed Jeffrey Hurley as md and chief technology officer. He has over 25 years of experience in technology management and has previously held leadership positions with Canada Pension Plan Investment Board, Nomura Holdings and Lehman Brothers.

RMBS

MERS case dismissed

The US District Court for the Middle District of Tennessee has granted MERSCORP a motion for dismissal over a borrower lawsuit challenging its role in a Tennessee deed of trust. In Johnson v. Broker Solutions, the plaintiffs identified 11 causes of action attacking the securitisation of their mortgage loan and claimed that MERS cannot be a real party of interest in a securitised mortgage.

The case is the latest incident in which the effectiveness and role of MERS has come into question in recent years (SCI passim). However, Judge John Bryant rejected the argument of the plaintiffs in his report by citing Dauenhauer v. BNY Mellon, which held that courts nationally - including Tennessee's - have consistently approved MERS' role in loans when designated as the nominee and beneficiary under a deed of trust. Bryant held that because the plaintiffs' deed of trust named MERS as nominee and beneficiary, MERS' role was valid.

Bryant also identified a 'flood of cases' where courts have addressed claims and 'certified forensic audit' or 'property securitisation analysis reports' that are almost identical to the report presented in the plaintiffs' complaint. The judge cited a previous district court ruling in Renfroe v. Flagstar Bank, which noted that Renfroe's allegations had been copied verbatim from a generic complaint readily available online and therefore reiterated the validity of MERS' role as trust beneficiary.

ABS

FFELP repacks examined further

Fitch says it is evaluating a variety of proposals and alternative solutions from market participants to address the risk that certain FFELP student loan ABS tranches may extend beyond their legal final maturity dates (SCI passim). The proposals include repackaging tranches with heightened maturity risk into new transactions with significantly longer legal final maturity dates.

In its simplest form, an existing tranche with heightened maturity risk would be placed in a trust and a new security with a significantly longer maturity date would be issued in its place. Assuming a straight pass-through of cashflows, the new security could in theory obtain a triple-A rating, according to Fitch.

The agency says  it would need to be confident to a triple-A level that the new maturity date would not be breached. In doing so, it would also need to consider potential cashflow changes on the underlying security, as well as any uncapped costs and other fees associated with the repackaged transaction. The original rating of the security will remain outstanding and could face downgrades under Fitch's criteria for rating FFELP student loans.

Fitch is also considering amendments to transaction documents to allow for an increased level of loan purchases. Navient has already amended 17 transaction documents to allow for up to 10% of the original pool balance to be purchased from individual trusts. In evaluating programmatic and bulk loan purchases from trusts, the agency says it will consider the ability of the issuer to make such purchases and review the post-purchase tranche balance, payment speeds and amortisation pattern to determine if the risk has been sufficiently reduced to a level commensurate with the current rating.

The other development cited by Fitch is maturity extension. Issuers are currently working with investors to get approval on extensions for tranches with looming maturity dates. However, to implement such a change, 100% of affected investor approval is typically required.

While challenging from an administrative perspective, Fitch believes this approach is relatively straightforward. Post-change, investors would continue to receive interest payments in accordance with the original or new terms and would ultimately be paid in full by the new maturity date. A missed original maturity date would not be considered an event of default if all bondholders agree to the extension, meaning the tranche could retain its triple-A rating.

Fitch will continue to review FFELP SLABS tranches currently on rating watch negative and assess its criteria as it develops new maturity stresses. Once finalised and communicated with the market, rating actions will be taken as appropriate.

ABS

Origination model risks weighed

CommonBond's first private student loan ABS transaction has credit risks similar to those of other securitisations backed by loans offered via marketplace lending platforms, reports Moody's. However, the credit quality of CommonBond's loans is of a similarly high quality to that of SoFi's student loan ABS (SCI 30 July).

In the CommonBond Student Loan Trust 2015-A (CBSLT 2015-A) transaction, Wisconsin-based Bank of Lake Mills originates the loans and then sells them to CommonBond. Moody's notes that this is similar to models used by prominent marketplace lenders, in which a bank is both originator and lender of the loans.

"This model could call into question which entity is the 'true lender' of the loans, a possible weak link in ABS transactions that CommonBond sponsors, though we believe this risk for CommonBond is relatively low," says Moody's vp and senior analyst Nicky Dang.

In the most severe case, a legal challenge over true lender status could result in some of the loans becoming void or unenforceable. However, although recent litigation in the consumer loan industry has stemmed from disputes over loans whose interest rates exceeded usury limits, the rates on CommonBond's loans are below the limits set in most state usury laws.

Other challenges could arise if the Bank of Lake Mills were to cease operations or CommonBond were to terminate its relationship with the bank. CommonBond would then need to either come to a similar arrangement with another bank or obtain the licenses required to originate loans,which could disrupt its operations and negatively affect borrower repayment behaviour, potentially leading to higher default rates.

Additionally, if other courts were to broadly construe a recent decision by the US Second Circuit Court of Appeals (SCI 21 July), they could deem some of CommonBond's loans unenforceable or lower the interest rate on the loans, reducing recoveries on defaulted collateral in the securitisation. But Moody's believes this is also a relatively low risk in the CBSLT 2015-A transaction, again because the interest rates on the loans are generally below state usury limits.

Moody's also highlights the fact that, like SoFi loans, most of the loans in CBSLT 2015-A are loans that refinanced existing student loans. These loans typically have very low default rates because they are primarily to borrowers who attended graduate programmes and are now employed.

ABS

SLABS sponsor risks observed

Slowing repayment rates on FFELP student loan ABS trusts sponsored by Navient and Nelnet will have a modest impact on their risk profile, according to Moody's. However, the sponsors could still face some risks from corporate debt and liquidity challenges.

Repayment rates on the FFELP ABS trusts continue to slow due to growing number of borrowers opting for income-based repayment plans, while the the number of loans in deferment and forbearance remains high. "However, these factors will weaken both companies' cashflows only slightly and the risk of impairment to the residual investments in these securities because of the slowing payment rates is also limited," says Brian Harris, a Moody's svp.

Although the direct financial costs to both companies is limited, Navient does have a large amount of unsecured debt - US$8.8bn - maturing over the next four years. Refinancing this debt at a time when student loans are likely to remain a focus of policymakers is the key risk for Navient, as public policy initiatives could create uncertainty for the company. However, the company will have access to the sizeable amount of cash generated by its student loan portfolio, as well as significant unencumbered assets, currently comprised of US$1bn of FFELP loans and US$4.7bn of private student loans.

Meanwhile, Nelnet's business is funded almost entirely with securitisations and cash from operations. In addition, given that its US$60m of corporate debt does not mature until 2036, its refinancing risk is minimal.

With regard to the direct financial risks from the slowing repayment rates, both Navient and Nelnet face some potential liquidity challenges. One such challenge could arise if the companies were to purchase loans from their FFELP ABS trusts up to the permissible limits to lessen the likelihood that ABS bonds will not be repaid by their maturity. However, Moody's says that significant purchases are likely only if the companies believe they will be able to obtain permanent financing for the loans.

Further, the two companies' residual investments in the securitisation trusts could pose another challenge if the bonds do not pay down fully by their final maturity dates. Nonetheless, the potential residual interest impairment over the next 10 years is only about US$185m for Navient (5.3% of its tangible equity) and US$17.5m for Nelnet (1.1%).

ABS

Debut ABS for marketplace lender

Marketplace lending platform Avant has completed its first securitisation, which provides US$139m in debt financing. The deal has three tranches and was placed by Jefferies.

Further deals could follow, as Avant says its inaugural ABS "sets a strong precedent for future transactions". The company has also closed a US$200m revolving warehouse facility, with JPMorgan and Credit Suisse serving as senior lenders and Waterfall Asset Management serving as a mezzanine lender. The deal will provide debt financing for Avant's core US installment loan business.

ABS

Agency lowers tobacco ratings

S&P has lowered its ratings on 14 maturities of Tobacco Settlement Financing Corp Series 2015A and removed them from creditwatch negative. There is an action plan in place to address an issue that could affect some of the series 2015A bonds, but the rating agency is increasingly unsure that the process will conclude successfully.

The ABS is backed by the right, title and interest in certain amounts due to the state of Rhode Island under the 1998 master settlement agreement. When S&P assigned final ratings in March, it did not consider certain provisions of the transaction documents regarding an event of default triggered by the subordinate series 2015B bonds, which would have implications for cashflow stress tests.

In resolving its creditwatch, S&P has determined that certain maturities of the 2015A bonds maturing on or after 1 June 2019 are not able to withstand the agency's cashflow stress test. A longer-maturity bond has also been downgraded due to the increased uncertainty and potential for event risk in the tobacco industry over the longer time horizon relative to the risk associated with other bonds with shorter maturities in the transaction.

Bonds maturing in 2019-2025 have been downgraded from single-A to triple-B plus. Bonds maturing in 2026-2030 have been downgraded from single-A minus to triple-B. The 2035 and 2040 bonds have both been downgraded to triple-B, from single-A minus and triple-B plus respectively.

Structured Finance

Pledge accounts mechanism welcomed

The introduction of pledge accounts is one of the most significant developments in Russian securitisation stemming from the July 2014 law, according to Moody's. Credit Europe Bank's recent Special Financial Organisation Europa 14-1A ABS was the first Russian transaction to feature such a mechanism.

The pledge accounts mechanism allows noteholders to enforce the funds in their favour if an issuer becomes insolvent or defaults. "A pledge account is a stronger arrangement for ABS noteholders than a traditional bank account. The latter does not allow for pledging the issuer's monetary claim in the noteholders' favour. Previously, all creditors of an insolvent account holder could have a claim over account funds," says Olga Gekht, vp - senior credit officer at Moody's.

She adds: "We could see more deals with pledge accounts - owing to the extra protection that they provide - as Russian originators begin to securitise non-mortgage assets, such as consumer loans and credit card receivables."

However, Moody's notes that the pledge account mechanism does not completely protect funds in the account from an account bank's insolvency. If the account bank defaults, the Central Bank of Russia can impose a moratorium over the accounts, including the pledge accounts.

Greg Davies, Moody's avp - research analyst, explains: "Under the moratorium, the Central Bank can temporarily freeze the funds in the clients' bank accounts for up to three months. Any cash that the borrowers pay into the collection account following the default of the account bank could become lost in the account bank's insolvency estate."

Special Financial Organisation Europa 14-1A features several pledge accounts, but there is no trigger for the transfer of the collection account to another bank before the servicer's insolvency. Moody's therefore accounted for account bank risk associated with the pledge collection account in its rating analysis of the transaction. If the servicer were to default, the agency assumes that there would be a loss of two months of collections.

Structured Finance

Structured real estate sale inked

Sabal Financial Group has retained Holliday Fenoglio Fowler (HFF) to market and sell a US$541m portfolio of real estate and performing, sub-performing and non-performing loans in a structured sale. The offering consists of 11 different geographically diverse sub-pools, which is designed to provide investors with flexibility to pursue specific pools to meet their investment objectives.

The portfolio consists of three major asset pool groups: a US$91.5m performing and sub-performing loan pool; four NPL pools totaling US$156.9m of outstanding principal balance organised geographically; and six real estate pools organised geographically comprised of real estate assets with a combined pre-foreclosure outstanding principal balance value of US$297.2m. The offering is Sabal's fifth structured sale transaction using an investment advisor.

"This pooled portfolio provides an excellent opportunity for investors looking for predictable cash yield from high quality investment property and loans, in addition to achievable value-add strategies," comments Brock Cannon, md of HFF.

Structured Finance

China accessibility expanding

S&P says that China's securitisation market has offered international investors greater access to renminbi assets over the last three quarters, helping bridge the gap between domestic and international practices. The latest development in July saw the start of offshore investors using QFII and RQFII channels to buy securitisation notes in the interbank bond market.

China's securitisation market is small compared with its bond market, with aggregate issuance of less than RMB600bn between 2005 and 1H15. However, it has attracted attention from domestic and international investors since the progressive roll-out of management guidance by regulators and opening to offshore investors.

The Chinese Securities Regulatory Commission (CSRC) and China Banking Regulatory Commission (CBRC) rolled out plans for transaction registration in their respective securitisation schemes back in November 2014. Since then, S&P believes that several infrastructure enhancements have convinced many that market normalisation is under way and that international practices are likely to be followed.

Among the developments that have occurred have been The People's Bank of China (PBOC) announcing an issuance registration process that allows shelf registration for multiple issuances and China's National Association of Financial Market Institutional Investors announcing information-disclosure requirements for auto-loan ABS and RMBS transactions (SCI passim). S&P believe these developments have helped adress money flow to and from the market, and helped narrow the information gap with more formal means of information disclosure.

The result has been increased participation by international investors, with at least five transactions carrying international ratings in the market and many transactions without international ratings attracting international investors. More than RMB110bn in securitisation transactions was issued under the CBRC/PBOC scheme in the first six months of 2015 and more than RMB30bn was launched under the CSRC programme.

Under the CBRC/PBOC scheme, smaller originators - such as city banks, agricultural banks and foreign banks - increased their issuance of CLO transactions, while larger banks continued to offer CLO, RMBS and consumer receivables ABS deals. Auto finance companies also rolled out many auto loan ABS.

Lease-backed transactions, infrastructure fee securitisation and micro-loan financings were popular under the CSRC programme. S&P also saw the first transaction with revolving collateral during the period, as well as market innovation in the form of property management-fee securitisation and catastrophe bonds.

Nonetheless, additional risks have surfaced for new issuers, assets and structures. The shorter history of securitisation in China raises the difficulty of evaluating the sensitivity to macroeconomic uncertainty and cashflow stress when important transaction parties need to be replaced, while questions remain over how transaction arrangements will work under stressed conditions, such as industry-related difficulties and legal disputes.

S&P adds that international investors want more information about economic development in China and to know how assets will perform under potential stress and related key risk factors. Such opacity has kept some investors out of the market, but the agency believes continued improvements in transparency and market standards should support further capital market development.

Structured Finance

Non-core disposals at 'record rate'

New research by PwC shows that European banks are disposing of their non-core portfolios at a record rate. In the first half of this year, transactions have been completed for portfolios with a face value of around €55bn, an increase of 20% on the same period in 2014.

As well as increased volumes, higher prices are being driven by continued demand from investors and favourable debt markets allowing investors to leverage many transactions. Continued calls from stakeholders for banks to continue their restructuring and deleveraging - prompted in part by last year's Asset Quality Review - has spurred such activity further.

"The volume of transactions in the market today is higher than it has ever been and shows no signs of abating over the next 12-18 months," comments Richard Thompson, global leader of PwC's portfolio advisory group. "Our analysis shows that banks continue to hold around €2trn of unwanted loans, which means that the supply of loan portfolios into the market won't dry up anytime soon."

European transactions currently underway total around €84bn and, with a flood of new transactions expected to launch after the summer holiday period, total sales for the year are expected to be close to €150bn - compared to €91bn in 2014. Driven by a few large deals, the UK market is likely to top the transaction table this year, with a total expected transaction volume of in excess of €60bn. Transactions in Germany, Spain and Italy are likely to be around €20bn-€25bn for each country.

PwC's research also shows that over the past five years banks have disposed of loan portfolios with a total face value of around €250bn. UK and Irish banks have been the largest group of sellers, accounting for half of this total. Spanish banks account for around €45bn, with Germany and Italy a long way behind at around €25bn and €15bn respectively - though in Italy's case, transactions this year are expected to be greater than the past five years combined.

"While there may well be some turbulence in this market over the next couple of years, regulatory changes, increased investor appetite and a stock of NPLs the highest in Europe mean it will be a significant market for many years to come," Thompson observes.

PwC identifies loan portfolios backed by real estate as continuing to be the most traded asset class, with around 80% of all transactions completed so far this year being either residential mortgages or lending backed by commercial real estate. This represents an increase from around 70% in 2014.

Structured Finance

Counterparty-linked review underway

S&P has placed 70 RMBS, 10 CDO, six CLO and five ABS tranches from European transactions on credit watch negative. The agency's actions are in response to the introduction of bank resolution frameworks in the UK and Germany, and the subsequent lowering of ratings to banks that serve as counterparties to the related transactions.

S&P lowered the ratings on Barclays, Deutsche Bank and National Westminster Bank - all of which have counterparty links to the affected transactions - due to the new bank resolutions. The agency says its placement of the tranches on negative outlook are additionally due to the ongoing regulatory impetus to have systemic banks hold sizeable buffers of bail-in capital that the authorities could use to recapitalise them and the associated reduced prospects for extraordinary government support.

Transaction documents usually provide for a range of potential remedies to be taken where S&P has lowered its ratings. Triggers, such as the replacement of the counterparty or provision of additional guarantees, are potential solutions. According to S&P's current counterparty criteria, the initial remedy period of 60 calendar days may be extended for up to an additional 30 calendar days if a written action plan to remedy the downgrade within the extended remedy period has been provided to it.

The initial remedy period has expired for the affected transactions and a remedy action has not been completed. However, for the majority of transactions, the agency has received a plan to replace the ineligible counterparty, with the intention of maintaining the current ratings on the notes.

S&P will seek to resolve the creditwatch placements in the coming weeks, once it has reviewed the transactions in conjunction with any remedy actions that have been taken. It expects to resolve all of the placements by November.

CDO

Trups defaults steady

The number of US bank Trups CDO combined defaults and deferrals remained at 18.8% at the end of July compared to the previous month, according to Fitch. One issuer representing US$3m of collateral in one CDO was closed by the FDIC in July and was marked as defaulted in Fitch's bank Trups universe - the first FDIC bank closure in the Fitch-rated bank Trups CDO universe in 2015.

Additionally, one defaulted issuer, with a notional of US$5m in one CDO, was sold from the portfolio with an estimated recovery of 1.6%. There were no new deferrals or cures in July.

Across 76 Fitch-rated Trups CDOs, 229 defaulted bank issuers remain in the portfolio, representing approximately US$5.6bn of collateral. There are 127 issuers that are currently deferring interest payments on US$1.5bn of collateral.

CDS

Liquidity boost for index rules

Markit has updated its rules for the CDX High Yield Index, effective for the upcoming index roll in September. The move follows an industry push to reinvigorate the CDS market (SCI 17 June).

As part of the index roll process, Markit will compile a liquidity list after each publication of the DTCC's 'Six-month Analysis Top 1,000 Single Names' report, which will be used to determine the roll exclusions and inclusions and create the new series of the HY index. Using the average weekly trading activity measured in the DTCC report, the list will be created by: determining all entities for which single-name CDS are traded under the Standard North American Corporate Transaction Type; including the entities that have been assigned a rating of below triple-B minus; and then ranking these entities from the most liquid to the least liquid, based on notional market risk activity. To the extent that two or more entities are determined to be equally liquid based on notionals, they shall be ranked from the most liquid to the least liquid based on number of trades.

No later than eight business days prior to a roll date, Markit will create a roll exclusion list comprised of current HY entities that no longer satisfy the liquidity list criteria or that have experienced corporate events or credit events. Further, an entity will no longer be suitable for inclusion in the HY index if it has issued/guaranteed less than US$100m of outstanding publicly traded debt securities or if it has not appeared in the two most recent consecutive DTCC reports since its inclusion in the index.

However, these entities shall only be excluded if the number of entities removed from the index is less than 10. In such circumstances, CDS liquidity-based exclusions will be carried out until the total number of entities removed from the index reaches 10 or until there are no entities remaining that are identified as CDS liquidity-based exclusions.

Entities will be removed based on sector weightings, with the entity that is in the sector with the highest excess weight of over 3% being removed first. If there are no sectors with an excess weight of over 3%, then entities will be removed based on the amount of debt outstanding, with the entity with the least amount of debt outstanding removed first.

Sector weights will be determined by taking the total weighting of the remaining constituents in a particular industry sector and dividing that by the total weighting of remaining constituents of the index. The sector weights of the most recently rebalanced Markit iBoxx USD Liquid High Yield index will be calculated by taking the market weighted average of each issuer and dividing that by the total weight of the index. The sector weights between the two indices will then be compared and if there are any sectors with an excess weight of over 3% in the HY index when compared to the iBoxx index, the entity listed lowest in the HY liquidity rankings from the sector with the highest excess will be excluded.

If there are two sectors with the same excess weight, the entity that is lower in the HY liquidity rankings will be excluded. The sector weights of the HY index will be recalculated after each exclusion.

If there are no roll exclusions, there will be no roll inclusions. Roll inclusions will comprise entities that rank within the top 50 of the HY liquidity rankings to reach the constituent level of 100 entities.

If fewer roll inclusions than roll exclusions are identified after the CDS liquidity-based criteria has been applied, a list of entities will be identified from the iBoxx index based on trace volumes, debt outstanding and DTCC average trade volumes for the prior six months. Entities in the list will be ranked in order of the aggregate value of these three values and added to the index in order of their ranking of highest aggregate value to lowest aggregate value.

An entity will not be eligible for inclusion if the average par weighted bid price for its bonds in the iBoxx index is 40 points or more below the par weighted bid price of the iBoxx index itself.

A similar roll process will be undertaken for the CDX Investment Grade Index, but with a few important differences. Constituents will have a rating of triple-B minus or above, but will not be eligible if they are included in the lowest 30% of the IG liquidity rankings. Eligible entities should have an average CDS spread over the preceding 90-day period that is less than five times the average CDS spread of the current series of the IG Index over the same period.

If there are not enough eligible entities on the liquidity list to meet the number of roll inclusions required, a supplementary list will be created based on entities included in the Markit iBoxx USD Liquid Investment Grade index, listed in descending order of total issued or guaranteed publicly traded debt securities.

CMBS

EMEA maturity defaults dip

The 12-month rolling loan maturity default rate for European CMBS in S&P's rated universe decreased to 19.6% from 25%, at end-July. The agency reports in its latest monthly European CMBS bulletin that the overall senior loan delinquency rate remained stable at 49.8%.

The delinquency rate for continental European senior loans increased slightly to 63.3% from 63.1%. The rate for UK loans remained stable at 20.6%.

CMBS

CMBS maturities looming

Approximately 35% of Fitch's performing US CMBS loan universe will mature through the end of 2017. Included is US$10.8bn that is scheduled to mature by end-2015, with US$52bn scheduled in 2016 and US$67bn scheduled in 2017.

Through the end of July, approximately US$20bn of loans with scheduled maturities in 2015 have been repaid. Additionally, approximately US$1.3bn and US$6bn of loans with original maturities in 2015 and 2016 respectively have defaulted.

By vintage, approximately 55% of the US$10.8bn in the remaining scheduled 2015 maturities are from 2005 transactions and another 35% represents loans from 2006 transactions. The largest property type concentration is retail, accounting for 37% of remaining 2015 maturities, followed by office (25%) and multifamily (13%).

The largest non-specially serviced loan maturing in 2015 is the US$563.9m Kindercare Portfolio (securitised in GECMC 2006-C1). The loan paid off in the August distribution ahead of its December maturity date; the loan's open period began in June.

In second and third places are the US$275.7m Oak Park Mall (BSCMS 2005-PWR10) - also maturing in December - and the US$192m JQH Hotel Portfolio (GSMS 2006-GG6), which matures in October. Fitch expects the JQH Portfolio loan to pay in full at or before its maturity date after passing Fitch's refinance test. However, the Oak Park Mall loan did not pass the agency's test, but could still refinance using a market refinance stressed constant of 5%.

Fitch says that many of the peak vintage loans may not be able to refinance at their respective maturity dates without additional capital. Potential higher interest rates later this year may also put additional stress on their ability to refinance.

The agency adds that many specially serviced loans may have to refinance or pay off in the near term. One of the larger assets that may be disposed of this year is the US$225m Riverton Apartments asset (CD 2007-C4), which is a 1,228 unit, rent-stabilised multifamily property located in Harlem, New York. A disposition, according to the loan's special servicer, is likely prior to the end of 2015 as litigation alleging rent overcharging has been settled and fully resolved.

Insurance-linked securities

ILS upgraded on sponsor action

S&P has raised its credit ratings on Avondale Securities class A1 and A2 notes from double-B plus to triple-B minus, following a similar action taken on the support sponsor, the Bank of Ireland. The ratings on the two ILS bonds are weak-linked to the long-term rating on the Bank of Ireland due to a support agreement, which obligates it to meet - under certain conditions - payments due on the notes, net of potential tax liabilities and costs from servicing the policies.

At year-end 2014, the total outstanding balance on the notes was €92.8m, close to half of the €181m balance at end-2012. At this level, S&P notes that the deal is sufficiently overcollateralised relative to the value of the total projected surplus from the defined insurance portfolio over time. The legal maturity on the notes is 30 July 2032.

NPLs

Latest agency auction opens

Freddie Mac is continuing its marketing of deeply delinquent NPLs from its mortgage investment portfolio by putting up for auction a further US$1.2bn in standard pool offerings. The Ocwen-serviced assets are being marketed as five geographically diversified pools and are the GSE's sixth NPL offering this year. 

Bids from qualified bidders are due by 9 September, with the sale expected to settle in October. All eligible bidders - including private investors, minority and women-owned businesses, non-profits and neighbourhood advocacy funds - are encouraged to bid. The winning bidder will be determined on the basis of economics, subject to meeting Freddie Mac's internal reserve levels.

Advisors to Freddie Mac on the transaction are Credit Suisse, Wells Fargo and First Financial Network.

Risk Management

Dealer liquidity scrutinised

PwC has compiled a report on the state of global market liquidity on behalf of the Global Financial Markets Association (GFMA) and the Institute for International Finance (IIF). The analysis highlights the important role of market-making and the roles played by different market participants that contribute to resilient market functioning, including the vital role of dealer market-makers as a source of liquidity.

"The findings from our research suggest early warning signals that regulation and other market factors are contributing to a reduction in certain aspects of secondary market liquidity that is likely to be exacerbated by the unwinding of quantitative easing or another stressed market situation," comments Nick Forrest, director in PwC UK's economics and policy practice. "Our analysis suggests it is important for policymakers to consider the aggregate impact of current regulation and weigh the incremental financial stability benefits of new rules against the incremental costs of diminishing market liquidity to ensure regulation is not counterproductive."

The two associations commissioned PwC to undertake a broad review of market liquidity data, given the importance of liquidity to an efficient financial system and increasing concerns from market participants and policymakers regarding the impact of financial regulation on liquidity. The analysis focuses on available data regarding the tightness, immediacy, breadth and depth of liquidity and concludes that there are grounds for policymakers to review the calibration of reforms to date and the ongoing regulatory agenda, in order to properly understand the effects of regulatory initiatives by asset class, and to consider whether upcoming regulatory initiatives could likely exacerbate the trends in liquidity with no incremental benefits to safety and soundness.

The report finds that notwithstanding the benign market environment encouraged by monetary stimulus, a combination of several factors - including banks reducing risk, following the introduction of new regulatory frameworks - have contributed to a measurable reduction in financial market liquidity across various asset classes. For instance, it highlights that European corporate bond trading volumes declined by up to 45% between 2010 and 2015. Evidence suggests that block trades are becoming more difficult to execute without affecting prices.

Further, bank holdings of trading assets decreased by over 40% between 2008 and 2015, while dealer inventories of corporate bonds in the US have declined by almost 60% over the same period. This has accompanied a decline in turnover ratios in corporate bond markets, where trading volumes have failed to keep pace with the increase in issuance.

The analysis indicates that this withdrawal of dealer liquidity to date has not caused measurable economic damage due to quantitative easing programmes and extraordinary monetary policy that are reducing liquidity pressures, and because market participants are adapting by trading some instruments less frequently and in smaller sizes. However, following the unwinding of QE or in a stressed environment, liquidity risks and market fragilities could be revealed - potentially resulting in higher volatility in financial markets.

The report concludes that it would be helpful for all stakeholders to better understand liquidity conditions and the link between regulation and market liquidity, so that future regulations strike the right balance between promoting stability and maintaining financial markets liquidity. Further, it is important to review the global regulatory landscape to ensure coherence and to avoid detrimental financial markets liquidity effects or fragmentation that could disrupt the financial system, according to the associations.

Risk Management

Resolution protections suggested

The EBA has issued an opinion which responds to the European Commission on how to define what arrangements should be protected in a partial property transfer of a bank in resolution. The opinion aims to ensure full protection of well-established sources of refinancing, such as secured debt - including securitisations - and means of risk mitigation.

The Bank Recovery and Resolution Directive lists five general categories of arrangements: covered bonds and structured finance, security, title transfer collateral, set-off and netting. As these categories are quite broad, the EBA says that the scope needs to be further specified, which the Commission is empowered to do.

The underlying principle proposed by the EBA in its opinion aims to allow effective separation and transfer of critical functions of the failing bank to another entity under a framework of safeguards. It notes that the resolution authority should have sufficient flexibility in splitting the balance sheet to reach the resolution objectives.

In particular, the EBA recommends that the Commission's delegated acts provide the highest possible degree of legal certainty with regard to the integrity of the arrangement as a whole and minimise the risk of legal challenges. At the same time, the delegated acts should avoid hampering the use of partial transfers within the application of a resolution tool and preventing contracts that would create an impediment to a partial transfer without a legitimate interest. On the other hand, the opinion says that the criteria in the delegated acts should not impair legitimate interests in developing new products and in structuring transactions.

The EBA also underlines that the protection granted should reflect the economic rationale for the specific legal treatment. This particularly applies to the function of protected arrangements in relation to reducing systemic risk in financial markets by minimising contagion, and should take into account whether they are recognised for this purpose under the applicable regulatory rules. In the same vein, statutory protection of those arrangements in member states' insolvency laws should be taken into consideration.

Accordingly, the EBA also recommends that in the case of set-off and netting arrangements, the protection should be limited to arrangements covering financial contracts and to those recognised under prudential rules.

Risk Management

UTI consultation opens

The Committee on Payments and Market Infrastructures (CPMI) and IOSCO have published a consultative report on the harmonisation of unique transaction identifiers (UTI). The report is the latest in an agenda set out by the G20 leaders in 2009 to improve data aggregation and reporting standards for OTC derivatives reported to trade repositories.

The regulatory bodies note that the objective of the report is to produce clear guidance as to UTI definition, as well as clarify the format and usage that meets the needs of UTI users. The report intends to make the subject of UTI global in scale and jurisdiction-agnostic, thus enabling the consistent global aggregation of OTC derivatives transaction data.

Besides this report, the CPMI and IOSCO will also be issuing a consultative report on the harmonisation of a first batch of key OTC derivatives data elements, other than UTIs and unique product identifiers (UPIs), that are essential for meaningful aggregation of data on OTC derivatives transactions on a global basis. They also plan to issue consultative reports on global UPIs and on other batches of key data elements other than UTIs and UPIs in the coming months.

In the meantime, the CPMI and IOSCO are inviting market participants to submit comments on its UTI consultation by 30 September.

Risk Management

Further NSFR, LR analysis underway

The EBA is set to incorporate additional analysis into its calibration reports on net stable funding requirements (NSFR) and the leverage ratio (LR). The move follows a request by the European Commission to obtain further advice, so as to ensure its possible future policy actions in this area are well informed.

As such, the EBA will conduct further analysis on proportionality, the scope of application and the impact on markets of the calibration of NSFR and LR. The analysis on proportionality will be based on an assessment of the impact of the requirements on banks with different business models and will also specifically aim to cover potential future reporting requirements. The authority says it will try to incorporate these aspects into its reports to the maximum extent possible and taking into account constraints in data availability.

The EBA is mandated to submit a calibration report on NSFR by end-2015 and on LR by October 2016. However, the delivery date of the latter is likely to be advanced to July 2016.

Risk Management

Swap reporting amendments outlined

The US CFTC has issued proposed amendments to existing regulations on swap data record keeping and reporting requirements for cleared swaps. The amendments aim to specifically address clarity over swap counterparties and registered entities regarding their reporting obligations, as well as improving the efficiency of data collections and maintenance associated with the reporting of cleared swaps.

The proposals would modify Part 45 of the CFTC's regulations that were adopted in December 2011. Part 45 implements the requirements of Section 21 of the Commodity Exchange Act by establishing the manner and contents of reporting to swap data repositories.

Among other goals, the proposals intend to remove uncertainty as to which counterparty to a swap is responsible for reporting creation and continuation data for each of the various components of a cleared swap transaction. This includes further clarifying whose obligation it is to report the extinguishment of a swap upon its acceptance by a derivatives clearing organisation for clearing.

The CFTC anticipates that the proposals will have a number of other benefits, including a reduced likelihood of double-counting notional exposures. It is also anticipated that there would be an improved ability to trace the history of a cleared swap transaction from execution between the original counterparties to clearing novation.

The comment period ends 60 days after the publication in the Federal Register.

RMBS

Fresh risk-sharing deal unveiled

Fannie Mae has completed its latest credit risk-sharing RMBS, the first of its kind to have an international reinsurer participate in the deal. Like its predecessor, CIRT-2015-2 allows Fannie Mae to retain risk for the first 50bp of loss - this time on an US$8.1bn pool of loans.

The GSE says that if this US$40.5m retention layer were exhausted, reinsurers would cover the next 250bp of loss on the pool, up to a maximum coverage of approximately US$202.5m. Coverage is provided based upon actual losses for a term of 10 years.

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

The reference loan pool for the transaction consists of 30-year fixed rate loans with LTV ratios greater than 60% and less than or equal to 80%. The loans were acquired by Fannie Mae from April through August of 2014.

RMBS

Review triggers examined

A number of features in the representation and warranty (R&W) framework of Shellpoint's new RMBS deal, SCOT 2015-1, are stronger than other jumbo RMBS deals in finding and remedying loan defects. In its latest Credit Outlook publication, Moody's notes that the transaction has two new triggers for reviewing loans that can reveal breaches of R&Ws that may remain hidden in other deals.

The two triggers are a mandatory review upon loan modification and an optional review of all 30-plus day delinquent loans if an originator goes bankrupt. Other transactions typically require R&W breach reviews when a loan becomes 120-days delinquent, is liquidated at a loss and/or when the servicer stops advancing. However, SCOT 2015-1's R&W framework includes all these triggers, as well as modification and bankruptcy triggers

Similar to a delinquency, a loan modification may indicate an underlying flaw in the loan that breaches a R&W. Without this mandatory trigger, a loan modification could conceal R&W breaches by making the delinquency breach review trigger inapplicable. For example, if the servicer modifies the loan prior to it becoming 120-days delinquent, the loan will not be applicable for a review because the servicer will typically report a modified loan as current.

In addition, SCOT 2015-1's bankruptcy trigger increases the likelihood that a bankrupt originator's estate will pay R&W breach claims. In the event that the originator or seller becomes bankrupt, the controlling holder has the option to review any loan that is at least 30-days delinquent for breaches of R&Ws. Reviewing these 30-day delinquent loans immediately instead of waiting until they become eligible for review after tripping the 120-day delinquency trigger will allow the transaction to maximise its R&W breach claims in bankruptcy court before they become time-barred, according to Moody's.

The transaction also mitigates potential conflicts of interest by excluding the sponsor's affiliates from being the controlling holder and voting not to pursue R&W breaches. While some RMBS transactions have the initial controlling holder and party responsible for pursuing R&W breaches on top of being the loan aggregator and seller, the holder must be independent of the depositor, the seller or any of their affiliates for SCOT 2015-1. 

A potential conflict of interest could typically arise from the aggregator's point of view, in that it may value repeat business with an originator, could have an incentive to ignore certain breaches or agree to settle breaches by some means other than requiring the originator to repurchase defective loans, such as requesting better terms on their next trade. Such conduct would allow the deal to incur losses instead of the originator.

However, SCOT 2015-1's controlling holder should be motivated to discover and pursue remedies for R&W breaches. This is because it can avoid losses from defective loans by requiring originators to buy back loans with legitimate R&W breaches.

Finally, the transaction also excludes certificates held by the seller and its affiliates from counting in the quorum to vote on whether or not to pursue R&W breaches. This mitigates a potential conflict of interest that exists when the affiliate has responsibility to backstop an originator's R&W repurchase obligations.

RMBS

Servicing rights retained

Ocwen has retained the servicing rights for 12 RMBS, following a noteholder vote on whether it should be replaced (SCI passim). Wells Fargo, as trustee for the deals, submitted a notice of event of default in March - due to the downgrade of Ocwen's servicer ratings - and requested noteholders vote on whether the firm should be terminated as servicer.

The affected transactions are: ABFC 2007-WMC1; HASC 2005-I1, 2005-OPT1, 2006-NC1, 2006-OPT1, 2006-OPT2, 2006-OPT3 and 2006-OPT4; SABR 2005-FR1 and 2005-FR²; and SVHE 2006-EQ2 and 2007-1. All 12 deals failed to gather enough votes to direct a servicing transfer away from Ocwen. Indeed, Bank of America Merrill Lynch RMBS analysts note that the majority of investors refrained from voting altogether and were regarded to be in favour of retaining the servicer.

RMBS

Aussie sales scaled down

The AOFM has released details of its fifth RMBS auction, to be held on 22 October. It has also clarified that, until further notice, it plans to offer bonds for sale in which its holdings are between A$350m and A$400m in amortised face value per auction.

Securities to be auctioned on 22 October comprise: Puma P-16 A3 notes, SMHL 2009-1 A2s, Torrens 2010-1 As and Firstmac 1-2012 A2s. Results will be announced on the same day as the auction, with settlement expected on 27 October.

The Firstmac bond was initially due to be auctioned on 15 September (SCI 14 July), but its sale has been pushed back to accommodate the AOFM's decision to reduce the volume of securities up for bid each month from a maximum of A$500m for the foreseeable future. The AOFM explains that it is "exercising its discretion with regards to sale volumes to minimise potential market disruptions".

Meanwhile, the results of the third auction - held today - have been announced. A$122.85m of bonds were sold north of par, consisting of A$39.36m Barton 2011-1 A2 notes, A$40.52m Illawarra 2010-1 As and A$42.97m SMHL 2008-2 A1s.

RMBS

Housing headwinds warning

Fitch believes it is premature for the Houston housing market to be given the 'all clear' to push on following an initial market resilience to oil price pressures and related reductions in employment and capital expenditures. The agency warns that the market has similar traits to New York City in 2008-2011 when the financial services industry was retracting.

Headwinds for the oil industry remain a concern as oil, gas and related industries comprise an estimated 35%-40% of Houston's GDP and have a multiplier effect on consumer confidence and market psychology. With WTI oil at US$42 per barrel, down from US$100 and Fitch's long-term price deck of US$70 through 2017, the agency expects continued pressure on employment and capital expenditures, which have historically been outsized relative to other corporate sectors.

Headcount reductions have been a key part of the industry's adjustment to lower oil prices and capex reductions have averaged approximately 30%-35% in 2015 for independent E&Ps so far. Moreover, recent announcements likely foretell the beginning of the second round of reductions.

Fitch says that Houston's employment outlook is similar to that for New York City in 2008-2011. Details as to where, timing, method and seniority/role/income level over company headcount reductions within these city's major industries remain unclear, but should New York be an appropriate guide, headwinds could persist for an extended period of time.

While economic headwinds will weigh on both the multifamily and single-family markets, Fitch believes that the magnitude will be influenced by the different supply and affordability conditions. Supply of new multifamily units in Houston is above the national average and concentrated in key submarkets. With deliveries expected to accelerate later in 2015 and into 2016, it views 2H15 to 1H17 as the timeframe in which to measure performance.

As for the single-family markets, supply began to decrease in 2011, resulting in an acceleration in home prices beyond sustainable levels. Houston now ranks as the seventh most overvalued city in the US, per Fitch's sustainable home price model. As of 1Q15, the model views Houston's home prices as 15% overvalued, but expects home prices in Texas' most overvalued markets - Houston, Austin and San Antonio - to be flat to slightly down over the next year.

Initial feedback from homebuilders indicates softness in demand has been more prevalent at higher price points. In response, Fitch expects homebuilders will shift more product offerings towards the entry and affordable categories and focus on volume and velocity in recognition of the need to restore affordability.