News Analysis
Structured Finance
Time to review
Asset reviewer relevant beyond mandated role
Public securitisations in the US will soon require an asset reviewer - as mandated by Reg AB 2 (SCI passim) - but the benefits of such a role may see it also included in both private and international deals. However, concerns remain that the function will not be used in the sector that led to its creation.
"One of the biggest problems exposed by the mortgage crisis was the lack of protections for investors in US securitisations. The systems that were in place were not always helpful, to say the least, so the asset reviewer role is one way in which investor confidence can be restored," says Vincent Varca, structured finance md, FTI Consulting.
Asset reviewers will be mandated for all US public securitisations from the end of this year. The role will involve reviewing assets for rep and warranty compliance, should a certain threshold of delinquencies be breached, so it will require a special skill set.
An asset reviewer will need sufficient expertise and resources - including a strong enough financial footing to ensure it can act if delinquency triggers are in fact breached - to carry out the role, suggests Varca. Some deals may also require a global presence.
"In its basic form, after the delinquency trigger has been breached and investors have voted in favour of a review, the asset reviewer will review the delinquent assets to determine if they were originated in adherence with their stated representations and warranties. However, the role can be expanded to include other areas of concern to investors, such as verification of the monthly waterfall payments, oversight of certain servicer functions, random review of reps and warrants on non-delinquent assets to identify potential issues, etc," says Varca.
But although the role has largely been introduced as part of the response to the US mortgage crisis, the nature of the RMBS market means it is less likely to become part of the fabric of this market than it is in others. As RMBS are so often issued privately, the likelihood of deals incorporating an asset reviewer is lessened.
"The asset reviewer role is particularly useful for RMBS, but it will also be required for other deals, such as credit card and auto ABS. Those markets were not hit as hard as mortgages during the crisis, so it is somewhat ironic that this is where the role will be most common," notes Varca.
He continues: "This is because credit card and auto ABS are typically public, whereas mortgage securitisations are now often done privately under 144a. If a deal is done privately, it does not have to include an asset reviewer - although, of course, that does not mean that one cannot be included anyway."
Indeed, if the role proves its worth with public securitisations, there could well be investor demand for it in other deals too. This could lead to inclusion not only in private US deals, but also in international deals as well.
"We think the asset reviewer idea will find its way to the European market as well. The IMF has highlighted the importance of quality control firms and, as we have often seen, markets take good ideas from other markets. This is something that can help the market, so some version of the role could definitely come up in Europe," Varca concludes.
JL
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SCIWire
Euro secondary lacks conviction
Despite an improving overall tone, the European securitisation secondary market continues to lack conviction.
Even though broader market concerns are shelved for now yesterday was extremely quiet thanks to month-end and the summer lull. What small pockets of activity there were revolved around short-dated prime assets, some peripheral paper and a few major CMBS names.
With a UK bank holiday on Monday little is likely to change today. There is one European BWIC on the schedule for today so far - a ten line €295.499m original face Portuguese RMBS list due at 10:30 London time.
The auction comprises: DOURM 1 A, DOURM 3 A, HIPOT 5 A2, LUSI 2 A, LUSI 4 A, LUSI 5 A, MAGEL 2 A, MAGEL 3 A, MAGEL 4 A and PELIC 2 A. Two of the bonds have covered with a price on PriceABS in the past three months - LUSI 5 A at 86.5 on 9 June and MAGEL 2 A at 97.41 on 15 June.
SCIWire
RMBS
Euro secondary struggles on
The European securitisation secondary market continues to struggle on amid broader market volatility.
Yesterday's European BWICs covered at reasonably strong levels where the line items did actually trade. However, the overall lack of flows continues to hamper price transparency and is pushing bid-offers still wider.
Today's BWIC schedule currently sees four lists. At 10:00 London time is a seven line €153.65m original face Italian RMBS auction.
It comprises: BERCR 9 A2, CLAAB 2011-1 A, CLARF 2011-1 A2, CLARF 2014-1 A1, CORDR 1 A2, SIENA 2010-7 A3 and VELAH 3 A. Six of the bonds have covered on PriceABS in the last three months - BERCR 9 A2 at 100.55 on 10 June; CLAAB 2011-1 A at 98.65 on 15 June; CLARF 2011-1 A2 at 100.55 on 9 June; CLARF 2014-1 A1 at 101.15 on 10 June; SIENA 2010-7 A3 at 98.27 on 8 July; and VELAH 3 A, which did not trade yesterday.
At 14:00 is a €13.25m three line CLO auction - ARBR 2014-1X B1, BABSE 2014-1X B2 and NEWH 1X C. None of the bonds has traded on PriceABS before.
Then, at 14:30 there are two CMBS lists. One involves a single €6.3m line of NACRE 2006-1 B, which has not traded on PriceABS in the last three months.
The other CMBS auction is an eight line 18.654m mix of euro and sterling tranches involving: ESTON 2006-1 C, GRF 2013-1 B, GRF 2013-1 E, GRF 2013-2 B, GRF 2013-2 C, GRF 2013-2 D, GRF 2013-2 E and GRF 2013-2 F. Three of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: GRF 2013-1 B at 100.55 on 21 July; GRF 2013-2 B at 100.6 on 21 July; and GRF 2013-2 F at 103.25 on 27 July.
SCIWire
Secondary markets
Euro secondary improves
Tone in the European securitisation secondary market is improving as broader market volatility reduces.
Market sentiment improved across the board yesterday and consequently secondary spreads edged in slightly, albeit on continuing very low volumes. Yesterday's BWICs all traded at or above expectations with the Italian RMBS auction a highlight, though covers were below recent levels.
Nevertheless, the summer lull is expected to remain in full force over the next few days in the run up to the UK holiday weekend. There are currently no European BWICs on the schedule for today.
SCIWire
Secondary markets
US CLO flurry
Today is set to see a flurry of activity in the US CLO secondary market after an extremely quiet few days, but it could be the last gasp of the summer.
"It's been very quiet, but we saw a seller bring out a buy-it-now list yesterday, which attracted some interest," says one trader. "However, only one line traded straight away as the bonds looked to be a little long-dated with most people looking for shorter mezz given long duration concerns."
The trader continues: "There are a few lists today, but there isn't much of a risk-on attitude given the equity market volatility and most people are running skeleton crews because of summer. The lists will be watched closely, but most players are likely to adopt a wait and see approach."
Overall, the trader says: "There's not a lot of volume to judge any real pricing levels and it may well stay that way over the next two weeks until after Labor Day. Then everyone will be back and we're likely to be going strong - in one direction or the other."
There are three US CLO BWICs on today's schedule so far. All involve 2.0 mezz.
At 10:30 New York time is a ten line triple-B list comprising $1m each of: ACIS 2015-6A D, AWPT 2014-2A D, CANYC 2014-1A C, CATLK 2013-1A C, CIFC 2014-5A D1, GWOLF 2015-1A C, INGIM 2014-1A C, JFIN 2015-1A D, JTWN 2015-6A C and WINDR 2014-3A D. Only CANYC 2014-1A C has covered with a price on PriceABS in the last three months - at 93H on 12 August.
13:00 sees a 22 item mixed auction totalling $56.115m. It consists of: AMMC 2013-13X A3L, ARES 2013-3X C1, BABSN 2014-IX C, BLACK 2006-1X D, BLUEM 2013-3X C, EASTL 2007-1X B, GALXY 2013-16X C, GHAWK 2007-1X B, GRNBR 2007-1X C, JTWN 2013-3X B, KCAP 2013-1X C, KEUKA 2013-1X C, LIMST 2007-1X C, MCFCL 2013-3X D, MHAWK 2013-2X D, NMRK 2013-1X D, NWSTR 2007-1X C, OCP 2013-4X B, PRIM 2007-2X C, WASAT 2006-1X B, WITEH 2013-1X A3L and WITEH 2013-1X B1L. None of the bonds has traded on PriceABS in the last three months.
Then at 15:00 is a six line $23.14m list involving: ARES 2014-1A D, AVERY 2014-1A D, CECLO 2013-20A C, FLAT 2014-1A B, HLA 2013-2A C and HLA 2014-1A C. Only CECLO 2013-20A C has covered with a price on PriceABS in the last three months - at 98.5 on 8 July.
SCIWire
Secondary markets
US CLOs tick over
Despite seasonal illiquidity and wider credit concerns, the US CLO secondary market continues to tick over.
Generic secondary spreads held fairly steady last week on low volumes once again. However, market tone is inevitably softening amid broader market volatility.
Sellers are still appearing though activity is scrappy thanks to the time of year as well as market nervousness. There are currently three US CLO BWICs on the schedule for today involving 1.0 mezz and 2.0 triple-As.
First, at 11:00 New York time is a seven line auction amounting to $8.5m - ABERD 2008-1A C, CENT9 2005-9A D1, GRNBR 2007-1A D, MSPB 2007-1A D, STAND 2007-1A B1L, VENTR 2006-1X B and VENTR 2007-9A D. None of the bonds has traded on PriceABS in the last three months.
Then, at 14:00, there are four lines totalling $4.39m - GLCC 2006-1A C, KATO 2006-9A A3L, LIBR 2005-1A A3 and OFSI 2006-1A C. Two of the bonds have covered with a price on PriceABS in the last three months - GLCC 2006-1A C at 99H on 9 July and LIBR 2005-1A A3 at 98.25 on 12 June.
Also at 14:00 is four line $47m list - ANCHC 2014-5A A, AVOCE 2014-1A A1A, SHSQR 2013-1A A1 and WINDR 2014-3A A. Two of the bonds have covered on PriceABS in the past three months AVOCE 2014-1A A1A at 99.6 on 22 June and SHSQR 2013-1A A1 at 98.86 on 2 June.
SCIWire
Secondary markets
Euro secondary holds up
In the face of continuing equity market volatility the European securitisation secondary market appears to be holding up relatively well.
True price discovery remains very difficult with almost no trading thanks to the summer lull combined with the extreme equity and FX market volatility discouraging any securitisation market participants still at their desks. However, dealers for now appear to be taking their cue from broader credit's more measured response to events in Asia and quotes have for the most part only edged out in single figures across asset classes as the market awaits real clearing levels.
Today currently sees a single European BWIC on the schedule - a mix of seniors due at 15:00 London time. The 72.5m 14 line list comprises: ARENA 2014-2NHG A3, BERAB 2011-1 A1, CATSN 1 A, CORDR 2 A2, CORDR 3 A2, DRMP 1 A2, DRWBY 2012-1 A, GNKGO 2012-1 B, HELIC 2002-1 A, LAN 2013-1X 1A2, LAN 2014-2X 2A, PARGN 23 A2, VELAH 3 A and VELAH 4 A2. Three of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: BERAB 2011-1 A1 at 99.25 on 15 June; DRMP 1 A2 at 99.91 on 8 July; and VELAH 4 A2 at 98H on 9 June.
There is also an OWIC due at 14:00 consisting of: CAR 2014-F1V A, CFHL 2014-1 A2A, COMP 2013-2 A, DRIFR 1 A, DRIFR 2 A, GNKGO 2013-SF1 A and GNKGO 2014-SF1 A.
SCIWire
Secondary markets
US secondary slowdown
US BWIC supply has slowed to a trickle today across asset classes.
Events in China and the feared knock on impact on the US Fed's rate strategy look to have sidelined the bulk of US securitisation secondary market participants. The resultant absence of sellers is making for a quiet looking day across asset classes even for the fourth week of August.
There are no US CLO BWICs currently on the calendar for today with the one list that was scheduled cancelled late yesterday. ABS, CMBS and RMBS are so far expecting only a handful or so of auctions each, which will result in relatively low headline volumes.
SCIWire
Secondary markets
US CLO shift
The US CLO secondary market is still refusing to completely give in to the summer doldrums and today sees BWIC supply shift up the capital stack albeit with low volumes persisting.
Yesterday's flurry of mezz paper on BWIC traded reasonably well although there were a relatively high proportion of DNTs. Today sees sellers focusing on senior tranches with only two fairly small auctions on the calendar so far.
At 11:00 New York time there are two lines due - $24.5m of ARES 2013-2A A1 and $5m of ARES 2013-2A B. At 13:00 there is a six line $55.05m list comprising: ACIS 2013-1A A1, CRNPT 2012-1A A1LA, OCP 2012-2A A1, OCP 2015-8A A1, OFSBS 2013-5A A1LA and WCHC 2007-1X A1A.
None of the bonds has covered with a price on PriceABS in the last three months.
News
Structured Finance
SCI Start the Week - 24 August
A look at the major activity in structured finance over the past seven days
Pipeline
Primary market activity was limited last week, with three new ABS and a single CLO added to the pipeline. The ABS were UniCredit's Consumer Three, Volkswagen's R$808m Driver Brasil Three FIDC and John Deere Capital Corp's John Deere Owner Trust 2015-B. The CLO was Invesco's US$513.5m Recette CLO.
Pricings
The week also brought five ABS prints, as well as three RMBS, one CMBS and two CLOs.
The ABS were: €500m ABS SME Lease Germany Compartment 2; US$850m Capital One Multi-Asset Execution Trust 2015-A6; US$210.52m First Investors Auto Owner Trust 2015-2; US$1.2bn Santander Drive Auto Receivables Trust 2015-4; and US$1.7bn Toyota Auto Receivables 2015-C Owner Trust.
US$573m LSTAR 2015-8, A$1.5bn PUMA Series 2015-3 and £302m Thrones 2015-1 accounted for the RMBS. The CMBS was US$716.3m WFCM 2015-SG1 and the CLOs were US$517.5m Anchorage Capital CLO 7 and US$457m BlueMountain CLO 2015-3.
Markets
US ABS primary spreads widened last week as broader market concerns regarding the Fed's rate hike intentions and other macro considerations dominated, say Bank of America Merrill Lynch analysts. They add: "Secondary spreads for most ABS were unchanged on a week-over-week basis, as trading volumes in these sectors declined. The exceptions include: FFELP ABS, fleet and rental auto ABS and aircraft ABS. Spreads in these sectors were wider by 5bp."
US CMBS spreads moved wider yet again, also due to macro concerns. "In secondary trading of recent issues, spreads widened across the capital stack. At the top of the capital stack, LCF triple-A bonds were 4bp wider, at swaps plus 117bp. More credit-leveraged tranches lower in the capital stack also sold off, with single-A minus rated C tranches 5bp wider," comment Barclays analysts.
All eyes in the European RMBS market were on Thrones 2015-1, which Deutsche Bank analysts note was "the focus of the week if not the month" in what was otherwise a quiet market. They say: "With non-conforming seniors trading at 130bp in the secondary, the wider pricing which was revised wider we understand several times, was due to a combination of factors. Weaker liquidity in the secondary and heavy sterling primary supply both in July and anticipated in September's pipeline both likely played a part."
Editor's picks
Capital plan: 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...
Transforming risk: The differing approaches of the GSEs to credit risk transfer have resulted in a number of innovations in the RMBS market. Freddie Mac's latest transaction contained several new features, while Fannie Mae intends to launch its first actual loss deal before year-end...
Deal news
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
Regulatory update
• 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 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 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.
• 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 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.
Deals added to the SCI New Issuance database last week:
abc SME Lease Germany Compartment 2; A-Best 12; Abruzzo 2015 RMBS; Abruzzo 2015 SME; Asti Group RMBS; Bosphorus series 2015-1; Capital Auto Receivables Asset Trust 2015-3; Cent CLO 24; CNH Equipment Trust 2015-C; Credit Acceptance Auto Loan Trust 2015-2; ENGS Commercial Finance Trust 2015-1; Ford Credit Floorplan Master Owner Trust A Series 2015-4; Ford Credit Floorplan Master Owner Trust A Series 2015-5; Honda Auto Receivables 2015-3 Owner Trust; KMU Portfolio Compartment 2015-1; OHA Credit Partners VI (refinancing); RESIMAC Triomphe Trust - RESIMAC Premier series 2015-1
Deals added to the SCI CMBS Loan Events database last week:
BACM 2004-3; BACM 2005-4 & BACM 2005-5; BACM 2006-1; BACM 2006-2; BACM 2006-5; BACM 2007-3; BSCMS 2006-T22; CD 2005-CD1; CD 2006-CD2; CD 2007-CD4; CGCMT 2006-C5; CGCMT 2007-C6; CGCMT 2014-GC19; COMM 2005-C6 & CD 2005-CD1; COMM 2006-C7; COMM 2006-C8; COMM 2012-CR1; COMM 2012-CR4; CSFB 2005-C4; CSFB 2005-C5; CSFB 2005-C6; CSMC 2006-C4; CSMC 2008-C1; DECO 2007-C4; DECO 6-UK2; DECO 8; EQTY 2014-INNS; FULBA 1998-C2; GCCFC 2005-GG5; GCCFC 2007-GG11; GCCFC 2007-GG9; GECMC 2004-C3; GECMC 2005-C4; GECMC 2007-C1; GSMS 2005-GG4; GSMS 2006-GG8; GSMS 2007-GG10; JPMCC 2004-LN2; JPMCC 2005-LDP3; JPMCC 2005-LDP4; JPMCC 2005-LDP5; JPMCC 2006-CB14; JPMCC 2006-CB16; JPMCC 2006-CB17; JPMCC 2006-LDP7; JPMCC 2006-LDP7 & JPMCC 2006-CB16; JPMCC 2006-LDP8; JPMCC 2006-LDP9; JPMCC 2010-C1; JPMCC 2013-LC11; LBUBS 2003-C5; LBUBS 2005-C5; LBUBS 2005-C7; LBUBS 2006-C3; LBUBS 2006-C6; LBUBS 2007-C6; LBUBS 2008-C1; MLCFC 2006-3; MLCFC 2006-4; MLMT 2005-CIP1; MLMT 2006-C2; MSC 2005-IQ10; MSC 2005-IQ9; MSC 2006-HQ10; MSC 2006-HQ8; MSC 2006-IQ11; MSC 2006-T21; MSC 2007-HQ13; MSC 2007-IQ16; MSDWC 2002-HQ; WBCMT 2005-C18; WBCMT 2005-C21; WBCMT 2005-C22; WBCMT 2006-C23; WBCMT 2007-C30; WBCMT 2007-C32; WFRBS 2011-C4; WFRBS 2014-LC14
News
Structured Finance
ECB 'behind OWIC increase'
OWICs have been circulating in the European ABS secondary market in growing numbers. While their source has not been confirmed, one London-based portfolio manager strongly suspects they are coming from the ECB.
"It could be anybody, but it is probably a reasonable bet that it is the agents of the ECB. The market is generally quiet right now, but the work has been done on these deals previously, so it makes sense to seek out paper that has already been approved," he says.
ABSPP purchase figures give further credence to the theory that the ECB is responsible. Deutsche Bank European securitisation analysts note that ABSPP purchases totalled €1.8bn over the last four weeks, compared to €900m in the previous four.
"Nevertheless, the €9.7bn of ECB purchases in 2015, together with a reduction of circa €9bn in investor placed paper of ECB-eligible asset classes reconfirms that the volume of outstanding bonds available for private market participants is shrinking. Indeed, this should act as a supportive technical going forward," the Deutsche Bank analysts note.
Speculation that the ECB's ABSPP buying process is both lengthy and complicated has been circulating the market for some time, so the portfolio manager notes that it would make sense for those agents which the central bank has mandated to favour paper where this groundwork has already been put in.
"These deals are approved before, so why not see whether they can go and ask dealers to go around the investors and see if they will sell any bonds. The agents might have done a massive write-up, so where the new issue market is closed, it makes a lot of sense to go out and do this on an OWIC basis," he says.
An OWIC this week contained French mortgage and consumer bonds (see SCIWire 25 August), while the portfolio manager notes that high quality Dutch paper has also been common. While the ECB's agents are understood to be acting through dealers, the portfolio manager is concerned that the central bank's struggle to source paper is partly its own doing.
"The agents have not been approaching investors directly, so far as I know. They certainly have not approached me. So I believe this is all happening with dealers as the intermediaries," he says.
He continues: "The ECB, other policymakers and regulators have made ABS very expensive to hold, so dealers are dropping out of the market. Dealers are not keeping bonds on their balance sheets and so the secondary market is broken. The summer lull does not help, but in the long term it is not healthy for the market to continue this way, so hopefully the mooted 'simple, transparent and standardised' regulation can address the issues that are building up."
JL
News
CLOs
Reinvestment extensions to pick up?
A total of 24 US CLOs have been refinanced so far this year (see SCI's new issuance database), representing a tranche balance of over US$9bn, according to Bank of America Merrill Lynch figures. Among the more recent refinancings, three took the unusual step of increasing the triple-A coupon spreads in return for substantially extending the reinvestment period.
The reinvestment periods of ALM 2012-5 and OZLM 2012-1 were last month pushed out from May 2015 to October 2019 and from July 2016 to July 2019 respectively, with the triple-A spreads increasing by 19bp and 2bp to 142 and 152. In June, ALM 2012-6 saw its reinvestment period extended from June 2016 to July 2019, while its triple-A coupon rose by 8bp to 143bp.
ALM 2012-5 also upsized by US$50m during its refinance, while the original fixed-rate single-A rated tranche of ALM 2012-6 was restructured to floating-rate. Other amendments included Volckerisation via the removal of non-loan collateral buckets, as well as increases in the percentage of cov-lite loans allowed in the portfolio.
BAML CLO analysts highlight a number of reasons that may have driven these refinancings, which they believe will also provide for a further pick-up in extension activity going forward. For example, equity investors in deals originally scheduled to exit reinvestment next year may be incentivised to push out the reinvestment period so that the manager has increased flexibility in navigating the portfolio through the turn of the credit cycle in lieu of potentially having to liquidate the collateral portfolio at more distressed levels. Equally, if equity investors expect liability spreads to widen going into the hiking cycle, they can lock in the current liability spreads by executing a refinance.
The majority of CLOs refinanced this year and last year were originally issued in 2012. Given that 2012 issuance totalled around US$56bn, the BAML analysts estimate that the total volume of refinanced 2012 tranches represents over 25% of that universe.
"Although new issue triple-A spreads are at levels similar to the original triple-A coupon spreads of the 2012 deals which have gone through refinancing, equity investors of these deals have been able to take advantage of the fact that these deals were closer to the end of reinvestment to enhance their cash returns," they observe.
CS
News
CMBS
Term default risk 'not a concern'
Morgan Stanley's latest review of CMBS 2.0 remittance reports shows a wide variety of activity. This month the first-ever 2015-vintage loans turned delinquent, a borrower requested an A/B-note modification and multiple loans were watchlisted as a result of vacancies.
In total, eight loans with a balance of US$69.5m became delinquent in August, including the US$23.9m La Gran Plaza (securitised in COMM 2015-LC21) and US$4.1m 110 Halstead Street (JPMBB 2015-C27). Morgan Stanley CMBS strategists note that the loans defaulted on debt service payments four and eight months after origination respectively.
Overall, 31 loans - with a balance of US$314.6m - were reported as delinquent in August, resulting in a delinquency rate of 15bp.
Meanwhile, three loans totalling US$16.6m transferred to special servicing: US$9.4m Commerce Distribution Center (COMM 2013-CR9), US$4.9m Candlewood Suites Decatur (UBSBB 2013-C5) and US$2.33m Villas of Gilbert Apartments (COMM 2013-CR9). The Candlewood Suites Decatur borrower has requested an A/B-note modification, following poor property performance due to reduced operations of four refineries in the area. DSCR declined to 0.41x, as of 31 May, according to the strategists.
In total, 40 CMBS 2.0 loans - with a balance of US$590m - are now in special servicing, resulting in a specially serviced rate of 15bp.
Of the 151 loans worth US$2.8bn that were watchlisted in August, the strategists highlight the US$57.7m Jefferson Mall (JPMCC 2012-CBX) asset - where a Sears expiration may result in an anchor tenant trigger - and the US$45.5m Williams Center Towers (WFRBS 2014-LC14) property, where Samson Investment is giving back space following its bankruptcy filing. The number of watchlisted CMBS 2.0 loans now stands at 780, with a current balance of US$13bn, which is approximately US$1bn higher than in July.
This month 15 loans with a balance of US$424m paid off, two of which - the US$11.4m Lakeways Portfolio (CFCRE 2011-C1) and US$21.9m Sheraton Raleigh (COMM 2015-CR25) - prepaid with yield maintenance. In total, 138 loans with a balance of US$3.05bn have now paid off.
Finally, 17 loans worth US$620m were defeased, including the US$91m Civic Opera House (UBSCM 2012-C1) asset. This brings the number of 2.0 defeased loans to 149, with a balance of US$3.2bn.
The strategists note that over 80% of the CMBS 2.0 universe has reported updated financials, ranging from a minimum of 59% for the 2015 vintage to a maximum of 94% for the 2012 vintage. Approximately 42% of the loans that have reported have NOIs that are less than underwritten, which steadily increases from 21% for the 2010 vintage to 55% for the 2014 vintage. However, the majority of loans by balance (82.3%) continue to report DSCRs of above 1.5x, suggesting that term default risk is not a significant concern at present.
CS
News
CMBS
A&P sell-off underway
A&P is set to auction its remaining 153 stores in October after the bankrupt grocer received bids for 118 of its 296 stores. Bids have come in from competitors Albertsons, Royal Ahold and Key Food.
A&P initially announced in July that 25 stores would close while the company reorganised (see SCI's CMBS loan events database). However, reports suggest that stores which are not sold via auction will ultimately close. Morningstar has identified eight stores backing US$92.3m in CMBS that could close by the end of the year.
Of the 118 stores securing bids, 15 back CMBS loans totalling US$196.3m, according to the agency. The sales are expected to go through, but there lies a greater risk in failure to attract buyers in the upcoming auction.
Of the 153 unsold stores in the A&P portfolio, 30 properties back CMBS loans, totalling US$536.7m that could be at risk in the event of closure. Six of the loans have a balance of US$25m or greater. In addition, four of the properties have an A&P store that accounts for more than 25% of the net rentable area, meaning that a closure could have serious cashflow implications.
The largest of the loans is Cedarbrook Plaza, with a balance of US$41.9m in WBCMT 2006-C25. In this instance, Morningstar says that the loss of a Pathmark store could result in a prospective LTV ratio of nearly 100% and high default risk at maturity in April 2016.
The agency has generated values of US$44.4m to US$50.6m for the property, down from US$60m at issuance. The downside value assumes that the Pathmark store closes and is not re-tenanted, while the higher value assumes that the store is re-leased after two years at a similar rent.
The second and third largest loans are the US$35m Yonkers Gateway Center loan (securitised in COMM 2014-CR17) and the US$33.5m Carman's Plaza (MLCFC 2007-9). Morningstar's analysis reduced the value of the Yonkers loan to US$59.6m from US$75m at issuance, but this still suggests a solid LTV ratio of 59% and nine years to re-tenant the space before the loan matures in April 2024.
Carman's Plaza is considered the riskiest of the three top loans, as the Pathmark store occupies 27% of the rentable area. Its closure could lead to an occupancy rate of less than 50% and cashflow that would be significantly below breakeven. Morningstar projects a downside value of US$22.9m for the property.
The store chains that A&P operates include Superfresh, Pathmark, Waldbaum's, Food Emporium and Food Basics.
JA
News
CMBS
US CMBS realise losses
August remittance data shows a mixed picture for US CMBS. A couple of prominent loans have moved into special servicing, while subordinated notes have realised losses in LBUBS 2008-C1, JPMCC 2006-LDP7 and CSMC 2008-C1.
The US$64m Chesapeake Square loan securitised in JPMCC 2004-LN2 has been transferred into special servicing, report Barclays analysts. It is the second time the loan has gone into special servicing with CWCapital (see SCI's CMBS loan events database).
The property's top tenant was Sears, which has now vacated. The DSCR NOI drops to 0.92x, although it would rise back above 1.0x should the borrower get a modification it has asked for.
Also transferred into special servicing is the US$95m Gateway Salt Lake loan, which has seen a decline in occupancy and decreased base rent. Full-year DSCR NOI in 2014 was 0.82x, with 79% occupancy.
"With the borrower contributing cash out of pocket to fund the loan, despite the property's struggles, we think the borrower will likely attempt to negotiate a modification. If instead the loan is eventually liquidated, it would pay off the A1 tranche and a significant portion of the A2 tranche in the deal, which are likely pricing at premium dollar prices," say the Barclays analysts.
While the property was appraised at US$163m in 2010, the borrower wrote it down to US$75m last year. If the loan was liquidated at US$75m, a loss of more than US$20 could be applied, potentially writing off the NR and H tranches, while the analysts say losses could also reach the G tranche.
Meanwhile, losses have now been realised on LBUBS 2008-C1 as a result of three liquidations. Almost all AJ support has been wiped out.
The US$67m Computer Sciences Building was the largest liquidation and took an 82% loss, while US$27m Sutton Plaza was liquidated with a 5% loss on the A-note and 100% loss on the B-note, while proceeds from US$16.6m Park 100 - Portfolio went entirely to repaying advances and ASER due.
The C-J tranches of LBUBS 2008-C1 have been written off, while shortfalls have been repaid to the H tranche. US$13.8bn of the B tranche was also written off and it now only has US$2.2m in balance. ASER repayments reimbursed outstanding interest shortfalls from AJ to G tranches.
The US$410m One and Two Prudential Plaza office securitised in JPMCC 2006-LDP7 has been prepaid, with the US$336m A-note receiving full principal back and the US$74m B-note incurring a 100% loss.
JPMCC 2006-LDP7's J tranche has been written off in full and the H tranche took a US$4m loss. A total of US$7.5m of interest shortfalls were paid back, repaying shortfalls for the AJ, B and C tranches in full and just over half of the D tranche's shortfall.
Finally, the US$58m A-note and US$27.5m B-note of the 1100 Executive Tower office securitised in CSMC 2008-C1 have paid off, with the B-note taking a 100% principal loss. The B-note did receive US$6.8m in interest proceeds, while the A-note was repaid in full.
"The US$58m in principal proceeds paid down most of the remaining balance of the A2 and A2FL tranches in CSMC 2008-C1; in addition, the A2 tranche received a US$2.9m prepayment penalty," note the analysts. The G-J tranches and 20% of the F tranche were written off, while the B-note interest recoveries repaid shortfalls on the F, G and H tranches.
JL
News
CMBS
Gagfah opportunity identified
Price tiering for Gagfah CMBS has emerged over the summer, although not in the way that might be expected. These price movements make TAURS 2013-1 appear particularly cheap.
Deutsche Bank European securitisation analysts initially expected a staggered prepayment throughout 2016 of the three Gagfah transactions, with TAURS 2013-1 the most likely to prepay on a standalone basis. However, the market appears to disagree as TAURS 2013-1 prices the widest to a 2016 prepayment, with GRF 2013-2 the tightest.
To maintain a triple-B plus corporate bond rating, S&P requires that Deutsche Annington achieve at least 50% income from unencumbered assets by September next year. The ratio was 32% in June and is projected to reach 44% in December, after the prepayment of existing secured loans. Either TAURS 2013-1 or GRF 2013-1 would be sufficient to reach the 50% target, but GRF 2013-2 would not be.
TAURS 2013-1 should be large enough to meet rating requirements and has the highest cost of funds of the Gagfah CMBS. Despite market pricing, the Deutsche Bank analysts continue to believe it is most likely to prepay.
"Given the price differential, our top pick is the TAURS 2013-1 transaction (we cannot explain [why] it prices wider to the other two transactions, when we consider it more likely to prepay), where we think a combination of rating requirements and its significantly higher cost of funds make it most likely to prepay. Our least preferred transaction is GRF 2013-2, which prices richer to the other two transactions across all scenarios, despite - in our assessment - having the greatest risks of extension," say the analysts.
The low leverage of the transactions and stable economics of the German multifamily sector suggest that credit risk is limited. Extension risk is a more likely concern, which will be governed by factors such as swap rates, any change in corporate strategy and any acquisitions which might affect corporate bond unencumbered income calculations.
JL
News
CMBS
Short loan MBS debuts
Amicus has issued what is believed to be the first UK MBS to be backed entirely by short-term property loans. Three of the four tranches in the unrated Amicus Mortgage Finance 2015-1 were privately placed last week, amounting to £95m of the £100m transaction.
The £78m class A notes feature 22% credit enhancement and were sold at par. The junior £5m class D notes have been retained by Amicus.
"The loans in the pool are loans backed predominantly by UK residential property, with terms ranging from six to 18 months," says Gareck Wilson, partner at Brookland Partners - one of the co-arrangers on the deal. "The transaction will provide Amicus with three years of financing by including a replenishment period in the first 2.5 years."
The transaction also has a number of other credit enhancements, including deficiency ledgers and reserves. It has a scheduled maturity of July 2018 and is backed by a portfolio of predominantly first-lien loans with a weighted average loan to value of 60%.
HSBC is the other co-arranger on the transaction. The deal is the first for Amicus in the structured finance universe, but Wilson says that it could become a permanent feature in the future for the UK lender in order to diversify its funding sources and drive its growth strategies.
"The UK mortgage market is seeing a sustained and growing appetite for short-term property finance driven by the tightening of mainstream bank underwriting requirements; recent changes to planning laws; and the inability of some lenders to act sufficiently quickly to respond to demand," comments John Jenkins, ceo of Amicus. "There is clear investor demand for this type of short-term MBS. Many institutions are increasing their focus on the alternative finance sector as a means of enabling enhanced returns without taking on large risks. Given the continued appetite for short-term property finance, we anticipate significant growth in demand for short-term syndication of this class of debt through bond issuance."
JA
News
RMBS
FHFA plots GSE paths
The FHFA has adopted a final rule to establish single-family and multifamily housing goals for Fannie Mae and Freddie Mac for 2015-2017. It has also released a risk transfer document pointing to continued large volumes of CRT deals in various forms.
The final rule sets the same benchmarks for each GSE. For single-family, the GSEs have been set a purchase goal of 24% for low income homes (up from 23% in 2014), a purchase subgoal of 6% for very low income (down from 7%), a purchase subgoal of 14% for low income areas (same as 2014) and a single-family low income refinance goal of 21% (up from 20%).
The multifamily housing goals are 300,000 units each year for each GSE (up from 250,000 for Fannie Mae and 200,000 for Freddie Mac in 2014). Each GSE has also been set a very low income multifamily housing subgoal of 60,000 units.
The risk transfer document lists different transaction types being considered. These include back-end risk transfer approaches, such as debt issuance through STACR and CAS, credit-linked note structures - which would remove the counterparty risk to the GSEs for investors and does not rely on government support - and insurance or reinsurance transactions, such as CIRT and ACES.
The GSEs recently confirmed that they intend to continue growing these programmes (SCI 20 August). Front-end risk transfer approaches - such as additional loan-level mortgage insurance, more deals like JPMMA 2014-1 and senior-subordinate structures, such as Freddie Mac's recent FWLS 2015-SC01 - are also called for.
"The FHFA also provided some colour on its near-term goals, stating that it will encourage the GSEs to engage in large volumes of these transactions by continuing to set specific goals in the annual conservatorship scorecards and working with the GSEs to evaluate alternative forms of risk transfer structures," note Barclays RMBS analysts.
The FHFA will also work to: improve measures of credit risk and the amount of risk transferred; build a broader investor base; refine structures; develop a more diverse mix of structures; expand CRT to other types of assets, such as ARMs; explore ways to facilitate greater use of CRT, such as procuring REMIC treatment for CLNs; and potentially replace the STACR/CAS structures with CLNs.
JL
Job Swaps
Structured Finance
APAC trading head named
Barclays has appointed Alex Aram as head of credit trading for the Asia Pacific region. He will be responsible for the bank's regional credit business across investment grade, high yield and distressed debt, which have been brought together under one management structure.
Aram has previously held several senior positions for Barclays, including leading its distressed debt business in the region, as well as convertible bond trading. He has also headed the Asia structured credit trading group for Bear Stearns and previously was involved in structuring derivatives at Morgan Stanley.
Aram will be working alongside Ellis Thomas, APAC head of credit sales at Barclays.
Job Swaps
Structured Finance
Credit head poached
Joshua Baumgarten is set to join Angelo Gordon next year as senior md and head of credit, reporting to co-founder and cio Michael Gordon. In his new role, Baumgarten will oversee the firm's credit strategies, including US and European distressed, RMBS/ABS/whole loans and CMBS.
Baumgarten is currently a senior md at Blackstone Group, which he joined in 2007, and prior to that was a portfolio manager and trader at BlackRock. He began his career at Jefferies in investment banking and has also spent time engaged in venture capital investing.
He will become a member of Angelo Gordon's executive committee and a partner in the firm.
Job Swaps
Structured Finance
SF advisors tapped
Ldger has hired Peter Morgan and John Meserve as advisors to its structured finance platform. Advising independently, Morgan is a private practice attorney who focuses on securitisation, while Meserve focuses particularly on regulation.
Morgan's practice specifically focuses on advising financial firms, credit providers, investors, rating agencies and intermediaries on the formation and capitalisation of financial products. He also assists on the structuring, negotiation and execution of junior and senior credit facilities.
Meserve's previous experience includes a stint at BNY Mellon, where he served as executive md of affiliate ConverEx Group.
Job Swaps
Structured Finance
Credit team merged
Nomura's European credit teams have been combined in the wake of the firm recently cutting up to 60 positions in its fixed income and credit derivatives departments (SCI 12 August). As part of a streamlining process, Nomura executive director Peter Chung will head the trading desk for the firm's newly formed high yield, loan and distressed team, while Nick Oxlade will head the sales side.
Job Swaps
CLOs
CLO equity acquired
Fair Oaks Income Fund has entered into binding contracts to acquire in the primary market US$28m notional of equity notes (representing 73% of the total equity) and US$8.6m notional of class F notes of Shackleton 2015-VIII CLO. Managed by Alcentra, the CLO's current target portfolio has a principal value of US$430m across an expected 156 unique bank loan issuers, with an expected weighted average exposure per issuer of approximately 0.8%. The potential total return for this investment, as estimated by Fair Oaks, is between 14% and 16% per annum.
Job Swaps
Risk Management
Product director drafted in
Mark Demo has joined AcadiaSoft as product director. Demo will assume responsibility for directing the company's response to regulatory changes, as well as leading AcadiaSoft's product and industry working groups. He will report to AcadiaSoft ceo Chris Walsh.
Demo arrives from JPMorgan, where he was vp of business architecture and transformation. He was additionally responsible for collateral market infrastructure planning in the OTC derivative space and implementing technology and business process changes associated with derivatives financial reform. Demo is also a former co-chair of the ISDA Collateral Steering Committee.
Job Swaps
RMBS
RMBS trust suit filed
The FDIC has filed a lawsuit against BNY Mellon over alleged breaches that the bank made as trustee for approximately US$2.06bn worth of bonds in 12 RMBS trusts. Standing as receiver for Guaranty Bank, the FDIC claims that the breaches led to it losing over US$440m from the sale of a resecuritsed transaction - SSGN 2010-S1.
In its filing to the US District Court for the Southern District of New York, the FDIC alleges that BNY breached contractual obligations by failing to provide notice of representation and warranty violations when it was supposedly aware that the interest of related certificateholders could be severely affected. The FDIC's lawsuit explains that BNY 'stood idly for years' while the sponsors of the trusts - Countrywide Homes Loans and EMC Mortgage Corp - kept defective mortgage loans in the trusts.
In addition, BNY is accused of allowing servicers to reap excessive fees for servicing the defaulted loans, all while the plaintiff suffered enormous losses. BNY also supposedly failed to push the sponsors to replace the non-compliant loans and was believed to be providing false remittance reports and regulatory certifications.
The lawsuit believes that specific breaches were made by BNY in relation to the federal Trust Indenture Act and the New York Streit Act.
News Round-up
ABS
Rate rise risks downplayed
Fitch suggests that US credit card ABS metrics will remain in record territory near term, despite potential September interest rate rises. In prime indices, delinquency rates are expected to be steady, while charge-offs could see a slight improvement for the month.
In addition, the monthly payment rate (MPR) for cardholders paying back their balance is expected to rise, while gross yield is anticipated to drop. Retail metrics for the most part will also remain strong, with a decline in charge-offs. Retail 60-plus day delinquencies will likely remain near their previous record lows and MPRs are expected to remain virtually unchanged here.
Fitch says that the strength of the performance metrics, combined with the continuing recovery of the job market indicate that any reasonable interest rate rise by the US Fed is unlikely to have any impact on credit card ABS. MPRs are more susceptible to interest rate movement as the percentage of consumers making smaller credit card payments may increase.
Nonetheless, the agency says that the expected impact on delinquencies and charge-offs is less immediate and believes that consumers will divert a greater proportion of their disposable income to service higher payments on other debts. It adds that a steep rate increase is highly unlikely and therefore credit card ABS metrics should remain stable in the near term.
News Round-up
ABS
FFELP ratings diverge
S&P last week upgraded the ACCSS 2007-1 A3 and A4 FFELP student loan ABS tranches to triple-A from double-A plus. The bonds are currently under review for possible downgrade by Moody's and Fitch for extension risk beyond final maturity.
The tranches are two of five ACCSS senior classes from the 2005-1, 2005-2, 2006-1 and 2007-1 transactions upgraded to triple-A after S&P updated its non-monetary EOD criteria. The upgrades reflect the agency's view that the current credit enhancement is sufficient to absorb the 15% haircut to the cash inflows received from the US federal government under FFELP in a triple-A stress scenario. The agency notes that based on the principal reduction of the class A notes in these transaction over the last two years, it believes the liquidity risk is minimal and expects each of the classes to be paid off by their respective legal final maturity dates.
News Round-up
ABS
Solar regulatory risks highlighted
Moody's suggests that contract renegotiations could dent cashflows of existing solar ABS deals following the recent adoption of a new electric rate structure for residential customers of California's three major investor-owned utilities. The agency notes that outstanding solar deals have large concentrations of obligors in the most populous US state.
"Existing solar customers in California entered into contracts with solar providers who promoted long-term savings based on the previous electric rate structure," says Moody's vp and senior analyst Tracy Rice. "The new rate structure will bring down the price of grid electricity for many of them, which could lead some to try to renegotiate their solar contracts because they are not seeing the savings they expected."
While associated cost savings to solar energy may diminish, existing customers will still be obliged to continue paying their solar providers as leases and power purchase agreements typically run for 20 years. Moody's says that this leaves renegotiation risk a remote possibility among affected customers, but it remains contingent on leaving customers incentivised to pay the lower solar costs relative to grid electricity.
In contrast, contract renegotiation risk will be higher where solar customers sell their homes. As a result of lower utility rates, consumers who buy homes already equipped with solar systems will have less incentive to assume solar contracts.
"This could jeopardise solar contracts or lead to contract renegotiations in which customers pay less for solar," Rice adds. "The degree of contract renegotiation risk is somewhat uncertain, however, because there is limited historical performance data on the payment behaviour of solar customers."
In light of these developments, Moody's explains that future regulatory developments in California and elsewhere could affect both outstanding and future solar ABS transactions. The agency suggests that the credit effects will vary depending the collateral composition of the transactions.
News Round-up
ABS
Instalment sales plan 'credit positive'
Proposed amendments to Japan's Instalment Sales Law are credit positive for credit card ABS, according to Moody's latest 'Structured Thinking: Asia Pacific' report. The agency notes that the planned changes require greater scrutiny of merchants that accept credit cards and are expected to result in fewer problem credit card loans caused by fraudulent or unscrupulous sales practices.
The Industrial Structure Council of Japan's Ministry of Economy, Trade and Industry last month proposed to extend the Instalment Sales Law to: require credit card loan originators to screen and monitor merchants that accept their credit cards; and require 'acquirers' and 'payment service providers', who work on behalf of credit card companies, to screen and monitor merchants that accept the cards of those companies. Under the current law, loan originators are required to periodically screen and monitor merchants involved in door-to-door and telephone instalment sales. However, to date, this requirement has not applied to all merchants who accept credit cards.
The requirement to screen and monitor merchants is designed to prevent fraudulent and unscrupulous sales practices. If securitised credit card pools include receivables originated through merchants that have acted inappropriately and consumers refuse to repay their loans, these receivables will become uncollectible. As such, Moody's believes the proposed amendments will prove supportive for the performance of credit card ABS pools.
Furthermore, the extension of the law to acquirers and payment service providers should ensure that the largest possible proportion of merchants is screened and monitored in the credit card industry.
Credit card ABS with a large proportion of lump-sum payment receivables in the pool particularly stand to benefit from the proposed amendments to the legislation, as these receivables have more to gain from the greater scrutiny of merchants. Consumer complaints relating to lump-sum payment receivables have historically been higher than those for other credit card debt and instalment sales loans. Such complaints include issues, such as the receipt of goods and services that vary from the purchasers' expectation when placing their orders online.
The proposal, which is likely to be submitted for consideration in the next session of the Diet in January 2016, may include provisions to permit the Ministry of Economy, Trade and Industry to issue business improvement orders to credit card companies or acquirers that do not comply with the rules. The details of how originators and acquirers will have to screen and monitor merchants are yet to be determined.
News Round-up
ABS
Structured settlements 'under-rated'
New issuers entering the market could help to grow structured settlements ABS, which Morningstar Credit Ratings says are generally easier to service than other ABS receivables and are less prone to default. The rating agency believes class B notes in these transactions can achieve higher ratings than are presently awarded.
An analysis of a hypothetical transaction with two rated tranches suggests the class B tranche warrants a higher credit rating than is currently typically ascribed in similar real-world deals. However, if the likelihood of the structurally driven deferral of interest payments to the class B tranche under certain credit scenarios is assessed to be high, it may preclude the rating agency from assigning ratings higher than single-A, it says. Class A performance is consistent with the triple-A rating that is typically assigned.
Morningstar created a hypothetical asset pool and transaction structure, with various stress and recovery assumptions. In one case, recovery rates for investment grade obligors were 60% and for non-investment grade obligors were 30%, while in another the rates were 70% and 50% respectively.
The rating agency's tests find a single-A rated tranche must be able to withstand portfolio defaults of at least 7.9% before there are any losses to noteholders. A double-A rated tranche must withstand 18.6% portfolio default, while a triple-A rated tranche must be able to withstand 25.4%.
Morningstar notes that historical defaults on structured-settlement receivables and the number of bankruptcies by structured-settlement obligors are low, so its rating level scenarios are based on conservative assumptions. Actual recoveries in the event of highly rated insurance companies defaulting may also be higher than those used to calculate the weighted average recovery rate, while the concentration of the collateral pool is usually not as high as assumed in the rating agency's hypothetical portfolio.
"We analysed a hypothetical pool with conservative assumptions for recovery rates, fees and granularity of the pool. The results and their sensitivity to our assumptions indicate that Morningstar would rate class B notes higher than the outstanding ratings in the market for similarly structured notes backed by a pool with substantially similar characteristics, while maintaining the rating of triple-A on the class A notes," the rating agency says.
News Round-up
Structured Finance
SF approach confirmed
Scope has updated its structured finance rating methodology following the conclusion of its request for comment (SCI 17 July). The approach emphasises a fundamental analysis of structured finance instruments in a European context, as well as applying rating stability through a longer-term adjustment of assumptions.
Scope says that it provides larger credit differentiation because it uses a fundamental bottom-up analysis to capture the rating impact of different asset, portfolio or structural characteristics, and avoids the application of one-size-fits-all assumptions. At the same time, it takes into account the characteristics of the originator and the relevant jurisdiction, the agency adds.
In its approach, Scope includes an analysis of counterparty risks, building on post-crisis realities. It covers the new regulatory and supervisory framework for banks - such as bail-in and stronger prudential metrics - and the resulting limited likelihood for banks to default in the short term. In addition, the agency has left out a sovereign cap tying into a transaction, noting that this limits the maximum achievable rating of a securitisation.
The agency's implementation of the methodology will not have a rating impact on outstanding structured finance ratings. None of the comments from market participants challenged the content of Scope's original proposals.
News Round-up
Structured Finance
FHA to provide PACE update
The FHA will soon issue guidance on residential property-assessed clean energy (PACE) financing. Kroll Bond Rating Agency says there should be no negative credit effect on the senior PACE lien asset class, although borrowers may be encouraged to refinance and subordinate their PACE liens to mortgage liens, in which case prepayments could increase.
The FHFA has already voiced its opposition to programmes which result in senior PACE liens priming mortgages purchased by the GSEs, but is understood to support programmes offering PACE liens that are subordinate to existing or subsequent mortgage liens. The FHA's announcement is largely silent on the continued existence of senior PACE lien programmes.
To incentivise subordinated PACE lending, the FHA has posted guidelines on which properties with subordinated PACE liens can be purchased. Kroll expects this to significantly increase the number of subordinated PACE programmes and potentially spur other public-private partnership mechanisms for encouraging renewable energy improvements.
News Round-up
Structured Finance
Greek upgrades follow sovereign action
Following the upgrade of the Greek sovereign's issuer default rating to triple-C and revision of the country ceiling to single-B minus, Fitch has upgraded 18 tranches of seven Greek RMBS. It has also taken action on one credit-linked Greek ABS tranche.
The 18 RMBS, originated by Piraeus Bank, Consignment Deposit & Loans Fund and Eurobank Ergasias, have all been upgraded to single-B minus, which is the highest rating currently achievable for Greek structured finance transactions. The affected RMBS are Estia Mortgage Finance and Estia Mortgage Finance II, Grifonas Finance No.1, Kion Mortgage Finance, and Themeleion II Mortgage Finance, Themeleion III Mortgage Finance and Themeleion IV Mortgage Finance.
The Greek ABS is Aeolos, guaranteed by the government and backed by receivables from Greek airspace route charges. The notes have been upgraded to triple-C.
There have also been covered bond rating actions as a result of the revised country ceiling. Fitch says that further changes in the sovereign rating or country ceiling will affect the rating of the highest-rated structured finance tranches and covered bond programmes.
News Round-up
Structured Finance
Liquidity cited as a concern
Morgan Stanley's Q3 global securitised product investor survey lists central bank policies as the top concern for the third quarter in a row, accounting for 32% of respondents' votes. Liquidity - added this quarter - was ranked second, securing 22% of votes. Disappointing US economic growth, meanwhile, dropped from second place to third.
Over the next three months, the majority of investors expect to maintain or increase their allocation to securitised products. Only 9% expect to decrease their allocation, a slight increase from Morgan Stanley's survey last quarter.
The survey suggests that investors' rate expectations have increased over the last three months, as have their expectations for US housing prices. However, most respondents still expect the first hike to happen in September and believe that the US Fed will wait longer before it ends reinvesting MBS pay-downs after the first hike.
News Round-up
Structured Finance
RFC on joint-support approach
S&P is requesting comments on a proposed update to its methodology and assumptions for rating jointly-supported financial obligations, which will incorporate a revised view of correlation risk among the supporting parties following observations from the financial crisis. In addition, the proposed criteria will address the agency's view of increased correlation when the rating is above that of the sovereign.
Under the proposed criteria, a jointly-supported obligation rating will be based on: the ratings on the two sources of the obligation's full and timely payment; the degree of credit risk correlation between the ratings on the two sources of repayment; and the impact of sovereign-related risk on the jointly supported obligation. The proposed methodology applies to all financial obligations where two or more supporting parties are contractually committed to irrevocably provide full and timely payments. Common examples of joint support include a primary obligor and a guarantor or a primary obligor and a letter of credit (LOC) provider.
S&P says it will continue to exclude very highly correlated entities - such as affiliated companies - from any joint-support benefit, as well as obligations insured by monoline bond insurers, certain US public finance bonds and obligations, and those supported by Federal Home Loan Bank and its member banks' confirming and fronting LOCs. To enhance the transparency of its public ratings, the agency adds that it will continue to apply the joint-support approach only when both obligors have public long-term ratings (and, if relevant, short-term ratings).
S&P currently rates about 2,000 jointly-supported obligations. If these criteria are adopted, approximately two-thirds would be rated the same or downgraded by one notch and approximately one-third would be downgraded by two to three notches.
Comments on the proposed criteria are invited by 21 October.
News Round-up
CDS
CDS curve fund launched
XAIA Investment and Universal-Investment are jointly launching a new fund that will use CDS curves as a source of income. The XAIA Credit Curve Carry fund will invest in CDS for a single issuer or company with two different maturities, thus creating opposite positions buying and selling protection of different maturities simultaneously.
XAIA says that the fund aims for a return profile that is comparable to an investment in corporate bonds, but without having to bear the default risk that is associated with corporate bonds. Interest rate and currency risks are also set to be minimised.
The positions that offer the most attractive risk-return profile among available CDS will be targeted. The portfolio will be adjusted regularly, but the position will close out and be replaced with new positions at the latest when the hedging position matures. XAIA explains that the invested capital will act as collateral for the CDS contracts underlying the strategy.
The investment level is geared towards the respective risk and return potential, while the risk capacity is adjusted to the credit market's general spread level. Investment levels will be lower during periods of tight spreads to avoid a pro-cyclical approach.
The strategy of the fund aims for a yield of three-month Euribor plus 5%. It is XAIA's fourth mutual fund and has made way for the closing of the asset manager's three previous funds.
News Round-up
CDS
CDS trading edges down
Average daily CDS index trade counts rose by 22.2% in 2Q15 compared with the same period in 2014, according to ISDA's latest quarterly index results. However, the number fell by 11.8% versus 1Q15.
SEF trades represented 71% of the total CDS average daily trade count during the last quarter, which is up from the 68.1% figure in 2Q14 but down again on the 73.5% in the first three months of this year. In addition, bilateral trade counts rose by 11% during 2Q15 compared to the same period a year ago, but fell by 3.5% versus 1Q15. In total, the CDS average daily trade count is 817 in 2015, compared to 846 in 2014.
The average daily notional volume for CDS was flat last quarter when compared with the same period a year earlier, but decreased by 18.4% compared with the 1Q15. SEF notional volumes comprised 65.2% of the daily average total in 2Q15, compared with 61.2% in 2Q14 and 70.7% in 1Q15.
Average CDS index trade size also fell by 18.2% last quarter from the same quarter last year and by 7.5% versus 1Q15. SEF trade size fell slightly less in 2Q15 by 16.8% compared with the same time last year and by 11.8% when compared with 1Q15.
Finally, cleared trades represented 77% of the average daily total in CDS trades during 2Q15, compared to 75.4% in the same period in 2014 and 81.2% during 1Q15. Average daily cleared trade counts increased by 24.7% last quarter compared to the same period in 2014, while non-cleared trade count was up by 13.6% in 2Q15 from the same time last year.
News Round-up
CLOs
CLO redemption waiver requested
A recent investor notice for Gresham Capital CLO III requests that the trustee of the deal waive a rating requirement with regards to its optional redemption terms. The deadline for objections from the controlling class of noteholders (class B) is 17 September.
Bank of America Merrill Lynch securitisation analysts explain that an optional redemption may occur when the issuer can certifity to the trustee that an agreement to sell the portfolio to a financial institution would provide adequate net proceeds to repay the debt tranches at par. The proposed waiver by the issuer would lower the S&P rating requirement of the financial institution's unsecured debt from A1+ to A1, which would result in the deal being called if it passes.
A financial institution entering into such a binding agreement would also require a P-1 rating from Moody's; however, the waiving of this rating is not part of the issuer's proposal in this instance. As a result, the terms of the waiver reiterate that a financial institution entering into an agreement must have its unsecured debt obligations equal to or greater than the two qualifying ratings proposed the respective agencies.
News Round-up
CMBS
Resurfaced CMBS amended
Goldman Sachs has restructured its REITALY Finance CMBS transaction by splitting the €109.3m of class A senior notes to include some additional protections. The deal, which provides exposure to leisure properties, had recently been postponed by the bank (SCI 24 July).
Fitch has assigned single-A plus and single-A ratings to the newly tranched A1 (€70m) and A2 (€39.3m) notes respectively. The tranches rank pari passu until the earlier of loan maturity, the transfer of the loan to special servicing or an enforcement of the note security, after which the A1 ranks senior.
The deal is a securitisation of a single €191.5m CRE loan advanced by Goldman Sachs to an Italian fund, which is secured by a portfolio of 25 Italian real estate assets. Goldman Sachs has retained 5% of the loan.
The collateral falls into five sub-portfolios, including five large retail assets, with exposure to a cinema operator, five cash-and-carry assets and three retail galleries. The other sub categories are five retail boxes and seven smaller retail units.
Fitch has assigned the following ratings to the remaining tranches: triple-B to €33.3m in class Bs; triple-B minus to €12.4m in Cs; double-B to €17.7m in Ds; and double-B minus to €9.25m in Es. There are also €200,000 worth of X1s and €100,00 of X2s - both unrated by Fitch.
News Round-up
CMBS
CRE recognition urged
CREFC Europe has sent a letter to the European Commission, calling for it to include a special mention for CRE debt and CMBS when it releases its securitisation 'package' in accordance with its Capital Markets Union action plan next month. The letter stresses that the current proposals do not accommodate securitised CRE debt, while noting that a healthy CMBS market could improve transparency and liquidity for non-bank investors in this asset class.
CREFC Europe acknowledges that it has not managed to persuade regulators to design criteria for simple and transparent securitsation that could accommodate securitised CRE debt. The trade association explains that the asset class lacks the granularity and homogeneity of many other kinds of ABS and the characteristics of CRE loans are inevitably a function of the underlying CRE investment market.
However, the letter argues that most of the CRE-related problems that emerged in the financial crisis related to far larger exposures on bank balance sheets, not to securitised CRE debt. As a result, it urges that regulators find ways to encourage the growth of a sustainable and responsible securitised CRE debt market, allowing risk to be distributed in a comparatively liquid and transparent form out of the banks and into the hands of non-originating investors.
"If the Commission's proposals for securitisation are to be truly comprehensive, they have to work with the industry to find a way to promote healthy securitisation practices and markets for asset classes like CRE debt and CMBS, which are effectively excluded from the simple and transparent framework," says CREFC Europe ceo Peter Cosmetatos. "That would support financial stability, as well as the ability of the financial system to do its job of connecting investment capital to real economy businesses seeking credit."
News Round-up
CMBS
CMBS property incomes improve
The NOI of Fitch-rated US CMBS improved 3.2% year-over-year in 2014, compared to 2.5% growth in both 2012 and 2013. Led by hotel and multifamily properties, approximately 65% of the commercial properties by loan count in Fitch's portfolio reported an increase in NOI between 2013 and 2014.
Year-on-year increases for the major property types in 2014 from their 2013 figures were: hotel by 8.1% from 5.4%; multifamily at 3.8% from 4.2%; retail at 2.1% from 1.8%; office at 1.5% from 0.9%; and industrial at 1.4% from 1.6%.
Among the states with larger CMBS hotel exposure are California (across 116 loans worth US$2bn), Florida (103 loans worth US$1.8bn) and Texas (99 loans worth US$1.4bn), where NOI improved by 13%, 12% and 10% respectively. On loans greater than US$50m, the most notable improvements include the US$65m South Beach Marriott loan (securitised in CGCMT 2013-GC15), the US$56m Four Seasons San Francisco loan (MSCI 2007-HQ12) and the US$74m Hyatt Regency Austin (MSBAM 2012-C6), with NOI improving by 52%, 48% and 35% respectively.
New York hotels saw weaker performance, where 60 loans worth US$1.6bn provided an overall NOI decline of 2.2%. Fitch says that this has been driven mainly by an increase in overall supply in the market. Nonetheless, the agency notes that overall current hotel occupancy and average daily rates have already exceeded the prior peak.
Multifamily NOI growth was helped by strong performance in Florida (243 loans worth US$3.2bn) and Colorado (75 loans worth US$1.2bn), both with gains greater than 7%. California, Texas and New York - which have the largest CMBS retail exposure - all reported NOI improving by at least 2.5%.
For office loans, California was by far the strongest performer with NOI improving 23% for 442 loans totalling US$7.3bn. New York, which has the largest CMBS office exposure in Fitch's portfolio with 200 loans worth US$11.9bn, showed NOI improvement of 2.6%.
Finally, office properties in the suburban Washington DC markets appear to be struggling, while properties closer to the central business district of the US capital have seen improvement. Virginia (112 loans worth US$3.3bn) and Maryland (78 loans worth US$1.4bn) each exhibited NOI declines greater than 3%, while Washington DC (45 loans worth US$2.9bn) improved 4.8%. The declines are associated with a number of issues, including the increasing vacancies in the related suburban submarkets between 2013 and 2014, oversupply issues and limited/falling demand.
News Round-up
CMBS
US CMBS loss severities normalise
The weighted average loss severity of US CMBS loans liquidated at a loss rose to 41.6% in 2Q15, up from 24.5% in the prior quarter. Moody's notes that the 1Q15 figure was highly unusual, so last quarter's figure represents a return to historical levels.
There were 234 loans liquidated with an average disposed balance of US$11.5m in 2Q15, compared to 141 loans and a balance of US$16.5m in 1Q15. The weighted average loss severity for April-June was only 50bp lower than the total weighted average loss severity of all liquidations that took place from 1 January 2000 to 30 June 2015.
The average amount of time for resolution of all loans liquidated at a loss since 2000 was 14.3 months in 2Q15, up from 14 months one year ago. Loans that were resolved within 12 months of a default had a loss severity of 28.1%, while loans that took more than four years to be resolved had a severity of 91.9%.
Among the 10 metropolitan statistical areas with the highest cumulative dollar losses, New York was top last quarter with a cumulative dollar loss of US$1.79bn, although it also has the lowest loss severity at 28.2%. Detroit continues to have the highest loss severity at 60.1%.
News Round-up
Insurance-linked securities
APAC ILS issuance to rise
Fitch expects catastrophe bond issuance to increase in Asia-Pacific - particularly for catastrophe-prone countries, such as Japan and China - as the region strengthens its resilience to disasters. At the same time, insurers are seeking alternative sources of funding to reduce their heavy dependence on reinsurers.
The high catastrophe exposure and significant gap between insured losses and economic losses mean that the Asia-Pacific region is in need of proper (re)insurance protection for its catastrophe losses, according to Fitch. The agency points to the emerging trend of catastrophe funds/pools in certain Asian markets, typically led by governments or industry associations.
"Thus far, Thailand and China have started the process of implementing such initiatives as part of their national disaster-management schemes, which would help the local (re)insurers manage their catastrophe losses," it notes.
Fitch expects the operating landscape of Asian reinsurance to be shaped by a combination of three factors: new operations established by foreign reinsurers in Asia; start-ups by Asian insurers themselves; and ongoing M&A activities in specific Asian reinsurance markets. "This will raise the level of competition and allow a transfer of technical expertise and knowledge from the foreign entrants," the agency says.
This year has so far been relatively free of major catastrophes, except for an explosion at a chemical warehouse in Tianjin, China on 12 August. The Chinese insurance regulator is yet to release official statistics on the amount of claims incurred from this event, but the insured losses are likely to be substantial, potentially exceeding US$1bn-US$1.5bn. Fitch expects the number of reported insurance claims cases to surge in the coming weeks.
News Round-up
NPLs
Second NPL pool sold
Fannie Mae has announced Lone Star as the winning bidder for its second NPL sale that it began marketing last month (SCI 20 July). The transaction is expected to close on 25 September and includes approximately 3,900 loans totalling US$765m in UPB for the two larger pools.
The cover bid price for the first pool is 51.04% of UPB (69.67% BPO), while the second is 86.28% of UPB (58.2% BPO). The average loan size and note rate on the aggregate of the two pools were US$197,927 and 5.2% respectively. Average delinquency of the loans was approximately 37 months, with an average BPO LTV of 76%.
The sale included a smaller community impact pool, a geographically-focused pool marketed to encourage participation by non-profits and minority- and women-owned businesses. Bidding on this pool, which comprises approximately 75 loans totalling US$11m in UPB, has been extended to 25 August.
News Round-up
RMBS
Freddie loans swap servicer
Marix Servicing, an affiliate of Walter Capital Opportunity (WCO), has been approved by Freddie Mac to hold MSRs relating to a pool of approximately US$3.3bn in UPM of the GSE's residential mortgage loans. Walter Investment subsidiary Green Tree Servicing will sub-service the loans on its behalf.
WCO ceo Denmar Dixon says that the transaction represents approximately half of the MSRs associated with US$6.75bn in UPB of agency MSRs that Marix anticipates acquiring. The mortgage loans are scheduled to transfer on 16 September. The previous owner of the servicing rights has not been disclosed.
News Round-up
RMBS
Aussie delinquencies diverging
Fitch reports that Sydney's mortgage performance has benefitted the most from the rise in house prices. Metropolitan regions, including the historically worst-performing ones in western Sydney, appear not to have experienced the usual deterioration in mortgage delinquency rates caused by Christmas spending.
Budgewoi (2262), on New South Wales' (NSW) Central Coast, has topped Fitch's list of worst-performing postcodes in Australia for the second time in terms of missing housing loan repayments. With a 30-plus day delinquency rate of 3.2%, Budgewoi has appeared 11 out of 14 times in the agency's previous mortgage delinquency reports.
This year, Tasmania replaced Queensland (QLD) as the worst-performing state in Australia for mortgage repayments, with a delinquency rate of 1.33%. This figure reflects Tasmania's high unemployment rate and low house appreciation over the past three years.
On average, the delinquency rate across Australia increased by 9bp to 0.99% at end-March 2015, up from 0.90% at end-September 2014. The strong house price appreciation and lower interest rates slightly offset the negative impact of seasonal Christmas overspending, as arrears are 36bp lower than 12 months ago.
Fitch notes that over the past two years local unemployment and the housing market have been the major drivers in regional mortgage performance, particularly in the current low-interest rate environment.
Most of the 20 worst-performing postcodes were in metropolitan regions, with Laidley and Mount Isa in QLD being the only exception. However, metropolitan regions overall performed better than non-metropolitan areas, especially in Western Australia, Queensland and the Northern Territory, where the slow-down and job cuts in the mining industry have been detrimental to mortgage performance.
Christmas spending and the general cost-of-living affected mortgage performance of regions in states that showed strong sensitivity to mortgage rates - such as the north-west of Melbourne and south-west of Brisbane - due to socio-economic factors like high unemployment.
For the first time, Mackay (QLD) became the worst-performing region in Australia by dollar value, replacing Hume City (Victoria (VIC)), following a 59bp worsening in 30-plus day arrears. Mackay's performance deteriorated the most in the six months to end-March 2015.
The best performing regions in their respective states by value are: Lower Northern Sydney (NSW); Inner Melbourne (VIC); Inner Brisbane (QLD); and Central Metropolitan Perth (West Australia).
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