Contents

Secondary markets

Slight return for US CLOs

The US CLO secondary market is making something of a return but remains hidebound by thin liquidity.

"It feels like the market is coming back a little bit, but volumes are still very low," says one trader. "It's going to be another tough week this week with the Jewish holiday today and tomorrow combined with the Miami conference from Wednesday."

That said, the trader adds: "There are a few lists out today from hedge fund/prop desk type sellers. They're mainly small sizes though, so they're probably putting them out just to see what happens."

There are currently four lists on the US CLO BWIC calendar for today. Of those, perhaps the most eye-catching is an auction of two pieces of emerging market CLO ICEC 2013-1A at 11:30 New York time.

The list involves $30m of the triple-A A1 tranche and $25m of the double-A B2. Neither has traded on PriceABS before.

Secondary markets

Euro ABS/MBS keeps BWIC focus

The European ABS/MBS secondary market is continuing to revolve around BWICs

"We've been fairly busy with a quite a few BWICs going through last week and this," says one trader. "Most seem to have traded reasonably well even though the macro backdrop remains challenging."

The trader continues: "As with other markets we've softened a little but paper is still going through at expected levels. At the same time, many people are pre-occupied with the new issue pipeline which is now quite strong and goes some way to explaining the BWIC supply pattern."

There are currently three European ABS/MBS BWICs on the schedule today so far all involving UK RMBS. The trader highlights a deep mezz non-conforming list due at 16:00 London time for particular attention. "It'll be very interesting to see where that trades from a ratings perspective."

The £44.247m nine line list comprises: ALBA 2005-1 E, ALBA 2006-2 F, LGATE 2007-1 E, MANSD 2006-1X B2, NGATE 2007-3X E, RLOC 2007-1X E1B, RMACS 2006-NS2X B2A, RMS 22X B2 and ROOF 2 B2A. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Large Trups list circulating

The largest and most diverse Trups CDO BWIC seen for a while is circulating for trade today at 12:00 New York time.

Despite reduced liquidity because of the Jewish holiday and impending Miami conference the list is likely to attract plenty of attention in a sector that often lacks significant numbers of widely seen price points. The 16 line $274.878m original face auction offers bonds with a range of vintages across first-pays, second-pays and mezz.

The list comprises: ALESC 4A B2, ICONS 2004-1A A, INCAPS 1 B2, PRETSL 16 A1, PRETSL 17 A1, PRETSL 18 A1, PRETSL 19 A1, PRETSL 20 A1, PRETSL 22 A1, PRETSL 23 A1, PRETSL 26 A2, PRETSL 7 MEZZ, TRAP 2003-2A A1B, TRAP 2004-7A B1, TRAP 2007-12A A1 and TROPC 2003-2A A1L. Only PRETSL 17 A1 has covered with a price on PriceABS in the last three months - M70s on 24 June.

Secondary markets

Euro secondary lull continues

The European securitisation secondary market's summer lull has morphed into a September one with liquidity still very thin across the board.

"There's still very little going on other than a few BWICs," says one trader. "For September it's bad and we can't even blame the summer anymore."

The trader continues: "What little secondary activity there's been has focused around prime assets, but for the most part people are keeping out of the market. I would say they're waiting on the FOMC tomorrow, but before that they were waiting on Greece and then China - they just seem to be content to wait."

There are currently two BWICs on the European calendar for today. At 13:30 London time is a seven line €8.5m 1.0 mezz CLO list consisting of: CELF 2006-1X C, CORDA 2006-1X C, CORDA 2007-1X C, EGLXY 2006-1X D, HARBM 10X A4, HARBM PR3X A3 and HARVT II-X C1. Two of the bonds have covered on PriceABS in the last three months - CELF 2006-1X C at 92.675 on 1 September and CORDA 2007-1X C at 93.41 on 11 September.

Then, at 15:00 is four line 19.7m mixed euro and sterling UK non-conforming list, comprising: KMS 2007-1X B1B, LMS 1 CC, MPS 4X M2A and RMS 21X B1A. None of the bonds has traded on PriceABS in the last three months.

Secondary markets

Euro secondary stalemate

The European securitisation secondary market stalemate is continuing as participants stay on the sidelines apart from for selected assets.

"Things haven't changed much despite the better tone in global markets," says one trader. "In particular, off-the-run assets, such as CMBS and UK non-conforming, remain difficult to move, though UK non-conforming liquidity has slightly improved on the back of further pricing details on Warwick 2."

Prime assets continue to fare the best the trader notes. "UK and Dutch paper is stable to 1bp tighter, while autos are selling well on the back of new issues."

Meanwhile, the trader says: "Peripherals are still quiet in general, but the downgrade of LUSI 5 meant some investors began selling their portfolios yesterday. Thanks to the current thin liquidity in the sector prices in the bond were disproportionately impacted."

CLOs are similarly quiet, according to the trader. "There has been a bit of secondary activity and the occasional BWIC but it's quite limited. In addition, the lack of new issuance, including the latest Avoca seemingly postponed until next week, means there's little sense of direction for secondary, though spreads are still stable across the structure."

There are currently two BWICs on the European calendar for today. Both are due at 15:00 London time and involve 1.0 CLO mezz and CDO auctions.

The four line €15.55m original face CLO list comprises: HSAME 2007-IX E, HSAME 2007-IX A2, KNTYR 2007-1X E and SKELL 2006-1X E. The six item €32.25m CDO BWIC consists of: BRUCK IX A2-1, HOEF V A2, PANTH III-X E, PULS 2006-1 F, RHODI 1X D and STNTM I A1T. None of the bonds has traded on PriceABS in the last three months.

In addition, there are two OWICs also due today. At 13:00 are eight lines of Australian RMBS - AIMS 2004-1 B, CALIBRE 2007-1 B, IMT 2002-1G B, IMT 2003-3G B2, IMT 2004-5 B, RMSPL 2002-1 B, RMSPL 2004-1E B and RMSPL 2007-3 B. Then, at 14:00 is mixed ABS OWIC involving ABEST 10 A, ABEST 9 A, ALSPV 7 A1, KIMI 3 A and QUARC 1 A.

Secondary markets

US RMBS halted

Activity in the US non-agency RMBS secondary market has halted this week, but is expected to pick up again next.

"There's been very little trading in the last few days," says one trader. "Tuesday was the last day with any BWIC activity and even then there was less than $50m in for the bid."

However, the inactivity is only to be expected, the trader suggests. "Most participants are away at the Miami conference and everyone still here is waiting on the FOMC later today and doesn't want to get in front of any volatility the announcement may cause."

Volumes should increase next week, however. "Once people start to return from Monday onwards and things have had a chance to settle after the Fed, I expect a fully functioning market to come back as people start to trade ahead of quarter-end," says the trader.

Indeed, the week will get a kick-start with a 447 line $2.08bn current face subprime RMBS BWIC generated by the liquidation of the Prudential Covered Trust 2012-1 due at 10:00 New York time on Monday. "It's a SIV that had a fixed termination date of 30 September 2015 and they're just looking to sell the assets a little ahead of that," the trader explains.

Secondary markets

Euro secondary keeps quiet

The European securitisation secondary market was once again quiet yesterday and looks likely to stay the same today.

Secondary spreads remained fairly stable yesterday, though some softening of tone continues in the peripheral space. Volumes remained low in both flow and BWIC trading across the board in advance of the Fed announcement. On a Friday amid slightly weaker broader markets post-FOMC and with the US market still largely absent in Miami liquidity is unlikely to improve significantly today.

There are currently three European BWICs on the schedule for today. One is a mixed list and two involve CLO mezz.

At 11:00 London time is a ten line €12.05m 1.0 CLO auction. It consists of: ARESE 2007-1X B1, ARESE 2007-1X C, HARVT III-X B, HYDEP 1X C, JUBIL V C, LEOP IV-X B, NWEST III-X B, OCI 2007-1X A3, SKELL 2006-1X B and SKELL 2006-1X C. Only SKELL 2006-1X B has covered with a price on PriceABS in the past three months - 99.31 on 28 July.

At 13:30 is the eight line €23.05m mixed list - BCJAM 4 A2, HSAME 2006-IIX B, IMCAJ 3 A, NGATE 2006-3X A3A, PARGN 10X A2B, RMS 20X M1A, TAURS 2014-UK1 A and TDAI 3 A. Only TAURS 2014-UK1 A has covered with a price on PriceABS in the past three months - 99.85 on 25 June.

Then at 14:30 is a four line €7.75m 2.0 CLO list, which comprises: BABSE 2014-1X E, BABSE 2014-2X D, ORWPK 1X C and ORWPK 1X D. Only ORWPK 1X C has covered on PriceABS in the last three months, doing so at 97.65 on 21 July.

ABS

PACE ABS supported?

DBRS expects the PACE market to grow rapidly once certain regulatory overhangs are fully addressed, citing rated ABS issuance as one potential funding source. This is in light of an FHA announcement last month, stating its intent to allow borrowers to use single-family FHA financing for properties with existing PACE loans that meet certain conditions.

"The legislation has caused some buzz in the market," says DBRS senior US ABS rating analyst Lain Gutierrez. "Most of the market believes it addresses the key concern surrounding the forwarding of senior priority PACE liens by virtue of being parri passu with property taxes."

In its recent statement, the FHA said that it will use single-family financing to support expanding access to clean energy financing options for 'creditworthy' borrowers. However, in the event of default, the PACE loan as a tax assessment may have super lien status and/or take precedence over the first lien mortgage during the event of default, which has raised concern among some lenders.

The anticipated single-family guidance is expected to address the impact of PACE assessments on purchases, refinances and loan modification options available to borrowers experiencing distress and will require the subordination of PACE financing to the first lien FHA mortgage. The guidance will also address the eligible methods of subordination of existing PACE liens.

For now, the FHA is in ongoing talks with the FHFA in its development of guidelines and has set out a number of minimum requirements. Among them, only PACE liens that preserve payment priority for first lien mortgages through subordination will be included, financing must be set as a fixed rate and fully amortising loan, and assessments must be attached to FHA-defined single-family properties.

Subordinated ABS issuance could subsequently follow and has got people in the market talking, explains Chuck Weilamann, team leader of DBRS' ABS group. "There have been two issuers that have been in the market and others are considering issuing. If subordinated PACE can gain traction, it could become attractive to certain programme administrators and bodies looking to provide PACE to municipalities interested in clean and alternative energy."

He adds: "The adoption could be very broad, but the number of issuers will likely be in the 10s or 20s, rather than triple-digit numbers."

Weilaman warns that there will likely be increased loss absorption in subordinated deals in the case of a negative event related to a deal. However, he says that the difference in credit enhancement between senior and subordinate ABS deals will be mostly incremental.

In finalising its guidelines, the FHA says it will work with the CFPB, US Department of Energy, US Treasury and other industry stakeholders to advocate for strong consumer protections.

JA

Structured Finance

SCI Start the Week - 14 September

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

Pipeline
It was another active week for the pipeline, with four new ABS and six CMBS added. There were also four RMBS announced - one from the UK, one from Canada and two from Australia.

US$300m CPS Auto Receivables Trust 2015-C, €750m Driver Espana Two, US$1.05bn Ford Credit Auto Owner Trust 2015-C and A$500m Series 2015-1 REDS EHP were the ABS. The RMBS were Genesis Trust II Series 2015-2, IDOL 2015-1 Trust, Light Trust No.5 and Warwick Finance Residential Mortgages No.2.

The CMBS were: US$757.3m BACM 2015-UBS7; US$959m CGCMT 2015-GC33; US$1.57bn FREMF 2015-K48; US$925m JPMCC 2015-SGP; US$708.2m MAD 2015-11MD; and US$963.7m Wells Fargo Commercial Mortgage Trust 2015-LC22.

Pricings
Several deals also priced. As well as nine ABS prints there were also five RMBS and two CLOs.

The ABS were: US$763.21m Ally Auto Trust 2015-2; US$131.2m CarNow Auto Receivables Trust 2015-1; US$310.4m CCG Receivables Trust 2015-1; C$511m CNH Capital Canada Receivables Trust Series 2015-2; £350m Driver UK Three; US$320.51m First National Master Note Trust Series 2015-1; US$1bn Hyundai Auto Receivables Trust 2015-C; CNY2.7bn Rongteng Individual Auto Mortgage-Backed Securitization 2015-2; and €1.028bn Silver Arrow Compartment 6.

£325m Albion No.3, US$477.73m American Homes 4 Rent 2015-SFR², £460m Dukinfield, A$197m RedZed Trust Series 2015-1 and €1.2bn STORM 2015-II accounted for the RMBS. Meanwhile, the CLOs were US$398m NewStar Commercial Loan Funding 2015-2 and US$512m York CLO-2.

Markets
US ABS spreads were mostly stable as secondary trading remained light, report Barclays analysts. They say: "Given that non-mortgage ABS spreads are at their widest level in four years, while collateral fundamentals remain strong, we believe that non-mortgage ABS is attractively priced. That said, given our expectation of continued spread volatility in the ABS markets in the coming months, we favour shorter-dated tranches across ABS sectors."

US CLO secondary market activity picked up as the week wore on, following a very quiet post-Labor Day weekend Tuesday. BWIC volumes for the week reached around US$680m, according to Bank of America Merrill Lynch analysts. They add: "Investment-grade paper made up the majority of this week's volumes with triple-A to triple-B (original ratings) tranches making up 58%, 8%, 22% and 7% of all line items."

In Europe, the UK gapped widest, while other jurisdictions cheapened more modestly. "Exiting the summer lull and being bombarded with a plethora of deals in the primary (both priced and stacked up in the pipeline), coupled with a modest list of BWICs, primarily in the mezzanine space of CMBS and UK NCF RMBS, secondary spreads were tested for resiliency this week," say JPMorgan analysts.

Editor's pick
Equity gap: A two-tier system is emerging within US CLO equity as large investors competitively expand their mandate while smaller players move out of the market. This emerging gap is also manifested in a wave of manager consolidation, as risk retention remains a dominant concern...

Deal news
• The US$61.8m Phoenix Airport Marriott loan has returned to special servicing, having previously gone into special servicing last year (see SCI's CMBS loan events database). The loan is securitised in BACM 2006-3. The US$45m Maxtor Campus loan in CSMC 2006-C4 has also moved into special servicing. Seagate Technology, which is the only tenant, intends to vacate at the end of its lease next March.
• Dock Street Capital Management is taking over as collateral manager for Kleros Preferred Funding. Vertical Capital gave notice of its intention to stand down as collateral manager in the summer (SCI 12 June).

Regulatory update
• The SEC has charged three traders over lying to customers with regard to pricing information on RMBS. Ross Shapiro, Michael Gramins and Tyler Peters allegedly generated millions of dollars in additional revenue for former employer Nomura Securities as a result of their supposed misconduct.
• Taberna Capital Management's recent settlement with the SEC in relation to charges made over its fraudulent management practices of 11 CDOs (SCI 3 September) is credit positive for the transactions, according to Moody's. The agency says that settlement proceeds for the CDOs - which have a par of around US$5.2bn - along with other diverted interest and principal proceeds, will pay down the notes as a result of the transactions' overcollaterlisation (OC) test failures.
• The recent Madden Ruling by the US Court of Appeals for the Second Circuit could have a limited, but negative, credit impact on Moody's-rated securitisations backed by bank-originated consumer marketplace lending loans. The ruling holds that non-bank debt collectors that purchase written-off credit card accounts from a bank cannot benefit from the bank's federal pre-emption of state usury laws (SCI 21 July).

Structured Finance

NAIC MBS assumptions 'mixed'

The NAIC's structured securities group (SSG) last week released recommendations for macroeconomic assumptions, scenarios and probability weightings for use in this year's annual surveillance of insurer-owned CMBS and RMBS. Morgan Stanley analysts believe these are mixed for CMBS but positive for RMBS.

For CMBS, the probability weights across the four modelled scenarios remain consistent in 2015 with those used in 2014. The three-year NPI growth is stable for the optimistic and baseline scenarios, but has meaningfully declined for the second consecutive year for both the conservative and most conservative scenarios.

"However, given the realised price appreciation in 2014, the absolute level of assumed CRE prices is higher at every point over the next three years across every scenario. This should result in lower assumed defaults and loss severities for many legacy CMBS loans corresponding to a decline in modelled losses (especially for some cuspier AM and AJ bonds)," note the analysts.

Assumed prices for the conservative and most conservative scenarios are lower 10 years forward, given more severe current-to-trough assumptions. This may result in a greater amount of CMBS 2.0 bonds with NAIC marks of less than 100.86, which the analysts warn could be compounded if the NAIC models that use these scenarios as inputs were to default later vintage loans at a higher rate than earlier vintages over the next three years.

Late last year the analysts found that 50 CMBS 2.0 conduit bonds across 46 deals had marks of less than 100.86. Of the 50 CMBS 2.0 conduit bonds with a price of less than 100.86, 40 were from 2014 vintage deals, reflecting their lower quality. This trend could continue, with some triple-B bonds starting to have prices of less than 100.86.

For RMBS, probability weights across modelled scenarios stayed constant for 2014. Home price appreciation has largely followed the NAIC's forecast from last September, so the heavily-weighted baseline scenario has become even more optimistic. Three-year and five-year forecast HPI growth is, however, lower across both the conservative and most conservative scenarios.

"That being said, as was the case last year, the higher starting point for these economic forecasts means that at no point over the next 10 years would the absolute level of forecasted home prices be lower than 2014 forecasted levels for the conservative and most conservative scenarios. The only forecast that would ends up being slightly below last year's projections is the optimistic scenario, and then only for the first few years for a scenario with a probability weighting of only 10%," say the analysts.

NAIC marks in the non-agency space are almost exclusively concerning legacy issuance from 2007 and earlier, so the percent of depreciation in the near to medium term is less important than the absolute level of home prices after such depreciation. Higher absolute prices would suggest realised loss severities upon liquidation would be lower under this year's projections.

However, that does depend on how Blackrock Solutions factors home prices into its loss-severity assumptions and on how Blackrock Solutions' model for expected losses in RMBS differs from its predecessor. Blackrock Solutions is taking over financial modelling services for RMBS for the first time this year (SCI 18 August).

A conference call is scheduled for today to allow the industry to comment on the SSG's recommendations. Final adoption will be on 8 October.

JL

CDS

Swaps collusion settlement reached

A dozen banks have agreed to pay a US$1.87bn settlement to investors in a case accusing them of rigging the CDS market by deterring and delaying credit derivatives products from reaching open and regulated platforms. ISDA and Markit have also agreed to their involvement in the settlement after supposedly colluding in blocking competitor providers from entering the market.

The case, which came before the US District Court for the Southern District of New York, alleges that there was a coordinated effort to delay or prevent exchanges from trying to put certain credit derivatives onto regulated platforms where the prices would have been more transparent. The activity supposedly caused certain investors to pay unfair prices on CDS trades between 2008 and 2013, as they were obscured from what were constituted as fair prices.

The argument of the plaintiffs also accused the defendants of holding secret monthly meetings in New York, in order to prevent new entrants to the market. In late 2008, a number of banks supposedly attempted to thwart the launch of a credit derivatives exchange being developed by CME Group by agreeing not to use new CDS platforms. ISDA and Markit were also allegedly pushed into not providing licenses to the exchange.

"It was a case where the accused were trying to protect a very profitable franchise," says Daniel Brockett, partner at Quinn Emanuel Urquhart & Sullivan - the law firm representing the plaintiffs in the case. "The settlement is one of the largest ever recoveries in a private antitrust lawsuit."

The investors making the accusations were the Los Angeles County Employees Retirement Association and Salix Capital US. The 12 banks that were accused alongside ISDA and Markit were Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, RBS and UBS.

"Many of the essential terms have now been agreed," adds Brockett. "We just have a number of issues to iron out, but that should be finalised within the next seven to 10 days."

Brockett says that details surrounding the distribution of the settlement will be released at the conclusion of the settlement talks. Details as to what issues are yet to be finalised are currently confidential.

It is said that investigations remain ongoing into related trading practices, dating back to as early as 2009, but Brockett is unaware that there is much else that can be done in the US based on the clarifications that Dodd-Frank rules now provide. The European Commission is believed to still be investigating similar issues, but details on its progress remain unclear.

JA

CDS

iTraxx S24 skew projected

Markit iTraxx indices roll to Series 24 on 21 September. The new series is expected to trade wider than Series 23, albeit the Crossover index could open in negative territory for the first time.

Seven constituents are due to change in the Crossover portfolio, with iTraxx Main Non-financials seeing five name-changes and Financials seeing one. For the Crossover index, Air France-KLM, Ephios, HeidelbergCement, International Game Tech, Matterhorn, New Look Secured and Renault will replace Abengoa, Clariant, Eileme 2, New Look Bondco I, Norske, Smurfit Kappa Acquisitions and TVN. AstraZeneca, Michelin, Linde, SABMiller and TDC will replace Brisa, GKN, Unibail-Rodamco, Metro and STMicroelectronics in Main Non-financials, while Bayerische Landesbank replaces Svenska in Financials.

Bank of America Merrill Lynch credit derivatives analysts estimate S24/S23 rolls of +5.5bp, -22bp, +10bp and +12bp for iTraxx Main, Crossover, senior financials and subordinate financials respectively. They suggest that a large long-base on the non-dealer side means that interest in rolling shorts into Crossover S24 will be less apparent than what has been seen historically.

"This time around - with Norske and Abengoa leaving the index - the new portfolio will be of higher quality, with a thinner tail and less single-name jump-to-default risk. Note that the average spread of the new portfolio versus the old one (without adjusting for the maturity extension) will be around 30bp tighter, according to our estimates," the BAML analysts observe.

The new S24 seems to currently be - on an average spread basis - a better portfolio. "We expect the Crossover change of skew to be almost 2% of the index spread, similar to that seen six months ago. This equates to a change of skew of roughly -6bp," the analysts add.

Meanwhile, with the new entity in the Senior Financials index not adding significantly more spread, the change of skew is unlikely to deviate from the historical pattern. However, with a significant short-base in senior financials to be rolled eventually, the analysts believe that any change of skew will be driven by positioning rather than technicalities and expect it to be around +3bp.

They expect no change of skew for the iTraxx Main and subordinate financials indices.

CS

CDS

CDS trading platform mooted

ICE is said to be exploring the launch of an anonymous single name CDS trading platform as part of industry efforts to revive the credit derivatives market. The clearinghouse is understood to have circulated such a proposal among a number of buy- and sell-side players as one solution to the lack of liquidity in the sector.

It is believed that ICE's proposal for an open trading venue would help reduce costs associated with forming bilateral agreements. As a result, the platform could help boost CDS liquidity while encouraging new participants to enter the market.

"The proposal implies that ICE is extremely focused on increasing the number of participants choosing to go through the cleared process rather than seeking bilateral trades," says one bond advisory executive.

ICE has been pushing for more participants to centrally clear their trades, as it claims this will reduce their capital requirements. This follows ISDA's publication of a set of principles earlier this year that aimed at promoting regulatory consistency as market participants move to more centralised trading avenues (SCI 1 April).

"The move to centralisation remains a key theme in the market since Dodd-Frank set up centralised clearing for interest rate and single name derivatives," the executive adds. "There is now around 45 to 50 investors that are clearing US corporate single names with ICE Clear Credit and 235 US corporate names being traded."

However, it is believed that a successful anonymous trading platform would require even more traders to be clearing their contracts. "There needs to be reasons for potential players to enter the market, not exit it," the executive says. "Anonymity would certainly be a good incentive."

Certainly, ICE has reiterated its commitment to revitalising the market. "We have always been active in CDS execution and believe that cleared CDS is the future of the single name market," says a spokesperson at the clearinghouse. "As we have always done, we're continuing to engage with customers to see how we can leverage our technology to help them manage their credit exposure and address illiquidity in the credit markets."

Despite interest in ICE's proposals, additional work is needed before the clearinghouse can consider launching a trading platform anytime soon. "The launch of a trading platform won't be imminent," the executive suggests. "I suspect that it will not be out before the end of this year."

JA

CMBS

Liquidations lead to CMBS losses

September remittance shows seven liquidated loans for JPMCC 2006-LDP7. The loans had US$133.7m in total balance and were liquidated at a severity of 63%, with losses wiping out the deal's G and H tranches.

The largest property to be liquidated was the US$50.7m Shoreview Corporate Center, which was liquidated with a 96% severity. Barclays analysts note that the loan's performance plunged after securitisation as occupancy remained stubbornly low.

A 2013 appraisal valued the property at US$29m but proceeds were short of that figure. US$15.4m in ASER and advances left only about US$2m for bondholders, realising a US$48.5m loss to the trust.

The US$28m Shoppes at Jupiter loan was the second-largest JPMCC 2006-LDP7 loan to be liquidated. It has also had low occupancy as well as increased expenses, which put the loan into special servicing in August 2012.

Liquidation expenses for the loan totalled US$7.8m and losses of US$10.5m were allocated to the trust, on a 37.4% severity. Liquidation net proceeds of US$25.6m exceeded the latest appraisal.

A 59% severity was applied to the trust as a result of the liquidation of the K-V Pharmaceutical Portfolio. The US$10.2m Matthews Festival loan was liquidated with a 26% severity, while Leggett & Platt, Yakima Avenue Plaza Retail and Cedar Creek Mall were all also liquidated.

"As a result of the liquidations, a total of US$12m was paid the bondholders via the interest waterfall reimbursing ASER and non-recoverable interest. This repaid the outstanding interest shortfalls for D, E, and F tranches fully and US$2m of the outstanding shortfalls for G tranche," say the analysts.

They add: "The liquidations contributed to US$50m of total principal pay-downs this month, leaving the A4 tranche with US$1.14bn outstanding balance, while the losses bottom-up wrote off the H tranche and leave the G tranche with US$2m outstanding balance."

A further US$234m of distressed CMBS will be up for auction in late September and October, with 28 properties securitised in 14 deals. Only one property has a balance larger than US$20m.

The largest properties out for auction this month are Washington Technology Park I and II, which are part of the US$150m COPT Office Portfolio securitised in CMLT 2008-LS1.

The second-largest loan up for auction is the US$17m Prince George's Metro Center, securitised in FUCMT 1999-C1. The loan was previously listed for auction in July 2014 (see SCI's CMBS loan events database).

JL

CMBS

Mixed outlooks for Dutch CMBS

Recoveries from remaining Dutch CMBS 1.0 loans are expected to be limited. Dutch 2.0 loans are expected to perform better and risks are skewed toward prepayment.

There remains high structural vacancy across the country, with vacancy rates of 13%-24% across the four major cities, according to CBRE. Deutsche Bank analysts note that there is also a significant number of old buildings which are now structurally obsolete.

The remaining Dutch exposure in legacy deals is clustered around two portfolios sponsored by Breevast. These are the MPC portfolio securitised in TITAN 2007-2 and the single loan Mesdag (Delta) portfolio.

Sale prices for the MPC portfolio have historically been around valuation, but more recently sales have been below valuation and the Deutsche Bank analysts expect this trend to accelerate. "We think the ultimate resolution (allowing for some cash trapping) to be in the €216m-€228m range, versus the September 2013 valuation of €305.98m (both figures at whole loan level, with 55% share to the CMBS)," they say.

The transaction's legal final is in April 2017 and there are still 69 assets remaining. The CMBS is also backed by three other smaller loans, so recoveries of 80%-88% are expected at the class B level, with current indicative pricing in the 80 area thought to be at the upper end of fair.

The analysts consider the Mesdag (Delta) portfolio to be of materially better quality than MPC, with ultimate recoveries of around €450m expected. The current loan balance is €604.9m.

"However, we think the mechanism for principal to be allocated sequentially in the transaction before note maturity is ambiguous at best, and significant risks of a lengthy period of pro-rata distributions exist. We assume an attempt to restructure the transaction before the December 2016 loan maturity will be made, where this feature along with what we think from the OC are relatively strong rights for the controlling class (class F - not impacted by valuation) on changing the special servicer, will give the junior notes a very strong negotiating position," the analysts say.

In the case of Mesdag (Delta), the analysts say current indicative pricing levels - low 90s for the class A and mid-70s for class B - do not make sense. They recommend selling into these levels.

As for CMBS 2.0, there are currently three loans with Dutch exposure. The underlying collateral is not particularly strong, but the combination of conservative valuations, low leverage and strong sponsorship lead the analysts to believe the risks are skewed towards prepayment.

The two CMBS 2.0 with Dutch exposure are the pure Dutch DECO 2014-TLPX and the multi-jurisdiction hybrid DECO 2015-CHRX. Sponsor quality for both is strong, with average collateral quality - which is nevertheless stronger than for the 1.0 transactions - and lower LTVs.

JL

Structured Finance

Advisory spin-off date set

Blackstone's board of directors has set the record and distribution dates for the spin-off of its financial and strategic advisory services, restructuring and reorganisation advisory services, and Park Hill Group businesses. They will combine to form PJT Partners, a plan that the Blackstone board approved last year (SCI 13 October 2014).

PJT will be an independent company led by founder Paul Taubman. On 1 October, each Blackstone common unitholder of record will receive one share of class A common stock of PJT for every 40 common units of Blackstone held as of the close of business on 22 September - the record date for the distribution.

No fractional shares of the class A stock of PJT will be distributed, but will instead be aggregated and sold on the open market. The aggregate net proceeds of the sales will be distributed through cash payments to Blackstone common unitholders, who would have otherwise been entitled to the fractional shares.

Blackstone anticipates that on the record date it will have approximately 615.1 million common units issued and outstanding. It also expects to distribute approximately 15.4 million shares of class A stock of PJT in the distribution.

The completion of the distribution is still subject to the satisfaction or waiver of a number of conditions. Following this, both companies will be listed on the New York Stock Exchange.

Structured Finance

SF head resurfaces

Mediobanca has hired Philippe Dufournier as md and head of lending and structured finance. He reports to Mediobanca ceo Alberto Nagel and executive chairman Stefano Marsaglia, both co-heads of the bank's corporate investment banking group.

Prior to Mediobanca, Dufornier was most recently head of global finance for EMEA at Nomura. He has also held senior roles at Deutsche Bank and Lehman Brothers.

Structured Finance

Capital markets group adds three

Wilmington Trust has expanded its global capital markets structured finance group with three new hires. Rick D'Emilia has been hired as business development officer, Ben Jordan as head of transaction management and Steve O'Neal as asset servicing manager.

D'Emilia will seek to develop new client relationships, while maintaining existing relationships in the structured finance industry. Prior to joining Wilmington Trust, D'Emilia was director and senior sales specialist at Deutsche Bank, where he covered ABS, MBS and ABCP markets in the US.

Jordan is responsible for developing and closing new ABS and MBS transactions for Wilmington Trust. Before joining, he was head of ABS servicer oversight for Wells Fargo's corporate trust services.

Finally, O'Neal will oversee the asset servicing products within the group. He was previously md in BNY Mellon's corporate trust division, where he was responsible for managing multiple product lines.

Structured Finance

SF co-heads appointed

ING Americas has appointed Bill James and Pieter Puijpe as co-heads of structured finance Americas. They take over from Chuck O'Neil, who retired in July.

Both James and Puijpe will report to Rudolf Molkenboer, ceo of ING Americas, and Krista Baetens, global head of the specialised financing group. They will be on the ING Capital board and will be members of the ING Americas commercial management team and regional management team.

James was previously ING's head of telecom, media and technology finance in structured finance Americas. Prior to that, he held various lending and corporate finance positions with the firm.

Puijpe's most recent position for ING was global head of telecom, media and technology finance. He has also served in a variety of other roles, including global head of corporate and structured finance risk.

ING Americas' strategy for structured finance is continued growth in the core global sector teams, which includes natural resources, telecom media and technology, structured acquisition finance and real estate finance. Structured finance Americas also expects growth in the local sector franchises, including acquisition finance, healthcare, insurance and special situations.

Structured Finance

Structured solutions pair appointed

Mizuho International has appointed Andrew Feachem and Juan Carlos Martorell as co-heads of structured solutions within the investment bank's fixed income unit. The pair join from Lazard, where they established the derivatives and credit advisory business.

Feachem and Martorell have both also worked at ABN Amro. At Mizuho they will be responsible for developing the EMEA structured solutions business with a particular focus on leveraging synergies with other Mizuho entities, both within EMEA and globally.

Structured Finance

Iberian SF expert poached

StormHarbour has appointed Yago Valderrama as md to work alongside Gonzalo Chocano in its Madrid office, focusing on coverage of Spanish institutional clients. Alejandro Gonzalez-Ruiz, md in structuring and client solutions, has also relocated from the firm's London office to Madrid to build on its structuring capabilities.

Valderrama joins StormHarbour from SG, where he headed the Iberian institutional cross assets solutions group. Prior to that, he worked at Nomura as senior contributor to the Iberian team, while originating structured transactions to address liquidity and capital constraints for banks. His experience covers structured credit and rates, fund derivatives, collateralised financing and NPLs.

CDO

CDO manager steps in again

Dock Street Capital Management has replaced Vanderbilt Capital Advisors as the collateral manager for Lakeside CDO II. Fitch was notified that the holders of at least 66% of the aggregate outstanding amount of the controlling class agreed to the new appointment.

Given that Lakeside II is a static pool transaction, Fitch does not expect the manager replacement to have any impact on the rating of the notes. For other recent CDO manager transfers, see SCI's CDO manager transfer database.

CLOs

CLO manager acquired

Rothschild Merchant Banking (RMB) has acquired West Gate Horizons Advisors, combining the latter's expertise in US leveraged loan credit with its focus on European senior leveraged loan credit products. The transaction leaves RMB with €3.3bn in private debt under management.

West Gate becomes a wholly owned subsidiary of RMB's parent company, Rothschild North America, as part of the deal. However, the firm will continue to operate under the leadership of president Mike Hatley and cfo Gray Wilcox.

Mike Clancy, co-head of private credit management at RMB, adds: "The combined credit group will manage European funds, US funds and global funds, with a product offering including unlevered credit funds, multi-strategy funds and CLO vehicles."

CLOs

CLO equity acquired

Fair Oaks Income Fund has entered into binding contracts to acquire, in the primary market, US$26m notional of Ares XXXV CLO equity notes. The investment represents 68.5% of the Ares Management transaction's total equity.

This CLO's current target portfolio has a principal value of US$400m across an expected 177 unique bank loan issuers, with an expected weighted average exposure per issuer of approximately 0.8%. The estimated potential total return for this investment is between 15% and 16% per annum.

CLOs

NewStar buys CLO manager

NewStar Financial has agreed to acquire Feingold O'Keeffe Capital (FOC) Partners. The transaction will close in 4Q15.

FOC Partners is an alternative asset management firm based in Boston, established in 2001 by PIMCO high yield pair Andrea Feingold and Ian O'Keeffe. The firm manages six CLOs and two hedge fund strategies.

NewStar will retain FOC Partners' investment team and support staff to manage existing accounts and intends to expand the platform through organic growth in existing accounts and new fund formation with CLO risk retention solutions provided or arranged by NewStar. Feingold and O'Keeffe will jointly lead the platform.

K&L Gates served as legal counsel to NewStar. GreensLedge Capital Markets advised FOC Partners and Seward & Kissel served as legal counsel to the firm.

CMBS

Defeasance firm expands

Waterstone Defeasance has opened a new office in Irvine, California, to better meet the needs of its clients in the region. Director Addison McMillan has relocated from the firm's Charlotte office and will focus on business development activities, specifically in connection with CMBS defeasance transactions. He reports to John Felter, md, who will continue to oversee the firm's presence in the Northeast and California regions.

Insurance-linked securities

Structuring head recruited

Peter Nowell has joined SCOR as global head of structuring - financial solutions. He is tasked with structuring life reinsurance transactions, which includes ILS deals.

Nowell joins from BNP Paribas, where he was head of ABS and ILS trading. Prior to that, he was a director at RBS, covering principal investment and ABS exotics trading. Nowell has also held senior roles at Nordea Bank, CDC IXIS Capital Markets and Royal Bank of Canada.

Insurance-linked securities

Capital solutions unit launched

Tokio Millennium Re (TMR) has established a capital solutions unit, tasked with developing new capital markets products and leveraging the use of technology to transact business with the firm's capital markets partners. The unit will be led by Edwin Jordan, current head of Bermuda for Tokio Solution.

TMR says the the unit should provide a more holistic underwriting and retrocession approach, leverage the company's expertise to help build portfolios and better align resources in its product offering. Tokio Solution will remain the distribution hub, working closely with capital markets partners in managing and facilitating reinsurance-linked contracts and structures.

As part of a management shuffle, Tokio Solution ceo Kathleen Faries will replace Jordan as head of Bermuda in January 2016, allowing Jordan to focus solely on the new unit. TMR expects to announce a successor to Faries at a later date.

Insurance-linked securities

ILS vehicle launched

Hiscox Re has launched Cardinal Re, a Bermuda-based special purpose insurer designed to transform collateralised insurance and reinsurance risk into securities suited for capital market investors. The launch  takes parent company Kiskadee Investment Managers' AUM to over US$600m.

Cardinal Re is a platform that will attempt to quickly create sidecars and managed accounts in a segregated cell. The first external investor cell was launched in July by Cardinal Re, with the transformation of a portfolio of Hiscox insurance risk into a transaction supported by US$55m of external capital.

Risk Management

Risk analytics pro recruited

Yaacov Mutnikas has been appointed as co-head of Markit's solutions division focusing on risk analytics, portfolio management and enterprise data management solutions. He will report to ceo Lance Uggla.

Mutnikas was previously senior advisor at the Bank of England, where he focused on financial networks and systemic risk. He has over 30 years of experience across software engineering, systems architecture, financial engineering and advanced risk analytics and has also worked at Bridgewater Associates, the UK Financial Services Authority and Algorithmics.

RMBS

RMBS losses case settled

RBS had agreed to pay US$129.6m to the NCUA over a case involving losses related to RMBS that the bank sold to Members United and Southwest corporate credit unions. The latest settlement means the NCUA has now obtained more than US$1.9bn in legal recoveries from institutions linked to the corporate crisis.

The government agency says it uses the net proceeds to reduce temporary corporate credit union stabilisation fund assessments charged to federally insured credit unions to pay for the losses caused by the failure of five corporate credit unions. "Each recovery as well as our ongoing lawsuits further NCUA's goal of minimising the losses of the corporate crisis and future costs to credit unions," says NCUA board chairman Debbie Matz.

The NCUA still has litigation pending in federal courts in Kansas and California against RBS for the sales of supposedly faulty RMBS to US Central and Wescorp. The agency also has lawsuits pending against Goldman Sachs, Wachovia, UBS, Barclays, Credit Suisse and Morgan Stanley based on the sale of faulty securities that allegedly caused the collapse of five corporate credit unions.

ABS

SLABS clean-up calls continue

Navient has exercised it 10% call option on four more FFELP student loan ABS trusts, following its decision to call three trusts last month (SCI 11 August). US$636m of outstanding bonds across the four trusts - SLM Student Loan Trust 2004-6, 2004-9, 2005-1 and 2005-2 - will be repaid on 26 October.

Navient has repaid US$1.1bn so far this year across 12 FFELP student loan ABS trusts. With these latest clean-up call plans, JPMorgan ABS analysts note that US$758m in Navient bonds should be paid off in September and October, before Moody's finalises its rating methodology for the sector.

However, they suggest that the remaining trusts under rating review will not be eligible for clean-up calls before May 2016, assuming the current pace of amortisation. While the JPMorgan analysts view the sponsor's intervention as helpful, they believe that the very slow current payment rates could put first eligible call dates after the legal final maturity under Moody's various proposed scenarios, rendering the clean-up call ineffective.

ABS

Marketplace reps and warranties assessed

The issue of representations and warranties for marketplace lending ABS should not be considered alone in a transaction's ratability, suggests Morningstar. The agency adds that positive originator and servicer operational assessments, coupled with robust credit enhancement can help mitigate concerns over the strength of reps and warranties.

Approximately 250 marketplace lenders are in operation, but securitisation of loans originated through these platforms has been limited to the largest originators and only a handful have been publicly rated. However, Morningstar believes that rated securitisations can provide access to a large investor base with a conservative risk profile and offer economical long-term industry funding.

The agency adds that good reps and warranties for marketplace ABS will provide useful transparency and information. In addition, debt documentation can protect an investor if a rep and warranty is incorrect as of the date made. In the context of marketplace lending, remedies for a breach could include an obligation of the originator to repurchase at the original sale price adjusted for any payments received by the issuer.

Nonetheless, Morningstar notes that additional eligibility information would be relevant in modelling cashflows for marketplace ABS deals. This is because the agency assumes that pooled loan characteristics conform to reps and warranties. Such examples could include representations regarding payment history on the loans, who can be a borrower with respect to any loans and how interest payments on the loans are calculated.

The agency also explains that the most important reps and warranties covering the characteristics of loans eligible to be included in a securitised pool are those that would be difficult to verify independently. For example, the originator and any intermediate purchaser or sponsor selling loans to the securitisation must represent that, in choosing which loans to sell, no selection procedures were used to negatively affect the buyer of the loans.

Additionally, Morningstar says assessment of some of the fundamental reps and warranties should incorporate their ability in enforcing loans, as well as accuracy of information. The agency says that loan originators must provide statements that the financial contracts evidencing the loans are in full effect and legally enforceable. Deal documents should also clearly state that each borrower is legally obligated to make loan payments and that information describing the loans is accurate.

Another consideration to make is the shifting and uncertain regulatory landscape in marketplace lending. In addition to the potential impact of the Madden case (SCI passim), the US Treasury Department recently requested comment on possible measures to regulate the industry, including requiring risk retention for marketplace lenders. Deal documentation, as for all ABS deals, must confirm the originator's and servicer's diligence in keeping up with existing and emerging laws.

ABS

Further Navient ABS amended

Navient has amended the transaction agreements for 16 of its FFELP student loan ABS trusts, allowing it to purchase up to 10% of the trusts' initial pool balance, as well as to provide loans to the trusts under a subordinated revolving credit agreement (RCA). The loan purchases and any borrowings under the RCA are designed to help ensure payment obligations are met by the trusts' legal final maturity dates.

The securitisations affected by the amendments are SLM Student Loan Trust 2003-1, 2003-4, 2003-5, 2003-7, 2003-11, 2003-14, 2004-1, 2004-3, 2004-10, 2005-4, 2005-5, 2005-10, 2006-1, 2007-6, 2007-8 and 2012-3.

The RCA allows the trusts to borrow from Navient at or before a scheduled note maturity date to cover any payment shortfalls on the legal final maturity date. Any borrowings and interest thereon will be repaid from the trust at the bottom of the waterfall one step above any cash release. Borrowed funds will accrue interest at a rate of one-month Libor plus a spread deemed in good faith by Navient to be a market rate.

The increased purchase amount is allowable as long as the A1 note maturity date has passed.

Fitch notes that the move is not expected to affect ratings assigned to the notes issued by the trusts or Navient's corporate debt rating. The agency recognises that Navient is seeking to avoid the adverse market perception associated with a technical default under the ABS trusts, even if ultimate repayment is highly likely.

"That said, Navient is effectively converting cash on hand to a secured asset, backed by a first loss position in the ABS transactions. Depending on the magnitude of loans extended to the trusts and the performance of the collateral thereafter, this could adversely affect Navient, although this is not envisioned at this time," Fitch observes.

Navient previously introduced similar amendments for 17 transactions - SLM Student Loan Trust 2002-1, 2002-7, 2003-2, 2003-3, 2006-3, 2007-2, 2007-3, 2007-7, 2008-1, 2008-2, 2008-3, 2008-4, 2008-5, 2008-6, 2008-7, 2008-8 and 2008-9 - in December.

ABS

US auto concerns flagged

A reduction in the easing of US auto loan lending underwriting terms has not averted concerns over underperforming new loan vintages in US auto ABS, reports Fitch. The agency says that a quarterly drop in eased underwriting from 1Q15 to 2Q15 is positive, but the persistent relaxation of terms may eventually prompt asset quality to revert to historical averages over the medium term.

Nonetheless, Fitch adds that an improving employment picture, steadier economic conditions and falling gas prices are contributing to robust auto sales. These same factors could push new vehicle sales in the US to break 17 million units for the first calendar year since 2001.

The July Fed loan survey also showed that over 2Q15, loan officers seeing an increase in auto loan demand exceeded those seeing decreases by a margin of 18%. Macroeconomic factors that correlate with auto loan performance, such as unemployment, also point to the market remaining robust.

However, competitive underwriting conditions, combined with potential future pressure on auto residual values and consumers' ability to continue to service their personal debt obligations in a rising rate environment could push the market toward weaker asset quality over the medium term. Fitch also says that high levels of competition between major auto lenders may result in further easing of terms, lower FICOs and new entrants into subprime lending over the near term.

Year-over-year performance for the top nine Fitch-rated auto lenders was mixed, a reflection of underwriting standards, higher subprime lending and a decline in used car values. However, prime loans saw improvements that were attributable to better consumer discretionary spending, which is a seasonal effect typical in the first half of the calendar year following year-end consumer spending surges.

Fitch's prime Auto ABS index performance remained solid, while its subprime auto ABS index experienced a 47% increase in annualised net losses to 5.44% in 2Q15. Nonetheless, the subprime auto loan index still remains well below peak recessionary levels in late 2008 to early 2009.

ABS

Russian control agent 'aids performance'

The presence of a control agent will reinforce independent performance and asset eligibility monitoring for future Russian ABS deals, says Moody's. The independent entity will reduce dependency on the originator and servicer and lessen the link between those parties and loan collateral performance.

A note trustee can also improve the ways in which an ABS can adapt to operational challenges, notes the rating agency. While a control agent is not required, the first cash securitisation of auto loans in Russia under the domestic law - Special Financial Organisation Europa 2014-1A - does include one.

"The control agent's experience and familiarity with the assets' characteristics, as well as its independence from the originator, are particularly important for the party performing this role," says Moody's vp and senior analyst Stanislav Nastassine. "It also ensures compliance with eligibility criteria for the initial loans in the portfolio, as well as for the loans added during the revolving period. Other functions of the control agent include monitoring collateral disposals and the use of cash available in the issuer accounts."

Structured Finance

MMF ratings requirement removed

The US SEC has adopted amendments to remove credit rating references in the principal rule governing money market funds and the form that they use to report on their portfolio holdings. The SEC has also adopted amendments that would subject additional securities to issuer diversification provisions in the money market fund rule.

The amendments remove credit ratings from one of the last areas of the SEC's rules that reference them. "Reducing reliance on credit ratings to determine which securities money market funds can hold is an important part of our efforts related to these funds," says SEC chair Mary Jo White.

Currently, the money market fund rule 2a-7 requires money market funds to invest only in securities that have received one of the two highest short-term credit ratings or, if they are not rated, securities that are of comparable quality. It also requires a money market fund to invest at least 97% of its assets in securities that have received the highest short-term credit rating.

These requirements are eliminated by the amendments. Now, a money market fund is limited to investing in a security only if the fund determines that the security presents minimal credit risks after analysing certain prescribed factors.

The amended rules become effective 30 days after their publication in the Federal Register. The compliance date will be 14 October 2016.

Structured Finance

Non-bank lending risks noted

Moody's says that non-banks can aid European policymaker initiatives to fund small businesses by packaging their loans into structured deals. However, the agency warns that information asymmetry can expose such deals to a potential misalignment of interest between investors and portfolio managers.

In light of recent efforts by European policymakers' efforts to grow the non-bank lending market, Moody's expects securitisation to emerge as a new funding source for SMEs and mid-caps in Europe. Policymakers are supporting non-banks' SME lending activities with a view to encouraging investors to support growth in the real economy, but the agency warns that certain risks must be considered.

"Data on SME and mid-cap debt originated by non-banks is fragmented at best," explains Monica Curti, a vp and senior credit officer at Moody's. "This exposes the deal to risks, such as an adverse pool cut, or a potential misalignment of interest between investors and portfolio managers."

She continues: "With traditional bank lending to SMEs in the euro area well below pre-crisis levels, alternative investors can undertake lending directly in the case of private placements, through a fund or a SPV."

Moody's says that transaction governance and the alignment of interest between the investors and the portfolio manager are key, and may affect a transaction's maximum achievable rating. Borrowers that are ineligible for traditional bank financing because of a weak credit profile may look for alternative fund providers.

Moody's cites the UK as the leading market for peer-to-business lending, with growing SME debt funds and a developed private placement market. France is also a well-known private placement market, while SME debt funds have also been established in Italy with its growing mini-bond market. Germany has a small, but mature SME bond market, showing there is some uneven growth across the continent in non-bank SME lending.

Although Moody's expects non-bank SME deals to resemble CLO and granular balance-sheet SME securitisations, especially from a structural point of view, it says that they will differ somewhat. The agency says it has observed a strong divergence in the past performance of SME and mid-cap transactions with originate-to-distribute models.

Structured Finance

RFC issued on Aussie benchmark

Analysis undertaken by a number of market participants suggests that a more diverse range of interest rate benchmarks could be beneficial in Australia, particularly reference rates that are closer to risk-free, as this may better suit financial transactions like RMBS. The Australian Financial Markets Association (AFMA) is consequently working with the Australian regulatory authorities to develop a near-risk free benchmark interest rate. The new benchmark would complement the Bank Bill Swap (BBSW) reference rate that AFMA administers, which continues as the principal domestic benchmark rate.

AFMA has issued a market notice providing greater insights into the design attributes of the potential complementary benchmark. It has also released a market survey designed to assist in the determination of the form that the benchmark will take. The forms being considered are: a compounded total return index, which quantifies the compounded return of the overnight cash rate; or a benchmark calculated by an ex post compounding of the overnight cash rate.

AFMA says it is interested in receiving feedback from Australian Securitisation Forum members as to the industry application of these potential benchmarks. In the case of RMBS product, the close correlation of the underlying mortgagee's base interest rate to that of the potential benchmarks may be relevant, for example.

Structured Finance

Mexican upgrades outweigh downgrades

S&P reports that last year there were more upgrades than downgrades among its national-scale ratings on Mexican structured finance securities, for the first time since 2007. The downgrade rate fell from 13.8% in 2013 to 8.6% in 2014 - the lowest rate in seven years - while the upgrade rate increased to 17.3% from 10.9% over the same period. In addition, the default rate decreased for the second consecutive year to a three-year low of 2.7%.

Structured Finance

US, European issuance forecast

S&P projects that US securitisation issuance levels for 2015 and 2016 will experience moderate year-over-year growth, but will not reach the pre-crisis levels of 2006 and 2007. The agency forecasts issuance of US$474bn and US$537bn in 2015 and 2016 respectively, up from a total of US$462bn in 2014.

"Although many securitisation products are benefiting from an improving economy and are likely to see increased issuance, certain segments, in our view, are still being underutilised as financial institutions hold more loan assets - potentially due to post-crisis regulation," says Darrell Wheeler, head of S&P's global structured finance research group.

Auto-related ABS issuance is near its 2006 level, having already reached US$381bn during 1H15. This has been boosted by new highs in auto sales this year, due to a combination of employment growth and low interest rates. Strong credit performance has also contributed, leading S&P to forecast US$102bn issuance by end-2015 and US$110bn in 2016.

However, credit card ABS issuance would have to increase by 20% to 30% in order replicate volumes achieved during the 2006 to 2007 peak. Loan growth and strong performance have not boosted related issuance to date in 2015, as lenders are keeping a fair portion of their originations. A modest issuance of US$35bn-US$40bn is projected for the asset class by the end of the year.

S&P believes that the moderate decrease in CLO issuance is mostly the result of waning supply in new loan collateral and possibly, to a lesser degree, by risk retention culling some of the smaller collateral managers. Nevertheless, the performance of CLOs since 2007 continues to attract a variety of investors that could also finance their retention vehicles, thus prompting S&P's issuance forecast for 2016 to be only a minor drop to US$90bn from an expected US$100bn in 2015.

CMBS volume could reach US$110bn by the end of 2015, prompted by year-to-date issuance of US$70bn, a pipeline indicating an additional US$12bn issuance in September and S&P's base-case expectation for 4Q15 to average almost US$9bn per month. Beyond this, the agency expects a surge of issuance going into 2016, due largely to an estimate of US$100bn of CMBS-related CRE loans in 2016 and 2017.

Alternatively, RMBS is still struggling to find a consistent issuance format. Although originations are active, government agencies continue to represent the lion's share of MBS issuance. S&P anticipates that banks will eventually see a breakthrough for further issuance though, with an issuance projection of US$60bn for 2016 and US$70bn for 2017.

Finally, European issuance levels have been more supressed, but there is hope that regulators are beginning to encourage the utilisation of securitised vehicles in an effort to diversify funding sources and spur economic expansion. S&P's 2016 forecast for the region is between US$110bn and US$140bn - up about 20% over its 2015 issuance expectation.

Structured Finance

Credit opportunities fund launched

Touchstone Investments has launched the Touchstone Credit Opportunities Fund, which aims to take advantage of market inefficiencies and relative value opportunities in the global fixed income market. Ares Management will sub-advise the fund.

The fund seeks to generate absolute returns by investing primarily in global debt securities and identifying opportunities that offer attractive relative value when compared to their fundamental credit risk. Ares' investment strategy will focus on reallocating assets among core investments and opportunistic investments as market conditions change. Broad investment categories include structured credit, high yield bonds, bank loans, special situations and hedges.

Management of the fund is led by Ares' Seth Brufsky, John Leupp and Darryl Schall. Shares of the fund are offered as A shares, C shares, Y shares and institutional shares.

CDO

LBA pay-outs begin

Former clients of Lehman Brothers Australia (LBA) who sustained losses on CDO investments received initial pay-outs earlier this month from the liquidation of LBA. According to Amicus Advisory, the amounts received represented 11% of the total admitted claim and came exclusively from the Scheme Fund, a pool of monies from insurance policies held by LBA that were triggered when there was an adverse court ruling against it in 2012.

Liquidator PPB is distributing the Scheme Fund monies prior to paying a dividend from the main funds of the estate to all creditors to avoid prejudicing some creditors. "Essentially the earlier dividend payment process failed, due to an inability to reach agreement to limit some claims against the estate. As a result, when these issues are resolved or become clearer, PPB will re-advertise for claims submission prior to the declaration of a second dividend," Amicus explains in a recent client memo.

This second dividend is expected to be paid in October, but could be delayed based on the history of the LBA bankruptcy process and its inherent complexities. "Positively for those former clients of LBA who have not made claims against the estate, this provides a short window when they can submit claims before the second dividend is declared," Amicus adds.

CDS

Alpha CDS settled

The final price for Alpha Appalachia Holdings CDS has settled at six. During yesterday's auction, 11 dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the entity.

CLOs

CLO 2.0 A2E mulled

The issuer for Cairn CLO III - the first-ever European CLO 2.0 deal - intends to make a number of amendments to the transaction to bring it line with market developments, including risk retention requirements. If executed, the proposal would effectively refinance the deal and extend the non-call, reinvestment and maturity dates of the notes.

CRNCL 2013-3 priced before European risk retention requirements were amended in May 2013. The proposed amendments would therefore allow Cairn Loan Investments to become the manager of the deal and satisfy the risk retention requirement as a sponsor.

Further, Bank of America Merrill Lynch CLO analysts note that the extension of the non-call period, reinvestment period and maturity date, along with a reduction of the coupon spread for each class of rated notes would be the first example of an amend-to-extend of a European CLO 2.0. Finally, the proposed amendments include issuance of further class D (triple-B) notes and one or more new classes of notes subordinated to the class Ds and senior to the class M (equity) notes, likely to bring the capital structure more in line with subsequently issued deals.

The BAML analysts point out that CRNCL 2013-3 was issued with a relatively conservative capital structure in comparison to the deals which followed it. Only triple-A to triple-B rated debt tranches were issued and the debt-to-equity ratio was 4x. In comparison, most other European CLO 2.0 deals were issued with triple-A to single-B rated tranches and the debt-to-equity ratio has increased to around 8x-9x.

Equity investors are expected to benefit from the extension and increase in leverage. In addition, tighter pricing may be available relative to the existing spreads, which could boost equity returns.

Meanwhile, in the European CLO 1.0 space, since the beginning of August six transactions were either called or are awaiting a call after investor notices were issued. GLSPE 2007-1X (managed by BNP Paribas), GSHAM 2006-2X (Investec) and DUCHS IV-X (Babson Capital) were all called last month, while GSHAM 2006-1X (Investec), GROSV II-X (CQS) and DRYD XIV (Pramerica) are expected to be called in their upcoming IPDs. This brings calls so far this year to €2.57bn across 18 deals and 14 managers, according to Deutsche Bank figures.

CMBS

Euro CMBS defaults inch up

The 12-month rolling loan maturity default rate for the European CMBS in S&P's rated universe increased slightly to 20% at end-August from 19.6% a month previously. The delinquency rate for continental European senior loans decreased to 60.3% from 63.3%, while the rate for UK loans increased slightly to 21.2% from 20.6%. Overall, the senior loan delinquency rate decreased to 48.1% from 49.8%.

CMBS

CMBS vintage delinquencies vary

US CMBS delinquencies were nearly unchanged again in August, while rates varied widely by vintage, according to Fitch's latest index results for the sector. Loan delinquencies inched down to 4.52% from 4.53% a month earlier and the dollar balance of late-pays fell US$224m to US$16.9bn last month from US$17.1bn in July.

Loans from legacy transactions continue to dominate the index, with the rate for CMBS 1.0 assets at 10.16% of Fitch's outstanding 1.0 universe versus just 0.07% for CMBS 2.0 assets. The Fitch-rated 2.0 universe stands at US$209bn, now far exceeding its rated 1.0 universe of US$165bn.

The highest delinquency rate for CMBS 2.0 loans is in the 2010 vintage, for which there remains only three delinquent loans at a 0.44% rate. In contrast, legacy deals in the 2007 vintage have the most delinquent loans with 357, but 2004 loans have the highest delinquency rate at 27.73%.

Last month, overall resolution and delinquency activity picked up, with resolutions of US$884m outpacing new delinquencies of US$704m. This compares with US$485m of resolutions and US$455m of new delinquencies in July. In addition, Fitch-rated new issuance volume of US$2.5bn in July was exceeded by US$6.6bn in portfolio runoff, causing a decrease in the index denominator.

The largest new delinquency in August was the US$163.75m Jericho Plaza (I & II) loan (securitised in CSMC 2007-C5), which fell 60 days past due. The largest resolution was the previously US$269m Empirian Portfolio Pool 2 (MLCFC 2007-8), which was modified at the end of July and split into a US$205m A-note and a US$111.9m B-note.

Fitch's current and previous delinquency rates by property type for August are: retail at 5.48%, from 5.41% in July; hotel at 5.27%, from 5.34%; office at 5.04%, from 4.73%; industrial at 4.9%, from 4.87%; multifamily at 4.55%, from 4.9%; mixed use at 3.58%, from 3.61%; and other at 1.04%, from 1.12%.

By transaction type, delinquency rates were: large loan floaters at 21.93%, with 10 loans worth US$536m; conduit at 5.57%, with 952 loans worth US$16.3bn; small balance at 2.58%, with 18 loans worth US$22m; seasoned at 1.54%, with four loans worth US$7m; Freddie Mac at 0.05%, with two loans worth US$23m; and miscellaneous/other at 0.03%, with a single loan worth US$292,123.

CMBS

Mall values 'negative' for Chinese CMBS

Various pressures on the values of malls in China are credit negative for Chinese CMBS as the situation will make it more difficult for obligors to refinance their loans at maturity, says Moody's. However, as consumption levels in the country demonstrate large room for growth, the negative impact is expected to be moderate.

"The supply of mall space in China is outpacing demand, as growth in retail sales slows because of the country's lower GDP growth, and in cities where mall space is abundant, vacancy rates have risen substantially," says Moody's associate md Marie Lam.

Demand for mall space has fallen as online shopping has grown in popularity. Mall operators have responded by reconfiguring retail spaces to place a greater emphasis on lifestyle consumption, but Moody's notes that the success of such reconfigurations depends on whether the strata title owners of the mall can agree to such plans and whether malls can stand out from the competition.

CMBS

Liquidations hit LBUBS CMBS

There were 13 loans with a balance of US$100.7m securitised in LBUBS 2006-C4 liquidated at 53.6% severity last month, according to September remittance data. All 13 loans were under US$20m, but the timing of the liquidations resulted in large cash outflows.

Barclays analysts note that the liquidations were not a surprise, as they were all listed for auction in the summer. The liquidations generated US$74.4m in proceeds, compared with a combined appraisal value of US$81.2m.

"The liquidations generated US$47m in prepayments, while principal losses totalled US$53.6m. A couple of loans took interest losses in addition to principal losses, while one loan was liquidated with no loss," say the analysts.

The largest loan was Oxford Court Business Center, which had an original balance of US$17.9m and most recent value of US$11.1m. It was listed for auction back in May (see SCI CMBS loan events database). Liquidation proceeds of US$8.8m allowed US$5.46m in principal recoveries and resulted in a US$12.48m realised loss.

Principal proceeds paid down 5% of LBUBS 2006-C4's A4 tranche and 9% of its A1A tranche, while losses wrote off the J and K tranches and a small piece of the H tranche. ASER recoveries of US$6.1m were enough to repay shortfalls on the J and K tranches as well as a US$2.5m loss recoupment to the K tranche.

CMBS

CMBS pay-offs dip

Trepp reports that the percentage of US CMBS loans paying off on their balloon date slid modestly last month. The August reading stands at 73.8%, less than one point below the July percentage, but above the 12-month moving average of 67.1%.

By loan count as opposed to balance, 61.7% of loans paid off in August. On this basis, the pay-off rate was lower than July's level of 72.9%. The 12-month rolling average by loan count is now 68.1%.

Risk Management

Derivatives ID initiative underway

ISDA has launched a new industry data project, which aims to develop an open-source standard derivatives product identification system. The system will be applied consistently across all derivatives facilities, including trading venues, clearinghouses, repositories and other infrastructures.

ISDA is overseeing the symbology project, which involves a consortium of buy- and sell-side market participants, vendors, platforms and trade associations. Capital markets technology consultancy Etrading Software is acting as project manager.

The initiative is a response to a variety of regulatory changes, including the revised MIFID 2/MIFIR and the US SEC's reporting rules, which require a standardised means of identifying derivatives instruments at a granular level. ISDA believes that a common methodology for classifying and identifying derivatives instruments across all platforms will cut complexity and costs for market participants that need to connect to multiple trading venues, and simplify the distribution of liquidity.

The consortium will initially work to produce globally standardised symbols for credit, rates and equity derivatives in 2015. ISDA has additionally created a Symbology Governance Committee (SGC), which will provide oversight and governance on the project. The SGC will focus on both the near-term product priorities and longer-term symbology governance model, and will report to the ISDA board of directors.

Subject to finalising contracts, 18 entities have agreed to participate in the initiative, including: Barclays, Bloomberg, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, DTCC, Goldman Sachs, ICAP-Traiana, JPMorgan, Markit, SIFMA, SG, Thomson Reuters, Tradeweb and UBS.

RMBS

Mexican model replacement mooted

Moody's is requesting comments on a proposal to replace its rating methodology on Mexican RMBS with its MILAN model. The agency explains that the MILAN framework provides a more refined approach to monitoring RMBS in Mexico.

Under the existing methodology, Moody's estimates projected lifetime net losses on a portfolio. The agency then compares these to each note's credit enhancement, with the ratings determined by comparing the multiple of credit enhancement to net losses.

Under the MILAN approach, Moody's would first perform a portfolio analysis of the securitised collateral pool, with the results providing the portfolio's expected losses and MILAN credit enhancement. The former would capture expected performance under the current economic outlook and the latter would provide performance in a severe recession. The two outputs would be used to determine a probability loss distribution, which associates a probability with each future loss scenario.

Moody's would use a cashflow model to assess the structural features of the RMBS transaction using each scenario in the loss distribution. Finally, the counterparty default risk and the legal risk would be assessed to derive the final ratings.

Moody's believes that the adoption of the methodology would bring the surveillance of Mexican RMBS in line with the method applied in other markets globally. Its adoption would have a rating impact on some existing RMBS transactions in Mexico, with less than 15% of rated tranches downgraded on average by two notches on the global scale.

Market participants are invited to submit their feedback to Moody's by 19 October.

RMBS

Platinum programme streamlined

Ginnie Mae is amending its Platinum programme's guaranty fee structure and lowering the minimum amount necessary to create a Ginnie Mae Platinum security, effective for October settlements and thereafter. The move is designed to: reduce the administrative fee associated with creating these securities; allow Ginnie Mae MBS certificateholders to aggregate smaller pools into larger, more fungible pool sizes; achieve superior TBA pricing; increase the availability of the TBA supply, particularly in higher MBS coupons; and eliminate the need to pay higher multi-class REMIC fees to distribute the smaller MBS holdings.

"The Platinum programme is an efficient mechanism for investors to manage their Ginnie Mae securities," comments John Getchis, Ginnie Mae's svp of capital markets. "We want to encourage utilisation of the programme by lowering the g-fee, the minimum amount investors need to create a platinum security, which will increase the administrative, pricing and distribution efficiency of the MBS programme."

Ginnie Mae Platinum securities allow investors to combine Ginnie Mae MBS pools with uniform mortgage interest rates and original terms to maturity into a single security, backed by the full faith and credit of the US government. Investors then receive a single payment from the combined securities every month, rather than separate payments from each individual security.

Under the changes, the fee structure will be modified by increasing the number of pricing tiers by face amount and by lowering the fee by 0.25-0.50 tics across the tiers. The minimum fee will be US$5,000 and the maximum fee will be US$156,250.

Additionally, the non-cash fee payable by the allocation of a portion of the underlying Ginnie Mae MBS certificates to the creation of the Ginnie Mae Platinum principal only bond will be reduced from US$5,000 to US$1,000.

The minimum aggregate remaining principal balance of the underlying Ginnie Mae MBS certificates will also be reduced from US$10.01m to US$5m. The newly issued Ginnie Mae Platinum Certificate will have an original principal balance equal to the aggregate remaining principal balance of the underlying Ginnie Mae MBS certificates as of the issuance date, minus the non-cash fee of US$1,000.

RMBS

Interest capitalisation mods scrutinised

The increasing use of interest capitalisation modifications is credit negative for US RMBS due to the poor performance of these modifications, according to Moody's latest ResiLandscape publication. The agency adds that many borrowers receiving modifications that increase their monthly payments do not have the ability to make the higher payments, resulting in higher re-default rates on the modified loans.

Of the interest capitalisation loan modifications completed between October 2013 and May 2014, 14% on average became 60 or more days delinquent 12 months after the modification. This is significantly higher than the observed re-default rate of approximately 8% for loans that have had principal reduction or rate reduction modifications, or a combination of these two.

While the observed re-default rates for first-time modifications are roughly the same across the different loan modification types, the re-default rates on interest capitalisation loan modifications are significantly higher when the modification is offered as a subsequent modification option. Between 5% and 10% of first-time modifications with capitalisations were 60 days or more delinquent 12 months after the modification. However, on an average, 23% of the subsequent modifications with capitalisation were 60 days or more delinquent 12 months after modification.

"This suggests that for borrowers with poor credit history, interest capitalisation loan modification is a less effective loss mitigation option," Moody's observes.

Higher re-default rates for capitalisation modifications are the result of an increase in a borrower's monthly mortgage payments, as compared with the reduction in payments that other modification types offer. For interest capitalisation modifications completed between October 2013 and May 2015, the monthly payment increased by US$38 (or 13%) on average. However, the average monthly payment fell by 46% during the same period for modifications with principal and interest reduction, 28% for modifications with principal reduction and 21% for modifications with an interest rate reduction.

While the average dollar amount increase in the monthly payment owing to an interest capitalisation modification is small, almost half of the borrowers with this modification have seen an increase in their monthly payments. About 50% of the interest capitalisation modifications completed in May 2015 resulted in an increase in the monthly payment, while 20% resulted in no change and the remaining 30% resulted in a decrease in the monthly payment.

Interest capitalisation modifications constitute a significantly larger portion of modifications being offered than they did two years ago, Moody's notes. The overall share of interest capitalisation modifications increased to 22% in May 2015 from 10% in October 2013.

However, interest capitalisation constituted only 11% of the first-time modifications completed in May 2015, compared to 25% of the second modifications. This suggests that interest capitalisation is increasingly being offered as a modification option to borrowers who have received one or more modifications in the past.

RMBS

Spanish house prices stabilising

Recent data indicates that the decline in Spanish home prices has bottomed out, according to Fitch. However, a persistently low level of recoveries from properties taken into possession by lenders supports the agency's view that national home price growth will be slow and uneven.

The Spanish National Institute of Statistics revealed last week that the Spanish Housing Price Index (HPI) rose by 4% year-on-year in 2Q15 - the biggest increase since 2007. The HPI has now shown annual growth for five consecutive quarters, as Spanish residential property prices continue to stabilise. In addition, the recent fall in mortgage costs suggests that the return of credit flows to households may support a gradual recovery of property prices.

Nevertheless, the average difference between the value of a property at loan origination and the price at which the lender can sell it after it has been taken into possession remains close to 70% of the initial property valuation. This ratio has remained broadly unchanged since 1Q13.

Fitch explains that persistent low recoveries seemingly point to fundamental weaknesses in the Spanish residential property market. Among such weakness are a large overhang of between 500,000 and 600,000 empty new homes, high unemployment and demand constraints for a large portion of the population with low salaries.

In addition, only 16% of RMBS transactions in Fitch's Spanish mortgage market index reported a decline in the level of outstanding defaults as of July, compared to a year ago. The total volume of outstanding defaults for the sector had increased slightly to 4.9% from 4.5%.

Finally, Fitch anticipates that collateral servicers will continue to aim for out-of-court settlements with distressed borrowers rather than traditional legal proceedings, to achieve faster recoveries and better outcomes. This trend may be boosted by changes to Spain's personal insolvency regime enacted earlier this year that formalise the adoption of certain practices, such as maturity extensions and principal write-downs (SCI 13 March).

RMBS

Nevada rulings support FHFA position

The US District Court for Nevada recently issued three rulings that Moody's believes are credit positive for US RMBS because they further support the FHFA's position that federal law prevents a home owner association (HOA) foreclosure from extinguishing a mortgage owned by a GSE while the GSE is under conservatorship (SCI 27 April). The new cases make it clear that the holding applies even to a mortgage recorded in a GSE's name after a HOA foreclosure sale had concluded, according to the rating agency.

The three cases expand the Skylights LLC v. Byron ruling from 24 June. The Skylights holding only applied to a mortgage recorded in a GSE's name prior to the HOA foreclosure.

All three of the rulings found that the plain language of the Federal Law strictly prohibits the property of the FHFA from being extinguished without its consent.

RMBS

Loan-level data reveals GSE differences

The loan-level data recently disclosed by Fannie Mae (SCI 4 August) reveals similarities between historical loss severities for liquidated Fannie Mae mortgages and fixed loss severity schedules used in Connecticut Avenue Securities (CAS) risk transfer deals, notes Fitch. However, there are still differences in the loss severities among Fannie Mae and Freddie Mac loans.

All CAS risk-sharing transactions issued so far have passed losses on defaulted loans to investors using a pre-determined loan loss severity schedule. Fitch has analysed Fannie Mae's historical loss data and contrasted it with the fixed severity schedules used in CAS transactions.

"For 60%-80% LTV loans, observed loss severities closely matched the severity schedule at all default levels. For 81%-97% LTV loans, the observed severities were generally in line with the schedule for defaults above 10%, while at the lower default range observed severities were modestly lower than the schedule. In this comparison, historical loss severity averages included defaulted loans that subsequently cured and prepaid, or liquidated without a loss," Fitch says.

While actual and CAS-scheduled severities are similar, the credit enhancement required for actual loss risk-sharing transactions may differ from that seen in CAS to date. For actual loss transactions, credit enhancement requirements will be driven by the particular credit, leverage and mortgage insurance profile of the pool, and so the rating agency notes they may be higher or lower than for existing fixed-severity transactions.

A comparison of Fannie Mae's loss data with Freddie Mac's loan-level historical loss data reveals very similar loss severities between the two GSEs for loans originated between 2003 and 2006. However, among loans originated before 2003 and after 2006, the data suggests that severities on Fannie Mae loans appear to be lower than those of Freddie Mac.

Fannie Mae's apparent lower loss severities seem to be due to a combination of lower expenses, higher net sales proceeds, and higher mortgage insurance recoveries, Fitch notes. There are also some differences in portfolio composition which will have affected how the agencies selected their historical sample sets, which may affect observed loss levels.

RMBS

RMBS comparison tool debuts

Fitch has launched the SA RMBS Compare, an Excel tool that provides access to the agency's surveillance and index data on South African RMBS transactions. The tool allows users to review the performance of transactions in comparison with macroeconomic indicators, such as arrears, defaults, recoveries and loss severity.

RMBS

CSP update supplied

The FHFA has released an update on the Common Securitisation Platform (CSP), detailing progress made in the development of a new infrastructure for the securitisation of single-family mortgages by Fannie Mae and Freddie Mac. The update includes details on the organisational structure of Common Securitisation Solutions and the various modules that comprise the CSP and their functions.

The update also looks ahead to the anticipated announcement in 2016 of an implementation date for the first release, which will be the initial use of the CSP by Freddie Mac. This will be followed by the second release, enabling both Freddie Mac and Fannie Mae to use the CSP to issue single securities. The update also describes ongoing efforts to seek input from industry stakeholders, including formation of a single security/CSP industry advisory group.

RMBS

Irish mortgage restructurings 'credit positive'

Persistent high levels of late-stage arrears indicate that Ireland's mortgage arrears crisis is not yet resolved, according to Moody's. Nonetheless, the agency believes that the expansion of restructuring methods and introduction of restructuring targets have helped address borrowers' payment problems - a credit positive for Irish RMBS, covered bonds and banks.

"Borrowers are benefitting from the strong economic recovery in Ireland, with improving employment and housing markets almost halving 60- to 90-day arrears over the past year," says Moody's avp and analyst Gaby Trinkaus. "With the level of late-stage arrears still the highest in Europe, the expanded use of restructurings should help curb losses as the economy continues to pick up steam."

Existing restructuring methods, such as temporary payment arrangements, have been supplemented by new options over the past three years. New methods include split mortgages and dual approach arrangements. Moody's says the shift from temporary to long-term payment arrangements is credit positive for RMBS, as it provides both certainty and further incentive to pay for borrowers with a long-term insufficient debt servicing capacity.

The agency adds that the shift is also credit positive for Irish banks, since it will reduce their costs on workout units and help resolve long-term arrears in a more efficient manner than through repossessions. Restructuring involving debt write-down is additionally positive for covered bonds while the issuer's support continues.

Meanwhile, information from Irish lenders covering about 89% of Moody's-rated Irish RMBS shows that the restructuring of buy-to-let loans has outpaced that of owner-occupier loans. Moody's attributes this to BTL borrowers' weaker credit profile and high willingness to reach a restructuring arrangement in order to avoid the appointment of a receiver of rent.

"With borrower-friendly courts allowing repossession only after all attempts to engage with a borrower have failed, it can take up to four years to repossess and sell a property in Ireland," adds Trinkaus. "And even though limited or no reporting of restructurings in most Irish RMBS exacerbates uncertainty around their performance, we expect arrears and losses to decline during the next year on the back of economic recovery."

RMBS

Aussie auctions progress

The AOFM has released details of its sixth RMBS auction, to be held on 23 November. Securities up for bid comprise the Apollo 2010-1 A2 (with a face value of A$300m), Progress 2012-1 A (A$128.75m), REDS 2010-1 A (A$250m) and Torrens 2009-1 A2 (A$190m) tranches. Settlement is due on 26 November.

Separately, the results of the AOFM's fourth auction - held today - have been announced. The total volume sold was A$77.98m in amortised face value of IDOL 2010-1 A2 bonds. The lowest accepted clean price for the securities was 100.308.