Contents

Secondary markets

Euro secondary mixed

The European securitisation secondary market continues to experience mixed fortunes amid thin liquidity.

It was another mixed day on Friday with some ABS/MBS sectors, notably Portugal, ending the week softer as broader market tone weakened, while CLOs continued to lack direction. However, relatively strong flows were seen in UK prime and Greek RMBS benefitted from pre-election interest. This morning's open sees overall secondary pricing levels, including GRIF 1 A, broadly unchanged.

There are currently two European BWICs on the calendar for today. At 11:00 London time there is a four line £36.78m UK CMBS list comprising: BLNDLN 0 01/05/30 A1, BLNDLN 0 01/05/22, CANWA II B3 and TRFRD A3. Only BLNDLN 0 01/05/30 A1 has covered on PriceABS in the last three months - at 95.07 on 10 July.

At 15:00 there are two lines of Portuguese RMBS seniors - €55m LUSI 4 A and €61.8m MAGEL 3 A. Neither bond has covered with a price on Price ABS in the past three months.

In addition there is a French ABS OWIC due at 15:30. It involves: CFHL 2015-2 A1, DRIFR 1 A and DRIFR 2 A.

Secondary markets

Euro secondary solid

The European securitisation secondary market is staying solid despite distractions from elsewhere.

Broader market volatility thanks to the Volkswagen story failed to feed through into the ABS market as autos for the most part held firm yesterday. VCL bonds edged wider by only a couple of points while spreads across the remainder of the auto sector were unchanged with buyers slightly outweighing sellers.

Elsewhere, with participants distracted by primary activity secondary flows remained very light with only the occasional pocket of action - Italian RMBs, for example - but the net effect was to keep pricing levels unmoved across the board. Nevertheless, there are signs of a potential pick up in volumes with buying interest increasing and a growing BWIC schedule for the remainder of this week.

However, there are currently only three European BWICs on the calendar for today. First is a €50m three line prime auction due at 14:00 London time. It involves: HERME 18 A2, LUNET 2013-1 A2 and STORM 2014-2 A2. The latter two have covered on PriceABS in the last three months, both doing so on 29 July at 102.5 and 101.24 respectively.

At 15:00 is a nine line €27.6m CLO list comprising: BABSE 2014-2A F, BABSE 2014-2X F, BACCH 2007-1 D, BLACK 2015-1A E, BLACK 2015-1X E, HLAE 2014-1A F, HLAE 2014-1X F, MUNDA 1X E and TCLO 1X E. Also at 15:00 is a mixed European and US CLO BWIC involving two euro-denominated line items - €18m HEC 2006-NX B and €8.5m JUBIL VI-X B.

None of the CLOs has covered with a price on PriceABS in the past three months.

Secondary markets

US CLO flurry

The US CLO secondary market is experiencing a flurry of activity today, but looks set to quieten down again for the rest of the week.

"We're seeing a burst of activity today post-conference," says one trader. "But with the Jewish holiday over the next two days and Friday being effectively a half day I don't expect to see much more happening this week."

In the absence of any sense of direction over the past week or so, market tone appears to be softening. "Everything is wider especially at the lower end," confirms the trader.

There are six US CLO BWICs on the schedule for today so far. However, the trader notes: "There's no obvious driver behind the lists and not much that stands out."

Nevertheless, he does highlight a $28.2m 2.0 double-B list due at 11:00 New York time as including some strong bonds and therefore interesting to see where, or if, they trade. "I'm not sure of the motivation behind the list, but it looks like the seller is just thinking to himself 'let's see if I can't get a decent bid here'," says the trader.

The seven line item list comprises: CIFC 2014-3A E, OZLM 2014-6A D, SNDPT 2015-1A E, VENTR 2014-17A E, VENTR 2014-18A E, VOYA 2014-2A D and ZIGG 2014-1A E. Only CIFC 2014-3A E has covered on PriceABS in the past three months, last doing so at 89H on 6 August.

Overall, today's BWICs have a strong bias towards 2.0 mezz, but the largest piece in for the bid comes as a triple-A single line item due at 11:30 - $50m GOLD7 2013-7A A. The bond last covered on PriceABS at 98H on 10 September.

Secondary markets

Euro secondary picks up

The European securitisation secondary market is seeing a pick-up in activity.

Amid a spike in broader market volatility and the evolving Volkswagen story, secondary activity and client enquiries grew significantly from recent levels yesterday. Inevitably attention was focused around auto ABS with a flurry of bonds across European jurisdictions offered for sale, most traded but transparency on pricing levels was limited.

Generic secondary auto spreads in the sector have widened further, but Driver Espana 2 did manage to price in the primary market at reasonable levels in the circumstances. Elsewhere in secondary, there is less price movement as activity remains patchy with select names in CLOs and Dutch/UK prime seeing the healthiest flows.

There are currently two BWICs on the European ABS/MBS calendar for today. Unsurprisingly one includes some auto names, while the other, a 25 line mixed MBS auction of small clips, is due at 14:30 London time.

The autos BWIC involves a range deal types and currencies and is due at 13:00. It consists of: €3m BLUGA 2006-1 A3, $5m BRNL 2007-1A A4C, €3m BUMP 6 A, €2.5m CFHL 2015-2 A2A, €3m DOLPH 2013-2 A, £2m GMG 2015-1 A, €2m GMITE 2 A, €68.4m GRANM 2005-1 A5, £2m LAN 2014-2X 2A, $5m MOTOR 2015-1X A1, £2m PARGN 19 A, £2m PARGN 20 A and £1.4m PENAR 2014-2X A1. Five of the bonds have covered on PriceABS in the last three months - BUMP 6 A at 100.25 on 24 June; CFHL 2015-2 A2A at 100.068 on 22 September; DOLPH 2013-2 A at 100.85 on 15 September; GRANM 2005-1 A5 at 99.526 on 2 September; and LAN 2014-2X 2A at 99.87 on 25 August.

Meanwhile, there are three euro CLO lists on the schedule for today so far. At 14:00 is a €35.5m five line double-B list involving: CASPK 1X A1, CRNCL 2013-3X A, DRYD 2013-27X A1BT, JUBIL 2014-11X A and SORPK 1X A1A. None of the bonds has covered with a price on PriceABS in the last three months.

14:30 sees seven lines of triple-Bs totalling €18.5m - ARESE 2013-6X D, CGMSE 2013-1X D2, CONTE 2X D, CRNCL 2014-4X D, JUBIL 2013-10X D, RYEH 1X D and SPAUL 5X D. None of the bonds has traded on PriceABS in the last three months.

Then, at 15:00 there is a three line €11.4m double-A list comprising: CRNCL 2014-4X B1, SKELL 2006-1X B and SPAUL 1X B. Only SKELL 2006-1X B has covered on PriceABS in the past three months, last doing so at 99.42 on 18 September.

Secondary markets

Real return for US CLOs

US CLO secondary market activity is experiencing something of a real return to form following the extended summer lull.

"We are finally returning to something like normal post-Miami," says on trader. "However, people are still reflecting on the Fed and that will continue to hang over the market for some time."

Nevertheless, the trader adds: "There's now a fair amount of activity and we're seeing a lot of BWICs, though there's still no clear theme to what's being sold - there are 1.0s and 2.0s from across the capital structure. It feels like everyone is settling in for the rest of the year and there's a lot of price discovery going on."

The market is likely to stay in price discovery mode for some time, the trader suggests. "We'll need to see a a lot more secondary prints and some new issues before people will be truly comfortable with the future direction of the market. For now, offers are staying wide and there are a lot of bonds going through with no colour being released, so there aren't yet a lot of real data points to focus on."

Today's US CLO BWIC schedule currently runs to five lists. The auction attracting most attention as a potential bellwether is single large triple-A block.

The $152.9m slice of WITEH 2014-1A A is due at 13:00 New York time. The bond hasn't traded on PriceABS in the past three months, but is being talked from around 99 to low-to-mid 99.

Secondary markets

Euro secondary still selective

The European securitisation secondary market continues to see trading across the board, but only on selected names.

Secondary spreads closed unchanged yesterday on, once again, patchy activity on- and off-BWIC. Most sectors saw some action, but prime assets remain the strongest performer. Autos were much quieter than the previous session with only the German programmes edging wider.

There are currently five BWICs on the European calendar for today. They again offer bonds across all asset types but all bar one auction either partially or exclusively involves CMBS.

The chunkiest CMBS list comes at 14:00 London time and comprises: £500k DECO 2006-C3X B, £1.182m DECO 2007-C4X D, £1.68m ECLIP 2005-4 F, £16.9m ECLIP 2006-3 A, €1.75m ECLIP 2007-2X C, €5.306 EMC 6 C, €2.45m EURO 25X E and €8.4m TMAN 6 C. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US RMBS shaken

The US non-agency RMBS secondary market has been impacted by broader market volatility and the FOMC statement following last week's rate decision.

"We had the worst case scenario from the Fed - keeping rates the same wasn't the main issue, but the statement afterwards really didn't help," says one trader. "The Fed's comments suddenly got everyone thinking the world is in worse shape than they previously thought and since then the RMBS secondary market has been very shaky."

That shakiness is masked by circumstance today, the trader suggests. "Today is the day before remits and we're heading toward quarter-end meaning the BWIC market is active again - 20 lists with over $1bn in for the bid. So, it appears normal for a Thursday, but the market doesn't feel normal - we're getting hit every day with adverse headlines, which is making everyone re-asses risk."

Consequently, prices are falling, but it is hard to assess by how much. "Colour is at a premium - there's not a lot of price information being disseminated," says the trader. "When anything is actually released all that's now appearing is either traded or DNT. If this continues liquidity will break down."

That breakdown is could be some way away, however. "RMBS fundamentals are still strong even though the technical basis is being moved by volatility and the widespread uncertainty is impacting new deals," the trader says. "As a result, people are still adding for now, but need to be compensated for doing so."

Secondary markets

Euro ABS/MBS sidelined

Investors are for the most part staying on the sidelines in the European ABS/MBS secondary market.

Sellers are outnumbering buyers in most sectors as broader market volatility is now heavily impacting ABS. Inevitably VW paper is taking the biggest hit at the moment and that is causing reticence in the rest of the European auto sector. Instead, buying is continuing in prime paper and consumer ABS, albeit mainly at the short-end of the curve.

There are two European ABS/MBS BWICs on the schedule for today, so far. At 10:30 London time there is a four line CMBS list involving €500k BUMF 6 A2, €11.75m ECLIP 2006-2 E, £11.301 TAURS 4 A and €11.935 TITN 2006-3X A. None of the bonds have traded on PriceABS in the past three months.

At 13:30 is a 26.85m 12 line mixed seniors list comprising: ATLAM 4 A, BFTH 11 A2, BFTH 13 A2, EURO 27X A, FSTNT 9 A1, HEC 2006-NX B, INFIN SOPR A, LGATE 2008-W1X A2B, RMFE III-X IV, ROOF 2 M2A, SLMA 2003-5 A5 and VELAH 4 A2. Two of the bonds have covered on PriceABS in the past three months, last doing so on 22 September as follows: FSTNT 9 A1 at 102H and HEC 2006-NX B at L99.

Secondary markets

Euro CLO activity surges

The European CLO secondary market is seeing a surge in activity this week.

"It's been a busy week this week primarily driven by BWICs," says one trader. "It's mostly been about selling, but there are still some buyers left in the market."

The majority of sellers are either hedge funds or asset managers, the trader notes. "So, I'd say most of the BWICs are a result of redemptions."

The recent waves of selling are now impacting pricing. "Bids in 2.0 are getting weaker thanks to the BWICs and the allegedly 20 new European CLOs due to price this year," says the trader. "Noticeably, 2.0 triple-Bs - typically the thickest part of the structure - are starting to widen, now following the path already taken by single- and double-Bs.

Meanwhile, 2.0 equity looks to be heading in the opposite direction, the trader suggests. "2.0 equity is being aggressively sought after as it's now got some track record and can be modelled more accurately. New issue equity remains more a question of feel."

At the same time, 1.0 paper is relatively calm. "There's not much selling in 1.0 and spreads for the most part are unchanged. The exception is we've seen some widening in three-to-four year investment grade bonds purely due to lack of buying as they are currently less attractive in leverage terms to investors."

There are currently seven BWICs on the European CLO calendar for today. The lists primarily involve 2.0 mezz, the largest of which falls due at 14:30 London time.

The €20m seven line list combines double- and triple-B bonds and comprises: ADAGI IV-X D, ADAGI IV-X E, AVOCA 11X D, BABSE 2015-1X D, BABSE 2015-1X E, CRNCL 2015-5X D and CRNCL 2015-5X E. None of the bonds has traded on PriceABS in the past three months.

ABS

Ford debuts Reg AB 2 compliance

Ford Motor Credit last week priced the first Reg AB 2-compliant ABS - the US$1.05bn Ford Credit Auto Owner Trust 2015-C prime auto loan transaction. New data disclosures under the filing include weighted average LTV, subvented receivables and commercial use percentages, delinquencies, losses and prepayment charts, according to JPMorgan ABS analysts.

Further, a required process for 'asset representation review' was added to the registration. The issuer also disclosed monthly pool factors, aggregate 61-plus day delinquencies and cumulative losses not required by Reg AB 2.

In connection with the filing, Ford made a number of structural changes to the securitisation, including removing the triple-B rated class D notes from the structure. S&P notes that this change effectively has the transaction starting at par, whereas previously the debt issuance exceeded the adjusted pool balance by 2% at closing. Credit enhancement to more senior notes remains unchanged, however, with the JPMorgan analysts suggesting that this is in anticipation of adopting risk retention rules in December 2016.

The optional purchase/clean-up call on the notes has also increased to 10% of the initial pool balance from 5% under the changes, while the maximum fees and expenses payable first in the payment waterfall has risen to US$300,000 per year from US$150,000, to include amounts potentially payable to the asset representations reviewer. Finally, the targeted overcollateralisation amount was increased by 200bp of the initial adjusted pool balance.

Rated by Moody's and S&P, the deal comprises US$220.4m P-1/A-1+ rated class A1 notes (which priced at 0.38%), US$273.4m Aaa/AAA class A2As (36bp), US$100m Aaa/AAA class A2Bs (one-month Libor plus 36bp), US$300m Aaa/AAA class A3s (47bp), US$105.72m Aaa/AAA class A4s (52bp), US$31.57m Aa2/AA+ class Bs (75bp) and US$21.04m A1/AA class Cs (100bp).

CS

ABS

VW 'rule breach' impact weighed

The US Environmental Protection Agency's issuance of a notice of violation of the Clean Air Act (CAA) to Volkswagen has direct implications for securitisations backed by Volkswagen vehicles. Volkswagen's auto loan (VALET), auto lease (VWALT) and dealer floorplan (VWMT) transactions will all be affected.

Volkswagen is alleged to have fitted software to certain Volkswagen and Audi vehicles sold since 2008 which detects when a car is undergoing official emissions testing and turns on full emissions controls only during the test. True emissions are thus masked and cars can go on to emit up to 40 times the allowable pollution under the CAA during normal operation.

Volkswagen has responded by stopping sales for affected new models. Depending on how long this sales stoppage lasts and on the extent of the damage to consumers' perception of the company, there could be downward pressure on recovery values.

"However, the violations do not present a safety hazard and the cars remain legal to drive and resell. As a result, adverse consequences to collateral performance in Volkswagen's retail loan and lease transactions should be limited," note Barclays ABS analysts.

Volkswagen's dealer floorplan deal - Volkswagen Credit Auto Master Owner Trust 2014-1 - is a different proposition, as dealers are now burdened with product they cannot sell. The sales-stop only affects diesel engine models, so around 75% of the total Volkswagen inventory is still expected to be salable and although VWMT 2014-1's payment rate should fall, it is expected to remain within historic norms.

"This is important because, as with all dealer floorplan transactions, VWMT 2014-1 incorporates early amortisation triggers, among which is the three-month average of the monthly payment rate (for VWMT 2014-1 the trigger level is 27.5%). The sales stoppage will likely have a further negative effect on payment rates in October, the extent of which depends largely on how long the sale stoppage persists," say the analysts.

They continue: "Nevertheless, if we assume the payment rate for the September collection period falls to 40% (a conservative assumption, since the stoppage began toward the end of the September collection period), even if the October collection period (November servicer report) shows a 0% MPR, the three-month average would be 31%, still above the 27.5% trigger level."

A 0% MPR for October is considered a very low probability event. It is also thought to be unlikely that Volkswagen will be slow to respond to the CAA breach or do so in an ineffectual way, but in these circumstances it is possible that bad will toward to the company will result in hampered recovery and residual values as well as decreased new vehicle sales.

"Nevertheless, we believe the VWMT transaction will be able to avoid early amortisation due to failing the MPR trigger. As an aside, even if the transaction were to trip the trigger, class A noteholders are likely to be paid out rapidly," the analysts say.

JL

Structured Finance

Mezz purchases on the cards

The ECB has clarified its intention to buy mezzanine tranches of European securitisations with a third-party guarantee under the ABSPP. The update effectively allows the central bank to purchase guaranteed mezzanine tranches - defined as tranches between the senior-most and first-loss tranches on the basis of post-enforcement or post-acceleration priority of payment - providing the guarantor is subject to at least one credit assessment by an accepted ECAI at a minimum of credit step 3 (investment grade). Mezzanine tranches must also fulfil the eligibility criteria for Eurosystem monetary policy operations, while the guarantee must meet the ECB's requirements for the guarantee of marketable securities.

"The publication of the eligibility criteria for guaranteed mezzanine tranches of ABS almost a year since they were first mentioned in the ECB communication of the ABSPP, given how simple and straightforward they are, is somewhat puzzling. It raises both questions about the possible need to build internal consensus for such purchases and about the intention of the ECB to make such purchases," observe European securitisation analysts at Bank of America Merrill Lynch.

Regarding the ECB's guarantee requirements, they further question the stipulation that the guarantee "shall be payable on first demand independently of the guaranteed marketable asset or credit claim". Explanations for such a requirement could include the desire to protect the guaranteed ABS buyer against extension risk or mitigate counterparty risk.

"Whatever the reasoning behind this 'guarantee on demand' decision, it will in our view reduce the available guarantors, especially among the multilateral development bank and international organisations - unless, of course, they get some additional support to bridge the gap between the payment they are supposed to make to the ECB on demand and the receipt of payment from the ABS tranches, which could potentially expose them to low loss but high liquidity pressure," the BAML analysts observe.

They suggest that such purchases may expand the available assets for the ECB QE, should it be extended beyond September 2016 or modified materially to initiate what some economist are already calling for - QE2. Nevertheless, the volume of purchases will depend on sovereign and multinational budgets, which will limit the scope of the mezz ABSPP.

Meanwhile, in line with its goal of expanding purchases under the ABSPP, the ECB is set to increase the proportion of purchases by national central banks rather than external managers. As of 27 October, Banque de France - with an increased number of jurisdictions covered - and Nationale Bank van België/Banque Nationale de Belgique will both act as Eurosystem asset managers executing purchases.

In addition, the ECB will extend the contracts of two of its external executing asset managers (reportedly NN Investment Partners and Amundi). The executing asset managers will continue to conduct eligible ABS purchases on explicit instructions from and on behalf of the Eurosystem. The Eurosystem will maintain its role in undertaking price checks and due diligence prior to approving transactions.

CS

Structured Finance

SCI Start the Week - 21 September

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

Pipeline
Fewer deals joined the pipeline last week. At the final count there were three new ABS, two RMBS, four CMBS and one CLO.

US$1bn Drive Auto Receivables Trust 2015-D, Eagle Credit Card Trust Series 2015-1 and US$807.98m Shenton Aircraft Investment I accounted for the ABS. The RMBS were US$1.97bn JPMMA L Street Securities Series 2015-CH1 and US$872m STACR 2015-HQA1.

C$570m Canadian Commercial Mortgage Origination Trust 2015-3, US$258m Colony Mortgage Capital Series 2015-FL3, US$1.1bn COMM 2015-CCRE26 and €258.4m DECO 2015-Ruby constituted the week's CMBS. The sole CLO was US$250m Financial Institution Note Securitization 2015-1.

Pricings
The number of deals pricing was also lower last week than it had been the week before. There were three ABS, three RMBS, three CMBS and three CLO prints.

US$300m CPS Auto Receivables Trust 2015-C, C$537.6m Ford Auto Securitization Trust 2015-R4 and A$500m Series 2015-1 REDS EHP were the ABS. The RMBS were Genesis Trust II Series 2015-2, A$300m Liberty Series 2015-1 SME and A$460m Securitised Australian Mortgage Trust 2015-1.

US$400m BBCMS 2015-MSQ, US$959m CGCMT 2015-GC33 and US$963.7m Wells Fargo Commercial Mortgage Trust 2015-LC22 made up the week's CMBS. Lastly, the CLOs were US$406.43m Ares XXXV CLO, US$415.3m Benefit Street Partners CLO 2015-1R and US$512.2m Dryden 41 Senior Loan Fund.

Markets
US ABS spreads tightened 2bp in credit card ABS and were steady in other asset classes, say JPMorgan analysts. They add: "Our bank credit card ABS index charge-offs rise in August for the first time in three consecutive months from 2.09% to 2.18%. Three-month average excess spread declined 10bp to 13.60% month over month."

Spreads were slightly wider in the US CMBS market. Barclays analysts say: "The CMBS market was transfixed this week by a large amount of issuance pricing and the Federal Reserve's decision to not raise rates on Thursday, but spreads were ultimately slightly wider week-over-week in secondary trading, while new issue bonds priced in line with guidance."

Around €140m of European CLO bonds appeared on BWICs last week, report Bank of America Merrill Lynch analysts. "Trading levels appeared slightly softer than in recent weeks, potentially explained by the reduced liquidity with so many market participants away from their desks. 1.0 single-A bonds generally traded at spreads in the mid-200s, for 2.5 to 3.5 year paper," they say.

Editor's picks
PACE ABS supported?: The PACE market is expected to grow rapidly once certain regulatory overhangs are fully addressed, with rated ABS issuance cited 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...
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...
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...

Deal news
• 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.
• 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 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.
• 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.
• 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.
• 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.
• 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 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.
• 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.

Regulatory update
• 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 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 Australian Financial Markets Association (AFMA) is 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.
• 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.

Deals added to the SCI New Issuance database last week:
Albion No. 3; Ally Auto Trust 2015-2; CarNow Auto Receivables Trust 2015-1; CCG Receivables Trust 2015-1; Driver UK Three; Dukinfield; Fifth Street Senior Loan Fund II; First National Master Note Trust Series 2015-1; Hyundai Auto Receivables Trust 2015-C; Medallion Trust series 2015-2; NewStar Commercial Loan Funding 2015-2; RedZed Trust series 2015-1; Securitised Australian Mortgage Trust 2015-1; Silver Arrow Compartment 6; Storm 2015-II; York CLO-2

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-C5; BACM 2006-3; BACM 2007-2; CGBAM 2014-HD; CMLT 2008-LS1; CSMC 2006-C3; CSMC 2006-C4; CSMC 2007-C5; FUCMT 1999-C1; GCCFC 2005-GG3; GECMC 2007-C1; GMACC 2006-C1; GSMS 2005-GG4; HGMT 2015-HGLR; INFIN SOPR; JPMCC 2006-LDP7; JPMCC 2008-C2; LBUBS 2006-C1 & LBUBS 2006-C7; LBUBS 2006-C4; MLCFC 2006-3; MSBAM 2013-C9; MSC 2007-IQ13; TIAA 2007-C4; TMAN 5; WBCMT 2007-C32; WFCM 2014-LC18; WFRBS 2011-C2; WINDM X

Structured Finance

Euro market looks liquid

European ABS BWIC activity was high over the summer, while the traded percentage also surprised to the upside. From this perspective, at least, European liquidity appears healthy, with UK RMBS proving particularly liquid.

Over the 16-week period from 1 June until the end of last week, JPMorgan analysts counted €3.6bn of bonds at current face value - or €6.9bn in original face value - offered to investors via BWICs. The weekly average was €227m and the peak weekly volume was €595m, at the end of June.

Average weekly BWIC supply of €227m compares to average weekly primary issuance of €1.8bn. Ignoring those weeks where both volumes were uncharacteristically low, there were three weeks where BWIC volumes accounted for more than 20% of the paper available in the new issue market.

DNTs were limited. Of the €3.6bn offered on BWICs, €2.8bn (76%) was traded. Of the bonds that came back as DNT, around 80% were UK RMBS.

The split between traded and DNT bonds was not consistent throughout the summer, as periods of heightened volumes frequently coincided with lower traded ratios. This was typically at month-end, although the spike in activity that came at the end of July also saw a traded ratio of 90%.

"We would suggest that this is likely to be attributed to sellers more willing to trade prior to the characteristically lower activity month of August. As evidence of this, we point to the similar-sized BWIC volume week of 11 September, but when the market was back to full strength, which saw a much lower traded ratio," say the JPMorgan analysts.

Asset managers were responsible for €2bn of the €3.6bn issued over the 16 weeks, with hedge funds accounting for another €915m. It was the asset managers who were more successful in selling bonds as they sold 85% of their offerings and the hedge funds only liquidated 70%.

"This could either be ascribed to end redemptions at asset managers forcing vertical-slice liquidations as opposed to opportunistic trading from hedge funds, or may in fact be reflective of the different type of (and the ease of selling) bonds owned by the two different investor categories," note the analysts.

By currency, 56% of traded bonds were denominated in euros and 43% in sterling. This does not quite match outstanding ABS balances, which the analysts calculate to be 61% euros and 32% sterling, suggesting the sterling bonds have been 'oversold' based on their share of balances and chimes with the theme of UK RMBS underperforming.

"Considering seniority levels, 57% of bonds traded were senior offerings in total across all currencies, although just over half (52%) of sterling-denominated bonds traded off lists were mezzanine/juniors - again this is likely to sit logically with the recent spread underperformance of UK NCF bonds, where many of the pre-crisis senior bonds have already redeemed," say the analysts.

UK RMBS accounted for a disproportionate share of bonds traded over the 16 weeks as they made up 45% of traded notionals, compared to a percentage of outstanding stock of closer to 27%. Dutch RMBS amounted to 11% and German auto ABS accounted for 6% and should be considered strategic liquidations into an extremely supportive demand environment considering the ECB's appetite for such assets, the analysts believe.

"Over our 16-week period, six weeks saw traded NCF volumes greater than €75m, and three of these weeks saw more than €75m of UK NCF mezz switch hands. While compared to outstanding balances (€28bn as at 30 June), traded amounts account for only 3% of stock, the clear frequency of trades in the UK NCF RMBS space is undoubtedly feeding into the comparatively weak pricing sentiment around the sector," the analysts conclude.

JL

CMBS

Bs lose out in hope note refi

The One & Two Prudential Plaza loan has been refinanced in such a way as to avoid paying proceeds to the modified B-note. Barclays CMBS analysts describe it as "the worst case of hope note strategic refinancing to date".

The CMBS loan paid off last month with a full recovery and deferred interest paid to the senior US$336m A-note, while the US$74m B-note was written off in full with no recoveries. The modified loan was split pari passu between JPMCC 2006-LDP7 and JPMCC 2006-CB16.

The Barclays analysts have previously warned that hope note documentation provides little protection to prevent a borrower from refinancing a property at a value that repays the A-note and the new borrower preferred equity but before the B-note receives any proceeds. This allows the borrower to retain equity in the property but prevent the B-note from receiving equity if the property recovers further or is eventually sold.

Some loans, such as the US$678m Skyline portfolio, have included terms to protect against such refinancing by stating that capital event proceeds must be determined based on fair market value minus 3% in assumed costs. Such a protection ensures that, should a property recover to the point where the B-note would be entitled to some proceeds, it does indeed receive them.

The One & Two Prudential Plaza loan - which did not have such protection - was paid off through a refinancing which replaces the A/B modified loan with a new loan of US$415m and a coupon of 4.61%. The analysts note that the loan was made using an issuer appraisal of US$642m, which is more than double the December 2012 appraisal of US$317m (see SCI's CMBS loan events database) that was used to justify the hope note modification.

About US$30m seems to have been spent by the borrower on renovations, with reserves also pulled out from the refinancing. The analysts calculate the total amount due to the B-note could have been US$84m.

"Through the refinance, proceeds were high enough to repay the A-note and the A-note's accrued balance through the waterfall, but there was not enough proceeds to reach the point where the B-note would receive cashflows. Despite a smaller cash payout, refinancing allowed the borrower retained equity in the property," say the analysts.

They continue: "The borrower was also able to pull out additional cash through the release of reserves. However, if instead the borrower had sold the property at the appraised value from the new loan, the US$642m in cashflows would have been sufficient to repay the B-note in full based on the modification waterfall. This extra payout to the trust would have come at the expense of the borrower."

JL

ABS

Marketplace lender beefs up

James Paris has joined Avant as evp in capital markets and corporate development. In this role, he will focus on optimising debt and equity capital structured and strategic acquisition strategy, as well as contributing to potential securitisation transactions. Avant completed its first securitisation last month and has hinted at further deals in the pipeline (SCI 21 August). 

Paris arrives from BMO Capital Markets, where he was md in US debt capital markets. Prior to this, he was md in US leveraged finance at UBS. He has also held senior roles at Barclays, Deutsche Bank and Cravath, Swain & Moore.

ABS

Navient forum launched

Navient last week launched an online investor forum designed to facilitate communication with FFELP student loan ABS bondholders. The forum is provided by Navient through DealVector.

Through the new online investor forum, ABS investors can register to receive notifications regarding their bonds and can also communicate with Navient and directly with other bondholders through identity-protected messages. "As the largest issuer of student loan-backed securities, Navient is committed to supporting a well-functioning, transparent and efficient market for our investors," comments Somsak Chivavibul, cfo at Navient. "To that end, we have adopted an innovative technology solution and we encourage all of our ABS investors to register on DealVector's website."

Structured Finance

Corporate partner poached

Costanza Russo has joined Faegre Baker Daniels' corporate team as partner. She will advise international financial institutions, commercial banks, governments, corporations and sponsors with major project financing and refinancing across international borders.

Costanza's experience focuses particularly on Eastern European and the Italian market. Her expertise encompasses a number of areas, including derivatives, structured finance and real estate financing.

Prior to joining Faegre Baker Daniels, Costanza was a partner at Winston & Strawn. She focused her practice on cross-border project and infrastructure finance in this role.

Structured Finance

CDS manager tapped

La Française Global Investment Solutions (GIS) has appointed Michael Hattab-Maruani as senior credit portfolio manager. Hattab-Maruani joins the team that manages La Française GIS' credit opportunities strategy, contributing his expertise in credit derivatives. His arrival also comes as the firm readies the launch of a new UCITS credit vehicle.  

Before this move, Hattab-Maruani was head of the US credit equity proprietary trading desk at BNP Paribas. He has also previously worked as a senior correlation trader at SG.

Structured Finance

Colony adds finance chief

Colony American Finance (CAF) has hired Christopher Hoeffel as cfo. He arrives from Investcorp, where he was head of real estate debt investments, including three high-yield debt funds.

Hoeffel has also held senior roles at JPMorgan, Bear Stearns, Eastdil Realty and Walker & Dunlop. His duties have ranged from real estate investment banking to originating, underwriting and selling CMBS.

CAF provides acquisition financing and loans for investor-owned single-family rental (SFR) portfolios. Affiliate Colony American Homes recently agreed to merge its SFR operations with Starwood Waypoint Residential Trust, creating a joint company with 30,000 homes under management (SCI 22 September).

Structured Finance

Strategic partnership formed

OppenheimerFunds has formed a strategic partnership in which Apollo Credit Management will serve as sub-sub-advisor to the Oppenheimer Global Strategic Income Fund (GSIF). The agreement will provide OppenheimerFunds investors with access to Apollo's liquid alternative credit solution, offering yield advantages and diversification to the individual investor.

GSIF provides current income from diversified sources of fixed income investments while maintaining low overall volatility relative to the multi-sector fixed income category. The new partnership will enable the fund to access non-traditional fixed income market opportunities, including structured credit, middle-market loans, direct real estate investments and ILS.

CDO

ABS CDO transferred

Dock Street Capital Management is set to replace Chotin Group as collateral advisor to Saturn Ventures 2004 - Fund America Investors III. Under the terms of the appointment, Dock Street agrees to assume all the responsibilities, duties and obligations of the collateral advisor under the applicable terms of the indenture.

Moody's has determined that the execution of an amended and restated collateral advisory agreement between the issuer and Dock Street and performance of the activities contemplated therein will not impact any current ratings on the notes. In reaching its conclusion, the agency considered the experience and capacity of Dock Street to perform duties of collateral advisor to the ABS CDO.

For other recent CDO manager transfers, see SCI's CDO manager transfer database.

CMBS

CRE firm bolsters SF group

Michael Poe has joined NGKF Capital Markets' debt and structured finance group as senior md. His expertise spans CRE finance, including DUS/agency finance via Fannie Mae and Freddie Mac CMBS execution. Poe's most recent roles include being president of Inland Commercial Mortgage Group and principal at Mid-North Financial Services.

CMBS

SFR managers set to merge

Starwood Waypoint Residential Trust (SWAY) and Colony American Homes (CAH) are set to merge as they combine their SFR operations into a single company. The combined company is expected to own and manage over 30,000 homes and have an aggregate asset value of US$7.7bn at the closing of the transaction.

The merger, which is expected to close in 1Q16, is estimated to achieve annualised savings of US$40m to US$50m. CAH shareholders will own approximately 59% of the company's shares, with SWAY shareholders owning the remaining 41%.

The company's shares will continue to trade on the New York Stock Exchange, while SWAY's quarterly dividend of US$0.19 per share is expected to be maintained. The transaction has been approved by the boards of both firms, but is subject to the approval of SWAY shareholders.

Barry Sternlicht, ceo and chairman of Starwood Capital Group, and Thomas Barrack, executive chairman of Colony Capital, will serve as non-executive co-chairmen of the company's board of trustees. In addition, CAH president and coo Fred Tuomi will serve as ceo of the new firm, while current SWAY ceo Doug Brien will serve as president and coo. Arik Prawer, cfo of CAH, will serve as cfo in the newly merged firm.

The company's corporate and operational headquarters will be in Scottsdale, Arizona, while maintaining a significant presence in Oakland, California.

SWAY was advised by Moelis & Co and Sidley Austin. CAH was advised by Morgan Stanley, Skadden, Arps, Slate, Meagher & Flom and Clifford Chance US.

CMBS

P2P lender taps CMBS vet

Gary Bechtel has been appointed as president of Money360. He will be responsible for expanding the firm's lending programmes, building out its origination and loan processing capabilities, and interacting with institutional investors.

Bechtel joins the CRE marketplace lender from Business Partners, where he was chief lending officer. He has also held senior roles at a number of other firms, including Grubb & Ellis, Bechtel Realty Group, Hometown Commercial Capital, Meridian Capital and Johnson Capital. His experience covers involvement in transactions regarding CMBS, life companies, and equity and mezzanine funds.

Insurance-linked securities

ILS legal pro recruited

Michael Halsband has joined Drinker Biddle & Reath as part of its insurance transactional and regulatory team. His transactional work includes complex structured reinsurance transactions, products and entities, and ILS.

Before joining Drinker Biddle, Halsband was the founding senior executive and president of the capital markets and ILS convergence initiative at Sirius Group, where he was responsible for the development and launch of convergence strategy, as well as the structuring of third-party institutional catastrophe platforms. Prior to this, he was director of capital markets and treasury solutions at Deutsche Bank, where he originated, structured, executed and marketed a range of ILS transactions.

RMBS

MBS director appointed

SFIG has hired Dan Goodwin as director of mortgage policy to focus on MBS policy issues. He will report directly to SFIG executive director Richard Johns.

Before joining the association, Goodwin was group head at Hilltop Holdings and Southwest Securities. Prior to that, he was head of ABS and principal investing at Bank of America, as well as vp in MBS at Nomura and FSA.

ABS

German auto loans to 'remain strong'

Moody's expects the credit quality of German auto loans to "remain very strong". The agency notes that German consumers have avoided excessive loan-funded spending, despite the lure of low interest rates and positive economic sentiment.

"Higher consumer loan volumes have not been accompanied by a deterioration in credit quality. Data show that the current economic environment has not triggered excessive spending, which is not typically the case," states Armin Krapf, a vp - senior credit officer at Moody's.

The agency considers that the conservative German approach towards financed consumption has kept default rates low. Consumer loan default rates for borrowers between the age of 45 and 64 have been stable since 2009, ranging between 1.8% and 2% from 2009 to 2014. These borrowers are more likely to be economically stable, have a more conservative view towards personal financial leverage and can afford higher loan amounts, according to Moody's.

Its analysis reveals that demand for new consumer loans has shifted from smaller loans toward loans with higher principal amounts, a category that includes most auto loans. Average loan amounts increased above 10,000 for older borrowers, a borrower group with strong payment behaviour. The statistics indicate that borrowers in the 45-64 age range take out loans above 10,000 more often than younger borrowers.

A high percentage of loans in German auto ABS exceed 10,000. Schufa's data show that these large loans are more often linked to the strong borrower group, aged between 45-64.

Even as the volume of new consumer loans in Germany is rising, the overall number of new loans is decreasing. Moody's suggests that this trend, along with stable auto loan and consumer loan performance in the past, will strengthen the performance of German auto loan ABS.

The total volume of new consumer loans in Germany increased by 5.6% in 2014 to 65.3 billion, up from 61.8 billion in 2013, according to Schufa's data. At the same time, the overall number of new consumer loans declined to 7.4 million in 2014, from 7.7 million in 2013.

Structured Finance

SME payment delays to improve

SME loan payments in Italy and Spain lag behind those of the UK and the Netherlands, but could improve on the back of the economic recovery, says Moody's. Data compiled by the agency show that the jurisdictions display the largest gap between contractual and actual payment timing in the business-to-business and public sectors.

Moody's expects payment delays to improve in Spain, mirroring the country's economic recovery, while Italian SMEs have already shown some improvement so far in 2015. Improvements to financial, behavioural and performance data quality on European SMEs should also help lenders assess borrower creditworthiness more accurately, boosting their willingness to lend, and decreases refinancing risk in European ABS deals backed by SME loans.

"Moody's delinquency data for ABS backed by SME loans show performance is more closely correlated with economic growth rather than payment delays. For this reason, although payment delays are still long - especially in Italy and in the public sector - we do not expect arrears to rise in ABS SME deals due to delays," says Monica Curti, a vp - senior credit officer at Moody's.

Moody's adds that payment delays can affect SME liquidity, as liquidity conditions are tight. "Assuming that liquidity issues are a direct result of late payment, they nonetheless do not necessarily lead to default because Southern European SMEs are operationally prepared to manage this problem, which is reflected in ABS SME deal performance," observes Curti.

Intrum Justitia data shows that in 2015, 82% of companies in Italy cited financial difficulties as reasons for late payment; in Spain, this percentage is 88%. This is considerably higher than 39% in the UK and 60% in the Netherlands. But, in Italy, 73% of companies in 2015 cited liquidity problems owing to late payments.

Initiatives to improve data quality are already underway, including the ECB's Ana Credit project to establish a European credit register, tools leveraging the European DataWarehouse and the European centralised financial database. "Improvements to the quality of - and lenders' access to - data on SMEs' creditworthiness will help lenders more accurately assess this, which will have a two-fold effect of increasing lenders' willingness and ability to lend to SMEs, while simultaneously decreasing refinancing risk in SME ABS pools," says Curti.

Moody's says that widely available borrower data discourages bad behaviour among SME borrowers, especially in fragmented banking systems. For example, borrowers have greater incentive to repay when they know lenders share their credit records and that a default with one lender would disrupt their access to credit from all other lenders.

Second, data sharing helps close the information gap between SMEs and banks and between banks and non-bank lenders. This diversifies the lender base by encouraging alternative lending, which reduces refinancing risk and lowers borrowing costs. Non-bank lenders typically do not have their own data on borrowers' past payment behaviour, so better access to SME borrower data is crucial for sound origination and servicing.

Structured Finance

Standardisation 'a double-edged sword'

Scope Ratings says it welcomes initiatives to increase standardisation in the European securitisation market, providing they strengthen transparency and enable better credit risk analysis of transactions. However, the agency warns that standardisation of transactions can prove a double-edged sword and should not divert market participants from careful credit analysis.

Better disclosure among originators and issuers, as well as standardisation of reported data aid transparency through common and clearly defined delinquency and default metrics, according to Scope. However, it notes that reliable and extensive comparable data is necessary - but not sufficient - for good credit analysis.

"The value of loan-level data for auto ABS transactions is still to be exploited," the agency observes. "We believe credit risk analysis can benefit from loan-level data, as it can aggregate market information, allowing a deeper understanding of fundamental risk drivers behind auto ABS performance. For single transactions considered in isolation, loan-level data is mostly useful for leveraging the originator's knowledge of credits in the securitised portfolio."

It adds: "We believe investor demand rewards transparency, as it enables correct assessment of risks. More transparent issuances should attract a broader investor universe, which - combined with reduced transaction costs - leads to lower financing costs for the originator."

Scope cautions against reduced scrutiny when standardisation of transactions, features and characteristics are in place. The agency also perceives a risk of market distortion if standardisation goes beyond common definitions for information provided to market participants.

For example, it suggests that standardisation of transactions that excludes certain collateral types could alter auto ABS characteristics. "For good reason, forms of auto ABS vary between European jurisdictions. Forced standardisation would ignore the different designs of auto financing in Europe, distorting the individual market's established business models with a risk of impairing the economy at a pan-European level."

Elimination of certain structural features from auto ABS structures could also reduce the ability of securitisation to coordinate consumer demand for credit with investor demand. For instance, without interest rate swaps, the risk of interest rate mismatches has to be covered by credit enhancement, resulting in higher securitisation costs that are ultimately passed to end consumers.

Regarding residual value in auto ABS, regulators view it as a source of risk that does not belong in securitisations because it includes a component of market value risk. Whether auto ABS with exposure to residual value should benefit from favourable regulatory capital requirements is currently being discussed.

"In Scope's view, this discussion is driven largely by semantics because any securitisation of secured exposures is effectively exposed to market value risk. Upon default of the obligor, collateral is typically liquidated by selling it on the market. This is when market value risk becomes relevant and why rating agencies and investors haircut the collateral value when calculating loss-given default," the agency notes.

Structured Finance

Multifamily debt mounts

Outstanding US multifamily mortgage debt now exceeds US$1trn and is growing at almost 10% a year, according to the Mortgage Bankers Association. The level increased by US$38.5bn in 2Q15, a 1.4% increase over the last quarter, as three of the four major investor groups increased their holdings.

The four major investor groups are: bank and thrift; CMBS, CDO and other ABS; federal agency and GSE portfolios and MBS; and life insurance companies. Agency and GSE portfolios and MBS hold the largest share of multifamily mortgages, with US$437bn, or 43% of the total multifamily debt outstanding.

This is followed by banks and thrifts with US$315bn (31%), while state and local government hold US$87bn (9%). Meanwhile, CMBS, CDO and other ABS hold US$72bn (7%), life insurance companies hold US$58bn (6%) and federal government holds US$13bn (1%).

The US$23.6bn increase in multifamily mortgage debt outstanding between the first and second quarters of 2015 represents a 2.4% increase. In dollar terms, agency and GSE portfolios and MBS saw the largest increase in their holdings, with an increase of US$14.5bn (3.4%). In contrast, CMBS, CDO and other ABS saw the largest decline in their holdings, by US$1.6bn (2.2%).

Structured Finance

Model bail-in clause provided

AFME has published a model clause for contractual recognition of bail-in. It provides model wording designed to assist banks in complying with obligations under the Article 55 of the EU's Bank Recovery and Resolution Directive (BRRD).

The directive requires banks to insert clauses in contracts to give effect to bail-in in a very broad range of liabilities governed by non-EU law. AFME's model clause is part of effort to ensure the cross-border effectiveness of resolution and provide banks and counterparties with model drafting to assist with the significant challenges of implementation.

The model clause is aimed at inclusion in debt instruments and is supported by a legal opinion. It was developed with assistance from Cleary Gottlieb Steen & Hamilton. Bail-in provisions come into force in most EU jurisdictions from 1 January 2016.

Structured Finance

Loan stats enhanced

The ECB has published new statistical series on loans adjusted for sales and securitisation, based on an enhanced adjustment method. The new method provides for a more comprehensive view of developments in loans originated by euro-area banks by taking into account, on an ongoing basis, stocks and repayments of loans that are no longer recorded on bank balance sheets as a result of a securitisation or other transfer.

The central bank says that in addition to contributing to a more complete picture of lending to the real economy originated by euro-area banks, this new method improves comparability through more harmonised adjusted growth rates across countries with differing practices regarding the derecognition of transferred loans.

Previously, statistical series on loans adjusted for sales and securitisation published by the ECB took into account only the one-off impact of transactions resulting from (net) loan transfers - off or on balance sheet - in the period during which the transfer took place. The refined adjustment method also uses data on repayments and stocks of securitised loans that have been derecognised and are serviced by monetary financial institutions (MFIs).

These new requirements were introduced under Regulation ECB/2013/33 concerning the balance sheet of the MFI sector, which was implemented with the data transmission for the reference period December 2014. Data on other derecognised loans are also taken into account, where available. Comparable back data have been compiled by national central banks and the ECB in order to make available consistent statistical series from the beginning of 2010.

The inclusion of stocks and repayments of derecognised loans results in somewhat lower adjusted flows and growth rates in general. For the 12 months to July 2015, the growth rates of loans to the euro-area private sector, households and non-financial corporations have been revised downwards, on average by 54bp, 77bp and 41bp respectively.

CDO

Trups defaults unchanged

The number of US bank Trups CDO combined defaults and deferrals remained at 18.8% for the second month running at the end of August, reports Fitch. Two defaulted issuers, with a total notional of US$9m in two CDOs, were sold from their respective portfolios with an average recovery of 20.8%.

Additionally one cured issuer with notional of US$2.9m in one CDO redeemed its Trups. There were no new deferrals, defaults or cures in August.

Across 76 Fitch-rated Trups CDOs, 229 defaulted bank issuers remain in the portfolio representing approximately US$5.6bn of collateral. Meanwhile, 128 issuers are currently deferring interest payments on US$1.5bn of collateral.

CDS

CDS exposure falls, remains concentrated

Insured US commercial banks and savings institutions reported trading revenue of US$5.5bn in 2Q15, 28% lower than in the quarter before and 14% lower than 2Q14, reports the OCC. Credit exposures from derivatives also fell sharply.

Net current credit exposure (NCCE), which the OCC uses to measure credit risk in derivatives activities, fell US$97bn (19%) to US$406bn. The notional amount of derivatives held by insured US commercial banks declined US$5trn (3%) to US$198trn.

"While trade compression continues to reduce notionals, this quarter it was a decline in forward contracts, rather than swaps, that caused notionals to fall," says OCC financial markets group director Kurt Wilhelm. "Swap contracts had declined by a cumulative US$31trn in the fourth quarter of 2014 and the first quarter of 2015. This quarter, however, they were virtually unchanged. Forward contracts, on the other hand, fell by nearly US$5trn, explaining the entire notional decline."

Q215 was the first time since 2007 that recoveries of previously charged-off derivatives exposures exceeded charge-offs in the second quarter. Banks reported net recoveries of US$10m, compared to net charge-offs of US$70m in the first quarter.

Derivative contracts are concentrated in a small number of institutions, with the largest four banks holding 91% of the total notional amount of derivatives. The largest 25 banks hold nearly 100%.

While derivative contracts are largely concentrated in interest rate products, swap products now represent 59% of total derivatives notionals, up from 58% in the previous quarter. The percentage of centrally cleared derivatives transactions fell from 36% to 35%. For credit derivative products, 21% of investment grade and 16% of non-investment grade products are cleared.

CDS remain the dominant credit derivatives product. CDS represent 95% of total credit derivatives by notional value.

CDS

Ukraine moratorium eyed

ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a potential repudiation/moratorium has occurred in respect of the Republic of Ukraine. The move comes after Ukraine agreed to a restructuring deal with creditors that includes a 20% write-down to the face value of about US$18bn of Eurobonds.

ISDA's resolution establishes that some, but not all, of the conditions for a repudiation/moratorium credit event have been met. The association notes that a potential repudiation/moratorium is not a credit event and so credit default swap contracts will not be settled as a result of this resolution.

However, publication of the resolution causes an extension of the period during which a repudiation/moratorium credit event may occur for certain CDS contracts referencing the Republic of Ukraine. The DC will reconvene tomorrow (25 September) to discuss the possibility of an expedited auction settlement process in the event that a repudiation/moratorium credit event occurs as a result of this standstill.

CMBS

StuyTown settlement soon?

A court hearing last week related to the StuyTown lawsuit was adjourned without resolution, with Morgan Stanley analysts believing a resolution may be near. This could bring forward the timing of a sale.

The 17 September hearing on whether to dismiss the StuyTown lawsuit in the New York Supreme Court is understood to have been postponed for 30 days to allow time for the parties to reach a settlement. The suit was filed by Centerbridge, which owns several mezzanine loans related to the complex and may receive compensation as part of any settlement.

According to court documents, the StuyTown property is worth US$5bn. Centerbridge estimates the property to be worth even more, while the most recent appraisal - from September 2014 - values it lower, at US$3.5bn. The outstanding loan balance, securitised across five CMBS deals, is US$3bn.

"In our view, the settlement may surround the payment of default interest and gain on sale given that the value of the property is now well in excess of the loan balance," note the analysts. They add that these payments are made at the bottom of the waterfall on REO properties when sale proceeds exceed the loan balance. Additionally, the GSEs' increased emphasis on affordable rental housing, particularly in high-cost areas such as New York City, should make a successful sale of the property more likely.

CMBS

CMBS loan use queried

Following reports that proceeds from a mortgage loan securitised in Velocity Commercial Capital 2015-1 were misused by the related borrower to purchase a home as a primary residence, Kroll Bond Rating Agency has undertaken a thorough review of Velocity's credit policies, underwriting guideline, sample loan documentation and loan sale representations. As a result of this review, the rating agency is satisfied that Velocity is acting properly and is not making any consumer loans to residential buyers.

Kroll's rating process for the deal was based on the premise that all underlying loan collateral was commercial in nature and secured by income-generating real estate. As part of the rating agency's investigation, Velocity provided a hand-written note from the borrower stating that the loan was indeed obtained for a business purpose.

The promissory note signed by the borrower states that "the borrower represents to the lender that the proceeds of this note will not be used for personal, family or household purposes" and that it is an event of default if any statement made by the borrower was false or misleading in any material respect when made. Following an event of default, the lender can declare the full amount of the note to be immediately due and payable.

Velocity intends to contact the borrower to verify whether they are occupying the mortgaged property as a primary residence in violation of the loan documents. While using the property as a primary residence would constitute an event of default for the borrower, it would also mean Velocity was in breach of representations it made in the securitisation documents.

"The transaction documents provide that if a representation was breached and such breach materially and adversely affects either the trust's interest in the loan or the value of the loan, then Velocity has 90 days following receipt of notice of the breach to cure the breach, repurchase the loan, or substitute a qualifying loan for the affected mortgage loan," notes Kroll. It is not possible to confirm whether the loan is in default until Velocity has made contact with the borrower, and Kroll will continue to monitor the situation until this time.

CMBS

US CRE market 'like 2007'

Market participants can ill afford to forget how quickly US CRE performance can change, warns Fitch. The rating agency notes that the market is beginning to resemble 2007 in several key ways, although differences do exist.

While weakening loan characteristics, declining underwriting quality and concerns about originator, banker and rating agency competition are not new concerns for investors, in this cycle pro forma income is greatly discounted or ignored altogether and credit enhancement levels are substantially higher. However, some CMBS originators have not experienced a full cycle and may lack the experience required to respond to unanticipated stress, the rating agency says.

Average DSCR across 40 fixed rate conduit transactions rated by Fitch in 2007 was 1.05x, compared to 1.18x in 2015 year-to-date, with the difference largely attributed to the current low interest rate environment. Average LTV in 2007 was 110.7%, compared to 110.3% currently.

Fitch notes two major differences between 2007 and 2015. First, 2007 loans were often originated based on an expectation that cashflow would continue to rise in a market that had already experienced dramatic upward trends, so metrics were driven in part by pro forma income that artificially provided numbers than were never actually achieved.

Second, credit enhancement is much higher now. Triple-A credit enhancement is currently 23.625%, compared to 11.875% in 2007.

"Therefore, it's unlikely that the next twelve months will bring the same level of misery that followed the September 2008 peak. But it is important to remember that economic cycles are, by definition, cyclical. The current upturn commercial real estate has been enjoying since 2009 will eventually come to pass and the CMBS market can ill afford to forget the tough lessons learned in previous cycles," says Fitch.

CMBS

LL, MASB structures could limit ratings

Multi-borrower large loan (LL) and multi-asset/single borrower (MASB) CMBS may be structured in a way which raises risks for senior bondholders, says Moody's. The rating agency believes these structural shortcomings must be offset by higher credit enhancement to ensure sufficient credit quality to achieve the highest ratings.

Credit negative structures include non-senior sequential payment priority and release provisions that do not offset the risk of the portfolio quality deteriorating as it seasons. Most other CMBS have a purely sequential pay structure, which allows the senior classes to deleverage more quickly and so reduces the risks of decreased loan quality and reduced diversity due to collateral releases.

Moody's notes that release provisions must be well crafted to help offset the possibility of cherry-picking higher-quality assets, which could weaken a portfolio on release of collateral. Credit risk stemming from collateral release can also be countered by a provision for the payment of a sufficient premium over and above the allocated loan amount of the collateral to be released.

Without offsetting credit enhancement, the rating agency warns transactions with multiple structural shortcomings could be rated "several notches" lower than their peers.

Insurance-linked securities

UK ILS proposals promoted

The London Market Group (LMG) has provided an update on its work towards improving London's attractiveness as a potential hub for future ILS activity. Two particular proposals have been put forward by LMG chair Steve Hearn, including changes to corporation law to enable ILS vehicles to be set up in the UK.

A proposal to change UK corporation law would involve creating a necessary protected cell structure for related SPVs. The process could be lengthy though, as Hearn notes that it will need primary legislation to be pushed forward as a viable idea. Additionally, LMG is looking into ways in which ILS vehicles themselves can pay out on maturity prior to any tax being sought.

"In the absence of a claim event, most ILS structures see a return of 100% of the capital to the original investors once the specified period of the deal has finished," says Hearn. "So under this proposal, the vehicles themselves would not attract any tax, but the investors would on any gains they had made. This would make us competitive with the zero tax regimes in that investors there are subject to tax on profits in their home countries."

Hearn suggests that this would allow an overseas investor to provide funds to a UK domiciled ILS vehicle and pay no more tax than if they were investing in a Bermudian vehicle. This could bring the UK closer to a 'level playing ground' without the government having to compensate at all on rates, he adds.

NPLs

Freddie posts record NPL sale

Freddie Mac says it has sold 5,208 deeply delinquent NPLs worth US$1.1bn, making it the biggest such transaction so far from the GSE. The sale was composed of Ocwen-serviced loans across five pools - three of which were bought by Lone Star - after Freddie Mac opened the auction last month (SCI 17 August).

The other two pools were bought by Pretium Partners and OSAT Sponsor II. The transaction is expected to settle in October and servicing rights will transfer post settlement. The GSE has followed this up by announcing its seventh NPL sale of US$327m, which is expected to settle in December.

Freddie says that the loans from its most recent sale have been delinquent for approximately 3.5 years, on average. Given the deep delinquency status of the loans, the borrowers have likely been evaluated previously for, or are already in various stages of, loss mitigation or foreclosure.

Mortgages that were previously modified and subsequently became delinquent comprise approximately 33% of the aggregate pool balance. The aggregate pool is geographically diverse and has a LTV of approximately 91.1% based on BPO.

The loans were offered as five separate pools of mortgage loans and investors had the flexibility to bid on one or more pools, or bid on the aggregate of all five pools. Pools one and two are comprised of loans with CLTVs of between 50% and 110%, while pools three and four are comprised of loans with CLTVs of greater than 110%.

Meanwhile, HUD has announced its first 2016 NPL offering, which will consist of one national pool and one neighbourhood stabilisation outcome pool, to be offered on 18 November. Bank of Americal Merrill Lynch securitisation analysts note that HUD has offered US$1.4bn in NPLs for sale in 2015, compared with US$12.9bn in 2014.

Risk Management

Aussie reporting exemptions allowed

ISDA has published an Australian single-sided reporting letter, allowing certain market participants to take advantage of the Australian single-sided reporting regime for Phase Three entities. The letter provides necessary representations to allow Phase Three entities to take advantage of an exemption from reporting.

The letter allows market participants to provide counterparties with status representations which can be used to determine whether single-sided reporting is applicable for Phase Three entities, provided they engage in derivatives transactions with counterparties that are already required or agree to report. Its publication follows a long consultation process with a diverse group of market participants in the Australian derivatives market.

RMBS

High LTV STACR priced

Freddie Mac has priced its first STACR actual loss offering with original LTV ratios ranging from 80% to 95%. The transaction is the GSE's sixth in 2015 and fifteenth since the programme began in 2013.

The US$872m STACR 2015-HQA1 has a reference pool of single-family mortgages with a UPB of more than US$19bn. The reference pool consists of a subset of 30 year fixed-rate single-family mortgages acquired by Freddie Mac between 1 August 2014 and 30 November 2014.

The STACR 2015-HQA1 M-1 class priced at one month Libor plus a spread of 125bp, while the M-2 class priced at plus 265bp. The M-3 priced at plus 470bp and the B class at plus 880bp.

Freddie Mac is issuing 100bp of first loss with the transaction. The GSE holds the senior loss risk in the capital structure and a portion of the risk in the M-1, M-2, M-3 and the first loss B tranche.

Moody's recently upgraded the ratings of tranches from two previous STACR transactions - STACR 2014-DN1 and STACR 2013-DN2 (SCI 4 September). The agency based this on low serious delinquencies and credit enhancement buildup.

RMBS

RFC called on Slovak RMBS

Moody's is seeking comments on its proposed new methodology for analysing the credit risk of Slovakian RMBS transactions. The agency says that no rating changes will result from the publication of the new approach.

Moody's says its emerging securitisation markets reference is a highly relevant benchmark for Slovakia. To derive the calibration of the country-specific values and assumptions for Slovakia, Moody's specifically benchmarked the Slovak residential real estate market to other jurisdictions.

For example, the agency says that there are high expectations for growth in credit in the country, particularly with regards to the mortgage market, given the relatively low household debt levels. In addition, the narrow time series of relevant historical data that is available in Slovakian RMBS is due to limited historical mortgage performance data during a severely stressed economic cycle.

Meanwhile, Moody's is proposing using its MILAN framework for analysing pools of residential mortgage loans in the jurisdiction. The agency adds that the plan is to use the proposed approach in conjunction with its existing methodologies to rate RMBS and covered bonds in Slovakia.

Moody's invites market participants to submit comments on its proposals by 23 October.

RMBS

RPL credit factors highlighted

The performance of reperforming mortgage loans (RPLs) since their last modification is crucial in the analysis of their credit strength, says Moody's. Potential operational risks must also be prioritised in the analysis.

"The credit strength of RPLs depends not only on the creditworthiness of the underlying asset pool, but also on the effective servicer practices with regards to loan modifications," says Alberto Barbachano, a Moody's vp and senior credit officer. "Servicers are particularly important in these deals as they are deeply involved in creating workout plans with troubled borrowers and organising the foreclosure or repossession of assets."

The inability to manage a growing portfolio may lead to a significant deterioration of the credit quality of the portfolio. Moody's notes that transactions from new and small servicers that emerged recently during the credit crunch are particularly vulnerable.

Additionally, two keys factors that influence the likelihood of a default by an RPL can be the length at which the loan has performed since its last modification and the type of modification. For instance, the longer a borrower has been current on an RPL, the less likely they are to re-default. However, for loans that are already in default or in late stages of delinquency - such as NPLs - the main determinants of the ultimate loss severity levels are the type and location of the real estate security.

For RPLs, the main component of expected loss would be the status of delinquencies in the pool and the historical roll rates, and potentially the differentiation between the different sub pools if the loans come from more than one originator. For NPLs, expected loss would depend on the timing of the recoveries, including the servicer's exit strategy for each loan and when to foreclose.

Banks in some European countries hold a significant portion of RPLs on their balance sheets, with the sale and securitisation of these assets being the two options for banks to discharge them. Moody's believes that banks' acute need to deleverage will spur securitisation.

RMBS

UK FF assumptions updated

Fitch has published an exposure draft over proposed revisions for estimating losses on UK residential mortgage pools that are applicable in the analysis of UK RMBS. Although the overall analytical framework remains unchanged, revisions have been made to foreclosure frequency (FF) assumptions.

One such proposal by Fitch is for a proposed reduction in FF assumptions for prime and non-conforming loans. The agency notes that the UK mortgage market has been robust over the past 40 years, while also citing underwriting tightening from recent economic stresses.

Fitch has also proposed a reduction in FF assumptions for prime and non-conforming loans in arrears. The proposal specifically seeks to lower the minimum FF for such loans and introduce a new category of loans that are six months or more in arrears.

Further, the agency proposes a number of adjustments to its base FF assumptions to account for loan- or borrower-specific features. These include a reduction in the size of certain borrower adjustments related to adverse credit history, adjustments to loans without borrower income verification, removing any such adjustments related to right-to-buy loans and introducing certain adjustments for non-conforming loans that have been one month or more in arrears within the past two years.

The agency is also seeking to introduce a loss severity floor, as well as increased differentiation of mortgage portfolios with unhedged Libor bank base rate risk. If the aforementioned proposals are adopted, they are expected to lead to smaller loss expectations for all types of mortgage portfolios.

As a result, Fitch expects all outstanding UK RMBS ratings to either be affirmed or upgraded. The proposed criteria can have a rating impact on up to 151 tranches across 39 UK prime pass-through and BTL transactions, and up to 453 tranches across 93 UK non-conforming transactions.

Fitch is inviting market feedback for its proposed revisions by 23 October.

RMBS

Italian mortgage refinancing rising

Fitch has noted a strong refinancing trend in the Italian mortgage market from end-2014 to 2Q15, which continues to drive the annualised prepayment rate - up to 3.9% last quarter from 3.1% in 1Q15. Over the quarter, subrogation loans have remained the main source of new originations and constitute more than 60% of new mortgages.

Borrowers opted to refinance mainly to fixed-rate mortgage products in 2Q15, supported by CRIF data showing that 70% of the refinancing loan applications indeed targeted fixed-rate products. Fitch believes this trend reflects the low reference rates associated with fixed-rate loans and suggests that refinancing activity is likely to remain sustained in the coming months.

In addition, the agency notes that the ratio of loans in late stage arrears was almost unchanged - at just under 1.6%, compared to 1.5% reported in March. In contrast, the constant default rate contracted by 10bp and the average now stands at 1.2%, while the proportion of loans on payment holiday declined by 20bp to 1.9%.

Further, Italian home prices in 2Q15 contracted by 0.3% quarter over quarter to stand at 16.6% below their 2008 peak. Prices remained flat in Lombardia, one of the largest and wealthiest regions. In Southern Italy, residential prices continue to contract at a faster pace, currently down by 28.4% from their peak.