Contents

CLOs

Under pressure?

Credit deterioration affecting 2.0 CLOs

The percentage of US CLO 2.0 loans trading below 90 continues to rise, reaching a year-to-date peak of more than 8% last month. Credit quality erosion is limiting origination and impacting pricing, with manager performance coming under greater scrutiny as a result.

"Certainly the market value overcollateralisation deterioration is apparent across the CLO 2.0 space. We are seeing dispersion among 2.0 deals based on portfolio quality," says Christopher Long, president, Palmer Square Capital Management.

He continues: "There are a lot more loans trading below 90 dollar prices. There are more loans in the oil and gas and contagion sectors which are stressed, and finally, there is greater manager tiering now on the part of investors. However, that of course also brings plenty of interesting opportunities."

Morgan Stanley figures suggest that the US$5.6bn of US CLO issuance last month was the lowest monthly total since January. Macro concerns stemming from China and declining confidence in sectors such as energy, as well as metals and mining have taken a toll.

Among the 77 loan issuers with price drops last month of larger than five points, 17 issuers were in oil and gas. Morgan Stanley notes that 610 CLO 2.0 transactions have exposure to these 77 issuers.

"There has been a major sell-off in commodity- and energy-focused high yield credit. As CLOs have diversified portfolios, inevitably they are going to have exposure," says Matt Natcharian, head of structured credit, Babson Capital.

He continues: "Most CLOs will have low exposure, but we have seen some CLOs with weighting to these sectors as high as 13%. Junior tranches have traded off as a result."

However, a CLO could be highly overweight to oil and gas, metals and mining or another compromised sector and still only see very limited losses. As these sectors typically account for only a small part of a portfolio, Natcharian notes that if a deal with high exposure was to suffer 2% losses, double-B tranches would still be unaffected as they can typically handle losses of up to 10%.

Long agrees that the deterioration in credit should not have investors too worried just yet. He says: "If you were to stress test a CLO, then from a fundamental credit perspective it would still hold up. There are cases where the market is being unfairly penalised and that means there are opportunities, not least in the 2.0 double-B space."

Commodity market concerns make credit picking even more important than normal. While managers have to choose the right loans, investors have to choose the right managers. Experience through credit cycles is highly valued.

"Managers have to be very discerning in this environment and, as an investor, you absolutely cannot cut corners. You need to do your research to get the right manger, with the right structure and the right loan pool. You need to do your homework loan by loan," says Long.

He continues: "If you do your homework, there are great opportunities. A lot of double-B paper has traded down to very low dollar prices, but comes with tremendous convexity and very low remaining life. The perception of distress in creating a lot of opportunity."

Investors will increasingly be looking for opportunities in the secondary market, as the primary pipeline continues to dry up. While a summer slowdown is not unusual, the fact that issuance did not pick back up over September - and that the month saw the second lowest volumes of the year as the market dealt with Fed nervousness, market volatility, credit weakness and deteriorating liquidity - is more concerning.

"Bank loan prices over this period mean things can still get done, albeit at a slower pace than the market initially expected. Until macro conditions look more positive, I do not think people will jump back in," says Natcharian.

JPMorgan CLO analysts note that their previous prediction of total yearly issuance in the US$100bn-US$110bn range now looks less likely. Issuance to the end of September was just under US$80bn, with near-term issuance expected to be slow.

"The equity arb is very tough right now. It also appears to be the case that the market has hit an inflection point, whereby people need to see some definite plans around risk retention. That is causing some issuers to go back to the drawing board and reconsider issuances," says Long.

He continues: "There is typically a catalyst that allows assets to widen or liabilities to tighten, but we do not see anything like that in the near term. In that case, investors need to be patient and discerning and do their homework, because the action is going to be in the secondary market."

Any primary issuance should be of good quality, however. The ability to construct cleaner portfolios has meant that the 2015 vintage has significantly lower exposure to loans trading below 90 than the 2013 or 2014 vintages.

"We are trying to take advantage of buying good deals from good managers. New issue CLOs are offering a wide spread with a newly selected portfolio, which should have only limited exposure to sectors such as oil and gas. The ability to ramp up with cleaner loans in this environment is positive," says Natcharian.

He concludes: "Total yearly issuance of US$100bn-US$120bn is still possible, but things would need to pick up again for that target to be reached. Without a change in the market, issuance will continue to be limited."

JL

Secondary markets

Euro secondary mixed

Activity in the European securitisation secondary market continues to be mixed.

For the most part ABS/MBS is still being hampered by very thin liquidity and prices are softening across the board. Prime assets continue to benefit from a buying bias albeit only in pockets. Unsurprisingly autos remain the main focus and are seeing reasonably healthy two-way flows, though spreads continue to remain relatively wide.

The euro CLOs story also continues to be mixed. In 2.0s decent BWIC supply last week and a strengthening new issue pipeline is pushing spreads out. Conversely, demand outweighing supply in 1.0s is holding spreads in.

There is currently only one BWIC on the European calendar for today. At 14:30 London time is a six line €20.6m mixed ABS and RMBS auction.

It consists of BPMO 2007-1 C, DOURM 2 A2, ITALF 2007-1 C, LOCAT 2005-3 B, LUSI 3 D and VELAH 2 C. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US CLOs keep busy

The US CLO secondary market looks set for another busy week after last week's uptick in activity.

Last week saw an increase in secondary activity with focus primarily around 2.0 triple-As, double-Bs and triple-Bs. With macro concerns and quarter-end causing a volatility spike, price transparency evaporated and kept some investors on the sidelines.

Consequently 2.0 spreads across the stack moved wider over the week despite a late rally on Friday. The BWIC pipeline for this week is already building strongly as sellers seek to capitalise on momentum from that rally.

There are currently six BWICs on the US CLO schedule for today. The longest of which is a collection of 2.0 double-Bs at 13:00 New York time.

The ten line $58.3m auction comprises: AVERY 2013-3A E, CIFC 2013-4A E, CIFC 2013-4X E, CIFC 2014-1A E, CIFC 2014-3A E, FIG 2014-1A E, FLAGS 2013-7A E
OAKCL 2014-1A D, OCT18 2013-1A D and SNDPT 2013-2A E. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary slowly improves

Tone and activity are slowly picking up in the European securitisation secondary market.

Bolstered by stronger broader markets sentiment in most secondary sectors has improved, which is helping to stabilise spreads and encourage participants to return, but liquidity remains generally thin. In prime, autos led the way yesterday notably in VW assets, whereas in peripherals Portuguese bonds saw the biggest increase, elsewhere in ABS/MBS spreads were mainly unchanged on the day.

Meanwhile, CLOs continue to be hampered by a lack of pricing transparency. However, the auction calendar is building strongly for the sector over the next few days, which should provide some much needed widely distributed clearing levels.

There are currently three BWICs across the European calendar for today. At 13:00 London time is an 11 line 11.3m mixed euro and sterling CLO and MBS auction.

The list comprises: CELF 2006-1X C, CANWA II D2, CORDR 1 C, CORDR 3 B, EGLXY 2006-1X D, EGLXY 2015-4X C, ESAIL 2006-4X B1A, HIPO HIPO-8 D, MONAS 2006-I B, RMAC 2005-NS2X M2C and WARW 1 A. Six of the bonds have covered with a price on PriceABS in the last three months: CANWA II D2 at 95.4 on 28 July; CELF 2006-1X C at 92.675 on 1 September; CORDR 3 B at 88.06 on 28 July; EGLXY 2006-1X D at H97 on 6 August; RMAC 2005-NS2X M2C at 87A on 28 July; and WARW 1 A at 98.48 on 8 July.

Then, at 15:00 is a single line of CLO NEWH 1X F. The bond hasn't appeared on PriceABS before.

Last, and likely to be most closely watched, are two lines of VW mezz also due at 15:00 - €6m DRVON 13 B and £3.2m DRVUK 2 B. Neither of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary accelerates

The pick-up in activity and pricing levels in the European securitisation secondary market is accelerating.

Yesterday saw a further improvement in sentiment on the back of the same in broader markets. As a result, flows increased, though liquidity is still very patchy, and spreads were broadly flat to slightly tighter. Prime spreads, including autos, continue to hold firm, but it is peripherals that are currently receiving the biggest boost with Portuguese paper benefitting the most from dealer buying activity.

Today's BWIC calendar also sees a further increase with six lists on the schedule so far. Total auction sizes are larger than of late with assets from across jurisdictions and all deal types in for the bid on predominantly mixed lists.

The most substantial mixed auction comes at 13:30 London time. It involves 18 line items with a total original face of approximately €35.54m and comprises: DOURM 1 D, DOURM 2 C, DOURM 2 D, ECLIP 2006-2 E, EURO 23X D, GRIF 1 C, HERME 12 B, KION 2006-1 B, LOCAT 2006-4 B, LUSI 5 D, MBNAS 2005-B3 B3, MESDG CHAR C, MPS 4X B1B, THEME 2 B, THEME 3 B, TMAN 5 C, TMAN 7 D and WINDM VII-X C.

Three of the bonds have covered with a price on PriceABS in the past three months - HERME 12 B at 99.61 on 1 October; GRIF 1 C at 27.95 on 24 July; and TMAN 5 C at 12.01 on 16 July.

Secondary markets

US CLOs suffer

The US CLO secondary market continues to suffer from a lack of liquidity for a variety of reasons.

"We're seeing a decrease in liquidity," says one trader. "That's to some extent being driven by bank regulation - bank balance sheets are skewed toward investment grade, which obviously reduces liquidity in non-investment grade, and those balance sheets are now required to be smaller so investment grade is hit as well."

At the same time, further down the capital stack there has also been an absence of the fast money normally seen in the area. "It looks like hedge fund redemptions have caused the limited participation," the trader says. "It also indicates they have a negative view on the direction of spreads - there's definitely a lot of risk off attitude."

Meanwhile, the trader suggests that in some circumstances the commodity concerns that have been keeping a number of CLO investors out of the market are overplayed. "People tend to look at sectors, such as oil and gas and metals and mining, as a whole in terms of a CLO's exposure and draw a conclusion from that, but if you look at individual companies within those sectors, some are, without doubt, better positioned than others. The same is therefore true of the CLOs in which they are involved."

There are currently five BWICs on the US CLO calendar for today. The chunkiest of which is a six line $24.87m 2.0 double-B auction.

Due at 11:00 the list comprises: ANCHC 2014-5A E, ANCHC 2015-6A E1, ICG 2014-1A D, SHACK 2015-7A E, SNDPT 2015-1A E and TICP 2014-2A D. Only ANCHC 2014-5A E has covered with a price on PriceABS in the past three months - at 89.86 on 6 August.

Secondary markets

Euro secondary return continues

Activity and prices in the European securitisation secondary market continue to return to normal, but liquidity is still below usual levels for this time of year.

"We saw flows across all asset classes yesterday," says one trader. "Even UK non-conforming is taking off having been very quiet recently."

Peripherals are continuing their rise of recent days. "Prices are up noticeably, even including high beta names such as UCI and HIPO HIPO," the trader reports.

Meanwhile, prime assets remain stable. "Anticipation of new deals is increasing with the new PERMM UK announced yesterday and plenty of rumours of new Dutch transactions. However, this has caused little impact on secondary spreads in the sector," says the trader.

CLOs are the most notable exception to the rally. "There's not much action in CLOs," the trader says. "The visible primary pipeline is quite big and a lot of investors are waiting to see where new issues price before returning to the secondary market."

There are seven European BWICs circulating for trade today so far, offering a wide range of assets and jurisdictions. The stand-out auction is a huge multiple deal type and currency portfolio liquidation due at 15:00 London time, which also involves a large US component. The liquidation is sub-divided into a number of pools where bonds are offered on an AON basis, but some line items may trade individually.

The trader suggests the liquidation is unlikely to cause significant market disruption. "It's likely the European component can be absorbed especially given the lack of BWIC supply over most of the last week or so. That said, liquidity is still not great, so prices may be a little off and it's possible some of the reserves will not be met."

Secondary markets

US RMBS stabilises

The US non-agency RMBS secondary market has stabilised and activity is slowly increasing again.

"It was slow last week and that continued through to this Tuesday," says one trader. "But since then high yield has rallied and that has had a knock-on effect in secondary RMBS."

The trader continues: "Sentiment has stabilised and everyone appears a bit more optimistic. It's not necessarily risk on, but bonds are changing hands - buyers are returning and sellers are a being a bit more realistic in their expectations and that little bit of flex is allowing the market to trade."

That desire to trade was evidenced yesterday, the trader suggests. "We saw $1.2bn in for the bid including a $648m list that for the most part went through as anticipated. That was the busiest day of the week as BWIC volumes are now dropping ahead of next Monday's holiday - there's only $600m due today."

The trader adds it's likely that after the holiday the market will see more of the same. "People will of course be keeping an eye on the hotspots of the world, both in political and hurricane terms, over the long weekend, but if not much changes a Fed surprise later in the month is the only potential distraction. If that's the case, I expect next week to see more slow and steady progress."

Secondary markets

Euro secondary stays on track

Ever-improving broader markets are driving increasingly positive sentiment in the European securitisation secondary market and its revival over the past few days remains on track.

Yesterday again saw an uptick in overall activity though flows were slightly down as the heavier BWIC calendar took precedence. There was buying interest across the board, albeit still restricted to selected names in each sector.

The prime segment was once again solid with spreads ending yesterday unchanged. UK non-conforming continues to garner some interest, but it was peripherals - Italian and Spanish paper in particular - that once again reaped the most benefit.

The week looks likely to end a little quieter with only two European BWICs on the calendar for today so far. Both consist of CLOs.

At 14:00 London time there is a €3.5m two line auction involving CADOG 4X C and CORDA 2006-1X D. Only CADOG 4X C has covered on PriceABS in the past three months - at 93.28 on 9 July.

Then, at 15:00 there is a €15.46m five line list, comprising: GROSV 2015-1A A2AE, JUBIL 2015-15X B, NEWH 1X B1, ORWPK 1A A2 and RYEH 1X B1. None of the bonds has covered on PriceABS before.

Structured Finance

SCI Start the Week - 5 October

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

Pipeline
The number of deals joining the pipeline picked up again last week, with CMBS leading the way. There were four ABS, two RMBS, seven CMBS and three CLOs announced.

US$1bn BMW Vehicle Lease Trust 2015-2, US$1.63bn DPABS 2015-1, US$833.33m Nissan Auto Receivables Owner Trust 2015-C and US$800m World Omni Auto Receivables Trust 2015-B accounted for the ABS. The RMBS were US$334.76m Agate Bay Mortgage Trust 2015-7 and US$450m WinWater Mortgage Loan Trust 2015-5.

The CMBS were: US$650m BBCMS Trust 2015-STP; US$840m FREMF 2015-KS03; US$300m GSCCRE 2015-HULA; US$377.5m JPMCC 2015-UES; US$1.2bn MSBAM 2015-C25; US$248.4m RFT 2015-FL1; and US$500m SBA Tower Trust 2015-1. The CLOs were US$800m Atrium XII, US$400m Eaton Vance CLO 2015-1 and US$400m ICG US CLO 2015-2.

Pricings
As with the week before, last week's prints were fairly evenly distributed. In total there were five ABS, three RMBS, three CMBS and four CLOs.

The ABS were: US$220m American Credit Acceptance Receivables Trust 2015-3; C$460m Canadian Credit Card Trust II Series 2015-2; US$675m Discover Card Execution Note Trust 2015-3; US$636m Hertz Vehicle Financing II Series 2015-2; and US$530m Hertz Vehicle Financing II Series 2015-3. The RMBS were €585.5m Hypenn RMBS IV, A$750m IDOL Trust 2015-1 and US$1.97bn JPMMA L Street Securities Series 2015-CH1.

US$477m Colony Mortgage Capital Series 2015-FL3, US$1.1bn COMM 2015-CCRE26 and US$925m JPMCC 2015-SGP constituted the CMBS. The CLOs, meanwhile, were US$700m Ares XXXVII CLO, €517m Avoca 15, US$425m Fortress Credit BSL III and US$820m Octagon Investment Partners 25.

Markets
Spreads for nearly all US ABS sectors widened last week, with three-year triple-A floating-rate credit card ABS 4bp wider and both prime and subprime auto loan ABS 3bp wider. "FFELP and private student loan ABS generally moved 5bp-15bp wider, with the exception of 10-and 13-year FFELP ABS spreads, which tightened 5bp and 10bp, respectively," comment Bank of America Merrill Lynch analysts.

US CMBS spreads widened throughout the week following the weak jobs report. "The CMBS market underperformed this week, with spreads widening on Monday and lagging a broader mid-week market recovery. Investors seemed to be particularly concerned about the wide pricing of the latest new issue deal on Monday," say Barclays analysts.

European ABS and RMBS spreads were broadly unchanged, although Volkswagen's trials and tribulations (SCI passim) have affected auto ABS spreads. "Generic two-year senior auto ABS bonds are now trading at one-month Euribor plus 42bp, 8bp wider versus the previous week," say JPMorgan analysts. "Five-year Dutch RMBS spreads gave up 3bp on average as the asset class saw a new issuance this week."

Editor's picks
Capital clarity: The release of the European Commission's Capital Market Union action plan has been hailed for reducing capital requirements and outlining a succinct and centralised definition for simple, transparent and standardised securitisation. However, key concerns remain over Solvency 2 capital recalibrations...
Derivatives development: Efforts to create US marketplace loan derivatives are gaining traction, as investors seek hedges for their long positions and increased secondary market liquidity. According to a new SCI research report entitled 'Marketplace lending: disruptors and the new credit paradigm', the development of marketplace lending securitisations and structured products goes hand-in-hand...
New index rules roll: The Markit CDX High Yield index rolled from Series 24 to 25 on 28 September, marking the implementation of new composition rules (SCI 20 August). The updated rules aim to bridge the gap in sector composition between the cash and synthetic indices, which has partly driven the performance divergence in the two markets since the summer of 2014...
CMBS bulk sale planned: CWCapital Asset Management is marketing US$2.12bn of distressed CRE loans and properties, most of which are from the company's specially serviced CMBS portfolio. There are 15 US CMBS transactions affected...
US RMBS cautious: Caution is prevailing in the US non-agency RMBS secondary market. It's been a very quiet week, with only about US$800m in for the bid in total so far, which is highly surprising for quarter-end...

Deal news
• Concerns over the US$115m Prudential Plaza loan are believed to be behind COMM 2015-CCRE26 pricing this week at a significant concession across the capital structure. Morgan Stanley CMBS strategists suggest that underwriting of the loan, the largest in the deal, provides little margin for error and that it may be a future modification candidate under certain scenarios.
• A US$5.3m loan securitised in FREMF 2011-K12 has been liquidated at a loss severity of 55%. It is the first Freddie K loan to be liquidated at a significant loss.
• September remits show that three CMBS 2.0 loans totalling US$71m sponsored by the same borrower - Colony Hills - have been transferred to special servicing. The affected loans are the US$25.26m Colony Hills - Sandpiper and Cabana Apartments (securitised in COMM 2013-CR9), US$23.35m Colony Hills Portfolio Loans - Yester Oaks Apartments (JPMBB 2013-C12) and US$22.37m Colony Hills Portfolio Loans - Windsor Place and Pathways Apartments (JPMBB 2013-C12).
• AES Distributed Energy has launched its inaugural securitisation, making it the first solar ABS deal to be backed by a utility company. Aurora Master Funding 2015-1 is secured by 15 limited purpose solar power distributed energy project companies, comprising 12 commercial, industrial, municipal and small utility companies (CIMU) and three that are residential.
• Fannie Mae has completed its latest credit risk sharing transaction, CIRT 2015-3. For the second time since the credit insurance risk transfer (CIRT) programme's inception in 2014, an international reinsurer participated in the RMBS. Coverage is provided based upon actual losses for a term of 10 years.
• Hatfield Philips International has negotiated the successful resolution of the Bridge loan, securitised in the Windermere X CMBS, via a highly targeted marketing process for the underlying properties. The gross disposal proceeds from the sale of the portfolio are in excess of €330m - a price that is greater than the latest public valuation - and net proceeds are expected to fully repay the amount of principal and interest outstanding on the senior loan and partially repay the amount outstanding on the junior loan.

Regulatory update
• The CFPB, US Department of Education and Department of the Treasury have issued a joint statement on student loan servicing principles to provide a framework to improve servicing practices, promote borrower success and minimise defaults. The CFPB has also released its student loan servicing analysis of public input and recommendations for reform, which has direct implications for FFELP ABS through higher potential adoption rates in income-based repayment plans.
• The Structured Finance Industry Group (SFIG) yesterday (30 September) released its response to the US Treasury's recent Request For Information on the marketplace lending industry. The response covers securitisations of marketplace loans, regulations that are currently in place and what challenges the industry faces in the near future.
• The European Commission has launched its Capital Markets Union action plan to build a single market among EU member states. The proposal provides specific criteria to differentiate simple, transparent and standardised (STS) securitisation products, while also making amendments to capital requirements regulations.
• ESMA has published its final technical standards on MiFID 2, revealing how the legislation will apply in practice to market participants, market infrastructures and national supervisors. The standards are broken down into how they will help increase transparency, safety and investor protection.
• ESMA has published two sets of technical advice and a report on the regulation of credit rating agencies in the EU. These papers consider measures to provide stronger controls around credit ratings for structured finance instruments and to reduce reliance on credit ratings.
• Last week, the US SEC voted to propose tighter liquidity rules for open-end funds, including mutual funds and ETFs. While the rules would lead to several changes, the most significant one for CLO investors could be regarding liquidity buckets.
• The US CFTC has settled charges against TeraExchange over its failure to enforce prohibition on wash trading and prearranged trading on its SEF platform. Tera allegedly offered for trading on its SEF a non-deliverable forward contract based on the relative value of the US dollar and Bitcoin, without indicating that it was a wash sale.
• An appeal by the FDIC of the June ruling in the WaMu rep and warranty trial (SCI 4 June) was approved last week. Proposed schedule changes are due to be submitted by both parties this week, which may shed more light on the timing of the subsequent process.

Deals added to the SCI New Issuance database last week:
Apidos CLO XXII; California Republic Auto Receivables Trust 2015-3; DRB Prime Student Loan Trust 2015-B; Drive Auto Receivables Trust 2015-D; OneMain Financial Issuance Trust 2015-3; Oscar US 2015-2; Synchrony Credit Card Master Note Trust series 2015-3; Synchrony Credit Card Master Note Trust series 2015-4; THL Credit Wind River 2015-2

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; BACM 2006-3; BSCMS 2005-PWR9; CD 2007-CD4; CFCRE 2011-C2; CGCMT 2013-GC17; COMM 2013-CR9; COMM 2013-LC6; COMM 2014-UBS2; COMM 2014-UBS3; COMM 2014-UBS6; CSFB 2005-C5; CWCI 2006-C1; CWCI 2007-C3; DBCCRE 2014-ARCP; DBUBS 2011-LC2A; FREMF 2011-K12; GCCFC 2005-GG3; GCCFC 2007-GG9; GSMS 2011-GC3; GSMS 2011-GC5; GSMS 2012-GCJ9; JPMBB 2013-C12; JPMBB 2013-C15 & JPMCC 2013-C16; JPMCC 2003-C1; JPMCC 2006-CB17; JPMCC 2006-LDP9; MLMT 2006-C1; MLMT 2007-C1 & BSCMS 2007-PW17; MSBAM 2013-C11; MSBAM 2015-C21; MSC 2005-HQ5; MSC 2007-HQ11; TAURS 2007-1; TMAN 6; TMAN 7; UBSBB 2012-C4; WBCMT 2007-C31; WFCM 2015-LC20; WFCM 2015-NXS2; WINDM X

CMBS

CMBS ruling logic questioned

A legal ruling has had to fill in the gaps in documentation for yet another pre-crisis transaction - Gemini (Eclipse 2006-3) - as CMBS 1.0 shortcomings continue to cause problems. However, while the court has ruled in favour of what it believes is most in line with the deal's intended economics, its logic has been questioned.

The court was asked to decide which payments constitute revenue and which constitute principal for the purposes of Gemini (Eclipse 2006-3)'s payment waterfalls. Rental income to service the loan fell during the financial crisis and the loan was accelerated in 2012, with various administrators and receivers appointed over the portfolio.

An interest rate swap with Barclays which hedged the rate of interest on the loan became significantly in-the-money to Barclays. Special servicer CBRE entered into an arrangement with Barclays whereby the bank would not terminate the swap provided that its exposure was paid down over time from property disposal proceeds.

There was no explicit arrangement for how payments should be allocated as principal, interest or expenses due. Although the loan had defaulted and been accelerated, the notes had not.

There were two pre-acceleration payment waterfalls. The first was a revenue waterfall for meeting interest payments and the second was a principal waterfall.

"The issue was how the proceeds of disposals of properties, once Barclays' hedging exposure was paid down in full, were to be characterised for the purposes of the note waterfalls and, in turn, distributed to noteholders and the liquidity provider," Fieldfisher says in a client memo. "The class A notes would be better served if the payments flowed through the principal waterfall and the lower classes of notes (and liquidity provider) would be better served if the proceeds (or at least some of them) flowed through the revenue waterfall."

The cash management agreement gave no indication as to how funds should be identified and did not define principal or interest. Both parties in the litigation agreed that rental income should be characterised as interest, so their disagreement was over the treatment of sale proceeds.

The senior noteholders argued that disposal proceeds should be applied in repayment of the loan, as it had prior to default, and should be carried through to the notes. They added that this would be consistent with the economic subordination of the junior notes to the senior notes.

The junior noteholders argued that the common law presumption should operate and receipts should be applied as interest first and only as principal once all interest arrears were discharged. They added that it made good commercial sense for all receipts to be allocated to paying interest on the notes rather than principal until the notes were either redeemed or accelerated.

Fieldfisher notes that the court followed the usual principles for resolving such matters, including giving preference to whatever would be most consistent with business common sense. It concluded that disposal proceeds should be regarded as principal and applied to the principal waterfall alone, thus siding with the senior noteholders.

However, Fieldfisher is not convinced that the court's ruling does in fact most closely resemble the deal's intended economics. "We wonder whether, in fact, the most commercially sensible solution would have been to first apply receipts and recoveries (of whatever kind) first towards unpaid interest and then towards principal in the usual way that applies to loans like this and which could presumably therefore have been what the parties might have intended," Fieldfisher says.

"This approach would also be consistent with what would have happened if there had been mandatory prepayment of the loan on a disposal prior to acceleration as the credit agreement provided for the proceeds to be applied in repayment 'together with accrued interest'. So even on a regular disposal there would always have been an interest component, even if a small one."

JL

ABS

Marketplace warehousing facility inked

Cross River Bank has partnered with marketplace lender Marlette Funding to complete a US$100m private, unrated amortising warehouse facility. The transaction is the first to be completed between an FDIC insured bank (CRB) and a marketplace lender.

The two firms will share the 12.5% equity tranche, with Deutsche Bank acting as lender in the deal. CRB ceo Gilles Gade says the move demonstrates the two firms' joint commitment to the sector through their risk retention strategy. "We believe this strategy will set new industry standards of best business practices and broaden the appeal of MPL players," he adds.

ABS

Bank lines up Five Arrows purchase

Paragon Bank is set to acquire Five Arrows Leasing Group as part of its strategy to enter into the UK SME asset finance market. The challenger bank will acquire the total share capital of Five Arrows for £117m, with the transaction expected to complete by 3 November.

Five Arrows provides asset finance products through its subsidiary brands to UK SMEs, including equipment, vehicle and construction equipment finance, and is also a provider of lease servicing. The acquisition is expected to accelerate Paragon Bank's business plan, allowing it to achieve profit in 2016.

ABS

ABS exec recruited

Shirley Chen has joined Mogo Finance Technology in the newly created role of treasurer, based in the firm's Toronto office. She has over 15 years of financial management experience and has led or been directly involved in C$20bn of ABS deals.

Mogo says that Chen's addition underscores its commitment to expand and diversify its sources of funding as it continues to grow its instalment loan portfolio within the broader C$278bn unsecured consumer loan market in Canada. Under her direction, the firm expects to develop marketplace lending and securitisation programmes, consistent with its plans to continue lowering its cost of capital.

Most recently, Chen served as vp, treasury at Street Capital Financial. Previously, she spent seven years with ING Direct Bank, most recently as director, finance. She has also held senior roles with Coventree Capital and Maple Trust Company.

Structured Finance

Private debt advantages outlined

Benefit Street Partners (BSP) ceo Thomas Gahan and president Richard Byrne have issued an open letter to the stockholders of TICC Capital Corp regarding its agreement to acquire TICC Management. The letter reiterates the firm's "full commitment" to complete the transaction with TICC and shares information about its plans for delivering superior, sustainable and long-term returns to TICC stockholders. The move comes ahead of a special stockholder meeting on 27 October to approve the investment advisory agreement with BSP.

In particular, the letter highlights the success of BSP's private debt strategy, which - in combination with a large and experienced credit team - it believes is a key competitive advantage. "Our sourcing advantage, coupled with our rigorous investment process, allowed us to deliver superior absolute and relative investment performance at our three flagship private debt funds over our seven-year history and substantially outperform public credit indices. Additionally, we were able to achieve these results while utilising substantially less leverage than the BDC industry average," it states.

The firm anticipates that the new investment strategy will primarily focus on private debt investments, as opposed to syndicated loans and CLOs. It says its pipeline is "robust", with the majority of the portfolio transition taking place within twelve months from closing. TICC's management fees in connection with the pending new investment advisory agreement will be reduced to 1.50%.

BSP believes a tender offer or share repurchase programme of between US$50m and US$100m would be in the best interests of TICC's stockholders. The purpose of such a programme would be to immediately reduce or eliminate the market price discount of TICC's shares to net asset value, with an appropriate minimum tender offer price of no less than the current average price to net asset value ratio for large-cap BDCs, which is approximately 90%.

As part of the transaction, a change of control provision will be triggered in both the TICC Funding and TICC CLO 2012-1 financings.

Structured Finance

SF specialist recruited

Voisin Law recruited Howard O'Toole as an associate in its commercial department. He has over 15 years of experience in all areas of offshore capital markets and structured finance transactions, specialising in MTN and CP programmes. O'Toole was previously a consultant in Hatstone Lawyers' capital markets and structured finance practice.

Structured Finance

Institutional relationship agreed

SME marketplace lender P2Binvestor has forged a relationship with HCG Fund Management. The partnership marks the first of several new institutional relationships for P2Binvestor.

P2Binvestor says it spent the last few months in the due diligence process with HCG, retooling its investment product offering to address matters, such as the complicated tax requirements of foreign-domiciled funds. The result is a new agreement that governs investment activity for all accredited investors who use the P2Binvestor platform, which is expected to improve the company's ability to accommodate larger funds.

HCG says the marketplace lending platform is attractive due to its rigorous underwriting process and the performance of its lending portfolio. The firm also likes the fact that "the investment is asset-backed with short duration, attractive yields and broad risk diversification", HCG ceo Joe Penabad states.

The firm plans to make P2Pinvestor one of its preferred marketplace lenders.

Structured Finance

Minority interest acquired

Dyal Capital Partners has acquired a passive minority interest in the controlling company of Chenavari Investment Managers. Chenavari will continue to be led by ceo and co-cio Loic Fery and co-cio Frederic Couderc, who will retain complete control over the firm's operations and investment process.

Dyal's strategic minority interest will be passive with no oversight of Chenavari's governance. The vast majority of Chenavari's economic interests remain in the hands of its existing shareholders.

The strategic relationship is expected to strengthen Chenavari's ability to provide institutional investors with leading investment solutions across tradable credit, structured finance and private debt. The firm had approximately US$5.4bn of assets under management, as of 1 September. Dyal is a private equity business within Neuberger Berman.

CLOs

CLO pro poached

Seix Investment Advisors has appointed John Wu as md of structured capital markets for its leveraged finance platform. He will play a key role in expanding the firm's CLO business, which it says is a "strategic priority".

Wu joins Seix from CIFC Asset Management, where he served as co-head of structured products, senior portfolio manager and md. He oversaw various structured product portfolios and managed 15 CLO new issue/refinancing transactions. He previously served as head of CLO structuring at UBS and director in global credit trading at Deutsche Bank. He began his credit career at Goldman Sachs in the Credit Derivatives group.

In addition to CLOs, Wu has created financing structures for credit hedge funds, BDCs and asset managers, combining flexible leverage and term financing for long-short credit management.

CMBS

Euro CMBS leader appointed

DBRS has appointed Christian Aufsatz to its London office, where he will lead the European CMBS team. He was previously head of European securitised products strategy at Barclays.

At Barclays, Aufsatz led analysis and research for European securitised products, with a focus on CMBS and CLOs. He previously spent eight years at Moody's, where he became team leader for EMEA CMBS.

Insurance-linked securities

Swedish ILS manager expands

ILS-specialist Entropics Asset Management has expanded its footprint by appointing Mika Mäkinen to represent the firm in Finland. He will work as a country representative through his company Helsingin Aktuaarikonsultointi.

Mäkinen will strengthen relations with institutional investors in Finland. One of his priorities will be to inform institutions about how the asset class is treated in the upcoming implementation of Solvency 2.

Mäkinen has previously served as md at Retro Life Assurance and at the Finnish Mutual Insurance Company for Pharmaceutical Injury Indemnities. He is currently a member of the board for the mutual insurance company Pohjantähti.

Insurance-linked securities

ILS lawyer brought back in

Cadwalader, Wickersham & Taft has appointed Matthew Feig to its capital markets group in New York, where he will focus on risk-linked securities and structured finance. He previously spent seven years with the firm, before leaving for Stroock & Stroock & Lavan.

Feig returns to Cadwalader as special counsel to the ILS team, which is led by Malcolm Wattman and Frank Polverino. Cadwalader is expanding its capital markets practice globally and into additional areas of ABS and lending, and last month appointed CLO specialist Michael Mascia and Wesley Misson from Mayer Brown to its capital markets team in Charlotte, North Carolina.

RMBS

Vice chair steps up

Walter Investment Management has appointed Denmar Dixon ceo and president, effective from 10 October. He is currently the company's vice chairman, cio and evp.

Dixon succeeds Mark O'Brien, who is retiring from his role as ceo, but will continue as chairman through year-end. The company expects to benefit from his continued service as a director thereafter.

RMBS

SEC raps HLSS over accounts

The US SEC has charged Home Loan Servicing Solutions (HLSS) for making material misstatements about its handling of related party transactions and the value of its primary asset and for having inadequate internal accounting controls. HLSS has agreed to pay a US$1.5m penalty to settle the charges and to cease and desist from disclosure and books and recordkeeping violations.

The SEC says HLSS misstated its handling of transactions with related parties, including Ocwen. HLSS and Ocwen had the same chairman from 2012 to 2014 and although he was required to recuse himself from transactions between the companies, he actually approved several.

HLSS misstated its net income in 2012, 2013 and 1Q14 because the methodology it used to value its primary asset - billions of dollars of rights to mortgage servicing rights that it purchased from Ocwen - did not conform to generally accepted accounting principles (GAAP), the SEC also found. While HLSS said it valued these assets at fair value, the SEC says it did not and that the firm's audit committee failed to adequately review whether the valuation methodology complied with GAAP.

ABS

VW rating actions 'premature'

S&P says it is premature to take any rating actions, including credit watch, on the VW ABS it rates. The agency rates 33 transactions originated by separate finance subsidiaries of VW and backed by loans or leases related to vehicles from the Volkswagen group.

On 24 September, S&P placed its A/A-1 long- and short-term corporate credit ratings on VW on credit watch negative following the firm's announcement that it will take a €6.5bn charge to cover costs related to a global recall of 11 million vehicles that showed discrepancies between diesel test results and actual road use. The agency also placed on credit watch negative its A/A-1 long- and short-term ratings on VW's related captive finance entity subsidiaries, which include Volkswagen Financial Services and Volkswagen Bank.

Of the 33 ABS transactions it currently rates that were originated by VW's finance subsidiaries and backed by loans or leases related to VW group vehicles, six are US transactions, comprising four auto loan, one auto lease and one dealer floorplan deal. The majority of the remaining 27 deals are European auto loan transactions.

"We believe the recent events could ultimately affect the VW ABS transactions in a number of areas: potential decline of the resale value of vehicles backing the transactions; potential dilution of the loan or lease receivables backing the transactions, as a result of vehicle owner claims against VW; and potential increase in the operational risk associated with VW," S&P observes.

The agency notes that its criteria for analysing non-diversified auto dealer floorplan (ADFP) ABS emphasises the related manufacturer's corporate credit rating (CCR). The obligors of a non-diversified ADFP pool are predominantly the franchised dealers, so it believes their financial health largely depends on the financial health of the related manufacturer. However, as noted in the non-diversified ADFP criteria, a downgrade on the manufacturer may not necessarily lead to a downgrade on the classes for the related non-diversified ADFP ABS.

For VW auto loan ABS, where the only exposure to resale values is via recoveries, S&P expects lower resale values to have less of an impact because the obligors are prime borrowers, who are considered to be less likely to default on their obligations. Currently, these transactions are performing within the agency's expectations.

In loan and lease transactions that also show direct or indirect residual value risks, the market value decline assumptions currently applied in those transactions are expected to mitigate these risks. Those transactions deleveraging due to sequential payment structures have also benefitted from the increase in their credit enhancement since closing.

ABS

BPF Spain, Santander partnership affirmed

Fitch says that the partnership between Banque PSA Finance and Santander Consumer Finance has no impact on the ratings of Auto ABS 2012-3. The transaction is secured by Spanish assets originated by BPF Spain.

Spain has now implemented the global cooperation between BPF and SCF, following France and the UK (SCI 3 February). The partnership has been structured through the transfer of BPF Spain's business to PSA Financial Services Spain, a newly incorporated entity controlled by Santander and BPF on a 50/50 basis, which is expected to become consolidated at the level of Santander.

PSA Financial Services has replaced BPF Spain in its role as seller and servicer of the receivables of Auto ABS 2012-3. All the administrative and regulatory tasks and consents were finalised on 2 October.

Fitch believes that these events will not entail any change to the financial conditions of Auto ABS 2012-3. BPF Spain's representations and undertakings have been taken up by PSA Financial Services. Most importantly, the agency expects the underwriting, servicing and recovery procedures to remain unchanged as BPF Spain's IT systems and staffing will remain in place.

ABS

Offshore liquidity risk eyed

TMMCB 10 - a Mexican securitisation backed by offshore vessels - remains highly levered and is increasingly exposed to liquidity risk, according to Fitch. The agency says that the oil sector downturn could exacerbate these risks as asset values and day rates have declined and re-contracting of charter agreements mostly depends on a single off-taker.

TMMCB 10 is currently rated 'HR AA (E) en Revision Especial' by HR Ratings. While Fitch does not rate the transaction, its opinions on the deal are based on public information and are intended to provide transparency to the market.

The transaction securitises cashflows generated by a dynamic pool of charter agreements between subsidiaries of Grupo TMM and various off-takers, the largest one of which is Petroleos Mexicanos (Pemex). The underlying contracts relate to the use of various offshore vessels by the off-takers for specified activities and time periods. Bondholders also benefit from a pledge over these assets through a Fideicomiso de Garantia (guarantee trust).

Based on public information, TMMCB 10's loan-to-value (LTV) ratio was approximately 152.2% in January 2011. As of January 2015, the LTV had increased to 158%, reflecting asset value declines and virtually no debt amortisation.

"These LTVs imply limited credit protection, should bondholders need to liquidate collateral to fully recover principal," Fitch observes.

Pursuant to TMMCB 10's 2014 annual report, the pool of 28 existing assets in the guarantee trust was valued at US$435.4m in January 2015, down from US$565.3m reported in January 2011. Fitch believes the continued oil market slump, coupled with very modest debt amortisation in 1H15 have further swelled LTVs.

Low net cashflows caused the transaction to deplete the contingency reserve to pay the February 2015 coupon and a portion of previously deferred principal and interest on July 2015. While the legal documentation allows for deferral of debt service, the original amortisation schedule permitted 5% amortisation per year.

More than four years into the deal's life, there has been virtually no amortisation. The outstanding balance represents 99.4% of the original balance as of today and the contingency fund has been partially refilled with account receivables.

Intrinsic net cashflows would need to improve for the notes to pay debt service, according to Fitch. But this seems challenging in the short term, as three of the top five assets (the top five assets represented 42.8% of total revenue in 2014) are scheduled for dry-docking in 2015. Also, vessel operational and maintenance expenses appear to be both volatile and relatively high, on average representing 69.3% of monthly revenues in 2014.

According to the transaction documentation, the notes cannot defer interest after November 2015 (the tenth payment date) and the bonds have already deferred a proportion of interest payments twice since closing.

The securitisation remains closely linked to TMM's ability to renew the underlying contracts with Pemex and other off-takers, as the securitised charter agreements mature prior to the bonds. But Fitch notes that the transaction has a good track record with respect to renewing underlying contracts.

Structured Finance

Growing options for European SMEs

New debt market instruments which have been developed over recent years will increase funding flows to European SMEs and mid-caps, says Moody's. This will allow these firms to access more flexible, less expensive financing, potentially through securitisation.

New funding options range from SME bond markets and private debt funds to peer-to-business lending. However, the rating agency notes that bank lending is still crucial and will remain so for the foreseeable future. While the overall volume of debt being channelled through new mechanisms is growing, it remains small.

Challenges remain for smaller SMEs and mid-caps as the minimum bond sizes that most investors expect are typically too large for most SMEs, notes Moody's. The cost of issuing wholesale debt securities can also be a hurdle for smaller companies, while public reporting requirements can be onerous. For many SMEs, bond issuance can represent almost all of their debt, which places them at greater refinancing risk.

SME specific bond markets have developed across Europe, with the German market active since 2009 and now standing at €8.1bn in outstanding bonds. The Italian mini bond market is growing rapidly (€6.2bn outstanding), while the private placement of debt has flourished in the UK and France, which account for 45% and 23%, respectively, of the European total.

Using measures such as new regulations regarding 'financement participatif' in France, and the extension of equity crowdfunding to innovative SMEs in Italy, policy makers have played their role in promoting the use of peer-to-business platforms. The UK has the largest peer-to-peer market in Europe, with a cumulative lending volume of £3.15bn by 2Q15.

The issuance of ABS with underlying SME debt remains low, with high regulatory capital and liquidity requirements weighing on investor interest. However, Moody's does expect securitisations using non-bank originated SME and mid-cap debt to emerge with improved information flow and policy initiatives.

CDS

Ukraine CDS settled

The final price for Ukraine CDS was settled at 80.625. At yesterday's auction, 11 dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the Republic of Ukraine (SCI passim).

CDS

Ukraine auction called

ISDA's EMEA Credit Derivatives Determinations Committee has ruled that a repudiation/moratorium credit event and a failure to pay credit event have occurred in respect of the Republic of Ukraine. An auction will be held in respect of outstanding credit default swaps (CDS) on the entity today (6 October).

Pursuant to the DC meeting statements published last month, the EMEA DC agreed to affect an accelerated auction process if such a credit event occurred (SCI 24 September). Consequently, it is taking preparatory steps so that an auction can be held and representative auction settled transactions can be settled, in each case prior to the deadline set by the Republic of Ukraine for bondholders to participate in the exchange offer and consent solicitation.

CLOs

Negative returns for post-crisis CLOIE

The total amount of CLOs paid down in JPMorgan's Collateralised Loan Obligation Index (CLOIE) since the August rebalance through 30 September was US$1.45bn in par outstanding, US$1.37bn of which comprises pre-crisis bonds. The post-crisis CLOIE added US$7.4bn across 85 tranches at the August rebalance.

The post-crisis index suffered negative total returns in each category during the month, especially at the mezzanine and subordinate levels. The double-B and single-B segments were down by -2.42% and -2.72% respectively.

Following the price losses seen last month, the return for post-crisis single-Bs is now down by -0.63% year to date. However, the return for the overall CLOIE index remains up, at +1.47% year to date.

JPMorgan CLO strategists note that while some tranches of the index remain up, the CLO market is not outperforming broader credit markets as much as it was earlier in the year.

CMBS

CMBS vintage differences grow

There are considerable differences between early US CMBS 2.0 transactions and those rated in 2015, says Fitch. The rating agency continues to observe declining underwriting standards and increasing credit enhancement levels.

Credit enhancement has significantly increased at both triple-A and triple-B minus since 2010. Triple-A credit enhancement has increased from 17.125% in 2010 to 23.625% in 2015, while triple-B minus enhancement has increased over the same time period from 5.125% to 7.875%,

Issuer LTVs of 60%-65% and issuer weighted-average DSCRs of 1.6x-1.8x have remained fairly consistent since 2010. However, Fitch's stressed LTV has increased from 82.6% to 108.9% and Fitch's stressed DSCR has declined from 1.36x to 1.21x.

On average, nearly 77% of the pool in 2015 has stressed LTVs above 100%, compared to 8.1% in 2010. Nearly 23% of the pool in 2015 has stressed DSCRs below 1x, compared to 3.7% in 2010.

Top 10 loan concentration has declined from 61.2% in 2010 to 48.2% in 2015, while the loan count has increased from 38 to 76. There is an increasing concentration of hotel loans and an increase in the number of interest-only loans.

Investment-grade credit option loans comprised approximately 5.5% of the pool in 2010, before becoming less prevalent in 2012 when they comprised only 2.3%. After climbing to 3.3% in 2013, they are now at 4.1%.

CMBS

Limited cap change effect for CMBS

The capitalisation rate increases likely to follow a move by the Federal Reserve to raise interest rates will have little effect on the ratings assigned to new issue CMBS, says Moody's. Among seasoned transactions, recovery rates for specially serviced loans could decline and the percentage of loans unable to refinance at maturity could increase.

Moody's expects the 10-year Treasury rate to rise by two percentage points over the next few years, leading to an increase of one percentage point in the cap rates used to value commercial property. It believes that the cap rate compression which helped drive commercial property prices to new peaks is either at or near its low point for this cycle.

The rating agency takes the cyclical nature of commercial property prices into account because the interest and cap rates in place when a loan is originated may no longer prevail when it reaches maturity. Also, while underwritten values asses collateral at loan origination, Moody's factors in risk when a loan matures.

CMBS

New US property price peak

Central business district (CBD) office was the best-performing segment of Moody's/RCA Commercial Property Price Indices (CPPI) national composite index in the last three months. CBD office prices rose 6.3%, with suburban office prices rising 3%.

The CPPI rose 1.6% in August, led by a 1.8% rise in the core commercial segment. It has now topped its pre-crisis peak on a consumer price index (CPI) adjusted basis, having topped it on a nominal basis back in September 2014 (SCI 7 November 2014). The CPPI is now 14.5% above its pre-crisis peak on a nominal basis and 1.5% above it on a CPI adjusted basis.

Apartment prices now exceed their pre-crisis peak by about 33%. Core commercial property prices are approximately 8% higher than their prior peak.

CMBS

Synthetic CRE note prepped

Scope Ratings has assigned a preliminary triple-B rating to an unusual synthetic securitisation. The €10m Herrenhausen Investment - Compartment IV note represents the 10.9% first-loss exposure to a €97m syndicated portion of a €347m commercial real estate loan.

The loan was issued by a Landesbank, and syndicated with Deutsche Hypothekenbank and another German mortgage lender. It is exposed to the performance of 11 German properties, which Scope describes as having 'good secondary property' quality in 'A' locations. The assets are actively managed by a well-recognised asset manager with 24 years of experience in the German commercial real estate market.

In addition to the loan, each property is financed by individual SPVs with 30.3% paid-in equity providing subordination to the loan. The issuance is expected to close early this month, with a legal final maturity on 31 March 2022.

The rating takes into account the oversight of the asset manager, the SPVs owning each property, Deutsche Hypothekenbank and the other German banks in the loan syndicate. In particular, Scope notes that these banks benefit from veto rights on the quality of new tenants identified by the asset manager, which helps to maintain a stable tenant quality. In addition, upon breach of loan covenants, the banks can exercise cash-trapping rights and have to approve the property SPVs' business plans.

CMBS

FHSL 2006-1 resolution eyed

Both the RPI and interest rate swap providers for the Fairhold Securitisation CMBS are set to exercise their rights to terminate the hedges. A period of lengthy discussion is now expected between the borrower (ultimately the Tchenguiz brothers), bondholders and swap counterparties with a view to a resolution.

At the last reporting date in May, the aggregated mark-to-market of the swaps was -£472m, versus an 'actuarial' valuation of the portfolio of £1.02bn and a combined note balance of £353m, according to Deutsche Bank European securitisation analysts. Neither the underlying nature of the swaps nor how the MTM is split between the RPI and interest rate components is publically disclosed, although Moody's has historically commented that the bulk is via the hedging swaps. The Deutsche Bank analysts note that the distinction is important, as the RPI swap is pari-passu to the class A notes, while the interest rate swap is senior.

A group of noteholders holding between them substantially more than 50% of the class A notes and around 50% of the class Bs formed an Ad Hoc Group in March to promote the interests of noteholders as a whole. The group retained Rothschild as its independent financial adviser and Freshfields Bruckhaus Deringer as its legal adviser.

The analysts point out that indicative pricing for the FHSL 2006-1 class A bonds is currently in the mid-50s, implying that an ultimate loss on the class As is likely - an outcome that they believe is warranted.

CMBS

CMBS pay-offs slide

The percentage of US CMBS loans paying off on their balloon date slid sharply last to 60.4%, according to Trepp, more than 13 points below the August percentage. The rate is also below the 12-month moving average of 67.7%.

By loan count as opposed to balance, 65.3% of loans paid off in September. On this basis, the pay-off rate was above August's level of 61.7%. The 12-month rolling average by loan count is now 68.3%.

CMBS

German multifamily stability expected

German multifamily housing (MFH) transactions should continue their trend of stable to positive collateral performance over the coming quarters, says Fitch. Rental levels have increased while vacancy rates are stable and cost ratios over the last 12 months have been within expectations.

The rating agency expects the MFH sector to also continue to consolidate, following a series of mergers over the last few years, including Deutsche Annington's takeover of Gagfah last year. Fitch also does not expect recent legislation limiting rental increases for re-lettings to reduce achievable property income in its MFH rating analysis.

CMBS

CMBS 2.0/3.0 defeasance tallied

In a review of US CMBS 2.0/3.0 remit reports, Morgan Stanley CMBS strategists find that 75 loans totalling US$1.5bn have prepaid and 155 loans totalling US$3.4bn have defeased, driven by rising property valuations and falling interest rates. An additional 88 loans totalling US$2.2bn have paid off during their open periods or at maturity.

As a result of these prepayments, 19 classes of bonds across 18 deals have paid off in full - the A1s from CFCRE 2011-C1 and 2011-C2, GSMS 2011-GC3 and 2011-GC5, JPMCC 2011-C3, 2011-C4, 2011-C5 and 2012-C6, MSC 2011-C1, 2011-C2 and 2011-C3, WFRBS 2011-C2, 2011-C3 and 2011-C4, DBUBS 2011-LC3A and COMM 2012-CR1 and 2012-LC4, as well as the A1 and A2s from JPMCC 2012-CBX. Another 176 bonds across 174 deals have partially paid off.

Credit enhancement has correspondingly increased across the capital structure, but the impact varies across vintages and deals. For bonds originally rated triple-A, 2011 2.0 and 3.0 deals have seen the greatest increase in weighted average credit enhancement, rising from 22.9% and 32.1% to adjusted figures of 29.5% and 37.6% respectively. Similarly, credit enhancement for BBB+/BBB/BBB- rated bonds from the same vintages has risen from 6.6% and 7% to 8.6% and 8.2%, according to Morgan Stanley figures.

Risk Management

Valuations service offered

Principia Partners has launched an online derivatives portfolio valuation, risk and accounting management platform dubbed pasVal. The offering is a web-based interface and valuations engine that aims to provide complete portfolio reporting without the burden of full-scale system ownership. The monthly subscription service is designed to help portfolio and risk managers quickly value and analyse the most complex subset of their derivatives portfolio, which usually requires intense manual effort.

Risk Management

SIMM utility vendor named

ICE Benchmark Administration (IBA) has been selected to build and operate a crowdsourcing utility for the ISDA Standard Initial Margin Model (SIMM). The crowdsourcing utility is intended to aggregate and compile risk data to enable market participants to implement the ISDA SIMM consistently.

ISDA says that IBA was chosen following an in-depth selection process, which began with a public invitation to tender in July (SCI 2 July). The selection process was run by a committee comprised of ISDA staff and industry participants, active in ISDA's WGMR implementation initiative.

As part of its new responsibilities, IBA will build and run a centralised crowdsourcing solution that is needed to achieve this consistent mapping. The value of crowdsourcing is that parties will use the consensus results instead of their own internal determination of risk buckets and weightings.

The utility will: accept data from participants that are in scope for non-cleared margin rules; analyse data and produce consensus results; provide results reports to users; establish policies and procedures for the utility; and ensure continuity and integrity of the utility and associated data. To maintain the standards of the ISDA SIMM and its application, ISDA will retain an oversight role of the crowdsourcing utility and will work closely with IBA to establish an appropriate governance structure for the utility.

ISDA will also work with IBA and industry participants to define infrastructure needs, processes and controls, with the aim of ensuring the utility is operational ahead of the 1 September 2016 effective date for the implementation of the non-cleared margin rules.

Risk Management

CDS clearing RTS issued

ESMA has issued a draft regulatory technical standard (RTS) for the central clearing of CDS. It defines the types of CDS contracts which will have to be centrally cleared, the types of counterparties covered by the obligation and the dates by which CDS central clearing will become mandatory.

The submission follows a previous RTS on interest rate derivatives developed by ESMA and adopted by the European Commission in August (SCI 10 August). The new rule on index CDS mirrors the overall approach of the previous RTS.

The draft RTS adds the five-year iTraxx Main and iTraxx Crossover untranched indices to the clearing obligation. The European Commission now has three months to endorse ESMA's draft RTS.

RMBS

Lack of action puts RMBS on watch

S&P has placed 22 tranches of 11 European RMBS on creditwatch negative. The move follows various rating actions taken on UK and German banks over the summer.

Among those summer rating actions, ratings were lowered on Barclays and Deutsche Bank, which are involved as counterparties in transactions now placed on creditwatch. The overarching principle of S&P's counterparty criteria is the replacement of a counterparty when the rating on the counterparty falls below a minimum eligible rating.

Where S&P has lowered counterparty ratings below documented triggers, documents typically provide for a range of remedies, such as counterparty replacement or the provision of additional guarantees. The remedy period outlined in S&P's current counterparty criteria is 60 days, with an additional 30 days if a written action plan is provided.

For the ratings placed on creditwatch negative, S&P was presented with a definitive plan to remedy downgrades within an extended 30-day period but that period has now expired without remedies. The rating agency will seek to resolve the placements in the coming weeks, once it has reviewed the transactions in conjunction with any remedy actions.