Contents

Secondary markets

Euro secondary settled

The European securitisation secondary market is continuing in the settled pattern seen of late.

There were no surprises on Friday as a relatively quieter day, though flows continue to improve slowly, saw spreads close broadly unchanged overall. Today looks set to follow a similarly settled pattern especially given the US public holiday.

Peripherals continue to benefit the most from buying interest, but the CMBS and UK non-conforming sectors are picking up too. Meanwhile autos remain stable and the prime sector holds firm.

There are no BWICs on the European schedule for today so far.

Secondary markets

Euro ABS/MBS keeps impetus

Despite a quiet day yesterday thanks to the US holiday, the European ABS/MBS secondary market is still heading in the right direction.

"We're seeing more flows and there's generally more impetus to get things done," says one trader. "Stability in broader markets for the last six or seven days, though they have opened weaker this morning, is bringing people back into our market."

The trader continues: "We're seeing assets across the board being better bid with activity returning to some previously quiet areas. For example, mezz UK non-conforming has been trading for the first time in a very long time."

The BWIC calendar is also building strongly for the remainder of the week, but there is currently just one European ABS/MBS auction on the calendar for today. Due at 14:30 London time it is a €6.25m nine line mixed list comprising: AYTPI III A, BANKP I C, BBVAP 6 B, E-MAC DE06-I B, EMERM 4 C, LEASI 2 C, PTRMO 2006-1 F, TDCAM 3 A2 and TDCAM 4 B.

Only TDCAM 3 A2 has covered with a price on PriceABS in the past three months doing so at 96.75 on 8 October.

Secondary markets

Euro CLOs slip

European CLO secondary spreads are slipping wider as liquidity remains limited.

"We're seeing quite a lot of BWICs, but not much flow business," says one trader. "It's difficult to get client interest at the moment because they're apprehensive about the current price trajectory continuing through to the end of the year."

At the same time, the trader adds: "There are still a lot of account redemptions and that's sustaining the heavy auction supply. I expect BWICs to continue to trade back as there are still no accepted clearing levels, so buyers will continue to underbid previous levels. However, 2.0 single-As and triple-Bs are still in demand."

Meanwhile, 1.0s, which had previously held firm, are now also widening in some parts of the capital stack, though double- and triple-Bs remain resilient, the trader says. "Double- and single-As in particular have moved out, but that's not for fundamental reasons it's more to do with CPRs being so high and causing WALs to shorten quickly. So, without seeing any two-way flows dealers have got fed up with holding them."

Today currently sees four European CLO lists on the BWIC schedule and the bulk of line items are 2.0 double-Bs. The largest auction is first up at 14:30 London time.

The €47.55m 12 line list comprises: AVOCA 11X E, AVOCA 12X E, BABSE 2014-1X E, BABSE 2014-1X F, BABSE 2014-2X E, CGMSE 2013-1X E1, CGMSE 2013-2X D, CORDA 3X F, EGLXY 2013-3X E, HOLPK 1X D, SPAUL 4X D and SPAUL 4X E. Two of the bonds have covered with a price on PriceABS in the past three months - CGMSE 2013-2X D at 95 on 11 September and EGLXY 2013-3X E at 96H on 14 September.

Secondary markets

Euro secondary consolidates

Yesterday was primarily about consolidating recent gains in the European securitisation secondary market, though pockets of activity remain.

"After a few days of market strength, yesterday saw some stabilisation," says one trader. "At the same time, away from BWICs flows reduced again."

However, there continue to be strong pockets of activity. "We again saw activity in autos with DRVON bid in the low-50s, which represents an improvement for VW paper, and French and German autos holding firm overall in the low-40s," the trader says. "Meanwhile, we saw some UK prime sterling paper trade in the Street in a 75 context, which is good but wider than the talk released on the new PERMM deal this morning."

The trader continues: "We're also seeing a pick-up in activity in German multifamily CMBS with GRF paper up 5-10 cents thanks to growing demand from real money. That encourages the belief that the sector is now on a better path having hit the bottom after losing some value recently."

The converse is true of CLOs, which saw the vast majority of the large number of line items on BWIC yesterday DNT as reserves failed to be met. "CLOs are a bit weaker overall and in single- and double-Bs in particular," says the trader. "That's a lot to do with people waiting on the large primary pipeline to give secondary some direction. So far, little is visible but there is an Apollo deal coming soon and that should give some pricing insight."

There are currently five BWICs on the European calendar for today offering a wide range of deal types and jurisdictions. The longest list is a 13 line 59.51m mix of euro and sterling ABS and MBS due at 14:30 London time.

The auction comprises: DECO 2005-C1X D, DECO 8-C2X E, ECLIP 2007-2X C, EMC 4 C, ESAIL 2006-1X C1A, LMS 2 BC, NGATE 2006-1 BB, PARGN 10X A2A, SPIRIT 5.86 12/28/14, SPS 2006-1X C1C, TDAC 4 B, WINDM XIV-X B and WINDM X-X D. Only NGATE 2006-1 BB has covered with a price on PriceABS in the past three months, doing so at 84 on 28 July.

Secondary markets

US CLOs stuck

Despite a hefty BWIC calendar the US CLO secondary market continues to lack direction.

"We're still mainly seeing sideways trading," says one trader. "There's no consensus on future price direction though it feels like we're going wider to flat."

However, the trader adds: "We are seeing some people come in and try to opportunistically add - particularly single-As and triple-Bs - but it's not sufficient to have a real impact. The only place where we're seeing any notable movement is in out of competition bids on equity, which are wider in 2.0 and even 1.0 than last week's levels."

Meanwhile, today sees a large number BWICs due, but the trader suggests there's little behind the spike in selling. "It just looks like people are just putting bonds out to see what will happen, especially given it's slow in primary. The theory goes that when primary is quiet secondary tightens, but there's nothing to indicate that's the case right now."

There are currently 12 lists on the US CLO schedule for today. The majority of line items are mezz from a range of vintages, but the biggest auction involves a seven line $116.28m mix of 1.0 and 2.0 seniors.

The latter comprises: BLACK 2006-1A B, HLA 2014-1A A1, HLA 2014-1A A1, HLA 2014-1A A1, STAND 2007-1X A2L, ZAIS1 2014-1A A1 and ZAIS1 2014-1A A2. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary unchanged

The European securitisation secondary market continues to see light flows and only pockets of activity.

Yesterday saw another day of broadly directionless trading and limited activity away from BWICs. Consequently, spreads across the board were unchanged at the close.

Once again, UK non-conforming was one of the few sectors to see above average activity on the day and pricing levels improved there. At the same time, CMBS and, to a lesser extent, CLOs saw some action on selected names.

There are currently four European BWICs on the schedule for today. They include two mixed odd lot ABS/MBS lists predominantly involving small clips. More substantial are an eight line CLO auction due at 11:00 London time and a four line Dutch RMBS list at 14:30.

The €45.497m CLO list comprises: CADOG 2X B, CELF 2007-1X B, EGLXY 2007-2X B, HARVT 8X B, HARVT III-X B, HARVT V B, HEC 2006-2NX B and JUBIL I-RX B. Only HARVT III-X B has covered with a price on PriceABS in the past three months, last doing so at 98 on 1 October.

The €42.25m Dutch list involves: HERME 12 A, LUNET 2013-1 A2, PHEHY 2013-1 A2 and SAEC 12 A2. Only LUNET 2013-1 A2 has covered with a price on PriceABS in the past three months, last doing so at 102.43 on 22 September.

In addition, there is an Italian OWIC due at 14:00. It consists of: BERAB 2011-1 A1, BERAB 2012-2 A1, BERAB 2012-2 A2, BERAB 3 A, BERCR 8 A and BESME 1 A1X.

Secondary markets

US RMBS turns positive

The US non-agency RMBS secondary market has taken a turn for the positive.

"It's been a relatively busy week despite the holiday on Monday and yesterday's concerns over a China slowdown," says one trader. "Indeed, yesterday morning saw a 44 line $589m list and all the bonds traded, which is a very positive sign for the market."

The positive tone has fed through into today with more than $1.3bn in for the bid across over 20 lists, many from hedge funds profit taking. "Sellers are taking advantage of the reduction in risk perception, though that remains fragile and subject to daily reassessment, and it seems like real money is buying," the trader says.

Equally, the Countrywide IRS settlement has also helped. "It's what everyone expected and is already priced in, so in that sense it's a non-event," explains the trader. "But it also means we're done with the issue now and other settlements will hopefully go through more easily, which can only improve prospects for the RMBS market."

At the same time, the trader adds: "High yield has tightened a little and the REOs we're seeing from BWICs are around price talk, so that's positive too and means that paper in general is holding up. That said, attention is focused around high quality, high dollar bonds, the more challenging stuff is still harder to trade."

Structured Finance

SCI Start the Week - 12 October

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

Pipeline
ABS accounted for the majority of transactions joining the pipeline last week, including a number of esoteric deals. Additionally, a pair apiece of CMBS and RMBS were announced, as well as a European CLO.

The ABS comprised: US$376m CHAI 2015-PM2, US$799m Capital Auto Receivables Asset Trust 2015-4, US$300m Exeter Automobile Receivables Trust 2015-3, €150m FADE Series 21, US$160.4m Purchasing Power Funding 2015-A, US$794.12m Santander Drive Auto Receivables Trust 2015-5, US$250m Sierra Timeshare 2015-3 and US$985.3m Utility Debt Securitization Authority Restructuring Bonds Series 2015. The US$252m Colony American Finance 2015-1 and Permanent 2015-1 accounted for the RMBS, while US$848.4m GSMS 2015-GC34 and US$1.1bn JPMBB 2015-C32 accounted for the CMBS. Finally, €300m Cairn CLO III rounded out the new entrants to the pipeline.

Pricings
A mixed bag of securitisations priced last week, with auto ABS the dominant asset class. A rare catastrophe bond was also issued.

The auto ABS prints consisted of: US$381m DT Auto Owner Trust 2015-3, US$1bn GMALT 2015-3, US$1.18bn Nissan Auto Receivables Owner Trust 2015-C, US$1bn World Omni Auto Receivables Trust 2015-B, US$350m Westlake Automobile Receivables Trust 2015-3 and US$1bn BMW Vehicle Lease Trust 2015-2. The ILS was US$200m PennUnion Re Series 2015-1.

The US$650m BBCMS Trust 2015-STP, US$840m FREMF 2015-KS03, US$500m JPMCC 2015-UES and US$1.2bn MSBAM 2015-C25 accounted for the CMBS pricings, while US$450m WinWater Mortgage Loan Trust 2015-5 was the sole RMBS issuance. In terms of CLOs, US$818m Atrium XII, US$409m Eaton Vance CLO 2015-1 and US$508m OCP 2015-10 printed.

Editor's picks
Under pressure? 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...
Growing pipeline: A heavy European securitisation pipeline is pushing spreads wider, enticing investors to pick up cheap paper. Nevertheless, calls remain for the ECB to extend its buying mandate to a more diversified pool of ABS across a broader range of countries...
CMBS ruling logic questioned: A legal ruling has had to fill in the gaps in documentation for yet another pre-crisis European 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...
US CLOs suffer: The US CLO secondary market continues to suffer from a lack of liquidity for a variety of reasons. To some extent, it is being driven by bank regulation, while further down the capital stack there has also been an absence of the fast money normally seen in the area...

Deal news
• 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.
• 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.
• TMMCB 10 - a Mexican securitisation backed by offshore vessels - remains highly levered and is increasingly exposed to liquidity risk. 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.

Regulatory update
• ESMA has issued a draft regulatory technical standard 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 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.

Deals added to the SCI New Issuance database last week:
Agate Bay Mortgage Trust 2015-6; American Credit Acceptance Receivables Trust 2015-3; Avoca CLO XV; BBCMS 2015-MSQ; COMM 2015-CCRE26; Discover Card Execution Note Trust 2015-3; Fortress Credit BSL III; FREMF 2015-KF10; FREMF 2015-KS03; FRESB 2015-SB3; FRESB 2015-SB4; Hertz Vehicle Financing II Series 2015-2; Hertz Vehicle Financing II Series 2015-3; Hypenn RMBS IV; Idol 2015-1 Trust; JFIN CLO 2015-II; JPMCC 2015-SGP; MSBAM 2015-C25; Octagon Investment Partners XXV; PennUnion Re series 2015-1; Rongteng Individual Auto Mortgage-Backed Securitization 2015-2; STACR 2015-HQA1; Towd Point Mortgage Trust 2015-4; WFCM 2015-LC22; WFCM 2015-NXS3.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; BSCMS 2006-PW13; CGCMT 2008-C7; COMM 2013-CR12; CSFB 2005-C5; CSMC 2006-C5; DBUBS 2011-LC2A; DECO 2006-C3; DECO 2007-E6; ECLIP 2006-2; ECLIP 2006-3; ECLIP 2007-2; FHSL 2006-1; GCCFC 2007-GG9; GSMS 2014-GC26; JPMBB 2014-C19; JPMCC 2007-CB18; JPMCC 2007-CIBC20; JPMCC 2007-LD12; MLMT 2008-C1; MSC 2012-C4; TITN 2006-3; TITN 2006-5; TITN 2007-2; TITN 2007-2, TITN 2006-2, TITN 2006-1 & TITN 2007-CT1; UBSBB 2013-C6; WBCMT 2007-C30; WFRBS 2013-C11; WFRBS 2014-C23; WINDM VII; WINDM X; WINDM XIV.

Structured Finance

International ABS issuance surging

The international ABS markets have seen the highest issuance volumes in the first three quarters of this year than any post-crisis period, according to JPMorgan European securitisation analysts. Issuance hit €67.8bn at the close of 3Q15, approximately 18% higher than the average volume over the past five years.

During 3Q15 only, €21.5bn in bonds were sold to investors, some 5% and 18% higher than the same period in 2014 and 2013 respectively. This contrasts with €44.3bn of bonds flowing into investor hands as at the close of 1H15, which was itself 20% higher than 1H14 volumes.

Although there has been a pick-up in primary market activity in 2015 in absolute terms, the jurisdictional share of the eurozone and non-eurozone areas remain broadly unchanged. At the end of  3Q15, distributed eurozone securitised paper volume totalled €28.3bn, or 42% of the entire primary market issuance universe. In comparison, distributed paper totalled €23.4bn at a similar point last year, prior to the ECB's ABSPP coming into operation.

Nonetheless, the JPMorgan analysts explain that eurozone issuers have been latecomers in the primary arena this year, rising from a share of 26% of volumes in 1Q15 to 52% and 50% in the following two quarters respectively. Non-eurozone Europe and Australian shares of the primary pie remain broadly unchanged versus 2014, at 33% and 26% respectively.

Australian RMBS accounts for one-fifth of the primary market issuance volume, at €13.9bn. This is closely followed by UK RMBS at 19% - or €12.8bn-equivalent year to date - which is up from the sector's15% share (€8.9bn) at a similar point last year. Within this category, buy-to-let and non-conforming deals make up 47% of volume, previously unseen in the post-crisis era. German auto ABS ranks third at 16%, with twice the distributed volume compared to Dutch RMBS in fourth.

JA

RMBS

'Unique' SFR parity feature debuts

Colony American Finance's (CAF) latest deal is the first single-family rental (SFR) transaction to include a parity feature, which accelerates principal payments under moderate-to-high collateral losses. Moody's says that CAF 2015-1's unique structural feature helps provide additional protection to senior bonds.

The feature, tested for class A through class E bonds, is effective whenever the aggregate outstanding par value of the bond and the bonds senior to it exceed the outstanding loan amount after the collateral pool suffers losses. If effective, it diverts interest payments due to junior bonds toward the repayment of senior bond principal.

Moody's explains that the quicker repayment of principal to the senior bonds makes them more resistant to future collateral losses. The transaction's accelerated principal payments, depending on the timing of collateral losses, can provide the class As with the ability to sustain an additional 2% to 5% of collateral losses than they would without the parity feature.

Unlike other SFR transactions, CAF 2015-1 does not write down subordinate bond balances when they become under-collateralised as the securitised loan pool realises losses. Instead, it pays down senior bond principal with proceeds that would otherwise have gone to junior bond interest until the outstanding bond aggregate balance ceases to exceed the loans' balance.

Moody's says that the size of the credit enhancement benefit for the senior bond depends not only on the parity feature itself, but also on other structural features, the loan terms and the quality of the collateral. A similar feature could, therefore, provide another transaction with a different credit enhancement benefit.

The transaction's lack of loss allocation allows the loan seller CAF Sub REIT, and its subsidiary that holds the junior-most bond, to take advantage of the REIT's tax-exempt status. As a REIT, the seller's income is exempt from taxation as long as it distributes 90% of its annual income to its shareholders.

If the transaction allocated losses as they were realised on the collateral, losses would eat into the REIT's income without an offsetting decrease in its tax liability. Under the parity structure, any outstanding bonds do not realise any collateral losses until their final maturity.

JA

RMBS

'Swapless' Belgian RMBS prepped

Belfius Bank is marketing Penates 5, the first Belgian RMBS to be publicly placed since the financial crisis. The structure is similar to the swapless Arena NHG and Dutch Residential Mortgage Portfolio transactions seen in the Netherlands (SCI 20 August 2014).

It appears that only mortgage loans with fixed rates until maturity will be included in the Penates 5 pool. Rabobank asset-backed research analysts suggest that this negates the strict Belgian mortgage law for interest-rate resets, although it also means that in a rising rates environment, the gap between the mortgage interest payments and floating-rate coupon payments could grow.

In order to mitigate this risk, the structure will make use of an interest rate cap agreement, which pays any excess over the three-month Euribor strike rate of 3.5% until the first optional repayment date of November 2020. The counterparty is Belfius Bank itself, with BNP Paribas acting as stand-by provider.

"Similar to the swapless Dutch RMBS transactions of Arena NHG and DRMP, there are quite strong incentives embedded to call the deal at the FORD," the Rabobank analysts observe.

WALs are calculated on a CPR of 5%. According to the marketing material for the transaction, actual CPRs in the Belfius mortgage portfolio are much higher - even exceeding 45% in 2014 - and are mainly driven by the low rates environment and low maximum prepayment penalties (three months of interest payments).

But as Belfius mainly includes low coupon mortgages (average of 2.8%) with a short seasoning (average of 9.9 months) in the pool, the lender argues that a 5% CPR assumption is warranted. While this could be true, the analysts indicate that it could also be based on the implicit assumption that Belgian mortgage rates will no longer fall.

Rated by Fitch and Moody's, the deal comprises triple-A rated class A1 and A2 notes, as well as unrated class Bs and Cs. Tranche sizes are to be determined, but the collateral pool is believed to be around €1.1bn.

Together with Belfius, lead managers for the transaction are ABN Amro, BNP Paribas, RBS and Santander.

CS

Structured Finance

Cross-asset conviction

Renaud Champion, head of credit strategies for La Française Global Investment Solutions, answers SCI's questions

Q: How and when did La Française Global Investment Solutions (LFGIS) become involved in the securitisation market?
A: LFGIS is the solutions business line of the La Française Group. LFGIS was established in late 2012 and is 35% owned by its founders - Sofiene Haj Taieb and Arnaud Sarfati - and key personnel; La Française is the majority shareholder. The aim was to leverage the founders' investment bank expertise: other banks were exiting the structured products business and La Française saw this as an opportunity to step in and replicate what Sofiène and Arnaud were previously doing at SG - structuring products and distributing them to clients.

LFGIS' asset management business has three parts: a cross-asset absolute return unit, focused on arbitrage strategies within an enhanced risk premia framework and with around €190m AUM; a dedicated funds/solutions unit, where we try to resolve various client issues, which has €1.2bn AUM; and a credit opportunity strategy, which I run. The credit strategy started in June 2013 and has grown from €50m seed capital to €260m AUM.

The main conviction of our credit approach is that credit markets are undergoing a normalisation process and since July 2012 have been transitioning from a systemic regime to an idiosyncratic regime. This normalisation has seen many big players disappear from the market and regulations become increasingly stringent.

Consequently, we're seeing dislocations between investment grade and high yield and within high yield between loans and bonds. Credit curves and capital structures have also become too steep - implying that there is too much value in the senior and mezzanine tranches, whereas the first-loss piece is overcrowded, and that the long end of credit is cheap relative to the short end.

We view everything in terms of tranches and like to move up and down the capital structure to create value.

Q: What are your key areas of focus today?
A: To express our convictions, we tend to build major investment themes around our main bets. One of these bets is that leveraged loans are better than bonds and CDS in the high yield arena.

Given that we're transitioning towards an idiosyncratic regime, we like both US and European mezzanine CLO tranches because they provide protection against idiosyncratic risk. Buying mezz CLO tranches at a discount means that with higher prepayment rates, there is a quicker pull to par.

At the same time, we're short the Markit Crossover index. From a technicals perspective, the index is tight to its CDS constituents and the cash market.

We're confident that where we are in the cycle resembles the 2005-2007 cycle, so we're overall net long. But being long loans through CLOs and short CDS means we're protected against shocks while being positively convex to loan prepayments.

We've had this conviction for two years and initially purchased CLO 1.0 paper, but a clear divergence between the 1.0 and 2.0 segments emerged last year. The former lost most of its convexity and the latter became more attractive, yielding a 250bp pick-up at the double-B level, for instance.

The cheapening was driven by fundamental concerns about the energy sector: the US high yield bond market has 15%-20% exposure to energy names. For CLO collateral, the exposure is more like 4% and the fear appears to be overdone here. We're comfortable at the mezz level that shocks can be absorbed over time.

The market has also been subjected to technical pressure from risk retention rules, with US CLO managers frontloading issuance in 2014, which weighed on spreads. By end-2014, we felt comfortable that the widening would stop.

IRRs dropped because liabilities had widened too much and with arbitrage disappearing, this would constrain supply and thus spreads would rally again. Hence we moved our portfolio to CLO 2.0 bonds. Spreads in Europe followed those of the US, so we bought across both markets.

We also love financials, which suffered significantly in 2008-2009. But banks have become much safer since then: they have better quality own funds and are more tightly regulated, yet still trade much wider than non-financials. This dislocation is slowly normalising at the same pace that banks delever.

Our view on financials has changed over the last two years. Initially we saw value higher up in the capital stack and bought long-dated covered bonds from peripheral issuers.

We viewed them as homogenous to Spanish RMBS front-pay tranches, but with greater convexity. Covered bonds had 15- to 20-year durations and mid-70s cash prices, and have since traded up by 50 points due to improvements in Spain's residential market, banks and government bonds. The ECB's CBPP3 triggered the last leg of the rally and covered bonds began trading inside Spanish government bonds, which prompted us to sell the whole bucket.

Meanwhile, hybrid financials dropped by 10-15 points and were cheap by end-2014. The risk of noise from the ECB's AQR and stress tests was behind us, so we moved into hybrid financials instead and the carry remains - they still trade in the high-90s with a 7% or 8% coupon.

Our third big bet is around default correlation, which increased significantly during 2008-2009 and is yet to normalise. The upper part of the capital stack remains very attractive as there is no natural buyer of super senior risk.

We like taking risk in mezz and senior index tranches and buying protection on the underlying names. This trade should make money if idiosyncratic shocks rise - and they are finally emerging.

The preponderance of hedge funds in equity tranches has caused correlation to remain high, but they will begin unwinding their positions soon to avoid defaults popping up and losses crystallising. We also expect more buyers of super senior risk to emerge over time, as the cost of leverage cheapens.

Our fourth and final bet is more plain vanilla: given steep credit curves, five-year forwards are attractive, so flatteners make sense and allow us to be jump-to-default positive. Usually when there is a big shock in credit, curves invert and the five-year blows out. But because we're buying more protection than we're selling, the position should make money if there are defaults.

This strategy means that we're neutral to curve shifts, which mitigates the potential pain of being long-biased. It's essentially a zero-cost hedge for the entire portfolio, albeit we lose some money if spreads leak out slowly.

Q: How do you differentiate yourself from your competitors?
A: We tend to be driven by macro investment themes and favour big convictions, which can then be refined to allow us to drill down to individual security selection. For example, with CLOs, we tend to pick collateral managers that are debt-friendly, then look at structural features and choose deals that have shorter reinvestment periods.

We're more fundamental credit-driven and asset agnostic than pure structured credit shops. We screen the entire credit market, which allows the portfolio to be repositioned to find value. Whereas specialists concentrate on a single area, we offer cross-asset expertise and can allocate risk efficiently, which is where we add value.

To achieve this, our portfolio managers have complementary skills. Stéphanie Ferrieu has expertise in financials, ABS and leveraged loans; Michael Hattab-Maruani has a quant and credit derivatives background; and I have a broad credit background.

Obviously there are areas that we don't cover, such as emerging markets, so we don't trade EM. But we could recruit someone with EM experience, if we were convinced that the sector was worth moving into. The plan is to broaden our reach, but we're not in any hurry to do so.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: The third quarter was turbulent, even though the CLO market tends to be more resilient than the broader credit market as there is less trading on sentiment. The US is ahead of Europe in the cycle, but this summer Europe finally imported idiosyncratic risk.

It began with energy and emerging market names and morphed into pure idiosyncratic risk with VW. Consequently, we decided to increase our bet on correlation, as dispersion is finally materialising - although prices are yet to catch up fully.

Q: What are your plans for the future?
A: We're currently looking at whether to allocate more to Trups CDOs. We like the convexity they offer, as well as the fact that they're de-correlated from the rest of the market and have their own dynamic. But the sector is less liquid, so it is unlikely to form a major investment theme.

We're also looking at hybrid corporates, which have seen 10- to 30-point price drops over the last 2-3 months. Previously they were too expensive in terms of spread differential.

Finally, we're planning to launch a UCITS fund this quarter, with €50m in seed capital plus additional subscriptions expected from early-bird investors. It will have a similar strategy to our credit opportunity programme, but will offer weekly liquidity and focus on relative value rather than long-biased investments. With a target return of 6%-8%, the aim is to broaden our investor base - there is tremendous demand for such offerings.

CS

Note: All figures are as of 31 August 2015.

Structured Finance

Rating agency expands in Italy

Scope Ratings has hired Roberto De Santis to help build up its presence in Italy. As the agency's new official 'Representative for Italy', he will manage all client relationships across Scope's four rating segments: corporates, banks, structured finance and alternative investments.

The agency's avoidance of US-centric perspectives is said to be of particular interest to Italian issuers, as it does not mechanistically cap ratings of banks and corporates by the rating of their respective domicile. This should allow Scope to more precisely incorporate the issuer's unique features in the rating.

De Santis has over 35 years of experience in the capital markets - most recently as director for client business management at S&P in Italy. Before that, he was ING Bank's head of corporate relationships for wholesale banking, and also held diverse roles including head of structured finance at Banca Intesa, New York. He also spent more than ten years at the Fiat Group in roles such as head of capital markets, international treasurer and head of group investor relations.

Structured Finance

Finance practice bolstered

Thomas Jones has joined King & Spalding as partner in the firm's financial institutions and finance practices. He specialises in structured finance and derivatives, representing banks and financial institutions on a range of structured products.

Jones arrives from Allen & Overy, where he was a partner. His experience spans monetisation transactions and complex transactions involving commodities, as well as funding, hedging and acquisition finance. Jones' practice has also included coverage of structured finance in Asia.

Structured Finance

TICC responds to 'misrepresentations'

TICC Capital has sent a letter to stockholders urging them to support the agreement - at its special meeting on 27 October - which will allow for an affiliate of Benefit Street Partners to become TICC's new investment adviser (SCI 8 October). The letter also lists a number of 'misrepresentations' made by rival bidder TPG Specialty Holdings (TPG BDC).

TICC says that claims of the company's distributions being improperly inflated are false. The company explains that it is paying distributions consistent with what is required by the IRS.

"Under IRS rules, we must pay out a minimum 90% of our taxable income to maintain our favourable tax status, and 98% of taxable income to avoid a 4% excise tax on the undistributed portion above 90%," the letter explains. "As we have discussed previously, TICC's GAAP income has recently been lower than its core net investment income, due to differences between tax and GAAP accounting policies for CLO investments. Our experience is that our cashflows have historically represented a reasonable estimate of our total taxable earnings and, as such, are included in our measurement of 'core' net investment income."

TICC's core net investment income in 1H15 has exceeded its distributions for that period. The company says that this complication is part of the reason that the CLO asset class is not a great fit for BDCs and reducing TICC's CLO exposure is part of BSP's transition plan.

The letter also refutes claims by TPG BDC that TICC has made promises for future distributions. The letter says that under the BSP  agreement, TICC stockholders would experience no immediate reduction to current distributions, while under the TPG BDC proposal TICC stockholders are expected to experience an immediate 42% reduction in current distributions.

"Based on TPG BDC's proposal, your annual per share distributions would decrease from US$1.16 to 67 cents," the letter adds. "Going forward, while we can't predict long-term distributions and never would, we would expect near-term distributions to be superior to distributions under the TPG BDC proposal based simply on the expected pro forma profile of our portfolio and the lower fees that are guaranteed with the BSP investment advisory agreement."

The letter also says that TICC's distribution to net asset value ratio of 13.5% is 37% higher than TPG BDC's ratio of 9.8%.

Structured Finance

TICC presents BSP case

TICC Capital has issued a presentation that seeks to clarify facts on how TPG Specialty Lending's (TPG BDC) incentive fee structure and stockholder catch-up provision would harm TICC stockholders. The presentation is an additional response by TICC in the continued saga surrounding the anticipated sale of the company (SCI passim).

The presentation includes a number of 'key' issues, including the argument that TICC's fee structure under the agreement with Benefit Street Partners is better for stockholders than TPG BDC's. Among its justifications are the higher hurdle rate level with BSP - at 6.65% compared to the 6% of TPG BDC's - which TICC says will require better performance before the manager is paid.

The presentation also puts forward the argument that TICC's floating rate fee structure would afford more value to stockholders in a rising rate environment. Also included are reasons why TPG BDC's catch-up provision will harm stockholders and how the agreement with BSP would provide one of the 'lowest expense structures' in the BDC sector.

Structured Finance

Supply chain finance team added

Mitsubishi UFJ Financial Group has recruited four new members to its investment banking & markets team - Mona Ghazzaoui, Thomas Educate, Gina Camaiani and Sheryl Broca. The move is part of the firm's ongoing effort to organically grow with diversified investment banking and markets products in the Americas.

Ghazzaoui joins MUFG as md of North American supply chain finance, reporting to securitisation head Akira Kawashima and located in Montreal, Canada. She has over 25 years of trade finance and supply chain finance expertise, and was most recently executive director and head of supply chain finance at RBS.

Educate also joins the bank as an md, with over 25 years of experience in securitisation, asset-based lending and supply chain finance. He will be based in Chicago and was most recently head of structured portfolio management at RBS.

Camaiani and Broca will be located in Montreal.

Insurance-linked securities

ILS pro promoted

Adam Beatty has been promoted to md of Nephila Advisors UK, in recognition of what the firm describes as his "outstanding contributions" since joining in January 2013. Based in London, he was initially recruited as business development director, with a multi-faceted role that included responsibility for administrating Nephila's Lloyd's syndicate platform. In January 2014, he assumed the role of active underwriter for Syndicate 2357.

Beatty has 21 years' experience of reinsurance markets and was previously an md with Willis Capital Markets & Advisory, based in New York and London. He focused on projects, such as catastrophe bond structuring and origination, and transaction structuring and capital raising for the catastrophe risk asset class.

Insurance-linked securities

ILS fund gains manager

Pioneer Investments has added Chin Liu as the fourth portfolio manager of its Pioneer Diversified High Income Trust, joining Andrew Feltus, Jonathan Sharkey and Charles Melchreit. Liu is vp for Pioneer, managing event-linked bonds and ILS across multiple fixed income portfolios. His duties in ILS include risk modelling, portfolio construction and security selection.

Liu is also portfolio manager of the Pioneer ILS Interval Fund. Prior to joining Pioneer, he worked as a quantitative equity analyst for Numeric Investors.

Insurance-linked securities

ILS team beefs up

Hiscox Re's ILS operation, Kiskadee Investment Managers, has announced two senior appointments. Andrew Hughes will assume the role of ILS chief compliance officer and general counsel, while Matthew Swann has been appointed to the position of portfolio manager. Director of ILS - Michael Jedraszak - has also been named cio of Hiscox Re Insurance Linked Strategies.

Hughes joins Kiskadee from QIC, where he was senior legal counsel advising on a broad range of funds and investments (both buy-side and sell-side) across multiple alternative asset classes. He is a lawyer with 10 years' post-qualification experience and has also worked as a senior associate within the structured finance and securitisation team at King & Wood Mallesons.

Hughes will be based in Bermuda, reporting to coo of ILS, Richard Lowther. He will advise on legal and product structuring and take full charge of the ILS compliance function.

Swann is transferring from Hiscox Re's London office, where he held the role of senior non-marine treaty underwriter. Swann joined Hiscox in 2007 as a catastrophe modelling analyst after completing a PhD in climate prediction. He will be based in Bermuda and will also report to Lowther.

Insurance-linked securities

James Alpha taps fund managers

John Brynjolfsson and Tim Alford have joined James Alpha Advisors, in order to continue serving as portfolio managers of the James Alpha Global Enhanced Real Return Fund (GRRIX). Their moves follow the winding down of Armored Wolf - the company founded by Brynjolfsson - which includes the transition of the corporate and operational aspects of the GRRIX fund to James Alpha. The fund includes an allocation to catastrophe bonds and ILS. 

Before founding Armored Wolf, Brynjolfsson was md at PIMCO, specialising in asset allocation, risk management, global macro investing and managing alternative real assets, including event-linked catastrophe bonds.

Alford was previously md at Armored Wolf. Prior to that, he was portfolio manager, head trader and a member of the investment committee at Clarium Capital Management. His areas of expertise include risk management, securities trading and investing across multiple asset classes.

Insurance-linked securities

Longevity swaps consultant hired

Murray Blake has joined Lane Clark & Peacock as a consultant and member of its pension de-risking practice. He specialises in advising trustees and companies in understanding and implementing risk-reduction strategies through the use of buy-ins, buy-outs and longevity swaps.

Blake arrives from Pacific Life, where he worked in structuring and commercial negotiations for new longevity swap contracts, treaty implementations and new marketing initiatives. He has also been a consultant for Towers Watson and was a member of its longevity research group.

ABS

Navient data welcomed

Navient last week released a data package detailing the performance of its FFELP student loan portfolio, with the aim of providing more transparency on the performance trends for loans in deferment, forbearance and income-driven repayment (IDR) plans, as well as default and prepayment history. Barclays ABS analysts note that the data broadly shows that deferment and forbearance rates rose during the Great Recession but are now declining, while the percentage of FFELP loans in IDR has grown substantially since 2009, when the income-based repayment (IBR) plan was introduced.

"The data package and presentation go a long way in helping market participants better understand Navient's FFELP portfolio. That said, Navient analysed loan performance by vintage year, not by each securitisation trust's collateral pool, and since each securitisation trust contains loans from multiple vintages, it would be difficult to apply the company's analysis directly when modelling ABS collateral performance," they add.

Approximately 12% of Stafford loan borrowers and 10% of consolidated loan borrowers are enrolled in some form of IDR, up from below 1% in 2009, according to Navient's trust performance data. Although deferment rates for both loan types and forbearance rates for consolidation loans have declined since the Great Recession, forbearance rates on Stafford loans have increased in recent years.

However, Navient points out that the rise in Stafford loan forbearance rates has been driven mostly by the use of short-term forbearances for borrowers applying to enter the IBR programme. When this type is excluded from the calculation, Stafford loan forbearance rates have actually declined.

Most deferment types - other than those for college or military service - are limited to three years of cumulative usage, while Navient's policy generally limits cumulative discretionary forbearance usage to five years.

Meanwhile, if borrowers have used IBR, they may be eligible to have 100% of their outstanding principal and interest forgiven. Forgiveness is granted if the borrower has made 300 qualifying payments and 25 years has passed since the qualification date, at which point the loan is forgiven and the servicer receives 100% of principal and accrued interest from the Department of Education. This is most likely to occur for borrowers with student loan debt that exceeds income, according to the Barclays analysts.

They add that it is unclear if the rating agencies will incorporate deferment and forbearance usage limits or IBR loan forgiveness into their analysis. "Moody's makes no mention of these factors in its request for comment, but given IBR loan forgiveness and policy limits on deferment and forbearance usage, Navient rightfully points out in its presentation that every loan has an end point. As such, Moody's proposal to hold a portion of loans in deferment and forbearance status for the life of the transaction when modelling cashflows seems mistaken."

ABS

Tariff deficits near sustainability

Fitch reports that Spain and Portugal are within sight of restoring financial sustainability to their electricity systems as measures to cut costs and increase revenues bear fruit. However, the agency believes that adverse macroeconomic trends and legal intervention are the main risks to sustainability.

Electricity system tariff deficits (TD) are expected to reach the sustainability threshold of 100% of annual regulated revenues in 2019 in Spain and 2018 in Portugal. This ratio is a key performance indicator in Fitch's TD securitisation ratings.

The agency's base case forecast has Spain's TD stock continuing to fall from its €28.8bn peak at end-2013 to €19bn at end-2018. Portugal's TD stock is expected to stabilise at €5.3bn this year, before falling to €3.6bn over the next three years.

Spanish and Portuguese policymakers have attempted to tackle the cost/revenue imbalances with a number of corrective measures. This has included the gradual removal of regulated consumer tariffs and reforming subsidies for renewables investments.

As a result, regulated revenues from end-2014 are expected to have exceeded regulated costs in Spain for the first time since 2005, while Portugal could experience the same scenario this year too. Fitch notes that market liberalisation should keep the systems in equilibrium, so that higher-than-expected energy costs will not result in large increases in debt.

With regard to regulatory and legal intervention risk, the threat to Spain remains the most significant. The Spanish regulator is less independent than its Portuguese counterpart and its ability to set access tariff adjustments is limited and may be subject to greater political interference. Some investors in Spanish renewable plants are also mounting legal challenges to retroactive cuts to remuneration for special-regime generators.

ABS

Auto ABS approach updated

S&P has published a new approach for rating European auto loan ABS and assessing the obligor default analysis for auto lease ABS. The criteria supersedes the agency's previous broad approach for rating European consumer finance deals.

The new criteria also replaces S&P's rating approach for leasing securitisations in Italy. This is in relation to obligor default risk analysis when rating Italian ABS backed by diversified pools of auto leases that were originated using underwriting standards comparable with those applied to consumer auto loans.

The new criteria applies to all new and existing European ABS backed by diversified pools of auto leases that were originated under the same circumstances. It includes prepayment rate assumptions, as well as weighted average coupon compression and purchase above par stress assumptions.

S&P says that these stress assumptions apply where the obligors have the right to prepay without fully compensating for the loss of future interest collections. It reflects the agency's view that a significant increase in prepayments is unlikely in situations where the obligors only have the right to prepay when fully compensating for the loss of future interest collections.

Structured Finance

Peripheral calls to gain pace?

The THEME 2 RMBS (with a mortgage factor of 7%) was called and the final distribution received this week, following last month's UCI 5 and 6 clean-up calls. Deutsche Bank European securitisation analysts note that the move underlines their view that peripheral RMBS calls are likely to gain pace.

Although reserve fund size, the cleanness of the pool and the cost of available funding alternatives all need to be examined, they believe that the BCJAF 3 A (17%), TDAC 3 A (15%) and TDCAM 3 A2 (16%) tranches - all with low factors - are strong candidates for near-term calls. Furthermore, these bonds are actionable, given their recent appearances on trading runs.

A number of other Spanish RMBS are approaching the 10% clean-up level, including BFTH 3, TDA 14 and UCI 8.

Structured Finance

TRS programme debuts

Goldman Sachs and Sumitomo Mitsui Trust Bank are marketing the first series of notes from an unusual total return swap (TRS) programme. The US$1bn SumitG Guaranteed Secured Obligation Issuer series 2015-1 has been assigned a preliminary double-A plus rating by S&P.

SumitG is an SPE established in Ireland. At closing, it will issue the series 2015-1 notes and enter into two TRS agreements - one with Goldman Sachs and another with Sumitomo Mitsui - to purchase collateral assets, subject to eligibility criteria. The assets - initially expected to be RMBS - can be added or removed on an ongoing basis, in line with portfolio profile tests.

For each series issued, 55% of the net issuance proceeds will be used to purchase assets pursuant to the Sumitomo TRS agreement and 45% will be used to purchase assets pursuant to the Goldman TRS agreement. In return, the TRS counterparties will match the relevant proportion of the issuer's payment obligations for the relevant series of notes.

The TRS counterparties will pay for fees relating to the establishment and creation of the credit swap agreement collateral account and custody account, as well as any extraordinary fees and expenses that might arise. At the same time, the issuer will on an ongoing basis pay Sumitomo a guarantee fee, funded by Goldman through its TRS agreement with the issuer.

The issuer may purchase assets that are denominated in any currency. The collateral may represent an obligation of one or more obligors in any jurisdiction, which have a stated maturity before or after the final maturity of the series 2015-1 notes (November 2020).

CDS

Sovereign CDS clearing expanded

ICE Clear Credit has introduced CDS clearing for three more sovereign single names. The addition of France, Germany and the UK increases the number of sovereign names clearing on the platform to 21.

Across ICE Clear Credit and ICE Clear Europe, notional volume traded in sovereign CDS is up 23% year over year, as of 30 September. ICE has also introduced 43 new corporate single names for clearing during 2015.

"During 2015, we've more than doubled the number of buyside participants who clear single names and we've seen a 70% increase in volume over last year," says Stan Ivanov, ICE Clear Credit president.

CLOs

Cairn restructuring completed

The restructuring of the first European CLO 2.0 was completed last week (SCI 16 September). Cairn CLO III has been 'Volckerised' via a loan-only exemption and extended to enable the non-call and reinvestment periods to end two and four years after settlement respectively. Two new mezzanine tranches were also added to the capital structure - €22m double-B rated class E and €8m single-B rated class F notes - while the size of the class D notes was increased by €5.5m.

While the coupon of the triple-A tranche was maintained at 140bp, the spreads on the B, C and D tranches were repriced 15bp-25bp lower. Finally, Cairn Financial Products has been replaced as collateral manager by Cairn Loan Investments.

CLOs

Commodities weigh on CLOs

US CLO 2.0 notes are being weighed down by oil and gas  and metals and mining exposures, says S&P. As of end-3Q15, four deals with exposure to the industries have notes containing market value overcollateralisation ratios of under 100%.

The four deals are: a 2013 vintage double-B rated note, a 2013 single-B note and two 2014 single-B notes. In addition to exposure to the struggling industries, the notes also have low double-B and single-B subordination levels when compared to peers or exposure to troubled companies from other industries, such as apparel and retail.

At the end of last quarter, 450 S&P-rated US CLO 2.0 transactions held about US$10.8bn worth of loans to oil and gas and metals and mining companies with a combined market value of about US$8.9bn. The average market price of these loans was just under 80 cents on the dollar, the lowest of the common industry categories of loans held in US CLOs.

However, S&P says that US CLOs have limited exposure to loans from these issuers. "Given the diversified nature of US CLO 2.0 portfolios, we do not expect any imminent ratings impact to our investment grade US CLO ratings," says S&P credit analyst Daniel Hu.

CMBS

Reporting requirements reflected

CREFC has adopted interim guidance for compliance with the US SEC's expanded reporting requirements in Form 10-D with regard to delinquent loans. This guidance is reflected in the latest iteration of the CREFC Investor Reporting Package (IRP) Version 7.2.

Effective from 31 October, IRP Version 7.2 will require a new report to be produced that will fall under the umbrella of the existing CREFC delinquent loan status report. The association recommends that, as a best practice, servicers and certificate administrators should coordinate with each other to identify impacted deals.

Compliance with the new Form 10-D is required for forms filed after 23 November, which means that the new reporting needs to be in place with the November 2015 reporting cycle.

A recommended long-term solution is to update the payment status of loan legend to enable servicers to report additional delinquency buckets in the CREFC loan periodic update file. Once this is in place, the association says that certificate administrators can leverage the new codes to provide the necessary disclosures and the CREFC delinquent loan status report - part B would be removed from the IRP. It is anticipated this change will be included with the release of the IRP Version 8.0, which will include all schedule AL items.

CMBS

EMEA maturity defaults stable

The 12-month rolling loan maturity default rate for the European CMBS in S&P's rated universe remained stable at 20%, as at end-September. Overall, the senior loan delinquency rate decreased to 47.1% from 48.1% during the month. The delinquency rate for continental European senior loans decreased to 59.7% from 60.3%, while the rate for UK loans decreased to 18.8% from 21.2%.

CMBS

Cap rates projected

Given investor concern over the impact of higher interest rates on capitalisation rates and CRE values, S&P has developed a cap rate simulation over a 10-year horizon for the five major property types. The tool utilises future interest rate projections from the agency's term structure model and a regression that was created from historical CMBS loan data.

"In the current economic cycle - which has US interest rates and cap rates at record lows - investors have been concerned over the potential for rising interest rates, along with a variety of other economic factors, to increase cap rates and push property values down," comments Darrell Wheeler, head of global structured finance research at S&P.

The simulation shows that under some scenarios, average cap rates could on occasion touch and even exceed S&P's cap rates that are anticipated in a single-B economic stress over the forecast period. In cases where cap rates are projected to reach 8%-9%, the inflation rate would likely be elevated (at around 4%) and rents would be growing, so values may not necessarily be down. However, the agency notes that the lower-rate scenarios may be more worrisome, as the analysis suggests that in a low-rate environment cap rates are unlikely to drop one for one, while rents could decrease substantially.

"In most cases, however, cap rates are not forecasted to remain at those levels for very long. In fact, the more likely median interest rate path only resulted in a modest increase in average cap rates during that same 10-year period," Wheeler notes.

CMBS

Retail late-pays trend up

US CMBS delinquencies fell last month, despite retail late-pays trending slightly higher, according to Fitch's latest index results for the sector. Loan delinquencies dropped by 6bp in September to 4.46% from 4.52% a month earlier. The dollar balance of late-pays fell by US$87m to US$16.8bn from US$16.9bn in August.

Resolutions of US$688m in September edged out new delinquencies of US$624m. Meanwhile, Fitch-rated new issuance of US$8.7bn - across 10 transactions - in August exceeded US$5.3bn in portfolio run-off, causing an increase in the index denominator.

The overall delinquency rate has fallen 31bp over the past 12 months, led by hotel and multifamily improvements. However, retail is the lone laggard, despite healthy new issuance in the retail segment.

The large drop in the hotel rate was driven by US$174m in resolutions and no new hotel delinquencies in September. Indeed, the largest resolution reported last month was the US$134m Westin Casuarina Hotel & Spa (securitised in WBCMT 2005-C22), which was resolved in mid-August for a 42% loss (see SCI's CMBS loan events database).

The largest new delinquency last month - which caused a spike in the mixed-use rate - was the US$80.3m Atlantic Development Portfolio (JPMCC 2005-LDP5), which fell 60 days past due in September.

Current and previous delinquency rates by property type are: 5.58% for retail (from 5.48% in August); 4.95% for office (from 5.04%); 4.64% for hotel (from 5.27%); 4.47% for multifamily (from 4.55%); 4.35% for industrial (from 4.90%); 4.17% for mixed use (from 3.58%); and 0.96% for other (from 1.04%).

Insurance-linked securities

ILS risk tool launched

Huang & Associates Analytics has released a risk aggregation platform designed to assist ILS investors in making quick investment decisions. RAPID is built to allow ILS investors to actively monitor portfolio analytics while they participate in the market. The tool seeks to provide critical portfolio information in a robust, transparent and readily available manner, preventing investors from making crude assumptions based on their own aggregation of a variety of different metrics and data granularity.

Insurance-linked securities

UK ILS hurdles surveyed

The success of a UK-domiciled ILS market hinges on it passing 'considerable hurdles', according to a report by Grant Thornton. The firm says that a proposal to form a new competitive corporate and tax structure (SCI 25 September) to accommodate the development of a UK ILS hub will centre on the size of the opportunity, the required changes and the likelihood of success.

The report claims that company law, the tax rulebook and regulation remain the key difficulties in the UK. Respondents to a recent survey conducted by the Grant Thornton listed the approval process and regulation as either quite or very important. For example, SPVs or protected cell companies (PCCs) are not feasible under current legislation, but are two structures that are essential components to an ILS marketplace.

In addition, the report says that the UK's highly complex tax system would require substantial change, including corporate vehicle tax becoming neutral and that each cell of a PCC vehicle becoming a separate taxable entity. Issues such as taxation on profits, deductions of expenses and withholding tax on interest payments would also require deliberation.

Grant Thornton adds that a strong priority would have to be set on speeding up a sluggish regulatory process in the UK to compete with the quick turnover in well-established domiciles like Bermuda. However, it adds that any reform must be done without compromising the regulatory objectives of the UK's Prudential Regulatory Authority and FCA.

The likelihood of success will rely on a number of factors, which include establishing differentiation from established competitors, such as Bermuda, the Cayman Islands and Ireland, and new entrants in Malta, Gibraltar and the Isle of Man. There is also scepticism over targeting the UK as a domicile, as many investors, fund managers and buyers in the space are already situated in the UK, with five of the top ten ILS fund managers currently possessing a physical presence in the country.

NPLs

Third NPL batch up for sale

Fannie Mae is marketing its third set of NPLs as part of its programme to offload severely delinquent loans and assist troubled mortgage borrowers. The latest group consists of three pools of approximately 7,000 loans, totalling US$1.2bn in UPB.

"As with previous loan sales, servicers are required to apply a range of options to help borrowers avoid foreclosure whenever possible," says Joy Cianci, svp for credit portfolio management at Fannie Mae.

The GSE recently completed the sale of its second pool of NPLs to Lone Star (SCI 24 August). This latest proposed sale is being marketed in collaboration with Credit Suisse, JPMorgan, Bank of America Merrill Lynch and the Williams Capital Group.

RMBS

Spanish housing recovery 'uneven'

Fitch reports that loss severities on Spanish mortgage foreclosures have continued to rise, despite the gradual recovery of the country's residential property market. The agency suggests that the distressed property market is unlikely to share in the benefits of the wider recovery any time soon.

Average loss severities on repossessed properties sold in 1H15 were 61% of the loan balance at the time of repossession, up from 53% last year. Average loss severities have grown steadily since the housing, reaching nearly double the level seen in 2009 and nearly 10 times that seen in 2007.

Meanwhile, prime Spanish urban properties are benefitting from economic and credit growth, but many poor quality residential units are still vacant and unsellable in peripheral, economically weak areas. With the addition of physical deterioration to repossessed homes, Fitch explains that this large overhang and constrained demand will keep loss severities high on such assets in the medium term.

The aggressive foreclosure strategies used by some creditors to clean up their balance sheets, as well as the legal and operational complexities of repossession could also weigh on final sale values and recoveries. Legislative changes may also affect property values, specifically with areas such as Catalonia, which has this year seen the introduction of a tax on some properties that have been unoccupied for more than two years.

Fitch notes that loss severities vary, depending on original LTV ratios, whether judicial or out-of-court proceedings are used and other trends in property prices. For mortgages with original LTVs above 80%, the simple average loss severity rate is 63% for the period of 2014 to 1H15, compared with 37% for original LTVs below 80%.

Data from the Bank of Spain indicates that just over half of foreclosures are completed in court, mostly relating to vacant properties, while the remainder are concluded privately between lender and borrower. In 1H15, loss severities on repossessions were around six percentage points higher in judicial than in out-of-court proceedings.

RMBS

GSE remedies clarified

Fannie Mae and Freddie Mac have released a selling representation and warranty remedies framework, which aims to provide clarity on the process followed in categorising origination defects, seller corrections of such defects and available remedies. In addition, it offers greater transparency regarding GSE discretion on loan-level decisions when reviewing a mortgage in quality control.

The framework introduces a new three-category classification system - findings, price-adjusted loans and significant defects - for defects discovered by the GSEs when conducting their quality control reviews and those reported by lenders. Definition, consequence and outcome are clarified for each category, including under which circumstances a loan will receive rep and warranty relief.

Mortgages with defects categorised as findings will not require a correction or a remedy from the seller. Loans categorised as price-adjusted require the seller to pay the applicable post-settlement delivery fee that should have been paid to a GSE when the mortgage was delivered.

If a mortgage has one or more defects categorised as a significant defect, the seller will be required to repurchase it or be offered a repurchase alternative. At any time during the appeals process, the seller will have the right to correct any significant defect in the specified time frame and in the manner required by the purchase documents. If the significant defect is corrected in accordance with the terms of the purchase documents, the related remedy request will be rescinded.

Barclays RMBS analysts note that the framework provides more certainty about the rep and warranty liabilities faced by originators. "As they become more comfortable with the guidelines, their credit boxes could widen, even if only modestly. That said, other regulations - such as the TRID rules - have imposed additional burdens and liabilities on lenders and may work to negate some of the upside from these clarifications," they suggest.

The new framework will apply to all loans with settlement dates on or after 1 January 2016.

RMBS

Subprime loan losses compared

Loans that are serviced by banks experience higher losses than those serviced by non-bank entities within the top US states for home foreclosures, says Moody's. Florida, New York and New Jersey account for 42% of all subprime loans in foreclosure in US private label RMBS, with loss severities across all three more than 10% higher for bank serviced loans that those serviced by non-banks.

"One of the main reasons bank-serviced loans see higher losses than non-bank-serviced loans is that the former usually have longer foreclosure timelines due to regulatory settlements," says Moody's vp and senior credit officer William Fricke. "The additional time needed to process foreclosures led banks' foreclosure inventories to grow, while non-bank servicers did not initially face the same scrutiny, keeping their inventories smaller and their foreclosure timelines shorter."

Moody's explains that bank-serviced loans have experienced higher losses because their longer timelines increase expenses to the RMBS trusts that hold the loans. Such expenses include principal and interest advances on delinquent loans, tax and insurance payments, attorney fees and property maintenance costs.

Non-bank servicers' foreclosure timelines did eventually lengthen with the establishment of the US CFPB and the adoption of the National Mortgage Servicing Standards, adds Moody's. However, due to maintaining a large pipeline of loans in foreclosure, bank servicers' losses will remain higher than non-bank servicers' through 2017 as both sets of serviced loans move slowly through the liquidation process.

RMBS

RMBS arrears reach record low

Australian housing loan arrears in August reached their lowest level for the prime RMBS sector since 2004, according to S&P. Arrears levels for prime RMBS fell to 0.93% in August, down from 0.96% in July.

Additionally, loans in arrears for more than 90 days, categorised as 'severe', fell to the lowest level since 2009. Non-conforming RMBS in arrears recorded a fifth consecutive month of decline in August too, dropping to 4.6% from 4.69% a month earlier.

"While we tend to see falling arrears after the first quarter due to seasonal factors, both prime and non-conforming arrears are lower than they were a year earlier," says S&P credit analyst Narelle Coneybeare. "In our view, the current arrears trend reflects the historically low interest rate environment and general macroeconomic conditions, including relatively stable employment levels."

RMBS

Countrywide IRS ruling received

The IRS ruling on the Countrywide RMBS settlement has been received, making the approval date 13 October. The move clears the way for settlement cashflows to be made to investors.

According to Morgan Stanley RMBS analysts, three steps remain: the allocable share must be calculated by the third-party expert within 90 days of the approval date (by 11 January 2016); Bank of America is required to pay the settlement payment within 120 days of the approval date (10 February); and the trustee will then distribute the settlement payment to the RMBS trusts. The trustee expects to provide notices once the allocable shares have been calculated, Bank of America informs the trustee of when it will make the payment and the distribution date to investors is known.

The IRS ruling states that the settlement "may not be cited or used as precedent", which the Morgan Stanley analysts suggest could mean that the Citi settlement will have to go through a similar process. "If we assume the same timeline as Countrywide, it would be roughly eight months before we get a final decision, or sometime in June/July 2016. Given the absence of objectors, this could be a conservative estimate and we could potentially lack the appeals process altogether - which took over a year for Countrywide," they observe.

They estimate that Citi distributions could occur around April/May 2017, assuming eight months in court, plus six months while the IRS deliberates and a further 120 days for calculation and payment.