Contents

Secondary markets

Euro secondary patchy

Activity in the European securitisation secondary market remains patchy.

Friday saw a slight dip in volumes and liquidity remains thin overall. Activity continues to be patchy across sectors and selective within them. However, spreads remained broadly stable amid broader market positivity.

Prime assets and UK non-conforming continue to attract the most attention and look strongest. Meanwhile, peripherals and CLOs are experiencing a softer tone.

There are currently two BWICs on the European schedule for today. At 14:00 London time is a single €15m line of CELF 2006-1X A1, which hasn't traded on PriceABS in the last three months.

Then, at 15:00 is an 11 line 74.017m mixed ABS, CMBS and non-conforming RMBS list comprising: CPKLN 7 08/28/20, ECLIP 2006-3 A, ESAIL 2006-2X D1C, ESAIL 2006-4X C1C, ESAIL 2007-4X A4, ESAIL 2007-4X A5, PRS 2005-2X D1C, PRS 2006-1X D1A, PRS 2006-1X D1C, SPS 2006-1X D1C and THEAT 2007-2 B. Only the two CMBS have traded on PriceABS in the past three months - ECLIP 2006-3 A at 24.5 on 24 September and THEAT 2007-2 B at 96.5 on 30 July.

Secondary markets

Euro secondary picking up?

After a quiet start to the week, the European securitisation secondary market looks to be picking up.

"Yesterday was very quiet both on- and off-BWIC," says one trader. "The highlight was probably the deep mezz UK non-conforming auction, which on the face of it was pretty interesting and saw strong client interest. But as is the case with many BWICs at the moment there was no real colour given other than DNT or trade, so it's difficult to read too much into it."

Nevertheless, the BWIC calendar is building strongly from today for the remainder of the week. "There's a big line up for today, which again include some interesting cashflows and deals," the trader says. "As we've seen over the past week people are selectively looking to start adding and where there are trades to be done things will go through. So today should be a better gauge of where we are and hopefully we'll get some more colour."

There are currently four lists on the European BWIC calendar for today. The largest by far is a 29 line 292.76m mix of dollar, euro and sterling CLOs and MBS due at 14:00 London time.

The BWIC comprises: AVERY 2015-6A A, BLNDLN 0 01/05/22, CONTE 2X A, CORDA 5X A1, DECO 2007-C4X A1, ECLIP 2007-2X A, ESAIL 2006-1X B1C, ESAIL 2006-3X A3A, ESTON 2006-1 A2, GRF 2013-1 A, HARVT 11X A1, HARVT 11X B1, HARVT 11X C, HARVT 8X B, HARVT V A2, HEC 2006-2NX A, IMT 2004-4E A1, JUBIL I-RX A, MARS4 4X A3C, MODA 2014-1 A, PARGN 13X A2B, PMF 2014-2 A, PROG 2014-SFR1 A, RMACS 2006-NS2X A2A, RMACS 2007-NS1X A2A, SPF 2005-B A, SPS 2005-1X C1C, TAURS 2014-UK1 A and WARW 1 A.

Five of the bonds have covered with a price on PriceABS in the past three months - BLNDLN 0 01/05/22 at 96.24 on 21 September; ECLIP 2007-2X A at 97.75 on 1 October; GRF 2013-1 A at 100.6 on 9 September; HARVT 8X B at 98A on 15 October; and WARW 1 A at 97.69 on 6 October.

Secondary markets

US CLOs show stabilisation signs

US CLO secondary spreads are showing the early signs of stabilising.

"The last month has been challenging and we've been widening for the past four weeks," says one trader. "However, it now feels like the widening could be coming to an end, though prices are not yet firming up by any stretch of the imagination there is a sense they might be stabilising."

The trader continues: "Dealers continue to be less aggressive and light on inventory, while hedge funds are also still not so active. However, we're now seeing a little bit of interest from people looking for bargains, especially in mezz. This all seems like money coming in from the sidelines - it will be end-accounts who will determine whether this is a turning point not the Street."

For now, BWIC activity remains moderate at best and is offering only limited transparency, the trader says. "We're still not seeing a lot of BWIC colour, so the market is still focused on price discovery to help it re-set and establish where it's heading in the fourth quarter."

There are currently four BWICs on the US CLO calendar for today. The largest auction primarily involves 2.0 triple-As but also includes two 2.0 single-A pieces.

The ten line $74.5m list is due at 10:30 New York time and comprises: APID 2013-15A A1, BLUEM 2013-2A A, CGMS 2013-4A A1, DRSLF 2013-30A A, FLAT 2014-1A B, LCM 13A A, OAKC 2013-8A A, RACEP 2013-8A A, RACEP 2013-8A C and SYMP 2013-12A A.

Three of the bonds have covered with a price on PriceABS in the past three months - FLAT 2014-1A B at 97.25 on 15 September; OAKC 2013-8A A at M98H on 20 August; and RACEP 2013-8A A at L99H also on 20 August.

Secondary markets

Euro secondary retains BWIC focus

BWICs are continuing to dominate the European securitisation secondary market.

Thanks in part to a relatively quiet primary market, secondary auctions saw increased interest yesterday. Most bonds in for the bid traded in line with expectations and tone across most sectors firmed a little. The notable exception is CLOs where any potential rally is being hampered by strong primary and secondary supply.

Away from the lists liquidity remains very thin with activity still focused on selected names primarily in CMBS and UK non-conforming, along with some interest in prime autos and RMBS. Overall, secondary spreads remain broadly unchanged.

There are currently five BWICs on the European schedule today including two CLO mezz lists, a single line of CMBS EURO 27X A and a mixed list of predominantly small clips. However, the most closely watched is once again likely to be a UK non-conforming auction.

The five line BWIC is due at 14:00 London time and comprises: €5m MPS 4X M2B, £2.937m RLOC 2007-1X M1B, £4m RMAC 2004-NS3X M1, £4.68m RMACS 2006-NS1X M1A and £6.389m SPF 2005-B C. None of the bonds has covered on PriceABS in the last three months.

Secondary markets

Euro secondary still strong

The European securitisation secondary market is continuing to see a strong BWIC calendar and market tone, but little overall price movement as liquidity remains thin.

Despite the continuing positive tone and yesterday's BWICs trading well, secondary spreads are broadly unchanged. Away from lists flows remain light with peripherals notably quiet ahead of today's ECB meeting.

The UK non-conforming space continues to see the most activity, though generic spreads in the sector are unmoved. Trades are going through both on- and off- BWIC, with buyers looking for bonds across the capital structure.

There are nine BWICs on the European schedule for today so far. They include another large UK non-conforming list, a single €7m line of ABS CDO FAXT 2005-1 A2F and two auto ABS pieces - €3.2m BILK 4 A and €2.7m SILVA 4 A. The latter auction is due at 13:00 London time and only SILVA 4 A has covered on PriceABS in the past three months - at 100.002 on 28 September.

There are also six CLO BWICs, which primarily involve senior and mezz paper across vintages. However, there is also the relatively rare sight recently of an equity piece in for the bid.

The equity piece, €4.6m BNPAM 2015-1X SUB, is part of a larger mixed primarily US dollar auction due at 15:00 London time that also includes a euro triple-A tranche - €6.5m HLCN 2005-1 A. Neither European bond has covered with a price on PriceABS in the past three months.

Secondary markets

US RMBS active

Activity continues to be strong in the US non-agency RMBS secondary market.

"It's been another busy week," says one trader. "Risk perception continues to abate and high yield continues to tighten, which is positive for RMBS."

The trader continues: "There are, of course, still global risks, but our market is concentrating on the fundamentals for now. Those are good so bonds are trading well in an orderly market."

This week's activity has again been skewed to earlier in the week than usual, the trader notes. "Yesterday saw $1bn go through, which is a little high for a normal Wednesday and included a large list of mixed seniors that all traded at relatively high dollar prices. Today there is a little less scheduled, so a little low for a Thursday, with paper mostly from hedge funds and scattered across asset classes, though there is a slight bias towards re-REMICs and subprime."

The weekly pattern is likely to return to normal soon, the trader suggests. "It's remit day on Monday and the next Fed meeting is at the end of the month, so people are just trying to get stuff resolved sooner rather than later ahead of that in the unlikely event of any surprises."

Secondary markets

Euro secondary solid

The recent solid performance in the European securitisation secondary market is continuing.

Yesterday's ECB press conference went down well in broader markets and that fed through to ABS/MBS where tone improved still further, though activity remains unspectacular. Where trading is occurring bonds are going through at or above expectations, but liquidity still remains thin across the board.

After the surge in European BWIC volume in recent days, today looks set to be quieter. There are currently only two auctions on the schedule.

At 13:00 London time is a nine line 28.1m mixed list comprising: AYT 11 A, BCJAM 4 A2, BERCR 6 A2, DECO 2014-BONX A, HARBM 7X A3, LORDS 2 C, PARGN 10X A2B, ROOF 2 M2A and VELAH 4 A2. Two of the bonds have covered with a price on PriceABS in the past three months - DECO 2014-BONX A at 99.9 on 9 September and VELAH 4 A2 at 97.38 on 8 October.

Then, at 14:30 is an eight line €36+m 1.0 mezz CLO list that consists of: AVOCA VII-X E1, CLAV 2007-1A V, HARBM 7X B1, HARBM 9X D, HARBM 9X E, HARVT V E1, HEC 2006-2NX D and PENTA 2007-1X E. None of the bonds has traded with a price on PriceABS in the past three months.

ABS

ABS disclosure rules released

The National Association of Financial Market Institutional Investors (NAFMII) has published a new set of rules on the issuance of ABS backed by consumer loans in China. The rules are the fourth set released by the regulatory organisation, following guidelines for auto ABS, RMBS and loans for urban redevelopment.

The new rules set a number of disclosure requirements required by NAFMII at registration, as well as throughout the life of a transaction. Originators are obligated to provide a number of pre-issuance details, with a minimum requirement of five years' history on the performance of the consumer loans in the underlying pool of a potential transaction. Those loans that have seasoning of less than five years would need to have disclosures covering their entire life span to date.

"The new rules provide a good template, which standardises the disclosure requirements," says Jerome Cheng, svp at Moody's. "These requirements apply to all transactions in the field and will require disclosure on the underlying pool information, including details on the history of principal and interest payments."

The rules also require periodic disclosure updates, following issuance of a transaction, and are also the first by NAFMII to set disclosure requirements on revolving structures. Originators are required to disclose new assets added to the pool, from time to time.

Such additional obligations push the onus further on the originator, according to Georgina Lee, a Moody's avp and research writer. "It creates a standard not only for now, but for future transactions," she says. "Are originators sticking to eligibility criteria throughout the transaction? This is the question that will be posed under these regular reporting requirements."

As China continues to establish a presence in securitisation, Cheng believes the move should help entice more investors by providing them with the necessary underlying information in a growing market. "Although there will be a limited amount of historical data now, investors need these details as the market becomes more developed, so it's a positive step," he says. "As the market develops, more and more historical data will become available. This will not only allow an investor to analyse and compare a transaction, but evaluate the originator too, allowing them to make much more informed assessments."

Cheng continues: "For example, the investor will be able to see how asset pools of different transactions or originators perform during the crisis period."

JA

Structured Finance

SCI Start the Week - 19 October

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

Pipeline
Activity picked up last week as several deals joined the pipeline. These deals consisted of eight ABS, four RMBS, three CMBS and a CLO.

The ABS were: US$277m Ascentium Equipment Receivables 2015-2 Trust; BBVA Compass Auto Receivables Trust 2015-A; US$900m CarMax Auto Owner Trust 2015-4; US$873.15m Dell Equipment Finance Trust 2015-2; Ford Credit Auto Lease Trust 2015-B; US$140.68m Orange Lake Timeshare Trust 2015-A; €389.4m SCF Rahoituspalvelut I (Kimi 4); and SMART ABS Series 2015-3US Trust.

US$200m Green Tree Agency Advance Funding Trust I series 2015-T1, US$100m Green Tree Agency Advance Funding Trust I series 2015-T2, €1.05bn Penates Funding Compartment 5 and US$1bn SumitG Guaranteed Secured Obligation Issuer series 2015-1 accounted for the RMBS, while the CMBS were US$760.4m COMM 2015-CCRE27, US$1.6bn FREMF 2015-K49 and C$378.1m Real Estate Asset Liquidity Trust series 2015-2. The CLO was €1.12bn Foncaixa PYMES 6.

Pricings
ABS dominated the week's prints. As well as seven ABS deals there was also an RMBS and three CLOs.

The ABS were: US$759m Capital Auto Receivables Asset Trust 2015-4; US$1.3bn DPABS 2015-1; US$300m Exeter Automobile Receivables Trust 2015-3; €150m FADE Series 21 (tap); US$1.19bn Honda Auto Receivables 2015-4 Owner Trust; US$1.12bn Santander Drive Auto Receivables Trust 2015-5; and US$300m Sierra Timeshare 2015-3.

£3bn-equivalent Permanent 2015-1 was the RMBS. The CLOs were €414mn Harvest CLO XIV, US$400m ICG US CLO 2015-2 and US$509m LCM XX.

Markets
US ABS primary and secondary spreads both continue to widen. "A combination of factors have contributed to wider spreads including: volatility in the broader financial markets, uncertainty regarding the Fed's rate policy, spreads widening in other credit sensitive securitised products, tighter swap spreads, and concerns regarding liquidity," say Bank of America Merrill Lynch analysts.

Spreads for recently issued US CMBS conduits widened last week, having rallied in the week before, note Barclays analysts. They say: "As of Thursday's close, LCF 10-year triple-A bonds were 3bp wider to swaps plus 125bp. Lower in the capital stack, spreads sold off more sharply, with single-A minus rated C tranches 7bp wider to swaps plus 300bp and triple-B minus rated mezzanine tranches 13bp wider at swaps plus 475bp."

European RMBS spreads remained supported last week thanks to improved sentiment around the asset class and the increased willingness of investors to engage with securitised risk, as well as shallow primary supply, say JPMorgan analysts. They add: "Italian and Irish RMBS seniors moved in 3bp on a generic basis compared to last week, while Portuguese seniors gapped 10bp wider. UK BTL and NCF ended the week unchanged, while Dutch and UK prime tightened 1bp each."

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Euro secondary consolidates: The European securitisation secondary market [last week] primarily saw consolidation of recent gains, though pockets of activity remain. At the same time, away from BWICs, flows reduced again...
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...

Deal news
• 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).
• 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 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.
• 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.
• 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.

Regulatory update
• 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.
• 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.
• Brazil's capital markets regulator Comissão de Valores Mobiliários (CVM) recently released guidance to trustees and auditors of fundos de investimentos em direitos creditórios (FIDCs) on procedures to determine non-performing loan (NPL) provisioning levels. Moody's notes in its latest Credit Outlook publication that the move is credit positive for senior tranches of securitisations because it will divert more collateral cashflow to them sooner when forward-looking measures of collateral credit quality are signalling increased expected losses.

Deals added to the SCI New Issuance database last week:
Ares XXXVII CLO; Atrium XII; BBCMS 2015-STP; BMW Vehicle Lease Trust 2015-2; Colony Mortgage Capital series 2015-FL3; DT Auto Owner Trust 2015-3; Eaton Vance CLO 2015-1; GM Financial Automobile Leasing Trust 2015-3; Golden Bar (Securitisation) series 2015-1; Nissan Auto Receivables 2015-C Owner Trust ; Permanent Master Issuer series 2015-1; Westlake Automobile Receivables Trust 2015-3; World Omni Auto Receivables Trust 2015-B

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; BSCMS 2007-PW18; CD 2007-CD4; CGCMT 2008-C7; COMM 2007-C9; COMM 2014-CR19; COMM 2015-DC1; CSMC 2007-C4; ECLIP 2006-2; FHSL 2006-1; GECMC 2005-C4; GECMC 2007-C1; GMACC 2004-C2; LBUBS 2007-C6; MSC 2006-HQ10; WFCM 2012-C6; WFRBS 2014-C23

CMBS

Surprise StuyTown deal agreed

The Stuyvesant Town/Peter Cooper Village apartment complex has been sold for US$5.3bn, despite an appraisal as recently as September of US$3.5bn. The timing of the deal also comes as a surprise, with CMBS payoffs possible as soon as the November remittance.

The complex has been bought by Blackstone and Ivanhoe Cambridge. Barclays analysts had not been alone in expecting a sale to still be around a year away - not least because a lawsuit still remains outstanding on the loan's deed-in-lieu - but it is now believed that contracts could be signed within days.

Barclays analysts note it is unclear whether the lawsuit has been settled or remains outstanding. It was reported to be near to a settlement in September (see SCI's CMBS loan events database). A settlement could reduce liquidation proceeds to the trusts.

The sale waives the US$77m cost of the mortgage recording tax, increasing proceeds to the trusts, and includes a US$144m loan from the New York City Housing Development Corporation. The sale also includes an agreement to not convert the units to condos.

CMBS are not expected to take losses as a result of the deal. The payoff should be enough to repay all advances, ASER and principal on the outstanding US$3bn loan in WBCMT 2007-C30 (US$1.5bn), MLCFC 2007-5 (US$800m), CWCI 2007-C2 (US$250m), WBCMT 2007-C31 (US$248m) and MLCFC 2007-6 (US$202m).

"After this, the loan is likely to pay a yield maintenance penalty due on the loan, which is applied since the loan can no longer be defeased and was first mentioned in foreclosure proceedings on the loan. After this, the proceeds should repay delinquent interest to CWCapital as an incentive, which has been accruing at 3% since the loan first became delinquent," say the Barclays analysts.

Proceeds should then repay all special servicing fees paid on the loan and potentially some other small fees. Proceeds would finally be applied to the REO gain-on-sale provisions in CMBS, whereby proceeds are used to recoup losses previously taken on the trusts. The analysts believe this could lead to substantial loss recoveries on bottom tranches, which have previously taken losses.

"The WBCMT 2007-C30 trust may have enough proceeds to repay all outstanding losses, which would setup a gain-on-sale reserve, providing a cushion against future losses. The ASER recoveries should also lead to substantial interest shortfall recoveries to the trusts. The principal proceeds will primarily payoff the A1A tranches in the trusts," they say.

JL

RMBS

HAMP payment ramp begins

In the more than six years that HAMP has been in effect, there have been eight million modifications. As a growing number of mods reach 60 months of performance, increased borrower payments are expected to increase the number of prepayments, delinquencies and refinancings.

Morgan Stanley analysts note that 2.3 million borrowers have begun a HAMP trial modification since the programme's inception and there have also been over six million proprietary modifications. Almost three million of these modifications have been carried out on mortgages within non-agency RMBS deals.

"This volume of modifications means that any given loan in the legacy non-agency space is almost more likely to be modified than not. In fact, over 60% of the outstanding mortgages in the subprime space have been modified at least once, while option ARM and Alt-A pools are approaching a 50/50 breakdown," the analysts say.

With such a high concentration of modified borrowers, the effect of increased payments takes on obvious importance. While HAMP brought borrowers' mortgage rates down to as low as 2%, after five years those rates were always due to increase periodically until they reached the prevailing Primary Mortgage Market Survey (PMMS) rate at the time of modification.

The earliest modifications have already reached this point and a great deal more are due to over the coming months. A number of trends have already become apparent.

So far, 90% of borrowers have met the higher monthly payments, but others have not and some have refinanced or made prepayments. The number of observed prepayments is also probably an underestimate, as it shows only borrowers who prepaid in full after the monthly payment increased.

"A number of borrowers, knowing the increase was coming, are likely to have refinanced their mortgage in advance. In fact, if we look at the six months prior to a modification's 60th month of performance - for this same cohort of modifications performed in 1H10 - the dollar amount of prepayments increased by 182%," the analysts add.

Looking at transition rates from time of modification, delinquencies spike at around 60 months. The rate at which modified borrowers transition from current to prepay starts increasing several months before the expected payment change, but that prepayment rate does speed up as the 60th month approaches.

Four main borrower behaviour trends have emerged. Whether borrowers are likely to meet higher payments, prepay or default depends largely on credit score, MTMLTV, the percent change in P&I payment and the size of the loan.

All else being equal, the analysts note that a high borrower credit score correlates with a high likelihood of refinancing. Lower credit scores increase the likelihood of lapsing into delinquency.

The more equity a borrower has in their house, the more likely they are to prepay when their monthly payment increases. Being underwater makes a re-default more likely.

Further, the greater the P&I change, the more likely that a borrower falls delinquent. However, this does not appear to affect prepayments.

Lastly, size matters. Larger mortgages are more likely to re-default and refinance than smaller mortgages are.

Of the modifications that are scheduled for a payment adjustment in 2H15 or 1H16, the majority appear to be above water but also with credit scores below 700. The analysts say: "The MTMLTVs might leave these borrowers predisposed to refinance, and the credit scores might lead one to believe some of them will go delinquent. However, looking at the modifications that saw a payment increase in 1H15 leads us to conclude that a vast majority of these borrowers are simply going to make the higher payment - at least initially."

Over 90% of borrowers who were current when their payment increased have continued making their payments. This has resulted in more than US$5m of additional cashflow into the non-agency universe each month, helping to pay down current tranches and acting as soft enhancement for tranches absorbing losses.

JL

Structured Finance

Asian credit trader poached

PAG has hired Jeffrey Yap as md and portfolio manager in absolute returns. He will focus on a number of liquid credit strategies, including long-short credit, relative value and directional credit trading.

Yap's experience includes heading debt derivatives in Asia for Rabobank and credit trading for Nomura. More recently he was md and head of Asia fixed income trading for Mizuho, before becoming cio at Ark One.

Structured Finance

Deutsche reveals revamp

Deutsche Bank is set to undertake a 'fundamental' reorganisation of its leadership structure, led by the transition of its corporate banking and securities (CB&S) division into a new corporate and investment banking group. The move is part of a drive by the bank to provide a 'better controlled, lower cost and more focused bank', according to Deutsche Bank co-ceo John Cryan.  

The new group will combine the corporate finance business from the CB&S division with Deutsche's global transaction banking (GTB) group. In addition, CB&S' sales and trading activities will combine into a newly created global markets division.

Ten of the current 16 management board committees will be abolished, along with the bank's group executive committee. All of Deutsche's four core business divisions will be represented directly on a 10-person management board - the other two units being a new private clients and business division and Deutsche Asset Management.

Current co-head of CB&S, Jeff Urwin, will replace Stefan Krause on the board and will also be responsible for the new corporate and investment banking division. Werner Steinmüller will remain head of GTB, reporting to Urwin.

However, Colin Fan is set to leave his position as the other co-head of CB&S. He will be succeeded by Garth Ritchie, who will be responsible for the global markets group and serve on the management board.

Meanwhile, former head of alpha strategies at Blackrock, Quintin Price, has also been brought in to take on management board responsibility for Deutsche Asset Management. The group will become a standalone business division and focus exclusively on institutional clients and funds. Head of Deutsche Asset & Wealth Management, Michele Faissola, will subsequently leave the bank after a transition period.

Structured Finance

DOJ lawyer moves on

Geoffrey Graber has joined Cohen Milstein Sellers & Toll as a partner. He will be part of the firm's consumer protection and product safety practice group, and will contribute to other practice areas, including whistleblower/false claims, securities fraud and public clients.

Prior to joining the firm, Graber served as a deputy associate attorney general and director of the RMBS Working Group at the US Department of Justice. He oversaw the Department's nationwide investigation into the packaging and sale of MBS leading up to the financial crisis.

Prior to this, Graber led the Department's investigation of S&P concerning the rating of ABS. He has also been an associate at Morrison & Foerster, practicing in the firm's securities litigation and consumer class action groups.

Structured Finance

Corporate head hired

First Names Group has appointed Malcolm Macleod as head of corporate services in the Channel Islands. In this newly created role, he will focus on developing key sectors such as structured finance, real estate and capital markets.

Macleod will be supported by First Names client service director Paula Thompson and corporate lawyer Carol Keenan. Macleod joins from Capita Asset Services, where he was head of corporate solutions in Jersey.

Structured Finance

Seeding agreement inked

Investcorp has formed a strategic relationship through its seeding platform with Nut Tree Capital Management, a New York-based alternative credit investment manager led by Jed Nussbaum. Under this agreement, Investcorp will provide seed capital to Nut Tree Capital and help its investors gain access to a fundamental credit strategy.

Founded in June, Nut Tree will invest in distressed credit, stressed credit, high yield and value equities across North America. The strategy seeks to leverage opportunities in less efficient or undervalued small and mid-sized capital structures between US$250m and US$2bn that are facing cyclical challenges, such as defaulted securities, restructurings and liquidations, and earnings inflection points. Downside protection will be provided through minimal use of leverage, sector diversification and an active hedging programme.

Prior to launching Nut Tree, Nussbaum was at Redwood Capital Management for 12 years, where he served as a partner from 2010 and deputy portfolio manager of Redwood Opportunity Fund from 2013. In this role, he invested in the credit and equity of companies across a wide range of industries.

Nussbaum has also held positions in the mezzanine debt group at Whitney & Co and in the high yield finance department at Chase Securities.

Investcorp's seeding business was launched in December 2004 to provide investors with access to select investment talent with the backing of an institutional platform.

Structured Finance

Nuveen targets Europe

Nuveen Investments has teamed up with TIAA-CREF Asset Management to provide three new UCITS funds to non-US investors. This includes the TIAA US Bond ESG strategy, which invests in a broad range of publicly traded investment grade bonds and fixed income securities, including MBS and ABS.

The fund's investment options also include US Treasuries, corporate bonds and taxable US municipal securities. The objective of the fund is to seek a favourable long-term total return through income and capital appreciation, while giving special consideration to certain environmental, social and governance criteria. As a result, the strategy includes investment in a portion of its assets in fixed income instruments that reflect proactive social investments.

The other two funds are the TIAA Global Equity ESG strategy and the TIAA Emerging Debt strategy. The funds are offered via Nuveen Global Investors Fund and will be sub-advised by TCAM's Teachers Advisors.

CDS

Correlation trader resurfaces

Orchard Global Asset Management has hired Ahmed Triki as a senior trader. He was most recently an md at UBS, where he was European head of bespoke correlation trading. Triki has also held senior roles at Deutsche Bank and Lehman Brothers, trading structured credit for both banks.

CDS

Firms pay price for CDS decision

A pair of UBS advisory firms have agreed to settle US SEC charges that they failed to disclose a change in investment strategy by UBS Willow Fund. UBS Willow Management and UBS Fund Advisor will pay US$17.5m to settle the charges, more than US$13m of which will be returned to investors.

UBS Willow Management marketed the UBS Willow Fund as one primarily investing in distressed debt, but the SEC claims the fund changed strategy after 2008 and began to invest heavily in CDS. As a result of losses arising from the CDS holdings, the fund began to perform poorly and was liquidated in 2012.

The SEC says UBS Willow Management did not provide adequate disclosure of the change in investment strategy to the fund's investors or board of directors. Investor letters sent even up until August 2011 contained false or misleading information about the fund's CDS exposure and UBS Willow Management also caused the fund to misrepresent its investment strategy in shareholder reports filed with the SEC from 2008 until its liquidation, the SEC says.

UBS Fund Advisor had ultimate control of the fund and was aware of the change in investment strategy. It failed to supervise UBS Willow Management by allowing the change to occur without adequate disclosure to the fund's investors or board, the SEC says.

The SEC's order finds that UBS Willow Management negligently violated the antifraud provisions of the federal securities laws and that UBS Fund Advisor failed to supervise UBS Willow Management. Without admitting or denying the charges, UBS Willow Management and UBS Fund Advisor agreed to be censured and to jointly and severally pay US$8.2m in disgorgement of advisory fees, US$1.4m in pre-judgement interest, a US$3m penalty and US$4.9m to compensate investors for losses.

CLOs

European credit team bolstered

Jeffrey Soar has joined Blackrock's European fundamental credit team as a director, as the firm prepares to establish a European CLO business. Soar arrives from Rothschild, where he was a director. He focused on debt advisory for the asset manager, before moving to its leveraged finance team.

CLOs

CLO expert recruited

CIFC has brought in Robert Klein as senior portfolio manager and md in structured products, leading the firm's structured products portfolios. He reports to co-presidents Oliver Wriedt and Steve Vaccaro and will also join the firm's operating committee.

Klein joins from Prospect Capital Management, where he was the lead portfolio manager and founder of the firm's CLO business. Prior to that, he worked at American Capital, where he was md and led the private equity and financial sponsor lending teams. His other previous roles have been based at American Securities, American Industrial Partners, First Boston and Morgan Stanley.

Insurance-linked securities

Actuary head added

Horseshoe Group has appointed Kathy Garrigan as svp and head of actuarial services, responsible for pricing and reserving activities for the ILS firm. She is the primary contact for Horeshoe Group's portfolio of clients and participates in consulting activities that include pricing and underwriting reviews, and enterprise risk management functions.

Prior to joining Horseshoe Group, Garrigan was a principal consultant at Hawthorn Advisors, advising specifically in the hedge fund reinsurance space. She has also held senior roles with Endurance, Converium and Continental Insurance.

Risk Management

Data service expanded

SunGard has expanded its pricing and data services solution to include the entirety of Markit's fixed income pricing data. The offering aims to provide third-party administrators and asset managers with a customised and scalable price validation solution that gives clients the freedom to focus on value-added practices, such as oversight analysis rather than data scrubbing. It also helps customers improve operational efficiency, mitigate financial and reputational risk, increase ROI and reduce costs.

Pricing and data services previously included Markit's iBoxx index data. With the addition of the firm's entire universe of fixed income pricing data, SunGard customers will now have access to daily coverage of 2.4 million instruments, including securitised products and credit default swaps.

RMBS

Wachovia claims settled

Wachovia has agreed to pay US$53m to resolve NCUA claims arising from losses related to purchases of RMBS securities by corporate credit unions. This brings the agency's total recoveries from litigation against banks that sold faulty RMBS to corporate credit unions to US$2.2bn.

NCUA uses the net proceeds to reduce Temporary Corporate Credit Union Stabilisation Fund assessments charged to federally insured credit unions to pay for the losses caused by the failure of five corporate credit unions.

The agency filed suit against Wachovia in 2011. Once the settlement is completed, NCUA will dismiss pending claims against the firm in federal district courts in California, Kansas and New York. Wachovia does not admit fault in the settlement.

NCUA continues to pursue litigation in federal courts in New York, Kansas and California against financial firms, including Goldman Sachs, UBS, Credit Suisse and Morgan Stanley. The agency has other litigation pending against financial firms alleging their failure to perform their duties as trustees of RMBS trusts.

RMBS

Barclays settles with NCUA

Barclays has agreed to pay US$325m to settle NCUA claims that it sold faulty RMBS. It is the latest in a string of settlements (SCI passim) and brings the NCUA's total recoveries to over US$2bn.

The proceeds will be used to reduce Temporary Corporate Credit Union Stabilization Fund assessments charged to federally insured credit unions to pay for the losses caused by the failure of five corporate credit unions that invested in such 'faulty' RMBS. Barclays does not admit fault as part of the settlement.

The NCUA continues to pursue litigation in federal courts against firms including Goldman Sachs, UBS, Credit Suisse and Morgan Stanley due to losses stemming from the sale of RMBS. Further litigation is also pending against securities firms alleging violations of state and federal anti-trust law by manipulation of Libor and against financial firms alleging failure to perform their duties as trustees of RMBS trusts.

ABS

Asian aircraft ABS debuts

BOC Aviation has sold a portfolio of 24 aircraft to Shenton Aircraft Investment I, in what is believed to be the first aircraft lease ABS from an Asian-based sponsor. SHNTN 2015-1 has issued two tranches of notes to finance a portion of the purchase.

The tranches comprise US$747.4m of 4.75% series A notes and US$60.5m of 5.75% series B notes. S&P and Fitch have both rated the A notes at single-A and the B notes at triple-B.

The source of repayment for the notes will be limited to the aircraft portfolio, the leases and related collateral. A third-party institutional investor acquired 100% of the equity interest via a private placement.

The notes are backed by the 24 commercial jet aircraft, which are currently on lease to 21 airlines in 18 countries. These include 11 Airbus A320 family aircraft, seven Boeing 737NG aircraft, two Embraer E190 aircraft, two Airbus A330 aircraft and two Boeing 777s.

The portfolio has a weighted average age of 4.6 years and weighted average remaining lease term of 5.7 years. BOC Aviation will continue to manage the portfolio going forwards.

ABS

Exposed VW deals revealed

Up to €2.6bn worth in loans and leases packaged into Volkswagen auto ABS transactions have exposure to the EA189 EU5 engines that were supposedly built with emissions-cheating software, according to documents disclosed by the car manufacturer. In total, the documents reveal 15 deals with exposure, including eight German transactions.

The German deals are: VCL 18, 19, 20 and 21; and Driver ten, eleven, twelve and thirteen. Two Australian (Driver Australia one and two), two French (Driver France one and two), two UK (Driver UK two and three) and one Spanish (Driver Espana two) deals also have exposure.

Driver France two has the highest ratio of affected collateral in both ratio and volume, at 59.47% and 61.4% respectively. The number of affected contracts totals 35,259, representing over €198m.

In contrast, Driver Australia two is the least affected, with only 10.68% in the number of affected contracts by ratio, and just 9.84% in volume. This amounts to 1,394 affected contracts, totalling A$63m.

Volkswagen has been under intense scrutiny following allegations from the US Environmental Protection Agency, which accused the car manufacturer of fitting software to certain Volkswagen and Audi vehicles since 2008 that masked the true pollution total that the cars were emitting (SCI 23 September). Volkswagen responded earlier this month by announcing its aim to launch a recall of all affected vehicles and to complete repairs to such vehicles.

ABS

Conservatism aids Chinese auto ABS

China's auto finance and related securitisation sector will face new tests as macroeconomic uncertainty increases and new vehicle sales growth slows, says S&P. However, the industry's strong regulatory framework and the simplicity of its ABS structures should contain the risks.

"The market development and regulatory oversight have helped to shape credit risk profiles in China's auto finance and auto loan securitisation sectors," says S&P credit analyst Vera Chaplin. "This feature in turn limits the impact of macroeconomic uncertainties and expected competition in the near future."

Almost CNY46bn of auto loan ABS has been issued under the Chinese Banking Regulatory Commission (CBRC) and People's Bank of China's (PBOC) securitisation scheme. Cumulative net losses have been low and overall portfolio performance has been similar to those in prime auto ABS in more established markets.

Auto loan product design is more conservative in China than in more developed markets, as loans more frequently target borrowers who do not already own a car. This conservative approach contributes to the low number of loan defaults.

"We believe China's comparatively short experience in auto financing and securitisation has been offset by its less-severe competition within the industry; relatively conservative practices, which have been influenced by regulatory oversight; the growing affordability of cars, and the so far simple and supportive ABS structures," says Chaplin. "We have also seen a rapid improvement in auto financiers' loan underwriting, infrastructure, and risk-control capabilities."

ABS

China prompts container concern

The recent economic slowdown in China could have negative implications for US container ABS transactions, says Fitch. A continued decline in China's manufacturing sector accompanied by the country entering a longer-term recessionary environment with slow GDP growth could put container utilisation and lease rates in outstanding transactions under pressure.

China's GDP growth already decreased to 6.9% in 3Q15, moving below 7% for the first time since 2009. The IMF recently lowered global growth forecasts for 2015 from 3.3% to 3.1% as a direct result of China's increasingly stagnant growth, underlining the country's importance in the global economy.

Shipping in China is particularly significant, where its ports account for over one-third of the world's containerised traffic, the majority of which travels on the Asia-Europe and Trans-Pacific trade routes. Hapag-Lloyd, one of the largest container shipping companies in the world and consistently one of the largest lessees in container ABS pools, announced that its worldwide cargo volumes decreased 3% in 1H15, largely due to exposure to Chinese ports.

In addition, state-owned China Cosco Holdings (COSCO) - China's largest container shipping line - recently announced declines in cargo volumes and revenue declines of 9%. With global shipping lines already struggling in recent years, Fitch believes that the Chinese slowdown could also prompt an increase in lessee default risk.

The agency expects lease rates to remain near record lows in the interim, generating lower amounts of monthly cashflows for outstanding container ABS transactions. Lease rates for 40- and 20-foot dry containers recently reached all-time record lows, due to oversupply of containers and increased competition in the market. Fitch notes that these containers are the most popular types in securitised pools and their lease rates are the primary drivers of cashflow.

Therefore, a combination of increasing LTVs, declining monthly cashflows and an increasing probability of lessee default create a higher degree of risk for container ABS, should the situation in China worsen. Meanwhile, if interest rates rise over the next 12 months, the lessors could potentially lose their ability to refinance outstanding debt. In this scenario, Fitch would expect older transaction LTVs to increase further due to the decline in monthly cashflows.

CLOs

CLO default rise expected

US CLO pool default rates are expected to rise at some point in 2016 or 2017, according to JPMorgan's 4Q15 client survey. Responses were varied as to how the credit cycle will play out, with some respondents believing that upcoming credit stress will be idiosyncratic, while others expected more broad-based scenarios.

JPMorgan CLO analysts note that a systemic rise in default rates is likely predicated on a contraction in the business cycle, with bank's economists shaving their third-quarter US GDP forecast from 1.5% to 1%. However, the economists see only a 25% chance of a US recession over the next 12 months.

Apart from obvious distressed sectors, such as energy and metals and mining, the survey reveals that respondents are most concerned with retail exposures. The analysts suggest that respondents may be concerned with the cyclical nature of some businesses in that sector. Remaining credit sector concerns are about evenly split among three sectors that have recently been in the headlines - healthcare, chemicals and technology.

US CLO issuance in October is on pace to be the slowest month in 2015. The primary market has seen only US$2.6bn worth of new issuance over five deals, due to a challenging arbitrage and the inability of CLO spreads to stabilise.

For relative value, the analysts believe that triple-As remain quite valuable, but the quarter has also seen an uptick in interest lower down the CLO capital structure. Double-Bs are favoured in both US primary and secondary, with some interest as well in triple-B and single-B tranches.

CLOs

Innovative community bank CLO closed

StoneCastle Financial has closed Community Funding CLO, believed to be the first pooled bank credit securitisation to print since 2008. Citi arranged the transaction.

The deal comprises two tranches: US$205m class A notes (rated A3 by Moody's), which priced with a fixed rate coupon of 5.75%; and US$45.5m unrated preferred shares, which were retained by StoneCastle. The collateral has an average yield of 7% and the proceeds were primarily used to fund direct capital investments in 35 community and regional banks from 24 different states. These banks can use this capital to support nearly US$2.5bn of local lending, fund acquisitions or refinance more expensive capital.

The original form of pooled bank credit securitisations, Trups CDOs, accounted for over US$40bn of community bank capital issuance between 2000-2008. But the credit crisis, together with regulatory changes to bank capital rules, effectively halted such issuance.

StoneCastle Investment Management is the servicer for the CLO.

CMBS

Ty Warner defeasance expected

The pending defeasance of the Ty Warner Hotel portfolio in MSC 2012-C4 has prompted Kroll Bond Rating Agency to place its ratings on the class B and C certificates to watch upgrade. The portfolio is the second largest loan in the transaction, comprising 9.1% of the pool.

KeyBank, the master servicer, anticipates full defeasance of the loan on 30 October. The loan's sponsor is Ty Warner Hotels & Resorts.

A partial defeasance of the loan occurred on 30 September in conjunction with the release of the Las Ventanas al Paraiso property, located in San Jose del Cabo, Mexico (see SCI's CMBS loan events database). The servicer indicates that the sponsor is seeking to defease the remaining US$54.1m portion of the loan, which is secured by two luxury hotels in Santa Barbara, California - the Four Seasons Biltmore and the San Ysidro Ranch.

KBRA says that should the defeasance occur, it will improve the overall credit quality of the pool. The agency would subsequently consider upgrading the ratings of the certificates that have been placed on watch.

CMBS

Underperforming retail asset warning

The US CMBS retail subsector should continue to stabilise through the end of the year, says Fitch. However, already underperforming assets in secondary and tertiary markets could lose momentum in 2016 if retailers face a particularly weak holiday season.

Sales in September were up 2.4% year-over-year and Fitch expects retail holiday sales - excluding autos - to be up 3%-4%, versus 4.1% last year. Disappointing holiday sales could add pressure to class B and C malls if retailers close underperforming locations, with store closure announcements having been frequent this year (SCI passim).

CMBS retail vacancies declined to a new post-recession low in 2Q15, although rents only increased 0.6%. Construction activity has picked up, but remains lower than last year.

Retail delinquencies have lagged the rest of the CMBS market. The overall delinquency rate has fallen 31bp over the past 12 months, but retail delinquencies rose by 39bp. Retail assets have also been the slowest to refinance at maturity, despite currently strong metrics.

CMBS

CMBS workouts exceed transfers

With four European CMBS loans worked out last quarter, the pace of workouts continues to exceed new special servicing transfers, according to Moody's latest monthly update on the sector. A total of 114 loans were in special servicing at end-September, securitised within 45 large multi-borrower and 40 single-borrower CMBS transactions monitored by the agency.

As well as the workouts, another loan was restructured and another made a full repayment during Q3. Additionally, two loans realised a principal loss.

The €39.9m Eurocastle loan securitised in Vulcan (ELOC 28) was further extended to May 2016 as the borrower met the lease renewal and sales related milestones. The €50.5m Nordostparkloan in Windermere VII CMBS repaid in full through a loan sale.

The €5.3m DD Karstadt Hilden loan in Deco 14 - Pan Europe 5 and the £5.6m Amsterdam Place loan in Indus (Eclipse 2007-1) - secured by retail collateral in Germany and office collateral in the UK respectively - were worked out with realised principal losses through a consensual property sale.

As of October, Moody's tracked 62 loans worth €7.3bn - representing 57% of loans in special servicing - as undergoing liquidation, either through consensual property sales or enforcement. For an additional nine loans worth €2.6bn, the special servicers have already sold the underlying properties and are finalising workouts.

The weighted average Moody's expected principal loss for EMEA CMBS loans in special servicing is currently 49%.

CMBS

Retail pay-off exposure highlighted

Approximately US$3.7bn within Fitch's US CMBS loan universe is still scheduled to mature through the remainder of 2015, with an additional US$47bn scheduled in 2016 and US$65bn in 2017. Collateral backed by retail properties accounts for a large proportion of loans due to mature, as well as loans defaulting at their 2015 maturities.

As of October 2015, approximately US$2.4bn, US$7.1bn and US$5.4bn of loans with original maturities in 2015, 2016 and 2017 respectively have been transferred to special servicing, of which US$1.4bn, US$6.1bn and US$4bn are delinquent. For loans with original maturities in 2015, retail comprises the majority of the currently delinquent loans (at US$555.2m), followed by office (US$469m), hotel (US$162.9m), mixed use (US$161.9m), multifamily (US$44.6m), industrial (US$12.4m) and self-storage (US$6.5m).

Of the remaining US$1bn of non-delinquent loans in special servicing with original maturities in 2015, over 75% (US$769.5m) by loan balance were non-performing matured balloons and the rest are current or less than 60-days delinquent. Retail tops the list of non-performing matured balloons (at US$368m), followed by mixed use (US$235.6m), office (US$117.8m), multifamily (US$28.1m), hotel (US$16.7m) and industrial (US$3.3m).

Of the non-performing matured balloons, Fitch says that retail properties, in particular, appear slower to pay off and refinance - with nearly one-third of these loans currently in forbearance or still in the process of finalising pay-off proceeds (albeit with credit metrics that would suggest the ability to secure timely refinancing). On a weighted average basis, these retail non-performing matured balloons have a DSCR of 1.18x and a debt yield above 9%, based upon the most-recently reported servicer net cash flow for the loans.

The relatively small loan size - averaging US$11m and ranging between US$1.5m and US$55.2m - may be a hindering factor, according to the agency. Additionally, in some instances, the ability to secure refinancing is dependent on the ability to extend the lease of a single tenant or a major tenant occupying a significant percentage of the property square footage.

Through October 2015, the default rate for each of the major property types with 2015 maturities is: 12.1% for retail; 5.6% for office; 5.1% for hotel; 3.2% for multifamily; and 2% for industrial. A breakdown of the non-specially serviced loan maturities for the remainder of 2015 by property types is: US$1.31bn for retail (across 205 loans); US$990m for office (64 loans); US$670m for multifamily (110 loans); US$260m for hotel (22 loans); US$190m for industrial (27 loans); and US$270m for other property types (40 loans).

For the remainder of 2015, the largest non-specially serviced loans maturing within Fitch's portfolio are: US$91.1m Ashford II Portfolio (securitised in LBUBS 2006-C1); US$88.4m Crocker Park (BSCMS 2005-PWR10); and US$88m Prentiss Pool (WBCMT 2005-C20). Recent larger exposures that have been repaid in full include Oak Park Mall (securitised in BSCMS 2005-PWR10); JQH Hotel Portfolio (GSMS 2006-GG6) and Millennium Park Plaza (WBCMT 2005-C20).

CMBS

CMBS credit quality slip continues

The credit quality of US conduit/fusion CMBS loans continued to decline in 3Q15, Moody's reports. Conduit loan leverage topped the pre-crisis peak of 117.5% for a second time during the period.

Conduit loan leverage as measured by Moody's LTV (MLTV) rose to 118.2% in 3Q15, up from 117.8% in 2Q15. The weakening credit has also highlighted the disparity in the credit enhancement Moody's assesses for these transactions compared with other rating agencies.

"The credit enhancement we assess is two to five notches higher for conduit classes B through D than that of other rating agencies," says Tad Philipp, Moody's director of commercial real estate research. "We have continued to increase the enhancement levels we assess to keep pace with weakening conduit credit quality."

A larger share of loans now have MLTV ratios above 130%, which Moody's considers higher risk. There is also a lower level of diversity, with the top 10 loans making up 50% of collateral last quarter (up from 45% in 2Q15).

Hotel loans are among the most highly leveraged of all conduit collateral and had a "significant negative credit effect" on conduit transaction performance last quarter, says Moody's. While hotel loans only make up 17% of conduit collateral year-to-date, they account for more than half of the 100 loans with the highest MLTV ratios among loans with balances greater than US$10m.

Beyond MLTV, other factors are more positive than at the pre-crisis peak. DSCRs are higher and fewer loans have an interest-only component. Overall, Moody's believes credit quality is comparable to that of loans originated between late 2005 and mid-2006.

NPLs

NPL provisioning guidance welcomed

Brazil's capital markets regulator Comissão de Valores Mobiliários (CVM) recently released guidance to trustees and auditors of fundos de investimentos em direitos creditórios (FIDCs) on procedures to determine non-performing loan (NPL) provisioning levels. Moody's notes in its latest Credit Outlook publication that the move is credit positive for senior tranches of securitisations because it will divert more collateral cashflow to them sooner when forward-looking measures of collateral credit quality are signalling increased expected losses.

CVM's guidance establishes that trustees should focus only on the expected losses related to the underlying assets. It clarified that the practice of not recognising NPL provisioning based on the argument that current subordination levels are sufficient to repay senior shares is not acceptable because it distorts the valuation of subordinated tranches and delays the breach of minimum subordination triggers.

"We expect that with this clear guideline for NPL provisioning, senior tranches will better benefit from available overcollateralisation and performance triggers in a more timely and effective manner," Moody's says.

The regulator also clarified that NPL provisioning should be forward-looking and incorporate expected future losses. Therefore, the practice of determining NPL provision amounts by comparing the level of incurred losses vis-à-vis original loss expectations should no longer be applicable. This is because the practice does not take into account the effect of changes in the economic conditions that erode the expected cashflows from the receivables pool.

Moody's points out that inadequate NPL provisioning can mask poor performance in Brazilian FIDCs. If trustees do not provide adequate NPL provisioning for potential pool losses due to obligor delinquencies and defaults, the collateral's net asset value becomes inflated and senior tranches will be under-collateralised.

After the minimum subordination requirement is satisfied, obligor payments will flow to subordinated shares, even if remaining cashflows are insufficient to pay down the senior shares.

"We think the new CVM guidance reduces the risks of inadequate provisioning in FIDCs related to the flexibility allowed by the regulation because it clarifies the good practices that trustees should apply and clearly points out bad practices to avoid.
We expect that all rated FIDCs will benefit from the guidelines because initial performance trends will be projected and any expected deterioration on expected cashflows will be reflected in the NPL provisioning levels," Moody's observes.

Risk Management

Margin requirement finalised

The US Fed, FDIC, OCC, Farm Credit Administration and the FHFA have approved a joint final rule establishing margin requirements for swaps that are not cleared through a clearinghouse. The rule was developed in consultation with the CFTC and the SEC.

The final rule sets forth requirements for covered swap entities to post and collect initial and variation margin for non-cleared swaps activity. A Chapman and Cutler client memo notes that, significantly, the agencies have not modified the definition of financial end-user to exclude structured finance SPVs.

"The agencies expressly stated that they feel that these entities should be classified as financial end-users and subject to the margin requirements set forth in the final rule," it states.

SPVs that have material swaps exposures will consequently have to post initial margin. The final rule has, however, increased the amount that gives rise to a material swaps exposure to US$8bn from the previously proposed level of US$3bn.

Additionally, the rule requires variation margin exchange for all financial end-users - including structured finance SPVs - but has broadened the types of collateral that may be used for variation margin. While the 2014 proposal would have limited variation margin payments to cash only, the final rule permits assets that are eligible as collateral for initial margin to also be eligible for variation margin, subject to applicable haircuts.

Compliance dates for the final rule commence on 1 September 2016.

Risk Management

Trading book capital charges scrutinised

Bank capital charges attached to market risk in the trading book could increase by 2.2 times for those involved in securitisation, according to a joint report by ISDA, the Global Financial Markets Association and the Institute for International Finance. The report analyses impact studies submitted by 28 banks to the Basel Committee regarding the regulator's framework for the fundamental review of the trading book.

The studies were combined to generate comparative metrics on the impact on an 'aggregate bank'. Quantifying the submitted data by the banks involved shows that the new regulation, which is referred to as Basel 2.5, will push banks to hold 4.2 times more in capital overall against trading books when calculated under the Basel Committee's standardised method.

The report says that its findings 'run counter to other regulatory objectives of restoring confidence in the securitisation market' and will lead to a contraction in the market. The European Commission only recently released its Capital Markets Union plan, which included an initiative to reduce capital charges by lowering the risk floor for simple, transparent and standardised transactions to 10% (SCI 2 October).

As a result, the report proposes an alternative specification that removes the credit spread risk charge, which overlaps with the banking book charge. "This alternative is based on the banking book framework and addresses the double count issue, and would not require material BCBS resources and testing for completion," the report explains. "Furthermore, the industry proposal would increase comparability and transparency of the overall capital framework."

RMBS

No sales for AOFM

The AOFM will hold its seventh RMBS auction on 8 December, with results announced on the same day. Settlement is due on 11 December.

Securities up for bid in December comprise the Apollo 2009-1 A3 (A$319.2m in original face value), FirstMac 2011-2 A3 (A$87.7m), Progress 2009-1 A2 (A$425m), REDS 2009-1 A1 (A$500m) and Resimac 2012-1 A2 (A$137m) tranches.

Separately, the AOFM released the results from its fifth auction (SCI 18 August), held today (22 October). Although bids were received for the SMHL 2009-1 A2 and Torrens 2010-1 A bonds, they were ultimately not accepted.

RMBS

FNMA unveils actual loss deal

Fannie Mae has priced its latest credit risk sharing transaction, which is the first to use an actual loss framework. The GSE says that this structure will be the standard for its CAS programme going forward, and follows in the footsteps of Freddie Mac after it debuted its first actual loss issuance earlier this year (SCI 8 April).

The US$1.45bn note offering in CAS 2015-C04 is scheduled to settle on 27 October and will be the ninth completed CAS deal. Fannie anticipates that it will have transferred a portion of the credit risk on approximately half a trillion dollars in single-family mortgages through all of its risk transfer programmes by the end of 2015.

Rated by Fitch and DBRS, the US$242.55m BBB-/BBB 1M1 tranche printed at one-month Libor plus 160bp; the US$155.34m BBB-/BBB (low) 2M1 tranche at plus 170bp; the US$651.06m 1M2 tranche at plus 570bp; and the US$396.99m 2M2 tranche at plus 555bp. The latter two tranches are unrated.

The reference pool of mortgages will be divided into two loan groups. The first group will consist of loans with LTVs of greater than 60% and less than or equal to 80%, while the second group will consist of loans with LTVs of greater than 80% and less than or equal to 97%. While each loan group has its own issued notes, each group's structure will be identical.

Fannie retained the first loss and senior piece of the structure, as well as a vertical slice of the M1 and M2 tranches in both groups. The GSE says that this is to enable alignment of interests with investors throughout the life of the deal.

To date, CAS deals have operated on a fixed severity schedule in calculating write-downs, with credit events occurring generally when reference pool loans become 180-days delinquent. Under the actual loss framework, any losses are passed through based on the realised losses of the loans following final disposition. Fannie will also now provide enhanced monthly disclosures to help investors monitor the ongoing performance of their investments in CAS securities.

Bank of America Merrill Lynch was the lead structuring manager and joint bookrunner, while Barclays was the co-lead manager and joint bookrunner on the transaction. Citi, Credit Suisse and JPMorgan were co-managers.

RMBS

SFR issuance hits milestone

Morningstar reports that US single-family rental (SFR) securitisation issuance has now topped US$13bn, spanning 25 deals and backed by loans on nearly 100,000 homes. Although recent issuance has slowed down from issuers re-directing focus from property acquisition to management, certain signals in the market could suggest room for more growth.

Morningstar says the recent merger between Starwood Waypoint Residential Trust and Colony American Homes (CAH) (SCI 22 September) shows that institutional investors are committed to the asset class. A finalisation of the deal will create a combined company that owns more than 30,000 homes and have US$7.7bn in assets.

Colony American Finance brought a US$239.1m SFR deal this month, with the triple-A rated tranche offering 33.3% credit enhancement. Prior to that, three deals from Invitation Homes, Colony American Homes and Progress Residential came to market in June, followed by an issuance from American Homes 4 Rent (AH4R) in September.

The lack of a challenge yet from a period of economic instability does not worry Morningstar. The agency cites confidence in the credit ratings for the historical rental and housing price data, as well credit enhancement levels in these deals.

Morningstar says that actual cashflows exceeded what it had originally underwritten for the ten SFR deals that have closed in the last year. The average DSCR for these deals was 2.41x, with the lowest at 1.6x for AH4R 2014-SFR 2 and the highest at 2.9x for CAH 2014-2. As a result, the deals are generating cashflows after expenses that are more than double the amount of cash needed to pay down principal and interest.

The agency explains that the performance of SFR securitisations is largely attributable to the popularity of renting rather than purchasing homes. Further, vacancy rates are low, and delinquency rates also remain low in 15 of 21 deals that Morningstar analysed in a recent performance update.

The agency believes that multi-borrower deals continue to grow as a sub-asset class and provide an additional bright spark for the market. Nonetheless, they also add an additional set of concerns, particularly over the diversity of the borrowers, their operational procedures and their properties. However, Morningstar notes that its evaluation of the initial deals that have come to the market shows that issuers and credit rating agencies are presenting the ability to adequately mitigate such risks.

RMBS

BTL rate buffers evaluated

The prospect of increasing interest rates in the UK is prompting a re-examination of mortgage affordability, says Moody's. However, the agency believes that UK buy-to-let landlords should benefit from substantial affordability buffers through rising rental income.

"With a 0.5% interest rate hike, if we take the rising cost of rent since the loan was granted into account, the percentage of BTL landlords with insufficient rental income actually falls to 0.2%, and those facing tight affordability decreases to 1.5%," says Emily Rombeau, Moody's analyst.

The agency explains that voids are at a record low, which means strong occupancy levels will further support the BTL market's resilience to moderate interest rate increases. Without accounting for rent increases, Moody's analysis indicates that an interest rate rise by 0.5% would cause the proportion of BTL landlords with tight affordability buffers to rise to 2.2% from 0.9% currently.

The agency's forecast suggests that the Bank of England base rate will start to rise progressively at the end of 1Q16 to reach about 1% by the end of 3Q16 from 0.5% currently. Low interest rates have prompted a gradual decline in arrears in UK RMBS backed by BTL loans since 2009.

From a regional perspective, landlord ability to repay BTL mortgages is fairly even, despite a stronger rental market in the South of England. However, those borrowers located in the South will be slightly better positioned when rates start rising.

Taking into account rental price appreciation, the proportion of BTL loans with insufficient rental cover is 5.5 times higher in Wales and Scotland combined than in the South of England. Similarly, the proportion of mortgages with rental shortfalls is 2.5 times higher in the North of England versus the South, albeit at negligible levels - at 0.12% versus 0.05%.

RMBS

French true sale RMBS debuts

Crédit Agricole has closed FCT Crédit Agricole Habitat 2015, a self-led retained securitisation of French home loans. The transaction is the bank's first true sale RMBS in France.

The underlying asset portfolio consists of French residential mortgage loans extended to individuals, which are either guaranteed or benefit from a first mortgage lien. The €10bn transaction has been fully subscribed by the originators, which are the 39 Caisse Régionale de Crédit Mutuel (CRCAMs) belonging to the Crédit Agricole group.

The deal consists of €8.6bn class A notes (rated triple-A by Moody's and DBRS) and €1.4bn class B notes. The portfolio will be serviced by the individual CRCAMs, but Eurotitrisation will facilitate the search for a substitute servicer, should a servicing agreement with any of the CRCAMs terminate.

Moody's says that if a servicer report is not available at any payment date, continuity of payments for the rated notes will be assured by the calculation agent preparing the payment report on estimates. In this case only, interest on the class A notes and items senior thereto will be paid.

RMBS

Default predictors identified

In an analysis of default frequencies of both US agency and non-agency mortgage loans originated from 1999-2008, S&P finds that default rates for both agency and non-agency loans were higher for crisis-era vintages relative to pre-crisis vintages. The study also suggests that the default rate of agency loans was approximately 30%-65% that of comparable non-agency loans, with FICO scores, debt-to-income ratios and loan-to-value ratios the most significant predictors of default.

S&P analysed historical GSE loan-level performance data to provide insight into the historical default frequency of agency loans originated during the period, as well as the default frequency of comparable non-agency loans that collateralised RMBS it rated. The agency also conducted a logistic regression that relates the likelihood of default to various predictive variables while controlling for differences between agency and non-agency pools. In addition to showing how these variables influence default behaviour, the regression allowed the incidence of default to be estimated for archetypical borrowers with specific characteristics for agency and non-agency pools.

The GSE data consists of 30-year, first-lien, fixed rate, fully amortising, fully documented mortgage loans purchased by Fannie Mae and Freddie Mac between 1999 and 2008. The data reflects performance through September 2014 for Freddie Mac and through March 2015 for Fannie Mae.

The non-agency data comprises mortgage loans from non-agency RMBS transactions rated by S&P between 1999 and 2008. For the purposes of the analysis, a subset of loans was selected that have comparable characteristics to the agency datasets.

For both the agency and non-agency datasets, additional selection criteria were applied for standardisation purposes: FICO score of 620-800; combined LTV of 60%-95%; term to maturity of 301-419 months; and first payment between 1 January 1999 and 31 December 2008.

In addition to examining how historical agency default rates compared to those of non-agencies, S&P considered the effect of the origination vintage, as well as other static borrower attributes that are generally considered to be material predictors of default. The primary predictive variables were FICO score, LTV ratio, DTI ratio and loan term. The effects of property type, occupancy type and loan purpose were also considered.

The analysis shows that default rates for non-agency loans were materially higher than those for agency loans in all vintage years and that there was an upward trend in the ratio of agency default rates to non-agency default rates. The 2002-2008 vintages show a reasonably steady average of about 45%. Further, the ratio of agency to non-agency defaults increases by roughly one-third when comparing pre-crisis to crisis-era vintages.

Other general trends observed include: default rates were higher for non-agencies than for agencies for all comparable strata; default rates decrease with increasing FICO scores; default rates increase with increasing DTI ratios; and default rates increase with increasing LTV ratios.

Because the data lends itself well to a logistic framework, S&P also carried out a regression to examine the extent to which historical default rates depend on the continuous variables LTV, FICO, DTI and loan term. Additionally, it tested the effect of categorical variables property type, occupancy type and loan purpose on historical default rates.

The results indicate that the most important effects were driven by FICO, LTV and DTI. The regressions also suggest that agency loans have a lower probability of default than non-agency loans for a given set of parameter values.

"These variables turned out to be highly significant predictors of default," S&P concludes.

RMBS

Smith files Ocwen update

A report has been filed by the monitor of the US National Mortgage Settlement, Joseph Smith, revealing the results of Ocwen's compliance with the National Mortgage Settlement servicing standards during 3Q14 and 4Q14. Filed with the US District Court for the District of Columbia, the report reveals that Ocwen failed four metrics in the second half of 2014.

Several metrics with timeline requirements were deemed failures in that time as part of Ocwen's Global Corrective Action Plan (CAP) to address its incorrect dating of foreclosure correspondence to borrowers. In all, 10 metrics were subject to either individual CAPs, the Global CAP or both as of 4Q14.

Smith recently filed the final report into Ocwen's internal review group and compliance with the settlement for 1H14 and 2H14, finding just one failed metric during the first quarter (SCI 12 August). Smith says that he will continue to work with Ocwen to provide updated reporting and testing on compliance for 1H15 and the status of its various CAPs.