Contents

RMBS

Grey area

Granite casting shadow on European sentiment

UKAR's sale of the Granite portfolio remains the hot topic in the European RMBS market, with uncertainty over its resolution affecting sentiment. Resecuritisation is a viable option for the eventual buyer, but how much paper will remain in the market post-sale is uncertain.

A variety of potential bidders for the portfolio have been touted, with speculation dating back to earlier this year (SCI 28 April). Recent reports suggest that the preferred bidder is Cerberus Capital Management, in partnership with Morgan Stanley. The deal would involve the duo purchasing up to £11.7bn of loans in the portfolio.

"With the holiday season upon us, I doubt we will see a deal completed by year-end, but there may be a progress update," says Rob Ford, partner and portfolio manager at TwentyFour Asset Management. "There will be administrative issues to handle and, depending on what the buyer does, it may be a case of them needing time to roadshow the assets too."

Granite's September investor report notes that some £7.3bn of securitised bonds remain outstanding in the programme. These are split between a capitalist trust and a socialist trust, holding £1.2bn and £6.1bn in assets respectively, according to JPMorgan ABS analysts.

The capitalist structure includes autonomous individual issuer vehicles, with different issues able to experience differential performance based on their own liability structures. The socialist structure has all liabilities of the same seniority line up alongside each other, regardless of their share.

The remaining £4.4bn of assets is held in the seller's share, which does not receive any principal repayments until the outstanding distributed liabilities are repaid. The JPMorgan analysts suggest that the currently unencumbered mortgage assets backing the seller's share element of the structure provide the most attractive aspect for buyers.

However, they note that the assets from the seller's share can only be directly accessed following redemptions of the last remaining securitised bonds, which is not scheduled until 2Q20. "With annual excess spread on the collateral pool running at £70m for the last 12 months, the returns of simply owning the seller's share hardly seem a compelling reason to participate in the Granite sale," they observe.

Consequently, a restructuring of the portfolio has been suggested as the most beneficial - and therefore most likely - scenario. One of the options in this case would be to call the existing liability structure and subsequently sell the underlying assets. Existing noteholders would receive repayment in full and would be free to redeploy the cash redemptions into either other securitisation bonds or investment alternatives.

"The credit enhancement is massive for the triple-A tranches, standing over 65%, when 10% to 20% is usually enough. You could re-lever the outstanding notes alone, including the seller's share," says Ford. "I could see an external player such as Banco Sabadell, who now owns TSB, as a bidder that could take the seller's share, resecuritise it and offload it back into the RMBS market."

Even so, Ford adds: "The question is whether someone re-levers the whole thing and then sells it off again, as you have around £7.5bn in outstanding bonds as part of the £11.7bn in total loans to deal with."

A key issue would be successfully distributing redemption proceeds following a restructuring. With the Granite portfolio displaying a mixture of currencies, Ford expects the behaviour to vary among potential bidders.

"I expect that much of the almost 30% of bonds that are currently denominated in US dollars would unlikely be redeployed in UK or European ABS. Buyers have enough options in the US domestic market with more attractive spreads," he says. "There is also no guarantee that the international investors involved in euro tranches will necessarily reinvest either when they get their money back."

Instead, Ford believes that sterling investors are the most likely source to remain interested in the UK market. This is due, in part, to the likelihood that a follow-up Granite transaction would be denominated in sterling, given the expensive cost of currency swaps in pass-through ABS structures.

"The reality, then, is that maybe 40% to 50% will not reinvest back into securitisation," he adds.

A second restructuring option could involve a more efficient use of the US$4.4bn seller's share via the issuance of additional securitisation bonds to largely fund the seller's share purchase. However, the analysts note that it could be difficult to find buyers for the newly issued bonds, particularly as many in the European ABS sector already hold positions in Granite. Without generous spreads to entice investors, the option could be very challenging, but not impossible.

While the market waits for clarity on Granite's future, the analysts believe that the various proposals surrounding the portfolio's fate has cast a shadow over the UK ABS market. In particular, fear of potential oversupply in the market may continue to precipitate underperformance of UK risk.

"As the largest UK master trust outstanding currently, accounting for 25% of all prime master trust bonds, Granite's effect on sentiment should not be underestimated," they explain.

Ford argues that the more significant and direct effect on pricing will come when an official announcement arrives on the sale of the portfolio. "There has been around a 15% average in the prepayment rate over the last few years or so, and the senior notes have a WAL of about 0.7 years, so they will be paid off by 2017," he concludes. "Therefore, their impact may not be significant for that much longer. Granite is still undoubtedly a benchmark, but it is no longer necessarily the benchmark in the market."

JA

Secondary markets

Euro secondary rolls on

The bulk of the European securitisation secondary market took month end in its stride and continues to roll on at a solid if unremarkable pace.

Friday was quieter than earlier in the week, but saw relatively healthy flows for month-end. Overall, tone remained positive and spreads were little moved.

The main area of buying focus was once again UK prime and non-conforming paper. At the same time, Italian and Spanish bonds continue to attract investors. CLOs are still the laggard sector with primary activity distracting away from the secondary market.

There are currently no BWICs on the European schedule for today.

Secondary markets

Euro secondary refocuses

After a couple of quiet sessions the European securitisation secondary market looks set to refocus in the days ahead.

"After a very busy week last week on our side at least it was pretty quiet yesterday and one or two data points were enough to distract the market," says one trader. "However, there are a couple of big BWICs today, which will help everyone refocus."

Indeed, the European BWIC pipeline is growing throughout the remainder of this week and the trader expects to see a continuation of recent patterns. "Last week we saw growing activity on- and off-BWIC and increasing client engagement across most sectors."

There are currently just the two large BWICs on the European schedule for today. Both are due at 14:30 London time.

By far the largest is a 20 line €309+m original face mixed list. It comprises: ARENA 2012-1 A2, ATLAM 1 A, BANKP I A2, BCARD 2011-1 A1, BRNL 2007-1X A4A, CORDR 1 A2, ECLIP 2007-2X A, FGOLD 1 A2, GRAN 2003-2 2M, GRAN 2004-1 2A2, GRANM 2005-1 A5, GRANM 2005-2 A5, GRANM 2005-2 M2, GRANM 2006-4 M3, HMI 2011-1X A4, ITALF 2007-1 A, PELIC 1 A, SAEC 12 A2, TAURS 2007-1 A1 and VELAH 2 A2.

Nine of the bonds have covered with a price on PriceABS in the past three months. They last did so as follows: ATLAM 1 A at 96.75 on 9 September; BANKP I A2 at 99.01 on 21 October; ECLIP 2007-2X A at 97.75 on 1 October; GRANM 2005-1 A5 at 99.526 on 2 September; GRANM 2005-2 M2 at 98.1 on 23 September; GRANM 2006-4 M3 at 98.36 on 7 October; ITALF 2007-1 A at 97.87 on 2 September; SAEC 12 A2 at 101.865 on 15 October; and TAURS 2007-1 A1 at 89 on 2 September.

The other list involves 33.596m across 11 lines of euro and sterling mezz CMBS. The auction consists of: DECO 2006-C3X A1B, DECO 6-UK2X A2, DECO 8-C2X A2, ECLIP 2006-1 B, ECLIP 2007-1X C, EMC 6 B, EMC 6 C, EMC 6 D, FHSL 2006-1 A, RIVOL 2006-1 B and TITN 2007-2X B. None of the bonds has covered with price on PriceABS in the past three months.

Secondary markets

US CLOs stay light

Volumes are still low in the US CLO secondary market, but there are patches of activity and also some action in Trups CDOs.
"CLO trading is pretty light at the moment as people are still calibrating the market after their month-end marks," says one trader. "However, there is activity here and there."

For example, the trader reports: "There's been some hedge funds coming to market with double-Bs, single-Bs and equity to test for liquidity, but not much of that is trading. That's partly because tiering in mezz is massive right now - double-Bs, say, range from mid-700s DM to mid-900s. These assets are such long duration that the price swings are all over the map."

Nevertheless, there appear to still be fast money accounts willing to keep testing the market and there are another two 2.0 double-B lists that make up the entirety of the BWIC calendar so far today. First up is an $11m three line auction due at 10:30 New York time - OCT22 2014-1A E1, VOYA 2014-4A D and WINDR 2014-3A E. None of the bonds has covered with price on PriceABS in the past three months.

Then, at 11:30 there is a two line list - $5m BATLN 2015-9A E and $7.25m MDPK 2015-18A E1. Neither bond has traded on PriceABS before.

Overall, the trader adds: "The BWIC calendar for this week is very quiet. At the moment it mostly involves real money cleaning up some shorter duration 1.0 bonds - mainly first pays, plus some mezz."

Meanwhile, the trader says: "There has been a little bit of activity in Trups CDOs over the past week with a few lists circulating, again from hedge funds. Not all of it traded, but participation was good, which is a healthy sign for the market."

This week also sees three Trups CDO BWICs already on the schedule. "This week's auctions mainly revolve around second pays - there's not a lot of size but it'll be interesting to see where that part of the stack trades," says the trader.

One of those lists is due today at 13:00 and involves ten line items accounting for $50m original face. It comprises: ALESC 15A A2, ALESC 6A A2, ALESC 8A A2, MMCFND 18 C1, PRETSL 15 A2, TRAP 2006-10A A2, TRAP 2006-11A A2, TRAP 2007-12A A2, USCAP 3 B1 and USCAP 3 B2. None of the bonds has covered with price on PriceABS in the past three months.

Secondary markets

Euro secondary strengthens

The positive tone in the European securitisation secondary market continues to build.

"Overall, we're strengthening, but still lagging the positive tone in broader markets," says one trader. "We're seeing something of a pick-up and flows are better especially in some of the recently quiet sectors."

The trader continues: "We're not seeing much in prime, but Portuguese RMBS and UK non-conforming are improving. Even 2.0 CLOs are a bit better off the back of the new Oak Hill transaction, particularly at the bottom of the capital structure."

Secondary supply is also increasing, but caution is advisable, the trader suggests. "There are a growing number of BWICs on the schedule covering a wide range of assets, so they should reinforce the price improvements we're seeing. However, that may be off-set if we see the high levels of DNTs we saw last week."

There are currently three European ABS/MBS BWICs on today's calendar. Two are mixed lists of predominantly small clips, but the other focuses on large slices of Spanish RMBS.

Due at 15:00 London time the nine line €296.3m original face list comprises: HMSF XI A, UCI 9 A, UCI 10 A, UCI 11 A, UCI 12 A, UCI 14 A, UCI 15 A, UCI 16 A2 and UCI 17 A2. None of the bonds has covered on PriceABS in the past three months.

There are also two short European CLO auctions due today - 14:30 there are €2m pieces of CADOG 6X D1 and PENTA 2015-2X D; and at 15:00 €3m of CGMSE 2014-2X SUB. None of the bonds has covered with a price on PriceABS in the past three months.

In addition, there are two OWICs scheduled for today. First, up to £10m each of PARGN 18 A and PARGN 19 A due by 10:00. Then, up to €50m each of CAR 2014-F1V A, GNKGO 2013-SF1 A, GNKGO 2014-SF1 A and MCCPF 2015-1 A due by 15:30.

Secondary markets

SLABS tiering switch

Tiering in the US student loan ABS secondary market continues to be a major issue.

"Tiering between FFELP and non-FFELP deals has been in evidence since the extension risk issue began having an impact in July," says one trader. "The related rating agency downgrades then caused further divergence with downgraded bonds prices falling far further than non-downgraded paper."

However, the trader adds that opportunistic buying is causing the latter trend to reverse. "While we've seen non-downgraded bonds drift wider, the opposite is happening in downgraded and we're now seeing buying interest in the 150-160DM area."

Meanwhile, market participants are also beginning to view Navient bonds differently, the trader suggests. "Navient has become more aggressive about calling its bonds - it has done so with seven deals since the summer. It's seen as looking to do the same with other bonds at the earliest possible opportunity to try to safeguard its reputation as a triple-A issuer."

Secondary markets

Euro secondary improves

Yesterday saw further improvement in the European securitisation secondary market, but it is still yet to take off.

"We've got what we wanted at last - stability in broader markets - but our space isn't picking up massively," says one trader. "Tone is generally better and we are seeing a pick-up in high beta paper in particular."

The trader continues: "CMBS 2.0 and UK non-conforming have been active and levels are better in both sectors. However, prime remains quiet as most people are looking to the primary market to add there."

BWIC volumes have been picking up in recent days and bonds are going through strongly. Among yesterday's auctions the highlight was the Spanish RMBS list that included large blocks of UCI - it saw healthy participation and all bonds traded at or above expectations.

There are currently six European ABS/MBS BWICs on today's calendar. The largest, a 17 line €36+m auction, offers a range of deal types and jurisdictions.

Due at 13:30 London time, the mixed list comprises: AYTGH VII B, AYTGH VIII B, AYTGH VIII C, BRNL 2007-1X B4A, FEMO 1 C, GNKGO 2013-SF1 A, LGATE 2006-1X C, MECEN 2 C, NGATE 2006-2 CB, NGATE 2006-3X CB, NGATE 2007-1X CB, RLOC 2007-1X C1A, RLOC 2007-1X D1A, RMACS 2006-NS1X M2C, RMACS 2006-NS2X M2C, RMACS 2006-NS3X M2C and TMAN 6 C. Two of the bonds have covered with a price on PriceABS in the past three months - AYTGH VII B at 81 on 20 October and RMACS 2006-NS2X M2C at 82.66 on 22 October.

There are also six European CLO BWICs on the calendar for today so far. Perhaps most eye-catching among them are two small equity lists.

At 14:30 is a three line €9.5m auction consisting of: CADOG 2X M, CADOG 3X M and CADOG 4X SUB. Then, at 15:00 is a €2+m line of ACLO 1X SUB. None of the bonds has traded on PriceABS in the past three months.

Secondary markets

US RMBS distracted

Macro concerns are distracting the US non-agency RMBS secondary market.

"The market has been fairly busy this week, but continued rate volatility is proving a distraction," says one trader. "Swap spreads are tighter - currently negative to US Treasuries; we have non-farm payrolls tomorrow; and the Fed still has a chance to do something this month. That's all keeping people frozen as they try to figure out where they want to be vis a vis the global macro picture."

Consequently, the trader says: "RMBS liquidity is still poor. However, BWICs remain the preferred medium to trade and headline volumes remain high."

Today sees $1.4bn in for the bid, but the trader notes around half of that is on a single MTA IO list. "There will be strong interest in how that list trades, but away from it the reality is that today is fairly quiet for a Thursday and is really mainly about clean ups."

That pattern could change temporarily tomorrow, the trader suggests. "I expect it to be busy tomorrow morning after non-farm payrolls, but it'll quieten down again in the afternoon."

Secondary markets

Euro secondary firms up

Tone in the European securitisation secondary market continues to firm up.

Despite the large number of BWICs yesterday, pricing levels held up across the majority of sectors and the majority of bonds in for the bid traded in line with expectations. CMBS, peripherals and UK non-conforming continue to improve, while UK and Dutch prime remain solid. Auto ABS were the most notable exception as they continue to remain under pressure from VW related headlines.

There are currently four BWICs on the European calendar for today. They include two mixed lists due at 15:00 London time today - one involves a range of deal types in fairly small size and the other even smaller dollar-denominated clips of UK RMBS.

In addition, at 14:00 there is a £34.35m block of SLT 1 B and at 15:00 a €10m slice of HLCN 2005-1 A. Neither bond has covered with a price on PriceABS in the past three months.

Structured Finance

SCI Start the Week - 2 November

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

Pipeline
The number of deals joining the pipeline and staying there grew again last week. In total there were eight new ABS, one ILS, three RMBS, one CMBS and two CLOs.

The ABS were: US$1bn AmeriCredit Automobile Receivables Trust 2015-4; US$650m Arby's Funding Series 2015-1; US$732m Bank of the West Auto Trust 2015-2; US$820m Nissan Auto Lease Trust 2015-B; Orbit Aircraft Leasing; US$505.3m Porsche Innovative Lease Owner Trust 2015-2; Scandinavian Consumer Loans V; and US$154m Skopos Auto Receivables Trust 2015-2.

US$300m Kilimanjaro Re Series 2015-1 was the sole ILS, while the RMBS were Duncan Funding 2015-1, Paragon Mortgages No.24 and US$1.07bn STACR 2015-DNA3. The CMBS was US$313m FREMF 2015-KVAD and the CLOs were €416m CGMSE 2015-3 and US$511.25m Neuberger Berman CLO XX.

Pricings
A large number of deals also priced. The final count consisted of nine ABS, five RMBS, two CMBS and five CLOs.

The ABS were: US$250m Barclays Dryrock Issuance Trust Series 2015-3; US$250m Barclays Dryrock Issuance Trust Series 2015-4; US$115.3m Brazos Education Funding 2015-1; CARDS II Trust Series 2015-3; US$550m Discover Card Execution Note Trust 2015-4; US$750m Fifth Third Auto Trust 2015-1; US$450m Flagship Auto Trust 2015-3; €510m Titrisocram 2015; and €820.5m VCL 22.

US$344m JPMMT 2015-6, €1.03bn Penates Funding Compartment 5, A$300m Pepper Residential Securities Trust No.15, US$428m Progress 2015-SFR3 and US$1.12bn Towd Point Mortgages Trust 2015-5 made up the RMBS, while the CMBS were US$846m Hudson's Bay Simon JV Trust 2015-HBS and US$1bn MSBAM 2015-C26.

The CLOs were US$512m Benefit Street Partners CLO VIII, €1.96bn Claris SME 2015-1, US$599m FDF I, €412.8m Jubilee CLO 2015-XVI and US$407.71m OHA Credit Partners XI.

Markets
US ABS spreads were mostly unchanged, although Bank of America Merrill Lynch analysts note that container and railcar ABS spreads did widen 5bp and 20bp respectively. "Spread widening in these two sectors likely reflect weakening conditions in the related industries," they say. "TRACE data covering October 23rd to October 29th shows that there were 1,587 trades with total volume of at least US$3.6bn (based on current face)."

With little impetus for spread tightening, US CMBS spreads stayed flat across the board. Barclays analysts say: "As of Thursday's close, LCF 10-year triple-A bonds were at swaps plus 125bp. Lower in the capital stack, spreads were also flat for the single-A minus rated C tranche at swaps plus 300bp, and the triple-B minus rated mezzanine tranches held steady at swaps plus 490bp."

It was a slow week to end the month in European RMBS. "Selling pressure continues to exist in the UK BTL and NCF space (mezzanine in particular), although the segments held ground well and the seniors were relatively unaffected in spread terms during the week. Peripheral RMBS saw better buyers, resulting in c.2bp-3bp tightening across the stack of seniors," say JPMorgan analysts.

Editor's picks
Navient lays out FFELP recommendations: Navient has released repayment data on FFELP student loans, as well as a comment letter to Moody's regarding its ratings on ABS backed by such assets. The letter includes a number of recommendations, including Navient's belief that voluntary prepayments will continue to increase due to improving economic conditions, refinancing activity and the ultimate launch of the RePAYE programme...
Drug store deal CMBS impact weighed: Walgreens Boots Alliance is set to acquire Rite Aid for US$17.2bn, in a move which will impact almost US$10bn of CMBS conduit loans. There is slightly more 'high risk' exposure in legacy CMBS than in 2.0 deals...
US RMBS held: US non-agency RMBS secondary spreads are being held at or around recent wides by a range of external and internal factors. All eyes have been on the Fed and while the lack of a rate rise was anticipated, its hawkish comments mean fixed income and equities are off...

Deal news
• While S&P has affirmed Punch Taverns' ratings and revised its liquidity outlook from less than adequate up to adequate, the rating agency's use of its corporate methodology rather than corporate securitisation remains wrong, suggests Barclays credit analysts. With further non-core disposals expected, there is value to be found in Punch's bonds.
• TSB Bank has begun roadshowing its debut UK prime RMBS. Duncan Funding 2015-1 will not be issued from a regular master trust structure, but will maintain a revolving period of five years, with the ability to add new assets.
• The anticipated pay-off of the Stuyvesant Town/Peter Cooper Village loan (SCI 21 October) has prompted Fitch to place 12 bonds in four CMBS on rating watch positive. The rating agency has also revised its outlook for one class of notes.
• Freddie Mac has obtained its largest insurance policy to date under its ACIS programme. The transaction transfers much of the remaining credit risk associated with STACR 2015-DNA2.
• Kroll Bond Rating Agency has placed all of its outstanding ratings for Invitation Homes 2013-SFR1 on watch developing. The agency will keep this status in effect until it receives details from the servicer, Midland, as to whether the borrower will exercise one of its three one-year maturity extension options prior to the loan's current maturity date of 9 December.

Regulatory update
• The US FDIC's board has approved a final rule regarding the treatment of financial assets transferred in connection with a securitisation. Certain provisions adopted by the criteria for a securitisation safe harbour are set under the final rule.
• DBRS has agreed to pay nearly US$6m to the US SEC over charges that it misrepresented its surveillance methodology for rating certain RMBS and re-REMICs. The rating agency allegedly failed to conduct a monthly monitor of the transactions over a three-year period.

Deals added to the SCI New Issuance database last week:
Ascentium Equipment Receivables 2015-2 Trust; Capital One Multi-Asset Execution Trust 2015-7; Capital One Multi-Asset Execution Trust 2015-8; CarMax Auto Owner Trust 2015-4; Cerberus ICQ Levered CLO 2015-1; Citi Held for Asset Issuance 2015-PM2; Colony American Finance 2015-1; COMM 2015-CCRE27; Dell Equipment Finance Trust 2015-2; FCT Credit Agricole Habitat 2015; Foncaixa PYMES 6 ; Ford Credit Auto Lease Trust 2015-B; FREMF 2015-K49; FREMF 2015-K720; FRESB 2015-SB6; Golub Capital Partners CLO 26(B); Green Tree Agency Advance Funding Trust I Series 2015-T1; Green Tree Agency Advance Funding Trust I Series 2015-T2; GSCCRE 2015-HULA; Honda Auto Receivables 2015-4 Owner Trust; Kimi 4 (SCF Rahoituspalvelut I); Magnetite XV; Mercedes-Benz Auto Lease Trust 2015-B; MSBAM 2015-C26; Orange Lake Timeshare Trust 2015-A; Penates 5; Pepper Residential Securities Trust No. 15 ; SBA Tower Trust 2015-1; SMB Private Education Loan Trust 2015-C; VCL 22; World Financial Network Credit Card Master Note Trust Series 2015-C

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-6; BACM 2006-2; CGCMT 2014-GC25; COMM 2010-C1; COMM 2013-CR6; COMM 2014-CR15; COMM 2014-LC17 & COMM 2014-CR²0; CSMC 2006-C1; DECO 2007-E5; DECO 2007-E6; DECO 2007-E7; DECO 6-UK2; DECO 7-E2; ECLIP 2006-1; ECLIP 2006-2; ECLIP 2006-3; ECLIP 2006-4; EURO 26; GCCFC 2007-GG11; GCCFC 2007-GG11 & CGCMT 2008-C7; GSMS 2011-C3; JPMCC 2005-CIBC13; JPMCC 2006-CB14; JPMCC 2011-C3; LBUBS 2007-C7; MSBAM 2013-C10 & MSBAM 2013-C12; MSBAM 2014-C18; MSBAM 2015-C21; MSBAM 2015-C22; MSC 2011-C1; WBCMT 2007-C33; WFRBS 2011-C2

Structured Finance

Regulation threatens market viability

Banks' market making ability in securitised products is set to be severely affected by the Basel Committee's proposed Fundamental Review of the Trading Book (FRTB). JPMorgan ABS analysts have joined a growing chorus (SCI 15 June) in warning that FRTB would make secondary trading in securitised products unprofitable.

The final FRTB ruling is expected to be published next month, before national regulators modify it to conform to their individual jurisdictions. The JPMorgan analysts expect the final ruling to be implemented in 2019, although banks could be expected to wind down activities beforehand.

The FRTB requires a standardised approach for calculating capital requirements for securitisation positions held in trading books, with a default risk capital charge, an enhanced delta plus risk capital charge and a residual risks add-on component. For securitisation purposes, the enhanced delta plus risk capital charge is the major contributor to higher capital charges.

The enhanced delta charge calls for banks to hold capital buffers which equate to losses in market value under extraordinarily large changes in spread. For a jumbo 2.0 bond at the top of the capital structure, the credit spread shock is equal to its market value change if spreads move by 400bp.

"Other sectors and bonds that are lower down in the capital structure have to hold enough capital to buffer spread movements that are multiples of that," note the analysts. "This has to be resolved by the regulators for capital to move down to a reasonable level."

Taking the JPMMT 2015-4 B1 bond as an example, the analysts suggest that the SSFA formula under the current Basel 3 regime leads to a risk weight of 560%, but that the capital charge using the SSFA formula becomes even more punitive under FRTB and the risk weight would jump to 829%. That is before the credit spread shock and residual add-on are included.

The three risk weight components are aggregated and multiplied by a firm-wide capital rate to derive a FRTB capital charge. The firm-wide rate is 8% for small banks, but large broker-dealers will have to add on the global systemically important bank charge as well, raising their capital charge to the mid- to low-teens.

In ABS, the senior investment grade part of the capital structure will see the biggest increase in capital from the old regime. Using FORDO 2015-C as an example, the class A senior tranches can be expected to see total capital increase by 4.4 to 10.4 times, while subordinate tranches will see increases of 1.3 to 1.9 times.

On an absolute basis, even the smaller increase for subordinate bonds still represents a large increase. The analysts find the proposed FRTB capital as a percentage of market value for FORDO 2015-C C becomes 154% instead of the previous 117%.

"In other words, more than a dollar-for-dollar capital charge will be required for a large bank to hold FORDO 15-C C on its trading books," say the analysts. "The proposed required FRTB capital will be 236% of market value for NAVSL15-3 B, a bond that is backed by FFELP student loans guaranteed by the US government."

These capital charges would require banks to "completely rethink their market making activity", with bid/ask spreads or trading volumes having to increase substantially to achieve target ROE. Eventually, the economics could rule out market making, which would result in a loss of liquidity for ABS investors, sponsors thus losing access to securitisation funding and consumers ultimately having less access to credit.

Dealers would have to hold far more capital than the actual market value of a CMBS, with the credit shock RWA component contributing by far the most to the capital charge. As with ABS, the proposed rules are "effectively making it impossible for market makers to continue to operate", with CMBX and CDX not providing effective capital relief for the credit shock component.

Non-agency RMBS would be similarly affected. Capital on triple-A jumbo 2.0 bonds would increase from 2.1% of market value to 26%, potentially causing more dealers to exit the market.

"The capital impact on jumbo 2.0, CRT and SFR markets is so onerous that we wonder if this was the actual intent of the regulators," say the analysts. If a trading business targeted a pre-tax, pre-expense 15% ROE, the current capital charge would require them to turn their book twice a year, but the new charge would require them to turn the book over 32 times per year. The analysts add that, anecdotally, a good year sees desks turn their book over four to six times.

Capital on the bottom classes for the CRT sector triples from more than 100% to over 300% under the proposed regime. SFR goes from a viable 2.1% for class A through D to around 200%. "If this was the intended impact from Basel, then they are effectively shutting down the non-agency RMBS markets," say the analysts.

JL

Structured Finance

Smaller portfolios catered for

Finacity Corporation has established Finacity Capital Management (FCM), a new business designed to facilitate efficient processing of trade receivables and access to the securitisation markets for companies with smaller portfolios of receivables. Magnetar Capital has provided strategic capital to FCM, which is initially capitalised with US$50m.

The business will fund transactions in the range of US$5m to US$25m using a simplified securitisation structure. The firm expects to add talent and infrastructure to the team as it ramps up the new business.

Structured Finance

Deutsche re-allocates trading resources

Deutsche Bank's management board has approved a five-year plan to revamp its strategy in the hope of achieving a number of newly set financial objectives. In a large cost-cutting scheme, the bank will exit uncleared CDS market-making and agency RMBS trading, along with higher risk-weight securitised trading.

The cuts are part of Deutsche's goal to reduce costs to below €22bn in 2018. The bank describes its exit from these areas as part of an attempt to streamline rates, securitisation and emerging market debt hubbing. From the re-allocation of resources in corporate banking & securities, it anticipates a net reduction of approximately €70bn in CRD4 leverage and of approximately €28bn in risk weighted assets.

The latest announcements have a four-fold strategy, says Deutsche co-ceo John Cryan. This includes a simpler and more efficiently run bank that is headlined by lower costs.

The bank also wants to become less risky by modernising its technology and withdrawing from higher-risk relationships and locations. The other two elements of its strategy include a better capitalised bank to catch up with regulation, as well as greater internal discipline and accountability.

Deutsche recently announced a number of changes to its leadership as part of the larger plan to reshuffle operations at the bank (SCI 19 October).

Structured Finance

Rating agency targets expansion

A partnership has been formed between Kroll Bond Rating Agency, the Kroll family and Wharf Street, effective immediately. It will provide permanent capital for the rating agency to grow.

Kroll Bond Rating Agency says it will use the additional capital to develop other sectors beyond the structured finance, public finance and financial institution spaces. It will particularly look to accelerate its growth within the corporate finance markets and expand internationally.

Structured Finance

Amherst welcomes mortgage team

Standish Mellon Asset Management has strengthened ties with subsidiary Amherst Capital Management by moving its mortgage team over to the firm. The team will remain in Boston and continue to utilise the same investment processes for Standish clients.

However, it will gain access to Amherst Capital's real estate data set and analytical tools to provide additional advantages to its work in the US real estate credit space. The team will provide investment advice with respect to approximately US$6.5bn of real estate-related assets.

Under the leadership of Sean Dobson, Amherst Capital will tap the expertise of senior mortgage analysts, including Laurie Goodman. Formerly Amherst Securities' RMBS strategy head (SCI 13 September 2013), she will provide leadership and guidance in research and investment strategy on an exclusive advisory basis as non-executive director.

"Amherst Capital's loan-level data analysis of the real estate capital markets provides the mortgage team with a unique perspective on the fundamental elements driving asset performance and a specialised set of tools for managing risk," says Dave Leduc, ceo of Standish.

Amherst Capital was established this year by BNY Mellon, in collaboration with Amherst Holdings. It was formed to help support Standish's capabilities in real estate investing and solutions.  

CLOs

CLO specialist poached

Golub Capital has hired Joseph Wilson as md to expand the firm's existing distribution capabilities. His responsibilities include managing and expanding relationships with buyers of leveraged loans.

Wilson is additionally tasked with identifying and executing secondary market opportunities within and outside the current Golub Capital portfolio. He will also provide insights on underwriting and financial structures for LBOs, recapitalisations and refinancings.

Prior to joining Golub Capital, Wilson was md at Citigroup, where he was member of the leveraged credit sales team. He was responsible for primary loan, secondary loan and structured credit sales. He has also worked at JPMorgan in a variety of roles, including investment banking, commercial banking, and par and distressed loan sales and trading.

CLOs

CLO manager acquired

Conning has agreed to acquire CLO and high yield bond specialist Octagon Credit Investors, taking over management of its US$12bn in assets. Andy Gordon will continue as Octagon's ceo, and the firm's existing investment and business teams will remain in place.

The acquisition will enable Conning to expand its expertise by inheriting Octagon's experience in below-investment grade assets. These assets span across CLOs, separate accounts and commingled fund offerings on behalf of insurance companies, banks, pension funds and asset managers.

Following the closing of the transaction, Octagon will operate as a subsidiary of Conning and be governed by its own board of directors. The transaction is expected to close early in 2016.

Broadhaven Capital Partners served as financial advisor and Morgan, Lewis & Bockius served as legal advisor to Conning on this transaction. Citigroup served as financial advisor and Weil, Gotshal & Manges served as legal advisor to Octagon and other sellers. Simpson Thacher & Bartlett served as legal advisor to Octagon management.

CLOs

CLO equity investment disclosed

Fair Oaks Income Fund has entered into binding contracts to acquire, in the primary market, US$25.5m notional of equity notes and US$10m of class F notes of Neuberger Berman CLO XX. The purchase represents 66% of the total equity of the transaction.

Managed by Neuberger Berman, the CLO's current target portfolio has a principal value of US$500m across an expected 133 unique bank loan issuers, with an expected weighted average exposure per issuer of approximately 1.01%. The potential total return for this investment is estimated to be between 15% and 16% per annum.

CMBS

Automated lender launches

Aries Capital has launched an automated mortgage banking platform that specialises in non-recourse, permanent and bridge loans from US$3m to US$75m for hotel, multifamily, self-storage, retail and other commercial properties in the US. Headquartered in Chicago, LendingCap Commercial is headed by Neil Freeman, Aries chairman and ceo, and Rushi Shah, Aries svp and president of LendingCap.

LendingCap's originators are expected to work closely with a network of CMBS lenders and other institutional investors to offer competitive rates and terms. The objectives of the platform are to ultimately reduce costs and time for both the lender and the borrower. To facilitate this, an online dashboard provides borrowers - as well as their employees, accountants, originators and underwriters -with real-time access to every step in the loan process.

Borrowers can receive a variety of non-recourse financing, which includes five- and 10-year fixed rate permanent debt for the refinance or acquisition of cashflowing properties, without the burden of personal guaranties. The assumable loans allow LTV ratios of up to 75% and the flexibility to take cash out for other investments. Non-recourse bridge loans from two to five years are also available.

RMBS

MERS settlement agreed

Bank of America has agreed to pay US$335m to settle a lawsuit, in which it allegedly misled shareholders about risky mortgage securities and its dependence on the electronic mortgage registry known as MERS. According to an SEC quarterly earnings filing from the bank, the agreement remains subject to final documentation and court approval.

The settlement fee will be paid to Pennsylvania Public School Employees' Retirement System, which represented the shareholders. The case dates back to 2011, but involves stock that shareholders bought in 2009 and 2010, which was supposedly sold to repay US$45bn in TARP funds.

The plaintiffs also allege that Bank of America knew it could not raise sufficient capital to repurchase billions of dollars in securities that were using loans originated by Countrywide as collateral. In addition, the bank is accused of being aware that MERS was faulty and would be an unreliable tool in attempting to legally foreclose on thousands of delinquent borrowers.

RMBS

Mortgage fund inks first investment

UK Mortgages Limited (UKML), TwentyFour Asset Management's listed closed-ended fund, has signed its first transaction. Under the agreement, the fund will invest in profit participating notes (PPNs) issued by a dedicated acquisition company (Corporate Funding), which will purchase £310m UK buy-to-let mortgages from The Coventry Building Society Group.

The pool comprises 1,743 recently originated mortgages, with an average balance of £178,855 and an average loan-to-value ratio of 65%. The Coventry originated the mortgages and will continue to service the loans, resulting in a seamless transaction for the borrowers.

As this is the fund's first transaction, a significant majority of the net IPO proceeds raised by UKML in July will be invested in the PPNs to finance the acquisition. To supplement UKML's funding for the transaction and for ongoing financing purposes, Corporate Funding has established a loan financing facility with Bank of America Merrill Lynch that is available for up to two years, thereby providing maximum flexibility on the timing of a securitisation. The transaction's capital allocation will be rebalanced as further transactions are completed or when the pool is securitised.

It is expected that the long-run capital usage from this first deal will be around £51m upon securitisation, representing the deployment of approximately 20% of UKML's initial capital raise.

The initial transaction with The Coventry combines high quality mortgages and low initial leverage, a combination that TwentyFour believes will generate an appropriate risk-adjusted return. The estimated annualised return of this first portfolio over its life is 7.35% gross, assuming securitisation takes place as intended.

TwentyFour has been working concurrently on other potential transactions that target slightly higher yielding mortgages, with the goal of providing a good balance with this initial transaction. The firm will also seek to build on its relationship with The Coventry with a view to further deals in the future.

Douglas Charleston, portfolio manager at TwentyFour, comments: "To have completed a transaction with an originator that the RMBS market is already familiar with, and with such an enviable track record, gives UKML and Corporate Funding a very steady foundation on which to build."

UKML's remit is to purchase legacy portfolios with strong observable performance histories and new portfolios with robust underwriting standards. The aim is to create conservative leverage (around 4x) via matched long-term RMBS issuance, targeting returns of 7%-10% once fully invested.

TwentyFour says that the introduction of a bank leverage cap and an expected increase in capital charges on mortgage lending have created an opportunity for the fund to enter the UK mortgage market. At the same time, increasing capital requirements for financial institutions means that capital is a scarce commodity for lending, resulting in higher margins paid by borrowers.

RMBS

Broker-dealer adds RMBS trio

Nathan Hale Capital has made three hires to strengthen its institutional agency RMBS team. The new additions are Scott Mooney, John Fenwick and DJ Dal Pizzol.

Mooney has more than 15 years of experience in trading agency RMBS. He was most recently director of mortgage-backed trading at Société Générale in New York and has also worked at BNP Paribas and Merrill Lynch.

Fenwick was most recently a vp in Wells Fargo's institutional interest rate sales and trading team. He joins Nathan Hale's institutional RMBS sales team.

Pizzol also joins the institutional RMBS sales group. He has more than 20 years of experience in the inter-dealer RMBS markets and dealer sales at regional brokers and has worked for firms such as Murphy Durieu, Prebon, ICAP and Amherst Securities.

ABS

ABS benchmark offered

JPMorgan has launched an ABS index that it describes as a comprehensive benchmark, which captures 70% of the US ABS market. The aim is to offer increased transparency through its extensive coverage of the ABS market, with robust third-party pricing on the underlying constituents and rigorous management of the index portfolio.

As of 30 October 2015, the aggregate index contains 2,449 ABS CUSIPs, accounting for US$461bn in notional value. Each ABS sector - credit card, auto/equipment, student loan, floorplan and other - is represented in the aggregate ABS index. The five sectors will also be offered as subsets of the index.

Fixed and floating bonds from all issuers are eligible for inclusion in the index, providing they meet the well-defined criteria designed to capture the tradable market of ABS deals. Pricing is calculated by PricingDirect, with assumptions derived from secondary trading levels, new issue pricing and bond characteristics.

The ABS Index will be produced on every business day, based on the US bond market calendar, and rebalances on the last business day of the month.

Year-to-date returns on the composite ABS index were +0.75% through May, before selling off to +0.30% through October.

ABS

Marketplace ABS compared

Peer IQ has launched a marketplace lending securitisation tracker, with the aim of improving transparency and liquidity in the sector. In its inaugural report, the firm finds that marketplace lending securitisations do not differ significantly from more traditional securitisations in terms of structure and collateral pools. However, it suggests that differences in investor perception may be driving the higher coupons and lower ratings seen in deals so far.

The report highlights that investors may perceive marketplace securitisations more cautiously due to certain factors, including the asset class not having gone through a full credit cycle, lack of traditional credit risk measures like FICO scores and it being unsecured. However, the analysis finds that such perceived shortcomings are mitigated by faster amortisation on senior classes, due to conservative expected loss estimates, and by junior classes that have not been impacted by losses.

To gauge relative performance of the sector, PeerIQ compared a subset of 18 marketplace consumer loan securitisations (a total of 66 note classes representing US$2.4bn in issuance) to a broader universe of nearly 150 consumer credit deals (containing nearly 600 note classes and US$130bn of issuance). The deals in the comparison data were issued in or after January 2014 and are backed by assets that fall into analogous consumer credit categories, such as auto loans, credit cards and traditional consumer loans. The firm also examined summary statistics on marketplace versus non-marketplace originated student loan ABS.

Total US marketplace lending originations are projected to reach US$50bn by end-2015. Concurrently, marketplace securitisation volumes have increased substantially, with issuance up by almost five times versus the first three quarters of 2014.

Securitisation volume to date stands at US$4.3bn, according to PeerIQ, with a total of 25 deals issued since 2013. More than three-quarters of this volume was issued in 2015 alone, which has seen US$3.1bn issued across 13 deals so far.

ABS

PILOT deal pulled

Fitch has withdrawn its expected ratings for the Porsche Innovative Lease Owner Trust 2015-2 deal. The agency reports that Porsche has chosen to withdraw the deal from the market, with the decision coming in light of a second round of emission violations regarding Volkswagen-linked vehicles.

Owned by Volkswagen, Porsche was recently accused by the US Environmental Protection Agency in a letter that claims the car manufacturer installed emmissions cheating devices in a number of 2014-2016 models equipped with 3.0 litre engines. The latest probe by the EPA also includes a number of Audi models to have adopted the emissions devices - another company under Volkswagen ownership.

Volkswagen recently revealed that up to €2.6bn worth in loans and leases packaged into its auto ABS transactions have exposure to the EA189 EU5 engines and is seeking to remedy the situation by recalling affected vehicles to complete the necessary repairs (SCI 21 October).

Fitch says that it may assign the transaction its expected ratings again in the future, following an updated analysis of the portfolio and the proposed structure.

ABS

Allowing lawsuits 'adds ABS risk'

The CFPB's intention to remove a hurdle to class-action lawsuits would create risks for consumer lenders and related ABS, says Moody's. However, it could also bolster the credit quality of some borrowers.

The CFPB is considering a ban on clauses in financial contracts that prevent consumers from taking part in class-action lawsuits. It may also require companies that include arbitration provisions in contracts to regularly submit information related to arbitration proceedings, potentially for public dissemination.

If the CFPB's proposal is adopted, it would result in changes to many types of consumer borrowing contracts, possibly affecting both lenders and ABS. Moody's notes that legal risks would increase for lenders and servicers and that direct costs to securitisations could rise.

ABS sectors with generally financially stronger sponsors and servicers face less risk than sectors that tend to include weaker counterparties, because those weaker entities are less likely to have the necessary resources to manage additional litigation risk, according to Moody's. Greater regulatory oversight means banks are also less likely to engage in practices that plaintiffs will challenge.

Creating greater legal recourse for consumers and increasing transparency around arbitration proceedings should improve securitisation credit quality sufficiently to strengthen borrowers' finances. Moody's believes that more consumer-friendly lender and servicer practices could be more important than the monetary awards that individual consumers might win through class-action litigation.

ABS

Marketplace pricing partnership agreed

Thomson Reuters has launched an evaluated pricing service for marketplace lending, partnering with MountainView. The service aims to provide fixed income investors and investment managers with third-party, fair market valuation and price verification for hard-to-value loans.

Originations on marketplace lending platforms have doubled each year since 2010, reaching approximately US$12bn in 2014 and exceeding US$16bn for the first six months of 2015. The addition of marketplace lending to the existing Thomson Reuters Pricing Service is a marker of this exponential growth and signals the greater need for data on the nascent industry.

Jeff Drott, md of MountainView, comments that providing this service with Thomson Reuters will "build data and therefore trust around marketplace loans as an investable asset".

The move also highlights the growing need for data on securitisations of marketplace loans as they increase in frequency, with more than three-quarters of total marketplace securitisations in the US issued in 2015 alone.

Jayme Fagas, global head of evaluated pricing at Thomson Reuters, emphasises the importance of securitisation in the marketplace lending space and the concurrent need for clearer data. She states: "We anticipate securitisation will play a critical role in sustaining marketplace lending platform growth, and it will provide both transparency and liquidity to investors seeking potentially greater returns than they might derive from comparable high yield and/or ABS."

Further to this, Thomson Reuters is confident that by partnering with MountainView, it is poised to take advantage of the growing need for marketplace securitisation data. Fagas adds: "We are happy to collaborate with [the firm] to deliver pricing on loans and expect to do more with [it] as the marketplace solution moves towards securitisation."

ABS

PREPA agreement formalised

The Puerto Rico Electric Power Authority (PREPA) has entered into a restructuring support agreement with an Ad Hoc Group of PREPA bondholders, comprising traditional municipal bond investors and hedge funds, its fuel line lenders and the Government Development Bank for Puerto Rico. The agreement formalises the economic terms agreed between PREPA, the Ad Hoc Group and the fuel line lenders in September (SCI 4 September).

Lisa Donahue, PREPA chief restructuring officer, notes that the formalisation of the agreement solidifies the support of key creditors and will help facilitate a sustainable capital structure for the Authority. "We are working to build a strong financial foundation for PREPA and we are continuing constructive negotiations with our monoline insurers in order to achieve a consensual recovery plan. The financial measures and agreements we are working to implement are strengthening PREPA and are in the best interests of all stakeholders."

The restructuring support agreement provides a structured framework to implement the economic agreements and is designed to provide PREPA with five-year debt service relief of over US$700m and a permanent reduction in its principal debt burden of over US$600m. The agreement also outlines other elements of PREPA's recovery plan, including new governance standards, operational improvements, a rate structure proposal and a capital plan.

In addition to the debt exchange outlined in September, the Ad Hoc Group will negotiate with PREPA to backstop a financing on terms to be mutually agreed that will allow for a cash tender for bonds held by non-forbearing creditors. Fuel line lenders will also have the option to convert existing credit agreements into term loans with a fixed interest rate of 5.75% per annum, to be repaid over six years in accordance with an agreed schedule, or exchange all or part of the principal due under the existing credit agreements for the new securitisation bonds.

PREPA's debts owed to the Government Development Bank for Puerto Rico will be treated in substantially the same manner as those owed to the fuel line lenders.

CDO

Trups defaults drop again

The number of combined defaults and deferrals in US bank Trups CDOs dropped to 18.1% at the end of September from 18.8% in August, according to Fitch's latest index results for the sector. The drop resumes following two straight months of the indices remaining unchanged (SCI passim).  

In September, 16 bank issuers representing US$138m of notional cured in 10 CDOs, while there were no new defaults. Meanwhile, three issuers re-deferred, representing US$10.5m of notional in three CDOs. One defaulted issuer, with a notional of US$115.5m across six CDOs, has been exchanged for preferred stock and the notional has been removed from Fitch's index.

Across 78 Fitch-rated Trups CDOs, 229 defaulted bank issuers remain in the portfolio, representing approximately US$5.5bn of collateral. In addition, 113 issuers are currently deferring interest payments on US$1.4bn of collateral.

CLOs

Pre-crisis double-Bs outperform

The total amount of CLOs paid down in JPMorgan's Collateralised Loan Obligation Index (CLOIE) since the September rebalance through 30 October was US$3.74bn in par outstanding, split between US$2.41bn and US$1.33bn of pre-crisis and post-crisis CLOs. The post-crisis index added US$4.3bn across 57 tranches from 10 deals at the October rebalance.

Pre- and post-crisis triple-A discount margins each widened by 4bp during the month, according to the latest index results. The biggest outperformer in September was the pre-crisis double-B index - which returned 0.36% - while the laggard was the post-crisis single-A index, which returned -0.07%. The post-crisis triple-A index posted a negative return for the second straight month.

CLOs

Debut CLO equity fund closes

American Capital says it has closed its new US$450m CLO equity fund. American Capital CLO Fund I, comprised entirely of third-party investors, has US$150m of investment capacity after the fund previously purchased US$300m of American Capital's existing equity portfolio at its fair value (SCI 10 September).

"This is our first fund dedicated to CLO equity and it diversifies our asset management income while leveraging an existing investment team," says Tom McHale, American Capital svp, finance.

An affiliate, American Capital Asset Management (ACAM), manages the fund for customary management and incentive fees. Following the closing, ACAM now manages 14 private funds and three public funds with approximately US$15bn of third-party earnings AUM and US$81bn of total AUM.

Kirkland & Ellis served as lead counsel to American Capital on the transaction. Cleary Gottlieb Steen & Hamilton was lead counsel for the investors.

CLOs

CLO-driven offering closes

CIFC Asset Management has closed an offering of US$40m in aggregate principal of unsecured senior notes. Proceeds from the offering will be used by the firm, together with short-term investments and cash currently on its balance sheet, to comply with future CLO risk retention obligations.

The notes will pay interest semi-annually at a rate of 8.5% per annum and will be non-callable for five years, maturing in 2025. CIFC may also use proceeds for general corporate purposes, including possible acquisitions.

S&P has assigned a rating of double-B minus to the notes. Sandler O'Neill & Partners acted as initial purchaser and sole manager for the offering.

CLOs

Volcker compliance sought

Separate meetings of St Paul's CLO IV noteholders have been convened for 26 November to consider and, if thought fit, pass an extraordinary resolution. The issuer wishes to amend the investment management agreement (IMA) to comply with the Volcker Rule.

The proposed amendments will provide noteholders with the option to hold notes with different voting rights in respect of resolutions to remove or replace the CLO manager. This would involve splitting each class of rated notes into three separate subclasses - voting notes, non-voting notes and non-voting exchangeable notes.

Voting notes will carry the right to vote on any investment manager removal or replacement resolutions and are exchangeable at any time into non-voting or non-voting exchangeable notes. Notes (except subordinated notes) issued on 27 March 2014 - when the transaction closed - will be deemed as voting notes.

Non-voting notes will not carry a right to vote on manager removal or replacements, but will be counted in respect of all other matters in which the voting notes have a right to vote. These notes are not exchangeable into voting notes or non-voting exchangeable notes.

Equally, non-voting exchangeable notes will not carry a right to vote on manager removals or replacements, but will be counted in respect of all other matters. However, they will be exchangeable at any time into non-voting and voting notes.

In order to obtain broader noteholder support before making certain modifications to the collateral quality tests, the issuer also wishes to amend Condition 14(b)(vii)(A) of the IMA. Under this provision, noteholders have the power by way of ordinary resolution of the controlling class only to modify, amend or replace any components of the S&P Matrix and Fitch Tests Matrix.

CMBS

CMBS liquidations dip again

US CMBS loan dispositions have dipped back below the US$1bn mark to reach a liquidation volume similar to the end of the summer, says Trepp. There were 54 loans totalling US$868.9m liquidated with losses in October.

Although total disposition volume declined, average loan size has continued to trend upward. From US$11.48m in August and US$14.46m in September, average size reached US$16.09m in October.

There were seven loans - totalling a combined US$77.8m - that took losses of over 95%, one of which was a US$14.5m B-note. Overall loss severity was 40.73%, down from September's 43.48%.

The US$35.42m Mercantile Bank & Trust Building loan took a 95.87% severity, while the US$30.74m Seven Mile Crossing suffered a 74.96% loss (see SCI's CMBS loan events database). The largest loan disposed of last month was the US$163.75m Jericho Plaza (I and II) loan, which took a US$44.96m loss.

CMBS

Fresh & Easy exposure gauged

About US$209.2m in CMBS exposures across 16 loans could be affected by Fresh & Easy's latest bankruptcy filing, reports Morningstar. However, the agency says that the impact would be limited to five loans with balances of less than US$7m.

These loans have the greatest risk of going delinquent because the grocer occupies at least 48% of the leasable space. Conversely, Fresh & Easy occupies 18% or less of the space at the collateral securing the five largest loans, which Morningstar renders as low default risks.

The US$38.2m Lakewood Marketplace loan is the largest CMBS exposure to Fresh & Easy, accounting for 4.3% in MSBAM 2015-C21. While the grocer is the second largest tenant, it occupies just 9.3% of the suburban Los Angeles shopping centre.

Fresh & Easy, which filed for Chapter 11 bankruptcy protection in September, plans to sell off its assets and wind down its business. "However, Fresh & Easy's pull-out from the grocery industry doesn't necessarily mean that the real estate is destined for long-term vacancy," adds Morningstar. "The stores could have value to several newcomers."

The agency notes that Aldi plans to open 45 new stores in the increasingly competitive Southern California region. In addition, Bargain Market recently announced that it will be opening 14 stores in the greater Los Angeles area.

CMBS

CMBS delinquency drop continues

Trepp's US CMBS delinquency rate in October fell by 5bp, marking the ninth month of improvement in the past year. The next big move for the delinquency rate could come as early as November, with a forthcoming resolution expected on the US$3bn Stuyvesant Town/Peter Cooper Village loan (see SCI's CMBS loan events database).

The loan defaulted in 2009 and was later foreclosed upon, but the deal by Blackstone to purchase the properties for US$5.3bn will resolve the existing debt (SCI 21 October).

"The removal of StuyTown from the list of distressed assets alone should lead to a 60bp drop in the delinquency rate," says Manus Clancy, senior md at Trepp. "The rate for multifamily loans, which currently exceeds 8%, could jump from the worst performing property sector to the best performing when the loan is paid off."

Meanwhile, the October drop in the delinquency rate for US CMBS loans leaves it at 5.25%, which is down 52bp year-to-date. During the month, US$1.4bn in CMBS loans became newly delinquent.

In addition, about US$400m in loans were cured in October, while loans that were previously delinquent but paid off either at par or with a loss totalled almost US$1.2bn. Total delinquencies fell to US$27bn month-over-month.

Delinquencies for all but one of the five major property sectors declined in October. Lodging and office loans posted the largest month-over-month rate improvement, falling by 11bp to 3.17% and 5.7% respectively. The only sector to worsen in October was industrial, as delinquencies jumped by 10bp to 6.28%.

CMBS

CMBS criteria updated

Moody's has updated its methodology for rating multi-borrower large loan and single-asset/single-borrower (LL/SASB) CMBS. The changes incorporate previous proposals from two request for comments that the agency sent out in August and September (SCI passim).

The main changes to the methodology include updated LTV targets for US, Canadian and Japanese LL/SASB CMBS. The agency has also refined adjustments that it makes to its benchmark LTV ratios and has established credit neutral tail period standards. Further, Moody's has formed rating caps during the tail period for loans that remain outstanding past the contractual loan term in the Asia Pacific and Latin America regions.

The updated approach will result in rating upgrades of between one and four notches on some tranches from approximately half of the US and Canadian LL/SASB transactions that Moody's currently rates. The upgrades will result mainly from the recalibration of its benchmark advance rates for such transactions.

However, there will be no ratings impact on the LL/SASB transactions outstanding in Latin America and Asia-Pacific, the latter including transactions in Japan, Singapore and Australia. Similarly, the update will have no ratings impact on US conduit/fusion or CRE CLO transactions that share elements of the collateral analysis approach with LL/SASB transactions.

CMBS

Loan misuse confirmed, refinanced

Further details have emerged regarding a mortgage loan securitised in Velocity Commercial Capital 2015-1, which was thought to have been misused by the borrower (SCI 22 September). That loan has now been repaid in full.

The borrower was contacted on Velocity's behalf and confirmed that it was indeed occupying the property as a primary residence, in violation of the loan documents. The loan was therefore refinanced and the proceeds from the refinancing were used to pay off the loan in the securitisation on 27 October. Kroll Bond Rating Agency notes that under the CMBS, the loan was not declared to be in default and was not transferred to special servicing at or prior to repayment.

CMBS

CMBS defaults dip

Fitch's US CMBS cumulative loan default rate for fixed-rate CMBS fell slightly to 13.2%, as of 3Q15, from 13.3% at end-2Q15. The agency suggests this is due to fewer new defaults and strong new issuance levels.

In 3Q15, 38 loans totalling US$779.1m were newly defaulted during their term. This represents a decrease from 3Q14, when 77 loans totalling US$1.11bn defaulted. It also represents a slight decrease from 2Q15, when 70 loans totalling US$797.4m defaulted.

The average size of the newly defaulted loans was US$20.5m. Of the loans, nine had an original balance of over US$20m, accounting for approximately 73% of the total newly defaulted loans by balance.

Office properties were the largest contributor to new 3Q15 defaults by loan balance, with 15 loans comprising 55.7% of defaults, five of which were over US$20m. Retail properties were the second largest contributor with 12 loans at 31.8%, two of which were over US$20m.

"Office and retail defaults were generally due to struggling occupancy levels and declining rents," Fitch observes.

Meanwhile, three industrial, three hotel and four multifamily loans defaulted in 3Q15, representing 7.8%, 4.3% and 3% of total defaults respectively. The five largest defaults in 3Q15 were: US$163.8m One and Two Jericho Plaza (securitised in CSMC 2007-C5); US$108.5m The Mall at Stonecrest (BACM 2005-1); US$89.8m Vista Ridge Mall (LBUBS 2001-C3); US$52.5m Fifth Third Center (BACM 2006-3); and US$48.8m Maxtor Campus (CSMS 2006-C4) (see SCI's CMBS loan events database).

Finally, three CMBS 2.0 loans defaulted in 3Q15, with a total balance of US$26.3m. The largest of these loans is US$14.5m 540 Atlantic Avenue, securitised in WFRBS 2013-C14.

Insurance-linked securities

Trigger event for cat bond?

The class C notes of MultiCat Mexico Series 2012-I have been downgraded from single-B minus to triple-C minus by S&P. The rating agency had placed the ratings on credit watch on 28 October.

The ILS bond remains on credit watch with negative implications. They were placed on credit watch because of concerns that a trigger event may have occurred when Hurricane Patricia made landfall on 23 October. Swiss Re has submitted an event notice to calculation agent AIR Worldwide.

"We are downgrading the class C notes because we believe that in the absence of any significant changes in the reported minimum central pressure by the National Hurricane Center, a default appears to be inevitable within six months," says S&P.

The notes were due to mature on 4 December, but S&P believes Swiss Re will extend the maturity by 30 days to allow AIR to publish its event report. The annual extension spread will be 3%, which the rating agency considers to be a coupon step-down from the current interest spread of 7.5%.

If S&P does not receive an event report before the notes' maturity is extended, the rating agency will lower the class C notes' rating to single-D.

Risk Management

ESMA seeks clearing feedback

ESMA has opened a public consultation on draft requirements regarding indirect clearing. The draft rules cover arrangements for OTC derivatives and exchange-traded derivatives.

ESMA's consultation aims to address issues raised by stakeholders in prior consultations. It also seeks to ensure consistency in the application of EMIR and MIFIR.

Risk Management

Utility benefits polled

Financial Markets Consulting has polled market participants on the inefficiencies that continue to challenge post-trade processing in both exchange-traded and cleared OTC derivatives, along with potential solutions that could address them. Commissioned by SunGard, the study underscores a desire among global clearing firms for industry-wide collaboration and utilities to eliminate redundant and inefficient processes, drive the standardisation of data and migrate to systems that are more modular, open and real time.

Among the key sentiments revealed by the study is interest in collaborating to define data requirements and work with exchanges, clearinghouses and regulators to standardise data across the globe, with the consistent belief that utilities are prime candidates to facilitate data standardisation. Desire for a centralised reporting facility that could source trade data from exchanges and clearinghouses, enrich it with client data and deliver it back to a variety of data repositories in their specific required formats was also expressed. Further, the value in collectively pushing for regulators to adopt a standardised global approach to data reporting and the handling of margins, segregation and clearing requirements was underlined.

According to the research, over 85% of industry leaders named data standardisation in trading, clearing and post-trade as the most urgent opportunity for addressing their operational challenges. The study also suggests that utilities can create a strong and unified voice to facilitate industry-wide communication, collaboration and ultimately standardisation of data, systems and processes.

Risk Management

OTC outstandings compressed further

The notional amount of outstanding OTC derivatives contracts declined from US$629trn at end-December 2014 to US$553trn at end-June 2015, according to the BIS. The organisation says that trade compression to eliminate redundant contracts was the major driver of the decline.

Gross market value of outstanding derivatives contracts declined even more sharply in 1H15. Market values decreased from US$20.9trn to US$15.5trn between end-December 2014 and end-June 2015. The decrease is likely to have been driven by the reduction in notional amounts outstanding, as well as increases in long-term interest rates, which took yields back closer to those on outstanding swaps.

Central clearing made further inroads. In credit default swap markets, for instance, the share of outstanding contracts cleared through central counterparties rose from 29% to 31% in 1H15.

RMBS

AOFM auctions put on hold

The AOFM has cancelled its previously planned RMBS auctions for November and December. The decision follows the government agency's failure to sell any assets in its fifth auction last month (SCI 22 October).

The AOFM has not committed to any further scheduled sales as of now, but states that auctions will be on hold until at least February 2016. If the government agency chooses to go ahead with an auction, it will provide no less than two weeks of notice prior to its undertaking.

Five auctions have been held to date by the agency. It originally planned to sell A$300m to A$500m of RMBS per calendar month when it announced the launch of the programme earlier this year (SCI 13 May), but scaled the size of the sales down from August.

RMBS

Low losses for Japanese apartments

Credit losses on Japanese apartment loans will remain low for Moody's-rated banks because they tend to attract strong borrowers, says the rating agency. This is despite the strong growth in the construction of new rental housing.

The average annualised default rate in the past 10 years for securitised apartment loans has been only 0.07%, with a loss given default rate of about 0.01%. Most defaults have been due to obligor bankruptcy, but there have also been cases of heirs refusing to accept inheritances after the death of an obligor - which is less likely to happen with bank-originated apartment loans, where heirs are typically required to guarantee the loans.

Apartment loans are one of the fastest growing loan segments for Japanese banks. Loan originations for rental properties owned by individuals grew by 6% year-over-year in 1Q15 and by 15.8% year-over-year in 2Q15, with apartment loans comprising a large percentage of this growth.

RMBS

Population growth to support RMBS

Population growth will support housing demand and property prices in the UK, the Netherlands and Ireland, says Moody's. Housing supply shortages and robust economic growth could help reduce losses on residential mortgage loans.

The UK is projected to experience population growth of 3.2% until 2020, with 1.5% growth in the Netherlands. Moody's believes this will support housing markets in the context of a strong economic environment.

"Additionally, the size of the 25 to 35 age bracket - which forms the core of the first-time buyer segment - is expected to remain largely stable in the UK and the Netherlands until 2020," says Gaby Trinkaus, avp and analyst at Moody's. "While this demographic is projected to shrink in Ireland based on Eurostat data, the economic recovery and improved employment rates will support the market."

Ireland's population growth is set to slow down to 0.2% over the next five years. However, the strong economic recovery could draw recent expatriates back and eventually support a rise in population, supporting housing demand.

Equally, Spain's economic recovery could counteract the effect of a shrinking population - based on a 1.3% decline until 2020 - reducing downward pressure on house prices. The economy's recovery will determine how long house prices will stay flat and how long it will take to alleviate the stock of unsold new houses.

"A fall of the 25 to 35 segment in Ireland and Spain may weaken housing demand in and of itself," explains Greg Davies, avp at Moody's. "However, this segment will benefit the most from improved income prospects in future and increased mortgage lending activity, which could lighten the pressure on house prices and subsequently RMBS collateral performance."

He continues: "Better employment and income prospects in Spain and Ireland will improve first-time buyers' affordability, while house prices are still low and banks are increasing their focus on mortgage lending."

Meanwhile, Italy's 1.7% projected population increase to 2020 is markedly slower than the 3% rise over the past five years. A slower population increase and muted economic growth may weigh on housing demand. These factors, combined with Moody's assessment of an oversupplied housing market, indicate that house prices will remain steady in Italy - underpinning stable loss severities and RMBS collateral performance.