Contents

Secondary markets

US CLOs ticking along

The US CLO secondary market activity looks set to continue to follow its recent pattern.

"It was a little bit busier last week, but activity continues to be no more than light to moderate and I expect this week to be the same," says one trader. "In terms of spreads, there's no obvious catalyst to move us out of the range that we're in, so the secondary market is likely to continue to tick along where it is."

That current picture is mixed, the trader says. "Bid offers remain wide, but last week at least most of the bonds in for the bid were going through - cleaner 2.0s were trading OK and 1.0s continue to trade well. However, there remains significant bifurcation for any CLO that has a portfolio issue or an unloved manager."

Even the US holiday on Wednesday is unlikely to significantly impact the market, the trader suggests. "I think people will return after the holiday rather than the market shutting down through to the end of the week. They'll want to get things done as Thanksgiving is only a few weeks away and that's when the real slowdown usually starts."
There are currently, two BWICs on today's US CLO schedule. First is an 11 line $78.5m collection of triple-As due at 11:00 New York time, then there is a ten line $28m double- and triple-B auction at 13:00.

The triple-A list comprises: BNPIP 2014-1A A1, CFIP 2014-1A A2, CVPC 2013-CLO1 A1, GCLO 2006-1A A1B, KVK 2014-1A A1, LCM 5A D, NMRK 2014-2A A1, TELOS 2006-1A A2, TELOS 2014-5A A, TGCLO 2014-1A A1 and TICP 2014-1A A1. None of the bonds has traded on PriceABS in the past three months.

The mezz list consists of: BLUEM 2015-3A D, BSP 2015-VIA C, CIFC 2015-2A D, CIFC 2015-2A E, MIDO 2015-4A D, MUIRW 2012-1X E, NGCLO 2014-1A E, OZLM 2015-11A C2, SNDPT 2013-3A E and ZCLO3 2015-3A C. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary stays positive

Market tone remains broadly positive in the European securitisation secondary market.

"Tone remains pretty good despite a weaker day yesterday in broader credit markets," says one trader. "Overall, secondary spreads aren't gapping in but continue to grind tighter in many sectors."

The trader continues: "We saw quite a bit of activity in UK non-conforming yesterday and senior buy-to-let in particular where we continue to see investors looking for paper in size. Mezz buy-to-let remains harder to shift and demand in the rest of the UK non-conforming sector is still name specific."

At the same time, the trader notes that yesterday's initial price talk for the new Paragon deal also bodes well for the non-conforming sector. "It's certainly positive for buy-to-let paper and reflects the last few days of strong customer demand."

The prime segment continues to see consistent activity as well. "Prices are slightly up in sterling prime and the market appears to be normalising there," the trader says. "Dutch prime is also active but remains range-bound."

Meanwhile, the CLO market remains focused on new issues, the trader reports. "The latest Guggenheim deal priced on Friday, but we saw little follow-through impact in secondary. There, low mezz remains the easiest part of the stack to trade, but triple-As are still tricky and are currently quoted north of 150."

There are currently three European ABS/MBS BWICs on the schedule for today. First, at 10:00 London time is combination of Dutch and UK prime, followed by a mixed bag at 14:30 where the majority of line items are Italian bonds, finally at 15:00 is a an eight line 15.79+m UK non-conforming and Spanish RMBS.

The latter comprises: ALBA 2015-1 E, AYTDS 2006-1 B, GHM 2007-2X EA, MARS4 4X E1, NGATE 2007-3X D, RHIPO 8 B, SLT 1 Y and UROPA 2007-1 B2A. Only GHM 2007-2X EA has covered with a price on PriceABS in the past three months - 86 on 7 October.

There are two European CLO BWICs on today's calendar so far. One involves four tranches of 1.0 mezz the other two pieces of 1.0 equity.

The latter is due at 14:30 and consists of €24.1m BOYNE 1A F and €5.5m HEHDS 1A A, which is a repack of HEC 2006-2NX F2. Neither of the bonds has traded on PriceABS in the past three months.

Secondary markets

US CLOs challenged

The US CLO secondary market continues to face challenges.

"There's not much going on in secondary today apart from a handful of BWICs," says one trader. "People are taking advantage of tomorrow's bond market holiday to step out of what continues to be a challenging environment."

The trader continues: "It's been pretty tough to get trades done as external factors continue to weigh heavily on CLOs. Primarily it's contagion from the energy markets, but also the difficulties in the high yield and leveraged loan markets are feeding through into the CLO primary market and slowing it down, which in turn has slowed secondary as well."

Difficulties in the new issue market have been added to further of late by the absence of some key participants, the trader suggests. "A few of the larger triple-A buyers are currently out either because of the time of year or shortened approved manager lists; and at the same time because of the pull back from BDCs there are fewer equity buyers. So it's not entirely surprising there are signs of dealer exhaustion across the CLO market."

There are five US CLO BWICs on the calendar for today so far. The chunkiest of those still due involves a three line 2.0 triple-B list at 16:00 New York time.

It comprises: $4m ACIS 2015-6A D, $5m COV 2014-1A D and $6m MCLO 2014-7A C. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary stabilises

The European securitisation secondary market continues to stabilise.

Yesterday saw another stable if sluggish day across secondary flows. BWICs took the lead and most lists saw reasonable execution.

Fast and real money continue to look to add in the UK non-conforming space both on- and off-BWIC, though spreads across the sector remain broadly unchanged to very slightly tighter. Prime assets are still able to catch a bid too, but activity has subsided a little.

Meanwhile, peripherals remain the other key area of focus with interest around major Italian and Spanish names in particular. There is also some buying in Portuguese paper, but liquidity there is being hampered by political concerns.

With some parts of Europe and the US out, today is set to be quieter still. There is currently one BWIC on the European calendar.

Due at 14:00 London time it consists of €500k each of ANTHR 2006-1X C and TMAN 6 D. Neither bond has traded on PriceABS in the past three months.

Secondary markets

Euro secondary slow

As expected, yesterday was a slow day in the European securitisation secondary market and today has begun quietly.

With the US and parts of Europe out yesterday liquidity thinned further across the secondary market and only patchy trading was seen. Nevertheless, tone remains broadly constructive and spreads were unchanged to slightly tighter into the close.

Appetite for selected names across the board continues to be evidenced with pockets of trading notably in autos, CLOs, Spanish RMBS and UK prime and non-conforming. At the same time, investor interest in Dutch prime is returning.

Meanwhile, the new issue pipeline continues to distract participants and has meant a quiet start to secondary this morning. Equally, there are currently just two BWICs on the European schedule for today.

At 14:00 London time there are two lines of RMBS - £3m ERF 5 B and £2.75m ERF 5 C. Neither of which have traded on PriceABS in the past three months.

Also at 14:00 is a 12 line €14.6m ABS CDO auction comprising: BRUCK IX C1, CAVSQ 1 B, CAVSQ 1 C, DEKAE III-X D, DEKAE II-X D1, DUNC 2007-1X C2, FAB 2002-1 A1, FAXT 2004-1X A-3, PANTH III-X D1, PLLS II-X B, RHODI 1X D and STNTM I D. Two of the bonds have covered on PriceABS in the last three months - FAXT 2004-1X A-3 at 95.75 on 20 October and RHODI 1X D at 86H on 17 September.

Secondary markets

US RMBS eases

Volumes and market sentiment are easing in the US non-agency RMBS secondary market as the week progresses.

"It feels like a Monday following on from yesterday's holiday and certainly volumes are down for a Thursday," says one trader. "There's less than $300m in for the bid today, but we did have higher volume on Tuesday with over $800m on auction as predominantly fast money sellers tried to push stuff through early."

That approach appears to have been a good one. "High yield is a little weaker today and oil is lower - so risk perception is creeping back in causing market tone to soften and liquidity to begin drying up," says the trader. "Consequently, sellers today are mostly money managers and the slower hedge funds - real money in essence - looking to move higher dollar bonds."

The current risk aversion may not last, however, the trader says. "We seem to change direction each day taking our cue from other markets - swaps in particular and rates in general are a big overhang in the mortgage market. That used to be the case because the big mortgage players were heavily involved in those markets for hedging purposes, but RMBS players have changed and we now just seem to follow where others lead."

Secondary markets

Euro ABS/MBS holds up

Spreads are holding up in the European ABS/MBS secondary market despite broader market weakness.

Riding off the back of reasonably strong performance in the primary market, secondary activity picked up a little yesterday and spreads held firm in most sectors. The return of appetite for Dutch prime continued and saw select names edge in.

Meanwhile, Spanish and Italian paper continued to be better bid along with German CMBS. However, Portuguese bonds saw some selling as political concerns remain.

There are currently four BWICs on the European ABS/MBS schedule for today. They include three CMBS auctions, the largest of which is a €15m slice of WINDM XIV-X A due at 15:00 London time. The bond last covered on PriceABS at 94.1 on 29 October.

In addition, at 14:30 there is a nine line 219.436m original face euro and sterling mix of UK non-conforming seniors comprising: ESAIL 2006-1X A2C, ESAIL 2006-2X A2C, ESAIL 2006-4X A3C, MARS4 4X A3C, PMF 2014-2 A, SPF 2005-B A, SPF 2004-A A, SPS 2005-3X B1A and WARW 1 A. Four of the bonds have covered with a price on PriceABS in the past three months, all last doing so on 20 October as follows: MARS4 4X A3C at 98.58; PMF 2014-2 A at 97.75; SPF 2005-B A at 95.81; and WARW 1 A at 97.61.

Secondary markets

Euro CLOs stymied

New issue activity is pulling focus away from the European CLO secondary market.

"There's not much happening in secondary - we've only done a handful of trades this week," says one trader. "It's all about primary at the moment as we're in one of those windows in which new issues can price most easily and that's taking the focus away from secondary."

Nevertheless, the trader adds: "In secondary 2.0s are being offered inside of new issue because they're more seasoned now. Accounts are bidding at these levels in the belief that we're still at the wides and spreads will come in in the next few months because of seasonal factors if nothing else."

In 1.0 paper spreads are heading the other way, the trader reports. "Ratings in 1.0s are having the biggest bifurcation impact I've seen in the past few years. At the same time, there's also a division over a deal's remaining tenor and how likely it is to be called. Overall, those two issues have caused 1.0s to back off."

There are currently three European CLO BWICs on the calendar for today all comprising 2.0 bonds. One list involves single-As, another triple-As, but the highlight is perhaps four €5m lines of equity due at 14:30 London time.

The latter consists of: CGMSE 2013-2A SUB, DRYD 2013-29X SUB, DRYD 2014-32A SUB and RPARK 1A SUB. None of the bonds has covered on PriceABS in the past three months.

In addition there is also an OWIC of European CLO equity scheduled for today. Due by 14:00 it involves: CADOG 6X M1, CORDA 3X SUB, CORDA 4X SUB, CORDA 5X SUB, DRYD 2014-35X SUB, DRYD 2015-39X SUB and OHECP 2015-3X SUB.

Structured Finance

SCI Start the Week - 9 November

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

Pipeline
The pipeline continued to grow last week as a raft of new deals were announced. In total there were seven ABS additions as well as six RMBS, four CMBS and four CLOs.

The ABS were: Bilkreddit 7; US$106.1m BlueVirgo 2015-1 Trust; US$788.54m Chrysler Capital Auto Receivables Trust 2015-B; US$180m Diamond Resorts Owner Trust 2015-2; US$200m Ocwen Master Advance Receivables Trust 2015-T2; US$400m Ocwen Master Advance Receivables Trust 2015-T3; and SMART ABS 2015-4E.

The RMBS were: US$301m B2R Mortgage Trust 2015-2; US$422m Citigroup Mortgage Loan Trust 2015-PS1; A$500m Firstmac Mortgage Funding Trust No.4 Series 2-2015; Gemgarto 2015-2; US$250m Oaks Mortgage Trust Series 2015-2; and US$337m Sequoia Mortgage Trust 2015-4.

US$960.9m COMM 2015-LC23, US$705m Lone Star Portfolio Trust 2015-LSP, US$305m Morgan Stanley Capital I Trust 2015-XLF2 and US$633.2m MSBAM 2015-C27 accounted for the CMBS. Meanwhile, the CLOs were US$375m Avery Point VII CLO, US$400m Carlyle Global Market Strategies CLO 2015-4, €350m Cork Street CLO and US$411.2m Galaxy XXI CLO.

Pricings
A significant number of deals also priced. The final count consisted of four ABS, three RMBS, two CMBS and six CLOs.

US$978m AmeriCredit Automobile Receivables Trust 2015-4, US$1bn Nissan Auto Lease Trust 2015-B, Skr1.8bn Scandinavian Consumer Loans V and US$135.63m Skopos Auto Receivables Trust 2015-2 accounted for the ABS. The RMBS were £537m-equivalent Duncan Funding 2015-1, US$1.07bn STACR 2015-DNA3 and US$1bn SumitG Guaranteed Secured Obligation Issuer Series 2015-1.

US$939.6m CSAIL 2015-C4 and US$313m FREMF 2015-KVAD were the week's CMBS. Lastly, the CLOs were: US$511m CIFC Funding 2015-V; US$436m Cole Park CLO; US$250m Financial Institution Note Securitization 2015-1; US$511.25m Neuberger Berman CLO XX; €416m Oak Hill European Credit Partners IV; and €413m Tymon Park CLO.

Markets
While three auto deals priced in the US ABS market, another two - from Bank of the West and Porsche - were pulled due to unfavourable pricing levels. Meanwhile, ABS secondary trading averaged around US$1.2bn daily Monday-Thursday. "Student loan ABS spreads moved 5bp wider this week due to increased selling activity from some buy-side accounts. Meanwhile, prime auto spreads moved 2bp wider and are now at levels last seen in November 2009, causing some issuers to postpone bond offerings," comment Barclays analysts.

Secondary activity picked up in the US CLO market to reach US$590m for the week, according to Bank of America Merrill Lynch analysts. They say: "Activity continued to be concentrated in triple-As while mezz and equity saw minimal action for the week. Similar to last week, trading in non-Volcker compliant deals pushed triple-A spreads slightly wider, to the 168bp context."

Lack of primary supply in European RMBS drove secondary spreads tighter, report JPMorgan analysts. They say: "Securitised products shone across the universe and BWIC execution improved on the back of broader engagement with the asset class. Senior RMBS bonds from the periphery tightened 3bp-5bp on average, while senior UK NCF paper traded
3bp inside last week's levels."

Editor's picks
Grey area: 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...
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). A growing chorus is emerging, warning that FRTB would make secondary trading in securitised products unprofitable...
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"...
Cautious acceptance: Funding Circle is tipped to become the first marketplace lender to securitise in the UK, paving the way for other platforms to tap the market. Investors appear to view the development with caution, however...

Deal news
• 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.
• 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.
• 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.
• 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.
• 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.

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

Deals added to the SCI New Issuance database last week:
Barclays Dryrock Issuance Trust Series 2015-3; Barclays Dryrock Issuance Trust Series 2015-4; Benefit Street Partners CLO VIII; Brazos Education Funding 2015-1; CAS 2015-C04; Cathedral Lake III; Claris SME 2015; Discover Card Execution Note Trust 2015-4; Duncan Funding 2015-1; FDF I ; Fifth Third Auto Trust 2015-1; Flagship Auto Trust 2015-3; Jubilee CLO 2015-XVI; NextGear Floorplan Master Owner Trust 2015-2; OHA Credit Partners XI ; Progress Residential 2015-SFR3 Trust; Shenton Aircraft Investment I; SMART ABS Series 2015-3US Trust; STACR 2015-DNA3; WFCM 2015-C31

Deals added to the SCI CMBS Loan Events database last week:
BSCMS 2006-PWR11; COMM 2006-C7; COMM 2012-CR4; COMM 2014-CR15; COMM 2014-CR²0; DECO 2006-E4; DECO 2007-E6; DECO 8-C2; ECLIP 2006-1; ELoC 28; FHSL 2006-1; GSMS 2013-GC12; GSMS 2013-GC13; JPMBB 2013-C12; JPMCC 2011-C3; JPMCC 2012-C6; LBUBS 2006-C1; MESDG DELT; MSC 2013-WLSR; TAURS 2006-1; TAURS 2007-1; TITN 2006-5; TMAN 4; TMAN 6; TMAN 7; WFRBS 2011-C4; WFRBS 2012-LC14; WFRBS 2013-C12; WINDM XIV

Structured Finance

Divergent HQS approach highlighted

The Basel Committee yesterday released a consultative document on capital treatment for 'simple, transparent and comparable' (STC) securitisations, which builds on the criteria issued in July (SCI 23 July). However, given the European Commission's recent 'simple, transparent and standardised' (STS) proposals, it seems that regulators continue to pursue different approaches towards high-quality securitisations (SCI 21 August) and therefore exacerbate regulatory uncertainty.

"In our view, this approach to high-quality securitisations following two different tracks is resulting in further regulatory confusion. The related uncertainty is unlikely to bring investors back in the market," Rabobank credit analysts warn.

Under the STC regime, the Basel Committee proposes to lower the risk-weight floor for senior tranches to 10%-12% from the 15% risk-weight put forward in the Revised Securitisation Framework. Formulas to calculate the risk weights under the different approaches would also be recalibrated for STC exposures, resulting in lower risk weights. The parameters in these formulas differ slightly from the STS proposal, however.

The criteria for STC securitisations appear to be more general than the STS criteria, although some details are identical. For example, a 1% maximum single-obligor exposure and constraints to the average (standardised) risk weights for the pool assets are included.

However, the Basel Committee proposes that both sellers and issuers will have responsibility to comply with STC requirements. In contrast, the European version proposes to make only the seller responsible for STS compliance.

Another difference is the risk floor. In the proposed European version, the risk floor is 10% for STS, which is at the lower range of the suggested Basel version.

Further, in contrast to the European STS, there is no explicit LTV threshold included for RMBS in the Basel version. Nonetheless, the Basel document includes footnotes for a more general classification on underwriting criteria, such as the size of the obligation, the age of the borrower or the LTV of the property, DTI and/or debt service coverage ratios.

Another important difference is that the Basel Committee is not considering including synthetic securitisations in the STS framework, whereas the EC has left this option open for the future.

Stakeholders can submit their feedback on the STS proposals by 5 February. The Basel Committee intends to conduct a Quantitative Impact Study for the framework and make a final decision on calibration in 2016.

The Rabobank analysts point to uncertainty over how the new Basel framework for HQS will be translated into a European version. "The framework is highly similar, but details could be different and do matter," they observe.

They suggest that the front-running of the EC on HQS implies that European regulators are unlikely to wait on the outcome of the global Basel exercise, yet the European proposals already have an option whereby Basel recommendations might eventually be included in the STS framework.

CS

CMBS

CMBS borrower bunching considered

Blackstone is the ultimate borrower for a full third of floating rate European CMBS issuance from 2014 and 2015. When adding the second-largest borrower - IVG - concentration increases to 50%.

The third-largest borrower is the consortium behind London's Westfield Stratford shopping centre, which consists of Westfield, CPPIB and AIG. When Blackstone, IVG and the Westfield consortium are considered together, they account for 63% of floating rate CMBS loans from 2014 and 2015.

Deutsche Bank analysts note that there is greater granularity outside of the top three, however. The residual 36% of issuance is distributed among 14 borrowers, most of which are private equity borrowers.

"The retrenchment of bank lending in the 2009-2012 period caused more companies in the listed sector to explore the issuance of rated corporate bonds as a diversified funding route - a trend still growing (Alstria becoming the latest entity to acquire a corporate rating last week). Other listed entities, such as Unite and Intu, migrated from the floating rate CMBS market (agency and principal) to the long dated fixed CMBS issuance route," say the Deutsche Bank analysts.

Taking all of the CMBS loans from the last two years into account, 95% are private equity borrowers. Classifying the listed Kennedy Wilson Europe - which the analysts note has a private equity-type fee structure - would move this up to 96%.

While Blackstone has a dominant position among borrowers, the UK dominates in terms of jurisdiction. The UK accounts for 46% of the total, spread across eight loans.

However, this jurisdictional dominance is skewed by the large Mint 2015, Westfield Stratford City Finance and Logistics UK 2015 transactions. Germany accounts for 16% of the total, although again this is skewed by a pair of large loans.

The jurisdiction with the greatest number of loans is Italy. These are typically small, though, so the country accounts for only 17% of total share.

France accounts for 6% and the Netherlands for 8%. Other jurisdictions make up the remaining 7%.

Retail dominates issuance by asset type at 31%. However, this is mainly because of the Westfield transaction and so the analysts caution against reading too much into it.

They comment: "We think there is a broad acceptance of varying property asset types among the investor community - though we consider only a handful of loans to be backed by prime assets (Westfield Stratford, UK Logistics, Tibet and - perhaps - the Squaire). Hence, we do not read a great deal into the skew towards retail."

Unweighted average LTV is 61.6%, while average loan margins are 302bp unweighted and 273bp weighted by loan size. These margins are consistent with lending on secondary property or peripheral jurisdictions.

European CMBS should continue to be attractive to private equity borrowers, believe the analysts. They say objections to dealing with a special servicer, public reporting requirements and difficulties restructuring should not be allowed to put borrowers off.

"We see the floating rate CMBS space going forward to be predominantly used by private equity borrowers - by and large listed entities are using the corporate bond route and - to a lesser degree - the long-dated fixed rate CMBS market. However, for meaningful pick-up in issuance size clearly the pool of borrowers needs to expand," say the analysts.

JL

Insurance-linked securities

PCC unveiled for ILS push

The Government of Gibraltar has announced legislation that provides a new form of protective cell company (PCC), designed specifically for ILS. The new PCC regime will be regulated under Gibraltar's Insurance Companies (SPV) Regulations 2009.

"When the SPV legislation was introduced in 2009, it permitted SPVs to be established but not for multiple transactions," says Michael Ashton, senior executive at HM Government of Gibraltar. "This new legislation enables multiple transactions to be undertaken within the SPV PCC, with each new transaction being structured in a new cell, thus providing greater flexibility."

Each SPV PCC will only be permitted to establish cells that are 100% collateralised. This allows the solvency capital requirement for the core capital of the SPV PCC to be £500.

"The SPV PCCs are targeted at the ILS sector. We believe they will be utilised for collateralised reinsurance, sidecars and catastrophe bonds," explains Ashton. "The SPV PCC is also attractive for a single issue as, once established, it offers the flexibility for the issuer to utilise the structure at a future date if they so choose."

The SPV PCCs are expected to complement Gibraltar's current single insurance transaction SPVs, according to Gibraltar's Minister of Financial Services, Albert Isola. The jurisdiction has already witnessed its first domiciled ILS early this year, when Lottoland completed a €100m transaction. The deal followed the introduction of ILS guidelines in Gibraltar in 2014.

"Our focus is to give more choice within the EU, but also to become the EU's first choice for ILS. The next stage is to gain greater traction in this asset class, across the full range of ILS categories," adds Ashton.

JA

ABS

Marketplace platform bolstered

Marketplace loan securitisation platform Ldger has appointed James Alexander as cio. He will open an office in San Francisco to build relationships with leading technology-based originators.

Alexander has been involved in marketplace lending since 2010. He previously held roles at Prosper and Lending Club, where he facilitated access to institutional capital. In a previous role for Colchis Capital he developed a fund which now holds US$2bn of marketplace credit loans.

Alexander has over 20 years of experience in traditional banking, having worked at Goldman Sachs, Royal Bank of Canada and Nomura. He also co-founded the Swiss merchant bank Alternative Capital Associates.

"James' track record of innovating the marketplace origination space through the confluence of technology and deep capital markets knowledge is unmatched and a great fit for Ldger as we scale our platform," says Ldger founder and ceo Miles Cowan.

Structured Finance

Corporate team makes addition

Mark Graham has joined Lloyds' corporate solutions team within capital markets, reporting to corporate securitisation head Ben Green. He will work on secured deals, comprising corporates and infrastructure. Graham has previously held a number of senior roles, including co-head of securitised products at Deutsche Bank.

Structured Finance

Private lending platform bolstered

DDJ Capital Management has appointed Michael Weissenburger as md and head of origination, a newly-created role that is effective immediately. He joins the firm from Wells Fargo Capital Finance, where he served for ten years as director of direct loan origination. Prior to that, he held financial positions at Sonus Networks, Cognos and Converge.

At DDJ, Weissenburger will be responsible for building out the firm's private lending platform in the US and Canada by developing relationships across several financing channels, including investment banks, commercial lenders, private equity firms, business development companies (BDCs), restructuring advisors/consultants and other non-traditional lenders.

Structured Finance

Structured syndicate strengthened

Santander has made a number of appointments to boost its loan origination, syndicate and sales team in the UK and Europe. Among the hires is Sujoy Roy, who joins the firm's structured finance syndicate as an associate. Previously an analyst at HSBC, he reports to Mariano Hernandez, head of structured finance syndicate for EMEA.

Another of the appointments is Peter Bulbrook as head of loan origination in the UK, Ireland and Nordics, replacing Neville Crow. He joins from Barclays, where he was global head of debt capital markets risk. He has previously held senior roles at HSBC and Industrial Bank of Japan, with his experience including structured finance.

Structured Finance

New moniker for investment manager

Pramerica Investment Management will change its name to PGIM from 4 January 2016. It is also launching PGIM Funds, a UCITS platform serving the UK and Europe.

The firm's name-change coincides with the expansion of the business around the world and reflects its position as one of the world's largest asset managers, says the firm. Pramerica's businesses operate in 16 countries on five continents.

Pramerica Fixed Income will use PGIM in markets outside of the US where it currently uses the Pramerica name. Pricoa Mortgage Capital Company will be renamed PGIM Real Estate Finance globally in mid-2016, while Pramerica Real Estate Investors will be renamed PGIM Real Estate.

Structured Finance

Amicus builds commercial group

Amicus Finance is launching a commercial finance business dedicated to serving the small business and professional services communities. Amicus Commercial Finance will be led by John Wilde and David Hogg.

Wilde and Hogg previously founded SME Invoice Finance, which was sold to Metro Bank two years ago. Amicus Commercial Finance aims to begin operating in January 2016 and will provide a revolving working capital facility powered by a proprietary funding platform using smart technology and real-time data connectivity.

Amicus offers short-term, property-based lending solutions to private and corporate borrowers. It recently completed a £100m CMBS that is believed to be the first in the UK market to be backed entirely by short-term property loans (SCI 24 August).

Structured Finance

FinTech partner named

MNKS has appointed Basile Fémelat as partner, with a specific focus on finance, private equity, regulation and FinTech. He was previously senior associate and head of Baker & McKenzie's securitisation practice in Luxembourg, and before that was an associate at Bonn Schmitt Steichen.

At MNKS, Fémelat is tasked with expanding the firm's range of services in the financial and corporate sector. In particular, he is responsible for the FinTech sector, with the objective of ensuring a focussed understanding of the segment and coordinating various departments and expertise in order to create a dedicated offering.

Structured Finance

Alternative debt head hired

BNP Paribas Investment Partners has hired Laurent Gueunier as head of alternative debt management, reporting to Dominick DeAlto, cio of institutional fixed income. Based in Paris, he joins a team that is currently involved in the management of funds that invest in European securitisations, mini bonds and multi-strategy credit.

Prior to his move, Gueunier was most recently head of structured finance at AXA Investment Managers. He has also been involved in structured credit for JPMorgan and commodities trading at Societe Generale.

Structured Finance

Direct lender beefs up

Comvest has recruited Colleen Gurda as vp, responsible for originating, structuring and managing investments for the firm's direct lending fund, Comvest Capital. She was previously a vp at Alcentra Capital Corporation, with responsibility for origination, transaction execution, due diligence and the monitoring of portfolio companies. Before that, Gurda was in the healthcare investment banking group at Barclays, where she worked on various leveraged finance, M&A and capital markets financing assignments.

Structured Finance

DMS names SF chief

DMS Offshore Investment Services has appointed Murray McGregor as global head of structured finance. He brings over 15 years of structured finance and asset finance experience and will also serve DMS as an independent director on the boards of structured finance vehicles, other special purpose entities and hedge funds.

McGregor was previously structured finance and asset finance md at Citco Corporate Services in Dublin. He has also worked at Ogier Fiduciary Servives and on Goldman Sachs' credit derivatives trading desk in London.

CLOs

AIMCO equity acquired

Fair Oaks Income Fund has entered into binding contracts to acquire, in the primary market, US$25m notional of AIMCO CLO Series 2015-A equity notes. The investment represents 78% of the transaction's total equity.

The manager of the CLO is Allstate subsidiary AIMCO. The deal's current target portfolio has a principal value of US$500m across an expected 200 unique bank loan issuers, with an expected weighted average exposure per issuer of approximately 0.57%. The potential total return for the investment is estimated to be between 15% and 17% per annum.

Following this investment, as well as a US$4m secondary purchase of Neuberger Berman XIX equity, the proceeds raised by the fund in August have been fully committed.

Insurance-linked securities

Duo step up to lead ILS firm

Tokio Solution Management has appointed Susan Lane and Tsuyoshi Harigai as co-ceos, effective from 1 January 2016. They will take over from Kathleen Faries, who will become head of the Bermuda branch of Tokio Millennium Re.

Lane and Harigai will have joint responsibility for the day-to-day management of Tokio Solution. Lane is currently svp and head of business development and will lead the client-facing, business development activities, while Harigai is currently head of operations for the Bermuda branch of TMR and will be responsible for managing corporate operations.

Insurance-linked securities

Premier strengthens ILS issuer ties

Premier Diversified Holdings has acquired 158,000 common shares of Sequant Re Holdings for US$316,000. The acquisition is for investment purposes and to maintain Premier's current equity position in the firm.

Premier held 3,010,000 common shares of Sequant Re before the purchase and now holds around 34.1% of all common shares. It maintains the right to appoint three directors to Sequant Re's board and these continue to be Alnesh Mohan, Sanjeev Parsad and Andrew Cooke, with the latter acting as chairman of Sequant Re's audit and financial committee.

Risk Management

Electronic trading units to merge

Tullett Prebon is set to acquire ICAP's global hybrid voice broking and information business, including its associated technology and broking platforms, such as iSwap. Tullett Prebon intends to purchase the business in return for the issue of new shares in Tullett Prebon to a new holding company of the ICAP group (ICAP NewCo) and to ICAP's shareholders, representing in aggregate 56% of the enlarged firm's issued share capital, as at completion of the transaction.

Subject to the satisfaction of certain conditions and the exercise of an option arrangement, following completion, 36.1% of the enlarged Tullett Prebon share capital would be issued to ICAP shareholders and 19.9% to ICAP NewCo. Existing Tullett Prebon shareholders would continue to own 44% of the enlarged Tullett Prebon issued share capital.

The transaction will combine the complementary strengths of two leading global hybrid voice broking franchises to create the largest player in the industry and is expected to achieve significant cost synergies of at least £60m. The post-trade, risk and information and electronic markets divisions of ICAP will operate under a new group holding company ICAP NewCo, which will be positioned as a leader in the financial technology space, ready to capitalise on the many opportunities it sees in these markets.

ICAP NewCo's businesses will include: the exchange-like electronic platforms, EBS and BrokerTec; the post-trade risk mitigation businesses, TriOptima and Reset; the transaction processing business, Traiana; the financial technology incubator, Euclid; and ICAP information services as it relates to ICAP's electronic platforms.

No changes are anticipated to the ICAP board, each of whom is expected to become a director of ICAP NewCo. On completion, current ICAP group coo Ken Pigaga will resign and be appointed to the board of the enlarged Tullett Prebon as a director and coo. Additionally, ICAP NewCo will appoint a non-executive director to the board of the enlarged Tullett Prebon. ICAP group ceo Michael Spencer will have an honorary title of president of the enlarged Tullett Prebon and will be available to advise the board, but will not be a member of the board.

Completion is conditional on the approval of shareholders of both Tullett Prebon and ICAP, clearance from antitrust authorities and the consent of various regulatory bodies. It is expected to occur in 2016.

ABS

Timeshare delinquencies push up

Fitch reports that US timeshare ABS delinquencies moderately increased in 3Q15, rising to 2.96% from 2.66% in the previous quarter. The number is also a slight jump from the 2.79% delinquency rate in 3Q14, making it the first year-over-year increase since 2013.

Defaults also increased last quarter at 0.59%, which is up slightly from 0.57% in 2Q15 and 0.53% observed a year ago. Although they remain slightly elevated to pre-recessionary levels, Fitch notes that defaults have displayed overall improvement over the last three years.

On a rolling 12-month basis, defaults were 6.64% for 3Q15, up from 6.49% for 2Q15. This again represents the first increase after three years of consecutive quarterly improvement.

Fitch expects some additional nominal increases in delinquencies and defaults in the near term as performance normalises after recent year-over-year improvement. The agency's 2016 rating outlook for timeshare ABS remains stable due in part to the de-levering structures found in timeshare transactions and ample credit enhancement levels.

ABS

New FFELP plan evaluated

The US Department of Education's latest student debt repayment plan could raise prepayment rates for FFELP student loan ABS, says Fitch. The REPAYE plan is available to Direct Loan (DL) programme borrowers who received loans prior to 2010 and will be available in December.

FFELP borrowers can become eligible for the new programme by consolidating their existing FFELP loans into DLs. Fitch explains that this programme follows a similar pay-as-you-earn programme in place since 2012 that was eligible for borrowers that received loans beginning in 2011.

REPAYE is forecast to extend benefits of income-based repayment to five million more borrowers. It will allow borrowers to cap monthly student loan payments at 10% of their monthly discretionary income and forgive all remaining principle and interest after 20 or 25 years. It will also provide a new interest subsidy designed to soften ballooning payments that will occur if the borrower's income-driven payments do not match the accruing interest.

Fitch expects that the terms of this programme may entice borrowers to prepay their FFELP loans and consolidate into DLs, but it remains unclear how many FFELP borrowers will opt into it. However, a rise in FFELP prepayment rates could be a positive factor in mitigating the maturity risk in some of the FFELP ABS transactions.

According to Navient, in the fourth quarter of fiscal 2015 - ending 30 September - the average prepayment speed for consolidated FFELP ABS trusts rose by 0.5% to 5.4%. The average prepayment speeds for non-consolidated trusts declined to 7.2% from 11.1% due to decline in optional loan repurchases. The servicer's portfolio represents nearly one-half of outstanding FFELP student loan ABS trusts.

Last month, the Department of Education also announced that the cohort default rate for federal student loans fell for the second year in a row to 11.8%, from 13.7% last year.

ABS

Chinese disclosure rules weighed

The recent announcement of new disclosure rules for consumer credit ABS in China will improve transparency and contribute to the development of the market, says Fitch. The disclosure rules were presented by the National Association of Financial Market Investors and are the fourth to be released by the regulatory organisation (SCI 22 October).

Fitch warns that the disclosures still stop short of what the agency requires from issuers. However, it believes that they should be sufficient to spur issuers to build the necessary infrastructure to capture and report more relevant information for investors than is currently available.

The new guidelines' stress on data transparency and standardisation could be particularly important as China's securitisation market is still in an early stage of development. Many issuers still lack experience and knowledge on securitisation, but data insufficiency could lead Fitch to not rating transactions.

The guidelines require issuers to provide specific information on collateral attributes, cashflow distribution and static pool performance data. In addition, standard templates are provided to capture time-series collateral stratifications, cohort performance data and cash collections.

Notably, the guidelines require issuers to provide five years of cohort performance data for consumer credit and auto ABS issuance, or all available data since inception if issuers have been in operation for less than five years. For RMBS issuers, the data requirement is ten years of cohort performance data, or available data since inception if issuers have been in operation for less than 10 years.

The guidelines also address the disclosure requirements for a revolving structure, where principal collections can be used to purchase new eligible assets. Revolving structure ABS transactions need to disclose additional information on asset selection criteria and performance data on principal and interest/fee collections.

Fitch believes that additional disclosure rules for revolving structures is appropriate, as repurchase of new assets could lead to changes in portfolio composition. The agency adds that it could also expose transactions to the risk of changes in origination standards during the revolving period.

Structured Finance

Credit assessment standards proposed

The EBA, EIOPA and ESMA have jointly published two draft implementing technical standards (ITS) on credit assessments by external credit assessment institutions (ECAIs). The standards are intended to ensure sound credit assessments and thus contribute to financial stability in the EU.

The standards are part of the EU Single Rulebook for banking and insurance. The supervisory bodies aim to ensure that only credit ratings issued by ECAIs can be used for calculating capital requirements for finance institutions and insurance undertakings.

In order to determine the allocation of appropriate risk weights to the credit ratings issued by ECAIs, the three supervisory bodies have specified an approach that establishes the correspondence between credit ratings and the credit quality steps defined in CRR and Solvency 2. The factors and benchmarks that need to be taken into consideration for this are specified in the ITS.

The group has also addressed situations where the degree of risk underlying a credit assessment cannot be determined due to a lack of factual evidence. Rating agencies which can only provide limited datasets will be required to apply a transitional period of three years, during which quantitative information can be collected.

The standards have been submitted to the European Commission for endorsement.

Structured Finance

Israeli securitisation plan set out

A joint report has been published by a number of Israeli government organisations which calls for the promotion of securitisation in Israel, albeit in a 'cautious' and 'measured fashion'. It concentrates on obstacles in areas such as taxation, regulation and accounting, and cites various recommendations to remove them.

The report was released by the Bank of Israel, the Israel Securities Authority, the Ministry of Finance, the Ministry of Justice and the Israel Tax Authority. It follows an initial interim report published in August, with the changes in the final draft reflecting consultation feedback.

The recommendations include providing a platform for a variety of loans and assets to be part of securitisation, including loans to SMEs. It suggests making it obligatory for the initiator of a securitisation transaction to maintain exposure of at least 10% of the credit risk of the securitised portfolio.

The report suggests prohibiting complex securitisations, such as CDOs. In addition, it also calls for appropriate transparency to allow investors to understand the various aspects of the transactions and to properly price them.

Further recommendations include establishing the terms for public offerings of securitisations, while imposing legal responsibility on the various participants involved. In addition, the report calls for a neutral tax model for securitisations that will prevent tax distortions and double taxation.

"This is a significant step that will lead to the sophistication of the capital market in Israel and to increased competition," says finance minister Moche Kachlon. "The development of the securitisation market will bring additional sources of financing into the capital market, will lower the price of credit and will remove entry barriers."

Structured Finance

SMEs tap alternative funding

Moody's expects bank lending to remain prevalent for SMEs, in line with broader disintermediation trends. The agency notes that mid-cap companies and SMEs are increasingly tapping a variety of alternative funding sources and debt instruments to diversify their funding.

"SMEs have greater trouble than mid-caps in accessing bank funding because of the risks they entail," says Alain Laurin, associate md at Moody's. "While Basel 3's enhanced capital requirements look set to constrain banks' balance sheets, it is not certain that banks will be more reluctant to lend to SMEs, which are often considered a higher risk prospect."

Laurin believes that banks will continue lending, albeit at a higher charge for their services. Even when SMEs are able to secure bank lending, they could face increased borrowing costs as banks look to exit unprofitable relationships and place more focus on additional revenue generation to meet new Basel 3 requirements.

Regardless, the agency explains that alternative funding options are growing fast, noting an already increasing range of alternative debt providers and debt instruments available for each size of company. European policy initiatives are also actively supporting disintermediation, promoting investments in SME and mid-cap debt funding by non-bank investors, such as insurances and pension funds, or even individual investors.

Moody's expects securitisation backed by alternative lending receivables to increase, which will also support disintermediated lending to SMEs and mid-caps. The agency believes that securitisation of debt backed by non-bank lending can provide liquidity for SMEs and mid-caps by allowing investors to gain exposures to diversified pools of SME and mid-cap lending with specific risk and return profiles.

CLOs

Insurer capital 'credit positive'

Moody's suggests that Conning's acquisition of Octagon Credit Investors (SCI 6 November) is credit positive for Octagon CLOs because Conning's financial support will help keep Octagon's CLO platform stable after US risk-retention rules go into effect in December 2016. The agency says that the purchase shows insurance companies can be a key provider of capital to enable manager compliance with risk-retention requirements.

Risk-retention rules are expected to dampen CLO issuance due to the significant capital outlays required of CLO managers to issue new deals. Nevertheless, most CLO managers should either be able to retain risk outright or develop other solutions to comply. Consolidation and strategic partnerships, along with the exploration of financing structures are helping to fuel such activity.

Since December 2014, a number of CLO managers - including Feingold O'Keeffe, West Gate Horizons Advisors, Kramer Van Kirk Credit Strategies and Silvermine Capital - have been acquired by or completed strategic transactions with entities that have resources to provide risk-retention capital. The entities with whom they partnered include asset managers, private equity firms and larger managers.

"Insurers, in particular, are in a strong position to finance CLO risk retention, given their ability to provide long-term capital that helps them weather market volatility as it arises. Other potential CLO risk-retention financiers, such as hedge funds, are more vulnerable to market downturns and redemption requests," Moody's observes.

Conning's US$175.6m investment reportedly provides it with an 82% ownership stake in Octagon, which manages US$12.8bn of total assets. Octagon's US$8.4bn of CLO assets - across 16 transactions - under management, as of 30 June, made it the eighth-largest US CLO manager by AUM.

Other insurers that own or are affiliated with CLO managers include Massachusetts Mutual Life Insurance Co (Babson Capital Management), Voya Financial (Voya Alternative Asset Management), Prudential Financial (Prudential Investment Management), New York Life Insurance Company (New York Life Investment Management), AXA Group (AXA Investment Managers) and Aegon (AEGON USA Investment Management).

CLOs

CLOs feeling commodity impact

CLO performance is feeling an adverse effect from the ongoing struggles in the commodities sector, according to Fitch's latest index results for the sector. The number of CLOs reporting defaults more than doubled in 3Q15 to 41 from 19 in the previous quarter.

Fitch believes that the ongoing stress in commodities will lead to an increase in CLO exposure to distressed and defaulted loans in the future. Alpha Natural Resources led the largest default exposures by notional amounts held in CLOs. However, other names contributing to the higher defaults include Samson Investment Company, Sabine Oil & Gas, Patriot Coal, Walter Energy and Arch Coal.

Some collateral managers were able to exit or pair down their positions with a minimum loss, while others have realised steeper losses. Yet, some managers never sold these defaulted names.

In addition to defaults in commodity-related sectors, other recent defaults included MMM Holdings, Millennium Health, Medical Card System, Targus Group International and Edmentum, as reported by CLO trustees.

Fitch says that variability in CLOs' definition of defaults becomes more apparent as more issuers enter a distressed territory. One such example was the 18 CLOs with exposure to Arch Coal at the end of the quarter, with only six reporting its loans as defaulted.

CLOs

Purpose test amendments adopted

The retention undertaking letters for Castle Park CLO, Orwell Park CLO, Dartry Park CLO, Phoenix Park CLO and Sorrento Park CLO have been amended to include two further representations made by their manager GSO/Blackstone, which aim to comply with the 'purpose test', as envisaged under the European Commission's Capital Requirements Regulation proposals (SCI 2 October). The amendments state that the issuers are not entities that have been established for the sole purpose of securitising exposures and that they have the capacity to meet payment obligations from resources unrelated to the exposures they securitise. Together with the originator and issuers, the initial purchaser, collateral administrator and trustee have each consented to the amendments.

CLOs

Public ratings up credit quality

The substantial increase in the share of publicly rated collateral from rated pre-crisis European CLOs to their post-crisis counterparts is credit positive, reports Moody's. European CLO 2.0s have a 75% share in publicly rated collateral, in contrast to less than 25% in CLO 1.0s.

"For the high yield market issuers that make up CLO 2.0 portfolios, we have observed that a high share of companies with public ratings in a sector facilitate better future access to the bond/corporate loans markets," says Javier Hevia Portocarrero, a vp and senior analyst at Moody's. "Public ratings also allow CLO investors to frequently track the credit quality and outlook for each obligor in the CLO, helping them form more timely forward-looking opinions of credit risk in their portfolios."

The agency says that sectors in CLO 2.0 portfolios with more publicly rated debt also have better rating factors than those with private monitored loan ratings (PMLRs) and credit estimates. This is largely a result of some higher-quality names transitioning to public ratings from credit estimates.

Since transactions do not disclose to investors the individual credit quality of issuers with credit estimates or PMLRs, the increase in publicly rated credits improves CLO 2.0 transparency for investors. The median rating factor - a measure of default risk - for the publicly rated names across the different sectors is 2572, compared with 3410 for credit estimates.

Specifically among CLO 2.0s, publicly rated companies comprise 75.6% of collateral, followed by PMLRs (17.2%) and credit estimates (7.2%). In comparison, CLO 1.0s average 60% publicly rated names.

The results have been an overall stable performance in credit quality of European CLOs in the second half of 2015. The agency says that this reflects the benign credit environment in the high yield corporate market.

"Noise around the Greek negotiations, the slowing Chinese economy and uncertainties around global growth increased systemic stress and equity market volatility, drove credit spreads wider and lowered European leveraged loan prices," adds Portocarrero.

CLO 1.0s' median exposure to defaults decreased to 0.8% in 3Q15 from 2.1% in 2Q15, as a result of the restructuring and subsequent re-performance of a widely held name in the waste management sector. CLO 2.0s' median exposure to defaults remained non-existent at 0% in 3Q15. Portocarrero expects the trend of stability to extend into 1H16.

CLOs

CLO credit quality drops

In contrast to their European counterparts, the credit quality of US CLOs slipped during 3Q15, says Moody's. The agency believes the drop was due largely to woes among energy-sector corporate issuers.

This is evident in the higher proportions of both collateral on review for downgrade and low-rated CLO assets. In addition, recovery rate expectations for US CLO collateral - particularly CLO 2.0s - have continued to slide in the past several months.

"US corporate credit quality deteriorated during 3Q15," adds Moody's vp and senior analyst Oktay Veliev. "Most notably, the number of companies with our weakest liquidity rating climbed to a five-year high, while corporate rating downgrades spiked, driving our 2016 default forecast for speculative-grade issuers higher."

Meanwhile, equity, bond and loan market volatility hit a three-year high last quarter, and the financial stress index was at its worst level since January 2012. Finally, because of rating downgrades in the energy sector, the number of issuers Moody's rates B3 negative or lower reached a five-year high.

CMBS

CRE momentum continues

Positive momentum continued in all US CRE sectors in 3Q15, says Moody's. Though GDP growth will be constrained by the strong dollar and low oil prices, the rating agency notes that the US economy is healthy and interest rate increases are likely to be more gradual than in previous monetary tightening cycles.

Moody's base expected loss for conduit/fusion transactions rose slightly in 3Q15, to 7.46% from 7.44% in the previous quarter. In addition, the overall share of specially serviced conduit loans increased by 7bp to 6.8% from 6.73% in 2Q15 - the first increase in 12 months.

"Multifamily construction is increasing and performance will remain solid due to continued strong demand, there is significant activity in the hotel sector, and the office and retail sectors are moving in a positive direction," observes Keith Banhazl, svp at Moody's.

The rating agency expects low vacancy rates in the multifamily sector to continue, thus contributing to rent increases. New construction will also be expected to increase due to high rents, with demand sufficient to absorb it.

Meanwhile, the hotel sector is expected to stabilise with lower RevPAR, as occupancy nears an all-time high at close to 68%. Vacancy rates in the office sector continue to decline, as they have for the past five and a half years, with demand continuing to outstrip new supply. In addition, improving vacancy rates in the retail sector could lead to rent growth in the coming quarters.

Lenders modified 12 loans for a total of US$595.2m in 3Q15, the fewest since 1Q09. Rating upgrades and downgrades both increased, to 13.3% from 11.4% and to 5.2% from 3.6%, respectively. Affirmations and confirmations decreased to 81.5% last quarter, from 85% in the one before.

CMBS

CMBS payoff rate climbs

October's payoff rate for loans backing US CMBS rose from 84.3% in September to 86% in October, according to Morningstar. October was the fourth consecutive month where more than US$6bn was due for repayment.

US$6.21bn was due for repayment last month, of which US$5.29bn was repaid in full. The month's performance bumped the year-to-date maturity payoff rate up by 10bp, to 85.1%.

"Matured loans reported as current in payment status (with respect to monthly payments), which accounted for 7.1% of this month's total, included the US$73.6m Fireman's Fund loan, accounting for 11.2% of GECMC 2005-C4. The loan, with an anticipated repayment date of 1 October 2015, could come under stress prior to its final maturity date of 15 October 2018, because of the single tenant's intention to vacate before its lease expires in November 2018," says Morningstar.

That collateral also secures an US$81.9m pari passu loan in BACM 2005-5 and is worth more than the combined loan balance, the rating agency notes. Among the matured non-performing loans, the US$56.5m Cedarbrook Corporate Center Portfolio securitised in CD 2005-CD1 transferred to special servicing in July (see SCI's CMBS loan events database) because of the potential loss of a major tenant next month.

The wave of performing CMBS maturing throughout 2017 continues to shrink, with the total amount down to US$188.35bn as loans are refinanced. CMBS loans of some US$5bn are scheduled to mature throughout the remainder of 2015, increasing to US$79.54bn in 2016 and US$103.79bn in 2017.

CMBS

Office drives delinquency drop

US CMBS delinquencies fell by 9bp in October to 4.37%, from 4.46% a month earlier, according to Fitch's latest index results for the sector. The dollar balance of late-pays fell by US$348m to US$16.4bn during the month.

Resolutions of US$833m in October exceeded new delinquencies of US$504m. Fitch-rated new issuance volume of US$5.2bn across five transactions was outpaced by US$5.8bn in portfolio run-off, causing a decrease in the index denominator.

Delinquency rates are down for all property types: retail stands at 5.51% (from 5.58% in September); office at 4.80% (from 4.95%); hotel at 4.57% (from 4.64%); multifamily at 4.42% (from 4.47%); industrial at 4.22% (from 4.35%); mixed use at 4.08% (from 4.17%); and other at 0.93% (from 0.96%). The large drop in the office rate was driven by US$496m in resolutions exceeding US$306m of new delinquencies. The sector contributed to the largest resolutions, as well as the largest new delinquency this month, according to Fitch.

The three largest resolutions were the US$163.75m Jericho Plaza (I & II) (securitised in CSMC 2007-C5), US$88m Prentiss Pool (WBCMT 2005-C20) and US$75m Manhattan Towers (CD 2007-CD4) loans (see SCI's CMBS loan events database). The largest new delinquency was the US$203.25m Lafayette Property Trust loan (JPMCC 2007-LDP10), which is secured by a portfolio of nine office properties. Portfolio occupancy - which has already declined significantly, primarily due to the largest tenant vacating prior to lease expiration - is expected to plummet further due to upcoming lease rollover risk, as well as additional tenants with 2017 expirations already providing notice of their intention to vacate.

The large drop in the industrial rate was driven by twice the amount of resolutions compared to new delinquencies (US$32m versus US$16m respectively). Both the resolutions, as well as the new delinquencies, were attributable to smaller balance loans - none of which had a balance greater than US$15m prior to disposition or currently have an outstanding balance greater than US$7m.

Fitch expects the overall delinquency rate to drop below 4% with the imminent resolution of the Stuyvesant Town/Peter Cooper Village loan, bringing the multifamily rate to the lowest of the major property types.

CMBS

Split triple-B tranches seen

The latest US conduit CMBS to print - the US$960.9m COMM 2015-LC23 - has a structural feature not seen since 2012. Rated by Fitch and Kroll, the US$28.83m D tranche was rated BBB/BBB+ (with 10.75% subordination), while the US$24.02m E tranche was rated triple-B minus (8.25%).

Transactions featuring both triple-B plus and triple-B minus tranches were common in 2010-2012, when CMBS 2.0 issuance was emerging. But they disappeared in 2013, as weakening credit standards and thicker tranches mandated by rating agencies made execution uneconomical.

The COMM D and E tranches priced on Friday at swaps plus 405bp and 575bp respectively. The effective blended spread on the triple-B tranches together was 482bp, which Trepp notes is tighter than recent deals in the 500bp to 540bp range. For example, the Fitch-rated triple-B minus D tranche of MSBAM 2015-C26 - which printed on 28 October and also featured Moody's ratings down to the single-A level - came at plus 500bp.

Some of this tightening is related to improving market conditions, as the single-A tranche priced at plus 300bp, compared with 320bp previously. "However, a sizeable portion of the better pricing appears to be to the result of the tranching mechanism alone. This could encourage other dealers to copy the deal structure when possible," observe Barclays CMBS analysts.

CMBS

CMBS pay-offs spike

The percentage of US CMBS loans paying off on their balloon date jumped sharply last month, posting the highest level in six months, according to Trepp. The October reading is 76.7%, more than 16 points above the September number. The rate is also above the 12-month moving average of 68.1%.

By loan count as opposed to balance, 74.9% of loans paid off last month. On this basis, the pay-off rate was above September's level of 65.3%. The 12-month rolling average by loan count now stands at 68.1%.

CMBS

CBD price push continues

Central business district (CBD) office continues to be the best-performing segment of Moody's/RCA Commercial Property Price Indices (CPPI) national all-property composite index. CBD prices rose 4.3% over the past three months.

The CPPI rose 0.7% in September, with a 0.8% rise in the core commercial segment. Prices in non-major markets have now topped their pre-crisis peaks, mainly due to gains in the CBD office and apartment segments.

Core commercial property prices are 9.3% higher than their pre-crisis peak and apartment prices are 33.53% above their pre-crisis peak. Hotel price growth has increased by 30% over the past 12 months, although this is not included in the Moody's/RCA composite CPPI.

Insurance-linked securities

UK ILS legislation underway

HM Treasury's announcement that it has begun the legislative process for introducing a UK ILS framework has been welcomed by the London Market Group (LMG). An amendment to the Bank of England and Financial Services Bill has been tabled to the government, which seeks power for the Treasury to make regulations facilitating and regulating ILS business.

The main focus of the proposed power is on SPVs used in ILS transactions, which are referred to as transformer vehicles in the tabled amendment. If Parliament accepts the amendment, Treasury ministers will be able to make regulations for any aspect of ILS activity. The amendment will be considered by the House of Lords today (11 November), the second day of the committee stage of the bill. 

"ILS is very much at the innovative end of the market and we want London to be the next big centre for this business," says Malcolm Newman, ceo of SCOR's Paris-London hub and sponsor of LMG's ILS working group. Newman supports a UK ILS framework to be put in place in 2016.

NPLs

Freddie auctions more NPLs

Freddie Mac is marketing its latest NPL offering - US$1.2bn in deeply delinquent loans from the GSE's mortgage investment portfolio. The latest auction is the eighth to be held by Freddie Mac.

The NPLs are being marketed via seven pools: five geographically diversified standard pool offerings (SPO) and two geographically concentrated extended timeline pool offerings (EXPO). The latter offerings target participation by smaller investors, including non-profits and minority and women-owned businesses.

Bids are due from qualified bidders on 2 December for the SPO offerings and 16 December for the EXPO offerings. The sales are expected to settle in 1Q16.

Advisors to Freddie Mac on the transaction are Wells Fargo, JPMorgan and First Financial Network. Wells Fargo is also currently servicing the NPLs.

Risk Management

EBA consults on CVA guidelines

The EBA has launched a public consultation on guidelines for the treatment of CVA risk under the supervisory review and evaluation process (SREP), as well as a data collection exercise for the quantitative impact study (QIS) to calibrate threshold values. The public consultation runs until 12 February 2016 and the data collection exercise should be completed by 28 January 2016.

The guidelines aim to provide a common European approach to the assessment of CVA risk. Using the guidelines, competent authorities should be able to determine the relevance and materiality of CVA risk for an institution, assess any material CVA risk under SREP, assess the adequacy of own funds to cover material CVA risk and determine additional own funds requirements, where the risk is not adequately covered.

Risk Management

Stay protocol relaunches

ISDA has relaunched its Resolution Stay Protocol to cover securities financing transactions (SFT). At launch, 21 major global banks have signed the protocol, adding three more to last year's count (SCI 14 November).

The new protocol has again been developed in close coordination with the Financial Stability Board by an ISDA working group including buy- and sell-side market participants. A new SFT Annex was developed jointly by ISDA, the International Capital Market Association, the International Securities Lending Association and SIFMA.

The Protocol opts adhering parties into certain existing and forthcoming special resolution regimes, with the aim of ensuring that cross-border derivatives and SFT transactions are captured by statutory stays on cross-default and early termination rights in the event that a bank counterparty enters into resolution. ISDA says that these stays are intended to give regulators time to facilitate an orderly resolution of a troubled bank.

In addition, the ISDA Working Group is developing a separate protocol for other market participants, including buy-side and end-user firms, and other banks. This will attempt to provide users with a tool to comply with forthcoming regulations requiring the inclusion of stays within financial contracts.

ISDA will publish the separate protocol next year. The provisions of the protocol will be developed to facilitate compliance with the specific legislative or regulatory requirements in different jurisdictions.

Risk Management

Blockchain usage examined

A new GreySpark Partners report examines how a number of investment banks and exchanges are experimenting with usage of blockchain and distributed ledger technology (DLT). The report highlights how these experiments are supported by software applications that are being developed by US and European financial technology start-up companies, and how usage of the blockchain by banks is poised to increase in the future as applications for DLT become more widespread.

The report explores seven capital markets use cases for the blockchain: payments and remittance uses; know-your-client or anti-money laundering uses; digitised financial instruments; regulatory reporting; clearing and settlement uses; reconciliation uses; and smart contracts. Further, it assesses the functionality of capital markets blockchain solutions developed by 17 fintech companies.

The research finds that some of the use cases have proven stronger than others as offerings capable of either disrupting or replacing the use of existing trade lifecycle technology systems and processes within banks and financial markets infrastructure providers like clearinghouses and exchanges. However, banks and buy-side firms have approached the adoption of such technology slowly because of the cultural shifts that their usage within the trading lifecycle would entail.

The report argues that success for fintech companies in developing capital markets uses for the blockchain will depend in the future on the willingness of banks and financial institutions to adapt their markets infrastructure-facing software so that it can operate on a distributed, shared basis, spanning a potentially limitless number of approved counterparties and settlement agents.

Camron Miraftab, GreySpark analyst consultant, says that the technology presents two challenges that financial institutions must consider before deciding whether its use is applicable within their businesses. First, scalability issues - related to the trade-off between the current level of transaction throughput-capacity offered by blockchain protocols, and the size of real-world transaction values - and volumes must be resolved. Second, there will inevitably be winners and losers among the fintech companies competing with each other to develop an optimal capital markets DLT infrastructure or protocol.

RMBS

Calpers sells off property funds

Strategic Partners Fund Solutions, the secondary and private market fund solutions business of Blackstone, has agreed to acquire approximately US$3bn of global real estate funds interests from California Public Employees' Retirement System (Calpers). The sale is the largest to date by Calpers, representing 43 international and domestic funds from its non-strategic real estate portfolio.

RMBS

Cerberus set to buy Granite

UKAR will sell £13bn of loans previously held on Northern Rock's legacy book to Cerberus Capital Management, £12bn of which lies in the Granite securitisation vehicle. The sale ends months of speculation regarding the winning bidder and the potential scenarios the portfolio could face (SCI passim).

"The sale, which raises £13bn for the British taxpayer, is the largest ever sale of financial assets by a British government, and we are now clear that taxpayers will get back more money from Northern Rock than they were forced to put in during the financial crisis," says Chancellor of the Exchequer George Osborne.

The complex nature of the Granite structure has prompted Cerberus to push forward with purchasing NRAM, the mortgage servicing arm of UKAR. Assets and liabilities not included in the transaction will be transferred from NRAM to a newly established subsidiary of UKAR, currently known as NRAM (No.1).

The asset portfolio comprises performing and non-performing residential mortgages and unsecured loans from Northern Rock's previous mortgage book. Cerberus European Residential Holdings will purchase the portfolio, while the entire issued share capital of NRAM will be sold to Landmark Bidco. Both companies are affiliates of Cerberus.

The Granite assets will be refinanced by Cerberus. As a result, the mortgages will be wound up with the outstanding securities being repaid in full.

Cerberus has indicated it intends for the management of the assets to remain with NRAM. In this case, mortgages beneficially owned by Granite will be serviced by NRAM in exactly the same way as all of NRAM's mortgages.

The transaction is expected to enable UKAR to repay £5.5bn of the NRAM government loan. This will be through £4.54bn of NRAM funding within Granite, plus the additional £1bn of loans that are included in the sale. In a further development, Cerberus has also agreed to sell £3.3bn of the assets to TSB Bank.

UKAR says that the agreed sale will provide the company with a £280m premium on their book value. It is expected to be completed following NRAM's exercise of the portfolio's seller call option prior to the distribution date, which is scheduled to fall on or around 9 December.

RMBS

Mexican RMBS approach published

Moody's has published its transitioned approach for rating Mexican RMBS using its MILAN framework. The agency recently proposed the change from its previous rating approach in a request for comment to the market (SCI 18 September).

Under the MILAN framework, Moody's begins with a portfolio analysis of the securitised collateral pool. The results of this analysis are the portfolio's expected losses and Moody's individual loan analysis credit enhancement.

The agency explains that the portfolio's expected loss captures its expectations of performance considering the current economic outlook, while the MILAN credit enhancement captures the loss that it expects the portfolio to suffer in the event of a severe recession scenario. Moody's uses the two outputs from the portfolio analysis to determine a probability loss distribution.

In the structural analysis, Moody's uses a cashflow model in order to assess the structural features of the RMBS transaction. The structure is assessed using each scenario in the loss distribution. Finally, Moody's assesses the counterparty default risk and the legal risk to derive the final ratings.

RMBS

Invitation chooses to extend

Invitation Homes has decided to exercise its one-year optional term extension on the single loan backing Invitation Homes 2013-1, a move that Moody's has labelled credit neutral. The deal, which was the first-ever single-family rental securitisation, still has a number of technical conditions to be settled before the extension takes effect.

The decision to extend the loan resolves the uncertainty surrounding the deal, which led to Kroll Bond Rating Agency placing all of IH 2013-1's outstanding ratings on watch developing (SCI 26 October). The transaction's servicer, Midland Loan Services, also placed the loan on its watch list as it waited to see if the required extension notice would be submitted.

Moody's credit neutral stance rests largely on both the performance of the SFR sector and the expectation that the transaction will remain strong from high rental demand, home price appreciation and efficient management by Invitation Homes. The deal has been able to secure monthly rents on new leases and lease renewals that are 6% higher than those on previous leases, as compared with 3% to 5% for the SFR universe average.

Meanwhile, home price appreciation has caused SFR transactions to de-lever. Moody's estimates that for transactions closed prior to 2015, MEDC-indexed annualised equity growth is about 7%-12%, and Invitation Homes' MEDC-indexed annualised equity growth is around 12% from the transaction's closing. Further, IH 2013-1's vacancy rate is about 2.9% compared with the SFR universe average of 5.5%, as of August. The agency believes that such key performance metrics are unlikely to deteriorate over the next year.

Moody's notes that the one-year extension does not make the terms of the loan more onerous. The optional extension was a feature of the transaction at closing, which gave the issuer the option to essentially refinance the transaction at the original, pre-determined cost of funding. As a result, the agency explains that the transaction was never fundamentally at risk of a refinancing default.

Nonetheless, Invitation Homes must settle a few technical conditions before the 9 December trigger date for the extension. Although the company has delivered its first extension notice, the right to extend is subject to it delivering the required documents to the servicer Midland.

These documents include the replacement interest cap agreement and acknowledgement, the executed collateral assignment of interest rate protection agreement, the legal opinion and the final officer's certificate. However, Moody's believes that these requirements should be satisfied without much difficulty.

RMBS

Slovak RMBS rating approach published

Moody's has published its approach to rating Slovakian RMBS, using its MILAN framework. The rating agency will use this approach in conjunction with existing methodologies to rate both RMBS and covered bonds in Slovakia.

Moody's issued a request for comment six weeks ago (SCI 23 September) and its rating approach implements the proposals from that RFC. The Slovakian residential real estate market has been benchmarked to other jurisdictions that use MILAN, while the rating agency has also used some parameters from the  model's EMEA emerging securitisation market settings.

RMBS

RMBS comparison tool updated

Moody's has released an updated RMBS tool which compares the key characteristics of 19 different RMBS markets, including the UK, Spain, Italy, the Netherlands, Japan, Australia and the US. The update introduces a new interactive map to compare key indicators across European markets.  

The tool now also includes a number of new markets, such as Austria, Canada, Mexico, South Africa, South Korea and Sweden. RMBS markets can be compared by several different topics, including collateral, modelling assumptions, typical structural features and counterparties.

For example, the collateral characteristics comprise details on loan amortisation profiles, maturities and underwriting metrics. In comparison, RMBS structural features comprise typical structures, portfolios, tranching and structural trends.

Additionally, the RMBS performance section allows comparison of 90-plus day arrears, worst performing vintages, sector outlook and market specific rating change drivers. With reference to underlying properties, the tool allows a comparison of house price direction, housing supply, housing bubbles and tax benefits available for investment and/or owner-occupied properties.

According to information obtained using the tool, Moody's says that RMBS structures continue to be simpler and have higher subordination levels than before the financial crisis.

RMBS

Pricing source to expand

Barclays is set to incorporate third-party pool-level prices into the pricing for MBS index generics in its US MBS Index, as part of several changes announced after concluding its annual index review and governance process in October. The firm says its decision reflects the evolving fixed income landscape and stakeholder feedback from a diverse set of global investors who use the indices as portfolio benchmarks and measures of broad fixed income market returns.

The existing structure of the US MBS Fixed-Rate Index will not change as a result of the change in price source. The target date for implementation is 2Q16.