Contents

Structured Finance

Purchase progress?

ABSPP prospects assessed one year on

The ECB's ABSPP entered into force on 19 November 2014 (SCI passim) and has dominated European ABS proceedings since. A recent ECB commitment to QE2 has buoyed the market, but the lackluster performance of the purchase programme a year since its inception may temper expectations.

What role ABSPP could have in QE2 is not yet known, but the purchase programme's limited success so far suggests changes may be necessary. However, whether it is within the ECB's power to make the required changes remains to be seen.

"The ECB's ABS purchase programme set itself a high bar, so the fact that it has not met it is not a huge surprise. A key aim of this programme was to revive new issuance and in terms of that metric it has been disappointing," says David Covey, head of European ABS strategy, Nomura.

He continues: "However, ABSPP has been responsible for €15bn in purchases at a time when issuance has been struggling and that is an achievement. The ECB put money where its mouth is, but it has not been broad enough and it is constrained by the facts of the market."

Those facts continue to be dictated by an unfavourable regulatory regime. Without substantive improvements there, changes made by the ECB could be seen as little more than tinkering.

"ABSPP is fighting monetary policy because it is hard to get banks to issue when those same banks are being offered very low-cost term funding via TLTROs. Ultimately, until the regulatory bias against the securitisation market fades, investor numbers are going to be limited," says Covey.

Bank of America Merrill Lynch European securitisation analysts argue that while the ECB is pulling its own weight, the European Commission is not. They note: "We continue to believe that a joint delivery by ECB - active purchases and EC-favourable regulatory framework - is the only way to arrest the freefall of the European securitisation market and bring it back into the mainstream, from an increasingly isolated niche market."

The analysts suggest that there are two directions in which the EC's regulatory framework needs to work. The first is to fine-tune the proposed regulations, because although there appears to be the political will to promote a non-recourse EU bond market, there is no certainty about the final outcome or timing.

The other issue is levelling the playing field with other fixed income sectors. "This particular issue seems to be constantly postponed and side-tracked, as the latest EC announcements indicate," the analysts observe.

Against this background, a reassessment of the ABSPP suggests the programme is best seen as a temporary solution while regulators get around the table and thrash out the issues that remain unresolved. Covey believes it would be wrong to think of ABSPP - whatever role it plays in the future - as a permanent source of demand.

He says: "I view it as a bridge to the point where the market can survive on its own. If regulatory reform occurs during that bridge period, then the market can survive this difficult time and go on to grow, but the ABSPP is not enough to do it all by itself."

That is not to say that there is nothing ABSPP could do differently or more effectively. With retained ABS volume set to exceed placed volume for the year, targeting retained transactions could provide access to a cumulative total in excess of €500bn of ABS, which would give the programme a substantial boost.

The analysts also recommend moving from being a price taker to a price setter, thus shifting the economics of the ABS market and helping improve supply. Additionally, further clarity around the programme's eligibility criteria and transparency around its purchases could be helpful.

Ultimately, these may be stop-gap measures. The key, it appears, lies with the EC.

"There is a big dichotomy between the current state of the market and where policymakers and participants want it to be. For the first time since the crisis, we have regulators in agreement that they want to put securitisation on a more level playing field and that positive intent should not be glossed over," says Covey.

He adds: "Things are going in the right direction, but it is not clear that everything will be achieved in time. There is a brain-drain of sorts in the European ABS market right now and if that continues for too long, it will put the prospects of sustainability and growth at risk."

JL

CLOs

Carve out?

CMU CLO treatment weighed

The European Council has published its first compromise proposal in respect of the Securitisation Regulation forming part of the CMU action plan (SCI 2 October). The newly proposed Article 5a appears to misunderstand the practices of the CLO market, however, adding to the industry's disappointment at the treatment of the sector.

Article 5a requires originators, sponsors and original lenders to apply the same criteria for credit granting to exposures to be securitised as they apply to exposures that aren't securitised. According to a Milbank client alert, the criteria of the first paragraph of Article 5a effectively replicate the corresponding text in Article 408 of the existing Capital Requirements Regulation while extending it to any entity purporting to act as originator, sponsor or original lender in relation to a securitisation.

"In practice, this means applying a common standard to all originators and sponsors in relation to a securitisation - which is understandable and has the benefit of providing a level playing field," the firm notes.

However, the second paragraph of Article 5a - which applies solely to 'limb (b)' origination - requires originators to ensure that the entity involved in the original agreement creating the underlying obligations itself complies with the first paragraph of Article 5a. Milbank highlights a number of issues with this stipulation, one of which is that an originator intending to intermediate a loan between an original lender and ultimate CLO issuer will need to diligence the underwriting standards of that original lender.

"In the absence of any legislative requirement for original lenders to provide the pertinent information on their underwriting standards, originators will be reliant on the goodwill and cooperation of original lenders and so subject to the vagaries of market forces," the firm observes.

The proposal becomes more problematic where there are additional secondary market participants interposed between the originator and the original lender. In such a situation, the second paragraph of Article 5a would require the originator to diligence back up the 'chain' to verify the underwriting standards of the original lender, the feasibility of which is "highly questionable", according to Milbank.

The firm states: "As it stands, compliance with Article 5a of the Presidency Compromise would likely be achieved contractually and involve assurances from the loan seller as to its underwriting processes. However, such a representation would be completely at odds with current market practice. In light of the favourable statements of the European Commission with respect to the Capital Markets Union and the European securitisation market and the laudable performance of the CLO industry during the recent financial crisis, this latest addition seems counterintuitive."

In light of the narrow definition of sponsor in the Securitisation Regulation, the proposal will also adversely impact non-European collateral managers seeking to be compliant with both the US and European risk retention regimes, as these managers need to avail themselves of the originator model in the European market. Participants had hoped that the sponsor definition would be widened under the CMU framework, but were disappointed by the latest iteration. A sponsor still needs to have established and managed a deal, and be a bank or MiFID-authorised entity.

"Most CLO managers aren't banks and US managers typically aren't MiFID-authorised entities," observes Cameron Saylor, partner at Ashurst. "Allowing non-MiFID entities to retain would be very useful for US managers in complying with European risk retention rules."

He adds that a possible explanation for the stipulation is concern that it could create loopholes in other asset classes, where regulators want banks to retain.

Additionally, participants remain disappointed at the treatment of CLOs under the simple, transparent and standardised securitisation framework, which includes a criteria stipulating that portfolios can't be subject to active management on a discretionary basis. "It's disappointing that CLOs can't benefit from the STS regime, since they performed well throughout the crisis," Saylor explains.

Encouragingly from a CLO perspective, however, the final CMU proposal contained a significant amendment from earlier iterations that were leaked to the market in the run-up to its release. Specifically, the 'primary purpose test' for origination vehicles was changed to the 'sole purpose test' in respect of complying with risk retention requirements.

"The final CMU proposal retains 'limb (b)' from the CRR to qualify as an originator. However, the additional overlay of the sole purpose test is designed to ensure that an entity has a broader business purpose and is not established for the sole purpose of securitising assets," notes Saylor.

He suggests that the primary purpose definition was deemed as too unclear by the market, so it was changed to sole purpose. "The rule is focused on the specific retaining entity, rather than the group that the entity is part of. Generally, managers who seek to fall within the definition of originator because they don't have the correct authorisations to hold the retention as a sponsor - for example, US managers - will meet the test. They can also undertake warehouse lending and first-loss lending as 'other business' to comply."

Another important addition under the CMU proposals is the 'direct approach', whereby the retention obligation is extended to originators and sponsors. The current framework operates on an 'indirect approach', where buy-siders can't invest in securitisations unless they have confirmed a party has satisfied the retention requirements. If they fail to do this, they're punished with punitive regulatory capital (for banks) or forced to sell the asset (for funds).

The consequence of failure under the direct approach is punitive, with punishments including a public name-and-shame regime, bans on employees, board-level sanctions and fines (equal to twice the benefit derived from the infringement or up to 10% of a group's global turnover). Member states also have the option to impose criminal sanctions.

"Collateral managers have always sought to ensure risk retention compliance, but there is a heightened sense of conservatism regarding structuring under the new rules," Saylor observes.

He notes that given the nuance within the rules, it remains a case of interpreting how they should be applied. The length of time for which originators should hold assets before securitising, for instance, has been heavily debated.

Market practise has emerged around two types of structures: seasoning of a month is typical for third-party originator vehicles, where the entity originates over 50% of the assets; but seasoning can be less for originator/manager vehicles. The latter option aims to bring more managers within the rules, with the regulators appearing to look favourably on this type of structure and therefore being more lenient regarding seasoning.

The CMU securitisation package is expected to come into force in late 2016 or early 2017. Following amendments by the European Council, Commission and Parliament, the EBA will draft Regulatory Technical Standards. The Authority is likely to run a public consultation on the RTS and it is hoped that any outstanding issues can be resolved then.

CS

CMBS

New wave

Next CMBS modification wave 'unlike predecessors'

US CMBS maturity modifications have been modest this year, but the pace is set to pick up in 2016. Moreover, not only the pace of the mods - but also the manner of them - is set to change.

With US$83bn of performing conduit loans due to mature in 2016, Citi CMBS analysts expect 21% to face difficulties refinancing. Many of the loans could also require modification, although the total may ultimately be smaller than is currently being predicted.

"A year ago the expectation was that up to 33% of loans would struggle to refinance this year, but instead 80% have paid off at or before maturity. In fact, if you include loans which paid off within three months after maturity, it is closer to 90%," says Malay Bansal, head of portfolio management and trading for CMBS at BNY Mellon Investment Management.

He continues: "This is because property prices are up and interest rates are low. With strong capital markets, loans which might have had problems refinancing have instead been able to. As measured by the Moody's CPPI index, commercial real estate values are up 92% since January 2010 and are now 15% above their pre-crisis peak."

These high property values stand in stark contrast to conditions in most of the post-crisis timeframe. This will significantly limit special servicers' incentive to provide lengthy extensions, so borrowers can expect a far less accommodative approach.

The extension recently provided to the US$93.9m Mall at Stonecrest loan securitised in BACM 2005-1 could be informative in this regard. The loan was extended in July for one year only, with the option to extend an additional year (see SCI's CMBS loan events database).

The use of extension options rather than outright lengthy extensions is likely to become a more prevalent feature. The Citi analysts highlight the recent three-year extension to the US$56.9m Doral Arrowwood Hotel loan securitised in GCCFC 2005-GG3. However, they note that they "would be surprised to see very long extensions of the GGP loans kind, which averaged more than seven years".

Upcoming mods are also expected to more prominently feature partial pay-downs, building of reserves and explicit re-default provisions. Furthermore, the analysts believe modifications on maturing loans are also set to become more complex, with multiple provisions beyond the extension itself, as special servicers find themselves in a better position than having to extend and hope for macro changes.

Bansal is slightly more optimistic than the Citi analysts about the number of loans that are likely to run into difficulty, predicting only 15%-20% of loans will transfer into special servicing in 2016. "In 2017, so far it looks like 65% will pay off and 15% will have problems, with the rest depending on market conditions. If loan coupons go up because of higher interest rates or higher spreads resulting from risk retention and other regulatory changes, that may make it more difficult for the borderline loans to refinance," he says.

Loans in the smaller markets are likely to experience greater difficulties than loans in major markets, where Bansal notes that prices are 34% above their pre-crisis peak. Similarly, multifamily property prices are 33.5% above their pre-crisis peak and therefore should fare better than other property types and are less likely to need workouts by special servicers.

The average monthly number of modifications this year has been four, which compares to the previous wave of 32 per month in 2012 and 48 per month in 2011. The average size of this year's modifications has also been modest.

Among the loans maturing in 2016 that are expected to struggle to refinance are large loans, such as the US$458m Gas Company Tower (securitised in JPMCC 2006-LDP8 and WBCMT 2006-C28) and the US$430m 280 Park Avenue loan (CSMC 2006-C4 and CSMC 2006-C5). The US$292.7m Warner Building loan (JPMCC 2006-CB15) is another noteworthy example.

Investors looking to take advantage will have to do their homework, reckons Bansal. He says: "Special servicers are not likely to extend loans as much as they did in last few years. If investors use the recent extension experience as expectation for the loans maturing in 2016 and 2017, they may be overvaluing IOs."

Bansal continues: "Similarly, there may be opportunities in discount bonds if people are over-estimating extensions. As loans pay off and each deal has fewer remaining loans, it will become even more important to analyse all of the loans in the deal."

JL

Secondary markets

Euro secondary solid

The European securitisation secondary market remained solid into last week's close.

Reasonable flows across the board on Friday once again evidenced the slow rise in secondary liquidity and spreads remained stable. Activity was once again strongest in UK non-conforming and Dutch prime. UK prime was relatively quiet following the news on Granite and Portuguese paper continues to suffer from political concerns.

Today is likely to begin quietly as participants calibrate the impact of events in Paris and their aftermath. For now there is only one European BWIC on the calendar.

It involves two lines Dutch consumer ABS Due at 15:00 London time - €1m CHAPE 2003-I D and €500k CHAPE 2007 D. Neither bond has traded on PriceABS in the past three months.

Secondary markets

US CLO surge

The US CLO secondary market is seeing a surge in BWIC volume today.

"It's unusually busy for a Monday," says one trader. "Certainly in terms of the number of sellers, if not the total volume being traded."

The trader continues: "Activity has increased following the market going wider across the capital stack last week. The biggest moves were in the 2.0 double- to triple-B sector and there liquidity is very tight - there's less than half a dozen double-B buyers out there at the moment and there's no support from dealers."

The current pattern is likely to continue the trader suggests. "There are only three solid trading weeks before year-end so people are going to keep trying to get paper out of the door, but buyers are going to keep testing pricing levels - all we're seeing now is back bids. So the market is only going to go wider."

Overall, there are 13 BWICs on the US CLO calendar for today. They provide a mix of vintages across the capital stack but with a bias towards 2.0 mezz.

The largest list still to come today is a 15 line $38+m collection of 1.0 and 2.0 double-As to double-Bs due at 13:30 New York time. It comprises: BAKR 2005-1A B, BAKR 2005-1A D, CECDO 2006-12A B, CECDO 2006-12A D, CECDO 2007-14A B, EV7 1-A B2, INGIM 2006-2A D, LCM 9A E, MDPK 2007-4A B, OAKC 2007-5A C, OHALF 2013-1A D, PRSP 2006-1A C, STAND 2007-1A A2L, STAND 2007-1A A3L and STCLO 2006-5A A3. Only PRSP 2006-1A C has covered with a price on PriceABS in the past three months, doing so at 97.055 on 29 September.

Secondary markets

Euro secondary still slow

It has been a typically slow start to the week in the European securitisation secondary market.

"Yesterday was a typical Monday - a little bit slow going," says one trader. "There wasn't much on BWIC either, though the action around the two CHAPE bonds was interesting and they covered at 15 and 32."

At the same time, the trader says: "We're continuing to see real money looking to add in UK non-conforming with trading happening across shelves. The bulk of activity is at the senior level but we did a handful of trades in mezz yesterday."

Meanwhile, Friday's Granite announcement is having little impact on the secondary market, the trader reports. "The calls in the next couple of months are happening a lot earlier than we and many others expected, but the net effect is that we can expect a lot more cash coming back into the market from January and that can only be a good thing."

There are currently two BWICs on the European schedule for today. They involve an ABS/RMBS mix at 14:30 London time from and a mix of distressed CMBS at 15:00.

The eight line 23.945m ABS/RMBS list comprises: ARMBS 1 A, BRNL 2007-1X A4A, DFUND 2015-1 A2A, GRANM 2005-1 M2, GRANM 2006-2 B3, PARGN 17 B, PENAT 5 A2 and SUNRI 2015-2 A. Three of the bonds have covered on PriceABS in the past three months, last doing so as follows: BRNL 2007-1X A4A at 99.135 on 3 November; GRANM 2005-1 M2 at 98.2 15 September; and SUNRI 2015-2 A at 99.951 on 1 October.

The six line 20.07m CMBS auction consists of: ECLIP 2006-1 B, EMC 6 B, FHSL 2006-1 A, TITN 2006-3A A, TITN 2006-3X A and TITN 2007-2X B. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US CLOs lack clarity

Despite the surge in BWICs yesterday, it is still difficult to divine clear pricing trends in the US CLO secondary market.

"Yesterday was one of the busiest days for quite some time," says one trader. "A fair amount of what was in for the bid traded, but there wasn't a great deal of colour released."

Consequently, pricing levels are hard to define. "Some people are saying prices are softer, but I haven't seen any real evidence of that myself," the trader says. "It seems more like we're moving sideways."

At the same time, clarity is being hampered by the disparate nature of the bonds on offer, the trader notes. "There was no real theme behind what was sold on Friday or yesterday and so no major pattern is coming out of it."

The next few days currently have significantly fewer BWICs on the schedule. "People are now focusing on winding down towards year-end, so, barring any unforeseen events, I'd expect activity to be moderate throughout the remainder of this week and the earlier part of next prior to Thanksgiving," says the trader.

There are currently two US CLO BWICs on today's calendar. 10:00 New York time sees a nine line $165+m original face mix of 1.0 and 2.0 bonds from triple-As to double-Bs.

The list comprises: ATRM 8A D, BLUEM 2012-1A D, BLUEM 2012-1A E, CGMS 2012-3A C, DRYD 2006-16X A1, INGIM 2006-3A A1, KKR 2007-1A A, MAGNE 2012-7A C and SYMP 2007-5A B. Only KKR 2007-1A A has covered with a price on PriceABS in the past three months - 99.13 on 16 November.

Then at 11:00 there is an eight line $34.998m 2.0 triple- and double-B auction consisting of: ACIS 2014-4A D, CIFC 2015-3A E, HLDN 2015-4A D, MCLO 2013-5A D, NMRK 2014-2A D, PARL 2015-1A E, STCR 2014-1A D and WITEH 2014-9A D. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary on the up

Activity and sentiment are on the up in the European securitisation secondary market.

Bolstered by improving broader markets, activity in securitisation secondary picked up yesterday and market tone continues to improve. Better buying interest was seen across most sectors and spreads are broadly flat to slightly tighter.

Prime autos and RMBS saw healthy flows yesterday, while the bid for UK non-conforming paper remained firm. Peripherals continue to attract interest too including Portuguese paper, which has begun to recoup some of last week's losses. At the same time, the bulk of the line items on yesterday's small number of BWICs traded strongly.

There is currently one BWIC on the European schedule for today - a single €1m line of TAURS 2015-DE2 E due at 14:30 London time. The bond last covered on PriceABS at 98.4 on 2 September 2015.

Secondary markets

US CLO drop off?

After Monday's high watermark, US CLO secondary volumes have dropped significantly and could stay that way for some time.

"There's not much going on," says one trader. "Sure, there are still a few lists and we're still being lifted out of stuff, but not in large volumes - it's more pockets of activity."

This pattern could continue for some time, the trader suggests. "We're hearing some investors have already shut down for the year, which seems premature to me, but that's what they're telling us. Equally, with the, shall we say, staffing changes at dealers combining with regulatory changes, there is a real concern over how much capital is going to be allocated in future to our market."

However, the trader isn't ready to give up on 2015 yet. "We're trying to stay light and nimble with the hope that the market picks up in the days or weeks ahead."

There are currently four US CLO BWICs on the calendar for today. They include two triple-A lists with moderate size line items and a longer mix of double- and single-As of smaller sizes.

In addition there is a two line 1.0 and 2.0 equity auction at 11:00 New York time. It consists of: $8.473m MCLO 2005-1A INC and $4.9m MCLO 2012-4X SUB. Neither bond has appeared on PriceABS before.

Secondary markets

Euro secondary tight

Spreads across the European securitisation secondary market are holding up, but liquidity remains tight.

"Market tone and pricing levels are better across secondary in line with global credit," says one trader. "However, we're not seeing huge flows, they even fell back a little yesterday, and liquidity is still tight, so it doesn't take many trades to move spreads."

UK non-conforming once again led the way yesterday. "The sector, especially buy-to-let is better bid in both seniors and increasingly in mezz, which is a result of the Granite redemption news - investors are already looking to redeploy capital in light of the reduced buy-to-let primary pipeline," the trader says.

The trader adds that there is also growing activity in CMBS. "German manufactured housing is seeing increased interest from real money and while there aren't yet large amounts of buying it's moving in the right direction."

The prime sector is also improving, but is much quieter, the trader reports. "Autos were boosted by the announcement of the new BMW deal, but Dutch and UK RMBS aren't seeing any big moves while tone there is more constructive."

There are more constructive signs in CLOs as well. "The basis between 2.0 primary and secondary is compressing," says the trader. "That's not yet a full turnaround, but it is a sign that the market is normalising. At the same time, the smaller than originally anticipated CLO new issue pipeline for the remainder of the year is also supportive for secondary."

There are currently six BWICs on the European schedule for today. The largest comes at 14:00 London time involving a euro and sterling mix of ABS, CLOs, CMBS and RMBS.

The 18 line 270.55m original face list comprises: AVOCA 12X A, BCARD 2014-1X A, DECO 2007-C4X A1, DMPL X A2, ECLIP 2007-2X A, ESAIL 2006-1X B1C, ESTON 2006-1 A1B, HARVT 9X A, HARVT V A2, IMT 2004-1E A2, IMT 2004-4E A2, IMT 2005-3E A2, JUBIL 2015-15X A, MPS 1X M1, PRS 2005-1X B1C, SMI 2011-1X 2A, SPF 2005-B B and STORM 2011-4 A2. Three of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: ECLIP 2007-2X A at 98.51 on 3 November; ESTON 2006-1 A1B at 97H on 20 October; and JUBIL 2015-15X A at 98.72 on 13 November.

Secondary markets

US RMBS steady

The US non-agency RMBS secondary market is keeping steady.

"Anticipation of year-end is increasing, but while the market is a little slower it's steady," says one trader. "It's been fairly busy this week with increasing volumes each day - there's around $1bn in for the bid today."

The make-up of today's supply is steady too, the trader notes. "Sellers today are a mix of a good amount of money managers and hedge funds - the usual suspects offering nothing out of the ordinary. The volume is just a result of the large number of lists - about 20 so far."

The number of lists suggests BWICs remain the overwhelmingly preferred vehicle to market despite an uptick in DNTs, the trader says. "There were quite a few DNTs yesterday, but that's not a major concern. It's most likely because at this time of year sellers have specific target amounts to sell and once that threshold is reached they're pretty happy to hold on to the rest, so keep to reserves more strictly."

Looking ahead, the trader says: "The market is likely to slow down significantly now. We've got remits next week and then Thanksgiving, so unless there's a spike for month-end this could be the last busy day of November."

Secondary markets

Euro secondary accelerates

The recent uptick in the European securitisation secondary market accelerated further yesterday.

A noticeable pick up in flows was seen across the board. As a result, prices were broadly either unchanged or edged a little higher.

Stronger but still selective activity was seen in Autos, CLOs and CMBS. At the same time, peripherals held firm with continued buying interest in Italian and Spanish names as Portuguese paper stabilised further.

However, it was once again Dutch and UK RMBS that led the way. Dutch prime saw strong two-way flows across the capital stack, while much of the UK activity revolved around Granite, where many investors continued to reallocate capital ahead of the expected call next month, but there was also some opportunistic buying of the outgoing paper.

There are currently two BWICs on the European schedule for today, both due at 14:00 London time. One involves a single €8.8m line of ABS CDO CARN 2007-1 B, which hasn't appeared on PriceABS before.

The other list comprises four lines of THEAT CMBS - £1.4m THEAT 2007-1 C, £1.5m THEAT 2007-1 D, £4.034 THEAT 2007-2 C and £1m THEAT 2007-2 D. None of the tranches have traded on PriceABS in the past three months.

Structured Finance

SCI Start the Week - 16 November

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

Pipeline
Last week's pipeline additions were skewed to ABS and CMBS. There were nine of the former and four of the latter, as well as an ILS, an RMBS and a CLO.

The ABS were: CNY3.22bn Bavarian Sky China 2015-2; US$400m NRZ Advance Receivables Trust 2015-ON1 2015-T3; US$400m NRZ Advance Receivables Trust 2015-ON1 2015-T4; US$536.4m SoFi Professional Loan Program 2015-D; US$198.4m South Carolina Student Loan Corp 2015-A; €983.3m Sunrise Series 2015-3; Swiss Car ABS 2015-1; US$250m TCF Auto Receivables Owner Trust 2015-2; and €882.2m VCL Master Residual Value Compartment 2.

US$1.5bn FREMF 2015-K50, US$820.6m GSMS 2015-GS1, US$761.8m JPMBB 2015-C33 and US$774.5m WFCM 2015-NXS4 accounted for the CMBS. The ILS, RMBS and CLO were Residual Reinsurance 2015-II, US$600m FWLS 2015-SC02 and US$400m Ares XXXVIII CLO, respectively.

Pricings
There were eight ABS prints as well as five RMBS. There was only one CMBS and three CLOs.

The ABS were: US$635m Arby's Funding Series 2015-1; US$106.1m BlueVirgo 2015-1 Trust; US$751m 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; €270m Sligo Card Finance 2015; and €231m Success 2015.

The RMBS consisted of: US$301m B2R Mortgage Trust 2015-2; A$500m Firstmac Mortgage Funding Trust No.4 Series 2-2015; £267m Gemgarto 2015-2; US$250m Oaks Mortgage Trust Series 2015-2; and £341.5m Paragon Mortgages No.24.

US$960.9m COMM 2015-LC23 was the sole CMBS. The CLOs were US$509m Carlyle Global Market Strategies CLO 2015-4, €406m Cork Street CLO and US$411.2m Galaxy XXI CLO.

Markets
US ABS auto and credit card spreads were unchanged on the week. "In the student loan sector, spreads for 5- and 10-year senior notes for FFELP ABS widened 5bp, as the market remains cautious in front of new ratings criteria. Wider spreads for FFELP ABS have had a knock on effect on private student loan ABS, where spreads for 3- and 5-year senior notes widened 5bp, while spreads for both class B and C notes widened by 20bp," say Bank of America Merrill Lynch analysts.

US CLO secondary market activity was up significantly in October compared to September, with US$6.4bn of investment grade securities. "A main driver of the surge in public BWIC volume was the continued pickup of supply in CLO senior tranches in October, especially in the first half of the month, from strong real money demand in the senior tranches of the capital structure. Accordingly, secondary trading levels widened considerably across the capital structure, with CLO 2.0 triple-As generically trading in the 160bp-plus context," comment Morgan Stanley analysts.

Editor's picks
Divergent HQS approach highlighted: The Basel Committee has 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...
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%...
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..."

Deal news
• 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 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%).
• 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.
• 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 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.

Regulatory update
• 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.
• 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.
• 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 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.

Deals added to the SCI New Issuance database last week:
AmeriCredit Automobile Receivables Trust 2015-4; CIFC Funding 2015-V; Cole Park CLO; COMM 2015-LC23; Firstmac Mortgage Funding Trust No. 4 series 2-2015; FREMF 2015-KVAD; GSMS 2015-590M; Highbridge Loan Management 7-2015; Neuberger Berman CLO XX; NewDay Funding series 2015-2; Nissan Auto Lease Trust 2015-B; Oak Hill European Credit Partners IV; Paragon Mortgages No. 24; Scandinavian Consumer Loans V; Skopos Auto Receivables Trust 2015-2

Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-5; CD 2007-CD4; CGCMT 2006-C5; CGCMT 2008-C7; DECO 2007-E6; ECLIP 2006-3; EMC 6; EURO 25; INFIN SOPR; JPMCC 2006-CB17 & JPMCC 2006-LDP9; MLCFC 2007-5; TITN 2006-3; TITN 2006-5; WINDM X; WINPP I

ABS

OneMain merger approved

Springleaf has reached a settlement with the US Department of Justice and the Attorneys General of seven states that will allow the company to proceed with closing its acquisition of OneMain Financial Services. An announcement on the acquisition was released earlier this year, with an original expectation for it to close in 3Q15 (SCI 9 March).

Springleaf says that details of the settlement have now been filed with the US District Court in Washington, DC. An approval of a stipulated asset preservation order is required by the court before the deal can close.

Terms of the agreement include Springleaf agreeing to sell 127 branches in 11 states to Lendmark Financial Services, which should close on or about 1 April 2016. The sale will represent 6% of the company's branches and US$608m, or 4%, of the company's receivables.

Springleaf president and ceo Jay Levine will lead the new company, along with an executive management team that includes leaders from both Springleaf and OneMain. The company will be renamed OneMain Holdings and will have nearly 1,850 branches in 43 states, following the sale of Springleaf's branches to Lendmark.

Levine says: "Reflecting the significant earnings power of the new combined company, we expect to generate core net income of US$830m to US$900m, or US$6.2 to US$6.7 per share in 2017."

Structured Finance

CIB bulks up

Alasdair Warren has joined Deutsche Bank to head up its new corporate and investment banking (CIB) division in the EMEA region. Warren's hire is among a number made by Deutsche as it continues to restructure its leadership team and operations under co-ceo John Cryan (SCI passim).

Warren joins from Goldman Sachs, where he was partner and global co-head of the financial sponsors group. He will be based in London and will report to Jeff Urwin, recently appointed head of CIB.

A Deutsche spokesperson confirms that a number of other appointments were announced in an internal memo. These include Mark Fedorcik as head of debt capital markets, James McMurdo as head of CIB APAC, Paul Stefanick as head of CIB Americas and Rashid Zuberi as coo for CIB.

Structured Finance

SF platform set to spin off

First Names Group plans to spin off its US-based structured finance subsidiary, First Names Structured Services (USA), to its existing US management team of Mark Ferraris and Orlando Figueroa. The transfer of the ownership is expected to complete by the end of the year and will prompt a subsequent rebranding. As part of the agreement, both companies will continue to build their working relationship and ensure a smooth and orderly transition over several weeks, so as to prevent disruption to clients.

Structured Finance

Sullivan names new partner

Sullivan & Cromwell has elected six new partners, including Ari Blaut. His corporate practice provides a particular focus on leveraged finance and acquisition finance transactions involving syndicated institutional loans, asset-based loans and issuances of secured and unsecured high yield debt securities. Blaut also regularly acts in direct lending and distressed lending transactions.

Structured Finance

LatAm structured leader added

Nomura has made three appointments to its emerging markets business in the Americas. Karan Madan, JP Alvarado and Siobhan Morden join as mds.

Madan becomes md and head of emerging markets in the Americas. Among his duties will be building out the structured products business in the region. He was most recently regional head of Latin America and head of Latin America FICC trading at Barclays.

Alvarado becomes md and head of Latin America credit trading, which is the same role he held at Barclays. Morden becomes md and head of Latin America fixed income strategy, which is similar to the role she previously held at Jefferies.

Structured Finance

MBS efforts bolstered

Palmer Square Capital Management has recruited Vesta Marks as a portfolio manager focused on building out the firm's efforts in CMBS and RMBS. He was previously md at Tradex Global Advisory services, where he oversaw mortgage credit within its flagship hedge fund.

Marks has also served as a portfolio manager at Semper Capital Management, where he was responsible for investments in multiple strategies involving non-agency RMBS, CMBS and ABS. In addition to managing portfolios, he developed a comprehensive loan-level CMBS model to re-underwrite the credits of legacy CMBS for opportunistic investing within the firm's hedge fund and absolute return products.

Structured Finance

Call for change at FSC

Fifth Street Finance Corp (FSC) has responded to calls from RiverNorth Capital Management for certain changes at the firm. It says that RiverNorth's press release on the matter was inflammatory and misleading, noting that since its founding 17 years ago, Fifth Street has created "a long-term track record as a middle market credit-focused asset manager with strong underwriting and portfolio management expertise".

While the firm agrees with RiverNorth's assertion that it has built a solid portfolio that has been undervalued by the market, it says that RiverNorth has only recently begun acquiring shares of FSC, with most of its shares purchased while FSC was trading at a discount in the last six weeks. FSC adds that it is disappointed that RiverNorth disregarded its invitation for a meeting and launched its initiative without making a good-faith effort to learn the facts.

The firm says it looks forward to further describing its decisions to build value for investors and "remains committed to engaging in a transparent dialogue with its shareholders".

RiverNorth is the largest stockholder of FSC, with a combined beneficial and economic ownership interest in approximately 6% of its outstanding shares. The firm sent a letter to the FSC board and launched a dedicated website detailing what it describes as its campaign to enhance stockholder value at FSC.

In its letter, RiverNorth addresses FSC's "dramatic underperformance, problematic conflicts of interest and abusive fee structure", and outlines the actions that are needed to change the direction of the firm and materially improve the valuation of FSC shares. Further, it has nominated three candidates - Randy Rochman, Fred Steingraber and Murray Wise - for election to the board at the 2016 annual meeting of stockholders. The firm has also submitted a proposal to terminate the investment advisory investment agreement between FSC and Fifth Street Management.

Rochman is ceo of West Family Investments, Steingraber is chairman of Board Advisors and Wise is chairman and ceo of Murray Wise Associates.

Structured Finance

Structured debt chief moves on

Paul Hastings is set to add Paul Severs to its London office as a partner in its corporate practice. He joins from Berwin Leighton Paisner, where he was head of structured debt and capital markets.

Severs has experience across the structured finance and securitisation markets. He has previously also worked at FGIC and Clifford Chance, where he was a partner.

CLOs

Cavalry CLO quartet acquired

Sankaty Advisors is set to acquire the management contracts of four CLO portfolios, totalling US$1.6bn of assets, from Regiment Capital Advisors. The contracts to be transferred are for Cavalry CLO II, Cavalry CLO III, Cavalry CLO IV and Cavalry CLO V.

The transaction is expected to be completed by the end of 2015. Sankaty has managed 27 CLOs since inception and currently has 12 under management.

CLOs

Law firm adds CLO pro

Ashurst has appointed Lawrence Berkovich as a partner in its US CLO team. He joins from Mayer Brown and specialises in complex structured finance transactions.

Berkovich has a particular focus on broadly syndicated and middle-market CLOs, first mortgage and mezzanine CRE loan securitisations and rated and unrated leveraged loan and CRE loan warehouse facilities. He also has extensive experience with derivatives products such as CDS.

The firm recently hired structured finance specialists Scott Pierpont and Lee Ann Anderson (SCI 30 October). It also added Eric Bothwell to its CLO practice in the summer (SCI 28 July).

CMBS

Default interest suit filed

Four funds - understood to be Appaloosa Investment LP I, Palomino Fund, Thoroughbred Fund and Thoroughbred Master - have filed a complaint in New York State Supreme Court to block a potential pay-out of default interest to CWCapital following the impending Stuyvesant Town/Peter Cooper Village sale (SCI passim). The crux of the issue is whether the special servicer is entitled to the full amount of default interest, calculated at a rate of 3% since 2010.

Bank of America Merrill Lynch CMBS strategists suggest that the pay-out could total as much as US$566m or as little as around US$38m, depending on how it is calculated. The plaintiffs collectively are investors in the five CMBS trusts that hold the original US$3bn StuyTown A-note.

According to the complaint, if CWC is permitted to collect and retain the default interest, it will constitute a "significant and unprecedented windfall" to CWC and deplete the amount of proceeds that should be deposited into the gain-on-sale reserve accounts of the StuyTown CMBS trusts for the benefit of their investors. The plaintiffs argue that the interest should be used to offset losses suffered by the CMBS trusts.

While this complaint is unlikely to affect the timing of the StuyTown sale, the BAML strategists warn that depending on how it is resolved, the value of the CMBS bonds - especially mezzanine tranches - could be materially affected if losses occur in the future and there aren't enough funds in the gain-on-sale account to reimburse noteholders.

Insurance-linked securities

Leadenhall brings in two

Leadenhall Capital Partners has made two new hires to bolster its portfolio management team. Joel Milnes joins as an investment analyst in the firm's non-life team, while Craig Gillespie moves into life investments as a portfolio manager.

Milnes arrives from Markel International, where he worked in the reinsurance pricing team. He focused particularly on pricing marine and specie, energy, financial risk, motor reinsurance and terrorism risks.

Gillespie was most recently at Swiss Re in a range of actuarial roles. These included the origination of capital solutions for UK life insurers and costing of longevity transactions.

Insurance-linked securities

PartnerRe deal approved

Shareholders of PartnerRe have voted to approve EXOR's proposed acquisition of the firm, edging the deal closer to completion. The vote was made yesterday (19 November) at PartnerRe's special general meeting at the company's offices in Bermuda.

PartnerRe's board of directors also declared a special dividend of US$3 per share payable to common shareholders, contingent upon the completion of the acquisition. The deal is still expected to close during 1Q16, with the required antitrust approvals now obtained and insurance regulatory approvals remaining on track.

Exor's success as the preferred bidder for PartnerRe was announced just over three months ago (SCI 4 August). The announcement put an end to an ongoing bidding war with AXIS Capital to obtain the company (SCI passim).

Insurance-linked securities

Insurance merger progresses

Willis Group has urged its shareholders and shareholders of Towers Watson to vote in favour of the proposed merger between the two firms (SCI 30 June). Both boards have already unanimously agreed on the transaction.

The proposed deal will enable Willis shareholders to benefit from a significant economic opportunity generated by the combination, while Towers Watson investors would benefit through the acceleration of the firm's strategy. ISS' claim that Willis has more riding on the transaction has been refuted.

Willis will hold an extraordinary general meeting of its stockholders to vote on the proposed merger with Towers Watson on 18 November. Towers Watson will hold a special meeting of its stockholders on the same day.

Insurance-linked securities

Catastrophe agreement extended

State National Companies has extended its partnership with Nephila Capital. In exchange for the continued exclusive right to produce catastrophe-exposed property insurance via State National, Nephila has agreed to pay State National contractual minimum ceding fees through 2019.

The contractual minimum fees are subject to State National maintaining its single-A AM Best rating, with potential reductions if State National is unable to provide production year capacity or is otherwise constrained from writing premium. Nephila may also terminate the exclusivity under certain circumstances, which would reduce the minimum fees to a total of US$32.5m for 2016-2019.

Risk Management

ICE prices senior offering

ICE has priced an underwritten public offering of US$2.5bn in new senior notes. It says it will use the proceeds, along with available cash and borrowings under its US dollar commercial paper programme, to finance the cash element of its purchase of Interactive Data.

The offering is split equally between US$1.25bn in aggregate principal amount of 2.75% senior notes due to mature in 2020 and an additional US$1.25bn of 3.7% senior notes due in 2025. The offering is being made under a shelf registration statement and is expected to close on 24 November.

ICE announced last month that it had agreed to acquire Interactive Data from Silver Lake and Warburg Pincus in a US$5.2bn deal (SCI 27 October). The data company's services will integrate with ICE into a single platform. 

RMBS

REIT's board bolstered

Two Harbors Investment Corp has appointed Lisa Pollina to its board of directors. She has extensive experience in the financial services industry, having most recently served as vice-chairman for RBC Capital Markets.

Prior to that, Pollina was senior advisor to the ceo for RBC International, where she also served as senior advisor for the boards of RBC Canadian Trust Company and the RBC Dexia Holding Company. She was previously global financial institutions executive in Bank of America's global corporate banking division and a founding partner of Bordeaux Capital.

ABS

VW credit risks vary

The credit quality of ABS sponsored by Volkswagen is being negatively affected by the heightened risks to the earnings and reputation of the car manufacturer, says Moody's. The agency currently rates 34 VW ABS transactions globally, including 20 in Europe, six in the US, six in Asia and two in Latin America.

Moody's downgraded the long-term senior unsecured ratings of VW to A3 from A2 on 4 November. It followed this up on 6 November by downgrading the senior unsecured rating of VW Bank to A1 from Aa3, as well as downgrading the counterparty risk assessment to Aa3 from Aa2.

The credit quality of many of the ABS transactions is linked to VW's financial health because the automaker's entities act as servicers for the deals. However, while that linkage can be strong, Moody's believes that the risks are generally mitigated.

"European VW ABS that we rate benefit from either a large-scale servicing platform that would likely remain intact, even in the event of a corporate bankruptcy, or the presence of a back-up servicer facilitator," says Mehdi Ababou, Moody's vp and senior credit officer. "VW's European ABS also include liquidity reserves that cover at least 10 months of coupon payments on rated notes in case of a cashflow disruption."

Nevertheless, the declining credit quality of VW is expected to have an uneven effect on the company's ABS transactions in part because of regional differences in how the deals are structured. In the US, losses on residual values included in VW lease ABS are expected to rise, particularly for defective diesel vehicles. Payment rates on its dealer floorplan transaction could also decline.

"In Europe, however, lower VW car values will not directly affect lease-backed VW ABS that we rate because these transactions do not securitise residual values," observes Jody Shenn, a Moody's research analyst. "In Japan, lower resale values would have no credit impact on the four deals we rate because we already assume no recoveries on defaulted loans."

Commingling risk  also exists for VW ABS from some regions, but is often mitigated by rating-based triggers. This also applies to the US, where the corporate downgrades are set to lead to faster remittances to a segregated account.

ABS

Madden scenarios played out

The ongoing litigation surrounding Madden vs. Midland Funding poses risks to marketplace lenders and related ABS, suggests Moody's. The agency says that it throws into doubt the presumed legal benefits that come with marketplace lenders using third-party partner banks to originate loans.

The US Second Circuit Court of Appeals back in May held that non-bank debt collectors that purchased written-off credit card accounts from a bank could not benefit from the bank's federal pre-emption of state usury laws (SCI 21 July). On 10 November, the defendants in the case petitioned the US Supreme Court to review that decision.

"With further court decisions needed to provide more clarity around the likelihood of losses resulting from the use of the partner bank origination model, whether the current arrangement remains viable remains to be seen," says Moody's vp and senior analyst Alan Birnbaum. "As a result, some market participants are already restricting their exposure to potentially usurious loans from the three Second Circuit states, namely New York, Connecticut and Vermont."

Moody's sets out three possible scenarios that may play out. The Supreme Court could outright decline to hear the case in such circumstance. Contrastingly, it may hear the case and choose to either affirm the Second Circuit's ruling or overturn it.

Under the first scenario, the Madden case would remain unresolved until the US District Court in New York - where it was originally heard - ruled on remaining issues. Which state law would apply to the plaintiff's loan remains unclear, but if it is subject to New York usury laws, it could be deemed void. Legal actions affecting marketplace lenders and potentially also the securitisations backed by their loans would likely follow.

Moody's believes that the second scenario, with the Supreme Court hearing the case and affirming the Second Circuit's ruling, would be the worst outcome for marketplace lenders. Under these circumstances, the impact of the Second Circuit's decision would increase significantly because the risk of losing pre-emption of state usury laws would spread to states other than New York, Connecticut and Vermont.

The third scenario, in which the Supreme Court would overturn the Second Circuit's ruling, would be the most positive outcome for marketplace lenders and related ABS. "If the Supreme Court were to overturn the prior ruling, the Madden case would be resolved and there would be greater, though not complete, legal certainty around non-banks' ability to buy loans from banks to charge and collect interest at the rates set forth in the loan contracts," adds Birnbaum.

ABS

Aircraft ABS set to grow

The aircraft ABS sector should continue to grow next year, with more deals and more leasing entrants, says Fitch. The agency counts 11 aircraft securitisations completed since the start of 2014.

Some recent deals have included increased concentrations in older aircraft, while regional jets and turbo-prop aircraft are also being included more frequently in collateral pools. Outstanding ABS performance has been stable and is benefitting from low fuel costs.

An increase in interest rates could provide further impetus to the market. Fitch says that lease rates have historically shown positive correlation to long-term interest rates.

New aircraft leasing entrants are expected to join the market, particularly in the Asia-Pacific region. Combined with the low cost of funds, the aggressiveness of these entrants could influence market lease rates, the rating agency notes.

ABS

Navient extends RCA

Navient has amended the transaction agreements for 66 FFELP student loan ABS trusts, 23 of which are either on review for downgrade or on rating watch negative. The amendments allow Navient to provide loans to the trusts under a revolving credit agreement (RCA) at its discretion. The RCA permits the trusts to borrow from Navient to cover any payment shortfalls on the legal final date.

Navient took similar action with 16 trusts in September (SCI 17 September). At that time, it also amended the transaction agreements to include an option to purchase trust student loans aggregating up to 10% of the trust's initial pool balance. The latest amendments do not include such optional repurchases.

ABS

FFELP downgrades anticipated

Fitch has released an exposure draft that showcases proposed amendments to how it rates US FFELP student loan ABS. The agency expects to place potentially impacted tranches on rating watch negative, with potential downgrades to follow.

Among the main proposals is a revision of the assumptions and stresses for deferment, forbearance, IBR, default timing and prepayments. Fitch is considering amendments that reflect changing payment behaviour and loan status trends, partly driven by the introduction of government-sponsored payment programmes, such as the IBR.

Fitch also plans to apply a new methodology for existing transactions where its cashflow model indicates a lower rating for a tranche following the revised stresses. The agency says that the methodology allows for rating tolerance of one to two rating categories based on the rating and time to maturity.

The agency estimates that approximately 35% to 45% of existing FFELP student loan ABS tranches would be downgraded based on the new methodology. The magnitude of downgrades is expected to span one to five rating categories, ranging from triple-A to single-B.

Preliminary testing indicates that 55% to 60% of current triple-A rated senior tranches would remain in that category. In comparison, 30% to 35% could be lowered to either double-A or single-A. As much as 10% to 15% could be lowered to non-investment grade categories.

In addition, approximately 35% of current subordinate bond ratings could be lowered to non-investment grade. However, additional factors - such as remaining time to maturity, payment trends and sponsor support - will be considered in Fitch's analysis.

Fitch is inviting feedback on the proposals by 31 December.

Structured Finance

ESMA consults on CRAs

ESMA has published a discussion paper on the validation and review of credit rating agency (CRA) methodologies. The paper provides background on validation practices in the credit rating industry and shares good practice observed by ESMA in its recent supervisory investigation.

The paper also seeks stakeholders' views on the validation and review of CRA methodologies. It particularly requests views on how CRAs should demonstrate rating methodologies' 'discriminatory power', 'historical robustness', 'predictive power' or - where there is limited quantitative evidence - that the methodologies are 'sensible predictors of credit worthiness'.

ESMA is also asking how CRAs should meet the requirement in both Articles 7 and 8 of Commission Delegated Regulation No 447/2012. This requires CRA methodologies to have "processes in place to ensure that systemic credit rating anomalies highlighted by back-testing are identified and are appropriately addressed."

An open hearing will be held by ESMA on 25 January 2016, with the consultation closing on 19 February 2016.

Structured Finance

STS changes proposed

Insurance Europe has released a paper which makes a number of proposals regarding alignment of the draft regulation for a European STS framework with Solvency 2. Among its suggestions, the paper says that capital charges for STS deals should be aligned to those for corporate bonds.

The paper also says that the scope of all tranches - junior and senior - in STS transactions in Solvency 2 should align with capital requirements. It proposes that all tranches of STS securitisations should receive a more risk-sensitive approach and avoid current cliff effects between the senior and junior tranches within the same STS transaction.

"The current reference to Solvency 2 in the explanatory memorandum seems to indicate a review for only junior tranches of STS securitisations," the paper notes. "This would be a very limited scope of work and would not be enough to achieve a better risk-sensitive approach for the calibration of STS securitisation, which are currently unnecessarily penalised under Solvency 2."

It says that the STS status will be a good indication for the qualitative aspects of the securitisation as a whole, while any rating differences between the senior and the junior tranches will implicitly impact the capital requirement. This means that the difference between the charges for junior and senior tranches of high quality securitisations can be significantly lowered, if not removed.

Further, the paper proposes that capital charges for securitisations of residential loans should be capped at the level of charge applied to the underlying pool of residential loans. It also suggests that high-quality, senior tranches of STS ABCP should have the same capital treatment as cash.

Other recommendations include calls for a clarification of the due diligence requirements and accreditation of securitisations to be undertaken by a non-partisan third party. This is prompted by Insurance Europe's concern about potential conflicts of interest among sponsors and originators. The organisation believes this "would not give investors sufficient confidence in the STS framework".

CDO

Trups defaults dip

US bank Trups CDO combined defaults and deferrals marginally dropped to 18% at the end of October from 18.1% the previous month, according to Fitch's latest index results for the sector. Three bank issuers representing US$19m of notional cured in three CDOs during the month.

In addition, there were no new deferring or re-deferring issuers in October. However, one issuer representing US$6.5m of collateral in two CDOs was closed by the FDIC and was marked as defaulted in Fitch's bank Trups universe.

Across 78 Fitch-rated Trups CDOs, 229 defaulted bank issuers remain in the portfolio, representing approximately US$5.4bn of collateral. Further, 107 issuers are currently deferring interest payments on US$1.3bn of collateral.

CLOs

Chinese concentration risk highlighted

China Shanshui Cement Group's default last week will test how Chinese CLO structures withstand underlying corporate defaults, says Fitch. The agency notes that this event highlights the concentration risk prevalent in typical Chinese CLO structures, which it considers a major obstacle to assigning high ratings in the sector, along with the lack of financial information on underlying loans.

Fitch downgraded Shanshui's long-term issuer default rating (IDR) on 11 November to RD (restricted default) from single-C, following the company's announcement that it had filed a winding-up petition and an application for the appointment of provisional liquidators with the Grand Court of the Cayman Islands the day before. The company said that it was not able to repay around CNY2bn of onshore debt due 12 November 2015 and a default on the onshore debt would trigger the cross-default provisions of its other debt.

A fully owned subsidiary of Shanshui is one of the obligors in Tianyuan 2015 Collateralized Loan Obligations Trust Series One, which was issued in July 2015 by Tianjin Bank. The debt owned by Shanshui's subsidiary - sized at CNY200m - constitutes approximately 16% of the transaction's outstanding principal balance at the time of announcement, up from 11.89% at closing.

At issuance, the underlying collateral of the CLO comprised 24 loans from 22 obligors totalling CNY1.68bn. The top four obligors' borrowing was CNY200m apiece, amounting to 11.89% of the portfolio each at closing.

The top five obligors combined contributed 53.51% of the trust's original balance. The concentration risk was heightened after the first distribution date in August when the number of loans was reduced to 13 from the initial 24, Fitch notes.

Default of a single top obligor, assuming no recoveries, is expected to reduce credit enhancement to the senior notes to CNY77m, exposing senior notes to significant risk of future loss. This is despite a senior/sub structure, where subordinated bonds initially provided CNY277m CE for the senior tranches.

A typical Chinese CLO may have 20-50 obligors and may be highly concentrated towards single obligors, as well as certain industries and geographic regions. In the case of Tianyuan, loans originated in Shandong Province constituted 47.56% of the portfolio at closing, while loans from Shanghai and Hebei Province contributed another 20.93% and 17.84% respectively. Construction, non-metal mining and coal mining were the top three industries, representing 23.90%, 23.78% and 11.89% respectively.

Fitch believes that credit portfolios that are less diversified with higher concentrations in terms of obligor, industry and region could exhibit higher volatility of defaults rates. Consequently, to achieve high ratings from the agency, a CLO either needs to be diverse in nature or have sufficient CE to mitigate the concentration risk within the underlying portfolio.

CLOs

Pharma scrutiny 'contained'

The ongoing scrutiny of Valeant Pharmaceuticals International and other drug company pricing practices will curtail gains that CLOs have recently made on M&A activity in the generic and specialty pharmaceutical sector, according to Moody's. The agency suggests that these negative sector developments will have limited credit implications for CLOs, however.

M&A activity in the pharma sector spiked in 1H15 and CLOs benefited from the deal-making wave after most transactions accelerated repayment of existing loans. "CLOs have benefited from high levels of M&A activity in the sector through deleveraging in amortising CLOs and low-risk par building in reinvesting CLOs," says Ramon Torres, a Moody's svp. "Moreover, the ensuing borrowings via leveraged loans have increased the availability of CLO-eligible collateral. The scrutiny raises credit risks for generic and specialty pharmaceutical companies and will slow sector M&A activity going forward because the attention calls into question the sustainability of growth rates for companies dependent on driving revenues through large price increases on acquired drugs."

Drug pricing is currently under scrutiny by the US Department of Justice and two congressional committees after dramatic price increases on certain products. CLOs have long provided significant amounts of financing to the high-yield generic and specialty pharmaceutical sector, with loans from the sector among the most widely held assets in US CLOs. Any negative impact on CLOs from the scrutiny will remain contained, however, as portfolio concentrations in Valeant and other generic and specialty pharmaceutical companies are limited.

CMBS

Euro CMBS maturity defaults tumble

At the end of October, the 12-month rolling loan maturity default rate for European CMBS rated by S&P decreased from 20% to 10.3%. The senior loan delinquency rate increased from 47.1% to 49%, however.

The delinquency rate for continental European senior loans increased from 59.7% to 61.3%. For the UK, the rate increase from 18.8% to 20%.

CMBS

Fewer CMBS servicing transfers

Increased US CMBS issuance has coincided with a decrease in the number of loans transferring to special servicing, notes Fitch. Through October, US$4.3bn has transferred to special servicing in Fitch-rated transactions this year, down from US$6.8bn in both 2014 and 2013.

The rating agency has received notification from master servicers of 383 loans being transferred to special servicing year-to-date October 2015. The average loan size was US$11.3m, with only seven loans greater than US$75m being transferred into special servicing so far.

Office and retail continue to lead transfers into special servicing by property type, as has been the case for the past several years. Transfers in the retail sector account for approximately 36% of the overall balance transferred.

Fitch expects the volume of specially serviced loans to continue to decline in 2016, particularly for REO assets, as the pace of resolutions exceeds new transfers in. The agency believes that continued strong market liquidity for commercial real estate assets coupled with low interest rates and increasing property values have created ideal conditions for special servicers to liquidate stabilised assets.

NPLs

Winning NPL bidders named

Fannie Mae has announced the winning bidders for its third non-performing loan (NPL) sale of approximately 7,000 loans totalling US$1.24bn in unpaid principal balance (UPB), divided among three pools (SCI 12 October). The winning bidders for the transaction - which is expected to close on 17 December - are Fortress (New Residential Investment Corp) for pools one and two, and Goldman Sachs (MTGLQ Investors) for pool two.

Pool one comprises 1,963 loans with an aggregate UPB of US$418.84m, average loan size of US$213,366, weighted average note rate of 5.21%, average delinquency of 52 months and weighted average broker price opinion (BPO) LTV of 108%. Pool two consists of 3,823 loans with an aggregate UPB of US$588.37m, average loan size of US$153,902, weighted average note rate of 5.32%, average delinquency of 34 months and weighted average BPO LTV of 70%. Pool three has 1,224 loans with an aggregate UPB of US$235.32m, average loan size of US$192,256, weighted average note rate of 4.90%, average delinquency of 36 months and a weighted average BPO LTV of 135%.

The cover bid price for pool one is 72.36% of UPB (64.74% BPO), for pool two is 87.76% of UPB (52.81% BPO) and for pool three is 54.75% UPB (68.80% BPO). The average loan size and weighted average note rate on the aggregate of the three pools were US$177,251 and 5.20% respectively. The average delinquency of the loans was approximately 41 months, with a weighted average BPO LTV of 95%.

The loan sale was marketed by Credit Suisse, Bank of America Merrill Lynch, JPMorgan and Williams Capital Group.

Risk Management

FRTB impact analysed

The Basel Committee has published the results of its interim impact analysis of its fundamental review of the trading book. The report assesses the impact of proposed revisions to the market risk framework set out in two consultative documents published in October 2013 and December 2014. Further revisions to the market risk rules have been made since then and the Committee expects to finalise the standard around year-end.

The analysis was based on a sample of 44 banks that provided usable data for the study and assumed that the proposed market risk framework was fully in force as of 31 December 2014. It shows that the change in market risk capital charges would produce a 4.7% increase in the overall Basel 3 minimum capital requirement. When the bank with the largest value of market risk-weighted assets is excluded from the sample, the change in total market risk capital charges leads to a 2.3% increase in overall Basel 3 minimum regulatory capital.

Compared with the current market risk framework, the proposed standard would result in a weighted average increase of 74% in aggregate market risk capital. When measured as a simple average, the increase in the total market risk capital requirement is 41%. For the median bank in the same sample, the capital increase is 18%.

Compared with the current internally modelled approaches for market risk, the capital requirement under the proposed internally modelled approaches would result in an increase of 54%. For the median bank, the capital requirement under the proposed internally modelled approaches is 13% higher.

Compared with the current standardised approach for market risk, the capital requirement under the proposed standardised approach is 128% higher. For the median bank, the capital requirement under the proposed standardised approach is 51% higher.

Risk Management

EMIR reporting standards updated

ESMA has published an update of existing technical standards regarding data reporting requirements under EMIR. The update transposes a series of Q&As as well as other improvements which have followed a review of existing technical standards.

The updated technical standards clarify date fields, adapt existing fields to the reporting logic prescribed in existing Q&As and introduce new fields and values to reflect market practice. The final draft technical standards have been sent for endorsement to the European Commission.

Risk Management

Netting synchronisation service set up

Markit has launched a service to help banks to automatically update their risk systems after netting and compression activity at their clearinghouses. It is live with LCH.Clearnet's SwapClear and will expand to other clearinghouses.

Netting exposures within a clearinghouse allows firms to reduce the capital and operational costs associated with OTC derivatives. Markit's offering is also designed to allow firms to reconcile all OTC derivatives trades - cleared and uncleared - with the data maintained centrally by its trade processing service for OTC derivatives, MarkitSERV.

Risk Management

EBA consults on cross-border liquidity

The EBA has launched a public consultation on its draft regulatory technical standards (RTS) related to liquidity requirements for cross-border intragroup financial support under stress conditions. The RTS aims to specify the additional criteria set out for institutions seeking to apply higher inflows and/or outflows on liquidity and credit facilities on cross-border transactions.

In particular, the draft RTS specify how the liquidity provider and receiver shall present a low liquidity risk profile. This can be achieved by the liquidity provider monitoring and overseeing the liquidity position of the receiver at least on a daily basis. Its contingency funding plan is expected to ensure through this monitoring that the support to the receiver is guaranteed even in times of stress.

The EBA's standards also detail the necessary legally binding agreements between group entities regarding the credit or liquidity line. The regulatory body says that the criteria, which is specified in the liquidity coverage requirement delegated act, is set out to ensure the effectiveness of the liquidity support.

The EBA welcomes comments from the market regarding the RTS. The consultation window is open until 13 January 2016.

RMBS

Euro HPA 'RMBS positive'

Recovering house prices in the UK, Ireland, Spain and the Netherlands will help to suppress RMBS deal losses, says Moody's. However, the recovery has been noticeably less pronounced in the Italian market.

All else being equal, the increase in borrower equity which typically results from house price growth should lead to higher recoveries on loans that default. The risk of house price increases prompting overheating remains remote at this stage, the rating agency adds.

Ireland has experienced the most pronounced house price recovery, mainly due to that market's collapse in 2008-2012. While the pace of the recovery could be an indication of potential overheating in the market over the long term, at this stage the increase in house prices is not sufficient to have an impact on Moody's model outputs for outstanding Irish RMBS transactions.

Moody's adds that macro-prudential measures proposed by the Central Bank of Ireland to restrict lending at higher LTV and LTI ratios will likely temper the pace of house price growth in the short term, if implemented. House price increases have generally also translated into an improvement in arrears and this improvement will likely continue as long as Ireland's macroeconomic conditions remain positive.

Housing price growth in the UK should be more moderate than in other European countries because of a softening in demand for buy-to-let properties, while in Spain a strengthening macroeconomic environment, persistent low interest rates and fewer house repossessions is expected to increase mortgage loan origination and push up house prices. Housing recovery rates in the Netherlands have been steadily increasing since 2013, but house prices in Italy are expected to remain flat for the next year.

RMBS

Aussie arrears at record low

Australian nonconforming RMBS arrears fell to a record low of 3.99% in September, according to S&P's latest performance index (SPIN) result for the sector. The total is down from 4.47% in August, a drop of 0.48%.

"The nonconforming arrears level is significant because it is the lowest recorded since we began compiling the SPIN in 2000," says S&P credit analyst Narelle Coneybeare.

Meanwhile, arrears levels for prime RMBS also fell in September, dropping to 0.91% from 0.93% the previous month.

RMBS

GSEs continue risk transfer innovation

Fannie Mae and Freddie Mac have both priced innovative risk transfer deals. The deals build on plans outlined earlier in the year (SCI 20 August).

Fannie Mae has completed two more credit insurance risk transfer (CIRT) transactions, one of which has, for the first time, been completed directly with a multi-line insurer. Also for the first time, the covered loan pools of both transactions consist of 30-year fixed-rate loans with LTVs all greater than 80%.

The loans for CIRT 2015-4 and CIRT 2015-5 - the latter being the transaction completed directly with the multi-line insurer - were acquired from September 2013 to December 2013 and from April 2014 to December 2014 respectively. The combined unpaid principal balance of the reference loans in the two deals is larger than previous transactions at just over US$12bn.

Fannie Mae has now acquired more than US$800m of insurance coverage on over US$32bn of loans this year with five CIRT transactions. By the end of 2015, the GSE anticipates it will have transferred a portion of the credit risk on approximately US$500bn in single-family mortgages through all of its credit risk transfer efforts, including CIRT, CAS and other forms of risk transfer.

Meanwhile, Freddie Mac has priced its first rated senior/subordinate RMBS. At US$634.5m, Freddie Mac Whole Loan Securities Trust Series 2015-SC02 is approximately twice the size of its predecessor, which was not rated.

Bank of America Merrill Lynch and Credit Suisse are co-lead managers and joint bookrunners, while Barclays and Nomura are co-managers. Freddie Mac intends to grow the WLS programme and introduce quarterly issuances next year.

RMBS

RMBS uses new servicing fee structure

Mill City Mortgage Loan Trust 2015-1 has introduced a fee-for-service structure which is unique to rated re-performing loan (RPL) securitisations, notes Moody's. This new structure will see Shellpoint Mortgage Servicing charge a base free that increases as a loan becomes more delinquent.

The rating agency notes that this fee structure provides monetary incentives for the servicer to work out delinquent loans in an RPL transaction, but also that it could hurt the transaction if the servicer does not intervene in the early stages of a delinquency to mitigate loan losses to the pool. Therefore the structure would work best if either the transaction's controlling holder or a third party oversees servicing functions for the trust.

The transaction has a second servicer, although Moody's views Fay's stability as weak, due to its size and private ownership structure.

RMBS

HECM deal rated

Nationstar Mortgage is marketing an RMBS backed by inactive home equity conversion mortgages (HECM), believed to be the first deal of its kind to be rated. Moody's has assigned provisional ratings to three classes of Nationstar HECM Loan Trust 2015-2.

The class A tranche in the deal has been rated Aaa by the agency. The M1 tranche has been assigned an A3 rating and the M2 tranche assigned a Ba2 rating.

The certificates are backed by one pool of inactive HECM reverse mortgage first-lien loans. The collateral pool is comprised of 1,106 mortgage loans, with Nationstar serving as the servicer for the deal.

The HECM loans are covered by FHA insurance to individuals secured by properties in the US, along with REO properties acquired through conversion of ownership of reverse mortgage loans that are covered by FHA insurance. Nationstar acquired the mortgage assets from Ginnie Mae-sponsored HECM MBS.

Moody's says that all of the mortgage assets are covered by FHA insurance for the repayment of principal up to certain amounts. If a borrower or their estate fails to pay the amount due upon maturity or otherwise defaults, sale of the property is used to recover the amount owed.

The transaction - which has a sequential liability structure - is callable after six months with a 1% premium, after 12 months without a premium and mandatorily at 36 months. If the mandatory call at 36 months is not exercised, the coupons of all of the notes will step up by 3%. The legal final maturity of the transaction is 10 years.

RMBS

SFIG proposals 'credit positive'

SFIG has proposed a transaction parties framework for private-label RMBS which contains a pair of features that will provide a stronger governance structure for these securities, says Moody's in its latest ResiLandscape publication. These features are an expanded transaction parties framework and the role of a 'deal agent' (SCI passim) to provide independent oversight of the trust and represent investors' best interests.

SFIG's expanded transaction parties framework provides a comprehensive list of the roles and responsibilities of each participant in a transaction as determined by a broad and diverse group of industry participants. Moody's believes this list strengthens RMBS transaction governance by identifying the parties accountable for each part of a transaction and providing clear expectations for each participant.

"The framework will also serve as a benchmark, giving market participants an easy reference point with which to compare the governance framework of any particular transaction to evaluate risk. Such a reference point will also allow communication of deviations from the framework and will lead to better analysis of a transaction," Moody's says.

The much-mooted deal agent would provide independent third-party oversight to safeguard investors' interests. The deal agent would oversee loan servicing and asset management and document custody and maintenance, and would report to bondholders and rating agencies.

"The deal agent can provide greater transparency on the performance of the trust through regular data reviews and quality control of performance reporting, disclosing any adverse findings as they arise. The deal agent will also play an active role in determining and declaring representation and warranty breaches and in enforcing deal mechanisms that serve investors' interests," says Moody's.

RMBS

Granite funding structure formed

Cerberus European Residential Holdings (CERH) has established a non-revolving warehouse facility - dubbed Neptune Rated Warehouse - to finance the purchase of the Granite portfolio from UKAR (SCI 13 November). Arranged by Morgan Stanley, loan facilities to the SPV will be provided by a consortium of four lenders.

The structure comprises six loan facilities and an unrated subordinate note. Fitch and Moody's have assigned AAA/Aaa ratings to facility A, AA/Aa1 ratings to facility B, A/Aa2 ratings to facility C, BBB+/A1 ratings to facility D and BB/Baa1 ratings to a mezzanine facility. Facility F is not rated.

Facilities A and B are rated for timely payment of interest and principal, while Facilities C to mezzanine are rated for ultimate interest and principal payments. A non-amortising reserve fund sized at 1.5% of the initial facility balance will be fully funded at close through the proceeds of the subordinate note.

Of this, 1.5% of facilities A and B outstanding consist of the liquidity reserve portion, whereby the remaining portion can be used to cure credit losses. Once facility D has been paid-off, the reserve fund is released as available principal.

The transaction also contains additional subordinated non-interest amounts owed by the warehouse to the loan providers.

The warehouse will be backed by a portfolio of seasoned prime UK owner-occupied mortgage loans, predominantly originated between 2005 and 2007 by Northern Rock. The assets to be purchased are currently securitised in the Granite Master Trust, which will be collapsed for the purpose of this transaction at a later date. UKAR is selling the mortgages to CERH, which plans to subsequently on-sell a randomly selected subset of the acquired mortgage loans into the warehouse.

The loans to be securitised have a weighted average seasoning of 113 months, an indexed WA current loan-to-value ratio of 78.3% and a WA debt to income ratio of 40.4%. Of the portfolio, 3% is greater than three months in arrears. In addition, 17.4% of the borrowers in the pool are self-employed.

A key feature of the transaction is CERH's ability to dispose of the mortgage loans with a view to refinancing some or all of the amounts owed by it to the lenders. The sales are subject to certain disposal conditions, such as no recordings on the principal deficiency ledgers, a minimum par sales price covering accrued interest, and one- and three-month arrears not exceeding twice their respective levels at close.

Servicing of the portfolio is currently undertaken by Bradford and Bingley, which was placed into public ownership along with its entire mortgage business with UKAR in November 2010. B&B's servicing platform is currently undergoing a sale process, which is expected to complete in 2016. The purchaser will be contractually required to perform the role of servicer on the portfolio.

A back-up servicer and back-up servicer facilitator (Wilmington Trust) will be appointed at closing. The back-up servicer is required to step in within 90 days and perform the duties of the servicer, if the servicer is insolvent or defaults on its obligation under the servicing agreement.

The Granite RMBS transactions are expected to be redeemed on 17 December for series 2007-1 and series 2007-2 and 20 December for all other deals. Partial redemption of the Whinstone 1 and 2 notes is expected on 25 January 2016, with full redemption on 25 April.

RMBS

RMBS criteria update planned

S&P is planning to propose revisions to its criteria for analysing pools of residential loans that support RMBS or covered bonds in France, Germany, Sweden and Denmark. The agency also plans to publish new criteria for analysing pools of residential loans in Belgium and Austria.

"We expect to align the revised and new criteria, where relevant, with the analytical framework applied in other European jurisdictions, with adjustments to reflect the market characteristics and key credit factors in each country," says S&P credit analyst Andrew O'Neill.

The plan is for S&P to publish one criteria article that presents a common analytical framework which applies to pools of residential loans in all European countries. This will be complemented by assumptions that the agency applies in each of those jurisdictions.

A request for comment to the market is expected by S&P, which will include an outline of its proposed criteria.

RMBS

Freddie RMBS benefits mezz

Freddie Mac is in the market with its first rated senior/subordinate cash RMBS. The US$600m Freddie Mac Whole Loan Securities Trust Series 2015-SC02 has a number of unique structural features that differentiate it from private-label RMBS transactions and generally benefit the mezzanine bonds, according to Moody's latest Credit Outlook.

Moody's has provisionally assigned A2, Baa2 and Ba1 ratings to the deal's M1, M2 and M3 classes respectively. The senior-most bonds are unrated and feature Freddie Mac-guaranteed timely interest and ultimate principal payments. The junior-most bond is also unrated.

FWLS 2015-SC02 allocates unscheduled principal collections toward paying mezzanine bond principal, pro rata with senior bonds, beginning at closing. In contrast, private-label transactions with shifting interest structures only begin allocating unscheduled principal to subordinate bonds five years after closing. The accelerated subordinate bond pay-down does not come at the expense of senior bond credit quality, as it would in a private-label transaction, due to the Freddie Mac guarantee.

However, performance triggers limit the benefit of early pay-down for the mezzanine bonds if mortgage performance deteriorates. Minimum credit enhancement tests also halt all principal allocations to mezzanine bonds if senior bond credit enhancement falls below a minimum amount. Additionally, a step-down test halts unscheduled allocations if delinquencies or losses exceed pre-set thresholds.

In another departure from private-label RMBS structures, FWLS 2015-SC02 can allocate interest losses toward the write-down of the junior-most bond's principal balance when interest rate loan modifications and extraordinary expenses reduce interest collections available to pay bond interest. Coupon rates are not reduced when modified loan rates are lowered, so the transaction protects more senior bonds from insufficient interest funds by allocating lost interest first towards the junior-most bond's interest allocation and then towards its principal allocation.

Class B principal balance must be reduced to zero before any of the mezzanine bonds begin to incur interest shortfalls. More senior mezzanine bonds benefit more from this feature than junior mezzanine bonds because interest shortfalls are allocated in reverse sequential order among the mezzanine bonds. Nevertheless, there is a risk that if mortgage losses are high enough to reduce the class B balance to zero, class M3 will next begin to suffer interest shortfalls.

The transaction sets a 180-day limit past which the master servicer cannot advance principal and interest on delinquent loans, preventing the junior most bond from receiving interest payments on those loans. In contrast, private-label RMBS transactions - with the exception of certain Sequoia Mortgage Trust deals (SEMT 2015-2, SEMT 2015-3 and SEMT 2015-4) - typically only require the servicer to stop advancing once it deems that further advances on the loan would be unrecoverable from eventual property sale proceeds.

"FWLS 2015-SC02's stop-advance limit could lead to temporary rated bond interest shortfalls from declining interest collections under high-delinquency scenarios, but the transaction has a strong interest-recovery mechanism," Moody's notes. "The transaction allows interest accrued but not paid on stop-advanced loans to be recovered from liquidation proceeds, borrower payments and cash from modified or repurchased loans, and paid to the bonds in the order of their payment priority."

Freddie's debut issuance under the Freddie Mac Whole Loan Securities Trust programme priced in July (see SCI's new issue database).

RMBS

Dutch mortgage lending jumps

New players entering the Dutch housing market are intensifying competition and prompting more lending activity, according to Moody's. Lending shot up by 36.5% over the first nine months of 2015, but Dutch RMBS volume is expected to stay flat going into 2016.

"Home purchases, as opposed to mortgage refinancings, are the main driver of the increased lending volume and we expect that house prices will rise by up to 5% in 2016, supporting the housing market's recovery," says Jeroen Heijdeman, a Moody's avp and analyst.

Low interest rates and increased competition are expected to continue reducing mortgage rates, thus benefiting loan affordability. Geographically, the recovery is being broadly driven by house price increases in key urban cities and other regions. With the exception of Zeeland, house prices grew in all Dutch provinces in 2015.

Further, Moody's adds that tight underwriting criteria will especially affect single-income homeowners. However, low double-income homeowners seem less affected, as the maximum LTI ratio should increase to 3.2x in 2016 from 2.9x in 2015.

"These developments are credit positive for Dutch RMBS, as rising house purchases together with higher home values will result in higher recoveries," explains Greg Davies, avp at Moody's. "This will lower the likelihood of losses for noteholders."

The agency says that well-established market players are driving the issuance of Dutch RMBS. It expects such issuers to continue relying on a diverse funding base, which will result in similar RMBS issuance levels in 2016 relative to 2015.

RMBS

CRT deals upgraded on performance

Moody's has upgraded the ratings of 37 tranches from six credit risk transfer transactions backed by conforming balance RMBS loans issued by Freddie Mac and Fannie Mae. US$1.6bn of securities are impacted by the move.

The affected deals are: Connecticut Avenue Securities (CAS) Series 2014-C04; and Structured Agency Credit Risk (STACR) Series 2014-DN3, 2014-DN4, 2014-HQ1, 2014-HQ2 and 2014-HQ3. Moody's notes that the action is due to recent performance of the underlying pools and reflects its updated default projections on the pools and credit enhancement build-up.

The transactions have seen low serious delinquencies and credit events in the reference pools since issuance. Credit events currently remain at or below 1bp of the original pool balances for all transactions. Sustained prepayment rates have also resulted in increased credit enhancement to the subordinate bonds.

RMBS

High RMBS severity warning

Smaller loan balances will keep liquidation severities on US RMBS loans high over the next few years, according to Moody's. This is due to the high observed loss severities on smaller loan balances and a larger proportion of such loans in existing pools.

Moody's notes that loss severities on loans with liquidated balances of less than US$45,000 are consistently 30% to 60% higher than on loans with liquidation balances greater than US$90,000 across the different LTV brackets. Alt-A loans liquidated with balances of less than US$45,000 incur a high severity, averaging 90%, despite having low current LTVs ranging from 40% to 70%. The severity on corresponding subprime loans with similar levels of equity in the property average 97%.

Moody's says that small balance loans consistently incur higher loss severities than larger balances across the different foreclosure timeline buckets. The higher severities on small-balance loans are a result of fixed costs incurred during the delinquency and liquidation process of the loans. Because these costs are fixed, they represent a greater percentage of small-balance loans balances, thus resulting in the loans' higher loss severity.

In addition, severities are highest on small balance loans with high interest rates. This may be due to the the high percentage of interest - relative to the loan balance - advanced and recouped by the servicers upon liquidation.

With small-balance loans increasingly forming a large proportion of the outstanding loan population in RMBS pools, severities on liquidated loans are expected to remain high, despite improving LTV ratios. Loans with balances of US$115,000 and lower still account for a significant proportion of outstanding loans in US RMBS, between 31% and 47% with Alt-A and subprime loans. This percentage of low-balance loans as a proportion of all RMBS loans continues to increase as loans continue to amortise.