Contents

ABS

Utility factor

PREPA deal presents opportunities, risks

Puerto Rico Electric Power Authority (PREPA) plans to exchange newly issued utility cost recovery charge (UCRC) ABS bonds to its uninsured bondholders as part of an agreement to reduce its debt burden. The deal remains in limbo for now, however, as PREPA continues thrash out details with the bondholders yet to sign up.

The planned securitisation, which Moody's says would be the first that seeks to help restructure the debt of a utility, is part of a debt restructuring plan that PREPA reached with its Ad Hoc Group of bondholders earlier this month (SCI 6 November). The group consists of traditional municipal bond investors and hedge funds, its fuel line lenders and the Government Development Bank for Puerto Rico.

Full details are yet to emerge, but the agreement will broadly call for the uninsured bondholders to exchange all of their existing bonds for new securitisation bonds at a discount. PREPA says that the bondholders will receive 85% of their claims into the new bonds, which also must receive an investment grade rating.

"The deal is also particularly notable for its size," says Tracy Rice, vp and senior analyst at Moody's. "It could be by far the largest single issuance of UCRC bonds to date."

Moody's notes that PREPA currently has about US$8.3bn in outstanding power revenue bonds, of which about US$5.8bn, or 70%, are uninsured. The basis for the transaction becoming the largest of its kind, though, rests on whether all of these uninsured bondholders choose to take up the offer.

In such a scenario, they will be faced with two options. The first option will have the bonds pay cash interest at a rate of between 4% and 4.75%, depending on the rating obtained, and an interest-only payment process for the first five years. The second option will see convertible capital appreciation bonds being issued that accrete interest at a rate of 4.5% to 5.5% for the first five years, before paying current interest in cash thereafter.

The agreement would provide PREPA with a five-year debt service relief of more than US$700m and a permanent reduction in its principal debt burden of more than US$600m. "It will definitely put PREPA on a sounder financial footing," says Richard Donner, vp and senior credit officer at Moody's. "But it is still essential for them reduce their dependence on oil, which is weighing them down."

Although PREPA's operating cashflow has been positive at about US$500m to US$530m annually, debt service and capital expenditure have weighed down this figure to put the government-owned utility in a negative. A suggestion for reducing the debt burden would involve PREPA converting its largely oil-fired generation fleet of power plants to lower-cost and cleaner natural gas-fired plants.

Moody's explains that such a route will require a credible business plan and an ability to obtain financing, potentially through the private sector. PREPA issued back in September a request for expressions of interest, seeking private partners for modernising existing facilities and providing new generation options. Further details and the feasibility of these are not known at this stage.

In any case, Rice says that the benefits should not mask the potential risks that are also involved in a UCRC deal. The biggest of those, she says, is the risk attached to a US state changing or revoking legislation that protects the assets and cashflows.

UCRC bonds are backed by surcharges on customers' utility bills, with securitisation deals contingent on state legislation authorising and protecting such charges. So far, 18 US states have passed a bill that authorises special utility charges on customers' bills to allow utilities to recover costs associated with environmental control, storm recovery, utility restructuring and renewable energy improvements.

The legislation typically includes a non-impairment pledge, under which the state government pledges to UCRC bondholders that it will not take or permit any actions that reduce, alter or impair the charges until the bonds have been repaid in full. However, a court challenge or strong political pressure in a jurisdiction could force through new laws that would rescind these charges and change the outlook for PREPA's proposed exchange.

"Puerto Rico is unique, compared with the US states, so the key item for Moody's to analyse is the legislative framework," explains Rice. "However, looking at how the Puerto Rican government has tackled previous scenarios before is the best approach to gauge what might happen. In this case, the commonwealth during the past year and a half has leaned towards maintaining public services at the expense of meeting bondholder obligations."

Therefore, Moody's says there can be no assurance that the Puerto Rican government would not invoke such an argument to seize or redirect securitisation charge revenues if necessary. The government is currently the largest customer in PREPA bonds, accounting for about 50% of the utility's account receivables. However, Moody's views this risk as remote in the outstanding UCRC securitisations that it rates.

For now, the most pressing issue remains the ongoing negotiations between PREPA and the bondholders. Lawmakers continue to work on a bill that appeases all parties, with the deadline having already extended to 20 November and subsequently moved again to 10 December.

"The plan has been broadly accepted by the uninsured members of the ad hoc group, who represent about 37% of PREPA's bonds outstanding," says Donner. "The remaining uninsured bondholders represent about 33%. They have the opportunity to join in, but it is not clear right now how many will choose to do so."

Reports suggest that MBIA, Assured Guarantee and Syncora Guarantee are the parties that PREPA has failed to make sufficient grounds with. Puerto Rico Governor Alejandro Garcia Padilla is set to convene an extraordinary session of the legislature during the first week of December, after lawmakers failed to pass the bill in time.

"They are trying to get it tackled by year-end; however, this is unlikely due to the complexity of the deal," adds Donner. "It should not be a surprise, as there has been a pattern over the last year and a half, which has seen deadlines consistently extended. Based on this trend, there will likely be another extension."

JA

Secondary markets

Euro secondary undented

A typically quiet Friday has failed to dent the positive tone in the European securitisation secondary market.

After a pick-up in activity earlier in the week, Friday was typically quiet across most sectors. Nevertheless, market sentiment remained strong and spreads closed the day broadly unchanged.

Continued trading around the Granite redemption means UK prime remains the main focus. Friday again saw two-way flows across all the main shelves in the sector.

It is likely to be fairly quiet in terms of BWICs over the coming days with Thanksgiving meaning that many US participants will be out for the bulk of this week. However, there are two decent sized lists among the three on the European schedule for today so far.

At 14:00 London time is ten line 25.57m mixed auction comprising: CFHL 2014-1 B, DILSK 1 A, GRANM 2005-4 M4, GRANM 2006-2 M3, GRANM 2007-2 3A2, HOHO III A, MARSS 2014-1 A1, PARGN 17 B, PENAT 5 A2 and TURBF 4 B. Six of the bonds have covered with a price on PriceABS in the past three months - GRANM 2005-4 M4 at 98.23 on 7 October; GRANM 2006-2 M3 at 98.13 on 7 October; GRANM 2007-2 3A2 at 99.5 on 2 September; HOHO III A at 99.7 on 22 September; PARGN 17 B at 100.001 on 17 November; and PENAT 5 A2 at 100.141 on 17 November.

At 14:30 is a single €4m line of CATSN 1 D. The Dutch RMBS hasn't traded on PriceABS in the past three months.

At 15:00 is a €19.1m 17 line 1.0 CLO mezz list consisting of: AQUIL 2006-1X D, AVOCA VII-X C1, CELF 2006-1X C, CELF 2007-1X C, EUROC VII-X C, HARBM 6X B1, HARBM 7X B1, HARBM 9X C, HARVT III-X D1, HYDEP 1X C, JUBIL I-RX C, JUBIL VI-X D, JUBIL V-X C, LEOP IV-X D, PENTA 2007-1X D, RMFE IV-X IV-A, and SKELL 2006-1X D.

Seven of the bonds have covered with a price on PriceABS in the past three months. Last doing so as follows: CELF 2006-1X C at 91.55 on 21 October; CELF 2007-1X C at 91H on 5 November; HARBM 7X B1 at LM90S on 23 October; HARVT III-X D1 at 94.75 on 21 October; HYDEP 1X C at 95.84 on 18 September; RMFE IV-X IV-A at 95.91 on 21 October; and SKELL 2006-1X D at 96.55 on 22 October.

Secondary markets

Trups CDOs quiet

The US Trups CDO market is quiet again after a small flurry of BWIC activity last week.

"It's pretty quiet across the Trups CDO sector," says one trader. "There were a few lists last week, but participation was light so there wasn't much action off the lists and a lot of DNTs etc on them."

The market is likely to continue to remain quiet, the trader suggests. "There's not a lot of supply coming out in the days ahead and activity in general will be spotty over the next couple of weeks. So unless we eventually see some year-end cleaning up going on it's likely to stay that way for the remainder of 2015."

However, the trader adds: "Soloso has announced plans to liquidate over five different sales of collateral, which is an unusual approach. I'm not sure of the strategy behind it, but it will at least generate some interest in the market."

Meanwhile, US CLOs are having a fairly quiet day too, but there is the relatively rare sight of an OWIC circulating. "It's pretty large, which makes it interesting, but could easily be a pricing exercise," says the trader.

Due by 10:00 New York time, the OWIC involves 16 $10m pieces of 2.0 equity. It comprises: APID 2014-19A SUB, ARES 2013-3A SUB, BOWPK 2014-1A SUB, BRCHW 2014-1A SUB, CGMS 2014-1A SUB, CGMS 2014-3A SUB, CGMS 2014-4A SUB, CGMS 2015-1A SUB, HLM 3A-2014 SUB, KEUKA 2013-1A SUB, PPARK 2014-1A SUB, SHSQR 2013-1A SUB, SPARK 2014-1A SUB, SYMP 2014-15A SUB, THRPK 2014-1A SUB, and WINDR 2013-2A SUB.

Secondary markets

Euro secondary UK focused

The heightened focus on UK RMBS is continuing in the European securitisation secondary market.

"Overall, secondary is somewhat quiet," says one trader. "With Thanksgiving coming, today will be another day to get a few things done but away from UK RMBS there's not much broad-based trading."

The trader continues: "Both UK prime and buy-to let were very busy yesterday. It's mostly a follow on from the Granite redemption news and investors looking to put cash to work."

Elsewhere, the trader says: "Peripherals were reasonably quiet with a few pockets of activity. CLOs too saw some action, particularly around the BWICs which traded fairly well, but that aside flows were light."

There are currently three BWICs on the European schedule for today. At 13:30 London time there is a €37.75+m 15 line mixed auction comprising: ABEST 10 A, BPMO 2007-1 C, BRNL 2007-1X C4A, EURO 25X C, INFIN CLAS D, KIMI 3 A, KION 2006-1 B, MECEN 2 B, MPS 2X M1B, MPS 3X M1B, MPS 3X M2B, MPS 4X M2B, SUNRI 2015-2 M1, TDAI 2 C and TDCAM 3 B. Only MPS 4X M2B has traded with a price on PriceABS in the past three months last doing so at 85.58 on 22 October.

At 15:00 there is a €24.7m original face collection of six 1.0 double-A CLOs. It consists of: AVOCA V-X B, CELF 2005-1X B, DALRA 4-X B, HARBM 5X A3, HEC 2006-NX B and SKELL 2006-1X B. Two of the bonds have traded on PriceABS in the last three months last doing so with a price as follows: HEC 2006-NX B at L99 on 22 September and SKELL 2006-1X B at 99.455 on 30 October.

Also at 15:00 is a single €600k line of ANTHR 2006-1X C. The CRE CDO hasn't traded on PriceABS in the past three months.

Secondary markets

US RMBS restricted

Activity and transparency in the US non-agency RMBS secondary market is restricted in this shortened week.

"As expected for this holiday week it's pretty quiet - today is likely to be the busiest day and there's $2-300m in for the bid," says one trader. "Overall, it's hard to get a sense of real pricing levels with trading sessions essentially restricted to the mornings, as is typical this week most years, and a lot of people already out."

Nevertheless, activity is for the most part following a similar pattern to last week's with a mix of money managers and the slower hedge funds making up the majority of sellers. However, one notable difference this week is the cancellation of some BWICs. "One or two lists have been postponed, but it's not a major market issue - more likely geopolitical concerns mixed with thin liquidity simply encouraged the sellers to push them back," says the trader.

Those lists are likely to reappear in what could be a busy week next week, the trader suggests. "Tomorrow is remit day so people will be able to asses deal performance and see how much cash they'll have available immediately after Thanksgiving. So, that combined with month-end on Monday; everyone back at their desks after the holiday; and year-end only a few weeks away, I expect the market to pick up next week."

Secondary markets

Euro secondary stays strong

Despite weaker global markets and reduced volumes the European securitisation secondary market is still showing some strong signs.

"Yesterday was a bit quieter with flows minimal across most sectors as a result of weakness in broader credit thanks to increasing global political tension," says one trader. "However, we saw some strong activity and prints around BWICs."

The trader continues: "Italian RMBS traded up on a list and we saw some real money activity in the sector. Meanwhile, UK non-conforming and buy-to-let paper continues to attract interest, again a BWIC in the sector traded well yesterday and major names continue to be better bid."

In CLOs, the trader adds: "We saw a bit of flow in 1.0 bonds, but after a busy end to last week and start of this, 2.0s are much quieter. That's surprising given the lack of primary activity."

The market laggard is still Portuguese paper, which remains under pressure because of domestic political concerns. However, the trader notes: "The announcement of the buy-back of bonds from Douro Mortgages 1 to 3 will hopefully give the market some much-needed support."

There are four BWICs on the European schedule today including a four line €12.5m double- and triple-B CLO list that was due at 9:00 London time. Of the lists remaining the highlight is a collection of Spanish seniors due at 12:00.

The 12 line €104.5m original face auction comprises: BBVAR 2007-2 A2, BCJAF 4 A, BFTH 3 A, IMCAJ 1 A, KUTXH 1 A, KUTXH 2 A, SHIPO 2 A, TDA 13 A2, TDA 14 ANC, TDA 16 A1, TDAC 5 A and UCI 12 A. Only UCI 12 A has covered on PriceABS in the past three months - at 91.35 on 5 November.

In addition there is a Dutch prime OWIC due by 14:00. It involves up to €50m each of: DMPL IX A2, DMPL X A2, DRMP 1 A1, DRMP 1 A2, HYPEN 3 A1, HYPEN 3 A2, HYPEN 4 A1, HYPEN 4 A2, LUNET 2013-1 A2, ORANL 2015-11 A and PHEHY 2013-1 A2.

Secondary markets

Euro secondary activity fades

Activity in the European securitisation secondary market is fading away thanks to the US public holiday, but sentiment remains positive.

"We're quietening down now with Thanksgiving today," says one trader. "Also a lot of people are being distracted away looking at primary and the BMW deal in particular."

Secondary tone appears to remain strong however. "UK non-conforming and buy-to-let seniors are still creeping tighter," the trader says. "At the same time, yesterday's Spanish BWIC traded well and although there were five DNTs, bids there were still quite decent - they just decided not to sell at those levels. "

There are currently no BWICs on the European calendar for today, but there is a Spanish seniors OWIC due by 14:00 London time. It involves up to €50m each of: AYTCH II A, AYTGH IX A2, AYTGH VIII A2, BCJAF 8 A, BFTH 10 A2, BFTH 13 A2, BVA 2 A, BVA 3 A2, CLAB 2006-1 A, COMP 2012-3 A, PENED 1 A, RHIPG I A, RHIPO 6 A, RHIPO 9 A2 and TDAC 4 A.

Secondary markets

Euro secondary slumbers

The European securitisation secondary market is taking it easy through the US public holiday but market tone is staying strong.

Despite low volumes yesterday spreads remained firm to slightly tighter across the board. UK non-conforming and buy-to-let bonds are still the most active areas and remain better bid, primarily from the Street. At the same time, peripherals continue to generate increasing investor interest assisted by recent ECB OWICs in the sector.

There are no BWICs on the European schedule for today so far, but there is another OWIC. Due by 14:00 London time, it involves Portuguese RMBS - up to €100m each of ATLSM 5 A, HIPOT 4 A, LUSI 1 A, LUSI 2 A, LUSI 3 A, MAGEL 1 A and MAGEL 2 A.

Structured Finance

SCI Start the Week - 23 November

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

Pipeline
Last week it was RMBS and CMBS which dominated the pipeline's additions. In contrast to the week before, there were only three ABS and one CLO, while there were five RMBS and four CMBS.

€800.4m Bavarian Sky 4, US$332.5m DRB Prime Student Loan Trust 2015-D and US$102m JG Wentworth XXXVI accounted for the ABS. The RMBS were: US$345.141m CSMLT 2015-3; US$474m Mill City Mortgage Loan Trust 2015-1; US$217.3m Nationstar HECM Loan Trust 2015-2; US$520m New Residential Mortgage Loan Trust 2015-2; and Towd Point Mortgage Trust 2015-6.

US$430m BBCMS Trust 2015-SRCH, US$1.1bn CGCMT 2015-GC35, US$805m MSCI 2015-UBS8 and US$176m Ready Capital Mortgage Trust 2015-2 were the CMBS. The CLO was US$400m KKR CLO 13.

Pricings
There were nine ABS prints. There was also an ILS, three RMBS, two CMBS and two CLOs.

The ABS were: CNY3.22bn Bavarian Sky China 2015-2, €571m Bilkreddit 7; US$145.45m Go Financial Auto Securitization 2015-2; US$201.5m HERO Funding Series 2015-3; A$910m SMART ABS 2015-4E; US$536.4m SoFi Professional Loan Program 2015-D; €898m Sunrise Series 2015-3; US$250m TCF Auto Receivables Owner Trust 2015-2; and US$155.9m Westgate Resorts 2015-2.

US$125m Residual Reinsurance 2015-II was the sole ILS. The RMBS were US$422m Citigroup Mortgage Loan Trust 2015-PS1, US$600m FWLS 2015-SC02 and US$337m Sequoia Mortgage Trust 2015-4.

The CMBS were US$820.6m GSMS 2015-GS1 and US$774.5m WFCM 2015-NXS4. The CLOs were US$400m Ares XXXVIII CLO and US$408m Avery Point VII CLO.

Editor's picks
Carve out: 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...
New wave: 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...
Purchase progress: 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...
Titan up: The English Court of Appeal overturned a landmark decision earlier this month when it reversed a UK High Court ruling that provided CMBS issuers with a legal basis for pursuing negligence claims against a property valuer. The decision is believed to potentially be transferable to other CMBS transactions...
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..."

Deal news
• 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.
• Fannie Mae has completed two more credit insurance risk transfer (CIRT) transactions, one of which - CIRT 2015-5 - 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%.
• 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.
• 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.
• 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.

Regulatory update
• 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 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.
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
AIMCO CLO 2015-1; ALME Loan Funding IV; Arby's Funding Series 2015-1; Bilkreditt 7; BlueVirgo 2015-1 Trust; Carlyle Global Market Strategies CLO 2015-4; Chrysler Capital Auto Receivables Trust 2015-B; Cork Street CLO; Diamond Resorts Owner Trust 2015-2; FCT TitriSocram 2015; FRESB 2015-SB8; Galaxy XXI CLO; Gemgarto 2015-2; GSMS 2015-GS1; Ocwen Master Advance Receivables Trust 2015-T2; Ocwen Master Advance Receivables Trust 2015-T3; Precise Mortgage Funding 2015-3R; Silk Finance No. 4; Sligo Card Finance 2015; Success 2015; Sunrise series 2015-3

Deals added to the SCI CMBS Loan Events database last week:
BSCMS 2006-PW14; BUMF 3; BUMF 4; CD 2007-CD4; CGCMT 2013-C17; COMM 2013-CR12; CSFB 2005-C5; CSMC 2006-C4; DECO 2007-E6; DECO 9-E3; ECLIP 2006-2; ECLIP 2007-2; EURO 25; EURO 28; JPMCC 2003-PM1; JPMCC 2006-CB14; JPMCC 2006-CB17; JPMCC 2006-LDP7; JPMCC 2007-LD11; JPMCC 2007-LDP12; MLCFC 2006-1; MLCFC 2006-4; MSC 2005-HQ7; MSC 2006-HQ6; MSC 2007-IQ13; MSC 2007-IQ16; UBS 2012-C1; WFRBS 2013-C11; WINDM X; WINDM XIV

Structured Finance

Structuring head recruited

Demica has appointed François Terrade as head of structuring, responsible for creating financing solutions to secure optimum advance rates and the lowest cost of funds for the firm's corporate clients. Based in London, he will combine traditional bank securitisation techniques with funding alternatives for non-bank investors.

Terrade previously held roles in cross-border receivables finance at GE Capital International and was head of structured finance at GE Capital France. During his time there, he led large value and cross-border receivables transaction teams within Europe and helped create pan-European factoring transactions.

Prior to this, Terrade was director of debt capital markets - securitisation at Societe Generale, where he arranged securitisation programmes for European, American and Asian corporates.

Structured Finance

China committee assembled

The China Asset Securitisation and Structured Finance Professional Committee has held its inaugural meeting, after being established under the leadership of the People's Bank of China. The committee, also known as the Inter-Bank Market Dealers Association, will explore ways of improving institutional arrangements for securitisation in China, specifically through conjunction with regulatory authorities.

PBOC deputy governor Pan Gongsheng says that the committee will work on accelerating the formation of an institutional framework in the country in accordance with its growing securitisation market. The committee will also be used to explore and learn from the development of foreign markets.

CDB director Zhang Baorong has been appointed as the first committee chairman. The committee includes senior members from regulatory authorities, banking, securities, trust, funds, insurance, accounting and legal. The committee will also consult with foreign experts and academic scholars with knowledge on the matter.

CDO

Zohar bankruptcy filed

Patriarch Partners has filed a Chapter 11 bankruptcy petition for Zohar CDO 2003-1. The firm says its actions are a result of it trying to protect against efforts by MBIA to obtain the assets of the transaction.

The latest development extends the controversy surrounding Patriarch's management of the Zohar deals. The SEC charged the firm earlier this year for defrauding clients and collecting nearly US$200m in fees after allegedly hiding the poor performance of the funds (SCI 31 March).  

Patriarch says that the new filing will have no effect on the operations of the portfolio companies whose loans are held by Zohar I. In addition, it states that the filing will not trigger any defaults on portfolio company loans. Zohar II 2015-1 and Zohar III are not involved in the filing and will not be subject to any cross-defaults.

Patriarch ceo Lynn Tilton says: "We believe the Chapter 11 process now presents the best way for Zohar I to restructure its finances, while preserving the value of the portfolio companies it owns on behalf of its key stakeholders."

Patriarch entered discussions with MBIA, which insures approximately US$150m in Zohar I notes, after it recognised that the deal would require time beyond its 20 November 2015 maturity to pay off the notes. The payment issues supposedly originate back to the 2008 crisis.

Tilton claims that Patriarch attempted to accomplish a 'fair and transparent' restructuring of Zohar I with MBIA outside of court. The intention was to extend the deal's maturity dates with a 'global' restructuring of the Zohar funds. The decision to file for bankruptcy emerged after MBIA allegedly acted in 'bad faith'.

Specifically, Patriarch's lawsuit says it spent more than US$100m to buy out a third-party noteholder in Zohar I that MBIA had indicated was an 'impediment' to both an extension of Zohar I and a global restructuring of the Zohar funds. After Patriarch removed the supposed impediment, it says that MBIA still refused to consent to an extension of Zohar I.

"A Chapter 11 filing is now the only course of action available that allows us to continue our efforts to turn around and build value at the portfolio companies, preserve their value on behalf of all of our stakeholders and protect the jobs of the tens of thousands of our portfolio companies' employees," adds Tilton.

Patriarch's restructuring counsel is Skadden, Arps, Slate, Meagher & Flom and its financial advisor is Moelis & Co. The filing petition was made in the US Bankruptcy Court for the Southern District of New York.

MBIA responded in a statement that describes Tilton's filing as 'utterly baseless' and a 'desperate and transparent effort to deflect attention and blame' from her role as Zohar's collateral manager. The insurer says that it honoured its obligation when it recently paid a claim on the insurance policy following a payment default in the transaction.

CLOs

Asset manager expands board

David Richards has been appointed to American Capital's board of directors after it voted to increase its size to 10. He will become a member of the board's executive committee and its audit, compliance and valuation committee.

Richards recently joined the firm from Pine River Capital Management, where he was a portfolio manager focusing broadly on financial sector investments. Prior to this, he was an analyst with Goldentree Asset Management. He has also held analyst positions with Citadel Investment Group, Raymond James and SunTrust Bank.

Insurance-linked securities

JLT partner relocates

Nick Duffin has transferred from JLT Re's London office to join JLT Bermuda as a partner. He joined JLT Re in 2012 and through his 14-year reinsurance career has gained experience across multiple asset classes, including ILWs.

In his new role, Duffin will continue to work with existing clients, as well as expanding the JLT Re role in the Bermuda market from both an inward and outward production standpoint. He will work on all aspects of reinsurance in Bermuda.

RMBS

Marketing head brought in

Clayton Holdings has hired Mark Hughes as evp of sales and marketing. He will be responsible for sales, business development and marketing for Clayton, as well as subsidiaries Green River Capital, Red Bell Real Estate, ValuAmerica and Clayton Euro Risk.

Prior to joining Clayton, Hughes was president of LenderLive's due diligence division, assisting lenders and investors in diligence and underwriting services. Before that, he was vp of due diligence solutions at CoreLogic. He has also been president and coo at Bohan Group and vp at Salomon Brothers and is active in SFIG's RMBS 3.0 working group.

ABS

Marketplace ABS deals struck

Victory Park Capital (VPC) has closed a pair of securitisation financings: a A$100m ABS warehouse programme with zipMoney, an Australian digital retail finance provider; and a US$175m marketplace lending transaction, alongside KKR.

Dubbed zipMoney Trust 2015-1, the Australian transaction comprises three classes of unrated notes issued by Perpetual in its capacity as trustee. Pricing on all classes of notes is undisclosed. US$7m of current loan receivables will be transferred to the trust from the zipMoney balance sheet to establish the facility.

Peter Gray, coo and executive director of zipMoney, says: "The facility is a great result and the trust represents a compelling investment, given the short weighted average life of the portfolio, small average contract sizes and strong diversification benefits."

VPL also invested US$1m in zipMoney through the purchase of five million fully paid shares. As part of the deal, the investment firm will receive five million options exercisable at 20 cents each, expiring on 31 December 2018. These securities are subject to a voluntary escrow period of 12 months.

Meanwhile, the marketplace lending securitisation is backed by unsecured consumer loans originated by Avant. The deal marks VPC's first issuance in the ABS market.

The inaugural 144A securitisation is comprised of three tranches of unrated notes supported by an initial pool of Avant loans totaling approximately US$195m. Avant will continue to act as servicer for the underlying loans and hopes it will help the company expand its platform.

The securitisation marks the next stage in a long-term partnership between Avant and VPC involving an initial credit facility, which now totals US$500m, and an agreement to purchase newly originated loans.

ABS

Auto incentive warning

The proliferation of vehicle incentives could depress the value of used vehicles and contribute to higher loss severity, according to Fitch. The agency warns that this could ultimately push up auto loan and lease ABS loss rates.

The average incentive per vehicle has risen gradually this year and rose above US$3,000 per vehicle in recent weeks. Incentive levels rose to over 9% of the manufacturer suggested retail sales price in October, the highest level in over four years. If incentives rise even further, manufacturers are artificially driving sales, which Fitch notes can contribute to higher loss severity and losses in auto ABS.

"If consumer demand slows next year and new vehicle sales decline, we expect manufacturers to ratchet up incentives to support sales, especially if vehicle inventories rise. This may impact used vehicle values negatively and pressure auto ABS loss rates," the agency says.

Incentive levels have also been driven by weakness in demand and sales for smaller vehicle segments, including mid-size and compact cars. These segments have recorded lower sales, while larger trucks and SUV sales have risen, buoyed by low gas prices and the introduction of fresh models like the new Ford F-150. This can negatively impact loss severity on auto ABS transactions, particularly pools with large concentrations of smaller vehicles.

However, one important mitigant to this risk is that current vehicle inventory levels are low. The average days vehicle supply was 69 days through 1 November, up from 60 days a month earlier, and have been hovering within range of the optimal 60 days target level for the industry throughout the year.

Fitch's prediction for auto sales in 2016 is 17-17.5 million units, which is flat to down over 2015. Current sales are tracking at an annualised pace of 18.2 million units through October.

Incentives have risen due to higher transaction prices, resulting in a net increase in average transaction prices. Higher incentives have supported increased new vehicle sales in 2015, along with low interest rates and available financing.

Some seasonality in auto sales exists. During the last six weeks of the year, manufacturers actively drive sales volumes and try to hit annual targets, clear lots of older 2015 models and drive market share figures.

For instance, Ford Motor Company recently rolled out its 'Friends and Neighbours' incentive programme, while General Motors introduced the 'Black Friday All Month Long' programme. Both companies' incentive programmes seek to clear lots of older 2015 models to make room for newly introduced 2016 models.

ABS

Agricultural receivables deal debuts

BSEC has launched a trade receivables securitisation for Debbané Frères, a provider of agricultural solutions in Lebanon. Dubbed Debbane Agri SIF, the US$13.3m transaction is believed to the first of its kind in the local market and channels financing to support agriculture, an underserved vital economic sector in Lebanon.

Etienne Debbane, chairman and ceo of Debbané Frères, comments: "Our long legacy of delivering tailored solutions to farmers will be sustained by a pioneering financing platform, with the support of BSEC's expertise in structured finance and the support of the investing banks. We are using securitisation as a tool to provide our customers with sustainable financing to support their operating needs and to contribute to the growth of the sector."

Ronald Yazbeck, ceo of BSEC, adds: "We view this transaction as an important milestone in bridging the gap between Lebanon's primary sector and the banking sector."

Facilities extended to the agriculture sector constitute around 1% of the aggregate loans held by commercial banks when this sector generates 6.3% of GDP and employs over 10% of the workforce. BSEC says that, as a major supplier, Debbané Frères is well positioned to properly assess famers' business operations, track record and financial capacity. Such positioning is important for credit assessment and a strong collection capacity, thereby enabling the banking sector to support the agriculture sector while minimising its risk exposure.

Debbane Agri SIF has the flexibility to issue subsequent series of notes under the same platform, credit features and issuance terms.

The transaction is structured, arranged, placed and managed by BSEC. The issuance was subscribed to by FFA Private Bank, Bank Audi, BlomInvest Bank, BankMed, Banque BEMO, CSC Bank and Crédit Libanais Investment Bank.

ABS

Consumer ABS programmes minted

Latitude Financial Services - the renamed GE Consumer Finance business acquired by KKR, Varde Partners and Deutsche Bank - has closed a pair of revolving ABS transactions. Rated by Fitch, the NZ$972.9m New Zealand Sales Finance and Credit Cards Trust and A$3.76bn Australian Sales Finance and Credit Cards Trust programmes are backed by New Zealand and Australian consumer receivables respectively.

The New Zealand programme comprises: NZ$776m single-A rated class A notes; NZ$62.7m triple-B class Bs; NZ$50.7m double-B class Cs; and NZ$83.5m unrated class Ds. The pool comprises 325,000 active accounts, with an average balance outstanding of approximately NZ$2,400.

The Australian programme consists of: A$3.1bn single-A rated class A notes; A$157.5m triple-B class Bs; A$241.7m double-B class Cs; and A$264.9m unrated class Ds. The pool consists of 1.8 million active accounts, with an average balance outstanding of approximately A$1,800.

The revolving receivables pools are subject to eligibility criteria and portfolio parameters. If the revolving period under the programmes is not extended or the debt not otherwise voluntarily repaid in full at the end of the revolving period, the notes will enter a controlled amortisation period, during which a twenty-fourth of the face value will be repaid on each payment date following the end of the revolving period. To protect the debt holders from deterioration in the credit quality of the portfolio, the transaction features performance triggers that either require rectification or may cause a rapid amortisation event, in which all collections will be used to pay down the debt in sequential order.

ABS

US job growth supports card ABS

Strong employment growth should keep US credit card ABS performance metrics near records through the end of the year, says Fitch. Prime charge-offs are expected to increase this month and delinquencies are expected to rise.

The unemployment rate for October fell to 5%, according to the US Department of Labor, which is a level last reached in April 2008. The unemployment rate has declined steadily since starting 2015 at 5.7%.

Four-week average initial jobless claims are at 270,750. That average has remained below 300,000 since March, which Fitch notes is a level which can be considered as a benchmark of economic health.

Gross yield and monthly payment rate (MPR) are expected to decrease slightly this month, but still remain above historical standards. Prime 60-plus days delinquencies are expected to rise above the 1% mark for the first time since May.

Retail metrics are expected to loosen from last month, with retail MPR improving. Charge-offs should increase after dropping below 6% last month for the first time in a year. Delinquencies of more than 60 days past due will increase slightly but remain below 2.5%.

ABS

Euro auto delinquencies down

European auto ABS performance continued to improve in 3Q15 as arrears reached record lows, says Fitch. The rating agency's 30-plus day delinquency index fell from 0.83% in the previous quarter to 0.76% and its 60-plus day delinquency index fell from 0.4% to 0.37%.

Fitch's annualised loss index decreased from 0.2% in 2Q15 to 0.15% in 3Q15. Macroeconomic factors were positive across the EU as new car registrations increased across all five major economies and used car prices also increased on an aggregate basis.

The manipulation of diesel emissions by Volkswagen (SCI passim) has introduced uncertainty, however. Additional concerns about manufacturers' profitability over slowing growth in new vehicle sales in China mean that sector sentiment remained subdued in 3Q15.

Total auto ABS issuance volumes, which include retained transactions, were up by 13% in 3Q15 relative to 3Q14. New issuance increased to 20 transactions in 3Q15 from 14 in 3Q14, including tap issuances from French and German master trusts.

ABS

HERO hits the market

Renovate America has issued the first ever 'green' PACE securitisation. HERO Funding Trust 2015-3 represents 8,939 home improvements made to reduce energy or water consumption or produce renewable energy.

The notes are considered green bonds based on the classification standards of the International Capital Market Association. The transaction is secured by approximately US$207.7m of PACE bonds, issued by WRCOG, SANBAG and LA County. Of this, US$201.5m comprise class A notes, rated double-A by both Kroll and DBRS.

Initial credit enhancement for the notes will be 3%, in addition to the inclusion of a liquidity reserve account. The account will not be funded at closing, but will gradually build up to 7% of the aggregate principal balance of the PACE bonds.

Ratings and research firm Sustainalytics worked with Renovate America to verify the bonds in the selection process. According to Renovate, all the bonds were deemed robust and helpful for creating more energy efficient homes.

Renovate America partners with local governments to provide its version the HERO programme, which assists homeowners who finance a wide variety of product installations to conserve water and energy. These installations include energy-efficient products like HVAC, windows and roofing; renewable and alternative products like solar; and water efficiency products for indoor systems and outdoor landscaping. It is also the largest residential PACE programme in the US. 

"Investors are looking for sustainable choices and now take environmental, social and governance factors into just as much account as shareholder returns," says Renovate America ceo JP McNeill.

Renovate says that HERO is unique in that it provides 100% financing for energy and water savings products for up to 20 years, with fixed interest rates designed to make payments affordable. Homeowners make payments along with their property taxes and, in the event the property is sold, the remaining balance may be able transfer to the new owner.

Structured Finance

Prudential changes proposed

The Australian Prudential Regulation Authority (APRA) has released a paper that sets out revisions to the country's prudential framework for securitisation. The regulatory body intends to simplify the rules, in order to strengthen the funding profile for market players and add clarity for entrants looking for capital benefits.

The proposals take into consideration global reform initiatives and specifically incorporates the Basel 3 framework. However, there are some appropriate adjustments to reflect the Australian context.

APRA says that simplification of the framework will come in a number of forms, including well defined thresholds for capital relief securitisation. In addition, it will streamline the approaches to determining regulatory capital requirements for authorised deposit-taking institutions' (ADIs) securitisation exposures, while harmonising the requirements for ADIs using standardised or internally-modelled risk weights.

The paper also lays out greater flexibility in funding-only securitisation. APRA says that an explicit recognition of this will include the flexibility for bullet maturity structures that possess a date-based call option. In APRA's view, they will increase the potential size of the term securitisation market by attracting a broader investor base.

The proposals also suggest the potential removal of explicit references to warehouse arrangements in the prudential framework. APRA explains that regulatory requirements for warehouse arrangements have created a gap that has led to less capital being held in the banking system relative to the risk retained. The regulator is, however, seeking submissions on viable approaches that maintain the benefits of warehouse arrangements but also address the gap in the prudential framework.

A further significant change to the framework will include dispensing with a credit risk retention or skin-in-the-game requirement.

APRA seeks feedback to its proposals by 1 March 2016. It plans to implement the changes in line with the Basel Committee's effective date of 1 January 2018 for its securitisation framework.

A draft prudential practice guide and reporting standards and reporting forms for consultation are also expected to be released in 1H16. The plan is for the final prudential standard, the practice guide, reporting standards and reporting forms to be released in 2H16.

Structured Finance

BDC shareholder activism eyed

Depressed share price valuations and governance concerns have ignited shareholder activism campaigns against three business development companies (BDCs) over the last several months. Fitch believes the heightened dialogue may lead to strengthened oversight, which would be beneficial for BDC creditors, provided other equity-friendly measures are not over-emphasised.

Four fund managers - respectively TPG and Highland, Elliot Management and River North - have recently presented arguments for changes at TICC Capital Corp, American Capital and Fifth Street Finance Corp (SCI passim). Key areas of focus include the appropriateness of investing in broadly syndicated loans and CLO equity, the lack of high watermarks (or total return) in incentive fee compensation structures and the deployment of share repurchase programmes.

The Fitch-rated universe of BDCs was trading at an average discount to net asset value of 14.3%, as of 19 November. Given the significant number of new BDCs operating, variations in governance quality have emerged. Activist presence may trigger more widespread attention to management vulnerabilities among these companies, according to the agency.

BDCs are paid a relatively high management fee (often 1.375%-2% of assets) for originating illiquid loans in the middle market. CLOs - which manage broadly syndicated loans - charge investors a much lower fee (often 0.5%), given less complexity in the origination and underwriting process and the focus on liquid collateral. Therefore, BDC investment in BSLs raises the question of the appropriateness of the strategy relative to the associated management fee.

Fitch acknowledges that arbitrage opportunities may periodically exist in the liquid market. However, it suggests that BDC investors are unlikely to appreciate outsized investments in BSLs as part of a BDC's core strategy.

CLO equity is another asset class to which some BDC shareholders have aversion. Fitch believes the valuation of CLO equity investments is often less transparent, can yield heightened valuation volatility for the BDC and can have an outsized impact on BDC leverage. Such investments also add an extra layer of leverage to portfolio investments, as CLOs are themselves levered structures.

BDC incentive fees generally come in two parts: an incentive fee earned on net investment income, which excludes credit gains and losses; and an incentive fee earned on total income, which includes credit gains and losses. Within this construct, many BDC managers earned incentive fees even while generating significant realised credit losses 'below the line'.

The establishment of a high watermark, as some newer BDCs have implemented, ensures that the manager can only earn incentive fees if credit performance is strong. This better aligns the interests of investors and managers and helps preserve more debt service capacity for the BDC creditors, in Fitch's opinion.

Finally, the agency views share repurchases as generally shareholder friendly and a contributor to higher leverage ratios. However, given the requirements on BDCs to distribute 90% of taxable earnings on an annual basis, repurchases can help manage a BDC's dividend burden.

If the earnings per share accretion through a buy-back is greater than any accretion otherwise achievable through new loan investments, then the BDC's creditors benefit from the reduction in share count, lowering cash outflows to support dividends.

Structured Finance

Aussie ABS, RMBS defaults to inch up

The delinquency and default rates for Australian ABS and RMBS will rise slightly next year from their current low levels, Moody's projects. This is due to below-trend economic growth and an uptick in unemployment.

"The credit quality of the mortgage collateral for new RMBS issued in 2016 will deteriorate - when compared with 2015 - owing to the inclusion of a greater proportion of riskier housing investment and interest-only loans, and mortgages originated during a period of low interest rates and rapidly rising house prices," says Moody's associate md Jennifer Wu. RMBS are also increasingly expected to reduce their dependence on lenders mortgage insurance policies.

Delinquencies and defaults for ABS are expected to remain at low levels, as low interest rates keep performance stable. Delinquencies in 2015 have been higher than 2014, largely due to below-trend economic growth and a soft labour market.

Moody's expects the Australian economy to grow 2% and the unemployment rate to reach 6.5% in 2016.

Structured Finance

Pass-through tax treatment mooted

The US Bipartisan Budget Act of 2015 - signed earlier this month - is set to impact the tax treatment of a variety of securitisation structures. The act replaces a longstanding set of statutory provisions governing the audit and adjustment of partnership income tax returns.

Under existing rules, adjustments to partnership income are generally accounted for and tax paid at the partner level. In contrast, the new rules would impose any tax attributable to audit adjustments on the partnership itself. Subject to meeting certain conditions, the new rules provide partnerships with two 'pass-through' elections to avoid the partnership-level tax, allowing for payment of tax at the partner level.

"This represents a sea-change in the tax treatment of partnerships, which have generally avoided taxation as separate entities, and these new rules will impact a wide variety of securitisations," Chapman and Cutler notes in a recent client memo. "Securitisation structures treated explicitly as partnerships for tax purposes are most clearly affected and consequently transaction parties are expected to favour making one of the two pass-through elections, so as to avoid the issues created by potential entity-level taxation on the securitisation vehicle (e.g. rating agency issues, stress on enhancement sizing, investor concerns)."

Other transactions not initially classified as partnerships for tax purposes, but for which partnership classification is the agreed fall-back tax position (based on multiple subordinated interests potentially characterised as equity rather than debt for tax purposes) generally also may find it necessary to take similar action, for similar reasons. However, Chapman and Cutler suggests that in many instances it may be unclear whether either of the two pass-through elections is actually available or effective - especially where equity interests and interests that might be equity for tax purposes are held through nominees - and taxation at the securitisation entity-level may continue to present a risk.

The new rules are applicable beginning in 2018. But affected transactions are expected to begin addressing the impact of the rules in operative and disclosure documents during the current transition period.

Structured Finance

Bank's LatAm exit raises concerns

Deutsche Bank's decision to close its operations in Argentina and Mexico is credit negative for the Argentine and Mexican securitisations for which it acts as trustee or common representative, says Moody's. Deutsche Bank Argentina acts as trustee in 36 securitisations, while Deutsche Bank México acts as common representative in 1,300 transactions.

The bank's decision to close its operations in Argentina and Mexico raises uncertainty around its support of its branches in those countries. The assumption of parental support is vital to the subsidiaries' financial stability, notes the rating agency.

"Even if Deutsche Bank is ultimately replaced as trustee or common representative in Argentine and Mexican securitisation transactions, there will likely be a ramp-up phase before a substitute party can take control of the operations, which could also create temporary operational problems," says Moody's analyst Frank Medrisch. "A transparent and smooth transfer is key to avoiding disruptions in the payment of obligations where Deutsche Bank acts as trustee or common representative."

CDS

CDS volumes rise

Emerging markets CDS trading in 3Q15 was US$376bn, according to EMTA's latest index results for the sector. Meanwhile, ISDA figures show a 12.9% trade count increase from the previous quarter.

The latest EMTA figure is very close to the one from 3Q14 and represents a 37% increase from the US$275bn of reported transactions in 2Q15.

Aside from 2Q15, reported volumes have been steady at around US$380bn per quarter for the past year.

The largest reported CDS volumes were those on Brazil, at US$65bn. Other notable volumes include Turkish CDS at US$46bn and Russian CDS at US$35bn.

The survey also covered nine corporate CDS contracts. Of these, the highest reported quarterly volume was on Pemex, at US$4bn. Participants additionally reported US$2.6bn in Gazprom contracts and US$2.4bn in Petrobras CDS.

ISDA's CDS trading results show 81.4% of average daily trade counts and 81.2% of average daily notional volume cleared in 3Q15. The trade count rose by 12.9% from the previous quarter and represents a 1.2% increase on the same time last year.

SEF trading accounted for 75.7% of average daily trade counts and 72.5% of average daily notional volume. The average daily trade counts rose by 3.4% during 3Q15 compared with the same period a year earlier and by 18.6% compared with 2Q15. However, bilateral trade counts decreased by 5% from the same time last year and by 1.9% versus the previous quarter.

CMBS

Post-issuance changes eyed

Fitch reports that US borrowers are increasingly seeking to change the terms of their CMBS loan shortly after securitisation. The agency says that some of the proposed changes - had they been known prior to issuance - would have resulted in the loan being modelled differently and often more conservatively.

Fitch has seen approximately 15 requests this year for rating confirmations pertaining to loans from 2014 or 2015 vintage deals. The majority of the requests have been loan assumptions to new borrowing entities or ownership structures. However, a handful have contemplated more fundamental changes to other loan terms.

One such request - which is of particular concern to Fitch - is the borrower trying to add more debt. The agency notes that additional debt, particularly in the form of preferred equity or mezzanine debt, would cause it to assign a higher probability of default and resulting higher expected loss in the modelling of the loan. Unless the loan or the transaction had experienced increased cashflow and amortisation, Fitch would be unlikely to state that a downgrade would not be warranted.

The majority of confirmation requests the agency has received from servicers this year have been to defease loans. Fitch has reviewed 75 defeasance requests, mainly from legacy transactions originated in peak vintage years. Approximately 20 of these requests were from 2.0 transactions, in particular from the 2011 through 2013 vintages.

Borrowers are locked out from defeasing loans within the first two years of origination. But there appears to be no such lock-out for other changes to the loan, providing the lender gives consent.

CMBS

Windermere clarity requested

Hayfin Capital Management has made a request to the English High Court to decide how interest should have been calculated on the payment of class X notes in Windermere VII CMBS. The bonds were structured to continue paying following the default of the underlying loans.

Hayfin has also asked the court whether an event of default occurred on the class B notes of the deal, which it holds a portion of. It is further seeking clarification on the extent of indemnity owed to the trustee in the event that the trustee declared the notes due and repayable.

CMBS

Multifamily attracting investors

The CRE multifamily sector is seeing increased investment as underwriting standards loosen for multifamily loans, reports Trepp. Market indicators suggest that the rebound of the economy has prompted lenders to take on more risk.

"Coming out of the recession, multifamily CRE garnered a lot of attention, capital and development," says Joe McBride, research associate at Trepp. "Caps on GSE lending volume, maturing loans and continued investment appetite in multifamily have propelled non-agency CMBS lending and the competition for loans, which has pushed LTVs up and debt yields down."

Trepp explains that relaxed credit underwriting practices from traditional lending banks and the re-emergence of private capital have driven a rise in non-agency CMBS loan originations. Between 2013 and 2014, CMBS loan origination for multifamily properties doubled, reaching US$10.8bn in volume by the end of 2014.

Trepp also cites additional factors behind the increasing competitive investment for multifamily loans, including a rise in interest-only loans and a shrinking delinquency rate. The multifamily delinquency rate has improved by over 600bp since October 2012 and could further strengthen when the Stuyvesant Town loan is paid off in the coming months (SCI passim).

In addition, the multifamily sector has shown generally strong occupancy and financial performance. More than 85% of reported loans maturing through 2020 currently hold occupancy levels greater than 90%, while less than 10% of those loans have occupancies below 50%.

"Given the large balance of multifamily loans maturing in the next two years, these factors will serve as a pipeline for additional multifamily CMBS issuance growth," adds McBride.

Insurance-linked securities

Ratings withdrawn on 'lack of interest'

S&P has withdrawn its ratings on all notes, except one, issued by Ballantyne Re. The agency says it received a request from the sponsor of the ILS, Scottish Re (US), to withdraw the ratings in 2010 but opted to maintain unsolicited ratings due to potential market interest. However, it notes that there is seemingly no longer significant market interest in the bonds.

S&P will maintain its double-A rating on the class A2 series B notes because they benefit from a financial guaranty policy from Assured Guaranty (UK). The six classes of senior notes had been rated double-C, while two classes of subordinated notes were rated single-D.

Fitch - the other rating agency on the Regulation XXX securitisation - withdrew its ratings in July 2013, citing "significant mark-to-market losses" experienced in the investment portfolio of RMBS and ABS (SCI 30 July 2013). More recently in February, Ambac refused to consent to the release of excess funds from the transaction's reinsurance trust account, in accordance with its rights under the guarantee and reimbursement agreement.

Risk Management

ESMA, SFC sign MOU

ESMA and the Securities and Futures Commission (SFC) of Hong Kong have concluded a memorandum of understanding that will allow the exchange of information on derivative contracts held in trade repositories. The agreement allows both regulatory bodies to have indirect access to trade repositories established in the EU and Hong Kong respectively.

ESMA has already reached MOU agreements with the Australian Securities & Investments Commission and the Reserve Bank of Australia for direct access to trade repository data. These were respectively concluded in November 2014 and February this year.

However, the agreement with the SFC is the first arrangement among authorities to establish an indirect access to trade repositories. The move follows a recent recommendation from the Financial Stability Board that such agreements can help overcome legal barriers to accessing data on derivatives trades.

The announcement also comes shortly after the SFC set out proposals to revise how it regulates its automated trading services in Hong Kong (SCI 24 November).

Risk Management

Hong Kong OTC proposals set out

The Hong Kong Securities and Futures Commission (SFC) has opened a consultation on proposals to update the guidelines for regulating automated trading services (ATS). The proposals are presented in a paper which primarily covers potential regulatory changes to encompass OTC derivative transactions.

"The ATS Guidelines have not been amended since they were first introduced in 2003," the paper says. "A review is needed in light of regulatory and other developments over the last 12 years, and to take into account the SFC's experience of regulating ATS."

Specific changes would include the introduction of a mandatory clearing obligation. In this instance, certain standardised OTC derivative transactions will have to be cleared through a designated central counterparty that is a recognised clearing house.

The SFC also proposes a greater alignment with international standards. It stresses the need to enhance the 'core standards' in its guidelines to better reflect recent changes made in the Principles for Financial Market Infrastructures - a set of guidelines laid out by the Committee on Payment and Settlement Systems and IOSCO a number of years back (SCI 16 April 2012).

The SFC welcomes feedback on the proposals prior to the 31 December deadline. It plans to implement the guidelines at the same time as the implementation of the subsidiary legislation for mandatory clearing obligation for OTC derivatives transactions, which is expected to be in mid-2016.

RMBS

Property market sensitivity weighed

A 20% decline in Australian property values would affect only a small proportion of triple-A rated prime RMBS, according to S&P. In a new report, the agency considers the sensitivity of Australian prime RMBS to a potential decline in property market values.

"Strong property price growth has featured prominently in Australia's economic narrative during the past two decades," S&P notes. "Against a backdrop of increasing household indebtedness and a prolonged period of low interest rates, there is growing concern over households' vulnerability to a decline in property prices, prompting regulatory bodies to focus on lending standards in a bid to safeguard the nation's financial system. Falling property prices increase financial losses for borrowers in financial difficulty and are a key consideration for Australian prime RMBS."

With this in mind, the agency has assessed the resilience of Australian RMBS transactions to a moderate fall in home prices. The report examines the effect of hypothetical 10% and 20% declines in property prices on Australian prime RMBS, from ratings and credit enhancement perspectives, together with the attributes of the Australian RMBS portfolio that underpin its relative ratings stability and strong collateral performance. Additionally, it highlights tail-risk exposure and the importance of debt serviceability.

S&P finds that the subordinated classes of notes in RMBS that rely on lenders' mortgage insurance (LMI) and excess spread to cover losses would be more sensitive to price movements if LMI providers were to simultaneously increase claims adjustments. "We have observed that most Australian lenders have aligned their practices closely to the requirements of LMI providers and promptly adjust their practices when they uncover gaps," the agency says. "As a result, we expect incidences of claims denials to remain negligible and increases in claims adjustments to be contained."

Loss experiences and subsequent claims adjustments in the context of RMBS have been low to date and risk mitigants, such as excess spread, have been more than sufficient to cover transaction exposures to such risks.

RMBS

Spanish repossession recovery to continue

Moody's expects recoveries on repossessed Spanish properties to continue rising. Recovery rates have so far risen alongside an improving economy and a 5.8% increase in Spanish house prices since 2013.

"Given the favourable economic backdrop, we consider that Spanish securitisation vehicles will be able to sell their repossessed properties more easily," says Moody's vp Carole Bernard. "So far, losses on repossessed houses remain within our assumptions for defaulted mortgage loans; we will continue to monitor the recoveries on repossessed properties."

Spanish mortgage loan defaults increased following the financial crisis, driving a high volume of property repossessions since 2009. After those properties could not be sold at auction, Spanish RMBS transactions had to hold onto them.

Moody's analysed the sale prices of 5,008 repossessed properties in Spanish RMBS. The rating agency estimates that 43% of repossessed properties in a study of more than 14,000 loans have been sold so far, compared with just 30% in its previous study two years ago.

The sales of repossessed properties averaged 34% of their original valuation. The corresponding decline in property value of 66% is greater than the peak-to-trough national house price index.

Moody's notes that repossessed properties sold in Catalunya depreciated the most. Repossessed properties sold in Murcia, Valencia and Castilla-La-Mancha - where unemployment remains high - depreciated by more than 67% of their initial valuation.

RMBS

NPL, RPL RFC issued

Moody's is requesting feedback on proposed changes to its methodology for rating securities backed by non-performing loans (NPL) and re-performing loans (RPL). The proposed changes consolidate the approaches the rating agency has used to rate RMBS of NPLs and RPLs into a single methodology.

The proposed methodology would not result in any rating changes, says Moody's. Market participants are invited to comment by 30 December.

RMBS

GE portfolio sold off

GE Capital has agreed to sell a £3.8bn portfolio of first lien mortgage loans from its UK Home Lending business to an investment consortium consisting of Blackstone, TPG Special Situations and CarVal Investors. The transaction represents the sale of almost all of GE Capital's remaining UK mortgages and is expected to close in December.

"We began this year with around US$13bn of ending net investment (ENI) and when this transaction closes, we will have approximately US$400m of ENI remaining in our UK mortgage business," says Keith Sherin, GE Capital chairman and ceo.

It is the latest development in the firm's strategy to offload its assets and shift focus to its industrial business (SCI passim). GE says it will retain its related financing verticals for the industrial business.

When completed, the sale will contribute approximately US$400m of capital to the overall target of approximately US$35bn of dividends expected to be paid to GE under the plan. The combined sales of the UK Home Lending portfolios will now reach a contribution of nearly US$1bn of capital to the target. The sale also pushes the total ENI for GE's 2015 announced sales to US$136bn.

RMBS

Largest ACIS deal inked

Freddie Mac has obtained the largest insurance policy to date under its Agency Credit Insurance Structure (ACIS) programme. The transaction transfers much of the remaining credit risk associated with the fourth actual loss STACR offering, STACR Series 2015-DNA3.

The policy transfers up to a combined maximum limit of approximately US$702.4m of losses on a pool of single-family loans acquired from December 2014 to March 2015. With this transaction, Freddie Mac has acquired approximately US$2.2bn in insurance coverage this year, with eight ACIS transactions and nearly US$3.1bn since the programme's inception.

Freddie Mac has closed 16 STACR offerings, two Whole Loan Security deals and now 12 ACIS transactions since mid-2013. Five of the ACIS transactions have provided coverage on a first loss and actual loss basis. The GSE has grown its investor base to about 180 unique investors, including reinsurers.

RMBS

Aussie affordability deteriorating

Moody's reports that housing affordability in Australia has deteriorated significantly over the 12 months to October 2015. The agency suggests that this increases the risk of delinquency and default for Australian RMBS.

"Nationally, Australian households with two income earners spent an average of 29.3% of their monthly income on monthly mortgage repayments as of 30 October 2015, up from 28.2% last year," says Natsumi Matsuda, a Moody's analyst. "The current low mortgage interest rates have failed to offset the impact of rising house prices over the past year, and the implementation of interest rate hikes this month will further increase delinquency and default risks for mortgage loans."

In Sydney, where house prices rose rapidly over the past year, households spent an average of 39.2% of their income on mortgage repayments as of October 2015, up from 36.1% a year ago. This represents the highest level since 2001.

Housing affordability also deteriorated in Melbourne (32.1%) and Adelaide (21.7%), but improved in Brisbane (23.3%) and Perth (21.0%).

The deterioration in housing affordability is credit negative for new mortgage loans and for RMBS backed by such loans, Moody's notes. Specifically, the less affordable a mortgage becomes relative to household income, the higher the risk of delinquency and default.

The current low mortgage interest rate - the average standard variable mortgage interest rate of 5.45%, as of October 2015, is well below the 10-year average of 7.07% - has also failed to offset the impact of rising house prices. And while the Reserve Bank of Australia has cut the official cash rate twice so far this year to a record low of 2%, Australian mortgage lenders last month lifted their mortgage interest rates by between 0.15 and 0.20 percentage points. The rate hikes will take effect in November and are expected to further weaken housing affordability.

Moody's says new mortgages in Sydney and Melbourne are especially problematic, given the steep housing price increases in these two cities of 17.6% and 15.4% respectively over the 12 months to October 2015. Mortgages from Sydney and Melbourne account for 45% of loans in the agency's rated Australian RMBS portfolio, as of May 2015.

Conversely, median house prices in Perth declined by 5.7% over the year and are now down by 7.2% from their 10-year peak in April 2014. This is due to the city's high exposure to employment industries affected by the downturn in the mining and resources sector.