Contents

CLOs

Friend request

CLO managers look for allies as deadline looms

None of January's US CLOs were risk retention-compliant at issuance, but change has swept the market as 20% of those issued in September and 19% of those issued in October were. However, finding adequate solutions has proved tough enough for large managers, with smaller ones in an even more precarious position.

Risk retention has been on the horizon for some time now and comes into force in 12 months, although managers are already gearing up for it. With time running out, some managers may find themselves squeezed out of the market.

"Risk retention requires managers or their affiliates in some cases to provide a significant amount of capital. The majority of managers - both big and small - are simply not well enough capitalised to meet those requirements," says Michael Rosenberg, principal, Tetragon Financial Management.

He continues: "It seems like the bigger managers have been very proactive in seeking solutions. Smaller managers have been exiting the business. If even the larger managers are scratching their heads looking for how to move forward, then the smaller managers may find it that much more difficult."

The two main considerations for risk retention compliance are which 5% is retained and where the capital to do so comes from. The first question, at least, is fairly simple to answer.

"Managers are likely to find retaining a horizontal slice more difficult because it would require holding over half of the equity tranche in a typical CLO. Banks may not offer workable financing for that," says Jeff Herlyn, principal, Tetragon Financial Management.

He continues: "The vertical slice may be better able to get financing, so that could be an easier option for some managers. However, ultimately the banks are likely going to want to provide funding to the more established firms and they are likely to prefer larger managers over smaller ones, because they will be seen as better able to navigate these changing market conditions."

Several different strategies have been mooted to raise capital. Manager mergers provide one obvious solution and consolidation has recently gathered pace.

An interesting new twist on this theme is the introduction of insurance company capital. The recent merger between Octagon Credit Investors - one of the top 10 managers in the US - and Conning (SCI 6 November), which is owned by Cathay Financial, is one example of this and suggests other insurers might move into the space.

"It makes sense where a manager may be a decent size but lacking a large balance sheet to link up with insurers or other firms. Insurance firms partnering with CLO managers would make a natural home for the vertical slice because they are already involved in the debt all the way from the senior to the mezzanine," says Herlyn.

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

Man Group's acquisition of Silvermine Capital (SCI 17 December 2014) and private equity venture Public Pension Capital's partnership with KVK (SCI 30 April) provide examples of other interesting combinations that CLO managers have formed in order to safeguard their future. Many more partnerships could follow.

"We have heard of some smaller managers putting themselves up for sale. The fact is that risk retention regulations look set to make this business too expensive for certain managers to find it viable," says Herlyn.

He continues: "There are also companies actively seeking capital. We have heard that a number of major players are keen to find investors that could give them a war chest to meet risk retention requirements. They are generally large managers but maybe do not have big balance sheets, so they need to find a solution."

CIFC Asset Management has taken a different route by turning to the high-yield bond market and raising a US$40m bond offering (SCI 6 November). Proceeds of the debt issuance are to be used to fund risk retention.

"A public company would have slightly different access to capital. A bond offering could be useful for meeting risk retention," notes Herlyn.

Whether managers choose to leave the market or are forced out, one panellist at Opal Financial Group's recent CLO summit in California predicted that the current crop of 130 managers could be whittled down to just 70 by the cost of capital required to comply with risk retention. With the clock ticking, the need for a workable solution becomes ever more pressing.

JL

Secondary markets

Euro secondary unmoved

Despite initial post-ECB softening on Friday across broader markets, the European securitisation secondary market remains unmoved.

Liquidity remains thin across securitisation secondary and that in part helped to ensure spreads closed Friday unchanged. Nevertheless, tone remains positive and pockets of buying activity continue to be seen.

Where those pockets appear prices are even edging slightly up. Once again, prime assets are the main focus but UK non-conforming also continues to garner interest.

There are currently three BWICs on the European schedule for today. By far the longest is a 20 line €54.6m CLO list due at 15:30 London time.

The triple- and double-B mix comprises: ADAGI II-X D1, ADAGI IV-X E, AVOCA VII-X D1, AXIUS 2007-1X E, BABSE 2014-1X E, CADOG 4X E, CASPK 1X D, DRYD 2013-27X ET, DUCHS VII-X E, GRENP 2006-1X D, GSCP 2007-4X E, JUBIL VIII-X E, OHECP 2006-1X E, PENTA 2007-1X E, QNST 2006-1X D1, QNST 2007-1X D, QNST 2007-1X E, REGP 1X E, RMFE V-X IV and SORPK 1X D.

Five of the bonds have covered with a price on PriceABS in the past three months -- ADAGI II-X D1 at 89.65 on 3 December; ADAGI IV-X E at 93.74 on 25 September; CASPK 1X D at 96A on 3 December; PENTA 2007-1X E at L90S on 23 October; and SORPK 1X D at LM90S on 11 September.

Secondary markets

Euro secondary slows

Yesterday saw a fairly slow session across the European securitisation secondary market, but it could yet pick-up again before year-end.

"Yesterday was quiet, but it's too early to be thinking of year-end just yet," says one trader. "The areas of activity there were still bode well for the remainder of this week and hopefully next."

The main focus yesterday was the two relatively large BWICs, the trader says. "The double- and triple-B CLO list traded at pretty good levels especially given the level of supply lately. Equally, the CMBS block list went through in line with recent prints."

Other sectors saw only limited activity, but market tone remains positive. "Prime, of course, saw some activity, but we only did a few trades there," the trader says. "At the same time, the upsize in the Trinity Square new issue was good news and shows there's still cash to be put to work in that space."

There are currently two BWICs on the European schedule for today - a UK non-conforming residual involving ALBA 2006-1 and ALBA 2006-2 at 13:30 London time and a CDO/CLO seniors mix at 15:00.

The latter €7.75m original face list has seven line items - AVOCA VIII-X A1, CADOG 3X A, CELL 2006-1X A3, JUBIL I-RX A, MSIMM 2007-1X A, OCI 2007-1X A2 and PANTH IV-A A1. Four of the bonds have covered with a price on PriceABS in the past three months: AVOCA VIII-X A1 at 98.15 on 22 October; JUBIL I-RX A at 98.391 on 20 October; MSIMM 2007-1X A at 98.41 at 22 October; and OCI 2007-1X A2 at 99.23 on 22 October.

Secondary markets

US CDO/CLO pick up

The US CLO secondary market is picking up a little, while activity in the Trups CDO sector is outperforming recent levels

"CLOs are getting a little busier again as we head into year-end," says one trader. "Buyers are still fairly cautious though and the bid-ask in mezz is still pretty wide so the bonds that are changing hands are restricted to higher up the capital structure."

Equally, selling activity is only gradually picking up. "I expected more of a pop in list volume post last week's conference, but I guess it's not a great day to be selling given what's going on in oil and metals today," the trader says.

However, the trader notes: "We are seeing quite a few Trups CDO BWICs at the moment. There were two lists yesterday, which we believe traded but no pricing colour was released, which is causing some frustration in the market. Nevertheless, there is still plenty for people to work on in the sector."

The trader continues: "First up is a list of first pays in decent size from a real money seller today, which is expected to trade. In addition, there are a couple of auctions of underlyings due this week - Soloso 5 tomorrow and INCAPS 2 on Thursday. There are also a few other smaller size TRUPS CDO BWICs circulating for trade later this week."

Today's auction is a nine line Trups and ABS CDO mix due at 12:00 New York time. The $212.9+m original size list comprises: ALESC 11A B, ALESC 2A A1, ICONS 2004-1A A, PRETSL 12 A1, PRETSL 13 A1, PRETSL 18 A1, PRETSL 9 A2, SORIN 2006-3A A2 and TRAP 2007-12A A1. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro ABS/MBS stable

The European ABS/MBS secondary market remains stable amid wider market volatility.

"Overall our market is generally OK," says one trader. "ABS/MBS is still well insulated from the weakness in broader markets."

The trader continues: "We're continuing to see a strong bid for UK non-conforming and buy-to-let. Meanwhile, the rest of the market appears to be well supported and spreads are stable."

There are three European BWICs on the schedule for today so far. At 10:00 London time is a CLO and MBS mix; at 14:00 are five lines of UK non-conforming mezz; and at 15:00 are five pieces of UK prime.

The latter involves £111.16m original face across: BRASS 3 A, GFUND 2012-2 A2, LAN 2014-1X 2A, LAN 2014-2A 2A and LAN 2015-1X 1A. Only BRASS 3 A has covered on PriceABS in the past three months - at 100.175 on 4 December.

Secondary markets

Euro CLOs BWIC-driven

The European CLO secondary market is being dominated this week by a spike in BWIC volume.

"Everything is BWIC-driven this week - away from the auctions not a lot is happening," says one trader. "Things have widened, but we're still seeing strong execution."

The trader continues: "There have been a lot of mezz lists in particular, but they're still clearing fairly well. In fact, that's the most interesting part of the stack - mezz 1.0s are better value than mezz 2.0s at the moment because their DMs are so close."

The spike in supply across the curve is not a cause for concern, the trader suggests. "Some lists are compulsory year-end activity, some are redemptions and some are simply people trying to shore up cash just in case - nothing out of the ordinary. There are so many this week because it's likely that next week liquidity will really start to disappear for the year."

Meanwhile, overall European CLO market tone is being boosted by a revival in new issuance activity that had looked to have disappeared for 2015. "Primary has kicked off again and the debt in the deals is getting oversubscribed," the trader notes.

Today's European CLO BWIC calendar is currently quieter than recent days with only two auctions - one was due at 10:00 London time as part of mixed list and the other is due at 15:00. However, there are already five lists on the schedule for tomorrow.

Today's 15:00 list involves four single-A line items totalling €8.95m - ADAGI III-X C, CELF 2007-1X C, JUBIL VIII-X C and LOMBS 2006-1X C. Only CELF 2007-1X C has covered with a price on PriceABS in the past three months, last doing so at 91.35 on 23 November.

Secondary markets

Euro secondary mixed

It's turning into a typically quiet December across most of the European securitisation secondary market, but there is some healthy activity in a couple of sectors.

"The secondary market is still holding up quite well despite broader credit concerns," says one trader. "Flows in general are very quiet, but we are continuing to see strong activity in some sectors via BWICs."

The main area of BWIC activity is, as previously noted, CLOs. "We're continuing to see a lot on the offer side in secondary CLOs and primary has picked up too with the latest Sankaty deal now circulating," the trader says. "However, the market has absorbed the supply well so far."

Another sector continuing to see strong demand is UK non-conforming, the trader reports. "In primary the Trinity deal priced in line with expectations yesterday and was oversubscribed. At the same time, in secondary UK non-conforming paper was trading at fairly tight levels, again via BWIC."

There are currently seven BWICs on the European calendar for today of which five are CLOs. The largest is a CLO mezz auction due at 12:00 London time.

The 25 line €100.61m list comprises: CADOG 2X D, CADOG 2X E, CADOG 3X D, CADOG 3X E, CADOG 6X E1, CADOG 6X F1, CORDA 2006-1X D, CORDA 2007-1X D, CORDA 5X E, DRYD 2014-32X E, DRYD 2015-39X E, DUCHS VI-X D, EGLXY 2006-1X E, GRENP 2006-1X D, JUBIL 2014-12X E, KNTYR 2007-1X E, MERCT III-X B2, MERCT II-X B1, NEWH 1X E, NPTNO 2007-1 E1, OHECP 2007-2X E, REGP 1X E, RMFE V-X V, RYEH 1X E and WODST IV-X D.

Six of the bonds have covered with a price on PriceABS in the past three months - CORDA 2006-1X D at 94.11 on 9 October; CORDA 5X E at 94.3 on 11 September; DRYD 2014-32X E at 93.97 on 11 September; EGLXY 2006-1X E at 97.53 on 30 October; KNTYR 2007-1X E at 97.03 on 18 September; and NEWH 1X E at 96.13 on 11 September.

Secondary markets

US CLOs stutter

After a slight pick-up earlier in the week the US CLO secondary market is stuttering once more.

"It's very quiet again," says one trader. "That's not unusual at this time of year, but at last week's conference people weren't as upbeat as usual and predictions for next year are for a fall in new issuance."

At the same time, the trader says: "Commodity and credit concerns are weighing heavily on the market and keeping people out of secondary as they try to figure the implications for loans and CLOs. In particular, the oil price breaking the $40 barrier was a blow and has also triggered some redemptions. So it seems everyone is taking the opportunity to head into their year-end shells a little early."

As a result, the trader reports: "CLO secondary bid-offers are very wide. Overall, secondary prices are unchanged, but the market remains bifurcated - if you've got clean paper from a good manager it'll trade, if you don't it won't."

There is, however, a more positive note from the primary market. "There have been quite a few new issue prints in recent days and levels have been OK," the trader says. "We're also hearing there's still a fair amount of new deals that people want to get done in 2015, though, of course, some of that might run into year-end liquidity problems."

There are only three small BWICs on the US CLO calendar for today so far. The first two were due at 10:00 New York time, the other is due at 11:00 and involves $1m KING 2007-5X E and $3m ZING 9A D.

Neither bond has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary slowdown

The end of year slowdown in the European securitisation secondary market looks to be increasing.

Flows were generally light again yesterday as year-end liquidity thinning becomes increasingly evident. Consequently, spreads moved very little. CLO BWICs once again dominated the day with most bonds trading flat to slightly lower than recent prints.

Then at 14:30 is an eight line 47.25m mixed euro and sterling CMBS list. It comprises: BUMF 4 B, BUMF 4 M, BUMF 5 M1, GRF 2013-1 E, GRF 2013-2 E, GRF 2013-2 F, TAURS 2015-DE2 E and TIBET 1 D. None of the bonds has covered on PriceABS in the past three months.

In addition there is an OWIC of ABS seniors due by 15:30. It involves up to €50m each of: CAR 2014-F1V A, GNKGO 2013-SF1 A, GNKGO 2014-SF1 A, TTSOC 2015-1 A, KIMI 3 A and KIMI 4 A.

Structured Finance

SCI Start the Week - 7 December

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

Pipeline
Several deals joined the pipeline in the first week of December. The final count consisted of seven ABS, two ILS, three RMBS, one CMBS and one CLO.

The ABS were: US$380m California Republic Auto Receivables Trust 2015-4; US$265m CHAI 2015-PM3; CNY3bn Fuyuan 2015-2 Retail Auto Mortgage Loan Securitization Trust; €800m Noria 2015; US$600m SPS Servicer Advance Receivables Trust Series 2015-T2; US$399.9m SPS Servicer Advance Receivables Trust Series 2015-T3; and SPS Servicer Advance Receivables Trust Series 2015-VF1.

Queen Street XI and US$100m Vita Capital VI Series 2015-1 made up the ILS, while the RMBS were €900m IM Grupo Banco Popular MBS 3, US$231.181m Onslow Bay Mortgage Loan Trust 2015-4 and £1bn Trinity Square 2015-1. The CMBS was US$1bn WFCM 2015-P2 and the CLO was €2.94bn FT PYMES Santander 12.

Pricings
Even more deals printed as year-end came into view. While there were only two ABS, there was also an ILS as well as four RMBS, two CMBS and seven CLOs.

A$190m Liberty Series 2015-1 and US$359m Navient Private Education Loan Trust 2015-C accounted for the ABS, while the ILS was US$300m Kilimanjaro Re Series 2015-1. The RMBS were US$315.141m CSMLT 2015-3, US$474m Mill City Mortgage Loan Trust 2015-1, US$590m STACR 2015-HQA2 and US$757m Towd Point Mortgage Trust 2015-6.

The CMBS were US$1.09bn FREMF 2015-K721 and US$805m MSCI 2015-UBS8. Lastly, the CLOs were: US$500m Apidos XXII; US$300m Bean Creek CLO 2015-1; €716m Lanterna Finance 2015; US$610m Madison Park Funding XIX; US$506.5m Magnetite XVI; PLN1.475bn ROOF Poland Leasing 2014; and €430m Tymon Park CLO.

Markets
While US ABS December issuance has averaged US$4.1bn since 2011, Wells Fargo analysts expect the month will undershoot the average this year. "There are currently a few deals in the pipeline, however, they are either backed by non-benchmark collateral or sponsored by a non-benchmark issuer. In our opinion, pricing spreads are likely to remain wide given the current environment," they say. Secondary spreads were unchanged last week.

The European ABS and RMBS primary markets closed the week broadly tighter, with Trinity Square 2015-1 helping to drive UK non-conforming and BTL seniors 4bp-5bp tighter, according to JPMorgan analysts. "Along the southern fringe of Europe, the peripherals met better buyers translating into 3bp-5bp spread compression in Italian and Spanish seniors," they add.

Editor's picks
Recycling risk?: The European Commission's Capital Markets Union proposals for reviving Europe's securitisation market sparked the most debate among players in the capital relief space this year, according to a new SCI research report entitled 'Capital relief trades: the mechanics of recycling risk'. Under the framework for simple, transparent and standardised (STS) securitisation, synthetic balance sheet transactions remain ineligible for high quality status (SCI 30 September), yet capital relief trades can benefit the real economy...
Growing trade: A number of UK government legislative initiatives are expected to help breathe life into small businesses. This, in turn, could help deepen interest in trade receivables securitisation as a useful tool for facilitating working capital...
Euro secondary picking up: Activity in the European securitisation secondary market is starting to pick up. "[Tuesday] was very quiet again, with not a lot of flows or BWICs," says one trader. "However, it appears to be picking up and the BWIC calendar is building for the rest of the week, though involving a lot of off-the-run securities."
Proof of concept: Representatives from Reed Smith and StormHarbour Securities recently provided an introduction to capital relief trades, focusing on regulatory and structuring considerations, during a live webinar hosted by SCI (view the webinar here). This Q&A article highlights the main talking points from the session...

Deal news
• An extraordinary resolution has been passed by St Paul's CLO III noteholders that amends the investment management agreement to comply with the Volcker Rule. Under the amendments, noteholders have the option to hold notes with different voting rights in respect of resolutions to remove or replace the CLO manager.
• Freddie Mac has released a 2016 STACR issuance calendar. The move coincides with the pricing of STACR 2015-HQA2, its eighth and final STACR transaction this year.
• Online lender loanDepot has closed a US$150m securitisation of unsecured personal loans. It was structured and sold by Jefferies.
• Shanghai Provident Fund Management Centre is set to issue an ABS backed by housing fund loans on China's interbank bond market, according to Shanghai Clearing House. The CNY6.96bn (US$1.09bn) deal is believed to be the first of its kind and will launch on 4 December.

Regulatory update
• A class action lawsuit was filed last week that accuses 10 banks and two trading platforms of colluding to halt competition from SEFs in the interest rate derivatives (IRDs) market. The Public School Teachers' Pension and Retirement Fund of Chicago brought forward the suit, having purchased IRDs from the defendants.
• The ECB has extended its purchases under the ABSPP by six months to end-March 2017 and says the programme will run beyond this date if necessary, until there is a "sustained adjustment" in inflation. The bank will also begin reinvesting principal payments on the securities purchased under the ABSPP as they mature, for "as long as necessary", in order to "contribute to favourable liquidity conditions".
• ESMA has published its final report on guidelines on complex debt instruments and structured deposits in MiFID 2. The guidelines are intended for the assessment of securitised debt and money market instruments incorporating a structure which makes it difficult for the client to understand the risk involved.
• The European Council appears set to approve the CMU securitisation package. The Presidency of the Council, Luxembourg, reported yesterday that a special working group has discussed the proposals in six meetings, after which different compromise proposals were prepared. There seems to have been no further reaction to the latest compromise texts, however.
• The Australian Prudential Regulation Authority's revised discussion paper on its prudential securitisation framework (APS120) is now in a form that makes future RMBS and ABS master trust issuance from Australia a distinct possibility, Fitch suggests. The discussion paper - a revision of the proposal issued in 2014 - contemplates allowing early amortisation event triggers, date-based call options and the seller interest to vary in size during the revolving period (SCI 26 November).
• The Committee on Payments and Market Infrastructures (CPMI) and IOSCO have completed a review of jurisdictions' compliance with the principles for financial market infrastructures (PFMI). They find an overall high level of observance with the PFMI responsibilities, although there are concerns regarding trade repositories.

Deals added to the SCI New Issuance database last week:
5180-2 CLO; A-Best 13; Ares XXXVIII CLO; Avery Point VII CLO; Florence SPV; FONCAIXA PYMES 7; FREMF 2015-KF12; Gracechurch Card Programme Funding 2015-1; Gracechurch Card Programme Funding 2015-2; Grecale RMBS 2015; Jamestown CLO VIII; JG Wentworth XXXVI series 2015-3; Lanterna Finance; NRZ Advance Receivables Trust 2015-ON1 series 2015-T3; NRZ Advance Receivables Trust 2015-ON1 series 2015-T4; ProFamily Securitisation; Residential Reinsurance 2015-II; South Carolina Student Loan Corp 2015-A; STACR 2015-HQA2; Tymon Park CLO

Deals added to the SCI CMBS Loan Events database last week:
BSCMS 2006-PW12; CSMC 2007-C4; CWCI 2007-C3; ECLIP 2007-2; GSMS 2007-GG10; MSC 2006-IQ12; MSC 2007-T25; PCMT 2003-PWR1; TITN 2007-CT1; WFCM 2014-LC18; WFRBS 2012-C8

Structured Finance

Marketplace lending set for lift-off

Marketplace lending is primed for further expansion globally in 2016, in terms of both volume and loan type. Moody's anticipates that US marketplace lenders will continue to broaden their product offerings as they build out their platforms, although legal and regulatory issues will remain a significant risk for the industry. Marketplace lenders in France, Germany, Italy and the UK should also make further inroads in Europe, while China will remain the largest market for online lending platforms in the Asia-Pacific region.

The legal and regulatory landscape will likely continue to evolve for marketplace lenders in the US, according to Moody's, as policymakers assess industry practices and the role of marketplace lending in the financial system. "Questions remain about the viability of the origination model that many marketplace lenders currently use, in which a partner bank originates the loans, then promptly sells them to the marketplace lender. Also, a recent federal appeals court ruling increases the risk that courts could deem some loans void or unenforceable or could lower the interest rates on them," the agency explains.

As a result of the legal questions stemming from the Madden ruling and over who is the 'true lender', marketplace lenders may limit the maximum interest rate they charge on loans in some states or decide to obtain state-specific lending licenses and originate loans directly. In addition, new transactions with collateral sourced via the third-party bank origination model might exclude loans from the three Second Circuit states - New York, Connecticut and Vermont - where interest rates could be considered usurious. New transactions might also include loan participations in the pools, in which banks retain an interest in the loans they originate and sell through the marketplace lending platform.

The US ABS transactions issued to date have been backed mostly by unsecured personal loans or refinanced student loans. Future deals could include different types of collateral - including loans from lenders that focus on subprime customers or on borrowers with extremely high credit quality - as marketplace lenders continue to expand their product suites. Moody's suggests that new collateral could include small business loans from Lending Club, as well as consumer loans or mortgages from SoFi.

The agency notes that credit quality of new US marketplace lending ABS backed by consumer loans will likely show more variability than 2015 transactions. In the student loan sector, the credit quality of refinanced student loan collateral backing ABS transactions should remain the same or weaken marginally compared with 2015 deals.

Meanwhile, low interest rates are helping marketplace lenders in Europe bring in capital to expand, although a continued sluggish economy in much of the region could negatively affect the credit quality of marketplace loans. European policymakers have also generally been supportive of the industry, though they could put more restrictions in place as it gets larger.

Further growth of the sector is expected in the UK, in particular, as well as potentially faster growth in less mature markets such as France, Germany and Italy. The UK market has undergone a similar transformation as the US market over the past two years, bringing in more institutional investors, including listed funds and banks. Partnerships in which banks refer their customers to marketplace platforms for loans have also developed, including Metro Bank's agreement to lend via Zopa.

Moody's expects UK marketplace loan originations to expand next year at a somewhat slower pace on a percentage basis than they have over the past few years, though the absolute pace of gains should remain brisk. Business lending will likely account for the majority of loans, with consumer lending also continuing to grow.

Securitisations of UK SME marketplace loans could be on the way, although competition for investment opportunities from individuals, listed and private funds, and banks in the continuing low-yield environment is sapping some of the supply of loans that could be packaged into ABS. "Any European marketplace loan ABS that come to market in 2016 are likely to have similar structural features as typical ABS SME balance-sheet securitisations," Moody's observes. "However, marketplace lending ABS could carry higher risks stemming from issues including the short performance history of the platforms and their still-developing underwriting criteria and processes, which may lack some of the checks and balances of traditional bank lending as they lean on technology to offer quicker application and approval processes."

Europe's low interest rate environment should continue to draw private capital to marketplace lenders and their loans. For instance, German marketplace lender auxmoney received a €150m loan-investment commitment from Aegon in October.

Marketplace lenders might also gain scale and fuel borrowing in new markets through acquisitions or expansions. For example, Funding Circle recently agreed to buy Germany's Zencap, while Germany-based Lendico has expanded into markets including Austria, Spain and the Netherlands.

Finally, China is expected to remain the largest market in the Asia-Pacific region for marketplace lending and similar online lending in 2016, while Australian origination volumes should grow from a low level and the industry might also expand further in Korea and New Zealand. In China - where, online lending volumes are estimated to be as much as several times larger than they are in the US or Europe - non-banks broadly operate two types of alternative lending platforms.

Alibaba, JD.com and a few other sizable e-commerce operators provide small or micro loans to smaller businesses. Some of these operators have established their own payment networks, creating an infrastructure that helps them assess borrower creditworthiness.

The second type consists of smaller self-regulated platforms that act more as true intermediaries linking borrowers with lenders. Over 2,600 such platforms are believed to operate in the country.

China's central bank has said it will form a cross-agency P2P lending industry body to improve operational standards and transparency, though no timetable has been set. The push to establish higher standards follows numerous instances of fraud and platform failure.

So far, two Chinese securitisations backed by online lending collateral have been issued: Alibaba securitised loans to smaller businesses, while JD.com securitised receivables from short-term consumer loans to customers that buy merchandise on its platform.

CS

CMBS

Remits ramp up

November saw a spike in US CMBS 2.0 remittance activity. Highlights include foreclosure of an 'oil boom' loan and a couple of maturity extensions.

Twelve loans totalling US$128.89m became newly delinquent last month, including three 2015 vintage loans (with two from JPMBB 2015-C3), according to Morgan Stanley. Additionally, two loans were classified as non-performing matured - the US$24m Woodlands Square Shopping Center (securitised in JPMCC 2010-C2) and the US$19.4m Novant Portfolio (DBUBS 2011-LC2) - after failing to pay-off at maturity.

The oil boom loan in foreclosure is the US$4.9m Candlewood Suites Decatur, securitised in UBSBB 2013-C5. Prism Hotels took possession of the collateral as receiver on 2 November, after the borrower closed collateral accounts and moved credit card processing without lender approval. The borrower had previously retained a workout consultant, which proposed an A/B-note restructuring.

Seven loans totalling US$85.6m transferred to special servicing during the month, including the US$16m Roosevelt East Apartments loan (COMM 2013-CR12), which is located in Williston, North Dakota. As of 10 September, the property is 74.05% occupied, after 14 tenants vacated at lease expiry.

Further, updated special servicer commentary on the US$94.6m Gateway Salt Lake loan (JPMCC 2010-C1) indicates potential for an imminent write-down and modification. A sale of the property is expected to complete on 11 December, with assumption of the debt to occur at 100% of the purchase price.

The US$12m Aquia Office Building loan (JPMCC 2010-C1) was granted a one-year extension to June 2016. The loan was transferred to special servicing in March, due to the borrower's inability to keep it current or refinance it (see SCI's CMBS loan events database).

Meanwhile, newly watchlisted loans totalled 159 for US$2.9bn in November. Morgan Stanley CMBS strategists point to increasing distress on loans secured by properties located in oil boom regions. They highlight as an example the US$11.8m TownePlace Suites Odessa loan (COMM 2012-CR4): as at 3Q15, DSCR and occupancy stood at 1.24x and 77% respectively, versus 2.10x and 86.7% at contribution.

More positively, 12 loans worth US$258.98m paid off last month, four of which prepaid with yield maintenance. The US$6.8m Youngsville Crossing loan (WFRBS 2011-C3) also paid off, but suffered a small loss resulting from special servicing fees. The strategists calculate that 201 loans with a balance of US$4.4bn have now paid off.

Finally, US$249.46m across 11 loans was defeased in November, pushing the defeasance total to 182 loans with a balance of US$3.8bn. The largest loan to defease was US$82m E Walk, securitised in WFRBS 2011-C4.

CS

CMBS

Final 2015 CMBS auctions announced

The volume of US CMBS loans out for auction has decreased slightly this month, to US$190m. The deals with the highest exposure are BACM 2006-2, BACM 2006-5 and MLMT 2006-C1.

BACM 2006-2 has US$93m from five properties and one note due for auction. Of the US$190m, Barclays analysts note that the bidding process has already been completed for US$53m, although many of these concluded auctions are still subject to seller approval and closing.

The US$54.6m 2 Rockledge Centre loan is the largest loan due to be auctioned later this month. It is securitised in BACM 2006-2 and was transferred to special servicing in May (see SCI's CMBS loan events database).

The property has performed at 1.84x DSCR in 1H15 and was valued at US$47.8m in June. The building has one tenant occupying 100% of the property, with that tenant's lease expiring in 2017.

The second-largest loan this month is the US$21.8m Fourth and Walnut loan securitised in MLMT 2006-C1. DSCR in 1H15 has been 0.7x and the occupancy rate as of October was just 52%.

"Tenant rollover has hurt occupancy, which was as high as 67% and 70% in 2014 and 2013. The property was most recently valued at US$10.9m in January 2015 and may now carry a value below that, according to special servicer CWCapital," say the analysts.

An auction was already held this month for the US$21.65m Seville Plaza loan securitised in BACM 2006-5. A bid of US$18.3m - quite possibly from the seller - did not meet reserves and the property was not sold. Occupancy has recovered this year after negative DSCR in 2014 and an ultimate severity of around 60% is expected.

The US$7.6m Best Western Baltimore loan received a high bid of US$16.5m, which is above its 2013 appraisal value of US$12.7m. The loan is securitised in UBSBB 2013-C6 and is performing with a DSCR of 2.1x. The Barclays analysts say that, if the property is sold, "it may result in an assumption of the outstanding loan or a possible defeasance of the mortgage".

JL

Structured Finance

Japanese mezz fund closed

Nomura ICG, the strategic partnership created by Nomura Holdings and Intermediate Capital Group (SCI 21 November 2013), has completed the final close of its dedicated Japanese mezzanine fund. The final size of the fund is ¥46.5bn, with the investor base almost entirely made up of Japanese accounts, as well as capital commitments from parent companies ICG and Nomura.

The fund launched in September 2014 and has already invested ¥17.5bn across three transactions, one of which has already been successfully realised. Overall the fund is now around 27% invested.

Nomura ICG was established to offer Japanese institutional investors access to Japan mezzanine investments via a fund structure. The partnership aims to make mezzanine investments in Japan by combining the sourcing and underwriting capabilities of Nomura with ICG's global insight and credit skills.

Structured Finance

TICC meeting confirmed

TICC Capital has announced that its special meeting will take place on 22 December, when stockholders of the company will be given the opportunity to vote on the agreement for it to be acquired by Benefit Street Partners (BSP). The meeting will also include the election of six new directors to the TICC board of directors.

The announcement comes after the US District Court for the District of Connecticut denied, for a second time, a request from NexPoint for a preliminary injunction requiring TICC to recognise its director nominees on the ballot for TICC's special meeting. NexPoint has now filed a motion requesting that the district court stay its ruling and prevent TICC from holding the special meeting in the manner that TICC plans to conduct it while NexPoint appeals the court's rulings.

"TICC believes that this request, like NexPoint's previous requests for relief, is baseless," the firms says in a statement. "If the meeting is further delayed, BSP has a right to walk away, without penalty, from its contract to acquire a controlling interest in TICC Management."

It is the latest in a number of hurdles that have come before the proposed acquisition of TICC, including a long-standing bidding war between BSP and TPG Specialty Holdings (SCI passim).

Structured Finance

SFM sale confirmed

Elian has completed its acquisition of SFM Europe, with Elian's international finance team set to merge with the company. An agreement for the sale of SFM Europe was announced by Elian three months ago as it expressed its intention to enhance its corporate and structured finance offering (SCI 3 September).

The acquisition pushes Elian's head count up to 640 employees and expands its geographical spread to 16 jurisdictions. SFM Europe ceo Robert Berry will lead the new 150-strong combined service line made out of the merger with the Elian international finance team.

Structured Finance

BDC revises fees

Medley Capital Corp has become the latest BDC to lower its fees under the investment management agreement (SCI 26 November). In consultation with the company's board, MCC Advisors has agreed to reduce its base management fee to 1.50% on gross assets above US$1bn from 1 January 2016. In addition, it will reduce its incentive fee from 20% on pre-incentive fee net investment income over an 8% hurdle to 17.5% on pre-incentive fee net investment income over a 6% hurdle.

The revised incentive fee will include a netting mechanism and be subject to a rolling three-year look-back from 1 January. The company stresses that the new fee structure will not result, under any circumstances, in higher fees to MCC Advisors than fees under the current investment management agreement.

Structured Finance

Collaboration to boost UK lending

A series of exclusive agreements signed by RBS with three separate investment partners - AIG Asset Management, Hermes Investment Management and M&G Investments - will boost access to capital for UK businesses backed by private equity. Mid-market firms will be able to borrow up to £100m in a single transaction that can be co-funded by all four lenders.

Each transaction will be led and co-ordinated by RBS alone, with the investment partners each undertaking their own internal credit analysis. The agreements mark the entrance of AIG, Hermes and M&G into the private equity-backed mid-sized corporate finance market, with three transactions having already been completed.

Under the terms of the agreements, AIG, Hermes, M&G and RBS will co-invest up to £100m in a single transaction, with RBS typically providing around £15m-£30m of its own capital.

Structured Finance

Private debt head poached

SL Capital Partners has appointed John Seal as head of private junior debt as it expands its involvement in the private equity, infrastructure and strategic credit segments. He was most recently a managing partner and founder of New Amsterdam Capital, focusing on European direct and syndicated leveraged loan markets. Prior to this, he was a director in high yield capital markets at Barclays Capital.

Structured Finance

Amherst leadership bolstered

Amherst Pierpont Securities has expanded its senior leadership team with the addition of mds Michael Burke and Chris Helwig. Based in New York, they will report to senior md and head of sales Ryan Mullaney.

Helwig will be responsible for developing an extensive MBS strategy at Amherst, with special emphasis on supporting investors whose needs include asset-liability management. Previously, he was director and co-head of US RMBS research for Deutsche Bank.

Burke takes over as head of credit sales for Amherst. He will work with the firm's senior trading leadership as part of a strategy to integrate sales and trading across a broader credit platform. Prior to this, he was md and co-head of investment grade credit sales for Credit Suisse.

Amherst has additionally announced the hiring of five mds across its structured products, rates and investment grade credit divisions. This includes Adam Broman, who will be responsible for agency multi-family trading, and Adam Smith as head of MBS and ABS banking. Broman and Smith join from Barclays and Fortress Investment Group respectively.

Structured Finance

Ratings expansion on the cards

Scope has successfully placed its final tranche - at a total of €3.25m - as part of this year's financing round. Subscribers were comprised solely of private investors with industrial or financial backgrounds - mainly from Central and Western Europe, but with some from the US.

In the last three years, the agency has invested €15m in expanding its rating capabilities and infrastructure, hiring over 20 established analysts that have extensive experience in the rating industry. Scope has now rated structured finance transactions, commissioned by issuers, at a total volume of €25bn.

In 2016, the agency says it will open up for investments from institutional investors for the first time. As part of this planned expansion, acquiring other companies in the analytical field, as well as hiring more analysts (even whole teams) is a possibility.

CDS

Commission drops CDS case

The European Commission has dropped proceedings against 13 investment banks over their alleged involvement in breaching antitrust standards in the CDS market. The Commission's decision comes nearly 2.5 years after it originally accused the banks of colluding to prevent the market from transitioning to regulated exchanges (SCI 1 July 2013).

"Today's closure decision regarding the 13 investment banks is based on a thorough analysis of all information received from the parties in their replies and during the oral hearing of May 2014, as well as on documents obtained through additional fact finding," says the Commission. "The evidence was not sufficiently conclusive to confirm the Commission's concerns with regards to the 13 investment banks."

The banks accused at the time were Bank of America Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, RBS and UBS. Markit and ISDA, which were also named in the original accusations, remain under investigation.

Although it has dropped the charges, the Commission says it will continue to monitor investment bank practice in the CDS space. The announcement follows a recent US$1.87bn settlement between investors and a dozen investment banks over accusations that the banks worked in collusion with ISDA and Markit to rig the US CDS market in their favour (SCI 15 September).

CMBS

GSE vet moves on

Jay Kirsch has joined Greystone as md, focusing on production of small balance loans across the Freddie Mac and Fannie Mae platforms. He reports to Rick Wolf, senior md and head of production for Greystone's small loan operations.

Kirsch arrives from Freddie Mac's multifamily group, where he most recently served as asset management and operations client relationship manager for the small balance loan programme. He also held various other roles for the GSE in underwriting, production and retained and securitised portfolio surveillance.

CMBS

Real estate lender bulks up

John Maute and Jon Barlow have been appointed to Money360's board of directors. The pair were the sole founders of the company's recent US$2.5m series A funding round and are expected to aid plans to expand Money360's infrastructure and further its national expansion.

Maute has over 30 years' experience in real estate and was managing director at Situs Holdings (formerly Helios AMC). He co-founded Helios AMC and has also held senior positions at GMAC Commercial Mortgage.

Barlow founded and served as ceo of Eaglewood Capital Management, where he assisted with the IPO of P2P Global Investments. Barlow has also held positions with Weiss Multi-Strategy Advisers, Lehman Brothers and JPMorgan.

Insurance-linked securities

Investment policy revised

Blue Capital Global Reinsurance Fund is set to revise its investment policy and modify the performance fees payable to the investment manager in advance of the January 2016 reinsurance cycle. Specifically, based on its long-term view of the property catastrophe market, the company's board believes that it is appropriate to reduce the fund's target return and modify the calculation of the performance fee paid to the manager.

The key changes proposed include: the formal adoption of investment guidelines and restrictions relating to the classes of reinsurance in which the fund may invest; adjusting certain maximum net aggregate exposure and net probable maximum loss limits, thereby providing the fund with more flexibility to pursue exposure to particular zones; and prohibiting the fund from investing directly in contracts or securities with a premium of less than 5% of the limit exposed to a single event. The company is seeking to lower its target net return from Libor plus 10% per annum to plus 8%, albeit its distribution target remains unchanged at an annualised dividend yield of Libor plus 6%.

In connection with the revised target return, the board also believes that the investment manager will be more appropriately incentivised and more closely aligned with the company's interests if the performance trigger is reduced from Libor plus 10% to plus 8%, meaning that annual performance has to meet the lower revised target return for a performance fee to be paid. However, an increase in the performance hurdle from Libor plus 3% to plus 5% is also proposed, meaning that the performance fee will only be paid on profits over a higher threshold than is currently in place.

Insurance-linked securities

CATCo acquisition completed

Markel has completed the purchase of CATCo Investment Management's assets, which will now operate under the name Markel CATCo Investment Management. CATCo ceo Tony Belisle will lead the newly branded firm, with the rest of the team transitioning over.

The completion of the deal combines Markel's traditional reinsurance capabilities with CATCo's focus on ILS. An announcement of the proposed acquisition was made back in September (SCI 3 September).

"With a significant amount of next year's renewals already committed and projected AUM expected to exceed US$3bn, 2016 is shaping up to be a positive and exciting year," says Belisle.

Willis Capital Markets & Advisory served as financial advisor in the transaction. Hogan Lovells International served as legal advisor to CATCo, while Sidley Austin represented Markel as its legal advisor.

Risk Management

SEF spins off post-trade arm

The processing services arm of trueEX is being separated from the derivatives trade execution platform. Splitting off the post-trade business should enable more efficient, cost-effective and independent solutions, says the firm.

The new entity - truePTS - will be able to offer allocations, instant status notification and other processing capabilities to all market participants, not just clients of the SEF. The new company will offer its post-trade services to dealers, buy-side firms, clearing firms, inter-dealer brokers and clearing houses.

"There is a fundamental need to simplify and rationalise the operational mess that is swaps processing," says trueEX ceo Sunil Hirani. "Most of the infrastructure that is in use today was designed and built prior to Dodd-Frank, before the need for pre-trade credit approvals and the existence of directly connected solutions such as truePTS."

Risk Management

Torstone targets expansion

Torstone Technology is hiring executives in London, New York, Singapore and Hong Kong as it seeks to grow its workforce by over a quarter. It has already named Julie Merry as cfo and Margaret Bailey as North American head of sales.

Merry has previously worked for a number of software and consultancy businesses, including Charteris. She spent eight years at PricewaterhouseCoopers and was most recently a consultant at Four Eyes Insight.

Bailey's financial services experience covers both software sales and working within banks. She has deep post-trade and regulatory knowledge, having joined from the London Stock Exchange. She has also worked on a number of Dodd-Frank and EMIR compliance projects at Lombard Risk.

Further appointments will include senior business analysts, product developers, infrastructure engineers and key business development functions and senior sales roles.

RMBS

NCUA settlement signed

The NCUA has announced a US$225m settlement with Morgan Stanley to resolve claims arising from losses related to corporate credit unions' purchases of faulty RMBS. The settlement covers claims asserted in 2013 by the NCUA Board on behalf of US Central Federal Credit Union, Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union and Southwest Corporate Federal Credit Union.

The NCUA will dismiss pending suits against Morgan Stanley in federal district courts in New York and Kansas. Morgan Stanley does not admit fault in the settlement.

Net proceeds from this settlement and others are used to pay claims against the failed corporate credit unions, including those of the temporary corporate credit union stabilisation fund. NCUA continues to pursue litigation in federal courts in New York, Kansas and California against RBS, Goldman Sachs, UBS and Credit Suisse (SCI passim). It also has pending suits against financial firms alleging their failure to perform their duties as trustees of RMBS.

RMBS

BlackBox data, analytics acquired

Moody's Corporation has acquired the RMBS data and analytics assets of BlackBox Logic. The loan-level data and technologies will be integrated into Moody's structured analytics and valuations unit.

The enhanced residential mortgage loan data will be available through Moody's Analytics' bulk data feeds and structured finance portal. The products feature extensive loan- and pool-level data for global securitised assets, as well as cashflow analytics, risk monitoring and credit modelling tools.

ABS

Further FFELP deals extended

Navient has extended the maturity dates of six FFELP student loan ABS trusts that it sponsors. In total, US$1.1bn of bonds have had their dates extended to 2083 on both the senior and subordinated tranches, effective from 2 December.

The six trusts affected by the amendments are Navient Student Loan Trusts 2014-2, 2014-3, 2014-4, 2014-5, 2014-6 and 2014-7. The move follows Navient's amendment of the transaction agreements for 66 FFELP student loan ABS trusts, 23 of which are either on review for downgrade or on rating watch negative (SCI 18 November).

Fitch says that the latest move is not expected to affect ratings assigned to the notes issued by these trusts. All senior and subordinate notes of the trusts are rated triple-A and double-A by the agency.

ABS

Solar loan ABS anticipated

ABS secured by residential and non-residential solar financing contracts are continuing to emerge as a distinct sector of the US securitisation market, observes Moody's. Although all securitisations to date in the sector have been backed by solar leases or power purchase agreements, the agency expects solar loan securitisations to arrive next year.

"We expect further growth in ABS secured by rooftop solar contracts in 2016 and beyond," says Moody's vp and senior analyst Tracy Rice. "The key drivers of expansion will be continued strong growth of the US rooftop solar market, regulatory and policy support for solar power, as well as institutional investors' growing acceptance of the asset class."

Credit quality in new 2016 transactions is expected to be similar to this year's. The underlying residential obligors in new deals are likely to have lower FICO scores, but Moody's explains that these scores are less predictive of default for solar obligors than they are for obligors of other types of consumer asset classes. This is due to the essential nature of electricity and the economic benefits of going solar for homeowners.

In addition, loss rates on solar financing contracts are expected to remain low next year, helping to maintain the strong credit performance of outstanding transactions. This will result from the strong credit quality of the obligors, the economic benefits that obligors receive from solar and the improving macroeconomic environment. However, long-term trends in obligor payment behaviour remain unclear over the 20-year time horizon of the contracts, owing to the relatively limited credit performance history of the asset class.

The key risks for solar transactions in 2016 are listed by Moody's as operational and servicing risks, contract modification and default risks, and legislative and regulatory risks. Meanwhile, issuance volume and the number of deals will increase next year as new solar developers tap the market and existing issuers bring additional deals to market.

Structured Finance

US, European ABCP outlook 'robust'

ABCP demand remains robust heading into 2016, says Fitch. A rising interest rate environment is expected to encourage increased use of the short-term product.

There was US$226bn in US ABCP outstanding through early December, which is slightly below year-end 2014 levels and 81% below the US$1.2trn peak of July 2007. However, conduit sponsors were active and the year-over-year decline is far less pronounced than it has been in previous years.

In Europe, the outlook for major banks is stable and sponsors are expected to maintain programmes as an alternative funding source. This is despite the regulatory hurdles, as the rating agency notes that European sponsor banks "appear committed to their ABCP programmes".

Structured Finance

Japanese credit outlook 'strong'

The credit quality and performance of Japanese ABS, RMBS and CMBS should remain strong in 2016, says Moody's. A supportive job market will be key in underpinning high credit quality.

The credit quality of collateral in new consumer-related Japanese ABS - such as auto loan, instalment sales and credit card ABS - will remain strong next year, reflecting supportive labour market conditions, Moody's says. There will also be moderate economic growth and steady underwriting policies.

Moody's expects the unemployment rate to remain between 3% and 4%, with GDP likely to grow 0.5%-1.5%. Default rates for loans backing consumer ABS will remain low.

Credit quality should also remain strong for new mortgages backing Japanese RMBS as underwriting standards remain strict and there are good employment conditions alongside historically low mortgage interest rates. While credit quality will remain strong, rising home prices will be a negative for loans.

The rating agency believes that the performance of assets in outstanding RMBS deals will be stable in 2016, with delinquencies and defaults holding at low levels. Moody's expects a default rate of around 0.15% for its RMBS index pool and a 31-60 day delinquency rate of around 3%, similar to the levels seen this year.

The annualised prepayment rate for outstanding RMBS rose to an average of around 9% in 2015. Moody's believes it will fall back to 7%-8%.

CMBS default rates declined in 2015 and are expected to stay low in 2016, due to the stable performance of the underlying properties and rising property prices. Property prices have been rising for years and should continue to do so for another one or two years, says Moody's.

Structured Finance

US outlook stable with caveats

The outlook for US structured finance is stable to positive overall next year, says Fitch. However, the rating agency notes that certain subsectors bear watching for signs of trouble.

Over 87% of Fitch's rating outlooks remain either stable or positive heading into 2016 as collateral quality remains excellent, with solid performance metrics and robust structural protections. "That said, it is probably safe to assume that structured finance has seen its best days, with underwriting likely to loosen further in some sectors," notes Fitch md Kevin Duignan.

The macro outlook has dampened slightly and overall growth expectations are receding as the prospect of higher rates threatens to limit broader gains. While Fed tightening will impact all sectors, CMBS is most likely to feel the effects as refinancing needs loom.

FFELP student loan ABS is also an area of concern as widespread maturity risk issues plague the sector. As with CMBS, there are also concerns about loosened underwriting standards.

Warning signs for the US CLO market are likely to manifest in the form of slowly increasing loan defaults, says Fitch. "That said, any ripple effect for the structures should be marginal and not affect the stable outlook for the sector next year."

RMBS is continuing to recover from the financial crisis. New deal volume has reached post-crisis highs and strong home price gains should continue to boost legacy deal performance, while post-crisis RMBS loan performance remains the best in the history of the sector.

Structured Finance

KfW commits to SMEs

KfW says it plans to commit a further €1bn in 2016 to the Europe securitisation market, up from its €840m investment this year. Half of the firm's 2016 volume will go towards promoting and diversifying SME financing in Germany and Europe, which will be a substantial increase on the €190m portion spent this year in the SME area.

KfW's plans were revealed in its annual press briefing in Frankfurt as part of its broader €70bn-75bn funding plan for 2016. For securitisation, KfW underlines a growing realisation among regulators, central banks and politicians in Europe that an overly tight regulatory framework would prevent a recovery of the market.

"This paradigm shift makes me optimistic that securitisation as the link between credit and capital market will become an important building block of the Capital Market Union," says Günther Bräunig, member of the executive board of KfW.

The firm stresses that it will continue to cooperate in revitalising the market, particularly through the 'Investment Plan for Europe' and its intention to strengthen cooperation of national funding institutions and the EIB Group. Further, as a chair of the 'SME securitisation in Europe' working group, KfW says it will continue to push objectives to define standardised processes and minimum criteria for the participation of promotional institutions in securitisation transactions.

In order to complement SME financing in Europe, where possible, KfW also says that funds from the European Fund for Strategic Investments should be utilised.

Structured Finance

Chinese liquidity provisions evolving

Fitch notes that new liquidity provisions in Chinese ABS are emerging as the market continues to mature. Provisions, which include both trapping collection cashflows after closing and fund reserve accounts, could be effective in mitigating structural liquidity risks.

The agency explains that the Chinese market is divided into three different structures to mitigate this risk. A number of transactions, including the most recent auto ABS transactions issued by Ford, Volkswagen and BMW, have distinct liquidity facilities funded at closing. Other transactions have no liquidity funds at closing and trap excess upon downgrade of the originator by local Chinese rating agencies.

However, a third structure is now emerging under which cashflows will be trapped immediately after closing until the liquidity reserve is fully funded. Fitch has only assigned ratings to structures with liquidity facilities fully funded at closing, but believes that funding the facility from cashflows within the first few payment periods would be likely to mitigate liquidity risk.

Payment interruption risk refers to a disruption to the collections process affecting the ability of transactions to maintain timely payments to noteholders. This could happen due to a servicer termination or operational failure, but can be mitigated by providing cash reserves or a liquidity facility from an eligible counterparty.

Fitch notes, though, that a liquidity facility from a third party is not often used in Chinese securitisation transactions. Reserve funds are a more commonly used feature in China to mitigate payment-disruption risk.

There are two types of reserve funds. One is prefunded at closing, which is a common feature in virtually all global auto ABS transactions. The other is unfunded at closing, but can be built up by trapping excess cashflow if servicers' ratings drop below the threshold required by domestic rating agencies.

Fitch explains that Chinese ABS transactions typically have no back-up servicing arrangements in place and most Chinese ABS originators are rated much lower than their ABS bonds by international rating agencies. Servicer termination is a real possibility in higher-rating stress scenarios, causing payment disruption. However, this can also be driven by other reasons, such as system failure, which can not be addressed by funding upon servicer rating triggers.

As a result, Fitch says it has recently seen issuers looking to structurally mitigate the liquidity risk within transactions by trapping collection cashflows after closing to fund reserve accounts. The trapping of cashflows on the first payment date to fund liquidity reserves can effectively mitigate payment disruption risk.

Fitch assumes that payment disruption will last for a time period constituting the longer of three months and one payment period. For auto ABS, the cash reserve is typically sized at the 1% to 1.5% of initial collateral balance - which can be trapped, if placed on the top of waterfall - or in other cases placed after senior expenses and note interests, within the first few collection periods. The agency believes that such a structure provides investors sufficient protection against payment-disruption risk

Structured Finance

Participation certificate debuts

Sarana Multigriya Finansial has listed on the Indonesia Stock Exchange (IDX) the country's first ABS in the form of a participation certificate - known as Efek Beragun Aset Berbentuk Surat Partisipasi (EBA-SP) - an instrument introduced by the regulator last year. Dubbed SMF-BTN 01 - Kelas A, the IDR181.6bn transaction securitises housing loans provided by state-owned lender Bank Tabungan Negara.

The securities have an interest rate of 8.6% per year, a 2.08-year WAL and mature in 2022, with Bank Rakyat Indonesia acting as trustee and custodian bank for the issuance. Pemeringkat Efek Indonesia assigned triple-A ratings to the deal.

This year has seen five other issuances of ABS, structured as collective investment contracts, listed on the IDX for a total nominal outstanding of IDR².28trn.

Structured Finance

ABS, RMBS improvements expected

Improving credit quality in 2016 will benefit European RMBS and ABS, says Moody's. However, a divide is likely to emerge, as collateral performance in northern European deals outperform their southern counterparts.

Moody's notes that jurisdictions such as the UK, Germany and the Netherlands will likely be supported by better borrower affordability, low underemployment and house price growth. In Spain, France and Italy, underwriting criteria will generally remain tight, but they may ease for ABS backed by loans to SMEs.

Improving economic conditions across Europe will also give lenders the opportunity to securitise legacy portfolios. Moody's suggests that the market will accommodate the sale of sizeable legacy RMBS, as well as ABS portfolios to a lesser extent.

The credit quality of such transactions should resemble more seasoned deals, and the UK market may see a higher share of these transactions. Between January 2014 and June 2015, pools of pre-crisis legacy assets and mortgage loans originated by new entrants accounted for almost half of UK RMBS issuance, at 15 out of 33 deals in total.

Generally, issuance is expected to increase slightly in 2016. However, demand from new or former investors in the European structured finance market rests on the alignment of regulatory capital profiles commensurate with associated credit quality of ABS and RMBS. 

Finally, Moody's says that the extension of the ECB's ABSPP into March 2017 is credit positive because it will continue to support the European structured finance market as a means of funding the real economy.

Structured Finance

Positive outlook for Canadian securitisations

Moody's expects Canadian ABS and RMBS to continue performing well in 2016. The agency notes that assets backing the securitisations are mainly consumer receivables, whose performance is aligned with that of the wider economy.

Slow but steady economic growth supports Moody's positive outlook for Canadian ABS and RMBS. In particular, issuers' strong credit ratings and well-seasoned collateral pools will ensure continued good performance from Canadian credit card ABS next year. Delinquency and charge-off rates should remain low, while monthly payment rates should stay high.

Meanwhile, lengthening loan terms will have only a muted impact on the performance of Canadian auto ABS, due to positive trends in the economy and prime borrowers' credit profiles. Delinquencies and net losses will remain close to all-time lows. Moody's also expects another year of solid performance from equipment-backed deals, with the agriculture and construction sectors benefiting from ongoing economic growth.

Genesis Trust II remains the primary issuer of Canadian RMBS since its launch by Toronto-Dominion Bank in 2013. Prime obligor quality and high levels of borrower equity are expected to remain significant positive influences on the collateral performance of the transaction next year. Moody's anticipates similar deals to emerge, following the precedent set by Genesis Trust.

CDS

Split ruling for Abengoa

ISDA's EMEA Determinations Committee has made a surprise split ruling on whether a bankruptcy credit event has occurred in connection with Abengoa. The move will trigger pay-outs on CDS written under the 2003 credit derivatives definitions, but not those under the 2014 definitions.

At issue is the DC's decision to treat the Abengoa question as two separate requests in respect of the 2014 transactions and the updated 2003 transactions, even though this may have two different outcomes in accordance with Section 2.4(f) of the DC rules. As a result, the DC determined that a bankruptcy credit event occurred in relation to updated 2003 contracts, but not in relation to 2014 contracts. Further, the date of the bankruptcy credit event for the updated 2003 transactions was determined to be 25 November 2015.

The split ruling has created confusion among industry participants and ISDA is expected to clarify its decision today.

Pursuant to section 82 of the Spanish Securities Market Act, Abengoa informed the Spanish Securities Market Commission of its decision to seek insolvency protection in a communication filed on 25 November.

CDS

Abengoa decision explained

ISDA's EMEA Determinations Committee has published a statement that details the background to its split decision regarding an Abengoa bankruptcy credit event (SCI 9 December). The statement reveals the DC's consideration of the nature of the filing of an Article 5bis communication and the effect it has on the debtor filing it. Abengoa filed on 25 November a communication pursuant to Article 5bis of the Spanish Law 22/2003 of 9 July 2009 on insolvency.

In circumstances where the relevant debtor has entered into restructuring negotiations with its creditors, Article 5bis allows the debtor to request from the court a three-month grace period in order to conclude those negotiations and to attempt to resolve its financial difficulties informally with its creditors. During this three-month period, the duties of the directors of the debtor do not change and the obligations of the debtor continue to fall when due, though its obligation to file for insolvency is suspended.

If the debtor is solvent after the three months, it is not required to file for an insolvency declaration. However, if its difficulties cannot be resolved within the three-month period, the debtor must file an insolvency request no later than one month after the conclusion of the three-month period.

No enforcement proceedings may be commenced during this period in respect of any of the debtor's assets necessary for the continuation of its business, while any legal proceedings initiated before the filing will be suspended. Further, no individual financial creditor may initiate enforcement action if creditors holding 51% or more of the debtor's financial liabilities have agreed to negotiate a refinancing agreement with the debtor. However, commercial and public law claims may still be brought in this period, while the fact that the debtor's payment obligations are not suspended means that any default in respect of them can be addressed and accelerated.

With respect to Limb (d) of the definition of bankruptcy credit event in Section 4.2 of the 2014 Definitions, the DC says it was of the view that the reference entity - having filed an Article 5bis communication with the relevant court - would constitute the "[institution of] a proceeding". The law under which the Article 5bis communication is filed is the Spanish Insolvency Law. The DC Question in relation to 2014 CDS transactions therefore turned on whether the relief sought was "similar" to that of a "judgment of insolvency or bankruptcy".

The DC was of the view that the relief granted by the filing of the Article 5bis communication is not a relief sufficiently similar in effect to that of a judgment of insolvency or of bankruptcy. It also noted a number of differences between the effect of filing an Article 5bis communication and the effect of initiation of an actual declaration of insolvency under the Spanish Insolvency Law. Accordingly, the DC resolved that a bankruptcy credit event had not occurred with respect to the reference entity in relation to 2014 contracts.

Regarding Limb (d) of the definition of bankruptcy credit event in Section 4.2 of the Updated 2003 Definitions, the DC was of the view that the filing of an Article 5bis communication would constitute the "[institution of] a proceeding" and that the law under which the communication is filed is an insolvency law. Under the Updated 2003 Definitions, the additional requirement in order to constitute a bankruptcy credit event is that the relief sought be "a judgment of insolvency or bankruptcy or any other relief".

Unlike under the 2014 Definitions, there is no requirement in the wording of the provision that the relevant relief be similar to a judgment of insolvency or bankruptcy. The DC noted the distinction in drafting between the 2014 Definitions and the Updated 2003 Definitions and was of the view that the relief sought pursuant to the filing of an Article 5bis communication did constitute such "other relief", considering the enforcement restrictions resulting from the filing. Accordingly, the DC resolved that a bankruptcy credit event had occurred with respect to Abengoa in relation to Updated 2003 credit derivative transactions.

The DC agreed to hold a vote on a future date to be determined as to whether to hold an auction in relation to updated 2003 transactions.

CLOs

Deutsche debuts landmark CLO

Deutsche Bank has closed a US$3.5bn synthetic CLO, which it claims is the largest-ever securitisation of trade finance assets to hit the market. TRAFIN 2015-1 uses an innovative structure that enables it to hedge a globally diverse short-term trade finance portfolio of corporate and financial institutions via the sale of a first loss tranche.

Deutsche structured, arranged and placed the first loss notes, building a syndicate of seven key investors from Europe and the Americas. The bank says it is the third synthetic CLO it has issued.

Given the short-term nature of the underlying assets, the portfolio will be regularly replenished. The transaction's structure enables a broad range of assets to be included, which provides the bank with flexibility to further develop de-risking activities.

Part of the purpose behind Deutsche's TRAFIN platform will be to allow it to scale and industrialise its hedging, leading to more efficient balance sheet management of its trade finance business. The transaction is also aligned with the bank's strategic aims of reducing risk weighted assets.

CMBS

SB offering innovates again

Freddie Mac has priced its largest small balance loan offering to date and the first to include collateral from multiple lenders. The GSE will provide approximately US$400m in SB9 Certificates, which are anticipated to settle on 22 December.

Freddie is guaranteeing four classes of senior notes issued by FRESB 2015-SB9 Mortgage Trust and is acting as mortgage loan seller and master servicer. The pool consists of 155 mortgages, which are originated by Arbor Commercial Mortgage and Greystone Servicing.

The four senior tranches comprise: the A5 tranche (US$236.41m in principal), A7 (US$12.29m), A10 (US$152.02m) and X1 (US$445.24m). Three of the classes will hold principal and interest, with the latter an interest-only class.

The trust will also issue certificates for class B, X2A, X2G and R certificates. These will not be guaranteed by Freddie Mac and will be sold to private investors.

The deal is the latest in Freddie's SB programme, following the launch of the first deal earlier this year (SCI 4 August). Freddie's vp of multifamily capital markets, Mitchell Resnick, says that additional innovations will be applied to the programme as the GSE looks to shift further risk from taxpayers to private capital markets.

Bank of America Merrill Lynch was lead manager and bookrunner on the deal.

CMBS

CMBS liquidations nudge up

Total US CMBS loan dispositions rose slightly in November, but still came in below the US$1bn mark, notes Trepp. Average loan size declined from US$16.1m in October to US$13.1m in November.

There were 72 loans - totalling US$941.9m - liquidated with a loss in November. Of these, five - totalling US$59.6m - were hit with losses greater than 100%, while there were 100% losses for a US$14.3m B-note and a US$1.6m C-note.

The US$88.8m Trinity Hotel Portfolio (Rollup) took an 86.63% loss (see SCI's CMBS loan events database), while the US$24.1m Memphis Industrial Portfolio (Rollup) took a 94.02% loss. The US$43.6m Palm Beach Mall loan securitised in JPMCC 2003-PM1A realised a 101.32% loss.

Average loss severity was 44.06%, compared to 40.73% in October. Ignoring losses of less than 2%, volume was US$745m, with a loss severity of 55.47%.

CMBS

StuyTown gets FNMA funding

Fannie Mae is set to provide a US$2.7bn loan to help finance the acquisition of Stuyvesant Town/Peter Cooper Village after a recent surprise agreement was reached to sell the property (SCI 21 October). The financing of the sale will come through an affiliate of Blackstone securing the loan from Wells Fargo Multifamily Capital - a Fannie Mae-delegated underwriting and servicing (DUS) lender. The loan will be a 10-year, low-levered commitment.

Fannie says that financing the residential community will help New York maintain 5,000 rental units that are affordable to moderate-income residents over the next 20 years. It also notes that the transaction possesses a premier and strong sponsor, and solid public support from the City of New York and its Housing Development Corporation.

"This deal would not have been possible without Fannie Mae because there are very few financing sources in the marketplace with the expertise to execute these types of transactions," explains Alan Wiener, group head of Wells Fargo Multifamily Capital Group.

CMBS

CMBS pay-offs dip

The percentage of US CMBS loans paying off on their balloon date fell modestly last month to 76%, less than a point below the October number and above the 12-month moving average of 68.1%, according to Trepp. By loan count as opposed to balance, 77.1% of loans paid off in November.

On this basis, the pay-off rate was above October's level of 74.9%. The 12-month rolling average by loan count is now 68.7%.

CMBS

CPPI continues upwards trend

The Moody's/RCA Commercial Property Price Indices (CPPI) national all-property composite index increased by 0.4% in October, extending its streak of double-digit annualised gains to 33 months. Central business district (CBD) continues to be the best performing segment.

"The price recovery has been under way for more than five years, but is getting long in the tooth," says Moody's CRE research director Tad Philipp. "We expect the pace of appreciation to decelerate in the near term, particularly once interest rates start to rise."

CBD prices are up 5.6% over the past three months. Retail prices are up 3.8%. Commercial property price now exceed their pre-crisis peak by approximately 10%, while apartment prices are approximately 34% above their prior peak.

CMBS

Loan drops increasing

In a sample of 28 US CMBS it rates for the 12-month period ending 30 June, Fitch observed approximately 1,000 loans that were dropped between the initial data tape and final tape, representing approximately 30% of the final transaction amount. While it is not unusual for a pool to change from initial proposal to final pool cut, the agency notes that the number of iterations has increased materially over the past 12 months.

The majority of the dropped loans were sized at under US$20m. Larger loans that drop from pools will have a more significant impact on the overall deal metrics, including Fitch loan loss estimates that drive credit enhancement. That means pools experiencing a sizable number of large loan drops may have significantly different credit characteristics and, as such, credit enhancement between Fitch's initial feedback and when expected ratings are published.

It is not unusual for loans to be dropped from a pool. A property may experience last-minute changes to its tenancy, including the borrower's not securing signed leases in time; competition to make the loan from other lenders providing more favourable loan terms; or simply shaping the loan pool to provide better property, geographic and originator diversity. Often a loan is dropped from one pool, only to reappear in a subsequent pool as the cause for the delay is remedied.

However, Fitch is concerned that the numerous loan drops could indicate a lack of lender due diligence prior to sending the initial loan information to rating agencies and B-piece buyers. There is speculation that some originators may be using B-piece buyers and rating agencies as initial providers of credit feedback; less favourable feedback indicates to the potential originator that it's not worth proceeding with the loan process. As part of its originator reviews in 2016, Fitch says it will ask originators about the depth of their due diligence efforts for loans that appear on the initial tape, accompanied by a one-page asset summary.

Insurance-linked securities

MultiCat losses likely

S&P has lowered to single-D from triple-C minus its rating on MultiCat Mexico series 2012-I class C notes and removed it credit watch negative. The downgrade is due to Swiss Re's request for an extension of the maturity of the notes, which were scheduled to mature on 4 December.

The catastrophe bond's maturity will now automatically extend by one month each month through to June 2016, unless Swiss Re requests that the maturity is not extended. The extension will reduce the annual interest spread on the notes to 3% from 7.5%.

Even in the event that there is no reduction in principal following a qualifying event, noteholders will now receive a lower coupon payment. In accordance with its rating criteria, S&P considers this as a coupon step-down and has therefore lowered the rating on the class C notes.

The credit watch placement reflected that a triggering event may have occurred after Hurricane Patricia made landfall on 23 October near Manzanillo in Mexico (SCI 6 November). Swiss Re submitted an event notice to the calculation agent AIR Worldwide Corp and asked it to generate an event report. The extension will allow AIR to publish its event report before the final legal maturity of the notes.

AIR has 15 business days after the hurricane event parameters date to publish its event report. This date is defined as either the release date of the first tropical cyclone report by the National Hurricane Center (NHC) containing all the information necessary to determine if Hurricane Patricia is a covered event, or 120 days after Hurricane Patricia made landfall.

Based on the event definition in the transaction documents, a triggering event occurs when the central pressure of the hurricane is equal to or lower than 932 millibars. S&P reviewed an update from the NHC that indicated a reading of 920 millibars at one station located at 19.4N 105.0W, which falls within the covered area. The transaction documents state that noteholders would lose 50% of their principal amount if the central pressure is between 932 and 920 millibars, and 100% if it is lower than or equal to 920 millibars.

NPLs

Latest SPO sale completed

Freddie Mac has sold via auction 5,311 deeply delinquent non-performing loans (NPLs) serviced by Wells Fargo from its mortgage investment portfolio as part of its standard pool offerings (SCI 10 November). The transaction is expected to settle in February, after which servicing will be transferred.

The loans have been delinquent for around three years and have an aggregate loan-to-value ratio of approximately 91%. Given the deep delinquency status of the loans, the borrowers have likely been evaluated previously for or are already in various stages of loss mitigation or foreclosure. Mortgages that were previously modified and subsequently became delinquent comprise about 32% of the aggregate pool balance.

The loans were offered as five separate pools and investors had the flexibility to bid on one or multiple pools, or bid on the aggregate of the pools. Pretium Mortgage Credit Partners I Loan Acquisition was the winning bidder for Pool 1 (US$330.5m UPB, comprising 1,777 loans), 2 (US$211.3m, 954 loans) and 5 (US$116m, 645), for which cover prices were high-80s, high-60s and low-60s respectively.

Rushmore Loan Management Services won Pool 3 (US$184.1m, 942 loans), while 21st Mortgage Corp won Pool 4 (US$214.2m, 993 loans). Cover prices for the latter two pools were low-50s and low-60s respectively.

Advisors to Freddie Mac on the transaction were Wells Fargo, JPMorgan and First Financial Network.

Separately, Freddie Mac has added all fixed-rate single-family mortgages to its single-family loan-level dataset, which now includes 21.5 million loans originated through 31 December 2014. The expanded dataset contains credit performance data on approximately 3.3 million 15- and 20-year fixed-rate single-family mortgages originated from 1 January 2005, plus approximately 18.2 million 30-year fixed-rate single-family mortgages originated from 1 January 19999.

Kevin Palmer, svp of credit risk transfer at Freddie Mac, comments: "Providing investors with this expanded view of credit risk for additional fixed-rate single-family mortgages will enable us to grow and evolve our credit risk offerings by expanding the products available for risk transfer and increasing the amount of risk transferred to private investors. Releasing this data now will help give potential credit investors sufficient time to analyse Freddie Mac's actual loss performance."

Risk Management

Basel tweaks standardised approach

The Basel Committee has issued a second consultation on revisions to its standardised approach for credit risk. The regulator says that its proposals are part of a broader review of the capital framework to balance simplicity and risk sensitivity, while reducing variability in risk-weighted assets across banks and jurisdictions.

Among the revisions, risk weighting of real estate loans have been modified, with LTV as the main risk driver. However, the Committee has chosen to drop DSCR as a risk driver, citing the challenges of defining and calibrating a global measure that could consistently apply across jurisdictions.

Instead, the Committee proposes requiring the assessment of a borrower's ability to pay as a key underwriting criterion. In addition, it proposes to categorise all exposures related to real estate, including specialised lending exposures, under the same asset class. This will be in line with applying higher risk weights to real estate exposures where repayment is materially dependent on the cashflows generated by the property securing the exposure.

The proposals also underline exposures to multilateral development banks, retail and defaulted exposures, and off-balance sheet items. The credit risk standardised approach treatment for sovereigns, central banks and public sector entities are not within the scope of these proposals, however.

Finally, the revisions include the reintroduction of external credit ratings after concerns were aired over the original proposals for a complete removal in references. Ratings will now be referenced in a non-mechanistic manner for exposures to banks and corporates. The revised proposal also includes alternative approaches for jurisdictions that do not allow the use of external ratings for regulatory purposes.

The Committee says it will conduct a comprehensive quantitative impact study (QIS) in 2016. All calibrations will be subject to review based on evidence from the QIS, to ensure adequate capitalisation and overall consistency with other components of the capital framework. A missing update has been that on capital floors, but the Committee has left open the possibility for further implementations prior to finalising its proposals.

Comments on the revisions are invited by 11 March 2016.

RMBS

TRID violations prompt concern

US mortgage lenders could face a tough time complying with the US CFPB's recently enacted TILA-RESPA Integrated Disclosure Rules (TRID), according to Moody's latest credit outlook publication. Several third-party review (TPR) firms have revealed to the agency that over 90% of the first pipeline of residential mortgage loans subject to TRID that they reviewed had TRID compliance violations, albeit many of them were only 'technical' in nature.

This is credit negative in Moody's view, because it increases the likelihood that loans with compliance violations will be included in future RMBS pools. The extent to which such violations would increase losses for RMBS remains unclear without further interpretation by the courts or the CFBP, but difficulty complying with TRID may result in delayed issuance of new securitisations due to issuer concerns about including loans with compliance violations.

TRID requires mortgage lenders to provide new and expanded loan estimates and closing disclosures to consumers within specific time frames. Its purpose is to ensure that consumers clearly understand the cost and risk of the proposed mortgage loan and have a chance to shop for a more suitable product. Moody's explains that TRID arguably expands the amount of erroneous information for which a secondary market purchaser, including an RMBS trust, is liable.

The informal feedback to Moody's from TPR firms was based on reviews of around 300 loans from more than a dozen unidentified lenders. Since the third parties performed these reviews for transactions not connected with a securitisation, the agency did not see the actual diligence results. But the fact that all such firms noted a large portion of the loans had notable violations could be significant.

Many of the violations were reportedly technical in nature, such as the need to use the same spelling convention for counterparties or the absence of a required hyphen. However, the TPR firms still believed that the violations were material because the extent to which a secondary market purchaser, such as an RMBS trust, would bear damages or costs from delayed foreclosures is unclear without further court or CFPB interpretation.

In a more positive light, Moody's says that a number of technical violations should decline over the next several months as lenders adjust their loan origination systems to comply with the rule's nuances. Some of these violations are also likely to be low risk. Even if TRID confers assignee liability for technical violations, the risk of significant damage from them remains low, and it is unlikely that courts will hold up a foreclosure or award damages for these kinds of violations.

Further, a transaction would be protected from this risk if features such as representations and warranties or indemnification required a creditworthy entity to reimburse the RMBS trust for any losses resulting from violations of the rule. On the other hand, Moody's believes that violations related to incorrect settlement fees - which previously did not carry assignee liability under the Real Estate Settlement Procedures Act - now carry higher risk under TRID.

RMBS

ARP 2014-SFR1 supported

The American Residential Properties and American Homes 4 Rent merger (SCI 4 December) is credit positive for ARP's single-family rental securitisation, according to Moody's in its latest Credit Outlook publication. The deal - American Residential Properties 2014-SFR1 - is expected to benefit from improved economies of scale and better refinancing opportunities.

The combined entity will have more than 47,000 homes worth over US$8bn in total, making it the largest US operator of SFR homes. After AMH, the next-largest SFR operators are Invitation Homes (with around 45,000 homes) and Starwood Waypoint (with around 30,000 homes).

The combined company's scale and property-density profile will increase, reducing expenses on property maintenance contracts and other property and tenant management expenses on ARP's legacy portfolio in particular. As a result of the merger, the combined company will manage overlapping operations in 16 of each company's top 20 metropolitan SFR markets.

The merger will strengthen ARP's current holdings in nine of these overlapping markets. For example, in Jacksonville, Florida, the 15 properties under ARP management will combine with AMH's 1,546 properties for a total of 1,561 properties under management.

Lower per-unit property maintenance costs increases the cashflow available to service securitised debt. The transactions also benefit from any operational efficiencies achieved for the overall portfolio of the combined company.

The combined company will manage properties for securitised transactions in 67 MSAs and two non-metro areas. The two companies have no overlap in 52 of these MSAs, but both have operations in the remaining 15.

According to a joint presentation by AMH and ARP management, the merger will cut 80% of ARP's general and administrative expenses. Based on annualising the nine months that ended 30 September 2015, the saving totals approximately US$14m for ARP operations on 8,938 properties.

It is unclear how much of the savings will directly apply to property management-related expenses applicable to the securitised transaction. However, assuming 20% property-level savings to the securitisation implies a property expense reduction of US$318 per property, Moody's estimates that this should increase ARP 2014-SFR1's DSCR by approximately 10bp to a pro forma 2.27x.

The agency adds that management of ARP 2014-SFR1 by a larger, more efficient operator and a better capitalised corporate entity enhances the deal's refinancing prospects. The merger also increases the size of the portfolio managed by AMH.

"One risk that we have evaluated in our past research is whether an exit by any given operator introduces a property price contagion risk in a given MSA. Our research suggested that while this risk is growing, SFR property holdings by all the institutional investors combined is still manageable in relation to the size of the local real estate market in nearly all of the MSAs," Moody's concludes.

RMBS

Irish real estate portfolio unloaded

RBS subsidiaries Ulster Bank and Ulster Bank Ireland will dispose of a portfolio of Irish real estate loans to a subsidiary of Cairn Homes and an affiliate of Lone Star Funds for £360m. Completion is expected by the end of the year.

The transaction represents the equivalent of £700m in risk-weighted assets as at 31 December 2014 and is part of the continued reduction of assets by RBS, in line with the bank's plan to strengthen its capital position and reduce higher risk exposures.

The carrying value of the loans as at 31 December 2014 was approximately £115m. The gross assets were approximately £1.63bn and the loans generated a loss of approximately £28m in the year to 31 December 2014. The transaction is expected to generate a gain compared to carrying value of approximately £245m after associated costs, which will be recognised in 4Q15.