Contents

ABS

Black whole

Whole business securitisation treatment unclear

The path to eligibility remains unclear for whole business bonds when it comes to the securitisation criteria under Solvency 2. This has stalled new issuance and prompted pricing instability.

"The regulators' sentiment on securitisation has somewhat reversed course and it is clear that certain types of securitisation are now seen more favourably," says Conor Downey, partner at Paul Hastings. "However, there has always been difficulty in accurately defining such a complex financial structure and it has led to a generalised definition within regulations, such as Solvency 2."

This, he says, has led to difficulty in distinguishing between the treatment of particular types of transactions. Whole business bonds appear to be falling into this grey area, yet there is no expectation of any clarification in the immediate regulatory pipeline.

Barclays credit analysts suggest the likelihood is that most whole business bonds will not be considered as securitisations under Solvency 2. This is due to two factors: first, such assets are secured on single loans, rather than a pool of loans; and second, the performance risk of whole business bonds is considered to be corporate credit.

"Most multi-tranche deals would fall within the definition of 'securitisation' under the regulations, so whole business deals should be included," says Downey. "However, whole business deals do not seem to meet the eligibility criteria for treatments as high quality securitisations. So these transactions will not receive the beneficial capital relief treatment given to eligible high quality deals."

He adds that most whole business bonds would in principle be eligible for purchase under the ECB's ABSPP, but the bank has not made any actual purchases in this segment of the market. This could be suggestive of policymakers' views on the future treatment of whole business bonds.

"The ECB's programme uses agents to determine eligibility of the assets prior to purchase," Downey explains. "We understand that applications have been made for a variety of types of securitisation, but they have not yet accepted any whole business deals. Some reports suggest that this may be part of a wider policy."

In the meantime, the fallout has prompted weakened pricing on whole business bonds. Insurance and pension funds are therefore faced with the prospect of pricing bonds when they cannot be sure if these bonds will be treated as a high quality securitisations.

"Holding a whole business bond could be more expensive than holding bonds in many other types of securitisation if this treatment is not available. As such, these investors have little incentive to invest in these securities right now," says Downey.

What little new WBS issuance there was has stalled during this quarter, with a number of expected transactions being put on hold. "It will be interesting to see how pricing responds as these transactions begin to be issued into 2016," Downey adds.

Refinancings of whole business deals are also being pushed back amid the uncertainty. Prime candidates for refinancing are the Green King class A5s, which pay a margin of 250bp, and the Spirit A2 bonds paying a 270bp margin. However, the Barclays analysts note these deals have significant swap breakage costs, which would negatively affect balance sheet metrics, even if cashflow and earnings are improved from the refinance.

Greene King is also expected to refinance the A6 and A7 bonds within the Spirit securitisation as the margins currently paid on these bonds are 390bp and 330bp respectively. But the analysts suggest a likely refinancing in 1H17, given that Spirit's securitisation goes into dividend block from September 2018 if the A6 and A7s are not refinanced.

In contrast, growing sales for Greene King - along with an improved forecast in synergies from £30m to £35m in connection with the takeover of Spirit - has led to suggestions that the pubco could issue further securitisations shortly. The synergies for the Spirit merger are expected to pass through the Greene King and Spirit securitisations, since the management service and intra-group supply agreements are based on cost plus margin. The improving cost efficiencies could then be seen as improving returns on Spirit's securitisation.

However, the analysts note that any new issuance will still likely be delayed until 2Q16. Although they do not rule out the issuance of debentures at the group level, they suggest that Greene King will wait for the dust to settle on Solvency 2 before committing cost and time to opening up a new funding route.

Downey, on the other hand, says issuance shouldn't necessarily be ruled out for 1Q16. With three to four CMBS already due in the New Year, he believes it wouldn't be surprising to see some whole business deals follow.

"There is the possibility that some issuers think it is worth taking a gamble by bringing some paper to the market and seeing what they can get," he concludes.

JA

Secondary markets

Euro secondary stays slow

It was, as anticipated, another quiet day in the European securitisation secondary market on Friday and today looks likely to be little different.

Year-end liquidity thinning continues to hold sway across all sectors. However, market tone remains positive despite broader credit weakness and secondary spreads are generally holding up.

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

Secondary markets

Euro secondary hangs on

European securitisation secondary spreads are mostly hanging on despite increasing broader market volatility but there are some signs of softening.

In the end, a handful of BWICs emerged yesterday and provided the main focus. However, the highlight, a double-B CLO list, for the most part did not trade. The covers released indicated spread widening in the sector, though the trend will be re-examined more closely today with a heavier auction calendar in that area.

Off-BWIC activity remains very limited. Once more Prime assets are seeing most action and spreads across deal types are holding firm. At the same time, higher beta paper in general showed signs of softening yesterday.

There are currently six BWICs on the European calendar for today. One is a euro and sterling RMBS mix and the other five are mezz CLO auctions.

The Three line RMBS list is due at 15:00 London time and comprises: €3.8m CFHL 2014-1 E, €5m CFHL 2015-2 E and £7m SLT 1 E. None of the bonds has covered with a price on PriceABS in the past three months.

The largest of the CLO BWICs is an 11 line €56.95m combination of 1.0 and 2.0 double-Bs. It consists of: CADOG 6X E1, CORDA 2006-1X E, CORDA 3X E, CRNCL 2015-5X E, DALRA 4-X E, EGLXY 2013-3X E, EGLXY 2015-4X E, OHECP 2015-3X E, PENTA 2007-1X E, PENTA 2015-2X E and SKELL 2006-1X E.

Three of the bonds have traded with a price on PriceABS in the last three months. They last did so as follows: CADOG 6X E1 traded at 90H on 10 December; PENTA 2007-1X E covered at 92H on 7 December; and SKELL 2006-1X E covered at 95.03 on 18 September.

Secondary markets

US CLO supply surge

After a quiet few days US CLO BWIC supply has picked up today.

"We're seeing a lot more lists today," says one trader. "I don't think it's anything to do with the Fed tomorrow, it looks like it's just sellers trying to get in ahead of any more bad stuff in commodities."

List volume aside, the market is exhibiting the same patterns as recent weeks, the trader says. "We continue to see tiering in bonds that have excessive oil and gas or metals and mining exposure; as well as those involving pharmaceutical names such as Valiant; and there's even some skittishness around retail names now too. Overall, it's just what's been on the increase over the past month or so - buyers are going through the loan portfolios in ever more granular fashion."

Nevertheless, the trader adds: "For decent bonds secondary spreads remain firm. Until this moment at least, CLOs haven't seen the spread carnage there's been in corporates."

There are eight BWICs on the US CLO calendar for today. The chunkiest of which is a seven line $67.555m mixed 1.0 list due at 16:30 New York time. It comprises: ARES 2007-11A C, CNOVA 2007-2A B, GALE 2007-4A C, JFIN 2007-1A C, OHAPA 2007-1A D, STCLO 2007-6A C and WESTW 2007-2A A2. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

Euro secondary split

Activity and price direction in the European securitisation secondary market is currently split in two key sectors.

"In common with broader credit, overall volumes are low and liquidity is very thin," says one trader. "It's a result of both the time of year and the volatility in global markets."

However, within securitisation secondary it continues to be a story of two markets - prime and CLOs. "In prime, volumes remain thin but spreads are holding up quite well," the trader reports. "Apart from the usual areas, CMBS prices are up and autos are doing a bit better, while overall positive prime tone was reinforced when a mixed BWIC yesterday afternoon traded quite well."

CLOs on the other hand are seeing plenty of volume, says the trader. "There's been something like €150m in BWICs over the past week. That's a lot of paper especially as it was concentrated in sub-investment grade, mainly in the double-B area."

The trader continues: "We're seeing sellers for a variety of reasons but it does include a couple of forced sellers. The increased supply combined with market volatility has meant spreads have widened - for example, 2.0 double-Bs went from 620 last week to 650 on Monday and are now at 655."

There is now hope of some retracement, the trader adds. "We could see some narrowing now as it looks to be getting a bit quieter and the BWIC calendar is easing up. Though we are still hearing rumours that the new Oak Hill deal is aiming to price this year, but that could still be postponed because of current volatility."

There are currently two BWICs on the European schedule for today. First, at 11:00 London time is a single £1m line of NGATE 2007-2X M, which hasn't appeared on PriceABS before.

Then, at 15:00, is a five line combination of single- and double-A CLOs, comprising: €2m AVOCA III-X C, €3.5m CADOG 1 C, €4m EV7 1-X B1, $2.035m EV7 1-A B2 and €7m MERCT III-X A3. Only EV7 1-A B2 has covered with a price on PriceABS in the past three months - at 93 on 16 November.

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

Secondary markets

US CLOs lose momentum

The US CLO secondary market looks to have lost its momentum as quickly as it appeared yesterday.

The high proportion of DNTs seen across yesterday's BWICs combined with broader market volatility looks to have stemmed selling volume for now. As the market awaits the Fed later today there are only two CLO auctions due and only limited bilateral activity elsewhere. While there are signs of a pick-up in the BWIC calendar again tomorrow year-end liquidity challenges are likely to continue to be an issue.

Both of the lists currently due for today are set for 12:00 New York time. One is a four line $5+m original face mezz list comprising: BAKR 2005-1A D, BRDG 2006-1A D, SFORK 2005-1A B and SYMP 2007-3A E. Only BAKR 2005-1A D has covered on PriceABS in the past three months - at 96.75 on 16 November.

The other list involves $48+m original face across three 1.0 triple-As - ABERD 2008-1A A, MTWIL 2007-2A A2 and WCHC 2007-1X A1A. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary chugs along

Despite wider credit market volatility the European securitisation secondary market is still maintaining its course.

"We've kept going - there have been a few BWICs, but none of the volatility of broader markets," says one trader. "Flows have been light, but we're still chugging along."

Overall, the trader adds: "Tone remains constructive and technicals are helping the market. We've got the Granite call in a couple of days, which has created a demand for paper in that sector. At the same time, there is a sense that the Street is looking to add, especially European bonds, into the turn of the year."

Consequently, for the most part secondary spreads are holding up. "The heavy supply in mezz CLOs has meant some weakness there but generally we're unchanged to slightly better," the trader says.

There are currently four BWICs on the European schedule for today. First at 13:00 London time is a mix of RMBS seniors - $25m PARGN 9A AC, €27m PARGN 13X A2B, £15m PARGN 13X A2A and €7m LUSI 5 A. Two of the bonds have covered with a price on PriceABS in the past three months - PARGN 13X A2B at 89.28 on 24 November; and PARGN 13X A2A at 88.5 on 20 October.

Then, at 14:00 is a single €7.1m line of CLO STRAW 2007-1X D. The tranche hasn't appeared before on PriceABS.

At 14:30 there is another mixed RMBS list involving €25m original face across three line items - BCJAF 9 C, EHME 2007-1 A and MAGEL 4 D. None of the bonds has covered on PriceABS in the past three months.

At 15:00 is a ten line €19m single- and double-B CLO auction, It comprises: ARESE 7X E, DRYD 2014-32X E, DRYD 2014-32X F, HOLPK 1X D, HOLPK 1X E, JUBIL 2014-12X E, OHECP 2015-3X F, RYEH 1X F, SPAUL 4X D and SPAUL 4X E. Three of the bonds have traded with a price on PriceABS in the past three months - ARESE 7X E covered at 81H on 3 December; DRYD 2014-32X E traded at 91H on 10 December; and JUBIL 2014-12X E traded at H92H on 10 December.

Secondary markets

US CLOs equity focused

Post Fed lift-off activity has picked up a little across the US CLO secondary market, but it is the equity space that is attracting the most focus today.

"There are few more lists around today than yesterday," says one trader. "It's mostly tidy up activity and volumes are relatively low, but there will be a lot of interest in the equity space."

The trader continues: "Everything with the Fed played through as expected, so it's factored in for the most part, but the rise will have the biggest impact on equity because of Libor floors. So, we're now into price discovery mode in the new rate environment for the bottom of the stack."

There are a couple lists already due today to help with that discovery, the trader notes. "There is a large equity OWIC from a hedge fund this morning and then a small size equity BWIC later in the day. So, everyone will be looking to see if anything actually trades on either."

Anything doing so is far from a foregone conclusion, the trader suggests. "There is definitely interest in equity at a level, I'm just not sure that it is one at which sellers are willing to sell. So, we could continue to see a stand-off in the sector."

Overall, there are six BWICs on the US CLO calendar for today so far. The equity list is due at 14:00 New York time and involves $2m each of ACASC 2014-1I SUB, APID 2014-18I SUB and OZLM 2014-6I SUB. None of the bonds has covered on PriceABS in the past three months.

The OWIC is due by 11:00 and involves up to $851.023m across 15 line items. It comprises: ALM 2013-8X PREF, BLUEM 2013-2X SUB, BOWPK 2014-1X SUB, BRCHW 2014-1A SUB, DRSLF 2014-31X SUB, DRSLF 2014-33X SUB, GOLD8 2014-8X SUB, MCLO 2013-5X SUB, MCLO 2014-6X SUB, MCLO 2014-7X SUB, MDPK 2014-12A SUB, MDPK 2014-13A SUB, MDPK 2014-15A SUB, SHSQR 2013-1A SUB and THRPK 2014-1A SUB.

Secondary markets

Euro secondary stalls

Activity in the European securitisation secondary market has stalled.

Year-end illiquidity was fully in evidence yesterday with an extremely slow day across the board and secondary spreads closed unchanged. Italian and Dutch paper did garner some interest, but saw negligible trading.

There is currently one BWIC on today's European schedule - a single €1.9m line of QUADF 2011-1 A1 due at 10:00 London time. The Italian RMBS tranche hasn't appeared on PriceABS in the past three months.

Secondary markets

US CLOs unclear

Little price clarity was achieved in yesterday's US CLO secondary market, but supply keeps coming.

No pricing colour was released for the majority of yesterday's bonds in for the bid leaving pricing levels post Fed lift-off still unclear. In the equity space, where prices are most heavily impacted by rate rises, of the three line items on BWIC only one had a cover provided - APID 2014-18I SUB at LM50s.

Meanwhile, all the line items on the large OWIC did not trade. Of those, three had no offer made - GOLD8 2014-8X SUB, MDPK 2014-12A SUB and THRPK 2014-1A SUB.

Nevertheless, sellers continue to emerge and are making it look like it could be a busier than usual Friday. There are already four US CLO BWICs on the calendar for today providing a range of assets and vintages, but nothing below the middle of the stack so far.

The chunkiest auction is due at 11:00 New York time and involves 1.0 double-As to triple-Bs. It totals $60.325m across seven line items - ACACL 2007-1A C, BATLN 2007-1A D, CLRLK 2006-1A C, GCLO 2006-1A A2, JASPR 2005-1A C, KKR 2007-1A D and PRIM 2007-2A C. Two of the bonds have covered on PriceABS in the last three months, last doing so as follows: ACACL 2007-1A C at VL95H on 1 December; and KKR 2007-1A D at H99H on 16 November.

ABS

Market supports benchmark change

A majority of US ABS and CMBS market participants would support switching the pricing benchmark from the swaps curve to US Treasuries, according to a JPMorgan survey. Of the respondents, 61% favour a switch, while 28% advocate sticking with swaps.

The survey was fairly representative of the ABS investor base, with money managers accounting for 47% of respondents (compared to around 64% of all 2015 new issue purchases), insurance companies accounting for 20% (compared to 12% of purchases), hedge funds accounting for 15% (compared to less than 2%, making this the most over-represented group), banks 10% (12%), pension funds 4% (also 4%) and other investor types 4% (6%). Support for switching was at around 60% for banks and money managers.

Hedge fund respondents were most supportive of sticking to a swaps benchmark as that group voted 64% in favour of swaps and just 36% for Treasuries. It was very different for insurance companies, who backed Treasuries over swaps by 84% to 11% (with 5% indifferent).

ABS and CMBS portfolio holdings were under US$1bn for 28% of respondents, US$1bn-US$5bn for 31% of respondents, US$5bn-US$10bn for 24% and over US$10bn for 17%. Greater ABS and CMBS holdings generally correlated with greater support for using Treasuries as a benchmark.

Support for Treasuries was 60% for investors with US$1bn-US$5bn, 65% for investors with US$5bn-US$10bn and 81% for investors with over US$10bn. The smallest investors were roughly evenly split between swaps and Treasuries.

"Switching pricing benchmarks could involve more complexity if market participants have to unwind/change existing portfolio hedging strategies," JPMorgan ABS analysts note. The survey results show 40% of respondents do not hedge rates on their ABS and CMBS books.

Those that do hedge generally use a mix of instruments, with 62% using Treasuries, 72% using swaps and 64% using futures. A third of hedgers rely exclusively on one instrument.

Half of banks only use swaps to hedge, with an additional 20% using all three instruments. 86% of hedge funds hedge their books, with 71% using swaps. Only 42% of insurance companies hedge, while 60% of money managers do.

JPMorgan RMBS analysts note that mortgage pricing has followed Treasuries more closely than swaps in recent months, with the sharp flattening in the swap curve raising concerns about the right valuation framework and benchmark. Switching to Treasuries has implications beyond just the benchmark, as it could derail the entire valuation framework and require a new one, they say.

"The recent shift in investor base away from real swap-based investors to those who hedge more with Treasuries is far too recent a trend to expect remaining RMBS hedgers to cover their swaps shorts with Treasuries, let alone cumbersome to carry out operationally and contingent on the relationship between RMBS/swaps/Treasuries continuing. Thus a switch to a Treasury benchmark would be far too premature, despite expectations for mortgages to continue to be more linked to Treasuries through the end of the year," say the analysts.

Considering the size of the RMBS market relative to ABS or CMBS, the analysts expect it would be the first securitised products market to establish a pricing benchmark.

JL

Structured Finance

Capital preservation sought

Assenagon Asset Management has launched a new fund that aims to make active and flexible use of opportunities within a diverse investment universe to achieve attractive long-term returns. Dubbed Assenagon Multi Asset Wertsicherung (translated as capital preservation), the fund harnesses a smart approach to risk management that is designed to ensure the capital preservation level does not fall below 90% over a twelve-month period, thereby creating alignment of interest.

Led by multi-asset head Thomas Romig, the Assenagon team will utilise opportunities from across the entire capital market on an active and flexible basis while combining different sources of returns, so as to optimise the opportunity/risk profile of the portfolio. "Active portfolio management is based on three pillars - multi-asset, multi-instrument and multi-management," says Romig.

A multi-asset approach means building a diverse investment universe that includes credit derivatives and securitisation exposures. A multi-instrument approach provides freedom to utilise individual securities, target funds and derivative instruments, depending on which are the most efficient.

Finally, a multi-management approach centres on efficient portfolio management that uses international specialist expertise. Over 100 international cooperation partners for asset management solutions are available to the team to offer additional ideas and information.

"While building the portfolio, we combine current investment issues and their impact on the capital markets - such as expansionary monetary policy, stabilisation efforts by the Euro periphery countries and geopolitical developments - with active management of the overall risk," explains Romig.

To minimise loss risks, the portfolio managers pursue a continuous capital preservation strategy. Based on the initial offering price when the fund is launched, this sets out a twelve-month capital preservation period and a capital preservation level of 90% of the initial offering price.

This entails the portfolio managers checking the current unit value on a monthly basis. If it is higher than it was at the last monitoring date, a new twelve-month capital preservation period starts, with the capital preservation level set at 90% of the high that has just been established. This approach ensures that interim gains do not lead to a significant increase in the risk profile of the fund.

Index CDS are employed both to gain credit exposure and to hedge the fund's positions. Although it doesn't hold any CDS at the moment, the fund would currently allocate up to 15% to the sector.

The fund currently has about 10% exposure to European securitised products via mutual fund instruments, but can allocate up to 20% exposure.

"The multi-asset approach allows us to be agnostic about instruments," Romig concludes. "The emphasis is on having solid investment themes and then introducing the exposure in the most efficient way. This could be via active or passive investment."

CS

Structured Finance

SCI Start the Week - 14 December

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

Pipeline
The pace of pipeline additions slowed last week. The final count consisted of two ABS, an ILS, an RMBS, a CMBS, a CRE CDO and two CLOs.

US$160m CRG Issuer 2015-1 and US$185m SolarCity FTE Series 1 Series 2015-A accounted for the ABS, while the ILS was US$250m Atlas IX Capital 2016-1. The sole RMBS was US$272.04m Mill City Mortgage Loan Trust 2015-2.

US$613m NorthStar 2015-1 was the CMBS while the CRE CDO was US$349.1m RAIT 2015-FL5 Trust. The CLOs consisted of €780m BBVA-10 PYME FT and US$800m JPMCC 2015-JP1.

Pricings
There were considerably more deals printing, with ABS leading the way. As well as 12 ABS there were also two RMBS, two CMBS and three CLOs.

The ABS were: US$380m California Republic Auto Receivables Trust 2015-4; US$713m Castlelake Aircraft Securitization Trust 2015-1; US$265m CHAI 2015-PM3; US$333m DRB Prime Student Loan Trust 2015-D; R$808m Driver Brasil Three FIDC; US$216.5m Edsouth Indenture No.10 Series 2015-2; CNY3bn Fuyuan 2015-2 Retail Auto Mortgage Loan Securitization Trust; US$127m MPLT 2015-CB2; €1bn Noria 2015; €1.4bn SC Germany Consumer 2015-1; US$600m SPS Servicer Advance Receivables Trust Series 2015-T2; and US$400m SPS Servicer Advance Receivables Trust Series 2015-T3.

€900m IM Grupo Banco Popular MBS 3 and £1.5bn Trinity Square 2015-1 were the RMBS, while the CMBS were US$1.2bn FREMF 2015-K51 and US$1bn WFCM 2015-P2. Lastly, the CLOs were €416m CGMSE 2015-3, €2.94bn FT PYMES Santander 12 and US$606m OHA Credit Partners XII.

Markets
The tone of the US ABS market continued to improve last week, notes JPMorgan. "A prime auto ABS new issue came this week at the tight end of initial price guidance. Pricing in the secondary market firmed up on brisk activity and on the tapering-off of new issuance as we approach year-end."

Stabilisation was the theme for US CMBS. Barclays analysts say: "CMBS secondary trading spreads were slightly wider but issuance spreads came in a bit tighter. Part of the stability was simply to the result of reduced issuance, with two deals originally expected for 2015 now shelved until January."

The European ABS markets were not cowed by fixed income's reaction to the ECB's latest announcement, reports Bank of America Merrill Lynch. "European structured finance and covered bonds markets were busy in the beginning of the week, tapering off towards the end. A couple of BWICs containing high beta bonds seemed well received by the remaining few investors."

Editor's picks
Space for rent: Of the 26 single-family rental securitisations issued since the market's inception - totalling US$14bn - only three have been multi-borrower deals. However, a significant shift in issuance is underway...
Friend request: 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...
Euro CLOs BWIC-driven: The European CLO secondary market is being dominated 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..."

Deal news
• November saw a spike in US CMBS 2.0 remittance activity. Twelve loans totalling US$128.89m became newly delinquent last month, including three 2015 vintage loans (with two from JPMBB 2015-C3).
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• Navient has extended the maturity dates of six FFELP student loan ABS trusts that it sponsors. 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.
• 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.

Regulatory update
• 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.
• 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).
• 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 their reviews of more than 90% of the first pipeline of residential mortgage loans subject to the rules had TRID compliance violations.
• 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.

Deals added to the SCI New Issuance database last week:
Apidos XXIII; Bean Creek CLO; FREMF 2015-K721; KKR CLO 13; Lanterna Finance; Madison Park Funding XIX; Magnetite XVI; Navient Private Education Loan Trust 2015-C

Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-2; BACM 2006-5; BSCMS 2007-T26; CD 2006-CD2; CD 2007-CD4; DBUBS 2011-LC1; DECO 2006-E4; DECO 2007-E6; ECLIP 2006-1; ECLIP 2006-1 & ECLIP 2006-4; ECLIP 2007-2; GCCFC 2005-GG3; GCCFC 2007-GG9; JPMCC 2005-LDP5; JPMCC 2007-LDP11; JPMCC 2011-C4; LBUBS 2006-C1; LBUBS 2006-C7; MLMT 2006-C1; MSC 2007-HQ11; TITN 2006-1, TITN 2006-2, TITN 2007-CT1 & TITN 2007-2; TITN 2006-3; TITN 2007-CT1; TMAN 5; TMAN 6; UBSBB 2013-C6; WBCMT 2007-C33; WFCM 2015-C27; WINDM XIV

RMBS

FHFA scorecard heralds change

The FHFA has released its 2016 scorecard for the GSEs and Common Securitization Solutions (CSS). Highlights include the imminent end to HARP and an updated timeline for the implementation of the single security initiative, as well as credit risk transfer (CRT) changes.

The FHFA scorecard calls for the GSEs to prepare for the expiration of HARP by creating a new high-LTV refinance programme to be implemented at the start of 2017. As FHFA director Mel Watt indicated his intention last May to allow HARP to expire next year, Barclays RMBS analysts note that the market impact from this announcement should be limited.

An end to HARP is expected to have only a modest effect on pre-HARP speeds. The analysts expect pre-2006 cohorts to fall by 1 CPR or less, with 2006-1H09 cohorts declining by 4 CPR at most.

Post-HARP borrowers might also be able to use the new programme. Freddie Mac loan-level data suggests 4%-11% of borrowers in post-HARP cohorts have current LTVs greater than 80% and refinancing incentives of at least 50bp.

'Release 1' of the single security initiative has been scheduled for next year, with 'Release 2' - when the single security will actually be introduced - scheduled for 2018. The scorecard notes that the market must be told of the precise implementation date of the single security at least 12 months in advance.

The FHFA also intends to develop a process to evaluate GSE policies that may affect prepayments and buyouts on TBA mortgages, as well as monitor issuance and prepayments between the two agencies. The Barclays analysts note that this was probably prompted to ease investor concerns around the ability to deliver either Fannie Mae or Freddie Mac pools into the same TBA deliverable leading to the GSEs relaxing their origination standards to fight for market share.

"Perhaps because of the extended timeframe for 'Release 2', GLD/FN swaps did not noticeably respond to the updated single security timeline. GLD/FN 3.5s and 4s are currently trading at approximately -5 ticks," say the analysts. The single security initiative is not expected to lead to significant swap convergence in the near term.

"That said, we also believe that [the announcement] provides a floor for the swap and that it is unlikely to trade significantly below -9 or -10 ticks (the lowest it reached earlier this year) in 2016. As such, we continue to recommend that investors trade the swap in a range-bound fashion, buying it when it falls to around -10 ticks and returning back to neutral when it climbs back to -3 or -4 ticks," the analysts add.

The criteria for CRT in the 2016 scorecard is to transfer credit risk on 90% of unpaid principal balance of newly acquired single-family non-HARP fixed-rate mortgages with longer than 20-year terms and LTV ratios greater than 60%. The FHFA is also asking the GSEs to expand CRT to new loans and investors and the Barclays analysts raise their 2016 issuance forecast to US$13bn-US$17bn as a result.

"We find that the total reference obligations for deals issued in 2015 are about 50%-70% of all 30-year fixed-rate mortgage loans. A cursory look at this might suggest that if the GSEs are required to go from current levels to 90%, then that could lead to much higher issuance than our US$12bn-US$15bn forecast for 2016. However, the numbers are not directly comparable," say the analysts.

HARP loans have to be stripped out of that, while lags in origination and CRT issuance prepays also have an effect, with each factor decreasing the balance by 5%-10%. Other exclusions add to this to mean that the latest STACR and CAS deals have reference pools containing all the loans that qualified, so there is only limited room for increasing the relative size of the reference pool compared to what is originated.

As well as the 90% requirement, the scorecard adds a requirement to transfer "a substantial portion of the credit risk on the targeted loan categories covering most of the credit losses projected to occur during stressful economic scenarios". This points both to continued actual-loss issuance and also to first-loss sales by changing attach-detach points if the current ones do not cover most of the credit loss requirement.

JL

CMBS

Right to sue

Macfarlanes partner Lois Horne and solicitor Alexa Segal examine the lessons to be learned from the recent Quelle Nurnberg reversal

The Court of Appeal has overturned a decision at first instance that a valuer, Colliers, was liable for a negligent valuation of a commercial property that was collateral for a securitised loan while Quelle - the then biggest mail order company in Germany - was the tenant. In doing so, the Court of Appeal has made comments that an SPV issuer of CMBS would be entitled to rely on a valuation provided to the original lender.

The claim, one of several substantial valuers' claims currently moving through the Commercial Court, arose out of a loan advanced after a property valuation. The valuation, of €135m, was done in 2005, during a bull market where banks where competing to lend as much money as possible, assuming that the value of commercial property would continue to rise.

The major tranche of the loan (the senior tranche) was purchased by Titan Europe 2006-3, which packaged it up in a complex securitisation process worth approximately €1bn. Titan used the loan, together with loans secured against 17 other properties in Europe, as the asset base for the securitisation.

As part of the securitisation process, the noteholders became the ultimate beneficiaries of the loan, receiving varying amounts of interest. Titan though, as issuer, retained the beneficial and legal ownership of the rights relating to the senior tranche.

Colliers argued that Titan did not hold the title to sue it and, even if it did have such a cause of action, it had not suffered any loss. This is because the securitisation agreements contained a waterfall provision whereby Titan was only obliged to distribute the actual sums it received by way of realisation to the noteholders.

As such, it was insolvency remote. The loss, if Collier's valuations were negligent, was borne by the noteholders, who would realise less from their subscriptions. The noteholders also had their own right of action, as Colliers had assumed responsibility to them.

The Court of Appeal disagreed. Titan held the legal and beneficial titles to, and therefore owned, the securitised loans.

These are a form of property. It is a commonplace truism of property law that the owner of property has rights of suit for damages in respect of any actionable negligence.

Regarding any future action by the noteholders, the Court of Appeal said that it would be reluctant to say that they could not bring a claim, but - since the noteholders stood in the same place to Titan as shareholders stand in relation to a company - such a claim might be met with an assertion that their loss was reflective of Titan's loss and thus be defeated. In any event, the Court of Appeal anticipated that the noteholders would receive the benefit of any damages through the waterfall provisions.

Finally, Titan would itself have suffered a loss (assuming the property was overvalued) when it acquired the loans and the securities on the basis of that overvaluation. The price paid for the loans would have been too high. In its concluding remarks, the Court of Appeal said: "Titan's relationship with the noteholders is analogous to that of a company with its shareholders; no one suggests that, because the shareholders may be the ultimate losers in a case of this kind, the company has not suffered a loss."

The Court of Appeal's comments were made obiter and, as such, would not be binding on any future court. That said, this will not be the last case arising out of the change in the commercial property market together with a complex loan structure.

We can expect further arguments in court on this point. It is, therefore, unsurprising that Longmore LJ noted that the issue of whether Titan had title to sue was more important to the securitisation industry than the outcome of any one valuation appeal.

Corralling together a group of disparate noteholders to bring a class action would have been much more difficult than using Titan as the claimant. There will, no doubt, have been some banks keenly awaiting the outcome of this decision to see whether their claims remain valid and they will be pleased to see that, despite the use of complex financial instruments and corporate structures, legal rights to recourse remains intact.

That said, there are lessons to be learned. With securitisation products now coming back into fashion, banks should pay keen attention to ensuring that, if it all goes wrong, they retain a right to sue for damages and that right is expressly written into the securitisation agreements.

The full Court of Appeal Judgement can be found here.

Structured Finance

SF practice strengthened

DLA Piper continues to build its financial markets practice with the appointments of Vincent Keaveny, formerly head of structured capital markets and a partner at Baker & McKenzie, and Mark Dwyer, formerly a partner at Slaughter and May. The firm has made other significant hires across Europe this year including Okko Behrends, who joined the team in Germany from Latham & Watkins in November, and Luciano Morello, who joined the firm in Italy from Hogan Lovells in September.

Keaveny's practice is divided into the three core areas of securitisation, structured finance and derivatives. He advises arrangers, originators and rating agencies on transactions in the UK and across Europe. He has also worked on traditional and synthetic securitisations, including RMBS and CMBS.

Dwyer has a broadly based financing practice which - in addition to derivatives and capital markets - includes investment grade and leveraged financings, as well as structured finance transactions. During his career, he has acted for a range of listed and privately owned companies and has worked on significant financing transactions for approximately 20 of the current FTSE 350 companies.

Structured Finance

Mid-market vet brought in

HIG WhiteHorse, an affiliate of HIG Capital, has hired Eric Nadzo as principal in its Boston office. He will be responsible for sourcing and executing debt investments in middle market companies across a broad range of industries, with experience in business services, healthcare, technology, manufacturing and specialty finance. Prior to joining HIG, Nadzo focused on debt and equity investments at Hercules Technology Growth Capital.

Structured Finance

Third Avenue reshuffles management

Third Avenue Management is changing its management structure, pursuant to which the firm's management committee will lead the firm going forward. As part of the change, Third Avenue and ceo David Barse have mutually agreed to separate. The move follows the recent liquidation of the Third Avenue Focused Credit Fund (FCF).

Pursuant to the liquidation of FCF, a distribution will occur on 16 December to all FCF shareholders of the fund's cash assets not required for the expenses of the fund and its liquidation. The remaining assets have been placed into a liquidating trust and interests in that trust will also be distributed to FCF shareholders on 16 December. These two distributions will constitute the full redemption for all shares of FCF and existing FCF shareholders will all become beneficiaries of the liquidating trust, which will make periodic distributions as cash is received for the remaining investments.

While Third Avenue believes that in time FCF would have been able to realise investment returns in the normal course of business, investor requests for redemption - in addition to the general reduction of liquidity in the fixed income markets - have "made it impracticable" for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders.

The firm disclosed that it has some investments in companies that have undergone restructurings in the last 18 months and notes that if FCF were forced to sell those investments immediately, it would only realise a portion of their fair value, given current market conditions. "We believe that doing so would be contrary to the interests of all of our shareholders, which is why we have taken steps to protect shareholder value by returning cash and implementing the liquidating trust to seek maximum value for these investments," it states.

Third Avenue will manage the liquidating trust in order to obtain the best overall outcome for beneficiaries and will not charge any fee for those services. The firm anticipates that the full liquidation process may take up to a year or more before a final distribution is made in order to achieve favourable results.

Third Avenue's management committee includes: David Resnick, president and cio; Vincent Dugan, cfo and coo; James Hall, general counsel and secretary; and portfolio managers Matthew Fine and Jason Wolf. Third Avenue founder, Martin Whitman, comments: "Third Avenue has been committed to finding the best ways to deliver value for shareholders for nearly 30 years. [This] announcement is a step that enables Third Avenue to return to its roots, with broad-based leadership by the senior investment team."

Structured Finance

State aid settled

KBC is set to repay the Flemish Regional Government the full outstanding tranche of €2bn of state aid, as well as a penalty of 50%, before year-end - five years ahead of schedule. In so doing, the group will meet all of the remaining financial obligations imposed on it during and after the financial crisis (SCI passim).

The repayment was made possible due to the solid capital base the firm built up in recent years. Following the repayment of state aid, KBC's capital buffers remain 3.4% above the minimum capital requirements of the ECB and National Bank of Belgium of 10.25%.

KBC now intends to focus entirely on the continued growth of its bank-insurance business and on supporting local economies and clients in the countries in which it operates. In the past few years, the firm has divested 29 entities and business lines, reduced risk-weighted assets by 45% and repaid ahead of schedule and in full the state aid received, including payment of all penalties applying.

Structured Finance

Bloomberg to buy BRAIS

Bloomberg has agreed to acquire the Barclays Risk Analytics and Index Solutions (BRAIS) business from the bank for approximately £520m. This includes Barclays' indices on securitised products, covering US MBS and CMBS, pan-European floating and fixed rate ABS, and US and European covered bonds.

The transaction includes the sale of intellectual property in relation to the POINT portfolio analytics tool. Barclays has agreed to continue to operate POINT for 18 months post-completion in order to help clients transition to other providers, including Bloomberg's PORT product. Barclays will retain its quantitative investment strategy index business, with calculation and maintenance of its strategy indices outsourced to Bloomberg.

Barclays says the pre-tax gain on completion of the transaction is expected to be approximately £480m. Given the nature of the BRAIS business, the bank says the sale will have a negligible impact on RWAs.

In addition, Bloomberg and Barclays will maintain a co-branding arrangement on the benchmark indices for an initial term of five years. The completion of the deal is expected to occur by mid-2016.

Structured Finance

Mid-market lender launches

Great Rock Capital Partners has launched a lending platform that will provide asset-based and asset-backed loans to middle market companies lacking financial support from traditional bank lenders. The platform, named simply Great Rock, will be backed by Two Sigma Private Investments.

Stuart Armstrong has been appointed as Great Rock's ceo and cio. Most recently, he served as president of Great American Group's specialty lending division, GA Capital, and as cio of Great American Capital Partners.

Great Rock will provide a range of secured lending products and focus on refinancings, growth capital, bridge loans, rescue capital, bank replacement financings, acquisition and restructuring financings. Two Sigma will anchor the specialty lending platform.

CMBS

CRE pro moves on

Linda Gorbenko has joined Arbor Commercial Mortgage as director. In this role, she is responsible for originating commercial financing across the firm's loan product offering, including FHA, Fannie Mae, Freddie Mac, CMBS, bridge, mezzanine and preferred equity.

Prior to her move, she was an executive director at CIBC, where she originated short- and long-term, fixed and floating rate CMBS. She was also senior director at GE Real Estate, originating single asset and portfolio CRE loans.

Risk Management

Interactive Data deal done

ICE has completed its US$5.2bn acquisition of Interactive Data from Silver Lake and Warburg Pincus. As proposed in its earlier announcement (SCI 27 October), ICE has paid through a combination of US$3.65bn in cash and 6.47 million ICE common stock shares.

The shares were valued at US$1.55bn on 23 October, but have since risen to an approximate value of US$1.67bn on 10 December. ICE previously announced that it had issued US$2.5bn in senior notes relating to the cash portion of the transaction (SCI 20 November).

"Interactive Data is a cornerstone in ICE's strategy to provide more data and valuation services to our customers around the world," says Jeffrey Sprecher, ICE chairman and ceo.

RMBS

Ranieri recruits RMBS pro

Ranieri Strategies has added two new partners, including Eric Kaplan to focus on structured finance. His duties will include working on housing, mortgage and RMBS reform endeavours with regulators and industry colleagues.

Kaplan joins from Shellpoint Partners, where he was md and head of mortgage finance. In this role, he was primarily involved in the building of its non-agency RMBS and whole loan programme. Prior to this, Kaplan was at Morgan Stanley, helping develop and manage its distressed residential mortgage business and covering a wide range of structured transactions and advisory engagements. He is also chair of SFIG's 'RMBS 3.0' Task Force and a working group chair in the US Treasury-led private label securitisation initiative.

Kaplan's arrival coincides with K Krasnow Waterman, who joins as managing partner and chief technology officier for Ranieri. She moves from TIAA-CREF.

RMBS

Litvak case set for retrial

The Second Circuit Court of Appeals has reversed the conviction of former Jefferies md Jesse Litvak (SCI 12 March 2014) and remanded the case for retrial. A Haynes and Boone client memo notes that in doing so, however, the Court of Appeals rejected the broker's broad argument that lies concerning ancillary transaction fees could never form the basis for a securities fraud claim.

The appeals court based its reversal on narrower evidentiary grounds, holding that the trial court erred by precluding the defense from presenting evidence bearing on lack of materiality and fraudulent intent. The court also reaffirmed that to prove a charge of securities fraud - in contrast to mail and wire fraud - the government need not prove "intent to harm". Additionally, it vacated the charges of defrauding the government, holding that lies to asset managers to whom the US Treasury delegated complete trading discretion could not have influenced a decision of the government.

The government alleged that Litvak defrauded 14 privately funded entities and six Public-Private Investment Funds (PPIF) in the course of transacting RMBS. The indictment - filed in the District of Connecticut - included 11 counts of securities fraud, one count of TARP fraud and three counts of making false statements.

The government asserted at trial that Litvak lied to the asset managers in various ways in order to inflate Jefferies' profits in connection with RMBS trades it conducted for the asset managers. According to the government, those lies included falsely representing Jefferies' cost of acquisition of the RMBS being sold to victim counterparties, falsely claiming lower negotiated resale prices of the RMBS being purchased from the counterparties and falsely claiming that it was acting as an intermediary between third-party sellers and the counterparties, when in fact Jefferies was selling RMBS it held in inventory. The jury convicted Litvak on 15 counts presented to it, and the district court denied his post-trial motions for an acquittal and a new trial. After being sentenced to two years in prison, Litvak appealed his conviction to the Second Circuit.

A core objection raised by the defendant on appeal was the trial court's ruling precluding him from introducing expert testimony to the effect that his behaviour was commonplace in the industry and blessed by his own supervisors, according to Haynes and Boone. Meanwhile, the government has purportedly been awaiting a ruling in the case in evaluating how and when to proceed with other investigations into industry sales practices.

The most closely watched portion of the case was the defense's assertion that Litvak's misstatements about pricing cannot serve as the basis of a securities fraud claim because they were not "capable of affecting the value of the security being transacted". In other words, Litvak's lies were not material because they did not mischaracterise the value of the RMBS themselves, but instead were mere puffery relating to ancillary transaction costs.

"Had the Second Circuit accepted this argument in full, it might have presented a significant new impediment to enforcement actions relating to, among other things, opaque debt markets involving over-the-counter trading and sales practices in foreign-exchange and commodities trading. However, the Litvak court rejected that argument as inconsistent with the 'longstanding principle' that securities law 'should be construed not technically and restrictively, but flexibly to effectuate its remedial purposes and to protect against fraudulent practices, which constantly vary'," the memo states.

However, the Second Circuit overruled several of the district court's trial rulings excluding evidence proffered by the defense. Thus, on retrial, the defense likely will be allowed to offer expert evidence regarding whether a reasonable asset manager would credit brokers' statements regarding pricing of complex financial instruments, given custom and practice in the industry. Similarly, the defense will likely be permitted to offer expert evidence to show that the defendant was acting not in an agency capacity (where he might owe a concomitant duty of loyalty), but rather as a principal (owing no such duty).

"The broader import of Litvak appears now to relate more to how cases will be litigated than to whether cases will be brought. The Second Circuit refused to bless the defense's attempt to restrict the concept of materiality in the sales and trading industry, thus leaving the door open to other similar enforcement investigations of sales commission and mark-up practices. Nevertheless, the decision provides defense attorneys with ammunition to offer evidence - including expert testimony, relating to industry standards and practices - to rebut the government's proof of, among other things, materiality and fraudulent intent," the memo concludes.

ABS

Solar loan ABS debuts

SolarCity is in the market with an inaugural securitisation backed by its MyPower loan product. The US$185m SolarCity FTE Series 1 Series 2015-A is secured by a pool of 11,583 solar loans used to install residential rooftop photovoltaic systems.

The systems are geographically distributed across 13 states, with California, Colorado and Arizona constituting about 94.8% of the collateral. The original term of each loan is 30 years and, as of 31 October 2015, the weighted average remaining term of the loans is 357 months and the weighted average FICO of the obligors is 733.

Provisionally rated by KBRA, the transaction comprises US$151.55m triple-B rated class A notes and US$33.45m double-B rated class B notes. The aggregate discounted solar loan balance (ADSLB), consisting of the discounted interest and principal payments of the MyPower loans, is approximately US$249.5m. However, at approximately US$318.1m, the aggregate principal balance of the pool is significantly greater than the ADSLB for which the collateral side of the transaction is given credit.

The loan agreements contain a minimum performance guaranty that entitles the underlying customer to a performance guaranty payment from SolarCity to the extent that the cumulative energy production for the photovoltaic system during the previous two calendar years is less than the contractual guaranteed amount. The amount of the payment usually contains an annual escalator to account for the anticipated annual increase in costs associated with obtaining energy from a traditional utility provider to supplement the energy deficit.

While performance guaranty payments are obligations of SolarCity, KBRA assumed in its analysis that cashflow from the transaction would be used for these payments. Consequently, the agency notes that prolonged underperformance of PV systems under the loans is expected to lead to increasing performance guaranty payments over time, which would adversely impact available cashflow to service interest and principal of the notes.

Similar to a power purchase agreement, the borrower pays only for the energy produced by the system during a given period. Therefore, due to the seasonality associated with the production of a PV system, there are likely to be periods of accelerated principal payments and periods of no amortisation. During these periods of no amortisation, the unpaid interest is not capitalised in subsequent periods.

To the extent that a PV system underperforms for an extended period over the tenor of the loan, the repayment profile would result in a balloon payment at loan maturity. If there is a balance at the end of 30 years, SolarCity grants the customer two additional years to pay the outstanding balance.

A solar loan is deemed defaulted if the underlying customer is 120 days past due on any portion of a scheduled monthly payment and the PV system has not been removed/redeployed and the solar loan has not been brought current within 240 days after the end of 120-day period. The total period of 360 days until recognition of a default is twice as long as the generally accepted standard for most consumer assets, according to KBRA. Once a default is recognised, on the next payment date the expected discounted cashflow from the defaulted PV system prior to the recognition of the default is payable to the notes.

Despite the atypical default recognition policy, the impact of non-payment by any underlying customer is captured in the debt service coverage ratio calculation, which is calculated on every determination date. This transaction features DSCR-related triggers: an early amortisation period will commence if the DSCR falls below 1.15x for two consecutive determination dates; a sequential interest amortisation period will commence if the DSCR falls below 1x for any determination date; and a DSCR sweep period will commence if the DSCR falls below 1.25x on any determination date.

ABS

Trade receivables recommendations offered

Demica has published a guide on trade receivables securitisation for corporate treasurers. The report covers four important areas to be assessed by anyone contemplating a securitisation, taking into account new players in the market.

"With non-bank financiers entering the field, such as hedge funds and private equity houses, corporate treasurers can continue to benefit from important working capital advantages. However, they need to sharpen awareness of issues, opportunities and potential pitfalls, in order to successfully navigate this changing landscape," Demica says.

The first key point of advice is evaluating the appropriateness of the receivables pool. The new generation of securitisation arrangers brings flexibility to the market, with their ability to tap smaller portfolios and offer structural alternatives to funding riskier components within the pool.

The second is ensuring data quality. Arrangers are able to assist in the generation of consistent and compliant data sets to underpin the securitisation.

Third is determining the fee structure. Not necessarily bound by regulatory capital hurdles, the new investors in the market can offer flexibility on pricing when and where required.

Finally, assessing pricing offers is recommended. Bundling of services into organic offerings and the availability of a wider range of pricing data allow for increased transparency about pricing, according to Demica.

"Never before have treasurers had so much choice beyond their traditional banking relationships," says Tim Davies, head of origination at the firm. "New entrants to the receivables finance market are reshaping how treasurers think about their working capital needs. It is important for any organisation considering a securitisation to assess what it should be asking of its arranger and, importantly, of itself."

ABS

FFELP outlook weighed

Moody's expects FFELP student loan ABS repayment rates to remain low in 2016. The combined percentage of FFELP loans in deferment, forbearance and income-based repayment (IBR) are anticipated to remain high, while voluntary prepayments should rise slightly. At the same time, further strengthening in the job market for young college graduates - combined with continued high IBR usage - will lead to lower defaults in FFELP loan pools.

"Lower defaults will exacerbate slow pool pay-down rates. Because of the US government's guarantee on defaulted FFELP loans, reimbursements on defaulted loans act as prepayments, which the transactions use to pay down the bonds," says Moody's vp - senior credit officer Irina Faynzilberg.

The small rise in voluntary prepayments - a trend that started in 2014 - should partially offset the negative effects of borrowers' use of IBR, deferment and forbearance on pool pay-down speeds. Most voluntary prepayments are expected to result from loan refinancing through consolidation under the federal Direct Loan Program or non-federal student loan programmes. Prepayments resulting from borrowers making payments that exceed their required minimum payments could also increase slightly with the improving economy.

Slowing pool pay-down speeds have increased the risk that some tranches will not pay off by final maturity, which would trigger an event of default (SCI passim). "To mitigate the risk of some tranches not fully amortising by their maturity dates, sponsors of some outstanding deals will likely extend the final maturity dates of at-risk tranches," Faynzilberg says. "They might also purchase loans from affected pools, thus accelerating repayment of the notes."

Many new transactions will include structural features designed to protect the notes from the risk of default as a result of unpaid principal by final maturity. "Both Nelnet and Navient have used full turbo structures, in which the transaction will allocate collections to bondholders on an accelerated basis after a specific date, rather than releasing them to the residual holder," says Moody's vp - senior analyst Nicky Dang.

ABS

VW ABS performance updated

Recent updates from Volkswagen and its subsidiary Volkswagen Financial Services (VWFS) on the impact of the emissions scandal support a number of assumptions that have been made by Fitch regarding EMEA ABS transactions. Initial performance data and measures taken by VWFS to mitigate counterparty risks also support the credit quality of these transactions.

The November agreement between VW and the German Federal Motor Transport Authority to fix 2.0 and 1.6 litre EA189 engines suggests that a technical fix for vehicles affected by manipulation of nitrogen oxide emission tests can be achieved relatively easily. Although it has yet to be confirmed for all models, VW currently expects no impact on performance or fuel consumption. This reinforces Fitch's view that risk on ABS from reduced cashflows due to consumer rights is small.

Additionally, VW said on 9 December that considerably fewer vehicles have wrongly stated CO2 emissions than first thought. Internal re-measurements found deviations in only nine model variants, with an annual production of approximately 36,000 vehicles. A complete list of the affected VW cars in ABS transactions is not yet available, but Fitch expects potential exposure in ABS transactions to be materially lower than VW's initial projection of 800,000 vehicles.

It underpins the agency's view that risks to ABS transactions from potentially CO2-affected vehicles is adequately addressed in recently issued transactions via dedicated reserves. They are adjusted regularly to cover clearly identified and potentially affected vehicles. Once they are all identified, VWFS says it will no longer add CO2-affected vehicles to its revolving ABS transactions.

VWFS will decide on potential measures in older transactions once their exact exposure is known. Fitch expects that these transactions' exposures to affected vehicles will not impact ratings, given available credit enhancement, and could therefore withstand bigger price decreases than expected.

Meanwhile, data to end-November shows no indication of rising delinquency or default rates in VW's EMEA ABS transactions since VW revealed the emission irregularities in September. In UK transactions, Fitch sees no signs of increased voluntary terminations so far: the most recent reports show a slight increase in the percentage of contracts terminated, but this appears consistent with normal ranges over time. For instance, Driver UK Master reported 20bp in October, compared with 12bp to 19bp over the past 12 months.

Latest price data from Schwacke for Germany show no significant drops in value since the announcement either. The used-car values of VW vehicles were only marginally worse than all used car values, with no noticeable difference between diesel and petrol engine vehicles. This is in contrast to the US, where VW diesels have underperformed the market by 10% to 20%, and VW petrol cars by 5% to 15%.

VWFS has confirmed that remedial actions are in place following Fitch's downgrade of the car manufacturer. These include measures to address commingling risk and to fund reserves if necessary.

ABS

Bibby details emerge

Some additional details have materalised on Bibby Financial's recent securitisation of factoring and invoice receivables, which it issued in October (SCI 30 November). The transaction is the first rated private deal by a non-bank asset-based lender covering multiple legal jurisdictions.

Advisor to the deal, Norton Rose Fulbright, says that the securitisation involves Bibby's existing £480m loan book of factoring and invoice finance receivables, enabling it to boost lending by £290m. The joint lead managers were Barclays, Bank of America, HSBC and Lloyds, and the transaction was assigned double-A and Aa2 ratings from DBRS and Moody's respectively.

Structured Finance

Italian regs boost ABS

The Bank of Italy's regulatory framework enacted in 2015 for financial intermediaries carrying out servicing activities is credit positive for all Italian structured finance deals, says Moody's. Certain types of consumer ABS deals - Cessione del Quinto (CDQ) and Delegazione di Pagamento (DP) - will benefit the most.

Moody's notes that organisational and risk-control requirements for servicers will become stricter under the framework, which reduces operational and commingling risk in securitisations. This should improve structural integrity and therefore support continuity of payments to noteholders.

Under the Bank of Italy regulations, financial intermediaries carrying out servicing activity in Italian structured finance deals must enrol under the 'Albo Unico' register that the regulator holds, and comply with specific requirements as to the servicer's organisational structure, corporate governance and internal controls. Servicers must enrol by 12 May 2016 or they will be unable to continue to carry out servicing activities.

Consumer ABS transactions, particularly CDQ and DP, will benefit the most from the Bank of Italy's structural enhancements in the servicer requirements, through greater performance stability, says Moody's. These transactions have higher asset-repayment rates, so there is exposure to commingling losses.

"The more stringent requirements will help stabilise CDQ/DP deal performance, because the requirements will enhance the already robust structures of these transactions. Compared with a standard unsecured consumer loan transaction, CDQ/DP deals have existing structural features that are credit positive offering noteholders more protection," says Moody's avp Greg Davies.

He adds: "Two features in particular stand out: loan payments come directly out of a borrower's salary, and insurance is in place on the loans against unemployment and mortality risk; so, if the insurer meets its contractual obligations, loss levels in these deals will stay flat even if the borrower becomes unemployed."

Structured Finance

Rapporteurs assigned to securitisation files

The European Committee on Economic and Monetary Affairs is expected to start work on two key securitisation files as soon as the European Parliament reconvenes after the Christmas break, following the recent appointment of rapporteurs and shadow rapporteurs for the documents. The PCS Secretariat reports that for the STS securitisation file, the rapporteurship has been assigned to the S&D group (Paul Tang, a Dutch MEP), while the EPP shadow rapporteur will be Othmar Karas from Austria. For the CRR file, the rapporteurship will be held by the EPP group (Pablo Zalba Bigedain from Spain) and the S&D shadow rapporteur will be Jonas Alvarez from Spain. The other political groups are expected to nominate their shadow rapporteurs imminently.

Structured Finance

Spanish SME risks outlined

Increased lending to SMEs in Spain is seen by Moody's as a positive for the country's economic growth. However, fierce lending competition could spur mispricing risks and loosening underwriting standards.

"SMEs form the backbone of the European economy, and the Spanish one in particular," says Gaston Wieder, avp at Moody's. "They represent 99.9% of the total number of enterprises, provide almost three-quarters of all private sector jobs and 63% of the total value of goods and services produced in the country, surpassing the EU average."

Bank lending remains the key funding channel to SMEs, with Spanish banks hoping to utilise this to boost profits. Moody's explains that loans to SMEs provide higher returns that other types of lending, as these companies lack the flexibility of larger corporations that can fund themselves in the capital markets or borrow from foreign banks.

However, as indicated by the ECB's quarterly lending survey, many banks acknowledge that overall competition is affecting their lending policies. Most importantly, banks cited pressure from competition as the most pressing factor to reduce margins - ahead of better funding conditions or the improvement in risk perception.

SME borrower surveys show early evidence of loosening underwriting standards, as Spanish SMEs are reporting much easier access to financing. Borrowers are claiming to be obtaining more ample funding and more favourable terms and conditions.

In addition, lending to SMEs is generally is seen as a riskier business. "In our view, company size is a strength from a rating point of view and larger firms are less likely to default than smaller firms, provided all other key credit features are comparable," explains Alberto Postigo, a vp and senior credit officer at Moody's

Nonetheless, Moody's notes that banks should benefit from this redistribution in lending. This is because the SME segment is by definition widely diversified and adds granularity to the portfolio composition, mitigating concentration risk.

Structured Finance

Interest shortfall approach finalised

S&P has finalised its new rating methodology for structured finance temporary interest shortfalls. The criteria include a sliding scale that limits ratings to certain level, depending primarily on the duration of the aggregate interest shortfall outstanding and expected.

Another section of the methodology contemplates upgrades for reperforming bonds to as high as double-B plus after the reimbursement of all past shortfalls and six months of scheduled payments, and as high as double-A plus after 15 months. The new approach considered the agency's recent discussions with investors, in which many highlighted structured finance bonds that were downgraded due to interest shortfalls and are now paying again as expected.

No ratings are expected to be affected by the implementation of the new approach.

Structured Finance

Counterparty rating actions inked

S&P has taken various credit rating actions on 74 tranches in 33 European RMBS and ABS transactions. The move follows the downgrade of Barclays and Deutsche Bank, which are counterparties in the affected transactions (SCI passim).

Specifically, S&P has: lowered and removed from credit watch negative its ratings on 65 tranches in 26 RMBS and two tranches in two ABS; lowered and removed from credit watch developing its rating on one tranche in one RMBS; removed from credit watch negative its ratings on four tranches in three RMBS; and removed from credit watch developing its ratings on two tranches in two RMBS. The agency had previously placed on credit watch negative its ratings on transactions for which the initial counterparty remedy period of 60 calendar days had expired and a remedy action had not been completed, or for which no definitive action plan had been presented (SCI passim). The agency also placed on credit watch negative or credit watch developing its ratings on transactions for which the issuers had presented a definitive plan to remedy the downgrade within an extended 30 calendar day remedy period, and for which the extended remedy period had expired and the issuer had not completed a remedy plan.

The overarching principle behind S&P's current counterparty criteria is the replacement of a counterparty when the rating on the counterparty falls below a minimum eligible rating. Without the incorporation of replacement mechanisms or an equivalent remedy in the terms of the agreement with the counterparty, and if there are no other mitigating factors, the rating on the supported security is generally no higher than the long-term issuer credit rating (ICR) on the counterparty.

For transactions where evidence of a completed remedy action in accordance with S&P's current counterparty criteria has been received - such as novation to a suitably rated counterparty with an appropriate replacement framework - the agency has removed them from credit watch negative. For transactions where the issuers or transaction parties have not found an eligible replacement entity or taken any other remedy action, in the absence of any other mitigants, it has lowered and removed from credit watch negative or developing ratings on these notes to the long-term ICR on the counterparty, or removed from credit watch developing ratings on these notes.

For a number of European RMBS transactions where ratings were lowered, S&P understands that transaction parties are continuing to work towards completing a remedy action. Should the agency receive evidence of a completed remedy action, it will review the related transactions, which may lead to future upgrades.

Structured Finance

LatAm outlook 'mixed'

Fitch's outlook for Latin American structured finance in 2016 is mixed across sectors. Stable and positive rating outlooks for the region have dropped to 81% from 90% last year.

The agency says that consumer ABS continues to be a better performing asset class, as adequate levels of credit enhancement and structural features continue to protect against deteriorating macro conditions. Delinquencies are expected to peak in mid- to late-2016, but at a lower share compared to those observed in 2012. Meanwhile, Mexican consumer ABS is projected to continue performing well next year.

RMBS improvement is also predicted, after 2015 witnessed a larger percentage of rating affirmations/upgrades to downgrades than 2014. Macroeconomic stability and seasoned underlying portfolios have spurred a stable outlook for Mexican RMBS. Generally favourable loan characteristics are also helping Brazilian assets in this class against falling real income and increasing unemployment in the country.

In contrast, CMBS in Brazil has been assigned a negative outlook by Fitch, due to a challenging environment ahead for regional shopping mall-backed transactions. A negative outlook also remains for Brazilian credit-tenant-lease transactions in which Petroleo Brasileiro (Petrobas) is the obligor.

Negative rating actions by Fitch outpaced upgrades by a ratio of more than three to one in the year to end-November. The majority of downgrades concerned transactions exposed to the Brazilian oil and homebuilder sectors. From late 2014 through 3Q15, the agency took multiple negative rating actions on oil vessel-backed transactions, as this sector was severely impacted by depressed oil prices and extraordinary corporate scandal.

Certain issuances are sensitive to a prolonged recession in Brazil, with higher than expected unemployment growth. Oil vessel-backed structured finance and local Brazil transactions remain exposed to uncertainties related to Petrobras and the Lava Jato investigations.

CDO

Trups defaults, deferrals stable

The number of combined defaults and deferrals for US bank Trups CDOs was 18% at the end of November, as it had been at the end of October (SCI 16 November), according to Fitch's latest index results for the sector. There were no new deferrals, defaults or cures last month.

One cured issuer with notional of US$10m in one CDO redeemed its Trups. Across 78 Trups CDOs rated by Fitch, 229 defaulted bank issuers remain in the portfolio, representing US$5.4bn of collateral. There are 107 issuers currently deferring interest payments on US$1.3bn of collateral.

CDS

Single-name clearing commitment unveiled

ISDA, Managed Funds Association and SIFMA's Asset Management Group have announced that 24 of their collective member firms have pledged to begin voluntarily clearing their single-name credit default swap trades through central counterparties (CCPs). The initiative is intended to enhance the transparency and efficiency of single-name CDS and to promote a robust marketplace that can be accessed to manage credit risk.

The buy-side firms that have committed to single-name CDS clearing are: AB, Anchorage Capital Group, Apollo Global Management, AQR Capital Management, BlackRock, BlueMountain Capital Management, Brigade Capital Management, Citadel, Claren Road Asset Management, Cyrus Capital Partners, DCI, DW Partners, Eaton Vance Management, Field Street Capital Management, Hutchin Hill Capital, Kingdon Capital Management, Marathon Asset Management, MKP Capital Management, Och-Ziff Capital Management Group, PIMCO, Pine River Capital Management, Saba Capital Management, UBS O'Connor and Zais Group. The 24 firms will focus initially on voluntarily clearing eligible single-name CDS transactions, with the goal of migrating existing positions over time. They will work to develop the necessary processes internally to maximise efficiencies in booking, settling and maintaining positions, with a majority targeting 1Q16 for the transition.

CDS

Second Abengoa credit event called

ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a failure to pay credit event has occurred in respect of Abengoa. The move follows the company's failure to pay coupons under its €750m Euro CP programme on 10 December, in light of the negotiations being held under the protection of article 5 bis of the Spanish Insolvency Law (SCI passim).

The Committee also resolved to hold an auction in respect of outstanding CDS transactions incorporating the 2014 ISDA Credit Derivatives Definitions on a date to be determined in January 2016. ISDA will publish further information regarding the auction in due course.

CMBS

Mixed-use leads CMBS resolutions

US CMBS loan delinquencies fell by 21bp in November to 4.16% from 4.37% a month earlier, according to Fitch's latest index results for the sector. The dollar balance of late-pays fell by US$696m to US$15.7bn from US$16.4bn in October.

November resolutions of US$1bn were nearly triple the amount of new delinquencies of US$325m. In addition, Fitch-rated new issuance volume of US$7.3bn in October (across eight transactions) surpassed US$4.7bn in portfolio run-off, causing an increase in the index denominator.

Current and previous delinquency rates by property type are: 5.27% for retail (from 5.51% in October); 4.71% for office (from 4.80%); 4.23% for hotel (from 4.57%); 4.27% for multifamily (from 4.42%); 4.38% for industrial (from 4.22%); 2.99% for mixed use (from 4.08%); 0.90% for other (from 0.93%).

The largest resolution last month - which caused a sharp decline in the mixed-use rate - was the US$198m NGP Rubicon GSA Pool (securitised in WBCMT 2005-C20 and WBCMT 2005-C21). The special servicer indicated that a forbearance agreement with the borrower has been executed. The forbearance period - which runs through 31 December 2015, with one additional extension option through 29 February 2016 - provides the borrower with additional time to market and sell the properties.

The largest delinquency - which caused a spike in the industrial rate - was the US$47.5m First Industrial Portfolio (BSCMS 2006-PWR13), which fell 60 days past due in November. The significant decline in portfolio occupancy since issuance has put a strain on overall cashflow and the borrower is no longer funding debt service shortfalls out of pocket.

The large drop in the hotel rate was driven by two large hotel resolutions in MSCI 2007-IQ16: the US$86m Hilton Daytona Beach and the US$33.3m Hilton Antlers Colorado Springs, which were liquidated for a 12% and 45% loss respectively.

Retail resolutions outpaced new delinquencies by nearly three times (US$399m versus US$140m respectively). The largest retail resolution, the US$43.6m Palm Beach Mall (JPMCC 2003-PM1), was liquidated last month for an 81% loss. None of the new retail delinquencies exceeded US$20m.

Despite the sale of the Peter Cooper Village and Stuyvesant Town asset not closing, multifamily saw a double-digit basis point decline, due to resolutions of US$80m exceeding new delinquencies of US$23m. Fitch notes that multifamily new issuance has been strong and has now surpassed office as the second largest property type contributor in CMBS at US$87.7bn compared to US$86.2bn.

Office resolutions totalled US$152m compared to new delinquencies of US$85m.

CMBS

Euro CRE rates vulnerability 'increasing'

Continued yield compression is expected next year in the European commercial property market, which should also see declining debt yields. That has been the case in 2015, increasing borrowers' vulnerability to future interest rate increases.

Yields in prime UK commercial properties are expected to stabilise. Prime yields are already below 2007 peak levels in some European markets, which increases the risk of medium-term value declines.

"The difference between the current situation and the peak of the market in 2007 is the currently low interest rate environment, with a significant positive gap between government bond and property yields. Given the current yield gap, we expect property yields will not move to the same extent as interest rates, when they increase in the UK," says Moody's vp and senior analyst Magdalena Umsonst-Suminska.

Underlying CRE markets are expected to be stable in 2016 and CRE lending markets will remain very liquid. Owing to the high level of liquidity in the investment markets and the attractive relative value of CRE, Moody's expects investor interest in CRE assets will remain high and further yield compression for non-prime properties.

"The increasing LTV ratio trend is clearly visible, even if its extent varies across various markets and property types. As such, the marginally increasing LTV ratios somewhat conceal the increased vulnerability to interest rate increases," says Moody's vp and senior analyst Oliver Schmitt.

Continued investor demand for non-prime properties will lead to a further yield compression in this sector, as already observed in 2015. Reported LTV ratios are expected to increase moderately in 2016 to the high-60% or low-70% range, depending on the country and property type.

European CMBS issuance should be €5bn-€7bn in 2016. Deals will include more subordinated debt, but underwriting standards should generally hold up.

The rating agency says the majority of transactions maturing next year will not fully repay on time owing to weak characteristics of secondary property portfolios securing the underlying loans and a prolonged work-out of defaulted loans. Six Moody's-rated legacy transactions will approach their legal final maturity in 2016, with nine further transactions in 2017.

Insurance-linked securities

Lloyd's planning insurance index

Lloyd's has announced plans to launch its own insurance-based index, the Lloyd's Index, in the middle of 2016. The index aims to provide managing agents, brokers and other insurers with new options for the managing of risk and form the basis of index-related products that could attract the interest of wider capital markets participants.

"I believe this proposal would be advantageous to both Lloyd's and non-Lloyd's participants, keeping pace with the evolving insurance industry and the new sources of capital now available," says Lloyd's chairman John Nelson. "We look forward to hearing the views of the market."

Lloyd's will now spend the next few months discussing the initiative with the market and regulators.

Risk Management

Clearing rules released

ASIC has released rules implementing Australia's mandatory central clearing regime for OTC derivatives of financial institutions. The aim is to reduce systemic risk in OTC derivatives markets and applies to interest rate swaps denominated in Australian dollars, US dollars, euros, sterling and Japanese yen between dealers.

In line with overseas mandatory clearing requirements, the regime also provides the basis for substituted compliance or sufficient equivalence determinations by foreign regulators. This is designed to achieve substantial cost savings for Australian participants and facilitate access to global markets by Australian participants and infrastructures.

The rules set out which entities and derivative contracts are covered by the clearing mandate, the eligible central counterparties that may be used, alternative clearing (thereby allowing entities to comply with certain overseas clearing requirements) and certain exemptions from the clearing mandate. The clearing obligations will commence in April 2016.

The move marks Australia's implementation of the second G20 mandate in relation to OTC derivatives reform. The phased implementation of the first mandate on trade reporting of OTC derivatives began in Australia in July 2013, with the commencement of reporting obligations for Phase 3B firms completed on 4 December.

Risk Management

ESMA makes TR proposals

ESMA has published a consultation paper proposing to enhance the current functionalities offered by trade repositories (TRs) for data access under EMIR. The authority says current comparability of data is insufficient and rules for TR access should be improved significantly.

To that end, ESMA proposes amendments to the current rules in order to ensure direct and immediate access to data by national competent authorities (NCAs) and to facilitate the aggregation and comparison of data across trade repositories. Improvements would include standardised output format of the TR data, based on international ISO standards, and minimum types of data queries that need to be available for NCAs.

ESMA also proposes standardised and secure data exchange between TRs and NCAs based on ISO standards, standard frequencies for the provision of direct and immediate access to TR data, secure machine-to-machine connection and use of data encryption protocols.

Risk Management

Fund derivative rules outlined

The US SEC has proposed new rules that would limit the use of derivatives by registered funds. The proposal would also require funds to put risk management measures in place to ensure stronger investor protections.

The rules will apply to mutual funds, ETFs and closed-end funds, as well as BDCs. The Investment Company Act's purpose is to limit the ability of funds to engage in transactions specifically that involve potential future payment obligations, including derivatives, such as swaps.

Funds will be permitted to enter into these transactions, provided that they comply with certain conditions. They would be required to comply with one of two alternative portfolio limitations designed to limit the amount of leverage the fund may obtain through derivatives and certain other transactions.

An additional requirement would be the management of risks associated with funds' derivatives transactions. This would be applied through the segregation of certain assets in an amount designed to enable the fund to meet its obligations, including under stressed conditions.

A fund that engages in more than a limited amount of derivatives transactions or that uses complex derivatives would be required to establish a formalised derivatives risk management programme. The segregation of assets to cover obligations would apply to certain transactions, such as reverse repurchase agreements and short sales.

The comment period for the proposal will be 90 days after publication in the US Federal Register.

Risk Management

Latest MiFID 2 proposals unveiled

ESMA has published its technical standards for the implementation of MiFID 2. The standards describe how the legislation will apply in practice to market participants, market infrastructures and national supervisors.

The rules include cooperation arrangements for the trading venue of substantial importance in a host member state. They also include the suspension and removal of financial instruments from trading on a regulated market, a multilateral trading facility or an organised trading facility.

Additional proposals include the authorisation of data reporting service providers, as well as details on weekly position reports. Cooperation between authorities in supervisory activities and the exchange of information are also stressed.

This latest publication follows two other technical standards on MiFID 2 that ESMA released in June and September this year (SCI passim). The new standards have been sent to the European Commission for endorsement.

Risk Management

Uncleared swap margin rules finalised

The US CFTC has approved a final rule on margin requirements for uncleared swaps for swap dealers (SDs) and major swap participants (MSPs). The vote was split with two in favour and one opposed.

The new regulation addresses uncleared swaps entered into by SDs or MSPs that are not subject to regulation by the US Fed, the OCC, the FDIC, the Farm Credit Administration or the FHFA. The CFTC says its margin requirements will protect the safety and soundness of these bodies and the integrity of the financial system.

Risk Management

UPI consultation underway

The Committee on Payments and Market Infrastructures and IOSCO have published for public comment a consultative report entitled 'Harmonisation of the Unique Product Identifier (UPI)'. The report outlines proposals for implementing a harmonised global UPI, whose purpose is to uniquely identify OTC derivatives products that authorities require to be reported to trade repositories (TRs).

The UPI would consist of a product classification system and associated code. The focus of this latest report is on the product classification system.

The report responds to a G20 agreement in 2009 that all OTC derivatives contracts be reported to TRs, as part of the G20 commitment to reform OTC derivatives markets. Aggregation of the data reported across TRs should help ensure that authorities can obtain a comprehensive view of the OTC derivatives market and its activity.

The CPMI/IOSCO and the Financial Stability Board (FSB) have in recent years published reports that laid the foundation for the harmonisation work on key OTC derivatives data elements for meaningful aggregation on a global basis. Following a 2014 feasibility study, the FSB asked the CPMI and IOSCO to develop global guidance on the harmonisation of data elements reported to TRs and important for the aggregation of data by authorities, including the Unique Transaction Identifier (UTI) and UPI.

This consultative report is part of the harmonisation group's response to that mandate. Comments are invited by 24 February 2016.

The CPMI and IOSCO previously issued consultative reports on 'Harmonisation of the Unique Transaction Identifier' and 'Harmonisation of key OTC derivatives data elements (other than UTI and UPI) - first batch' and plan to issue a separate consultative report on the UPI code, as well as consultative reports on further batches of key data elements in the coming months.

RMBS

Greek foreclosure effect limited

A new foreclosure framework will only offer limited benefit to Greek RMBS transactions, says Fitch. This is because lenders are unlikely to increase foreclosures in an illiquid residential property market where house prices are still falling.

The threat of repossession may deter strategic defaulters, however. These appear to have contributed to persistent weakness in the country's mortgage market, where early- and late-stage arrears have continued to rise.

The proportion of loans in Fitch-rated RMBS deals in arrears by more than a month (including defaults) rose to 22% in October, from 18% in July and 17% in January, and the rating agency believes some payments may have been withheld during the extended period of uncertainty before July's bailout agreement. That has flowed through to late-stage arrears, which are at a historical high as three-month-plus delinquencies reached 7.8% in October.

"Discussions with Greek lenders suggest they have little appetite to step up repossession activity, even after parliament said it would make changes to the foreclosure framework to make it easier for lenders to take possession of collateral. Some borrowers will still be protected from repossession of their primary residence," the rating agency notes.

The weak economy is expected to push house prices down by 6% in 2015, 4% in 2016 and 2% in 2017. That will work against the boost that making it easier to repossess and auction debtors' main residences should provide to cashflows from recoveries.

"Previous adjustments to the foreclosure framework have not significantly boosted enforcement activity. We therefore expect the volume of properties in possession to remain low and recoveries on defaulted loans to come mainly from other sources, such as out-of-court agreements. Making repossessions easier will at least give the banks greater negotiating power to encourage borrowers to restructure their loans," Fitch says.

Greece is the only European RMBS market where Fitch has a negative asset performance outlook for 2016.

RMBS

Delavaco performance triggers breached

The underperformance of the Delavaco loan backing FirstKey Lending 2015-SFR1 - the first multi-borrower single-family rental securitisation rated by Moody's - will have minimal impact on the deal's performance, according to the agency. This is due to the small size of the loan; the low LTV at closing (61.2%); and the cash-trap mechanisms in the transaction. The borrower has also taken actions to improve the performance of the loan going forward, including working with a new property manager and repairing Section 8 homes to collect on deferred US Department of Housing and Urban Development payments.

DP Georgia BR (the Delavaco loan), one of the 16 loans backing the US$238m FKL 2015-SFR1 transaction, has breached two performance triggers - the cash-trap trigger (set at 1.35x DSCR) and the property management trigger (1.25x DSCR). The master servicer Wells Fargo placed the loan on watch in November.

At US$4m, the Delavaco loan is the second smallest by balance in the deal, which is backed by 3,622 predominantly single-family properties. The borrowers are mid- to large-sized institutional investors that own and manage portfolios of properties. The loan, which is interest-only, is backed by 120 properties and contributes 1.7% of the aggregate pool balance.

The breach of the triggers has resulted in all cash collections being trapped for the benefit of the trust. "This response to the breach will improve the performance of the transaction because excess cash remains in reserves and serves as additional collateral as cash is trapped for the trust," Moody's notes. "The trapped cash serves as additional collateral and benefits the lender if the loan dips into default. Further, the trapped cash also better aligns the borrower's interest with the lender's interest because the funds will not be returned to the borrower unless the loan cures."

To cure the loan, its debt service coverage ratio (DSCR) should have positive DSCR of at least 1.40x (multiplied by the applicable DSCR adjustment ratio) for three months or the loan must be prepaid in an amount such that the resulting DSCR is equal to or greater than 1.40x.

Moody's estimates that approximately US$14,000 of cash can be trapped every month. To illustrate, Delavaco averaged approximately US$63,300 of rental income per month, based on the trailing nine-month effective gross income, as reported in the November 2015 OSAR report. Indeed, the amount of excess cash that is eligible for trapping appears to be US$14,451, assuming: closing monthly reserves of US$8,343 for taxes, US$14,787 for insurance and US$4,500 for capital expenditures; an average monthly management fee of US$3,800 from the November 2015 OSAR report; and monthly debt service of approximately US$17,447.

One month's excess cashflow that is now trapped covers approximately 0.83x of monthly debt service.

Delavaco is currently trying to increase its net rental income and, to the extent that it is able to accomplish this increase, the amount of excess cash that is trapped would rise. Moody's says that a higher level of excess cash could potentially cover debt service further, adding continually to a buffer that is available - should the loan default - and providing greater incentive to the borrower to cure the loan.

Delavaco had already replaced its property manager around the time of the securitisation's closing, as the pre-closing property manager had performed poorly and occupancy for the underlying properties was low. However, occupancy has continued to fluctuate: it spiked to 84.2% in August 2015 from 72.5% in June and then fell to a low of 65.8% in September.

Meanwhile, Section 8 payments have been withheld due to the deferral of required maintenance, contributing to an even further decline in NCF. To resolve this issue, Delavaco is taking steps to repair the properties in a timely fashion.

Delavaco had the third-lowest occupancy (85.8%) of the loans in the pool, as of the cut-off date, and one of the lowest weighted average per-unit Moody's NCFs (at approximately US$1,900) compared with the weighted average per-unit Moody's NCF of approximately US$4,915 for the pool. Nevertheless, the credit profile of the rated notes has strengthened marginally: credit enhancement levels for the class A notes has nudged up from 37.70% to 38.12%, thanks to amortisation and prepayments, following property releases from two loans.

RMBS

Innovative CIRT issued

Fannie Mae has completed its final Credit Insurance Risk Transfer deal of 2015 - the first to include adjustable-rate mortgages (ARM) in the loan pool. CIRT 2015-6 shifts credit risk on a pool of single-family loans to a panel of reinsurers.

CIRT 2015-6 sees Fannie Mae retain risk for the first 50bp of loss on an US$8.2bn pool of loans. Reinsurers would cover the next 250bp of loss, up to a maximum coverage of US$206m. The covered loan pool consists of 5/1, 7/1 and 10/1 fixed-period ARMs.

Fannie Mae has acquired more than US$1bn of CIRT insurance coverage on over US$40bn of loans this year and over US$1.2bn of coverage on over US$46bn of loans since the programme's inception. Further CIRT and CAS deals are expected in 2016.

RMBS

CMHC limits upped

Canada Mortgage and Housing Corporation (CMHC) has announced a change to the guarantee fees it charges issuers, as well as the annual limits for new guarantees for 2016 for both National Housing Act Mortgage-Backed Securities (NHA MBS) and Canada Mortgage Bonds (CMB). The revised fee structure aims to encourage the development of private market funding alternatives by narrowing the funding cost difference between government-sponsored and private market funding sources.

For the period ending 30 June 2016, guarantee fees under the NHA MBS and CMB programmes will be kept at current levels. Effective from 1 July 2016: the threshold for an issuer's annual NHA MBS guarantees will be increased from C$6bn to C$7.5bn; the fee for annual NHA MBS guarantees in excess of C$7.5bn will rise from 60bp to 80bp for five-year securities; the fee for five-year CMB will decrease from 40bp to 30bp; and all NHA MBS sold into CMB series as original or reinvestment assets will be subject to guarantee fees.

Also effective 1 July, the guarantee fee for CMB will be restructured and will account for the fact that guaranteed NHA MBS will be sold into CMB. CMHC does not expect the change in fee structure to impact the timing and volume of its CMB issuances.

For 2016, CMHC is authorised to provide up to C$105bn for new guarantees of market NHA MBS and up to C$40bn of new guarantees for CMB.

RMBS

Aussie equity cushions increase

Rising house prices have pushed down Australian RMBS LTV ratios, says Moody's. The additional equity will be useful in absorbing potential losses, although the size of that equity cushion varies across states.

Housing prices in Australia have risen by an average of 44% over the last seven years. Despite housing price falls in certain regions, the rating agency notes that the indexed weighted-average current LVT ratio is lower than the current LTV ratio for all Moody's-rated RMBS, because the portfolio's exposure to regions with housing price drops is small.

The indexed weighted-average LTV ratio for Moody's-rated Australian RMBS - representing the ratio based on current property values - was 44.4% at the end of September, while the current weighted average LTV ratio - representing the ratio when the loans were originated - was 58.6%. Therefore, housing price appreciation provides 14.2 percentage points of equity.

House prices in Sydney are up 70% in seven years, while prices in Melbourne are up 56%. As a result, RMBS mortgages from New South Wales and Victoria have shown the most additional equity attributable to housing price appreciation, at 21 percentage points and 16 percentage points respectively.

The indexed current LTV ratio for New South Wales is 36%, but the current LTV ratio is 57%. The indexed current LTV ratio for Victoria is 43%, but the current LTV ratio is 59%.

The lowest equity cushion for a major state is Western Australia, at just under five percentage points. The indexed current LTV ratio for Western Australia is at 55%, compared with the current LTV ratio for the state of 60%.

RMBS

Fed to maintain MBS policy

In a unanimous decision by the FOMC, the US Fed announced yesterday that it is moving its target range for the federal funds rate up to 0.25% to 0.5% from zero to 0.25%. However, it stresses that it will maintain its existing policy of reinvesting principal payments from its holdings of agency debt and MBS.

The bank will also continue rolling over maturing Treasury securities at auction and anticipates that these actions will continue until normalisation of the level of the federal funds rate is "well under way". The Fed adds that keeping its holdings of longer-term securities at sizable levels should help maintain accommodative financial conditions in the meantime.