Contents

Structured Finance

Alarm bells

Fund liquidations bring echoes of 2007

With year-end rapidly approaching, high yield credit was thrown into a loop by a quick-fire succession of announcements from Lucidus Capital Partners, Third Avenue Management and Stone Lion Capital Partners. Redemption suspensions and portfolio liquidations at the funds are sparking fears of a 2007 re-run.

Lucidus announced last week that it had liquidated its entire portfolio, with the intention of returning the US$900m it held under management back to investors. The high yield credit fund is understood to have begun winding down in October, when a redemption notice was received from a key investor.

The US$788.5m fund run by Third Avenue and US$400m fund managed by Stone Lion each suspended redemptions a week earlier as high yield concerns grew. Third Avenue is liquidating its fund because losses and redemptions left it struggling to repay redeeming clients (SCI passim). Finding value in the market has become increasingly more difficult, with a tipping point possibly now reached.

"Part of the services we provide as an investment bank is to trade in unusual, less popular bond issues and other structured finance products. I spend a fair amount of time talking to counterparties who are seeking yield at the best price possible, but are finding that harder to come by," says Karl D'Cunha, senior md, Madison Street Capital.

He continues: "The bid-ask has widened a lot over the last few months. People want to find limited risk at a great yield that they can buy at 80 cents on the dollar or below, but that simply does not exist anymore. That has created a large supply of untradeable opportunities that are not getting traction."

Not only is name quality proving problematic, liquidity is also disappearing. A wave of liquidations in the wake of Lucidus and the others is only made more likely by interest rate shifts.

"Interest rates have moved now and if they move further next year - as most people expect - then it will make holdings even more illiquid. With that in mind, I think fund managers know that if they were forced to close their fund and grant redemption requests, there could be opportunities in the future to relaunch and rebrand themselves," says D'Cunha.

He adds: "There are short memories in the market. The team at Lucidus are looking to get out ahead of the curve. Others like them will see what is happening and may not want to be the last man standing when there is another interest rate hike, so they will look to return capital to investors while they can."

It is not all doom and gloom, however. While D'Cunha advocates keeping one eye on Puerto Rico - "there has been a lot of bad news there already, but I think there might still be more to come," he notes - he also sees the emerging environment as bringing plenty of opportunities, along with the more obvious challenges.

He concludes: "While there are definitely firms that are going to struggle in this coming environment, there could be opportunities for others. Overall, it is a very opportunistic market in terms of hedge fund M&A."

JL

Structured Finance

Recruitment shift

SF hiring zoning in on peripheral space

The recruitment outlook in structured finance remains subdued as regulation maintains its stranglehold in Europe and the US. However, peripheral players are keeping the market ticking over by testing the securitisation waters.

"There has been some activity going on in the traditional structure finance space; for example, on the rating agency side," says one London-based headhunter. "Some agencies have been fleshing out their teams with a number of appointments. But aside from that, much of the significant movement has been quite tangential."

The headhunter says that interest has emerged in areas of the market that are hiring with a view to securitisation as an exit strategy. "There have been some more specialist areas of the mortgage market that are potentially looking at securitisation," he adds. "P2P lenders have also been active as they start to test the structured finance space."

The headhunter continues: "The other peripheral area has been the credit space, where there has been some hiring for distressed assets and NPLs."

In contrast, the more established roles have not inspired much movement. The headhunter explains that the ABS and MBS spaces have had very little activity as investment banks remain cautious in the current regulatory environment.

"The usual areas of recruitment - such as structuring, syndication and origination - have yielded very little this year," he says.

Even CLOs have failed to remain constant after some healthy recruitment activity earlier in the year (SCI 19 June). The headhunter suggests that although interest is continuing to tick over in this asset class, it has slowed down in recent months.

In the US, traditional structured finance positions have also failed to engender much activity. According to Chadrin Dean, managing partner at Integrated Management Resources, a significant reason has been wariness of looming regulation.

"Jefferies has had a decent year for hiring, but it seems to be a rare exception in structured finance," he says. "There is an unnamed regional bank shopping in the market too. But we are going to see some fallout from the capital requirements within new regulations."

He goes on: "The US regulations are just as tough as the Basel proposals in Europe."

This scenario has left banks with no incentive to add to their head counts. On the contrary, there is the fear that lay-offs could be on the cards for certain players, with the suggestion that Credit Suisse could be the latest big name to take the axe to parts of its structured finance division.

"The fact is that performance is relatively flat, so the money isn't rolling in to suggest any hires for the investment banks," adds Dean. "Then you have the fact that structured products require a lot of capital. So it's just too expensive right now for banks to justify bringing new faces in."

A similar issue is pervading in Europe, underlined by Barclays scaling back its research, trading and sales team earlier this year. It has been suggested that JPMorgan and Morgan Stanley have also been similarly sizing down their foothold in the market.

"Quite simply, there are cheaper forms of finance," says the headhunter. "The buy-side and the banks are still engulfed in a number of disclosure issues. There have been no concrete changes in regulation that would suggest to them now is a good time to start building up their structured finance divisions again."

Like in Europe, this situation has left the majority of interest in US structured finance coming from tangential areas. "The one surprise has been the up-tick in recruitment for equities, but that's really it," says Dean. "The interest in ABS and MBS is nearly non-existent. A lot of the allocation by the investment banks is going into market and credit risk to help with compliance issues."

He continues: "Overall, it could be that there is a reduction in head count, at least in the first half of 2016."

In comparison, however, the sentiment in Europe seems buoyant going into next year. "But we will likely see a similar story to 2015, in which it will be relatively subdued," says the London headhunter. "We're not yet at a stage where banks are prepared to move forward confidently with hiring again."

JA

Structured Finance

SCI Start the Week - 21 December

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

Pipeline
The pipeline grew very quiet last week. The only deal to be added without disappearing before Friday's close was US$176m Palmer Square Loan Funding 2016-1, a CLO.

Pricings
With Christmas nearly upon us, the pace of completed issuance also slowed considerably. There were just two ABS, an ILS, an RMBS, two CMBS, a CRE CDO and five CLOs.

€700m FCT Ginkgo Compartment Sales Finance 2015-1 and €370m HVL Bolzano 2015 accounted for the ABS, while the ILS was US$100m Vita Capital VI Series 2015-1. The RMBS was €1.24bn FT RMBS Santander 5.

US$430m BBCMS Trust 2015-SRCH and US$766.5m CSMC 2015-GLPA were the two CMBS, while the CRE CDO was US$349.1m RAIT 2015-FL5 Trust. Lastly, the CLOs were: €780m BBVA-10 PYME FT; US$355m Maranon Loan Funding 2015-1; US$435m Oaktree EIF I Series A1; US$505m Symphony Credit Opportunities Fund CLO 2; and US$507m Webster Park CLO.

Editor's picks
Liquid launch: A 25bp increase in the Fed funds target rate is widely expected to be announced later today (16 December). The pace of future interest rate hikes will impact the mortgage basis and the US agency market, which is strengthening investor appetite for liquid RMBS...
Black whole: 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...
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 (17 December). "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," says one trader. "So, we're now into price discovery mode in the new rate environment for the bottom of the stack..."

Deal news
• 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.
• 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 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.

Regulatory update
• In a unanimous decision by the FOMC, the US Fed announced yesterday [Wednesday] 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.
• 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.
• 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 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 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.
• 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.
• 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 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 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 while for the CRR file, the rapporteurship will be held by the EPP group.

Deals added to the SCI New Issuance database last week:
Anchorage Credit Funding 2; BlueMountain CLO 2015-4; California Republic Auto Receivables Trust 2015-4; Carlyle Global Market Strategies Euro CLO 2015-3; Castlelake Aircraft Securitization Trust 2015-1; Citi Held For Asset Issuance 2015-PM3; DRB Prime Student Loan Trust 2015-D; Driver Brasil Three; Edsouth Indenture No. 10 Series 2015-2; FREMF 2015-KS04; FRESB 2015-SB10; FRESB 2015-SB9; IM Grupo Banco Popular MBS 3; MSC 2015-UBS8; Newhaven II CLO; Noria 2015; OHA Credit Partners XII; OZLM XIV; PYMES Santander 12; Sound Point CLO X; SPS Servicer Advance Receivables Trust series 2015-T2; SPS Servicer Advance Receivables Trust series 2015-T3; Trinity Square 2015-1; WFCM 2015-P2

Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-2; CD 2006-CD3; CD 2007-CD4; CGCMT 2007-C6; CSMC 2006-C4; GCCFC 2007-GG11; GSMS 2011-GC3; GSMS 2012-GCJ7; JPMCC 2005-CB13; JPMCC 2006-LDP8; JPMCC 2007-LD11; LBUBS 2006-C7; MLCFC 2007-5; MLCFC 2007-9; MSC 2005-HQ7; MSC 2007-HQ13; TIAA 2007-C4; UBSC 2011-C1 & UBSC 2012-C1; WBCMT 2006-C27

CLOs

US, Euro CLO BWIC activity up

CLO BWIC volumes grew significantly in the US this year, while also rising modestly in Europe. US CLO BWIC volume for 2015 has been 50% higher than the previous year, while European BWIC volumes grew 6% to reach a new high.

By original notional rather than amount traded, US CLO BWIC volume has reached US$35.51bn this year, according to JPMorgan figures. European CLO BWIC volume has reached €7.16bn.

Increased secondary market activity comes as primary issuance has slowed. US CLO supply was US$97.9bn in 2015 compared to US$124.1bn in 2014, while European issuance was €13.5bn compared to €14.5bn.

BWIC volumes for US original double-Bs surged 150% this year to reach US$7.4bn, becoming the second-most actively traded tranche behind triple-A. "The uptick in double-B volume was largely driven by investor price discovery/positioning around energy. February saw US$2.87bn in double-B BWIC volumes, which represents almost 40% of the annual total double-B BWIC total," comment JPMorgan CLO analysts.

Triple-A tranches continue to be most actively traded, as they have been throughout the post-crisis period. Triple-A BWICs totalled US$16.3bn this year, up 71% on 2014. The busiest month was June, when US$2.9bn in triple-A BWIC notional was out for the bid.

The majority of the increase in US BWIC volumes occurred in 1H15. US$20.3bn came in 1H15, while 2H15 (excluding the last two weeks of December) brought in US$15.2bn.

"Debt tranches that increased in BWIC volume (triple-A/double-A/double-B/single-B) compared to 2014 experienced a downward trend in BWIC activity from 1H15 to 2H15. The reverse is true for single-A and triple-B BWICs, which were down 28% and 10% year-over-year, but increased by 4% and 30% respectively in 2H15 compared to 1H15," note the analysts.

The increase in BWIC volumes in Europe was largely driven by triple-A paper, which increased 27% from last year to reach €3.15bn. While single-B BWIC volume increased by 163%, it remains the smallest tranche by volume at only €110m.

The largest decrease in Europe was a 36% drop at triple-B, although that does remain the second-largest tranche by volume, accounting for 13% of BWIC volume. As with the US, triple-A is the largest.

European BWIC volumes were €4.18bn in the first half of the year and €2.97bn in the second half. This is partly explained by a quiet July.

JL

Structured Finance

Exemptive relief for FCF

Third Avenue Management has obtained exemptive relief from the US SEC to continue to protect Third Avenue Focused Credit Fund (FCF) shareholders, following modification of the plan of liquidation for the fund (SCI 15 December). Pursuant to those modifications, the liquidating trust has transferred FCF's assets and liabilities back to the fund, which now has an exemptive order suspending redemptions. Concurrently, the Third Avenue Trust Board cancelled the distribution of interests in the liquidating trust.

As a result of the exemptive order, Third Avenue will be able to conduct an orderly liquidation without having to resort to forced selling of securities at reduced or disadvantaged prices. The securities portfolio as of 10 December 2015 is now held by FCF, which is operating under the modified plan of liquidation. Shareholders will be able to see updated daily NAVs of the positions on their FCF shares in their statements, along with the total value of their investment.

Pursuant to the SEC order, FCF will: report periodically on progress of the liquidation to shareholders and the SEC; invest proceeds of sales in US government securities and short-term high quality debt; make quarterly distributions of excess cash; maintain its website and a toll-free number for shareholder communications; and conduct a final audit upon completion of the liquidation. All shareholders received an initial cash distribution on 16 December.

Third Avenue will not charge a fee while the portfolio is being liquidated.

Structured Finance

RMBS, CLO fraud admitted

A former co-head of US ABS, RMBS and CMBS trading at RBS Securities has waived his right to indictment and pleaded guilty to participating in a multimillion dollar securities fraud scheme. Adam Siegel admitted that he and colleagues conspired to increase RBS's profits on CLO and RMBS trades at the expense of customers.

Siegel held the role at RBS from July 2008 until 2014. As part of the scheme, he and his co-conspirators made misrepresentations to induce buying customers to pay inflated prices and to encourage selling customers to accept deflated prices, all to benefit RBS.

In certain transactions the swindle involved misrepresenting the seller's price to the buyer - or buyer's price to the seller - and pocketing the difference. In others, buyers were told that bonds held in RBS's inventory were being offered for sale by a fictitious third party, allowing RBS to charge an unearned commission.

Siegel pleaded guilty to one count of conspiracy to commit securities fraud, which carries a maximum prison term of five years. He was released on a US$250,000 bond and will be sentenced in March 2016.

Matthew Katke pleaded guilty to the same charge last March (SCI 12 March) and is co-operating with the government.

Structured Finance

TICC sale hits roadblock

The agreement for Benefit Street Partners (BSP) to acquire TICC Capital (SCI 7 December) failed to reach the required votes by company stockholders at the TICC special meeting held yesterday. Although the proposed transaction received over 50% support of shares at the meeting, the total support only accumulated to 36% of all outstanding TICC shares.

As a result, TICC will continue to be managed under its existing investment advisory agreement. "We look forward to continuing to execute on our strategy of rotating out of lower-yielding, more liquid corporate loans, into higher-yielding, middle market loans, repurchasing shares, lowering leverage and continuing our ongoing dialogue with our stockholders," says Jonathan Cohen, ceo of TICC.

In response, TPG Specialty Holdings - a long-standing rival bidder to BSP (SCI passim) - has reiterated its commitment to reaching its own agreement with the TICC board. Under the terms of its proposal, TICC stockholders would receive a number of shares of TPG common stock. This would result in the stockholders receiving 90% of TICC's net asset value per share, which represents a premium of up to 18.3%.

Nexpoint has also commented on the results of the special meeting, describing the TICC stockholders' vote as a sign of their 'disdain' for the company's 'antics' throughout the process leading up to the vote. Nexpoint also plans to engage with the TICC board to reiterate its own management proposals. The company only recently failed in an attempt to obtain a court order that would have pushed back the general meeting (SCI 7 December).

Structured Finance

Guggenheim adds origination vet

Guggenheim Securities has appointed Diane Rinnovatore as a senior md in its structured products origination business. She reunites with Cory Wishengrad, head of structured products and former colleague at both Lehman Brothers and Barclays.

Rinnovatore joins Guggenheim from Star Mountain Capital. She was previously co-head of securitised products origination for the Americas and head of US bank DCM at Barclays, as well as head of consumer ABS at Lehman.

Structured Finance

BNP adds to ABS expertise

BNP Paribas has brought in Alex Nixon as vp in investment banking, focusing on non-flow ABS. He joins the bank from KGS-Alpha Capital Markets. Nixon has also held a number of roles at Ascent Biomedical Venutres and Ernst & Young.

Insurance-linked securities

Revised investment policy approved

Blue Capital Global Reinsurance Fund has approved a pair of resolutions at a special general meeting. It can now bring into effect changes first proposed earlier in the month (SCI 8 December).

The first resolution was for the adoption of a revised investment policy to come into force from 1 January 2016. It was approved with 94.49% of votes in favour and 5.51% against.

The second resolution was for the adoption of a modified manager performance fee, also to come into force from the start of the new year. It was approved with 92.41% of votes in favour and 7.59% votes against.

RMBS

Software firm acquired

CoreLogic is set buy software firm FNC for US$475m. The agreement will see it inherit FNC's provider services in real estate collateral information technology and solutions.

CoreLogic's Valuation Solutions Group (VSG) will act as the conduit to deploy a broader suite of property valuation capabilities following the merger of the two firms. Following the close of the transaction, FNC operations will be consolidated within the VSG. These operations include services in appraisal compliance, workflow best practices and process efficiency to mortgage lenders and servicers, appraisal management companies, secondary and capital markets firms, and property and casualty insurance companies.

The closing of the transaction is expected during 1Q16. The transaction price is expected to be accretive to 2016 financial results and will be funded using cash on hand and debt.

Evercore acted as financial advisor to CoreLogic and O'Melveny & Myers served as legal advisor. FNC was represented by Wells Fargo as financial advisor and Butler Snow as legal advisor.

RMBS

Citi settlement approved

Justice Marcy Friedman last week approved the US$1.125bn Citi RMBS settlement. It had been hoped that her approval would be issued before end-2015, given the complete absence of objectors to the agreement. However, the trustees now need to receive a ruling from the IRS before cash can be distributed.

To get a sense of timing, Morgan Stanley RMBS analysts note that it took 180 days to receive an IRS ruling in the Countrywide case (SCI 15 October), although the IRS explicitly stated that it could not be used as a precedent for future situations. Even taking such a timeline into account, the approval brings a cash distribution to the covered Citi trusts by end-2016 into play.

RMBS

SEC hands out 'parking' fines

Morgan Stanley has settled US SEC charges that one of its portfolio managers unlawfully conducted pre-arranged trading known as parking. Both the portfolio manager and a trader at SG Americas that assisted her have agreed to be barred from the industry and pay penalties in the settlement.

Morgan Stanley will pay US$8.8m, while SG Americas will pay US$1m. Morgan Stanley portfolio manager Sheila Huang arranged sales of RMBS securities to SG Americas trader Yimin Ge at a predetermined price, which would enable her to buy the positions back at a mark-up into other accounts advised by Morgan Stanley.

Huang also sold additional bonds at above-market prices to avoid incurring losses in certain accounts, before repurchasing them at unfavourable prices in a fund she managed, without disclosing this to the disadvantaged fund client, says the SEC. Morgan Stanley failed to notice this due to "lack of supervisory oversight and failure to implement policies".

Huang's fraudulent activity took place in 2011 and 2012. She has agreed to pay a US$125,000 penalty and is barred for five years, while Ge agreed to pay a US$25,000 penalty and is barred for three years.

ABS

FFELP watchlist grows

Fitch has placed a further 238 tranches from 118 trusts of US FFELP student loan ABS on watch for potential downgrade, in addition to maintaining the status for 77 tranches. This leaves approximately US$37.5bn of outstanding FFELP ABS bonds now on rating watch negative.

Fitch's latest action follows the heightened risk of the tranches missing legal final maturity dates. The agency has been joined by Moody's in making a number of rating moves in response to weakening fundamentals surrounding US student loan deals, which include low prepayment rates and high deferments (SCI passim). Fitch released an exposure draft last month that showcased revised plans for rating FFELP student loan ABS (SCI 19 November).

The agency believes that there could be significant variation in the outcome of the most recently placed tranches onto rating watch negative. This will depend on remaining time to maturity, recent payment trends, issuer actions - such as loan purchases - or other external factors. The result could ultimately lead to the lowering of triple-A ratings to non-investment grade rating categories.

Fitch identifies trusts with one or more individual tranches most at risk of missing their legal final maturities under various stressed rating scenarios. In particular, prepayments and principal repayment rates have come in more slowly than initial expectations. However, the agency notes that the seasoning of portfolios and recent issuer actions to address the risk of downgrade has helped offset the decline in payments.

In an event of default, Fitch says it would expect ultimate repayment of full principal and interest on all tranches after the legal final maturity. Tripping an event of default, however, could have adverse rating implications for additional tranches - although the implications will depend on the waterfall mechanics and voting rights and actions of investors.

In a default scenario, the agency believes that the class B notes would likely not receive timely interest because the principal for the class A notes must be paid in full prior to the Bs receiving interest. As a result, Fitch will not rate subordinate notes higher than any senior notes in the same trust.

Since FFELP student loan ABS relies on the US government to reimburse defaults, triple-A ratings in this asset will likely move in tandem with the triple-A US sovereign rating. Aside from this, default basis risk and loan extension risk account for the majority of the risk embedded in the transactions. Further factors that could lead to downgrades include additional defaults and basis shocks beyond Fitch's published stresses.

ABS

Utility tariff criteria updated

Fitch has updated the asset-backed sector of its criteria for rating US utility tariff bonds, outlining the unique features of a tariff bond relative to a traditional ABS. Most notably, tariff bonds are compared by the agency for their characteristics as intangible, future-flow regulatory assets. The criteria also references the special protections available to holders of tariff bonds that qualify for achievement of triple-A ratings.

Fitch has listed a number of key drivers in shaping its criteria, one of which is regulatory framework. Unlike that of other ABS transactions, the cashflow stream supporting tariff bonds is a special tariff established under legislative or regulatory authority. As a result, Fitch says the primary consideration comes through a thorough understanding of the statute and order.

In addition, Fitch's legal analysis of tariff transactions includes a review of the legal structure and the opinions furnished to confirm that the cashflow derived from the special tariff will not be impaired. Another prime consideration is credit analysis, specifically a review of the composition in the utility service territory. This is because cashflow supporting tariff bonds is generated by payments from all or designated categories of customers in the territory.

The economic environment can also have a material impact on US utility tariff ABS. As such, Fitch takes into consideration the strength of the US economy, as well as future expectations. Other considerations include structural and cashflow analysis, as well as counterparty review. The latter would include an investigation into the utility's servicing operations.

Fitch does not expect the changes and considerations in the criteria to impact any outstanding ratings.

ABS

P2P deal expands asset class

A second OnDeck Capital securitisation is in the market, but this time the online lender is acting as servicer, not sponsor. That role is being taken by Jefferies Asset Funding, which is sponsoring a rated marketplace lending ABS for the first time.

The US$143.646m MarketPlace Loan Trust Series 2015-OD4 comprises a US$128.525m A class and a US$15.121m B class. The class A notes are rated single-A by Kroll Bond Rating Agency and the class Bs are rated triple-B.

The collateral consists of 2,357 loans totalling US$151.2m. The loans have an approximate remaining term of 14 months. No loan has a term of more than 24 months.

OnDeck's previous deal - OnDeck Asset Securitization Trust 2014-1 - was issued in May last year (see SCI's new issue database). OnDeck sponsored the deal, while the arranger was Deutsche Bank.

ABS

PREPA deal reached

PREPA has finally reached an agreement with bond insurance subsidiaries of Assured Guaranty over a financial restructuring plan. The agreement will provide a framework for resolving the treatment of holders of insured PREPA revenue bonds, as well as supplying bridge financing for PREPA's interest payment on 1 January 2016.

Assured Guaranty's proportionate share of the PREPA bridge financing is approximately US$15m. Under the agreement, bondholders will be supported by securitisation bonds issued by a special purpose corporation and secured by a transition charge assessed on ratepayers.

The securitisation will be facilitated by Assured Guaranty issuing surety insurance policies to an aggregate amount that does not exceed US$113m. This will be in exchange for a market premium to support a portion of the reserve fund for the securitisation bonds.

The transaction is expected to aid PREPA in achieving debt relief and 'more efficient' capital markets financing. Specifically, it provides the utility with a five-year debt service relief of more than US$700m and a permanent reduction in its principal debt burden of more than US$600m.  

The deal is now subject to closing upon a number of conditions, including the enactment of related legislation by the Puerto Rico legislature. It will also rely on the execution of acceptable documentation and legal opinions.

Reports had suggested that Assured Guaranty was one of the key stumbling blocks for PREPA (SCI 26 November). Ongoing negotiations led to a number of deadline extensions, prompting the belief that a deal may not be reached before year-end. Most recently, PREPA announced the extension of the deadline to 23 December to ensure an agreement was indeed reached with monoline bond insurance holders on the recovery plan.

Structured Finance

Class A share added to fund

Semper Capital Management has added a class A share to its Semper MBS Total Return Fund. Class A shares are retail shares that are charged a front-end sales load of up to 2%.

The shares are charged a 0.25% Rule 12b-1 distribution and servicing fee, but do not have a contingent deferred sales charge. However, redemptions within 18 months of purchase of investments at US$1m or more - on which no front-end sales charge is paid - are subject to a 0.5% sale charge, based on the lower cost or market value at the time of redemption.

Semper's fund has grown to US$450m in assets after recently crossing the two-year mark. To date this year, it has seen nearly US$300m of net inflow.

Structured Finance

EBA makes synthetic STS suggestion

The EBA supports the limited extension of the prudential treatment granted to simple, transparent and standardised (STS) securitisations to banks that originate and retain certain SME balance sheet synthetic securitisation positions. The authority has published criteria to determine transaction eligibility.

The EBA has examined the synthetic securitisation market and, based on its findings, supports the extension of STS capital requirements on senior synthetic tranches of SME portfolios that banks decide to retain when transactions benefit from financial guarantees by public bodies or CDS provided by private investors that are fully cash collateralised. It now advises the European Commission to introduce a list of eligibility criteria that take into account the specificities of synthetic securitisation and to include, among eligible transactions, those in which private investors provide credit protection in the form of cash.

Structured Finance

Argentine rate cap scrap examined

The move by Argentina's central bank last Friday to lift interest rate caps will negatively affect securitisation, according to Moody's latest Credit Outlook. The caps were removed on personal loans, auto loans and, indirectly, credit card financing that banks and regulated financial companies issue.

Moody's believes this will encourage regulated financial companies to offer loans to higher-risk borrowers on the assumption that they are compensated by higher interest rates. This could ultimately have an adverse effect on collateral quality.

Since June 2014, when the central bank initially implemented the interest rate caps, regulated financial companies adjusted their underwriting guidelines to compete within a lower-risk segment of borrowers. Ending these caps allows such companies to return to riskier borrower segments, increasing the risk profile of their loan portfolios.

Higher interest rates could also increase the excess spread for new transactions. Albeit positive at first glance, the risks could turn negative if sponsors decide to balance the levels of credit enhancement in the transactions by decreasing subordination levels. Moody's favours subordination over excess spread because the protectiveness of subordination is not affected by prepayments or the timing of defaults.

Further, the deregulation - coupled with the central bank's recent decision to tighten monetary policy - could put pressure on the cashflows of existing transactions. Securitisations will face higher debt service payments because peso-denominated transactions in Argentina typically bear variable coupon rates. However, all securitisations in Argentina feature interest rate caps on their liabilities, which will limit the decline in excess spread on these transactions.

Moody's stresses, however, that the deregulation will boost originator profitability and liquidity in the Argentine securitisation market. Eliminating the restrictions will allow for more loans to become available to Argentine consumers across different risk segments, thus increasing origination volumes. A more liberalised market will also give financial companies the ability to more effectively match pricing with the risk profile of borrowers, helping boost profit margins.

Additionally, deregulation should spark new issuance of structured finance transactions in the domestic capital market. Securitisation issuance volumes, measured in US dollar terms, have decreased during the past four years in part because of the influx of bonds into the local capital markets from the sovereign and some corporates - in addition to the central bank's restrictions. This trend is expected to reverse as a consequence of the sovereign's likely return to international credit markets.

Moody's also expects more liquidity to enter the market, given that banks will be able to more freely invest in securitisations. Since June 2014, banks were banned from investing in transactions backed by loans bearing interest rates that exceeded the regulated caps. However, banks will now be allowed to invest in securitisation transactions without restrictions.

CLOs

Electra anchors CLO

Electra Partners has invested £13m in a new CLO managed by Blackstone/GSO Debt Funds Management Europe - an affiliate of GSO Capital Partners. The transaction is Tymon Park, a €414m CLO that invests in leveraged loans issued by predominantly private equity-backed companies in the US and Europe.

The CLO has a 13-year life and is invested in more than 80 individual credits. Electra's investment is in the CLO's equity alongside Blackstone/GSO Corporate Funding, which is funded by Blackstone/GSO Loan Financing.

"Our investment strategy focuses on buyouts, secondaries and debt investments," says Alex Fortescue, chief investment partner at Electra Partners. "Within this latter category, the CLO market offers an exciting opportunity for us to use our flexible mandate to earn attractive risk-adjusted returns by investing in the debt component of private equity deals."

CLOs

Volcker amendments agreed

An extraordinary resolution has been passed by St Paul's CLO II noteholders that amends the investment management agreement to comply with the Volcker Rule. Under the amendments, noteholders have the option to hold notes with different voting rights in respect of resolutions to remove or replace the CLO manager. This involves splitting each class of rated notes into three separate subclasses - voting notes, non-voting notes and non-voting exchangeable notes (SCI passim).

Voting notes are now exchangeable at any time upon request by relevant noteholders into: non-voting exchangeable notes or non-voting notes. Non-voting exchangeable notes will also be exchangeable at any time upon request by relevant noteholders into: voting notes or non-voting notes.

The exchange will only be effective upon receipt of a written request.

CMBS

Conduit NOI trends assessed

While US commercial property prices have now topped pre-crisis peak levels, NOI for collateral backing CMBS conduit loans has not yet fully recovered, notes Moody's. An analysis of NOI trends shows collateral NOI is up 9% from its 2004 baseline level, but 2% down from its pre-crisis peak.

The rating agency analysed year-over-year changes in property financials between 2004 and 2014. It notes that NOI trends help to assess credit drift because changes in NOI reflect changes in borrowers' ability to pay debt service and because NOI changes may move independently of other observables, such as market value.

Collateral NOI trends among vintages and property types generally align with credit and CPPI price trends. The 2007 vintage was the only one among pre-crisis vintages to fall below its initial level and took about four years to recover.

The 2011, 2012 and 2013 vintages have each ridden the wave of recovery to increasingly higher NOI, observes Moody's. The star performer among the 10 largest metro area and asset class pairings was New York apartment collateral, where NOI rose 40% over the 10 years.

CMBS

CMBX rule updates expected

The Markit CMBX.9 index is expected to launch on 25 January 2016. Similar to the previous CMBX series (SCI 16 December 2014), CMBX.9 will likely include some modifications to the index rules to accommodate new trends seen in conduit deals in 2015.

Morgan Stanley CMBS strategists highlight three notable CMBX index rule amendments for CMBX.9, the outcomes of which depend on a dealer vote. The first is in response to Moody's downgrading of the rating for AS tranches of recent deals, many of which are now rated Aa2.

"This results in an applicable rating of double-A for these tranches," the Morgan Stanley strategists explain. "The current rule prohibits inclusion of any AS tranches rated below double-A plus, so Markit is proposing to amend the rules to allow inclusion of AS/AM tranches that have an applicable rating of triple-A, double-A plus or double-A. This is similar to the rule amendment introduced for CMBX.8."

The second proposed amendment follows on from interest Markit received in creating two new shorter-maturity triple-A sub-indices for CMBX.9 - the A1 and A2 sub-indices. Finally, due to regulation taking effect in September that would impact uncleared OTC derivative products, Markit is proposing to set CMBX up as a cleared product.

CMBS

CMBS defaults edge up

The 12-month rolling maturity default rate for European CMBS increased slightly in November to 10.5% from the previous month, according to S&P's latest index results for the sector. The delinquency rate for continental European senior loans decreased to 60.3% from 61.3%, while the rate for UK loans remained stable at 20%. Meanwhile, the overall delinquency rate for senior loans decreased to 48% from 49%.
 

Risk Management

ECL guidance released

The Basel Committee has released a document setting out supervisory guidance on sound credit risk practices associated with the implementation and ongoing application of expected credit loss (ECL) accounting frameworks. The move to ECL accounting frameworks by accounting standard setters aims to help resolve the weakness identified during the financial crisis that credit loss recognition was too little, too late. It is also consistent with the April 2009 G20 call for accounting standard setters to "strengthen accounting recognition of loan loss provisions by incorporating a broader range of credit information".

The guidance - which should be viewed as complementary to the accounting standards - presents the Committee's view of the appropriate application of ECL accounting standards. It provides banks with supervisory guidance on how the ECL accounting model should interact with a bank's overall credit risk practices and regulatory framework, but does not set out regulatory capital requirements on expected loss provisioning under the Basel capital framework.

The Committee notes that failure to identify and recognise increases in credit risk in a timely manner can aggravate underlying weaknesses in credit quality, adversely affect bank capital adequacy and hinder appropriate risk assessment and control of a bank's credit risk exposure. The bank risk management function's involvement in the assessment and measurement of accounting ECL is essential to ensuring adequate allowances in accordance with the applicable accounting framework, it adds.

Risk Management

Credit assessment recommendations issued

IOSCO has released its final report on 'Sound Practices at Large Intermediaries Relating to the Assessment of Creditworthiness and the Use of External Credit Ratings'. The report recommends 12 sound practices that regulators could consider as part of their oversight of market intermediaries in relation to suitable alternatives to credit ratings. The aim is to reduce the overreliance on credit rating agencies for credit risk assessment.

Efforts to address overreliance on credit ratings have mainly focused on two areas: requirements for firms to undertake their own due diligence and internal risk management; and reconsideration of references to ratings in the regulatory framework. The sound practices recommended by IOSCO include: establishing an independent credit assessment function that is clearly separated from other business units; involving senior management to ensure the successful implementation of a robust credit assessment process; establishing a coherent oversight structure to ensure that the credit assessment process is properly implemented and adhered to; ensuring that a firm's governing committee receives an appropriate level of information on the amount of credit risk to which the firm is exposed; incorporating a variety of qualitative measures into robust credit assessment processes, in addition to quantitative measures; and prescribing internal risk levels and investment appetites for the assessment of creditworthiness that focus on the intrinsic value of the instrument to set limits and risk.

To identify its sound practices, IOSCO conducted a survey of market intermediaries and received responses from 53 firms in 14 jurisdictions. The organisation also convened two roundtable discussions with intermediary representatives and published a public consultation in May.

Risk Management

Bank derivatives exposure increases

Insured US commercial banks and savings associations reported trading revenue of US$5.3bn in 3Q15, a drop of US$200m - 4% - from 2Q15 (SCI 22 September), reports the OCC. Trading revenue was US$300m lower than 3Q14.

Credit exposures from derivatives rose sharply in the third quarter. Net current credit exposure increased by US$39bn to US$445bn.

"Concerns about weakness in the global economy in the third quarter, particularly reflected in sharp declines in equity prices in China, led to a substantial decline in interest rates. That decline caused a large increase in receivables from interest rate contracts, which drive credit exposure numbers because they are 77% of the derivatives market," says Kurt Wilhelm, OCC senior advisor for market risk.

The notional amount of derivatives held by insured US commercial banks declined by US$6trn to US$192trn. "However, the decline is not really reflective of current activity," says Wilhelm. "There is still a lot of business at the dealer firms. Trade compression is simply more than offsetting normal growth."

Trade compression was responsible for a US$5.9trn drop in interest rate contracts. Swap contracts fell by US$4.8trn.

CDS remain the dominant product in the credit derivatives market at 95%. Clearing is marginally more common for investment grade derivatives at 21%, while 20% of non-investment grade names are also cleared.

RMBS

Granite redemptions scheduled

NRAM has exercised its seller call option for Granite Mortgages 2003-2, 2003-3, 2004-1, 2004-2, 2004-3 and Granite Master Issuer in connection with the sale of the underlying mortgage loans to Cerberus European Residential Holdings (SCI passim). The proceeds will be applied to redeem the RMBS notes in full, together with the payment of any accrued interest.

Specifically, Granite Master Issuer Series 2007-2 was redeemed on 17 December, while the remaining Master Issuer notes and the 2004-vintage transactions were redeemed on 20 December. The 2003-vintage deals are scheduled to be redeemed on 20 January 2016.

Meanwhile, the Whinstone Capital Management notes will partially redeem on the 25 January IPD and will redeem in full on the 25 April IPD. Whinstone 2 Capital Management will redeem in full on the 25 January IPD.

RMBS

RPL approach updated

Fitch has updated its approach for rating RMBS backed by seasoned and reperforming loan (RPL) collateral. The changes include the increase of the due diligence sample size for compliance and data integrity to 100% from 20% for RPLs.

If 100% due diligence is not conducted, Fitch may adjust its loss expectations, cap the rating or decline to rate the transaction. In addition, the agency says that the lack of advancing associated with seasoned and RPL deals calls for cashflow analyses that demonstrate full and timely interest for high investment grade rated classes. As of now, analyses indicate that payments have indeed been full and timely. 

Fitch adds that it analyses the key risk drivers of the RPL asset class using its mortgage loan loss model, as well as existing representation and warranty and due diligence review criteria. However, since the existing approaches were developed with a focus on newly originated and seasoned performing collateral, RPL pools and some seasoned performing pools purchased in the secondary market are likely to have factors that require additional considerations to those in Fitch's RMBS master rating criteria.

The agency assures that the proposed changes will not have an impact on existing RPL ratings, as all but one transactions that it rates benefit from 100% due diligence.

RMBS

Freddie sells NPLs to non-profit

Freddie Mac has sold via auction 103 deeply delinquent NPLs serviced by Wells Fargo from its mortgage investment portfolio. The US$18.4m pool of loans was sold to Community Loan Fund of New Jersey.

The transaction is expected to settle in February 2016, after which servicing will be transferred. The loans have been delinquent for an average of approximately three years and are geographically concentrated in Miami-Dade and Tampa, with an LTV ratio of around 88%.

RMBS

Everbank servicing rights sold

Everbank has sold the servicing rights of 4,682 loans in ten Alt-A RMBS transactions to Nationstar Mortgage. The transfer is scheduled to go ahead on 1 February 2016.

The affected transactions are: Homestar Mortgage Acceptance Corp Asset Backed Pass-Through Certificates 2004-1, 2004-2, 2004-3, 2004-4 and 2004-6; and Opteum Mortgage Acceptance Corp Asset Backed Pass-Through Certificates 2005-1, 2005-2, 2005-3, 2005-4 and 2005-5.

Moody's says that the transfer, or any changes in the servicing strategy that follows, will have no material negative implications. As a result, there will be no reduction or withdrawal of the current ratings on the transactions.

RMBS

Payment allocation scrutinised

Kroll Bond Rating Agency has placed its ratings related to 34 classes from RPMLT 2014-1 Trust on watch developing. The agency says it is investigating principal payment allocations to certificateholders of the RMBS, which it now believes may have been misallocated.

The transaction is collateralised by two pools of re-performing mortgage loans. The rated classes are collateralised by the Group 1 collateral and there is no cross-collateralisation between Group 1 and Group 2.

The watch developing status reflects KBRA's view that funds may have been misallocated and that the remedy of such misallocation may disrupt future bondholder payments or payments previously made. "Our investigation is ongoing into whether principal allocations are being made in compliance with the trust governing documents and, if not, why payments have been misallocated and what remedies will take place," the agency explains.